In re Jacobs

Decision Date29 June 2007
Docket NumberNo. 06-15333.,06-15333.
PartiesIn Re: Arthur I. JACOBS, Debtor. United States of America, Plaintiff-Appellee, v. Arthur I. Jacobs, Defendant-Appellant.
CourtU.S. Court of Appeals — Eleventh Circuit

Appeal from the United States District Court for the Middle District of Florida.

Before PRYOR, KRAVITCH and ALARCÓN,* Circuit Judges.

ALARCÓN, Circuit Judge:

Arthur I. Jacobs appeals from the District Court's reversal of an order of the Bankruptcy Court, in which the Bankruptcy Court determined that Mr. Jacobs's federal income tax debt is dischargeable in bankruptcy and that Mr. Jacobs had not willfully attempted to evade or defeat a tax within the meaning of 11 U.S.C. § 523(a)(1)(C). Mr. Jacobs argues that the District Court improperly substituted its own factual findings for those of the Bankruptcy Court, and that the District Court applied an incorrect legal standard for nondischargeability under § 523(a)(1)(C). We have jurisdiction over Mr. Jacobs's appeal pursuant to 28 U.S.C. § 158(d)(1),1 and will affirm the District Court's decision. As explained below, the Bankruptcy Court applied an overly-strict legal standard for willfulness, and the undisputed facts demonstrate as a matter of law that Mr. Jacobs willfully attempted to evade or defeat his taxes.

I
A

Mr. Jacobs, a real estate and transactional lawyer, has practiced in the Fernandina Beach, Florida, area since 1972.2 He and his wife, Patricia Jacobs, have lived since December 1995 in a house on Amelia Island Plantation, a golfing resort community that offers amenities such as tennis courts, a spa, boutique-style shops, a golf club, and a grocery store. Many of Mr. Jacobs's clients also live in Amelia Island Plantation. Mrs. Jacobs's only assets when she married Mr. Jacobs were household furnishings and some artwork. She has never earned a significant amount of income during the marriage.

In the early 1990s, Mr. Jacobs established a law firm called Jacobs & Peters, P.A., which he subsequently re-named Arthur I. Jacobs, P.A. Mr. Jacobs testified that Arthur I. Jacobs, P.A. incurred federal tax debt and that, in 1995, it filed for bankruptcy "largely because of those tax debts." After the bankruptcy Mr. Jacobs reorganized the law firm and renamed it Jacobs & Associates, P.A. ("Jacobs & Associates"). Jacobs & Associates is a corporation, and Mr. Jacobs is its sole shareholder and sole officer.

Mr. Jacobs owes personal federal income tax for the years 1990-1995, 1997, and 1998.3 Although Mr. Jacobs could have arranged for his law firms to treat him as a salaried employee, and withhold tax from his income, in those years, tax returns submitted by the Government show that his law firms instead characterized his income as officer compensation in 1991-1995, 1997, and 1998.4 Because the income was so characterized, the firms did not withhold tax from Mr. Jacobs's compensation or pay withheld taxes on his behalf. The Government, however, submitted into evidence a document identified as a "certified official transcript" for the tax years 1989 through 1995, which shows two entries labeled "credit from withheld taxes & excess FICA" for, respectively, $76,911.25 on April 15, 1995 and $9,362 on April 15, 1996. The $9,362 amount is listed on Mr. Jacobs's 1995 tax return as "[f]ederal income tax withheld." Mr. Jacobs testified that the $76,911.25 amount "was either withheld or we paid an estimate. I don't know exactly how it was done." He did not testify about the $9,362 amount, which apparently was also either withheld or paid by Mr. Jacobs to the IRS. In any event, the $9,362 amount was only a small portion of the tax due on Mr. Jacobs's reported adjusted gross income of $233,510 for the tax year 1995. No other withheld tax amounts are evidenced in the record.

In each of the pertinent tax years Mr. Jacobs requested two extensions of time to file his returns, and then filed his returns before the extension deadlines. In each of the relevant years except 1997, he failed to send any estimated tax payment with his extension application.5 He filed his tax returns by the extension date each year, but without complete payment.6 In the early 1990s, Mr. Jacobs's law firm sold a building it owned in Tallahassee, Florida and paid the proceeds to the IRS. Also in the early 1990s, Mr. Jacobs paid the IRS the proceeds from the sale of some bank stock he owned.

From 1997 to 2001, Mrs. Jacobs worked at a jewelry store in Fernandina Beach called Morton-Jacobs Jewelers, Inc. ("Morton-Jacobs"), a corporation. She was the corporation's sole shareholder, officer and director. In 2001, she sold Morton-Jacobs, including its inventory and business goodwill, for $80,000. Morton-Jacobs's business never was profitable.

