In re Dawes, Case No. 06-11237 (Bankr. Kan. 7/30/2008), Case No. 06-11237.

• Decision Date: 30 July 2008
• Docket Number: Case No. 06-11237.
• Parties: In re: DONALD W. DAWES and PHYLLIS C. DAWES, Chapter 12, Debtors.
• Court: U.S. Bankruptcy Court — District of Kansas

Page 1

In re: DONALD W. DAWES and PHYLLIS C. DAWES, Chapter 12, Debtors.

Case No. 06-11237.

United States Bankruptcy Court, D. Kansas.

July 30, 2008.

MEMORANDUM OPINION AND ORDER GRANTING THE IRS'S SUMMARY JUDGMENT AS TO AMOUNT OF CLAIM

DALE L. SOMERS, Bankruptcy Judge.

The matter under advisement is the United States' Response to Debtors' Objection to IRS Claim and Motion to Dismiss the Objection or in the Alternative Motion for Summary Judgment (Motion).¹ Having considered the Motion, the Debtors' response, and the United States' reply, the Court is now ready to rule. The United States (also referred to herein as IRS) appears by Stephanie M. Page. Debtors Donald W. Dawes and Phyllis C. Dawes appear by Mark J Lazzo. There are no other appearances. The Court has jurisdiction.² For the reasons stated below, the Court holds that Debtors' objection to the amount of the United States' claim for unpaid income taxes, penalty, and interest is denied.

PROCEDURAL HISTORY AND PARTIES' POSITIONS.

The IRS is the principal creditor in this Chapter 12 case, which was initially filed under Chapter 7 by the Debtors, pro se. The IRS filed a proof of claim for $1,747,841.53.³ On January 29, 2008, Debtors filed an objection.⁴ They assert that of the $1,747,841.53 claimed, 94% or $1,654,145.61 is attributable to claims of principal, interest, and penalties on 1982 and 1983 income taxes, which tax liabilities are based upon erroneous substituted returns prepared by the IRS which determined taxes due in the amounts of $86,783 for 1982 and $55,224.00 for 1983. Debtors allege that they have now completed their own returns for 1982 and 1983 income taxes which show that the true taxes due are $8,892 for 1982 and $4,366 for 1983.

The IRS responded with the Motion now under advisement. It argues that Debtors' objection must be denied because the amount of taxes, interest, and penalties due for 1982 and 1983 are res judicata based upon Debtors' prepetition litigation in the United States Tax Court. Debtors refute the IRS' position, asserting that res judicata does not apply because their claim objection is based upon a claim for tax refund for overpayment of 1982 taxes and the elements of res judicata are not present since the Tax Court proceeding was dismissed for lack of prosecution.

SUMMARY JUDGMENT STANDARDS.

The Court will regard the IRS' Motion as one for summary judgment, rather than a motion to dismiss.⁵ Summary judgment is appropriate "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law."⁶ A genuine issue of material fact is a factual dispute that may affect the outcome of the case and one that a reasonable trier of fact could find in favor of either party.⁷ "[T]he plain language of Rule 56(c) mandates the entry of summary judgment . . . against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, on which that to party will bear the burden of proof at trial."⁸

The initial burden is on the moving party to establish the absence of a genuine issue concerning any material fact.⁹ "`[T]he party moving for summary judgment has the burden to show that he is entitled to judgment under established principles; and if he does not discharge that burden then he is not entitled to judgment. No defense to an insufficient showing is required.'"¹⁰ However, when the moving party does meet the initial burden, the nonmoving party may defeat the motion for summary judgment by presenting evidence from which a trier of fact might return a verdict in its favor.¹¹ In determining this, all evidence and inferences are viewed in the light most favorable to the nonmoving party.¹²

FINDINGS OF UNCONTROVERTED FACTS.

Because Debtors failed to file income tax returns, the IRS filed substitutes for returns pursuant to 26 U.S.C. § 6020(b) for Debtors' 1982 and 1983 income taxes. A Notice of Deficiency dated November 25, 1991, advised Debtors of increase in taxes due of $86,783 for tax year 1982 and of $55,224 for tax year 1983, and related penalties and interest. It advised that "if you want to contest this deficiency in court before making any payment, you have 90 days from the above mailing date of this letter . . . to file a petition with the United States Tax Court for a redetermination of the deficiency."

