“Forosophobia” refers to the pathological fear of taxes and taxing authorities. Of course, it’s unlikely that everyone who experiences tax trepidation is “forosophobic,” but even non-phobic anxiety levels produced by the thought of owing federal or state income taxes may cause serious trouble. IRS aversion is a real problem, which commonly manifests as a complete failure to file a return. Unfortunately, the failure to file a return almost always results in even more stressful and costly consequences than a timely filing with a balance due. 

Typically, when someone fails to file a tax return, federal and state taxing authorities will eventually take notice. For example, when the IRS receives information returns (like w-2 or 1099 forms) but can’t find a corresponding tax return in its systems, the IRS may begin investigating the taxpayer’s filing obligation. After appropriate notice and the requisite amount of time, if the taxpayer has not filed a return, the IRS may file one instead. This return is called a Substitute for Return (SFR). An SFR is prepared without including deductions that may otherwise have been available to the taxpayer, so taxpayers may want to “undo” an SFR by filing an original return reflecting deductions. 

You can see how this quickly gets messy for anyone, but mix it all up in a bankruptcy matter and even Circuit Courts start splitting over the question:  Is a Tax Return Filed After an SFR a Tax “Return” for Bankruptcy Purposes?1 Importantly, answering that question with a “no,” implicates the controversial “one day rule.” Under that rule, a debtor is precluded from obtaining a discharge of taxes in a chapter 13 bankruptcy even if the debtor filed his tax return just one day late. Here we highlight the First Circuit’s review of that question and its resulting preservation of the “one day rule.”

Have Questions? Call us for Your consultation.

Background

The facts in In Kriss v. United States (In re Kriss)2, are straightforward. Mr. Kriss failed to timely file tax returns for tax years 1997 and 2000. He also failed to pay the corresponding taxes owed. 

In March of 2003, the IRS assessed tax, penalties and interest in the amount of $30,568 for tax year 1997. Similarly, and just months later, the IRS assessed tax, penalties and interest in the amount of $46,344 for tax year 2000. The IRS made these assessments using the Internal Revenue Code (IRC) §6020(b) SFR procedures. The IRS also pursued unsuccessful collection efforts. 

Eventually, in 2007, Mr. Kriss filed original Form 1040 tax returns for tax years 1997 and 2000. Mr. Kriss did not pay the liabilities owed, though. Rather, he filed a chapter 13 petition for bankruptcy. Five years later, he received a discharge that failed to include the debts to the IRS for taxes due for tax years 1997 and 2000. The district court affirmed the bankruptcy court’s ruling that the tax liabilities had not been discharged.

Ruling and Analysis

The First Circuit Court of Appeals ruled that Mr. Kriss’s original tax returns, which were filed after SFRs, were not returns for bankruptcy purposes; therefore, the tax liabilities arising from the delinquent returns were not eligible for discharge in a chapter 13 bankruptcy.  The court further noted that under the Beard test, Mr. Kriss’s facts, “even viewed most favorably to him, fall well short of plausibly qualifying as descriptions of a reasonable effort to file timely returns.”4

The court began its analysis by reviewing 11 U.S.C. §523(a)(1)(B)(i),(ii), which the court itself described as “a particularly puzzling section of the Bankruptcy Code.”Under that section, a discharge is not available: (1) for any tax arising from an unfiled return, or (2) for any tax for which the corresponding return is filed late and is filed within two years before the bankruptcy petition date. 

After noting that the Bankruptcy Code didn’t define the term “return” until 2005, the court shared that Congress added an unenumerated subsection, stating:

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 a similar State or local law.6

The court then explained that it was required to decide whether Mr. Kriss’s returns satisfied the nonbankruptcy law filing requirements. When confronted with its earlier In re Fahey ruling, the court dismissed its application. Specifically, the court contrasted Mr. Kriss’s debt as arising under federal law, while the In re Fahey liability arose under Massachusetts state tax law.7 Notably, the court did recognize that “[t[he United States, though, makes clear that it nonetheless regards many late-filed federal returns to be returns within the meaning of section 523(a)(*).”8 But the court ultimately stated that “even if Fahey does not control, Kriss loses because his much belated filings did not qualify as returns under section 523(a)(*) even under the alternative test put forward by Kriss in the bankruptcy court.”9

What the court referred to as Mr. Kriss’s “alternative test” is widely known as the Beard test.10 As the court explained, the Beard test outlines four requirements that a document must meet in order to qualify as a tax return. These requirements are as follows:

  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.11

According to the court, Mr. Kriss satisfied the first three requirements, but he failed to convince the court that his late filed returns represented “honest and reasonable” attempts to satisfy the federal income tax law requirements. Arriving at that conclusion necessitated the court’s cursory review of each of two divisive subtests applied to the fourth Beard test prong. More specifically, depending on the court, the applicable subtest may invoke either an objective or a subjective analysis. 

