Bankruptcy

Judicial Conference Increases Dollar Amounts in Bankruptcy Cases

The Bankruptcy Code is full of specific dollar limitations and allowances. These figures include dollar limits on eligibility for use of Chapter 13 and many other amounts, such as the value of exemptions permitted to bankruptcy debtors under 11 USC §522. All of these dollar amounts are adjusted by the amount of change in the Consumer Price Index for All Urban Consumers in the manner set out in 11 USC §104(a), a part of the bankruptcy code. The adjustment occurs every three years on April 1st and is based on the amount of change that has occurred over the previous three years ending December 31 the year before the adjustment. Dollar amounts are rounded to the nearest $25 and the adjustment applies to other limits set forth in the bankruptcy code.

Well, it is that time of year for an announcement of the change and 2016 is a year when the changes are made as of April 1st. The Judicial Conference of the United States has just released a notice of the changes proposed to come into effect for cases filed after March 31, 2016. It looks like Chapter 13 cases will now be permitted for individuals with unsecured debts of no more than $394,725 and secured debts of no more than $1,184,200 for cases filed April 1, 2016, and later. This is an increase of more than $11,000, only about half the increase announced in 2013 for unsecured debt.   Secured debt increased by about $35,000 over the Chapter 13 limit imposed April 1, 2013.

In states where federal exemptions are allowed, such as Oregon, the federal homestead exemption will be increased from $22,975 to $23,675 per person. The federal exemption for a car will rise from $3,675 to $3,775. Under the statute, if the amount is increased it will go up by at least $25. While many states have opted out of federal exemptions and limit bankruptcy exemptions to those provided in state statute, many other dollar amounts apply to all cases filed in bankruptcy court. Federal exemptions were allowed in Oregon as of July 1, 2013. These new dollar figures will only come into play for filings after the effective date, but they may allow filings that were previously impermissible.

By |Feb 29, 2016|Categories: Bankruptcy|Tags: , |

Tax Relief in Bankruptcy?

The 9th Circuit Bankruptcy Appellate Panel decided a case recently with important consequences for delinquent taxpayers. On December 17, 2015, the Bankruptcy Appellate Panel handed down a decision in United States v. Martin that may advance a thorny problem toward resolution by the U.S. Supreme Court. The ruling, although of an interim nature, stated that a document filed by the taxpayer, intended as a tax return, should be considered a tax return and thus a dischargeable debt in bankruptcy. Bankruptcy lawyers and their clients with late tax returns should be well pleased.

The facts of the case are fairly common. Kevin and Susan Martin only got around to filing some missing tax returns after the IRS began collection on some involuntary tax assessments. The late-filed tax returns increased the Martins’ tax liability in some years, and decreased it in at least one tax year. After waiting the two years required by 11 U.S.C. §523(a)(1)(B)(ii) before a tax debt from a late-filed return can be discharged, the Martins filed bankruptcy.

A dispute arose when the IRS did not agree that the Martins’ tax debt had been discharged in the bankruptcy proceeding. To resolve the matter, the Martins filed an adversary proceeding in the bankruptcy court against the IRS. They took this action without the benefit of counsel, on a pro se basis. Bankruptcy Judge Richard Lee, sitting in the Eastern District of California, agreed with the Martins and ruled the tax was dischargeable. It was a well-reasoned opinion by the bankruptcy court that harmonizes the statutory language with the legislative intent of Congress. The reasoning carefully balances the “fresh start” of the debtors against the financial interests of the government.

The IRS did not share my enthusiasm for Judge Lee’s determination and appealed to the Bankruptcy Appellate Panel for the 9th Circuit. With the full weight of the federal government and the U.S. Attorney’s office arrayed against them, one would think the Martins would hire counsel to represent them in the Appellate Court. However, their win in the Bankruptcy Court encouraged them to go it on their own. Their briefs are just that, brief, and verify the pro se nature of this case. In fact, the Martins orally argued the case themselves before the Appellate Panel. The Martins won another round and the Bankruptcy Appellate Panel came back with a wonderful 28 page opinion, mostly in their favor. On the most important issue, the dischargeability of tax on late filed returns, this was an important win for bankruptcy debtors with outstanding tax liability.

Three circuits previously reached the opposite conclusion, holding that late-filed tax returns are no longer considered tax returns for bankruptcy discharge purposes. In the first of these decisions, McCoy v. Mississippi State Tax Commission, the 5th Circuit Appellate Court determined a late-filed state tax return to be disqualified from discharge by the 2005 amendment to 11 U.S.C §523(a)—specifically, the language included as part of a hanging paragraph appended to that section stating:

For the purposes of this subsection, the term ‘return’ means a return that satisfies the requirements of applicable non-bankruptcy law (including applicable filing requirements).

The 5th Circuit in McCoy found a timely filing requirement in the Mississippi state law and disqualified the McCoys’ late-filed tax return from discharge using this language.

