By Ryan C. Wood

What is this madness?  No, this is not madness.  It is just the layer upon layer of law that exists.  Let me begin by informing you that filing for bankruptcy protection and owing the Internal Revenue Service or the California Franchise Tax Board unpaid taxes, fees or penalties is treacherous.  Taxes can be discharged when filing for bankruptcy protection under certain circumstances, or better put, the taxes owed fulfill the requirements to be discharged.  There are so many rules and layers upon layers of Tax Code versus Bankruptcy Code versus California State Law that it is treacherous.  One little obscure overlooked, previously not enforced or not known rule could result in the tax obligation not being discharged when filing for bankruptcy protection.  Or some rule not previously defined a certain way could be used to seek a different result not previously known.   That could be what happened to two bankruptcy filers in California and the subject of two recently published opinions by the Ninth Circuit Bankruptcy Appellate Panel.  The opinions were published given this issue had not yet been addressed at the appellate level.  That seems hard to believe so something must have changed.  The various laws below did not change so it must be how they are being enforced or used.  I think that change was the California Franchise Tax Board choosing to define or try and enforce California Revenue Tax Code Section 18622(a)(2) differently.  Unfortunately the lower Bankruptcy Court judges and then the Ninth Circuit Bankruptcy Appellate Panel agreed with the California Franchise Tax Board.  They are going to broadly defined “report” and “change” so that people seeking bankruptcy protection and a discharge pursuant to the Federal Bankruptcy Code cannot discharge unpaid taxes.  Another way to look at it is if you have not fulfilled your obligations to the taxing authorities then taxes owed should not be discharged when filing for bankruptcy protection.   Bankruptcy attorneys everywhere have an entire new set of questions to ask regarding unpaid taxes.         

See: In re: RUDOLF P. SIENEGA, BAP No. EC-19-1334-FLS

The Sienega bankruptcy case was originally filed in the Easter District of California and heard by Judge Christopher D. Jaime.  This case is distinguishable from the Voloshin case listed below.  In this case the bankruptcy filer notified the California Franchise Tax Board of the increased IRS assessments but admittedly he did not actually file “returns” with the California Franchise Tax Board for the same years he was seeking to discharge his tax liability.  See In re Hatton, 220 F.3d 1070 (9th Cir. 2000) regarding what is a “return.”  This case is a good example of arguably the proper application of RTC Section 18622(a) and Section 523(a)(1)(B) of the Bankruptcy Code.  You have to at least file a “return” to have a shot at discharge.   See In re Hatton, 220 F.3d 1070 (9th Cir. 2000).  How to you define what is “an honest and reasonable attempt to satisfy the requirements of the tax law?”

See: In re IDENNIS BERKOVICH and MARINA VOLOSHIN, BAP No. CC-20-1025-FLS

The Berkovich bankruptcy case was originally heard in the Central District of California and heard by Judge Maureen A. Tighe.  Now this case is far different.  The bankruptcy filers in this case had an increase in tax assessment by the IRS of $145,000 for a tax year but did not report to the California Franchise Tax Board of the change.  Eventually the California Franchise Tax Board did learn of the IRS change of assessment and increased the bankruptcy filers’ taxes owed by $45,000 for that tax year.  The taxes owed to the California Franchise Tax Board remained unpaid at the time the bankruptcy case was filed and the taxes met the requirements to be discharged notwithstanding RTC Section 18622(a) and Section 523(a)(1)(B) of the Bankruptcy Code. Unfortunately no [report] of the [change] was made.

When Must This [Report} of the [Change] Take Place?

California RTC Section 18622(a) provides within six months after the date of each final federal determination of the change or correction or renegotiation, or as required by the Franchise Tax Board, and shall concede the accuracy of the determination or state wherein it is erroneous.

Wow, what a mess this temporal or time requirement will hopefully turn into for the sake of bankruptcy filers. When was the federal determination of the [change] final? Can it issue be reopened to as to not be final?

California Revenue and Tax Code Section 18622(a)

This section provides: “requires a taxpayer to make a [report] to the California Franchise Tax Board FTB if the Internal Revenue Service [changes] the taxpayer’s federal income tax liability.

There is actually no language that says increase or decrease. I suppose if there was a decrease in any tax liability that in theory would never create a larger tax liability with the California Franchise Tax Board so who cares. Section 18622(a) is about encompasses increases of tax liability with the IRS and then increasing the California Franchise Tax Board liability accordingly. What if the [change] that is supposed to be [reported] decreased the federal income tax liability of the filer and the bankruptcy filer failed to [report] this decrease to the California Franchise Tax Board? Would this result in some tax not being discharged as well? What if it is only a penny change?  Or a one hundred dollar change?  A tiny change that was not reported?  Would it still be equitable to not allow the discharge of $100,000 in unpaid taxes due to not [reporting] a $0.01 change of assessment by the IRS? It is never so simple and defining terms then applying them to real world circumstances becomes even more difficult.  

