In Re: Range ( 2002 )

UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 00-21152
In The Matter Of: SAMUEL H. RANGE,
Debtor.
SAMUEL H. RANGE; CONNIE C. RANGE,
Appellants,
VERSUS
UNITED STATES OF AMERICA,
Appellee.
Appeal from the United States District Court
For the Southern District of Texas, Houston Division
(USDC No. 4:00-CV-787)
August 20, 2002
Before JONES, WIENER, and PARKER, Circuit Judges.
PER CURIAM:*
Appellants Samuel H. Range and Connie C. Range (collectively
*
Pursuant to 5TH CIR. R. 47.5, the Court has determined that this
opinion should not be published and is not precedent except under
the limited circumstances set forth in 5TH CIR. R. 47.5.4.
-1-
hereinafter “Ranges”) appeal the district court’s decision
affirming the bankruptcy court’s ruling pursuant to an adversary
proceeding wherein the bankruptcy court held that Mr. Range’s
income tax liability for the 1983 through 1985 tax years was not
discharged in his 1992 Chapter 7 bankruptcy. The Ranges also
challenge the denial of their Rule 60(b) motion/independent action
for relief from judgment and their motion for attorney’s fees and
costs. For the reasons that follow, we affirm.
BACKGROUND
The Ranges were married in 1980. Prior to 1980, Mr. Range had
filed income tax returns, but Mrs. Range had not. For the 1980 tax
year, the Ranges were granted an extension of time, until August
15, 1981, to file their 1980 joint income tax return. The Ranges
did not file their 1980 return, however, until March 1983. Over
the next several years, the Ranges filed for several more
extensions of time but failed to ever file their income tax
returns. In June 1987, after being contacted by the Criminal
Investigation Division of the Internal Revenue Service (hereinafter
“IRS”), the Ranges filed their 1981 through 1985 income tax
returns. No payment of the taxes was made, however, either prior
to or contemporaneously with the filing of the 1981 through 1985
tax returns.
Although extensions were requested, the Ranges also failed to
timely file their 1986 through 1989 income tax returns. After
-2-
requesting an extension, the Ranges timely filed their 1990 return
including a payment of $1,000 toward their reported tax liability.
In 1991, The Ranges were charged in connection with their failure
to file timely income tax returns. In return for dropping the
charge against him for the 1984 tax year and all charges against
Mrs. Range for the 1983 through 1985 tax years, Mr. Range pleaded
guilty to charges of willful failure to file timely income tax
returns for 1983 and 1985. In 1992, Mr. Range filed for Chapter 7
bankruptcy and received a discharge under 11 U.S.C. § 727. In May
1995, the IRS assessed penalties against the Ranges for fraud in
connection with their taxes for the years of 1983 through 1986.
On May 11, 1995, the IRS sent Mr. Range a Notice of Deficiency for
Civil Fraud Penalties for the 1983 through 1985 tax years. On the
same day, a joint notice was sent to the Ranges for fraud penalties
for 1986. In July 1995, Mr. Range filed an adversary proceeding in
the bankruptcy court seeking a determination that his income tax
liability and penalties for the tax years of 1981 through 1985 were
discharged in his 1992 bankruptcy. Mr. Range also sought damages
from the IRS for allegedly violating the discharge injunction
pursuant to 11 U.S.C. § 524 by sending him deficiency notices on
May 11, 1995. Subsequently, the IRS agreed to withdraw the
deficiency notices in exchange for Mrs. Range’s agreement to file
her own Chapter 7 bankruptcy. An Agreed Order was entered
requiring withdrawal of the deficiency notices and an injunction
against administrative collection efforts during the pendency of
-3-
the adversary proceeding.
Mrs. Range filed for Chapter 7 bankruptcy on August 8, 1995.
