UNITED STATES OF AMERICA v. JERRY B. CLAYTON, et al

Filing 79

MEMORANDUM OPINION and ORDER re 51 MOTION for Summary Judgment. The court finds that a genuine dispute of material fact exists for trial. Clayton's motion for summary judgment (Doc. 51 ) is DENIED. Signed by JUDGE THOMAS D. SCHROEDER on 1/6/2012. (Solomon, Dianne) .

IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF NORTH CAROLINA
UNITED STATES OF AMERICA,

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Plaintiff,
v.
JERRY B. CLAYTON, DEBORAH P.
CLAYTON, ALLENE S. CLAYTON,
EDWIN L. CLAYTON, MARIA D.
CLAYTON, KEN A. CLAYTON, and
GAIL A. CLAYTON,
Defendants.

1:10CV198

MEMORANDUM OPINION AND ORDER
THOMAS D. SCHROEDER, District Judge.
This is a tax case in which the United States of America
(or “Government”) seeks recovery of alleged unpaid taxes and
penalties.
Clayton

Before the court is the motion of Defendant Jerry B.

(“Clayton”)

for

summary

Rule of Civil Procedure 56.
general

discharge

from

judgment

(Doc. 51.)

his

previous

pursuant

to

Federal

Clayton contends that a
bankruptcy

proceedings

protects him from the Government‟s attempt to pursue its claims
and,

alternatively,

sufficient

evidence

the
to

Government

support

them.

has

failed

The

argument on the motion on January 6, 2012.

court

to

muster

heard

oral

For the reasons set

forth below, the court finds there are genuine disputes as to

material facts that warrant trial, and Clayton‟s motion will be
denied.
I.

BACKGROUND
The record evidence, taken in the light most favorable to

the Government as the non-moving party, reveals the following:
At all times relevant, Clayton was a successful criminal
defense

attorney

practicing

in

North

Carolina.

He

and

his

second wife, Defendant Deborah P. Clayton (“Deborah”), timely
filed joint income tax returns for tax years 2002 through 2007
that

reported

significant

income

from

his

practice,

which

Clayton operated as a sole proprietorship:
Year

Net Business Income

2002

$798,129

2003

$780,663

2004

$530,662

2005

$769,269

2006

$807,674

2007

$1,200,000

TOTAL

$4,886,397

(Doc. 51-3 at 117; Doc. 55-5; Doc. 55-6.)1

However, for these

years, the Claytons paid only a fraction of the federal income
tax they owed.

For the years in question, the Claytons‟ federal

1

Clayton was specifically asked about, and admitted, to his signatures
on his tax returns for years 2003, and 2005 through 2007. (Doc. 51-3,
at 23, 88-89, 95-96, 108, 111, 114, 142.)
There is no dispute he
filed the returns timely.

2

tax liability totaled approximately $1.6 million before interest
and

penalties,

and

the

Internal

Revenue

Service

(“IRS”)

has

subsequently levied a bill against them for all unpaid income
taxes.2

(Doc. 51-3 at 24.)

On March 11, 2010, the Government initiated this action
against

Clayton

Clayton‟s

tax

and

other

liability

members

for

tax

of

his

years

family

2002

to

through

reduce
2007

to

judgment (Count I) and to foreclose on property owned jointly by
Clayton, his brothers, and their spouses to satisfy a tax lien
undergirded

by

“Count III”).

the

tax

liability

(Doc. 1.)

in

Count

I

(mislabeled

as

Before filing an answer, and faced

with these and other debts (that Clayton argues were related to
his

wife‟s

health

and

their

children‟s

education

expenses),

Clayton filed for Chapter 7 bankruptcy protection on May 22,
2010.

(Doc. 13; Doc 44 at 2.)

Clayton‟s bankruptcy filing

automatically stayed this action.

See 11 U.S.C. § 362.

In the

bankruptcy proceedings, Clayton listed the United States as a
creditor,

but

neither

Clayton

nor

the

Government

sought

a

determination from the bankruptcy court whether or not his tax
liabilities

were

nondischargeable

statutory exception.

in

bankruptcy

based

on

any

On September 2, 2010, the bankruptcy court

entered a general discharge of Clayton‟s debts.
2

Discharge of

Clayton and his wife have separated, and the court entered a default
judgment against Deborah on September 1, 2010. (Doc. 22.)

3

Debtor at 1, In re Clayton, No. 10-80899 (Bankr. M.D.N.C. Sept.
2, 2010), Doc. 31.
As Clayton‟s bankruptcy drew to a close, the United States
moved to reopen this action (Doc. 19), which the court did on
September 27, 2010 (Doc. 28).

On October 15, 2010, Clayton

answered the Government‟s complaint and raised several defenses,
including claims that “[s]ome or all of [his] debt(s)” had been
discharged in bankruptcy, that “[s]ome or all of the income tax
liability” had been paid, and that the Government‟s claims for
equitable

were

relief

barred

estoppel, and unclean hands.

by

the

doctrines

of

waiver,

(Doc. 30.)

On July 29, 2011, Clayton filed a motion for judgment on
the pleadings.
December
motion

13,

upon

(Doc. 43.)
2011,

the

the

In a memorandum opinion entered

court

Government‟s

conditionally
amendment

of

denied
its

Clayton‟s

complaint

to

include allegations of the willful evasion theory upon which it
was intending to proceed, and as to which it had given all
parties notice in the Rule 26(f) report over one year earlier
and upon which discovery had already been conducted.

