United States v. Spiwak (In Re Spiwak)United States v. Spiwak (In Re Spiwak)
ORDER
THIS CAUSE is before the Court upon Appellant’s Notice of Bankruptcy Appeal (DE# 1).
UPON CONSIDERATION of the Appeal, the Responses, and the pertinent portions of the record, and being otherwise fully advised in the premises, the Court enters the following Order.
Appellant, The United States of America (the “United States” or “Appellant”) commenced an action in the United States District Court for the Southern District of Florida against Appellee Stanley M. Spiwak (“Appellee” or “Spiwak” or “Debtor”), his wife Grethe Aarnes Spiwak, the Grethe Aarnes Trust, and Shaw Realty, Inc. entitled United States of America v. Stanley M. Spiwak, et al., Case no. 93-7001-dV-GONZALEZ. Following trial, on July 24, 1995, the District Court entered judgment against the Spiwaks in the amount of $456,344.50, for the Spiwaks’ unpaid income tax liabilities for the years 1977-79, 1981-83, and 1986. The District Court also entered an Order of Foreclosure, finding that the federal tax liens against the Spiwaks applied to their home at 3100 N.E. 47th Court, # 302, Fort Lauderdale, Florida (the “condominium”) and authorizing the United States to foreclose its liens. The condominium was nominally owned by the Grethe Aarnes Trust and encumbered by a Shaw Realty mortgage held to be null and void.
On June 14, 1996, three days before the scheduled foreclosure sale of the condominium, Spiwak filed his bankruptcy petition. Spiwak commenced an adversary proceeding seeking a judgment that his income tax liabilities were dischargeable. The United States filed a motion to dismiss on the grounds that the income tax liabilities were nondischargeable under 11 U.S.C. § 523(a)(1)(C). The Bankruptcy Court treated the motion to dismiss as a motion for judgment on the pleadings, and subsequently denied the motion.
On July 7,1997, the issue of whether the income tax liabilities were dischargeable under 11 U.S.C. § 523(a)(1)(C) was tried before the Bankruptcy Court. Stating its findings of fact and conclusions of law on the record, the Bankruptcy Court entered judgment in Spiwaks’ favor. That same day, the Bankruptcy Court entered its Final Judgment Discharging Income Tax Liability, discharging Spiwaks’ income tax liabilities for the years 1977-1979, 1981-1983, and 1986.
The United States now appeals the Final Judgment Discharging Income Tax Liability dated July 10, 1997 and the Memorandum Decision Denying Motion to Dismiss by United States of America and Denying Ore Tenus Motion to Render a Judgment on the Pleadings as to Count I dated March 26, 1997. The United States presents the following issues on appeal:
1. Whether the Bankruptcy Court erred in denying the United States’ Motion for Judgment on the Pleadings.
2. Whether the Bankruptcy Court erred in concluding that the debtor did not have the wherewithal to pay his tax liabilities.
3. Whether the Bankruptcy Court erred in concluding that the United States had not met its burden of proving that the debtor had willfully attempted in any manner to evade or defeat his tax liabilities.
DISCUSSION
A. Standard of Review
A district court reviewing a bankruptcy appeal is not authorized to make independent factual findings; that is the function of the bankruptcy court.
In re Sublett,
B. The Bankruptcy Court’s Denial of the United States’ Motion for Judgment on the Pleadings
The United States asserts that it was error for the Bankruptcy Court to deny its Motion for Judgment on the Pleadings as (1) the District Court’s finding that Spiwak had established a sham corporation necessarily rested on the premise that Spiwak acted a fraud upon the government, (2) Debtor’s recording of his transactions does not validate them, and (3) fraudulent intent should be presumed.
Appellee asserts that the District Court’s Order subjecting the Spiwak trust property to foreclosure by the Internal Revenue Service was based on two distinct theories, both of which did not concern fraudulent transactions. First, Ms. Spiwak had a present beneficial interest in the trust and Spiwak had a future interest in the trust. Therefore, the tax liens would attach to their beneficial interest as a matter of federal law. Second, the District Court noted that the trust was a sham, and that the trust held the property at issue as a “nominee” of the Spiwaks. The District Court found that the trust was properly classified as a sham, as it granted “almost total control to the beneficiaries, the Spiwaks. The trust’s only asset serves as the personal residence of the defendants Stanley and Grethe A. Spiwak. . .The taxpayers have exercised complete control over the trust’s sole asset since its acquisition, even to the extent of having a controlled corporation ostensibly hold a mortgage on the property and institute a foreclosure proceeding against the property.” 1
Appellee argues that the application of the nominee doctrine does not involve an inquiry into the existence of a fraudulent conveyance or the Debtor’s intentions to evade or defeat the tax at issue. Appellant asserts that had the Court not found fraud to exist, then the federal tax hens would have attached only to whatever limited interest the Spiwaks retained under the trust terms, and that the mortgage held by Shaw Realty would have held priority over the tax lien of the United States. In support of its argument, the United States refers to
Dallas Nat’l Bank v. United States,
Similarly, Appellant cites
United States v. McCombs,
The District Court allowed the lien against the mortgage held by Shaw Realty, and therefore necessarily found that fraud tainted the transaction. Appellee argues that fraudulent conveyance issues are separate causes of action from inquiries into the application of the nominee doctrine. Appellee’s authority, the case
Libutti v. United States,
The Court finds it instructive that the District Court, rather than simply stating that the trust property was held as a nominee of the Spiwaks, called the trust a “sham.” Nominee inquiries generally address the manner in which a taxpayer treats a property, while fraudulent conveyance questions concern the validity of a trust upon its creation. The District Court’s identification of the trust property as a sham indicates that the Court considered the validity of the trust in conjunction with the manner in which Spiwak treated the instrument of his creation
See In re Richards,
Appellant asserts that under the doctrine of collateral estoppel, the issue of Spiwak’s fraudulent transaction has been established and cannot be relitigated. Collateral estoppel is appropriate when the following three elements are present: (1) the issue at stake must be identical to the one involved in the prior litigation; (2) the issue must have been actually litigated in the prior litigation; and (3) the determination of the issue in the prior litigation must have been a critical and necessary part of the judgment in that litigation.
