Biggers et al v. Internal Revenue Service
Filing
15
MEMORANDUM OPINION OF THE COURT. Signed by District Judge Waverly D. Crenshaw, Jr on 9/9/16. (DOCKET TEXT SUMMARY ONLY-ATTORNEYS MUST OPEN THE PDF AND READ THE ORDER.)(af)
UNITED STATES DISTRICT COURT
MIDDLE DISTRICT OF TENNESSEE
NASHVILLE DIVISION
JAMES R. BIGGERS and
PAMELA BIGGERS,
Plaintiffs,
v.
INTERNAL REVENUE SERVICE,
Defendant.
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NO. 1:15-cv-00041
JUDGE CRENSHAW
MEMORANDUM OPINION
This is an appeal by Appellants James Robert Biggers (“Biggers” or the “Debtor”) and
Pamela Lynette Biggers (together, the “Biggers” or the “Debtors”) from an order of the United
States Bankruptcy Court for the Middle District of Tennessee (the “Bankruptcy Court”) granting
summary judgment to the Internal Revenue Service (the “IRS”) 1 and declaring their tax
assessments for 2001, 2002 (with the exception of an overage), 2003, and 2004 as
nondischargeable under 11 U.S.C. § 523(a)(1)(B)(i). 2 For the reasons stated below, the decision
of the Bankruptcy Court is REVERSED and this case is REMANDED to the Bankruptcy Court
for further proceedings consistent with this opinion.
1
Although the IRS is referred to as the party defendant for ease of reference, “[i]t is a well settled principle
that the IRS cannot be sued and the proper party in actions involving federal taxes is the United States of America.”
In re Smith, 205 B.R. 226, 227 n.1 (B.A.P. 9th Cir. 1997) (internal citations omitted).
2
Unless otherwise stated, all statutory references herein are to specific sections of the Bankruptcy Code, 11
U.S.C. §§ 101 et seq.
Background
The undisputed facts of the underlying case are relatively simple.
The following
background is found in the Bankruptcy Court’s memorandum opinion on the cross motions for
summary judgment filed by the Biggers and by the IRS:
The [Biggers] did not file federal tax returns for 2001, 2002, 2003
and 2004. The IRS assessed federal tax against [James Biggers] for
2001 on August 23, 2004, for 2002 on February 20, 2006, for 2003
on September 4, 2006, and for 2004 on November 6, 2006. 3
Thereafter, on February 15, 2007, the [Biggers] filed their joint tax
returns for 2001 through 2004. With the exception of 2002, the
[Biggers] reported that they owed less tax than the IRS had
previously assessed. For 2002, the [Biggers] reported that they owed
$15,088 more in tax. The IRS concedes that this overage of $15,088
is dischargeable. The IRS also concedes that [Pamela Biggers’] tax
liability is dischargeable because the IRS never assessed federal tax
against her for these years.
The [Biggers] filed a voluntary chapter 7 petition on December 9,
2009, the IRS was a scheduled creditor. The [Biggers] received a
discharge on March 11, 2010.
(Doc. No. 5-14 at 2.)
The IRS argues that these are the only salient facts appropriately considered. The Biggers
argue that there are disputed facts, including, most significantly for purposes of summary
judgment, whether the IRS made adjustments to the tax obligations as a result of or otherwise
utilized the late-filed Form 1040s submitted by the Biggers. (See Doc. No. 10-1 (Affidavit of
James and Pamela Biggers)). 4 Among the other disputed facts is the Biggers’ joint Affidavit in
3
The Biggers contend that the assessments were against both James Biggers and Pamela Biggers and if the
tax liability is dischargeable as to Pamela Biggers, as conceded by the IRS, is likewise dischargeable as to James
Biggers. (See Doc. No. 5-6 at 2.) The determination of that disputed fact, even if material, is not necessary to the
outcome of this appeal.
