Matter of Howard
| Decision Date | 11 May 1994 |
| Docket Number | Bankruptcy No. 92-16343-8B7. Adv. No. 93-123. |
| Citation | 167 BR 684 |
| Parties | In the Matter of David Carl HOWARD, f/d/b/a David C. Howard & Co., Debtor. David C. HOWARD, Plaintiff, v. UNITED STATES of America, Defendant. |
| Court | U.S. Bankruptcy Court — Middle District of Florida |
Michael Barnett, Tampa, FL, for plaintiff.
David N. Geier, Washington, DC, for defendant.
ORDER ON MOTION FOR SUMMARY JUDGMENT
THIS MATTER came on for consideration upon the Motion for Summary Judgment filed by the Plaintiff/Debtor in the above captioned case. This Court has considered all arguments and evidence consistent with a ruling on a motion for summary judgment. See Celotex v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). Having considered the Motion, together with the record, the Court finds the undisputable facts as follows:
Plaintiff (Debtor) filed for relief under Chapter 7 of Title 11 of the United States Code on December 17, 1992. This Adversary Proceeding was brought on behalf of Debtor to determine the dischargeability of a debt owed the United States of America (defendant) and the applicability of 11 U.S.C. § 523(a)(1)(C). Debtor has moved for summary judgment asserting Defendant has not established any genuine issue of material fact on fraud or willful attempt to evade payment of tax for nondischargeable debt under 11 U.S.C. § 523(a)(1)(C). Defendant moves for summary judgment as well. On Cross Motion for Summary Judgment, Defendant asserts the facts surrounding the 1987 taxable year, when taken together, establish no genuine issue of material fact with respect to fraudulent or willful intent on Debtor's part.
Debtor was in the business of buying and selling real estate through what he describes as "creative financing." This financing typically involved a seller who, as part of the sale, would hold a mortgage subordinated to a lending institution. The debt to the seller was generally used as a down payment, as well as subordinated. This enabled Debtor to obtain property with no capital investment of his own. Unfortunately for the Debtor, his creative investment stratagem became criminally suspect and mustered him an indictment.
In 1987, while an indictment was pending, Debtor had a banner year with gross income of approximately $4,000,000 and a taxable income of approximately $300,000. There were no estimated tax payments made during 1987, but Debtor's taxable income resulted primarily from the disposition of two trailer parks during the 1987 tax year. In Defendant's deposition of Debtor there is testimony he did not consult his accountant until late in 1987.
Debtor, although married at the time, filed his timely tax return separately. The 1987 tax return reflected all 1987 transactions and tax due and owing for that year. The tax liability was approximately $78,572, and Debtor has not made payment on the tax liability to date.
During the 1987 tax year, Debtor's wife purchased a day-care facility with funds the Debtor provided. Debtor asserts approximately $45,000 was made as a loan to the wife, but he does not recall whether an additional $15,000 to $20,000 was a loan or a gift to his wife. Debtor asserts he was instrumental in helping his wife of that time acquire a van for her business. In addition, Debtor purchased a new car for his wife in the same year. Regardless of both parties assertions, there was no loan repayment and it appears that any debt owed by the wife to the Debtor was satisfied in an ensuing divorce settlement. Debtor does not contest the fact advances made to his wife would have completely satisfied the 1987 tax liability.
Debtor asserts that during the 1987 tax year he was concerned about the well-being of his family, should he be confined to a correctional facility for any length of time. Apparently, this was a factor in obtaining the day-care center for his wife, although Debtor alleges they had been interested in engaging in a day-care business for some time, and 1987 was the first year they were financially able to seriously consider the prospect.
Debtor asserts he timely and properly filed his tax return understanding his tax liabilities. In addition, Defendant makes no allegations with respect to prior tax years, although Debtor asserts he did not file tax returns for subsequent years because he was not required to file. All Debtor's records have apparently been lost or destroyed during Debtor's incarceration as a result of warehouse rental payments becoming overdue. Both parties now move for summary judgment.
