6321 Bankruptcy page2

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In re Floyd W. Beam, Elaine M. Beam, Debtors. Floyd W. Beam, Elaine M. Beam, Appellants v. Internal Revenue Service, Appellee

(CA-9), U.S. Court of Appeals, 9th Circuit, 98-35576, 10/15/99, 192 F3d 941, Affirming a District Court decision, 98-1 USTC ¶50,469

[Code Sec. 6301 ]

Liens and levies: Enforcement of lien: Bankruptcy: Levy, property subject to.--Payments made by married debtors into their unconfirmed bankruptcy plan were subject to an IRS levy since the funds were not specifically exempted from levy under Code Sec. 6334 . The provision of the Bankruptcy Code requiring the trustee to return the payments to the debtors did not take precedence over the provisions of the Internal Revenue Code authorizing the IRS, via its broad levy powers, to seize the encumbered funds by any means since it ultimately held superior rights of possession.

[Code Sec. 6331 ]

Liens and levies: Enforcement of lien: Bankruptcy: Notice of levy, sufficiency of: Authority of IRS agent.--The IRS properly served a notice of levy on a bankruptcy trustee since the trustee was in possession of the funds deposited in the bankruptcy plan. Furthermore, the IRS agent who served the notice of levy on the trustee did not act outside the scope of his authority since he had authority to levy under Code Sec. 6301

Floyd W. Beam, Elaine Marie Beam, pro per, Springfield , Oregon , for the appellants. Charles F. Marshall, Department of Justice, Washington , D.C. 20530 , for the appellee.

Before: ALDISERT, ^* KLEINFELD and FLETCHER, Circuit Judges. ^**

OPINION

ALDISERT, Circuit Judge:

Appellants Floyd W. Beam and Elaine M. Beam filed a petition for bankruptcy reorganization under Chapter 13 and deposited $24,000 towards a proposed plan with the trustee in bankruptcy. They subsequently filed a motion to withdraw their bankruptcy petition and demanded return of the money they had deposited into their unconfirmed Chapter 13 plan. Upon dismissal of their petition, the Internal Revenue Service served a notice of levy on the trustee in bankruptcy, directing him to distribute the deposited funds directly to the IRS in partial satisfaction of the Beams' federal tax liability. We are to decide whether a Chapter 13 trustee in bankruptcy is required to honor an IRS notice of levy under 26 U.S.C. §6331 on these funds, notwithstanding 11 U.S.C. §1326(a)(2), which instructs the trustee to return the debtor's payments where a debtor's plan is not confirmed. The district court concluded that the IRS's power to levy is not compromised by the bankruptcy distribution provision. We affirm the judgment of the district court.

The bankruptcy court had subject-matter jurisdiction under 11 U.S.C. §157. The district court had jurisdiction under 28 U.S.C. §158(a). We have jurisdiction under 28 U.S.C. §1291. The appeals were timely filed. Rule 4(a), Federal Rules of Appellate Procedure.

Appellants contend that the district court erred because (1) distribution of the deposited funds directly to the IRS conflicts with the bankruptcy distribution provision in 11 U.S.C. §1326(a)(2); and (2) the IRS levy is invalid, because the IRS impermissibly served a "notice of levy" on the trustee in bankruptcy.

This court reviews the bankruptcy court's interpretation of statutory language de novo. In re Claremont Acquisition Corp., 113 F.3d 1029, 1031 (9th Cir. 1997); In re Maya Constr. Co., 78 F.3d 1395, 1398 (9th Cir. 1996).

I.

In January 1993, the Beams sought relief from their outstanding debts by filing a petition for Chapter 13 bankruptcy in the Bankruptcy Court for the District of Oregon. Over the next four years, the Beams deposited approximately $24,000 towards their proposed Chapter 13 plan with the trustee in bankruptcy.

In April 1993, the IRS filed a proof of claim against the Beams for $137,821.50--the amount of their federal tax liabilities since 1981. In November 1995, after several years of litigation regarding the Beams' tax liability, the IRS filed its final amendment to its proof of claim.

In June 1997, the bankruptcy court denied confirmation of the Beams' Chapter 13 plan, but allowed them to pay all creditors and administrative expenses in full by August 11, 1997 or, alternatively, to file a modified plan providing for full payment, plus interest, of all outstanding debts. Instead of paying their debts or filing a modified plan, the Beams filed a motion to withdraw their bankruptcy petition in August 1997 and demanded the return of the $24,000 which they had deposited into the unconfirmed plan. The bankruptcy court granted Appellants' motion and issued a notice of dismissal on August 21, 1997. At that time the IRS served a notice of levy on the Chapter 13 trustee, directing him to pay the deposited funds directly to the IRS in partial satisfaction of the Beams' federal tax liability.

In response to the IRS's notice of levy, the Chapter 13 trustee filed a Motion for Order Directing Disbursement of Funds with the bankruptcy court and requested an emergency hearing to determine whether the Beams were entitled to the funds despite the IRS's notice of levy. On August 27, 1997, the bankruptcy court directed distribution to the Beams pursuant to the bankruptcy distribution provision for unconfirmed plans, 11 U.S.C. §1326(a)(2).

The IRS appealed from the bankruptcy court's distribution order. The district court reversed the bankruptcy court's order and directed the trustee to disburse the held funds directly to the IRS. In the district court's view, regardless of which statute controlled the distribution, the IRS ultimately held superior rights to the funds via its broad levy powers.

On May 26, 1998, the Beams filed a timely notice of appeal to this court and a motion to stay disbursement of the funds pending appeal. On July 2, 1998, the district court denied the Beams' motion to stay.

II.