4
The IRS maintains that the Biggers cannot raise for the first time on appeal the proper amount of their tax
liability. (See Doc. No. 11 at 17.) The Court agrees that the determination of the amount of the Biggers’ outstanding
tax liability would be a new argument that cannot be considered and resolved for the first time on appeal. See
McFarland v. Henderson, 307 F.3d 402, 407 (6th Cir. 2002) (issues not presented to the trial court but raised for the
first time on appeal are not properly before the appellate court). However, as the Court understands the Biggers’
argument, they are not seeking to have this Court determine the amount of their outstanding tax liability, but, rather,
2
support of their motion for summary judgment, which provides some account of their reasons for
not timely filing income tax returns. (See Doc. No. 5-5 (Description DE 10-1) at 2; Doc. No. 5-6
(Description DE 13) at 3.) In their Affidavit, the Biggers state:
In 1999, our financial business records were seized by Gilmore
County Bank and those records were never released. We had to
recreate the information to be able to proved [sic] the Defendant
with the required information for the aforementioned tax years. In
addition, we moved approximately eleven times between 1999 and
2008.
Between 2004 and 2006 we had engaged JK Harris to assist us with
the tax years we had not filed. They had a power of attorney and
were communicating with the Defendant regarding our returns. In
late 2005, we realized that JK Harris was actually not doing anything
for us so [sic] started talking with an account [sic] and the Defendant
directly, through an agent named Ross Roy.
(Doc. No. 5-5 at 2.)
The Bankruptcy Court deemed the Biggers’ arguments regarding disputed facts as “red
herrings.” (Doc. No. 5-14 at 7.) Relying on the test articulated by the Sixth Circuit in United
States v. Hindenlang (In re Hindenlang), 164 F.3d 1029, 1033 (6th Cir. 1999), the Bankruptcy
Court held that the “only issue is whether the Form 1040s submitted by the [Biggers] after the IRS
had assessed tax liability served any tax purpose or had any effect under the Internal Code.” (Doc.
No. 5-14 at 7. Because the tax forms for 2001, 2003, and 2004 “all reported a lower liability than
the amount originally assessed by the IRS”, the Bankruptcy Court held that the forms served no
purpose, which compelled, as a matter of law, that the tax liability assessed by the IRS against
James Biggers for tax years 2001, 2002 (except as to the reported overage), 2003 and 2004 is
nondischargeable as to James Biggers, thereby entitling to the IRS to summary judgment. (Doc.
to determine whether the IRS made adjustments to the assessed taxes or otherwise ascribed “meaning” to the Biggers’
late-filed Form 1040s for purposes of examining the dischargeability of the tax obligations, in whatever amount.
3
No. 5-14 at 7-8.) 5 Based on this determination, the Bankruptcy Court did not consider either the
underlying reasons asserted by the Biggers for the untimely Form 1040s or any action taken by the
IRS in connection with the Form 1040s.
The issue on appeal is whether the Bankruptcy Court correctly determined that James
Biggers’ federal income tax liabilities for the 2001, 2002 (except as to the overage), 2003, and
2004 tax years are excepted from discharge under § 523(a)(1)(B)(i), because his Form 1040s for
those tax years were not “returns” within the meaning of § 523(a)(*). The Biggers argue that the
Bankruptcy Court erroneously concluded that the “hanging paragraph” added to 11 U.S.C. § 523
in 2005 by the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”) defining
“return” for dischargeability purposes did not change existing pre-BAPCPA law in the Sixth
Circuit. The IRS urges the Court to adopt the standard applied by the Bankruptcy Court; namely,
that “an untimely income tax form can be a “return” in certain circumstances, but cannot be
considered a “return” when it is filed after the Internal Revenue Service [has] already assessed the
tax.” (Doc. No. 11 at 6-7.)
Standard of Review
District courts have jurisdiction to hear appeals from final judgments, orders, and decrees
of bankruptcy judges. See 28 U.S.C. § 158(a)(1). Because there is a bankruptcy appellate panel in
the Sixth Circuit, an appellant must elect to have the appeal heard by the district court. See 28
U.S.C. §158(c)(1). Appellants James and Pamela Biggers elected to have this appeal heard by the
District Court. (Doc. No. 1 at 2.) On appeal of a bankruptcy court’s decision granting summary
judgment, the district court reviews a bankruptcy court’s factual findings for clear error and its
legal conclusions de novo. See In re Wells, 561 F.3d 633, 634 (6th Cir. 2009). Summary judgment
5
The tax form for 2002 reported $15,088 in additional tax liability, which the IRS conceded was subject to
discharge. Memorandum Opinion, DE 5-14, at p. 7.
