Matter of Gless

• Decision Date: 10 February 1995
• Docket Number: Bankruptcy No. BK92-82102,A93-8036.
• Citation: 179 BR 646
• Parties: In the Matter of Donald, C. GLESS, Debtor. Donald C. GLESS, Plaintiff, v. UNITED STATES of America, Acting Through the INTERNAL REVENUE SERVICE, Defendant.
• Court: U.S. Bankruptcy Court — District of Nebraska

179 B.R. 646 (1995)

In the Matter of Donald, C. GLESS, Debtor Donald C. GLESS, Plaintiff, v. UNITED STATES of America, Acting Through the INTERNAL REVENUE SERVICE, Defendant.

Bankruptcy Nos. BK92-82102, A93-8036.

United States Bankruptcy Court, D. Nebraska.

February 10, 1995.

Albert P. Burnes, Omaha, NE, for debtor/plaintiff.

Robert Metcalfe and Carol Schultze, Washington, DC, for U.S.

MEMORANDUM

TIMOTHY J. MAHONEY, Chief Judge.

Trial was held on October 13, 1994. Post-trial briefs and argument have been submitted. This memorandum contains findings of fact and conclusions of law required by Fed. Bankr.R. 7052 and Fed.R.Civ.P. 52. This is a core proceeding as defined by 28 U.S.C. § 157(b)(2)(I).

Question Presented

Are the 1981 and 1982 federal income taxes, and statutory interest thereon, which were assessed against debtor on September 15, 1985, excepted from discharge in this Chapter 7 bankruptcy case under Section 523(a)(1)(B)(i) of the Bankruptcy Code (11 U.S.C.)?

Decision

Such taxes, interest and penalties are dischargeable.

Background

This adversary proceeding was brought by the Chapter 7 debtor to obtain a determination of the dischargeability of federal income tax for the tax years of 1981 and 1982. The Internal Revenue Service (IRS) asserts that the debtor's federal income tax liability for 1981 and 1982 is not dischargeable in this bankruptcy case because the debtor did not file a tax return for those years. On the other hand, it is the position of the debtor that he filed the equivalent of a tax return and, therefore, his taxes are dischargeable.

Law

The Bankruptcy Code provides for an exception to discharge for a tax with respect to which a return, if required, was not filed. 11 U.S.C. § 523(a)(1)(B)(i). However, if a return is filed, income taxes for a taxable year ending within three years of the bankruptcy petition filing date or assessed within 240 days of the bankruptcy petition filing date are granted a certain priority status. At the time this bankruptcy case was filed, December of 1992, that priority status was listed at 11 U.S.C. § 507(a)(7)(A)(i) and (ii).¹ Read together, Sections 523(a)(1) and 507(a)(7)(A)(i) and (ii) provide that taxes assessed more than 240 days prior to the filing of a petition or taxes shown on returns for tax years ending more than three years before the petition date are not only deprived of priority status but are dischargeable as well. In re King, 122 B.R. 383, 385 (Bankr.9th Cir.1991).²

The Internal Revenue Code, at Section 6020(a) provides that if a person fails to file a required return, but provides sufficient information to the IRS to enable the tax to be determined, and if the taxpayer signs such IRS prepared return, it is the equivalent of the tax return of the taxpayer.³

Prior to trial, an order was entered denying a motion for summary judgment filed by the IRS. That ruling was filed on October 22, 1993. In it, the Court outlined certain conclusions of law. The following quote from that memorandum is adopted herein as a portion of the required conclusions of law:

Exceptions to discharge pursuant to section 523(a) of the Bankruptcy Code are narrowly construed against the creditor and liberally in favor of the debtor, and the burden of proof is on the creditor claiming an exception to discharge. Murphy & Robinson Inv. Co. v. Cross, 666 F.2d 873 (5th Cir.1982); D\'Avanza v. United States (In re D\'Avanza), 101 B.R. 787 (Bankr. M.D.Fla.1989). As a matter of law, this Court finds that a return filed pursuant to § 6020(a) of the Internal Revenue Code, which is prepared with the cooperation of the debtor and signed by the debtor is deemed to be a return under § 523(a)(1)(B)(i) of the Bankruptcy Code. The issues at trial will include whether the debtor cooperated with the IRS and whether he signed a document from which his taxes were determined. If the Court finds that he did so sign such a document, the tax obligation for 1981 and 1982 will be determined to be dischargeable because the language of 26 U.S.C. § 6020(a) and 11 U.S.C. § 523(a)(1)(B)(i) will be satisfied. Accord Bergstrom v. United States (In re Bergstrom), 949 F.2d 341 (10th Cir.1991) (holding that substitute returns do not constitute filed returns under § 523(a) in the absence of the signature of the taxpayer); Carapella v. United States (In re Carpella), 84 B.R. 779 (Bankr.M.D.Fla.1988) (holding that a signed Form 870 without accompanying schedules was a return filed by the debtor for § 523(a) purposes); Arenson v. United States (In re Arenson), 145 B.R. 310 (D.Neb.1992) (noting in dictum that certain documents, Form 870, are accepted as "returns" under § 523(a)(1)(B)(i), while holding that an amended Form 1040X, which was filed after the IRS prepared SFRs and assessed taxes against the debtor, was not a return under § 523(a)(1)(B)(i)).

