Opinion
No. 96-10443
May 30, 1997
ORDER
This matter came on for hearing on the Debtor's complaint to determine dischargeability of a debt pursuant to 11 U.S.C. § 523(a)(1). Prior to trial, the Debtor filed an objection, motion in limine and renewed motion to strike the IRS's trial exhibit 1(A)-(C), and exhibit 2(A)-(G). Appearances were as noted in the record. The Court has jurisdiction to decide this matter pursuant to 28 U.S.C. § 157 and 1334, and the Order of Reference of the District Court. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2). After due consideration of the pleadings, briefs of the parties, testimony, and evidence, the Court makes the following findings of fact and conclusions of law:
FINDINGS OF FACT
On or about February 7, 1996, the Plaintiff, John Grow, Sr. (hereinafter "Grow"), filed a Chapter 7 petition in this Court. He included a debt owed to the United States of America, by and through its agency, the Internal Revenue Service (hereinafter "the IRS"), for income taxes, penalties and interest for the years 1978 to 1984 and 1992. The IRS filed a proof of claim for $ 481, 288.27, representing $106,221.00 in taxes owed the government, and the balance for interest and penalties. The IRS assessed the taxes as follows:
The debtor does not dispute the nondischargeability of his 1992 tax liability pursuant to 11 U.S.C. § 507(a)(8)(A)(i), 523(a)(1)(A). The penalties relating to the 1992 tax debt are dischargeable. See 11 U.S.C. § 523(a)(7).
From 1978 to 1988, Grow was married to Sandra Grow (hereinafter "Mrs. Grow"). During their marriage, the Grows filed their tax returns as married filing separately. Grow testified that he preferred to file married but separately because he had filed jointly with his first wife, and that she later was held responsible for delinquent taxes that he should have paid. During the marriage, Mrs. Grow worked as a secretary earning less than $20,000.00. Grow practiced law as a sole practitioner, and earned between $20,000.00 and $57,000 annually during their marriage. Although Grow filed accurate returns on a timely basis, he did not pay any taxes with his returns, or pay quarterly estimated taxes on his income. Grow testified that he used the money that he earned from his law practice to support his family, and believed that he would be able to "catch up" on his unpaid taxes.
The Grows were divorced for a six-month period in 1983 and 1984, but subsequently remarried.
Grow did make payments on his tax liability for years prior to 1978 by income tax withholding and some estimated payments for 1982-84 during the time period at issue.
Mrs. Grow maintained a checking account solely in her name. Grow deposited income from his law practice into Mrs. Grow's checking account for household expenses. Grow did not have a personal or business checking account. The only banking account that he maintained was his attorney trust account. Grow occasionally made payments directly from his trust account to Mrs. Grow, his daughter, and his first wife, Hercelia Grow. The payments were from fees he had collected for legal services.
Mrs. Grow purchased a home and two cars for the family's use during the Grow marriage. On September 8, 1980, Mrs. Grow purchased on a home located at 816 Henckley Avenue in Mobile, Alabama from an individual who financed the purchase. Although Grow borrowed money from a friend to make the down payment on the house, only Mrs. Grow was recorded as the owner of the home, and obligated to the mortgage holder. Grow deposited money into Mrs. Grow's account for payment of the house note. Mrs. Grow purchased a 1977 Datsun 280-Z on March 26, 1979, again solely in her name and for her use. On September 9, 1980, she purchased a 1978 Cadillac Seville. Grow testified that the car was a gift for his birthday, but he understood that both he and his wife would make the payments. The title for the automobile was listed only in Mrs. Grow's name, but Grow drove the car. Grow testified that the home and the two cars were owned solely by Mrs. Grow because he was not able to obtain credit due to two unsatisfied judgments against him by First National Bank and Merchants Bank.
The Grows divorced in 1988, and Grow received the home on Henckley Avenue in the property settlement. The IRS required Grow to sell the house and pay his back taxes. In a "Collection Information Statement" dated September 19, 1980, Grow made a full disclosure of his financial situation to the IRS, including the property owned by his wife, and the fact that he deposited money into his wife's checking account. The IRS took no criminal or civil action against Grow to satisfy the delinquent taxes owed by Grow.