4
is appropriate when the record shows that there are no genuine issues of material fact and that the
moving party is entitled to judgment as a matter of law. Id. (citing Fed.R.Civ.P. 56(c) and Celetex
Corp. v. Catrett, 477 U.S. 317, 322 (1986)).
Discussion
In general, an individual who files for relief under chapter 7 of the Bankruptcy Code is
discharged from all pre-petition debt, subject to certain exceptions, including those found in
Section 523 of the Bankruptcy Code. See 11 U.S.C. § 727(b). The exception at issue here excludes
any debt “with respect to which a return, or equivalent report or notice, if required … was not filed
or given.” 11 U.S.C. § 523(a)(1)(B)(i).
The parties agree that the Biggers eventually filed a Form 1040 for each of the subject tax
years. By the time they did so in 2007 however the IRS had already assessed deficiencies against
the Biggers for the entire four-year period. The disputed question is whether the Biggers’ untimely
Form 1040s for tax years 2001, 2002, 2003 and 2004 were “returns” under § 523(a)(1)(B)(i). If
not, the tax debts are nondischargeable. 6 To answer this question, the Court must determine what
constitutes a “return” for purposes of this statutory exception to discharge. This is a question of
law reviewed de novo by this Court. United States v. Hindenlang (In re Hindenlang), 164 F.3d
1029, 1032 (6th Cir. 1999).
Prior to the 2005 enactment of the Bankruptcy Abuse Prevention and Consumer Protection
Act (“BAPCPA”), the term “return” was not defined in the Bankruptcy Code. In the Hindenlang
case, which predated BAPCPA, the Sixth Circuit examined federal tax law and reiterated the
definition of “return” set forth in Beard v. Commissioner, 82 T.C. 766, 1984 WL 15573 (1984),
6
As noted, the IRS conceded that the additional tax liability for the 2002 tax year was discharged.
5
aff’d 793 F.2d 139 (6th Cir. 1986). Hindenlang, 164 F.3d at 1033. Under the so-called Beard test,
for a Form 1040 to qualify as a 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 allow
calculation of tax; and (4) it must represent an honest and reasonable
attempt to satisfy the requirements of the tax law.
Id. (citation omitted).
In 2005, BAPCPA added a “hanging paragraph” to Section 523 to define “return” as:
For purposes of this subsection, the term “return” means a return
that satisfies the requirements of applicable nonbankruptcy law
(including applicable filing requirements). Such term includes a
return prepared pursuant to section 6020(a) of the Internal Revenue
Code of 1986, or similar State or local law, or a written stipulation
to a judgment or a final order entered by a nonbankruptcy tribunal,
but does not include a return made pursuant to section 6020(b) of
the Internal Revenue Code of 1986, or similar State or local law.
11 U.S.C. § 523(a)(*). 7 Now, to be a “return” for bankruptcy discharge purposes, a document
must satisfy the requirements of applicable nonbankruptcy law and be filed in accordance with
applicable filing requirements.
As noted by the Bankruptcy Court, courts are divided on whether, under applicable
nonbankruptcy law, every income tax return that is filed late is a “return” for discharge
purposes. See In re Biggers, 528 B.R. 870, 872 (Bankr. M.D. Tenn. 2015) (compilation of cases).
While the Sixth Circuit has not yet ruled on what constitutes a “return” post-BAPCPA, the First,
Fifth, and Tenth Circuits have all concluded that the Beard test no longer applies and § 523(a)(*)
excludes from its definition of “return” any untimely form. 8 The IRS apparently did not advocate
7
Most courts have adopted an asterisk to indicate the “hanging paragraph.”
