Opinion
No. 05-CV-183 HDC/SAJ.
February 27, 2006
REPORT AND RECOMMENDATION
This Court, having reviewed the arguments and authority submitted in the above referenced matter, enters the following report and recommendation: This Court has jurisdiction of this appeal from the final order of the bankruptcy court entered following trial on December 2, 2004 pursuant to 28 U.S.C. § 158(a). Notice of Appeal was timely filed. ( 28 U.S.C. § 158(c)(2) and F.R. App. P. 4(a)). The Judgment below disposed of all of the issues between the parties. Lowrance appeals Judgment determining dischargeability of 1994 tax debt entered by the bankruptcy court on February 28, 2005. Lowrance raises four propositions on appeal:
PROPOSITION I: Whether the Trial Court Erred in Determining that Lowrance failed to fully pay his federal income tax liability when due in 1987, 1989, 1991, and 1993;
PROPOSITION II: Whether the Trial Court Erred in Interpreting the Stipulations that were made regarding Lowrance's Life Style which were stipulations concerning Lowrance's financial affairs upon the commencement of the case rather than his current living conditions to which he testified at time of trial;
PROPOSITION III: Whether the Bankruptcy Court erred in determining Lowrance's taxes for the year 1994 are non-dischargeable; and,
PROPOSITION IV: Whether the Bankruptcy Court erred in determining that Lowrance willfully attempted to evade or defeat his income tax liability for tax year 1994.
The Court recommends all issues be resolved in favor of United States of America ("USA").
I. BACKGROUND FACTS A. Tax Assessment and Pre-Judgment Collection Efforts
Background facts are taken from the stipulations of the parties in the pre-trial order, the facts as set forth in the briefs and verified by the Court from the record, and the record as submitted.
1. Lowrance failed to fully pay his federal income tax liability when due in the years 1987, 1989, 1991, 1993 and 1994.
2. As early as 1994, the IRS filed a notice of federal tax lien against Lowrance with respect to his 1987, 1989 and 1991 taxes.
3. In 1994, Lowrance began to liquidate his assets, paying the IRS approximately $1,255,000.00 for overdue taxes, ultimately making payments sufficient to satisfy his tax liability for the years 1987, 1989, 1991 and 1993.
4. In March, 1996, the IRS undertook collection of Lowrance's tax assessments via a seizure of Lowrance's property at his home and office. This was before the assessment of over $2 million dollars had been reduced to judgment. During the seizure, Lowrance stated to the revenue officer that there was no cash in his office and refused to unlock a file cabinet. However, when a locksmith was called to open the locked file cabinet, over $130,000.00 in cash was found.
5. Lowrance offered to pay $750,000.00 a year for four years as a compromise shortly after the seizure, which offer was rejected based upon USA's conclusion that Lowrance had the assets from which the tax could be paid.
B. Prior Bankruptcy Filings
6. Lowrance filed for Chapter 11 bankruptcy protection on August 9, 1996, in the Northern District of Oklahoma following the over $2 million dollars tax assessment, filing of federal tax liens and collection efforts by the IRS in Oklahoma and Kansas arising out of Lowrance's failure to pay his 1994 tax liability. ("First Oklahoma Bankruptcy"). The First Oklahoma Bankruptcy was dismissed in March of 2000 without Lowrance obtaining a discharge.
7. Lowrance and one of his businesses, Lobo Cattle Company, ("Lobo"), a cattle feedyard owned 100% by Lowrance, had previously filed for Chapter 11 bankruptcy protection in Kansas in 1987, two days after the FDIC filed foreclosure actions against Lobo and Lowrance's son, Mark. ("Kansas Bankruptcy"). The foreclosure was filed, in part, based upon Lowrance's conversion of FDIC collateral consisting of cattle. The Kansas Bankruptcy was dismissed pursuant to a settlement in which Lowrance's liability was discounted by $4 million dollars.
