Opinion
CASE NO. 3:17CV00994 CASE NO. 3:17CV01041
2022-06-27
Richard M. KERGER and Jessica R. Kerger, Plaintiffs, v. UNITED STATES of America, Defendant. United States of America, Plaintiff, v. Richard M. Kerger and Jessica R. Kerger, Defendants.
Richard M. Kerger, Kerger Law Firm, Toledo, OH, for Richard M. Kerger, Jessica R. Kerger. Joseph M. Kaufman, Mary A. Stallings, U.S. Department of Justice, Washington, DC, for Defendant in 3:17CV00994. Mary A. Stallings, U.S. Department of Justice, Washington, DC, for Plaintiff in 3:17CV01041.
Richard M. Kerger, Kerger Law Firm, Toledo, OH, for Richard M. Kerger, Jessica R. Kerger.
Joseph M. Kaufman, Mary A. Stallings, U.S. Department of Justice, Washington, DC, for Defendant in 3:17CV00994.
Mary A. Stallings, U.S. Department of Justice, Washington, DC, for Plaintiff in 3:17CV01041.
OPINION AND ORDER
CHRISTOPHER A. BOYKO, Senior United States District Judge:
This matter is before the Court on the United States of America's Motion for Partial Summary Judgment in the above captioned cases. (ECF# 35 in case no. 17-994 and ECF # 39 in case no. 17-1041). For the following reasons, the Court grants the United States’ Motion. Plaintiffs Richard and Jessica Kerger bring their action in Case No. 17-994 for declaratory judgment seeking a declaration that they owe no federal back taxes as those taxes were allegedly discharged in bankruptcy; or alternatively, that the United States is equitably estopped from collecting on any alleged tax liabilities owed because of representations made by IRS agents to the Kergers and/or their agent. The Court dismissed the declaratory judgment claim because there is an exception to declaratory judgment jurisdiction for federal tax disputes.
The United States filed identical briefs and supporting materials in both cases. For clarity and ease of reference, the Court will use the documentation designations found in 17-994 throughout this Opinion.
The United States brings its action in Case No. 17-1041 against the Kergers to reduce to judgment the alleged amount of back taxes and penalties the Kergers owe the United States. The Kergers have counterclaimed for estoppel.
In both Case No. 17-1041 and Case No. 17-994, the United States of America filed a Motion for Partial Summary Judgment. The United States is not seeking entry of judgment for the 2002 tax year (as alleged in the Complaint) because the statute of limitations has expired. Nor is it seeking judgment against Jessica Kerger for anything but tax year 2007 ($8,650.42 as of March 28, 2022). It seeks summary judgment against Richard Kerger for tax years 2003 through 2007 ($374,788.43 as of March 21, 2022).
According to the United States, Richard Kerger's 2005 through 2007, and Jessica Kerger's 2007 liabilities are excepted from bankruptcy discharge pursuant to § 523(a)(1)(A) in view of the suspension of the limitations periods by one or both bankruptcies. The evidence also shows that Richard Kerger willfully attempted to defeat the taxes under § 523(a)(1)(C); so, discharge is not available.
The United States contends that it is entitled to judgment under 11 U.S.C. § 523(a)(1)(C) because the Kergers’ income tax liability is nondischargeable. Courts consider the totality of the circumstances in order to determine whether the debtors "willfully attempted in any manner to evade or defeat [a] tax." It is not necessary to demonstrate that a debtor had an evil motive or bad purpose in not paying his taxes in order to determine whether the debtor acted willfully. Choosing to satisfy other obligations or pay for non-essentials, while not paying taxes, can sufficiently demonstrate an intent to evade tax.
The United States says the evidence demonstrates that, after deducting the Kergers’ regular household expenses, self-reported medical costs and business-related expenses, Richard still had ample disposable funds with which to satisfy his tax debts. Rather than satisfying his tax liabilities, Richard chose to pay for credit card expenses for his wife, nearly $50,000 annually in private tuition for his then minor children, more than $10,000 in martial arts lessons, and nearly $200,000 in charitable contributions.
In their opposition, the Kergers describe mental and physical health problems and generally poor handling of finances. However, the United States points out that Richard still managed to maintain a profitable law practice, earning a substantial income over the years.
Next, the Kergers argue that they filed their returns and made some estimated tax payments. Nonpayment alone is insufficient to bar discharge; but knowing and deliberate nonpayment can render the tax debt nondischargeable. Richard chose the manner in which he would spend his discretionary income, instead of satisfying the tax liability each year.
It is undisputed that for the years in question, the Kergers filed joint returns. (ECF # 35-2). Jessica's tax liability was separately assessed (See ECF #31-7 Ex.B) based on the Kergers’ 2007 Joint Return.
