United States v. Payne, John H. , 431 F.3d 1055 ( 2005 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 05-1941
IN RE:
JOHN HOWARD PAYNE,
Debtor-Appellee.
APPEAL OF:
UNITED STATES OF AMERICA.
____________
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 04 CV 2740—Amy J. St. Eve, Judge.
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ARGUED SEPTEMBER 27, 2005—DECIDED DECEMBER 14, 2005
____________
Before CUDAHY, POSNER, and EASTERBROOK, Circuit Judges.
POSNER, Circuit Judge. The question presented by this
appeal is whether a debtor may obtain a discharge in
bankruptcy from a tax debt owed to the Internal Revenue
Service if he failed to file a return until after the IRS assessed
the tax that he owed. The bankruptcy judge, seconded by
the district judge, answered yes, and the government
appeals.
Payne filed no federal income tax return for 1986 until
1992, which was of course too late. In 1989, however, the
Internal Revenue Service, probably on the basis of an
information return submitted by someone from whom
2 No. 05-1941
Payne had obtained income in 1986 from which income
tax had not been withheld, had discovered that Payne
had not filed a return for that year and might owe in-
come tax. The following year, after investigating the matter,
the IRS assessed Payne for federal income tax due for 1986
of some $64,000, and after crediting him with the amount of
tax that had been withheld by his employer ($44,000) began
efforts to collect the balance. In 1992, months after the be-
lated filing of his 1986 tax return, Payne offered to com-
promise his tax liability with the IRS. The IRS rejected
his offer. In 1997 Payne filed for bankruptcy and sought,
and the following year received, a discharge of his un-
paid 1986 tax liability. The government argues that he
was not entitled to a discharge.
Section 523(a)(1)(B)(i) of the Bankruptcy Code forbids
the discharge of federal income tax liability with respect
to which a “return” was required to be filed but “was
not filed.” Payne argues that he filed a return for 1986,
all right, albeit six years late and after the IRS had gone to
the trouble of figuring out what he owed for that year and
assessing him the amount. The government argues that an
untimely post-assessment return is not a “return” within the
meaning of the statute and that therefore Payne has never
filed a 1986 return and so cannot be discharged
from liability for the taxes that he owes for that year.
The Bankruptcy Code does not define “return.” Nor for
that matter does the Internal Revenue Code. But there is
case law interpreting it because a lot can turn on whether a
submission to the IRS qualifies as a return. Taxpayers are
required to file tax returns, so a taxpayer who files a
document that purports to be, but is held not to be, a re-
turn can be in serious trouble.
No. 05-1941 3
The cases hold that to be deemed a return, a document
filed with the IRS must (1) purport to be a “return,” (2) be
signed under penalty of perjury, (3) contain enough infor-
mation to enable the taxpayer’s tax liability to be calculated,
and (4) “evince[ ] an honest and genuine endeavor to satisfy
the law.” Zellerbach Paper Co. v. Helvering, 293 U.S. 172, 180
(1934); United States v. Moore, 627 F.2d 830, 834-35 (7th Cir.
1980). “Genuine” is vague, however, and later cases sensibly
substitute “reasonable.” In re Moroney, 352 F.3d 902, 905 (4th
Cir. 2003); In re Hatton, 220 F.3d 1057, 1060-61 (9th Cir.
2000); In re Hindenlang, 164 F.3d 1029, 1033 (6th Cir. 1999);
Beard v. Commissioner, 82 T.C. 766, 779 (Tax Court 1984),
aff’d, 793 F.2d 139 (6th Cir. 1986). A purported return that
does not satisfy all four conditions does not play the role
that a tax return is intended to play in a system, which is
our federal tax system, of self-assessment. So while a
“return” that satisfies the first three conditions comports
with the literal meaning of the word, it does not comport
with the functional meaning.
All but the fourth condition is satisfied by Payne’s belated
return. That condition—that the purported return evidence
an “honest and reasonable” endeavor to comply with the
law—is not satisfied, and not only or even mainly because
Payne offers no excuse for having failed to file his 1986
return until six years after it was due. (At argument, his
lawyer claimed without elaboration that the period from
1986 to 1992 was a “difficult” one in his client’s life. That
assertion is not evidence and is entitled to no weight in our
consideration of the appeal.) More important, the belated
“return” was not a reasonable endeavor to satisfy Payne’s
tax obligations. It may have been intended to induce the IRS
to talk compromise with him, although it was only later that
the IRS adopted a rule requiring the filing of a return as a
prerequisite to negotiating a compromise. The belated filing
4 No. 05-1941
may also or instead have been intended to set the stage for
Payne’s attempt to discharge his tax debt in bankruptcy.