United

States v. Clayton, No. 10CV198, 2011 WL 6180033 (M.D.N.C. Dec.
13,

2011).

The

parties

have

subsequently

filed

amended

pleadings in compliance with the court‟s ruling,3 and the court

3

Clayton has moved the court to reconsider its ruling denying his
motion for judgment on the pleadings.
(Doc. 67.)
The court has

4

treats Clayton‟s present motion for summary judgment as directed
to the claims in the amended complaint.
Clayton contends that he was a “poor businessman,” focused
on

his

law

practice,

wife/business

and

manager,

left

all

Deborah,

financial

to

whom

he

matters
also

to

delegated

responsibility for complying with his tax obligations.
51-3 at 68, 80-82.)

his

(Doc.

He also says he only “skimmed” his tax

returns and denies he was aware of his specific tax liabilities.
(Id. at 88-89.)

Beginning in 2000, Clayton contends, he came

upon

because

hard

times

of

medical

issues

related

to

his

daughter and, subsequently (at some unspecified time), his wife
when

they

suffered,

among

other

things,

significant

health issues requiring expensive intervention.

mental

He points to

$98,000 in medical expenses incurred in 2002 (id. at 68) and the
“heavy financial demands” of college educations for several of
his four children (Doc. 52 at 3).

According to Clayton, his

wife‟s initially undetected deterioration of mental health, in
conjunction

with

her

coordination

of

unusually

large

distributions from their retirement fund, caused them to fall
behind in their tax payments.

(Id.)

This was compounded, he

claims, by several loans he made to his law practice.

(Id.)

When questioned about specific items, however, Clayton claimed
concluded that no change in the ruling is warranted. (Doc. 78.) For
that reason, any arguments in his summary judgment briefing raising
the same legal arguments are rejected for the same reasons previously
noted by the court.

5

he was afflicted with several bouts of “trans-global amnesia,”
which prevent him from recalling much information.
at 8-13.)

(Doc. 51-3

(He makes this claim even though he still actively

practiced law at the time of his September 2011 deposition. (Id.
at 19.))
The Government, on the other hand, has provided evidence
that

Clayton

engaged

in

an

extravagant

lifestyle

and

made

payments for non-necessities while being aware that he and his
wife

were

increasingly

obligations.
monthly

falling

behind

in

their

federal

tax

Initially, the Government points to his $10,000

mortgage

on

his

$2.2

million

home

(id.

at

30,

93),

complete with swimming pool and collection of exotic animals,
including zebras, leopards, monkeys, and horses; the Claytons‟
monthly electric bill alone was $2,000 (id. at 33-37, 59-62).
In

addition,

throughout

2002

through

2007,

Clayton

voluntarily paid $1,500 a month ($18,000 annually) to his exwife, even though he had no legal obligation to do so.4
39-40.)

(Id. at

He also made significant payments for his children‟s

college and graduate school education.

Though Clayton claimed

he did not know precisely when his children attended college,
the likely years can be extrapolated from the testimony he gave.
4

Clayton contended at oral argument that these payments were for his
ex-wife‟s medical expenses.
Clayton‟s deposition does not support
this.
(Doc. 51-2 at 39.)
Even if it did, it would be immaterial
because the point is that, while well-intentioned, the payments were
not legally required.

6

Thus,

for

one

daughter,

he

paid

for

six

or

seven

years

of

college tuition and living expenses extending through 2002 (and
perhaps 2003).

(Id. at 45-46 (noting he paid “everything”).)

For a son, Clayton paid tuition and all living expenses for
education at Barton College, a private institution, during 2002
through 2005; the annual tuition was approximately $26,000 to
$28,000 (less $1,800 in state stipend and an honors scholarship
of $2,250).

(Id. at 49-53.)

Thereafter, Clayton paid the son‟s

tuition and living expenses for a Masters degree program at Duke
University,

another

2005 through 2006.

private

institution,

(Id. at 52-53.)

during

approximately

Clayton then paid two more

years of living expenses (likely 2006 through 2007) for that
grown son‟s enrollment in a Ph.D. program at the University of
Minnesota.
four

years

(Id. at 55.)
of

college

Finally, another daughter attended
at

Greensboro

College,

a

private

institution, likely from 2004 through 2008, during which Clayton
paid her tuition, ranging from $26,000 to $30,000 annually, and
all expenses.

(Id. at 56-58.)

Clayton also regularly made payments of $300 a week to his
church, which would total approximately $15,600 a year, although
at some later point he reduced the payments to $100 a week (or,
$5,200 a year).

(Id. at 150-51.)

Clayton‟s tax return for 2003

also lists $52,000 in “gifts to charities.”

(Id. at 97-98.)

