In Sienega v. California Franchise Tax Board (In re Sienega), 18 F.4th 1164 (9th Cir. 2021), the U.S. Court of Appeals for the Ninth Circuit (the “Court”) held that faxes sent by a debtor to the California Franchise Tax Board (the “FTB”), notifying the FTB of adjustments to the debtor’s federal tax liability, did not constitute “returns” within the meaning of section 523(a) of the Bankruptcy Code.
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Rudolf Sienega (the “Debtor”) did not file California state income tax returns for 1990, 1991, 1992 or 1996. In 2007, the IRS made upward adjustments in the Debtor’s federal tax liability for those years. In 2009, a U.S. Tax Court ruled that the Debtor was liable for some additional penalties as well.
California Revenue and Taxation Code (“RTC”) section 18622(a) requires a taxpayer to make a “report” to the FTB if the IRS changes the taxpayer’s federal income tax liability. By facsimile, the Debtor’s counsel notified the FTB of the adjustments to the Debtor’s federal tax liability. However, the Debtor never filed a California Form 540 (“California Resident Income Tax Return”) or other formal income tax return for any of those tax years.
The Debtor filed for bankruptcy in 2014. The FTB filed a complaint seeking a determination that the Debtor’s outstanding state tax debts were nondischargeable because the Debtor had not filed a return for any of the relevant years. The Debtor argued that the faxes he sent the FTB regarding adjustments to his federal tax liability constituted “returns” within the meaning of section 523(a) of the Bankruptcy Code, and therefore the taxes were dischargeable.
The Bankruptcy Court ruled in favor of the FTB. The BAP affirmed. See Sienega v. California Franchise Tax Board (In re Sienega), 619 B.R. 405 (9th Cir. BAP 2020). On further appeal, the Ninth Circuit also affirmed.
Section 523(a)(1)(B) provides that a discharge does not discharge an individual debtor from any debt for a tax “with respect to which a return, or equivalent report or notice, if required – (i) was not filed or given.” In a “hanging paragraph” at the end of section 523(a), “return” is defined to mean “a return that satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements).” The hanging paragraph also says that the term “return” includes a return prepared pursuant to section 6020(a) of the Internal Revenue Code (the “IRC”) or similar state or local law.
IRC section 6020(a) provides that if a person fails to make a return required by law, but consents to disclose all information necessary for the preparation of a return, the IRS may prepare the return. When such a return is signed by the taxpayer, it may be received by the IRS as the person’s return.
First, the Court rejected the Debtor’s argument that RTC section 18622 (requiring California taxpayers to report adjustments to their federal tax liability) is similar to IRC section 6020(a). The Court pointed out that RTC section 18622 does not authorize the FTB to prepare or execute a return, and it was undisputed that the FTB did not in fact prepare or execute returns for the Debtor.
Second, the Court rejected the Debtor’s argument that his faxes to the FTB constituted the functional equivalent of a state tax return. The Court pointed out that the Ninth Circuit has adopted the Tax Court’s test for whether a document constitutes a return, articulated in Beard v. Commissioner, 82 T.C. 766 (T.C. 1984). Under the Beard test, a “return” is a document that (1) purports to be a return, (2) is executed under penalty of perjury, (3) contains enough data to allow computation of the tax, and (4) represents an honest and reasonable attempt to satisfy the requirements of the tax law. The Court also noted that California applies an almost identical definition, citing In re Appeals of R. & Sonja J. Tonsberg, 1985 WL 15812 (Cal. St. Bd. Eq. Apr. 9, 1985).
Applying the Beard and Tonsberg tests, the Court concluded that the Debtor’s faxes did not constitute returns. The documents were not in the form and did not contain the content required by California law to be included in returns. The faxes did not purport to be returns; they were not submitted under penalty of perjury, nor did they contain sufficient data for a complete computation of taxes owed. Finally, the Court stated that “nothing in the faxes indicates an ‘honest and reasonable attempt to satisfy the requirements of tax law.’”
The outcome of this case is unsurprising. The Ninth Circuit BAP may have put it best almost 25 years ago: “The plain meaning of the word ‘return’ should be conclusive, as it has a very specific meaning in the world of taxation. Certainly, taxpayers know what it means to have to file a tax return; they do it each year.” Cal. Franchise Tax Bd. v. Jerauld (In re Jerauld), 208 B.R. 183, 188 (9th Cir. BAP 1997). While the Debtor should be applauded for complying with California law by reporting adjustments to his federal tax liability, the faxed reports clearly were not “returns” under federal or California state law.
The most noteworthy part of the Ninth Circuit’s opinion is the Court’s continued adherence to the Beard test. Section 523(a)’s hanging paragraph, which defines “return” for purposes of section 523(a), was added by BAPCPA in 2005. Some courts have determined (expressly or effectively) that the Beard test was supplanted by the hanging paragraph’s definition of “return,” and that late-filed tax returns are not “returns” for purposes of section 523(a). See, e.g., McCoy v. Miss. State Tax Comm’n (In re McCoy), 666 F.3d 924 (5th Cir. 2012); Fahey v. Mass. Dept. of Revenue (In re Fahey), 779 F.3d 1 (1st Cir. 2015). In these courts, a tax is rendered nondischargeable if the debtor’s return was filed as little as one day late. Two years ago the Eleventh Circuit rejected this approach, and continued to apply the Beard test or a state equivalent. See Mass. Dept. of Revenue v. Shek (In re Shek), 947 F.3d 770 (11th Cir. 2020). Sienega is at least the second Ninth Circuit opinion issued within the last six years in which the court has continued to apply the Beard test to determine whether a document is a “return” for purposes of section 523(a). See Smith v. IRS (In re Smith), 828 F.3d 1094 (9th Cir. 2016).
These materials were written by former ILC co-chair John N. Tedford, IV, of Danning, Gill, Israel & Krasnoff, LLP, in Los Angeles, California (jtedford@DanningGill.com). Editorial contributions were provided by Summer Shaw of Shaw & Hanover, PC in Palm Desert, California (email@example.com).