Fernandez v. Internal Revenue Serv. (In re Fernandez)
| Decision Date | 23 August 2022 |
| Docket Number | Case No. 8:19-bk-04251-MGW,Adv. No. 8:19-ap-00396-MGW |
| Citation | 643 B.R. 490 |
| Parties | IN RE: Alexander Jose FERNANDEZ, Debtor. Alexander Jose Fernandez, Plaintiff, v. Internal Revenue Service, Defendant. |
| Court | U.S. Bankruptcy Court — Middle District of Florida |
643 B.R. 490
IN RE: Alexander Jose FERNANDEZ, Debtor.
Alexander Jose Fernandez, Plaintiff,
v.
Internal Revenue Service, Defendant.
Case No. 8:19-bk-04251-MGW
Adv. No. 8:19-ap-00396-MGW
United States Bankruptcy Court, M.D. Florida, Tampa Division.
Signed August 23, 2022
Buddy D. Ford, Esq., Jonathan A. Semach, Esq., Heather Reel, Esq., Buddy D. Ford, P.A., Tampa, Counsel for Debtor.
David A. Hubbert, Esq., Daniel B. Causey, IV, Esq., Aaron C. Brownwell, Esq., United States Department of Justice, Tax Division, Counsel for Internal Revenue Service.
FINDINGS OF FACT AND CONCLUSIONS OF LAW
Michael G. Williamson, United States Bankruptcy Judge
Under Bankruptcy Code § 523(a)(1)(C), a debtor cannot discharge a tax debt that he "willfully attempted in any manner to evade or defeat." Here, the Debtor seeks to discharge hundreds of thousands of dollars in unpaid taxes. The United States contends that the Debtor's failure to pay taxes was willful because rather than pay his taxes, the Debtor spent substantial sums on a house in an exclusive neighborhood, luxury cars, designer goods, international trips, and an expensive engagement ring. This Court must decide whether the United States has met its burden of proving that the Debtor's high discretionary spending, coupled with his failure to timely file his tax returns, constitutes a willful attempt to evade his tax debt under Bankruptcy Code § 523(a)(1)(C), thereby rendering his tax debt nondischargeable.
While excessive spending is circumstantial evidence of willfulness, whether the Debtor acted willfully must be determined from the totality of the circumstances. Here, the evidence at trial showed that the Debtor's spending was high, but it was not necessarily excessive or lavish. What's more, the evidence at
trial showed that the Debtor's initial failure to pay his taxes was the result of a mistake; the Debtor dealt with the IRS in good faith; and the Debtor did not attempt to conceal assets. Given the totality of the circumstances, the Court concludes that the United States failed to prove by a preponderance of the evidence that the Debtor's failure to pay his taxes was willful. The Debtor's tax debt is therefore dischargeable.
I. Findings of Fact
The Debtor is a radiologist. He earned his medical degree from the University of Michigan Medical School more than two decades ago.1 After finishing medical school, the Debtor did an internship, followed by his residency and then a fellowship.2 In 2008, following his fellowship, the Debtor began working in private practice.
A. From 2008 to 2015, the Debtor earned substantial income as a radiologist.
The Debtor's first job in private practice was with Imaging Consultants of South Florida, where he worked for five months until the practice was sold.3 In September 2008, the Debtor joined Optimal Radiology.4 The Debtor worked there for almost seven years.5 During his seven years with Optimal Radiology, the Debtor earned an average of $400,000 per year. Most years, his earnings were north of $400,000.6 He made the most money in 2013, when he made a little less than $500,000.7
B. The Debtor got into problems with the IRS because he didn't know he had to make estimated tax payments.
When the Debtor was a medical resident and a fellow, he worked as a W-2 employee.8 In fact, before entering private practice in 2008, every job the Debtor had was as a W-2 employee.9 As a W-2 employee, the Debtor's employers withheld taxes from his paycheck.10
It wasn't until the Debtor completed his fellowship and took a job with a radiology practice that he was employed as a "1099" independent contractor for the first time.11 As an independent contractor, the Debtor was responsible for his own business expenses: office rent, licensing and certification fees, malpractice insurance, etc.12
More important, he was also responsible for making estimated tax payments.13
When the Debtor took his first 1099 position, however, he wasn't aware of the need to make estimated tax payments.14 Nor was he prepared for the increase in his tax rate when he went from his fellowship to private practice.15 The Debtor didn't discover the need to make estimated tax payments until October 2010, when he went to a tax preparer (who worked for tax attorney Darren Mish) for help with his 2009 tax return.16
Because the Debtor had not been making estimated tax payments for 2009 and 2010, the tax preparer advised the Debtor, who up to that point had not owed any unpaid taxes, that he was going to incur a significant tax liability for 2009 and a similar liability for 2010.17 When the Debtor belatedly filed his tax returns for those years, he ended up owing $57,019 for 2009 and $104,195 for 2010.18
