On August 23, 2015, we posted a short article on the decision made by the Tenth Circuit Court of Appeals in In re Mallo, 774 F.3d 1313 (2014), cert. denied sub nom. Mallo v. I.R.S., — U.S. —, 135 S. Ct. 2889, 192 L.Ed.2d 924 (2015) where the court ruled that under an amendment added to the bankruptcy code in 2005, tax returns that are not filed timely do not qualify as “return[s],” and, therefore, do not qualify for discharge relief under the bankruptcy code. We noted that unless the bankruptcy code is amended or the Supreme Court takes a case to resolve the issue, people in Kansas would have to timely file their returns to have the opportunity to obtain a discharge.
Two recent cases have come down that make the chances for a review by the Supreme Court more likely. In United States v. Martin (In re Martin), 542 B.R. 479 (B.A.P. 9th Cir. 2015), the Ninth Circuit Bankruptcy Appellate Panel (which covers the states of Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon and Washington), strongly criticized the holding in Mallo and other cases employing the “literal construction” reasoning used in Mallo. The court began its analysis as follows:
When is a tax return not a tax return? According to an increasing number of courts, including some courts of appeal, the answer is: when the tax return, otherwise wholly compliant with applicable tax laws, is filed a second (or more) late. According to these courts, by way of the 2005 Bankruptcy Code amendments, Congress intended to make a substantial and exceptionally harsh change to nondischargeability law by adding a hanging paragraph at the end of 11 U.S.C. § 523(a) defining the term “return” to exclude any taxpayer filing that does not wholly and strictly comply with all applicable return filing requirements, even if the taxing authority itself could and would forgive that noncompliance. Indeed, the United States rejects this statutory interpretation in this appeal. Id. at 479.
More recently, in In re Justice, 817 F.3d 738 (11th Cir. March 30, 2016), the Eleventh Circuit discounted the reasoning in Mallo and other decisions employing the “literal construction” test and assumed that reasoning was incorrect in making its decision. Although the decision does not directly challenge the reasoning in Mallo, it does so implicitly.
For now, this means that even if you think you’ll have trouble paying your taxes, the worst thing you can do is not file your return on time. Income taxes can be addressed in a bankruptcy proceeding, but not if your return isn’t filed on time. We’ll continue to monitor the cases so we can provide up-to-date advice to our clients seeking bankruptcy advice.