Despite entry of the Agreed Order, the IRS failed to withdraw the
deficiency notices and attempted to collect from Mrs. Range. In
September 1995, the Ranges filed a motion for contempt against the
IRS for violating the Agreed Order. The motion resulted in the
entry of a second Agreed Order declaring the deficiency notices for
the 1983 through 1986 tax years null and void; ordering the IRS not
to take action to assess and/or collect pre-petition taxes,
interest, or penalties while the adversary proceeding and Mrs.
Range’s bankruptcy petition were pending; and requiring the IRS to
credit one of the Ranges’ civil fraud penalties in the amount of
$3,750.
Mrs. Range was granted a discharge in bankruptcy on April 5,
1996, and subsequently filed an adversary proceeding to determine
the dischargeability of her tax liability and penalties. The two
adversary proceedings were consolidated on September 16, 1996. In
a Joint Pre-Trial Order, the government conceded that the penalties
against Mr. Range for the years 1981 through 1988 and the penalties
against Mrs. Range for the years 1981 through 1990 were discharged
in their respective Chapter 7 bankruptcies pursuant to 11 U.S.C. §
523(a)(7). The bankruptcy court held a trial on the remaining
matters in September 1997.
In February 1998, the bankruptcy court issued its Findings of
Facts and Conclusions of Law wherein the bankruptcy court
-4-
determined that the Ranges: (1) had a duty to pay the tax liability
at issue; (2) knew that they had a duty to file tax returns and pay
taxes; and (3) had the financial ability to pay the taxes but
voluntarily and intentionally chose not to pay. The bankruptcy
court further found that the “IRS actually recognized the
‘discharge’ in Bankruptcy of the Ranges’ liability and abated the
taxes in question.” Notwithstanding its findings regarding
discharge and abatement, the bankruptcy court concluded that the
tax liability remained a valid debt still owing and subject to
collection. The bankruptcy court also found that Mr. Range
suffered no damages from the issuance of the deficiency notices
that were not already compensated for by the Agreed Order crediting
the Ranges’ liability for the $3,750 civil fraud penalty.
Additionally, the bankruptcy court noted that regardless of the
Agreed Order, “the United States ha[d] not waived sovereign
immunity from liability for damages for such a violation,” and
thus, damages were not recoverable. Premised upon its findings of
willful evasion and the existence of a valid debt, the bankruptcy
court rendered a Final Judgment on April 13, 1998, ordering that
Mr. Range’s income tax liabilities for 1981 through 1985 and Mrs.
Range’s income tax liabilities for 1981 through 1990 were not
dischargeable pursuant to 11 U.S.C. § 523(a)(1)(C). The Final
Judgment also ordered that Mr. Range was not entitled to damages
from the IRS on his claim for alleged violation of the discharge
injunction provided under 11 U.S.C. § 524(a)(2).
-5-
The Ranges appealed the bankruptcy court’s decision to the
district court. In March 1999, the district court affirmed the
bankruptcy court’s decision holding that the Ranges’ tax liability
was not discharged in bankruptcy and remained a valid debt. The
district court vacated the bankruptcy court’s decision with respect
to the award of damages, however, and remanded the issue to the
bankruptcy court for further consideration. Although the
bankruptcy court had addressed the recovery of damages under 11
U.S.C. § 106, the Ranges argued on appeal that damages were
recoverable under 26 U.S.C. § 7430. Because the bankruptcy court’s
factual findings addressed recovery only under § 106, the issue was
remanded to determine whether the Ranges satisfied the requirements
for recovery of damages under § 7430.
While the appeal was pending in the district court, the Ranges
requested the Inspector General’s office to investigate their tax
matter. In June 1999, the Ranges allegedly received information
from an investigator at the Inspector General’s office indicating
that the certified tax transcripts and certificates of assessment
admitted at trial were falsified and testimony of the government’s
witnesses was perjured. In July 1999, the Ranges filed a motion
for costs and fees under 26 U.S.C. § 7430 and a motion for relief
from judgment, or in the alternative, an independent action for
relief from judgment pursuant to Rule 60(b) of the Federal Rules of
Civil Procedure as incorporated by Bankruptcy Rule 9024. In
support of their § 7430 motion, the Ranges argued that they were
-6-
entitled to fees and costs because they prevailed in their
contention that the assertion of the fraud penalties violated the
bankruptcy discharge injunction. The crux of the Ranges’ argument
in support of their motion for relief was that the government used
falsified documents at trial and the government witnesses committed
perjury that resulted in a fraud upon the court. The Ranges argued
that but for the alleged falsified documents and perjurious
testimony, they would have prevailed on the issue concerning the
dischargeability of their tax liability and thus, they are entitled
to relief from judgment.
