Berkery v. COMMISSIONER, IRS, Civ. A. No. 94-1412. Adv. No. 92-2081. Bankruptcy No. 91-23954T.
| Decision Date | 22 February 1996 |
| Docket Number | Civ. A. No. 94-1412. Adv. No. 92-2081. Bankruptcy No. 91-23954T. |
| Citation | 192 BR 835 |
| Parties | John C. BERKERY, Appellant, v. COMMISSIONER, INTERNAL REVENUE SERVICE, Appellee. |
| Court | U.S. District Court — Eastern District of Pennsylvania |
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John R. Crayton, Crayton and Belknap, Bensalem, PA, for John C. Berkery.
John C. Berkery, Flourtown, PA, pro se.
Shannon L. Hough, Tax Div., U.S. Dept. of Justice, Washington, DC, for Commissioner, I.R.S.
Edward M. Mazze, Doylestown, PA, pro se.
Frederic Baker, Trustee, Philadelphia, PA, pro se.
This bankruptcy appeal arises out of a January 6, 1994, order of the United States Bankruptcy Court for the Eastern District of Pennsylvania. The appellant, debtor John Berkery initiated an adversary proceeding in United States Bankruptcy Court by filing a Complaint to determine the dischargeability of his 1980 and 1981 federal income tax debts. After a hearing on August 2, 1993, the bankruptcy court concluded that appellant's income tax debt was excepted from discharge under 11 U.S.C. § 523(a)(1)(C), finding that the appellant had made fraudulent returns and willfully attempted to evade the taxes. The appellant now appeals from this ruling.
The January 6, 1994, bankruptcy order is a final order entered in a core proceeding under 28 U.S.C. § 157(b)(2)(E). This Court has jurisdiction over the appeal under 28 U.S.C. § 158(a) and Bankruptcy Rule 8001(a).
In cases originating in the bankruptcy court, this Court occupies the first level of appellate review. It is settled law that our role is to apply a clearly erroneous standard to findings of fact, while applying a de novo standard of review to questions of law. In re Molded Acoustical Prod., Inc., 150 B.R. 608, 612 (E.D.Pa.1993); Universal Minerals, Inc. v. C.A. Hughes & Co., 669 F.2d 98, 102 (3d Cir.1981). Additionally, mixed findings of fact and law must be separated, with the appropriate standard applied to each component. See e.g., Resyn Corp. v. United States, 851 F.2d 660, 664 (3d Cir. 1988); In re Jersey City Medical Center, 817 F.2d 1055, 1059 (3d Cir.1987).
With respect to the "clearly erroneous" standard, the Supreme Court has stated, "A finding is `clearly erroneous' when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed." United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 542, 92 L.Ed. 746 (1948) quoted in Anderson v. City of Bessemer, N.C., 470 U.S. 564, 573-74, 105 S.Ct. 1504, 1511, 84 L.Ed.2d 518 (1985).
We summarize only those facts and prior proceedings believed relevant to an understanding of the issues raised on appeal. The facts are either not disputed or subject to dispute.
Appellant, John Berkery, (hereinafter "appellant") a citizen of both the United States and Ireland, filed income tax returns for the years 1980 and 1981 in the amounts of $44,810.00 and $53,000.00. The IRS determined that these amounts were underestimated by $364,237.29 in 1980 and $209,606.00 in 1981. and that appellant's additional income was derived from the sale of phenyl acetone (P-2-P), an illegal substance used in the manufacture of methamphetamine (speed). See, Berkery v. Commissioner, 91 T.C. 179, 1988 WL 77545 (1988). Appellant does not dispute that he was engaged in illegal drug transactions.1 (See, Transcript of bankruptcy hearing, p. 6-7, hereinafter "Trans.").
On January 18, 1982, appellant was named in a fourteen count indictment alleging one count of conspiracy to distribute (P-2-P) and methamphetamine, nine counts of possession with intent to distribute P-2-P, and four counts of possession with intent to distribute methamphetamine. Berkery v. Commissioner, 91 T.C. at 181. Appellant fled the country and became a fugitive from justice until his arrest in 1987.2
Appellant subsequently petitioned for a trial in United States Tax Court to challenge the IRS deficiency determination. A trial was held on December 11, 1986 in Philadelphia, Pa. before the Honorable Thomas B. Wells. The tax court found that the appellant had federal income tax deficiencies for the taxable years 1980 and 1981, due to unreported income deriving from the appellant's illegal activities, specifically, appellant's distribution of P-2-P. The court found a deficiency in the amount of $364,237.29 for 1980 and a deficiency in the amount of $209,606.00 for 1981.3 The Debtor subsequently appealed the tax court's ruling. On appeal the Third Circuit affirmed the holding of the tax court.
