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.
No. 14-1328, No. 14-1350, No. 14-9002, No. 14-9003
United States Court of Appeals For the First Circuit
February 18, 2015
KAYATTA, Circuit Judge.
APPEALS FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS [Hon. William G. Young, U.S. District Judge]. APPEALS FROM THE BANKRUPTCY APPELLATE PANEL FOR THE FIRST CIRCUIT. Before Torruella, Thompson, and Kayatta, Circuit Judges.
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.
February 18, 2015
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
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
(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[.]
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
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 similar State or local law.
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., 634 N.E.2d 114, 115 (Mass. 1994) (citing O‘Sullivan v. Sec‘y of Human Servs., 521 N.E.2d 997, 1000 (Mass. 1998)).
The two other circuits to have decided this issue, albeit construing other jurisdictions’ “applicable” filing deadlines,
The debtors nevertheless argue that the hanging paragraph‘s language is not quite so clear as to dictate our holding. Perhaps the term “applicable filing requirement” may acquire vagueness at the outer boundaries of its possible application. See Antonin Scalia & Bryan A. Garner, Reading Law: The Interpretation of Legal Texts 31-32 (2012) (explaining that vagueness is present when a phrase‘s “unquestionable meaning has uncertain application to various factual situations“). For example, is an instruction on an official form that the filer not staple the return together, or staple the check to the return, an “applicable filing requirement“? However one might answer that question, we do not see how there is any room for reasonable argument that, as a matter of plain language, a Massachusetts law setting the date when a tax return “is required to be filed” is somehow not a “filing requirement.”
In nevertheless describing the statute as materially ambiguous and our reading of it contrived, the dissent relies on the premise that when a statute states that the universe of X “includes” Y, one normally presumes that Y is merely an example of what is in X, and that X includes more than Y. Slip Op. at 30. The dissent errs, though, in claiming that our interpretation fails to satisfy this premise. The dissent makes this error by presuming that the universe defined by the statute is “late-filed returns that count as returns,” Slip Op. at 30, and that section 6020(a) returns (and “similar” state or local law returns) are therefore simply examples of a wider array of permitted late filed returns. The statute neither says nor implies any such thing. Rather, the statute provides that a “return” includes a “return prepared pursuant to section 6020(a) . . . or similar State or local law.” So one presumes only that a “return” includes more than these few types of returns. And it plainly does: it includes all sorts of returns (such as Form 1040s) that satisfy their respectively applicable filing requirements.
Similarly, the dissent errs in claiming that our reading of the statute “means that conversely, a section 6020(b) return would be the only type of return that is not a return.” Slip Op. at 31. This is plainly not so--any type of return not filed in accord with applicable filing requirements is not a “return” under our reading of the statute. The returns at issue in this case are a notable demonstration that section 6020(b) returns are not the only ones that are not returns under the statute.
Widening the scope slightly, debtors point to the language of
The defect in this argument is that the hanging paragraph itself carves out an exception from its general rule, deeming one type of late return to be a return. It specifies that “a return prepared pursuant to section 6020(a) . . . or similar State or local law” qualifies as a “return,” while those prepared pursuant to section 6020(b) do not.
The I.R.S.‘s Chief Counsel has referred to the number of section 6020(a) returns as “minute” and in 2010 took the position that the safe harbor created by it was “illusory” because taxpayers have no right to demand a return under the provision. I.R.S. Chief Couns. Notice CC-2010-016 at 2-3 (Sept. 2, 2010). We accept the claim that such returns are rare, and are allowed only at the I.R.S.‘s behest. It hardly follows, though, that the safe harbor expressly created for such returns is illusory. In fact, this “narrow safe harbor,” hypothetically described by the district court below in the Perkins case, was utilized by a debtor in a recent bankruptcy case where the bankruptcy court was bound by the reading of section 523(a)(*) that the Department urges here. See In re Kemendo, 516 B.R. 434, 438 (Bankr. S.D. Tex. 2014). In that case, the I.R.S. had prepared a tax return with information provided by the taxpayer, in accordance with section 6020(a). Id. at 438. More than two years later, the taxpayer filed for bankruptcy. Id. at 438-39. The bankruptcy court found that the taxpayer‘s delinquent tax debt had been properly discharged. Id. In short, reading the hanging paragraph as generally excluding returns filed after the date when applicable law requires them to be filed does not conflict with the implication of section
The dissent takes a different tack, deeming it “absurd” to think that Congress would allow a discharge of taxes due under a section 6020(a) return prepared years after the due date, but not under a Massachusetts return that is one day late. We see no absurdity. Section 6020(a) is a tool for the I.R.S., invoked solely at its discretion, when it decides obtaining help from the late filing taxpayer is to the I.R.S.‘s advantage. That Congress left the I.R.S. a carrot to offer a taxpayer in such infrequent cases does not mean that it was absurd for Congress not to extend this carrot categorically to large numbers of other late filers.