See Fahey v. Massachusetts Dept. of Rev. (In re Fahey), 779 F.3d 1, 10 (1st Cir. 2015) (2-1 decision); Mallo
v. IRS (In re Mallo), 774 F.3d 1313, 1321 (10th Cir. 2014); McCoy v. Mississippi State Tax Comm'n (In re McCoy),
666 F.3d 924, 932 (5th Cir. 2012). Notably, both the Fahey case from the First Circuit and the McCoy case from the
Fifth Circuit dealt with what constitutes a state tax return, a determination that the Sixth Circuit expressly declined to
address. Hindenlang, 164 F.3d at 1033 n.4.
8
6
for this result below. Id. (“The Court agrees with the IRS and those decisions that define
“applicable nonbankruptcy law” as the pre-BAPCPA Beard test.”)
The IRS suggests that, if this Court is disinclined to follow the Bankruptcy Court’s
reasoning, it might adopt the Fifth Circuit’s approach in In re McCoy, namely, that a late-filed tax
form cannot be considered a “return” for dischargeability purposes. See Docket No. 11 at 11. This
appears to be a reversal of position because in other cases, the IRS expressly advocated against
the McCoy result stating “The United States does not adopt this position, which creates a harsh
result that appears inconsistent with the statute’s intent.” In re Maitland, 531 B.R. 516, 519 (Bankr.
D. N.J. 2015) (quoting Martin v. Internal Revenue Service (In re Martin), 508 B.R. 717, 727 n. 14
(Bankr. E.D. Cal. 2014)). Indeed, the draconian result of a per se rule excluding from discharge
all untimely tax forms cannot be reconciled with the well-established rule that exceptions to
discharge are to be strictly construed in favor of the debtor. United States v. Storey, 640 F.3d 739,
743 (6th Cir. 2011) (citing Hindenlang); see also In re McBride, 534 B.R. 326, 332-36 (Bankr.
S.D. Ohio 2015) (analyzing bright-line approach to meaning of “return”); In re Maitland, 531 B.R.
at 519-22 (same). 9 The Court adopts the sound and thorough reasoning of the bankruptcy courts
in the Southern District of Ohio in the McBride case and the District of New Jersey in the Maitland
case in respectfully disagreeing with the conclusion that an untimely form can never constitute a
“return” under § 523(a)(*). See also In re Briggs, 511 B.R. 707, 713-15 (Bankr. N.D. Ga. 2014)
9
The Court recognizes that the stated purposes of BAPCPA included “restoring personal responsibility and
integrity in the bankruptcy system.” H.R.Rep. No. 109-31-109th Cong. 1st Sess., 2005 U.S.C.C.A.N. 88. Even with
this stated purpose, though, after BAPCPA exceptions to discharge continue to be narrowly construed “to promote the
central purpose of the discharge—a fresh start for debtors.” In re Leonard, 644 F.App’x. 612 (6th Cir. 2016) (internal
citation omitted). See also Marrama v. Citizens Bank of Mass., 549 U.S. 365, 367, 127 S.Ct. 1105, 1007 (2007)
(principal purpose of the Bankruptcy Code is to grant a fresh start to the honest but unfortunate debtor). Here, the IRS
does not allege any fraud in connection with the Biggers’ tax debt. That would be a separate basis for
nondischargeability. 11 U.S.C. § 523(a)(1)(C).
7
(analyzing and declining to adopt interpretation of “return” that excludes all untimely forms). The
Court concludes that “applicable nonbankruptcy law” as used in § 523(a)(*) includes preBAPCPA case law, which encompasses the Beard test, as well as any other nonbankruptcy law as
to the requirements for a return.
Here, the IRS concedes that the Biggers’ late filings satisfy the first three elements of
the Beard test. The only issue is whether the late filings represent an “honest and reasonable
attempt to satisfy the requirements of the tax law.” Hindenlang, 164 F.3d at 1034. Pre-BAPCPA,
the Sixth Circuit said of this part of the Beard test that “as a matter of law … a Form 1040 is not a
return if it no longer serves any tax purpose or has any effect under the Internal Revenue Code.” Id.
