Opinion
Case No. 95-22430T, Adv. No. 02-2512.
February 17, 2004
ORDER
AND NOW, this 17th day of February, 2004, upon consideration of the motion for summary judgment filed by Defendant, the United States of America ("United States"), with attached Exhibits, pursuant to Fed.R.Civ.P. 56 and F.R.Bankr.P. 7056 ("Motion"), seeking judgment on the complaint filed by Plaintiff, Leonard A. Pelullo ("Debtor"), which requests, inter alia, that certain income tax liabilities and civil penalty assessments in the United States' proof of claim be declared discharged and/or expunged; the Declarations of Lawrence P. Blaskopf, Esquire, dated November 17, 2003, and Kathleen K. Raup, Esquire, dated November 13, 2003, in support of the Motion; the United States' brief in support, with attached Exhibits; Debtor's Affidavit in opposition to the Motion, sworn to December 23, 2003; and Debtor's brief in opposition, with attached Exhibits; AND, the Motion alleging that the Income Tax Liabilities cannot be discharged because Debtor did not file tax returns and/or willfully attempted to evade them, and requesting that the Court abstain from determining the Civil Penalties since it would serve no bankruptcy purpose;
The income tax liabilities relate to the tax years of 1981, 1982, 1983, 1984, 1985 and 1986 ("Income Tax Liabilities").
The civil penalty assessments relate to the recovery of employee withholding tax penalties pursuant to 26 U.S.C. § 6672 for the tax periods ending June 30, 1985, December 31, 1985, September 30, 1986, December 31, 1987, March 31, 1988, December 31, 1988 and March 31, 1990 ("Civil Penalties").
In its Motion, the United States also seeks to have the Court abstain from determining the amount and validity of the Civil Penalties, as well as the civil penalty relating to AAA Trucking Corporation ("AAA Claim"). The Court also has the ability to abstain from determining such issues sua sponte. See 28 U.S.C. § 1334(c)(1); see also, N.O.T.I.C.E. v. Cloverly Assocs. Ltd. Partnership (In re Cloverly Assocs. Ltd. Partnership), Adv. No. 03-0109S, Case No. 91-12922S, 1993 Bankr. LEXIS 405, *5 (Bankr. E.D. Pa. March 3, 1993) (it is appropriate for a bankruptcy court to invoke 28 U.S.C. § 1334(c)(1) sua sponte in order to abstain).
Both of these Declarations qualify as Affidavits under 28 U.S.C. § 1746(2).
The Court did not consider the unsolicited reply and sur-reply briefs submitted by the parties.
AND, Debtor alleging in response, inter alia, that the United States failed to demonstrate that Debtor failed to file tax returns or willfully evaded tax liabilities, and that the request to abstain is devoid of merit;
AND, that for a motion for summary judgment to be granted all of the evidence must demonstrate that there are no genuine issues of material fact and that the moving party is entitled to judgment as a matter of law. See Christman v. Cigas Mach. Shop, Inc., Civ. Action No. 01-4155, 2003 U.S. Dist. LEXIS 21926, *4 (E.D. Pa. December 5, 2003); Shesko v. City of Coatsville, 292 F. Supp.2d 719, 723 (E.D. Pa. 2003); AND, when considering a summary judgment motion, a court must view all of the facts in the light most favorable to the non-moving party, and the facts asserted by the non-moving party must be taken as true. See Christman, 2003 U.S. Dist. LEXIS 21926 at *4; Shesko, 292 F. Supp.2d at 723;
AND, that the non-moving party must demonstrate, through affidavits, admissions, depositions or other evidence, that a genuine issue of material fact exists for trial. The non-moving party may not rely upon bare assertions not supported by record evidence to defeat a summary judgment motion. See Christman, 2003 U.S. Dist. LEXIS at *5; Shesko, 292 F. Supp.2d at 723;
AND, that a genuine issue of material fact exists from the evidence when a reasonable jury could return a verdict for the non-moving party. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986); Shesko, 292 F. Supp.2d at 723;
AND, the moving party having the burden of demonstrating that no genuine issues of material fact exist. See Celotex Corp. v Catrett, 477 U.S. 317, 323 (1986); Official Comm. of Unsecured Creditors of Xyan.com. Inc. v. Banta Corp. (In re Xyan.com, Inc.), 299 B.R. 357, 361 (Bankr. E.D. Pa. 2003);
AND, Debtor having filed an adversary proceeding on November 12, 2002, seeking to have the Income Tax Liabilities declared discharged pursuant to 11 U.S.C. § 507 and 523, and to have the Civil Penalties declared discharged and/or expunged pursuant to 11 U.S.C. § 105, 502 and 505;