But, say the debtors, our reading of the hanging paragraph still renders unnecessary its last clause, stating that the term “return” does not include “a return made pursuant to [section 6020(b)] or a similar State or local law.” The debtors are correct on this point. Nevertheless, we do not see this as the type of redundancy that invokes any effective application of the doctrine that we try to read statutes so that no section is superfluous. Here, in context, it simply appears that in creating an exception for section 6020(a), the drafters made clear (desiring a belt and suspenders) that they were not including its companion section 6020(b).6 Whatever one thinks of this redundancy, it offers too little to parry the force of the observation that a requirement to file on time is a filing requirement. See In re McCoy, 666 F.3d at 931.
Moreover, were we to adopt the debtors’ position that a law requiring compliance with a filing deadline is not a filing requirement, we would be left without any textual basis for distinguishing those filing requirements that count from those that do not. Instead--and debtors and the dissent are frank about this--we would be back to tinkering with subjective and conflicting judge-made rules. In that respect, we would render the principal thrust of the hanging paragraph to be largely of no effect. Of course, the debtors say that this is what Congress wanted, simply seeking to “confirm” pre-existing case law. But, as we discuss in greater detail later in this opinion, there was no such uniform rule in the case law to which the language in the hanging paragraph could be read as referring. Cf. In re Mallo, 2014 WL 7360130, at *10 (“If Congress intended to define a return through application of the Beard test or some other substantial compliance doctrine, rather than by a taxpayer‘s compliance with the applicable filing requirements contained in the Tax Code, Congress [would not have added] the phrase ‘including applicable filing requirements.‘“).
The debtors also seek support in the Massachusetts laws and regulations bearing on the meaning of “return.” They point out that in Massachusetts, a pre-assessment delinquent return is treated the same as any other return.7 This is not exactly so, however, as Massachusetts imposes a penalty on any taxpayer who does not file his return by the date required. See
Relatedly, the debtors contend that the Commonwealth‘s own definition of “return” lacks a timeliness element. This, too, is not exactly so. The Massachusetts Code of Regulations defines a return as “a taxpayer‘s signed declaration of the tax due, if any, properly completed by the taxpayer or the taxpayer‘s representative on a form prescribed by the Commissioner and duly filed with the Commissioner.” 830 C.M.R. 62C.26.1(2) (emphasis supplied). Webster‘s Third New International Dictionary gives as its first definition “in a due manner, time, or degree.” Webster‘s Third New International Dictionary 700 (3d ed. 2002). Courts consistently include a timeliness element when interpreting “duly” in other contexts. See, e.g., McAdams v. United States, No. 07-164T, 2008 WL 654271, at *3 (Fed. Cl. Feb. 1, 2008) (in order for a claim to be duly filed under
Sensibly anticipating weak support in the statutory and regulatory language, the debtors rely with much emphasis on three other rules of statutory construction.
First, they (and the amicus curiae) implore us to find instructive the notion that exceptions to discharge should be narrowly construed in the debtor‘s favor, Gleason v. Thaw, 236 U.S. 558, 562 (1915); Rutanen v. Baylis (In re Baylis), 313 F.3d 9, 17 (1st Cir. 2002), and that the Bankruptcy Code should be read in light of its purpose to provide a fresh start to the “honest but unfortunate debtor.” Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934) (“One of the primary purposes of the Bankruptcy Act is to relieve the honest debtor from the weight of oppressive indebtedness, and permit him to start afresh free from the obligations and responsibilities consequent upon business misfortunes.” (internal quotation marks omitted)).
Second, the debtors attempt to frame our interpretation--particularly with respect to the limitations it imposes on the two-year provision‘s applicability--as representing a significant change to the pre-2005 Bankruptcy Code. The debtors and the bankruptcy court below for the Brown and Gonzalez cases quote the Supreme Court in urging us to be “reluctant to accept arguments that would interpret the Code, however vague the particular language under consideration might be, to effect a major change in pre-Code practice that is not the subject of at least some discussion in the legislative history.” Dewsnup v. Timm, 502 U.S. 410, 419 (1992).
Third, the debtors and amicus curiae call the result we reach here--that all late filed returns in Massachusetts are not subject to discharge in bankruptcy--“unfathomable” and its consequences “draconian” and “absurd.”
