MEMORANDUM OPINION
"Honesty may not always pay, but lying always costs."1
A discharge of indebtedness in bankruptcy is reserved for the "honest but unfortunate debtor who surrenders for distribution the property which he owns at the time of bankruptcy."2 One of the debtor's duties in any bankruptcy case is to fully disclose his or her assets and liabilities. The income tax system in this country relies on many of the same principles as the bankruptcy system: namely, candor, cooperation, and disclosure. In the area of income taxation, failure to fully disclose income and pay taxes owed results in penalties, interest, and, in extreme cases, incarceration. Inthe bankruptcy arena, the concealment of assets is grounds for denial of a debtor's discharge. When the worlds of taxation and bankruptcy collide, a debtor who fails to pay taxes and conceals assets faces denial of his or her discharge and imposition of penalties under the United States Tax Code.
This case pits the Internal Revenue Service against an individual Chapter 7 debtor, with the bankruptcy discharge hanging in the balance. The operative facts include millions of dollars in unpaid taxes, the construction of an expensive home, and the acquisition of a large quantity of furniture and antiques. The Internal Revenue Service claims that the debtor has intentionally concealed assets from both the Internal Revenue Service and this Court, an allegation that (not surprisingly) the debtor denies. The following findings of fact and conclusions of law are made pursuant to Federal Rule of Bankruptcy Procedure 7052.
Jurisdiction
This Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334(b), and venue is proper pursuant to 28 U.S.C. § 1409.3 Reference to the Court of this matter is proper pursuant to 28 U.S.C. § 157(a). This is a core proceeding as contemplated by 28 U.S.C. § 157(b)(2)(I) and (J).
Findings of Fact
Michael J. Fletcher ("Michael Fletcher" or "Defendant") and Lori Jean Fletcher ("Lori Fletcher," together, the "Fletchers") received a large one-time capital gain from the sale of a business in 1998 and 1999. The United States of America, acting through the Internal Revenue Service (the "IRS" or "Plaintiff") has been pursuing them ever since to collect the tax owed on that capital gain. On August 12, 2011, the Fletchers filed an original petition for relief under Chapter7 of the United States Bankruptcy Code.4 In their schedules, the Fletchers listed the IRS as a creditor holding priority claims in excess of $281,000, and unsecured non-priority claims in excess of $2,000,000.5
The IRS filed this adversary proceeding seeking an order denying the Fletchers a discharge in their Chapter 7 case, or, in the alternative, a finding that the claim owed the IRS is not dischargeable. The IRS alleges that the Fletchers have attempted to conceal their ownership interest in a house located in Tulsa, Oklahoma, and also knowingly and fraudulently made false oaths in connection with their bankruptcy case. The Fletchers deny these allegations. Since the inception of this litigation, Lori Fletcher has died. The IRS no longer objects to her discharge.
Previously, in response to a motion for summary judgment filed by the IRS (the "IRS Motion"),6 this Court determined there was no genuine dispute as to the following material facts, and that they are considered established for purposes of this litigation:7
1. In 1998, the Fletchers incurred $1.6 million in federal income taxes based on their income of $7.2 million.
2. In 1999, the Fletchers incurred $378,000 in federal income taxes based on their income of $2.0 million.
3. The Fletchers failed to timely file their 1998 income-tax return: the 1998 return was due on August 15, 1999, but the Fletchers filed it on May 8, 2000.
4. Between 1998 and 2002, the Fletchers paid $416,641 toward their 1998 income taxes and $16,557 toward their 1999 income taxes.
5. During the same period, the Fletchers used their cash—which they had realized from a 1998 initial public offering of Michael Fletcher's company—to build an 11,000-square-foot house (the "Sheridan Oaks House") in a gated community in Tulsa, Oklahoma.
6. The Fletchers moved into the Sheridan Oaks House in December 2002, furnishing it with art and antiques that they had purchased, between 1998 and 2000, for more than $460,000.
7. In October 2004, the IRS sued the Fletchers for a judgment on their 1998 and 1999 income taxes and to foreclose its liens on the Sheridan Oaks House.
8. In February 2006, the Fletchers consented to a $2.7 million judgment for those taxes and agreed that the United States could auction off the Sheridan Oaks House if they were unable to sell it privately by a date certain.
9. On May 29, 2008, the Sheridan Oaks House was sold by private sale for $2.85 million; after payment of senior liens and sale expenses, the United States received approximately $1.75 million of the proceeds.
