This matter came before the Court for trial on February 12, 1996, on the Debtor's complaint seeking a determination that his tax liability to the Internal Revenue Service for the tax years 1977-1981 was discharged in his bankruptcy. For the reasons set forth in the Memorandum Opinion entered on even date, it is
ORDERED that the Debtor's liability to the Internal Revenue Service is discharged.
ORDERED in the Southern District of Florida this 23rd day of September, 1997.
MEMORANDUM OPINION
FRIEDMAN, Bankruptcy Judge: This matter came before the Court February 12, 1996, for trial on the Debtor's complaint seeking a determination that his debt to the Internal Revenue Service ("IRS") was discharged in his bankruptcy. The IRS contends that the debt of the Debtor, James Henry Sternberg (the "Debtor"), was not dischargeable under Section 523(a)(1)(C) of the Bankruptcy Code because he willfully attempted to evade or defeat his taxes. Having considered the evidence, the candor and demeanor of the witnesses, the argument of counsel and for the reasons set forth below, the Court finds that the Debtor's debt to the IRS is discharged.
The Debtor is a radiologist who has practiced in South Florida since 1974. During the years 1977 through 1981, the Debtor invested in a tax shelter known as Imperial Finance., N.V. ("Imperial Finance"). Imperial Finance was a Netherlands Antilles corporation formed for the ostensible purpose of acquiring an option to lease mineral rights on certain land in South Africa. These rights were divided into "working interests" which were sublet to investors. According to the sublease agreements, each working interest entitled the investor to mine and remove diamonds in return for a minimum annual royalty payment. The Debtor made annual royalty payments in various amounts, ranging from $25,000 to $43,000 per year. The Debtor claimed tax losses, however, of amounts far greater than his annual royalty payment. In 1977, the Debtor claimed a loss of $125,170; 1979's claimed loss was $310,000; 1980's claimed loss was $200,000, and 1981's claimed loss was $175,000. The IRS examined the Debtor's returns for those years and disallowed the deductions. In March, 1985, the Debtor delivered an Offer in Compromise to the IRS offering to pay the IRS $200,000 at the time the offer was accepted, plus a percentage of his adjusted gross income over $100,000. This offer was rejected by the IRS. Later in 1985, the IRS issued statutory notices of deficiency to the
The tax return for 1978 was not included in the evidence submitted to the Court.
Debtor for the tax years 1977, 1978, 1979, 1980 and 1981. The combined deficiency for those years was $479,777.62. The Debtor then filed petitions with the United States Tax Court contesting the deficiencies. The cases, as well as all cases involving Imperial Finance, were assigned to Judge Charles E. Clapp, II.
Judge Clapp tried two test cases related to Imperial Finance: Fredkin v. Commissioner, 51 T.C.M. (CCH) 865 (1986) and Cheng v. Commissioner, 51 T.C.M. (CCH) 861 (1986). Judge Clapp ruled that the deductions taken by the taxpayers with respect to Imperial Finance were properly disallowed by the IRS. The Fredkin decision was affirmed by the First Circuit Court of Appeals on March 30, 1989. Referring to the Fredkin decision, Judge Clapp entered an order in the Debtor's tax case on November 1, 1989, requesting that the parties submit a decision document or show cause why a decision document should not be submitted (the "Tax Court Order"). In response, the Debtor contended that his case was more akin to Cheng and that the Court should wait until the Ninth Circuit determined that case before resolving the Debtor's case. In 1991, the Ninth Circuit decidedCheng. Ultimately, on March 2 and 3, 1994, the Tax Court entered its decisions in the Debtor's cases. The Tax Court determined the Debtor's tax liability for 1977 to be $50,816; 1978 — $116,723; 1979 — $81,049; 1980 — $114,631; and 1981 — $63,073. Thereafter, on July 14, 1995, the IRS assessed the tax deficiency owed by the Debtor.
While the Debtor's tax liability was in question, he married Marsha May ("May") on January 14, 1989. The day before they were married, the Debtor and May executed a pre-nuptial agreement (the "Agreement") which contained language to the effect that —
(1) the parties separate property owned before the marriage, acquired after the marriage, earned after the marriage and income derived from rents, dividends, profits, etc. would remain separate;
(2) the Debtor would own their principal residence in his name alone, but that if they remained married for 3 years, he would transfer title to the home to both names as tenants by the entirety;
(3) upon the Debtor's death, May would be entitled to any of his interest in their principal residence and a certain percentage of his net probate estate determined by the length of their marriage;
(4) if the parties were divorced or legally separated, May would be entitled to a certain amount of alimony to be determined upon the length of their marriage;
(5) if the parties were divorced or legally separated, the Debtor would be permitted to buy May's interest in their principal residence at a price to be determined by the length of their marriage.
On November 30, 1989 (and perhaps not so coincidentally after the Tax Court Order was entered), the parties amended the pre-nuptial agreement (the "Amendment"). The Amendment provided that the provisions set out above would be revoked and that the Debtor would transfer certain property to May immediately either into her name solely, or into a tenancy by the entirety. The purported purpose of the Amendment was to account for the "considerable disparity in age of the parties hereto, the potential professional liabilities inherent in Mr. Sternberg's practice of medicine, and the speculative nature of many of Mr. Sternberg's business ventures." The Debtor testified at trial that the Amendment was precipiated by the Debtor's request that May quit working at her $100,000 per year job, and the Debtor's desire to provide May with some form of security in lieu of her decision to abide by the Debtor's wish that she terminate her employment. Among the assets transferred to May into her sole name were:
— The Debtor's one-third interest in a condominium unit in Utah.
