Ridgway v. United States (In Re Ridgway)Ridgway v. United States (In Re Ridgway)
MEMORANDUM OF DECISION ON MOTION FOR SUMMARY JUDGMENT
I.INTRODUCTION
This Memorandum of Decision considers whether the Internal Revenue Service’s making of a substitute income tax return upon a debtor’s default suffices as a “filed return” for purposes of a dischargeability determination under Bankruptcy Code Section 523(a)(l)(B)(i). This question is presented to the Court on a motion for summary judgment filed by the Defendant United States of America, Internal Revenue Service (hereafter, “IRS”). 1 For the reasons which follow, this matter shall be resolved in favor of the Debtor.
II.JURISDICTION
The United States District Court for the District of Connecticut has subject matter jurisdiction over the instant adversary proceeding by virtue of
III.FACTUAL BACKGROUND
The relevant facts are not in dispute between the parties. The following factual background recites verbatim the facts as agreed between the parties in a Joint Stipulation of Facts (Doc. I.D. No. 15):
1. The debtor did not file a tax return for his 1991 tax year.
2. The debtor did not file a tax return for his 1992 tax year.
3. As a result of the debtor’s failure to file a tax return for his 1991 tax year, and pursuant to26 U.S.C. Sec. 6020(b) , the Secretary of the Treasury from his own knowledge and from such other information as he could obtain through testimony or otherwise, prepared a substitute for return for the debtor for his 1991 tax year.
4. Proper notice of the 1991 tax deficiency was sent to the debtor pursuant to26 U.S.C. Sec. 6212 . The debtor did not respond to the notice of deficiency.
5. After expiration of the period provided in26 U.S.C. Sec. 6213(a) , the Secretary of the Treasury, pursuant to26 , properly made an assessment against the debtor in the amount of $38,060.00 for unpaid tax liabilities and in the amount of $11,542.83 for accrued interest on the unpaid tax liabilities of the debtor for his 1991 tax year.U.S.C. Sec. 6213(c)
6. Despite notice and demand for payment, the debtor’s 1991 tax liability remains unpaid.
7. As a result of the debtor’s failure to file a tax return for his 1992 tax year, and pursuant to26 U.S.C. Sec. 6020(b) , the Secretary of the Treasury from his own knowledge and from such other information as he could obtain through testimony or otherwise, prepared a substitute for return for the debtor for his 1992 tax year.
8. Proper notice of the 1992 tax deficiency was sent to the debtor pursuant to26 U.S.C. Sec. 6212 . The debtor did not respond to the notice of deficiency.
9. After expiration of the period provided in26 U.S.C. Sec. 6213(a) , the Secretary of the Treasury, pursuant to26 U.S.C. Sec. 6213(c) , properly made an assessment against the debtor in the amount of $11,238.00 for unpaid tax liabilities and in the amount of $2,184.65 for accrued interest on the unpaid tax liabilities of the debtor for his 1992 tax year.
10. Despite notice and demand for payment, the debtor’s 1992 tax liability remains unpaid.
11. On January 24, 2002, the debtor filed a Chapter 7 Bankruptcy Petition.
IV. DISCUSSION
A. Summary Judgment Standards.
In the present proceeding there is no material fact in genuine issue. Therefore the focus of this Court’s analysis is upon the question of whether the IRS is entitled to judgment as a matter of law.
B. Dischargeability of Federal Income Tax Obligations — Section 523(a)(1).
A debtor in a Chapter 7 case receives a discharge of debts under the authority of Section 727(b) of the Bankruptcy Code, which provides, in relevant part, that “[ejxcept as provided in section 523 of this title, a discharge ... discharges the debtor from all debts that arose before the date of the order for relief under this chapter .... ” This adversary proceeding concerns the applicability of an exception to discharge for tax debt, Bankruptcy Code Section 523(a)(1), which provides in pertinent part as follows:
(a) A discharge under section 727 ... of this title does not discharge an individual debtor from any debt—
(1) for a tax ...