C. Lowrance's Use of Other Names, Entities or Partnerships
8. During the 1980's and throughout the Kansas Bankruptcy, Lowrance conducted business, including obtaining bank loans, using at least ten different names, entities, or partnerships. This complicated collection efforts by USA, particularly where information regarding some of the entities was not readily or completely disclosed.
9. One such entity was R.D. Lowrance, Inc., a Missouri corporation which was formed in 1967. Lowrance is the President and sole shareholder. R.D.Lowrance Inc., held most of Lowrance's land holdings in Missouri.
10. When some of Lowrance's Missouri land holdings were sold, the proceeds were paid to Lowrance personally. Several of the HUD statements do not even list R.D. Lowrance, Inc., as the seller, and several checks representing proceeds of these sales were made out to Lowrance personally.
11. All of the Missouri land sale proceeds were reported as income on Lowrance's personal federal income tax returns. They were not reported on the federal income tax returns of R.D. Lowrance, Inc. R.D. Lowrance, Inc., files its own tax returns and owes no liability to the IRS.
12. In his First Oklahoma Bankruptcy petition filed in August, 1996, Lowrance did not disclose R.D. Lowrance, Inc., as a name he had used in the last six years to conduct business. R.D. Lowrance, Inc., was listed on Schedule B and also was listed in Debtor's disclosure statement.
13. In April, 1996, about a month after the seizure at his office and home but a few months before he filed for bankruptcy protection, Lowrance asked his realtor, Rick Barnes, to prepare a memorandum valuing land holdings in Missouri which were owned by R.D. Lowrance, Inc. The land holdings were valued at over $1.7 million.
14. In a 1997 deposition in the First Oklahoma Bankruptcy, Lowrance testified R.D. Lowrance, Inc., had very little in the way of assets, only a piece of land. He did not disclose that the corporation held over $900,000.00 in notes receivable.
15. During the First Oklahoma Bankruptcy, in December, 1996, Lowrance sold real property known as Palace Addition #2 in Garden City, Kansas to Dwight Smith, receiving net proceeds of sale in the amount of $149,405.17 and a note in the amount of $175,000.00 calling for monthly payments of $2,031.91.
16. USA filed a motion for temporary order denying use of cash collateral and for expedited hearing. In the motion, USA asserted that its interest in the cash collateral, including the monthly payments on the $175,000.00 note, was not adequately protected. This was granted by agreed order and the $149,405.17 check was moved into a separately-segregated account. In violation of the court's order, however, every monthly payment on the $175,000.00 promissory note (over $36,000.00) went into the debtor-in-possession account, not the separately-segregated account.
17. In 1998, Dwight Smith wanted to pay the note in full. Lowrance, in violation of the court order, had his attorney, Charles Owen ("Owen"), put a lump sum in Owen's trust account. The money earned no interest and Owen sent monthly payments of $2,031.91 to Lowrance. In this way, the creditors of the First Oklahoma Bankruptcy were unaware that full payment had been made on the promissory note. Lowrance did not answer questions regarding this truthfully in a 2000 deposition. Two months after the dismissal of the bankruptcy, Lowrance directed Owen to send him the balance of $104,000.00 in a cashier's check. Ultimately, Lowrance's direction to place the funds in the trust account of his attorney kept over $155,000.00 out of the bankruptcy estate and out of the segregated account created for the benefit of USA.
D. 2002 Judgment
18. On December 17, 2002, USA obtained a judgment from this Court in the amount of $5,135,046.19 against Lowrance with respect to his 1994 federal income tax liability in Case No. 00-CV-236 K (M). As part of that case, USA brought actions for tortious conversion of lien against other individuals, including Lowrance's bankruptcy counsel in the First Oklahoma Bankruptcy. The claims arose from Lowrance taking $700,000.00 out of a fund segregated during the First Oklahoma Bankruptcy for the benefit of the IRS and distributing the money, which was impressed with a federal tax lien, to various people and entities in violation of bankruptcy court orders.