Moreover, Clayton purchased several new or late model vehicles

7

during these tax years:

a 2003 Mercedes-Benz for his 16 year-

old daughter in 2002, a 2003 Dodge Ram truck purchased in 2003
for

himself,

himself.

and

a

2006

Dodge

Charger

(Id. at 128; Doc. 55-4 at 4.)

bought

in

2005

for

The Government has also

provided copies of fifteen months of statements from American
Express for the Claytons‟ credit card purchases during 2003 and
2004.5

These alone reflect significant charges for discretionary

expenditures, including:

$1,000 to Royal Caribbean Cruise Line;

$9,681 to a Nix Collectibles store; $7,814 at JR Tobacco; $1,987
to

the

Durham

Bulls;

over

$16,000

on

clothing

stores;

and

monthly bills for satellite Direct TV, veterinary services, and
monthly

charges

for

a

private

dining

Club”).

club

(the

“University

(Docs. 57-1 through 57-7.)

The Government also points to significant cash withdrawals
from Clayton‟s IRA.

Clayton‟s Form 1099-R for 2002 shows a

5

At oral argument, Clayton objected to the authenticity of these
statements, but had not done so in his prior brief.
Apart from
Clayton‟s having waived the objection, the court finds that the
records are properly before the court for consideration. See Fed. R.
Civ. P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 324 (1986).
Clayton also contended at oral argument that his American Express
statements indicate that his wife made the bulk of the couple‟s
purchases, for which Clayton should not be legally responsible for
purposes of a determination of willful evasion.
A review of the
statements, covering a scattered selection of fifteen months between
January 2003 and October 2004, show that the invoices were addressed
to Clayton at his law office. They also indicate that he and his wife
spent approximately $17,271 per month on their American Express cards;
the purchases attributable to Clayton‟s personal card averaged
$11,190.33 monthly, while purchases on his wife‟s card averaged
$6,083.00 monthly. While certain purchases on both cards are plainly
attributable to Clayton‟s law practice, the $5,000 disparity between
Clayton‟s charges and his wife‟s fails to support Clayton‟s position
that his wife spent the bulk of the couple‟s money.

8

withdrawal

of

$241,000,

with

$48,000

being

withheld

for

tax

liability; while his 2004 return shows a withdrawal of $475,000.
Clayton claims he does not know why these huge withdrawals were
made.

(Doc. 51-3 at 87-88, 91, 104-07.)

Clayton did admit that

his wife was apparently supporting a private school she founded
– Greenbrier Academy – because, as Clayton put it, “tuition will
not

pay

for

a

private

school

on

its

own.”

(Id.

at

75.)

However, on this record the Government has not linked any of
these withdrawals, or any

disbursement

at all, to a payment

supporting the Greenbrier Academy.
As to Clayton‟s claims that he spent his money on medical
expenses, the Government points out that his tax returns show
$98,000 in medical expenses in 2002, $12,535 in 2003, $57,000 in
2004, and $0 in 2005, 2006, and 2007.
109, 112, and 116.)

(Id. at 95-97, 104-07,

Thus, Clayton‟s total documented medical

expenses for the tax years at issue were $167,535, while his
total net business income was more than $4.8 million.
The

Government

also

notes

that

Clayton

admitted

that

throughout this entire period he was aware of his duty to file
returns

and

to

pay

taxes.

(Id.

at

142.)

Clayton

further

conceded that he knew he was not making his tax payments:
Q

At the time you filed your tax returns for 2002
through 2007, did you know that you hadn‟t fully
paid your federal income taxes?

A

Yes, ma‟am.

9

(Id.)

He

even

“got

on”

his

wife

Deborah

quarterly estimates due the Government.

about

paying

the

(Id. at 82, 83, 142.)

At one point in his deposition, Clayton said he decreased his
personal expenses in response to the outstanding liabilities,
reflecting an awareness of his liability and nonpayment.
at 92.)

(Id.

In other testimony, however, Clayton admitted that he

“didn‟t want to be bothered by all this stuff, frankly,” “didn‟t
pay attention to my business, let my wife do it,” but “thought
everything was being taken care of.”

(Id. at 91, 121, 144.)

As

to his involvement, he offered contradictory statements that his
taxes were not paid because “I didn‟t have any money” to pay
them (id. at 83) and “I‟m the cash cow” (id. at 148).
Clayton challenges the temporal nature of the Government‟s
evidence and reiterates the alleged hard times he was enduring.
He

responds

that

his

house,

pool,

and

collection

of

“zoo”

animals were all purchased years before his tax problems began
and thus cannot be the basis of a willful evasion claim.
66 at 2.)

(Doc.

He makes the same claims as to his vehicles, all of

which, except for “inexpensive Dodge vehicles” used by him and
his wife, he argues, were purchased in the years before 2003.
(Id.)

He also contends that the Greenbrier Academy was begun

before

the

medical

conditions

that

necessitated

his

wife

Deborah‟s “tremendous medical expenses in 2002” (id. at 2-3) and
argues that he simply did not have the money to pay his taxes

10

because

of

the

medical

expenses,

claiming

(without

further

evidence) that there were more expenses than documented.
II.

ANALYSIS
A.

Summary Judgment Standard

Summary judgment is appropriate where an examination of the
pleadings,

affidavits,

and

other

proper

discovery

materials

demonstrates that no genuine dispute as to any material fact
exists, thus entitling the moving party to judgment as a matter
of law. Fed. R. Civ. P. 56(a); Celotex Corp. v. Catrett, 477
U.S. 317, 323 (1986).

