Opinion
Civil Action No: 02-1764 Section: "S" (4)
July 2, 2003
OPINION
This appeal from the judgment of the bankruptcy court questions whether Bankruptcy Code § 523(a)(1)(C) prevents the dischargeability of the federal tax debts as set forth in the Internal Revenue Service's proof of claim. The judgment of the bankruptcy court in favor of the United States of America, Department of the Treasury, Internal Revenue Service and against E. Ward Sudderth is AFFIRMED for the following reasons.
I. BACKGROUND
E. Ward Sudderth is a physician who practiced medicine in Jefferson Parish. In October 1989, Sudderth formed the Bariatric Medical Clinic (Bariatric), where patients were treated primarily by another physician in a general practice with an emphasis on weight loss. In 1990, Sudderth formed the Westbank Medical Clinic (Westbank), operating as a general medical clinic with some specialties in the same location as Bariatric. In 1992, the physician who was running Bariatric died, and Sudderth assumed the weight loss-practice and began seeking patients for cosmetic surgery.
Westbank used the trade name Westbank Institute of Cosmetic Surgery for its auxiliary cosmetic surgery services.
Brenda Roberts, a former patient, began working with Westbank in February 1990. On October 1, 1991, Roberts entered into a five-year employment contract with Westbank to serve as the Director of Marketing Services. Under the contract, Roberts received a salary of $100,000 plus a bonus of zero to five percent when Westbank's revenue exceeded $3,500,000 a year. Roberts had not graduated from high school and had no previous experience in marketing or the health care field. For the first three to four years of the employment contract, Roberts worked three or four days a week. She later reduced her work schedule to one or two days a week. In addition to marketing duties, Roberts extended her credit to Bariatric and Westbank for leases of automobiles and equipment for the clinics, opened accounts with vendors, and obtained credit cards for the clinics.
Sudderth married Roberts, his third wife, on December 7, 1991. They were divorced in 1998 or 1999.
Sudderth states that Roberts appeared at the clinic less frequently because she was seriously injured in an automobile accident in 1995.
In 1995, thirteen claims for medical malpractice were pending against Sudderth. On January 1, 1996, Sudderth transferred all of the Bariatric stock to Roberts. Sudderth gave several explanations for the transfer of stock: a partial payment on a prenuptial obligation, a provision for Roberts to have an asset in her own name, love and affection, an exchange for allowing her good credit standing to be used by Westbank and Bariatric.
Sudderth received all of the Bariatric stock in the divorce.
On November 14, 1996, the Internal Revenue Service filed a civil lawsuit to preserve its tax lien against Sudderth. On January 14, 1998, Sudderth filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code. The case was converted to a bankruptcy liquidation under Chapter 7 on February 12, 1998, and Sudderth received a discharge on May 6, 1998.
The Internal Revenue Service filed a proof of claim in the bankruptcy case for income tax debts for 1978, 1984 through 1990, and 1993 plus interest for the year 1996. The parties agree that the tax debts set forth in the proof of claim are dischargeable unless 11 U.S.C. § 523(a)(1)(C) applies.
Section 523(a)(1)(C) provides:
(a) A discharge under section 727, 1141 . . . of this title does not discharge an individual from any debt —
(C) with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax.
The one exception is the claim for unpaid interest on Sudderth's 1996 tax obligation, which is a priority claim that is not dischargeable, pursuant to § 507(a)(8) and 523(a)(1)(A).
Subsequent to the discharge, the Internal Revenue Service filed two tax liens in the public records for $120,000 each. Sudderth filed a complaint in an adversary proceeding to determine whether the tax indebtedness is dischargeable in the Chapter 7 bankruptcy proceeding.
The sole issue before the bankruptcy court was whether Sudderth willfully engaged in conduct to evade or defeat the tax within the meaning of § 523(a)(1)(C). The bankruptcy court found that he had; therefore, the past due taxes owed were non-dischargeable. The bankruptcy court based its findings on Sudderth's actions in concealing income on Internal Revenue Service's Form 443-A to defeat the collection of taxes, overstating his debt to the State of Louisiana, diverting income to Roberts, and transferring ownership of Bariatric stock to Roberts without an adequate explanation.
Form 443-A is entitled "Collection Information Statement for Individuals." The purpose of the form is to assist the Internal Revenue Service in making a collection determination.
The facts are that, on March 23, 1995 and August 16, 1995, Sudderth filled out Form 443-A. On each form, Sudderth listed a tax liability of $40,000 to the State of Louisiana with payments of $2,600. Although in March he listed a gross monthly wage of $1,595, and a net wage of $1,000, Sudderth was actually receiving a gross wage of $3,190, and a net wage of $2,000. On the August form, Sudderth listed the correct gross wage of $3,190, and a net wage of $2,000.
In the "other income" portion of both the March and August forms, Sudderth listed the $2,600 payment per month to the State of Louisiana, but there was no corresponding income listed on Form 1099, "Miscellaneous Income." Further, Sudderth reported Form 1099 income from Westbank in 1994 in the amount of $21,656.41 and, in 1995, in the amount of $79,425. No portion of this income was reported in Form 433-A.