E. Second Oklahoma Bankruptcy
19. On August 21, 2003, Lowrance filed a voluntary petition for bankruptcy protection in the Northern District of Oklahoma, pursuant to Chapter 7 of title 11 of the United States Code, asserting that his 1994 tax debt was dischargeable. ("Second Oklahoma Bankruptcy"). As in the First Oklahoma Bankruptcy, collection efforts by the IRS, this time on the judgment, appear to have triggered the filing.
20. The IRS filed an adversary proceeding on November 17, 2003, seeking a determination that its debt is nondischargeable pursuant to 11 U.S.C. § 523(a)(1)(C).
21. In Lowrance's dischargeability trial, USA asserted that Lowrance used R.D. Lowrance, Inc., to hide assets from the government.
In the pre-trial order, Lowrance stipulated to the facts numbered 8-11 above concerning R.D. Lowrance, Inc.
22. The dischargeability trial was held on December 2, 2004, and the matter was taken under advisement by the bankruptcy judge with the parties directed to file post trial briefs which were to include their closing arguments.
F. Trial Testimony
23. At trial, Ramona Heinrich, Lowrance's secretary from January 1999 to April 2004, testified that Lowrance did not mislead or lie to her, did not mislead others and was not dishonest with the IRS nor did he hide money from the IRS.
24. Lowrance testified that he was 79 years old (as of December 2004), that he had filed tax returns for more than 50 years, that he did not think the amount of the 1994 tax liability he owed had been proved by the IRS, that he allowed the IRS to complete its seizure at his home and office in March, 1996, and that he had offered to pay $750,000.00 per year for four years or until the tax was resolved but that his income had steadily deteriorated so that he could not pay even $7500.00 per year at time of trial. He testified he relied upon his bankruptcy attorney, Todd Henshaw, and upon Dale Tacheny ("Tacheny"), an enrolled agent with the IRS and Lowrance's tax representative since 1996, to prepare his bankruptcies and there was no attempt to undervalue any assets.
25. When questioned about his income and/or assets, Lowrance often testified that such questions should be referred to Tacheny or stated he relied upon or agreed with testimony Tacheny had given. Tacheny was the person who gathered information and prepared Responses to the USA's First Request for Production of Documents. He was also the person who gathered and provided financial information to Lowrance's attorneys and to USA. Tacheny became aware of at least $62,500.00 that Lowrance kept in an undisclosed location only after Lowrance's deposition in 2004. At the same time, Tacheny learned that R.D. Lowrance, Inc., sold land near Garden City, Kansas to Goodwill Industries for over $160,000.00 during the First Oklahoma Bankruptcy. Lowrance had additional assets about which Tacheny was unaware.
. The Schedule A in Lowrance's First Oklahoma Bankruptcy did not list Lots 2 and 3, Lowrance Addition No. 3, to the City of Garden City, Kansas, as an asset of the debtor. No court order approved the sale of this property as was required. The proceeds of the sale were not reported on Lowrance's financial statements but were sent by Lowrance's attorney to Bruce Johnson, a Chicago commodities broker who was a creditor of the First Oklahoma Bankruptcy.
26. Tacheny testified that Lowrance had a stroke in October, 2002, which had a definite effect on Lowrance's ability to remember. He testified Lowrance's accountant was not very cooperative in preparing information for the First Oklahoma Bankruptcy filing because Lowrance owed him money, and the accountant was not willing to do the kinds of things Lowrance had hoped would be done as quickly and as expeditiously as Lowrance wanted.
27. Lowrance admitted he made a habit of converting bank account funds into cash or cashier's checks for the purpose of avoiding accounts being attached by USA, which Tacheny testified was a legitimate action.
G. Lowrance's Banking History
28. In March, 2001, Lowrance had opened a bank account at NBC Bank (later called Home National Bank) which he advised his secretary no one needed to know about.