That is speculation; what is certain is that the belated filing
was not a reasonable effort to satisfy the requirements of the
tax law, namely, the requirements of filing a timely return
and paying the amount of tax calculated on the return.
When Payne filed, the IRS had already calculated the tax
due from him, which means that he had succeeded in
defeating the main purpose of the requirement that taxpay-
ers file income-tax returns: to spare the tax authorities the
burden of trying to reconstruct a taxpayer’s income and
income-tax liability without any help from him. A return
filed after the authorities have borne that burden does not
serve the purpose of the filing requirement. Had Payne filed
his 1986 return on time, rather than filing for bankruptcy a
decade later, the IRS might have been able to collect the
entire $20,000 that he owed. It collected the $44,000 of taxes
due from Payne for 1986 that had been withheld by his
employer; it might well have been able to obtain the
rest—there is no suggestion that Payne was already bank-
rupt in 1986 or that having to pay $20,000 to the IRS would
have tipped him into bankruptcy.
Payne hints that his return, belated as it was, did fur-
nish the IRS with some helpful information, for he says
that “the Government points to no information sought from
[him] that was not provided by him.” But he does
not specify any useful information that he was asked to and
did provide. It is true that after he filed his return,
which showed taxable income on which he had failed to pay
the full tax owing, he could no longer argue that he owed
nothing. But this concession was academic, since, as far as
appears, his purpose in filing the belated return was to
satisfy a condition precedent to obtaining a discharge rather
than to pay any of the taxes that he owed. Similarly, the fact
No. 05-1941 5
that the IRS now has a rule that requires the filing of the
belated return as a condition to talking compromise, while
it shows that in some cases the return is useful to the
Service, does not show that it was useful here. But neither
Payne’s purpose nor whether his return had any value to
the IRS is critical. The legal test is not whether the filing of
a purported return has some utility for the tax authorities,
but whether it is a reasonable endeavor to satisfy the tax-
payer’s obligations, as it might be if the taxpayer had tried
to file a timely return but had failed to do so because of an
error by the Postal Service. There was nothing like that here.
Our conclusion that the return that Payne filed in 1992
was not a “return” for purposes of allowing him to dis-
charge his tax liabilities in bankruptcy is consistent with
all the appellate decisions (Moroney, Hatton, and Hindenlang)
that deal with untimely tax returns brandished in the
bankruptcy court in an effort to obtain a discharge. See also
Hayes v. United States, 227 F.2d 540, 542-43 (10th Cir. 1955).
Payne cites cases that hold that a fraudulent tax return is
a return for purposes of criminal and civil fraud stat-
utes even though such a return is worse than useless to
the taxing authorities. Badaracco v. Commissioner, 464
U.S. 386, 396-97 (1984); In re Meyers, 196 F.3d 622, 625 (6th
Cir. 1999); Klemp v. Commissioner, 725 F.2d 1488, 1488 (9th
Cir. 1984). He argues that if a fraudulent return is a re-
turn, then surely a return that is merely not very helpful,
or even completely useless, to the taxing authorities, rath-
er than being fraudulent, is also a return. But there is no
reason why the word “return,” undefined in either the
Bankruptcy Code or the Internal Revenue Code, should
carry the same meaning regardless of context. As we
have noted in reference to another term in the Internal
Revenue Code, “It would not be surprising for the same
word to bear two meanings in different contexts.” Indianapo-
6 No. 05-1941
lis Life Ins. Co. v. United States, 115 F.3d 430, 435 (7th Cir.
1997); see also United States v. Bishop, 412 U.S. 346, 356-58
(1973).
Consider the different contexts found just in tax cases,
rather than the greater contextual difference between a
bankruptcy discharge and a charge of fraud. In Case A,
the taxpayer on April 15, 1987, mails what purports to be his
tax return for 1986, and what indeed is labeled a return, is
signed under penalty of perjury, and contains all the data
necessary to calculate his taxes, but he deliberately mails
it not to the Internal Revenue Service but instead to Ar-
lington National Cemetery. That is not a “return” in any but
a literal sense because it is not an honest and reasonable
attempt to satisfy tax obligations, and if prosecuted
for failing to file a return the taxpayer could not point to
it by way of defense. In Case B, the taxpayer mails to
the right address a return that appears to comply fully
with the requirements for a return but in it he claims a blind
and dependent exemption for his pet cat, whom
he describes as his mother. This is deemed a return if he
is prosecuted for fraud, even though it is again not an
honest and reasonable attempt to satisfy his obligations. It
is a return because the submission of it is conduct that
Congress intended to punish in prohibiting fraudulent
tax returns.
