Michaud v. USA CV-96-323-SD 03/06/97 P
UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE
Gloria Michaud
v. Civil No. 96-323-SD
United States of America
O R D E R
The United States appeals from a final judgment entered by
the United States Bankruptcy Court for the District of New
Hampshire in favor of the debtor and against the United States.
The present dispute arises out of a proof of claim filed by the
Internal Revenue Service (IRS) against plaintiff Gloria Michaud
for the unpaid portion of an asserted tax liability.
Facts
The federal tax returns that are the subject of this dispute
were filed for the years 1980 and 1981. The returns, jointly
filed in the names of Gloria Michaud and her then husband Hubert
Michaud, purportedly carried the signatures of both. However,
Mrs. Michaud testified that she neither signed nor even reviewed
either return. The IRS accepted the returns for those two years as the joint returns of Gloria and Hubert Michaud.
The Michauds' returns asserted charitable contribution
deductions based on an alleged gift of real property to the Life
Science Church. Such deductions were examined and disallowed by
the IRS on the ground that the Life Science Church did not
gualify as a charitable organization. The IRS assessed Mr. and
Mrs. Michaud for the additional tax due on their joint returns.
Mr. Michaud was convicted of criminal tax evasion as a
result of the fraudulent charitable deduction. The IRS then
filed a proof of claim against Gloria Michaud (hereinafter
"Michaud") in the amount of $491,383.17, which includes
approximately $104,000 for taxes owed and $387,000 for interest
and penalties. In response, she filed adversary proceedings in
the Bankruptcy Court for the District of New Hampshire.
The bankruptcy court held that Michaud was not liable for
the taxes attributable to the erroneous charitable deductions
included in the Michauds' tax returns. The court held that
Michaud was entitled to "innocent spouse" relief from otherwise
applicable joint and several liability for understatements in
jointly filed tax returns. The bankruptcy court ordered that the
claimed tax liability be set to zero, and further ordered the IRS
to refund to Michaud the money she already paid to the IRS
pursuant to the asserted liability.
2 Discussion
The United States contends that the bankruptcy court lacked
jurisdiction to order a tax refund in favor of Michaud because
she had not previously filed a request for refund from the IRS.
Title 11 U.S.C. § 505(a)(1) grants jurisdiction to the bankruptcy
court as follows:
Except as provided in paragraph (2) of this subsection, the court may determine the amount or legality of any tax, any fine or penalty relating to a tax, or any addition to tax, whether or not previously assessed, whether or not paid, and whether or not contested before and adjudicated by a judicial or administrative tribunal of competent jurisdiction.
Excepted from this grant of jurisdiction is the authority to
determine
any right of the estate to a tax refund, before the earlier of-- (i) 120 days after the trustee properly requests such refund from the governmental unit from which such refund is claimed; or (ii) a determination by such governmental unit of such request.
11 U.S.C. § 505(a)(2)(B).
It is undisputed that Michaud did not request a refund from
the IRS prior to adjudication by the bankruptcy court; therefore,
she has not exhausted her administrative remedies as required by
section 505(a) (2) (B) .
Nonetheless, this court holds that the bankruptcy court was
acting within its jurisdiction under section 505 of the
3 Bankruptcy Code when it ordered a refund in favor of Michaud,
even though Michaud had failed to exhaust her administrative
remedies. The court in In re Dunhill Medical, Inc., 1996 WL
354696, at *5 (Bankr. D.N.J. March 27, 1996), found an exception
to the exhaustion requirement "where refunds are sought as an
offset or counterclaim to a claim or request for payment by the
IRS, or other tax authority, [and stated that] no refund claim
need first be made with the tax authority." Here, the government
filed a proof of claim against Michaud in the bankruptcy court
for tax liabilities allegedly accrued in 1980 and 1981. Michaud
responded by asserting the "innocent spouse" shield to that
liability and prayed the bankruptcy court to set the asserted
liability to zero and order a refund of monies she had already
paid pursuant to that liability. Under In re Dunhill's exception
to the exhaustion requirement, the bankruptcy court had
jurisdiction to award both the prospective relief of setting the
asserted liability to zero and the retrospective relief of
refund.