(A) of the kind and for the periods specified in section ... 507(a)(8) 2 of this title ...;
(B) with respect to which a return, if required—
(i) was not filed; or
(ii) was filed after the date on
which such return was last due, under applicable law or under any extension,and after two years before the date of the filing of the petition; or
(C) with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax ....
1. Income tax returns and collection under non-bankruptcy law.
Federal law requires that every person liable for payment of federal income tax “make” a return according to the forms prescribed by the Treasury Department.
(a) Preparation of return by Secretary. — If any person shall fail to make a return... but shall consent to disclose all information necessary for the preparation thereof, then, and in that case, the Secretary may prepare such return, which being signed by such person, may be received by the Secretary as the return of such person.
(b) Execution of return by Secretary.—
(1) Authority of Secretary to execute return. — If any person fails to make any return required by any internal revenue law or regulation made thereunder at the time prescribed therefor ... the Secretary shall make such return from his own knowledge and from such information as he can obtain through testimony or otherwise.
(2) Status of returns. — Any return so made and subscribed by the Secretary shall be prima facie good and sufficient for all legal purposes.
In general, a tax is not collectible from a debtor until it has been “assessed”.
See, e.g., Kurio v. U.S.,
Although he cites no
judicial
authority-supporting the dischargeability of tax debt for which a debtor failed to file a return, the Debtor appeals directly to the language of the Bankruptcy and Internal Revenue Codes. Indeed, the plain language of the relevant Code provisions is the appropriate starting point, and perhaps ending point, of statutory construction.
See, e.g., Toibb v. Radloff,
The language of the relevant statutes is strongly supportive of the Debtor’s position in this proceeding. Specifically, Bankruptcy Code
The Debtor also claims support from the Internal Revenue Code. He highlights subsection (2) of IRC
The Debtor’s reliance on the apparent plain meaning of these statutes is further bolstered by this Court’s obligation to construe exceptions to discharge
narrowly in favor of the debtor,
and confine such exceptions to those
plainly expressed
in the Bankruptcy Code.
E.g., Nat’l Union Fire Ins. Co. of Pittsburgh v. Bonnanzio (In re Bonnanzio),
It is thus surprising for the Court’s research to reveal that arguments such as the Debtor’s have failed to find support in the rulings of other courts. Indeed, in the few reported cases “on all fours” with the instant proceeding, courts have uniformly ruled against debtors.
E.g., In re Hatton,
The IRS contends that the Debtor’s personal failure to file income tax returns for the subject tax years disqualifies him from a bankruptcy discharge of the subject tax debt .under the terms of
a. Definition of “return”.
In arguing that a Substitute Return should not be considered a “return” for purposes of
Utilizing the
Beard
formulation, the IRS reaches a predictable conclusion' — -that a Substitute Return is not a “return”, because,
inter alia,
it is not executed under penalty of perjury and does not represent a
debtor’s
honest and reasonable attempt to satisfy the requirements of the tax law. However, reliance upon general definitions, whether codified or formulated by judicial authorities, is misplaced in the present context since the question of whether a Substitute Return is a “return” is answered directly and explicitly by IRC
Because “return” is not defined by the Bankruptcy Code, a court weighing the dischargeability of federal taxes under
It is not surprising, therefore, to find that no reported judicial authority has applied the
Beard
formulation to the precise fact pattern presented here — in which a Substitute Return stands
alone
as the purported “return”. Rather, courts utilizing the
Beard
definition in the context of Bankruptcy Code
b. Legislative purpose of
Undeterred by the apparent plain language of the relevant statutes, the IRS,
The process of statutory construction requires this Court to look first to the statutory language itself, and then to the legislative history only if the statutory language is unclear.
See Toibb,
i. The Bankruptcy Act.
The first stop along the relevant chronology is the Bankruptcy Act of 1898 (hereafter, the “Act” or “Bankruptcy Act”). Specifically, the Court notes that the lineage of Code
A discharge in bankruptcy shall release a bankrupt from all of his provable debts, whether allowable in full or in part, except such as (1) are taxes which became legally due and owing by the bankrupt ... within three years preceding bankruptcy: Provided, however, That a discharge in bankruptcy shall not release a bankrupt from any taxes (a) which were not assessed in any case in which the bankrupt failed to make a return required by law, (b) which were assessed within one year preceding bankruptcy in any case in which the bankrupt failed to make a return required by law, (c) which were not reported on a return made by the bankrupt and which were not assessed prior to bankruptcy by reason of prohibition on assessment pending the exhaustion of administrative or judicial remedies available to the bankrupt, (d) with respect to which the bankrupt made a false or fraudulent return, or willfully attempted in any manner to evade or defeat ....
