Jung v. Internal Revenue Serv. (In re Jung)
| Decision Date | 02 July 2019 |
| Docket Number | Case No.: 18-12211-7,Adversary No.: 18-52 |
| Citation | 604 B.R. 773 |
| Parties | IN RE: Harold F. JUNG and Alia I. Jung, Debtors. Harold F. Jung, Plaintiff, v. Internal Revenue Service, Defendant. |
| Court | U.S. Bankruptcy Court — Western District of Wisconsin |
George B. Goyke, Wausau, WI, for Plaintiff.
Julian Lee, U.S. Department of Justice, Tax Division, Washington, DC, for Defendant.
The Internal Revenue Service ("IRS") issued Notices of Deficiency to Harold ("Harold") and Alia Jung ("Alia") (collectively, "the Jungs") for additional taxes and penalties owed for the tax years 2008 to 2013. Fourteen days after the second Notice, the Jungs filed a voluntary chapter 7.
Harold filed this adversary proceeding seeking to determine and discharge his tax liability and penalties.1 The IRS moved to dismiss on the ground of lack of subject-matter jurisdiction. The Court denied the Motion to Dismiss and ordered the IRS to file an answer. The IRS filed its answer and, the next day, a Motion to Reconsider.
The Jungs timely filed and paid their joint 2008 to 2013 income tax returns and self-reported tax liabilities. The IRS audited the Jungs' income tax returns. It determined the Jungs "had additional income tax deficiencies due to unreported business income." This also resulted in a determination that Harold is liable for civil fraud penalties.
The IRS issued a Notice of Deficiency to the Jungs for the deficiencies and penalties for the tax years 2008 through 2012. The IRS then issued a Notice of Deficiency for the deficiencies and penalties due for 2013. Neither Harold nor Alia filed a petition in the United States Tax Court to contest the deficiencies or penalties. After the second of the Notices, the Jungs filed a no asset chapter 7.
Harold filed an adversary proceeding seeking to determine and discharge his tax liability and penalties. The IRS moved to dismiss on the ground of lack of subject-matter jurisdiction under Federal Rules of Civil Procedure 12(b)(1) and 12(h)(3). The IRS admits "[b]ankruptcy courts are authorized by statute to determine the dischargeability of a debtor's liabilities." But, the IRS says, the only issue for decision is whether Harold is liable for the deficiencies and penalties. So it argues dischargeability is not an issue. According to the IRS, "the liabilities and penalties are per se nondischargeable because they involve fraud."
The Court denied the Motion to Dismiss. Critical to the Court's decision was that Harold sought to discharge the taxes and penalties before any assessment or determination by a court. The Court distinguished this case from others finding lack of subject-matter jurisdiction over tax disputes where dischargeability was not at issue, reasoning:
In sum, this Court has jurisdiction. Dischargeability is a core proceeding. It is a substantive right that does not exist outside bankruptcy. Having assessed2 tax and penalties, the IRS acknowledges there is a debt. If necessary, this Court can determine the amount of tax or penalties as part of the decision on dischargeability.
The IRS moved for reconsideration. It asks the Court to dismiss the adversary for lack of subject-matter jurisdiction or, in the alternative, hold the matter in abeyance pending a decision in Matter of Bush , No. 16-13244 (7th Cir.). Bush was fully briefed and argued in April 2017.
It appears the IRS has changed its argument in the Motion to Reconsider. Unlike in the Motion to Dismiss, the IRS says it has "proposed tax deficiencies, including penalties, but there is no dispute that penalties are discharged." ECF no. 27 at 2. It seems the IRS now concedes all penalties are discharged. At the same time though it says "in the instant case, [the IRS] is not arguing that any of the penalties are excepted from discharge") (emphasis in original). Id. at 7.
The only issue in dispute according to the IRS is the legality of the underlying tax:
Fraud is relevant for the first four of the six tax years at issue (2008 through 2011) only because, unless the tax returns were fraudulent, the statute of limitations on assessment expired long before the bankruptcy petition. Simply put, if there was no fraud, then there is no tax liability in the first place. If there is no liability, there is nothing to discharge. And if there was fraud, then the liability is ipso facto excepted from discharge. For the last two of the six years at issue (2012 and 2013), the taxes could be assessed under an extended limitations period [pursuant to 26 U.S.C. § 6501(e) ] that would cause them to be priority claims under 11 U.S.C. § 507(a)(8)(A)(iii) and thus excepted from discharge under § 523(a)(1)(A) if there was no fraud. And if there was fraud, § 523(a)(1)(C) would apply. So, either way – fraud or no fraud – the 2012 and 2013 taxes are nondischargeable (except that the fraud penalties are discharged).
