Paul L. Caron

Sunday, December 18, 2005

Posner v. Easterbrook: What Is a Tax Return?

Interesting opinion from the Seventh Circuit this week, Payne v. United States, No. 05-1941 (7th Cir. 12/14/05), in which Judge Richard Posner and Judge Frank Easterbrook differed over the validity of an untimely post-assessment tax return.  The question arose in the context of whether a debtor can obtain a discharge in bankruptcy from a tax debt if he fails to file a return until after the IRS assessed the tax owed.

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.

The cases hold that to be deemed a return, a document filed with the IRS must (1) purport to be a “return,” (2) be signed under penalty of perjury, (3) contain enough information to enable the taxpayer’s tax liability to be calculated, and (4) “evince[ ] an honest and genuine endeavor to satisfy the law.”

Writing for the 2-1 panel majority, Judge Posner concluded:

that the return that Payne filed in 1992 was not a “return” for purposes of allowing him to discharge his tax liabilities in bankruptcy is consistent with all the appellate decisions (Moroney, Hatton, and Hindenlang) that deal with untimely tax returns brandished in the bankruptcy court in an effort to obtain a discharge....

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. We need not go that far in this case. There might as we have said be circumstances beyond a taxpayer’s control that prevented him from filing a timely return, or even from asking for an extension of the time to file, before the tax was assessed. Payne, however, offered no excuse . . .for his six-year delay in filing; and the assessment was hardly precipitate.

In dissent, Judge Easterbrook disagreed:

The majority writes that a document “filed after the [tax] authorities have borne [the] burden [of calculating the amount due] does not serve the purpose of the filing requirement.” I disagree with this view— and so does the Internal Revenue Service. Any taxpayer who wants to propose a compromise of his tax liabilities must file a return, even if the Service already has gone to the trouble of calculating and assessing the tax without his help....

The document that Payne filed is a tax return because it contains all of the required information and may have helped the agency.

(Hat Tip: Howard Bashman.)

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