Source: http://www.carnahanlaw.com/bankruptcy/
Timestamp: 2019-04-21 16:11:15+00:00

Document:
Under the Test in Beard v. Comm’r, 82 T.C. 766, 777 (T.C. 1984), aff’d, 793 F.2d 139 (6th Cir. 1986), the facts are analyzed to determine whether: a) The document purports to be a return, b) The document was executed by the debtor under penalty of perjury; c) The document contains sufficient information to permit a tax to be calculated; and d) It evinces an honest and reasonable attempt to satisfy the requirements of the tax law. Id. at 777, (citations omitted). The fourth factor (the honest and reasonable test) was considered by many Bankruptcy Courts as most important, but a split developed between the circuits. Most courts allowed the discharge of tax debt based on a return that was filed after the deadline but before the IRS filed a substitute return.
Most courts disallow discharge of tax debt based on a return that the taxpayer files after the IRS files a substitute for return.
Since the BAPCPA amendment became effective, the First, Fifth and Tenth Circuits have held that ANY tax return (other than one filed under Section 6020(a)) that is filed late is not a return under the hanging paragraph of Section 523(a) and the Beard Test no longer applies. This is the so-called “One-Day-Late Rule.” The Third, Ninth, and the Eleventh Circuits have acknowledged the One-Day-Late Rule but have not determined whether the rule is correct or incorrect. Rather, they applied the Beard Test and determined that in the cases before them, the late returns filed after an IRS assessment failed to meet the fourth prong of the Beard Test. In re Colsen. 446 F.3d at 839, was decided in 2006, after the enactment of BAPCPA, but the court did not analyze the hanging paragraph because the bankruptcy case was filed prior to BAPCPA. In its opinion, the court noted that the addition of the hanging paragraph in BAPCPA was an attempt by Congress to resolve the conflicting rulings by courts as to what qualified as a “return” for purposes of dischargeability. This leaves open the question of whether the courts will apply the Beard Test after enactment of BAPCPA in the Eighth Circuit.
Criticism of the “One-day Late Rule” points out that The BAPCPA amendments did not alter subsection Section 523(a)(ii), which allows for a discharge of late filed returns, as long as the returns were filed more than 2 years before the petition date. Accordingly, it would make no sense for Congress to leave that paragraph unchanged if the hanging paragraph was intended to make all taxes owing for late filings non-dischargeable.
What does this mean for debtors?
Keep current and file all taxes.
If a debtor fails to file a tax return, even if it is late and before the IRS has made an assessment, a debtor’s attorney should aid the debtor in working with the IRS in order to fall under the safe harbor of Section 6020(a) and Section 523’s hanging paragraph.
If a debtor has filed a late return, avoid filing a petition until three years have passed and attempt to make a deal with the IRS.
such as sales taxes, employment taxes (forms 940 and 941), and the trust fund recovery penalty (personal liability of persons in charge for a corporation’s or other entity’s failure to pay employment taxes), cannot be discharged in bankruptcy.
Internal Revenue Code (“IRC”) §§6072(a) and 6081(a) operate together to require that individual taxpayers must file an income tax return before April 15 of the year following the taxable year or within a period of time granted by an extension not to exceed six months (effectively denominating a late filed return an unfiled return). Thus, a late filed return cannot qualify as a return for determination of dischargeability.
While this appears insurmountable, a debtor confronted with a late filed return may still receive a discharge of the underlying tax debt under the “safe harbor” provision in §6020(a), specifically mentioned in the “dangling paragraph” of amended § 523(a). The untimely filing taxpayer can disclose all the information necessary for the preparation of the return to the IRS, the “Secretary” may prepare the return, and, if signed by the taxpayer, it may be received by the “Secretary” as a timely return.
In re Cannon, U.S. Bankruptcy Court, N.D. Georgia, Atlanta Div., 09-69712-MHM, April 1, 2011, considered the dischargability of taxpayers’ liability for several year. The IRS had audited taxpayers and filed a substitute for return (“SFR”). Taxpayers subsequently filed a return which the IRS accepted and then adjusted taxpayers’ liability. Taxpayers contended that the court should focus on their actions and intent surrounding their filing of the filing of the returns to determine whether the late returns filed after an assessment based upon IRS substitute returns were filed in good faith.
The court referenced that the cases that have addressed the impact of the undesignated paragraph added by the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”) to define “return” have concluded that a late return can never qualify as a return unless it is filed under the § 6020(a) safe harbor provision, and held that the tax years in question were non-dischargable.
