As someone who trained as a linguist, I cannot resist commenting on a Seventh Circuit decision from late 2005, In Re: John Howard Payne, about a discharge of a federal income tax liability in bankruptcy. The bankruptcy judge and district court below found that a debtor could discharge a federal income tax liability even though no return had been filed until after the IRS assessed the tax due. Posner, writing for the appellate panel, concluded that the discharge could not be upheld. The opinion rests on Posner's definition of a return for the specific provision at issue.
The facts of the case are relatively simple. Payne did not timely file his 1986 tax return. In 1990, the IRS assessed Payne for the tax due for 1986, possibly with the assistance of a tip from another taxpayer. Payne finally filed a 1986 return in 1992 but did not pay the tax due. Five years later, Payne filed for bankruptcy and successfully discharged his 1986 tax liability.
The problem is that section 523(a)(1)(B)(i) of the Bankruptcy Code prohibits discharging federal income tax liabilities for which a return should have been, but was not, filed. The government argued that a post-assessment return was not a "return" within that statute, and therefore Payne's 1986 tax liability could not be discharged.
Posner cites Zellerbach Paper Co, which states that a return must "evince an honest and genuine endeavor to satisfy the law" and concludes that a return doesn't fulfill the self-assessment function, and therefore is not a "return," when it is filed after the government has figured out the taxpayer's tax burden on its own.
This is a difficult conclusion, since a fraudulent tax return, which clearly doesn't fulfill the self-assessment function, is equally clearly a return under the Internal Revenue Code. Posner gets around this obstacle by claiming that the word "return" in the fradulent return context has a different meaning than the word "return" in the cited Bankruptcy Code provision! He says "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."
To prove his point, Posner compares a return intentionally mailed to a wrong address (Arlington National Cemetery) and one in which a taxpayer claims a pet cat as his dependent mother. He asserts that the first is not a return, because it isn't intended to satisfy tax obligations, while the latter is, even though it isn't intended to satisfy tax obligations. The reason--because it is necessary in the latter case to acknowledge the return as a return since it is the submission of the return that is intended to be punished by the fraudulent return statutes. He then goes on to assert a similar distinction for bankruptcy.
[Return] 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 discourage people from using bankruptcy law to avoid having to satisfy one's tax liabilities.
(The implication is also that there is factual evidence that Payne was trying to use the filing of a return to avoid taxes. But as Easterbrook points out, that was a factual question not argued by the Service.)
Once Posner distinguishes return and "return", he happily concludes that the discharge was inappropriate because no return had been filed. The problem, which Easterbrook points out, is that returns and the filing of them are two separate concepts. Congress fixed the Bankruptcy Code in this regard in the 2005 legislation, by prohibiting discharges in connection with untimely filed returns. Thus, Easterbrook argues, the document Payne filed was a tax return; the Service didn't argue that the return was fraudulent, so the Bankruptcy Code provision refusing discharges of taxes with respect to which a taxpayer filed a fraudulent return was not at stake; and Payne filed the return more than 2 years before the bankruptcy case commenced, so the related taxes should have been eligible for discharge.
Posner's approach in this tax/bankruptcy case may provide ammunition to those aggressive interpreters of the Internal Revenue Code who invent sham tax shelters by manipulating the text of provisions to support transactions clearly outside the scope contemplated by drafters. Now, they can just redefine a term at random, claiming that the word need not have a meaning that is the same as its meaning in other contexts. Such an approach discounts the importance of structural coherence. Judges should be cautious in deciding tax cases by ascribing such disparate meanings to simple terms.
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