CONCLUSIONS OF LAW I. GROW'S OBJECTION AND MOTION TO STRIKE
Grow filed an objection, motion in limine and renewed motion to strike the IRS's trial exhibit 1(A)-(C), "Certificates of Assessments and Payments, 1978-1995" (hereinafter referred to as "CAP") and exhibit 2(A)-(G), "Uncertified Transcripts of Accounts (hereinafter referred to as "TXMODs"), 1978-1984". The Court conditionally admitted the exhibits for trial. Counsel for the IRS described CAP as a "plain language" summary of all the transactions between Grow and the IRS. The TXMODs is the uncertified computer summary of Grow's transactions with the IRS, which is more complete than CAP.
Grow maintains that the IRS sought to introduce these documents to prove that he executed waiver forms (also referred to as "Form 900") to extend the statute of limitations for the tax liabilities for the years at issue. The statutes of limitation for Grow's tax liability have been extended more than once. For each extension, Grow was asked to sign a waiver or Form 900. The ordinary course of business for the branch office handling Grow's account is to destroy the old waivers when the new waiver is signed. Thus, the IRS can only produce the most recent waiver forms, and cannot locate the preceding waivers. According to Grow, the best evidence that he had signed the waivers would be the documents themselves, not the IRS's summaries of his accounts. The IRS counters that the CAP and TXMODs along with the testimony of Jackie Washington, an IRS agent and officer, are valid secondary evidence of Grow's consent to extend the statute of limitations.
The missing waiver forms are for the years 1985 and 1989.
Grow first argues that the TXMODs are hearsay, and unauthenticated. However, the records clearly qualify as exceptions to hearsay as either public records under F.R.E. 803(8) or as business records of regularly conducted activity under F.R.E. 803(6). The IRS called Jackie Washington, an IRS agent and officer (hereinafter "Washington"), to explain the information in the CAP and the TXMODs. Washington testified that the information contained in the TXMODs is kept in the ordinary course of business, and is used to track taxpayers' accounts. She stated that she was familiar with the IRS's computer record keeping system and the various codes used to input data. For example, the code for indicating that a waiver has been executed is "550". She described in detail the type of information in the record and how it is recorded. She explained that only certain IRS employees are able to input information. Based on Washington's testimony, the TXMODs are an exception to the hearsay rule as public records or, in the alternative, business records, and they were properly authenticated by Washington.
Grow's second theory against admissibility of the CAP and TXMODs is that their admission as evidence violates F.R.E. 1001 (the best evidence rule) and F.R.E. 1002 (Requirement of Original). Grow maintains that the IRS should be required to produce the original waivers as the best evidence that he actually executed them. He argues that the IRS has not met its burden under F.R.E. 1004 for introducing other evidence of the lost waivers because the IRS has not accounted for how the documents (and their three carbon copies) were lost, and has not shown that the documents were not destroyed in bad faith.
Rule 1004 of the Federal Rules of Evidence provides in pertinent part: "The original is not required, and other evidence of the contents of a writing, recording, or photograph is admissible if — (1) Originals lost or destroyed. All originals are lost or have been destroyed, unless the proponent lost or destroyed them in bad faith; . . ." Grow alleges that the waiver forms were destroyed in bad faith because the IRS did not follow the procedure for document destruction outlined in its manual, which provides that tax collection waiver forms can only be destroyed four years after the account on which the statutory period for collections has been extended is satisfied or three years after the statutory period as extended has expired. Grow also claims that the IRS violated federal law requiring records pertaining to claims and demands made by the United States to be retained until settled and adjusted by the General Accounting Office, and requiring notification to the National Archives of any unlawful destruction of records.
See Plaintiff's objection, motion in limine and renewed motion to strike, p. 2, citing Internal Revenue Manual, 1(15)59.24 EXH 100-1, Item no. 48.
See Plaintiff's objection, motion in limine and renewed motion to strike, p. 2-3, citing 44 U.S.C.A. § 3309 and 44 U.S.C.A. § 3106.
The IRS called Washington to explain the actual procedure and practice of the IRS for retaining waiver forms. Washington testified that when the statute of limitation is approaching on a taxpayer's unpaid tax liability, the agent assigned to the file obtains a Form 900 or waiver from the taxpayer. Form 900 has four parts or carbon copies: part one is sent to the "Special Procedures" division of the IRS; part two is sent to the taxpayer for his records; part three goes to a clerk to be entered into the IRS's computer system; and part four is kept by the agent assigned to the file. One of the copies is kept in a filing system arranged in alphabetical order at the branch office where the taxpayer's account is processed. Washington acknowledged that there are specific rules and deadlines for destroying these forms, but that the actual practice is for the clerks to destroy the documents as their work schedules allow. She had no personal knowledge of the waivers associated with Grow or their destruction.