Between 1998 and 2001, Mr. Jacobs and his law firms wrote a total of $44,900 in checks to Morton-Jacobs.7 Of that amount, $8,400 was paid by Mr. Jacobs from his personal bank account. During the same period, Mr. Jacobs and Jacobs & Associates transferred an additional $119,056.87 to Morton-Jacobs, which Mr. Jacobs characterized as loans. Mrs. Jacobs never repaid the loans, even though Mr. Jacobs testified that she received a "dividend" of $22,231 from Morton-Jacobs after she sold the business in 2001. Mr. Jacobs testified before the Bankruptcy Court that he did not require his wife to pay back his loan to her because she spent a period of time caring for his terminally-ill sister. No documentation of that arrangement appears in the record.

In 1995, Mr. and Mrs. Jacobs bought the house on Amelia Island Plantation in which they currently live, for $525,000. Mr. Jacobs testified before the Bankruptcy Court that the mortgage company would not loan him the money to buy the house "because of [his] bad credit," but that it would loan the money to his wife. At trial and in his Rule 2004 examination, he testified that the mortgage company "did not want my name on the title" because "I had all the tax liens." Mr. Jacobs therefore signed the note and mortgage but deeded the home to his wife so that only her name appeared on the title. Mr. Jacobs made all the mortgage payments on the home himself, both on the initial mortgage and on a second mortgage the Jacobses subsequently obtained. They became signatories to the first mortgage, which was for thirty years and $595,000, in May 2002. Mr. Jacobs testified that the current mortgage indebtedness is approximately $660,000, that he gave the IRS most of the proceeds from one of the refinancings of the home, and that the home's current fair market value is approximately $800,000. The monthly mortgage payments, including taxes and insurance, total $4,500 per month. Mr. Jacobs testified, however, that no equity currently exists in the home.

Mr. Jacobs testified at length about his lifestyle in Amelia Island Plantation. He and Mrs. Jacobs belong to the Amelia Island Plantation Club, to which Mr. Jacobs pays approximately $1,600 per month. Mrs. Jacobs makes no contributions to those payments. The Jacobses do "all [their] grocery shopping there," as well as all of their entertaining. Mr. Jacobs testified that some of the entertaining is purely personal, but that "a good part of it is business." He also testified that he plays golf at Amelia Island Plantation once a week, and pays between $250 and $285 per month for that privilege.

According to Mr. Jacobs's testimony, Mrs. Jacobs became very depressed in 2000 after an indictment unrelated to this case was filed against Mr. Jacobs. To help his wife, that same year Mr. Jacobs paid approximately $20,000 for her to receive cosmetic surgery "to correct what she considers imperfections on her face." At the time of trial, he was paying between $600 and $700 a month for Mrs. Jacobs to lease a 2001 or 2002 Mercedes-Benz automobile.

Between 1997 and 2003, the Jacobses obtained several vehicles, owned and paid for by Jacobs & Associates, which they used for personal purposes as well as for business. In 1997, Mr. Jacobs purchased a $36,001 Chrysler Town and Country minivan,8 but the title was in the name of Jacobs & Associates. In 1997, Mr. Jacobs testified, he traded the Town and Country minivan for a Jeep.9 At some later point, Jacobs & Associates bought a 1996 Suburban and a 2001 Suburban, both of which Mr. Jacobs drove for personal as well as business purposes. Mr. Jacobs testified that the 2001 Suburban was "financed in [Mrs. Jacobs's] name," but that Jacobs & Associates made the payments on it.

In 2003, Mr. Jacobs traded in the 2001 Suburban for a 2003 G.M.C. Yukon. Jacobs & Associates made all the payments on the Yukon, but the title was in Mrs. Jacobs's name because, Mr. Jacobs testified, the seller "would only put it in her name." Mrs. Jacobs has no rental or other agreement with Jacobs & Associates. Mr. Jacobs testified at trial that he drove the Yukon "exclusively," that he drove it for personal and business purposes, and that, because the Yukon had seven seats, it was "quite utilitarian for large groups of folks that [he] t[ook] around in [his] business."

Mr. Jacobs also made payments to organizations in 2000 and 2001. He paid approximately $12,152 to "Place of Encouragement," a charitable corporation Mr. Jacobs founded with one of his clients. Mr. Jacobs testified that he and the client "couldn't find a permanent home" for Place of Encouragement, so the client "gave me the old Alan Barton barbecue building." Mr. Jacobs further testified, "I took that building through the Place of Encouragement, and we leased it for . . . a dollar for fifty years, to Hope Ministries, and we'd conduct our own ministries." Mr. Jacobs testified that, despite being a real estate attorney, he failed to search the building title and later discovered that "there were $26,000 owed in taxes." The $12,152...

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