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United States v. Woods

United States District Court, S.D. Indiana

March 12, 2004

UNITED STATES OF AMERICA, Appellants,
v.
WILLIAM D. WOODS, Appellee ADVERSARY No. IP01-00212

          ENTRY ON APPEAL FROM BANKRUPTCY COURT ORDER ON CROSS-MOTIONS FOR SUMMARY JUDGMENT

          SARAH BARKER, DISTRICT JUDGE.

         The relevant facts in this litigation are undisputed and the issue before the court is straight forward. William Woods failed to file timely tax returns for the years 1988 through 1993. In November of 1994 the Treasury Department, pursuant to the Internal Revenue Code, prepared substitute returns for those years based upon the information available to it. I.R.C. § 6020(b). In December of 1994 the IRS sent Woods notice of the proposed income tax deficiencies, requesting that he respond within 30 days. Woods did not respond. Formal notice of deficiency letters were then sent to Woods in February 1995, giving him 90 days to respond or file a petition in the United States Tax Court to challenge the deficiencies. Again, Woods did not respond. Consequently, the IRS assessed the tax deficiencies against Voods in August of 1995.

         After the tax deficiencies, including penalties and interest, were assessed Woods executed a tax collection waiver and entered into an installment agreement with the IRS. He also made an offer of compromise to the IRS for payment of a reduced amount of taxes owed for the years 1988 through 1995. That offer was rejected by the IRS in April of 1997. Woods was advised by both an IRS agent and his own legal and tax consultants that he should file returns for the years at issue. He did so in December of 1997. The 1040 Forms signed and submitted by Woods for the 1988 through 1993 contained nearly the same information as the substitute returns that had been prepared by the Treasury Department. However, differences in marital status, standard deduction and cost of goods calculations, as submitted by Woods on the 1040 Forms, caused the IRS to make small changes to the ultimate tax assessment for four of the six years. The assessments increased slightly for two years and decreased slightly more for two other years. Woods made payments on the installment contract until he became ill and lost his job.

         On February 12, 2001, Woods filed a voluntary petition under Chapter 7 of the Bankruptcy Code. As a debtor, he then filed this adversary proceeding seeking, in part, a determination against the United States that his federal tax liabilities for the years 1988 through 1993 are dischargeable because they are not excepted from discharge by Section 523 of the Bankruptcy Code, 11 U.S.C. § 523.

         Section 523 specifically excepts various categories of debts from discharge. As it relates to this case, Section 523 provides as follows:

(a) A discharge under section 727 . . . 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)(2) 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, if required -
(i) was not filed; or
(ii) was filed after the date on which such return 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.

11 U.S.C. § 523(a)(1).

         Both woods and the United States moved for summary judgment in the adversary proceeding. woods maintains that the unambiguous language of Section 523 requires a finding that his tax liabilities for 1988 through 1993 do not fall under an exception to discharge. He filed tax returns, albeit late, more than three years prior to his filing a bankruptcy petition. According to woods, without evidence that he committed fraud or otherwise intended to deceive the Treasury Department with the returns he filed, he is entitled to discharge any tax liability that accrued and for which returns were filed, more than two years prior to the filing of his petition. The United States argues that the filing of a 1040 Form long after the IRS has already crafted a substitute return, issued a proposed deficiency and then assessed the tax liability, should not constitute a "return" as that term is used in 11 U.S.C. § 523(a)(1)(B) (ii). ...


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