In its post-trial brief, the IRS also provided the Court with legal authority concerning the admissibility of CAP. In U.S. v. Chila, 871 F.2d 1015 (11th Cir. 1989), the Eleventh Circuit addressed the admissibility and use of certificate
s of assessment and payment. The Court relied on its previous ruling affirming a district court opinion in U.S. v. Dixon, 672 F. Supp. 503 (M.D.Ala. 1987). As in the present case, the IRS was not able to produce a form signed by the Defendant indicating that a tax deficiency had been properly assessed. The IRS offered a Certificate of Assessments and Payments, signed by an IRS officer and certifying that it is a true transcript of all assessments, penalties, interest and payment on record for the Debtor. Chila, 871 F.2d at 1017 (citing Dixon, 672 F. Supp. at 504). The document included a notation of the date that the form was signed. The Dixon court held that the Certificate of Assessments and Payments was sufficient to prove that the form had been signed by the Debtor. Chila, 871 F.2d at 1017-18 (citing Dixon at 506). It was admitted as "presumptive proof" of a valid assessment. Id. at 1018. Absent rebuttal evidence from the defendant, the Dixon court ruled that the IRS had met its burden that the tax was properly assessed. Id. Certificates of Assessment and Payment have also been accepted in other courts as valid proof of execution of documents with proper authentication. See Eddins v. U.S., 1992 WL 439734 (S.D.Miss. 1992) (The Court accepted testimony from IRS employees concerning existence of a written consent extending time limitation for assessing tax liability in an instance where the time limit was extended several times. The IRS had the most recent consent form, but could not locate the preceding documents. The Court also considered evidence that: taxpayer had not protested when signing the later consent forms; taxpayer never contested the assessment of the tax as untimely; and taxpayer acted as if the consent form had been signed.)
The Court finds that the IRS's Exhibit 1(A)-(C) (CAP) and Exhibit 2(A)-(G) (TXMODs) should also be admitted pursuant to F.R.E. 1004(1). While the Court is disturbed that the IRS is unable to locate even one of four possible copies of the waivers and by its failure to follow its own written internal procedure, there is no indication of bad faith in its failure to produce the waivers at issue. Washington's credible testimony concerning the actual practice of the divisional office where Grow's tax records were located adequately explained the loss of the documents. The Court is also persuaded by Grow's actions regarding the subsequent waivers that were signed. As an attorney, Grow surely understood the significance of a waiver of a statute limitations. It would not be reasonable to sign a waiver of the statute of limitations if the limitations period had already run without action being taken. Grow did not testify that he did not sign the waivers at issue. There is no indication that Grow protested the tax liability due to expiration of the statute of limitations. The IRS has the burden of proof for proving that the statute of limitations was tolled by waivers. See U.S. v. Shaprow, 1979 WL 1464 (W.D.N.Y. 1979). Based on the foregoing, the Court finds that the IRS met its burden under F.R.E. 1004(1) for the admission of other evidence to prove the contents of a lost original document, and that Exhibits 1(A)-(C) and Exhibits 2(A)-(G) are due to be admitted.
II. DISCHARGEABILITY OF TAX DEBT PURSUANT TO § 523(A)(1)(C)
Grow filed his complaint to determine the dischargeability of his delinquent tax obligations under 11 U.S.C. § 523(a)(1). The IRS contends that the tax debts for 1978 to 1984 are nondischargeable under subsection (C) of § 523(a)(1) which provides that "[a] discharge under section 727, . . . of this title does not discharge an individual debtor from any debt — (1) for a tax or a customs duty — (C) with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax." According to the IRS, Grow's contributions of money to his wife and the fact that the marital property was in his wife's name only constitute a willful attempt to evade or defeat the taxes imposed. There are no allegations of fraud.
The Eleventh Circuit Court of Appeals addressed the meaning of a "willful attempt to evade or defeat a tax" in Haas v. Internal Revenue Service (In re Haas), 48 F.3d 1153 (11th Cir. 1995). The Court compared the language of § 523(a)(1)(C) to similar language and interpretation of I.R.C. § 7201, which states, "[a]ny person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall . . . be guilty of a felony". (Emphasis added). "The omission of the words `or the payment thereof' from section 523(a)(1)(C), in light of Congress's previous inclusion of these words on four previous occasions, indicates that Congress did not intend that a failure to pay taxes, without more, should result in the nondischargeability of a debtor's tax liability." Haas, 48 F.3d at 1157.
