United States v. Hart (In re Hart)

• Decision Date: 21 December 2016
• Docket Number: Case No. 13–20039–TLM,Adv. No. 13–07016–TLM, Adv. No. 13–07017–TLM
• Citation: 563 B.R. 15
• Parties: IN RE Philip L. HART, Debtor. United States of America, Plaintiff, v. Philip L. Hart, Defendant. United States Trustee, Plaintiff, v. Philip L. Hart, Defendant.
• Court: U.S. Bankruptcy Court — District of Idaho

563 B.R. 15

IN RE Philip L. HART, Debtor.

United States of America, Plaintiff,

v.Philip L. Hart, Defendant.

United States Trustee, Plaintiff,

v.Philip L. Hart, Defendant.

Case No. 13–20039–TLM

Adv. No. 13–07016–TLM

Adv. No. 13–07017–TLM

United States Bankruptcy Court, D. Idaho.

Signed December 21, 2016

Charles E. McFarland, Charles E. McFarland Attorney at Law, New Castle, KY, Brant L Stevens, Spokane, WA, for Defendant

Yael Bortnick, Adam D Strait, U.S. Department of Justice, Tax Division, Washington, DC, David Wayne Newman, Office of the US Trustee US Dept., Boise, for Plaintiff.

MEMORANDUM OF DECISION

TERRY L. MYERS, CHIEF U. S. BANKRUPTCY JUDGE

In this adversary proceeding, the Court must determine if a chapter 7 debtor is entitled to a discharge of his debts. In litigating this issue, the parties addressed events, disputes and litigation spanning two decades and three bankruptcies.

In June 2013, the United States Trustee ("UST") filed a complaint objecting to the discharge of debtor Philip L. Hart ("Hart") under § 727(a), commencing Adv. No. 13–07017–TLM.¹ Prior to that complaint being filed, the United States on behalf of the Internal Revenue Service ("IRS") had filed a complaint initiating Adv. No. 13–07016–TLM. The IRS objected to the dischargeability of significant tax liabilities under § 523(a) and to Hart's discharge under § 727(a). In September 2013, the two adversary proceedings were consolidated with the IRS' action becoming the lead case.

In the summer of 2014, the IRS and Hart settled certain aspects of litigation before the United States District Court for the District of Idaho in United States of America v. Philip L. Hart , Case No 11–cv–00513–EJL (the "District Court Case").² Under that settlement, Hart agreed to entry of a judgment establishing that Hart's 1996–2008 tax obligations, including interest to December 31, 2013 (amounts totaling $392,968.81), were nondischargeable and that statutory interest would continue to accrue thereon. The agreed judgment also provided that penalties and interest on penalties (amounts totaling $193,335.89) would be dischargeable in the event this Court ultimately granted Hart a discharge. The final amount of the judgment, including all categories, was $586,304.70 as of December 31, 2013.³

The IRS and Hart also successfully negotiated a settlement of their bankruptcy litigation. Hart wanted to keep the terms of the settlement confidential, and the parties agreed that he could seek an order from this Court sealing the record. He sought that relief, but it was denied by this Court's decision and order in September 2014. Adv. Doc. Nos. 38–39. Under this agreement, an agreed judgment would be entered establishing the amount of Hart's tax obligations and the § 523(a) nondischargeability of those amounts and interest accruing on such amounts. The District Court's Stipulated Judgment did so. The IRS also agreed to, and later in this Court did, dismiss its § 727(a) claims. But both the agreement and the later order dismissing the IRS' § 727(a) claims recognized the UST's ability to continue the pursuit of its separate § 727(a) action.⁴ This was the reason for the qualification in the District Court's judgment as to potential discharge of penalties and interest on penalties.

The UST's § 727(a) action came on for trial pursuant to notice on February 3–5, 2016. The parties appeared through counsel of record, and the events of the trial are reflected in the Court's minute entries.⁵ The matters were taken under advisement when post-trial briefing was completed in June 2016.⁶ This Decision constitutes the Court's findings of fact and conclusions of law. Rule 7052.

JURISDICTION

The Court has jurisdiction over this proceeding under 28 U.S.C. § 1334(b) and 28 U.S.C. § 157. This is a core proceeding under 28 U.S.C. § 157(b)(2)(J). The UST's complaint was timely filed. Rule 4004(a).

FACTS

A. Debtor's background

Hart received a bachelor of science degree in civil engineering from the University of Utah in 1980. He earned a master's degree in business administration (MBA) from the Wharton School at the University of Pennsylvania. He works as a licensed structural and civil engineer.⁷ He also served from 2004 to 2012 in the House of Representatives of the State of Idaho, sitting on the State Affairs, Revenue and Taxation, Judiciary and Rules, and Transportation Committees.