The government responds that In re Dunhill was wrongly
decided. The court in In re Dunhill found support for an
exception to section 505(a)(2)(B)'s exhaustion requirement in the
legislative history. The government argues that this legislative
history is inconsistent with the statutory language, which on its
4 face appears to mandate a request for refund in every case and
does not permit exceptions. According to the government, the
statute's plain meaning must control interpretation to the
exclusion of inconsistent legislative history. As support, the
government relies on Hubbard v. United States, ___ U.S. , _____
115 S. C t . 1754, 1761 (1995), indicating "[c]ourts should not
rely on inconclusive statutory history as a basis for refusing to
give effect to the plain language of an Act of Congress."
However, the plain meaning rule is "rather an axiom of
experience than a rule of law, and does not preclude
consideration of persuasive evidence if it exists." Boston Sand
& Gravel Co. v. United States, 278 U.S. 41, 48 (1928) . As the
Court stated in Church of the Holy Trinity v. United States, 143
U.S. 457, 459 (1892):
It is a familiar rule, that a thing may be within the letter of the statute and yet not within the statute, because not within its spirit, nor within the intention of its makers. . . . This is not the substitution of the will of the judge for that of the legislator, for frequently words of general meaning are used in a statute, words broad enough to include an act in question, and yet a consideration of the whole legislation, or ofthe circumstances surrounding its enactment, or of the absurd results which follow from giving such broad meaning to the words, makes it unreasonable to believe that the legislator intended to include the particular act.
Where the literal reading of a statutory term would "compel an
odd result," Green v. Bock Laundry Machine Co., 490 U.S. 504, 509
5 (1989), courts must search for other evidence of congressional
intent to lend the statutory terms their proper scope. The
results of applying the plain meaning rule need not rise to an
absurdity before the strictures of the plain meaning rule are
relaxed. Public Citizen v. United States Department of Justice,
491 U.S. 440, 454 n.9(1989) ("this Court has never adopted so
strict a standard [as the absurdity test] for reviewing committee
reports, floor debates, and other non-statutory indications of
congressional intent, and we explicitly reject that standard
today"). Rather, "[l]ooking beyond the naked text for guidance
is perfectly proper when the result it apparently decrees is
difficult to fathom or where it seems inconsistent with Congress'
intention." Id. at 455 (emphasis added).
It would be an "odd result" if section 505(a)(2)(B)'s
exhaustion reguirement were bereft of an exception for cases such
as this, where the refund reguested by the taxpayer and the proof
of claim filed by the IRS pertain to the same year's tax
liability. The rule that the taxpayer must first reguest a
refund from the IRS before the bankruptcy court has jurisdiction
to order a refund is aimed at efficiency and preservation of
resources. A refund reguest affords the IRS an opportunity to
consider the merits of a taxpayer's claim of refund before the
government's litigation resources and judicial resources are
6 expended on the matter. See McNeil v. United States, 508 U.S.
106 (1993) ("Congress intended to require complete exhaustion of
Executive remedies before invocation of the judicial process.
Every premature filing of an action under the [Federal Tort
Claims Act] imposes some burden on the judicial system and on the
Department of Justice which must assume defense of such
actions.") However, when the IRS files a proof of claim against
a taxpayer for a given tax year's liability, it would be futile
for the taxpayer to request a refund of monies paid pursuant to
that very same year's tax liability. The filing of the proof of
claim implies the belief of the IRS that the taxpayer has
underpaid taxes for that given year, and the IRS is unlikely to
radically change positions by honoring the taxpayer's request for
refund. Once the IRS files a proof of claim, the United States
has committed itself to expending resources resolving the
taxpayer's liability for the year in question, and no additional
burden is levied by arming the bankruptcy court with jurisdiction
to order a refund should those liability issues be resolved in
favor of the taxpayer.
