State of Maryland, Comptroller of Maryland v. Ciotti (Maryland U.S.D.C.)

Filed: December 16, 2009.

Opinion by Judge Frederick Motz.

Held: A debtor that owes additional Maryland State taxes after a federal determination of additional income cannot discharge such debt in bankruptcy if it did not report the federal determination to the State.

Facts: The IRS audited the debtor’s prior tax returns and found additional taxable income. Maryland law requires that taxpayers file a report of federal adjustment with the State upon such an IRS determination. The debtor did not do so, but the IRS itself reported the adjustment to Maryland tax authorities. As a result, the Comptroller of Maryland made adjustments to the debtor’s tax returns that resulted in increased tax liability. The debtor subsequently filed for Chapter 7 bankruptcy and sought a declaration that her additional State tax liability as a result of the upward adjustment was discharged. The bankruptcy court granted the discharge, and the State appealed to the district court.

Analysis: Whether the debtor’s additional State tax liability can be discharged turns on the meaning of the words “or equivalent report or notice” added to 11 U.S.C. § 523(a)(1)(b) by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”). Section 523(a)(1) provides that a debtor shall not be discharged from any debt for a tax “with respect to which a return, or equivalent report or notice, if required – (i) was not filed or given” (emphasis added). Accordingly, the issue is whether the debtor’s failure to report the federal adjustment to the State amounts to an “equivalent report or notice” that was “not given.”

Reversing the bankruptcy court, the district court held that the failure to report was indeed a failure to provide an equivalent report. In so holding, the district court looked to legislative history provided by a House of Representatives report which addresses the changes made to section 523(a)(1). The district court also expressly rejected the bankruptcy court’s reasoning that the report required under Maryland law is not a “return” – and thus cannot be deemed to be the “equivalent of a return.” The court stated that to equate “return” and “equivalent report or notice” would render the latter phrase redundant. In addition, the inclusion of “or given” provides further evidence that Congress contemplated something less formal than a “return.”

The district court opinion is available in PDF. The bankruptcy court opinion, which was reversed by the district court, is also available in PDF.