The provisions of 26 U.S.C. §6331, when read in conjunction with §6334, authorize the IRS to collect unpaid taxes via a levy on the taxpayer's property, so long as the property is not specifically exempt from levy. In tension with the Internal Revenue statutes, §1326(a)(2) of the Bankruptcy Code mandates, if a plan is not confirmed, the trustee in bankruptcy shall return to the debtors any payment made pursuant to the proposed plan.

The payment distribution clause of section 1326(a)(2) provides:

[If a debtor's] plan is not confirmed, the trustee shall return any such payment to the debtor, after deducting any unpaid claim allowed under section 503(b) of this title.

11 U.S.C. §1326(a)(2).

Section 6334(a) identifies 13 categories of property exempt from an IRS levy. ¹ Section 6334(c) further provides:

Notwithstanding any other law of the United States . . ., no property or rights shall be exempt from levy other than the property specifically made exempt by subsection (a).

26 U.S.C. §6334(c).

Resolution of this statutory conflict directly impacts upon collection and enforcement policies of the IRS regarding unpaid taxes from debtors who have deposited funds into unconfirmed bankruptcy plans. If funds deposited into unconfirmed bankruptcy plans are returned to debtors who are also delinquent taxpayers, then the IRS would be required to pursue additional legal action to collect these outstanding taxes.

We are persuaded that Congress clearly intended to exclude from IRS levy only those 13 categories of property specifically-exempted in section 6334(a). In drafting the levy authority of the Internal Revenue Service, Congress set forth in unambiguous language that "no property or rights shall be exempt from levy other than property specifically made exempt by [§6334](a)." 26 U.S.C. §6334(c). Section 1326(a)(2) of the Bankruptcy Code is not listed among the 13 items exempt from levy under §6334(a).

Moreover, courts have construed the plain language of §6334 literally and have refused to exempt property from IRS levy which is not specifically exempted by the statute. See, e.g., United States v. Mitchell [71-1 USTC ¶9451], 403 U.S. 190, 204-205 (1971) ("[Section 6334(c)] is specific and it is clear and there is no room in it for automatic exemption of property that happens to be exempt from state levy. . . ."); Sea-Land Serv., Inc. v. United States [85-2 USTC ¶9833], 622 F. Supp. 769, 772-773 (D. N.J. 1985) (holding that the IRS could levy on the wages of seamen even though the wages were not subject to attachment under 46 U.S.C. §11109); In re Jones, 206 B.R. 614 (Bankr. D.C. 1997) (allowing the IRS to levy a Chapter 13 debtor's Thrift Savings Plan, even though 5 U.S.C. §8437(e)(2) specifically prohibited such a levy).

Accordingly, we reject Appellants' argument that the specific construct of §1326(a)(2) trumps the general language of §6334(c). While specific statutes normally trump conflicting, general statutes, see Green v. Bock Laundry Mach. Co., 490 U.S. 504, 524 (1989), such an argument ignores the specifically stated intent of Congress to limit the instances where an IRS levy may not attach.

III.

Appellants contend also that the IRS's service of a notice of levy on the trustee was improper and that the IRS agent exceeded his statutory levying powers under 26 U.S.C. §6301. These arguments also fail. A notice of levy served on a third-party custodian of property is tantamount to a levy under 26 U.S.C. §6331. See, e.g., United States v. Donahue Industries, Inc. [90-2 USTC ¶50,343], 905 F.2d 1325, 1330 (9th Cir. 1990). Furthermore, the IRS agent had authority to levy upon Appellants' property, because the agent's levy power is derived directly from the Treasury Secretary's statutorily prescribed power to collect taxes.

A.

We reject Appellants' contention that the IRS's "notice of levy," which was served on the Chapter 13 trustee, was invalid. Service of a notice of levy on a third-party is proper, indeed customary, when the third-party is in possession of the debtor's property, or where the third-party is obligated to the debtor. See United States v. National Bank of Commerce [85-2 USTC ¶9482], 472 U.S. 713, 720 (1985). Furthermore, the Treasury Regulations expressly provide that a "[l]evy may be made by serving a notice of levy on any person in possession of, or obligated with respect to, property or rights of property subject to levy." 26 C.F.R. §301.6331-1(a)(1); see also 26 U.S.C. §6332(a) ("[A]ny person in possession of (or obligated with respect to) property or rights to property subject to levy upon which a levy has been made shall, upon demand . . ., surrender such property or rights. . . ."). Because a trustee in bankruptcy represents the bankruptcy estate, see 11 U.S.C. §323, the trustee is therefore obligated to the estate. Accordingly, service of a notice of levy upon the trustee in bankruptcy for any obligations owed by the estate is proper. See United States v. Hemmen [95-1 USTC ¶50,210], 51 F.3d 883, 890 n.6 (9th Cir. 1995).

Here, the IRS served a notice of levy on the Chapter 13 trustee, because the trustee held the deposited funds and was obligated to the Beams as their representative in bankruptcy. Consequently, the IRS properly levied the funds by serving a notice of levy on the trustee.

B.

Appellants contend also that the IRS agent who served the notice of levy on the trustee acted outside the scope of his authority, because 26 U.S.C. §7608 does not provide for the use of levies to secure payment of unpaid taxes. Appellants' reliance on §7608 is misplaced because this provision applies only to criminal enforcement officers performing certain functions relating to undercover operations, subtitle E of the Internal Revenue Code and other laws relating to alcohol, firearms and tobacco. These matters are not implicated here. We conclude, therefore, that the IRS agent had authority to levy pursuant to 26 U.S.C. §6301. See Hughes v. United States [92-1 USTC ¶50,086], 953 F.2d 531, 536 (9th Cir. 1992) (concluding that Secretary's assignment of authority to local IRS employees constituted valid delegation of power).

AFFIRMED.

^* Ruggero J. Aldisert, Senior Judge , United States Court of Appeals for the Third Circuit, sitting by designation.