29. Lowrance apparently used this account to get back into the cattle business and to fund his cattle operation. Checks to Murray Edwards Livestock worth $378,000.00 were written on this account in March and April, 2001, which include the memo notes: 330 Hfrs., 90 Heifers, 95 Heifers, 87 Heifers, 87 Heifers, 90 Heifers, and 93 Heifers. In May, June and October of 2001, Lowrance wrote over $35,000.00 in checks to Premier Cattle Co., with the memo notes relating to lot numbers, numbers of heifers, and percentage of ownership and equity.
30. Lowrance also used this account to turn deposited funds into cashier's checks and cash. For example, on September 12, 2001, Lowrance deposited a check into this account from the Strong Strong law firm for $98,115.29, then took $80,000.00 out in the form of a cashier's check.
31. On June 7, 2002, Lowrance wrote a $15,000.00 check to NBC Bank, presumably for a cashier's check.
32. On July 17, 2002, Lowrance wrote a check to NBC Bank for $4,000.00 with the memo line "cash".
33. On October 23, 2002, Lowrance had a check written out to himself on this account for $15,000.00.
34. On November 12, 2002, and December 16, 2002, Lowrance wrote checks for $5000.00 each, one to himself and one to NBC Bank with the memo line "Cashier's Check".
35. When USA attempted to collect on the December, 2002, judgment in May, 2003, by issuing writs of garnishment and Lowrance learned of the collection efforts, he wrote $41,000.00 in checks on the Home National Bank (formerly NBC Bank) account, thereby converting nearly the entire account balance into cashier's checks or cash.
36. On March 31, 2004, the day after USA took Lowrance's deposition, Lowrance purchased a $50,000.00 cashier's check to lower the balance of his Home National Bank account to a few thousand dollars.
H. Bankruptcy Court Ruling
37. The bankruptcy court found that Lowrance had "voluntarily, consciously, knowingly, and intentionally" attempted to conceal assets from the IRS in order to avoid payment of his 1994 tax liability by Judgment entered February 28, 2005. In re: Lowrance, 324 B.R. 358 (Bankr. N.D. Okla. 2005).
II. STANDARD OF REVIEW
Each of the four propositions urged by Lowrance presents questions of fact. Each is therefore subject to the "clearly erroneous" standard of review.
III. ARGUMENT AND AUTHORITY A. Proposition I
Lowrance asserts as his first proposition that the trial court erred in determining that Lowrance failed to fully pay his federal income tax liability when due in 1987, 1989, 1991, and 1993. The Court notes that at page 2, paragraph number 5, of the pre-trial order, this is listed as a fact which is admitted and requires no proof. Once a matter is stipulated, the ultimate and underlying facts have been accepted by and are binding upon both parties. It cannot be inquired into further unless set aside by the court or vacated by counsel, neither of which event appears in this record. Downs v. American Employers Insurance Company, 423 F.2d 1160 (5th Cir. 1970). Further, even if this fact had not been admitted, the record establishes the veracity of the statement. In the years in question, Lowrance either did not file his return on time with the required payment of tax or did not submit sufficient tax payments with the returns. The Court therefore finds no merit in Lowrance's assertion of error.
B. Proposition II
Lowrance next asserts the trial court erred in interpreting the stipulations that were made regarding Lowrance's life style which were stipulations concerning Lowrance's financial affairs upon the commencement of the case rather than his current living conditions to which he testified at time of trial. The stipulations entered into at time of trial regarding life style are treated no differently than any other stipulations. Counsel for Lowrance had the opportunity to limit the stipulations to a specific time period but did not. In fact, at the conclusion of the trial, the court addressed objections that were specifically included in the pre-trial order at page 13. These objections were raised to certain paragraphs of the stipulated facts, none of which relate to those which Lowrance now seeks to recant.