Based on the foregoing undisputed facts, Defendant contends Debtor either fraudulently evaded payment of tax or willfully attempted to evade tax. Debtor has brought this Adversary Proceeding to determine the issue of dischargeability under 11 U.S.C. § 523(a)(1). Exceptions to discharge are construed narrowly in favor of the debtor. Security Title & Guaranty Co. v. Stivers (In re Stivers), 84 B.R. 852 (Bankr.S.D.Fla. 1988); First Bank of Colorado v. Mullet (In re Mullet), 817 F.2d 677, 680 (10th Cir.1987). To make an interpretation of 11 U.S.C. § 523(a)(1)(C), this Court must look to the statutory language and the general rules of statutory interpretation. Pennsylvania Dept. of Public Welfare v. Davenport, 495 U.S. 552, 110 S.Ct. 2126, 109 L.Ed.2d 588 (1990). In as much as "the statutory scheme is coherent and consistent, there . . . is no need for a court to inquire beyond the plain language of the statute." United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 1030, 103 L.Ed.2d 290 (1989). Where the plain meaning of a statute "produces a result demonstrably at odds with the intention of its drafters" the intention of the drafters control. Id. at 242, 109 S.Ct. at 1030. Neither party suggests ambiguity in the plain language of 11 U.S.C. § 523(a)(1)(C), or the need to inquire further into the language of the statute. Defendant raises the issue of the applicable elements with respect to "fraudulent return" or "willfully attempted in any manner to evade or defeat such tax." 11 U.S.C. § 523(a)(1)(C).
This Court must determine if "willfully attempted in any manner to evade or defeat such tax" is to be first analyzed under other applicable law, mainly the Internal Revenue Code, or has a meaning solely related to the Bankruptcy Code. It appears the language of 11 U.S.C. § 523(a)(1)(C) comes close to several sections of the Internal Revenue Code.1 It seems logical the legislature sought to have the Bankruptcy Code encompass the possibility a debtor would attempt to discharge criminal tax penalties in bankruptcy. Therefore, it follows that willful evasion is tested as it would be best applied as under I.R.C. § 7201, no other intent being found in the Bankruptcy Code.
Debtor suggests there is a distinction between fraud and willfulness under 11 U.S.C. § 523(a)(1)(C). In the instant case, the linchpin of Debtors' argument centers on the applicable elements of "willfully attempted" to evade. Defendant, while not alleging fraud,2 asserts there is no affirmative act required under 11 U.S.C. § 523(a)(1)(C) with respect to willfulness. In fact, Defendant suggests the proof required to support a finding of willfully attempting to evade payment of taxes requires only the elements of proof applied under civil tax fraud. Defendant's position applies a less restrictive standard for 11 U.S.C. § 523(a)(1)(C) comparable to the manner in which civil tax fraud is proven, yet Defendant does not allege civil tax fraud in the instant case.3
Interpretation of the willfulness requirement under the second prong of 11 U.S.C. § 523(a)(1)(C) has prompted some debate among the courts. The Government has argued and successfully convinced some courts there is a less restrictive standard generally applied in civil cases under 11 U.S.C. § 523(a)(1)(C). This less restrictive standard does not require an affirmative act by the debtor to evade taxes. See United States v. Toti, 149 B.R. 829, 832 (E.D.Mich.1993); see also Irvine v. Comm'r (In re Irvine), 1994 WL 66056 (E.D.Pa.1994); Berzon v. United States (In re Berzon), 145 B.R. 247 (Bankr. N.D.Ill.1992); Langlois v. United States (In re Langlois), 155 B.R. 818 (Bankr.N.D.N.Y. 1993); Sells v. United States, 1991 WL 328039 (Bkrtcy.D.Colo.1991); 92-1 U.S.T.C. ¶ 5070; Jones v. United States (In re Jones), 116 B.R. 810, 815 (Bkrtcy.D.Kan.1990); Fernandez v. Internal Revenue Service (In re Fernandez), 112 B.R. 888 (Bankr.N.D.Ohio 1990).
An affirmative act by the debtor to evade taxes has been required by some courts for an imposition of nondischargeability under 11 U.S.C. § 523(a)(1)(C). See Toti v. United States (In re Toti), 141 B.R. 126 (Bankr. E.D.Mich.1992) rev'd, United States v. Toti, 149 B.R. 829, 832 (E.D.Mich.1993); Gathwright v. United States (In re Gathwright), 102 B.R. 211 (Bankr.D.Or.1989) (). Regardless, all courts appear to agree that there is no definition of evasion or willfulness under the Bankruptcy Code nor the Internal Revenue Code.
This Court agrees with the application of the definition of willful as applied in the criminal tax evasion statute with respect to 11 U.S.C. § 523(a)(1)(C). Since civil tax fraud has not been alleged, Defendant must satisfy the requisite elements of willfulness as would be found under I.R.C. § 7201 to meet its burden of proof. In applying I.R.C. § 7201, courts have held willfulness to be "a voluntary, intentional violation of a known legal duty." United States v. Pomponio, 429 U.S. 10, 97 S.Ct. 22, 50 L.Ed.2d 12 (1976) (); United States v. Bishop, 412 U.S. 346, 93...
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