The party seeking summary judgment bears

the burden of initially demonstrating the absence of a genuine
dispute of material fact.
burden

is

met,

the

Celotex, 477 U.S. at 323.

non-moving

party

must

then

If this

affirmatively

demonstrate a genuine dispute of material fact which requires
trial.
U.S.

Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475

574,

587

(1986).

There

is

no

issue

for

trial

unless

sufficient evidence favoring the non-moving party exists for a
fact finder to return a verdict for that party.

Anderson v.

Liberty Lobby, Inc., 477 U.S. 242, 250 (1986); Sylvia Dev. Corp.
v. Calvert Cnty., 48 F.3d 810, 817 (4th Cir. 1995).

Moreover,

on summary judgment, the non-moving party is entitled “to have
the credibility of [its] evidence as forecast assumed, [its]
version

of

all

that

is

in

dispute

accepted,

all

internal

conflicts in it resolved favorably to [it], the most favorable

11

of

possible

alternative

inferences

from

it

drawn

in

[its]

behalf; and finally, to be given the benefit of all favorable
legal

theories

invoked

by

the

evidence

so

considered.”

Charbonnages de France v. Smith, 597 F.2d 406, 414 (4th Cir.
1979); see Metric/Kvaerner Fayetteville v. Fed. Ins. Co., 403
F.3d 188, 197 (4th Cir. 2005).
failure

to

demonstrate

that

In a tax case, the debtor‟s

there

is

no

genuine

dispute

of

material fact as to whether a particular debt is dischargeable
in bankruptcy is grounds for denying the debtor‟s motion for
summary judgment.

See O‟Neal v. United States (In re O‟Neal),

Bankr. No. 08-70577-CMS-7, 2010 WL 3398403, at *14 (Bankr. N.D.
Ala.

Aug.

26,

2010)

(denying

a

debtor‟s

motion

for

summary

judgment where he failed to demonstrate that no genuine issue of
material

fact

existed

as

to

the

Government‟s

claim

of

nondischargeability under 11 U.S.C. § 523(a)(1)(C)).
B.
A

General Principles
discharge

in

bankruptcy

generally

prevents

a

from pursuing pre-bankruptcy debts against a debtor.

creditor
Congress,

however, has specifically excepted particular debts, including
certain federal tax debts, from discharge.

United States v.

Fegeley (In re Fegeley), 118 F.3d 979, 983 (3d Cir. 1997).
of those exceptions are significant to this case.

Two

First, under

11 U.S.C. § 523(a)(1)(C), a discharge in bankruptcy “does not
discharge

an

individual

debtor

12

from

any

debt

for

a

tax

or

customs duty with respect to which the debtor made a fraudulent
return or willfully attempted in any manner to evade or defeat
such tax.”

Second, under 11 U.S.C. §§ 523(a)(1)(A), 507(a)(8),

a debtor‟s bankruptcy does not discharge tax debts arising from
tax years where returns for those years are due within three
years before the bankruptcy filing.

The Government argues that

section 523(a)(1)(C) excepts Clayton‟s tax debts for tax years
2002

through

2007

from

discharge,

while

section

523(a)(1)(A)

operates as an independent and additional exception for tax year
2007.
The

Government

preponderance

of

nondischargeable.
(1991).

bears
the

the

burden

of

proving

that

a

tax

evidence

Grogan

v.

Garner,

498

U.S.

by

debt
279,

a
is

286-87

This policy promotes the Bankruptcy Code‟s goal of

providing a “fresh start” to the “honest but unfortunate debtor”
while recognizing that the Bankruptcy Code does not afford “a
completely

unencumbered

new

beginning.”

Id.

Exceptions

to

discharge, meanwhile, are strictly construed in favor of the
debtor.
There

is

Dalton v. IRS, 77 F.3d 1297, 1301 (10th Cir. 1996).
authority

suggesting

that

each

tax

year

should

evaluated separately, and so the court will do so here.

be

Lynch

v. United States (In re Lynch), 299 B.R. 62, 83 & n.97 (Bankr.
S.D.N.Y. 2003).

13

1.
Section
“willful

Section 523(a)(1)(C)
523(a)(1)(C)

attempt

to

does

evade

not

or

defeat

articulate standards for doing so.
not

cited,

nor

has

the

define

court

a

located,

courts

have

reached

a

constitutes

tax,”

Id. at 79.

precedent construing section 523(a)(1)(C).
appellate

what

nor

does

a
it

The parties have

any

Fourth

Circuit

Yet over time, other

consensus

that

the

willful

evasion of tax debts under section 523(a)(1)(C) comprises both a
conduct element and a mental state element.

In re Birkenstock,

87 F.3d 947, 951 (7th Cir. 1996) (“The plain language of the
second

part

of

§ 523(a)(1)(C)

comprises

both

a

conduct

requirement (that the debtor sought „in any manner to evade or
defeat‟ his tax liability) and a mental state requirement (that
the debtor did so „willfully‟).”); see also Griffith v. United
States (In re Griffith), 206 F.3d 1389, 1396 (11th Cir. 2000)
(en banc) (same).
a.

Conduct Requirement

Section 523(a)(1)(C) “encompasses both acts of commission
as well as culpable omissions.”

Bruner v. United States (In re

Bruner), 55 F.3d 195, 200 (5th Cir. 1995).