This historical provision is enlightening for the current dispute in at least two respects. First, it highlights a change in specification in the return filing “requirement”. Whereas Section 17 of the Act made clear that the relevant return filing was that done (or not done) by the “bankrupt”,
7
under current Code law the identity of the return filer is not specified. Under traditional canons of construction one could argue forcefully that such a conspicuous change from prior law strongly implies that Congress intentionally broadened the scope of the statute to make relevant to tax dischargeability returns filed by entities other than the debtor, namely those made by the Treasury Secretary. This implication seems even more reasonable in the context of
The second, and more fundamental, insight to be gleaned from a review of Section 17 of the Bankruptcy Act is that, contrary to common understanding, the Act actually permitted a debtor to discharge certain taxes for which he failed to file a return. This is true because the key to dischargeability under the Act was the timing of the assessment of taxes, not the filing of returns. Read as a whole, Section 17a(l) of the Act established the following scheme for the dischargeability for taxes:
• taxes “which became legally due and owing” within the three-year period immediately preceding bankruptcy could not be discharged, even if timely returns were filed by the debtor; and
• as to taxes outside the three-year non-dischargeability “window”—
(i) if a non-fraudulent and non-evasive (and presumably timely) return was filed by the debtor, full dis-chargeability was available; and
(ii) even where a debtor “failed to make a return”, dischargeability was also possible, but only in those instances in which the IRS assessed the subject tax more than one year prior to the bankruptcy filing.
Thus under the Act, when a bankrupt did not file a tax return, he was nonetheless eligible to discharge the subject taxes, so long as the IRS had assessed those taxes
and
enjoyed one full year of collection opportunity. Accordingly, the object and emphasis of Bankruptcy Act law in this area does not appear to have been on punishing a debtor’s non-fraudulent failure to file a timely return. Rather, it seems to
In light of the foregoing, it is evident that if the present proceeding were decided under the dischargeability standards of the Bankruptcy Act, the Debtor would prevail. 8 Hence, the question becomes what elements, if any, of the Bankruptcy Code and/or the history of its enactment plainly evidence a Congressional intention to narrow pre-Code tax dischargeability law by, inter alia, requiring that a debtor personally file returns as an absolute prerequisite to dischargeability? This Court concludes that there is no clear indication in the Bankruptcy Code’s legislative history, reviewed below, that Congress chose to replace its practical, assessment-based approach with a scheme that was more penal in nature with respect to non-fraudulent tax return non-filers.
ii. The Bankruptcy Commission Report.
In 1970, Congress determined that the Bankruptcy Act was likely in need of significant overhaul. In that year it established the Commission on the Bankruptcy Laws of the United States (hereafter, the “Commission”). Act of July 24, 1970, Pub.L. No. 91-354, 84 Stat. 468. The charge of the Commission was to study, analyze, evaluate, and recommend changes in the substance and administration of the bankruptcy laws of the United States. Id. After two years of study and analysis the Commission filed with Congress a report of its findings and recommendations — Re port of the Commission on the Bankruptcy Laws of the United States, H.R. Doc. No. 93-137, 93d Cong., 1st Sess. (1973) (hereafter, the “Commission Report”).
The Commission’s recommendations with respect to the dischargeability of taxes did not propose to alter the pragmatic approach of the Bankruptcy Act with respect to the tax return filing. Although the Commission’s recommendations on exceptions to discharge generally included both expansions and restrictions of the classes of non-dischargeable debts, the general tenor of the Commission Report, and the specific action proposed regarding taxes, can be fairly characterized as debtor-friendly. 9 Specifically, the Commission’s Draft Code provided in pertinent part as follows:
(a) Exceptions from Discharge. A discharge extinguishes all debts of an individual debtor, whether or not allowable, except the following:
(1) any liability for taxes with respect to which (A) a priority is granted under section 4r-405(a)(5), (B) a return, if required to be filed, was not filed more than one year prior to the date of the petition, or (C) the debtor made a false or fraudulent return or willfully attempted in any manner to evade or defeat ....
