Kun v. Internal Revenue Service

Background

Albert Kun filed an adversary complaint against the Internal Revenue Service in the Bankruptcy Court, seeking a declaration that his tax obligations for 2012 and 2013 had been discharged through his Chapter 7 bankruptcy. The Bankruptcy Court granted the IRS’s motion to dismiss, concluding that the tax obligations were not dischargeable as a matter of law. Kun appealed.

2012 and 2013 tax obligations

The district court reviewed the Bankruptcy Court’s legal conclusions anew. Under 11 U.S.C. §§ 523(a)(1) and 507(a)(8), certain income-tax obligations cannot be discharged in Chapter 7 bankruptcy if they satisfy either the three-year rule or the 240-day rule.

Kun conceded that his 2012 taxes were due on April 15, 2013, and his 2013 taxes were due on April 15, 2014. Because both obligations were due after November 5, 2012—three years before his initial bankruptcy filing on November 5, 2015—they satisfied the three-year rule. The later conversion of the bankruptcy case from Chapter 11 to Chapter 7 did not change that analysis. The court also held that it was irrelevant that the obligations did not satisfy the 240-day rule because the statute makes the two rules alternatives; satisfying either one is enough.

The district court therefore affirmed the Bankruptcy Court’s conclusion that the 2012 and 2013 tax obligations were not dischargeable.

2014 tax obligation

The Bankruptcy Court also referred to Kun’s 2014 tax obligation, even though the issue before it concerned only the 2012 and 2013 obligations. The district court characterized that reference as an advisory opinion because it did not resolve an actual dispute properly presented by the parties. It held that Kun had a due-process interest in litigating any finding about the 2014 obligation, particularly if the finding could later have binding effect.

The district court vacated the Bankruptcy Court’s order to the limited extent that it held the 2014 tax obligation nondischargeable as a matter of law.

Amendment and hearing

The district court held that the Bankruptcy Court did not abuse its discretion by dismissing the complaint without allowing amendment. Kun’s arguments concerning the 2012 and 2013 obligations were legally defective, and the defects could not be cured by alleging additional facts.

The district court also held that the Bankruptcy Court was not required to hold a hearing on the motion to dismiss. The applicable bankruptcy rule governing dismissal of adversary proceedings does not require notice and a hearing, and Kun did not identify authority requiring a hearing under the Fifth Amendment in this situation. The district court therefore upheld the decision to rule without a hearing.

Disposition

Judge Richard Seeborg affirmed the Bankruptcy Court’s order as to the 2012 and 2013 tax obligations and its decision to grant the motion to dismiss without leave to amend and without a hearing. The court vacated the order to the limited extent it addressed the 2014 tax obligation and remanded the case for further proceedings consistent with the order.