Reynolds v. United States Internal Revenue Service
Filing
8
Judge Nathaniel M. Gorton: ORDER entered. MEMORANDUM AND ORDER: "For the foregoing reasons, the motion of the Internal Revenue Service for leave to appeal (Docket No. 5 ) is ALLOWED, the Bankruptcy Court's denial of its motion for summary judgment is REVERSED and plaintiff's discharge petition for the years 2000, 2001 and 2003 is DENIED. So ordered."(Moore, Kellyann)
United States District Court
District of Massachusetts
DIANE M. REYNOLDS,
Plaintiff,
v.
UNITED STATES INTERNAL REVENUE
SERVICE,
Defendant.
)
)
)
)
)
)
)
)
)
)
)
)
Civil Action No.
13-10788-NMG
MEMORANDUM & ORDER
GORTON, J.
As part of an adversary proceeding brought in connection
with her bankruptcy, pro se plaintiff Diane Reynolds (“Reynolds”
or “plaintiff”) sought to discharge her federal tax liability
for the years 2000, 2001, 2002 and 2003.
The United States
Internal Revenue Service (“IRS” or “defendant”) opposed that
effort, maintaining that Reynolds is a tax protester who
willfully evaded the subject tax liabilities and, therefore,
cannot qualify for discharge.
The IRS moved for summary
judgment but the Bankruptcy Court denied that motion, reasoning
that a factfinder could plausibly find that plaintiff lacked the
requisite mental state.
Pending before this Court is the IRS’s motion for leave to
file an interlocutory appeal and its associated appeal of the
Bankruptcy Court’s denial of its motion for summary judgment.
-1-
For the foregoing reasons, the Court will allow the IRS’ motion
for leave to appeal and reverse the Bankruptcy Court’s denial of
summary judgment.
III. Factual Background and Procedural History
In February, 2008, Reynolds filed a Chapter 13 petition in
bankruptcy in Massachusetts.
In November, 2012, she began an
adversary proceeding seeking to discharge her tax liability for
the income tax years 2000, 2001, 2002 and 2003.
The IRS opposed
Reynolds’ discharge petition, contending that she may not
discharge her tax liability for 2000 or 2001 because she did not
file valid income tax returns and that she may not discharge her
tax liability for the same years or for 2003 because she
willfully attempted to evade such taxes.
Plaintiff also sought
to discharge her tax liability from 2002 but the IRS noted that
plaintiff owes no taxes for that year.
In January, 2013, Reynolds moved for summary judgment,
after which the IRS filed an opposition and cross-motion for
summary judgment.
After a hearing, Chief Bankruptcy Judge Frank
J. Bailey denied both parties’ motions for summary judgment.
The Bankruptcy Court reasoned that although the IRS had
presented “abundant evidence of the necessary intent,” it was
insufficient at summary judgment where specific intent is
“notoriously difficult to decide.”
-2-
In April, 2013, the IRS
filed a motion for leave to file an interlocutory appeal of the
Bankruptcy Court’s denial of its motion for summary judgment.
IV.
Legal Analysis
A.
Motion for Leave to Appeal
In bankruptcy proceedings, appellants must have leave of
court to file an interlocutory appeal. 18 U.S.C. § 158(a)(3).
In evaluating whether to allow an interlocutory appeal, district
courts generally employ the standard outlined in 28 U.S.C.
§ 1292(b) which applies to the certification of appeals from
United States District Courts to the United States Courts of
Appeals. See In re Clark-Franklin-Kingston Press, Inc., Nos. 9011231-MLW, 90-11232-MLW, 1993 WL 160580, at *2 (D. Mass. Apr.
21, 1993).
Accordingly, district courts consider whether (1) the
Bankruptcy Court’s order involved a controlling question of law,
(2) there exists “substantial ground” for a difference of
opinion and (3) deciding the appeal would materially advance the
termination of the litigation. See In re Envtl. Careers Org.,
Inc., No. 12-10928-GAO, 2013 WL 936501, at *1 (D. Mass. Mar. 11,
2013) (citing 28 U.S.C. § 1292(b)).
Defendant urges this Court to jettison the standard
outlined in § 1292(b) because § 158(a)(3) states simply that
interlocutory appeals are proper “with leave of the court.”