Under the objective test, at least as applied by the Eighth Circuit, the “honest and reasonable requirement” is determined by looking solely at the information provided on the Form 1040 itself.12 In fact, the debtor’s subjective intent is completely irrelevant under this test. And while Mr. Kriss emphasized that he would have succeeded under that objective test, the court promptly pointed out that Mr. Kriss never made that argument in the bankruptcy court; rather, he had urged the bankruptcy court to apply the Beard test’s subjective version, as defined in other Circuit Courts.13

The court indicated that the subjective version of the test scrutinizes the debtor’s conduct and excuses or explanations for that conduct. And applying the subjective version of the test, the court noted that Mr. Kriss’s excuse for his delinquency fell “well short of plausibly qualifying as descriptions of a reasonable effort to file timely returns.”14

Conclusion

In the matter of In re Kris, the First Circuit adopted the subjective test used by other Circuit Courts to evaluate the Beard test’s “honest and reasonable” requirement. In doing so, the First Circuit maintains the “one day rule.” From our perspective, this rule is draconian and defeats sensible bankruptcy and taxation policy. Where the “one day rule” reigns, we believe there is a failure to achieve the desired balance between a debtor’s need for a “fresh start” and the interest of the IRS as “creditor.” 

Perhaps reading somewhat between the lines, there is some reason to hope that the Court may have been persuaded to deem this a “return” under slightly different facts and circumstances. As we relayed above, Mr. Kriss waited until his appearance in the First Circuit Court of Appeals to bring up the objective test at all. It’s possible the court would’ve ruled differently if the objective test had been introduced at the bankruptcy court.

Regardless of whether or not the In re Kriss decision hints at an alternate ending under the right conditions, there is one takeaway that remains true. No matter how much anxiety is caused at the prospect of filing a return, avoidance is not the answer. A timely filed return—even one with a balance due—is the best way to prevent a non-dischargeable debt later and a potential avalanche of problems post-bankruptcy. 

Footnotes

  1. For further discussion of the answer to this question, read: Is Your Late-Filed Form 1040 a Tax Return for Bankruptcy Discharge Purposes?
  2. 53 F.4th 726 (1st Cir. 2022).
  3. In re Kriss at 729.
  4. Id. at 727.
  5. Id., citing §523(a)(*). Id., citing §523(a)(*). Note that the Office of Chief Counsel issued Chief Counsel Notice CC- 2010-016, Litigating Position Regarding the Dischargeability in Bankruptcy of Tax Liabilities Reported on Late Filed Returns and Returns Filed After Assessment, clarifying the IRS’s position regarding SFRs: [I]f the debtor files a Form 1040 after the Service made an assessment, then it is only a return for bankruptcy purposes to the extent it reported new, previously unassessed liabilities. If the debtor files a return after the assessment of a substitute for return under IRC 6020(b), only the additional income and tax on the return filed after the SFR is subject to discharge. More on this position may be found in IRM 5.9.17.8.1, Determining Dischargeability of Late Filed Returns in Which a SFR was Prepared, IRM Exhibit 5.9.17-6 and IRM Exhibit 5.9.17-7.
  6. 779 F.3d 1 (1st Cir. 2015).
  7. In re Kriss at 728.
  8. Id.
  9. Beard v. Comm’r, 82 T.C. at 779 (1984), aff’d, 793 F.2d 139 (6th Cir. 1986).
  10. In re Kriss at 728, citing In re Giacchi, 856 F.3d 244, 248 (3d Cir. 2017) (paraphrasing Beard).
  11. See Colsen v. United States, 446 F.3d 836 (8th Cir. 2006).
  12. See, e.g., Giacchi v. United States, 856 F.3d 244 (3d Cir. 2017); Justice v. United States, 817 F.3d 738 (11th Cir. 2016); Smith v. IRS, 828 F.3d 1094 (9th Cir. 2016).
  13.  In re Kriss at 729.
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First Circuit Views Beard Test’s Fourth Prong Subjectively, Maintaining “One Day Rule”

Published on
May 2, 2023
First Circuit Views Beard Test’s Fourth Prong Subjectively, Maintaining “One Day Rule”
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“Forosophobia” refers to the pathological fear of taxes and taxing authorities. Of course, it’s unlikely that everyone who experiences tax trepidation is “forosophobic,” but even non-phobic anxiety levels produced by the thought of owing federal or state income taxes may cause serious trouble. IRS aversion is a real problem, which commonly manifests as a complete failure to file a return. Unfortunately, the failure to file a return almost always results in even more stressful and costly consequences than a timely filing with a balance due. 

