Opinion
No. 90-B-06403 D
December 19, 1991
Discharge of Debts — Taxes — Evasion of Payment. — The discharge exception for evading taxes in Section 523(a)(1)(C) applies to attempts to evade collection of taxes due as well as to attempts to evade the assessment of taxes. The debtor here owed the Internal Revenue Service back taxes. (Ironically, they would have been dischargeable had the debtor immediately filed for bankruptcy relief.) He entered into negotiations with the IRS, but was served a notice of levy on his salary as CEO of a small company. He thereupon reduced his salary to minimum wage (which the IRS could not execute on) and took a series of loans from the company approximating his lost salary. This overall course of behavior was designed to evade paying the taxes, warranting denial of discharge of the tax debts.
See Sec. 523(a)(1) at ¶ 9227.
This adversary proceeding is before the Court on debtor's complaint to determine the dischargeability of his tax liability for 1981 and 1985.
The debtor appears by G. Harris Adams of Lefly Associates, Lakewood, Colorado. The United States of America ("United States") appears by Joel J. Roessner, Washington, D.C.
JURISDICTION
This Court has jurisdiction over this adversary proceeding. 28 U.S.C. § 1334. This is a core proceeding. 28 U.S.C. § 157(b)(2)(I).
NATURE OF THE CASE
At issue in the instant proceeding is whether 11 U.S.C. § 523(a)(1)(C) excepts from discharge a debtor's tax obligation when the debtor has attempted to avoid the collection of a tax obligation rather than trying to evade or defeat the assessment of a tax. The debtor asserts that under the facts, the United States has failed to prove that he was willfully attempting to evade the payment of the tax. Moreover, the debtor argues that even if the facts indicate that he attempted to evade the payment of the tax, 11 U.S.C. § 523(a)(1)(C) does not except from discharge, taxes owed as a result of a debtor's attempted evasion of payment.
FACTS
The debtor filed for bankruptcy in 1990 and on May 16, 1991, the debtor filed this adversary complaint seeking a dischargeability determination regarding his 1981 and 1985 tax liabilities pursuant to 11 U.S.C. § 523(a)(1)(C). The United States filed its answer on June 21, 1991, asserting that the debtor's tax liabilities were nondischargeable. The adversary proceeding came on for trial on September 24, 1991, and, based on the testimony and exhibits presented, the court finds the following to be the facts:
At some point in the 1980s, the debtor was subjected to a tax audit for the years 1982 through 1986. While the questions regarding the tax years of 1982, 1983, 1984, and 1986 were resolved, problems developed regarding the 1985 tax year. The problems with the 1985 assessment are not apparent on the documents and evidence before the Court. It is sufficient to state that the debtor agrees that he owes taxes for the year 1985.
Around the same time that the debtor's 1982 through 1986 tax returns were being audited, the debtor apparently became worried that his 1981 tax return may have been incorrect and, therefore, requested an audit of his 1981 tax return. The debtor's unease about his 1981 tax return was the result of the late filing of the original 1981 return. After obtaining an extension, he filed his 1981 tax return in October of 1982. Because the debtor was unsure of his tax liability, on the advice of his accountant, the debtor overestimated the amount due. Tr. 86. When the debtor was able to afford counsel, an amended 1981 tax return was filed. Apparently the IRS refused to accept the amended return and a substantial amount of paperwork for both the debtor and the Service resulted.
At trial, the debtor indicated that in seeking an amicable solution to the problems regarding the 1981 taxes, he conversed with at least ten different IRS employees in different cities and during different periods of time. Tr. 88-89. Much of the problem was precipitated by the debtor's move from the Chicago area to Denver in April of 1989. At the time of the move, the IRS apparently asserted a tax liability of in excess of $48,000 in taxes, interest and penalties for 1981 and 1985. The debtor contested the amount vigorously and unsuccessfully.
The parties have stipulated that the debtor's liability for the 1981 tax year is $6,341.00 plus statutory additions, interest, and penalties, less any amount previously paid. At trial the parties indicated that the debtor's liability for 1985 was not in dispute. However, the parties were not able to provide the court with an exact figure at the time. On December 16, 1991, the Court, through its law clerk, contacted the IRS in order to ascertain the exact figure. The IRS has indicated that it is seeking to collect $3,369.66 plus statutory additions, interest, and penalties, less any amount previously paid for 1985. Since counsel for the debtor was allowed to withdraw after trial, the Court was unable to obtain a stipulation as to the amounts indicated. The Court makes no finding of fact with respect to the actual amount owed for 1985. These figures are provided to suggest that the debtor's doubts about the amount of the assessment were justified.
