In re Hall
| Decision Date | 01 November 1994 |
| Docket Number | Bankruptcy No. 93-31495-S. Adv. No. 94-3089-S. |
| Citation | 174 BR 210 |
| Court | U.S. Bankruptcy Court — Eastern District of Virginia |
| Parties | In re Chris A. HALL, Annette D. Hall, Debtors. Sherman B. LUBMAN, Trustee, Plaintiff, v. Chris A. HALL, Annette D. Hall, Defendants. |
Sherman B. Lubman, Richmond, VA, for plaintiff.
Chris A. and Annette D. Hall, pro se.
This matter comes before the Court on the complaint of the Trustee in Bankruptcy. The trustee objects to the debtors' discharge, and asks this Court to refuse to grant a discharge pursuant to 11 U.S.C. § 727. After consideration of the record and pleadings, and of the testimony and argument heard at a trial held October 25, 1994, the Court makes the following findings of fact and conclusions of law.
The debtors, Chris A. Hall and Annette D. Hall, filed their joint Chapter 13 petition on April 6, 1993. The schedules appended to the debtors' petition in bankruptcy listed current monthly gross income in the amount of $4498 for Mr. Hall, a computer programmer/analyst for the U.S. Postal Service, and $1937 for Mrs. Hall, a development secretary for the American Red Cross. (Sched. I-Current Income of Individual Debtors). Also listed was income from employment for husband and wife from 1991 to 1993. (Statement of Financial Affairs). The debtors' schedules indicated that the debtors were owed no tax refunds. (Sched. B-Personal Property, Items 17 and 20). In addition, the debtors have scheduled various property items, as well as a time share and time share maintenance obligations.
A plan was confirmed on July 13, 1993, but on November 12, 1993, the Halls converted their case to one under Chapter 7 pursuant to 11 U.S.C. § 1307(a), stating in their notice of conversion that they were no longer able to comply with their Chapter 13 plan. The amended schedules filed December 22, 1993 again listed no tax refunds due the debtors. (Sched. B-Personal Property, Items 17 and 20, at page 6).
Mr. Lubman, Trustee in Bankruptcy, has filed a complaint objecting to the Halls' discharge. Mr. Lubman states that at a December 8, 1993 meeting required by 11 U.S.C. § 341, he became aware through interrogatories that the debtors had not filed income tax returns for the years 1989 through 1993 and he directed them to do so by April 15, 1994. He contends that returns have not been filed, and as a result he cannot determine the extent of the estate's property. Without the returns, he cannot determine whether any tax refunds are due the Halls, nor can he determine the financial condition of the debtors. Mr. Lubman asks that the Court refuse to grant the debtors a discharge under 11 U.S.C. § 727, and states that the debtors have refused to cooperate with the trustee as required by 11 U.S.C. § 521(3) and Federal Rule of Bankruptcy Procedure (F.R.B.P) 4002.
The Halls deny any failure to cooperate with the trustee, and state that Lubman learned of the failure to file by way of an undated letter addressed to Lubman from the Halls. This letter is appended to the Halls' answer as Exhibit A. In that letter, at the Pre-trial Conference, and at trial, the Halls have expressed various bases for their contention that they are not required to file tax returns. One basis for their position, as expressed at the Pre-trial Conference, is that their wages are not income for the purposes of filing a return. Another basis for their position, as evidenced by the letter appended to their answer, is that 26 U.S.C. § 6020 requires the Secretary of the Treasury to file the Halls' returns. At trial, the Halls argued that the Internal Revenue Code does not require American citizens to file tax returns unless they have foreign income, and that withholding agents are liable for taxes and for filing tax returns rather than individual taxpayers.
This Court finds that the Halls have not kept or filed their tax returns for the years 1989-1993, and that they refuse to do so. This Court also finds that the Halls have refused to provide copies of their tax returns to the Trustee in Bankruptcy. Those copies are necessary to inform the Trustee as to whether or not the Halls might be entitled to tax refunds that would be property of this bankruptcy estate, and whether they have other income producing property or assets omitted from their schedules. In addition, the debtors have failed to cooperate with the trustee by refusing to file or prepare tax returns, and by failing to deliver copies of those returns to the trustee.
Title 26 of the United States Code (The Internal Revenue Code), Section 6012, requires that returns be made by every individual whose "gross income" is greater than or equal to the exemption amount.1 Gross income is defined in § 61 of the Internal Revenue Code as "all income from whatever source derived, including, (but not limited to) the following items: (1) Compensation for services." 26 U.S.C.A. § 61 (West Supp. 1994). Wages are income; to argue otherwise is to make a meritless contention. Lonsdale v. Commissioner, 661 F.2d 71, 72 (5th Cir.1981); United States v. Burton, 737 F.2d 439, 441 (5th Cir.1984) (); Scull v. United States, 585 F.Supp. 956, 963 (E.D.Va.1984) ().