Typically, when someone fails to file a tax return, federal and state taxing authorities will eventually take notice. For example, when the IRS receives information returns (like w-2 or 1099 forms) but can’t find a corresponding tax return in its systems, the IRS may begin investigating the taxpayer’s filing obligation. After appropriate notice and the requisite amount of time, if the taxpayer has not filed a return, the IRS may file one instead. This return is called a Substitute for Return (SFR). An SFR is prepared without including deductions that may otherwise have been available to the taxpayer, so taxpayers may want to “undo” an SFR by filing an original return reflecting deductions. 

You can see how this quickly gets messy for anyone, but mix it all up in a bankruptcy matter and even Circuit Courts start splitting over the question:  Is a Tax Return Filed After an SFR a Tax “Return” for Bankruptcy Purposes?1 Importantly, answering that question with a “no,” implicates the controversial “one day rule.” Under that rule, a debtor is precluded from obtaining a discharge of taxes in a chapter 13 bankruptcy even if the debtor filed his tax return just one day late. Here we highlight the First Circuit’s review of that question and its resulting preservation of the “one day rule.”

Have Questions? Call Our Team Today.

Background

The facts in In Kriss v. United States (In re Kriss)2, are straightforward. Mr. Kriss failed to timely file tax returns for tax years 1997 and 2000. He also failed to pay the corresponding taxes owed. 

In March of 2003, the IRS assessed tax, penalties and interest in the amount of $30,568 for tax year 1997. Similarly, and just months later, the IRS assessed tax, penalties and interest in the amount of $46,344 for tax year 2000. The IRS made these assessments using the Internal Revenue Code (IRC) §6020(b) SFR procedures. The IRS also pursued unsuccessful collection efforts. 

Eventually, in 2007, Mr. Kriss filed original Form 1040 tax returns for tax years 1997 and 2000. Mr. Kriss did not pay the liabilities owed, though. Rather, he filed a chapter 13 petition for bankruptcy. Five years later, he received a discharge that failed to include the debts to the IRS for taxes due for tax years 1997 and 2000. The district court affirmed the bankruptcy court’s ruling that the tax liabilities had not been discharged.

Ruling and Analysis

The First Circuit Court of Appeals ruled that Mr. Kriss’s original tax returns, which were filed after SFRs, were not returns for bankruptcy purposes; therefore, the tax liabilities arising from the delinquent returns were not eligible for discharge in a chapter 13 bankruptcy.  The court further noted that under the Beard test, Mr. Kriss’s facts, “even viewed most favorably to him, fall well short of plausibly qualifying as descriptions of a reasonable effort to file timely returns.”4

The court began its analysis by reviewing 11 U.S.C. §523(a)(1)(B)(i),(ii), which the court itself described as “a particularly puzzling section of the Bankruptcy Code.”Under that section, a discharge is not available: (1) for any tax arising from an unfiled return, or (2) for any tax for which the corresponding return is filed late and is filed within two years before the bankruptcy petition date. 

After noting that the Bankruptcy Code didn’t define the term “return” until 2005, the court shared that Congress added an unenumerated subsection, stating:

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 a similar State or local law.6

The court then explained that it was required to decide whether Mr. Kriss’s returns satisfied the nonbankruptcy law filing requirements. When confronted with its earlier In re Fahey ruling, the court dismissed its application. Specifically, the court contrasted Mr. Kriss’s debt as arising under federal law, while the In re Fahey liability arose under Massachusetts state tax law.7 Notably, the court did recognize that “[t[he United States, though, makes clear that it nonetheless regards many late-filed federal returns to be returns within the meaning of section 523(a)(*).”8 But the court ultimately stated that “even if Fahey does not control, Kriss loses because his much belated filings did not qualify as returns under section 523(a)(*) even under the alternative test put forward by Kriss in the bankruptcy court.”9

What the court referred to as Mr. Kriss’s “alternative test” is widely known as the Beard test.10 As the court explained, the Beard test outlines four requirements that a document must meet in order to qualify as a tax return. These requirements are as follows:

  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.11

According to the court, Mr. Kriss satisfied the first three requirements, but he failed to convince the court that his late filed returns represented “honest and reasonable” attempts to satisfy the federal income tax law requirements. Arriving at that conclusion necessitated the court’s cursory review of each of two divisive subtests applied to the fourth Beard test prong. More specifically, depending on the court, the applicable subtest may invoke either an objective or a subjective analysis. 

