IRS Issues new Bankruptcy Tax Guide, Publ 908 (10/27/12)

The IRS has issued a new version of the Bankruptcy Tax Guide, Publication 908 (October 2012).  The pdf version is here and the html version is here.

The following is the discussion of discharge of tax liability in bankruptcy:

Discharge of Unpaid Tax 

If you are a debtor in a bankruptcy case, the bankruptcy court may enter an order providing you with a discharge of debts. However, not all of your debts may be discharged. The scope of the bankruptcy discharge depends on the chapter you are in and the nature of the debt. Many tax debts are excepted from the bankruptcy discharge. 

If you are an individual under chapter 7, the following tax debts, including interest, are not subject to discharge: taxes entitled to eighth priority, taxes for which no return was filed, taxes for which a return was filed late after 2 years before the bankruptcy petition was filed, taxes for which a fraudulent return was filed, and taxes that you willfully attempted to evade or defeat. Penalties in a chapter 7 case are dischargeable unless the event that gave rise to the penalty occurred within 3 years of the bankruptcy and the penalty relates to a tax that is not discharged. Corporations and other entities that are not individuals do not receive a discharge in chapter 7 cases. 

The same exceptions to discharge that apply to individuals in chapter 7 cases apply to individuals in chapter 11 cases. Different rules apply for corporations. A corporation in chapter 11 may receive a broad discharge when the plan is confirmed, but secured and priority claims must be satisfied under the plan and there is an exception to discharge for taxes for which the debtor filed a fraudulent return or willfully attempted to evade or defeat, for bankruptcy cases filed after October 16, 2005.

No Bankruptcy Discharge for Taxpayers Attempting to Defeat Payment of Tax (7/25/12)

In United States v. Coney, ___ F.3d ___, 2012 U.S. App. LEXIS 15283 (5th Cir. 2012), here, the Fifth Circuit affirmed a denial of a bankruptcy discharge.  The background is that a chapter 7 discharge normally covers all debts of the debtor, but there are certain exceptions.  One of the exceptions is in 11 U.S.C. § 523(a)(1)(C) which excludes from discharge a tax liability "with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax[.]"  [Emphasis supplied, to show the disjunctive.]

The debtors in the case were husband (now deceased) and wife, who we will refer to as Curtis and Barbara and together as the Coneys.  Curtis was a lawyer operating through a sole owner S corporation.  The tax liabilities arose from his law practice.  Without going through all the details, the Coneys had a large amount of taxable income coming from the law firm.  They apparently reported the income, but went to extraordinary lengths to prevent the IRS from discovering available assets to pay their resulting large tax liabilities.  In negotiating with the IRS regarding payment of the liabilities, the debtors committed to turn over certain fees as received.  They failed to turn over one large fee.  Furthermore, the law firm "engaged in a high volume of cash transactions."  Some of the cash proceeds it received were used to make illegal payments to runners for the law firm.  In order to disguise the withdrawal of the cash, the husband debtor instructed staff to draw checks under the $10,000 reporting requirement to obtain the cash to pay the runners, thereby avoiding the CTR reporting requirement.

Things unraveled from there.  Husband debtor was charged with

(a) one count of conspiracy to structure financial transactions in violation of 31 U.S.C. § 5324 from 1997 to 2001, (b) ten counts involving ten separate incidents of structuring financial transactions in violation of 31 U.S.C. § 5324 from 1997 to 2001, and (c) one count of obstruction of justice for attempting to influence [a staff member's] grand jury testimony.

Barbara was charged with "one count of obstruction of justice for attempting to influence [the staff member's] grand jury testimony.

The Coneys thereafter pled to all charges.  [I am sure there is a story there, but it is not given in the case.]