If “return” can thus mean two different things in different
parts of the federal tax law, it can mean a different thing in
a bankruptcy case and in a fraudulent-return case. In the
latter setting, a dishonest return is classified as a return in
order to discourage fraud; in the former case, a return that
does not meet the “honest and reasonable endeavor”
standard is denied the status of a return in order to discour-
age people from using bankruptcy law to avoid having to
satisfy one’s tax liabilities. Not that there is culpability if an
No. 05-1941 7
honest taxpayer simply does not have the money to pay the
taxes he owes; but there is if the taxpayer fails to file a
timely income tax return and when years later the IRS
finally catches up with him declares bankruptcy. All the
cases cited to us make sense and are consistent if “return”
can vary with context; nonsense results if “return” must
bear the same meaning everywhere.
The Bankruptcy Code forbids discharge of a federal tax
debt not only if no return is filed but if a return was
filed within two years preceding the bankruptcy. 11 U.S.C.
§ 523(a)(1)(B)(ii). Does this mean that since Payne filed
his return five years before he declared bankruptcy, he
is home free? It does not. The two-year provision is ad-
dressed to a different situation from the one in this case, that
of the filing of a return that is genuine, but is disqualified
from discharge because filed too soon before, and therefore
presumably in anticipation of, the bankruptcy. The timing
makes it like a payment made to a favored creditor shortly
before bankruptcy, which is treated as a preference and
voided. It is the preceding subsection in the Bankruptcy
Code, the one at issue in this case, that addresses the
situation in which no return is filed; it is only in that
situation that return and “return” must be distinguished. So
there is no inconsistency.
Still another section of the Code forbids the discharge of
a debt created by a tax “with respect to which the debtor
made a fraudulent return or willfully attempted in
any manner to evade or defeat such tax.” 11 U.S.C.
§ 523(a)(1)(C). It could be argued that this is the proper
provision under which to test the adequacy of a return
offered to discharge a debt in bankruptcy. But the argument
ignores the difference between filing a fraudulent return
and filing a return that does not do what a return
is supposed to do. Payne’s untimely return was not fraudu-
8 No. 05-1941
lent, or a false denial of liability, as in cases under section
523(a)(1)(C). See, e.g., In re Birkenstock, 87 F.3d 947, 952 (7th
Cir. 1996); In re Gardner, 360 F.3d 551, 557-58 (6th Cir. 2004);
In re Fretz, 244 F.3d 1323, 1329-31 (11th Cir. 2001). At worst
and in all likelihood, he was angling for a discharge, but he
was not doing it by concealing anything. Maybe his earlier
failure to file timely returns was fraudulent, but the govern-
ment was not required to bear the burden of proving that in
order to deny him a discharge, provided that his untimely
return was not a reasonable effort to comply with his tax
obligations; we have seen that it was not.
The influential Hindenlang decision (on which the other
two discharge cases, Moroney and Hatton, build) states that a
return filed after the assessment of tax can never
be adjudged an honest and reasonable endeavor to com-
ply with the tax law. 164 F.3d at 1034-35. We need not
go that far in this case. There might as we have said be
circumstances beyond a taxpayer’s control that pre-
vented him from filing a timely return, or even from ask-
ing for an extension of the time to file, before the tax was
assessed. Payne, however, offered no excuse (we said his
lawyer’s unsubstantiated assertion at oral argument doesn’t
count) for his six-year delay in filing; and the assessment
was hardly precipitate.
The judgment is reversed with directions to deny the
discharge.
REVERSED AND REMANDED WITH DIRECTIONS.
No. 05-1941 9
EASTERBROOK, Circuit Judge, dissenting. My colleagues
show convincingly that the absence of a statutory definition
of the word “return” in tax law leaves the judiciary with
discretion to vary the definition according to both economic
and legal context. Compare Badaracco v. CIR, 464 U.S. 386(1984), with Zellerbach Paper Co. v. Helvering, 293 U.S. 172(1934). I also agree with their (implicit) conclusion that there
is no good reason for a bankruptcy-specific definition of the
term. Language newly added to §523(a) provides: “[f]or
purposes of this subsection, the term ‘return’ means a return
that satisfies the requirements of applicable nonbankruptcy
law (including applicable filing requirements).” 11 U.S.C.
