Aggressive moves by Mass. DOR shot down in bankruptcy court

taxesPeople behind on their Massachusetts state income taxes have an aggressive foe out there — the Massachusetts Department of Revenue.

Mass. DOR has been taking some pretty far-out positions in court on bankruptcy cases filed by Massachusetts residents looking to discharge back taxes. Just recently, they argued in Judge Hoffman’s courtroom that all tax returns that were filed late could never be discharged in bankruptcy.

Thankfully for debtors state-wide, the judge didn’t agree, and it is still possible for late returns to sometimes result in a discharge.

The dispute, decided in the twin cases of Brown and Gonzalez, on March 11, 2013, both involved unrelated debtors who both filed bunches of Mass. returns late, and then more than three years later each filed for bankruptcy.

This situation is governed by section 523 of the bankruptcy code, which has a “two year rule,” allowing for a discharge of the tax only if the late tax returns were filed more than two years before the bankruptcy.

Mass. DOR, on the other hand, wanted their own rule enforced — saying virtually any tax debt for a late return couldn’t be discharged in bankruptcy.

Judge Hoffman ruled that such an extreme approach could not have been what the drafters of section 523 had in mind when the section was amended back in 2005, and granted the debtors their discharges.

There are three important takeaway points in these cases:

First, the two year rule survives, at least where the late tax return is filed before the tax authority (IRS or DOR) gets around to formally assessing the tax on their own.

Second, bankruptcy practitioners need to be aware that Mass DOR will sometimes pursue unreasonable long-shot positions that require additional litigation in bankruptcy court.

And third, bankruptcy lawyers should not be reluctant to take them on. Just because a bureaucrat takes a legal position doesn’t mean it is correct. This is especially true in the often upside-down world of bankruptcy court.


By Doug Beaton

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