Under the objective test, at least as applied by the Eighth Circuit, the “honest and reasonable requirement” is determined by looking solely at the information provided on the Form 1040 itself.12 In fact, the debtor’s subjective intent is completely irrelevant under this test. And while Mr. Kriss emphasized that he would have succeeded under that objective test, the court promptly pointed out that Mr. Kriss never made that argument in the bankruptcy court; rather, he had urged the bankruptcy court to apply the Beard test’s subjective version, as defined in other Circuit Courts.13

The court indicated that the subjective version of the test scrutinizes the debtor’s conduct and excuses or explanations for that conduct. And applying the subjective version of the test, the court noted that Mr. Kriss’s excuse for his delinquency fell “well short of plausibly qualifying as descriptions of a reasonable effort to file timely returns.”14

Conclusion

In the matter of In re Kris, the First Circuit adopted the subjective test used by other Circuit Courts to evaluate the Beard test’s “honest and reasonable” requirement. In doing so, the First Circuit maintains the “one day rule.” From our perspective, this rule is draconian and defeats sensible bankruptcy and taxation policy. Where the “one day rule” reigns, we believe there is a failure to achieve the desired balance between a debtor’s need for a “fresh start” and the interest of the IRS as “creditor.” 

Perhaps reading somewhat between the lines, there is some reason to hope that the Court may have been persuaded to deem this a “return” under slightly different facts and circumstances. As we relayed above, Mr. Kriss waited until his appearance in the First Circuit Court of Appeals to bring up the objective test at all. It’s possible the court would’ve ruled differently if the objective test had been introduced at the bankruptcy court.

Regardless of whether or not the In re Kriss decision hints at an alternate ending under the right conditions, there is one takeaway that remains true. No matter how much anxiety is caused at the prospect of filing a return, avoidance is not the answer. A timely filed return—even one with a balance due—is the best way to prevent a non-dischargeable debt later and a potential avalanche of problems post-bankruptcy. 

Footnotes

  1. For further discussion of the answer to this question, read: Is Your Late-Filed Form 1040 a Tax Return for Bankruptcy Discharge Purposes?
  2. 53 F.4th 726 (1st Cir. 2022).
  3. In re Kriss at 729.
  4. Id. at 727.
  5. Id., citing §523(a)(*). Id., citing §523(a)(*). Note that the Office of Chief Counsel issued Chief Counsel Notice CC- 2010-016, Litigating Position Regarding the Dischargeability in Bankruptcy of Tax Liabilities Reported on Late Filed Returns and Returns Filed After Assessment, clarifying the IRS’s position regarding SFRs: [I]f the debtor files a Form 1040 after the Service made an assessment, then it is only a return for bankruptcy purposes to the extent it reported new, previously unassessed liabilities. If the debtor files a return after the assessment of a substitute for return under IRC 6020(b), only the additional income and tax on the return filed after the SFR is subject to discharge. More on this position may be found in IRM 5.9.17.8.1, Determining Dischargeability of Late Filed Returns in Which a SFR was Prepared, IRM Exhibit 5.9.17-6 and IRM Exhibit 5.9.17-7.
  6. 779 F.3d 1 (1st Cir. 2015).
  7. In re Kriss at 728.
  8. Id.
  9. Beard v. Comm’r, 82 T.C. at 779 (1984), aff’d, 793 F.2d 139 (6th Cir. 1986).
  10. In re Kriss at 728, citing In re Giacchi, 856 F.3d 244, 248 (3d Cir. 2017) (paraphrasing Beard).
  11. See Colsen v. United States, 446 F.3d 836 (8th Cir. 2006).
  12. See, e.g., Giacchi v. United States, 856 F.3d 244 (3d Cir. 2017); Justice v. United States, 817 F.3d 738 (11th Cir. 2016); Smith v. IRS, 828 F.3d 1094 (9th Cir. 2016).
  13.  In re Kriss at 729.