Sienega v. State (In re Sienega)

• Decision Date: 05 October 2020
• Docket Number: Adv. No. 18-02191,BAP No. EC-19-1334-FLS,Bk. No. 14-30986-B-7
• Citation: 619 B.R. 405
• Parties: IN RE: Rudolf P. SIENEGA, Debtor. Rudolf P. Sienega, Appellant, v. State of California Franchise Tax Board, Appellee.
• Court: U.S. Bankruptcy Appellate Panel, Ninth Circuit

619 B.R. 405

IN RE: Rudolf P. SIENEGA, Debtor.

Rudolf P. Sienega, Appellant,

v.State of California Franchise Tax Board, Appellee.

BAP No. EC-19-1334-FLS

Bk. No. 14-30986-B-7

Adv. No. 18-02191

United States Bankruptcy Appellate Panel of the Ninth Circuit.

FILED OCTOBER 5, 2020

Robert L. Goldstein argued for appellant;

Donny P. Le argued for appellee.

Before: FARIS, LAFFERTY, and SPRAKER, Bankruptcy Judges.

FARIS, Bankruptcy Judge:

INTRODUCTION

Chapter 7¹ debtor Rudolf P. Sienega failed to file state tax returns for four years in the 1990s. After receiving notices of federal tax adjustments from the Internal Revenue Service ("IRS") and an adverse U.S. Tax Court ruling, he notified the California Franchise Tax Board ("FTB") of the increased federal assessments. The FTB assessed state taxes accordingly. Mr. Sienega did not contest the state assessment or pay the taxes owed. Nor did he ever file formal state tax returns for the relevant years.

When he filed for bankruptcy protection, the FTB sought to have the tax debts declared nondischargeable under § 523(a)(1)(B) because he had not filed his state tax returns. The bankruptcy court agreed and held that the state tax debts were not dischargeable.

On appeal, Mr. Sienega concedes that he did not file formal tax returns as state law required, but he contends that the act of notifying the FTB of the federal tax adjustments was sufficient to constitute a "return" under § 523(a)(1)(B). We disagree with Mr. Sienega, we agree with the bankruptcy court, and we AFFIRM. We publish this decision because the interplay between § 523(a)(1)(B), California Revenue and Taxation Code ("RTC") section 18622(a), and other applicable California statutes presents questions of first impression at the appellate level in this circuit.

FACTUAL BACKGROUND²

A. Mr. Sienega's tax debts

Mr. Sienega failed to file California state tax returns for the 1990, 1991, 1992, and 1996 tax years.

In or around 2007, the IRS made adjustments to Mr. Sienega's federal tax liability for the relevant tax years. In January 2009, the U.S. Tax Court ruled in Sienega v. Commissioner of Internal Revenue , case no. 22920-07 ("Tax Court Ruling") that Mr. Sienega was liable for accuracy-related penalties totaling approximately $9,688.

In July 2009, Mr. Sienega's counsel notified the FTB of the adjustments via fax transmissions (the "Faxes"). The cover sheet read:

Pursuant to California State law, Mr. and Mrs. Sienega hereby notify the Franchise Tax Board that the Internal Revenue Service has made recent adjustments to their 1990 federal tax return, which they concede. Following please find a copy of the IRS' adjustments, including a computation of how the changes were made.

Counsel submitted a substantially similar cover sheet for each of the relevant tax years. The attached IRS forms (Form 4549-A) listed the adjustments to the Sienegas' income, the corrected taxable income and tax liability, interest and penalties, and the total balance due. Mr. Sienega did not sign the Faxes or expressly state that they were submitted under penalty of perjury. He apparently did not provide a copy of the written Tax Court Ruling to the FTB until 2017.

In August 2009, the FTB sent Mr. Sienega notices of proposed assessment. The notices informed him that the FTB had not received his state income tax returns for the relevant years. The notices proposed to assess state taxes "based upon the federal audit report submitted by the taxpayer or representative." The FTB calculated Mr. Sienega's state tax liability (including penalties and interest) and informed him that, if he disagreed with the proposed adjustment, he had to submit a protest to the FTB or the assessment would become final.

Mr. Sienega did not file his state tax returns for the relevant years or protest any of the proposed assessments. Accordingly, the tax assessments became final in October 2009.

B. The bankruptcy case and adversary proceeding

In November 2014, Mr. Sienega filed a bankruptcy petition. He received a chapter 7 discharge in October 2016.

In November 2018, the FTB filed an adversary complaint to have Mr. Sienega's state tax debts declared nondischargeable under § 523(a)(1)(B) due to his failure to file state income tax returns. Mr. Sienega asserted that he was entitled to discharge of the tax debts because he "satisfied a state law similar to Internal Revenue Code § 6020(a), and/or has a court order upon which the taxes were based, and/or an equivalent report or notice of a return was filed."

