In re Dube

• Decision Date: 07 July 1994
• Docket Number: 92 A 00848.,Bankruptcy No. 92 B 13895
• Citation: 169 BR 886
• Parties: In re Lawrence H. DUBE and Janet M. Dube, Debtors. Lawrence H. DUBE and Janet M. Dube, Plaintiffs, v. UNITED STATES of America, Defendant.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

169 B.R. 886 (1994)

In re Lawrence H. DUBE and Janet M. Dube, Debtors Lawrence H. DUBE and Janet M. Dube, Plaintiffs, v. UNITED STATES of America, Defendant.

Bankruptcy Nos. 92 B 13895, 92 A 00848.

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

July 7, 1994.

COPYRIGHT MATERIAL OMITTED

Collins & Collins, Chicago, IL, for debtors/plaintiffs.

Barbara E. Seaman, Eugene Rossi, Trial Attys., Tax Div., U.S. Dept. of Justice, Washington, DC, for defendant.

FINDINGS OF FACT, CONCLUSIONS OF LAW AND MEMORANDUM OPINION

ERWIN I. KATZ, Bankruptcy Judge.

This adversary proceeding comes before the Court on the complaint of Lawrence H. ("Lawrence") and Janet M. ("Janet") Dube to determine the dischargeability of their federal income tax debt. After considering the arguments and evidence presented, the Court enters these Findings of Fact and Conclusions of Law. This is a core proceeding over which the Court has subject matter jurisdiction pursuant to 28 U.S.C. §§ 1334 and 157(b)(2)(I).

BACKGROUND

Lawrence Dube ("Lawrence") was a pilot, trained by the United States Airforce. He married three times, being twice divorced, with his last marriage to his current wife, Janet, in 1972. In 1977, Janet and Lawrence Dube ("the Dubes") experienced some turmoil in their lives which caused them to closely examine their religious beliefs. At about this same time, Lawrence a pilot with United Airlines ("United"), was to receive two large increases in pay.¹ Lawrence decided to devote his life to God and found a church (the "Dube Church").

The Dube Church articles of incorporation state the Dube Church was organized for the following purposes:

(1) to promote and encourage the dissemination of the Gospel of Jesus Christ through apostolic action;

(2) to hold regular teaching, prayer and worship services open to all, who would learn and practice the principles set forth in the Holy Bible, the Word of God, without regard to race, sex or national origin;

(3) to engage in charitable efforts for relief of those in need or distress, and to lessen the burden of government in this regard;

All to the glory of God.

The Dube Church had a Board of Directors which consisted of Lawrence, Janet and one other non-family member.

As part of founding the Dube Church, Lawrence took a vow of poverty. This vow of poverty stated he would not have any property in his name, but it did not require him to live in poverty. In fact, the Dubes continued to live in their home, drive their cars and purchase the same household items. Lawrence conveyed the title of their home to the Dube Church on August 20, 1979. He also put the title of their cars in the Dube Church's name and made the Dube Church the beneficiary of his life insurance policy. The Dubes set aside part of their basement solely for worship. Otherwise, the Dubes continued the use and enjoyment of their facilities as before.

The Dube Church was originally affiliated with the Life Science Church. Both Lawrence and Janet received certificates of ordination from the Life Science Church. By affiliating with this established church, the Dubes stated that they thought they would receive guidance, both spiritual and practical. Further, the Dubes thought by affiliating with a church they knew to be tax exempt, they too would be covered by the affiliate church's tax exemption.

Soon thereafter, the Dube Church left the Life Science Church and affiliated with the Basic Bible Church. The Dube Church affiliated with and then resigned from several other churches² in the following years. Eventually, the name of the Dubes' Church was changed to the Church of the Holy Spirit. Part of the reason for the name change was that both the Life Science Church and the Basic Bible Church had a history of being "tax sham" churches. Lawrence knew this from articles in national magazines and newspapers.

In 1978, after creating the Dube Church, the Dubes stopped paying taxes. The Dubes' position was that all of their income and possessions having been assigned in the Dube Church, there was no taxable income to them. Lawrence stated he knew churches were automatically exempt from paying taxes so they did not file any forms with the IRS. Lawrence attempted several times to keep United Airlines from withholding taxes by providing false W-4 forms to United. For example, in May of 1978, Lawrence submitted a W-4 to his employer on which he claimed 85 allowances.

