In re Mitchell

• Decision Date: 24 February 2011
• Docket Number: No. 10–10596.,10–10596.
• Citation: 633 F.3d 1319
• Parties: In re: Larry C. MITCHELL, Debtor.United States of America, Defendant–Appellant,v.Larry C. Mitchell, a.k.a. Larry Carl Hazen Mitchell, Plaintiff–Appellee.
• Court: U.S. Court of Appeals — Eleventh Circuit

633 F.3d 1319
107 A.F.T.R.2d 2011-979
2011-1 USTC P 50,246
22 Fla. L. Weekly Fed. C 1816

In re: Larry C. MITCHELL, Debtor.United States of America, Defendant–Appellant,
v.
Larry C. Mitchell, a.k.a. Larry Carl Hazen Mitchell, Plaintiff–Appellee.

No. 10–10596.

United States Court of Appeals, Eleventh Circuit.

Feb. 24, 2011.

[633 F.3d 1322]

Kathleen E. Lyon, Atty. Gen., Bruce R. Ellisen, Benjamin L. Tompkins, U.S. Dept. of Justice, Tax Div., Washington, DC, for U.S.Stephen G. Gunby, Grogan, Rumer & Gunby, Columbus, GA, for Mitchell.Appeal from the United States District Court for the Middle District of Georgia.Before WILSON and PRYOR, Circuit Judges, and BUCKLEW,¹ District Judge.BUCKLEW, District Judge:

The United States appeals from the district court's decision affirming an order of the bankruptcy court, in which the bankruptcy court determined that Larry C. Mitchell's (“Mitchell”) federal income tax debt was dischargeable in bankruptcy.² Because we conclude that the bankruptcy court clearly erred in its finding that Mitchell had not willfully attempted to evade or defeat his taxes within the meaning of 11 U.S.C. § 523(a)(1)(C), we REVERSE the decision of the district court.

I. BackgroundA. Procedural History

Mitchell filed Chapter 11 bankruptcy on August 29, 2006, which was converted to a Chapter 7 petition on October 3, 2007. On March 19, 2008, Mitchell filed an amended complaint to determine the dischargeability of his past due income taxes for the years 1998 to 2002.³ The Government contended that the taxes were not dischargeable under 11 U.S.C. § 523(a)(1)(C). That statute prohibits discharge of taxes with respect to which a debtor willfully attempted in any manner to evade or defeat such tax. See 11 U.S.C. § 523(a)(1)(C).

In February and March of 2009, the bankruptcy court held a trial on the issue of dischargeability and found that Mitchell's failure to pay his taxes was not willful for three reasons: (1) there was insufficient circumstantial evidence to support a finding of willfulness using the traditional badges of fraud analysis;⁴ (2) Mitchell's discretionary expenditures were not lavish or extravagant enough to be considered

[633 F.3d 1323]

evidence of willful tax evasion; and (3) the various forces impacting Mitchell's financial situation excused his nonpayment of his federal taxes. The bankruptcy court found Mitchell's taxes to be dischargeable in bankruptcy by reasoning that “[a]lthough, Debtor's failure to file tax returns or pay his taxes satisfies the conduct requirement, the case lacks the type of fraudulent behaviors—such as hidden assets or extravagant spending—that would support a finding of willfulness.” (R.1:34).

The Government appealed the bankruptcy court's decision to the district court. The district court affirmed the bankruptcy court, holding that the bankruptcy court had not committed clear error in finding that Mitchell did not willfully evade paying his taxes within the meaning of § 523(a)(1)(C). However, the district court noted that “[w]hether [Mitchell] satisfied § 523(a)(1)(C)'s mental state requirement by ‘willfully’ engaging in the conduct is a closer call, one that this [c]ourt finds the bankruptcy court could have resolved either way.” (R.5:1117). The district court stated that it was “not authorized to second-guess the factual findings of the bankruptcy court unless they are clearly erroneous.” (R.5:1118). The Government appealed the district court's decision to this Court.

B. Factual Background1. Mitchell's Employment and Earnings

Since 1986, Mitchell has been a successful real estate agent in Columbus, Georgia, affiliated as a sales associate with Coldwell Banker, Kennon, Parker, Duncan and Key Realtors (“Kennon Parker”). Between 1986 and early 2006, Mitchell was self-employed and worked for Kennon Parker as an independent contractor. Due to Mitchell's status as an independent contractor, Kennon Parker did not withhold payroll taxes from his commission checks, and Mitchell was responsible for remitting his outstanding federal income and employment taxes to the Internal Revenue Service (“IRS”). Until 1998, Mitchell paid all federal taxes owed; however, on multiple occasions he fell behind in payments, which resulted in levy threats and repayment plans with the IRS.

Starting in 1998, Mitchell simply stopped filing tax returns and stopped paying his federal income taxes. Mitchell maintained this pattern of non-compliance for five years, until June 2003, when he filed late returns for 1998 through 2002. At the time Mitchell filed these late tax returns, he did not make any payments toward his past due taxes for 1998 through 2002. At trial, Mitchell testified that he did not pay his taxes from 1998 to 2002 because his living, business, and divorce expenses fully exhausted his income.

