McCoy Marches On

In re McCoy, , a case that should have been relegated to the realm of judicial outliers has instead advanced another step through the circuit courts. First it toppled the Tenth Circuit in In re Mallo, 2014 WL 7360130 (10th Cir. Dec. 29, 2014), and now the First Circuit has likewise found that a late-filed Massachusetts state income tax return does not constitute a “return” for dischargeability purposes under section 523(a). Fahey v. Mass. Dept. of Rev., No. 14-1328; Perkins v. Mass Dept. of Rev., No. 14-1350, Gonzalez v. Mass. Dept. of Rev. No. 14-9002; Brown v. Mass. Dept. of Rev. No. 14-9003 (February 18, 2015).

The First Circuit cases involved interpretation of section 523(a) which provides that a debtor may not discharge a tax debt for which a return was either not filed or was filed late and within two years of the petition. Specifically, the case turned on interpretation of what constitutes a “return” in the hanging paragraph to that section. That paragraph defines a “return” with reference to non-bankruptcy laws including their “applicable filing requirements,” and specifies that returns filed by the IRS with debtor cooperation under 6020(a) are “returns,” but those filed by the IRS without debtor cooperation under 6020(b) are not.

The court tipped its hand early, attributing motive to the delinquent debtor at the outset, stating: “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” (emphasis added).

The question that has divided the courts is whether “applicable filing requirements” includes the time for filing. Turning to Massachusetts tax law, the court found that the language that tax returns “shall be made on or before the fifteenth day of the fourth month,” was a mandatory requirement. Basing its decision on plain language, the court found that the state instruction with respect to the time for filing was an “applicable filing requirement,” thereby rendering a return filed outside that time nondischargeable unless filed under 6020(a).

Finding no ambiguity to justify going beyond the plain language of the hanging paragraph, the court rejected arguments of statutory construction raised by the debtors and their amici, and propounded in the dissenting opinion.

The majority was untroubled by the fact that its opinion rendered the specific exclusion of returns filed under 6020(b) redundant, finding that Congress apparently wanted both “a belt and suspenders.” On the other hand, the court cited definitional difficulties it believed would ensue if timing were not considered a filing requirement.

The court also rejected the argument that the two-year rule in section 523(a)(1)(B)(ii) implied that late-filed returns filed more than two years prior to bankruptcy could be deemed “returns” within the meaning of section 523(a)(*). It found that that section was limited to those returns filed under 6020(a).

Turning to pre-BAPCPA law, the court found that analysis set forth in the four-part Beard test was not so well-established or uniformly applied as to suggest that Congress merely intended to codify it in section 523(a)’s hanging paragraph.

Ultimately, the case came down to the court’s equating “as a matter of plain language,” the state law pinpointing the date when a tax return “is required to be filed” with an “applicable filing requirement.”

In an extensive dissenting opinion, Judge Thompson argued that the majority statutory interpretation led to absurdity. He identified the following flaws in the majority opinion:

• Massachusetts tax law contemplates tax assessments based on late-filed returns, therefore, it is inaccurate to say that under applicable state law late-filed returns are not “returns.”
• The two-year rule set forth in section 523(a)(1)(B)(ii), which pre-dates BAPCPA, contemplates discharge of taxes based on late-filed returns and was not amended when the hanging paragraph was added.
• The majority’s explanation that section 523(a)(1)(B)(ii) is still meaningful because it applies to returns filed under section 6020(a) is illogical because, a) the hanging paragraph permits late-filed returns “including,” and therefore not limited to, those filed under 6020(a), and, b) it renders the exclusion of those returns filed under section 6020(b) redundant.
• Permitting only late-filed returns under section 6020(a) absurdly rewards the tax debtor who sits on his hands and awaits IRS invitation to complete the return while punishing the debtor who voluntarily files his own return even one day late.

The dissent also disputed the majority’s dismissal of the significance of the pre-BAPCPA Beard test noting that the hanging paragraph answered in the affirmative the previously debated question of whether a return filed under 6020(a) was a “return.”

From a policy standpoint, the dissent opined that the majority view takes a punitive position unjustified by the language, history, and purpose of the statute.

The IRS has consistently sought a more measured approach than that taken by the courts in McCoy, Mallo, and now Fahey, seeking to designate the point at which a return is filed under 6020(b) as the cut off for a late-filed return to be dischargeable.

Fahey 1st Cir opinion