Between August and November of 1999, the Ranges made two
requests for an evidentiary hearing on their motions. The
bankruptcy court denied the Ranges’ motions in January 2000,
without conducting a hearing. Because the Ranges’ arguments in
support of their Rule 60(b) motion for relief demonstrated that
their motion was actually an independent action for relief, the
bankruptcy court treated it as such.
Addressing the procedural aspects of the Ranges’ motion for
relief, the bankruptcy court stated that had the Ranges filed a
Rule 60(b) motion, it would have been untimely in that the motion
was not filed within the one year deadline from the judgment issued
in February 1998. Treating the motion for relief as an independent
action for relief under the savings clause of Rule 60(b), however,
the bankruptcy court held that the motion still failed to satisfy
the more lenient temporal requirement of being filed within a
-7-
reasonable time. As to the Ranges’ equitable arguments, the
bankruptcy court further held that the “issues were open to
litigation, were litigated, and plaintiffs had more than a fair
opportunity to make [their] claim or defense,” and thus, were
precluded by res judicata from re-litigating the issues in an
independent action.
With respect to the § 7430 motion, the bankruptcy court held
that the dischargeability of the tax liability was the primary
object of the trial, the bankruptcy court’s judgment, and the
appeal to the district court, and notwithstanding the IRS’s
concession on the discharge of the tax penalties assessed against
Mr. Range, the Ranges failed to show that they were the “prevailing
party” at trial as that term is defined in § 7430(c)(4)(A) and as
required for recovery. Because the bankruptcy court determined
that the Ranges were not the prevailing party at trial and that
relief from judgment was not warranted, the requests for an
evidentiary hearing were also denied.
The Ranges again appealed to the district court. In November
2000, the district court affirmed the decision of the bankruptcy
court. In so doing, the district court found that the fraud upon
the court alleged by the Ranges did not rise to the level of fraud
required under Rule 60(b) because “[a] fraud upon the Court does
not exist where a judgment has simply been ‘obtained with the aid
of a witness who, on the basis of after-discovered evidence, is
believed possibly to have been guilty of perjury.’” The district
-8-
court held that the bankruptcy court did not abuse its discretion
in denying the Ranges’ motion for relief because an independent
action is not a viable vehicle for re-litigating issues that were
previously decided in a former action where a party was afforded a
fair opportunity to make their claim or defense in that action.
Upon finding that the Ranges were not the “prevailing party” at
trial as required to recover under § 7430, the district court held
that bankruptcy court did not abuse its discretion in denying the
Ranges’ § 7430 motion for fees and costs. Accordingly, the
district court found that the bankruptcy court did not abuse its
discretion in denying the Ranges’ requests for an evidentiary
hearing.
The Ranges raise three issues in the instant appeal. First,
the Ranges maintain that the bankruptcy court erred in holding that
Mr. Range is liable for income taxes for the years of 1983 through
1985. Second, the Ranges contend that the bankruptcy court abused
its discretion by denying their Rule 60(b) motion/independent
action for relief from judgment without conducting an evidentiary
hearing. Finally, the Ranges assert that the bankruptcy court
improperly denied their § 7430 motion for fees and costs.
STANDARDS OF REVIEW
When reviewing a bankruptcy case on appeal, we must accept the
bankruptcy court’s findings of fact, “whether based on oral or
documentary or evidence,” unless they are clearly erroneous. FED.
