BAP Uses Hatton II Version of Beard Test to Determine Dischargeability of Untimely Filed Tax Returns

The BAP for the Ninth Circuit held that the proper determination of the dischargeability of tax debt related to untimely filed tax returns is not limited to a narrow, exclusively objective analysis of the form and content of the tax returns; rather, it must be broad in scope, at least partially subjective and “also include the number of missing returns, the length of the delay, the reasons for the delay, and any other circumstances reasonably pertaining to the honesty and reasonableness of the [debtor taxpayer’s] efforts.” (491). There was no decision on dischargeability in this case. Prior to BAPCPA, courts used some version of the Beard Test to determine what qualifies as a tax return (for dischargeability purposes) since it was not defined in the Bankruptcy Code. This Court upheld the version of the Beard Test as articulated in Hatton II:

             For a document submitted by a taxpayer to the IRS to qualify as a tax return:

(1) it must purport to be a return;

(2) it must be executed under penalty of perjury;

(3) it must contain sufficient data to calculate the tax liability; and

(4) it must represent an honest and reasonable attempt to satisfy the requirements of the tax law.

Additionally, the Court determined that tax debts preexist both the filing of a return and the issuance of an IRS assessment. “Under the Internal Revenue Code, the tax debt – or right to payment – arises at the end of each tax year and not later on….[and an IRS] assessment is merely a method for fixing the amount of that debt and not the source of the debt itself.” (491) The IRS argued that the debt was established by the IRS assessments, NOT the subsequently filed tax returns. This argument attempts to force a distinction between tax liabilities based on assessments versus those based on filed tax returns. The Court did not accept the distinction proposed by the IRS, stating it proves too much, since it proves that the tax liability arose without a tax return and that the tax return was neither necessary nor required to impose a tax debt based on the IRS assessment. Thus, the assessment/return distinction is irrelevant to any determination of the existence of a tax debt for purposes of bankruptcy and dischargeability.

KEYWORDS: Tax Returns, IRS Tax Assessment, Dischargeability of Tax Debt in Bankruptcy

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