SCOTUS Declines to Settle Circuit Split Over Meaning of ‘Return’

On November 4, the U.S. Supreme Court denied certiorari to a taxpayer who asked it to settle a multi-circuit split over the meaning of the word “return” in the Bankruptcy Code. The case presented an opportunity for the Court to provide clarity to debtors seeking to discharge a tax debt. (Salvador v. U.S. (No. 24-108))

The case involves a claim by John Paul Salvador — who filed for Chapter 7 bankruptcy in 2019 — that his tax liabilities from 2003 to 2014 were dischargeable. Salvador, however, did not timely file returns for each of these years; rather the IRS issued deficiency notices for the 2003, 2004, 2006, and 2009 tax years. Salvador later filed Form 1040s for these tax years at the request of an IRS Revenue Officer.

Under Bankruptcy Code Section 523(a)(1)(B)(i), tax debts are dischargeable only if the debtor has filed a “return.” But Salvador contends there is “a three-way conflict” between U.S. circuit courts over whether late-filed 1040s constitute “returns” for bankruptcy discharge purposes.

The 9th U.S. Circuit Court of Appeals concluded in March 2024 that Salvador’s income tax debt for the 2003, 2004, 2006, and 2009 tax years was not dischargeable, upholding the Bankruptcy Appellate Panel and Bankruptcy Court’s findings. (In re: John Paul Salvador, 2024 WL 885041 (9th Cir. 03/01/24))

In its decision, the 9th Circuit acknowledged that the Bankruptcy Code did not originally define the word “return,” but noted the 9th Circuit had already adopted a test for determining what qualifies as a return — the U.S. Tax Court’s Beard test. That four-part test provides that a return is filed when (1) there is “sufficient data to calculate tax liability,” (2) the document in question “purport[s] to be a return,” (3) there is “an honest and reasonable attempt to satisfy the requirements of the tax law,” and (4) the taxpayer has executed the return under penalties of perjury. (Beard, 82 T.C. 766 (1984))

In 2005, Congress elaborated on the word “return” in the Bankruptcy Abuse Prevention and Consumer Protection Act — specifying that it must satisfy “the requirements of applicable nonbankruptcy law (including applicable filing requirements).”

But the 9th Circuit concluded that because Salvador did not file a return until after the IRS had already assessed his tax liability, he fails under the Beard test and the 2005 refined definition as well.

Salvador, however, argued that a “longstanding, deep, and intractable” circuit split over what constitutes a return exists, and urged the Supreme Court to settle the split in his favor his cert petition. According to Salvador, “the nation’s poorest and most vulnerable debtors have vastly different discharge rights in bankruptcy based only on the fortuity of where they happen to litigate their cases.”

Salvador’s petition identifies six circuits, including the 9th Circuit, which have held that a late-filed Form 1040 where the IRS has already prepared a substitute return and assessed tax is not a tax return for bankruptcy dischargeability purposes. Meanwhile, the petition says, three circuits have held that a late-filed return is not a return for these purposes because it is not filed in accordance with “applicable filing requirements” as called for in the 2005 statutory amendment.

But Salvador contends that the IRS has rejected both of these positions — it explicitly rejected the position that a late-filed return is nondischargeable because it is not filed in accordance with “applicable filing requirements” in Notice CC-2010-016, Litigating Position Regarding the Dischargeability in Bankruptcy of Tax Liabilities Reported on Late-Filed Returns and Returns Filed After Assessment. And it “at least implicitly” rejected the position that post-assessment Form 1040s are not returns, says Salvador.

One circuit — the 8th U.S. Circuit Court of Appeals — has held that a late-filed Form 1040 is a tax return for bankruptcy dischargeability purposes if it shows a “sincere effort to comply with the tax laws,” says Salvador. He urged the Court to take that position, which he says aligns with that of the IRS.

The Department of Justice, in its brief in opposition, disagreed with Salvador’s view that a circuit split is causing inconsistency and confusion. While acknowledging that “circuits have differed somewhat in their approaches to questions of dischargeability,” the DOJ contends that “every court of appeals that has addressed the question in the circumstances presented here has reached the same result.” That result, the DOJ explains, is that a debt cannot be made dischargeable by “filing a Form 1040 years later that reports debt the IRS already identified.”

The American College of Tax Counsel, the Center for Taxpayer Rights, and the Central District Consumer Bankruptcy Attorney Association (CDCBAA) all filed amicus briefs in support of Salvador — calling on the Supreme Court to settle the circuit split and provide clarity and uniformity for debtors.

According to Kostelanetz attorneys Andrew Weiner and Abigail Burke, who co-authored the American College of Tax Counsel’s amicus brief, “for decades, circuit courts have been divided on whether tax reported on late-filed returns is dischargeable with profound consequences for debtors as well as tax authorities.” As a result, they said, “debtors don’t know if bankruptcy affords relief from tax debts, and some are being unfairly deprived of the fresh start that is the fundamental promise of bankruptcy law.”

Weiner and Burke told Checkpoint they were disappointed that the Court failed to address the issue, which they said “has gone on far too long.” But they added that “at the same time, that could be a call for Congress to step up with a legislative fix.”

Matthew Resnik, of RHM Law, who authored CDCBAA’s amicus brief, said the group had hoped for “the Court to adopt the common-sense approach of the 8th Circuit, which says that a late-filed return is, in fact, a return, instead of the harsh and punitive rule of the 9th Circuit and others that unfairly penalties mostly the lower and middle class.”

“Unfortunately, the Court decided to leave untouched this circuit split on a critical federal issue that treats taxpayers differently based on location, and we hope it will be revisited in the future,” Resnick told Checkpoint.