The bankruptcy court found that, during the years that Sudderth and Roberts were married, his income decreased, and her income increased. The reverse was true while their divorce was pending. Further, even though Roberts had a written employment contract, her work and skill level were not comparable to her salary. By paying Roberts a large salary, Sudderth was able to maintain his lifestyle while reporting less income to the Internal Revenue Service. Similarly, the court found that Sudderth attempted to evade or defeat taxes by transferring ownership of Bariatric stock to Roberts.
The bankruptcy court decreed that Sudderth's tax indebtedness for the tax years 1978, 1984 though 1990, 1993, and 1996 is nondischargeable. Sudderth filed an appeal from the judgment of the bankruptcy court, as amended. Sudderth challenges the bankruptcy court's finding that he intentionally committed acts designed to evade the collection of taxes, interest, and penalties.
The Bankruptcy Code applies separate standards to income tax obligations and to the penalties associated with income tax obligations.See Range v. United States, 245 B.R. 266, 269-70 n. 1 (S.D.Tex. 1999). Tax for which a return was required to be filed within three years preceding bankruptcy or after bankruptcy, or tax that was assessed within 240 days before bankruptcy or that is still assessable at the time of bankruptcy is entitled to priority and not discharged. Tax penalties imposed with respect to an event that occurred before three years before the date of filing the petition are discharged. Id.
Sudderth has paid the principal of the 1978 tax debt, but there remains unpaid interest. The Internal Revenue Service admits that the penalties for 1978, 1984 through 1990, and 1993 are dischargeable because they are more than three years old; however; the penalty for the 1996 taxes is nondischargeable because it accrued less than three years prior to the 1998 filing of Sudderth's petition.
II. DISCUSSION
A. Legal standard
"When a Chapter 7 debtor obtains bankruptcy relief, the general rule is that all debts arising prior to the filing of the bankruptcy petition will be discharged." Matter of Bruner, 55 F.3d 195, 197 (5th 1995). The "fresh start" provided by a bankruptcy proceeding applies only to an "honest but unfortunate debtor." See In re Fegeley, 118 F.3d 979, 982-83 (5th 1997). Congress has excepted certain liabilities from discharge, such as § 523 of the Bankruptcy Code, which enumerates situation in which tax liabilities are not dischargeable in bankruptcy. Matter of Bruner, 55 F.3d at 197. Section 523(a)(1)(C) "encompasses both acts of commission as well as culpable omissions." Id. at 200. "The language of the statute itself reveals that a willful attempt in any manner' to evade or defeat a tax precludes discharge." Id. "[T]he key § 523(a)(1)(C) determination is whether debtor's conduct is willful." In re Grothues, 226 F.3d 334, 339 (5th 2000). The determination that a debtor's conduct is willful is a finding of fact and is reviewed for clear error. See Dalton v. I.R.S., 77 F.3d 1297, 1302 (10th 1996). The burden of proving by a preponderance of the evidence that the debtor's tax liabilities are nondischargeable under § 523(a)(1)(C) is on the United States. In re Fegeley, 118 F.3d at 983.
The bankruptcy court's findings of fact are reviewed under the clearly erroneous standard. See Coston v. Bank of Malvern, 991 F.2d 257, 261 (5th Cir. 1993). The findings of fact will not be set aside unless, based on the entire record, the court is left with a definite and firm conviction that a mistake has been committed. Id. at 262. Due regard is given to the bankruptcy court's opportunity to judge the credibility of witnesses.Id. Findings of fact are not clearly erroneous if the bankruptcy court's "account of the evidence is plausible in light of the record viewed in its entirety." Id. (internal quotation and citation omitted)
B. Challenge to bankruptcy court's findings of fact
Sudderth challenges the following fact found in paragraph 10 of the findings of fact:
As of the March Form 433-A, the Debtor only owed four more payments on the state debt that would have totaled $10,400.00. The last payment made to the State of Louisiana was in July of 1995. This payment absolved the Debtor for the installment agreement for his liability to the State of Louisiana.
Sudderth contends that even the government concedes that the July 1995 payment did not end his indebtedness to the State because he owed approximately $10,000 in outstanding interest.
Sudderth contends that the same argument applies to the August Form 433-A. He maintains that listing the outstanding debt of $40,000 and payment of $2,600 to the State was a mistake and that the Internal Revenue Service had every opportunity to verify the amount of the debt and payment.
Sudderth contends that there is no evidence that he knew that 1099 income should be listed on Form 433-A. He argues that the form is vague because 1099 income is not listed in any of the categories of income, and the revenue officers did not discuss 1099 income with him. Moreover, Sudderth argues that the 1099 income was included in the bank statements, check, tax returns, and balance sheets for the corporation that he presented to supplement Form 433-A.
