In re Weiss

• Decision Date: 17 August 1999
• Docket Number: Bankruptcy No. 97-31204DAS. Adversary No. 99-0312DAS.
• Citation: In re Weiss, 237 B.R. 600 (Bankr. E.D. Pa. 1999)
• Parties: In re Charles J. WEISS, Debtor. United States of America, Plaintiff, v. Charles J. Weiss, Defendant.
• Court: U.S. Bankruptcy Court — Eastern District of Pennsylvania

237 B.R. 600 (1999)

In re Charles J. WEISS, DebtorUnited States of America, Plaintiff, v.Charles J. Weiss, Defendant.

Bankruptcy No. 97-31204DAS. Adversary No. 99-0312DAS.

United States Bankruptcy Court, E.D. Pennsylvania, Philadelphia Division.

August 17, 1999.

COPYRIGHT MATERIAL OMITTED

James Nelson Clymer, Lancaster, PA, former counsel for debtor.

Paul B. Maschmeyer, Ciardi, Maschmeyer & Karalis, PC, Philadelphia, PA, present counsel for debtor.

Christopher R. Zaetta, U.S. Department of Justice, Washington, DC, for Internal Revenue Service.

Arthur P. Liebersohn, Philadelphia, PA, trustee.

Frederic Baker, West Philadelphia, PA, Ass't.U.S. Trustee.

OPINION

DAVID A. SCHOLL, Bankruptcy Judge.

A.INTRODUCTION

The instant proceeding ("the Proceeding"), initiated by the UNITED STATES OF AMERICA on behalf of its agency the Internal Revenue Service ("the IRS") against CHARLES J. WEISS("the Debtor"), presents our first opportunity to apply the principles established for interpretation of 11 U.S.C. § 523(a)(1)(C), relating to the dischargeability of federal income tax liabilities, in In re Fegeley,118 F.3d 979(3d Cir.1997).Specifically, the question before us is whether the Debtor's failure to file tax returns for six years, 1986 through 1991, while he earned substantial income and made substantial non-tax expenditures during that period, constitutes sufficient grounds to support a finding of willful evasion of taxes in light of the Debtor's partial but significantly underestimated annual tax payments and series of claimed hardships during this period, namely missing records for 1986 and 1987, a hostile divorce, and an extraordinarily complex and expensive home building project.

Since the Debtor's conduct is clearly sufficient to justify nondischargeability of all of the taxes in question, the issue is whether the Debtor was able to convince us that his various hardships and distractions were sufficient to establish the lack of a voluntary intention on his part not to pay the IRS.We find these hardships and distractions sufficient only as to tax years 1986 and 1987, but not thereafter.As a result, only the liabilities for tax years 1986 and 1987 will be discharged.Per a stipulation between the parties and our reluctance to liquidate nondischargeable obligations generally, see e.g., In re Brady,234 B.R. 652, 663(Bankr.E.D.Pa.1999), and cases cited cases cited therein, will not assign a dollar figure to the Debtor's remaining tax liability.

B.PROCEDURAL AND FACTUAL HISTORY

The Debtor filed his first bankruptcy case, Bankr. No. 94-15488DAS, under Chapter 13 of the Bankruptcy Code on August 22, 1994.That case was voluntarily dismissed on January 10, 1995.On September 15, 1997, the Debtor filed the instant underlying case, under Chapter 7 of the Code.He received a discharge of all of his "dischargeable debts" in this case on April 16, 1998, and it was closed on April 23, 1998.We note that, prior to his discharge, on February 2, 1998, the Debtor filed a proceeding, AdversaryNo. 98-0062, against the IRS to determine the validity, priority and extent of its lien(s).However, this proceeding was voluntarily dismissed on April 9, 1998.

On January 11, 1999, the IRS filed a motion to reopen("the Motion") the Debtor's case in order that it could pursue the Proceeding and obtain a determination of the dischargeability of the Debtor's liabilities to it.In our experience, it is quite unusual for the IRS to take the initiative in bringing such matters before this court.The hearing on the Motion, originally scheduled on February 11, 1999, was continued until March 16, 1999, and then again until March 23, 1999, when it was granted without opposition.In granting the Motion, we directed the IRS to file the intended proceeding concerning the dischargeability of the Debtor's tax debts to the IRS by April 9, 1999, and we tentatively fixed a trial for June 8, 1999.

After the IRS filed its complaint on April 12, 1999, it successfully moved to extend the filing date.In the order granting this motion, the trial of the Proceeding was rescheduled on a must-be-tried basis on June 30, 1999, at which time it was in fact conducted.

