Gonzalez v. Mass. Dep't of Revenue

• Decision Date: 06 March 2014
• Docket Number: BAP No. MW 13–026.,Bankruptcy No. 10–41907–MSH.,Adversary No. 11–04149–MSH.
• Citation: 506 B.R. 317
• Parties: Anthony M. GONZALEZ, Debtor. Anthony M. Gonzalez, Plaintiff–Appellee, v. Massachusetts Department of Revenue, Defendant–Appellant.
• Court: U.S. Bankruptcy Appellate Panel, First Circuit

506 B.R. 317

Anthony M. GONZALEZ, Debtor.

Anthony M. Gonzalez, Plaintiff–Appellee,

v.Massachusetts Department of Revenue, Defendant–Appellant.

BAP No. MW 13–026.

Bankruptcy No. 10–41907–MSH.

Adversary No. 11–04149–MSH.

United States Bankruptcy Appellate Panel of the First Circuit.

March 6, 2014.

Daniel J. Hammond, Esq., Boston, MA, Celine E. Jackson, Esq., and Jeffrey S. Ogilvie, Esq., Redding, CA, on brief, for Defendant–Appellant.

Marques C. Lipton, Esq. and Timothy M. Mauser, Esq., on brief for Plaintiff–Appellee.

Before DEASY, CABÁN, and FINKLE, United States Bankruptcy Appellate Panel Judges.

CABÁN, Bankruptcy Judge.

Massachusetts Department of Revenue (the “MDOR”) appeals from a bankruptcy court determination that certain state income tax liabilities of the debtor, Anthony M. Gonzalez (the “Debtor”), were dischargeable, even though his corresponding tax returns were filed late. For the reasons discussed below, we AFFIRM.

BACKGROUND

The material facts are not in dispute. On February 28, 2005, the Debtor filed his Massachusetts resident income tax returns for each of the tax years 1999 through 2002. On July 19, 2005, he filed his returns for tax years 2003 and 2004. All were overdue, although filed prior to any assessment ¹ by the Commissioner of Revenue.²

Approximately five years later, on April 19, 2010, the Debtor filed a voluntary petition for chapter 7 relief. On his Schedule E, the Debtor listed outstanding tax indebtedness to the MDOR for the years 1999 through 2004, totaling $36,174.80. On September 23, 2010, he received a discharge of his debts pursuant to § 727.³

In November 2011, the Debtor commenced an adversary proceeding against the MDOR with a single-count complaint, seeking a determination that his prepetition state income tax liabilities had been discharged pursuant to the discharge order entered in his chapter 7 case. After filing an answer, the MDOR moved for summary judgment, arguing that the subject income tax liabilities were not discharged as a matter of law. The MDOR's theory was that the Debtor's late-filed income tax returns did not qualify as “returns” for purposes of § 523(a), and that § 523(a)(1)(B)(i) renders nondischargeable tax liabilities for which a return was not filed. At the crux of the MDOR's argument was the language of BAPCPA's “hanging paragraph,” which states:

For purposes of this subsection, the term ‘return’ means a return that satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements). Such term includes a return prepared pursuant to section 6020(a) of the Internal Revenue Code of 1986,⁴ or similar State or local law, or a written stipulation to a judgment or a final order entered by a nonbankruptcy tribunal, but does not include a return made pursuant to section 6020(b) of the Internal Revenue Code of 1986,⁵ or a similar State or local law.

11 U.S.C. § 523(*) (footnotes added).⁶

The MDOR relied on certain cases which have held that the definition of “return”in amended § 523 means that a late-filed federal income tax return, unless filed pursuant to 26 U.S.C. § 6020(a) of the Internal Revenue Code, can never qualify as a return for dischargeability purposes because it does not comply with the applicable filing requirements. See, e.g., Shinn v. Internal Revenue Serv. (In re Shinn), Adv. No. 10–8139, 2012 WL 986752 (Bankr.C.D.Ill. Mar. 22, 2012); Hernandez v. United States (In re Hernandez), Adv. No. 11–5126–C, 2012 WL 78668 (Bankr.W.D.Tex. Jan. 11, 2012); Cannon v. United States (In re Cannon), 451 B.R. 204 (Bankr.N.D.Ga.2011); Links v. United States (In re Links), No. 08–3178, 2009 WL 2966162 (Bankr.N.D.Ohio Aug. 21, 2009); Creekmore v. Internal Revenue Serv. (In re Creekmore), 401 B.R. 748 (Bankr.N.D.Miss.2008). The MDOR also cited McCoy v. Miss. State Tax Comm'n, 666 F.3d 924 (5th Cir.2012), for the same principle, in the context of state income tax returns. The MDOR argued that BAPCPA's definition of “return” abrogated the common law test for determining whether a document filed with the Internal Revenue Service (“IRS”) qualified as a “return” for tax purposes set forth in Beard v. Comm'r, 82 T.C. 766, 774–79 (1984), aff'd,793 F.2d 139 (6th Cir.1986). See Creekmore, supra. According to the MDOR, to be considered a return for discharge purposes post-BAPCPA, the return must comply with applicable requirements of nonbankruptcy law, namely, Mass. Gen. Laws ch. 62C, § 6(c), requiring that state tax returns be made on or before the fifteenth day of the fourth month following the close of each taxable year. In other words, the MDOR contends that if the return is filed late, it is tantamount to noncompliance which results in a nondischargeable tax debt unless filed under 26 U.S.C. § 6020(a) or its state law equivalent. Hence, the Debtor did not file a “return” for the applicable years because he failed to file the returns on time.

