Terrell v. Internal Revenue Serv. (In re Terrell)

Citation594 B.R. 792
Decision Date14 December 2018
Docket NumberCase No. 10-16662-SAH,Adv. No. 16-01109-SAH
Parties IN RE: David E. TERRELL, Debtor. David E. Terrell, Plaintiff, v. Internal Revenue Service, Defendant.
CourtUnited States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — Western District of Oklahoma

Gary D. Hammond, Oklahoma City, OK, for Plaintiff.

Gretchen E. Nygaard, Richard G. Rose, Department of Justice, Washington, DC, for Defendant.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

Sarah A. Hall, United States Bankruptcy Judge

On June 18 and 19, 2018, the Court conducted a trial on the Second Amended Complaint (the "Complaint") [Doc. 9] filed on January 3, 2017, by debtor David E. Terrell ("Terrell") against the United States of America ex rel. the Internal Revenue Service (the "IRS"), seeking a determination that his 1998 and 1999 tax debts were discharged in his 2010 bankruptcy case. Attorney Gary D. Hammond appeared on behalf of Terrell, and attorneys Gretchen E. Nygaard and Richard G. Rose appeared on behalf of the IRS. As directed by the Court at the conclusion of trial, the parties filed their written closing arguments on July 31, 2018.

JURISDICTION

The Court has jurisdiction to hear this Complaint pursuant to 28 U.S.C. § 1334(b), and venue is proper pursuant to 28 U.S.C. § 1409. Reference to the Court of this matter is proper pursuant to 28 U.S.C. § 157(a), and this is a core proceeding as contemplated by 28 U.S.C. § 157(b)(2)(I).

BACKGROUND

Terrell filed a voluntary chapter 7 petition in 2010 and was granted a discharge in early 2011, and his bankruptcy case was closed shortly thereafter. The IRS then attempted to collect taxes relating to tax years prior to Terrell's 2010 bankruptcy. In response, Terrell filed a motion to reopen his case in 2015 and subsequently initiated this adversary proceeding seeking a determination that his taxes for the 1998 and 1999 tax years had been discharged. The IRS contends that, pursuant to 11 U.S.C. § 523(a)(1)(C),1 these taxes are not dischargeable because Terrell made fraudulent returns and/or willfully attempted to evade or defeat the taxes. The actual amount of taxes Terrell owes the IRS is not at issue in this proceeding, but instead will be determined in a case pending before the United States District Court for the Western District of Oklahoma after this Court has determined whether or not the tax debts are dischargeable.

In making the following Findings of Fact and Conclusions of Law, the Court considered:

a. The Final Pretrial Order [Doc. 102] (the "Pretrial Order"), entered on June 11, 2018;
b. The trial record, including exhibits introduced by the IRS and Terrell and admitted by the Court,2 and the testimony of the following witnesses:
(i) Terrell;
(ii) Linda Poindexter ("Poindexter"), Terrell's long-time business bookkeeper;
(iii) Laurie Day ("Day"), Revenue Officer in the Oklahoma City office of the IRS;
(iv) Randall K. Calvert ("Calvert"), Terrell's previous tax attorney; and
(v) Pamela Jackson, formerly Pamela Terrell ("Jackson" or "Mrs. Terrell") (the IRS presented her designated deposition testimony taken on July 25, 2017, by reading into the record).
c. United States' Post-Trial Submission filed on July 31, 2018 [Doc. 121] ("IRS Closing Argument"); and
d. David Terrell's Closing Arguments filed on July 31, 2018 [Doc. 122] ("Terrell Closing Argument").
FINDINGS OF FACT 3
Terrell's Relevant Business Background

1. After graduating from college and working in his father's windows and siding business in Indiana, in the 1970s Terrell opened his own patio and sunroom company in Cincinnati, Ohio. At some point, Terrell relocated his business to Terre Haute, Indiana and thereafter moved his business to Oklahoma in the early 1980s. Over the past 40 plus years, Terrell has continued to operate a business that includes one or more of the following: roofing, siding, windows, remodeling, and home interior services.4 Terrell testimony, Transcript of Proceedings Held on June 18, 2018 (the first day of trial, hereafter "Tr. 1"), pp. 15-17.

2. At all times, Terrell has been the owner and president of the home improvement business he has operated. Terrell testimony, Tr. 1, pp. 15-17; Poindexter testimony, Tr. 1, p. 118; Jackson testimony, Tr. 1, p. 194.

3. Terrell's home improvement business in Terre Haute, Indiana, "had a lot of different names through the years." Jackson testimony, Tr. 1, p. 194.

4. Since being established in Oklahoma, Terrell's business has been located in three different places in the Oklahoma City/Edmond area: 8005 S. I-35, Oklahoma City; 8825 S. Santa Fe, Oklahoma City; and at his home in Edmond, Oklahoma. Terrell testimony, Tr. 1.

5. Since being operated in Oklahoma, Terrell's home improvement business has been in continuous existence and, although consisting of substantially similar activities, has been incorporated under Oklahoma law and operated under the following different names: Terrell's, Terrell Inc., Terrell Roofing, Terrell Siding, Terrell Home Center, Inc., T-Square, L.L.C., and David Terrell, Inc.5 Terrell testimony, Tr. 1; Poindexter testimony, Tr. 1, pp. 120-21; Exhibits 70-74. The Court notes that this list of corporations may not be exhaustive.6

6. Terrell admitted it was "possible" that he changed the names of his home improvement business in order to avoid creditors. Terrell testimony, Tr. 1, p. 20.