Additionally, the Court finds evidence presented at trial supported the stipulations regarding life style in that Lowrance still resided in the "large and beautiful" 5000 square foot home as he had when the proceedings began. There was testimony that he had sold the home after the First Oklahoma Bankruptcy and now rented it. However, there was no testimony regarding to whom it had been sold, the amount of the rent or the complete terms of the rental agreement. Lowrance testified he had not paid rent for two and one-half years but did not say why or if this put him in danger of being evicted. The house has a large lot, four car garage and swimming pool. Lowrance paid for lawn and pool upkeep. He maintained at least two vehicles on which he paid insurance. His secretary did not testify, as urged by Lowrance, that he did not have expensive artwork but that she wouldn't know expensive artwork.
The testimony was evaluated by the trial court in assessing credibility and it is clear from the order entered by the trial court that it was not impressed with the credibility of Lowrance. Lowrance testified adamantly that he did not ever place money or property in the name of someone else and that he "worked properly." However, the evidence presented regarding his secreting cash and promissory notes directly contradicted this. He testified he was not working, but was "fiddling around," yet paid for a housekeeper, someone to pay his bills, lawn and pool maintenance, $1500.00 to $1800.00 a month for medication, and taxes and insurance on the property and on the vehicles. The trial court is in the best position to evaluate credibility and that determination will not be disturbed on appeal where it is supported by the evidence.
C. Propositions III and IV
Lowrance next posits that the bankruptcy court erred in determining his taxes for the year 1994 are nondischargeable. Lowrance combines this with his final proposition for purpose of discussion, that being the bankruptcy court erred in determining that Lowrance willfully attempted to evade or defeat his income tax liability for tax year 1994.
The statutory authority under which the exception to dischargeability of a tax obligation in bankruptcy is found at 11 U.S.C. § 523(a)(1)(C), which states:
(a) A discharge under Section 727 . . . does not discharge an individual debtor from any debt —
(1) for a tax or a customs duty —
. . .
(C) with respect to which the debtor . . . willfully attempted in any manner to evade or defeat such tax. . . .
The Tenth Circuit Court of Appeals interpreted this statute in Dalton v. Internal Revenue Service, 77 F.3d 1297 (10th Cir. 1996), which defined a willful attempt as an attempt that has been done voluntarily, consciously or knowingly, and intentionally. Nonpayment, standing alone, does not compel a finding that tax debt is nondischargeable.
Lowrance urges the general rule cited in Dalton should apply that exceptions to discharge are to be strictly construed in favor of the debtor. The Court agrees. However, even when strictly construed in his favor, the rule provides no aid to Lowrance under the facts of this case.
Lowrance asserts that he simply followed the advice, albeit bad, of his tax representative, Tacheny, in disbursing $700,000.00 from the segregated account following the dismissal of his First Oklahoma Bankruptcy, that he later learned he should not have done that and he admits it was a mistake which he characterized as an honest one. Lowrance urges this could not constitute willfullness.
The bankruptcy court did not find Lowrance's assertion of an honest mistake credible and, in light of the "totality of conduct" of Lowrance, as that term is referenced in Dalton, this Court does not find that conclusion to be clearly erroneous. Further, Lowrance's actions in regard to the First Oklahoma Bankruptcy was not the only factor on which the bankruptcy court based its opinion.
The trial court is in the best position to judge credibility by direct observance of the demeanor of all witnesses. Higgins v. Oklahoma ex rel. Oklahoma Employment Security Commission, 642 F.2d 1199 (10th Cir. 1981). Lowrance's testimony as to his intent was not supported by his actions in numerous instances. Lowrance testified he did not withhold information from Tacheny. However, Tacheny testified there were numerous transactions and financial information of which he was unaware. Even though Lowrance testified Tacheny was faxed monthly statements from the NBC bank account, Tacheny was unaware of its existence and Lowrance's secretary testified that when the account was opened, Lowrance instructed her that no one needed to know about it. She was unable to answer whether those instructions applied to Tacheny and stated she probably would have asked Lowrance for instructions had Tacheny asked about the account. This is supported by Lowrance's own testimony that he opened the account after the IRS garnished his other accounts because he had to have a place to clear checks.
Lowrance further definitively testified he had not placed money or property in the name of someone else, stating that he "worked properly." His treatment of sales of out-of-state properties and the sales proceeds and income generated from these sales belie his testimony.
