Jung v. Internal Revenue Serv. (In re Jung)

• Decision Date: 21 February 2019
• Docket Number: Adversary No.: 18-52,Case No.: 18-12211-7
• Citation: 597 B.R. 872
• 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

597 B.R. 872

IN RE: Harold F. JUNG and Alia I. Jung, Debtors.Harold F. Jung, Plaintiff,

v.Internal Revenue Service, Defendant.

Case No.: 18-12211-7

Adversary No.: 18-52

United States Bankruptcy Court, W.D. Wisconsin.

Signed February 21, 2019

George B. Goyke, Wausau, WI, for Plaintiff.

Julian Lee, U.S. Department of Justice, Washington, DC, for Defendant.

MEMORANDUM DECISION

Hon. Catherine J. Furay, U.S. Bankruptcy JudgeHarold Jung asks the Court to determine the dischargeability of taxes and penalties assessed by the Internal Revenue Service ("IRS") for the tax years 2008 to 2013.¹ Jung and his wife, Alia, received Notices of Deficiency from the IRS for those years. Shortly after the second Notice of Deficiency, they filed a Chapter 7 petition. Jung then filed this adversary. The IRS responded with a Motion to Dismiss on the ground of lack of subject-matter jurisdiction.

BACKGROUND

Jung and his wife ("Debtors") filed and paid their joint 2008 to 2013 income tax returns and self-reported tax liabilities:

Tax Year Filing Date Assessment Date Tax Assessed
                  2008       May 18, 2009       May 18, 2009        $9,445.00
                  2009       May 24, 2010       May 24, 2010       $24,715.00
                  2010       May 16, 2011       May 16, 2011       $24,764.00
                  2011       May 14, 2012       May 14, 2012       $14,273.00
                  2012       June 3, 2013       June 3, 2013       $14,542.00
                  2013       June 2, 2014       June 2, 2014       $11,699.00
                

ECF no. 15 at 2.²

The IRS audited the Debtors' income tax returns. It determined the Debtors "had additional income tax deficiencies due to unreported business income." This also resulted in a determination that Jung is liable for civil fraud penalties. The deficiencies total $ 187,986.00. Civil fraud penalties total $ 137,880.00. Totaling $ 325,866.00, the tax and penalties are:

Tax Year Additional Tax Due Fraud Penalties Due
                  2008           $27,917.00             $20,937.75
                  2009           $15,229.00             $11,421.75
                  2010           $55,829.00             $41,871.75
                  2011           $39,798.00             $29,848.50
                  2012           $40,604.00             $30,453.00
                  2013            $8,609.00              $3,347.25
                

ECF no. 15 at 3.

The IRS issued a Notice of Deficiency to the Debtors for the deficiencies and penalties for the tax years 2008 to 2012. The IRS then issued a Notice of Deficiency for the deficiencies and penalties due for 2013. Neither Jung nor his wife have filed a petition in the United States Tax Court to contest the deficiencies or penalties. ECF no. 15 at 3. After the second of the Notices, the Debtors filed a chapter 7 petition.

Jung seeks to determine and discharge his tax liability and penalties. The IRS moved to dismiss this adversary on the ground of lack of subject-matter jurisdiction under Federal Rules of Civil Procedure 12(b)(1) and 12(h)(3). The IRS asserts the adversary should be dismissed because the decision will not affect creditors given that the case is a no asset chapter 7. The IRS argues that even if the Court has jurisdiction, the Court should abstain from exercising it "in the interests of judicial economy and because a more appropriate forum exists to adjudicate this matter."

Jung responds the Court has jurisdiction because (1) the determination of tax liability arises under Section 505(a) of the Code, and (2) a dischargeability determination is a core proceeding.

ANALYSIS

A. The Court has subject-matter jurisdiction.

"If the court determines at any time that it lacks subject-matter jurisdiction, the court must dismiss the action." Fed. R. Civ. P. 12(h)(3), adopted by Fed. R. Bankr. P. 7012(b). A court has initial jurisdiction to consider whether it has subject-matter jurisdiction for the purpose of Federal Rules of Bankruptcy Procedure 7012 adopting Fed. R. Civ. P. 12(b)(1) and 12(h)(3). Henry v. United States , 277 Fed. Appx. 429, 434 (5th Cir. 2008). The party alleging jurisdiction bears the burden of proof. Nuveen Mun. Trust ex rel. Nuveen Yield Mun. Bond Fund v. WithumSmith Brown, P.C. , 692 F.3d 283, 293 (3d Cir. 2012).

"The jurisdiction of the bankruptcy courts ... is grounded in, and limited by, statute." Celotex Corp. v. Edwards , 514 U.S. 300, 307, 115 S.Ct. 1493, 131 L.Ed.2d 403 (1995). Congress's general grant of bankruptcy jurisdiction is in section 1334 of Title 28 of the U.S. Code. Congress vested the district courts with original but not exclusive jurisdiction over "all civil proceedings arising under title 11, or arising in or related to cases under title 11." 28 U.S.C. § 1334(b). Section 157 of Title 28 allows a district court to refer to the bankruptcy court for the district "any or all cases under title 11 and any or all proceedings arising under title 11 or arising in or related to a case under title 11." Id. § 157(a). The District Court has done so in this District.