7. During the tax years in question, Terrell's business changed banks to avoid garnishment by creditors. Poindexter testimony, Tr. 1, p. 129.

8. At all times, Terrell was in complete control of the finances of his business and could determine the salary paid to him from the business, if any. Terrell testimony, Tr. 1; Poindexter testimony, Tr. 1, p. 128.

9. In addition to his home improvement business, during the tax years in question, Terrell owned InfoTel Solutions, Inc., a software company that sold predictive dialers and operated on the premises of his home improvement business. Terrell testimony, Tr. 1, p. 20; Poindexter testimony, Tr. 1, p. 120; Exhibit 42.

Terrell's Relevant Personal/Financial Background Prior to and During Tax Years in Issue

10. The Terrells filed for bankruptcy protection in early 1986. After the chapter 7 trustee issued his final report of no assets for distribution, the Terrells were granted a discharge on November 24, 1986, in Case No. 86-00832.7

11. In August of 1990, Terrell was invited to and accepted membership for his family in Oak Tree Country Club in Edmond, Oklahoma. Exhibit 68.

12. At some point in 1997, Terrell bought a house on Fox Lake Lane in Edmond, Oklahoma. Terrell testimony, Tr. 1. Although the purchase price of the new home was not introduced into evidence during trial, the evidentiary record indicates that Terrell placed the following values on his home for purposes of interactions with the IRS and bankruptcy filings: (i) $297,500 in November 1999, Exhibit 40; (ii) $235,000 in April 2001, Exhibit 8; (iii) $275,000 in December 2008, Exhibit 51; and (iv) $320,580 in November 2010, Exhibit 23.

13. At the time Terrell purchased his home on Fox Lake Lane in 1997, he owned another home located on Barrington Lane, also in Edmond. Mrs. Terrell had been living in the previous home during a period of marital separation. When the Terrells resumed their marriage and both moved into the home on Fox Lake Lane, the home on Barrington Lane was rented out to Ted and Linda Tate (collectively, the "Tates"). Terrell testimony. Tr. 1, pp. 28-29 ; Jackson testimony, Tr. 1, p. 200.

14. During the tax years in question, Terrell's teenage daughter drove a 1994 Toyota Camry, his teenage son drove a 1996 Dodge truck, and his wife drove a 1996 Ford Explorer. The combined total of the monthly payments for the three vehicles was $1,527. Exhibit 33; Terrell testimony, Tr. 1, pp. 34-35.

15. At some point in 1998, Terrell purchased a pair of jet skis for his family's use. Terrell testimony, Tr. 1, p. 56; Jackson testimony, Tr. 1, pp. 205-06.

16. In October 1999, Terrell had a custom deck built onto his house that cost at least $1,254. Exhibit 81; Terrell testimony, Tr. 1, pp. 50-51.

17. In December 1999, Terrell purchased an elliptical machine for his personal home use that cost $1,410.34. Exhibit 82; Terrell testimony, Tr. 1, pp. 53-54.

The Terrells' 1997, 1998, and 1999 Tax Returns

18. Terrell incorporated Terrell Home Center, Inc. on June 1, 1998. Exhibit 72.

19. On October 15, 1998, the Terrells filed a joint federal personal income tax return for tax year 1997 and signed it under the penalty of perjury. Exhibit 16 at p. 19.

20. For tax year 1997, the Terrells reported adjusted gross income of $10,000. The income consisted solely of W-2 wages for Terrell from Terrell, Inc. The Terrells' reported taxable income was zero, and therefore, their tax liability was zero. In fact, they claimed an Earned Income Tax Credit due them by way of refund. Exhibit 41 at p. 8810-16; Terrell testimony, Tr. 1, p. 72.

21. On April 15, 1999, the Terrells filed a joint federal personal income tax return for tax year 1998 and signed it under the penalty of perjury. Pretrial Order ¶ 3.

22. For tax year 1998, the Terrells reported adjusted gross income of $26,156. The income consisted of:

a. W-2 wages for Terrell from Terrell Home Center, Inc.;
b. "Sales Consultation Income" for Terrell reported on Schedule C-EZ (business name was stated as David Terrell – Sales, and the business address as 1128 Fox Lake Lane, Edmond, OK); and
c. Business Income for Mrs. Terrell reported on Schedule C-EZ.

The Terrells' reported taxable income was $3,957, and, after claiming an Education Tax Credit and a small Earned Income Tax Credit, their income tax liability was $121.8 Exhibit 1.

23. On April 17, 2000, the Terrells filed a joint federal personal income tax return for tax year 1999 and signed it under the penalty of perjury. Pretrial Order ¶ 4.

24. For tax year 1999, the Terrells reported adjusted gross income of $45,066. The income consisted of:

a. W-2 wages for Terrell from Terrell Home Center, Inc.;
b. 1099-MISC income for Mrs. Terrell from James M. Taylor Designs;
c.
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