AND, the Court having the power to determine the dischargeability of the Income Tax Liabilities and Civil Penalties. See Shapiro v. United States (In re Shapiro), 188 B.R. 140, 143 (Bankr. E.D. Pa. 1995); see also F.R.Bankr.P. 4007(a); AND, that since the bankruptcy court is an appropriate forum to determine the bankruptcy issue of dischargeability, see Shapiro, 188 B.R. at 149, the Court will hear and determine such issue;
AND, with respect to the Income Tax Liabilities for the tax years 1981, 1982, 1984, 1985 and 1986, the United States alleges that such liabilities are not dischargeable because Debtor did not file tax returns for those years;
AND, the United States submitting in support of such claim the declaration of Kathleen K. Raup, Esquire, an attorney employed with the Internal Revenue Service's Office of Chief Counsel, who indicated that she is familiar with Debtor's income tax accounts for the years 1981 through 1986 and that Debtor failed to file any 1040 forms with the Internal Revenue Service for the years 1984, 1985 and 1986, and that for the years 1981 and 1982, Debtor filed 1040 forms with altered jurats (the jurats were crossed out by Debtor), which the Internal Revenue Service considered invalid; AND, 11 U.S.C. § 523(a)(1)(B)(i) providing that:
Debtor does not deny crossing out the jurats on the 1981 and 1982 returns.
The United States does not contend that Debtor failed to file a valid tax return for the year 1983 and, therefore, it is presumed that Debtor did so. See note 12, infra.
A discharge under section 727 . . . of this title does not discharge an individual debtor from any debt with respect to which a return, if required, was not filed;AND, that in order for a tax return to be valid, it must be verified under penalties of perjury. See Hettig v. United States, 845 F.2d 794, 795 (8th Cir. 1988); Pierce v. United States (In re Pierce), 184 B.R. 338, 342 (Bankr. N.D. Iowa 1995); Cupp v. Commissioner of Internal Revenue, 65 T.C. 68, 78-79 (Tax Ct. 1975), aff'd, 559 F.2d 1207 (3rd Cir. 1977); AND, that any deletion or addition to a jurat on a tax return qualifies it and makes it unverified, see Pierce, 184 B.R. at 342; Schmitt v. United States (In re Schmitt), 140 B.R. 571, 572 (Bankr. W.D. Okla. 1992), and, therefore, an altered jurat makes a tax return invalid. Pierce, 184 B.R. at 342; Schmitt, 140 B.R. at 572;
The Internal Revenue Code requires the execution of an unqualified jurat, see 26 U.S.C. § 6061 and § 6065; accord Pierce, 184 B.R. at 342, and unverified documents are not considered tax returns. See Pierce, 184 B.R. at 342.
AND, since the jurats were altered on Debtor's 1981 and 1982 income tax returns, these returns are not valid and the income tax liabilities for those years are not dischargeable under 11 U.S.C. § 523(a)(1)(B)(i). See Pierce, 184 B.R. at 342;Schmitt, 140 B.R. at 572; AND, that while Debtor alleges that he believed he filed income tax returns for the years 1984 through 1986, Debtor has failed to support this assertion with any factual allegations sufficient to raise any genuine issue of material fact that he did file the tax returns. See e.g., Byerly v. Internal Revenue Service (In re Byerly), 154 B.R. 718, 718 (Bankr. S.D. Ind. 1992) (holding that the IRS established that the debtor failed to file tax returns based upon declaration of an employee of the IRS who declared that the debtor failed to file);
The cases cited by Debtor in support of his contention that an altered jurat on a tax return does not necessarily result in the non-dischargeability of a tax liability, Mathis v. United States (In re Mathis), 249 B.R. 324 (S.D. Fla. 2000), Berard v. Inited States (Matter of Berard), 181 B.R. 653 (Bankr. M.D. Fla. 1995) and Carapella v. United States (Matter of Carapella), 84 B.R. 779 (Bankr. M.D. Fla. 1988), are distinguishable from the present matter. In each of these cases, the debtors did not file or timely file tax returns but, in cooperation with the Internal Revenue Service, each of these debtors executed substituted returns which the Internal Revenue Service accepted. Although the substituted returns did not contain a penalty-of-perjury clause, they were considered valid tax returns since the debtors waived valuable statutory rights when signing these substituted forms and the forms themselves, which were issued by the IRS, did not contain such clauses.see, In re Hamilton, supra, at 326; Matter of Berard, supra, at 656. Unlike the cases Debtor cited, there is no indication that Debtor executed any substituted tax forms for the years 1981 and 1982 in cooperation with the United States, which the United States accepted. In addition, the 1040 tax return forms contained penalty-of-perjury clauses that Debtor crossed out. Accordingly, we find that the cases cited by Debtor simply do not stand for the proposition that an income tax return executed by a debtor is still valid even if the jurat is altered.