The United States asserts that Richard transferred the assets of the firm Kerger & Associates to his wife and Attorney Stephen Harman without adequate consideration in 2008. Richard offers his declaration that Harman and his wife executed a Note based upon the "appraised" assets of the firm, little over $9,000. Yet, at his deposition, he testified that there was no valuation of assets at the time of transfer. According to the United States, the transfer of the firm from a sole proprietorship to an LLC prejudiced the ability of the IRS to collect on Richard Kerger's tax liabilities.
The United States argues that even if there were no willful attempt to defeat tax collection, the Court should enter judgment in favor of the United States and against Richard Kerger for the 2005, 2006, and 2007 liabilities in the amount of $180,111.62, as of March 21, 2022, and against Jessica Kerger for 2007 in the amount of $8,650.42 as of March 28, 2022, based on § 523(a)(1)(A). This section allows for tolling during the pendency of certain bankruptcy proceedings of the statute of limitations for collection and provides for a three-year look-back exception to dischargeablility.
As far as the Kergers’ equitable estoppel claims, the United States contends that the there has to be some affirmative misconduct and not simply negligence by a government agent. The Kergers argue that an IRS agent told their representative that income tax liens and obligations were "zeroing" out. The United States says there was no "secret" process; rather, the joint liabilities were transferred to separate non-master-file accounts due to Richard Kerger filing bankruptcy without his wife. ("mirrored spousal account-splitting procedure"). "It is important to understand, at the outset, that with respect to tax liabilities of spouses who have filed a joint tax return, the IRS creates a mirror assessment (or a mirrored spousal assessment) if one of the spouses later obtains innocent spouse relief under 26 U.S.C. § 6015, submits an offer in compromise, receives a bankruptcy discharge , petitions the Tax Court, requests an installment agreement, or does a number of other things requiring separating the accounts as specified in the Internal Revenue Manual (IRM) § 21.6.8." (IRS Brief, ECF DKT #39-1).
The United States argues that the Kergers’ agent and the IRS employee who informed them that the liens were being removed were both likely unfamiliar with this process and confused by the joint account transcripts showing a "zero" balance. Therefore, there was no affirmative misconduct. According to the United States, clerical IRS employees have no authority to forgive or compromise a tax liability.
The Kergers do not dispute what their reported income was for the relevant tax years nor do they dispute the tax assessment calculation by the United States. The Kergers rely upon the effect of the bankruptcy discharge in September of 2010 and upon their contention that the United States is equitably estopped due to the conduct of its agent/employee.
LAW AND ANALYSIS
Standard of Review
Summary judgment shall be granted only if "the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." See Fed. R. Civ. P. 56(a). The burden is on the moving party to conclusively show no genuine issue of material fact exists. Celotex Corp. v. Catrett , 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986) ; Lansing Dairy. Inc. v. Espy , 39 F.3d 1339, 1347 (6th Cir. 1994). The moving party must either point to "particular parts of materials in the record, including depositions, documents, electronically stored information, affidavits or declarations, stipulations, admissions, interrogatory answers, or other materials" or show "that the materials cited do not establish the absence or presence of a genuine dispute, or that an adverse party cannot produce admissible evidence to support the fact." See Fed. R. Civ. P. 56(c)(1)(A), (B). A court considering a motion for summary judgment must view the facts and all inferences in the light most favorable to the nonmoving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp. , 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). Once the movant presents evidence to meet its burden, the nonmoving party may not rest on its pleadings, but must come forward with some significant probative evidence to support its claim. Celotex , 477 U.S. at 324, 106 S.Ct. 2548 ; Lansing Dairy , 39 F.3d at 1347.
This Court does not have the responsibility to search the record sua sponte for genuine issues of material fact. Betkerur v. Aultman Hospital Ass'n. , 78 F.3d 1079, 1087 (6th Cir. 1996) ; Guarino v. Brookfield Township Trustees , 980 F.2d 399, 404-06 (6th Cir. 1992). The burden falls upon the nonmoving party to "designate specific facts or evidence in dispute," Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 249-50, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986) ; and if the nonmoving party fails to make the necessary showing on an element upon which it has the burden of proof, the moving party is entitled to summary judgment. Celotex , 477 U.S. at 323, 106 S.Ct. 2548. Whether summary judgment is appropriate depends upon "whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law." Amway Distributors Benefits Ass'n v. Northfield Ins. Co. , 323 F.3d 386, 390 (6th Cir. 2003) (quoting Anderson , 477 U.S. at 251-52, 106 S.Ct. 2505 ).