C. The Debtor enters into an installment agreement with the IRS.
When the Debtor learned he was going to owe substantial past-due taxes to the IRS, he asked Mish for help.19 An associate at Mish's office told the Debtor not to do anything until the IRS sent him a bill, at which point the associate would tell the Debtor how to proceed.20 Mish's office advised the Debtor to begin making estimated tax payments in the meantime.21
So the Debtor made $14,462 in estimated payments at the end of 2010; then, in 2011, the Debtor made $53,126 in estimated tax payments22 . Although it's not clear if or when the IRS sent the Debtor a bill, the Debtor says Mish's office instructed him sometime in 2012 to stop making payments to the IRS (presumably on past-due taxes) until Mish worked out an installment agreement.23 By August 2012, however, no installment agreement had been worked out.24
At that point, the Debtor reached out to the IRS directly.25 As part of his negotiations with the IRS, the Debtor offered to pay $3,000 per month, which the IRS accepted.26 And for two years, the Debtor paid the IRS $3,000 per month under the installment agreement.27
D. The Debtor defaulted on his installment agreement when he became entangled in a costly divorce.
Around the time the Debtor entered into his installment agreement with the IRS, his wife, Intissar, filed for divorce.28 The divorce was costly. Of course, there were legal fees—both his own and Intissar's.29 On top of that, the Debtor had to pay the household expenses for Intissar, who had custody of the couple's two children.30 Because child support and alimony were based on the Debtor's recent income, and 2013 was the Debtor's highest grossing year, at one point the Debtor was obligated to pay as much as $13,000 per month in domestic support obligations ($10,000 in alimony and $3,000 in child support).31
Making matters worse, at the same time the Debtor became entangled in a costly divorce, his income had taken a hit. In fact, it appears the Debtor's income was basically cut in half from 2013 to 2014.32 The decrease in income, coupled with the costly divorce, caused the Debtor to default on his installment agreement in 2014.33
E. In the meantime, the Debtor's tax problems were getting worse.
Although the Debtor entered into the installment agreement in 2012 and made payments on it in 2013 and parts of 2014, the Debtor was actually falling further behind on his tax obligations because he still was not paying enough in estimated taxes.34 According to his 2013 and 2014 tax returns, both of which (like his 2009, 2010, and 2011 tax returns) were filed late, the Debtor ended up owing $125,443 for 2013 and $54,570 for 2014.35
F. The IRS rejects the Debtor's offer in compromise.
In June 2015, the Debtor once again retained Mish to deal with his tax debt.36 According to the Debtor, Mish recommended that he pursue an "offer in compromise."37 Mish apparently recommended that the Debtor, whose tax debt at that point totaled in the hundreds of thousands of dollars, make an offer of $10,000.38 Mish told the Debtor $10,000 should be enough to get his foot in the door with the IRS, at which point they could begin negotiating with an IRS Revenue Officer.39
To file the offer of compromise on the Debtor's behalf, Mish requested that the Debtor fill out certain required forms and provide to Mish certain financial documents.40 The Debtor insists that he submitted all the required forms and documents to Mish by July or August 2015.41 The Debtor, assuming that Mish had submitted the $10,000 offer in compromise not long after the Debtor had provided him the requested documents, did not hear from Mish until sometime in 2017, which did not surprise the Debtor because Mish had told him the offer-in-compromise process could take more than a year.42
In actuality, the offer in compromise was not submitted until May 2017.43 It turns out Mish did not have all the information he needed to submit the offer.44 In December 2016, Mish's office sent a letter to the Debtor seeking more information, but the Debtor was no longer living at the address where Mish sent the letter.45 Eventually, Mish got in touch with the Debtor and got the information he needed, at which point Mish submitted a $10,000 offer in compromise on the Debtor's behalf.46 The IRS rejected the offer, however, because it was less than the Debtor's "reasonable collection potential" and because the IRS had determined, based on the information the Debtor had submitted, that he could pay his past-due taxes in full.47
G. The Debtor's appeal of the denial of his offer in compromise was unsuccessful.
Mish advised the Debtor that it was common for the IRS to reject an offer in compromise.48 Mish also told him it was common for offers in compromise to be worked out on appeal.49 So, based on Mish's advice, the Debtor appealed the IRS's rejection.50
During the appeal, the Debtor increased his offer of compromise from $10,000 to $20,000.51 But there was a problem: to pursue the appeal, the Debtor needed to be current on his tax obligations52 —and he wasn't.
In 2015 and 2016, when he thought the offer in compromise had been submitted, the Debtor says he was more or less current with his tax obligations...
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