State of Maryland v. Ciotti

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
In Re: DENISE A. CIOTTI, 
Debtor.
STATE OF MARYLAND, Peter
Franchot, Comptroller of
Maryland,
Plaintiff-Appellee,
 No. 10-1083
v.
DENISE A. CIOTTI,
Defendant-Appellant,
and
CHARLES R. GOLDSTEIN,
Trustee.

Appeal from the United States District Court
for the District of Maryland, at Baltimore.
J. Frederick Motz, District Judge.
(1:09-cv-02702-JFM)
Argued: January 27, 2011
Decided: March 8, 2011
Before TRAXLER, Chief Judge, and KING and
WYNN, Circuit Judges.
2 IN RE: CIOTTI
Affirmed by published opinion. Chief Judge Traxler wrote the
opinion, in which Judge King and Judge Wynn joined.
COUNSEL
ARGUED: Daniel Mark Press, CHUNG & PRESS, PC,
McLean, Virginia, for Appellant. Brian L. Oliner, OFFICE
OF THE ATTORNEY GENERAL OF MARYLAND,
Annapolis, Maryland, for Appellee. ON BRIEF: Douglas F.
Gansler, Attorney General of Maryland, Baltimore, Maryland,
for Appellee.
OPINION
TRAXLER, Chief Judge:
Denise Ciotti appeals a district court order reversing a
bankruptcy order declaring that her Maryland state income tax
liability for the tax years 1992-1996 had been discharged in
bankruptcy. Finding no error, we affirm.
I.
In 1996 Ciotti filed Maryland state income tax returns for
the 1992, 1993, 1994, 1995, and 1996 tax years. Ciotti later
filed for Chapter 7 bankruptcy on April 9, 2007. She received
her discharge, and her case was subsequently closed.
In 1998 the Internal Revenue Service ("IRS") issued a Let-
ter of Determination making adjustments to each of Ciotti’s
returns, significantly increasing her federal adjusted income
for each of the 1992-1996 tax years. Inasmuch as Maryland
taxable income is based upon federal adjusted income, Ciotti
was required under Maryland law to report the amount of the
changes to her federal adjusted income to Maryland tax
IN RE: CIOTTI 3
authorities (and explain any errors that she believed the IRS
made). See Md. Code Ann., Tax-Gen. § 13-409(b). Although
Ciotti, in fact, did not report the changes to the Maryland
authorities, the IRS forwarded its determination to the Mary-
land Comptroller. Based on the information the IRS provided,
the Comptroller made adjustments to Ciotti’s state returns that
resulted in an assessment of more than $500,000 in taxes,
penalties, and interest.
In February 2009, Ciotti successfully moved to reopen her
bankruptcy case and filed a complaint seeking a declaration
that her Maryland income tax liabilities for 1992 through
1996 had been discharged. The Maryland Comptroller
responded that the tax liabilities were excepted from dis-
charge under 11 U.S.C.A. § 523(a)(1)(B) (West Supp. 2010),
which prohibits discharge of a tax debt "with respect to which
a return, or equivalent report or notice, if required . . . was not
filed or given." The bankruptcy court subsequently granted
judgment on the pleadings to Ciotti, see Fed. R. Civ. P. 12(c);
Fed. R. Bankr. P. 7012(b), concluding that the report that
§ 13-409 required Ciotti to file did not constitute an "equiva-
lent report or notice" within the meaning of § 523(a)(1)(B).
On appeal, the district court reached the opposite conclusion
and reversed the bankruptcy court judgment.
II.
Ciotti now argues that the district court erred in ruling that
her tax debt was not discharged. We disagree.
The question before us is the legal issue of the proper appli-
cation of § 523(a)(1)(B) on established facts. We review de
novo the judgment of a district court sitting in review of a
bankruptcy court, reviewing the bankruptcy court’s legal con-
clusions de novo as well. See Foley & Lardner v. Biondo (In
re Biondo), 180 F.3d 126, 130 (4th Cir. 1999).
Although we traditionally interpret exceptions to discharge
narrowly, see id., we have an "obligation to interpret statutory
4 IN RE: CIOTTI
language in a manner that effectuates congressional intent," In
re Price, 562 F.3d 618, 628 (4th Cir. 2009) (internal quotation
marks omitted). We conclude that the district court did just
that in ruling that § 523(a)(1)(B) excepted Ciotti’s Maryland
tax debt from discharge.