Tolling of Limitations Period
26 U.S.C. § 6502(a)(1) imposes a ten-year statutory limitation period on the United States for bringing an action for unpaid tax assessments. The United States filed suit in 2017 against the Kergers to reduce to judgment their alleged tax liabilities. According to the United States, its claims for unpaid taxes for the years 2003-2007 are not time-barred because the limitation period was tolled multiple times over the years. On November 10, 2005, the Kergers submitted an offer to compromise their tax liabilities for the years 2000-2004. That offer was rejected by the United States on December 28, 2006. Pursuant to 26 U.S.C. §§ 6331(k)(1) and 9K)(3)(B), an offer to compromise tolls the applicable period from the date the offer is made through the date a determination and is made and for thirty days thereafter. The United States alleges this tolled the limitation period for a total of four hundred forty-four days.
In addition, the statute of limitations was further tolled during Richard's bankruptcies pursuant to 26 U.S.C. § 6503(h). Therefore, its claims for unpaid tax assessments from 2003-2007 are timely. The Kergers do not dispute that the United States’ claims for 2003-2007 are timely. However, the United States concedes that its claims for tax liabilities owed prior to 2003 are time-barred and those claims are waived. Tax Liabilities and Discharge
As an initial matter, the Kergers contend the United States waived any challenges to discharge by failing to raise the exceptions to discharge in the bankruptcy proceedings. However, the law is clear that failure to raise discharge challenges in bankruptcy proceedings does not bar the United States from asserting them post-bankruptcy. "The Internal Revenue Service (IRS) need not appear and object in a bankruptcy court to have a tax debt be excepted from a discharge; it remains free to wait until the bankruptcy discharge is invoked as a defense to its collection efforts, and then prove a factual basis for the tax fraud exception in the collection proceedings." Internal Revenue Serv. v. Murphy , 892 F.3d 29 (1st Cir. 2018) citing 11 U.S.C.A. § 523(a)(1) C). Consequently, the Court finds the United States has not waived its discharge challenges and the Court will address them below.
The United States contends that Richard's tax liabilities for the years 2005, 2006 and 2007 and Jessica's tax liabilities for 2007 are excepted from discharge under § 523(a)(1) A) and § 507(a)(8)(A)(i) as the joint returns from which these assessments were derived were due more than three years prior to the Chapter 7 bankruptcy petition date when taking into account a tolling of six hundred twenty-six days and an additional ninety days pursuant to § 507(a)(8). The relevant bankruptcy code provisions except from discharge those tax debts "for which a return, if required, is last due, including extensions, after three years before the date of the filing of the bankruptcy." 11 U.S.C. § 507(a)(8). At a May 25, 2022 telephone status conference, the Kergers conceded the United States’ argument that taxes owed for 2005-2007 are excepted from discharge under § 523(a)(1)(A) of the Bankruptcy Code, with the three-year look back period in § 507(a)(8)(A)(i) tolled by Richard Kerger's 2008 bankruptcy. Moreover, the Kergers do not dispute the amounts of the tax liabilities assessed against them as reflected in the United States’ Motion for Partial Summary Judgment.
The United States presents undisputed evidence that the Kergers’ combined yearly gross income in the years 2003, 2004, 2005 were $249,266, $382,598 and $303,812 respectively. Over the next three years the Kergers’ combined gross income totaled well over $1,000,000.00. In his 2008 Chapter 11 bankruptcy filing, Richard represented that his monthly expenses for 2008 totaled $13,197 per month or $158,364 for the year and that his yearly expenditures for the years 2001 through 2010 were "essentially the same" and "maybe a little lower." (RK depo. 157:15-25; 158:1-8). Consequently, the undisputed evidence demonstrates that the Kergers possessed over $100,000 of discretionary income each year after paying their household expenses. However, rather than satisfying their tax liabilities, the United States presents undisputed evidence that the Kergers paid out over $190,000 in charitable donations from 2003-2010, $10,000 on martial arts lessons for Jessica and their children from 2006-2009 and were spending $100/month for martial arts lessons in 2010. The Kergers also spent nearly $50,000 in private school tuition from 2001-2010. In addition, the Kergers spent over $16,000 a year on credit card debt related, at least in part, to Jessica's shopping habit. In her deposition, Jessica admitted to a shopping habit that began in the 1990s through 2008. (JK dep pg. 44).
Willful Avoidance
Pursuant to Chapter 7 of the Bankruptcy Code, a debtor is generally granted discharge from debts that arose prior to the filing of the bankruptcy petition. See 11 U.S.C. § 727(b). However, that general rule faces certain exceptions set forth in Section 523 of the Code. Pertinent to the instant action, Section 523(a)(1)(C) provides:
(a) a discharge under § 727, ... of this title does not discharge an individual debtor from any debt—
(1)for a tax or customs duty—
(c)with respect to which the debtor made a fraudulent return or wilfully attempted in any manner to evade or defeat such tax.
This exception "serves to limit the Bankruptcy Code's discharge of tax debts to the honest but unfortunate debtor." Grogan v. Garner, 498 U.S. 279, 286–87, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991).
