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In re Smith

United States District Court, N.D. California

April 29, 2014


Bankruptcy Case No. 11-73272 RLE. Adversary Proceeding No. 12-4086.

For Internal Revenue Service, United States of America, Appellants: Chong Sung Hong, LEAD ATTORNEY, U.S. Attorney's Office, San Francisco, CA; Landon Monte Yost, Tax Division, Civil Western, Washington, DC; Thomas Moore, U.S. Attorney's Office, Tax Division, San Francisco, CA.

For Martin Smith, Debtor, Appellee: Robert Lawrence Goldstein, LEAD ATTORNEY, Sarah Drinkwater, Law Offices of Robert L. Goldstein, San Francisco, CA.

For California Franchise Tax Board, Appellee: Karen W. Yiu, LEAD ATTORNEY, Office of the Attorney General, San Francisco, CA; Todd M. Bailey, California Franchise Tax Board, Rancho Cordova, CA.

U.S. Bankruptcy Court, Northern District of California, Oakland, Miscellaneous, Pro se, Oakland, CA.

Judge Roger L. Efremsky, Miscellaneous, Pro se, Oakland, CA.

Page 15

Order Reversing Decision of Bankruptcy Court; Denying Debtor's Motion to Strike (Dkt. No. 20)


This is an appeal by the Internal Revenue Service (" IRS" ) from the Order Granting Debtor Martin Smith's (" Debtor" ) Request for Summary Judgment and Denying IRS's Motion for Summary Judgment, entered by the Bankruptcy Court on January 31, 2013, and more fully explicated on the record on January 8, 2013. IRS filed a Notice of Appeal on February 14, 2013, as well as a statement of election to have the United States District Court for the Northern District of California hear its appeal of the Order. See 28 U.S.C. 158(c)(1)(A), Fed. R. Bankr. P. 8001(e), and 9th Cir. B.A.P. L.R. 8001(e)-1. The controversy stems from the treatment, for bankruptcy purposes, of a Form 1040 submitted seven years after it was due and three years after the IRS made an assessment and commenced collection proceedings.

Having carefully reviewed the record of the proceedings in this matter, the legal determinations in the Bankruptcy Court's decision, and the parties' briefing, the Court is persuaded the approach used in a majority of the circuits across the United States in their treatment of late-filed tax returns is the appropriate method of resolving this issue presented. Accordingly, with respect to the facts presented here, the Court Reverses the Bankruptcy Court's January 31, 2013 Order and Remands for further proceedings consistent with this Decision.


Debtor filed a voluntary petition under Chapter 7, Title 11, of the United States Code on December 22, 2011. The Court issued a discharge order on May 11, 2012. The only year at issue in this adversary proceeding is 2001, a year for which Debtor did not file an income tax return timely. The IRS sent Debtor a letter requesting that he file an income tax return for 2001, but Debtor failed to do so. The IRS then

Page 16

began an examination regarding Debtor's liability for the 2001 tax year and determined his tax liability for 2001 based on information gathered from third parties. After making its determination, the IRS prepared a " substitute for return" (or " SFR" ) pursuant to 26 U.S.C. § 6020(b) for 2001.

On March 27, 2006, the IRS mailed a notice of deficiency to Debtor for the 2001 tax year showing the IRS's determination of tax liability of $70,662. Debtor had ninety days from March 27, 2006, to challenge the notice of deficiency by filing a petition with the United States Tax Court. Debtor filed no such challenge. On July 31, 2006, the IRS assessed the $70,662 tax liability and began collection activities.

On May 22, 2009--over seven years after Debtor's 2001 tax return was due, over three years after the IRS had determined Debtor's tax liability for 2001, and after the IRS had already initiated collection activity on the debt--Debtor submitted a Form 1040 for the 2001 tax year, reporting a higher tax liability than the IRS previously had determined (" the Return at Issue" ).[1] He thereafter filed his bankruptcy petition on December 22, 2011. This appeal focuses on the treatment of the $70,662 tax liability assessed by the IRS in 2006, in light of the bankruptcy.


A. Standard of Review and Statutory Framework

In reviewing a bankruptcy court's decision, this Court functions as an appellate body and is authorized to affirm, reverse, modify or remand the Bankruptcy Court's ruling. 28 U.S.C. § 158(a); Fed. R. Bankr. P. 8013. In this case the relevant facts are undisputed. The Bankruptcy Court's conclusions of law are subject to de novo review. Miller v. United States, 363 F.3d 999, 1003-1004 (9th Cir. 2004).

The question presented is whether Debtor's 2001 federal income tax liabilities, assessed by the IRS based upon its own examination and determination, should be (i) discharged in bankruptcy, or (ii) non-dischargeable pursuant to 11 U.S.C. section 523(a)(1)(B)(i). In general, the filing of a bankruptcy petition allows a debtor to discharge personal liability for all debts incurred prior to the filing of the petition, including unpaid taxes. 11 U.S.C. § 727(b); see also Hatton, 220 F.3d 1057, 1060 (9th Cir. 2000). However, Section 523(a)(1) of Bankruptcy Code sets forth certain exceptions to dischargeability identified in nineteen subsections. See 11 U.S.C. § 523(a)(1)-(a)(19).[2] At issue here is the exception set forth in section 523(a)(1)(B) which provides:

(a) A discharge [in bankruptcy]...does not discharge an individual ...

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