As originally enacted as part of the Bankruptcy Reform Act
of 1978, Pub. L. No. 95-598, 92 Stat. 2549 (1978), the statute
provided that a discharge under Chapter 7 did "not discharge
an individual debtor from any debt – (1) for a tax . . . (B) with
respect to which a return, if required – (i) was not filed"; or
was filed late and within 2 years of filing the bankruptcy, or
was fraudulent or evasive. This exception reflected Con-
gress’s attempt to balance the
three-way tension [that] exists among (1) general
creditors, who should not have the funds available
for payment of debts exhausted by an excessive
accumulation of taxes for past years; (2) the debtor,
whose "fresh start" should likewise not be burdened
with such an accumulation; and (3) the tax collector,
who should not lose taxes which he has not had rea-
sonable time to collect or which the law has
restrained him from collecting.
S. Rep. No. 95-989, at 13 (1978), reprinted in 1978
U.S.C.C.A.N. 5787, 5800. The exception also embodied the
bankruptcy policy that "[i]n general, tax claims which are
nondischargeable, despite a lack of priority, are those to
whose staleness the debtor contributed by some wrong-doing
or serious fault." S. Rep. No. 95-989, at 14, reprinted in 1978
U.S.C.C.A.N. 5787, 5800. After Congress enacted
§ 532(a)(1)(B), several courts considered whether a failure to
file reports similar to the one § 13-409 requires constituted the
failure to file "a return," such that the corresponding tax lia-
bility would be excepted from discharge, and almost all of
them determined that § 532(a)(1)(B) did not except the tax
liability from discharge. Compare Dahmer v. United States
IN RE: CIOTTI 5
(In re Dahmer), 336 B.R. 784, 789 (Bankr. W.D. Mo. 2006)
(holding that taxpayer’s failure to follow state requirement
that he report change in federal income tax did not except
state tax liability from discharge), State of Cal. Franchise Tax
Bd. v. Jerauld (In re Jerauld), 208 B.R. 183, 189 (B.A.P. 9th
Cir. 1997) (similar); Olson v. United States (In re Olson), 174
B.R. 543, 547-48 (Bankr. D. N.D. 1994) (similar), and Black-
well v. Commonwealth of Va. Dep’t of Taxation (In re Black-
well), 115 B.R. 86, 88-89 (Bankr. W.D. Va. 1990) (similar),
with Blutter v. United States Dep’t of IRS (In re Blutter), 177
B.R. 209, 211-12 (Bankr. S.D.N.Y. 1995) (holding that failure
to report a change in federal taxable income, as required by
state law, excepted state tax liability from discharge).
In 2005, Congress, attempting to reduce the spiraling cost
to society of bankruptcies, enacted the Bankruptcy Abuse Pre-
vention and Consumer Protection Act of 2005 ("BAPCPA"),
Pub. L. No. 109-8, 119 Stat. 23 (2005). See H.R. Rep. No.
109-31, at 90-92 (2005) (explaining that the legislation was
motivated by four factors: the "recent escalation of consumer
bankruptcy filings," the "significant losses . . . associated with
bankruptcy filings," the fact that the "bankruptcy system has
loopholes and incentives that allow and—sometimes—even
encourage opportunistic personal filings and abuse," and "the
fact that some bankruptcy debtors are able to repay a signifi-
cant portion of their debts"). In amending § 523(a)(1)(B) in
particular, Congress made it applicable not only to the failure
to file a required return, but also to the failure to file or give
an "equivalent" required "report or notice." Thus, as amended,
§ 523(a)(1)(B) provides that a discharge under Chapter 7
"does not discharge an individual debtor from any debt – (1)
for a tax . . . (B) with respect to which a return, or equivalent
report or notice, if required – (i) was not filed or given"; or
was filed or given late and within 2 years of filing the bank-
ruptcy, or was fraudulent or evasive. 11 U.S.C. § 523(a)(1)(B)
(new language underlined). It is apparent from the changes
that Congress determined that the same policy reasons that
justify precluding the discharge of tax debt when the debtor
6 IN RE: CIOTTI
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. See Collier on
Bankruptcy ¶ 523.07 (Alan N. Resnick & Henry J. Sommer
eds., 16th ed. 2010) ("The reference to the failure to provide
‘notice’ means that if a debtor is obligated under nonbankrup-
tcy law to file an amended return or give notice to a govern-
mental unit of an amendment or correction to a prior filed
federal tax return, the failure to do so will render nondischar-
geable any corresponding tax liability to the governmental
unit." (footnote omitted)).
