MORE ABOUT FEDERAL AND STATE TAX DISCHARGE
EMERGING ISSUE: WHAT IS AN“ EQUIVALENT REPORT OR NOTICE”?
By Morgan D D. King. King, Esq,. of Morgan King King Company Company & Morgan & King Law Offices Morgan
Dublin, California
King Law Offices
The Reform Act1 added language to some sections of the Bankruptcy Code in connection with tax discharge. This essay addresses an often-missed issue regarding the“ twoyear rule,” which is set forth in 11 U. S. C. § 523( a)( 1)( B).
BAPCPA added words
Before BAPCPA, section 523( a)( 1)( B) provided that taxes were not dischargeable where a“ return was not filed, or filed late and within 2 years of filing the bankruptcy case.” To this language BAPCPA added,“ with respect to which a return, or equivalent report or notice, if required, was not filed or given, or was filed or given after the date such return, report, or notice was last due, under applicable law or under any extension … and after two years before the date of the filing of the petition …”
The issue arises where a“ return” or its“ equivalent report or notice” is alleged to have been required but was not filed by the taxpayer.
This issue has come up most frequently in a number of state tax situations.
Following an IRS audit
States that have personal income taxes 2 typically require a taxpayer to report any additional assessment by the IRS( e. g., following an audit). The information is required to enable the state to assess its additional assessment( often called the“ piggy back” tax) based on the increased IRS liability. But, is it required that it be a return or equivalent, or rather just an ordinary notice?
Equivalent report or notice
At first glance the words“ equivalent report or notice” seem to add categories of documents that could be filed in lieu of a regular IRS 1040, which would expand opportunities for debtors to satisfy the two-year rule for the piggyback tax by filing something other than a regular return but is equivalent to a return. This sentiment was stated in at least one case- a 2009 chapter 7 case – Ciotti. V. Comptroller of Maryland, 3 in which, following an increased IRS assessment, the debtor was required by state law to file“ … a report of federal adjustment.”
In that case the debtor had filed a timely original state tax return, but there was an IRS audit and the taxpayer did not report the additional IRS assessment with the state taxing entity. 4
The bankruptcy court held that the document, although required by the state, was not“ a return or equivalent report or notice” within the meaning of § 523( a)( 1)( B), and hence failure to file did not render the taxes nondischargeable.
However, on appeal the 4 th Circuit 5 reversed, holding that the additional words“ equivalent report or notice” are not intended by Congress to expand opportunities for discharge, but just the opposite … to add additional kinds of document that are equivalent to a“ return,” giving a taxpayer more ways in which to fail to satisfy § 523( a)( 1)( B). 6
Since then, this author has identified 13 additional cases addressing state piggy-back taxes … most holding that a document that was the equivalent to a“ return,” was“ required,” and was not filed by the debtor. 7 Ten of these cases ruled against the debtor. Almost all involve state income taxes. The issue has rarely involved IRS taxes. 8
This author has found only three cases which held in favor of the debtor on this or a similar issue; one, Jerauld, 9 held that the document that was supposed to be filed with the California Franchise Tax Board( FTB) was required but it was not a“ return” 10 or equivalent report or notice, and hence the taxes were discharged.
The other, Dahmer, 11 out of Missouri held essentially the same; debtors“ … were not required to file an amended
16 CONSUMER BANKRUPTCY JOURNAL Fall 2016 National Association of Consumer Bankruptcy Attorneys