To determine if a debtor willfully attempted to evade or defeat a tax, rendering their tax debt nondischargeable, the Sixth Circuit in Stamper v. United States (In re Gardner ), 360 F.3d 551, 558 (6th Cir. 2004) adopted a two part analysis. Section 523(a)(1)(C) has "a conduct requirement and a mental state requirement. The government satisfies the conduct requirement when it proves the debtor engaged in affirmative acts to avoid payment or collection of the taxes.... Under the mental state requirement, the government must prove the debtor voluntarily, consciously, and knowingly evaded payments. The mental state requirement is proven when the debtor: (1) had a duty to pay taxes; (2) knew he had such a duty; and (3) voluntarily and intentionally violated that duty." In re Harold, 611 B.R. 835, 844–45 (Bankr. E.D. Mich. 2020).
In its Motion, the United States makes the following arguments in support of the conduct element. First, it argues that it is undisputed that the United States made accurate tax assessments on the Kergers’ own reported tax liabilities for the years 2003-2007. The Kergers acknowledged they owed taxes and even made some payments but did not make full payment for any of the years 2003-2007. Second, the United States points to the substantial amounts of income the Kergers earned in these years that satisfied their obligations while leaving sufficient amounts to cover their assessed tax liabilities. Lastly, the United States argues that instead of satisfying their tax liabilities, the Kergers spent substantial amounts on private tuition for their children, martial arts lessons for Jessica and the children, large credit card payments that funded Jessica's admitted shopping problem and significant charitable contributions.
The Kergers, in opposition, argue their 2010 discharge wiped out all their liabilities, including their tax liabilities. In order to except from discharge these tax liabilities, the United States must show the Kergers willfully evaded their tax liabilities. The Kergers claim the evidence fails to show any willful avoidance by the them. Rather, the evidence shows the Kergers filed timely and accurate returns for all the contested years. There is no evidence to show they attempted to hide any income earned or assets owned. They did not live lavishly, taking only one vacation in 2002 to Puerto Rico that was largely funded by Richard's frequent flyer miles. Moreover, the Kergers made large and substantial tax payments utilizing loans and proceeds from their law practice and the sale of their house. Instead, their failures to pay were largely the result of their numerous and serious health issues and a number of failed business opportunities, rendering them the "unfortunate debtors" for whom bankruptcy discharge is intended.
Conduct Element
The Sixth Circuit has determined that " § 523(a)(1)(C) covers both acts of omission, such as failure to file returns and failure to pay taxes, and acts of commission, such as affirmative acts of evasion. Moreover, while nonpayment alone is insufficient to bar discharge of a tax obligation, a "knowing and deliberate" nonpayment provides the basis for determining that the tax debt is non-dischargeable." In re Gardner, 360 F.3d at 557. "In order to satisfy the conduct requirement, the government need only show that a debtor failed to file tax returns and failed to pay taxes. It need not show an affirmative act to evade payment of taxes that would rise to the level of criminality." In re Candy , 625 B.R. 701, 712 (Bankr. W.D. Tenn. 2021).
"The government must prove by a preponderance of the evidence that the debtor willfully attempted to evade the tax liability." In re Gardner , 360 F.3d at 557–58. "When determining whether the conduct element or mental state requirement has been satisfied, the totality of the debtor's conduct is considered." In re Volpe, 377 B.R. 579, 586 (Bankr. N.D. Ohio 2007). While failing to pay taxes does not in and of itself satisfy the United States’ burden to show willful avoidance or evasion, it is a relevant consideration. Id. Inadvertent mistakes by a debtor do not satisfy the conduct element. Id. Repeated failure to pay assessed taxes despite having the money to do so is evidence that satisfies the conduct element, as is evidence that debtor paid for non-necessities such as vacations and private school tuition instead of the debtor's tax liabilities. Id.
In this case the United States has exhaustively shown that the Kergers regularly failed to pay assessed tax liabilities over the course of many years though they had the financial wherewithal to do so. Over the course of seven years the Kergers filed tax returns but failed to pay their assessed taxes. While tax year 2000's assessed liability of $51,566 was ultimately satisfied, this was largely due to a combination of tax levies and payments made under an installment agreement that required the Kergers pay $1,000 per month, which Richard defaulted on. The Kergers’ 2001 and 2002 tax liabilities were ultimately written off by the United States in the approximate amount of $125,000 due to the expiration of the statute of limitations.
The Kergers’ pattern of only paying a small portion of their assessed liabilities continued through 2007 despite substantial income that would have satisfied their tax obligations even after Richard satisfied his family expenses. (See Kergers filed returns 2001-2008).
