Vaughn v. United States of America Internal Revenue Service (In Re Vaughn)
765 F.3d 1174
| 10th Cir. | 2014Background
- Vaughn, former CEO of FrontierVision Partners, LP, filed a Chapter 11 petition; IRS claims 1999 and 2000 taxes are non-dischargeable under §523(a)(1)(C).
- BLIPS: Vaughn participated in Bond Linked Issue Premium Structure through Presidio/KPMG, designed to create large tax losses with minimal economic loss, to offset FrontierVision gain.
- BLIPS losses were generated by a high basis and a 60-day fund cycle; Vaughn testified he intended to withdraw and realize a tax loss to cover gains.
- Vaughn filed his 1999 tax return reporting ~$30.6M long-term gain and ~$32.3M BLIPS short-term loss plus other ordinary losses; he admitted knowing there was no corresponding economic loss.
- Notice 2000-44 (IRS) warned against such abusive losses; Vaughn and KPMG were aware of the notice and BLIPS risks; Vaughn received Notice 2000-44 by early 2001.
- Post-sale expenditures and asset transfers (expensive home, vehicles, jewelry) followed, with further asset dispositions before an actual tax assessment; Vaughn later disclosed BLIPS participation to the IRS and opened a trust for his step-daughter.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether willful evasion under §523(a)(1)(C) requires conduct and mental-state elements | Vaughn argues the two discrete elements must be separately proven | IRS contends the bankruptcy court properly applied two-element approach | Affirmed: two-element framework applied; conduct and mental state satisfied |
| Whether the district court's “holistic” review invalidly affirmed the bankruptcy court | Vaughn contends holistic review was improper | IRS did not challenge the underlying two-element approach used by the bankruptcy court | Affirmed: court relied on bankruptcy court’s two-element analysis; no reversible error on holistic-review point |
| Whether reliance on KPMG advice negates willfulness | Vaughn argues reliance on advisor could negate willfulness | IRS argues that, given credibility findings, reliance was not reasonable or credible | Affirmed: reliance not credible; willfulness established despite advisor’s role |
| Whether Blum v. Commissioner governs review | Vaughn suggests Blum controls and supports negligence, not willfulness | Blum is distinguishable and does not control the result here | Affirmed: Blum does not control the willfulness finding in this case |
| Whether the bankruptcy court’s findings were clearly erroneous | Vaughn asserts lack of clear evidence for willfulness | IRS argues findings are supported by a substantial record | Affirmed: findings not clearly erroneous; deferential standard applied |
Key Cases Cited
- Dalton v. IRS, 77 F.3d 1297 (10th Cir. 1996) (two elements of willful evasion; conduct and mental state)
- United States v. Jacobs (In re Jacobs), 490 F.3d 913 (11th Cir. 2007) (willful evasion standard; credibility matters)
- In re Fretz, 244 F.3d 1323 (11th Cir. 2001) (pre- assessment evasion can be willful)
- In re Fegeley, 118 F.3d 979 (3d Cir. 1997) (lack of bona fide losses; tax-avoidance schemes)
- In re Birkenstock, 87 F.3d 947 (7th Cir. 1996) (pre-assessment willful omissions considered evasion)
- Conoco v. Styler (In re Peterson Distrib., Inc.), 82 F.3d 956 (10th Cir. 1996) (standard of review for bankruptcy determinations; de novo vs. clearly erroneous)
- Blum v. Commissioner, 737 F.3d 1303 (10th Cir. 2013) (negligent underpayment vs. willfulness distinctions in tax shelters)