Commission Report, Part II, Section 4-506(a)(1) (emphasis supplied). 10 Thus, the Commission’s Draft proposed to alter the structure and mechanics of Bankruptcy Act Section 17a(l) in significant respects. First, the general non-dischargeability reach-back period was circumscribed by reference to, and incorporation of, the Draft Code’s independent priority tax claim provisions, 11 rather than through internal definition, as had been the case under Act Section 17a(l). Second, while the focus of dischargeability remained upon the IRS’s opportunity to collect, the concept utilized to express that goal became return filing rather than tax assessment. Significantly, although a timely return — rather than assessment — became the sine qua non of dischargeability, the Commission broke with the Bankruptcy Act by not denominating the relevant return as a debtor’s return.
Hi. Congressional Action on the Commission’s Recommendations.
The Commission’s Draft Code became the substance of a House of Representatives’ bill — H.R. 10792 — introduced during the 93d Congress to implement the recommendations of the Commission (hereafter, the “Commission Bill”). Thereafter, the National Conference of Bankruptcy Judges, disagreeing with major aspects of the Commission Bill, drafted and proposed an alternative (hereafter, the “Judges’ Bill”). The Judges’ Bill was also introduced in the 93d Congress, as H.R. 16643. In the 94th Congress, both of these bills were again introduced, as H.R. 31 and H.R. 32, respectively. The House conducted extensive hearings on both bills, at the conclusion of which a fresh, consolidated bill was drafted and introduced in the 95th Congress as H.R. 6. That bill was itself subjected to extensive mark-up and amendment, and ultimately introduced as a clean bill — H.R. 8200 (hereafter, the “House Bill”).
(a) A discharge under section 727 ... of this title does not discharge an individual debtor from any debt—
(1) for a tax- — ■
(A) of the kind and for the periods specified in section 507(6) of this title ...;
(B) with respect to which a return, if required—
(i) was not filed; or
(ii) was filed after the date on which such return was last due, under applicable law or under any extension, and after one year before the date of the filing of the petition; or
(C) with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat ....
H.R. 8200,
The House Bill’s version of Section 523 — which is nearly identical to the codified version of Bankruptcy Code
The extensive report which accompanied the House Bill out of the Judiciary Committee, Report of the Committee on the Judiciary, House of Representatives, to Accompany H.R. 8200, H.R.Rep. No. 95-595, 95th Cong., 1st Sess. (1977) (hereafter, the “House Report”), does not discuss the question before the Court. That silence is telling; if in fact the purpose of return filing vis-a-vis tax dischargeability had evolved from one serving the pragmatic objective of tax collection to one directed toward a goal of penalizing a non-filer, one would naturally expect to find comment in that vein within the voluminous House Report. The absence of such editorial material is even more conspicuous in light of the reform principles animating the enactment of the Bankruptcy Code in the late 1970s, to wit — “[t]his bill makes bankruptcy a more effective remedy for the unfortunate consumer debtor.” Id., at 4, U.S.Code Cong. & Admin.News 1978, pp. 5963, 5966.
Passage by the Senate of its own version of bankruptcy reform legislation lagged behind that of the House. On July 14, 1978, well after the full House of Representatives had passed the House Bill, the Senate Committee on the Judiciary (hereafter, “Senate Judiciary Committee”) favorably reported S. 2266, the analogous Senate bill (hereafter, the “Senate Bill”). The text of
In connection with its reporting of the Senate Bill, the Senate Judiciary Committee prepared and published a Report,
Report of the Committee on the Judiciary, United States Senate, to Accompany S. 2266,
S.Rep. No. 95-989, 95th Cong., 2d Sess. (1978) (hereafter, the “Senate Judiciary Report”). In the description of its proposed version of
A three-way tension ... exists among (1) general creditors, who should not have the funds available for payment of debts exhausted by an excessive accumulation of taxes for past years; (2) the debtor, whose “fresh start” should likewise not be burdened unth such an accumulation; and (3) the tax collector, who should not lose taxes which he has not had reasonable time to collect or which the law has restrained him from collecting.