However, a debtor‟s

mere failure to pay his taxes is insufficient proof to establish
that he has acted to evade or defeat his taxes.

E.g., Haas v.

IRS, 48 F.3d 1153, 1158 (11th Cir. 1995), overruled on other
grounds, In re Griffith, 206 F.3d 1389.

14

“Rather, nonpayment is

relevant evidence which a court should consider in the totality
of conduct to determine whether or not the debtor willfully
attempted to evade or defeat taxes.”

Dalton, 77 F.3d at 1301.

Thus, nonpayment coupled with the failure to file timely
returns, In re Birkenstock, 87 F.3d at 952, or the concealment
of assets, In re Bruner, 55 F.3d at 200, demonstrate the conduct
requirement
sufficient

of
to

recordkeeping,

section
meet

the

523(a)(1)(C).
conduct

intra-family

Other

element

transfers

factors

include
for

found

inadequate
insufficient

consideration, transfers made in the face of serious financial
difficulties, and a lavish or extravagant lifestyle.

Geiger v.

IRS (In re Geiger), 408 B.R. 788, 791 (C.D. Ill. 2009); Hamm v.
United States (In re Hamm), 356 B.R. 263, 276-77 (Bankr. S.D.
Fla. 2006);

see also Volpe v. IRS (In re Volpe), 377 B.R. 579,

587 (Bankr. N.D. Ohio 2007) (holding that the IRS proved the
conduct element of section 523(a)(1)(C) by showing, among other
things, that a debtor failed to pay his taxes “even though he
had enough money to pay for non-necessities such as vacations
and private school”).

Significantly, such acts or omissions are

relevant if they took place either during the tax year(s) in
which the debtor failed to pay or during later years while the
tax obligation remained due.

In re Hamm, 356 B.R. at 276.

Pertinent here is In re Lynch, where the court found that a
debtor‟s

payments

of

discretionary

15

expenses

constituted

sufficient affirmative conduct to constitute willful evasion of
the payment of tax liabilities.

In that case, the debtor had

amassed large tax debts because deductions based on her tax
shelter investments were disallowed after years of litigation.
When the taxes (for the 1980s tax years) came due, the debtor
claimed

she

was

unable

to

pay.

In

applying

section

523(a)(1)(C), the court found that the debtor “knowingly spent
several thousand dollars per month on discretionary expenditures
that could not reasonably be regarded as essentials, knowing
that her tax obligations had to be satisfied, and were unpaid.”
In re Lynch, 299 B.R. at 77.

For example, she continued to pay

volitional tithes to her church and made gifts totaling $13,248
a year, bought dinners at restaurants several nights a week,
took trips, leased an expensive Manhattan, New York apartment,
and

paid

occupation.

$6,153

in

annual

tuition

for

courses

Her credit card averaged $2,486 a month.6

for

her

The court

concluded that her conscious choice to make these distributions
on

nonessential

items

“is

a

classic

example

of

traditionally held to warrant nondischargeability.”

the

conduct

Id. at 86.

Similarly, in Hawkins v. Franchise Tax Bd., 447 B.R. 291
(N.D. Cal. 2011), the court, relying on In re Lynch, concluded
6

The court found that these outlays were sufficient to meet the
conduct element of a willful evasion claim apart from other evidence
that the debtor also cancelled a direct deposit of her paycheck to
evade the Government‟s ability to garnish her wages. In re Lynch, 299
B.R. at 76.

16

that

a

debtor‟s

extravagant

lifestyle,

which

included

the

purchase of four vehicles in a family of just two drivers, was
sufficient to meet section 523(a)(1)(C)‟s conduct requirement
where the debtor recognized that he would be unable to satisfy
his debts and anticipated that he would be forced to file for
bankruptcy.
that

the

Id. at 302.

debtor

unreasonable

and

“avoided

According to the court, the finding
the

unnecessary

collection

of

discretionary

tax

by

making

expenditures

at

a

time when he knew he owed taxes and knew he would be unable to
pay

those

taxes

. . .

is

sufficient

requirement of Section 523(a)(1)(C).”

to

satisfy

the

conduct

Id. (internal citation

and quotation marks omitted).
And in United States v. Jacobs (In re Jacobs), 490 F.3d 913
(11th Cir. 2007), the Eleventh Circuit concluded that section
523(a)(1)(C)‟s

conduct

requirement

was

“further

satisfied

[the debtor‟s] large discretionary expenditures.”
The

court

concluded

that

the

debtor‟s

large

by

Id. at 926.
gifts

to

his

children and church, as well as his significant discretionary
expenditures on luxury items, expensive automobiles, and golf
memberships were a factor in determining the debtor had met the
conduct requirement.

As the court summarized, “[s]uch large

discretionary expenditures, when a taxpayer knows of his or her
tax liabilities, is capable of meeting them, but does not, are
relevant to § 523(a)(1)(C)‟s conduct element.”

17

Id.

b.
Section

Mental State Requirement

523(a)(1)(C)

also

requires

that

willfully in evading or defeating his taxes.

the

debtor

act

The Government

need only demonstrate that the debtor‟s actions were willful –
not that he acted with fraudulent intent.
F.3d at 984.

In re Fegeley, 118

A debtor‟s actions are willful if his actions are

“voluntary, conscious, and intentional.”

