In re Berzon, Bankruptcy No. 91 B 05208
| Decision Date | 07 July 1992 |
| Docket Number | Adv. No. 91 A 00339.,Bankruptcy No. 91 B 05208 |
| Citation | 145 BR 247 |
| Parties | In re Wayne B. BERZON, Debtor. Wayne B. BERZON, Plaintiff, v. UNITED STATES of America, Defendant. |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
Kevin D. Sprow, McKenzie & McKenzie, Chicago, Ill., for debtor.
David S. Newman, U.S. Dept. of Justice, Washington, D.C., for U.S.
This matter comes before the court on the debtor's motion for summary judgment with respect to a complaint he filed to determine the dischargeability of certain tax debts the debtor owed the United States. The issue is whether the debtor's federal income tax liabilities for the years 1981 through 1984 are dischargeable in this Chapter 7 case under 11 U.S.C. § 523 and § 727. The IRS takes the position that the debtor's tax liability is excepted from a discharge under § 523(a)(1)(C) because debtor failed to file tax returns, understated his income, and deposited his paychecks into his girlfriend's bank account.
The pleadings and exhibits filed in connection with the instant summary judgment motion indicate the following: Wayne Berzon was a commodities trader with Rosenthal & Company from 1976 to 1984. From 1976 until 1980, Berzon filed his federal income tax returns on time. However, from 1981 to 1984, Berzon did not file any federal income tax returns because, he claims, he did not have the money to pay the taxes, and his life was in disarray.
Berzon was a drug and alcohol user. According to Berzon, he initially used drugs only on an experimental basis, but by 1982 extensive use of cocaine began to cause him serious problems. Berzon claims that his drug use contributed to his failure to file tax returns and also helped to destroy his family life.
In 1982 Berzon separated from his wife. They were divorced in 1984. About this time Berzon began living with Rosemary Sprenger. He deposited his paychecks into her bank account. According to Berzon, he did this to help pay for their joint household expenses. However, the IRS asserts that Berzon deposited his wages into Sprenger's account to evade seizure of his money by the IRS.
In 1986, Sprenger pressured Berzon to file his 1985 tax return. She then discovered that Berzon had not filed tax returns for the years 1981 through 1984. She brought him to her accountant, Lizbeth Pryde. Pryde prepared Berzon's delinquent tax returns with Berzon's help, and the returns were filed in 1986. The 1983 return reported $100,822 income with a $1,500 loss, and the 1984 return reported $23,899 income with a $3,000 loss.
On March 11, 1991 Berzon filed a Chapter 7 petition, his third bankruptcy filing since 1985. The earlier cases were dismissed. Thereafter, he filed a complaint to determine the dischargeability of his income tax debt, and filed a motion for summary judgment. The IRS filed a cross-motion for summary judgment asserting that the tax liability was nondischargeable because Berzon willfully attempted to evade his income tax liability.
The question has been fully briefed by both sides. A review of the various documents the parties have filed with this court leads to the conclusion that there are no issues of material fact in dispute between the IRS and the debtor. The outcome of the adversary proceeding turns on whether the debtor's intent at the time he failed to file his returns, why he understated his income in returns he did file, and what motivated him to deposit his paychecks into Ms. Sprenger's account. The burden is on the IRS to establish by a fair preponderance of the evidence that Berzon acted willfully to evade his tax obligation. After reviewing the submissions and arguments of the parties, this court finds that the record is clear, that the IRS has met its burden, that there are no issues of material fact, and that Berzon willfully attempted to evade payment of his income taxes. Therefore his obligation to the IRS for the years 1981-1984 are not dischargeable under 11 U.S.C. § 727. Accordingly, the IRS's motion for summary judgment is granted. The debtor's motion for summary judgment is denied.
The court has jurisdiction over this proceeding under 28 U.S.C. § 1334(b) as a matter arising under §§ 523 and 727 of the Bankruptcy Code. The matter is before this court for determination under Local Rule 2.33 of the United States District Court for the Northern District of Illinois automatically referring bankruptcy cases and proceedings to this court for hearing and determination. This is a core proceeding under 28 U.S.C. §§ 157(b)(2)(B) and (I).