In balancing these interests, ... [the House Bill] gives governmental units a priority claim on assets of a debtor’s estate for certain taxes which have not grown so “stale” as to constitute an unjustifiable burden on general unsecured creditors who may have extended new credit to the debtor since the tax liabilities arose. To avoid unduly burdening the debtor’s fresh start, the bill continues the basic coordination of priority and discharge provisions that apply to taxes, so that unpaid taxes accorded priority are nondischargeable, and tax claims which are not given priority are with some exceptions not collectible from the debtor’s post-bankruptcy assets.
sj: * ‡ sK ❖
In general, tax claims which are non-dischargeable, despite a lack of priority, are those to whose staleness the debtor contributed by some wrongdoing or serious fault as, for example, taxes with respect to which the debtor filed a fraudulent return.
Senate Judiciary Report, at 14, U.S.Code Cong. & Admin.News 1978, pp. 5787, 5800 (emphasis supplied) (hereafter, the “Policy Statement”).
The Policy Statement is consistent with the tax dischargeability law’s longstanding practical focus on the staleness of the tax claim, as measured by the taxing authority’s opportunity to collect, not on the identity of the actor who triggers those collection rights through return preparation and filing. Nothing in the Policy Statement’s language signals a change of approach.
While one might argue that the Policy Statement’s identification, as non-dis-chargeable, of taxes “to whose staleness the debtor contributed by some wrongdoing or serious fault .... ” implicates a debtor’s non-filing conduct, such a reading is ultimately not supportable. While a
The Policy Statement clearly and concisely summarizes the philosophy of a tax dischargeability scheme in which the debt- or’s failure to file a return is not alone grounds for a determination of non-dis-chargeability. The Policy Statement reveals the Senate Bill’s proposed legal scheme to be premised on tenets analogous to those developed by courts under their equity jurisdiction. The primary concept is consistent with the doctrine of laches — ie. a taxing authority will not be entitled to the benefit of non-dischargeability, inter alia, if it is not diligent and allows its claim to go stale. Consequently, the law will punish a debtor’s conduct with respect to a taxing authority’s claim only when such conduct “contributes” to the staleness of that claim. In essence, concepts akin to “equitable estoppel”, and/or “equitable tolling” of laches, underlie the relief granted to a taxing authority whose collection efforts have been prevented or obstructed by debtor misconduct. By way of illustration, a debtor who has filed a fraudulent return has taken action which affirmatively frustrates a taxing authority’s ability to assess and collect the true tax. By contrast, the passive, non-fraudulent failure to file a tax return does not impair or impede a taxing authority’s ability to assess and collect because the authority can proceed on the basis of its own, substituted return. 15
In light of the foregoing, this Court views the Senate Judiciary Report, as a whole, as not supportive of the statutory construction urged by the IRS. The issue at bar is an arcane one, which the draftsmen of the Senate Judiciary Report could well have failed to appreciate or anticipate. Thus the Senate Judiciary Clause’s use of the modifier, “debtor”, could well have been non-purposeful and innocuous, springing simply from a failure to appreciate the substituted return possibility. Instead, this Court looks to the Report’s Policy Statement as a reflection of the Senate Bill’s intention not to change radically the historically pragmatic scheme of tax dischargeability through imposition of a punitive debtor return-filing requirement.
One final element of the legislative record deserves analysis. Prior to its debate and passage by the full Senate, the Senate Bill took a brief detour for review by the Senate Finance Committee. The Senate
The bill recognizes that the tax law places numerous restrictions on the collection of taxes. These limitations, which do not encumber private creditors, often complicate the collection of prepetition taxes. S. 2266 also recognizes that tax collection rules for bankruptcy cases have a direct impact on the integrity of Federal, State and local tax systems. To the extent that debtors in bankruptcy are freed from paying their tax liabilities, the burden of making up the lost revenues must be shifted to other taxpayers.