Gless v. United States (In re Gless), Neb. Bkr. 93:515, 520 (Bankr.D.Neb.1993).

In addition to the statutes and case law referred to above, the IRS has promulgated Revenue Ruling 74-203 which states in pertinent part:

Even though a document is not in the form described for use as appropriate return, it may constitute a return if it discloses the data from which the tax can be computed, is executed by the taxpayer, and is lodged with the Internal Revenue Service.

Rev.Rul. 74-203, 1974-1 C.B. 330 (1974) (citation omitted).

In an adversary proceeding concerning the dischargeability of a particular debt, the objecting party, the IRS in this case, has the burden of proof. FED.BANKR.R. 4005.

Findings of Fact

The debtor was an attorney licensed to practice law in the State of Nebraska. He became a compulsive gambler and to support his compulsion, he took client funds and lost them in commodity speculation. During 1982, and before his 1981 federal income tax return was due, he met with an attorney and revealed what he had done. He received advice from the attorney concerning his tax obligation. That advice included an admonition not to file a tax return which was false and not to file a tax return at all until any potential criminal action against him had been resolved.

Acting upon such advice, he requested and received an extension of time to file his 1981 income tax return. That extension expired in May of 1982.

At approximately the same time as the extension expired, he turned in his license to practice law and informed the law enforcement authorities of his actions. He was charged with and pled guilty to "theft by deception and conversion by bailee." On October 22, 1982, he was sentenced to two concurrent terms of five to fifteen years in the state penitentiary. He immediately began serving his prison sentence at the prison facility in Lincoln, Nebraska.

During his prison confinement, he was sued by some of his clients for his actions. He confessed judgment in three lawsuits and judgments were entered in the District Court of Dodge County, Nebraska.

While he was incarcerated, his wife brought letters to him from the IRS. Those letters requested information about an unfiled tax return. The letters provided an 800 number for him to use if he had any questions or comments. He made arrangements with the prison authorities to use a telephone and called the IRS at the 800 number. He informed the IRS representative that he was in prison and unable to prepare tax returns.

Some time after the telephone call, the debtor was visited by a representative of the IRS at the prison facility. He informed the representative that he was not in the position to file his tax returns because he did not have his financial information available to him. However, he informed the representative about the criminal case and the civil judgments and gave the representative information about his law partnership income and commodities income. He directed the IRS representative to the entities that would provide information about his 1981 and 1982 income.

Approximately one month later, the debtor was contacted by agents of the IRS at the prison. He provided the agents with additional financial information and reviewed the information that the IRS representatives had obtained from the prior sources to whom he had referred them.

A few months later, representatives of the IRS met with him at the trustee dormitory at the state correctional facility in Lincoln, Nebraska. At that time, the IRS representative presented him with documents for his review. The documents showed the total amount of tax which he owed. He told the IRS representatives that he objected to the total amount of the tax because it was extremely high and because the form showed no deduction for the funds which he had lost in the commodity speculation. After arguing with the IRS representatives concerning the amount of the tax and the lack of deductions, he signed the documents and gave them to the IRS agents. He was not given a copy of the documents that he signed and, thereafter, he was not again contacted concerning failure to file the 1981 and 1982 returns.

In 1985, while the debtor was still in prison, and after he had signed the documents referred to above, he received a demand letter from the IRS for payment of the tax liability. He was then contacted in person by a collection agent of the IRS. He discussed with the agent his current prison income, assets, liabilities and the judgments in the District Court of Dodge County, Nebraska. He prepared an asset schedule and provided the collection agent with information about his family, including his parents, to enable the IRS to verify that he had not transferred any assets to relatives.

Later in 1985, the debtor had a meeting with an IRS agent at the work-release center at the state correctional facility in Lincoln, Nebraska. He and the agent discussed all of the financial information that the agent had gathered and discussed a proposed payment schedule. He made it clear to the agent that he was unable to make payments because of his prison situation.

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