-9-
R. BANKR. P. 8013; In re Sims, 994 F.2d 210, 217 (5th Cir. 1993).
The bankruptcy court’s conclusions of law are reviewed de novo. In
re Herby’s Foods, Inc., 2 F.3d 128, 131 (5th Cir. 1993). We review
the denial of a motion for relief from judgment under Rule 60(b)
for abuse of discretion. United States v. O’Keefe, 169 F.3d 281,
286 (5th Cir. 1999); Ergo Science, Inc. v. Martin, 73 F.3d 595, 599
(5th Cir. 1996). Similarly, we review the denial of an independent
action for relief pursuant to Rule 60(b) under an abuse of
discretion standard. Carter v. Dolce, 741 F.2d 758, 760 (5th Cir.
1984); Fuentes v. Stackhouse, 182 B.R. 438, 442 (E.D. Va 1995). We
review a ruling on the award of attorney’s fees under § 7430 for
abuse of discretion, Marre v. United States, 117 F.3d 297, 301 (5th
Cir. 1997), and “[w]e can only reverse if we have a definite and
firm conviction that an error of judgment was committed.”
Wilkerson v. United States, 67 F.3d 112, 120 (5th Cir. 1995)
(internal quotations and citation omitted).
DISCUSSION
The Ranges argue that the bankruptcy court erred in holding
that Mr. Range is liable for income taxes for the years of 1983
through 1985. Specifically, the Ranges assert that Mr. Range’s tax
liability was discharged in his 1992 Chapter 7 bankruptcy. The
Ranges maintain that because the tax liability was discharged in
bankruptcy and subsequently abated, the previous assessment was
eliminated. The Ranges contend that any tax liability after
-10-
discharge and abatement would require a reassessment of the tax
pursuant to the Treasury Regulations. The Ranges argue that
because the three-year statutory limitations period expired, and
the tax liability was not properly reassessed within the
limitations period by an assessment officer signing the summary
record of assessment as required by the Treasury Regulations, 26
C.F.R. § 301.6203-1, no tax liability remains for the IRS to
collect.
In support of this argument, the Ranges assert that the
bankruptcy court found that Mr. Range’s tax transcripts reflected
the IRS’s recognition of the discharge in bankruptcy and abatement
of his tax liability. The government argues, however, that Mr.
Range’s tax liability was neither discharged in his 1992 bankruptcy
nor abated. The government contends that although the Ranges’ tax
transcript contained an entry acknowledging Mr. Range’s discharge
in bankruptcy, Mr. Range’s liability was excepted from discharge
under 11 U.S.C. § 523(a)(1)(C) due to his willful attempt to evade
or defeat the tax. The government further contends the entry
acknowledging the discharge was a clerical error resulting from an
IRS technician’s erroneous determination that Mr. Range’s liability
was dischargeable. Additionally, the government asserts that the
tax liability at issue was not abated, but rather transferred from
the Ranges’ joint master file account to a non-master file account
in the name of Mrs. Range as a result of the technician’s erroneous
determination that Mr. Range’s liability was dischargeable.
-11-
Finally, the government argues that the IRS is authorized to abate
a tax assessment only where the liability is: (1) excessive in
amount; (2) is assessed after the expiration of the period of
limitations properly applicable thereto; or (3) is erroneously or
illegally assessed, and none of these circumstances apply to tax
liability at issue.
The Ranges initiated adversary proceedings to determine
whether their income tax liabilities were discharged in their
separate Chapter 7 bankruptcies. Both the government and the
Ranges presented the bankruptcy court with documentary evidence
regarding Mr. Range’s tax liability. The documents, however,
reflected two different account balances and each party argued that
they supported their respective position. The government’s
witnesses also testified that the taxes were not abated and the
entry in the transcripts acknowledging a discharge was made in
error.
Although the bankruptcy court found that the “IRS transcripts
in evidence reflect[ed] that the IRS actually recognized the
‘discharge’ in Bankruptcy of the Ranges’ liability and abated the
taxes in question,” the bankruptcy court found the documentary
evidence to be merely one form of evidence of the tax liability and
the oral testimony another form of evidence of the tax liability.
