Direct Appeal Allowed in Bankruptcy Late-Filed Returns Case

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(f). (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.

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.) 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)(1)(B)(i). Section 523(a)(1)(B)(i) excepts from discharge any debt for a tax, "with respect to which a return . . . if required, was not filed or given." 11 U.S.C. § 523(a)(1)(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 ("BAPCPA"), 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 BAPCPA, "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 BAPCPA. In re Davis, No. 14-26507, 2015 WL 5734332, at *4 (citing In re Fahey, 779 F.3d 1, 10 (1st Cir. 2015); In 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 conclusion. Id. at *5 (citing In re Maitland, 531 B.R. 516 (Bankr. 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 bankruptcy court stated:

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 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).