Rossman v. United States (In re Rossman)

• Citation: 487 B.R. 18
• Decision Date: 05 December 2012
• Docket Number: Bankruptcy No. 10–18534–JNF.,Adversary No. 11–1006.
• Parties: In re Neil ROSSMAN, Debtor. Neil Rossman, Plaintiff v. United States of America, Department of the Treasury, Internal Revenue Service, and Gary W. Cruickshank, Chapter 7 Trustee, Defendants.
• Court: United States Bankruptcy Courts. First Circuit. U.S. Bankruptcy Court — District of Massachusetts

487 B.R. 18

In re Neil ROSSMAN, Debtor.Neil Rossman, Plaintiff

v.United States of America, Department of the Treasury, Internal Revenue Service, and Gary W. Cruickshank, Chapter 7 Trustee, Defendants.

Bankruptcy No. 10–18534–JNF.

Adversary No. 11–1006.

United States Bankruptcy Court, D. Massachusetts.

Dec. 5, 2012.

Nina M. Parker, Parker & Associates, Winchester, MA, Roger S. Davis, Davis & Rubin, Quincy, MA, for Plaintiff.

Edward J. Murphy, U.S. Department of Justice, Tax Division, Washington, DC, for Defendants.

Gary W. Cruickshank, Law Offices of Gary W. Cruickshank, Boston, MA, pro se.

MEMORANDUM

JOAN N. FEENEY, Bankruptcy Judge.

I. INTRODUCTION

The matter before the Court is the First Amended Complaint for Determination of Dischargeability of Indebtedness (the “Complaint”) pursuant to 11 U.S.C. § 523(a)(1)(C) filed by Neil Rossman (“Rossman” or the “Debtor”). Through his Complaint, Rossman seeks a judgment determining that assessed but unpaid federal income tax liabilities for the tax year 1986 and the assessed and unassessed interest and penalties with respect to those tax liabilities are dischargeable in his bankruptcy case, as well as all penalties, “additions to tax” as that term is used in the Internal Revenue Code ¹ whether assessed or unassessed, which were imposed with respect to a transaction or event that occurred prior to three (3) years before August 5, 2010, the date he filed his bankruptcy petition, are dischargeable, regardless of whether the underlying tax liability is dischargeable. The Defendant United States of America, Department of the Treasury, Internal Revenue Service (the “IRS”), filed an Answer to the Debtor's Complaint. The Chapter 7 Trustee was named as a defendant and served with the Amended Complaint as an interested party but has not participated in these proceedings. ²

The Court conducted a two-day trial on August 7, 2012 and August 8, 2012 at which two witnesses testified, Rossman and Donald Guild, a revenue officer and technical advisor with the Special Advisory Group of the IRS located in Boston, Massachusetts. Additionally, the parties introduced numerous exhibits into evidence. Pursuant to post-trial motions, the Court permitted the parties to submit additional exhibits and portions of the deposition testimony of Gerard Miller, an attorney with the Tax Division of the Department of Justice.

The Court has jurisdiction pursuant to 28 U.S.C. §§ 1334(b). This is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2)(I). The IRS does not contest this Court's jurisdiction except as to a re-determination of the Debtor's 1986 federal income tax liability under 28 U.S.C. § 1334(b) “because, in a no-asset Chapter 7 case such as this, there are no assets to pay any tax claim and thus no bankruptcy purpose for a proceeding under 11 U.S.C. § 505.”

On May 7, 2012, the Court ruled in conjunction with “Plaintiff's Motion to Strike Declaration of Shelley Modahl and Motion in Limine,” that “the amount of the debt owed the IRS is not an issue in this proceeding as no money judgment has been requested.” At the commencement of the trial, the Court modified that ruling, stating that reference to the amount of the debt would be permissible to the extent it was germane to the willfulness of the Debtor's belief or conduct resulting from his understanding of the amount he owes the IRS. Additionally, before the trial began, the IRS through counsel indicated that it did not intend to submit evidence regarding the filing of a fraudulent return by the Debtor. Thus, the sole issue in this proceeding is whether the IRS sustained its burden of establishing that the Debtor “willfully attempted in any matter to evade or defeat” any tax owed. See11 U.S.C. § 523(a)(1)(C).

Prior to trial, the parties filed a Joint Pretrial Memorandum, setting forth facts which were admitted and required no proof. Based upon the stipulated facts, the testimony, and documentary evidence, the Court now makes its findings of fact and rulings of law in accordance with Fed. R. Bankr.P. 7052.

