US v. Toti, Civ. A. No. 92-73870.
| Decision Date | 07 January 1993 |
| Docket Number | Civ. A. No. 92-73870. |
| Citation | 149 BR 829 |
| Parties | UNITED STATES of America, Appellant, v. Edward TOTI, Appellee. |
| Court | U.S. District Court — Western District of Michigan |
Mark Lansing, U.S. Dept. of Justice, Washington, DC, for U.S.
Paul Steinberg, Southfield, MI, for Toti.
This is a bankruptcy appeal by the United States of America (the Government) from a decision of the Bankruptcy Court granting Edward Toti's (Toti) motion for summary judgment in an adversary proceeding. The Bankruptcy Court ruled that Toti's federal income tax liability was dischargeable in his Chapter 7 case because he did not willfully attempt to evade or defeat the payment of his federal income taxes.1 The Government contends that the Bankruptcy Court incorrectly adopted a criminal definition of the phrase "willfully attempted to evade" under 11 U.S.C. § 523(a)(1)(C) and applied it in this civil bankruptcy proceeding. In the alternative, the Government argues that even if the Court determines that the criminal definition is appropriate, the bankruptcy judge made findings of fact which precludes a grant of summary judgment.
For the reasons stated below, the Court finds that the Bankruptcy Court erred in its application of the criminal definition of "willfully attempted to evade" to a civil bankruptcy discharge case. Therefore, the decision of the Bankruptcy Court is REVERSED. The case is REMANDED to the Bankruptcy Court for entry of an order consistent with this decision.
The parties have stipulated that the following facts are not in dispute:
1. Toti failed to timely file federal income tax returns for the years 1974 through 1981.
2. Toti has unpaid federal income tax liabilities for the years 1974 through 1983 (except 1976, which liability was previously paid in accord with a sentence and probation order following Toti's conviction on June 4, 1981 for wilful failure to file an income tax return for the year 1976, pursuant to 26 U.S.C. § 7203).
3. Toti failed to make any voluntary payments towards any of these federal income tax liabilities during the tax years in question, or prior to his criminal conviction on June 4, 1981.
4. Toti knew he was required to pay the tax liabilities as they arose during each of the years in question.
5. Toti knew in 1977 that the Internal Revenue Service (IRS) was conducting a criminal investigation with respect to his failure to file income tax returns and pay the income tax liabilities.
6. After having knowledge of the IRS criminal investigation, Toti did not file his federal income tax returns or make payments on his federal income tax liabilities for the years prior to or subsequent to that investigation, up to and including 1991.
7. Toti timely filed his federal income tax returns for 1982 and 1983.
8. Toti knew he had federal income tax liabilities for each of the years in question and he had that knowledge with respect to each tax year's liabilities during each of the years in question.
9. Toti made no effort to pay those tax liabilities until after he served his confinement pursuant to his conviction and sentence order of June 4, 1981, which directed him to make restitution for 1976, the year for which he plead guilty.
10. Toti knew he had a responsibility to file federal income tax returns for each year in question, at the time they were statutorily required to be filed.
11. Toti knew he was required to make estimated quarterly tax payments with respect to his federal income taxes during each year in question, and admits that he failed to do so for each quarter of each year in question.
12. Toti states that he failed to file federal income tax returns and pay his year end federal income tax liabilities because he did not have sufficient funds at the end of the respective years in question.
13. Toti failed to set aside any money during each of the respective years in question to make the required estimated quarterly payments.
14. Toti had a profit from his business as an insurance agent.
15. Toti had no other debts or liabilities that precluded him from making the tax payments.
16. In 1981, the United States indicted Toti on three counts pursuant to 26 U.S.C. § 7203 for failure to file federal income tax returns for the years 1974, 1975, and 1976. On June 4, 1981, Toti was convicted and sentenced as a result of a Plea Agreement by the United States District Court for the Eastern District of Michigan for wilfully failing to file federal income tax returns for the years 1974, 1975 and 1976.
17. Pursuant to the Plea Agreement, Toti agreed to plead guilty to wilfully failing to file an income tax return for the year 1976 only. In return, the Government agreed to dismiss Counts I and II, which concerned his failure to file federal income tax returns for the years 1974 and 1975.
18. Pursuant to the sentencing and probation order, Toti was required to file all his delinquent federal income tax returns and pay the federal income tax liability for the year 1976. Toti has complied with that order.