Instead of paying their tax liabilities, the United States has shown that the Kergers spent $190,000 on charitable contributions from 2003-2010. (ECF #35-2). In fact, in his Declaration Richard attests, "We did tithe to our church which is part of our religious belief. In hindsight it would have been better for the IRS that I sent the money to it. But that is in hindsight but at the time I had plans to satisfy the tax debts but they just didn't pan out." (RK Dec. ¶ 17). They spent $10,000 in martial arts lessons for Jessica and the children from 2006-2009. (JK depo. pgs. 157-160, RK depo pgs. 201-02). The Kergers further spent over $47,000 in private tuition payments for their children from 2000-2010, though this is only a portion of the full amount since the United States was unable to quantify large time periods where the Kergers testified their children attended private schools. Therefore, the likely total amount paid in private school tuition was much higher. (JK depo pg.91-95, 100-01, 103-105,107-110).
Lastly, Jessica has a self-admitted shopping problem, resulting in maxing out a number of credit cards which Richard would pay. In 2008, Richard listed $1,400 per month for Spouse's debt service on his Chapter 11 bankruptcy schedules. Richard made a $12,500 payment to Capitol One and $14,749.55 to Fifth Third Bank in 2008 in the months leading up to his Chapter 11 filing.
On average the United States has shown that the Kergers netted disposable income of more than $170,000 between 2003 and 2007 after taking their average adjusted gross income of $332,968 in that time frame and subtracting the Kergers average annual household expenses of $158,364, as reported in their 2008 bankruptcy schedules.
In short, the Kergers’ repeated failures to pay their assessed tax liabilities while making substantial non-essential expenditures satisfy the conduct element.
Mental Element
The Sixth Circuit has interpreted the Code's phrase "wilfully attempted in any manner to evade or defeat such tax" as requiring a voluntary, conscious, and intentional evasion. In re Toti, 24 F.3d 806, 809 (6th Cir. 1994). The United States is not required to show a debtor engaged in fraudulent activity to demonstrate willfulness. In re Jacobs , 490 F.3d 913, 925 (11th Cir. 2007). Instead, the United States must prove the debtor: "(1) had a duty to pay taxes; (2) knew he had such a duty; and (3) voluntarily and intentionally violated that duty." In re Volpe , 377 B.R. at 588. There is no dispute that the Kergers knew they had a duty to pay taxes as they did in fact file returns each year and paid some portion of their assessed liabilities. Richard attests, "While this was playing out, I was continuing to file my taxes every year and make some payments of my estimates, albeit inadequate to satisfy those obligations." (RK dec. ¶11).
In deposition Richard was asked:
So at the time you understood that you were required to make estimated tax payments, quarterly estimated tax payments?
A. Yes.
Q. And did you?
A. No. I made some. I didn't ignore it completely, but they -- the quarter would come in at a point in time -- I don't know if I can explain this well. Income in a law firm like ours is sporadic, and some months are good, some quarters are good, some quarters are bad. (ECF DKT 37-10, p. 13 (pp.46-47 of transcript).
As their Declarations, tax returns and deposition testimony evidence, the Kergers had a duty to pay taxes and knew of this duty to pay. Moreover, at times they worked out installment plans in which to pay their assessed liabilities. Therefore, the United States has shown the first two elements of the mental component.
In In re Toti , the Sixth Circuit held that evidence that a debtor had the wherewithal to file and pay his taxes but did not do so supported the conclusion that the debtor "voluntarily, consciously and intentionally" failed to pay his taxes, supporting an exception to discharge. 24 F.3d at 809. The Sixth Circuit further held that 523(a)(1)(C) includes acts of omission as well as commission. "A knowing, intentional violation also may be established by showing that a debtor paid for non-essential expenses such as vacations, luxury cars, or children's private school tuition, rather than taxes." In re Candy , 625 B.R. 701, 711 (Bankr. W.D. Tenn. 2021). Here, the United States has exhaustively and undisputedly demonstrated that the Kergers paid substantial monies on non-essential expenses, such as private school tuition, martial arts lessons, shopping sprees and charitable contributions, rather than pay their tax liabilities. Thus, the United States has proven the mental component of 523(a)(1)(C).
Moreover, these spending decisions were intentional and deliberate. Both Kergers attest their religious faith supports tithing, a practice in the Christian church to give a percentage of one's income to charitable causes. Thus, this was a conscious and intentional spending decision as they continued to tithe despite knowing they had outstanding tax liabilities. "No matter how laudable, a taxpayer is not permitted to fund discretionary expenditures, even charitable donations, by failing to pay his taxes." In re Obinwa, No. 6:11-BK-08951-KSJ, 2012 WL 5555715, at *5 (Bankr. M.D. Fla. Nov. 13, 2012). They further attest that they chose private education for their children because the public schools in their community were poor performing schools. Again, this is not an essential personal expense but a conscious choice, albeit an understandable and even commendable one. But not one that exempts the obligation to pay one's taxes. In addition, they chose martial arts as it would benefit Jessica's and their children's mental and physical well being. While again understandable, there is no evidence these lessons were medically necessary or prescribed by a medical practitioner, but instead were a conscious decision based on the Kergers’ own preference over paying their tax liabilities. Finally, Jessica's admitted spending problem, while not easily quantifiable, certainly evidences that the Kergers possessed discretionary spending abilities beyond their monthly obligations that could have been, but were not, applied to their tax liabilities.