This language has sometimes been construed as establishing a per se rule that an untimely filing
can never be an honest and reasonable endeavor to comply with the tax law. See e.g., In re Payne,
431 F.3d 1055, 1059 (7th Cir. 2000). However, Hindenlang did not necessarily dictate that result,
even by its own language, because it left open the possibility of circumstances where a Form 1040
filed after assessment might serve a tax purpose. Hindenlang, 164 F.3d at 1034 n.5 and 1035 n.6. 10
Now, under § 523(a)(*), whether a filing satisfies the requirements of a return depends not
only on consideration of Hindenlang, the determination must also be informed by any other
applicable nonbankruptcy law. A survey of reported Tax Court decisions on when a taxpayer
honestly and reasonably attempts to comply with tax law is therefore instructive, particularly those
decided after Hindenlang. The Bankruptcy Court for the Northern District of Georgia undertook
this examination in the Briggs case: 11
10
The U.S. Tax Court has described Hindenlang as utilizing a subjective approach to the “honest and
reasonable attempt” prong of the Beard test. See Green v. C.I.R., 95 T.C.M. (CCH) 1512 at *14 n.13 (T.C. 2008),
aff'd, 322 F. App'x 412 (5th Cir. 2009).
11
The “honest and reasonable attempt” prong of the Beard test is usually referred to in Tax Court cases as
the third prong due to different ordering.
8
The U.S. Tax Court tends to analyze [this] element of the Beard test based on the
form and content of the taxpayer's filing. Walbaum v. C.I.R., 106 T.C.M. (CCH)
68 (T.C.2013) (no honest and reasonable attempt where taxpayer's form 1040 was
filled out with all zeroes for relevant figures); Diamond v. United States, 107
Fed.Cl. 702, 706 (Fed.Cl.2012), appeal dismissed (Feb. 26, 2013), aff'd, 530
Fed.Appx. 943 (Fed.Cir.2013), reh'g denied (Oct. 22, 2013), cert. denied, ––– U.S.
––––, 134 S.Ct. 1344, 188 L.Ed.2d 309, (2014) (taxpayers could not have
reasonably believed requirements of tax law fulfilled where filing withheld
information regarding wage and foreign income); Glover v. C.I.R., 100 T.C.M.
(CCH) 342 (T.C.2010) (no honest and reasonable attempt where taxpayer used
incorrect form); Sakkis v. C.I.R., 100 T.C.M. (CCH) 459 (T.C.2010) (honest and
reasonable attempt where return reported accurate wages, exemptions, and personal
information, despite claiming frivolous deductions); O'Boyle v. C.I.R., 100 T.C.M.
(CCH) 14 (T.C.2010) aff'd, 464 Fed.Appx. 4 (D.C.Cir.2012) (no honest and
reasonable attempt where taxpayers' income figures omitted majority of their
taxable income).
Other tax court cases include an analysis of the taxpayer's subjective intent at the
time of filing … whether the taxpayer intended to convey accurate information in
the filing. See Laue v. C.I.R., 103 T.C.M. (CCH) 1575 (T.C.2012) (“[T]he
Commissioner should not be forced to accept as a return a document clearly not
intended to provide the required information.”) (quoting Coulton v. Commissioner,
T.C. Memo.2005–199); Williams v. Commissioner, 114 T.C. at 143 (2000)
(finding that a taxpayer's “denial of tax liability and refusal to self-assess [did] not
evidence a reasonable attempt to satisfy his obligation to file a return under the tax
laws”); see also Green v. C.I.R., 95 T.C.M. (CCH) 1512 (T.C.2008) aff'd, 322
Fed.Appx. 412 (5th Cir.2009) (noting the disagreement among the bankruptcy
courts over whether test for honest and reasonable under the Beard analysis should
scrutinize the debtor's intent and circumstances or the face of the document filed,
but declining to adopt a position). But see Mendes v. C.I.R., 121 T.C. 308, 330
(2003) (Vasquez, J. concurring) (endorsing the per se approach adopted
in Hindenlang).
In re Briggs, 511 B.R. at 718. In applying the Beard test, the Tax Court has consistently looked to
the taxpayer’s action and intent, as well as to the nature of the information provided. Fairly
recently, the Tax Court noted that, in a case in which the taxpayer’s honesty and reasonableness
in attempting to comply with tax laws is the only issue, which often tips the scale against the
taxpayer, because of the taxpayer’s intentional recording of “uninformative entries,” contains “no
information from which a determination of tax liability can be made.” Sakkis v. C.I.R., 100 T.C.M.
