Fahey v. Mass. Dep't of Revenue (In re Fahey)

• Decision Date: 18 February 2015
• Docket Number: 14–9002,Nos. 14–1328,14–1350,14–9003.,s. 14–1328
• Citation: 779 F.3d 1
• Parties: In re Brian S. FAHEY, Debtor Brian S. Fahey, Appellant, v. Massachusetts Department of Revenue, Appellee. In re Timothy P. Perkins, Debtor Timothy P. Perkins, Appellant, v. Massachusetts Department of Revenue, Appellee. In re Anthony M. Gonzalez, Debtor Anthony M. Gonzalez, Appellee, v. Massachusetts Department of Revenue, Appellant. In re: John T. Brown, Debtor John T. Brown, Appellee, v. Massachusetts Department of Revenue, Appellant.
• Court: U.S. Court of Appeals — First Circuit

779 F.3d 1

In re Brian S. FAHEY, Debtor

Brian S. Fahey, Appellant

v.Massachusetts Department of Revenue, Appellee.

In re Timothy P. Perkins, Debtor

Timothy P. Perkins, Appellant

v.Massachusetts Department of Revenue, Appellee.

In re Anthony M. Gonzalez, Debtor

Anthony M. Gonzalez, Appellee

v.Massachusetts Department of Revenue, Appellant.

In re: John T. Brown, Debtor

John T. Brown, Appellee

v.Massachusetts Department of Revenue, Appellant.

Nos. 14–1328

14–1350

14–9002

14–9003.

United States Court of Appeals, First Circuit.

Feb. 18, 2015.

Celine E. Jackson, Counsel to the Commissioner, Massachusetts Department of Revenue, with whom Jeffrey S. Ogilvie, Counsel to the Commissioner, Amy A. Pittner, Commissioner, Massachusetts Department of Revenue, Martha A. Coakley, Massachusetts Attorney General, Daniel J. Hammond, Assistant Attorney General, Kevin W. Brown, Special Assistant Attorney General, were on brief, for Massachusetts Department of Revenue.

Andrew L. Barrett for appellant Brian S. Fahey.

Carl D. Aframe, with whom Aframe & Barnhill, PA, was on brief, for appellant Timothy P. Perkins.

Marques C. Lipton, with whom Law Office of Nicholas F. Ortiz, P.C., was on brief, for appellees Anthony M. Gonzalez and John T. Brown.

Tara Twomey, National Consumer Bankruptcy Rights Center, Joanne Mulder Nagjee, Joel Peter–Fransen, Shane Mulrooney, and Kirkland & Ellis LLP, on brief for National Association of Consumer Bankruptcy Attorneys, amicus curiae in support of appellants Brian S. Fahey and Timothy P. Perkins.

Before TORRUELLA, THOMPSON, and KAYATTA, Circuit Judges.

Opinion

KAYATTA, Circuit Judge.

The four bankruptcy appeals before us pose a single question of statutory interpretation: whether a Massachusetts state income tax return filed after the date by which Massachusetts requires such returns to be filed constitutes a “return” under 11 U.S.C. § 523(a) such that unpaid taxes due under the return can be discharged in bankruptcy. For the reasons set forth below, we conclude that it does not.

I. Background

The facts in each of the four cases now on appeal are undisputed. John Brown, Brian Fahey, Anthony Gonzalez, and Timothy Perkins (the “debtors”) all failed to timely file their Massachusetts income tax returns for multiple years in a row. This failure would not be a problem for them in these bankruptcy proceedings, but for the fact that they also failed to pay (either timely or otherwise) their taxes to the Massachusetts Department of Revenue. Eventually, each debtor filed his late tax returns, but still failed to pay all taxes, interest, and penalties that were due. More than two years later, they filed for Chapter 7 bankruptcy. The debtors seek a ruling that their obligation to pay the taxes they failed to pay is dischargeable.¹

The Department argues for the opposite result; it contends unpaid taxes for which no return was timely filed by the Commonwealth's statutory deadline fit within an exception to discharge under 11 U.S.C. § 523(a)(1)(B)(i).

The procedural postures of these four cases are described in detail in the Bankruptcy Appellate Panel (“BAP”) and district court opinions that gave rise to these appeals. Perkins v. Mass. Dep't of Revenue, 507 B.R. 45, 46–47 (D.Mass.2014) ; In re Gonzalez, 506 B.R. 317, 318–23 (B.A.P. 1st Cir.2014) ; In re Brown, B.A.P. No. MW 13–027, 2014 WL 1815393, at *1–5 (B.A.P. 1st Cir. Apr. 3, 2014). In brief, the bankruptcy courts below split three to one in favor of the debtors, the BAP sided with the debtors in the two cases appealed to the BAP, and the district court granted summary judgment to the Department in the two cases appealed to the district court.

II. Discussion

A. Standard of Review

Since no material facts are disputed and the issue before us turns entirely upon an interpretation of law, our review is plenary. Pasquina v. Cunningham (In re Cunningham), 513 F.3d 318, 323 (1st Cir.2008) ; Brandt v. Repco Printers & Lithographics, Inc. (In re Healthco Int'l, Inc.), 132 F.3d 104, 107 (1st Cir.1997).