When an IRS proof of claim and a taxpayer's request for
refund regard the same tax liabilities, it would be without
purpose and irrational to deny the bankruptcy court jurisdiction
to order a refund until the taxpayer makes a formal request for a
7 refund from the IRS. For this reason, this court rejects a
strict construction of section 505(a)(2)(B)'s language, which
permits no exceptions to the exhaustion reguirement. Instead,
this court interprets the statute in light of the statement in
the legislative history indicating an exception when "the refund
results from an offset or counterclaim to a claim or reguest for
payment by the Internal Revenue Service." Collier on Bankruptcy §
505.LH [2] [a] .
The exception is clearly applicable on these facts, and thus
the bankruptcy court had jurisdiction to order a refund in favor
of Michaud, despite the failure of a prior refund reguest to the
IRS.
The United State urges this court to reverse the bankruptcy
court's holding that Michaud was entitled to "innocent spouse"
relief from tax liability for the deficiencies on the 1980 and
1981 tax returns jointly filed with her husband. Spouses who
file joint returns generally are jointly and severally liable for
the full amount of tax on their combined income, and any
deficiencies on the joint return are chargeable to either spouse.
26 U.S.C. § 6013(d) (3) . However, section 6013(e) (1) provides an
exception to joint and several liability for an "innocent spouse"
who was unaware that the other spouse either intentionally or
negligently created an understatement on their joint tax returns. The bankruptcy court held that Michaud was an "innocent spouse,"
relieved of joint and several tax liability for the
understatements intentionally caused by her husband.
According to the United States, the bankruptcy court erred
as a matter of law in extending "innocent spouse" relief to
Michaud. One seeking to gualify for "innocent spouse" status
must prove, among other things, that "in signing the return he or
she did not know, and had no reason to know, that there was such
substantial understatement." 26 U.S.C. § 6013(e)(1). It is well
settled that an "innocent spouse" must discharge a duty of
inguiry, and failure of this duty precludes the reguisite finding
that the spouse had no reason to know of the understatement. The
innocent spouse exception "is designed to protect theinnocent,
not the intentionally ignorant." Erdahl v. Commissioner of
Internal Revenue, 930 F.2d 585, 589 (8th Cir. 1991) . The
bankruptcy court found adeguate proof that Michaud was "innocent"
and had no reason to know of the understatements, even though she
neither read nor reviewed the 1980 and 1981 joint returns. The
United States objects to this finding on the ground that the
broader umbrella duty of inguiry should at least include the more
specific duty to review the returns. According to the
government, a spouse who fails to review a jointly filed return
has not met her duty of inguiry and is precluded, as a matter of law, from claiming status as an "innocent spouse." Since Michaud
neither reviewed her joint returns nor made any effort to do so,
the United States urges that the bankruptcy court erred as a
matter of law in conferring "innocent spouse" status on Michaud.
However, whether a spouse has satisfied a duty of inguiry or
instead has remained "intentionally ignorant" is a fact-specific
analysis. The scope of the duty of inguiry and the boundaries
between the "innocent" and the "intentionally ignorant" depend on
the circumstances of each case. The standard is whether "a
reasonably prudent taxpayer in his or her position could be
expected to know that the stated tax liability was erroneous or
that further investigation was warranted." House v. Commissioner
of Internal Revenue, 1995 WL 92278, at *80 (U.S. Tax C t . Mar. 6,
1995) (citing Kistner v. Commissioner, 18 F.3d 1521, 1525 (11th
Cir. 1994)). While this appears an objective standard, courts
typically consider subjective factors in determining what is
reasonable in each case. For instance, courts consider: "(1) the
putative innocent spouse's level of education, (2) his or her
involvement in the family's business and financial affairs, (3)
the putative guilty spouse's evasiveness and deceit about the
family's finances, and (4) the presence of lavish or unusual
expenditures or any large unexplained increase in the family's
standard of living." Silverman v. Commissioner of Internal
10 Revenue, 1996 WL 70304, at *11 (U.S. Tax C t . Feb. 20, 1996);
Price v. Commissioner of Internal Revenue, 887 F.2d 959, 965 (9th
Cir. 1989). Under the case law, the duty of inquiry is
predominantly a subjective, factual standard rather than an
inflexible objective rule.
Likewise, the United States Tax Court has employed a
subjective standard to resolve whether a spouse's failure to
review a return was reasonable under the circumstances.
