In re Crawley
| Decision Date | 24 January 2000 |
| Docket Number | Bankruptcy No. 98 B 36478. Adversary No. 99 A 00161. |
| Citation | 244 BR 121 |
| Parties | In re Raymond J. CRAWLEY and Geraldine A. Crawley, Debtors. Raymond J. Crawley and Geraldine A. Crawley, Plaintiffs, v. United States of America, Defendant. |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
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Donna B. Wallace, Downers Grove, IL, for plaintiff/debtor.
Craig K. Weaver, United States Department of Justice, Washington, DC, for defendant.
Joel R. Nathan, Assistant United States Attorney, Chicago, IL.
This matter comes before the Court on the complaint filed by the Debtors, Raymond J. Crawley and Geraldine A. Crawley (collectively the "Crawleys") against the United States of America (the "USA") to determine whether their income tax liabilities for tax years 1985 through 1994 should be discharged pursuant to 11 U.S.C. § 523(a)(1). For the reasons set forth herein, the Court finds the debt is non-dischargeable under 11 U.S.C. § 523(a)(1)(C) because the Crawleys engaged in proscribed tax evasion, but is dischargeable under 11 U.S.C. § 523(a)(1)(B)(i) and (ii).
The Court has jurisdiction to entertain this matter pursuant to 28 U.S.C. § 1334 and Internal Operating Procedure 15(a), formerly known as General Rule 2.33(A), of the United States District Court for the Northern District of Illinois. This matter is a core proceeding under 28 U.S.C. § 157(b)(2)(I).
Many of the facts are undisputed. Mrs. Crawley is a high school graduate with no formal accounting training. Mr. Crawley has a tenth grade education with no formal accounting training. In 1977, the Crawleys started a business known as Multi-Ornamental Service Company ("Multi-Ornamental"). She did the office work and he did the supervision of work in the field for the ornamental iron working business. Multi-Ornamental was initially a sole proprietorship involved with rolling doors and grill work. It later became a subchapter S corporation for income tax purposes, solely owned and controlled by the Crawleys. Under 26 U.S.C. § 1366, income received by a subchapter S corporation is taxed to each shareholder pro rata. In 1993, Multi-Ornamental ceased to operate, but Mr. Crawley continued to provide service to customers as a sole proprietor.
When the Crawleys began their business in 1977, they employed the services of an accountant, Dennis Cipcich ("Cipcich"). Cipcich trained Mrs. Crawley to perform the bookkeeping functions for Multi-Ornamental. Cipcich prepared the payroll tax papers and other accounting statements for the business, including income tax returns. Cipcich also prepared the Crawleys' individual income tax returns.
The Crawleys filed tax returns for Multi-Ornamental for the taxable years 1977 through 1984. In 1985, Multi-Ornamental experienced financial difficulties. Cipcich negotiated an installment arrangement with the Internal Revenue Service (the "IRS") for the payment of delinquent withholding and payroll taxes. From 1985 through 1994, Mrs. Crawley forwarded business records to Cipcich, remitted all correspondence from taxing authorities to him and had conversations with Cipcich concerning the preparation and filing of income tax returns. See Crawleys' Exhibit Nos. 1-5.
The Crawleys were unable to pay their 1985 income taxes in full. The testimony was conflicting regarding Cipcich's advice to the Crawleys in 1985 and subsequent years regarding the filing of the returns. Mrs. Crawley testified that Cipcich advised her not to file tax returns if she and her husband could not pay the taxes in full. Cipcich, on the other hand, testified that he never advised the Crawleys not to file tax returns. Further, he did not recall specifically being requested to timely prepare the returns before he did so in 1996.
The Crawleys filed their individual income tax returns for the taxable years 1977 through 1984. The Crawleys did not timely file their individual income tax returns for taxable years 1985 through 1994, nor pay any taxes. The Crawleys did not timely file the income tax returns for Multi-Ornamental for taxable years 1985 through 1992, nor pay any taxes.
Mrs. Crawley testified she had no knowledge of proper tax procedures, but was aware of the annual April 15th deadline for filing income tax returns and the obligation to pay income taxes. Mr. Crawley was aware that the subject returns were not timely filed when due and the taxes in question were not paid. Lack of money triggered the decision not to timely file returns for the decade in question.
On January 18, 1996, the Crawleys sold their home and desired to purchase a new home. See Crawleys' Exhibit No. 6. Mrs. Crawley testified that they were unable to finance the purchase of a new home without submitting income tax returns from previous years. It was at this point that the Crawleys met with Richard M. Randick ("Randick"), an attorney who handles tax matters. Randick, Cipcich and the Crawleys were present at this meeting. Randick advised the Crawleys of the seriousness of their delinquent tax situation. Randick initiated contact with the IRS concerning the unfiled tax returns. In 1996, the Crawleys made a proposal for an "offer in compromise" to the IRS. The offer was refused because the IRS thought that the Crawleys were capable of paying more than their offer of $1,500.00. See Crawleys' Exhibit No. 7.
