The Duty to File Tax Returns under BAPCPA
Although anecdotal, many Department of Justice and Internal Revenue Service attorneys who practice bankruptcy would most likely state that one of their largest complaints with the previous version of the Bankruptcy Code was their inability to enforce tax compliance, most notably in the filing of tax returns. Consumer debtors had difficulty in producing or paying for the preparation of tax returns, and corporate debtors avoided tax compliance by not filing business tax returns or making tax deposits. One of the principal purposes of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) was to ensure tax compliance.
As an initial matter, BAPCPA amended 28 U.S.C. §960 (an officer's responsibility to file tax returns under the authority of a U.S. court) to comport with changes to the Code under BAPCPA by adding subsections (b) and (c) regarding the payment of taxes. Section 960(a) requires that:
(a) Any officers and agents conducting any business under authority of a United States court shall be subject to all federal, state and local taxes applicable to such business to the same extent as if it were conducted by an individual or corporation.
See also 26 U.S.C. §§6011, 6012.
New Code §1308 provides that on the first setting of the §341 meeting, the debtor is required to file all pre-petition tax returns that were due within four years preceding the petition date. The trustee may allow the debtor a reasonable amount of time to file the delinquent returns up to a period of 120 days that may be extended if the debtor is able to show by a preponderance of the evidence that the failure to file the return is attributable to circumstances beyond the debtor's control.
Further, the trustee may continue the §341 meeting to allow the debtor time to file the delinquent returns. If the debtor makes the requisite showing, the court may give the debtor an additional period of time that does not extend beyond any lawful extension period, and a party in interest or the U.S. Trustee may dismiss or convert a case for failure to file tax returns. §1307(e). Under BAPCPA, "return" as defined in this section now includes a tax return prepared under 26 U.S.C. §6020(a) or (b).
New Code §521(e)(2)(A) also requires an individual chapter 7 or 11 debtor to provide to a trustee at least seven days before the initial §341 meeting a copy of the debtor's most recent tax return or a transcript of that return, and to provide a copy of that return or transcript to any party who makes a timely request. Failure to do so requires dismissal unless due to factors beyond the debtor's control.
A taxing authority may also seek dismissal or conversion of a case if an individual debtor does not file any tax return that becomes due after the petition date within 90 days of the request, or fails to obtain an extension of the due date. §521(j). In addition, an individual debtor in a chapter 7, 11 or 13 case must file a delinquent tax return for any tax year ending within a three-year period before the petition date when either the court, U.S. Trustee or any party in interest requests it. In the context of chapter 13 plan confirmations, new Code §1325 (a)(9) requires the filing of tax returns as prescribed under §1308 as a condition of confirmation.
Given all the changes made to the Code regarding tax compliance, there is little doubt that Congress intended that debtors file their tax returns. That said, there are already some challenges to how a debtor achieves tax compliance. Although still in its infancy, and with a dearth of published opinions, a couple of developments have arisen under BAPCPA. Notably, there has been a reluctance among bankruptcy courts to dismiss chapter 7 cases for failure to provide tax returns seven days in advance of the §341 meeting. Also, there appears to be a question regarding what constitutes a tax return "for the most recent tax year ending immediately before the commencement of a case" under §521(e)(2)(A).
For example, in In re Merrill, 340 B.R. 671, 673 (Bankr. D. N.H. 2006), the court noted that although the debtor provided the most recent tax return on the eve of the §341 meeting as opposed to seven days before the §341 meeting as required by §521(e)(2)(A), dismissal was not mandated under §521(e)(2)(B). The court based its conclusion on the fact that the debtor did provide the return to counsel more than seven days prior to the §341 meeting, but that it was counsel who forgot to provide the return to the chapter 7 trustee. Id. The court found that the failure to submit the return to the trustee at least seven days in advance of the §341 meeting constituted circumstances beyond the debtor's control. Id.
Further, there was a dispute in Merrill as to what the most recent tax return was. The debtor filed for bankruptcy on Jan. 20, 2006. As such, the debtor submitted his 2004 individual income tax return to the chapter 7 trustee in satisfaction of §521(e)(2)(A). The chapter 7 trustee argued that the most recent tax return would be the 2005 income tax return because it was the 2005 tax year that immediately ended before the debtor filed for bankruptcy. Id. The court disagreed, noting that under the Internal Revenue Code (§6072(a)), the debtor did not have a filing obligation for the 2005 income tax return until April 15, 2006; therefore, the submission of the 2004 income tax return complied with §521(e)(2)(A). Id.
Similarly, in In re Duffus, 339 B.R. 746 (Bankr. D. Ore. 2006), the trustee asked for dismissal of the debtors' chapter 7 case because the debtors failed to provide to the trustee their most recent tax return seven days in advance of the §341 meeting. The trustee concluded that §521(e) required dismissal of the debtors' case, even though both parties acknowledged that there were assets available for distribution to creditors. Id. at 747. The court found that the chapter 7 trustee had "prosecutorial discretion" not to file the motion to dismiss. Id. (citations omitted).2 The court stated that the trustee could avoid the implications of §521(e) by simply not filing the motion to dismiss and that the trustee could base his decision not to file the motion to dismiss on the fact that there were assets to distribute to creditors, thereby making the non-filing of the motion in the best interests of the estate. Id.3
More importantly, the court held that BAPCPA does not require automatic dismissal of a chapter 7 case for failure to provide tax returns to the trustee seven days in advance of the §341 meeting, but rather that a chapter 7 case shall be dismissed for failure to comply with §521(e) upon the filing of a motion to dismiss and opportunity for notice and a hearing. Id. at 748; see also In re Ring, 341 B.R. 387 (Bankr. D. Maine 2006) (failure to file returns under §521(e) (2)(A) does not result in automatic dismissal of debtors' case absent filing of motion to dismiss).
The few cases that have considered the filing requirements of §521(e)(2)(A) have appeared to pave a path that suggests dismissal is not automatic under §521(e) until a party files a motion to dismiss and there is a hearing and opportunity to be heard. Moreover, initial indications are that courts will be lenient in allowing chapter 7 debtors to continue in bankruptcy where there has been compliance under §521(e)(2)(A) by providing tax returns to debtor's counsel or the trustee if done so before the §341 meeting, even if done less than seven days prior to confirmation. Finally, it appears that a debtor can meet its burden of demonstrating "circumstances beyond the debtor's control" by establishing production of documents prior to the first setting of the §341 meeting.
1 The views expressed in this article are Mr. Gargotta's and do not necessarily reflect the views of the Department of Justice or Internal Revenue Service.
2 A corollary to this discussion is noted in In re Satinoff, 2006 WL 1206492 (Bankr. S.D. Fla. 2006), where the court found merit in the Duffus court's suggestion that a panel trustee could use his or her discretion in not filing motions to dismiss under §521(e)(2)(A). Nonetheless, the panel trustee in that case advised the court that the U.S. Trustee was requiring panel trustees to file motions under §521(e)(2)(A) in the absence of discretion—a position the court found untenable.
3 At least one court has found that due to the complex nature of BAPCPA, the limited number of new cases filed under BAPCPA in its district, and the fact that at the time of decision BAPCPA was only effective five months, debtor's counsel's failure to provide the chapter 7 trustee tax returns in advance of the §341 meeting constituted "circumstances beyond the debtor's control" and did not require dismissal of debtor's case. In re Grasso, 2006 WL 1390397 (Bankr. D. N.H. 2006).