10. In April 2008—a month before the sale of the Sheridan Oaks House—Michael and Lori Fletcher contracted with Christopoulos Construction, LLC (the "April Contract") to purchase a newly constructed, 4,700-square-foot house located at 6209 E. 110th Street in Tulsa, Oklahoma (the "110th Street Property") for $735,000.
11. The April Contract called for the Fletchers to pay a $5,000 earnest-money depositand for settlement to occur on or before May 19, 2008.
12. In attempting to finance their purchase of the 110th Street Property, Michael Fletcher discussed the possibility of obtaining a mortgage loan with an individual named Jason Hadrava.
13. The Fletchers devised a plan to have one of Michael Fletcher's employees, Tim Long, purchase the 110th Street Property and lease it back to them.
14. In May 2008, the Fletchers signed an addendum that assigned their rights under the April Contract to Timax Properties, LLC, a company owned by Tim Long.
15. Tim Long and Timax Properties, LLC were unable to obtain financing to purchase the 110th Street Property. As a result, in June 2008 Michael Fletcher proposed to the seller (Christopoulos Construction) that he and Lori Fletcher lease the property while they attempted to obtain the financing to purchase it.
16. In June 2008, Michael Fletcher and Christopoulos Construction entered into a new contract for the purchase and sale of the 110th Street Property (the "June 2008 Contract"). Under that contract, the purchase price remained at $735,000, the closing date was set for January 5, 2009, and Michael Fletcher agreed to provide an additional deposit of $235,000. The June 2008 Contract acknowledged that the Fletchers had already made a $5,000 earnest-money deposit and expressly provided that additional deposits could be made before the closing.
17. At the same time, the Fletchers and Christopoulos Construction entered into a lease that allowed the Fletchers to occupy the 110th Street Property through January 5, 2009.
18. As required by the June 2008 Contract, on or about June 13, 2008, Michael Fletcher delivered to Dean Christopoulos a cashier's check in the amount of $235,000 (the "Christopoulos Cashier's Check"). On the face of that check, Michael Fletcher is identified as the purchaser.
19. Bank records reveal that Michael Fletcher purchased the Christopoulos Cashier's Check using two sources: (i) a $230,000 cashier's check payable to (and endorsed by) Tim Long (the "Tim Long Cashier's Check"), and (ii) $5,000 in cash that had been withdrawn from a bank account at Bank of America (the "Stonehenge Account") owned by Stonehenge Partners, Inc. ("Stonehenge") — a company that Michael and Lori Fletcher owned.
20. Bank records reveal that Michael Fletcher purchased the Tim Long Cashier's Check on June 11, 2008, using money withdrawn from the Stonehenge Account.
21. Less than a month before Michael Fletcher used funds in the Stonehenge Account to purchase the Tim Long Cashier's Check, Michael Fletcher arranged to have $350,000 deposited into that account.
22. In May 2008, Susan Kapuchuck, the owner of an antiques store in Claremore, Oklahoma, agreed to pay the Fletchers $100,000 for various of the Fletchers' antiques. Around that time, Michael Fletcher instructed Ms. Kapuchuck to make the payment by direct transfer into the Stonehenge Account.
23. On May 16, 2008, the $100,000 payment from Ms. Kapuchuck was deposited into the Stonehenge Account.
24. In May 2008, the Fletchers also made two agreements to sell various antiques andhousehold furnishings to Carlos and Pamela Langston, the buyers of the Sheridan Oaks House. The first agreement, which was in writing, called for the Langstons to make four installment payments totaling $223,750. The first installment, in the amount of $100,000, was paid on May 29, 2008—which was the date of the closing on the Sheridan Oaks House. The remaining installment payments were paid monthly between July and September 2008.
25. All of those installment payments were transferred by wire into the Stonehenge Account.
26. The Fletchers' second agreement with the Langstons was oral. Under that agreement, the Fletchers sold to the Langstons various chandeliers in the Sheridan Oaks House for $150,000.
27. The $150,000 payment for the chandeliers was transferred by wire into the Stonehenge Account on May 29, 2008.
28. Michael Fletcher instructed Mr. Langston to make the installment payments and the $150,000 chandelier payment by wire transfer into the Stonehenge Account.
29. The Fletchers received a total of $473,750 from Ms. Kapuchuck and the Langstons in 2008.
30. At the official meeting of creditors, however, Michael Fletcher testified that the Fletchers received $140,000 from the sale of their household furnishings in 2008.
31. By an agreement signed on July 9,
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