Last year, the First Circuit handed down Fahey v. Massachusetts Department of Revenue (In re Fahey), joining the Fifth and Tenth Circuits by holding that income taxes can never be discharged if the tax return was filed even one day late.
But what about penalties associated with the same taxes? Can they ever be discharged?
Bankruptcy Judge Henry J. Boroff of Worcester, Mass., decided on July 11 that penalties sometimes can be discharged, because they are governed by Section 523(a)(7) while the taxes themselves are covered by Section 523(a)(1).
The chapter 7 debtor did not get around to filing tax returns for 2001 through 2006 until 2008 and 2009, more than three years before the petition date. The debtor conceded that the taxes themselves were not dischargeable under Fahey.
When the State of Massachusetts attempted to collect some $7,500 in penalties, the debtor filed a motion in bankruptcy court to hold the state in contempt, alleging that the penalties were discharged under Section 523(a)(7).
Interpreting Section 523(a)(7) required the court to grapple with a triple negative. Citing the Eleventh Circuit and the plain meaning of the subsection, Judge Boroff summarized the statute as saying that penalties are discharged if the “transaction or event” giving rise to the penalty occurred more than three years before the filing date.
The state, however, contended that the “event” in subsection (a)(7)(B) is a continuing event — namely, the failure to pay the taxes.
Again relying on plain meaning and the statute’s use of the word “imposed,” Judge Boroff took sides with those courts holding that the relevant date is the due date for the taxes, which, in this case, was more than three years before the filing.
Judge Boroff therefore held the state in contempt of the discharge injunction. Because it was not appropriate to impose sanctions on a motion for summary judgment, Judge Boroff said he would decide later what damages the debtor incurred. The judge also reserved decision on whether the state has a sovereign immunity defense.