For purposes of this subsection, the term “return” means a return that satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements). Such term includes a return prepared pursuant to section 6020(a) of the Internal Revenue Code of 1986, or a similar state or local law, or a written stipulation to a judgment or a final order entered by a nonbankruptcy tribunal, but does not include a return made pursuant to section 6020(b) of the Internal Revenue Code of 1986, or a similar state or local law.
(a) Preparation of return by Secretary. – If any person shall fail to make a return required by this title or by regulations prescribed thereunder, but shall consent to disclose all information necessary for the preparation thereof, then, and in that case, the Secretary may prepare such return, which, being signed by such person, may be received by the Secretary as the return of such person.
(b)	Execution of return by Secretary.
(1) Authority of Secretary to execute return. – If any person fails to make any return required by any internal revenue law or regulation made thereunder at the time prescribed therefor, or makes, willfully or otherwise, a false or fraudulent return, the Secretary shall make such return from his own knowledge and from such information as he can obtain through testimony or otherwise.
(2)	Status of returns. – Any return so made and subscribed by the Secretary shall be prima facie good and sufficient for all legal purposes.
The timing of filing the bankruptcy petition is very important as to which tax years may be discharged. Filing a bankruptcy petition too early can prevent taxes from being discharged.
Filing bankruptcy extends the normal 10 year statute of limitations on collections for the time the bankruptcy is pending plus 6 months, including if the bankruptcy is dismissed and no discharge is granted.
Discharge of liability for the tax does NOT extinguish the tax lien.
The Tax Court in Vance L. Wadleigh v. Commissioner, U.S. Tax Court, CCH Dec. 58,243, 134 T.C. No. 14, (Jun. 15, 2010), found that the § 6321 tax lien continued in effect against taxpayer’s pension excluded from his chapter 7 bankruptcy estate.
On August 18, 2005, petitioner and his wife, filed a voluntary chapter 7 bankruptcy petition, claiming his fully vested interest in the Honeywell Pension Plan as exempt. The pension was not yet in payout status and did not contain a lump-sum or similar option that would have permitted petitioner to withdraw funds from the pension before reaching retirement age. Petitioner received a discharge on December 8, 2005, including the 2001 Federal income tax liability. Petitioner’s right to receive a $1,242.13 monthly pension payments matured on November 1, 2007.
The Tax Court found that a § 6321 lien arises by operation of law and continues until the liability is satisfied or becomes unenforceable by lapse of time. A § 6321 lien attached to all of petitioner’s property, including his pension income, notwithstanding that the pension had not yet entered payout status. That lien is not valid against a purchaser, holder of a security interest, mechanic’s lienor, or judgment lien creditor until a notice of federal tax lien (‘NFTL”) has been filed, and the IRS never filed a valid NFTL with respect to petitioner’s 2001 Federal income tax liability, so had only a § 6321 lien with respect to petitioner’s 2001 tax liability.
“[A] bankruptcy discharge extinguishes only one mode of enforcing a claim — namely, an action against the debtor in personam — while leaving intact another — namely, an action against the debtor in rem.” Johnson v. Home State Bank, 501 U.S. 78, 84 (1991); Iannone v. Commissioner, 122 T.C. 287, 292-293 (2004). …. Title 11 U.S.C. § 522 allows a debtor to exempt from his bankruptcy estate a personal residence, a car, certain property used in a trade or business, retirement funds, and certain other assets, to ensure that the debtor has at least some property with which to make a fresh start. …. Exempt property initially is part of the debtor’s bankruptcy estate, see Taylor v. Freeland & Kronz, 503 U.S. 638, 642 (1992), but is removed from the bankruptcy estate (and is therefore unavailable to satisfy creditors’ claims) for the benefit of the debtor as a result of the debtor’s exemption, Pasquina v. Cunningham, 513 F.3d 318, 323 (1st Cir. 2008). Property that is exempt from the bankruptcy estate pursuant to 11 U.S.C. § 522 is not available to satisfy prepetition debts during or after the bankruptcy, except debts secured by liens that are not avoided in the bankruptcy and § 6321 liens with respect to which an NFTL has been filed. 11 U.S.C. § 522(c). …. Unlike exempt property, which is part of a debtor’s bankruptcy estate but is unavailable to satisfy creditors’ claims, excluded property never becomes part of the bankruptcy estate and is therefore never subject to the bankruptcy trustee’s or the debtor’s power to avoid the § 6321 lien, thus, if a § 6321 lien on excluded property has not expired or become unenforceable under § 6322, it survives the bankruptcy.
The Tax Court found that the administrative record was insufficient to enable it to properly evaluate whether the Appeals Office abused its discretion in determining that a levy on petitioner’s pension income could proceed, and remanded the case to enable the parties to clarify and supplement the administrative record as appropriate.

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