I wrote last spring about how a conviction for filing a false tax return, IRC 7206(1), provided a basis for denying a bankruptcy discharge on the basis of collateral estoppel. The recent decision in United States v. Wanland provides an example of a conviction for tax evasion, IRC 7201, which creates the same result.
At issue in the Wanland case is only the unpaid taxes and not the fraud penalties. The civil fraud penalty, like all tax penalties, can be discharged in a bankruptcy case when it becomes three years old, as discussed here. The IRS does not argue that anything keeps the fraud penalty from discharge but it does make good use of an argument regarding its levy to extend the years in which Mr. Wanland was charged with criminal behavior to earlier years to also prevent their discharge.
Mr. Wanland was an attorney. The recently decided case seeks to obtain a judgment against him for $1,065,493.30. He is representing himself in this litigation. On September 26, 2013, he was convicted of 28 counts of criminal tax violations. One count of 7201 evasion of payment, 24 counts of concealment of property subject to levy and three counts of 7203 failing to file tax returns.
Before he was convicted of the criminal tax violations, Mr. Wanland filed bankruptcy and received a discharge of his debts on June 8, 2011. Because of the bankruptcy discharge, Mr. Wanland argues that the IRS is collaterally estopped from raising the issue of his liabilities since it did not bring an action in the bankruptcy case to except his liabilities from discharge. The issue presented is one of first impression in the 9th Circuit though other courts have addressed it. Must the IRS affirmatively seek a determination regarding the discharge of taxes or does the exception to discharge of 523(a)(1), except the described taxes from discharge without the need for affirmative action.
The IRS takes the position that it does not affirmatively need to bring an action in each bankruptcy case to have the bankruptcy court make a determination regarding which taxes are and which taxes are not discharged. At the conclusion of each bankruptcy case the IRS makes its own determination regarding the impact of the discharge on the taxpayer’s liabilities. If the IRS determines that the taxes or penalties, were discharged, it will write them off its books and the taxpayer does not need to do anything to request that the IRS do so. If the IRS determines that the taxes are not discharged, it sends them back into the collection stream. If a taxpayer thinks that the IRS decision to send the taxes back into the collection stream is wrong, the taxpayer can sue the IRS for violating the discharge injunction and cause the write-off of the taxes if it wins.
Here, the IRS has gotten to the point in the collection of the liabilities against Mr. Wanland that it is bringing a suit to reduce the liabilities to judgment. That will cause the liabilities to hang around his neck basically forever, as we have discussed here. In his effort to ward off the suit, he argues that the IRS missed the time to object to the discharge of his tax liabilities and it cannot seek to collect them at this point.
The district court rejects his arguments citing to the decisions of other courts that have faced this issue.
“Debts listed in sections 523(a)(2), (a)(4) and (a)(6) are automatically discharged in bankruptcy unless a creditor objects to their dischargeability by fiing an adversary proceeding. Fed. R. Bankr. P. 4007 (advisory committee notes). A creditor who wishes to object to the dischargeability of a debt under sections 523 (a)(2), (a)(4) or (a)(6), must file a complaint within sixty (60) days of the first scheduled meeting of creditors. Fed. R. Bankr. P. 4007(c)… Those debts excluded from discharge not listed in sections 523 (a)(2), (a)(4) or (a)(6), including certain tax debts, are automatically excepted from discharge… As a result, a complaint to determine the dischargeability of a debt, other than a debt listed in sections 523(a)(2), (a)(4) or (a)(6), may be filed at any time. Fed. R. Bankr. P. 4007(b)”
Quoting In re Walls, 496 B.R. 818, 825-26 (N.D. Miss. 2013)(citation omitted); see also In re Range, 48 Fed. App’s 103 at 5 & n.2 (5th Cir. 2002)(unpublished).
There are 19 subparagraphs of Bankruptcy Code section 523. Only three of them have been singled out in the Bankruptcy Rules to require the creditor to affirmatively bring an action early in the case to determine discharge. The first two deal with types of fraudulent activity by the debtor and the third with willful and malicious action that causes harm. Because the particular provision that prevents Mr. Wanland’s discharge is a type of fraud, there is some basis for looking at taxes excepted from discharge under 523(a)(1)(C) to determine if they create a different situation that “ordinary” taxes. It would create an enormous burden on the IRS and the bankruptcy court to have the IRS objecting to discharge in every bankruptcy case in which the debtor’s taxes are excepted from discharge because the volume would be enormous. The IRS has historically been a creditor in about 40% of all bankruptcy cases meaning that these types of motions would be filed in hundreds of thousands of cases each year.
The number of cases in which the IRS excepts the taxes from discharge under 523(a)(1)(C), however, is quite small. It would not place a big burden on the IRS or the bankruptcy court if the IRS were required to come into those cases with a motion similar to the motion made in the cases of the three provisions cited. Nonetheless, the general rule regarding tax debts prevails here and the district court finds with the other courts looking at the issue that the IRS need not affirmatively file an objection to the discharge of this debt.
The decision does not surprise me. Once the IRS gets past the issue of whether it should have raised the issue during the proceeding, the court has no trouble finding that the debtor’s conviction serves to estop the debtor from arguing that the liability is excepted from discharge for the years of the 7201 criminal conviction which were 2000-2003. The court finds it a closer question whether the IRS can use offensive collateral estoppel to the 1996-1998 tax liabilities which were not included in the criminal case. The IRS presented evidence that it served a levy to collect taxes for 1996-1998 and 2000-2003. That levy was the levy upon which the criminal case was based because he concealed his assets to keep the IRS from receiving payment on that levy. Under the circumstances, the court finds that affirmative collateral estoppel works to prevent Mr. Wanland from arguing that the taxes for all of the years are not excepted from discharge. This is an interesting extension of the collateral estoppel effect of the bankruptcy case. The court could have reached the same conclusion without the need for collateral estoppel if it found that he was trying to evade the payment of his taxes for the non-criminal years.