The debtor moved to the Denver area in 1989 to take a position as CEO of Sandhill Scientific Incorporated, a California corporation ("Sandhill California").
At the of time of debtor's employment by Sandhill California Robert R. Chambers ("Chambers") and his wife owned eighty-five percent of the corporate stock. Although the stability of Sandhill California in April of 1989 is questionable, it is clear that the debtor was hired in order to help the corporation prosper by raising capital and having a new corporation formed, Sandhill Delaware, in order to buy Chambers' shares of Sandhill California's stock. Exhibit 32; Tr. 104.
Under his employment agreement with Sandhill California, the debtor was to initially receive $60,000.00 per year payable at the rate of $5,000.00 per month. Exhibit 32, Plaintiff's Exhibit A. After a six-month probationary period, debtor was to receive, among other items, a $1,000.00 per month salary increase and an option to purchase stock in the corporation. Plaintiff's Exhibit A.
In June of 1989, Bernice Padillo-Mason ("Mason"), a revenue officer with the IRS, appeared at the Denver office of Sandhill California to serve notice of a levy on the debtor's salary to collect the $48,000 the IRS claimed was due. Tr. 18; Exhibit 3. Mason first tried to serve the notice on Floyd Neeriemer, an accountant employed by Sandhill California at that time. Tr. 18. When Neeriemer refused service, the debtor was personally called into the room, and Mason attempted to serve him. Tr. 18. The debtor refused the service on the basis that it pertained to the 1981 tax year and he still contested the amount owed. Tr. 19.
The day after service was attempted, Mason called the debtor and asked whether he would honor the levy. Tr. 19. At that time, the debtor informed Mason that he had filed a taxpayer assistance order, the effect of which was to allow the taxpayer and the revenue officer, at some time in the future, to sit down and work out a solution to the problem. Tr. 19-20. A meeting was scheduled for August 9, 1989.
In the meantime, the debtor apparently contacted Michael Shidler, a tax lawyer, regarding the IRS levy. Debtor testified that he first met with Shidler during the last week of July of 1989. Tr. 101. At that time, Shidler correctly advised debtor that if he filed for bankruptcy, the taxes would be dischargeable. Tr. 101. Debtor apparently indicated that he felt that this would be inappropriate because he was only contesting the amount owed rather than trying to avoid payment of the taxes altogether. Tr. 101. The court notes that had the debtor chosen simply to file bankruptcy at that time, rather than choosing to resist the levy, he would have been discharged of liability for the 1981 and 1985 taxes, irrespective of the amount. Instead, the debtor embarked on a futile effort to reduce his apparent income which the court is compelled to conclude was done with the sole purpose and intent of evading collection of the contested taxes.
At the August 9, 1989, meeting with Mason (held pursuant to the taxpayer assistance order procedures), the debtor presented a financial statement and budget which indicated that he had no monthly disposable income and, in fact, had a deficit of $700.00. Tr. 20-21, 25. However, notwithstanding his apparent cash flow deficit, the debtor proposed to pay the IRS a total of $36,000.00 over thirty-six months without interest. Tr. 20-21. Bear in mind that the IRS was at that time asserting that he owed over $48,000. Upon reviewng the financial statement, Mason concluded that the debtor had a monthly disposable income of $1,800.00 per month which could be used to pay off the indebtedness. Tr. 21. Mason made this determination upon concluding that the debtor had failed to include any of his wife's income in his budget. When Mason requested that the debtor divulge his wife's income, he refused. Mason thereupon assumed (apparently without any basis) that the debtor's spouse earned the same amount as the debtor and that given the debtor's stated expenses, he could afford to devote his entire "disposable" income of $1,800.00 to satisfy the tax liability. Tr. 25-27.
Negotiations broke down at that point because the debtor would not agree to the sum requested by Mason, and Mason had no authority to compromise the $48,323.51 claimed by the IRS and accept the $36,000.00 proposed by the debtor. Tr. 21-22. Mason thereupon again served a notice of levy on the debtor. Tr. 22.
The notice of levy indicated that the debtor owed $17,803.01 and statutory additions of $20,106.18 for 1981 and $3,369.66 plus $7,044.66 in statutory additions for 1985. The total amount due was $48,323.51. Exhibit 3.