On February 19, 1992, Debtors filed a petition in Tax Court challenging the deficiencies. According to the Tax Court docket sheet, the following occurred: The Respondent (the IRS) filed an answer on April 21, 1992; there was no counterclaim filed by the IRS; on May 13, 1993 notice of trial set for October 18, 1993 was given; the IRS filed two motions to compel, to which Debtors did not respond; and the case came on for hearing on October 18, 1993. The transcript of that hearing, at which Respondent appeared by David G. Hendricks and Debtors did not appear, includes the following:

MR. HENDRICKS: . . . Pursuant to a conference call on October 14, Petitioner, who lives in western Kansas, was excused from appearing today. Petitioner requested the trial be set at the latter part of the calendar. Respondent will advise Petitioner of the date and time the case is set for trial.

THE COURT: Mr. Hendricks, do you think the taxpayers are going to trial in this case? From the conference call I got the distinct impression they had no documents and nothing to offer.

MR. HENDRICKS: I would be surprised. As I say, the Respondent's case was developed in great detail during the criminal portion of the case and I would doubt that there are any significant variations between what is in the notice of deficiency and what records they might come up with.

* * *

THE COURT: My concern is I don't want to set it, for example, for Wednesday of next week and sit here in Oklahoma City waiting to find out that they are not going to appear, or if they appear, that they are simply going to default.

I would like to recall this case on Friday. Tell the taxpayers — if you contact them tell them that I want to know if they are definitely going to show up and if they are going to trial . . ..

The case was recalled at 2:15 PM on October 22, 1993. At that hearing, the IRS was granted leave to file a motion to dismiss. The transcript of that hearing, at which David G. Hendricks appeared for the Respondent and Debtors did not appear, includes the following:

THE COURT: . . .

Now, as I recall, Mr. Hendricks, during the conference call yesterday, I understood that Mrs. Dawes was to contact you before 2:00 today, if she wished the Court to set the case for trial next week.

MR. HENDRICKS: I believe she had the Court's telephone number and —

THE COURT: That is right. She had my number, also.

MR. HENDRICKS: And it was my understanding that she would contact the Court. Of course, she has my number, also, and if she had run into any problems, I can only assume that she would have then called myself.

THE COURT: Well, she did not call me, and I just want to make sure the record was clear.

Respondent's motion to dismiss for lack of prosecution will be granted, and decision will be entered for the full amount of the deficiencies and the additions to tax, as set forth in the statutory notice of deficiency.

The granting of the motion to dismiss for lack of prosecution is reflected in an Order of Dismissal and Decision, entered on the docket on December 1, 1993. As to the taxes for 1982 and 1983, the Tax Court ordered and decided that there were deficiencies in income tax and additions to tax from the Dawes in the amounts stated in the November 25, 1991 Notice of Deficiency. Debtor Donald Dawes asserts by affidavit, on his own behalf and on behalf of his wife, "[w]e were not aware that our abandonment of our petition in the Tax Court case could result in a final Order by the Tax Court as to taxes due for 1982 and 1983."

In April 2003, the United States brought an action against Debtors in the United States District Court to, among other things, reduce the Debtors' 1982 and 1983 unpaid tax assessments to judgment.¹³ Debtors, as parties to the action, filed responsive pleadings and participated in discovery. On September 21, 2004, the United States was granted summary judgment on its claim for unpaid income tax liabilities and other matters. A judgment was entered against the Dawes in favor of the United States for the assessed balance on their 1982 and 1983 income taxes, including accrued interest and other statutory additions. Debtors appealed to the Tenth Circuit Court of Appeals, but the judgment was affirmed.¹⁴

After this case was filed on July 14, 2006, the IRS was granted relief from stay to sell certain of Debtors' real property which was subject to a tax lien.¹⁵ Sale proceeds in the amount of $947,000 were deposited into the registry of the District Court and disbursement made to the IRS.¹⁶

ANALYSIS.

The IRS contends that res judicata bars the Debtors from objecting to the amount of 1982 and 1983 income taxes, interest, and penalties.¹⁷ Debtors respond that res judicata does not bar their objection to claim for two primary reasons: (1) Because their claim is for refund of taxes paid under 26 U.S.C. § 6511, a claim which could not have been made in the Tax Court or the District Court litigation; and (2) because of lack of notice as to the consequences of allowing dismissal of the Tax Court proceeding for lack of prosecution, there was not a full and fair opportunity to litigate the amount of 1982 and 1983 taxes in the Tax Court.

As in this case, when taxpayers receive a statutory notice of income tax deficiency, there are two means to challenge the accuracy of the determination: (1) File a petition for redetermination with the Tax Court within the applicable time limit;¹⁸ or (2) pay the taxes and bring a refund...