Penalties on Non-Dischargeable Taxes are Discharged in Chapter 7 (Sometimes)

I saw on another bulletin board recently a blanket statement that penalties on non-dischargeable taxes are discharged in chapter 7.  I spent a little time trying to confirm this as it is surprising to me.   As is common, the statement is sort of true but not completely.  The conundrum is set forth in Section 523(a)(7)(A) and (B).  (a)(7) states that penalties are not discharged “except (certain tax penalties).”  In re McKay v. United States, 957 F.2d 689 (9th Cir. 1992) takes a good stab at explaining that section.  In McKay, the taxpayer was found guilty of filing fraudulent tax returns.  That may be, he said, but the penalites are nevertheless discharged.  The district court agreed.  The Court of Appeals agreed saying:

Carefully parsed, [523(a)(7)] initially makes nondischargeable a “debt that is for a fine, penalty or forfeiture payable to and for the benefit of a governmental unit.”  Withdrawn from this class, however, are any such fines, penalties, or forfeitures that are “compensation for actual pecuniary loss.”  These are dischargeable.  The double negative, “does not discharge” and “not compensation for actual pecuniary loss,” accomplishes this end.  Another group of penalties are withdrawn from the nondischargeable group.  These appear in parts (A) and (B) of § 523(a)(7).  Part (A) withdraws tax penalties attributable to taxes which are not nondischargeable.  That is, part (A) makes dischargeable tax penalties attributable to dischargeable taxes.  This follows because part (A) relates “to a tax of a kind not specified in paragraph (1) of this subsection.”  Those types specified in paragraph (1) are not dischargeable taxes.  In relevant part “paragraph (1) of this subsection” makes not dischargeable “any debt” that is “for a tax … with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax.”
The other group of penalties withdrawn from the nondischargeable group is described in part (B).  It is quite straightforward.  It makes dischargeable any tax penalty “imposed with respect to a transaction or event that occurred before three years before the date of the filing of the petition.”  A penalty imposed on unpaid taxes accruing more than three years before the filing of the bankruptcy petition is dischargeable.   That describes the situation of the appellant. There is some evidence in the legislative history that Congress did not intend  this result.  We, like other circuits which have carefully considered this issue, have adhered to the language of the statute.  [cites omitted]  Amendment, as opposed to interpretation, is for the Congress.
Tax penalties are assessed for late filing, for late paying and for negligence etc.  If the penalty was imposed because the return was filed late, the “transaction or event” occured when the return was not filed on the due date (or the tax was not paid on the due date” it seems.  If that was more than three years before the petition was filed the penalty is deischarged even though the tax is not.

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