Third Circuit Widens the Circuit Split on Late-Filed Tax Returns

The Court of Appeals for the Third Circuit has joined the Fourth, Sixth, Seventh, Eighth, and Eleventh Circuits in employing a four-part test to determine whether debt associated with a late-filed tax return is dischargeable under section 523(a) of the Bankruptcy Code. This differs from the First, Fifth, and Tenth Circuits, which have held that a tax return that is filed late is not a “return” under section 523(a) of the Bankruptcy Code. As such, in those circuits, the debt associated with late-filed returns is not dischargeable in bankruptcy—even if they are only one day late.   

In Giacchi, the debtor filed his tax returns (Form 1040) late for years 2000–2002. The Court of Appeals for the Third Circuit, rather than using the one-day rule, applied a four-part analysis called the “Beard Test” in order to determine whether the returns qualified as “returns” under section 523(a). In order to qualify as a return under the Beard Test: (1) it must purport to be a return, (2) it must be executed under penalty of perjury, (3) it must contain sufficient data to allow calculation of tax, and (4) it must represent an honest and reasonable attempt to satisfy the requirements of the tax law. Only the fourth factor was at issue: whether the filing represents an honest and reasonable attempt to satisfy the requirements of tax law. The Circuit Court found that the tax debts were not dischargeable as the debtor, by filing the returns late with no real justification, did not make an honest and reasonable effort to comply with the tax law. 

This circuit split will not be resolved in the near future. In February of this year, the U.S. Supreme Court denied certiorari in a case on appeal from the Ninth Circuit on the tax return issue.   

For a more detailed discussion on this issue, please see the article authored by Anthony J. Manhart and Bodie B. Colwell: The Bankruptcy Code’s Return Policy: Another Hanging Paragraph Hangs Consumers Out to Dry. The article discusses recent cases, including: In re Fahey, 779 F.3d 1 (1st Cir. 2015), In re Nilsen, 542 B.R. 640 (Bankr. D. Mass. 2015) and Berry v. Massachusetts Department of Revenue, Case No. 15-41218-CJP (Bankr. D. Mass. June 30, 2016).

Bodie B. Colwell practices as an associate with Preti Flaherty's Bankruptcy, Creditors’ Rights and Business Restructuring group from the Portland office. She focuses on supporting bankruptcy, insolvency, and creditors’ rights clients.