19. In April, 1985, Toti and the IRS agreed to a payment plan for the payment of the unpaid back taxes.
20. Toti made some payments to the IRS but fell behind due to his inability to meet those payments and stopped making payments.
21. On February 27, 1990, Toti filed a Chapter 7 petition in the United States Bankruptcy Court. On March 28, 1990, Toti filed an adversary proceeding to determine the dischargeability of his tax obligations. The parties filed cross motions for summary judgment.
22. The Bankruptcy Court decided that in favor of Toti, holding that his income tax liabilities were dischargeable.
The scope of the Court's authority on this appeal is set by Bankruptcy Rule 8013:
On an appeal, the district court or bankruptcy appellate panel may affirm, modify, or reverse a bankruptcy judge\'s judgment, order or decree or remand with instructions for further proceedings. Findings of fact whether based on oral or documentary evidence shall not be set aside unless clearly erroneous and due regard shall be given to the opportunity of the bankruptcy court to judge the credibility of the witnesses.
The Court may not set aside findings of fact unless they are clearly erroneous. Fed.R.Civ.P. 52(a). However, questions of law are reviewed de novo. In re Caldwell, 851 F.2d 852 (6th Cir.1988). Here, the issue on appeal is solely a question of law.
A.
Exceptions to the discharge of a tax debt are addressed in 11 U.S.C. § 523(a)(1)(C) which provides, in relevant part:
The dispute here revolves around the definition of the phrase "willfully attempted to evade" as used in 11 U.S.C. § 523(a)(1)(C). The Bankruptcy Court adopted the accepted definition of like words in 26 U.S.C. § 7201.2 That section, the felony tax evasion provision, requires three elements: (1) willfulness, (2) failure to pay the tax when due, and (3) an affirmative act constituting an evasion or attempted evasion of the tax. Sansone v. United States, 380 U.S. 343, 351, 85 S.Ct. 1004, 1010, 13 L.Ed.2d 882 (1965). The Bankruptcy Court held that in order to constitute a willful attempt to evade a tax under 11 U.S.C. § 543(a)(1)(C), the debtor must have engaged in some type of affirmative action, some type of commission. Matter of Toti, supra, at 130, 131. An omission, the Bankruptcy Court held, is insufficient to constitute a willful attempt to evade or defeat. Id.
The Bankruptcy Court concluded that: (1) the government did not present any evidence to indicate that Toti engaged in any act of willful commission to evade or defeat the tax; (2) the fact that Toti admitted he knew he had a responsibility to timely file and pay his taxes and that he voluntarily and intentionally failed to file or pay them as an initial result of lack of money and eventually fear of filing subsequent returns, merely constitutes an omission; (3) no facts indicate that Toti engaged in any type of conduct which would prove he attempted in any manner to evade or defeat his federal income tax; and (4) absent such proof, the IRS could not prove that Toti met the requirements of 26 U.S.C. § 7201 or 11 U.S.C. § 523(a)(1)(C).
The Government contends that the Bankruptcy Court erred in applying the identical definition of "willfully attempted to evade" to bankruptcy discharge cases as that contained in 26 U.S.C. § 7201. It argues that the correct definition should be the same as that generally applied in civil tax cases — voluntarily, consciously, or intentionally attempted to evade.
Initially, the Government argues that this case turns on statutory interpretation. Any interpretation of a statute begins with 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). The plain meaning of the statute's language should control except in the rare cases in which the literal application of the statute will produce a result demonstrably at odds with the intentions of the drafters. In such cases, the intention of the drafters rather than the strict language controls. Sells v. United States, 92-1 U.S.T.C. ¶ 5070; 83,283, 1991 WL 328039 (D.Co.1991) (quoting United States v. Ron Pair Enterprises, 489 U.S. 235, 240-241, 242, 109 S.Ct. 1026, 1029-30, 1031, 103 L.Ed.2d 290 (1989)).
In Sells, a case factually similar, the Sells court grappled with the proper standard to apply in a § 523(a)(1)(C) case. The debtor urged the court to adopt the standard enunciated in In re Gathwright, 102 B.R. 211 (Bkrtcy.D.Ore.1989), that the phrase "willfully attempted to evade" should be interpreted to require some...
To continue reading
Request your trial