Under Rule 56(c) Fed.R.Civil P., Fed.R.Bkrtcy.Proc. 7056, summary judgment is proper if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247, 106 S.Ct. 2505, 2509, 91 L.Ed.2d 202 (1986); Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 585-86, 106 S.Ct. 1348, 1355, 89 L.Ed.2d 538 (1986). The inquiry the court must make is whether the evidence presents a sufficient disagreement to require trial or whether one party must prevail as a matter of law. Anderson, 477 U.S. at 251-52, 106 S.Ct. at 2512. All reasonable inferences to be drawn from the underlying facts must be viewed in a light most favorable to the party opposing the motion. In re Mirus, 87 B.R. 960 (Bankr. N.D.Ill.1988).
Section 523 of the Bankruptcy Code provides that certain tax debts are not dischargeable in a Chapter 7 case. The language in § 523 that is relevant to the instant dispute is:
11 U.S.C. § 523(a)(1)(C)
The case law suggests that the phrase "willfully attempted . . . to evade or defeat . . ." should be interpreted in accord with § 7201 of the Internal Revenue Code, providing that it is a felony to "willfully attempt in any manner to evade or defeat any tax imposed by Title 26, i.e. the Internal Revenue Code or the payment thereof." In re Gathwright, 102 B.R. 211 (Bkrtcy.D.Ore.1989). At the same time, however, it is clear that § 523 of the Bankruptcy Code and § 7201 of the Internal Revenue Code are not identical since § 7201 contains the additional phrase "or payment thereof;" the § 523 exception to discharge does not contain this language. However, this court believes that this difference in language is of no practical effect in terms of interpretation of the statute. See, In re Jones, 116 B.R. 810 (Bankr. D.Kan.1990). But see, In re Gathwright, 102 B.R. 211, 212 (Bankr.D.Or.1989) () Thus, contrary to the holding in Gathwright, this court believes that is would be relevant to determine whether Berzon deposited his paychecks into Sprenger's bank account to contribute to the payment of household expense bills or to avoid having the money seized by the IRS. However, as indicated below, it is not necessary to a resolution of the instant summary judgment motion to resolve that question.
The burden of proving that the debtor's tax liabilities are nondischargeable is on the IRS. In re Fernandez, 112 B.R. 888 (Bkrtcy.N.D.Ohio 1990); In re Kirk, 98 B.R. 51 (Bkrtcy.M.D.Fla.1989). The IRS must prove nondischargeability by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). Thus, the IRS will meet its burden if it shows that it is more probable than not that Berzon willfully attempted to evade his taxes.
Whether Berzon willfully attempted to evade income tax is a question of fact to be determined from the totality of the record. In re Kirk, 98 B.R. 51 (Bkrtcy. M.D.Fla.1989). The IRS must show by a preponderance of the evidence that Berzon willfully attempted to evade his tax obligation by filing late returns and understating his income. Direct proof of a debtor's intent to evade tax obligations is usually unavailable. Thus, intent to evade taxes is generally provable by circumstantial evidence and reasonable inferences drawn from the existence of certain fact patterns, otherwise called badges of fraud. In re Levinson, No. 85 A 1432, slip op. at 7 (Bankr.N.D.Ill. April 18, 1990). See also, Twyne's Case, 3 Co.Rep. 80b, 76 Eng.Rep. 809 (1601). In the income tax area, badges of fraud include significant understatements of income made repeatedly; failure to file tax returns; repeatedly filing returns late; implausible or inconsistent behavior by the taxpayer; and failure to co-operate with federal tax authorities. In re Graham, 108 B.R. 498 (Bkrtcy.E.D.Pa. 1989); Tax Court Rule 142(b), IRC. § 6653(b).
As the IRS sees it, the debtor's conduct in connection with his 1981-84 income tax obligations fits into a number of the badges of fraud. First, Berzon filed his returns late, in 1986 when they were due in 1982, 1983, 1984, and 1985. Second, he significantly understated his income in several of the tax returns he did file. His 1983 tax return reports income of $100,822, but he testified at his deposition that his 1983 income was $210,000. As for 1984, his tax return reports $23,899 income, but his 1985 bankruptcy schedules and statement of affairs state that is 1984 income was $65,000. At his deposition, Berzon testified that whatever amount he reported as his income on his bankruptcy papers was the proper amount. Third, the...
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