§523(a), as amended by §714 of the Bankruptcy Abuse
Prevention and Consumer Protection Act of 2005, 119 Stat.
23, 128-29 (Apr. 20, 2005). Use of non-bankruptcy law to
flesh out terms not defined in the Bankruptcy Code is the
norm. See Butner v. United States, 440 U.S. 48 (1979). Final-
ly, I agree with the majority that the two-year rule in
§523 applies only to documents deemed “returns” under
nonbankruptcy law; that a given document was filed
more than two years before the bankruptcy began does
not demonstrate that it is a tax “return.”
Application of these principles to Payne is another matter.
The majority writes that a document “filed after the [tax]
authorities have borne [the] burden [of calculating
the amount due] does not serve the purpose of the fil-
ing requirement.” Slip op. 4. I disagree with this view—
and so does the Internal Revenue Service. Any taxpayer
who wants to propose a compromise of his tax liabilities
must file a return, even if the Service already has gone to the
trouble of calculating and assessing the tax without his help.
26 C.F.R. §301.7122-1(d), implemented by Form 656.
10 No. 05-1941
This regulation did not become effective until 2002, after
Payne was in bankruptcy, but it tells us that the Treasury
Department does think that a taxpayer’s post-assessment
statement of all income and deductions is useful. Such a
document therefore must be a “return” under my col-
leagues’ definition. (In this court the Department of Jus-
tice, representing the United States, has asserted that a post-
assessment filing is useless without so much as acknowledg-
ing the Treasury regulation.) After the 2005 legislation, an
untimely return can not lead to a discharge—recall that the
new language refers to “applicable nonbankruptcy law
(including applicable filing requirements).” But to say that
a document came too late to allow a discharge in cases
commenced after October 2005 (when the amendment took
effect) is not to say that it wasn’t a “return” in 1992, when
Payne filed it, or for that matter today.
Post-assessment returns can be useful, whether or not
the agency insists on them, because otherwise it must
make estimates. Truthful returns, no matter how late,
replace estimates with facts. A taxpayer who provides all of
the information required by the tax laws may show that his
income was more (or less) than the Service believed, leading
to a more accurate assessment. Securing this information
from the person with the best knowledge about his income
and deductable expenses is why tax law requires returns in
the first place. Better late than never. The taxpayer then will
be unable to deny that he had income; the agency will be
able to levy on his assets without protest that it made up the
numbers. A belated return will close off some avenues,
narrow the dispute that remains should litigation ensue,
and—well, it will facilitate compromise. When both sides
have the same information, settlement is easier to achieve.
That’s why the 2002 regulation requires the filing. And for
the very reasons that filing is today obligatory if the tax-
No. 05-1941 11
payer wants to pursue compromise, it is inappropriate for
a court to proclaim that the document is worthless and
hence not a “return.”
One could say that a given document is not a “return”
for some purposes even though the IRS uses that label
for others, such as talking compromise, but that would
slice things too finely. Suppose Payne had sent the same
document, with the same description of his 1986 income and
deductable expenses, in 1989, two years after it was due but
one year before the IRS made its independent calculation.
Would it have been a “return” if unaccompanied by pay-
ment? What if Payne had filed it on time in 1987 but paid
nothing and hid or squandered assets in an attempt to
defeat collection? That would have been culpable—but not
because Payne failed to make a “return.”
A good part of my colleagues’ discussion rests on a
view that an honest and reasonable effort to satisfy the
law (the fourth element of Zellerbach) is one that leads to
collection, and they fault Payne’s 1992 filing because
no money was forthcoming. But this conflates disclosure
with substance. The portion of the Internal Revenue Code
that must be satisfied honestly and reasonably, if a docu-
ment is to be called a return, is the statute requiring revela-
tion of financial information, not the statute requiring
payment. A cashier’s check for all taxes due is
not a “return,” and its absence does not prevent a full
and accurate disclosure of income and deductions from
being a “return.” Similarly Payne’s 1992 filing, if not a
“return” based on its contents, would not have become
one if the envelope had included a check for $5,000.
The majority’s assertion that a document that contains
all information required by tax law but rests in Arlington
National Cemetery (slip op. 6) is not a “return” illustrates
12 No. 05-1941
the difference in our approaches. The problem with mailing
a document to the dead letter office rather than the IRS is
that it has not been filed; the document remains whatever it
was before the envelope was addressed. A bearer bond in
the purser’s safe of the Titanic is still a bearer bond, though
the coupons can’t be clipped. It makes perfect sense to say:
“Perkins completed his tax return but forgot to file it.” And
if Perkins posts it a year late, the thing being filed is a
“return.” If it is a return in the IRS’s files, it was a return
while in Perkins’s desk drawer. Judges should not fiddle
with the definition of “return” so that one word covers all
important steps in a system of self-assessment. Timely filing
and satisfaction of one’s financial obligations are require-
ments distinct from the definition of a “return”; the major-
ity, however, rolls them all together.