II. FACTSA. Procedural Background

The Debtor filed a voluntary Chapter 7 petition on August 5, 2010. On Schedule A–Real Property, he listed a residence located at 455 Puritan Road, Swampscott, Massachusetts, which he owns with his spouse as tenants by the entirety. ³ He valued the property at $825,000 and disclosed that it was subject to liens held by National Grand Bank of Marblehead, Massachusetts (i.e., a $91,273.53 first mortgage and a $19,218.20 home equity loan) and by the IRS ($1.2 million).⁴ On Schedule B–PersonalProperty, the Debtor disclosed various accounts, including 401(k) plans, as well as a 90% interest in Benny J Fisheries, a so-called “Subchapter S corporation,” a commercial, non-transferable lobster license and related permits, an interest in Neil Rossman, P.C. d/b/a Rossman and Rossman Partnership and a 50% ownership interest in the partnership, and a leased automobile. Rossman valued all assets listed on Schedule B at $234,173.45.

On Schedules I and J–Current Income and Expenses of Individual Debtor(s), the Debtor disclosed that his expenses exceeded his income, a result which would not be obtained if the expenses associated with Benny J Fisheries were excluded from Schedule J.

On December 14, 2010, the Chapter 7 Trustee filed a Report of No Distribution. Prior to that date, the Debtor commenced the adversary proceeding which is now before the Court. The Court entered a discharge order on January 11, 2011 with respect to all dischargeable debts.

B. Factual Background

Rossman is an attorney and a partner in a small law firm, Rossman & Rossman located in Boston, Massachusetts. He graduated from Wesleyan University and attended Boston University School of Law. In addition he served in the Army, was employed as a career firefighter to finance his law school education, taught school, and worked as a police officer. He is the father of three children.

Rossman testified that he performs a wide variety of legal work for a wide variety of clients. He served as lead counsel in the Dalkon Shield multi-district litigation and has tried cases all over the country for firefighters killed or injured in the line of duty. Rossman's income is primarily from his earnings as an attorney.

In 1985, one year before the onset of the investments which precipitated the current dispute with the IRS, Rossman recovered a $5 million dollar judgment in a case which rested on proof that fire engines were defectively designed and presented an unreasonable hazard to the firefighters who used them. According to the Debtor, the case resulted in a change to the design of fire engines. In conjunction with the action, Rossman received a substantial fee of approximately $900,000, a sum which dwarfed his previous, typical income of approximately $100,000 per year.

C. Rancho Madera Partners and Vista Ag–Realty Partners

Because of Rossman's success in obtaining a large judgment for firefighters, he was solicited by a financial planner, identified as Mr. Robillard (“Robillard”), with whom he shared office space. Robillard presented him with materials regarding investments in two partnerships, Rancho Madera Partners and Vista Ag–Realty Partners, both of which were promoted and operated by American Agri–Corp (“AMCOR”). The marketing materials set forth significant tax benefits for investments in the partnerships, namely a 220% write-off in 1986 for a minimum 30–unit subscription for Rancho Madera Partners, and a 200% write-off in 1986 for a 35–unit subscription for Vista Ag–Realty Partners. Prior to making any investments in the partnerships, Rossman consulted with his accountant, Paul Johnson (“Johnson”), a certified public accountant. Following his discussions with Robillard and Johnson, Rossman, in 1986, invested $200,000 in Rancho Madera Partners and $100,000 in Vista Ag–Realty Partners.

The Debtor explained his understanding of the investments:

The plan was that the land was being used—essentially it was being held and it was being used to raise crops and specifically grapes and other crops and with the idea that the land ultimately would be developed for shopping centers or shopping malls or sold to a developer who would use it for some other purpose and that there would be a large profit at the end.

* * *

I understood that the money that I could buy into these two—make these two investments with the same money that I would pay for taxes; in other words, the net amount to me was the same.

* * *

But then there was a—would be additional taxes in future years which are outlined on this document as a result of the stream of income in—presumably in future years when I would not have made anywhere near the amount of money that I made in 1986. So the attractiveness of this investment was that it was going to pay me back money in future years when presumably I would not be making—obviously not be making the money that I made in 1986 in a one-time windfall.

Indeed, hand written figures in the margins of the brochures describing the investments highlighted the cash distributions the Debtor expected to receive in the short-term from his investments in the two partnerships, which would then, in his view, be followed by substantial profit when the real estate owned by the partnerships was sold. Specifically, the Debtor expected to receive $42,000 from Rancho Madera Partners between 1987 and 1993 and $165,000 from Vista Ag–Realty Partners between 1989 and 1991, although those sums were insufficient to pay back the share purchase prices.

When asked on cross-examination whether the partnerships were tax shelters, Rossman responded that he had purchased the partnership units as investments, adding

[t]he write off was meaningless to me because I had—the net effect on my taxes was $300,000. So I would either have paid the $300,000 [for the investment]—had I not made the investment, I would have paid $300,000 more in taxes. I would have written the check; I...