Bankruptcy Debtor’s Income Tax Liabilities Held Not Dischargeable

Bankruptcy Debtor’s Income Tax Liabilities Held Not Dischargeable

Few issues are more misunderstood than the interplay between the taxing authorities and the bankruptcy court.  Congress is no help here because the language of the Bankruptcy Code is second only to the Internal Revenue Code in obtuseness.  These Codes give the most gifted lawyers fits in attempting to decipher them. 

 

Income tax obligations that are too new are not dischargeable while older taxes can be.  The theory seems to be that the Internal Revenue Service should get a fair chance to collect income taxes before losing that ability entirely to bankruptcy. 

11 U.S.C. 1328(a)(2) excepts from discharge the kind of debt specified in 11 U.S.C. 507(a)(8)(C) (withholding taxes) or 11 U.S.C. 523(a) (all other taxes), including specifically 11 U.S.C. 523(a)(1)(B) debt. 11 U.S.C. 523 (a)(1)(B)(ii) denies discharge of taxes for which a late return was filed after two years before the date of the filing of the bankruptcy petition.  Via 11 U.S.C. 507(a)(8)(A)(i), taxes for which a return is last due including extensions after three years before the date of the filing of the bankruptcy petition are not discharged. Via 11 U.S.C. 507(a)(8)(A)(ii), taxes assessed within 240 days before the date of the filing of the bankruptcy petition are also not discharged.  If any of these three are met, there is no discharge.

In In re Ollie-Barnes, 114 AFTR 2d ¶ 2014-5413 (Bktcy Ct 11/06/2014) the bankruptcy court ruled that the filing date was less than two years from the late tax return filing and therefore  the taxes were not dischargeable.  One of the issues in Ollie-Barnes was whether her prior bankruptcies tolled the two year period.  The bankruptcy court held that the earlier bankruptcy filings tolled the running of the two year period and therefore the two year period had not expired and thus the taxes were not discharged.

Moral of the case: when dealing with taxes and bankruptcy, engaging counsel familiar with the interplay between taxes and bankruptcy is key.

U.S. Tax Court upholds $10,000 penalty against a PRIVATE foundation who filed a return late

In Grace Foundation v. Comm., T.C. Memo 2014-229, the U.S. Tax Court sustained an Internal Revenue Service levy of a $10,000 penalty on a private foundation.  The Tax Court rejected all of the foundation’s arguments that there were errors in the IRS's conduct of the taxpayer's collection due process (CDP) hearing.  First, the Tax Court made clear that a private foundation which is not exempt from tax must comply with the same return filing requirements as organizations described in Code Sec. 501(c)(3) which are exempt from tax under Code Sec. 501(a). (Code Sec. 6033(d)) and that Code Sec. 6652(c)(1)(A) imposes a penalty for failing to file Form 990 in a timely manner.

Lesson learned #1:  The Internal Revenue Service will impose penalties for failure to timely file returns on private foundations and the Tax Court will uphold these penalties. 

Lesson learned #2:  All taxpayers, even private foundations, should have proper advice and counsel of their filing obligations so these issues do not occur. 

 

 

Richard Weber, the Chief of I.R.S. - Criminal Investigation issues statement regarding no longer seizing structured funds of otherwise legal source activity.

Richard Weber, the Chief of I.R.S. - Criminal Investigation issues statement regarding no longer seizing structured funds of otherwise licit activity.  This means that 31 U.S.C. 5324 will only be applied on a forward going basis to structuring of non-legal sourced funds.  This does not change the affect the government’s ability to audit and recommend criminal prosecution where structuring is a part of avoiding reporting for income tax purposes.

Here is the full statement:

After a thorough review of our structuring cases over the last year and in order to provide consistency throughout the country (between our field offices and the U.S. attorney offices) regarding our policies, I.R.S.-C.I. [Criminal Investigation] will no longer pursue the seizure and forfeiture of funds associated solely with “legal source” structuring cases unless there are exceptional circumstances justifying the seizure and forfeiture and the case has been approved at the director of field operations (D.F.O.) level. While the act of structuring — whether the funds are from a legal or illegal source — is against the law, I.R.S.-C.I. special agents will use this act as an indicator that further illegal activity may be occurring. This policy update will ensure that C.I. continues to focus our limited investigative resources on identifying and investigating violations within our jurisdiction that closely align with C.I.'s mission and key priorities. The policy involving seizure and forfeiture in “illegal source” structuring cases will remain the same.