United States v. Jacobs (In re Jacobs), No. 06-15333, 2007 U.S. App. LEXIS 15542 (11th Cir. June 29, 2007). Debtor was a lawyer with significant income tax debt related to his law practice. The opinion discusses several instances of the debtor’s somewhat lavish lifestyle, transfers to his spouse, placing assets in his spouse’s name, several vehicles, etc.
Nevertheless, the Bankruptcy Court found the tax debt dischargeable –
After a bench trial, the Bankruptcy Court determined that Mr. Jacobs’s tax liability was not excepted from discharge under § 523(a)(1)(C). (Bankr. Ct. Op. 8- 10.) It reasoned that the Government had not carried its burden of proof as to § 523(a)(1)(C)’s “willfullness” element, because Mr. Jacobs “ha[d] portrayed a remorseful debtor with a white heart,” “filed accurate returns each year [for the tax years in issue], voluntarily assessed himself with such tax debt, and paid, during the years 1990 through 1998, approximately $200,000 in income taxes to the government.” Id. at 8. The Bankruptcy Court further reasoned that § 523(a)(1)(C)’s “conduct” element, which the Bankruptcy Court stated required “evidence of actual evasion,” was not satisfied, because Mr. Jacobs’s payments to family members and charities instead of the IRS during the years in question “d[id] not rise to the level of willful evasion.” Id. at 10. … The Government timely appealed to the District Court.
The District Court reversed –
It held that the Bankruptcy Court had erred in construing § 523(a)(1)(C) to require “actual evasion,” as opposed to any 13 “affirmative acts of commission or omission, which actually or constructively would serve to evade or defeat a tax.” (Dist. Ct. Op. 17.) The District Court further held that the Bankruptcy Court had erred in construing § 523(a)(1)(C) to require “a showing that the debtor ‘engaged in a fraudulent scheme,’” or “‘of fraud or evidence that the Plaintiff concealed or transferred assets while maintaining control over the property.’” Id. at 18. The District Court determined that § 523(a)(1)(C)’s conduct element was met, because: Mr. Jacobs filed chronically late tax returns; he failed to pay his mounting tax obligations; he made many intrafamily gifts; he and his closely held professional associations made substantial monetary transfers to his wife’s business; he used his firm to pay for his personal transportation; he failed to properly report wage income; he titled property in his wife’s name to frustrate tax collection efforts; and he made the decision to engage in outrageously lavish spending while ignoring his tax obligations. Id. at 27.
The District Court rejected as clearly erroneous the Bankruptcy Court’s conclusion that § 523(a)(1)(C)’s willfulness requirement was not met. It concluded that Mr. Jacobs’s conduct displayed multiple “badges of fraud” relevant to the willfulness inquiry, including unreported loans from his law firm, intrafamily transfers, reporting of wage as non-wage income, transfers of money from 14 his firm to his wife’s business, and titling property in his wife’s name. Id. at 30- 33. Mr. Jacobs has timely appealed from the District Court’s decision to this Court.
The Eleventh Circuit affirmed the District Court’s holding. The Court engaged in a thorough analysis of the case law, and concluded –
First, the undisputed evidence shows that § 523(a)(1)(C)’s conduct requirement is satisfied. Mr. Jacobs admits that he and his wife purchased a home in 1995, after he been accumulating tax debt for several years, and titled it solely in his wife’s name while he remained on the mortgage, because the mortgage company wanted to avoid the attachment of tax liens.12 Mrs. Jacobs had essentially no income or assets, and Mr. Jacobs made all the mortgage payments on the home himself. Placing title to significant assets in the names of family members, while remaining on the mortgage, qualifies as an affirmative act to evade or defeat tax payments under § 523(a)(1)(C). ….
Also highly relevant to the conduct requirement is the undisputed evidence that Mr. Jacobs caused his law firms to characterize his earnings as officer compensation not subject to tax withholding, and then failed to pay estimated taxes on those earnings. He admits that his law firms failed to withhold taxes from the compensation they awarded him in the years in question, that he could have caused them to withhold tax from his earnings but did not do so, and that the law firms purchased numerous luxury vehicles that he and his wife used in part for personal purposes. Title to at least one of those vehicles, the 2003 G.M.C. Yukon, was in Mrs. Jacobs’s name, and Mr. Jacobs testified that the 2001 Suburban “was financed in [Mrs. Jacobs’s] name,” but all the payments for the purchase of those vehicles were made by Mr. Jacobs’s firms. Characterization of earnings as nonwage income, without paying quarterly estimated taxes, and use of business entities to pay personal expenses, constitute affirmative attempts to conceal assets under § 523(a)(1)(C).
Section 523(a)(1)(C)’s conduct requirement is further satisfied by Mr. Jacobs’s large discretionary expenditures. In 2000 and 2001, Mr. Jacobs donated approximately $12,152 to the Place of Encouragement, and in 1997 he paid $12,000 to the Amelia Island Chapel. He made thousands of dollars’ worth of gifts to his children. It is also undisputed that Mr. Jacobs made large payments for luxury items, such as approximately $20,000 for plastic surgery for his wife in 2000, over $1,000 per month for a golf club membership and entertaining expenses, and between $600 and 700 per month for a leased Mercedes-Benz for his wife, even though the Jacobses apparently also drive other luxury vehicles. Such 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….
The Bankruptcy Court also clearly erred in determining that Mr. Jacobs did not act willfully. Mr. Jacobs’s characterization of his earnings from his law firms as officer income not subject to withholding, his failure to pay estimated taxes, and his firms’ loans to Morton-Jacobs for undocumented consideration, strongly indicate willfulness. Hassan, 301 B.R. at 620-22 (S.D. Fla. 2003) (debtor’s large and unexplained transfers of money to family members, allegedly as repayment for loans, without documented consideration, indicated willfulness). At the very least, the evidence shows that Mr. Jacobs’s failure fully to pay his taxes, while making such large loans and expenditures, was done “voluntarily, consciously or knowingly, and intentionally.”