Toti v. United States

(In re Toti), 24 F.3d 806, 809 (6th Cir. 1994).
the

mental

state

requirement

of

section

Thus, to meet

523(a)(1)(C),

the

Government must prove that the debtor “(1) had a duty to file
income tax returns and pay taxes; (2) knew that he had such a
duty; and (3) voluntarily and intentionally violated that duty.”
United States v. Fretz (In re Fretz), 244 F.3d 1323, 1330 (11th
Cir. 2001).
The parties agree that the first two components are not at
issue in this case.

In his deposition, Clayton admitted that he

knew he had a duty to file tax returns and to pay his taxes, as
he in fact filed all of his returns.
95-96,

108,

111,

114,

142.)

As

(Doc. 51-3, at 23, 88-89,
a

result,

only

the

third

component – that Clayton voluntarily and intentionally violated
that duty – is disputed.
When determining if a debtor voluntarily and intentionally
violated his duty to pay taxes, courts traditionally look to
“badges of fraud.”

See, e.g., United States v. Mitchell (In re

18

Mitchell), 633 F.3d 1319, 1322 n.4 (11th Cir. 2011).

Badges of

fraud include: “„(1) the recurrence of the understatement of
income for more than one tax year, (2) the understatement of
income,

(3)

implausible

or

inconsistent

explanations

of

behavior, (4) inadequate records, (5) transfer of assets to a
family member, (6) transfer for inadequate consideration, (7)
transfer that greatly reduced assets subject to IRS execution,
and

(8)

transfers

difficulties.‟”

made

in

the

face

of

serious

financial

Hassan v. United States (In re Hassan), 301

B.R. 614, 620 (S.D. Fla. 2003) (quoting In re Spiwak, 285 B.R.
744, 751 (S.D. Fla. 2002)).

However, lavish spending coupled

with the knowledge of tax debts is a further indication that a
debtor acts willfully in the evasion of his tax obligations.

In

re Hamm, 356 B.R. at 285-86 (considering a debtor‟s significant
expenditures

when

determining

if

a

debtor‟s

actions

met

the

mental state requirement of section 523(a)(1)(C)).

Indeed, “[a]

typical

pursuant

case

of

non-dischargeable

tax

liability

to

§ 523 of the Bankruptcy Code often involves debtors who . . .
live a lavish lifestyle they cannot afford . . . while making no
effort to satisfy their tax liability.”

Hawkins, 447 B.R. at

296 (alternations in original) (quoting Rhodes v. United States
(In re Rhodes), 356 B.R. 229, 235 (Bankr. M.D. Fla. 2006)).

19

c.

Discussion

Clayton argues that despite his success as a lawyer he was
a poor businessman, was obligated to spend much of his money on
his wife‟s and daughter‟s medical expenses, and delegated the
handling of tax and financial matters to his wife.
reasons,

he

significant

claims
income

he
that

simply
he

was

earned

unaware
went.

of
On

For these
where

this

the

record,

however, the court finds that the Government has demonstrated a
genuine dispute of material fact concerning whether Clayton‟s
payments on apparently discretionary items were made with the
requisite

mental

state

to

evade

his

income

tax

obligations.

There is evidence that Clayton was aware of his ongoing income
tax obligations and nevertheless spent money on discretionary
items.

Indeed, he admitted during his deposition that when he

filed his tax returns for 2002 through 2007 (which would have
been filed in 2003 through 2008), he was aware that he had not
fully paid his federal income taxes at that time.
142.)

(Doc. 51-3 at

Despite his claim that he instructed his wife to make the

necessary tax payments (Doc. 51-3 at 82) and “didn‟t have any
money” to pay his taxes (id. 51-3 at 83), he appears to have
continued to spend large sums on unnecessary expenditures and
luxury purchases and made substantial gifts to charities, his
church, and his children.

20

Significant among these expenditures is the monthly payment
of $1,500 Clayton made to his ex-wife, Virginia Clayton, during
each tax year in question.
gratuitous

payments

(Doc. 51-3 at 39-40.)

totaling

$18,000

per

year

These were
that

Clayton

continued to make in the face of mounting financial burdens and
his significant tax debts to the IRS.
payments

to

an

ex-wife

beyond

that

Courts have held that
required

by

a

marital

settlement agreement or court order can serve as proof that a
debtor

willfully

obligations.

and

intentionally

sought

to

avoid

his

tax

See Schwartz v. United States (In re Schwartz),

Bankr. No. 6:03-bk-06007-KSJ, 2009 WL 361383, at *4 (Bankr. M.D.
Fla.

Jan.

9,

2009).

These

payments

satisfy

section
Cf. In re

523(a)(1)(C)‟s conduct and mental state requirements.

Griffith, 206 F.3d at 1396 (concluding that a debtor‟s intrafamily transfers of property for little or no consideration were
sufficient to meet section 523(a)(1)(C)‟s conduct requirement);
see also In re Lynch, 299 B.R. at 75 n.47, 85-86 (concluding
that a debtor was not entitled to discharge of her tax debts
where she elected to make discretionary expenditures and gifts
to charity in lieu of paying her taxes).
There

is

further

evidence

that

Clayton

prioritized

discretionary spending over his income tax obligations.

his
See,

e.g., In re Jacobs, 490 F.3d at 927 (indicating that a debtor
willfully

evades

tax

payments

where

21

he

is

aware

of

a

legal

responsibility to pay, could have used portions of his income to
do so, but “made a conscious decision not to apply the monies
[he

earned]

towards

his

tax

debt”

(alteration

in

original)

(quoting Stamper v. United States (In re Gardner), 360 F.3d 551,
561 (6th Cir. 2004))).