When presented with the second notice of levy, the debtor handed Mason a copy of an interoffice memorandum addressed to Neeriemer indicating that the debtor was voluntarily reducing his salary to minimum wage effective August 1, 1989. Tr. 22; Exhibit 2. The memorandum advised Neeriemer to comply fully with the IRS levy. Exhibit 2. It was no coincidence that the IRS regulations provide that the Service will not levy on income which does not exceed the minimum wage.
Mason was not advised of the debtor's voluntary wage reduction until the end of the August 9, 1989 meeting, even though the debtor had just offered to pay $36,000.00 at the rate of $1,000.00 per month in satisfaction of his tax liability. Tr. 22. The levy notice was subsequently returned to the IRS indicating that the debtor's semi-monthly wages were $290.33 and that he was allowed monthly exemptions totalling $358.33. Exhibit 3. The return provided that there were no funds subject to levy due to the debtor's exemptions. Exhibit 3. The number and amount of allowable exemptions was calculated by the debtor and sent to Neeriemer in an interoffice memorandum dated August 10, 1989. Exhibit 4.
Contemporaneously with the salary reduction, the debtor began receiving loans from Sandhill California and/or Sandhill Delaware. The amount of the loans and the date of the loans were as follows: fn_ fn_ fn_ fn_
indicates promissory notes were made payable to Sandhill Delaware.
indicates that a copy of this promissory note was not located in the record. However, this note is referenced in Exhibit 21. The debtor had no opinion as to whether it was actually made. Tr. 73-74.
During this same period of time, Sandhill California was experiencing financial difficulties. According to the debtor, at the time he started receiving the loans, Sandhill California was in desperate need of working capital. Tr. 105-06. On July 14, 1989 and August 3, 1989, the debtor wrote two letters to Chambers outlining Sandhill's problems. Tr. 106. Just how the loans from Sandhill to the debtor improved those financial problems is a mystery. In his letters, the debtor requested that Chambers loan Sandhill California $60,000.00 in working capital. Tr. 106. Debtor also testified that he told Chambers that he agreed to reduce his salary as a personal sacrifice in order to help with Sandhill's financial situation. Tr. 107. According to the debtor, the wage reduction/loan arrangement would help the corporation by eliminating the wage as an expense, "and increas[ing] the assets of the company because those wages then become assets on the books." Tr. 105. Again, just how placing a questionable receivable from an officer who was clearly insolvent on the books bolstered the financial condition of Sandhill is a mystery.
Although the debtor testified that Chambers agreed to the wage reduction and loan arrangement, Chambers stated in his deposition that he was not aware of the debtor's wage reduction until sometime after it had been initiated. Exhibit 31, p. 10. Indeed, Chambers only became aware of the wage reduction on inquiry into the loans that appeared on the company books. Exhibit 31, p. 11. Upon discovering the debtor's wage reduction and loans, Chambers inquired as to whether both were legal in light of the IRS levy. Exhibit 31, p. 12. Chambers requested that the debtor obtain an opinion letter from a knowledgeable lawyer. Exhibit 31, p. 12. In response to Chambers' request, debtor obtained and furnished Exhibit 9. Exhibit 9 is an opinion letter prepared by Shidler dated October 4, 1989. In essence, the opinion letter indicated that the debtor's voluntary wage reduction was legal, and that under the IRS Code and case law, a federal tax lien could not attach to the wages which the debtor was foregoing. Further, Shidler opined that Sandhill California was not obligated to loan the debtor money, and that the debtor would remain wholly liable for any loan. Exhibit 9. At the same time debtor apparently also obtained form Shidler Exhibit 33.
While Exhibit 9 seems to indicate that the wage reduction and loan arrangements are wholly independent and without question, Exhibit 33, another Shidler opinion letter dated October 4 is more detailed and less reassuring. Whereas in Exhibit 9 Shidler indicates that the wage reduction is legal and that the IRS cannot levy on forgone wages, in exhibit 33 Shidler questions the legality of the loans clearly indicating that the IRS may seek to qualify the loans as wages. Shidler opinies however that under the circumstances, the loans will probably be considered, and should be considered valid. Exhibit 9 was provided to the IRS within a relatively short period of time after it was drafted, but Exhibit 33 was not produced until a shortly prior to trial.
