In re Frosch
| Decision Date | 10 April 2001 |
| Docket Number | Bankruptcy No. 98-35948. Adversary No. 99-0240. |
| Citation | 261 BR 181 |
| Parties | In re Kevin FROSCH, Debtor. Kevin Frosch, Plaintiff, v. United States of America, City of Philadelphia, Defendants. |
| Court | U.S. Bankruptcy Court — Western District of Pennsylvania |
John R. Crayton, Bensalem, PA, counsel for debtor.
Thomas M. Rath, Philadelphia, PA, District counsel for IRS.
Before the court for resolution following trial, conducted on July 12, 2000, is Debtor's federal income tax liability for years 1989, 1990, 1991, and 1992.2 The IRS contends that the tax liabilities incurred by the Debtor in each of those four years are not dischargeable pursuant to 11 U.S.C. § 523(a)(1)(C). The IRS contends that the Debtor filed fraudulent returns or willfully3 evaded payment of his tax liabilities in each of the four years in question. The IRS admits that Debtor timely filed his 1989 through 1992 tax returns, that it has not examined the Debtor's returns for 1989 through 1992, that it has not made additional tax assessments, and that the three-year statute of limitations for assessment under the Internal Revenue Code, 26 U.S.C. § 6501(a), for those years has expired. 26 U.S.C. § 6501(c)(2), however, excepts "willful attempts in any manner to defeat or evade taxes" indicating that "a proceeding in court for collection of such tax may be begun without assessment, at any time" and Debtor admits that the statute of limitations would not have run if the Debtor filed a false return or made a willful attempt to evade or defeat the tax. Joint Pre-Trial Statement (hereinafter abbreviated J.P.S.), p. 2.
The court has reviewed the testimony of the witnesses, the exhibits admitted into evidence and the Memoranda of Law submitted by the parties.
Debtor, Kevin Frosch, contends that he has neither willfully evaded nor attempted to defeat payment of his tax obligations. He testified that he married his wife, Daryl Cohen, on October 20, 1989, Transcript of Trial by Video Conference (hereinafter abbreviated as T.V.C.), p. 9. Debtor testified that his financial circumstances at that time were dire. He had a bank account with less than $1,000.00 in it. All of his personal belongings were housed in his truck, which also served as his residence. From time to time, he stayed with his sister who lived in Annapolis, Maryland. From 1989 through 1992, Debtor was self-employed as a handyman doing small home repair jobs. He described himself as a person who was not good at business although he was good at construction work. From a prior marriage, Debtor had incurred a child support obligation requiring him, every two weeks, to pay $200.00 plus $50.00 toward arrears. He testified that he used nearly all of his income to pay that obligation and his other bills (all from T.V.C., pp. 9, 10).
Debtor's wife, Daryl Cohen, however, was gainfully employed in her own business as a medical insurance specialist who handled professional claims. In each of the tax years in question the Debtor and Daryl Cohen claimed "married filing separate" status on their federal income tax returns. Debtor's returns showed that he owed a tax liability in each year. Debtor testified that he was unable to pay the liability in full in any of the four years at issue and that at the time of filing the bankruptcy petition he still owed the IRS for each of those years (T.V.C., p. 11). He also testified (T.V.C., p. 12) that 1) his returns and those of his wife were prepared by accountants; 2) he has a General Educational Development (G.E.D.) diploma; 3) he has no training in tax preparation or accounting; 4) he merely looked at the bottom line of the completed return as it was presented to him before signing and filing his return; and 5) if he had any funds available to pay toward his tax liability, he did so. The parties have stipulated (J.P.S., pp. 1 and 2) that Debtor reported $4,079.00 due in 1989, $3,558.00 due in 1990, $1,143.00 due in 1991, and $1,078.00 due in 1992. With penalties and interest accrued, the total tax liability now approximates $25,000.00.