A three-way tension thus exists among (1) general creditors, who should not have the funds available for payment of debts exhausted by an excessive accumulation of taxes for past years; (2) the debtor, whose “fresh start” should likewise not be burdened ivith such an accumulation ; and (3) the tax collector, who should not lose taxes which he has not had reasonable time to collect or which the law has restrained him from collecting.
In balancing these interests, S. 2266 gives governmental units a priority claim on assets of a debtor’s estate for certain taxes which have not grown, so “stale” as to constitute an unjustifiable burden on general unsecured creditors (who may have extended new credit to the debtor since the tax liability arose). To avoid unduly burdening the debtor’s fresh start, the bill, with some exceptions, continues the basic coordination of priority and discharge provisions in the case of taxes.
* * % * * #
The bill contains several provisions designed to minimize the administrative problems that governmental tax authorities may face in collecting taxes in bankruptcy proceedings, and also contains safeguards to assure normal administrative procedures and to prevent tax avoidance.
Senate Finance Report, at 5 (emphasis supplied) (hereafter, the “Finance Report Overview”). The Finance Report Overview largely parrots the “three-way tension” discussion of the Senate Judiciary Report’s Policy Statement, while also, naturally, focusing upon the bill’s impact on the federal fisc, and the effectiveness of the Internal Revenue Service. Notably, there is no mention of a concern about bankruptcy abuse by those who merely fail to file a return. Rather, the overall policy presented is quite consistent with traditional jurisprudence in this area, ie. the emphasis is upon providing taxing authorities with a full and fair opportunity to collect their taxes. And as previously discussed, that opportunity can be afforded so long as a return is filed, regardless of whether filed by the debtor or the taxing authority in his stead.
Nonetheless, in its specific discussion of proposed
Taxes that are excepted from discharge under S. 2266 (as well as under present law) include claims against the debtor which receive priority in distribution of property of the estate.
Certain prepetition tax liabilities are not given priority in distribution from property of the estate, but under S. 2266would survive as liabilities of the debtor after the case. This category includes (1) taxes for which the debtor had not filed a return as of the bankruptcy petition, or for which a return had been filed beyond its due date but within 3 years before the petition, and (2) taxes with respect to which the debtor filed a fraudulent return, or as to which he fraudulently attempted to evade or defeat any tax. 19 The standard to be applied is the same as that used for asserting the civil fraud penalty under the applicable tax law.
Senate Finance Report, at 22 (emphasis supplied). While this passage (hereafter the “Finance Passage”) and its footnote (hereafter, “Footnote 19”) arguably lend some support to the argument for a requirement of debtor return filing, they do not do so nearly as forcefully as may first appear.
The Court notes initially that the Finance Passage merely parrots the return filing language of the Senate Judiciary Clause, i.e. “... taxes for which the debtor had not filed a return ....” (emphasis supplied). Hence, for the same reasons that this Court views the debtor specification of the Senate Judiciary Clause as unenlightening, so likewise does it view its re-appearance in the Finance Passage.
Footnote 19, however, does include language not found in the Senate Judiciary Report. This additional language might allow one to posit that because Footnote 19 provides a policy justification for a requirement of debtor return filing — “that it is not fair to penalize private creditors ... [with] liabilities arising from the debtor’s deliberate misconduct” — the debtor specification of the Finance Passage is unlikely to have been unconscious or inadvertent. A fundamental weakness in such reasoning, however, is its assumption that Footnote 19 was intended to address return filing at all. That is not necessarily so. Rather, given its placement at the end of a sentence containing two independent, numbered clauses, Footnote 19 likely modifies only the second such clause (referring to fraudulent evasive conduct), not the first (dealing with the mere failure to file a return). Reading Footnote 19 to modify only the second independent clause also facilitates the Court’s harmonization of the Senate Finance Report’s concept of “deliberate misconduct” with the Senate Judiciary Report’s notion of “wrongdoing”.