According to defendant’s argument, adopted by a scattering of
-3-
federal courts, a district court has unlimited discretion to
hear interlocutory appeals from bankruptcy courts which operate
under the plenary authority of district courts. See In re
Williams, 215 B.R. 289, 298 n.6 (D.R.I. 1997).
The widespread
reference in the bankruptcy context to § 1292(b) is, therefore,
“jurisprudential and not jurisdictional.” Id.
The Court declines to join this debate and, as it has done
previously, looks to the factors outlined in § 1292(b). See In
re Smith Valve Corp., No. 92-40205-NMG, 1993 WL 41606 (D. Mass.
Feb. 12, 1993); see also In re Envtl. Careers Org., Inc., 2013
WL 936501; Schwartz v. Deutsche Bank. Nat’l Trust, No. 09-40064RGS, 2009 WL 3347215 (D. Mass. Oct. 15, 2009); In re ClarkFranklin-Kingston Press, Inc., 1993 WL 160580.
Of course,
18 U.S.C. § 158(a)(3) and 28 U.S.C. § 1292(b) are not identical
and, accordingly, the discretion granted under the former is
likely greater than that allowed under the latter. See In re
Salem Suede, Inc., 221 B.R. 586, 596 (D. Mass. 1998).
The
three-part test of § 1292(b) provides sound, if limited,
guidance for the Court’s discretion.
First, plaintiff’s level of intent is a controlling issue
of law in this case.
An issue is “controlling” if it is
dispositive. See Lawson v. FMR LLC, 670 F.3d 61, 65 (1st Cir.
2012).
Here, reversing the Bankruptcy Court’s ruling with
respect to intent would terminate the litigation and result in
-4-
summary judgment for defendant.
Second, deciding the instant
appeal will materially advance the ultimate end of this
litigation because, as with the previous factor, plaintiff’s
level of intent is dispositive. See In re Bank of New England
Corp., 218 B.R. 643, 654 (1st Cir. BAP 1998).
The Court departs from one aspect of the § 1292(b) test,
declining to allow the absence of an unsettled question of law
to prolong the subject proceeding.
Other district courts
confronting similar scenarios have noted that strict application
of § 1292(b) would lead to an “absurd result” where bankruptcy
decisions that are “clearly reversible” would not be appealable.
See, e.g., In re Marvel Entm’t Grp., Inc., 209 B.R. 832, 837 (D.
Del. 1997).
Because the § 1292(b) factors are applied by
analogy to the present circumstances, a rigid application of the
standard is unwarranted.
Accordingly, the Court concludes that the subject case is
one in which an interlocutory appeal comports fully with sound
judicial administration and the interests of justice.
B.
The Bankruptcy Court’s Denial of Summary Judgment
Plaintiff seeks to discharge her tax liability for the
years 2000, 2001, 2002 and 2003. 1
The IRS responds that Reynolds
cannot discharge her tax liability from 2000 or 2001 because she
1
Plaintiff had no tax liability in 2002 and, therefore, the
Court will not address her effort to discharge a non-existent
liability.
-5-
did not file valid income tax returns, 11 U.S.C.
§ 423(a)(1)(B)(i), and that she also cannot discharge her tax
liability for those years or for 2003 because she willfully
attempted to evade such taxes. 11 U.S.C. § 523(a)(1)(C).
Because the Court finds the latter issue dispositive, it need
not address the former.
1. Summary Judgment
When reviewing the decision of a bankruptcy court with
respect to summary judgment, a district court engages in de novo
review of all the issues. Hermosilla v. Hermosilla, 447 B.R.
661, 666 (D. Mass. 2011).
To prevail at summary judgment, the moving party must 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.”
Fed. R. Civ. P. 56(c).
If the moving party meets its initial
burden, the burden shifts to the nonmoving party “to demonstrate
that a trier of fact reasonably could find in his favor.”
DeNovellis v. Shalala, 124 F.3d 298, 306 (1st Cir. 1997).
The
nonmoving party “must set forth specific facts showing that
there is a genuine issue” of material fact and may not rest on
“mere allegations or denials.” Anderson v. Liberty Lobby, Inc.,
477 U.S. 242, 256 (1986).
Although intent is difficult to
establish at summary judgment, it can be appropriate to do so if
the nonmoving party responds only with “conclusory allegations,
-6-
improbable inferences, and unsupported speculation.” Smith v.
Stratus Computer, Inc., 40 F.3d 11, 12 (1st Cir. 1994).