Bankruptcy Code Section 523(a)(1)(B)

Section 523(a)(1)(B)1 of the Bankruptcy Code provides that if a taxpayer fails to file a required “return, or equivalent report or notice,” the relevant tax debt is not discharged.  So without knowing more this is about filing a tax return or an equivalent tax return report or notice.  It has nothing to do with informing the California Franchise Tax Board of a “change” in tax liability by the Internal Revenue Service.  Is the “change” an increase or decrease by the way? 

So Is This “Report” Required By California Revenue Tax Code Section 18622(a) What Section 523(a)(1)(B) of the Bankruptcy Code Encompasses?

Sadly the answer was yes in both of the published opinions referenced above. 

The Ninth Circuit Bankruptcy Appellate Panel held that the “report” required under RTC section 18622(a) is an “equivalent report” within the meaning of § 523(a)(1)(B).   So otherwise dischargeable taxes owed to the California Franchise Tax Board are not dischargeable unless a “report” of a change in the taxpayers’ federal income tax liability.

What qualified as fulfilling this obligation to report?  Can you call up the FTB and verbally “report” a change in federal income tax liability?  An email?  A facsimile?  What will fulfill the obligation of RTC Section 18662(a) be?   This is what will come next and how it works.  First a term is broadly defined to encompass something or create a circumstance that was never intended by the legislature then good faith compliance with the new interpretation is deemed not sufficient.  Someone will in fact “report” their change in federal income tax liability and how they chose to “report” will be deemed not a “report.”  This is how it works.  Oh by the way, RTC Section 18622(a) does not make the distinction between an increase in tax liability or decrease in tax liability.  It just says you need to “report” a change in federal income tax liability.  As the plain language of these words provides that is any change.  So you are telling me that a bankruptcy filers federal tax liability could be reduced by hundreds of thousands of dollars but fail to “report” this decrease or change to the California Franchise Tax Board and as it stands right now that failure to “report” would make a tax liability owed to the California Franchise Tax Board not dischargeable when seeking bankruptcy protection?  Is this not absurd?  When the language of a statute is plain, courts must enforce the statute according to its terms unless doing so would produce absurd results.  See Lamie v. U.S. Tr., 540 U.S. 526, 534 (2004).  How is an absurd result defined as not absurd?  The court just says the result is not absurd.  

Section 523(a) Full Text

(a)A discharge under section 727, 1141, 1192 [1] 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt—

(1)for a tax or a customs duty—

(A) of the kind and for the periods specified in section 507(a)(3) or 507(a)(8) of this title, whether or not a claim for such tax was filed or allowed;

(B)with respect to which a return, or equivalent report or notice, if required—

(i) was not filed or given; or

(ii) was filed or given after the date on which such return, report, or notice was last due, under applicable law or under any extension, and after two years before the date of the filing of the petition; or

(C) with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax;

California Revenue and Tax Code RTC § 18622

(a) If any item required to be shown on a federal tax return, including any gross income, deduction, penalty, credit, or tax for any year of any taxpayer is changed or corrected by the Commissioner of Internal Revenue or other officer of the United States or other competent authority, or where a renegotiation of a contract or subcontract with the United States results in a change in gross income or deductions, that taxpayer shall report each change or correction, or the results of the renegotiation, within six months after the date of each final federal determination of the change or correction or renegotiation, or as required by the Franchise Tax Board, and shall concede the accuracy of the determination or state wherein it is erroneous.  For any individual subject to tax under Part 10 (commencing with Section 17001 ), changes or corrections need not be reported unless they increase the amount of tax payable under Part 10 (commencing with Section 17001 ) for any year.

(b) Any taxpayer filing an amended return with the Commissioner of Internal Revenue shall also file within six months thereafter an amended return with the Franchise Tax Board which shall contain any information as it shall require.  For any individual subject to tax under Part 10 (commencing with Section 17001 ), an amended return need not be filed unless the change therein would increase the amount of tax payable under Part 10 (commencing with Section 17001 ) for any year.

(c) Notification of a change or correction by the Commissioner of Internal Revenue or other officer of the United States or other competent authority, or renegotiation of a contract or subcontract with the United States that results in a change in any item or the filing of an amended return must be sufficiently detailed to allow computation of the resulting California tax change and shall be reported in the form and manner as prescribed by the Franchise Tax Board.

(d) For purposes of this part, the date of each final federal determination shall be the date on which each adjustment or resolution resulting from an Internal Revenue Service examination is assessed pursuant to Section 6203 of the Internal Revenue Code . 

The real absurdity or tragedy is that bankruptcy attorneys that know such distinctions and actually properly represent their clients rarely get paid properly for this knowledge and expertise.  The lowest common denominator effect and advertising have ruined the market.  Any attorney can put up a website then use pay-per-click and have fake reviews placed on the internet and sadly it works.  Honest attorneys receive reviews organically over a period of time. Dishonest attorneys have a bunch of reviews with few words in a short period of time on one online platform and it is not organic. A ten out of ten rating on some online website is bought and paid for regardless of experience and knowledge. How can certain entities take money to recommend attorneys with absolutely ZERO knowledge of that attorney? Nothing is being done about this by any organization. Hopefully you read this article and my other articles to know what I am about and how I represent my clients. If you dare try and make things better you will be the nail that sticks out you will get hammered by all those on board with “the system.”