On September 27, 1991, Appellant filed a petition for bankruptcy under Chapter 7. The appellant's debts, excepting those which were later found to be nondischargeable, were discharged on October 31, 1991. Subsequently, the United States filed a brief opposing discharge of Appellant's tax liabilities under 11 U.S.C. § 523(a)(1)(C).
After a hearing on August 2, 1993, the bankruptcy court held that the appellant's tax liabilities were excepted from discharge because the court found that the appellant had made fraudulent returns and willfully attempted to evade his taxes under § 523(a)(1)(C).
Subsequently, the appellant filed an appeal of the bankruptcy order to this court on January 18, 1994. On May 2, 1994, this Court handed down an Order dismissing the appeal without prejudice for failure to comply with Rule 8006 of the Rules of Bankruptcy Procedure. On May 9, 1994, appellant filed a Motion for Reconsideration in this Court. This Court granted the above Motion and reinstated the appeal. This appeal is presently before us.
The issue on appeal is whether the appellant's tax obligations for the years 1980 and 1981 are dischargeable under 11 U.S.C. § 523(a)(1)(C).4
At the outset the appellant argues that the bankruptcy court improperly accorded collateral estoppel effect to the tax court judgment with respect to the issues of fraud and willful evasion under § 523(a)(1)(C). Moreover, the appellant further alleges that the bankruptcy court blindly adopted all the factual findings of the tax court as res judicata, and that the United States failed to present any sort of case during the bankruptcy proceeding to meet its burden of proof for dischargeability under § 523(a)(1)(C). We will address these arguments accordingly.
In the first instance we note that appellant is correct in his assertion that the finding of an income tax deficiency by the tax court does not have collateral estoppel effect as to the issue of dischargeability for fraud and tax evasion under § 523(a)(1)(C). See, Graham v. Internal Revenue Service, 973 F.2d 1089 (3d Cir.1992) (). Stated differently, a finding of liability for an income tax deficiency alone is not akin to a finding of fraud or willful evasion for dischargeability purposes; these are separate issues which needed to be litigated separately.
The appellant's contention, however, although correct in principle, is without merit. The appellant misinterprets the bankruptcy court's holding regarding collateral estoppel. The bankruptcy court did not base its holding upon the conclusion that the tax court decision automatically established fraud and willful evasion under § 523(a)(1)(C). Rather, the bankruptcy court held that the appellant was estopped from attempting to relitigate the issues of whether the debtor had additional, unreported income in 1980 and 1981, the source thereof, i.e., the sale of P-2-P, and whether a tax deficiency existed for 1980 and 1981, since such issues had previously been litigated and determined by the tax court.5
We find that the bankruptcy court was correct in applying collateral estoppel to the existence of additional income, the source thereof and the income tax deficiencies, since all the elements required for collateral estoppel were met with respect to those issues.6
Next, the appellant contends that the United States failed to offer any sort of evidence to meet its burden of proof under § 523(a)(1)(A) and as a result the bankruptcy court simply adopted all the factual findings of the tax court as its own as res judicata. We disagree with this assertion, again finding it to be without merit.
We note in the first instance that the United States did submit evidence in support of its proposition that appellant committed either fraud or willful evasion as construed under § 523(a)(1)(C). This evidence largely consisted of appellant's own testimony during cross-examination by the United States at the hearing. During cross-examination the appellant testified to having been involved in illegal drug activities (Trans. p. 6-7) which led to his indictment. He also admitted to having been a fugitive from justice for four years (Trans. p. 11-12). Further, he testified to being a college graduate who had speculated in real estate and held overseas bank accounts. (Trans. p. 8-9). These factual findings largely formed the evidentiary basis upon which the bankruptcy court established its conclusion of fraud and willful evasion.
Furthermore, the United States submitted, as additional evidence to meet its burden of proof, the prior tax court opinion along with a copy of the Third Circuit's holding affirming the tax court decision. As explained previously, the bankruptcy court properly accorded the tax court decision collateral estoppel effect with respect to the existence and basis of the tax deficiencies. The bankruptcy court did not, however, adopt the entire record of the tax court a...
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