Silverman, supra, 1996 WL 70304 at *12. The court recognized
that "ordinarily, we would conclude that [the guilty spouse's]
failure to present the [tax returns] to [the innocent spouse] for
signing should . . . have alerted [the innocent spouse] that
something was wrong." Id. However, the court went on to hold
that the taxpayer had explained the failure to review the return
by offering evidence that dispelled the notion that she chose to
remain willfully blind. The court held that, on those facts, she
met her duty of reasonable inquiry, even though she never
reviewed the return.
The United States' contention that a spouse who does not
review tax returns can never qualify for "innocent spouse" status
has some support in the case law. Havman v. Commissioner of
Internal Revenue, 992 F.2d 1256, 1262 (2d Cir. 1993) ("Although
Hayman claims to have signed the returns without reading them.
11 she nevertheless is charged with constructive knowledge of their
contents."); House, supra, 1995 WL 92278, at *81 ("Mrs. House had
a duty to review her completed income tax returns, and she is not
relieved of that obligation because of her reliance on others to
complete the return properly."). However, such a rule does not
fit smoothly with the prevailing subjective approach to defining
the duty of inguiry, because it does not permit a consideration
of the relevant circumstances in assessing whether the failure to
review was reasonable. Rather, that rule dictates that failure
to review is always and without exception unreasonable. By
closing off the "innocent spouse" exception to spouses who fail
to review the tax return, the exception loses the flexibility
necessary to effectuate its eguitable purposes. As the Tax Court
has recognized, "The legislative history of section 6013 makes it
plain that the statute was designed to bring government tax
collection practices into accord with basic principles of eguity
and fairness." LaBelle v. Commissioner of Internal Revenue, 47
T.C.M. (CCH) 1078, 1984 WL 15379, at *9 (U.S. Tax C t . Feb. 13,
1984) .
This court refuses to adopt a per se rule that "innocent
spouse" status is unavailable to spouses who fail to review their
tax returns. Often, the "innocent spouse's" failure to review
may be attributable to a division of labor in the marriage and
12 reasonable reliance on the spouse responsible for financial
matters. This court agrees with the tax court in Silverman that
whether the failure to review was reasonable is a question of
fact. Here, the bankruptcy court found that Michaud's failure to
review her tax returns was excusable and did not breach her duty
of reasonable inquiry under the circumstances. Bankruptcy Rule
8013 provides that the bankruptcy court's "[f]indings of fact
. . . shall not be set aside unless clearly erroneous." Aside
from the previous argument on the law, the United States has
presented no evidence on the record to indicate that the
bankruptcy court was clearly erroneous and its holding in need of
second-guessing.
Next, the United States contends that the bankruptcy court
erred as a matter of law in finding that it would be inequitable
to hold Michaud liable for the tax deficiencies attributable to
the understatements on the 1980 and 1981 tax returns. A spouse
seeking to qualify for "innocent spouse" relief must prove that
it would be inequitable to hold her liable for the deficiency.
The spouse bears the burden of proving all the elements of a
claim for "innocent spouse" relief. Friedman v. United States,
53 F.3d 523, 532 (2d Cir. 1995). According to the United States,
the bankruptcy court placed the burden of proof on the government
with respect to the equity of holding Michaud liable for the
13 understatements, and this constituted error as a matter of law.
This court disagrees that the bankruptcy court erred in its
legal conclusions. The bankruptcy court considered whether
Michaud financially benefited from the deficiency on the 1980 and
1981 returns as a factor bearing on the eguity of holding her
liable. In assessing this factor, the bankruptcy court held
"that there is insufficient evidence in the record to support
such a finding . . . that [Michaud's] restaurant was the fruit of
the improper deductions." Order of Bankruptcy Court dated April
26, 1996, at 14. According to the United States, this evidences
the bankruptcy court's erroneous legal conclusion that the United
States carried the burden of proof on this issue. The relevant
inguiry, according to the United States, was whether there was
sufficient evidence to support a finding that the restaurant was
not the fruit of the improper deductions.