For example, Clayton testified he made

routine gifts of between $100 and $300 per week to his church
from 2002 through 2007 (Doc. 51-1 at 151).

See In re Lynch, 299

B.R. at 75 (indicating a debtor is not permitted to prioritize
payments to his church over his income tax obligations).
also

paid

tuition

and

living

expenses

for

children during the tax years in question.

several

of

He
his

Indeed, there is

record evidence that, among other education expenses, Clayton
paid college tuition and living expenses for a daughter in 2002,
a son from 2002 through 2005, and another daughter from 2004
through 2008, thus covering each tax year in question.

See In

re Volpe, 377 B.R. at 589; United States v. Ryan (In re Ryan),
286 B.R. 141, 156 (Bankr. W.D. Mo. 2002) (finding a “clear-cut
case” of willful evasion of taxes where an individual failed to
pay taxes for fourteen years, despite paying $30,000 a year in
tuition, room, and board so that one of the debtor‟s children
could attend a private university).7
7

In addition, Clayton‟s 2003

The Government has proffered evidence that such college and graduate
expenses were nonessential.
Courts are not uniform as to whether
educational expenses should be regarded as necessities, and on this
record, because of the presence of several other discretionary
payments throughout each tax year, the court need not resolve whether

22

tax return lists $52,000 in gifts to charities (Doc. 51 at 9596).

In re Jacobs, 490 F.3d at 926 (noting that donations of

$12,152

and

$12,000

nondischargeability
discretionary

were

under

outlays

belie

relevant

to

determining

section

523(a)(1)(C)).

Clayton‟s

contention

Such

that

he

was

simply unable to meet his tax obligations and raise a question
for the fact-finder.
In addition to purchasing a 2003 Mercedes-Benz, a luxury
vehicle, for his daughter on her 16th birthday, Clayton also
spent money on himself.

He purchased a Dodge Ram truck in 2003

and a Dodge Charger in 2005 – both for his personal use.
51-3

at

128.)

meanwhile,

His

indicate

sizeable

monthly

extensive

credit

expenditures

card
on

(Doc.
bills,

clothes,

collectables, tobacco products, and baseball games, among other
items.

(Docs. 57-1 through 57-7.)

Such purchases in the face

of his unpaid tax obligations are further evidence that Clayton
willfully attempted to evade his taxes
dispute

of

fact.

See

In

re

and create a genuine

Mitchell,

633

F.3d

at

1329

(explaining that a debtor‟s discretionary spending supports a
finding of willful evasion of tax payments).
At
States

oral
v.

argument,

Storey,

640

Clayton
F.3d

directed

739

(6th

the
Cir.

court
2011),

to

United

for

the

any portion of these expenses might in fact qualify as necessities.
See In re Lynch, 299 B.R. at 84 n.101.

23

proposition that mere nonpayment of taxes cannot constitute a
basis for denying a debtor discharge of his tax debts.
however, does not advance Clayton‟s argument.

Storey,

The Storey court

concluded that a debtor who simply failed to pay her taxes could
not

be

said

to

have

evaded

her

meaning of section 523(a)(1)(C).
debtor‟s

only

significant

tax

obligations

Id. at 745.

purchase

during

within

the

Apparently, the

the

tax

years

in

question was a home that was no more lavish that her previous
residence,

and

there

was

no

evidence

extravagantly during that period.

Id.

that

she

lived

The court went on to

note that the outcome might have been different had the debtor
made

significant

purchases

after

she

ceased

making

her

tax

payments or “chose[n] to engage in recreational or philanthropic
activities instead of paying her taxes.”

Id.

Here, by contrast, there is evidence that Clayton chose to
engage in recreational and philanthropic activities instead of
paying

his

taxes.

There

is

also

evidence

he

engaged

in

significant purchases and made substantial gifts after he became
aware of his tax debts.
the

Government

has

On this record, in contrast to Storey,

demonstrated

sufficient

facts

to

indicate

that Clayton was engaged in more than mere nonpayment of his tax
obligations.
Clayton

finally

argues

that

he

is

entitled

to

summary

judgment as to claims for tax year 2002 because there is no

24

evidence that he knew until 2003 that he was in arrears for his
2002 tax payments.

Assuming this to be factually true, Clayton

overlooks the fact that there is evidence that when his 2002 tax
liability

came

purposefully

due

spend

in
on

2003

and

needless

previous tax year liability.

thereafter,
items

in

lieu

276

(noting

that

acts

continued
of

paying

to
his

Therefore, the court declines to

grant him summary judgment on this record.
at

he

and

omissions

See Hamm, 356 B.R.
of

willful

evasion

occurring in later tax years are relevant if the prior years‟
taxes remained unpaid).
d.

