by The Eleventh Circuit broke with the First, Fifth and Tenth Circuits to find that section “523 does not incorporate a mandatory precondition that a tax return must be timely filed to be dischargeable.” Mass. Dept. of Rev. v. Shek, No. 18-14922 (11th Cir. Jan. 23, 2020).
The debtor filed his 2008 Massachusetts tax return seven months late. Six years later, he filed for chapter 7 bankruptcy in Florida. After discharge, the Massachusetts Department of Revenue commenced collection efforts to collect on the 2008 tax liability. Mr. Shek reopened his bankruptcy seeking to have that debt included in his discharge. Both he and the MDOR filed for summary judgment. The bankruptcy court found that, under the Beard test, section 523(a) did not except Mr. Shek’s tax liability from discharge. The district court affirmed. [blogged here]The MDOR appealed to the Eleventh Circuit.
Section 523(a)(1)(B)(i) and(ii) provide that a tax liability may not be discharged in bankruptcy when the debtor failed to file a tax return for that liability, or filed the return after its due date and within two years of filing for bankruptcy. Because, prior to 2005, the Code did not define a “return,” courts faced with returns that did not strictly conform to tax forms, generally followed the Beard test, (Beard v. Comm’r of Internal Revenue, 82 T.C. 766 (1984), aff’d, 793 F.2d 139 (6th Cir. 1986)), under which a tax return may qualify for discharge if it 1) purports to be a tax return, 2) was completed under penalty of perjury, 3) contains sufficient information to calculate owed taxes, and 4) was an honest and reasonable attempt to comply with tax laws.
In 2005, however, Congress added a hanging paragraph to section 523(a) which defines “return,” and which itself has become the subject of litigation. That amendment provides in part, “the term ‘return’ means a return that satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements).” The paragraph goes on to deal with two possible treatments of “substitute” returns by the Internal Revenue Service. Section 6020(a) of the Internal Revenue Code provides for cooperation between the IRS and a late-filing taxpayer to complete the return. Section 6020(b) provides for the IRS to file a late return on behalf of non-cooperating taxpayer. Under the hanging paragraph to section 523(a), only returns filed under section 6020(a) are dischargeable.
In this case, the MDOR argued that Mr. Shek’s late-filed tax return did not meet the definition of “return” because it was filed after the Massachusetts deadline and, therefore, did not comply with applicable non-bankruptcy law, or with applicable filing requirements.
The Eleventh Circuit began with the “one day late” rule, under which courts have found that “applicable filing requirements” includes filing deadlines and, therefore, a late-filed return cannot be said to satisfy those requirements. Though the court found this interpretation to be plausible, it expressed concern that had Congress intended to exclude late-filed returns, it could have said merely “filing requirements” without including the word “applicable.” The court turned to the argument advanced by University of Michigan Professor John Pottow’s amicus brief (which the court noted was particularly helpful) that “applicable filing requirements” are those substantive requirements going to the content of the return rather than peripheral details irrelevant to the calculation of taxes owed.
The court agreed. Rejecting the one-day-rule, the court found that “[s]tatutory context . . . makes clear that only the latter interpretation [that temporal requirements are not relevant] accords with § 523 as a whole.” The contrary reading would render the word “applicable” surplusage in violation of principles of statutory interpretation.
The court noted that its reading of the hanging paragraph harmonized with the language of section 523(a)(1)(B)(ii) which provides that a return filed late and within two years of the bankruptcy petition is nondischargeable. If all late-filed returns are deemed nondischargeable under the hanging paragraph, section 523(a)(1)(B)(ii) would be rendered meaningless as focusing on a subset of tax liabilities that would be nondischargeable without regard to the additional factor of being filed within two years of the bankruptcy.
The MDOR’s argued that section 523(a)(1)(B)(ii) would still have applicability in the case of a late-filed return that was completed by the taxpayer in cooperation with the IRS under section 6020(a), as those filings would need to fulfill the added requirements of not having been filed within two years of bankruptcy.
The court was unpersuaded. It noted that only a minute number of returns are filed under section 6020(a). Thus, subparagraph (B)(ii), if not nullified completely by the MDOR’s interpretation of the hanging paragraph, would at the very least be rendered “insignificant.” Citing Roberts v. Sea-Land Servs, Inc., 566 U.S. 93 (2012) the court found that a statutory interpretation rendering a provision irrelevant in all but “the most unusual circumstances,” runs counter to principles of statutory interpretation.
The court found its interpretation also comported with the bankruptcy principles of reading exceptions to discharge narrowly, and reading new statutes to harmonize with past practice unless Congress makes clear its intention to split with such practices.
The DOR next argued that a late-filed return does not comply with applicable nonbankruptcy law because Massachusetts instructs that a return be “duly filed” and a late-filed return does not meet that requirement. The court found this argument was answered by other provisions in the state tax laws. Massachusetts separately provides for treatment of both late-filed returns and non-filed returns. If returns had to meet timing requirements in order to be deemed “returns,” there would be no need for separate treatment of late-filed returns.
The court concluded that Mr. Shek’s return was a “return” under both the Beard test and under the state tax law. It affirmed the courts below.
In so holding, the Eleventh Circuit split with the courts in In re Fahey, 779 F.3d 1, 6 (1st Cir. 2015), In re Mallo, 774 F.3d 1313, 1318 (10th Cir. 2014), and In re McCoy, 666 F.3d 924, 932 (5th Cir. 2012).