INTERNAL REVENUE SERVICE v. DAVIS
Filing
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MEMORANDUM OPINION. Signed by Judge Michael A. Shipp on 6/28/2016. (km)
NOT FOR PUBLICATION
UNITED STATES DISTRICT COURT
DISTRICT OF NEW JERSEY
INTERNAL REVENUE SERVICE,
Appellant,
Civil Action No. 15-7601 (MAS)
v.
MEMORANDUM OPINION
MARK W. DAVIS,
Appellee.
SHIPP, District Judge
This matter comes before the Court on Appellee Mark W. Davis's ("Davis") Motion for
Certification of Direct Appeal to the Third Circuit Court of Appeals pursuant to 28 U.S.C.
§ 158(d)(2) and Federal Bankruptcy Rule 8001(±). (ECF No. 3.) Appellant Internal Revenue
Service ("IRS") filed opposition (ECF No. 6), and Davis replied (ECF No. 7). The Court has
considered the parties' submissions and decides the matter without oral argument pursuant to Local
Civil Rule 78.1. For the reasons set forth below, the Court grants Davis's motion.
I.
Facts 1
A.
Chapter 7 Bankruptcy
On July 24, 2012, Davis filed a voluntary petition for relief under Chapter 7 of the United
States Bankruptcy Code (the "Bankruptcy Code") (the "Chapter 7 Petition"). (Davis's Moving
Br. 1, ECF No. 3-1.) In the Chapter 7 Petition, Davis listed the IRS as holding a claim of
$103,628.89. (Id. at 3.) The Chapter 7 Petition "progressed without incident, and [on] October
26, 2012 the Bankruptcy Court entered an order discharging [Davis] in the normal course." (Id.)
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The facts set forth below are undisputed.
Before Davis filed the Chapter 7 Petition, however, the IRS had calculated Davis's obligations for
certain tax years in which he failed to file returns. (Id. at 2.) The IRS 's calculation of Davis's tax
obligations was based on two Substitutes for Returns ("SFR"), which the Internal Revenue Code
allows the Secretary of Treasury to prepare and file for taxpayers, like Davis, who fail to file their
own returns. (Id.) (citing 26 U.S.C. § 6020).) The IRS prepared the SFRs for the 2005 and 2006
tax years on November 17, 2008, and April 20, 2009, respectively. Davis did not sign the SFRs.
(Id. at 2-3.) "On January 28, 2010, Davis submitted Form 1040s for the 2005 and 2006 tax years,
which reduced the 2005 SFR estimated tax by $489.00, and reduced the 2006 SFR estimated tax
by $3,646.00." (Id. at 3.)
B.
Chapter 13 Bankruptcy
On August 11, 2014 (the "Petition Date"), Davis filed a voluntary petition for relief under
Chapter 13 of Title 11 of the Bankruptcy Code. (Id. at 2.) In the Chapter 13 Plan, Davis proposed
to pay "allowed priority tax debt, in full, through the plan." (Id.) "On his Chapter 13 schedules,
Davis listed the IRS as holding an unsecured priority claim in the amount of $39,167.15 for the
tax years 2005, 2006, and 2009, which he marked as disputed." (Id.) Thereafter, the IRS filed a
proof of claim ("POC") based on the 2005 and 2006 SFRs. (Id.) The most recently amended POC
lists a total claim amount of $63,887.78, of which $4,900.00 is listed as secured debt, $8,394.46 is
listed as unsecured priority debt, and $50,593.32 is listed as unsecured debt. (Id.)
On December 9, 2014, Davis filed a Motion to Reduce the IRS's POC. (Id.) In his motion,
Davis disputes "the portion of the unsecured debt for income tax obligations related to the 2005
and 2006 tax years, totaling $42,657. 72." (Id.) Specifically, Davis argues that his 2005 and 2006
tax obligations in his Chapter 13 Petition were discharged by the Chapter 7 Petition, pursuant to
11 U.S.C. § 523(a)(l)(B)(i). Section 523(a)(l)(B)(i) excepts from discharge any debt for a tax,
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"with respect to which a return ... ifrequired, was not filed or given." 11 U.S.C. § 523(a)(l )(B)(i).
In its opposition to Davis's motion, the IRS argues that the Form 1040s that Davis filed in 2010
for the 2005 and 2006 tax years do not constitute "returns," which would be discharged under the
Bankruptcy Code.
C.
Bankruptcy Court's Decision
On October 6, 2015, the bankruptcy court issued an Order granting Davis's motion to
reduce the IRS's claim. (ECF No. 2-1.) In its decision, the bankruptcy court noted that until the
passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCP A"),
the Bankruptcy Code did not define the term "return." In re Davis, No. 14-26507, 2015 WL
5734332, at* 2 (Bankr. D.N.J. Sept. 29, 2015). Thus, courts looked to various factors to define
the term, including whether the purported return "represent[ ed] an honest and reasonable attempt
on the part of the taxpayer to satisfy the requirements of the law." Id.
Under the BAPCP A,
"return" is defined to mean "a return that satisfies the requirements of applicable nonbankruptcy
law (including applicable filing requirements)." 11 U.S.C. § 523(a). In addition, the BAPCPA
specifically provides that the "term includes a return prepared pursuant to section 6020(a) of the
Internal Revenue Code of 1986, or similar State or local law ... but does not include a return made
pursuant to section 6020(b) of the Internal Revenue Code of 1986, or similar State or local law."
