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THE CONSUMER BANKRUPTCY LETTER
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In This Issue:
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August 18, 2003
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SPECIAL TAX DISCHARGE EDITION
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TAX DISCHARGE 2002 SUPPLEMENT AVAILABLE
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King's DISCHARGING TAXES Edition 2000
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LEGISLATION & REFORM NEWS . . .
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GOLD'S TAX DISCHARGE ANALYZER
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PHYSICIAN DEBTOR'S TAXES HELD NOT DISCHARGEABLE
A physician who owed substantial delinquent tax liabilities but who thwarted tax collection efforts was found to have engaged in conduct to evade or defeat the collection of the taxes within the meaning of § 523(a)(1)(C).
The court found that his conduct consisting of, among other things, transferring the stock in his medical corporation to his wife without valuable consideration, reducing his salary to a minimum, and increasing the wife's salary to an amount way out of proportion to her education and skill level, were deliberate attempts to thwart the collection of his pre-marital tax liabilities. He was found guilty of "acts of commission as well as culpable omission."
Sudderth v. US, __ B.R. __ (D.E.D.LA 2003).
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BANKRUPTCY COURT'S FINDING THAT DEBTOR'S TAX RETURNS WERE “PATENTLY FRAUDULENT” WAS REVERSED FOR LACK OF EVIDENCE
A tax for a year for which the return was fraudulent is not dischargeable in Chapter 7 or Chapter 11 pursuant to 11 U.S.C. § 523(a)(1)(C). In this case, § 523 was not so much the issue as the Trustee's complaint under § 727(d)(3), failure to obey a lawful order of the court; the judge's theory was that he had ordered the debtor to produce tax returns, but ostensibly fraudulent returns did not comply with the order. The debtors' discharge was revoked.
In reversing, the 10th Circuit BAP noted that the tax returns in question were never actually admitted into evidence, and thus the judge's conclusion that they must be patently fraudulent was mere "surmise."
The court also held that the burden of proving by a preponderance of the evidence that the debtor's tax liabilities are nondischargeable under § 523(a)(1) is on the Government, citing In re Fegeley, 118 F.3d 979 (5th Cir. 1997).
In re Beach __ B.R. __ (10th Cir. 2003).
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COURT HOLDS DEBTOR'S SUBSTANTIAL PAYMENTS TO HIS TAX AND BANKRUPTCY ATTORNEYS' FEES, RATHER THAN TOWARD BACK TAXES, DID NOT CONSTITUTE ATTEMPT TO EVADE TAXES
In this case the IRS argued, among other things (none of which were persuasive) that evidence the farmer-debtor “spent extravagantly” on attorneys and accountants to handle his bankruptcy and tax proceedings consitituted an attempt to evade the tax. The Court disagreed, saying, "Relying on the expertise of professionals to deal with difficult financial issues is not evidence of an intent to evade taxes; nor is the Debtor's exercise of his rights under the Bankruptcy Code.
In re Roper __ F.3d __ (8th Cir. 2003).
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SIXTH CIRCUIT RULES AGAIN, STATES NOT PROTECTED BY SOVEREIGN IMMUNITY IN BANKRUPTCY-TAX CASES
Possibly signaling a trend away from the majority rule that states are constitutionally protected by sovereign immunity when debtors sue in bankrutpcy court, the 6th Circuit has reiterated its previous ruling in In re Hood that Congress has the power to, and did in fact eliminate states sovereign immunity under 11 U.S.C. § 362.
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TAX ARTICLE PREDICTS BK REFORM WILL IMPAIR IRS COLLECTION OF DELINQUENT TAXES
In a recent article appearing in The Journal of Tax Practice & Procedure, attorney Morgan King says The Bankruptcy Abuse Prevention and Consumer Protection Act will, if enacted, drastically alter the manner in which Chapter 13 currently treats delinquent tax debts and would impair both a taxpayer’s opportunity to come back into compliance through the program, and very probably reduce the tax revenue generated to the government. Ironically, the Treasury is apparently supporting the proposed changes. But those who practice daily in the “trenches” of Chapter 13—that is, the debtors’ lawyers—know that the government is aiming to shoot itself in the foot.
The reform legislation would eliminate the super-discharge for delinquent income taxes in Chapter 13. By making income taxes more difficult to discharge, it will be impossible for many delinquent taxpayers to formulate a feasible Chapter 13 plan. Chapter 13, which under current law is frequently a budget life-line to taxpayers, will be out of reach of many debtors. As a result, many will remain “underground” and continue to evade tax collection, because they will have no viable alternative.
For the complete article, click on Morgan King's articles, below.
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