Therefore, the Court finds the United States has proven the mental component and has demonstrated the Kergers tax liabilities for 2003-2007 are nondischargeable.
Equitable Estoppel
There is no genuine dispute about the income earned during the relevant tax years nor about the amount of the assessments, interest and penalties calculated. Rather, the Kergers contend that the Internal Revenue Service is estopped by its conduct from collecting the claimed tax deficiencies. According to the Kergers, representations were made to them and their attorney by more than one IRS employee (and confirmed in writing) that the federal tax liens against their property were being removed and that the back taxes were no longer owed.
The United States insists that, for estoppel to apply, there has to be some affirmative misconduct and not simply negligence by a government agent. The Kergers argue that an IRS agent told their representative that income tax liens and obligations were "zeroing" out. However, in accordance with IRS policy, the Kergers’ joint liabilities were transferred to separate non-master-file accounts due to Richard's filing bankruptcy without his wife. ("mirrored spousal account-splitting procedure").
[W]ith respect to tax liabilities of spouses who have filed a joint tax return, the IRS creates a mirror assessment (or a mirrored spousal assessment) if one of the spouses later obtains innocent spouse relief under 26 U.S.C. § 6015, submits an offer in compromise, receives a bankruptcy discharge , petitions the Tax Court, requests an installment agreement, or does a number of other things requiring separating the accounts as specified in the Internal Revenue Manual (IRM) § 21.6.8. (Government's Brief, ECF DKT #35-1 at 17).
"It is well established that estoppel cannot be used against the government on the same terms as against private parties." United States v. Guy , 978 F.2d 934, 937 (6th Cir. 1992) (citing Office Pers. Mgmt. v. Richmond , 496 U.S. 414, 419, 110 S.Ct. 2465, 110 L.Ed.2d 387 (1990) ). "The party attempting to estop the government bears a very heavy burden." Fisher v. Peters , 249 F.3d 433, 444 (6th Cir. 2001) ; Richmond, 496 U.S. at 422, 110 S.Ct. 2465.
The elements required to invoke the protections of equitable estoppel are: (i) a definite misrepresentation by one party, (ii) intended to induce some action in reliance, and (iii) which does reasonably induce action in reliance by another party to his detriment. Guy , 978 F.2d at 937 (citing Heckler v. Cmty. Health Servs. of Crawford Cnty., Inc. , 467 U.S. 51, 59, 104 S.Ct. 2218, 81 L.Ed.2d 42 (1984) ). In addition to these traditional estoppel elements, a party asserting estoppel against the government must also "demonstrate some ‘affirmative misconduct’ by the government." Fuller v. United States , 475 F.Supp.3d 762, 767 (S.D. Ohio 2020), quoting Michigan Express, Inc. v. United States , 374 F.3d 424, 427 (6th Cir. 2004).
For purposes of the Partial Summary Judgment Motion, the United States does not refute the alleged statements made to the Kergers through their attorney, Mark McBride. (ECF DKT #35-1, fn. 13). Nevertheless, the parties disagree whether any IRS employee "intentionally or recklessly" misled them. Michigan Express , 374 F.3d at 427.
In his Declaration (ECF DKT #41-1), Mark McBride, the Kergers’ tax attorney, testifies that in early 2015, he contacted the Automated Collection Service (ACS) of the IRS to see about removing the Notice of Federal Tax Liens (FTLs) encumbering the Kergers’ residential property. The IRS representative pulled up the account transcripts and noted "indignantly" that the liens "were about to fall off on their own anyway." (Id. at ¶ 7). The representative added that the Kergers’ account was being "cleared to zero" for the years at issue. (Id. at ¶ 8). McBride asked her to fax the account transcripts to him. McBride was also directed to a representative in the lien removal unit in Louisville, Kentucky, George Ionnaides, for further clarification. After McBride explained that his clients needed the liens released so that the Kergers could transfer good title to their property, Ionnaides sent a certificate of federal lien release either to the Kergers or to McBride. (Id. at ¶ 12). McBride "cannot remember who received the lien release document, as [his] files are in storage and are not readily accessible." Id. McBride later learned that the liens were re-filed and that the Kergers’ joint account was separated into individual accounts. He avers: "I had only encountered this separate treatment of spouses by the Service in innocent spouse cases, never anywhere else" and "I certainly knew nothing of the Service's new individual treatment of the Kergers when I was seeking a solution to the problem of the notice of the FTLs when they were jointly filed against the Kergers." (Id. at ¶¶ 14-15).