The only witness to testify at trial was the Debtor.He related that he has been continuously employed as an attorney the law firm of Timoney, Knox, Hasson & Weand ("the Firm") since 1973, and has been quite successful, appearing before this court as an advocate in several cases.It was revealed that the Debtor's income during the period 1986 to 1991 ranged from approximately $140,000 to slightly over $220,000 annually.The Debtor testified that, although he knew of his duty to file tax returns and had indeed filed timely returns every year through 1985, he failed to do so in 1986 and for several years thereafter.

The Debtor attributed his failure to file to several occurrences in his life.In 1986he separated from his first wife.In both 1986 and again in 1987he learned that his first wife, whose mental and physical health apparently deteriorated and whose hostility towards the Debtor increased as time went on, had maliciously taken all of his records needed for the compilation of his tax returns.These records were recovered sometime after the Debtor's first wife died from cancer in 1989.Her death also marked the end of an increasingly hostile divorce proceeding between her and the Debtor.

The Debtor nevertheless continued in his failure to file returns for the next four years.As an explanation, the Debtor claimed that, at that point, it was "hard to catch up."The Defendant further explained that the house he and his girl-friend, who became his second and present wife, had contracted in 1986 to have built for approximately $300,000 became a "nightmare" due to numerous instances of incompetent workmanship by the original general contractor.The Debtor testified that this building project, over which he and his second wife ultimately assumed the role of general contractors, consumed substantial amounts of their time, energy, and money to the tune of at least an additional $300,000 and possibly as much as $700,000 over a period of the next ten years, and still is not fully completed.

The Debtor further testified, however, that he believed he was current or nearly so with his tax obligations at all times even though he failed to file returns for six years.That is because, in each of these years, the Debtor remitted an estimated payment which he believed was equal to his tax liability with a request for a filing extension.However, in each instance, he failed to file his tax return in the allotted extension time.He testified that he did not discover that he had underestimated his tax liabilities for all of these years until September 1994, the week after his first bankruptcy filing, when, with the help of an accountant, he finally filed returns for the years 1986 through 1991.

In fact, the Defendant had underestimated his tax liability during this period by a total of over $110,000.When asked how he could have so significantly underestimated his now-acknowledged tax liabilities, the Debtor stated that he based his estimates on his properly-filed 1985 return.The Debtor now attributes the discrepancies to 1986 changes to the Tax Code and his failure to include the "self-employment tax" in his calculations.Also, it appears that the returns through 1985 were prepared jointly with his first wife, and were filed individually thereafter, which greatly affected his liabilities.It is undisputed that, despite his failure to file, the Debtor never faced criminal charges for his actions.

The IRS, in its cross-examination, brought out that the Debtor had made several rather substantial non-tax expenditures during the 1986 to 1991 period.Specifically, the Debtor made two loans to his first wife, totaling $4,190, in 1987 and 1988, and another in 1988 to a friend in the amount of $12,500 to start a business.Although he owned a 1982 BMW automobile and his then girlfriend and eventual second wife had possession of a company vehicle from her employment of which the couple made use on trips, the Debtor also bought what he"thought" was a new Peugeot automobile for over $18,000 in 1988.In 1990 or 1991 this vehicle was traded for a Volvo.Also, in 1990 the Debtor spent "between $10,000 and $20,000" on his wedding to his second wife and in addition spent $6,000 on their honeymoon in Nova Scotia.Finally, he continued to invest "nominally" in the stock market.

The IRS also focused upon the Debtor's 1994 transfer of the title of the land upon which the home was built, purchased in 1986 under joint tenancy with a right of survivorship with his former girlfriend, to a tenancy by the entireties with his now-wife.The Debtor testified this was done at the request of a title insurance company as a prerequisite to acquiring refinancing for the home.He denied the assertion made by the IRS that this was a calculated maneuver to remove the home from the reach of an IRS tax lien.

By our order of June 30, 1999, we set a schedule requiring the IRS to file its post-trial brief by July 23, 1999, and the Debtor to file his brief by August 6, 1999.Both parties acknowledged that the decision in Fegeley was controlling, although each, as might be expected, argued that it supported their positions that the debts were nondischargeable or dischargeable, respectively, for all of the six tax years at issue.

C.DISCUSSION

A debtor under Chapter 7 of the Code receives, with certain exceptions, a discharge of all debts, including income tax debts, for which a return is due more than three years after the bankruptcy filing.See11 U.S.C. §§ 523(a)(1)(A),523(a)(1)(B),507(a)(8)(A).The most important exception relating to income tax debts, as are at issue here, is 11 U.S.C. § 523(a)(1)(C), which provides as follows:

(a) A discharge under section 727 . . . of this title does not discharge an individual

...