Sudderth further contends that there is no evidence to support the bankruptcy court's finding that Roberts' salary was not comparable to her skill level and that he was manipulating her earnings to continue his lifestyle. He argues that the government did not present expert testimony to calculate what would be a reasonable wage for Roberts' involvement in the two corporations. Sudderth contends that Roberts worked for the corporation and allowed the use of her credit cards to operate the clinics. Moreover, Roberts was a "self-labeled trophy wife" that required high maintenance. Sudderth asserts that she spent all of her money on herself and her children and that the only benefit he received was that he lived in her home.
The bankruptcy court found that Sudderth's explanation for the transfer of Bariatric stock to Roberts was insufficient. Sudderth argues that the finding was error because he reported the stock as his asset on every Form 433-A from 1989 until January 1997 and that the government demonstrated no interest in the stock of Bariatric or Westbank. Sudderth maintains that the transfer was legitimate because he received a $40,000 credit toward the settlement of the prenuptial agreement when the stock was returned to him a part of the partition in the divorce action.
In Range v. United States, 245 B.R. 266, 275 (S.D. Tex. 1999), the district court held that the evidence established that the Ranges willfully attempted to evade or defeat their tax liability. The evidence supported the bankruptcy court's finding that the Ranges had adequate resources to pay their taxes because they purchased cars, planes, and a home during the tax period in question. Id. The Ranges knew of their duty to file returns, but simply chose not to pay taxes. Id. The Court of Appeals affirmed the decision without opinion. See In re Range, 48 Fed. Appx. 103, 2002 WL 31016592 (5th 2002)
In Parker v. United States, 207 B.R. 129, 131 (W.D. La. 1996), the Chapter 7 debtor did not file tax returns or pay taxes, even though he had the ability to pay. The district court concluded that Parker's actions constituted "omissions" because, even though his behavior was passive, he "had the wherewithal to file his return and pay his taxes, but he voluntarily, consciously, and intentionally did not fulfill his obligation." Id. The Court of Appeals affirmed without opinion the district court's decision affirming the bankruptcy court's finding that Parker's tax liabilities are not dischargeable. See In Matter of Daniel Parker, 122 F.3d 1066 (5th 1997)
After considering the record on appeal in its entirety, the court concludes that, as in Range and Parker, Sudderth engaged in acts of commission and omission in order to evade or defeat his tax liability. In the March and August forms in section IV of Form 433-A, "Asset and Liability Analysis," Sudderth listed the balance of his liability to the State of Louisiana as $40,000, with monthly payments of $2,600. The record indicates that, as of March 1995, Sudderth owed $10,400 to the State of Louisiana and his last of 30 payments was made on July 6, 1995. Even if there was outstanding interest due the State of Louisiana, his agreement with the State was completed. The bankruptcy court's finding that Sudderth's representation on the 433-A forms that he still owed $40,000 and a monthly payment of $2,600 was willful is not clearly erroneous.
Sudderth's argues that he did not know that 1099 income should have been listed on Form 433-A. In the "other income" portion of section V, "Monthly Income and Expense Analysis," Sudderth noted that the payment of $2,600 to the State was not reflected as income or an expense, but he had included that amount on his income tax return. However, nowhere on the March or August 1995 433-A does Sudderth indicate that he was receiving 1099 income on a regular basis in 1995 in addition to the $2,600. The record indicates that Sudderth's 1995 miscellaneous income as reflected on Form 1099 was $79,425, and Sudderth withdrew funds in the amount of $32,192 before he completed the August Form 433-A. Moreover, as early as 1991, Sudderth was advised by his counsel that he was required to complete the 433-A forms as comprehensibly as possible. Sudderth signed a declaration under penalty of perjury that the information on Form 433-A was true, correct, and complete. Even if the information was available to the Internal Revenue Service from supplemental sources, the record establishes that Sudderth knew that he was required to include this information in Form 433-A. The bankruptcy courts finding that Sudderth's failure to provide complete collection information was willful omission is not clearly erroneous.
Further, the evidence supports the bankruptcy court's finding that Sudderth attempted to evade taxes by shifting income and stock to his wife. During the marriage, Roberts received income for her work at the clinic that exceeded Sudderth's income. He was the sole shareholder of the corporations until 1996 and made the decisions concerning the amount each was paid. In view of Roberts' apparent lack of experience and specialized skills, the bankruptcy court's findings that her salary was not commensurate with her skill level and that Sudderth arranged for business income to flow to Roberts instead of him in order to evade or defeat the payment of taxes are not clearly erroneous. In light of the totality of Sudderth's conduct, the bankruptcy court's finding that the transfer of ownership of Bariatric stock to Roberts was part of his willful attempt to evade or defeat the payment of taxes is not clearly erroneous.
Accordingly, the evidence supports the bankruptcy court's findings that Sudderth willfully engaged in conduct to evade or defeat the tax within the meaning of § 523(a)(1)(C), and the conclusion that the past due taxes owed by Sudderth are nondischargeable is affirmed.
JUDGMENT
The judgment of the bankruptcy court in favor of the United States of America, Department of the Treasury, Internal Revenue Service, and against E. Ward Sudderth is hereby AFFIRMED.