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Bankrupt woman’s state tax debt nondischargeable

Bankrupt woman’s state tax debt nondischargeable

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A debtor’s state tax liabilities were not discharged in her bankruptcy case, the 4th Circuit Court of Appeals has affirmed.

In 1996, Denise Ciotti filed Maryland state income tax returns for tax years 1992 through 1996. She filed for Chapter 7 bankruptcy on April 9, 2007, received a discharge of debts and her Chapter 7 bankruptcy case was closed.

In 1998, the Internal Revenue Service determined that Ciotti’s federal adjusted income was significantly more than she had reported during that 5-year period for which she filed Maryland tax returns. The IRS notified the Maryland Comptroller, which assessed $500,000 in taxes, penalties and interest against Ciotti.

Ciotti had her bankruptcy complaint reopened in 2009 and filed a complaint seeking a declaration that her Maryland income tax liabilities from 1992 through 1996 had been discharged.

The state contended that Ciotti’s tax debt was nondischargeable under §523(a)(1)(B) of the Bankruptcy Code. The statute prohibits discharge of a tax debt “with respect to which a return, or equivalent report or notice, if required … was not filed or given.”

The court agreed that the tax debt was nondischargeable because Ciotti failed to file a report of the federal tax adjustments with Maryland tax authorities as required by state law.

In reaching this conclusion, the court rejected Ciotti’s argument that her reporting obligation was satisfied by notice of the federal tax changes that the IRS provided the state.

“Maryland law is clear that the IRS’s reporting to Maryland the amount of a taxpayer’s increased federal liability does not satisfy the taxpayer’s statutory obligation to report the information herself. Thus, it is plain that the report required by [state law] was neither filed nor given as required by the Maryland statute, even if some or all of the information required in the report was given to the Maryland Comptroller by the IRS,” the court said.



State v. Ciotti, No. 10-1083. U.S. 4th Circuit Court of Appeals. Opinion by Traxler, J. Filed March 8, 2011.


Where a debtor files for Chapter 7 bankruptcy, is that debtor’s state tax debt dischargeable?


No. The district court correctly ruled that the debtor’s state tax debt was nondischargeable under §523(a)(1)(B) of the Bankruptcy Code.


Daniel Mark Press of Chung & Press PC in McClean, Va., for appellant; Brian L. Oliner of the Office of the Attorney General of Maryland in Annapolis for appellee.


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