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,
)
)
)
)
)
)
)
)
)
)
)
)
)
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
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