Hart's testimony and demeanor generally reflected his higher education and professional background. He appeared to be intelligent, was articulate, and his responses to questioning were for the most part precise. He generally was not argumentative. He answered carefully, often clearing up ambiguities in poorly phrased questions. He also at times in his examination clarified details or facts misstated in his counsel's excessively leading questions. Inconsistently, however, Hart on several occasions asserted that he was unable to remember or recall acts, events, discussions or details that were fundamental if not critical to the matters being litigated.⁸

B. Underlying tax issues

Hart filed federal income tax returns for 1994 and 1995, but claimed no liability or obligation to pay based on his personal interpretation of constitutional and tax law, and his conclusion that a person's wages and salary are not taxable "income." Hart did not file a return for 1996. These three years became the foundation of the initial disputes between Hart and the IRS, though they continued for many years.

Hart described his research on the subject of "income" and the Sixteenth Amendment, which he said included his review of "every document" on the subject contained in the Library of Congress. He ultimately wrote and in 2004 published a 400 + page book, "Constitutional Income: Do You Have Any?" which is currently in its 3rd edition.⁹ In the process of preparing his book, Hart also read and analyzed numerous reported court decisions.¹⁰

The IRS disagreed with Hart's position regarding his income taxes for 1994–1996, and this commenced what would become a lengthy and eventually litigated dispute. In 1998, after the IRS rejected the position he had taken, Hart petitioned the U.S. Tax Court.¹¹ He was unsuccessful there and, in 2001, the Ninth Circuit Court of Appeals affirmed the Tax Court.¹² Hart then petitioned the Supreme Court of the United States for a writ of certiorari, which was denied in 2003. Hart thereafter prepared and filed returns for the years through 2002.

In the subsequent process of collection of the tax liabilities, Hart completed an IRS "collection information statement" ("CIS") and signed it under penalty of perjury, certifying that it was "true, correct and complete."¹³ It was received by the IRS on September 20, 2004. Hart acknowledged that he knew the CIS would be relied upon by the IRS in its collection of taxes.¹⁴

Among other things, the CIS showed both his personal and business address as "2900 Government Way [#] 262, Coeur d'Alene, Idaho." Hart conceded at trial, however, that this address was nothing more than a UPS store location where he received mail.

Hart actually had, at that time, a business address on Front Street in Coeur d'Alene, Idaho. He explained he did not list this address on the CIS because the property was a rental and he had been told by the landlord it would only be available for a year. Hart admitted, though, that he maintained that business property on Front Street for another four or five years.

C. The Sarah Loop Property

Hart also failed to disclose on the CIS the residence where he had lived for several years. His response in the statement merely indicated that he rented, and did not own, a home.

In 1995, Hart purchased 10 acres of real property in Kootenai County, Idaho.¹⁵ It ultimately would be assigned the address of 4430 E. Sarah Loop, Athol, Idaho ("Sarah Loop Property" or, at times, simply the "Property"). Starting in 1996, Hart constructed a 2,888 square foot log and conventionally framed residence on the Property.¹⁶ Some of the logs and timber used in construction were commercially purchased by Hart, but some were illegally harvested from Idaho State Endowment Land. Hart acknowledged that the State sued him for this conduct and received a judgment against him.

Hart started living at the Sarah Loop Property in 2001 or so, apparently as it was nearing completion, and lived there continually thereafter until the Property was sold in early 2016 under District Court order.

D. The Trusts

Hart testified he had been involved in a bitter divorce, was concerned about his relationship with and the protection of his then-minor daughter Sarah, and that these concerns ultimately led him to attempt to create two trusts.

1. The White Peak Ventures Trust ("WPV Trust")

In 1997, Hart became acquainted with Tim E. Ortega and Ortega's associate, Clementine Estrada.¹⁷ Hart testified that he believed they were experienced in estate planning and trust issues, though he did not explain precisely why he had that view other than referring to his attending an Ortega seminar in Spokane, Washington. He acknowledged that Ortega never claimed to be an attorney. Estrada testified she was not an attorney and never told Hart that she was one.

Hart paid Ortega to create a trust—which Hart understood would be an "irrevocable" trust—into which he could contribute the Sarah Loop Property. Hart's professed intent was to protect this real property for Sarah's benefit.¹⁸ He indicated the plan or concept generally was that he would complete and live in the residence on the Property and, as a trust "manager" (but not "trustee") be required to maintain the residence and Property as an asset of the trust until Sarah turned 45 when it would be conveyed to her.¹⁹ According to Hart, Sarah visited the property and stayed with him only for holidays and extended vacations, and never "lived" there.

A "declaration of trust" dated July 1, 1997, and executed by Ortega was recorded in the Kootenai County real property records on August 8, 1997.²⁰ It specifically...