Tax Discharge in New York Bankruptcy

Game News reported March 28, 2011 in “Trip Hawkins in serious shizzle over $20m tax bill” that the founder of Electronic Arts was rejected by a federal judge when he tried to use personal bankruptcy to cancel more than $20 million of federal and state tax obligations.  The gaming giant is responsible for mega-blockbusters like Mass Effect, Crysis, the Battlefield franchise, the Sims, and Medal of Honor.  Electronic Arts recently moved to a 7,000 plus office space in 1515 Broadway.  Apparently the founder used “abusive tax shelters he used to shield vast profits from Electronic Arts, the pioneering video gaming firm he founded nearly three decades ago.”  Though he knew he was in tax debt, he continued to spend money extravagantly.  He is now the CEO of mobile game firm Digital Chocolate.  In 2006, he and his wife filed for bankruptcy, claiming assets of $5 million compared to liabilities of $28 million, the majority of which was tax debt.  From the bankruptcy, the couple obtained a general discharge of their debts, but the US tax agencies prevented them from avoiding tax liabilities under a provision of bankruptcy law that prohibited discharge of tax debts if the debtor “willfully attempted in any manner to evade or defeat such tax.”

Generally income taxes aren’t dischargeable and must be paid regardless of bankruptcy, unless the tax return was due over 3 years ago, the tax return was filed at least 2 years ago, and the Internal Revenue Service (IRS) hasn’t issued any income tax assessment within 240 days before a bankruptcy filing.  Filing for does not automatically allow a person to get out of tax debt.

For the individual, Chapter 7 provides for full discharge if the tax debt is an allowable debt. Chapter 13 provides a payment plan to repay some debts, with the remainder of debts discharged. Most likely in a repayment plan, the individual debtor will be required to pay tax debt as a priority.

Tax debts are associated with a particular tax return and tax year. To get tax debt discharged in bankruptcy, the New York debtor must show that the debt is too old:

  • Due date for filing a tax return is at least three years ago. The due date includes any extensions.
  • Tax return was filed at least two years ago.  The time is based on the date the taxpayer actually filed the return.
  • Tax assessment is at least 240 days old.  The IRS determination must be final.
  • Tax return was not fraudulent
  • Taxpayer is not guilty of intentional tax evasion

Consult an experienced New York tax attorney for advice on whether bankruptcy is an option when behind on tax debt.