Furthermore, even assuming that substitute returns were prepared on Debtor's behalf by the United States, see note 10,infra, there is no suggestion that Debtor executed any substitute returns in cooperation with the United States for any of the tax years at issue. Indeed, the Income Tax Liabilities would still not be dischargeable since the preparation of a substitute return on behalf of a debtor that a debtor does not execute will not constitute a filing of a tax return for purposes of dischargeability. See Eastwood v. Internal Revenue Service (In re Eastwood), 164 B.R. 989, 991 (Bankr. E.D. Ark. 1994);Gushue v. Internal Revenue Service (In re Gushue), 126 B.R. 202, 204 (Bankr. E.D. Pa. 1991).
Debtor fails to effectively rebut the United States' claim that he did not file tax returns. First, Debtor claims that he is unable to attach copies of his 1984 through 1986 income tax returns because the United States seized all of his financial records and has not responded to his document requests to produce such documents. However, the United States cannot produce tax returns that it asserts it never received from Debtor.
Second, Debtor alleges that tax returns must have been filed for the years 1984, 1985 and 1986 because the stipulation he entered into with the United States in 1990 ("the Stipulation") provided that the United States would prepare tax returns on Debtor's behalf for any year in which a tax return was not filed. However, this is prima facie proof that Debtor did not file income tax returns for 1984, 1985 and 1986. See Eastwood, 164 B.R. at 991 (the preparation of a substitute tax return by the Internal Revenue Service is itself prima facie proof that a return was not filed). This belies Debtor's belief that he filed tax returns in 1984, 1985 and 1986. Even assuming that the United States prepared returns on Debtor's behalf, the Income Tax Liabilities would still not be dischargeable. See note 9,supra.
Third, the Stipulation and the agreements that Debtor alleges he entered into with the United States affixing the amount of his tax liabilities for the years 1984 through 1986, and which were incorporated into decisions of the Tax Court, are not considered tax returns. See Gushue, 126 B.R. at 204-205.
AND, this Court finding that the United States demonstrated that Debtor failed to file tax returns for the Income Tax Liabilities for the tax years 1981, 1982, 1984, 1985 and 1986, Debtor's Income Tax Liabilities for these years are not dischargeable, see 11 U.S.C. § 523(a)(1)(B)(i); AND, this Court finding that the United States demonstrated that Debtor willfully attempted to evade his tax liability for the tax year 1983, Debtor's Income Tax Liability for tax year 1983 is not dischargeable, see 11 U.S.C. § 523(a)(1)(C); AND, with respect to the Civil Penalties assessed against Debtor pursuant to 26 U.S.C. § 6672, such penalties are not dischargeable pursuant to 11 U.S.C. § 523(a)(1)(A). See United States v. Pepperman, 976 F.2d 123, 126 (3rd Cir. 1992);Klippel v. Internal Revenue Service (In re Klippel), Adv. No. 99-3555, Case No. 98-23315, 1999 Bankr. LEXIS 1598, *21 (Bankr. D.N.J. November 18, 1999); In re Palij, 202 B.R. 27, 31 (Bankr. D.N.J. 1996); Queen v. United States (In re Queen), 148 B.R. 256, 258 (S.D.W. Va. 1992), aff'd, 16 F.3d 411 (4th Cir. 1994);
While the United States also alleges that Debtor's Income Tax Liability for the tax years 1981, 1982, 1984, 1985 and 1986 are also not dischargeable under 11 U.S.C. § 523(a)(1)(C) because Debtor willfully attempted to evade them, the Court need not address this issue because the Court already found that these debts are not dischargeable due to Debtor's failure to file tax returns.