Our response to the debtors’ reliance on these rules of statutory construction is fourfold.
First, and most importantly, where the question is whether a Massachusetts law setting a date by which a tax return “is required to be filed” is a “filing requirement” under Massachusetts law, we find little need--or justification--for turning to secondary principles of statutory construction. Cf. United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241 (1989) (“The language before us expresses Congress’ intent . . . with sufficient precision so that reference to legislative history and to pre-Code practice is hardly necessary.“).
Second, while the result we reach may be unfavorable towards delinquent taxpayers who are also bankrupt, there is hardly anything “unfathomable,” “draconian,” or “absurd” in the notion that Congress might disfavor debtors who both fail to pay their taxes and also fail to timely file the returns that would alert the taxing authority to the failure to pay. Cf. id. at 242 (“The plain meaning of legislation should be conclusive, except in the ‘rare cases [in which] the literal application of a statute will produce a result demonstrably at odds with the intention of its drafters.‘” (quoting Griffin v. Oceanic Contractors, Inc., 485 U.S. 564, 571 (1982))).
Third, application of secondary principles of statutory construction hardly cuts just one way, or as forcefully as the debtors claim. We note in particular that the hanging paragraph, adding to the statute the key language at issue, was part of an enactment whose motivating factors were: the “recent escalation of consumer bankruptcy filings“; the “significant losses asserted to
be associated with bankruptcy filings“; to close the loopholes that “allow and--sometimes--even encourage opportunistic personal filings and abuse“; and “the fact that some bankruptcy debtors are able to repay a significant portion of their debts.” H. Comm. on the Judiciary,Against this background, it is more plausible that Congress intended to settle the dispute over late filed tax returns against the debtor (who both fails to pay taxes and fails to file a return as required by law) than it is that Congress sought to preserve some version of the unsettled four-pronged Beard test by using language that has no reference to that case law and that certainly suggests no four-pronged definition. Particularly noteworthy is the fact that Congress‘s chosen test called for satisfying the filing requirements of applicable law, not merely making an “honest attempt” to do so.12
For the foregoing reasons, we affirm the district court‘s judgment in favor of the Department in the cases of Fahey and Perkins, and we reverse the BAP‘s grant of judgment for Brown and Gonzalez. Summary judgment shall be entered in favor of the Department for the tax years at issue because the debtors’ tax liabilities were not discharged in bankruptcy as a matter of law.
So ordered.
- Dissenting Opinion Follows -
In my view, the majority is unfairly dismissive of the debtors’ logical interpretation of the statutory provisions at issue. It simultaneously takes too academic and literal of an approach to its reading of one of the code‘s definitional provisions, leading to a result that defies common sense, while also conveniently ignoring the plain meaning of other words in the very same paragraph, in order to reach a certain outcome. It ignores the mandates of statutory construction we are obligated to follow, years of lines of caselaw upon which debtors had been relying, and the clearly stated policy reasons for Congress‘s imposing these statutory provisions in the first place.
Needless to say, I dissent.
The Canons of Construction
In our de novo review, the rules we follow to interpret a statute -- including bankruptcy statutes -- are well established. First, we “look [] to the specific language at issue.” In re Rudler, 576 F.3d 37, 44 (1st Cir. 2009). “If the statute‘s language is plain, the sole function of the courts . . . is to enforce it according to its terms.” Id. at 44-45 (citations and quotations
The majority concludes that the hanging paragraph, which Congress added to the bankruptcy statute in order to define what a “tax return” is for purposes of Subsection (ii),14 unambiguously dictates that “a return filed after the due date is a return not filed as required,” and thus, that debtors who file their Massachusetts taxes late can never benefit from Subsection (ii). As I will explain, I disagree that the hanging paragraph -- when read in concert with Subsection (ii) -- unequivocally demands that conclusion. To the contrary, the majority‘s interpretation of the
Plain Meaning
The statute at issue provides that a debtor may not discharge a tax debt if “a return . . . if required -- (i) was not filed or given; or (ii) was filed or given after the date on which such return . . . was last due, under applicable law or under any extension, and after two years before the date of the filing of the [bankruptcy] petition[.]”15
In 2005, Congress enacted the
The majority hones in on the hanging paragraph‘s added clarification that returns must comply with a state‘s “applicable
The majority‘s logic suffers from several flaws, which I address in turn.
