Consequences of Failing to Report Federal Changes to the California Franchise Tax Board
- Steven L. Walker PLC
- Mar 1, 2022
- 2 min read
Updated: Aug 23
On Oct. 14, 2021, the Ninth Circuit Court of Appeals in Berkovich, affirmed the decision from the Bankruptcy Appellate Panel (BAP) that because a debtor failed to report Internal Revenue Service (IRS) tax assessments to the California Franchise Tax Board (FTB), the debtor’s state tax liability was nondischargeable under § 523 (a) (1) (B) (i). California law required the debtor to file a report under Cal. Rev. & Tax. Code § 18622 (a), and the report was an “equivalent report” within the meaning of § 523 (a) (1) (B). The court rejected the debtor’s argument that the phrase “equivalent report” under § 523 (a) (1) (B) is limited to a “return” and anything not expressly a “return” is excluded.
In a concurrently decided case, the Ninth Circuit Court of Appeals in Sienega2 affirmed the BAP’s decision holding that because a debtor failed to file “formal” state tax returns that complied with California law, the state taxes were nondischargeable under § 523(a)(1)(B)(i). The debtor’s argument that he faxed reports of the federal changes to the FTB was insufficient because the faxes did not qualify as returns under the Beard test.
While both Berkovich and Sienega involve the California FTB, other states, such as Maryland, have similar statutes requiring the reporting of federal changes to a state’s taxing agency. Debtor’s counsel should be mindful of a state’s tax-reporting regime to avoid the Berkovich trap of nondischargeable state income taxes. A guiding principle is that whatever happens at the federal level should also be done at the state level, which means complying with state law notification requirements and filing tax returns and amended returns, as required by state law.