The bankruptcy court found that the Ranges: (1) had a duty to pay
the taxes at issue; (2) knew that they had that duty; and (3) had
the financial ability to pay the taxes but voluntarily and
-12-
intentionally chose not to pay, and notwithstanding the IRS’s
recognition of the discharge in bankruptcy of the Ranges’ liability
and abatement of the taxes in question, a valid debt existed which
was subject to collection and not dischargeable.
The Ranges’ arguments fail for several reasons. Under 11
U.S.C. § 524(a)(2), a § 727 discharge “operates as an injunction
against the commencement or continuation of an action, the
employment of process, or an act, to collect, recover or offset any
[debt discharged under § 727] as personal liability of the debtor,
whether or not discharge of such debt is waived.” 11 U.S.C. §
524(a)(2). Pursuant to 11 U.S.C. § 727, the court shall grant a
Chapter 7 debtor a discharge from all debts that arose before the
date of the order for relief, unless one of the conditions
enumerated in § 727 is present. 11 U.S.C. § 727. One such
condition enumerated in § 727 is when the liability is excepted
from discharge under § 523. 11 U.S.C. § 727(b). Section 523
excepts from discharge, liabilities for a tax with respect to which
the debtor willfully attempted in any manner to evade or defeat.
11 U.S.C. § 523(a)(1)(C). Except for the provisions of § 523(b)1,
there are no limitations imposed by § 523 on the non-dischargeable
status of these types of liabilities. 11 U.S.C. § 523. Thus, a
tax liability excepted from discharge under § 523(a)(1)(C), because
1
Section 523(b) applies to debts which were excepted from
discharge in a prior bankruptcy case concerning the debtor and is
not applicable to the instant case.
-13-
of a willful attempt in any manner to evade or defeat such tax, is
non-dischargeable as a matter of law, and no additional action is
required by the creditor.2 Furthermore, a tax liability excepted
from discharge under § 523(a)(1)(C) is not protected from
collection by the permanent injunction provided under § 524(a)(2).
In In re Bruner, 55 F.3d 195 (5th Cir. 1995), we approved a
three prong test for determining whether a tax liability is
dischargeable pursuant to § 523(a)(1)(C). In the case of a debtor
who is financially able to pay his taxes, a debt is non-
dischargeable when the debtor: (1) had a duty to pay the taxes at
issue; (2) knew that he had that duty; and (3) voluntarily and
intentionally chose not to pay. Id. at 197.
2
Debts excepted from discharge under § 523(a)(1)(C) differ from
some other debts excepted under § 523 in that debts excepted under
§ 523(a)(1)(C) are excepted automatically and a creditor’s failure
to file a proof of claim or object to the discharge does not affect
the dischargeability or non-dischargeability of the debt. In
contrast, pursuant to § 523(c)(1), debts specified in § 523(a)(2),
(4), and (6) are automatically discharged “unless, on request of
the creditor to whom such debt is owed, and after notice and a
hearing, the court determines such debt to be excepted from
discharge.” 11 U.S.C. § 523(c)(1). This interpretation is further
supported by Bankruptcy Rule 4007 governing the determination of
dischargeability of a debt. Rule 4007(c) provides that “[a]
complaint to determine the dischargeability of any debt pursuant to
§ 523(c) (i.e. § 523(a)(2), (4), and (6)) of the Code shall be
filed not later than 60 days following the first date set for the
meeting of creditors” while Rule 4007(b) provides that “[a]
complaint other than under § 523(c) may be filed at any time.”
FED. R. BANKR. P. 4007(b) and (c). Furthermore, Rule 4007(a)
provides that a complaint may be filed by a debtor or any creditor
to obtain a determination of the dischargeability of any debt, but
it does not require that a complaint must be filed by either party.
FED. R. BANKR. P. 4007(a).
