576 B.R. 660
Bankr. M.D. Fla.2017Background
- Chapter 7 bankruptcy case filed by Matthew L. and Kathleen M. Feshbach seeking dischargeability of a substantial 2001 federal income tax debt and avoidance of liens.
- IRS contends the remaining tax debt is nondischargeable under 11 U.S.C. § 523(a)(1)(C) due to willful evasion/defeat of taxes.
- Feshbachs had substantial pre- and post-2001 income (over $21 million 2002-2010) but maintained a lavish lifestyle and delayed tax payment.
- Historical tax strategy included selling short against the box, enabling income deferral; changes to law (Taxpayer Relief Act of 1997) closed the loophole.
- IRS and debtor engaged in multiple offers-in-compromise and installment agreements; the debtor's assets (e.g., Belleair home) were liquidated over time to satisfy debts.
- Court concludes the 2001 tax debt is nondischargeable, based on willful evasion, and rejects any partial discharge under § 523(a)(1)(C).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether § 523(a)(1)(C) nondischargeability applies | Feshbachs argue no willful evasion; attempts to resolve with IRS show good faith. | IRS contends spending and delay tactics demonstrate willful evasion. | Yes; debt nondischargeable under § 523(a)(1)(C). |
| Conduct prong sufficiency—single or multiple evasive acts | Expenditures were for income generation, not evasion. | Excessive spending and strategic behavior can satisfy evasion under ‘in any manner.’ | Conduct prong satisfied; excessive spending supports evasion. |
| Mental state prong—willful and intentional evasion | Debtor knowingly and voluntarily avoided paying taxes. | Reliance on advisors and intent to resolve debts show good faith. | Willful and intentional evasion established. |
| Partial discharge vs. complete nondischargeability | Statutory language does not permit partial discharge; full denial is appropriate. | Equitable adjustment under 11 U.S.C. § 105(a) could permit partial discharge. | Nondischargeability extends to the entire 2001 debt; no partial discharge. |
| Judicially crafted flexibility under § 523(a)(1)(C) | Statutory text should be read strictly against discharge for evasion. | Courts may consider fairness and unique circumstances in applying the statute. | Court adheres to strict reading but notes potential legislative revisit; not enough to alter outcome. |
Key Cases Cited
- Griffith v. United States (In re Griffith), 206 F.3d 1389 (11th Cir. 2000) (establishes that willful evasion can include asset transfers to defeat collection)
- Lynch v. United States (In re Lynch), 299 B.R. 62 (Bankr. S.D.N.Y. 2003) (discusses strict construction of discharge exceptions and burden of proof)
- Zimmerman v. United States (In re Zimmerman), 204 B.R. 84 (Bankr. M.D. Fla. 1996) (professional reliance defense to willful evasion under § 523(a)(1)(C))
- Pisko v. United States (In re Pisko), 364 B.R. 107 (Bankr. M.D. Fla. 2007) (illustrates evaluating debtor’s candor and circumstances in evasion inquiry)
- Fretz v. United States (In re Fretz), 244 F.3d 1323 (11th Cir. 2001) (nonfraudulent willfulness standard for § 523(a)(1)(C))