The Debtor countered that a late return is nonetheless a return under the plain language of the definition of a return in the Bankruptcy Code and reiterated that his income tax debts for the applicable years were discharged under § 727. He contended that even the § 523(a)(1)(B)(ii) exception, which explicitly excludes from discharge returns filed late and within two years of the filing of the bankruptcy case, was inapplicable here because he filed all of his required returns more than two years prior to his chapter 7 petition. The Debtor urged the bankruptcy court to reject McCoy and cases similarly decided, arguing that a conclusion that a late return is not a return for dischargeability purposes would render § 523(a)(1)(B)(ii) “superfluous.” Instead, the Debtor advanced the approach advocated by the IRS in analogous cases involving federal income taxes: “A late filed return will not render a tax non-dischargeable under [§] 523 unless the taxing authority assesses a tax against the taxpayer prior to the filing of the return.” See, e.g., Wogoman v. Internal Revenue Serv. (In re Wogoman), 475 B.R. 239 (10th Cir. BAP 2012); Casano v. Internal Revenue Serv. (In re Casano), 473 B.R. 504 (Bankr.E.D.N.Y.2012); Smythe v. United States (In re Smythe), Adv. No. 11–04077, 2012 WL 843435 (Bankr.W.D.Wash. Mar. 12, 2012). The Debtor maintained that this approach was less harsh, would preserve the meaning of § 523(a)(1)(B)(ii), and would further the Code's fresh start objective.

After conducting a hearing on the summary judgment motion in July 2012, the bankruptcy court took the matter under advisement. In December 2012, the bankruptcy court ordered the parties to file supplemental memoranda regarding the effect of a late-filed Massachusetts income tax return under state law.⁷ In its supplemental memorandum filed January 31, 2013, the MDOR stated that a late-filed Form–1 Massachusetts resident income tax return has the following effects under Massachusetts law: (1) the imposition of a penalty pursuant to Mass. Gen. Laws ch. 62C, § 33(a) and/or § 28; (2) the imposition of interest pursuant to Mass. Gen. Laws ch. 62C, § 32(a); and (3) the creation of an assessment, either through the filing of a tax return, or through a deficiency assessment made by the MDOR. According to the MDOR, once it has made a deficiency assessment and established the amount of tax to be paid, a late-filed return is treated as an application for an abatement. ⁸ The MDOR stressed, however, that the effect of a late return under Massachusetts law was irrelevant to the definition of return under § 523, arguing that:

Regardless of how state law treats a late filed return, the timeliness requirement of nonbankruptcy law is a part of the definition of “return” for discharge purpose. Therefore a late return can never qualify as a return, for purposes of [ ] § 523 (even if the return is accepted by the revenue agency) unless it is filed under the § 6020(a) safe harbor or similar state law exception.

The Debtor asserted in his supplemental memorandum, also filed on January 31, 2013, that “[n]owhere, in either the Massachusetts General Laws or the Code of Massachusetts Regulations, is it stated that a document, which satisfies the definition of a return in all other respects, is nevertheless not a return when it is filed after the due date.” He further argued that the very language of Mass. Gen. Laws ch. 62C, § 28 permits a taxpayer, once notified by the commissioner of its failure to file a return, to still file a proper return within 30 days before a tax will be assessed. Additionally, the Debtor maintained that he “satisfied each element of the definition of a ‘return’ ” articulated in 830 Mass.Code Regs. 62C.26.1, insofar as he filed with the Commissioner of Revenue a “signed declaration of the tax due ... properly completed ... on a form prescribed by the Commissioner.”

After consideration of the supplemental memoranda, the bankruptcy court entered an order denying the MDOR's summary judgment motion on March 11, 2013. In its accompanying memorandum of decision,⁹ the court explained:

I believe the MDOR's interpretation of § 523(a) is ill-conceived and unjustified. Interpreting the definitional paragraph of § 523(a) to mean that all late-filed Massachusetts tax returns are not returns renders virtually meaningless § 523(a)(1)(B)(ii), arguably the most frequently resorted-to subsection of § 523(a)(1). The interpretation of the definitional paragraph advanced by the MDOR and the decisions upon which it relies, rewrites § 523(a)(1)(B)(ii) so that it no longer covers late-filed returns filed more than two years prior to bankruptcy but merely covers late returns prepared pursuant to § 6020(a) of the Internal Revenue Code or similar statutes. The IRS Chief Counsel Notice, CC–2010–016, 2010 WL 3617597 (Sept. 10, 2010), refers to the number of § 6020(a) returns as “minute” and observes that taxpayers do not even have the right to demand that the IRS prepare such returns on their behalf. For all practical purposes, therefore, the...