Boudreau v. R.I. Div. of Taxation, Educ. Credit Mgmt. Corp. (In re Boudreau)

562 B.R. 853

IN RE: Jason D. BOUDREAU, Debtor

Jason Boudreau, Plaintiff

v.Rhode Island Division of Taxation, Education Credit Management Corporation, and Internal Revenue Service Defendants

BK No: 15–10162

A.P. No. 16–01001

United States Bankruptcy Court, D. Rhode Island.

Signed January 24, 2017

Jason Boudreau, pro se.

RI Higher Education Authority, pro se.

Kate Constance Brody, Rhode Island Division of Taxation One Capitol Hill, Mary Rogers, US Attorney's Office, Brian J. Lamoureux, Pannone Lopes Devereaux & West LLC, Providence, RI, James M. Strandjord, U.S. Department of Justice, Washington, DC, for Defendant.

DECISION AND ORDER ON MOTION TO DISMISS OF RHODE ISLAND DIVISION OF TAXATION

Diane Finkle, U.S. Bankruptcy Judge

The Rhode Island Division of Taxation ("Division") moves to dismiss plaintiff-debtor Jason Boudreau's adversary proceeding in which he seeks a declaration that the claims of each of the defendants are dischargeable in accordance with 11 U.S.C. § 727.¹ Doc. # 20. Mr. Boudreau is proceeding pro se in this matter. This Decision and Order addresses the proceeding only as it relates to the Division. Moving under Federal Rule of Civil Procedure 12(b)(6), incorporated by Bankruptcy Rule 7012,² the Division contends that the tax liability Mr. Boudreau owes is excepted from discharge as a matter of law under § 523(a)(1)(B) because he filed his tax return late. Dispositive of this determination, at least as to the underlying tax plus interest, is the decision of the United States Court of Appeals for the First Circuit in Fahey v. Mass. Dep't of Revenue (In re Fahey ), 779 F.3d 1 (1st Cir. 2015). In that case, the Court interpreted the so-called "hanging paragraph" of § 523(a)(*) and held that taxes owed relating to late-filed tax returns are not dischargeable. Based upon Fahey , this Court concludes that Mr. Boudreau's 2010 taxes and interest owed to the Division are indeed not dischargeable. The penalty component of the Division's claim is altogether another issue as it was not considered in Fahey, the operative Bankruptcy Code provision governing the discharge of penalties imposed by governmental entities being § 523(a)(7), not § 523(a)(1)(B). The Court concludes that these penalties are dischargeable.

I. Jurisdiction and Venue

The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157(a) and 1334, and DRI LR Gen 109(a). This is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (B), (I), and (O).

II. Relevant Facts and Procedural History

Mr. Boudreau filed his voluntary petition under Chapter 7 of the Bankruptcy Code on January 26, 2015 ("Petition Date"), and received his discharge on April 21, 2015. After discharge was entered, Mr. Boudreau filed a one-page complaint initiating this adversary proceeding. Faced with initial motions to dismiss filed by the Division and the Internal Revenue Service ("IRS"), Mr. Boudreau amended his complaint ("Amended Complaint," Doc. # 18) to add more detailed allegations and to reference the general statutory underpinning of his request that the taxes owed to these two governmental agencies be declared dischargeable.³

In the Amended Complaint, he alleges that he "has filed his income taxes for the tax years included in his chapter 7 petition" (without indicating when such returns were allegedly filed) and asserts that § 727 of the Code discharges all of his debts, including his tax debts. Amended Complaint ¶ 4. Although the Amended Complaint covers tax liabilities listed on his bankruptcy schedules for the years 2004, 2007, and 2009 through 2011, the Division responded that the only outstanding tax Mr. Boudreau owes is for 2010 in the amount of $3,103.⁴ See BK. No. 15–10162, Doc. # 1. This was reiterated by the Division at the hearing on the motion on July 21, 2016, and the parties have proceeded on the basis that this is the only state tax year in issue.

At the July hearing, Mr. Boudreau stated that he filed his state tax return for the 2010 tax year in 2012, not in 2014 as the Division asserts, but conceded that the return was nonetheless filed late because it was due by April 15, 2011. The Court raised the issue of whether Fahey was dispositive as to the principal tax and interest in light of the parties' agreement that the tax return was untimely, and requested that the parties file supplemental memos addressing the Fahey case. The parties did so (Division's supplemental memoranda, Doc. # 37; and Mr. Boudreau's response, Doc. # 47), and the Court took the matter under advisement.⁵

The Division maintains that Mr. Boudreau's 2010 tax liabilities are nondischargeable because, regardless of when Mr. Boudreau actually filed his 2010 tax return, he agrees that the return was not timely filed under the applicable Rhode Island tax statute. See R.I. Gen. Laws § 44–30–51. Hence, the claim (inclusive of tax and interest only) is not dischargeable under § 523(a)(1)(B), noting the similarities in the applicable Massachusetts statutory filing requirement considered in Fahey and its counterpart in the Rhode Island tax statutes, both of which constitute an "applicable filing requirement" under § 523(a)(*).