FTB filed a motion for summary judgment (the "FTB Motion") supported by a statement of facts. Mr. Sienega filed an opposition to the FTB Motion, but he did not respond to the FTB's statement of facts. He also filed his own motion for summary judgment (the "Sienega Motion") supported by a statement of facts.

The bankruptcy court decided the two motions without a hearing. It held that Mr. Sienega had failed to challenge the FTB's statement of facts, so those facts were admitted, and there was no factual dispute. It adopted by reference the FTB's reasoning. It granted the FTB Motion and denied the Sienega Motion as moot.³

Mr. Sienega timely appealed.

JURISDICTION

The bankruptcy court had jurisdiction pursuant to 28 U.S.C. §§ 1334 and 157(b)(2)(I). We have jurisdiction under 28 U.S.C. § 158.

ISSUE

Whether the bankruptcy court erred in granting the FTB Motion (and denying the Sienega Motion) to except the state tax debts from discharge under § 523(a)(1)(B) because Mr. Sienega failed to file his state income tax returns.

STANDARD OF REVIEW

We review de novo the bankruptcy court's decision to grant or deny summary judgment. Boyajian v. New Falls Corp. (In re Boyajian) , 564 F.3d 1088, 1090 (9th Cir. 2009). "De novo review requires that we consider a matter anew, as if no decision had been made previously." Francis v. Wallace (In re Francis) , 505 B.R. 914, 917 (9th Cir. BAP 2014) (citations omitted).

We employ the same summary judgment standards as the bankruptcy court. Summary judgment should be granted "if the movant shows that there is no genuine issue as to any material fact and the movant is entitled to judgment as a matter of law." Wank v. Gordon (In re Wank) , 505 B.R. 878, 886 (9th Cir. BAP 2014) (citing Civil Rule 56(a), made applicable in adversary proceedings by Rule 7056). Pure questions of law are appropriate for summary judgment. See Schrader v. Idaho Dep't of Health & Welfare , 768 F.2d 1107, 1110 (9th Cir. 1985).

DISCUSSION

A. Section 523(a)(1)(B) excepts tax debts from discharge if the debtor failed to a file a return or an equivalent report or notice.

1. The Bankruptcy Code

We begin with the text of the statutes. "The preeminent canon of statutory interpretation requires us to presume that [the] legislature says in a statute what it means and means in a statute what it says there. Thus, our inquiry begins with the statutory text, and ends there as well if the text is unambiguous." Satterfield v. Simon & Schuster, Inc. , 569 F.3d 946, 951 (9th Cir. 2009) (citation omitted).

Section 523(a)(1)(B) provides that a chapter 7 discharge excludes a 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[.]

§ 523(a)(1)(B). Section 523(a) also provides, in the "hanging paragraph" at the end of the subsection:

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.

§ 523(a). Internal Revenue Code ("IRC") section 6020(a)⁴ authorizes the IRS to prepare a return for a taxpayer's signature if the taxpayer consents and provides the necessary information. In contrast, IRC section 6020(b)⁵ permits the IRS to prepare a return for an uncooperative taxpayer.

2. Definition of "return"

Prior to the 2005 amendments under the Bankruptcy Abuse Prevention and Consumer Protection Act ("BAPCPA"), § 523(a)(1)(B) rendered tax debts nondischargeable if the debtor failed to file "returns."

In California Franchise Tax Board v. Jackson (In re Jackson) , 184 F.3d 1046 (9th Cir. 1999), the Ninth Circuit noted that "[t]he policy behind this subsection is that a debtor should not be permitted to discharge a tax liability based upon a required tax return that was never filed." Id. at 1052 (quoting 3 Norton Bankruptcy Law and Practice 2d § 47:6, 47-15 (1997)).

Before BAPCPA, § 523(a)(1)(B) did not define "return." The Ninth Circuit and other courts crafted their own definitions. In United States v. Hatton (In re Hatton) , 220 F.3d 1057, 1060 (9th Cir. 2000), the Ninth Circuit adopted the four-part test developed in Beard v. Commissioner of Internal Revenue , 82 T.C. 766, 1984 WL 15573 (1984), aff'd , 793 F.2d 139 (6th Cir. 1986). Under that test, "[i]n order for a document to qualify as a return: ‘(1) it must purport to be a return; (2) it must be executed under penalty of perjury; (3) it must contain sufficient data to allow calculation of tax; and (4) it must represent an honest and reasonable attempt to satisfy the requirements of the tax law.’ " In re Hatton , 220 F.3d at 1060-61 (quoting United States v. Hindenlang (In re Hindenlang) , 164 F.3d 1029, 1033 (6th Cir. 1999) ). The Ninth Circuit noted that the " Beard definition is consistent with the purpose of a return, which is not only to get tax information in some form, but ‘to get it with such uniformity,...