First, it is not obvious to me that under Massachusetts tax law, filing a return late necessarily means that a debtor did not comply with “applicable filing requirements,” such that his return would not “satisf[y] the requirements of applicable nonbankruptcy law.” As the majority concedes, a tardy return will still be accepted by the state, and the debtor‘s tax liability will still be assessed. See
If it is shown that any failure to file a return or to pay a tax in a timely manner is due to reasonable cause and not due to willful neglect, any penalty or addition to tax under this section may be waived by the commissioner, or if such penalty or addition to tax has been assessed, it may be abated by the commissioner, in whole or in part.
More importantly though, even if we assume, as the majority does, that timely filing is generally a necessary component of a “return” under Massachusetts tax law, we still cannot draw the majority‘s ultimate conclusion that late filers can never discharge
So how do we reconcile this discrepancy (i.e., ambiguity) that arises within the statute? The correct answer is to assess what the legislature likely meant when it wrote the statute -- a step the majority incorrectly assumes it can skip, based on its
As the majority notes, the hanging paragraph provides:
[“Return“] includes a return prepared pursuant to section 6020(a) of the Internal Revenue Code of 1986, or similar State or local law, . . . 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.
The majority‘s logic on this point is off for a number of reasons, two of which relate to plain language interpretation.
For one, the text of the hanging paragraph does not, as the majority concludes, dictate that
I am perplexed as to how the majority reaches this contrived extrapolation. Congress‘s use of the word “includes” connotes that
In a similar vein, the hanging paragraph also denotes that a “return” “does not include a return made pursuant to section 6020(b) of the Internal Revenue Code . . . or a similar State or local law.”21 Applying the majority‘s (incorrect) definition of the word “includes,” then, means that conversely, a
Second, allowing
The majority responds that
Given the absurdity of the majority‘s outcome, and the other textual ambiguities I described above, I disagree with my colleagues that we can avoid delving into legislative intent. I tackle that analysis next.
Legislative Intent
In dicta, the majority rejects the debtors’ arguments regarding the legislative intent behind Subsection (ii) and the hanging paragraph. I disagree with this portion of the majority‘s analysis, as well as its ultimate disposition.
The Caselaw
In trying to discern legislative intent, we look to the historical context of the statute (i.e., prior caselaw), the legislative history of the statutory provision, and the policy underlying the statute. In re Weinstein, 272 F.3d at 44-46. So
Prior to 2005, the bankruptcy code did not define “return” for purposes of Subsection (ii). Many courts, left to their own devices to figure out what constituted a “return,” ended up adopting what‘s been coined as the “Beard test,” a four-part standard formulated by the Tax Court for determining whether a document filed with the IRS qualified as a federal tax return. Under the Beard inquiry, a document qualified as a tax return if: (1) it purported to be a return; (2) was signed under penalty of perjury; (3) contained information sufficient to determine tax liability; and (4) was an honest and reasonable attempt to satisfy the tax law requirements. Beard v. Commissioner, 82 T.C. 766 (1984), aff‘d per curiam, 793 F.2d 139 (6th Cir. 1986). See also In re Colsen, 446 F.3d 836, 839 (8th Cir. 2006); In re Payne, 431 F.3d 1055, 1057 (7th Cir. 2005); In re Moroney, 352 F.3d 902, 905 (4th Cir. 2003); In re Hatton, 220 F.3d 1057, 1060-61 (9th Cir. 2000); In re Hindenlang, 164 F.3d 1029, 1033-34 (6th Cir. 1999) (all adopting Beard test).22
Many courts ended up grappling with the fourth prong. Some tried to figure out whether filing a return late counted as an “honest and reasonable attempt” to satisfy tax requirements. See, e.g., In re Payne, 431 F.3d at 1059; In re Hindenlang, 164 F.3d at 1034. Those decisions often turned on whether a return made after the government had already assessed tax liability defeated the main purpose of the filing deadline, which one court described as “spar[ing] the tax authorities the burden of trying to reconstruct a taxpayer‘s income and income-tax liability without any help from him.” In re Payne, 431 F.3d at 1057. See also In re Moroney, 352 F.3d at 906 (holding that the belated acceptance of responsibility for tax liability does not constitute an honest and reasonable attempt to comply with tax laws, and that whether the eventual effort had an effect on tax liability was irrelevant); In re Hatton, 220 F.3d at 1061 (finding that belated cooperation with IRS to settle tax liabilities was not an honest and reasonable attempt to comply with tax law, and tax liability was therefore not excepted from discharge under
Presumably aware of this confusion that was ensuing in the courts, in 2005, Congress added the hanging paragraph, clarifying specifically that substitute returns -- even though they were not prepared at the hand of the taxpayer and were filed late -- could qualify as dischargeable under