Mr. Boudreau filed his objection to the motion, arguing that Fahey is limited to Massachusetts tax law and is therefore not binding on this Court. He zealously and quite articulately presents various arguments why he believes the Fahey decision and its statutory construction of Bankruptcy Code § 523(a) (*) is faulty, noting a number of cases in which courts reached the opposite conclusion. Unfortunately for Mr. Boudreau, the First Circuit rejected such opposing views and this Court is duty bound to follow Fahey , which the Court concludes is controlling as to the underlying 2010 state taxes and interest he owes.

III. Applicable Standards

When considering a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6), the Court must accept the well-pleaded facts of the complaint as true, but the Court need not accept as true any allegations that are no more than "labels and conclusions" or "formulaic recitation of the elements of a cause of action." Bell Atlantic Corp. v. Twombly , 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ; see Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) ("Nor does a complaint suffice if it tenders ‘naked assertion[s]’ devoid of ‘further factual enhancement.’ "). Instead, a complaint must "state a claim to relief that is plausible on its face," rather than merely conceivable. Twombly , 550 U.S. at 570, 127 S.Ct. 1955. The Court must also "give the plaintiff the benefit of all reasonable inferences therefrom." Ruiz v. Bally Total Fitness Holding Corp. , 496 F.3d 1, 5 (1st Cir. 2007) (citing Rogan v. Menino , 175 F.3d 75, 77 (1st Cir. 1999) ).

IV. Applicable Law

A. Section 523(a)(1) and the Dischargeability of Tax Liabilities

Bankruptcy Code § 727(a) generally "grants the debtor a discharge"; but "[s]ection 523 addresses the nondischargeability of certain types of debts, including three categories of tax debts that are excepted from discharge." Berry v. Mass. Dep't of Revenue (In re Berry ), Adv. No. 15–4045–CJP, 2016 WL 3676528, at *2 (Bankr. D. Mass. June 30, 2016) (citing 11 U.S.C. § 523(a)(1)(A)–(C) ). "If the debt for such taxes meets the standard under § 523(a)(1)(A), (B) or (C), then the debt is nondischargeable." Nilsen v. Mass. Dep't of Revenue (In re Nilsen ), 542 B.R. 640, 643 (Bankr. D. Mass. 2015). "The party seeking to establish an exception to the discharge of a debt bears the burden of proof. ... by the preponderance of the evidence" that its claim falls "squarely within an exception to discharge ...." Id. at 645 ; N.H. Supreme Court Prof'l Conduct Comm. v. Richmond (In re Richmond ), 351 B.R. 6, 10 (Bankr. D.N.H. 2006) (citing Palmacci v. Umpierrez , 121 F.3d 781, 786 (1st Cir. 1997) ). The relevant portion of § 523(a)(1), subsection (B)(ii), provides

(a) A discharge under section 727, 1141, 1228(a), or 1328(b) of this title does not discharge an individual debtor from any debt—

(1) for a tax or a customs duty—...

(B) with respect to which a return, or equivalent report or notice, if required—

(ii) was filed or given after the date on which such return, report, or notice was last due, under applicable law or under any extension, and after two years before the date of the filing of the petition ....

"[S]ubsection (ii) sets forth the so-called ‘two year rule’ " that excludes from discharge taxes filed late but within two years of the petition. In re Nilsen , 542 B.R. at 644 (citing McBride v. City of Kettering (In re McBride) , 534 B.R. 326, 331 (Bankr. S.D. Ohio 2015) ).

Much litigation under this provision has ensued because of a lack of a statutory definition of "return" applicable to this provision. Congress attempted to address this shortcoming in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA") by adding a "hanging paragraph" to § 523(a) following subsection (19), commonly cited to as § 523(a) (*). It states,

For purposes of this subsection, the term "return" means a return that satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements). Such term includes a return prepared pursuant to section 6020(a) of the Internal Revenue Code of 1986, or similar State or local law, or a written stipulation to a judgment or a final order entered by a nonbankruptcy tribunal, but does not include a return made pursuant to section 6020(b) of the Internal Revenue Code of 1986, or a similar State or local law.⁶

With this definition, Congress intended "to settle the dispute over late filed tax returns against the debtor." Fahey , 779 F.3d at 10. As is not infrequently the case, "[i]n actuality, the ‘hanging paragraph’ has been the crux of many bankruptcy appeals, raising more questions about the definition of ‘return’ and thus leaving circuit courts to clarify the murky waters of the Bankruptcy Code." Nilsen v. Mass. Dep't of Revenue , ...