I. The IRS' first contention is that Debtor falsely and fraudulently claimed itemized deductions to which he was not entitled. These were mortgage interest expense and business use of the home expense. Debtor testified (T.V.C., p. 10) that, for the tax years in question, he operated his handyman business through a sole proprietorship known as K & D Home Improvements (K & D). During that time, Debtor owned no real estate. Nonetheless, Debtor claimed on Schedule A (Itemized Deductions) that he was entitled to a mortgage interest deduction, a credit for real estate taxes paid, and a deduction for use of the premises for the conduct of his business from his home. Debtor claims he was ignorant of these items claimed on his returns until after the bankruptcy case was filed (T.V.C., p. 13). Debtor's wife also testified about this matter. She admitted that the real estate was in her name alone in the relevant time period (T.V.C., p. 32). Daryl Cohen has a Master's Degree in Administration and has served as a director of health and cancer hospital services in the New Jersey and Philadelphia areas for approximately twenty years (T.V.C., p. 38). She testified that she received mortgage interest forms (Form 1098) each year and put them with the information she presented to the accountants who prepared her returns and those of her husband (T.V.C., p. 39). She stated that she did not alter the forms (T.V.C., p. 40). She testified that she received forms 1098 regarding mortgage interest payment (T.V.C., p. 32) and that they indicated how much she had personally paid on the mortgage (T.V.C., p. 40). She stated that she specifically told the accountants that all of the assets belonged solely to her (T.V.C., p. 41). Nonetheless, she also testified that she did not learn of the improper deductions claimed on Debtor's returns until sometime within the past year (T.V.C., p. 41).
To discredit the testimony of the Debtor and his wife, the IRS called the two accountants who had prepared the 1989 through 1992 tax returns. Frederick Etskovitz testified that he prepared the 1989 and 1990 Form 1040 Federal Income Tax Returns for the Debtor and for his wife (T.V.C., p. 45). He testified to the review process that was employed at his firm (T.V.C., p. 54). He stated that he believed at the time an accountant in his office prepared the returns that the property was owned jointly. He had no present recollection as to how he concluded that the property was jointly owned other than to say that it would have been through a discussion with either the Debtor or his wife. Because the discussion would have taken place ten years ago, he was uncertain as to the source of the information (all at T.V.C., p. 49). He testified that had he been given a Form 1098 listing mortgage interest paid, he would have used that information in preparing the return. If it was not provided, he would have accepted the information provided by his client (T.V.C., p. 50). Mr. Etskovitz could not recall whether he or one of his ten associates actually prepared the returns in question (T.V.C., pp. 53, 54).
The IRS also called Christopher Mark DiGiacomo, the accountant who prepared the 1991 and 1992 personal income tax returns for the Debtor and for his wife (T.V.C., p. 56). He specifically recalled assisting in the preparation of the returns and stated that he had communicated directly with Daryl Cohen with respect to the information contained therein (T.V.C., p. 56). He was not certain that he had ever talked to Debtor about the returns (T.V.C., p. 60). He did not check his file in preparation for testimony to see whether it contained a. Form 1098 (T.V.C., p. 64). He testified that the mortgage interest information from the Form 1098 would have been transferred to the tax return on Schedule A, Itemized Deductions, if the 1098 had been available (T.V.C., p. 64). Otherwise, the information on Schedule A would have been acquired from the taxpayer (T.V.C., p. 65).
The government also called Catherine A. Ponist. Ms. Ponist was the accountant who prepared the 1993 and 1994 personal income tax returns for Debtor and Ms. Cohen (T.V.C., p. 69). Most of her testimony did not involve the time periods at issue in this case. However, on cross examination, she was asked whether she had asked for and received Forms 1098 from her clients. She testified that Ms. Cohen did give her various documents including 1098 Forms (T.V.C., p. 80). However, banks issue 1098 Forms in only one Social Security number (T.V.C., p. 80). Therefore, the fact that the 1098 Form contains a designation of only one taxpayer is not conclusive that that taxpayer is the sole owner of the house.
The court credits the testimony of Daryl Cohen that she provided appropriate information to the accountants. Although the accountants testified that it was unlikely that their firms would have made mistakes in claiming mortgage interest deductions, the court credits the testimony of Ms. Ponist that the Form 1098 would be issued in the name of just one taxpayer, regardless of the number of owners of the home. The fair inference from the testimony of the various accountants who prepared the returns is that the Debtor improperly claimed one-half of the mortgage interest and associated real estate tax deductions, but Daryl Cohen claimed the other one-half when she could have claimed 100%. Thus, the Debtor's tax (and Daryl Cohen's return(s)) would have been subject to an adjustment had the IRS chosen to examine either or both.
The government also called Gregory Valenti, an IRS Revenue Agent who is also a Certified Public Accountant (CPA). Mr. Valenti was familiar with the Debtor's returns and Daryl Cohen's returns for 1989 through 1992 (T.V.C., p. 82). He saw that both had claimed itemized deductions on Schedule A. He testified that when individuals file in a "married...
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