To make matters more complicated, during this same time period, the debtor and Sandhill California were in a dispute over the debtor's employment contract. On December 1, 1989, the debtor was hospitalized for an acute infection of his gall bladder and bile duct. Exhibit 28. Three days later, on December 4, 1989, Chambers issued an announcement indicating that Charles Clark would act as interim General Manager of Sandhill in the debtor's absence. Exhibit 28. When the debtor returned to work in mid-December, he requested that Chambers rescind his prior announcement and place the debtor back in control. Exhibit 28. When the debtor demanded that his authority be reinstated, Chambers terminated the debtor, effective April 1, 1990. Exhibit 28.
On the same day, the debtor sent a letter to Chambers stating that if Chambers failed to comply with the severance bonus agreement in the employment contract, the debtor would have to consider the loans to be salary. Exhibit 21. In a subsequent letter dated February 12, 1991 from the debtor to Chambers, the debtor stated that his counsel has indicated that he should consider claiming the loans from Sandhill California as actual salary when filing suit against Sandhill. Exhibit 27. The debtor, acting pro se, filed suit on March 29, 1991, in California, alleging wrongful termination. Exhibit 27.
DISCUSSION
11 U.S.C. § 523(a)(1)(C) provides:
A discharge . . . 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.
Exceptions to discharge are construed narrowly and in favor of the debtor. In re Mullet, 817 F.2d 677, 680 (10th Cir. 1987). Any interpretation of a statute begins with the statutory language and the general rules of statutory interpretation. Pennsylvania Dept. of Public Welfare v. Davenport, 495 U.S. 552 (1990); Mallard v. U.S. District Court for Iowa, 490 U.S. 296, 300 (1989); United States v. Ron Pair Enterprises, 489 U.S. 235, 240-41 (1989). While other courts have interpreted this statute, it presents a new issue for this Court. Compare In re Peterson, 132 B.R. 68 (Bankr. D. Wyo. 1991); In re Gathwright, 102 B.R. 211 (Bankr. D. Ore. 1989), with In re Jones, 116 B.R. 810 (Bankr. D. Kan. 1990).
The plain meaning of the statute's language should control "except in the rare cases [in which] the literal application of the statute will produce a result demonstrably at odds with the intentions of its drafters. In such cases, the intention of the drafters, rather than the strict language, controls." Ron Pair Enterprises, 489 U.S. at 242 (quoting Griffin v. Oceanic Contractors, Inc., 458 U.S. 564, 571 (1982)); Crandon v. United States, 494 U.S. 152 (1990) (look not only to statutory language, but also the design of statute, its object, and its policy); United States v. Brittain, 931 F.2d 1413 (10th Cir. 1991) (if language unambiguous and free of irrational result, that language controls); Glenpool Utility Services Authority v. Creek County Rural Water Dist. No. 2, 861 F.2d 1211 (10th Cir. 1988), cert. denied, 490 U.S. 1067 (1989).
The key here is the definition of the word "evade." It is not defined in the Bankruptcy Code. The IRS asserts that the plain meaning of "evade" includes a debtor's attempt to block the collection of taxes which have already been assessed. The dictionary defines "evade," in connection with taxes, to mean "to fail to pay or to minimize [taxes] in violation of law." Webster's Third New International Dictionary, p. 786 (G. C. Merriam Co., 1981). Although the reading proposed by the IRS broadens the scope of the statute, the court is inclined to accept it. Clearly, the phrase "in any manner" which modifies the term "evade" supports this conclusion. 11 U.S.C. § 523(a)(1)(C). In In re Jones, 116 B.R. 810, 814 (Bankr. D. Kan. 1990), the court noted that the phrase "in any manner," "is sufficiently broad to include willful attempts to evade taxes by concealing assets to protect them from execution or attachment." Excluding a debtor's attempt to avoid payment from § 523(a)(1)(C) would contradict the plain meaning of the statutory language.
Because the statute is unambiguous, the Court's inquiry should end. However, the debtor cites the case In re Gathwright, 102 B.R. 211 (Bankr. D. Ore. 1989) as support for his argument that the statute does not cover a debtor's failure to pay taxes. See also In re Peterson, 132 B.R. 68 (Bankr. D. Wyo. 1991) (adopting the Gathwright rationale). In both Peterson and Gathwright, the courts conclude the resolution of the issue requires recognition of § 7201(a) of the Internal Revenue Code which provides criminal liability based on similar language. As stated by the Gathwright court:
Under section 7201(a), which provides that it is a felony to "willfully attempt in any manner to evade or defeat any tax imposed by [Title 26] or the payment thereof," the IRS must prove a willful and positive attempt to evade or defeat tax. [Citation omitted.] Although section 523(a)(1)(C) makes nondischargeable tax liabilities which the debtor has willfully attempted to evade or defeat, it does not include willful attempts to evade or defeat "payment" as a basis for nondischargeability. To the extent that the language of the statutes is identical and in the absence of any indication that Congress intended different meanings for the phrases in the different codes, I will interpret them the same. However, because the Bankruptcy Code exception to discharge lacks the language "or the payment thereof," evidence regarding any willful attempt to evade or defeat payment of the tax is not relevant to a determination of nondischargeability.