^** The panel unanimously finds this case suitable for decision without oral argument. Rule 34(a), Federal Rules of Appellate Procedure; 9th Cir. R. 34-4.

¹ The specific exemptions include wearing apparel and school books, fuel, necessary personal expenses up to $6250, books and tools up to $3125, unemployment benefits, undelivered mail, certain annuity and pension payments, workmen's compensation, judgments in support of minor children, minimum exemptions for wages and salary, certain service-connected disability payments, certain public assistance payments, assistance under the Job Training Partnership Act, residences exempt in small deficiency cases and principal residences and certain business assets exempt in absence of certain approval or jeopardy. 26 U.S.C. §6334(a)(1)-(13).

 

 

 

In re J. Greg Goodykoontz and Toni B. Goodykoontz, Debtors. J. Greg Goodykoontz and Toni B. Goodykoontz, Plaintiffs v. United States of America on behalf of its agency, the Internal Revenue Service, and The State of West Virginia on behalf of its agency, The WV Dept. of Tax and Revenue, Defendants

U.S. Bankruptcy Court, No. Dist. W.Va. , 00-10902, 5/30/2001

[Code Secs. 6321 , 6331 and 6871 ]

Tax liens: Property subject to tax liens: Bankruptcy: Levy and distraint: Property exempt from levy: Lien v. levy.--

Federal tax liens issued against the property of married debtors applied to property that was exempt from levy. The taxpayers unsuccessfully contended that the terms "lien" and "levy" had the same meaning under Code Sec. 6331 and, thus, the liens did not reach their exempt property. Although the Fourth Circuit had not addressed the issue, the court noted that the issue had arisen before courts within the Fourth Circuit, and those courts issued findings consistent with Seventh and Ninth Circuit opinions that liens and levy should be treated dissimilarly under the statute. Consequently, the tax liens attached to the debtors' exempt, as well as non-exempt, assets.

MEMORANDUM OPINION AND ORDER

FRIEND II, Bankruptcy Judge:

This matter is before the Court pursuant to the Plaintiffs' motion for summary judgment. The Plaintiffs, who are debtors in possession, filed this adversary proceeding to establish the validity of tax liens and to value property subject thereto. The Court has jurisdiction by virtue of 28 U.S.C. §1334 and the standing order of reference in this District. The matter before the Court is a core proceeding pursuant to 28 U.S.C. §157(b).

FACTS

The plaintiffs, J. Greg Goodykoontz and Tori B. Goodykoontz, ("debtors") filed for relief under Chapter 11 of the Bankruptcy Code on April 6, 2000 and were authorized to continue operating as debtors in possession. The parties have stipulated to the value of property owned by the debtors at the time of filing. Neither the prior consensual liens on this property nor the claimed exemptions are in dispute.

Property                    Value  Claimed Exemption  Prior Consensual Liens

Residence ................ 175,000            0             150,713.36

Cash .....................      50           50                      0

Checking, City Nat'l .....   1,000        1,000                      0

Checking, 

One
 
Valley

 .....      75           75                      0

Household Goods ..........   7,420        7,420                      0

Pictures .................   3,000        3,000                      0

Jewelry ..................  24,160        1,000                 24,000

Tea Set ..................   1,500            0                  7,500

Wearing apparel ..........   2,500        2,500                      0

Firearms .................     250          250                      0

401(k) ...................  20,000       20,000                 39,548

IRA ......................  15,000       15,000                  9,295

Partnership ..............  17,000       15,000                      0

Miata ....................   3,500        3,500                      0

Honda ....................  18,000            0              18,120.94

Audi .....................  13,000            0                 14,000

 

Prior to the bankruptcy filing, tax liens were filed by the United States of America on behalf of the Internal Revenue Service ("IRS"), and by the State of West Virginia on behalf of the Department of Tax and Revenue ("State Tax Department"). On August 21, 2000, the debtors filed an adversary proceeding against the IRS and the State Tax Department seeking to determine the validity of the tax liens. By agreed order entered November 8, 2000, the debtors and the West Virginia State Tax Department stipulated that the value of the assets involved was such that after the satisfaction of the consensual secured debt and the tax liens of the IRS, ¹ the state tax liens would be unsecured. The Court ordered that all tax liens filed pre-petition by the State Tax Department against the plaintiffs are of no further effect. The adversary proceeding continued with the IRS as the sole defendant.

The tax liens of the IRS are as follows:

Lien Amount  Period Ending  Assessed   Filed

$49,388.20      12/31/90     5/20/91   7/24/91

 49,762.17      12/31/91     5/25/92   7/23/92

 65,100.78      12/31/92     5/31/93    7/9/93

 92,281.29      12/21/93     5/30/94   2/15/95

 97,769.79      12/31/94     6/15/95   8/18/95

 68,296.08      12/31/96      2/2/99   6/21/99

 

Following a pretrial hearing on October 12, 2000, the plaintiffs and the IRS stipulated to the property values and were to submit briefs setting forth whether the liens of the IRS are limited to the value of the property subject to levy, or whether the value of property which may not be levied against should support the tax lien. The debtors filed a motion for summary judgment, and the IRS filed an objection to the motion and a cross motion for summary judgment. The Court then took this matter under advisement.

DISCUSSION

The Internal Revenue Code ("I.R.C.") provides that

If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.

28 U.S.C. §6321.

The Code further provides that the lien imposed by §6321 "shall arise at the time the assessment is made and shall continue until the liability for the amount so assessed . . . is satisfied or becomes unenforceable by reason of lapse of time." 26 U.S.C. §6322. The United States Supreme Court has stated that "[t]he statutory language 'all property and rights to property,' appearing in §6321 . . . is broad and reveals on its face that Congress meant to reach every interest in property that a taxpayer might have." United States v. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713, 719-720 (1985), cited by In re Voelker [95-1 USTC ¶50,028 ], 42 F.3d 1050 (7th Cir. 1994) ("The language of the statute unambiguously shows that the federal tax lien attaches to all of a debtor's property, without exception.").

