Kun v. Internal Revenue Service

Background

Albert Miklos Kun filed for Chapter 11 bankruptcy on November 5, 2015. The opinion states that a discharge was ordered on March 26, 2018, and refers to that discharge as arising from a Chapter 7 proceeding. After the Internal Revenue Service (IRS) told Kun that he owed a little more than $10,000 in taxes for 2012 and 2013, he reopened the bankruptcy case and filed an adversary complaint, which is a separate lawsuit within a bankruptcy case, seeking a ruling that those tax obligations had been discharged.

In an earlier round of this case, the district court affirmed the determination that the 2012 and 2013 tax obligations were nondischargeable as a matter of law. The earlier ruling vacated the bankruptcy court’s ruling concerning the 2014 taxes because Kun’s complaint had not raised those taxes. After the case was sent back, the bankruptcy court allowed Kun to amend his complaint. Kun added only the sentence, “The 2014 taxes are hereby discharged.”

The bankruptcy court treated the IRS’s motion to dismiss as a motion for judgment on the pleadings. That type of motion asks whether, accepting the material allegations in the pleadings as true, one party is entitled to judgment based on the law. The bankruptcy court concluded that further amendment would be futile, ruled that the 2014 taxes were priority tax obligations that could not be discharged, granted the motion, and entered judgment for the IRS. It later denied Kun’s motion for reconsideration, concluding that the motion addressed matters from a different adversary proceeding rather than the ruling on the 2014 taxes. The two appeals were consolidated in the district court.

Merits of the 2014 Tax Issue

The district court held that the 2014 tax obligation was not discharged. Under 11 U.S.C. § 523(a)(1), a bankruptcy discharge does not eliminate certain tax obligations described in 11 U.S.C. § 507(a)(8). Section 507(a)(8)(A) lists three separate categories of income or gross-receipts taxes that receive priority treatment. The court explained that satisfying any one of those categories is enough; an assessment is not required in every case.

The bankruptcy court applied the three-year rule in § 507(a)(8)(A)(i). The district court stated that three years before the November 5, 2015 bankruptcy filing was November 5, 2012. Because the 2014 taxes would have been due on or after April 15, 2015, they fell after that three-year date. The district court therefore concluded that the taxes were legally nondischargeable and that the bankruptcy court reached the correct legal conclusion.

Other Arguments

The district court rejected Kun’s argument that the taxes could not be enforced because certain funds were exempt property. The court noted that the argument appeared to concern a German government reparation payment and stated that Kun first raised it in his motion for reconsideration. Because the argument did not provide a valid basis for reconsideration, the bankruptcy court did not abuse its discretion by denying the motion.

The district court also rejected challenges involving judicial notice, the bankruptcy court’s treatment of the IRS’s motion, and due process. The fact that the 2014 taxes had not been assessed did not affect their status under the three-year rule. The court found no error in treating the motion to dismiss as a motion for judgment on the pleadings and explained that the IRS still bore the burden on that motion. Kun had not identified disputed facts or facts outside the pleadings that would have made judgment on the pleadings improper.

The district court declined to consider Kun’s requests that his medical and COVID-19-related hardships affect the appeal and that the court declare the IRS debt superior to his debt to the State Bar of California. The court stated that the priority issue had not been properly raised in the bankruptcy court and appeared to concern a separate adversary proceeding.

Disposition

The district court affirmed the bankruptcy court’s orders granting the motion to dismiss, entering judgment, and denying the motion for reconsideration. The result left the 2014 tax obligations nondischargeable in Kun’s bankruptcy proceeding.