Mitchell earned an annual adjusted gross income⁵ of over $100,000 from 1998 to 2002, with the exception of 2000 when he earned approximately $88,000. When asked at trial why he had not paid anything towards his past due taxes even though in 2001 he earned over $170,000,⁶

[633 F.3d 1324]

Mitchell responded: “[i]t doesn't take a rocket scientist to figure out that I'm going to owe somewhere around [$]300,000 plus interest and penalties. So at that point, I haven't filed anything. I don't have [$]300,000. I don't want to open this up yet.” (R.3:678). Additionally, from 2003 to 2006, despite consistently earning an annual adjusted gross income over $175,000, Mitchell did not pay any amount towards his past due taxes for 1998 to 2002, with the exception of payments made in July and August of 2006 under his installment agreement with the IRS.

2. 1998 to 2002: Events Surrounding Mitchell's Tax Delinquency

Mitchell and his first wife separated in 1998 and eventually divorced in November 1999. The divorce decree required Mitchell to pay his ex-wife monthly alimony and child support, a lump sum payment of $10,000, six percent of his adjusted gross income over $75,000, as well as her attorney's fees. In December 1999, Mitchell married his current wife, Kathleen Mitchell (“Kathleen”), and began supporting Kathleen, Kathleen's two children from previous marriages, and Kathleen and Mitchell's new baby.

From 1999 to 2002, Mitchell and his family lived in a rental house and Mitchell paid rent of $1,200 per month. Then, in 2002, despite owing four years of past due taxes to the IRS, amounting to approximately $164,000, Mitchell and Kathleen bought a house on Pintail Drive (“Pintail House”) for $200,000 from Mitchell's friend, Tommy Sorrell. The Pintail House was purchased solely in Kathleen's name, and she obtained 100% financing for the purchase from Mr. Sorrell, who knew Kathleen was not working and that Mitchell would be making the mortgage payments. Mitchell paid the monthly mortgage of $1,537 as well as the insurance and utilities. At trial, counsel for the Government asked Mitchell why the Pintail House was purchased solely in Kathleen's name:

Mitchell: I had tax problems. I hadn't paid my taxes and I knew I had these problems and I didn't want to jeopardize the house with Tommy Sorrell who was a personal friend. So I said, “[w]ould you finance it for my wife?” I'm not going to deny that. I mean, that's, kind of, a no-brainer here. I mean, obviously, that's why it was in her name.

Counsel: And why would that jeopardize Mr. Sorrell?

Mitchell: Because he owned the property free and clear and if I moved into that and bought that house and he financed it with me and if the IRS were to puts liens on it and levies and everything, it could affect the equity in his home.

(R.3:680).

3. Mitchell's Negotiations with the IRS

In June of 2003, Mitchell hired an attorney and submitted tax returns for all years at issue in this case. Based on those tax returns, Mitchell's adjusted gross income and federal income tax for the relevant years were as follows:

+------------------------------------------------+
                ¦ ¦ ¦ ¦Adjusted ¦ ¦ ¦
                +--+------+---------+---------+---------+--------¦
                ¦ ¦ ¦ ¦Gross ¦ ¦Tax ¦
                +--+------+---------+---------+---------+--------¦
                ¦ ¦ ¦ ¦Income ¦ ¦Owed ¦
                +--+------+---------+---------+---------+--------¦
                ¦ ¦ ¦ ¦ ¦ ¦ ¦
                +--+------+---------+---------+---------+--------¦
                ¦ ¦1998 ¦ ¦$164,782 ¦ ¦$ 56,947¦
                +--+------+---------+---------+---------+--------¦
                ¦ ¦1999 ¦ ¦$103,136 ¦ ¦$ 35,887¦
                +--+------+---------+---------+---------+--------¦
                ¦ ¦2000 ¦ ¦$ 88,586 ¦ ¦$ 28,428¦
                +--+------+---------+---------+---------+--------¦
                ¦ ¦2001 ¦ ¦$132,741 ¦ ¦$ 43,058¦
                +--+------+---------+---------+---------+--------¦
                ¦ ¦2002 ¦ ¦$128,561 ¦ ¦$ 40,727¦
                +--+------+---------+---------+---------+--------¦
                ¦ ¦Total ¦ ¦$617,806 ¦ ¦$205,047¦
                +------------------------------------------------+
                

Upon the late filing of his tax returns, the IRS sent Mitchell a final demand for payment. Rather than paying any of his delinquent taxes, Mitchell submitted an offer in compromise to the IRS, offering $25,000 for over $200,000 in past due taxes. A pending offer in compromise halts any collection activity by the IRS, and Mitchell understood this. This first offer was returned due to certain deficiencies in Mitchell's

[633 F.3d 1325]

employment tax returns. Mitchell submitted a second offer in compromise for $25,000 in January of 2004, which was returned because Mitchell had not made any of his 2003 estimated tax payments.

Finally, in April 2004, Mitchell submitted a third offer for $35,000. In November 2004, the IRS sent Mitchell a letter indicating that it had completed a preliminary analysis of his third offer in compromise and determined that Mitchell was capable of fully paying his outstanding tax debts. In response, Mitchell's attorney sent a letter on November 12, 2004 to the IRS, which warned:

[I]n determining what is in the best interest of the IRS, the Service should look at reasonable collection potential ... due to the fact that the taxpayer could file bankruptcy against all of the non-payroll taxes except 2002 and 2003 (and...