-14-
Applying Bruner to the instant case, the bankruptcy court
found that the Ranges attempted to evade or defeat their tax
liabilities for the years of 1983 through 1985 and thus found the
liabilities to be non-dischargeable under § 523(a)(1)(C). The
Ranges fail to address the non-dischargeable status of Mr. Range’s
tax liability pursuant to § 523(a)(1)(C).3 Although the Ranges
argue that oral testimony is insufficient to establish a tax
liability, this argument is not persuasive.
The Ranges’ argument is premised upon the validity of the
underlying abatement. Abatement of income taxes is authorized
when the unpaid portion of the assessment or any liability in
respect thereof is: (1) excessive in amount; (2) assessed after the
expiration of the period of limitation properly applicable thereto;
(3) erroneously or illegally assessed. 26 U.S.C. § 6404(a). The
tax liabilities at issue in the instant case do not fall into any
of the three enumerated categories in § 6404(a), and the Ranges do
3
The Ranges fail to address the non-dischargeable status of Mr.
Range’s tax liability pursuant to § 523(a)(1)(C) except to state
their belief that Bruner does not accurately state the law on this
issue. Rather, the Ranges contend that the issue is controlled by
the Eleventh Circuit’s holding in In re Hass, 48 F.3d 1153 (11th
Cir. 1994), which requires proof that the taxpayer undertook an
affirmative act to defeat or evade a tax in order for a tax
liability to be non-dischargeable under § 523(a)(1)(C). This
argument is without merit. We have repeatedly held that willful
attempts to evade or defeat tax liabilities for purposes of
determining dischargeability under § 523(a)(1)(C) include acts of
omission as well as acts of commission. See Bruner, 55 F.3d at
200; In re Grothues, 226 F.3d 334, 339 (5th Cir. 2000).
-15-
not dispute the validity of the original tax assessments for the
years of 1983 through 1985. Furthermore, an abatement executed
outside of the scope of the statutory authority conferred by §
6404(a) is not effective. Although evidence was presented
indicating that the IRS acknowledged Mr. Range’s discharge in
bankruptcy, neither the certificates of assessments nor the
certified tax transcripts indicated that the IRS abated Mr. Range’s
tax liability. Rather, that the IRS abated the taxes at issue was
simply the position taken by the Ranges because the certified tax
transcripts showed a zero tax liability and did not also show the
entries transferring the tax liabilities to Mrs. Range as a result
of the IRS technician’s erroneous determination that Mr. Range’s
tax liability was discharged in his 1992 bankruptcy. It is not
necessary that we determine whether the bankruptcy court was
correct in determining that the documentary evidence indicated that
the IRS actually abated the tax liabilities. Even assuming that
the bankruptcy court was correct, and the IRS did abate the taxes,
the abatement would be ineffective as it would have been outside
the IRS’s abatement authority because the tax liabilities at issue
did not fall within one of the three categories enumerated in §
6404(a) and thus were not eligible for abatement.
Because Mr. Range’s tax liability was non-dischargeable under
§ 523(a)(1)(C) and no valid authority existed authorizing the IRS
to abate the tax liability at issue, the bankruptcy court’s
determination that Mr. Range’s tax liability for the years of 1983
-16-
through 1985 was not discharged in his 1992 bankruptcy and remains
a valid debt subject to collection was not clearly erroneous.
The Ranges contend that the bankruptcy court abused its
discretion and improperly denied their § 7430 motion for fees and
costs and their Rule 60(b) motion/independent action for relief
from judgment without conducting an evidentiary hearing. Having
determined that Mr. Range is liable for income taxes for the years
of 1983 through 1985, we find that the bankruptcy court did not
abuse its discretion in denying either the Ranges’ § 7430 motion
for fees and costs or their Rule 60(b) motion/independent action
for relief from judgment without conducting an evidentiary hearing.
CONCLUSION
For the reasons stated above, the district court’s judgment
affirming the bankruptcy court is AFFIRMED.
-17-