At this stage, the Court views the entire record in the
light most favorable to the non-moving party and makes all
reasonable inferences in that party's favor. O'Connor v.
Steeves, 994 F.2d 905, 907 (1st Cir. 1993).
Summary judgment is
appropriate if, after viewing the record in the non-moving
party's favor, the Court determines that no genuine issue of
material fact exists and that the moving party is entitled to
judgment as a matter of law.
2. Application
In bankruptcy proceedings, a debtor may, subject to certain
restrictions, discharge outstanding tax liability. See 11 U.S.C.
§ 523.
Federal law excepts from discharge income taxes
“with respect to which the debtor made a fraudulent
return or willfully attempted in any manner to evade
or defeat such tax.”
Id. § 523(a)(1)(C).
To prove willful action, the IRS must prove
that the petitioner
(1) had a duty to file income tax returns and pay
taxes; (2) knew he had such a duty; and (3)
voluntarily and intentionally violated that duty.
In re Rossman, 2012 WL 6043279, at *15 (Bankr. D. Mass. Dec. 15,
2012).
The Bankruptcy Court interpreted this requirement to
“involve elements of specific intent” which is “notoriously
-7-
difficult to decide on summary judgment,” concluding that the
evidence does not prove that plaintiff had such intent.
The IRS
responded that the appropriate standard requires only a
“willful” mental state of which the evidence at summary judgment
warranted a finding.
That semantic debate can be avoided,
however, because regardless of the label used to describe the
required mental state, it is met in this case.
The Court need not describe the evidence in detail here
because it agrees with the Bankruptcy Court’s description that
there is “abundant evidence of the necessary intent” in this
case.
Although “abundant evidence” does not translate directly
to the applicable standard at summary judgment, it easily meets
the burden of the IRS, as the moving party, to identify items in
the record that demonstrate “the absence of a genuine issue of
material fact.” See Celotex Corp. v. Catrett, 477 U.S. 317, 323
(1986).
In response, plaintiff simply repeats the Bankruptcy
Court’s apparent finding that she had raised a genuine issue of
material fact.
She filed no relevant supporting affidavits,
resting instead on a series of improbable and conclusory
allegations. See Stratus Computer, 40 F.3d at 12.
The closest
plaintiff comes to responding to the issues raised in the IRS’s
motion for summary judgment is to assert that the motion
contains no evidence “from a firsthand knowledge [sic] competent
-8-
fact witness.”
Most of plaintiff’s 47-page opposition (which is
over-long by more than double and was filed without leave of
court) focuses on frivolous or ancillary details such as the
Bankruptcy Court’s lack of jurisdiction, the failure of the IRS
to disclose certain records and unsubstantiated allegations of
possible criminal conduct.
While a court reviewing a motion for summary judgment must
adopt reasonable inferences in favor the non-moving party, it
must also keep in mind the respective burdens of proof.
The IRS
has offered unrefuted evidence to prove, by a preponderance of
the evidence, that Reynolds “willfully” attempted to evade her
tax liability for the years 2000, 2001 and 2003. See 11 U.S.C. §
523(a)(1)(C).
In a world where nothing is certain but death and
taxes, this conclusion is unremarkable. See In re Meyers, 196
F.3d 622, 627 (6th Cir. 1998) (“No reasonable juror in America
... could have concluded that [defendant] honestly believed that
the tax code applied only to individuals who volunteered to
pay.”).
Reynolds is not the “honest but financially unfortunate
debtor” that Congress intended to protect when it established
the intent requirement in § 523(a)(1)(C). See In re Griffith,
206 F.3d 1389, 1395 (11th Cir. 2000) (citation omitted).
Accordingly, the Court concludes that the IRS is entitled
to judgment as a matter of law and will reverse the Bankruptcy
Court’s denial of the IRS’s motion for summary judgment.
-9-
ORDER
For the foregoing reasons, the motion of the Internal
Revenue Service for leave to appeal (Docket No. 5) is ALLOWED,
the Bankruptcy Court’s denial of its motion for summary judgment
is REVERSED and plaintiff’s discharge petition for the years
2000, 2001 and 2003 is DENIED.
So ordered.
/s/ Nathaniel M. Gorton_____
Nathaniel M. Gorton
United States District Judge
Dated January 15, 2013
-10-
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?