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