The IRS cautions the Court not to interpret the Haas decision as holding that all willful attempts to evade or defeat the payment or collection of a tax are irrelevant in dischargeability cases, and cites several cases to support this position. After reviewing these cases, the Court notes that while the cases cited do hold that Haas should not be limited to evasion of the assessment of taxes only, the fact situations of each case include evidence of both evasion of the assessment of a tax and evasion of payment of a tax. See Dalton v. United States, 77 F.3d 1297 (10th Cir. 1996) (debtor attempted to conceal assets by transferring property to his fiancee); In re Sumpter, 170 B.R. 908 (E.D.Mich. 1994) (debtor attempted to conceal assets transferred property to his children's trust); Matter of Bruner, 55 F.3d 195 (5th Cir. 1995) (debtors failed to file tax returns or pay taxes); In re Tai, 1996 WL 529411 (Bankr.M.D.Fla 1996) (debtor attempted to conceal property by fraudulent conveyance); Spirito v. U.S., 198 B.R. 624 (Bankr.M.D.Fla. 1996) (debtor sent false information to the IRS and failed to pay taxes). This Court agrees with the IRS that willful attempts to defeat the collection or payment of tax liability are not immaterial to dischargeability issues under § 523(a)(1)(C). Spirito, 198 B.R. at 628. This issue being decided, the question becomes whether there is evidence of other affirmative action to evade the payment of taxes which would constitute "more" than simple failure to pay taxes.
The decision was affirmed in part and reversed in part by the Sixth Circuit at 64 F.3d 663 (6th Cir. 1995), without an opinion.
The IRS asserts that Grow's contributions of money to his wife's checking account, refusal to maintain a checking account in his own name, and refusal to hold property in his name go beyond the conduct of the debtor in Haas, and constitute a willful attempt to evade his tax liability. The Court observed Grow's demeanor as a witness and found his testimony to be straightforward. Like the Haas debtor, Grow filed accurate tax returns on a timely basis for the years in question with the IRS. Further, he informed the IRS that his wife owned the house in which he lived and the automobile that he drove. The home was purchased and financed from an individual since Mrs. Grow and Grow would not have qualified for an institutional mortgage. Grow provided a reasonable explanation for this financial arrangement: the two state court judgments by local banks and their active pursuit of collection efforts. Grow also testified that the individual who sold the home to Mrs. Grow did not want Grow's name on the promissory note or mortgage because he knew about Grow's previous problems with alcohol, the judgments against him, and the IRS liens.
As for Grow's failure to maintain a checking account in his name, the bald fact that Grow did not have such an account is not sufficient to prove that the action was taken to frustrate the IRS's attempts to collect taxes. Grow testified that he never deposited personal funds in any account other than his wife's household checking account. There was no evidence that Grow ever had a checking account in his name or that he took affirmative action to close an account or change his normal business practices to avoid payment of his taxes. Grow did not attempt to conceal or secret funds, and there is no evidence that he had an extravagant lifestyle, which would indicate income from some hidden source. The IRS has failed to prove that Grow changed his financial and business dealings in response to their efforts to collect unpaid taxes.
The Court also finds very persuasive the fact that Grow fully informed the IRS that his wife held title to their home and automobiles in her name, and that he placed money into her checking account for payment of household and family expenses. He provided this information in reports filed the IRS and in annual interviews with the IRS. Clearly, Grow was not seeking to conceal this information from the IRS. Presented with this information, the IRS took no action against Grow and did not even request that he stop placing funds in his wife's checking account. The Court finds that the IRS has failed to meet its burden of proving a willful attempt by Grow to evade or defeat a tax on these grounds. Therefore, it is hereby
ORDERED that Grow's objection, motion in limine and renewed motion to strike the IRS's trial exhibit 1(A)-(C) and exhibit 2(A)-(G) is OVERRULED and DENIED; and it is further
ORDERED that Grow's complaint to determine dischargeability of income taxes owed to the United States of America for 1978-1984 be, and it hereby is, GRANTED pursuant to 11 U.S.C. § 523(a)(1) and the said debts be, and they hereby are, DISCHARGEABLE in Grow's bankruptcy case.