Id. In its decision, the bankruptcy court noted that although the Third Circuit has not yet ruled on
the issue, "each of the three circuit courts that have ruled on the issue held that a late return does
not satisfy ... the definition of a return" under the BAPCP A. In re Davis, No. 14-26507, 2015
WL 5734332, at *4 (citing In re Fahey, 779 F.3d 1, 10 (1st Cir. 2015);/n re Mallo, 774 F.3d 1313,
1327 (10th Cir. 2014); In re McCoy, 666 F.3d 924, 932 (5th Cir. 2014)). Notwithstanding these
decisions, however, the court noted that another bankruptcy court in this district reached a different
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conclusion. Id. at *5 (citing In re Maitland, 531 B.R. 516 (Ban1a. D.N.J. 2015)). Discussing the
decision in In re Maitland, which rejected the circuit courts' "one-day rule," whereby the circuit
courts held that late returns do not satisfy the BAPCPA's definition of "return," the ban1auptcy
court stated:
the court thoroughly analyzed the circuit court decisions applying
the one-day rule and respectfully departed from those decisions for
five reasons: 1) those courts' reading of the definition of "return"
would render other parts of the statute superfluous; 2) a plain
language approach does not fully support those courts' reading of
the term "return"; 3) the draconian result of the one-day rule is
inconsistent with the underlying purpose of the Ban1auptcy Code to
give a fresh start to honest but unfortunate debtors; 4) the one-day
rule is anomalous with the broader statutory scheme of 523(a),
which primarily address debts arising out of culpable conduct of the
debtor, not blameless mistake; and 5) the courts fail to address the
detrimental impact the rulings would have on unsecured creditors.
Id. Finding the analysis in In re Maitland persuasive, the court held that "there is no timeliness
requirement when determining if a filing constitutes a 'return' for the purposes of discharge." Id.
at *6. Thus, the court found that Davis's late-filed Forms 1040 for the 2005 and 2006 tax years
constituted returns, and granted Davis's motion to reduce the claim of the IRS. Id. The IRS filed
a notice of appeal with this Court. (ECF No. 1.) Thereafter, Davis moved for certification for
direct appeal to the Third Circuit. (ECF No. 3.)
II.
Analysis
Section 158(d)(2) provides that litigants in a ban1auptcy proceeding may appeal a
ban1auptcy court's decision directly to the court of appeals when, among other things, the district
court certifies that: "(1) the judgment, order, or decree involves a question oflaw as to which there
is no controlling decision of the court of appeals for the circuit or of the Supreme Court of the
United States, or involves a matter of public importance; (2) the judgment, order, or decree
involves a question oflaw requiring resolution of conflicting decisions; or (3) an immediate appeal
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from the judgment, order, or decree may materially advance the progress of the case or proceeding
in which the appeal is taken." 28 U.S.C. § 158(d)(2) (emphasis added). In its opposition, the IRS
agrees that the sole question on appeal is "whether the Forms 1040 filed by [Davis] for 2005 and
2006 are 'returns' under 11 U.S.C. § 523(a)(l)(B)(i) even though he filed them late and after the
IRS had already assessed the relevant taxes," and that this question has not been answered by the
Third Circuit. (IRS's Opp'n Br. 3, ECF No. 6.) The IRS disputes, however, whether this question
is purely a legal one. (Id.) In particular, the IRS argues that the bankruptcy court's decision was
"based in part on the fact that Davis filed [the Forms 1040 for 2005 and 2006] for a 'legitimate
purpose' because he did so 'in advance of filing an [offer in compromise] with the IRS' and
because he was required to file a Form 1040 before he could make such an offer." (Id.)
The
Court disagrees. Although the bankruptcy court described the facts noted above, its decision was
not heavily dependent on the particular facts in the case. Cf Weber v. United States, 484 F .3d 154,
158 (2d Cir. 2007) (noting that legislative history confirms that direct appeal is most appropriate
for cases involving pure questions of law, and not for questions "heavily dependent on the
particular facts of a case"). On the contrary, the bankruptcy court noted the canons of statutory
construction that were applied in In re Maitland, and stated that it was persuaded by this analysis.
In re Davis, No. 14-26507, 2015 WL 5734332, at *5. Accordingly, the Court finds that the
question on appeal - whether there is a timeliness requirement to the term "return" under the
BAPCA - is a legal one.
In addition, as the IRS concedes, there is no controlling decision from the Third Circuit on
this question. Furthermore, the Court finds that this issue, which has already been addressed by
several Circuit Courts, see, e.g., In re Fahey, 779 F.3d at 10; In re Mallo, 774 F.3d at 1327; In re
McCoy, 666 F .3d at 924, is an issue that is likely to affect a significant proportion of individuals
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and likely to arise repeatedly. Cf In re Marrama, 345 B.R. 458, 474 (Bankr. D. Mass. 2006)
(denying request for certificate for direct appeal because, inter alia, "[t ]his is not an issue of
significant proportion or one that is certain to arise repeatedly"). Accordingly, the Court finds that
this case should be certified for direct appeal pursuant to 28 U.S.C. § 158(d)(2)(A)(i). 28 U.S.C.
§ 158(d)(2)(A)(i).
III.
Conclusion
For the reasons set forth above, Davis's Motion for Certification of Direct Appeal to the
Third Circuit Court of Appeals is granted. The Court shall issue an order consistent with this
Memorandum Opinion.
s/ Michael A. Shipp
MICHAEL A. SHIPP
UNITED STATES DISTRICT JUDGE
Dated: June 28, 2016
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