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Wednesday, December 14, 2005

Ind. Decisions - Bankruptcy decision by Judge Posner today [Updated]

In In re Payne, Judge Posner writes:

The question presented by this appeal is whether a debtor may obtain a discharge in bankruptcy from a tax debt owed to the Internal Revenue Service if he failed to file a return until after the IRS assessed the tax that he owed. The bankruptcy judge, seconded by the district judge, answered yes, and the government appeals. * * *

Section 523(a)(1)(B)(i) of the Bankruptcy Code forbids the discharge of federal income tax liability with respect to which a “return” was required to be filed but “was not filed.” Payne argues that he filed a return for 1986, all right, albeit six years late and after the IRS had gone to the trouble of figuring out what he owed for that year and assessing him the amount. The government argues that an untimely post-assessment return is not a “return” within the meaning of the statute and that therefore Payne has never filed a 1986 return and so cannot be discharged from liability for the taxes that he owes for that year.

The Bankruptcy Code does not define “return.” Nor for that matter does the Internal Revenue Code. But there is case law interpreting it because a lot can turn on whether a submission to the IRS qualifies as a return. Taxpayers are required to file tax returns, so a taxpayer who files a document that purports to be, but is held not to be, a return can be in serious trouble.

Our conclusion [is] that the return that Payne filed in 1992 was not a “return” for purposes of allowing him to discharge his tax liabilities in bankruptcy * * *.

The judgment is reversed with directions to deny the discharge.

EASTERBROOK, Circuit Judge, dissenting. My colleagues show convincingly that the absence of a statutory definition of the word “return” in tax law leaves the judiciary with discretion to vary the definition according to both economic and legal context. * * *

The document that Payne filed is a tax return because it contains all of the required information and may have helped the agency, as the 2002 regulation demonstrates. Payne filed this return more than two years before his bankruptcy commenced, so §523(a)(1)(B)(ii) makes these taxes eligible for discharge. The United States has not argued—and we cannot properly declare sua sponte— that Payne has willfully attempted to defeat or evade any tax, so §523(a)(1)(C) does not foreclose a discharge. The judgment discharging this debt therefore should be affirmed, no matter what we think of Payne’s care, ethics, or strategy. There is no general equitable override to the Bankruptcy Code—as the IRS is quick to observe when a judge might be tempted to do the taxpayer a favor. * * * That principle works both ways.

NOTE: Thanks to the ILB reader who wrote in so promptly to tell me my summary did not make any sense -- I had combined Judge Posner's ruling with Easterbrook's dissent, a dangerous combination. Although I have now corrected the above, I include Branden Robinson's summary, which may be better than my own:
Hello Ms. Oddi,

I found your summary of _In re Payne_ today a little confusing.

The second quoted paragraph:

The document that Payne filed is a tax return because it contains all of the required information and may have helped the agency, as the 2002 regulation demonstrates. Payne filed this return more than two years before his bankruptcy commenced, so §523(a)(1)(B)(ii) makes these taxes eligible for discharge. The United States has not argued—and we cannot properly declare sua sponte— that Payne has willfully attempted to defeat or evade any tax, so §523(a)(1)(C) does not foreclose a discharge. The judgment discharging this debt therefore should be affirmed, no matter what we think of Payne’s care, ethics, or strategy. There is no general equitable override to the Bankruptcy Code—as the IRS is quick to observe when a judge might be tempted to do the taxpayer a favor. * * * That principle works both ways.
is a quote not from the majority decision authored by Posner, but from Easterbrook's dissent.

The majority held, in my lay reasoning, that Payne's purported tax return wasn't actually one because he filed it with bad intent, and therefore it could not be used to establish a dischargable debt under bankruptcy. Posner, writing for the majority, said:

The influential _Hindenlang_ decision (on which the other two discharge cases, _Moroney_ and _Hatton_, build) states that a return filed after the assessment of tax can never be adjudged an honest and reasonable endeavor to comply with the tax law. [...] Payne, however, offered no excuse (we said his lawyer's unsubstantiated assertion at oral argument doesn't count) for his six-year delay in filing; and the assessment was hardly precipitate.

The judgment is reversed with instructions to deny the discharge.

Thank you for maintaining the Indiana Law Blog; I find it an invaluable resource.

Posted by Marcia Oddi on December 14, 2005 12:35 PM
Posted to Ind. (7th Cir.) Decisions