FEDERAL AND STATE TAX DISCHARGE
tax return for 1987 because Mo.Ann.
Stat. § 143.601 states only that a
taxpayer must “report” the change in
federal income, and that a “report”
does not constitute a requirement to
file an amended return. Similar ruling,
In re Olson.12
The most recent case addressing the
issue is the chapter 7 case In re Berry,13
a 2016 Massachusetts opinion, took
the opposite position.
In Berry, the state required the debtor
to file what it termed an “amended
return” following an IRS assessment.
The debtor failed to file the required
document. Massachusetts argued, and
the court agreed, that the requirement
to file an “amended return” constituted
a failure to file a required return or
“equivalent report or notice…”14
The court said, citing precedent15: “
… Congress amended the text of §
523(a)(1)(B) to add further exceptions
from discharge for a tax with respect to
which an “equivalent report or notice
… was not filed or given.” (emphasis
added)
“Under Massachusetts law the debtor
must report changes in federal taxable
income in the manner prescribed …”
The opinion goes on to cite text from
the Massachusetts statutes identifying
the kind of document that must be filed,
namely, Mass. Form CA-6. The author
looked up CA-6 and it appears to
require that it be signed “under penalty
of perjury.”16
What is a “return”?
In order to determine whether a
document is an equivalent report or
notice, it is first necessary to define
what a return is, then address what an
equivalent is.
1) What is a “return?”17
a. Does it have to satisfy
the 4-prong Beard18
test?
b. Does it satisfy the
McCoy rule (in circuits
following McCoy19)?
c. Straddling;
Under
either
McCoy
or
Beard.20
d. Is
it
a
“written
stipulation”?21
2) Was there an IRS audit that
assessed additional taxes?
3) Is there a document required
to be filed with the state to
report it?
4) Is the document in question
“required” to be filed?
5) Is the required document a
“return” or the “equivalent” of a
“return”?
6) In what respects would it not
amount to the “equivalent” of a
return?
7) Was it filed or given?
There will be three situations
where all of these questions should be
answered:
1) Filed. A return or equivalent
was required to be filed and
the debtor argues that he
did file the required return or
“equivalent.”
2) Not required to be Filed. The
document he filed was not a
return or equivalent, because
a return or the equivalent was
not required to be filed.
3) Required, but need not be
equivalent. The document
he filed was not a return
or equivalent, because the
document that was required is
not a return or equivalent.
The question, what is an “equivalent
National Association of Consumer Bankruptcy Attorneys
Fall 2016
report or return,” is unanswered
The cases addressing the “equivalent”
issue in connection with state piggyback taxes do not adequately explain
why or in what respect a required
document may be deemed the
equivalent of a return. None of the
14 cases I’ve found have addressed
that issue, or addressed it but only in
passing. The challenge appears to be,
what features of a required document
make it the equivalent of a return?
Complicating this situation and lurking
in the background is the McCoy rule; if
the state required equivalent of a return
is late-filed, does that render it not a
valid “equivalent” and hence not a valid
return?
Trap for the unwary – overlooking
the piggy-back taxes
The mistake often made comes before
any of those questions must be dealt
with. The most frequent mistake is for
the attorney to address the client’s
IRS taxes and original state taxes, but
overlook the question, was there an
IRS audit that increased the federal tax
liability, and thus possibly a piggy-back
tax problem, and was it reported to the
state?
If the document is 1) not required, or
2) is required but is not the equivalent
of a return, the only one of the five
rules that would appear to apply would
be the 240-day rule for assessment.22
The debtor could in theory, file it and
wait 240 days following the state
assessment before filing bankruptcy
(that is, assuming there is no McCoy
issue).
However, if the state requires an
amended return or something that is
the equivalent of a return, then arguably
it gives rise to the requirements of §
523(a)(1)(B)(ii) (must be filed more
than 2 years before the bankruptcy is
filed), or § 507(a)(8)(A)(i) (due date
must be over three years old).23
CONSUMER BANKRUPTCY JOURNAL
17