The IRS questions the Court's competency to decide the tax issues. "[W]hen it comes to determining fraud on returns, the disputes are very complicated and almost never litigated in the bankruptcy courts." Id. at 10. The IRS notes many fraudulent tax return cases turn on contentions that the taxpayer relied on an accountant, the taxpayer's financial sophistication, and whether a taxpayer's professed ignorance of tax law is plausible and credible.
Finally, the IRS notes concern over the potential consequences of denying the Motion to Reconsider. If the "extremely fact-intensive" tax fraud issues applicable to six years of returns are tried before the Court, and an appellate court finds lack of jurisdiction after a trial, "the matter will have to be entirely re-tried in a court of competent jurisdiction." Id. at 3.
Harold opposes the Motion to Reconsider. He makes three main arguments. First, there is no explicit Federal Rule of Civil or Bankruptcy Procedure providing for a Motion to Reconsider. Movants typically cite Federal Rule of Civil Procedure 59(e) or 60(b). Any motion under Rule 59(e) is untimely. A motion under Rule 59(e) must be made within twenty-eight days of the appealed decision. The Court issued its decision on February 21, 2019. Twenty-eight days later was March 22. The IRS moved to Reconsider on April 2.
Harold also asserts a Motion to Reconsider under Rule 60(b) is improper. Rule 60(b) allows a court to relieve parties from the effect of a final judgment. He contends the Court's decision denying the Motion to Dismiss is interlocutory. Thus, any Motion to Reconsider under Rule 60(b) necessarily fails.
Second, he attacks the substance of the Motion to Reconsider. He argues there is no substantive difference between the Motion to Dismiss and Motion to Reconsider:
The [Motion to Reconsider] has raised no new issues since the original decision. It simply repackages its prior arguments in a vain attempt to get the [C]ourt to change its mind. The [IRS] has failed to demonstrate that the [Court] has made a manifest error of fact or law, and has not brought forth any newly discovered fact that was previously undiscoverable and unavailable ....
Finally, Harold states the Court should not await resolution of the Bush case because it will not decide this case. Id. at 4.
The IRS responds that Federal Rule of Civil Procedure 54, and not Rules 59 or 60, governs the Motion to Reconsider. A court may, under that Rule, revisit an interlocutory order at any time. It also asserts Harold is mistaken about which Bush proceeding the IRS refers. Finally, the IRS suggests Harold has mischaracterized the tax issues presented.
Neither the Bankruptcy Rules nor the Federal Rules of Civil Procedure explicitly provide for motions to reconsider. Courts hold that Federal Rule of Civil Procedure 54(b) "is the proper vehicle for a motion to reconsider" an interlocutory order. Young v. Murphy , 161 F.R.D. 61, 61 (N.D. Ill. 1995). Rule 54(b) provides that non-final orders "may be revised at any time before the entry of a judgment adjudicating all the claims and all the parties' rights and liabilities." Fed. R. Civ. P. 54(b). See also Peterson v. Lindner , 765 F.2d 698, 704 (7th Cir. 1985) (). "Disposition of a motion for reconsideration is left to the discretion of the [bankruptcy] court, and its ruling will not be reversed absent an abuse of that discretion." Caisse Nationale de Credit Agricole v. CBI Indus., Inc. , 90 F.3d 1264, 1270 (7th Cir. 1996) (citing Billups v. Methodist Hosp. of Chicago , 922 F.2d 1300, 1305 (7th Cir. 1991) ).
Courts in the Seventh Circuit impose an exacting standard in reviewing motions for reconsideration under Rule 54(b). "Motions to reconsider should be granted only in rare circumstances." Caine v. Burge , 897 F. Supp. 2d 714, 717 (N.D. Ill. 2012) (citing Bank of Waunakee v. Rochester Cheese Sales, Inc. , 906 F.2d 1185, 1191 (7th Cir. 1990) ). "While motions to reconsider are permitted, however, they are disfavored." Patrick v. City of Chicago , 103 F. Supp. 3d 907, 911 (N.D. Ill. 2015).
The purpose of Rule 54 is to allow the court to reconsider a previous order when doing so is "consonant with justice." United States v. Jerry , 487 F.2d 600, 605 (3d Cir. 1973). "Reconsideration is not an appropriate forum for rehashing previously rejected arguments or arguing matters that could have been heard during the pendency of the previous motion." Caisse Nationale de Credit Agricole , 90 F.3d at 1270.
The Seventh Circuit has held that ...
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