When a taxpayer fails to file a return, which the Court notes constitutes a criminal offense under 26 U.S.C. § 7203,2 the I.R.S. may file a substitute return for the taxpayer under § 6020.3 Case law refutes any argument the Halls may espouse that a plain reading of § 6020(b) requires the Secretary to file their return by its use of the word "shall." When the section is read as a whole, it should be noted that § 6020(a) uses the word "may" rather than "shall." Substitute returns filed under § 6020 do not constitute filed returns by the taxpayer, and at least one court has stated that: "Courts have held that 26 U.S.C. § 6020(b) provides the IRS with some recourse if a taxpayer fails to file a return as required under § 6012, but that it does not excuse a taxpayer from the filing requirement." In re Bergstrom, 949 F.2d 341, 343 (10th Cir.1991) (citation omitted). In Moore v. Commissioner, the 5th Circuit, in disposing of an argument similar to that of the Halls, awarded the government double costs due to the pro se taxpayer's use of frivolous "long defunct arguments" on appeal and held that § 6020(b) does not "supplant the taxpayer's original obligation to file" under § 6012. 722 F.2d 193, 196 (1984).
Finally, this Court finds no merit in the Halls' meandering trial argument regarding foreign income earners and the liability of withholding agents. Sections 1441, 1442, 1443, and 1461 of Title 26, and the various OMB control numbers or form numbers cited by the Halls as authority for their position do not sway this Court from its holding that 26 U.S.C. § 6012 requires the Halls to file tax returns.
Honest debtors are provided a "fresh start" through 11 U.S.C. § 727, which provides for a general discharge of their debts. Union Bank of the Middle East, Ltd. v. Farouki (In re Farouki), 133 B.R. 769, 776 (Bankr.E.D.Va.1991) (), aff'd sub nom. Farouki v. Emirates Bank International, Ltd., 14 F.3d 244 (4th Cir.1994); see also Pyramid Technology Corp. v. Cook (In re Cook), 146 B.R. 934, 935-936 (Bankr.E.D.Pa. 1992). Section 727 contains provisions that bar a general discharge "to make certain that those who seek the shelter of the bankruptcy code do not play fast and loose with their assets or with the reality of their affairs." Farouki, 133 B.R. at 776 (citing In re Tully, 818 F.2d 106, 110 (1st Cir.1987)). Section 727(a)(3) is one of those provisions, and requires, among other things, that the debtor "keep" certain records, from which the debtor's financial condition might be determined. 11 U.S.C. § 727(a)(3)4; Green Hill Corp. v. Kim (In re Kim), 97 B.R. 275, 279 (Bankr. E.D.Va.1989). "Keep" means not only to maintain, but "to maintain continuously and methodically for the purposes of a record; as, to `keep' books." Black's Law Dictionary 868 (6th ed. 1990).
This Court has held that the purpose of § 727(a)(3) "is to make the privilege of discharge dependent upon a true presentation of the debtor's financial affairs." Dominick & Dominick, Inc. v. Baxter (In re Baxter), 96 B.R. 58, 60 (Bankr.E.D.Va.1989) (citations omitted). "The statute also ensures that the trustee and creditors are supplied with dependable information on which they can rely in tracing a debtor's financial history." Meridian Bank v. Alten, 958 F.2d 1226, 1230 (3rd Cir.1992). By refusing to file tax returns, the debtors have run afoul of the purposes of § 727(a)(3).
Under F.R.B.P. Rule 4005, the Trustee, as the plaintiff, has the initial burden of proving his objection to the debtors' discharge. The Trustee must show that the debtors failed to keep adequate records, and that the debtor's failure makes it difficult, if not impossible, for the Trustee to fully determine the financial condition of the debtors. Id., at 1232. This Court is vested with broad discretion in determining whether the records kept by a particular debtor are adequate, given the circumstances of each case. See Goff v. Russell Co. (In re Goff), 495 F.2d 199 (5th Cir.1974); Dolin v. Northern Petrochemical (In re Dolin), 799 F.2d 251 (6th Cir.1986). Even though the sufficiency of record keeping varies with the facts of each case, all cases require complete disclosure. Meridian, 958 F.2d at 1230 (citing In re Underhill, 82 F.2d 258 (2nd Cir.) cert. denied, 299 U.S. 546, 57 S.Ct. 9, 81 L.Ed. 402 (1936)). Given the income, property and other items scheduled by the Halls, the returns requested by the trustee are, at a minimum, what must be kept and disclosed by the...
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