— The Debtor's fee simple interest in a condominium unit in The Criterion in Broward County, Florida.
— The Debtor's fee simple interest in Lot 39 of The Laurels in Boca Raton, Florida.
— The Debtor's partnership interest in Adderton Associates.
Among the assets the Debtor transferred to the parties as tenants by the entirety were:
— 200 shares of common stock of J. Sternberg, S. Schulman Associates Corp.
— 100 shares of common stock of S.A.S.G.P., Inc.
— 100 shares of common stock of Magnetic Resonance Institute of Boca Raton, Inc.
— 50 shares of common stock of P.O.D.C., Inc.
— 100 shares of common stock of Magnetic Resonance Institute of South Dade, Inc.
— 100 shares of common stock of Askay, Inc.
— 100 shares of common stock of Oakland Magnetic Resonance Institute, Inc.
— 33 1/3 shares of common stock of Serving Tray, Inc.
The only assets remaining solely in the Debtor's name consisted of cash in the bank ($12,000 at the time of the Agreement) and an IRA (valued at $6,000 at the time of the Agreement).
As pointed out by the IRS, the disparity in age, the potential liabilities of the Debtor and the speculative nature of his business ventures all existed at the time of the execution of the Agreement, and did not arise within the 10 months between the Agreement and the Amendment. Therefore, it appears that the Debtor amended the Agreement either as consideration for May quitting her job or as an attempt to evade his tax liability.
Section 523(a)(1)(C) excepts from discharge a debt for taxes if a debtor willfully attempts in any manner to evade or defeat such tax. The Eleventh Circuit in In re Haas, 48 F.3d 1153 (11th Cir. 1995), has examined the language of Section 523(a)(1)(C) and noted that Congress limited the application of the broad phrase "in any manner" —
to attempts to evade or defeat "such tax." That Congress added the words "such tax" and not "such tax or payment thereof," as it had four times previously in the [Internal Revenue Code], reflects congressional recognition that honest debtors may fail to pay their properly acknowledged taxes. We must give effect to Congress's decision to omit the words "or payment thereof" in section 523(a)(1)(C), where it has shown itself capable of including such language.
The Eleventh Circuit concluded that "a debtor's failure to pay his taxes, alone, does not fall within the scope of section 523(a)(1)(C)'s exception to discharge in bankruptcy." Id. at 1158.
It is difficult to interpret the Court's conclusion in light of its discussion that Congress did not include attempts to evade or defeat "such tax or payment thereof" in Section 523(a)(1)(C). That discussion could be interpreted to mean that Sect
ion 523 does not encompass the evasion of tax payment or collection. The bankruptcy court in In re Gathwright, 102 B.R. 211 (Bankr.D.Or. 1989), took this approach and determined that "evidence regarding any willful attempt to evade or defeat payment of the tax is not relevant to a determination of nondischargeability." Id. at 213. The court inGathwright, like the Eleventh Circuit in Haas, noted that Congress did not include "or the payment thereof" in Section 523(a)(1)(C) as it did in section 7201(a) of the Internal Revenue Code. Gathwright, however, has been rejected by the majority of courts that have addressed the question, including the bankruptcy court that initially decided Haas. Interestingly, the Eleventh Circuit cites approvingly to Gathwright. However, the Eleventh Circuit did consider the activities of Haas before reaching its conclusion. Thus, this Court believes that the more appropriate interpretation of Haas is that a mere failure to pay taxes when owed is not sufficient to deny the dischargability of the tax. As pointed out by the Tenth Circuit in Dalton v. Internal Revenue Service, 77 F.3d 1297 (10th Cir. 1996), an interpretation that Section 523(a)(1)(C) does not include evasion of the payment of a tax "would effectively render the second exception of § 523(a)(1)(C) meaningless and superfluous." Dalton, 77 F.3d at 1301, citing In re Jones, 116 B.R. 810, 814 (Bankr.D.Kan. 1990). In most cases, it seems that the main consideration is whether the actions of the debtor are the actions of an honest but unfortunate individual. Consequently, this Court will consider whether the Debtor's transfer of his significant assets to his wife was effected with an intent to evade or defeat the payment of his taxes, or rather, with a desire to provide her with security for leaving her job as a writer for the National Enquirer.
Clearly, the timing of the transfers from the Debtor to May is suspect. However, if the reason for the transfer truly was as consideration for May quitting her job, then the timing becomes less of a factor and causes the Court to consider the value of the assets transferred to determine whether equivalent consideration was given in exchange for May quitting her job.
Pursuant to the Agreement, the Debtor valued these assets at more than $1,000,000. However, during trial, he testified that he based those values on information he received from his business associates. The Debtor now believes that these assets were overvalued on the Agreement. The Court has the benefit of knowing the actual value of the Utah condo and the Criterion condo because those properties have been sold since the date of the Amendment. The Debtor's interest in the Utah condo netted approximately $53,000. The Criterion condo netted to the seller, May, approximately $84,000. A deed for Lot 39 of the Laurels shows that the property was titled in May's name and did not include the Debtor. The Debtor's expert's testimony established that the value of the remaining assets transferred to May or to the parties in tenancy by the entireties did not exceed $35,000. Most of the companies in which the Debtor held an interest were corporate general partners of limited partnerships. The corporate general partners held a mere 1% interest in the limited partnerships. Thus, the Debtor's interests in those corporations were valueless. Therefore, the Court finds that the transfer of these assets do not constitute excessive consideration for May quitting her job as a writer for the National Enquirer.
A final judgment finding that the Debtor's obligation to the IRS is discharged shall be entered in accordance herewith.
ORDERED in the Southern District of Florida this 23rd day of September, 1997.