Although a debtor’s passive non-filing behavior
might
be fairly termed “misconduct” in its most expansive sense,
ie.
not normative conduct, Footnote 19’s description of tax debt arising from a debtor’s
“deliberate
misconduct” (emphasis supplied) is not necessarily broad enough to implicate such behavior. The most appropriate definition of “deliberate” in the present context is: “characterized by ... careful and thorough consideration”.
Merriam-Webster’s Collegiate Dictionary
305 (10th ed.1999). Consequently, this Court concludes that the conduct involved in the instant proceeding — a mere passive failure to file a return
16
— is not embraced by the
iv. Summary of Legislative Materials
In the present case the utility of examining legislative materials lies in its potential to demonstrate a Congressional intention contrary to the apparent plain meaning of Code
A holistic analysis of the relevant legislative action and materials — from Bankruptcy Act through enactment of Code
While there is language in the reports of the two Senate Committees which arguably reflects an intention to condition dis-chargeability on personal tax return filing (hereafter, the “Isolated Passages”), such interpretation is retrograde; that is to say, if interpreted as suggested by the IRS’s authorities, the Isolated Passages (i) would run counter to the law’s historical, non-punitive pragmatism; (ii) are not in harmony with the Senate Reports’ more generally expressed philosophy; and (iii) are not echoed in the legislative materials of the House of Representatives. As a result, the Court finds no compelling evidence that Congress intended to alter pre-Code law to require that the debtor personally file returns as a prerequisite to tax dischargeability. 17
c. Public policy considerations.
The IRS devotes much of its written argument to the deleterious effects of return filing failure upon this country’s system of income self-reporting. Indeed, a debtor’s tax return “implements the system of self assessment which is largely the basis of our American scheme of income taxation.”
Commissioner v. Lane-Wells Co.,
Undoubtedly a dischargeability scheme which requires a debtor to file a tax return
personally
would create an incentive toward return filing. However, in discerning the question presently before the Court, a more complete policy analysis is required. Namely, even assuming the salience of a policy consideration not identified in the legislative history of
Under the Debtor’s construction of
The IRS’s stated concern for the administrative integrity of the tax system is also shortsighted. In judging the extent and importance of potential frustration of the IRS’s administrative procedures, one must compare the effects of both of the proffered constructions of
Y. CONCLUSION
There is no genuine issue of material fact with respect to the matter at bar. For purposes of this summary judgment matter, the parties have agreed upon a simple and concise
Joint Stipulation of Facts.
Those agreed facts present the circumstance of a debtor who failed to file federal income tax returns for Tax Years 1991 and 1992, and for whom, upon that default, the Treasury Secretary filed Substitute Returns. The limited legal issue presented by the IRS is whether a Substitute Return is sufficient as a filed return for purposes of Bankruptcy Code
In determining whether the IRS is entitled to judgment as a matter of law, this Court is under a duty to construe
The non-personal language of Bankruptcy Code
Further, the plain language of the Bankruptcy and Internal Revenue Codes are not undermined by a thorough and holistic examination of the legislative history relevant to
Finally, as discussed at length herein, the Court’s construction of
For the foregoing reasons this Court determines that the Treasury Secretary’s Substitute Returns are filed “returns” within the meaning of Bankruptcy Code
ORDER DENYING MOTION FOR SUMMARY JUDGMENT
The above-captioned motion for summary judgment filed by the Defendant (hereafter, the “Motion”) came before the Court upon a stipulated record and briefing of the parties. The Court having now fully considered the submitted material, and the fruits of its independent research, and having issued this day its Memorandum of Decision on Motion for Summary Judgment, in accordance with which—
IT IS HEREBY ORDERED that the Motion is DENIED.
Notes
. The record seems to indicate that in light of the parties’ stipulation to the relevant factual background, they agreed that this proceeding could be resolved on the basis of cross motions for summary judgment. Despite that apparent understanding, the only party to file a summary judgment motion was the Defendant IRS (Doc. I.D. No. 13). Hence, this matter is resolved only with respect to the issues presented by that motion.
. This cross-reference is to the Bankruptcy Code’s priority claim provisions.