There was also testimony establishing Lowrance secreted cash on at least one occasion. When asked by revenue officer Tinkler whether he had any cash on hand during a 1996 seizure, he stated he did not and refused to open a locked file cabinet. When a locksmith was summoned, a great deal of cash was found inside.
In addition to these issues, there is sufficient evidence in the record, including the stipulations, exhibits and testimony, from which the bankruptcy judge concluded Lowrance did not timely file and pay his taxes; lived an excessive lifestyle in lieu of paying his taxes; arranged his financial affairs so it would be difficult, if not impossible for the IRS to determine where assets were held; and, converted deposits to cash or cashier's checks in order to keep funds out of the reach of the IRS and instead used them to support his lifestyle.
Lowrance urges his actions fall short of conduct found to be nondischargeable in court cases cited in his brief. He asserts his use of cashier's checks was a legitimate way to keep cash on hand to pay bills and continue his business so that he could pay his taxes and that these left a paper trail, distinguishing his actions from those found in In re Birkenstock, 87 F.3d 947 (7th Cir. 1996). The Court agrees the actions reflected in Birkenstock are more egregious and obvious than the actions of Lowrance. However, Lowrance incorrectly concludes this should exonerate him in this case. As the bankruptcy court concluded, the totality of Lowrance's conduct leads to the conclusion that his failure to pay taxes was not the result of inadvertent, honest mistakes. Lowrance did leave a paper trail but also actively sought to cover that trail and conceal it from USA.
In Bruner v. United States, 55 F.3d 195 (5th Cir. 1995), debtors did not file or pay taxes for several years in spite of the fact the husband was a highly compensated surgeon, set up an admittedly shell corporation in an attempt to hide income, and engaged in numerous cash transactions during the years they did not file returns. Again, while the actions of the debtors were more readily identifiable as willful, Bruner provides no relief to Lowrance. Nor is any found in the numerous other cases to which Lowrance cites. The Court looks not to the specifics of each prior case, but to the "totality of conduct" in this case and concludes the bankruptcy court's decision should be affirmed.
IV. CONCLUSION
The Court recommends that the decision of the bankruptcy court should be affirmed and Lowrance's tax liability should not be discharged pursuant to 11 U.S.C. § 523(a)(1)(C).
V. OBJECTIONS
In accordance with 28 U.S.C. § 636(b) and Fed.R.Civ.P. 72(b), a party may file specific written objections to this Report and Recommendation. Objections must be filed with the Clerk of the District Court for the Northern District of Oklahoma within 10 days of being served with a copy of this Report and Recommendation. See Fed.R.Civ.P. 6 (as to computation of time periods). If specific written objections are timely filed, the district judge assigned to this case will
make a de novo determination upon the record, or after additional evidence, of any portion of the magistrate judge's disposition to which specific written objection has been made in accordance with this rule. The district judge may accept, reject, or modify the recommended decision, receive further evidence, or recommit the matter to the magistrate judge with instructions.
Fed.R.Civ.P. 72(b). See also 28 U.S.C. § 636(b)(1).
The Court of Appeals for the Tenth Circuit has adopted a "firm waiver rule" in connection with appeals from orders adopting a Magistrate Judge's report and recommendation. "[T]he failure to make timely objections to the magistrate's findings or recommendations waives appellate review of factual and legal questions." United States v. One Parcel of Real Property, 73 F.3d 1057, 1059 (10th Cir. 1996) (quoting Moore v. United States, 950 F.2d 656, 659 (10th Cir. 1991)). Thus, a timely, specific and written objection is necessary to preserve an issue for de novo review by the assigned district judge and for appellate review by the court of appeals. See Thomas v. Arn, 474 U.S. 140 (1985); Haney v. Addison, 175 F.3d 1217 (10th Cir. 1999); and Talley v. Hesse, 91 F.3d 1411 (10th Cir. 1996).