State of Maryland v. Ciotti (In re Ciotti)

Summarized by Frank Volk , U.S. Bankruptcy Court, Southern District of West Virginia
14 years 12 months ago

Citation:

No. 10-1083, 2011 WL 790309 (4th Cir. Mar. 8, 2011)

Tag(s):

4th Circuit

Ruling:

The report required from a taxpayer by Maryland Code Annotated Tax-General § 13-409(b) qualifies as an "equivalent report or notice" within the meaning of 11 U.S.C. § 523(a)(1)(B). The debtor's failure to give the report to state taxing authorities pursuant to section 13-409(b) will result in an exception from discharge for the increased state tax liability under section 523(a)(1)(B).

Procedural context:

The debtor appealed from a district court order that reversed a bankruptcy court decision. The bankruptcy court concluded that the debtor's state income tax liability for certain years preceding her Chapter 7 filing was discharged. The district court reversed, concluding that discharge was prohibited by Code section 523(a)(1)(B).

Facts:

In 1996, the debtor submitted state income tax returns in Maryland for tax years 1992 through 1996. In 1998, the IRS informed the debtor that her federal adjusted income for those tax years was significantly larger than she had previously ascertained. As a result, it was incumbent upon the debtor, under Maryland Code Annotated Tax-General section 13-409(b), to advise state tax collectors about the IRS’ actions. The debtor failed to do so. The IRS, however, notified the state tax collectors of its determinations. The state tax collectors then adjusted the debtor’s returns for 1992 through 1996, resulting in assessments exceeding $500,000 in taxes, penalties, and interest. In 2007, the debtor sought relief under Chapter 7 and received a discharge. The case was then closed. In 2009, the debtor sought to reopen the Chapter 7 proceeding. She desired a declaration that her state tax liabilities for tax years 1992 through 1996 had been discharged. The Maryland Comptroller cited Code section 523(a)(1)(B) as stating an exception to discharge under the circumstances. The Code section denies discharge for a tax obligation “with respect to which a return, or equivalent report or notice, . . . was not filed or given.” The bankruptcy court granted the debtor judgment on the pleadings. The bankruptcy court concluded that the report required of the debtor under section 13-409(b) was not an “equivalent report or notice” pursuant to section 523(a)(1)(B). The district court concluded otherwise. In affirming the district court's conclusion that the state tax debt was nondischargeable, the court of appeals noted that, prior to the enactment of BAPCPA, near judicial unanimity existed with respect to the effect of section 523(a)(1)(B) on the “failure to file reports similar to the one [Maryland Code] § 13-409 requires . . . .” Ciotti, 2011 WL 790309, at *2. The overriding view during that pre-BAPCPA period was that section 523(a)(1)(B) did not save such resultant state tax obligations from discharge. Noting the intervening BAPCPA statutory amendment, however, the court of appeals concluded that “[i]t is apparent from the changes that Congress determined that the same policy reasons that justify precluding the discharge of tax debt when the debtor failed to file a return also justify precluding the discharge of the tax debt when the debtor failed to file or give a required report or notice corresponding to that debt.” Id. The debtor’s contrary statutory construction arguments were rejected. Among those spurned assertions was her claim that the IRS’ notification of the state tax collectors satisfied the section 13-409(b) reporting requirement. Id. at *4 (“Maryland law is clear that the IRS's reporting to Maryland the amount of a taxpayer's increased federal liability does not satisfy the taxpayer's statutory obligation to report the information herself.”).

Judge(s):

William B. Traxler, Jr, Chief Judge, Robert B. King, Circuit Judge, James A. Wynn, Jr., Circuit Judge.

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