I have discussed McCoy and two subsequent cases, Fahey and Mallo, from the 1st and 10th Circuits respectively, in another article “Trouble With Tax Debt in Bankruptcy.”  With these three Circuit Court opinions, the trend has not been looking good for delinquent taxpayers. Only the 8th Circuit, with the Colsen case decided based on pre-2005 amendment law, holds that a late return can be discharged if it otherwise meets bankruptcy discharge criteria.

The Martin opinion, containing a comprehensive analysis of just why the McCoy, Fahey, and Mallo decisions are wrong, is only a Bankruptcy Appellate opinion[i].  As such, it does not carry the weight of an opinion from the 9th Circuit Court of Appeals.  Bankruptcy judges in the 9th Circuit generally follow Bankruptcy Appellate Panel opinions, and will likely enter discharges in accord with the Martin decision unless and until it is overturned.  That may be a long time in coming[ii].

The Martin opinion is interesting because the Bankruptcy Appellate Panel, after 28 pages of discussion, actually returned the case to the Bankruptcy Court for further findings[iii]. This is based on a prior 9th Circuit case, In Re: Hatton, that held the debtor’s behavior must be taken into consideration when determining if the papers filed constitute a tax return for discharge purposes. In that earlier case, the 9th Circuit decided that in the case of a late tax return, there was a good faith requirement.  Thus, in the 9th Circuit, the definition of a tax return includes a requirement that the document filed by the debtor be a reasonable attempt to comply with tax laws.

The Martins are not yet home free. Some of the delinquent tax returns were not filed until months after they were prepared, signed, and delivered by their accountant. To meet the good faith requirement, as expressed in Hatton, the debtors must convince the bankruptcy judge they had good reason for their delay in filing tax returns or, at least, had no improper motive.

More interesting than the remand issue is the fact that the decision of the Bankruptcy Appellate Panel is not yet appealable, because the remand order is not technically a final order. The ultimate decision on dischargeability will depend on findings of the bankruptcy court if the case is returned to the Bankruptcy Appellate Panel. Doubtless, this frustrates the Internal Revenue Service and may provide a window of opportunity for delinquent taxpayers to discharge their tax debts in the 9th Circuit.

[i] The Bankruptcy Appellate Panel (BAP) is composed of three bankruptcy judges. It is an optional avenue of appeal from a bankruptcy court decision and must be agreed upon by all parties to the appeal.  While persuasive, a BAP opinion is only clear binding authority in the specific case for which a decision is made.  The Court of Appeals is superior to the Bankruptcy court and its opinions are binding authority on all district courts and bankruptcy courts in the circuit.

[ii] The 9th Circuit Court of Appeals is currently considering a case with very similar facts. The euphoria over United States v. Martin could be short-lived if the 9th Circuit see the issue differently.

[iii] The BAP remanded the case to the bankruptcy judge for further findings. The record before the court on appeal contained no evidence on something the court considered an important issue.

Trouble in Bankruptcy Discharge of Tax Debt

One often used technique for resolving unpaid personal income tax debt is now in doubt.  Practitioners should take care in advising delinquent return filers that bankruptcy may be available, after a two year waiting period, to discharge the tax debt.

Whether or not a tax obligation is dischargeable in bankruptcy is, in part, determined by 11 U.S.C. § 523(a)(1). That statute provides:

A discharge under section 727, 1141, 1228(a), 1228(b), or1328(b) of this title does not discharge an individual debtor from any debt—

(1) for a tax or a customs duty—

(A) of the kind and for the periods specified in section 507(a)(3) or 507(a)(8) of this title, whether or not a claim for such tax was filed or allowed;

(B) with respect to which a return, or equivalent report or notice, if required—

(i) was not filed or given; or

(ii) was filed or given after the date on which 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;

This language has long been interpreted to meant that a tax return must of have been filed more than two years prior to commencement of the bankruptcy case for the tax debt to be dischargeable.

In 2005, for the first time Congress created a definition of “return.”  Language was inserted, in a hanging paragraph, as part of the Bankruptcy Abuse Prevention and Consumer Protection Act:

 . . . 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 a similar State or local law. 11 USC § 523(a)(*).

In 2012, the 5th Circuit decided McCoy v. Mississippi State Tax Commission (In re McCoy), 666 F.3d 924 (5th Cir. 2012).  That decision, relying on the new definition of return and focusing on the parenthetic language “including applicable filing requirements”, held that an untimely filed state tax return was not a “return” for bankruptcy discharge purposes.  Now, two more circuits have rendered similar opinions.

The McCoy case was based on the language of Mississippi state law.  However, a second case, Mallo v. Internal Revenue Service (In re Mallo), 774 F.3d 1313 (10th Cir. 2014) came up with the same result by applying 26 U.S.C. § 6072(a) language “shall be filed on or before” a particular date as an “applicable filing requirement.”  Thus, the federal income tax return that was filed late, despite the intervening delay of more than two years between the tax filing and commencement of the bankruptcy case, disqualified the document filed as a “return” for bankruptcy discharge purposes.