My colleagues have a subsidiary theme: that Payne’s
“purpose in filing the belated return was to satisfy a condi-
tion precedent to obtaining a discharge [in bankruptcy],
rather than to pay any of the taxes he owed.” Slip op. 5. This
is the basis for their assertion that Payne “was angling for a
discharge.” Id. at 8. Yet Payne’s purpose is a question of fact,
and as far as I can see the United States does not even
contend that Payne had such a purpose. (Nor, for that matter,
does the United States contend that it would have been able
to collect more had Payne made a return earlier; the major-
ity’s speculation that it “might have been able” to do so, slip
op. 4, to the extent it implies more than the truism that
anything “might” happen, is unsupported by the record.) I
rather doubt that Payne had such a motive, because he did
not enter bankruptcy until five years after he provided the
Service with a return, and the IRS could have levied on his
assets in the interim. Had the IRS begun to collect, and
Payne responded by declaring bankruptcy, then
§523(a)(1)(B)(ii) would have foreclosed a discharge. Because
No. 05-1941 13
the IRS had the means to prevent the tax debt’s forgiveness,
Payne must have had some other goal. At all events,
identification of Payne’s mental state is for a trier of fact, not
an appellate court.
Motive may affect the consequences of a return, but not
the definition. Section 523(a)(1)(C) provides that a discharge
may not be granted concerning any taxes “with respect to
which the debtor made a fraudulent return or willfully
attempted in any manner to evade or defeat tax law.” If
employment of a document to avoid paying taxes renders
that document a non-return, then §523(a)(1)(C) serves no
function, for it supposes that a “return” has been filed (else
§523(a)(1)(B)(i) would foreclose discharge). If a document
designed to game the system is not a “return” in the first
place, then no court ever would get to §523(a)(1)(C). Instead
a court should ask the statutory question: whether a person
“willfully attempted . . . to evade or defeat” the tax.
But we can’t do that now, because the bankruptcy
judge did not make (and was not asked to make) a find-
ing on that subject. The United States argued for a per se
rule: no document filed after an assessment can be a
“return,” no matter the taxpayer’s motive. The IRS is stuck
with that strategy; a court of appeals should not bail it
out by attributing to the taxpayer a motive that has
never been proposed before and with respect to which
he has had no chance to defend himself, and then read-
ing this motive back into the definition of a “return” rather
than working it out through §523(a)(1)(C).
The upshot of my colleagues’ approach is that a “bad”
motive precludes a discharge, where “bad” is something
short of a willful attempt to evade or defeat taxes—and
where motive will be imputed on appeal rather than
determined at trial. That both denies taxpayers an opportu-
14 No. 05-1941
nity for a hearing and contravenes the statute. Section
523(a)(1)(C) does not say that “willful tax evasion pre-
cludes discharge, and any other purpose may do so too
if the judge thinks the taxpayer crafty.” We should not
overlay open-ended discretion on a concrete text. See, e.g.,
Lamie v. United States Trustee, 540 U.S. 526, 542 (2004); Dodd
v. United States, 125 S. Ct. 2478 (2005).
The document that Payne filed is a tax return because
it contains all of the required information and may
have helped the agency, as the 2002 regulation demon-
strates. Payne filed this return more than two years before
his bankruptcy commenced, so §523(a)(1)(B)(ii) makes these
taxes eligible for discharge. The United States has
not argued—and we cannot properly declare sua sponte—
that Payne has willfully attempted to defeat or evade any
tax, so §523(a)(1)(C) does not foreclose a discharge. The
judgment discharging this debt therefore should be af-
firmed, no matter what we think of Payne’s care, ethics, or
strategy. There is no general equitable override to the
Bankruptcy Code—as the IRS is quick to observe when a
judge might be tempted to do the taxpayer a favor. See
United States v. Reorganized CF&I Fabricators of Utah, Inc., 518
U.S. 213 (1996); United States v. Noland, 517 U.S. 535, 539, 543
(1996); cf. Norwest Bank Worthington v. Ahlers, 485 U.S. 197,
206 (1988). That principle works both ways.
No. 05-1941 15
A true Copy:
Teste:
_____________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—12-14-05