Since 2005, disagreement has continued to persist among the courts about how to apply the law, at least as it pertains to late-filed returns. Only two of our sister courts have answered the specific question before us, and both have reached the same conclusion as the majority here. See McCoy v. Miss. State Tax Comm‘n (In re McCoy), 666 F.3d 924, 932 (5th Cir. 2012); In re Mallo, No. 13-1464, 2014 WL 7360130, at *12 (10th Cir. Dec. 29, 2014). But as we have said before, “[t]he numbers favoring a rule do not necessarily mean that the rule is the best one.” In re Atlas IT Exp. Corp., 761 F.3d 177, 182 (1st Cir. 2014). Numerous lower
As the Supreme Court has articulated, “[w]hen Congress amends the bankruptcy laws, it does not write on a clean slate.” Dewsnup v. Timm, 502 U.S. 410, 419 (1992) (quotations omitted). Therefore, we should be “reluctant to accept arguments that would interpret the Code, however vague the particular language under consideration might be, to effect a major change in pre-Code practice that is not the subject of at least some discussion in the legislative history.” Id. Given the widespread disagreement among the courts prior to and after 2005, as well as ubiquitous application of various versions of the Beard test‘s “honest and
Policy
Given the lack of legislative history on the hanging paragraph, it is also appropriate to look to the public policy behind the bankruptcy code to try to determine Congress‘s intent. See In re Weinstein, 272 F.3d at 46 (noting that while we “must not, of course, impose [our] own views of proper bankruptcy policy in place of those of the legislature[,] . . . an understanding of the congressional policies underlying a statute, including the Bankruptcy Code, can help to reconcile otherwise indeterminate parts of the statutory text“).
The primary purpose of the bankruptcy code has always been to “relieve the honest debtor from the weight of oppressive indebtedness, and permit him to start afresh free from the obligations and responsibilities consequent upon business misfortunes.” Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934) (citation and quotations omitted); Marrama v. Citizens Bank of Mass., 549 U.S. 365, 367 (2007) (“The principal purpose of the
Given the state of the caselaw in 2005, the most sensible explanation for Congress‘s addition of the provision was to elucidate that regardless of who prepared a return or when -- if the document a debtor filed would no longer be considered a “return” because the state won‘t accept it as one, the debtor can‘t just turn around and file a tax form solely for the purpose of discharging those taxes during bankruptcy. This interpretation of the law is further supported by Congress‘s choice, in 2005, to maintain the very safeguard that was already built into the statute to help prevent that kind of problem from arising: “the requirement of a two-year waiting period after filing a late return but before seeking discharge prevents a debtor who has ignored the filing
In my view, the most sensible interpretation of Subsection (ii) and the hanging paragraph, when considered in concert, is that a return that does not comply with state filing requirements (and thus will not be accepted by the state as a return when it is filed) does not count as a “return,” and so those taxes cannot be discharged. In order to prevent people from filing late returns solely for the purpose of discharging their taxes in bankruptcy, the debtor may only discharge if he filed for bankruptcy two years after he filed his late return. This reading aligns with the plain text (including Congress‘s choice to retain Subsection (ii) in its entirety), the historical context of the statute, and the public policy reasons for enacting the bankruptcy code. The majority, ignoring blatant textual ambiguities and judicial precedent, instead opts to create a per se restriction that is contrary to the goal of our bankruptcy system to provide, as the
Ultimately, this continued confusion may be Congress‘s problem to fix. In the meantime, debtors who legitimately resort to bankruptcy when they reach wit‘s end should not be punished for the lack of clarity that persists in the very laws enacted to help them -- or for the majority‘s implicitly articulated viewpoint that a financially strapped person who misses a deadline is trying to work a runaround.
I respectfully dissent.
Notes
If any return is not filed with the commissioner on or before its due date or within any extension of time granted by him, there shall be added to and become a part of the tax, as an additional tax, a penalty of one per cent of the amount required to be shown as the tax on such return for each month or fraction thereof during which such failure continues, not exceeding, in the aggregate, twenty-five per cent of said amount.
If any person shall fail to make a return required by this title or by regulations prescribed thereunder, but shall consent to disclose all information necessary for the preparation thereof, then, and in that case, the Secretary may prepare such return, which, being signed by such person, may be received by the Secretary as the return of such person.
If any person fails to make any return required by any internal revenue law or regulation made thereunder at the time prescribed therefor, or makes, willfully or otherwise, a false or fraudulent return, the Secretary shall make such return from his own knowledge and from such information as he can obtain through testimony or otherwise.