The debtors argue that under 26 U.S.C. §6331, the tax lien does not apply to exempt property. Section §6331 provides that

(a) . . . If any person liable to pay any tax neglects or refuses to pay the same within 10 days after notice and demand, it shall be lawful for the Secretary to collect such tax . . . by levy upon all property and rights to property (except such property as is exempt under section 6334) belonging to such person or on which there is a lien provided in this chapter for the payment of such tax.

(b) The term "levy" as used in this title includes the power of distraint and seizure by any means.

(Emphasis added).

The debtors' position is based upon the equation of the terms "lien" and "levy." However, the Seventh and the Ninth Circuits have found that the two terms have distinctly different meanings, and should be treated dissimilarly under the statute. The Seventh Circuit Court of Appeals stated that

This dissimilarity in treatment makes sense, for as the Ninth Circuit discussed in Barbier, a lien and levy are different things. "A levy forces debtors to relinquish their property. It operates as a seizure by the IRS to collect delinquent incomes taxes." [citation omitted]. On the other hand, "a lien . . . is merely a security interest and does not involve the immediate seizure of property. A lien enables the tax payer to maintain possession of protected property while allowing the government to preserve its claim should the status of [the] property later change." [citation omitted]. Thus, if a debtor later sells the exempt property, the IRS could move to collect the proceeds from the sale.

Voelker [95-1 USTC ¶50,028 ], 42 F.3d at 1052, quoting United States v. Barbier [90-1 USTC ¶50,107 ], 896 F.2d 377 (9th Cir. 1990).

The court followed this analysis to the conclusion that a federal tax lien attached to all of a Chapter 13 debtor-taxpayer's property, without exception, even to personal property exempt from levy. Id. The Ninth Circuit Court of Appeals had previously reached a similar conclusion in United States v. Barbier [90-1 USTC ¶50,107 ], 896 F.2d 377, holding that the IRS' priority tax claim could be secured by Chapter 13 debtors' household effects and other property which were otherwise exempt from administrative levy.

The Fourth Circuit Court of Appeals has not addressed this issue. The issue has, however, arisen before several courts within the Fourth Circuit. The findings of these courts are consistent with the Seventh and Ninth Circuit opinions on the matter. See In re O'Gorman-Sykes [2000-1 USTC ¶50,174 ], 245 B.R. 815 (Bankr. E.D. Va. 1999) (tax refunds claimed exempt by debtor nevertheless subject to IRS' secured claim); In re Evans, Bankruptcy 94-00785-5-ATS, WL 760821 (Bankr. E.D. N.C. Nov. 7, 1999) (summary non-judicial seizure of property available to the IRS under the levy provision of §6331 is separate and discrete from the IRS power to create a lien on property of the debtor); In re Dinatale, 235 B.R. 569 (Bankr. D. Md. 1999) (federal tax liens can properly attach to exempt assets); In re Deel, No. 7-93-02602-HPB-13, WL 571997 (W.D. Va. June 20, 1995) (debtors could not avoid federal tax lien on exempt property, but IRS could not levy on property).

The Court finds, therefore, that the liens of the IRS attach to the debtors' exempt assets, as well as their non-exempt assets. The motion for summary judgment of the debtors is DENIED and the cross motion for summary judgment of the IRS is GRANTED.

It is accordingly SO ORDERED.

¹ The IRS tax liens were undisputedly prior in time to those of the State Tax Department.

 

 

 

 

 

In re Jerrie S. Colish, Debtor. Jerrie S. Colish, Plaintiff v. United States of America , Department of Treasury, Internal Revenue Service, Defendants. United States of America , Third-Party Plaintiff v. Jerrie S. Colish, Third-Party Defendant.

U.S. Bankruptcy Court, East. Dist. N.Y. ; 197-14664-608, 289 BR 523, October 23, 2002.

[ Code Sec. 6871]

Bankruptcy: Discharge of debt: Willful evasion of tax: Trust interest: Tax liens. --

A bankrupt tax attorney's tax, interest and penalty liabilities were not dischargeable in bankruptcy because he willfully attempted to evade the payment of taxes. The taxpayer failed to file timely returns for six tax years and did not pay his federal income taxes for 13 years, except to the extent tax was withheld by employers. Moreover, the attorney, who was familiar with offers-in-compromise, succeeded in delaying the government's collection efforts for more than five years by submitting offers that were clearly too low in relation to the tax obligations. Finally, although he was aware of his remainder interest in a trust at the time of filing the bankruptcy petition, the taxpayer failed to disclose his interest to the court, despite the fact Schedule B explicitly asked whether he had any contingent or future interests at the commencement of the case.


[ Code Secs. 6321 and 6871]

Bankruptcy: Discharge of debt: Willful evasion of tax: Trust interest: Tax liens. --

The government carried its burden of proof under the preponderance of the evidence standard that a debtor knowingly and fraudulently failed to report to the court or surrender to the Chapter 7 trustee his remainder interest in a trust and the cash and other property distributions he received from the maturing of his remainder interest pursuant to section 727(d)(2) of the Bankruptcy Code. Accordingly, the taxpayer's Chapter 7 discharge was revoked. The taxpayer's contention that his interest in the trust was nonassignable and not reachable by his creditors and, thus, should not be included in the property of the estate was rejected. Federal tax liens attached to the remainder interest in the trust at the time of the creation of the liens, which predated the bankruptcy.

Gary C. Fischoff, Fischoff and Associates, for debtor, plaintiff, third-party defendant. Wendy J. Kisch, Bartholomew Cirenza, Department of Justice, Washington, D.C. 20044, for defendants, third-party plaintiff.