. Even though the factual stipulation of the parties recites that the Treasury Secretary "prepared” the subject returns, the parties’ citation to IRC
. The IRS has not argued non-dischargeability on any basis other than subsection (B) of
. The Supreme Court has also acknowledged that in "rare cases” the literal application of a statute may produce a result "demonstrably at odds with the intentions of its drafters.”
Griffin v. Oceanic Contractors, Inc.,
. The only terms which this Court might view as ambiguous are the words, "file” or "filed”, since the relevant IRC sections utilize the alternative terms, "made” or “make” to denote similar activity.
E.g.,
. The Bankruptcy Act’s term, “bankrupt”, is synonymous with the Bankruptcy Code’s term, "debtor”. For clarity of presentation, this Memorandum of Decision will utilize the term "debtor” uniformly, even when referring to the subject of a Bankruptcy Act case.
. This hypothetical conclusion assumes a fact not stipulated by the parties — that the assessment of the relevant taxes occurred more than one year prior to the commencement of this bankruptcy case.
. In this regard the Commission Report summarizes as follows:
The Commission also recommends that the discharge no longer be restricted to certain debts, e.g., provable debts, but extend to all debts of an individual debtor, with the exceptions from discharge in the present Act substantially continued. The more important changes recommended as to the exceptions are a reduction, generally, of the period of accumulation of nondischargeable taxes, and the elimination of the false financial statement exception as to consumer debts. On the other hand, the Commission recommends . several additions to the excepted debts in an effort to cope with potential abuses that have come to the attention of the Commission.
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The Commission is of the opinion ... that the exception from discharge of tax claims for a period of three years is too substantial, and in furtherance of the "fresh start” goal the Commission recommends that the period be reduced to one year.
Commission Report, Part I, Chapter 7.C.2. (emphasis supplied).
. Note 6 to Section 4-506 provides, inter alia, that "[c]lause (B) of this clause is added to provide nondischargeability but not priority for a tax claim, for whatever tax period or wherever [sic] first payable, for which a return is not filed before a date one year preceding the date of the petition.”
. Under Draft Code Section 4-405(a)(5) the Commission proposed a distributional priority for income tax claims "for any taxable period ending on or prior to the date of the petition for which a return was required to be filed on a date (including any extensions of time for filing) within one year prior to the petition or thereafter”.
. The eventual enactment and codification of
. The eventual enactment and codification of
. The Senate Judiciary Clause is also imprecise, in that it states that non-dischargeable taxes include those for which a return has been filed “beyond its last permitted due date.” In fact though, the Senate Bill allowed a discharge of taxes for which there was a late-filed return, so long as the return was filed before three years before the petition date. This lack of precision naturally undermines the reader’s confidence in the accuracy of the clause as a whole.
. Of course this statement is limited to those authorities which, like the IRS, have available procedures for the administrative preparation and filing of substitute returns for non-return-filing taxpayers. It is also important to appreciate that if a taxing authority does not have substitute return procedures, a non-filing debtor would be ensnared by the non-dischargeability provisions of
The bankruptcy policy for this treatment is that it is not fair to penalize private creditors of the debtor by paying out of the "pot” of assets in the estate tax liabilities arising from the debtor’s deliberate misconduct. On the other hand, the debtor should not be able to use bankruptcy to escape these kinds of taxes. Therefore, these taxes have no priority-in-payment from the estate but would survive as continuing debts after the case.
. The stipulated "record” of the instant summary judgment matter does not speak to the state of mind of the Debtor. Nor does the IRS assert
willful evasion
by the Debtor.
See
fn. 4,
supra.
Thus, for purposes of the present matter the Court must consider the relevant conduct to be a mere failure to file
. The Court notes with interest the language of an amendment to
The observations of this footnote have not formed any part of the basis of this Court's resolution of the instant matter. If they had, however, they would further bolster the conclusions otherwise drawn by the Court in this Memorandum of Decision.
. This Court's review of the legislative history of
. The Debtor’s construction of
. It also does not appear that the stipulated record or the state of the pleadings permit the Court to conclude that the subject Substitute Returns were filed two years or more pre-petition, so as to permit dischargeability despite the limitation of