The Dubes began attending the Christian Assembly of God Church in Zion (the "Zion church") in 1979. They were baptized into the Zion church in June of 1980 and remained members of the Zion church until the Fall of 1983. At the time the Dubes were members of the Zion church, the pastor was Michael Ciociola and the Assistant Pastor was Douglas Carroccio. The Zion church created "cell-groups" for bible study and the Dubes hosted one of these cell-groups. The Dubes' cell-group was cancelled by Pastor Ciociola when Assistant Pastor Carroccio verified rumors that the Dubes were claiming the members of the Zion church were members of the Dube Church. The Dube Church never had a congregation of its own. The people who attended the Dube Church were parishioners of other churches.

At about this time, the IRS began communicating with the Dubes to determine why they had not been paying their taxes. The IRS sent numerous letters and eventually had two revenue officers visit the Dube household. Janet knew of these letters and of the visit of the officers. Janet also knew Lawrence had difficulty accepting that he had to pay the government taxes of any kind. Lawrence described taxes by using such terms as "unconstitutional income tax", "damn socialistic security tax", "money being stolen by the government" and as "federal tax confiscation."

Lawrence was convicted by a jury of willfully attempting to evade and defeat his income tax for the year 1981, of failing to file tax returns for the years 1981, 1982, and 1983, and of submitting three false Employee Withholding Allowance Certificates (form W-4) to United, his employer, during the later part of 1982.³ Late tax returns for years 1978, 1979, 1980, 1981, 1982, 1983, and 1984 were filed in early 1986. There is no doubt the Dubes performed numerous benevolent activities during the time in question.

In 1986, after retiring from United, Lawrence liquidated his pension fund in the amount of $239,830.41. He used some of the funds to pay his legal bills, some to fund Individual Retirement Accounts, and $125,000 was used to purchase a Life Insurance Annuity from Aetna Insurance Company ("the annuity").

Instead of proceeding to the Tax Court on the issue of the tax-exempt status of the Dube Church, the Dubes executed Form 870-AD, Waiver of Restriction on Assessment and Collection of Deficiency in Taxes and Acceptance of Overassessment. Form 870-AD finalizes the result of a tax examination such that the government is permitted to go ahead and assess tax penalties and interest and to begin the collection process. The issues in dispute are negotiated and are considered closed once the form is signed. In the Dubes' case, as a result of signing the Form 870-AD, fraud penalties were not pursued against Janet. In the late returns, the Dubes conceded that their earnings constituted income to them. They did, however, claim charitable and other deductions for the amount donated to the Dube Church. The Dube Church funds were utilized to pay all of the Dubes' living expenses and entertainment (if any) with the balance devoted to charitable purposes.

In the Form 870-AD proceedings, the IRS traced the income through the Dube Church. As a result, contributions which the Dubes could substantiate as having been made to qualified charitable organizations were all allowed as charitable deductions. Also, the Dubes' tax deficiencies were reduced.

On October 7, 1991, an assessment of the debtors' tax liability, including additional tax for the year 1986, was made. On October 21, 1991, assessments against the debtor for the outstanding tax liabilities, including additions to tax, for the years 1978 through 1985 and 1987, were made.

In January of 1992, Lawrence created the Lawrence and Janet Dube's Children's Trust ("the Children's Trust") of which Janet is the Trustee. On January 31, 1992, Lawrence transferred the $125,000 annuity he purchased when he retired from United to the Children's Trust.

On June 19, 1992, Dube filed a Chapter 7 bankruptcy and filed a ten count complaint to determine the dischargeability of the IRS assessments for the years 1978 — 1987.⁴ The IRS responded by arguing the Debtors' taxes are not dischargeable under section 523(a)(1)(C). The IRS argues the debtors attempted to willfully evade their taxes by filing false W-4 withholding forms, failing to promptly file their taxes, using illegal deductions to evade taxes, creating a church to evade taxes, having the church pay personal expenses and purposely moving assets out of the IRS' grasp.

ESTOPPEL

Both sides argue collateral estoppel should be applied to the previous decisions rendered in the IRS' attempts to collect taxes from the Dubes. Both sides point to Lawrence's criminal conviction in 1986 as estopping litigation over the issues already adjudicated in that proceeding.

The Seventh Circuit has affirmed the use of collateral estoppel in proceedings pursuant to section 523(a). Klingman v. Levinson, 831 F.2d 1292 (7th Cir.1987). In order for collateral estoppel to be applied in dischargeability proceedings, four elements must be present:

(1) the issue sought to be precluded must be the same as that involved in the prior litigation;

(2) the issue must have been actually litigated in the prior litigation;

(3) a determination of the issue in the prior litigation must have been essential to the final judgment; and (4) the party against whom estoppel is invoked must be fully represented in the prior action.

Id. at 1295.

The burden of proof standard in the criminal...