DECISION AND ORDER

CRAIG, Bankruptcy Judge: This matter comes before the Court on the complaint of Jerrie S. Colish ("Colish" or "Debtor") to have his debt to the Internal Revenue Service ("Government") for his assessed federal income tax liabilities for years 1987 through 1992 declared dischargeable under 11 U.S.C. §523(a)(1) and, additionally, on the complaint of Government seeking a determination that Debtor's Chapter 7 discharge should be revoked pursuant to 11 U.S.C. §727(d)(2).

Procedural History

On April 29, 1997, Debtor filed a voluntary petition under Chapter 7 of the United States Bankruptcy Code (11 U.S.C.) and was granted a discharge of all dischargeable debts on August 19, 1997.

On August 8, 1997, Colish filed a complaint (Govt. Ex. R1.) to commence an adversary proceeding, wherein he requested that the Court issue an order declaring his assessed federal income tax liabilities for years 1986 through 1993 dischargeable under 11 U.S.C. §523(a)(1). On September 30, 1999, the Honorable Laura Taylor Swain, to whom this case was then assigned, determined that Debtor's 1993 assessed federal income tax liabilities were non-dischargeable priority liabilities pursuant to 11 U.S.C. §507(a)(8)(A)(ii). In the Matter of Jerrie S. Colish [ 99-2 USTC ¶50,906], 239 B.R. 670 (Bankr. E.D. N.Y. 1999). Hence, the only years for which dischargeability is still in dispute are tax years 1987 through 1992.

Subsequently, on October 26, 2000, the Government commenced an adversary proceeding seeking the revocation of Debtor's Chapter 7 discharge pursuant to 11 U.S.C. §727(d)(2) on the grounds that Debtor failed to disclose on Schedule B of the bankruptcy petition his remainder interest in a trust established by his father and that Debtor, additionally, failed to disclose and surrender to the Chapter 7 Trustee cash and other property distributions he received from the trust upon the maturing of his remainder interest. (Govt. Ex. S1.) On January 17, 2001, the Court denied the Government's motion to consolidate both adversary proceedings, but ordered that the two adversary proceedings be tried jointly. Consequently, on September 4 and 5 of 2001 and November 20, 2001, the above-entitled adversary proceedings were tried simultaneously. At the conclusion of the trial, the Court directed the parties to file post-trial briefs.

This Court has considered thoroughly all submissions, evidence, and arguments relating to this matter, and the decision rendered herein reflects such consideration.

Jurisdiction

This Court has jurisdiction over these proceedings pursuant to 28 U.S.C. §§151, 157 and 1334, and both these adversary proceedings are core proceedings pursuant to 28 U.S.C. §157(b)(2)(I) and (b)(2)(J).

Facts

Debtor's Work Experience and Education

Debtor is an attorney who holds a Juris Doctor (J.D.) degree from the University of Miami Law School and Masters of Law (LL.M.) degree in taxation from the University of Miami Law School. (T1 63.) ¹ In addition to his legal education, Debtor has a "Series 7" license to sell variable securities and a license to sell life insurance products. (JPTO ² ¶5(4).)

Debtor has substantial work experience in both private legal practice and in the sale of securities. From 1979 through October of 1985, Debtor practiced law, advising clients on federal tax issues and corporate and partnership formations. (JPTO ¶7.) Later, from 1985 to 1987, Debtor was hired by Equityline Securities as its vice president and general counsel, and worked in sales, marketing, analysis, due diligence and wholesaling. (JPTO ¶9.)

After an extensive period of time working as an independent wholesaler of securities, from October of 1987 through November 1994 (JPTO ¶10.), Debtor was employed by a Wall Street securities firm, D.H. Blair, as a retail sales broker, from late 1994 to late 1996. (JPTO ¶10.) Subsequently, starting in late 1996 and through the time of trial, Debtor has worked with a venture capital firm, Spencer Trask. (T1 at 67.)

At the time of trial, Debtor resided in a rented 4-bedroom apartment in Brooklyn , New York and had resided there since June 1993. (JPTO ¶32) From 1988 to 1993, Debtor resided in a rented apartment in Pennsylvania . Debtor leased a 1986 Buick Skylark from 1986 to 1991. (JPTO ¶31.)



Debtor's Expenses and Lifestyle

From 1986 to 1998, other than normal living expenses, Debtor's expenses mainly consisted of: 1) child support payments pursuant to a marriage settlement agreement, 2) tuition payments for private school education for his four children, and 3) charitable contributions and gifts made to his ex-wife and friends.

Pursuant to a marriage settlement agreement ("Agreement"), dated March 28, 1988, Debtor and his wife became legally separated. Debtor has four children. Under the terms of the Agreement, Debtor agreed to pay $375 per month, per child as support. (Debtor's Ex. 2 ¶7.) The Agreement further provides increases in the amount of support annually in the amount of "one-half of the excess of his net income from all sources over Sixty-Thousand ($60,000) Dollars" and that child support in no instance shall exceed $600 per month per child. (Debtor's Ex. 2 ¶7.) However, the $600 maximum allowance per month per child apparently could be modified "provided that the needs of the children ... require more." Furthermore, pursuant to ¶8 of the Agreement, Debtor was to pay for his children's college expenses provided that he was financially able to do so. ³ Nothing in the Agreement required the Debtor to fund the cost of private elementary or secondary school education.

Nevertheless, beginning in 1986 and continuing on through 1999, Debtor paid for his children's private school education. (T1 at 113, 124.) Although all four children graduated from Abrams Hebrew Academy in Yardley, Pennsylvania, one daughter attended boarding school (T2 at 45, 76) and one son went to public high school for two years. (T1 at 124.) The tuition at the private schools amounted to $16,000 in 1986, and steadily rose throughout the period at issue, reaching $33,000 in 1992. The tuition remained relatively constant from 1992 to 1997 at $33,000, before increasing substantially in 1998 to $48,500 due to one of Debtor's children attending college. ⁴

Furthermore, commencing in 1989 and continuing through 1998, Debtor made charitable contributions. (T2 at 20-21.) The contributions varied significantly from year to year, ranging from a low of $1,774 in 1997 to a high of $15,962 in 1993. (Govt. Ex. D3 through D12.)