The United States does not allege that Debtor failed to file a tax return for the 1983 tax year. Instead, the United States argues that Debtor's Income Tax Liability for the 1983 tax year should be found nondischargeable under 11 U.S.C. § 523(a)(1)(C) because Debtor allegedly willfully attempted to evade these taxes. Section § 523(a)(1)(C) provides that:
A discharge under section 727 . . . of this title does not discharge an individual debtor from any debt with respect to the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax.
The Court agrees with the United States and finds that Debtor willfully evaded the payment of his tax liabilities for the 1983 tax year. Despite filing a tax return for this tax year, Debtor does not contest his tax liabilities for tax year 1983 and his apparent failure to pay it even though he had the financial ability to do so (spent money on expensive items such as a $2.6 million home and s $150,000 Ferrari). In addition, Debtor does not dispute his subsequent transfers of assets (real and personal) to family members and straw corporations while his tax liabilities were still outstanding and subject to collection from the United States. This is evidence of Debtor's willful evasion of his tax liabilities. see United States v. Fegley (In re Fegeley), 118 F.3d 979, 983-984 (3rd Cir. 1997); United States v. Eleazar (In re Eleazar), 271 B.R. 766, 776 (Bankr. D.N.J. 2001), appeal dismissed No. Civ. 02-61, 2002 U.S. Dist. LEXIS 8600 (D.N.J. February 11, 2004); Pierce, 184 B.R. at 343; Lewis v. United States (In re Lewis), 151 B.R. 140, 144-145 (Bankr. W.D. Tenn. 1992). As a result, Debtor's income tax liabilities for 1983 are not dischargeable. See Fegeley, 118 F.3d at 984; Wright v. Internal Revenue Service (In re Wright), 191 B.R. 291, 295 (S.D.N.Y. 1995); Eleazar, 271 B.R. at 776-777.
AND, having found that the Civil Penalties are not dischargeable, the only issue left to consider is the amount and legality of such penalties; AND, the Court having the discretion under 11 U.S.C. § 505 to decide whether or not to determine the amount or legality of the Civil Penalties and the AAA Claim. See Klippel, 1999 Bankr. LEXIS 1598 at *22; Shapiro, 188 B.R. at 143; Williams v. United States (In re Williams), 190 B.R. 225, 227 (Bankr. W.D. Pa. 1995); Queen, 148 B.R. at 259; AND, this matter involving a no-asset Chapter 7 case, where Debtor has already received a discharge, and the only interested parties to this dispute are Debtor and the United States; AND, after considering the relevant factors, this Court finds it is appropriate to abstain from determining the amount or legality of the Civil Penalties and the AAA Claim because no bankruptcy purpose would be served in doing so. See Klippel, 1999 Bankr. LEXIS 1598 at *22-24 (abstaining from determining debtor's penalty assessment under 26 U.S.C. § 6672 because it would have no effect on the administration of the no-asset bankruptcy case); Shapiro, 188 B.R. at 149-150 (abstaining from determining debtor's tax liabilities because the rights of creditors and the administration of the no-asset estate will not be affected and issues concerning liability are based upon non-bankruptcy law); Williams, 190 B.R. at 227 (abstaining from determining debtor's tax liabilities because it will further no bankruptcy interest in debtor's no-asset case); Queen, 148 B.R. at 259 (Bankruptcy Court did not abuse its discretion in abstaining from adjudicating debtor's penalty assessment under 26 U.S.C. § 6672 since there would be no effect on debtor's no-asset bankruptcy proceedings); Millsaps v. United States (In re Millsaps), 133 B.R. 547, 556 (Bankr. M.D. Fl. 1991) (abstaining from determining debtor's tax liabilities because no bankruptcy purpose in doing so when there are no assets to be distributed from the estate and the only parties affected by the determination are the debtor and the IRS); Kaufman v. United States (In re Kaufman), 115 B.R. 378, 379 (Bankr. S.D. Fl. 1990) (no bankruptcy purpose in determining debtor's tax liabilities since it will not have any effect on the administration of debtor's no-asset bankruptcy case);
Debtor attempts to challenge, pursuant to 11 U.S.C. § 502 and § 505, the amount and legality of the Civil Penalties on the basis that he was "not a responsible person" in accordance with the provisions of 26 U.S.C. § 6672. Debtor also seeks to have the Court determine the amount and validity of the AAA Claim. However, Debtor does not seek to have the amount or legality of the Income Tax Liabilities determined. Indeed, Debtor asserts on page 8 of his brief that he only seeks a declaratory judgment that the United States' claim against him is dischargeable.