The third opinion, Fahey v. Mass. Dep’t of Revenue (In re Fahey), 2015 U.S. App. LEXIS 2458, has followed this line of analysis and has similarly determine that a tax return, filed one day late, will never qualify the resulting debt as dischargeable in bankruptcy.  Although a dissenting opinion by Judge Thompson argues for a debtor friendly interpretation of the new provision, the majority is emphatic in its plain language analysis that prohibits discharge of the tax due on a late filed return.

While the same question is currently pending in other circuits, three times is clearly the charm for the purpose of ringing alarm bells in the tax practitioner community.  In the past, those of us who have worked to clean up tax delinquencies have generally considered bankruptcy a possible alternative strategy.  Tax problems created by the lack of our clients’ diligence in timely complying with income return filing requirements would be well advised to seek another avenue for resolving the debt.

Before this unfavorable interpretation of the 2005 legislation, a typical non-filer may have been told to file the missing returns and then wait two years to file bankruptcy; with the promise that the unpaid tax will be discharged and the problem solved.  This advice can no longer be given without strong qualification.

While the 9th Circuit has yet to address the timeliness issue in determining whether or not a late tax filing constitutes a return for bankruptcy discharge purposes, three other circuits have ruled decisively against the taxpayer on this issue and it would be imprudent to assume a different result in this circuit.

There remain two other avenues for converting an unfiled return into a future dischargeable debt. The tax court offers one alternative and a collaborative effort with the IRS to prepare a tax return pursuant to 26 U.S.C. § 6020(a) provides another. A stipulated resolution in the U.S. Tax Court should meet the requirements of “a written stipulation to a judgment or a final order entered by a nonbankruptcy tribunal.” It will now be even more important to file a timely Tax Court complaint in response to a Statutory Notice of Deficiency. The language “a return prepared pursuant to section 6020(a) of the Internal Revenue Code of 1986” suggests the second route to a dischargeable tax debt for a delinquent taxpayer.

The practice of preparing a return pursuant to section 6020(a) has become so uncommon as to render it an unlikely alternative. Yet one case cited by the majority in Fahey shows a bankruptcy court willing to construe an IRS assessment made after the submission of information by the taxpayer as meeting the requirements of that statute. See In re Kemendo, 516 B.R. 434 (Bankr. S.D. Tex. 2014). If a substitute for return is pending, it may be helpful to supply information to the IRS in order to assist in the calculation of any tax due.

The ABA Taxation Section has made a formal recommendation to Congress for a change in 11 U.S.C. § 523(a) to remedy this problem. It is recommends that the phrase “other than timeliness” be added to the parenthetical language so that it would read “(including applicable filing requirements other than timeliness).” The National Taxpayer Advocate supports a change of this nature and, in its 2014 Report to Congress, recommends amendment of the bankruptcy code in order to ”provide that a late-filed tax return may be considered a return for purposes of obtaining a bankruptcy discharge.”

By |Feb 23, 2015|Categories: Bankruptcy, Tax Law|Tags: , , |

Credit Card Payment of Tax May Not Be A Good Idea

Credit cards are becoming more common for use in payment of taxes.  With the rapid increase in electronic filing of tax returns, online credit card payments have increased as well.  Nearly 70% of 2010 personal income tax returns were filed electronically.  By 2012, the federal government hopes to increase online filing to 80% for all tax returns.  When the electronic filing has been done and there is tax to pay, it is convenient and even encouraged to pay by credit card.

Convenience of credit card tax payment comes at some cost.  The government uses third party companies to process payment in most cases and a “convenience fee” is charged to the taxpayer for the service.  The IRS has a webpage entitled “Pay Taxes by Credit or Debit Card” with information on how to do just that.  The IRS website suggests that fees for the card payment range from a low of 1.9% to a high of 2.35%.   The additional fee is included in the transaction at the taxpayer’s expense.  Most state and local governments will accept payment through such a company.

By |Sep 16, 2011|Categories: Bankruptcy, Tax Law|

MERS Defeated Again in Oregon

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Foreclosure Fiascos Contiune...

We recently wrote a post describing a MERS defeat in Oregon Bankruptcy Court, and MERS (an acronym for Mortgage Electronic Services, Inc., an electronic registry) is in the news once again. This has not only been a hot topic in Oregon, but people around the nation have been attacking MERS as foreclosures mount and banks turn defaulting homeowners out into the streets.

By |Jun 16, 2011|Categories: Bankruptcy|Tags: , , , , |

Notify State Of IRS Audit Or Jeopardize Tax Dischargeability

Many states have their own personal income tax.  Generally these states also have laws that require a taxpayer to submit a copy of the IRS audit report if the federal liability is adjusted due to a reallocation of income or deductions on a previously filed return.   The failure to do so may cause bankruptcy discharge problems .  Changes to federal law contained in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 may render any undisclosed increase in liability a non-dischargeable debt for bankruptcy purposes.

By |May 29, 2011|Categories: Bankruptcy, Tax Law|Tags: , , , , |