In addition, Debtor gave substantial sums of money to close friends and his ex-wife. In 1998, Debtor gave his ex-wife $12,500. (Govt. Ex. PP; T2 93.) It was initially given as a loan, but later the Debtor forgave the loan, and it became a gift. (T2 at 93.) Debtor also felt responsible for the losses incurred by three friends who had invested and lost money on Debtor's advice. (T1 at 182-183.) As a result, Debtor gave three $20,000 nonrecourse loans each to the three friends. ⁵ Repayment was solely conditioned on the successful investment of the loans. (T1 at 182-183.)



Tax Return Filings: 1987-1998

On October 12, 1988, Debtor filed late his federal income tax return for the 1987 tax year in which he made a payment of $2,302 through employer withholding. (Govt. Ex. A1-A2.) His return reflected that he owed tax in the amount of $11,675, inclusive of interest and penalties, thus leaving a deficiency of $9,373. Id.

On April 15, 1989, Debtor timely filed his federal income tax return for the 1988 tax year in which he failed to make any payment. His return reflected that he owed tax in the amount of $6,579, inclusive of interest and penalties, thus leaving a deficiency in such amount. Id.

On March 18, 1991, Debtor filed late his federal income tax return for the 1989 tax year in which he made estimated payments of $3,250. His return reflected that he owed tax in the amount of $27,315, inclusive of penalties and interest, leaving a deficiency of $24,065. Id.

On June 3, 1991, Debtor timely filed his federal income tax return for the preceding year in which he made estimated payment of $100. His return reflected that he owed tax in the amount of $25,050, inclusive of interest and penalties, leaving a deficiency of $24,950. Id.

On April 10, 1992, Debtor timely filed his federal income tax return for the preceding year in which he did not make any payments. His return reflected that he owed tax in the amount of $16,207, inclusive of interest and penalties, leaving a deficiency in such amount. Id.

On April 15, 1993, Debtor timely filed his federal income tax return for the preceding year in which he made an estimated payment of $11,310. His return reflected that he owed tax in the amount of $27,042, leaving a deficiency of $15,732. Id.

On April 15, 1994, Debtor timely filed his federal income tax return for the preceding year in which he failed to make any payment. His return reflected that he owed tax in the amount of $38,913. Id.

On April 15, 1995, Debtor timely filed his federal income tax return for the preceding year in which he made an estimated payment of $9,250. His return reflected that he owed tax in the amount of $25,462, inclusive of interest and penalties, leaving a deficiency of $16,212. Id.

On April 15, 1996, Debtor timely filed his federal income tax return for the preceding year, and made a payment of $28,936 through employer withholding. His return reflected that he owed tax in the amount of $26,611, inclusive of interest and penalties, leaving an overpayment of $2,770, which was credited to his 1986 tax liability. Id.

On April 27, 1997, Debtor timely filed his federal income tax return for the preceding year, and made a payment of $27,009 through employer withholding. His return reflected tax in the amount of $12,516, inclusive of interest and penalties, leaving an overpayment of $14,493, which was credited to his 1986 tax liability. Id.

On June 25, 1998, Debtor filed late his federal income tax return for the preceding year, and made a payment of $20,826, through employer withholding. His return reflected tax in the amount of $12,324, inclusive of interest and penalties, leaving an overpayment of $8,502. Id.

On October 19, 1999, Debtor filed late his federal income tax return for the preceding year reporting no tax liability. On February 1, 2000, Debtor filed an Amended Return and made a $8,671 estimated payment as well as a $573 payment through employer withholding. His return reflected that he owed tax in the amount of $88,028, leaving a deficiency of $84,744. Id.



Serial Offers in Compromise

On April 30, 1992, Debtor submitted his first offer-in-compromise to the Government wherein he sought to compromise his tax liabilities for years 1986 through 1991, totaling $78,319, plus interest and penalties based on "doubt as to collectability" by offering to make future estimated tax payments and by paying $12,500. (Govt. Ex. F1.) The offer was amended on June 10, 1992 and again on April 5, 1993. (Govt. Ex. F2.) Under the revised offer, Debtor offered to pay $12,916 to compromise total reported tax liabilities of $85,241 for tax years 1987 through 1992. (Govt. Ex. F2.) On December 2, 1993, the Government rejected Debtor's first offer, as amended, based on Debtor's statement to the Government that the funds were no longer available. (Govt. Ex. F4.)

On April 20, 1994, Debtor submitted his second offer-in-compromise, seeking to pay only $12,500 for his total reported unpaid liabilities of $123,464 for tax years 1987 through 1993. (Govt. Ex. C.) The Debtor was, in effect, submitting the same amount as previously offered but attempting to satisfy an additional tax year as well. The Government determined that the Debtor actually had over $119,447 in net equity from which to collect outstanding tax liabilities of $130,780. ( See attachment to Govt. Ex. G3.) As a result, the Government formally rejected that offer on August 19, 1994, after determining that a much larger amount was collectible by the it. (Govt. Ex. G2.)

On September 15, 1994, Debtor submitted his third offer-in-compromise, which was amended on May 18, 1995. (Govt. Ex. H1.) As amended, Debtor offered to pay $20,000 to compromise total reported liabilities of $147,64. (Govt. Ex. H2.) The Government rejected Debtor's offer by letter dated June 22, 1995, and afforded him the opportunity to protest the decision. Debtor's final offer was rejected by letter on May 14, 1997 because a larger amount was deemed collectible. (Govt. Ex. H6.)