102 B.R. at 213. While it is permissible for courts to rely on other statutes to impart a meaning on the statute in question, Oscar Mayer Co. v. Evans, 441 U.S. 750 (1979), a court should not resort to other statutes unless the statute being considered is ambiguous. In the instant case, the statutory language is unambiguous, and the debtor's attempted injection of an ambiguity does not change that result.
Moreover, reading the statute as requested by the debtor contradicts the primary purpose of the Bankruptcy Code, to allow the honest debtor a fresh start. "If willful attempts to evade or defeat the collection of taxes do not satisfy § 523(a)(1)(C), then these debtors have discovered a most lucrative device, one which would allow them to defeat the collection of . . . taxes." Jones, 116 B.R. at 815.
Although the Court concludes that § 523(a)(1)(C) excepts from discharge taxes which the debtor willfully attempted to avoid payment, whether the debtor's conduct was willful is a factual question. The United States bears the burden of proving by a preponderance of the evidence that the debtor's tax liability should be nondischargeable. Grogan v. Garner, 498 U.S. ___, 111 S.Ct. 654 (1991).
The debtor's attempts to evade payment of the tax must be willful; that is voluntarily and intentional. See Peterson, 132 B.R. at 71; 11 U.S.C. § 523(a)(1)(C). Of course, debtors rarely admit that they voluntarily and intentionally tried to escape the collection of taxes due. Here, there is no question but that the debtor was aware of his duty to remit the payments; he did dispute the amount of his liability, however. The first notice of levy was served on the debtor in mid-June.
The court notes that had the debtor followed Shidler's advice at the July 1989 meeting, the tax liabilities would probably have been discharged.
When the second notice of levy was served after the August 9, 1989, meeting, the debtor provided Mason with a copy of a wage reduction statement prepared prior to the meeting. The debtor was preparing for what he felt was inevitable.
The effect of the wage reduction statement was to reduce the debtor's salary to minimum wage. That the debtor did not forego his entire salary compels the conclusion that the debtor was aware that the IRS could not levy on any amount less than the minimum wage.
At approximately the same time the wage reduction was initiated, the debtor started receiving loans from Sandhill California. While the debtor argues that the loans were legitimate and an effort to help the struggling corporation, the Court concludes that the sole reason for the combination wage reduction and loans was to evade the collection efforts of the IRS. The loans were initiated at about the same time that the wage reduction was initiated; the amounts of the loans approximately equaled the foregone salary; and the debtor demanded that they be treated as salary in his termination dispute with Sandhill. These facts alone compel the finding that the debtor willfully evaded the collection efforts of the IRS and that his tax liability for 1981 and 1985 is not dischargeable.
The debtor's efforts in this case are somewhat akin to a situation where a party ignores the order of a court because he or she disagrees with the court's jurisdiction and conclusion: a party ignores a court order at his or her peril. Where the debtor disagrees with an assessed tax, he or she may not ignore the collection efforts of the IRS but must use the courts to resolve the dispute rather than attempting to evade the tax collection. Had the debtor followed the advice of counsel in August of 1989 and simply filed bankruptcy, he would have avoided this whole problem. Instead he attempted to disguise his income by purporting to withdraw it as loans — even in the face of legal advice that the practice was risky. He cannot now complain that it did not work.
CONCLUSION
The Court holds that the debtor's tax liabilities for the years 1981 and 1985 are nondischargeable pursuant to 11 U.S.C. § 523(a)(1)(C). The parties have stipulated that the 1981 liability is § 6,341.00 plus statutory additions, interest and penalties, less any amount previously paid. As for the 1985 taxes, the Court notes that the parties stated that they had agreed on the amount due at the time of trial. While the Court requested the amount be entered into the record, the parties have failed to provide this information. Therefore, while the debt is nondischargeable, the extent of the debt cannot be determined on this record.
The foregoing constitutes findings of fact and conclusions of law as required by Fed.R.Civ.P. 52(a) and F.R.Bankr.P. 7052. A separate judgment will be entered giving effect to the determinations reached herein.