(CCH) 459, at *7-8 (T.C. 2010) (emphasis in original).
9
One tax case the Court finds particularly instructive in applying the Beard test in postassessment circumstances is Swanson v. C.I.R., 121 T.C. 111 (2003), which involved a chapter 7
debtor who failed to file income tax returns, but then claimed that the tax liabilities assessed by
the IRS for those years were dischargeable. In analyzing the Beard requirements, the Tax Court
specifically considered the debtor’s intent, as reflected in his actions, and concluded that the
taxpayer’s late filings were not a valid return because “there [was] no evidence that he attempted
to file any returns on his own initiative or that he cooperated with the Commissioner in a manner
that might represent an honest and reasonable attempt to satisfy the requirements of the tax
law.” Id. at 124 (emphasis added). The court explicitly considered the debtor’s subjective intent
and actions, including the extent to which an effort was made to provide accurate and complete
income and deductions information.
Additionally, Treasury Regulation § 301.7122-1(d), which became effective in 2002,
requires that any taxpayer who wants to propose a compromise of his tax liability must file a return,
even if the IRS has already calculated and assessed the tax due without the taxpayer’s help. 26
C.F.R. § 301.7122-1(d) (implemented by Form 656). As noted by Judge Easterbrook in his dissent
in In re Payne, 431 F.3d 1055 (7th Cir. 2005), this regulation “tells us that the Treasury Department
does think that a taxpayer’s post-assessment of all income and deductions is useful.” Id. at 3060
(Easterbrook, J. dissenting). Judge Easterbrook further canvassed other tax purposes served by the
required return, including that
[t]he taxpayer then will be unable to deny that he had income; the agency will be
able to levy on his assets without protest that it made up the numbers. A belated
return will close off some avenues, narrow the dispute that remains should litigation
ensues, and—well, it will facilitate compromise. When both sides have the same
information, settlement is easier to achieve.
10
Id. at 1060-61. Because any compromise under § 7122 of the Internal Revenue Code depends on
the taxpayer’s submission of returns in accordance with 26 C.F.R. § 301.7122-1(d) (implemented
by Form 656), submission of the returns has “an effect under the Internal Revenue
Code.” Hindenlang, 164 F.3d at 1034. See also Boulez v. C.I.R., 810 F.2d 209, 213-14 (D.C. Cir.
1987) (tax regulations have the force of law). This regulation could also be regarded as a “filing
requirement” within the meaning of § 523(a)(*), further supporting that returns filed postassessment are returns for purposes of § 523(a)(1)(B)(i).
Judge Easterbrook’s evaluation of the utility of the post-assessment filings is also
consistent with the second sentence of § 523(a)(*), which specifically includes in the definition of
return (i) an IRS-prepared return where the debtor/taxpayer provides the information to the IRS,
but not one where the debtor/taxpayer did not participate and (ii) a written stipulation to a
judgment. Put another way, in Hindenlang parlance, inclusion of these documents as returns under
§ 523(a)(*) suggests that there is a tax purpose served when the amount and collectability of a tax
debt can be established—and therefore made easier for the IRS—as a result of a debtor’s
cooperation.
Conclusion
Having considered applicable nonbankruptcy law requirements for a return, the Court
concludes that the determination of the fourth prong of Beard is a subjective test that allows for
circumstances in which there can be an honest and reasonable attempt to comply with the tax law
even after assessment by the IRS and even when untimely forms do not report additional tax
liability. Here, the only circumstances considered by the Bankruptcy Court in determining the
honesty and reasonableness of the Biggers’ attempt to comply with tax laws was the timing of the
Form 1040s and the nonexistence of any additional tax liability. Based on the entirety of the
11
record, the Court concludes that the Bankruptcy Court erred. Accordingly, the decision of the
Bankruptcy Court is therefore REVERSED and this case is REMANDED for further proceedings
consistent with this decision.
The Court will enter an accompanying order.
______________________________________
WAVERLY D. CRENSHAW, JR.
UNITED STATES DISTRICT JUDGE
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