The failure to report an increased federal tax assessment to the California Franchise Tax Board results in a tax debt that is not dischargeable in bankruptcy




Honesty Is the Best Policy in Taxes and Bankruptcy In Berkovich v. Cal. Franchise Tax Bd. (In re Berkovich), 20-60046 (9th Cir. Oct. 14, 2021), the United States Court of Appeals for the Ninth Circuit adopted a Bankruptcy Appellate Panel (“BAP”) decision holding that a tax debt was not discharged in bankruptcy because the debt derived from a “report or notice” equivalent to a tax return that he had failed to submit as required by California law. Tax debts are not discharged under 11 U.S.C. § 523 if a taxpayer fails to file a required “return, or equivalent report or notice.”The BAP explained that the debtor had failed to submit a required “report or notice” because he filed his state tax returns but did not inform the Franchise Tax Board (“FTB”) of increased federal tax assessments as required by Cal. Rev. & Tax. Code § 18622 and concluded that the report required under section 18622(a) is an “equivalent report” within the meaning of 11 U.S.C. § 523(a)(1)(B). Cal. Rev. & Tax. Code § 18622(a) Reports Are “Equivalent” to a Return Under 11 U.S.C. § 523(a)(1)(B) The BAP adopted the Fourth Circuit’s reasoning in Maryland v. Ciotti (In re Ciotti), 638 F.3d 276, which dealt with a similar factual scenario. Ciotti set out a a four-part test for determining the meaning of “returns” in 11 U.S.C. § 523(a)(1)(B). In order for a document to be considered a “return,” it must: (1) purport to be a return; (2) be executed under penalty of perjury; (3) contain sufficient data to allow calculation of tax; and (4) represent an honest and reasonable attempt to satisfy the requirements of the tax laws.The BAP concluded that the report required under Cal. Rev. & Tax. Code § 18622(a) furnishes the state tax authority with the information needed to ascertain the taxpayer’s state tax liability, and therefore, for the purposes of 11 U.S.C. § 523(a)(1)(B), the report is equivalent to a return.

April 14, 2022
Berkovich v. Cal. Franchise Tax Bd. (In re Berkovich), 20-60046 (9th Cir. Oct. 14, 2021)
California Courts