In his Declaration (ECF DKT #42), Richard Kerger testifies that he asked McBride to contact the IRS to see exactly the status of the liens. ¶ 20. McBride had contacted several IRS officials and had been told that the liens were being removed. Id. The Kergers were negotiating a land contract, based on the assurance of the IRS that the liens would be removed. Id. Richard Kerger and McBride spoke with the seller's lawyer and assured him that the liens would be gone before his client's mortgage needed to be paid. Id. In anticipation of acquiring the home, the Kergers spent in excess of $40,000 for new air handling equipment and other matters, much of which was paid by insurance. Id. Upon learning that they had been "misled" by representatives of the IRS, the Kergers were devastated. Id. The Kergers and the seller were in a difficult situation; but ultimately, a good friend and client who had substantial assets agreed to buy the house and the Kergers agreed to pay rent in excess of his costs. Id.
In her Declaration (ECF DKT #43), Jessica Kerger testifies that, while negotiating a land contract for their new home, McBride delivered the best financial news. ¶ 25. Apparently, "the IRS finally accepted his argument that [they] were not bad people, purposely wrongful taxpayers but rather poor money managers." Id. IRS officers told McBride that the Kergers no longer had any pre-bankruptcy tax debt. Id. They provided McBride with a copy of the Kergers’ IRS transcripts to prove it, which he in turn sent to them. Id. The seller of the property agreed to move forward once McBride and Richard Kerger reviewed the tax transcripts with him. ¶ 26. In September of 2015, Jessica Kerger received tax levy notices totaling $700,000. She called the IRS and learned of the "mirroring" process, which would likely be unknown to taxpayers, and was advised that, consequently, the liens were back. ¶ 30. With the reassertion of the liens, the Kergers struggled to complete the financing necessary to honor the land contract they had made with the seller. ¶ 33. Richard Kerger arranged with an investor client who agreed to buy the house and allow the Kergers to rent from him at a premium. Id.
In sum, the Kergers contend that IRS representatives misled them and misrepresented their income tax liabilities. Relying on the representation that the taxes were no longer owed and that the liens were removed, the Kergers entered into a land purchase transaction which they ultimately could not complete. They were forced to find a substitute buyer and to become renters instead of purchasers of their current home.
In support of the its position on Equitable Estoppel, the United States submitted a number of declarations for the Court's consideration.
The Declaration of IRS Revenue Officer and Fraud Enforcement Advisor Emily Ebaugh, (ECF DKT #37-1) was filed along with the Government's Motion for Partial Summary Judgment. Revenue Officer Ebaugh attaches the Kergers’ Forms 1040 for all of the relevant tax years.
She declares at ¶4:
Because taxpayer Richard Kerger filed for bankruptcy in 2008 but Jessica Kerger did not, pursuant to IRS procedures, the IRS zeroed out the Kergers’ joint tax accounts in the internal bookkeeping system, and made mirrored assessments using code "MFT 31" (the same assessment against each spouse), creating separate accounts for the existing assessments for the assessed years). The "zeroed out" transcripts are the "MFT 30" accounts.
She further explains that the ICS (Integrated Collection System) history typically contains contemporaneous notes from an IRS Revenue Officer that is handling a collection file. ¶ 25.
Mary A. Stallings, the IRS's Trial Attorney, offers her Declaration (ECF DKT #44-1) authenticating records of the Kergers’ Account Transcripts for tax years 2003-2007. Each year's transcript shows an Account Balance of $0.00. However, in addition, each year's transcript includes an entry dated May 17, 2010: "Balance transferred to split liability account."
Revenue Officer Ebaugh provides a Supplemental Declaration (ECF DKT #44-2), attaching the true and accurate Case Activity Record for Richard Kerger and Jessica Kerger (Exhibit S). There, the notes of Revenue Officer Jill Eicher for May 27, 2015, reflect that the POA (McBride) requested the liens against the Kergers’ property be released since the transcripts show a $0 balance. Revenue Officer Eicher told McBride that MFT30 transcripts will show $0 balance because the liability was separated to MFT31 under both of the Kergers’ Social Security Numbers. Revenue Officer Eicher agreed to fax copies of the liens as well as both the separate and joint transcripts to McBride; and she did so on May 28, 2015.
The first element of an Equitable Estoppel Claim which the Kergers must satisfy is a definite misrepresentation by the IRS. Heckler , 467 U.S. at 60, 104 S.Ct. 2218. The Kergers have not identified what individual at the IRS made the representation either to them or to their tax attorney that their back tax balance was "zero." In fact, the Government's evidence suggests that McBride and his clients, Richard and Jessica Kerger, were actually made aware of their continuing income tax obligations in 2015.