Cipcich subsequently prepared the delinquent personal tax returns for the Crawleys for the years at issue, as well as the corporate tax returns for Multi-Ornamental. The Crawleys' individual income tax returns for taxable years 1985 through 1990 were signed under oath by the Crawleys on June 26, 1996. See USA's Exhibit Nos. 1-6. Those returns were subsequently filed with the IRS in July. The Crawleys' individual income tax returns for taxable years 1991 through 1994 were signed under oath by the Crawleys on September 18, 1996. See USA's Exhibit Nos. 7-10. The returns were then filed with the IRS later that month. The income tax returns for Multi-Ornamental for taxable years 1985 through 1990 were signed under oath by Mr. Crawley on June 26, 1996 and subsequently filed with the IRS in July. See USA's Exhibit Nos. 11-16. The income tax returns for Multi-Ornamental for taxable years 1991 and 1992 were signed under oath by Mr. Crawley on September 18, 1996 and subsequently filed with the IRS later that month. See USA's Exhibit Nos. 17-18.
Cipcich testified that the returns were prepared based on the information that was available to him. Cipcich further testified that he placed his disclaimers at the end of each return, something he typically did not do, because he did not have all of the information necessary to completely and accurately prepare the returns. Cipcich admittedly did not review the returns with the Crawleys. Mrs. Crawley testified that hours after she and Mr. Crawley signed the returns, they noticed errors in the income reported, which they claim was excessive, and subsequently advised Cipcich. However, the Crawleys have not filed amended tax returns.
The Crawleys filed a Chapter 7 petition on November 12, 1998. Among the creditors listed on the Schedules was the USA, through its agency, the IRS. The USA asserts that the Crawleys owe income taxes, including penalties and interest, for years 1985 through 1994 in the amount of $294,549.00. The Crawleys filed the instant adversary proceeding on February 16, 1999. They seek a determination that the debt owed to the USA is dischargeable under 11 U.S.C. § 523(a)(1)(B)(ii). The USA contends that the debt is non-dischargeable because the Crawleys have willfully attempted to evade or defeat their taxes pursuant to 11 U.S.C. § 523(a)(1)(C). Alternatively, the USA argues that the 1040 Forms filed by the Crawleys for the tax years 1985 through 1994 did not fulfill the legal requirements of income tax returns and therefore the debt is also nondischargeable under § 523(a)(1)(B)(i).
The party seeking to establish an exception to the discharge of a debt bears the burden of proof. Selfreliance Fed. Credit Union v. Harasymiw (In re Harasymiw), 895 F.2d 1170, 1172 (7th Cir.1990); Banner Oil Co. v. Bryson (In re Bryson), 187 B.R. 939, 961 (Bankr.N.D.Ill.1995). The United States Supreme Court has held that the burden of proof required to establish an exception to discharge is a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991); In re McFarland, 84 F.3d 943, 946 (7th Cir.), cert. denied, 519 U.S. 931, 117 S.Ct. 302, 136 L.Ed.2d 220 (1996); In re Thirtyacre, 36 F.3d 697, 700 (7th Cir.1994). To further the policy of providing a debtor a fresh start in bankruptcy, "exceptions to discharge are to be construed strictly against a creditor and liberally in favor of a debtor." Goldberg Secs., Inc. v. Scarlata (In re Scarlata), 979 F.2d 521, 524 (7th Cir.1992) (quoting In re Zarzynski, 771 F.2d 304, 306 (7th Cir. 1985)). Accord In re Reines, 142 F.3d 970, 972-73 (7th Cir.1998), cert. denied, 525 U.S. 1068, 119 S.Ct. 797, 142 L.Ed.2d 659 (1999).
The burden of proving that the Crawleys' tax liabilities are non-dischargeable is on the USA. Sommers v. IRS (In re Sommers), 209 B.R. 471, 477-78 (Bankr. N.D.Ill.1997) (citations omitted); Dube v. United States (In re Dube), 169 B.R. 886, 891 n. 5 (Bankr.N.D.Ill.1994) (citations omitted), aff'd, 1995 WL 238674 (N.D.Ill. April 20, 1995); Sonnenberg v. United States (In re Sonnenberg), 148 B.R. 35, 37 (Bankr.N.D.Ill.1992); Berzon v. United States (In re Berzon), 145 B.R. 247, 250 (Bankr.N.D.Ill.1992) (citations omitted).
First, the Court will address the argument of the USA that the 1040 Forms filed by the Crawleys for tax...
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