The Mannie S. Colish Trust

Mannie S. Colish, Debtor's father, established the Mannie S. Colish Trust ("Trust") on October 25, 1979. (Govt. Ex. W, X1, X2, Y.) The Trust provided a life estate interest to Lorraine S. Colish, Debtor's mother, and equal vested remainder interests to Debtor and his sister, Julie Colish. Mannie Colish died on January 11, 1981. (T1 at 140.) Upon his father's death, Debtor learned that he was a beneficiary of the Trust (Govt. Ex. W, X1, X2, Y.) The Trust provided that Lorraine Colish had a testamentary power of appointment, which permitted her, by her last Will and Testament, to divest either remainder interest in the Trust. (Govt. Ex. W, X1, X2, Y.)

At the time of filing the bankruptcy petition, Debtor failed to disclose his remainder interest in the Trust in schedules filed with this Court. (Govt. Ex. P, Sch. "B", lines 18, 19; T1 at 145.) The Government contends that it only became aware of Debtor's interest in the Trust during settlement negotiations with the Debtor for adversary proceeding no. 97-1399, after which it commenced an adversary proceeding to revoke Debtor's discharge pursuant to 11 U.S.C. §727(d)(2). (T4 at 18-19.)

On December 20, 1997, Lorraine Colish died and the Debtor became entitled to collect his remainder interest. (T1 at 140-141; Ex. AA.) Subsequently, from January 1998 through June 1998, Debtor received cash and other property distributions from the Trust, totaling $718,000. (T1 at 142.) As part of the distributions, Debtor received $479,631 from a land contract held by the Trust. (T1 at 165-1661; Govt. Ex. OO.) On January 13, 1998, Debtor wire-transferred his share of these proceeds from his Citizens Bank account in Flint, Michigan to an account he maintained with Chase Bank in New York. (T1 at 169.) Next, Debtor transferred $450,000 from the Chase account to a savings account opened at Citibank. ( Id. ) On January 27, 1998 Debtor transferred $200,000 from the Citibank savings account into Citibank checking account and $245,335 into a 7-day CD. (T1 at 170.) Debtor then transferred $100,000 of the $200,000 in the Citibank checking account to a personal account at Spencer Trask (held by Schroeder Bank). (T1 at 184.)

On March 23, 1998, Debtor created a Nevada Limited Partnership, Phoenix Samson Associates, L.P. in which Debtor was named a general partner and limited partner, holding a 96% interest of the partnership and the Jerrie Saul Colish Irrevocable Children's Trust ("Irrevocable Trust"), a limited partner, holding the other 4% interest. (Govt. Ex. J; T1 at 180.) Debtor funded the partnership with cash and property valued at $740,625, including his Spencer Trask account, his newly opened Citibank accounts, numerous stock warrants, various general and limited partnership interests acquired from the Trust and extensive personal property. ⁶ Of the contributed funds, Debtor treated $711,000 (96% interest in partnership) as coming from himself and the other $29,625 coming from the Irrevocable Trust. However, the entire amount clearly came from Debtor's interest in the Trust. (T1 at 160-161.)

Discussion

Pursuant to 11 U.S.C. §523(a)(1)(C), Debtor's 1987 through 1992 Assessed Federal Income Tax Liabilities Are Non-Dischargeable

A discharge in bankruptcy does not discharge debtor of all debts.

§523(a)(1)(C) provides in relevant part:

Section 523. Exceptions to Discharge

 

(a) A discharge under §§727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual Debtor from any debt --

 

(1) for a tax or customs duty --

 

(C) with respect to which Debtor made a fraudulent return or willfully attempted in any manner [italics to highlight] to evade or defeat such tax.

The two exceptions to dischargeability in §523(a)(1)(C) are to be read in the disjunctive. "Nondischargeability under [§523(a)(1)(C) is not limited to finding a fraudulent return." In re Fernandez, 112 B.R. 888, 891 (Bankr. N.D. Ohio 1990); In re Tudisco [ 99-2 USTC ¶50,669], 183 F.3d 133 (2d Cir. 1999). Therefore, in order to prevail, the Government must prove that the Debtor either made a fraudulent return or the Debtor willfully attempted to evade or defeat payment of taxes. In re Lilley [ 93-2 USTC ¶50,427], 152 B.R. 715, 720 (Bankr. E.D. Pa. 1993); In re Griffith , 161 B.R. 727 (Bankr. S.D. Fla. 1993).

At issue in Adversary Proceeding No. 197-1399 is whether Debtor willfully attempted in any manner to evade or defeat payment of taxes for tax years 1987 through 1992. The Second Circuit has recently held that the "willfulness exception consists of a conduct element (an attempt to evade or defeat taxes) and a mens rea requirement (willfulness)." In re Tudisco [ 99-2 USTC ¶50,669], 183 F.3d 133, 136 (2d Cir. 1999).

The burden of proof is the ordinary civil standard; the government must show by a preponderance of the evidence that the claim should be excepted from discharge. Grogan v. Garner, 498 U.S. 279 (1991); Langlois v. United States [ 93-2 USTC ¶50,364], 155 B.R. 818, 820 (N.D. N.Y. 1993). We also bear in mind that exceptions to discharge are construed in favor of the Debtor. In re Birkenstock, 87 F.3d 947, 951 (7th Cir. 1996).