Accepting that a representation of "zero" liability was in fact made, the United States contends that the Kergers’ attorney and the IRS employee who allegedly informed them that the liens were being removed were both likely unfamiliar with the IRS internal mirroring process; and at best, were confused by the joint account transcripts showing a "zero" balance. However, that does not equate to affirmative misconduct.
Affirmative conduct "is more than mere negligence. It is an act by the government that either intentionally or recklessly misleads the claimant." Michigan Express , 374 F.3d at 427. "It is well settled that providing inaccurate information does not constitute affirmative misconduct unless the government agent provides it deliberately or fraudulently." Fuller , 475 F.Supp.3d at 768, citing Pauly v. United States Dep't of Agric. , 348 F.3d 1143, 1149-50 (9th Cir. 2003).
"The party asserting estoppel against the government bears the burden of proving an intentional act by an agent of the government and the agent's requisite intent." Michigan Express , 374 F.3d at 427. Estoppel does not apply where "[t]he government was not attempting to trick" the party asserting estoppel, but was rather "attempting, in good-faith, to advise [the party] as to its intended course of action based on the facts that it knew," and not acting with malicious intent. Id. , 374 F.3d at 428. See also, Abercrombie & Fitch Stores, Inc. v. American Commercial Const., Inc. , No. 2:08–cv–925, 2010 WL 1640883, *3 (S.D. Ohio April 22, 2010).
The Kergers have not met their substantial burden of proving a deliberate act by the United States with the intent to mislead them.
The next element of Equitable Estoppel is reasonable reliance on the definite misrepresentation. "[A] party seeking to estop the government cannot rely on alleged oral representations." Fuller , 475 F.Supp.3d at 768. "The necessity for ensuring that governmental agents stay within the lawful scope of their authority, and that those who seek public funds act with scrupulous exactitude, argues strongly for the conclusion that an estoppel cannot be erected on the basis of the oral advice." Heckler , 467 U.S. at 65, 104 S.Ct. 2218.
Neither the Kergers nor their tax attorney can provide written documentation that their back income tax balance was officially "zero." The Kergers insist that they were able to prove to the individual selling them their house that the liens were released because the taxes were no longer due. Nonetheless, the Kergers and their lawyer assert that, due to the passage of time, they have been unable to locate their copies of the Account Transcripts which reflect that nothing is due and owing. (Opposition Brief, ECF DKT #41 at 12). Oral statements without written substantiation is insufficient to show reasonable reliance under the law. Heckler , 467 U.S. at 65, 104 S.Ct. 2218.
However, even if there were some documentary proof to that effect, it would still be of no avail. Taking the Kergers’ Declarations as true and recognizing that the IRS's mirroring process is complicated and confusing, the Kergers still cannot meet the high bar for Equitable Estoppel. Premo v. U.S. , 599 F.3d 540, 547 (6th Cir. 2010) ; see Michigan Express , 374 F.3d at 427–28 ("It is true that the government could have worded the letter better.... But, the failure to explain is at best a negligent error, not a reckless one.").
For its part, the United States provides the Court with authenticated Account Transcripts and contemporaneous notes of a revenue officer. Those written documents reveal that the Kergers’ income tax accounts were separated once Richard Kerger filed for individual bankruptcy relief. Moreover, the revenue officer's notes demonstrate that McBride was informed that the joint account was zeroed out, but that the separate accounts still showed outstanding balances due from the Kergers for tax years 2003 through 2007. (ECF DKT #44-2, Exhibit S).
Even viewing the evidence in the light most favorable to the Kergers, the Court finds that the Kergers have failed to establish that the United States engaged in affirmative misconduct with the requisite intent, that the Kergers detrimentally relied upon any representations of an IRS employee and that the Kergers’ reliance, if any, was reasonable.
Based on the above findings by the Court that the Kergers’ 2003-2007 tax liabilities were nondischargeable and that the United States is not equitably estopped from pursuing the same, the Court grants the United States’ Partial Motion for Summary Judgment.
The United States has provided undisputed and uncontested evidence that Richard Kerger is indebted to the United States in the amount of $374,788.43 for income tax liabilities for the years 2003-2007 plus interest and that Jessica Kerger is indebted to the United States for income liabilities for 2007 in the amount of $8,650.42 plus interest. (ECF #35-2, Dec of Emily Ebaugh ¶ 3,5 and 6 and ECF #35-7).
Therefore, the Court enters judgment for the United States in the amount of $374,788.43 against Richard Kerger and $8,650.42 against Jessica Kerger plus statutory interest.
IT IS SO ORDERED.