Conclusion

The Government has demonstrated record evidence sufficient
to show that Clayton had an obligation to pay income taxes, knew
of that duty, and while making an extraordinary income willfully
evaded

that

duty

by

knowingly

prioritizing

expenditures over his income tax obligations.

discretionary

If such evidence

were to be believed, and depending on the credibility attributed
to Clayton‟s testimony, there is evidence upon which a factfinder could conclude that Clayton was not the type of “honest
but unfortunate debtor” contemplated by the Bankruptcy Code who
is entitled to discharge his tax debts.
for summary judgment will be denied.

25

Accordingly, his motion

2.

Section 523(a)(1)(A)

Another discharge exception applicable to certain tax debts
is section 523(a)(1)(A).

It excepts from discharge “any debt

for a tax or customs duty of the kind and for the periods
specified in section 507(a)(3) or 507(a)(8) . . ., whether or
not a claim for such tax was filed or allowed.”
§ 523(a)(1)(A).

11 U.S.C.

Section 507(a)(8) specifically lists “unsecured

claims of governmental units . . . for a tax on or measured by
income or gross receipts for a taxable year ending on or before
the date of the filing of the [bankruptcy] petition for which a
return, if required, is last due, including extensions, after
three years before the date of the filing of the petition.”
U.S.C. § 507(a)(8)(A)(i).

11

Simply put, tax debts that arise from

tax returns that are due within three years before a debtor‟s
bankruptcy

filing

are

excepted

from

discharge

in

bankruptcy.

Range v. United States, 245 B.R. 266, 269 n.1 (S.D. Tex. 1999)
(“Tax for which a return was required to be filed within three
years preceding bankruptcy or after bankruptcy . . . is income
tax entitled to priority and therefore, not discharged.”).
Government

contends

that

section

523(a)(1)(A)‟s

applies to Clayton‟s tax debts for tax year 2007.

26

The

exception

Clayton
Government‟s

does

not

raise

argument,8

a

but

substantive
the

response

application

523(a)(1)(A) to tax year 2007 is straightforward.

of

to

the

section

See Waugh v.

IRS (In re Waugh), 109 F.3d 489, 491 (8th Cir. 1997) (noting
that the application of section 523(a)(1)(A) is ordinarily a
“relatively

simple

process”).

It

is

undisputed

that

the

Government‟s tax claims against Clayton were unsecured and that
Clayton‟s taxes are measured as a percentage of his income.
only

question

of

law,

therefore,

is

whether

The

section

523(a)(1)(A)‟s three-year look-back period applies to Clayton‟s
2007 tax debts.
B.R.

3,

7

See Fontes v. United States (In re Fontes), 228

(Bankr.

N.D.

Ala.

1998)

(noting

that

section

523(a)(1)(A) limits dischargeability to unpaid taxes due within
three years of a bankruptcy filing).
Applying section 523(a)(1)(A) to the facts in the record,
the court finds that the Government has demonstrated a prima
facie case of a claim under section 523(a)(1)(A)‟s three-year
look-back

provision

to

Clayton‟s

2007

taxes.

While

the

Government has not submitted evidence on when Clayton‟s various
tax obligations became due, the court takes judicial notice that
federal income taxes for calendar year 2007 became due no sooner
8

Clayton objects to the Government‟s section 523(a)(1)(A) claim on the
grounds it is not specifically referenced in the complaint or amended
complaint.
As the court noted in its prior ruling, the complaint
clearly raised sufficient facts to support this claim that has a
straightforward application. See Clayton, 2011 WL 6180033, at *7 n.7.

27

than April 15, 2008, see Lord v. Comm‟r, 525 F.2d 741, 744 (9th
Cir. 1975) (taking judicial notice that a taxpayer‟s 1961 tax
return did not have to be filed until April 15, 1962 (citing 26
U.S.C. § 6072)), and, thus, dischargeable only in a bankruptcy
petition filed after April 15, 2011, see, e.g., In re Waugh, 109
F.3d at 491 (explaining that a debtor‟s income taxes for 1987
became due on April 15, 1988 and, therefore, would have become
dischargeable in a bankruptcy occurring after April 15, 1991);
see also United States v. Acker (In re Acker), Bankr. No. 0941961, 2010 WL 3547221, at *5 (Bankr. E.D. Tex. Sept. 7, 2010)
(explaining that a debtor‟s tax obligations for tax year 2006
became due on April 15, 2007, which was within three years of
the

bankruptcy

petition,

and,

thus,

were

nondischargeable).

Clayton filed for Chapter 7 bankruptcy protection on May 22,
2010.

(Doc 13; Doc. 44 at 2.)

As a result, Clayton‟s tax

obligations for tax year 2007 were nondischargeable in his 2010
bankruptcy petition.

At the very least, this record contains

sufficient evidence to indicate that the Government has raised a
genuine

dispute

of

material

fact

as

to

whether

section

523(a)(1)(A) should render Clayton‟s tax debts for tax year 2007
non-dischargeable.

Accordingly, Clayton‟s motion for summary

judgment, at least as to tax year 2007, will be denied on that
basis as well.

28

III. CONCLUSION
For the reasons set forth above, therefore,
The court finds that a genuine dispute of material fact
exists for trial.

Clayton‟s motion for summary judgment (Doc.

51) is DENIED.
/s/
Thomas D. Schroeder
United States District Judge
January 6, 2012

29