The Ninth Circuit’s Martin Decision
I have written several times about discharging income tax debt in bankruptcy. Some time ago I wrote a post that dealt with the question of whether a return filed after a substitute for return is a return for bankruptcy discharge purposes. At the time, I reported that the question hadn’t been addressed by the Ninth Circuit Court of Appeals. That statement is no longer correct.
Martin Smith v. IRS
I watched the oral arguments in Martin Smith v. IRS case that took place on May 12 at 9:00 a.m.
The Court sided with the IRS in this case, and held that Mr. Smith’s tax debt was not dischargeable in his Chapter 7 bankruptcy case. This case illustrates the old maxim that bad facts make bad law.
The Court summarized Mr. Smith’s history with the IRS:
After Martin Smith failed to timely file his 2001 tax forms, the IRS prepared a Substitute for Return or “SFR” based on information it gathered from third parties. In March 2006, the IRS mailed Smith a notice of deficiency. Smith did not challenge the notice of deficiency within the allotted 90 days and the IRS assessed a deficiency against him of $70,662. Three years later, in May 2009, Smith filed a Form 1040 for the year 2001 on which he wrote “original return to replace SFR.”
The fact that Mr. Smith filed his return seven years late, and three years after the IRS had filed an SFR clearly bothered the Court. On that basis the panel held:
Here, Smith failed to make a tax filing until seven years after his return was due and three years after the IRS went to the trouble of calculating a deficiency and issuing an assessment. Under these circumstances, Smith’s “belated acceptance of responsibility” was not a reasonable attempt to comply with the tax code.
Suppose Mr. Smith had filed his return a month after the IRS filed the SFR. Would the Court have sided with him? Probably not because of the locution: “. . . after the IRS went to the trouble of calculating a deficiency and issuing an assessment.” In sum, it appears that a return filed after an SFR is not a return for bankruptcy discharge purposes in the Ninth Circuit.
Discharging tax debt: Late filed return, but before the IRS files an SFR
What if you file a return late, but before the IRS files an SFR? Will that return qualify as a return for bankruptcy discharge purposes? The Court never considered the question. Therefore, the Fifth Circuit’s draconian holding in In re McCoy, 666 F. 3d 924 (5th Circuit 2012) (a late filed return is not a return for bankruptcy discharge purposes) has not yet polluted Ninth Circuit jurisprudence. So, at least for now, if you’re in the Ninth Circuit and you filed your return late, but there was no SFR, then if you satisfy the three-year, two-year, 240-day rule, you should be able to discharge the tax debt in bankruptcy.
If you’re a debtor in the Central District of California who is considering using bankruptcy to deal with your debts, call an attorney who is a board-certified bankruptcy law specialist to represent you.