Tax Not Always Discharged in Bankruptcy

In Vaughn (CA 10 8/26/14), the Tenth Circuit tells us that a taxpayer who entered into a tax shelter that created “artificial” losses willfully attempted to evade tax, and thus could not have his tax liability discharged in a Chapter 11 bankruptcy proceeding.

The taxpayer’s 1999 return, in this case, reported a large gain from the sale of his company, as well as a large loss arising from a strategy known as “Bond Linked Issue Premium Structure” (BLIPS), which had hit the IRS’ radar as one of several forms of transaction designed to give taxpayers an artificially high basis in partnership interests, thereby giving rise to deductible losses on disposition of those partnership interests.

Under Chapter 11, the law does not allow for discharge of any debt for a tax with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat the tax.