Debtor alternatively seeks to have his income tax liability for the year 1982 expunged because that portion of the United States' proof of claim was allegedly filed after the bar date for filing proof of claims. The last day to file a proof of claim was November 28, 1997. The United States filed its amended proof of claim on November 26, 1997. As such, the United States' amended proof of claim is timely and Debtor's tax liability for 1982 will not be expunged.
11 U.S.C. § 505(a)(1) provides that:
Except as provided in paragraph (2) of this subsection, the court may determine the amount or legality of any tax, any fine or penalty relating to a tax, or any addition to tax, whether or not previously assessed, whether or not paid, and whether or not contested before and adjudicated by a judicial or administrative tribunal of competent jurisdiction.
In exercising this discretion, a court may consider,inter alia, the complexity of the tax issues involved, the need to administer the bankruptcy case in an orderly and efficient manner, judicial economy and efficiency, the length of time for trial and decision, the burden on the Bankruptcy Court's docket; prejudice to the debtor and the potential prejudice to the taxing authority, and providing the debtor with a "fresh start." See Shapiro, 188 B.R. at 143; Williams, 190 B.R. at 228; Queen, 148 B.R. at 259.
Debtor received a discharge on December 21, 2000.
Determining the propriety of the Civil Penalties will not serve the dual purposes of § 505, to protect creditor interests and insure the prompt and orderly administration of the estate, since Debtor's case is no-asset. See Klippel, 1999 Bankr. LEXIS 1598 at *22 (purposes of § 505 are inapplicable in a no-asset Chapter 7 proceeding); Palij, 202 B.R. at 32 (purposes § 505 are not served in a no-asset Chapter 7 proceeding);Williams, 190 B.R. at 229 (abstention is warranted because purposes of § 505 are not served in a Chapter 7 no-asset case). Indeed, if Debtor was successful in having the Civil Penalties eliminated or expunged, no further assets would be available or freed up to distribute to creditors. Likewise, if the United States was successful in defending its claim, Debtor's estate would still be without any assets to pay the assessments and the debt would still be nondischargeable. See e.g., Queen, 148 B.R. at 259; Williams, 190 B.R. at 227. The only beneficiary would be Debtor if he prevailed and it is the general unsecured creditors that are the intended beneficiaries under § 505. See Williams, 190 B.R. at 227 (noting that general unsecured creditors, not the debtor, are the intended beneficiaries of § 505). In short, the determination of the propriety of the Civil Penalties would have no effect on the administration of Debtor's bankruptcy case since there are no assets. "Congress did not intend for a bankruptcy court to provide a forum for [tax liability disputes] when the outcome of the case will have no impact upon the administration of the bankruptcy case."Williams, 190 B.R. at 228.
While the Court is mindful of Debtor's need for a "fresh start" and the fact that the time required to try this case would not likely be lengthy and would not overburden the Court's docket, "the unique questions posed herein going to the proper determination of a `responsible person' as same is defined by the Internal Revenue Code for purposes of section 6672 liability, is a matter that is best handled by the expertise of either the IRS through an administrative determination, or through the District Court by way of a civil refund suit." Klippel, 1999 Bankr. LEXIS 1598 at *25. Debtor will not be prejudiced since he can seek to challenge the propriety of the Civil Penalties in another forum.
It is hereby ORDERED and DECREED that the United States' Motion for Summary Judgment is GRANTED and JUDGMENT on the Complaint is ENTERED in favor of the United States and: (1) Debtor's Income Tax Liabilities for the tax years 1981, 1982, 1984, 1985 and 1986 are hereby declared NONDISCHARGEABLE under 11 U.S.C. § 523(a)(1)(B)(i); and (2) Debtor's Income Tax Liability for the tax year 1983 is hereby declared NONDISCHARGEABLE under 11 U.S.C. § 523(a)(1)(C); and (3) Debtor's liability, if any, for Civil Penalty Assessments assessed against him pursuant to 26 U.S.C. § 6672 for the tax periods ending June 30, 1985, December 31, 1985, September 30, 1986, December 31, 1987, March 31, 1988, December 31, 1988 and March 31, 1990 are hereby declared NONDISCHARGEABLE under 11 U.S.C. § 503(a)(1)(A), see Pepperman, 976 F.2d at 126;Klippel, 1999 Bankr. LEXIS 1598 at *21; Palij, 202 B.R. at 31; Queen, 148 B.R. at 258.