Courts view sections 1334 and 157 in the context of section 505(a) of the Code. Section 505(a) gives bankruptcy courts authority to decide certain tax matters. This section provides:

[T]he court may determine the amount or legality of any tax, any fine or penalty relating to a tax, or any addition to tax, whether or not previously assessed, whether or not paid, and whether or not contested before and adjudicated by a judicial or administrative tribunal of competent jurisdiction.

The court may not so determine the amount of a tax, fine, penalty, or addition to tax if such amount or legality was contested before and adjudicated by a judicial or administrative tribunal of competent jurisdiction before the commencement of the case under this title.

11 U.S.C. § 505(a)(1)–(2).

Core proceedings include "determinations as to the dischargeability of particular debts." 28 U.S.C. § 157(b)(2)(I).

The Seventh Circuit defines "core proceedings" as:

A proceeding is core under section 157 if it invokes a substantive right provided by title 11 or if it is a proceeding that, by its nature, could arise only in the context of a bankruptcy case.

Diamond Mortg. Corp. of Illinois v. Sugar , 913 F.2d 1233, 1239 (7th Cir. 1990) (citation omitted). Among the list of actions found by law to fall within the scope of a "core proceeding" are "determinations as to the dischargeability of a particular debt." The action here conforms exactly to this category.

Indeed, determination of dischargeability does not exist outside bankruptcy. It arises under Title 11. Determination of tax liability is a prerequisite to determining dischargeability. The broad grant of jurisdiction to hear tax disputes supports the exercise of jurisdiction.

Most courts hold that section 505(a) is not an independent jurisdictional basis outside 28 U.S.C. § 1334. United States v. Zellers (In re CNS, Inc.) , 255 B.R. 198, 201 (N.D. Ohio 2000) ("The subject matter jurisdiction of bankruptcy courts over tax proceedings is derived from the jurisdiction of the federal district courts under 28 U.S.C. § 1334...."). Thus, any exercise of jurisdiction under section 505(a) must stem from one of the three components of 28 U.S.C. § 1334 : arising under, arising in, or related to a bankruptcy case. Although section 505(a) is not an independent grant of jurisdiction, courts recognize "[t]he legislative history is indicative of Congressional intent to vest the bankruptcy courts with a fairly broad jurisdictional grant under § 505(a)." In re Schmidt , 205 B.R. 394, 397 (Bankr. N.D. Ill. 1997) (citing a 1977 Congressional House Report).

A proceeding "arises under" Title 11, under sections 1334 and 157, when the action is based on a right or remedy explicitly provided in Title 11. Zerand-Bernal Grp., Inc. v. Cox , 23 F.3d 159, 161 (7th Cir. 1994). Courts within the Seventh Circuit are split about whether a proceeding brought under section 505(a)"arises under" Title 11. The Bankruptcy Court for the Northern District of Illinois opined "[t]he determination of tax liability provided for by § 505(a) ‘arises under’ the Bankruptcy Code." In re UAL Corp. , 336 B.R. 370, 371 (Bankr. N.D. Ill. 2006). The Southern District of Indiana held differently:

By filing their motion under § 505, the Debtors are not invoking a "substantive right" under that statute, but rather a procedural one: They are seeking to have a substantive question of law that arises under the Internal Revenue Code decided by means of a procedure provided for by Title 11. Accordingly, the § 505 motion does not "arise under" Title 11.

In re Bush , No. 1:15-cv-1318-WTL-DKL, 2016 WL 4261867 at *3 (S.D. Ind. Aug. 12, 2016). Each of these cases, however, involved a motion solely under section 505 to determine the amount of a tax. Neither invoked a decision on dischargeability.

In contrast, Kohl v. IRS (In re Kohl) , 397 B.R. 840 (Bankr. N.D. Ohio 2008), involved joint debtors in a no asset chapter 7 case who filed an adversary seeking to discharge a tax penalty assessed against the debtor-wife. Id. at 840. The IRS moved to dismiss for lack of subject-matter jurisdiction on the ground a determination of tax liability would serve no purpose in a no asset chapter 7 case. Id. at 842. The court held it had jurisdiction because the debtor-wife sought a dischargeability determination, a substantive right granted by the Code. Id.

While Swain v. United States Dep't of Treasury (In re Swain) , 437 B.R. 549 (Bankr. E.D. Mich. 2010), held there was no subject-matter jurisdiction over a tax dispute, it is distinguishable from Kohl . Id. at 552. There, the debtor and IRS agreed any debt owed to the IRS was nondischargeable. Id. at 556. The debtor did not seek to discharge a debt. Id. She sought only to determine the amount of tax liability. Id. As described in Swain :

This proceeding is not one "arising under title 11" because it does not "involve a cause of action created or determined by a statutory provision of title 11." See Bliss Technologies, Inc. v. HMI Indus., Inc. (In re Bliss Technologies, Inc.), 307 B.R. 598, 602 (Bankr. E.D. Mich. 2004) (quoting [Michigan Employment Security Commission v.] Wolverine Radio [In re

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