In Re: Starling

Background

Brian Starling did not timely file his federal income tax return for tax year 2002. The Internal Revenue Service assessed the tax in 2006 after sending notices that gave Starling opportunities to file a return, agree to the assessment, explain why he was not required to file, or challenge the assessment in Tax Court. Starling later filed a Form 1040 in 2007.

Starling filed a Chapter 13 bankruptcy petition in 2013. The IRS submitted a proof of claim that included the unpaid 2002 tax liability. The Bankruptcy Court confirmed Starling’s repayment plan in 2014 and entered a discharge order in 2016. The discharge order stated that certain tax debts are not discharged, including debts covered by 11 U.S.C. § 523(a)(1)(B) when the required return was not filed.

In 2017, the IRS told Starling that it had assigned his overdue tax account to Continental Service Group, Inc., also called ConServe. ConServe later sent Starling annual notices seeking payment. The IRS recalled the account in November 2019, and the opinion states that the IRS and ConServe had stopped trying to collect because the statutory collection period had ended.

Bankruptcy Court Proceedings and Appeal

Starling moved in the Bankruptcy Court for contempt, arguing that the 2002 tax debt had been discharged and that the collection efforts violated the discharge injunction. The Bankruptcy Court granted the motion in large part. It held that the tax debt had been discharged, held the IRS in contempt without imposing monetary sanctions because Starling had not exhausted administrative remedies, and ordered ConServe to pay $500 for each of two notices, plus $2,644 in attorney’s fees.

The IRS and ConServe appealed. They argued that the tax debt was not discharged and that the Bankruptcy Court should not have held them in contempt. The two appeals were consolidated. The District Court reviewed the Bankruptcy Court’s legal conclusions independently and its factual findings for clear error, meaning it could not reverse factual findings unless the record left it firmly convinced that a mistake had been made.

Tax Debt and Meaning of “Return”

The Bankruptcy Court’s discharge injunction barred collection of debts covered by the discharge order. Under 11 U.S.C. § 523(a)(1)(B), however, an individual is not discharged from a tax debt for which a required return was not filed. The parties agreed that the key question was whether Starling’s Form 1040, filed in 2007 after the IRS had assessed the tax, qualified as a “return.”

The opinion discusses several approaches courts have used. The traditional four-part test asks whether the filing contains enough information to calculate the tax, purports to be a return, is signed under penalty of perjury, and reflects an honest and reasonable effort to comply with tax law. After Congress amended the Bankruptcy Code in 2005, some courts adopted a rule that a filing submitted after the original deadline cannot qualify as a return, while other courts continued using a more flexible approach.

The IRS proposed focusing on whether the Form 1040 was filed before or after the IRS assessed the tax. Judge Seibel stated that it was unnecessary to choose among these tests because the result was the same under each relevant approach. The Form 1040 was filed nearly four years after the original deadline, more than a year after the IRS assessment, and after Starling had ignored multiple IRS notices. The court concluded that the filing was not a qualifying return.

The District Court also rejected the more lenient approach used by the Bankruptcy Court, which looked primarily at whether the Form 1040 appeared properly completed on its face. Judge Seibel held that this approach improperly weakened the requirement that the taxpayer make an honest and reasonable effort to satisfy tax obligations. The opinion further stated that Starling’s filing appeared simply to repeat the tax assessment the IRS had already made.

Ruling

The District Court held that Starling’s 2002 tax debt was not discharged as a matter of law in his Chapter 13 bankruptcy. Because the debt was not discharged, the IRS’s and ConServe’s collection attempts did not violate the discharge order, and the Bankruptcy Court erred by finding them in contempt. The District Court reversed the Bankruptcy Court’s decision and remanded the matter for vacatur of the contempt order and any other proceedings consistent with the decision. The Clerk was directed to close the two cases.