The Second Circuit has recently declined to decide whether more than a simple nonpayment of taxes is required to satisfy §523(a)(1)(C)'s conduct requirement or whether §523(a)(1)(C) "encompasses both acts of commission as well as culpable omissions." In re Tudisco [ 99-2 USTC ¶50,669], 183 F.3d at 137 (quoting Bruner v. United States (In re Bruner) [ 95-2 USTC ¶50,356], 55 F.3d 195, 200 (5th Cir. 1995) (holding that §523(a)(1)(C) "encompasses both acts of commission as well as culpable omissions")). However, the Second Circuit, in Tudisco, has joined the majority of the courts in holding that a failure to pay a known tax duty is, at a minimum, "relevant evidence which a court should consider in the totality of conduct to determine whether ... the debtor willfully attempted to evade or defeat taxes." Dalton v. IRS, 77 F.3d 1297, 1301 (10th Cir. 1996). Nonpayment of tax coupled with concealment of assets or income, or a pattern of failure to file returns is sufficient to establish conduct aimed at "evading or defeating taxes." See, e.g., In re Tudisco [ 99-2 USTC ¶50,669], 183 F.3d 133 (nonpayment of tax, failure to file and submission of false affidavit to employer intended to establish exemption from withholding), In re Birkenstock, 87 F.3d 947 (nonpayment of tax, failure to file, creation of shell trust); Dalton v. Internal Revenue Service, 77 F.3d 1297 (concealing assets and underestimating ownership interest in property on bankruptcy schedule).

The Second Circuit has interpreted "willfully" for purposes of §523(a)(1)(C) to require that debtor's attempts to avoid his tax liability be undertaken "voluntarily, consciously or knowingly, and intentionally." In re Tudisco [ 99-2 USTC ¶50,669], 183 F.3d 133, 137 (2d Cir. 1999) (quoting Dalton , 77 F.3d at 1302).

Because direct proof of intent is rarely found, courts look to circumstantial evidence to determine debtor's intent. Such evidence may include evidence outside the tax years in question, "if sufficiently related in time and character to be probative." In re Birkenstock, 87 F.3d at 951 (quoting United States v. Birkenstock [ 87-2 USTC ¶9416], 823 F.2d 1026, 1028 (7th Cir. 1987).

In the case at bar, there are a number of facts which, when taken together, show that the Debtor intended to evade or defeat taxes. Debtor, an attorney with an LL.M. in tax, despite the knowledge that he was required to pay estimated taxes and to fully pay his tax liabilities by April 15th of each year (T1 at 137), did not pay his federal income taxes for thirteen years, except to the extent tax was withheld by his employers, and his tax obligation has accumulated over this period, resulting in total tax liabilities to date of $228,277.60. (Govt. Ex. A1-A2.) Debtor failed to fully pay his tax liabilities for tax years 1986 through 1998, with the exception of tax years 1995 through 1997 when his employer was withholding taxes from his wages. (Govt. Ex. C, D9-D11; T1 at 131-32.)

Second, Debtor failed to timely file returns for tax years 1986, 1987, 1989, 1996, 1997 and 1998. It was only from tax years 1990 through 1995 that Debtor timely filed his tax returns. However, during this period, Debtor was negotiating three separate offers-in-compromise with the IRS and was required to comply with Internal Revenue Service Regulations, which included timely filing returns as a condition of acceptance of the offers-in-compromise. Moreover, Debtor attempted to thwart or at the very least delay the collection of his tax liabilities by filing serial offers-in-compromise from 1990 to 1995. In re Meyeres [Myers] [ 98-1 USTC ¶50,195], 216 B.R. 402 (6th Cir. 1998) (finding that §523(a)(1)(C)'s modifying phrase "in any manner" is "broad enough to encompass attempts to thwart the payment of taxes"). The undisputed evidence shows that Debtor, an intelligent, highly educated tax attorney who was familiar with the offer-in-compromise process, succeeded in delaying the Government's collection efforts for more than five years by submitting offers which were clearly too low in relation to the tax obligations owed. ⁷ In addition, Debtor knew that, while the offers were pending, he could forestall collection of all tax liabilities under consideration, which permitted him to delay filing bankruptcy and seeking discharge of his taxes. (Govt. Ex. F1-G1 (¶4), H1, H2 (¶7(d).)

Third, Debtor, aware of his remainder interest at the time of filing the bankruptcy petition, failed to disclose this interest to this Court despite the fact that Schedule B explicitly asked whether Debtor had any contingent or future interests at the commencement of the case. Debtor's failure to list his remainder interest in the Trust prevented the Government from asserting a secured claim position based on tax liens that had attached to all of Debtor's property.

As the Government pointed out at trial, had the Debtor reported his remainder interest in the bankruptcy schedules, even if he had reported the value as zero, the Trustee and the Government would have had an opportunity to inquire as to its value and the Government would have asserted a secured claim on this interest, permitting the Government to receive the value of the remainder interest at the time the interest matured post-petition. (T3 at 47-54.) As a general matter, federal tax liens survive bankruptcy and, to the extent that they are secured by the liened property, they remain enforceable against the liened property, despite the fact that the underlying obligations are dischargeable. See, e.g., In re Isom [ 90-1 USTC ¶50,216], 901 F.2d 744 (9th Cir. 1990); In re Dillard, 118 B.R. 89 (Bankr. N.D. Ill. 1990); U.S. v. Alfano [ 99-1 USTC ¶50,303], 34 F.Supp.2d 827 ( E.D. N.Y. 1999). The omission further enabled the Debtor to receive $718,000 in distributions, which he channeled to various accounts and ultimately a limited partnership in Nevada in an attempt to conceal his assets from the Government and thwart the collection of his tax obligations.

Fourth, Debtor did not even fully pay his $88,000 tax liability for the 1998 tax year when he received over $718,000 in distributions from the Trust, nor did he even make any effort to pay his tax obligations owed for prior years.

Debtor argues that an inference of intent to evade or defeat taxes should not be drawn from these facts, for the following reasons.

First, Debtor contends that he did not pay his 1998 tax obligations because he had future obligations, and because he was attempting to reach a settlement with the Government on prior taxes. (T1 at 114-115, and at 118-119.) The existence of future obligations is no excuse not to pay current tax obligations, In re Haesloop [