Ciotti argues against this interpretation but offers no plausi-
ble alternative meaning for the amendment. She argues that
Congress amended § 523(a)(1)(B) in order to allow dischar-
geability of tax debt for debtors who failed to file a required
return but nevertheless gave or filed an equivalent notice or
report. Congress, however, had no apparent motivation to
make such a change, and, in any event, the language of the
amendment is not susceptible to that reading. Congress
amended the statute to refer to the failure to file or give "a
return, or equivalent report or notice, if required." In so
doing, Congress clearly expanded the class of requirements
that, when they are not met, preclude dischargeability. Ciotti
fails to satisfactorily explain what sort of reports or notices
Congress targeted with its amendment if it was not the very
sort that are the subject of this case.
Ciotti contends that her failure to file a § 13-409 report did
not trigger application of § 523(a)(1)(B) because the required
report was not sufficiently similar to a return that the report
could be considered an "equivalent report or notice." The
Code provides that "return," in this context, "means a return
that satisfies the requirements of applicable nonbankruptcy
law (including applicable filing requirements)." 11 U.S.C.A.
§ 523(a). Under the relevant precedent,
[I]n order for a document to be considered a ‘return,’
under either the bankruptcy or the tax laws, it must
IN RE: CIOTTI 7
(1) purport to be a return; (2) be executed under pen-
alty of perjury; (3) contain sufficient data to allow
calculation of tax; and (4) represent an honest and
reasonable attempt to satisfy the requirements of the
tax laws.
Moroney v. United States (In re Moroney), 352 F.3d 902, 905
(4th Cir. 2003). Ciotti notes that a § 13-409 report need not
be submitted under penalty of perjury or even signed. She
also argues that it need not contain sufficient data to allow a
calculation of state tax liability because § 13-409 does not
require taxpayers to explain the bases on which their federal
tax liability was adjusted. She also points out that, unlike a
return, the report that § 13-409 requires must include an
explanation of any errors taxpayers believe the IRS made in
increasing their federal tax liability.
We conclude, however, that the report required by § 13-409
is much more similar to a return than Ciotti represents. First,
despite the lack of a requirement that a § 13-409 report be
signed, Maryland law provides that giving false or misleading
information in such a report with the intent to evade payment
or collection of the tax constitutes a misdemeanor punishable
by a fine of up to $5,000 and imprisonment of up to 18
months. See Md. Code Tax–Gen. § 13-1024(a). Also, not-
withstanding Ciotti’s argument that a § 13-409 report need
not contain the information necessary to compute a taxpayer’s
adjusted state tax liability, the applicable Maryland regulation
in fact requires that the report must include a "complete copy
of the federal audit including any exhibits attached to it." Md.
Code Regs. 03.04.02.11. Finally, the fact that § 13-409 also
requires that the taxpayer provide information additional to
that which would be found in a return, namely an explanation
of any disagreement the taxpayer has with the federal adjust-
ment, hardly supports the contention that the report is not an
"equivalent report" for purposes of § 523(a)(1)(B). In the end,
we conclude that the report required by § 13-409 is quite sim-
ilar to a return in several respects and is, indeed, the type of
8 IN RE: CIOTTI
report to which Congress intended § 523(a)(1)(B) would
apply.
Ciotti alternatively maintains that even if the § 13-409
report is the type to which § 523(a)(1)(B) can apply, the
report was nonetheless "given" to the Maryland Comptroller
when the IRS forwarded its audit determinations. We dis-
agree. Section 13-409 states,
Within 90 days after the [IRS] issues to a person the
final determination [increasing federal taxable
income], the person shall submit to the tax collector
a report of federal adjustment that includes:
(1) a statement of the amount of the increase; and
(2) if the person contends that the final federal deter-
mination is erroneous, an explanation of the reasons
for the contention.
Md. Code Tax-Gen. § 13-409(b) (emphasis added). 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 her-
self. See Brown v. Comptroller of the Treasury, 747 A.2d 232,
237 (Md. Ct. Spec. App. 2000). Thus, it is plain that the report
required by § 13-409 was neither filed nor given as required
by the Maryland statute, even if some or all of the information
required in the report was given to the Maryland Comptroller
by the IRS.
III.
In sum, we hold that the district court correctly ruled that
Ciotti’s state tax debt was nondischargeable.
AFFIRMED