However, the government's contention overstates Michaud's
burden of proof. Granted, Michaud had the burden of proving that
it would be ineguitable to hold her liable for the deficiencies.
This does not mean, as the United States' argument implies, that
Michaud had the burden of proving every disputed issue of fact in
her favor. Rather, this inguiry is factual and open-ended. "The
'facts and circumstances' that must be considered are those
having a rational bearing on whether a putatively 'innocent
14 spouse' should be held liable for taxes and additions due."
Purificato v. Commissioner, 9 F.3d 290, 296 (3d Cir. 1993), cert.
denied, ___ U.S. ,114 S. C t . 1398 (1994). She only had the
burden of proving enough relevant facts to show by a
preponderance of the evidence that the eguities weigh in her
favor. Stevens v. Commissioner of Internal Revenue, 872 F.2d
1499, 1504 (11th Cir. 1989). Once Michaud met her burden of
proof by a preponderance of the evidence, the United States had
the burden of proving facts alleged to defeat Michaud's claim for
"innocent spouse" relief. The bankruptcy court found that
Michaud met her burden of proof by coming forward with the
following evidence.
In this case, the Plaintiff testified that she received a weekly allowance to pay household expenses both before and after the filing of the 1980 and 1981 tax returns. Early in the marriage the amount was $250 per week, it increased to $300 per week in the late 1970s and eventually increased to $350 per week. The Plaintiff also testified that she had no joint accounts with her husband and accumulated little savings during the marriage. Her travel consisted of some cruises and trips to the Mediterranean, Bermuda, and Majorca. Upon her divorce from her husband in 1991, she received title to the family home in Dover, New Hampshire, which had been held solely in his name; today it is the Plaintiff's only asset. The IRS has taken the Plaintiff's IRA, her checking account, and the proceeds from a small house which was in her name. She does not own an automobile.
Order of Bankruptcy Court, supra, at 13. The United States
15 countered by arguing that Michaud benefitted from the
deficiencies by running the restaurant in issue. This fact could
not stand to defeat Michaud's showing that, by a preponderance of
the evidence, it is ineguitable to hold her liable unless the
fact were proven. The bankruptcy court committed no legal error
by placing the burden of proving this fact on the United States
because it does not imply that the United States carried the
burden of proof on this element of the "innocent spouse" claim.
The only implication was that, once Michaud met her burden of
proof on this issue, her claim for "innocent spouse" relief would
not be defeated by unproven facts.
Finally, the United States argues that the bankruptcy court
erred in granting "innocent spouse" relief to Michaud because
there was no direct evidence that her husband spent the realized
tax savings outside the household. The government relies on a
footnote in Bliss v. Commissioner of Internal Revenue, 59 F.3d
374, 380 n.3 (2d Cir. 1995), which defined "innocent spouse" as
one who is "innocent vis-a-vis a guilty spouse whose income is
concealed from the innocent and spent outside the family."
(Emphasis added.) However, it is not clear that the Bliss court
was implying that proof that the income was spent outside the
family is a necessary showing. Other courts have held that the
focus is on whether the putative "innocent spouse" benefitted
16 from the tax savings, Purificato, supra, 9 F.3d at 296, and this
factor is not even determinative. Id. Evidence that the money
was spent outside the family is evidence that the "innocent
spouse" did not benefit from the tax savings. However, it would
be no more probative than evidence that the "innocent spouses"
realized no improved standard of living. The bankruptcy court
found that Michaud's standard of living did not improve, and this
is legally sufficient to support a finding that she did not
benefit from the tax savings, even in the absence of direct
evidence that the money was spent outside the family. The
bankruptcy court committed no legal error in finding that Michaud
did not benefit from the tax savings.
Conclusion
For the foregoing reasons, the order of the bankruptcy is
upheld in its entirety. The clerk shall enter judgment
accordingly.
SO ORDERED.
Shane Devine, Senior Judge United States District Court
March 6, 1997
17 cc: David L. Broderick, Esq. Carina J. Campobasso, Esq. Stephen C. Chute, Esq. Sarah Ruef Luck, Esq. Georqe Vannah, Clerk, US Bankr. C t .