B. Legal Background

Section 727 of the Bankruptcy Code instructs the court to grant a debtor a discharge from his debts in a Chapter 7 bankruptcy proceeding. See 11 U.S.C. § 727. This rule is subject to several exceptions. In particular, 11 U.S.C. § 523(a)(1) controls whether unpaid taxes are dischargeable in bankruptcy. It provides, in relevant part:

(a) A discharge under section 727... of this title does not discharge an individual debtor from any debt—

(1) for a tax or a customs duty—

...

(B) with respect to which a return, or equivalent report or notice, if required—

(i) was not filed or given; or

(ii) was filed or given after the date on which such return, report, or notice was last due, under applicable law or under any extension, and after two years before the date of the filing of the petition[.]

11 U.S.C. § 523(a)(1)(B)(i)-(ii). In other words, a tax is not dischargeable if the debtor failed to file a return, or if—perhaps anticipating bankruptcy—he filed the return late and within two years of his bankruptcy petition.

Looking solely at the foregoing language, and using a common notion of what a “return” is, one could easily conclude that any return filed after the due date but more than two years before a bankruptcy filing would place the tax due under that return outside the section 523(a)(1) exception, and thus within the broad category of dischargeable debts. Prior to 2005, courts nevertheless attempted to fashion a definition of “return” that prevented debtors from relying on “bad faith” returns, or returns filed only after the taxing authority actually issued an assessment for taxes due in the absence of a tax return. See generally Moroney v. United States (In re Moroney), 352 F.3d 902, 905–06 (4th Cir.2003) (providing examples of courts that determined late tax returns “filed after an involuntary assessment do not serve the purposes of the tax system, and thus rarely, if ever, qualify as honest and reasonable attempts to comply with the tax laws”).

In 2005, Congress decided to define “return” on its own when it passed the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”), making numerous revisions to section 523. Pub.L. No. 109–8, 119 Stat. 23 (2005). Among the BAPCPA's changes was the insertion of a “hanging paragraph,” denoted as section 523(a) (*), at the end of section 523(a). It provides:

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, 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, or a similar State or local law.

11 U.S.C. § 523(a) (*).²

So the question now presented is a question of statutory interpretation: Is a Massachusetts tax return filed after the due date for such returns a “return” as defined in section 523(a) (*) so that the tax due under that return remains dischargeable?³

C. Analysis

Read together, the hanging paragraph's definitional language and the “applicable” Massachusetts law control our decision. Under the hanging paragraph, for a document, whatever it may be called, to be a “return,” it must “satisf[y] the requirements of applicable nonbankruptcy law (including applicable filing requirements).” So the question is whether timely filing is a “filing requirement” under Massachusetts law. The answer is plainly yes.

As the Massachusetts Supreme Judicial Court has held for state tax law purposes, “[t]he general rule of construction is that where the language of the statute is plain, it must be interpreted in accordance with the usual and natural meaning of the words.” Comm'r of Revenue v. AMIWoodbroke, Inc., 418 Mass. 92, 634 N.E.2d 114, 115 (1994) (citing O'Sullivan v. Sec'y of Human Servs., 402 Mass. 190, 521 N.E.2d 997, 1000 (1988)). Mass. Gen. Laws ch. 62C, § 6(c) (“section 6(c) ”) states that “[e]xcept as otherwise provided, [income tax returns] shall be made on or before the fifteenth day of the fourth month following the close of each taxable year.” None of the exceptions that “otherwise provide[ ]” are applicable here.⁴ This command that returns “shall” be made by the due date certainly seems like a “filing requirement.” See Black's Law Dictionary (10th ed.2014) (defining “shall” as “a duty; more broadly, is required to[;] the mandatory sense that drafters typically intend and that courts typically uphold”). And another section of the Massachusetts tax code makes plain that it is so viewed. See Mass. Gen. Laws 62C, § 32(a) (“section 32(a) ”) (“Taxes shall be due and payable at the time when the tax return is required to be filed.”). Accordingly, under this straightforward reading of Massachusetts law, a return filed after the due date is a return not filed as required, i.e., a return that does not satisfy “applicable filing requirements.”

The two other circuits to have decided this issue, albeit construing other jurisdictions' “applicable” filing deadlines, reached the same conclusion. The Tenth Circuit recently found returns filed late under the Internal Revenue Code (“I.R.C.”) not to be returns within the meaning of the hanging paragraph. Mallo v. Internal Revenue Service (In re Mallo), 774 F.3d 1313, 1321 (10th Cir.2014) (explaining, in reference to the I.R.C.'s deadline for income tax returns, that “the phrase ‘shall be filed on or before’ a particular date is a classic example of something that must be done with respect to filing a tax return and therefore, is an ‘applicable filing requirement’ ”). Similarly, the Fifth Circuit determined that a debtor's failure to comply with a Mississippi law stating that returns “shall be filed on or before April 15th” meant that the returns did not satisfy applicable filing requirements under the hanging...