In re Halpern,
The undersigned finds that the Bankruptcy Court, while relying on the status of the trust as a sham in its ruling, did not specifically rule on the dischargeability of the Debtor’s debt. Bankruptcy Judge Raymond B. Ray stated in his Memorandum Order that the Bankruptcy Court did not find that the issue of the dischargeability of Debtor’s debt had been litigated before the District Court for the purposes of application of the collateral estoppel doctrine.
The Court agrees with Appellant that the District Court’s allowance of the federal tax lien to take priority over the Shaw Realty mortgage may imply a finding of fraud. However, the Bankruptcy Court is to make a factual determination as to whether evidence of a willful attempt to evade taxes exists upon an examination of the totality of the circumstances.
C. Debtor’s Ability to Pay His Tax Liabilities
The Bankruptcy Court’s factual determination that Debtor was unable to pay his tax liabilities is renewable by this Court under a clearly erroneous standard.
Toledo,
Appellee asserts that there is no evidence of income on behalf of Spiwak after 1983. The Honorable Francis G. Conrad, a visiting Judge of the United States Bankruptcy Court, stated at trial on July 7, 1997 that the Internal Revenue Service and the United States failed to provide any evidence concerning Debtor’s
The United States asserts that Debtor did have the ability to pay, as evidenced by his use of the sham trust, his participation in tax shelters, and his receipt of money from friends. Spiwak asserts that the tax shelters did not provide him with income and that he used the money given to him for personal expenses. Under the holding of
In re Haas,
The undersigned holds that the Bankruptcy Court’s finding that Debtor did not have the wherewithal to pay his tax liabilities is clearly erroneous in light of Debt- or’s reported liability in 1986.
D. Dischargeability of Spiwak’s Income Tax Liabilities
The United States asserts that Spiwak’s income tax liabilities were not dischargeable pursuant to 11 U.S.C. § 523(a)(1)(C). This section of the Bankruptcy Code provides, in relevant part:
(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt—
" (1) for a tax or a customs duty ...
(C) with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax;
11 U.S.C. § 523(a)(1)(C).
The Eleventh Circuit, in
In re Haas,
However, in
In re Griffith,
The creditor bears the burden of demonstrating, by a preponderance of the evidence, that a particular claim is nondischargeable under 11 U.S.C. § 523(a)(1)(C).
Id.
at 1396
(citing Grogan v. Garner,
The determination whether the Debtor willfully attempted to evade payment of taxes is a question of fact for the Bankruptcy Judge to determine from the totality of the record.
United States v. Uria,
Appellant argues that the Bankruptcy Court erred in determining that Appellant had not met its burden of showing that the Debtor willfully attempted to evade or defeat his tax liabilities. In support of its argument Appellant states that Spiwak controlled the mortgage on his home, abandoned the foreclosure suit when he discovered that the United States did not have a lien on the condominium, failed to maintain bank accounts, accepted money as gifts from friends, and placed money into tax shelters.
Appellant states that badges of fraud existed throughout Debtor’s transactions, as Debtor did not have personal bank accounts, yet paid personal expenses from the accounts of businesses he owned.
See
Exhibit KK ¶ 18.
See In re Spirito,
Courts have relied on well-defined badges of fraud in order to presume fraudulent intent to transfer, as direct proof of fraudulent intent is rarely present.
In re Landen,
The existence of several badges of fraud will justify a finding of fraud, but the inference established is a rebuttable one.
Advest, Inc. v. Rader,
The Bankruptcy Court is instructed to examine Debtor’s 1986 tax liability in light of the existing facts of the above-styled matter, and to make a determination, based on the totality of the circumstances, as to the existence of a willful evasion on behalf of Debtor.
CONCLUSION
Based on the foregoing, it is hereby ORDERED and ADJUDGED as follows:
(1) The Bankruptcy Court’s Final Judgment Discharging Income Tax Liability dated July 10, 1997 is REVERSED and REMANDED.
(2) The Bankruptcy Court’s Memorandum Decision Denying Motion to Dismiss by United States of America and Denying Ore Tenus Motion to Render a Judgment on the Pleadings as to Count I dated March 26, 1997 is REVERSED and REMANDED.
The Clerk of the Court is directed to mark this case as CLOSED.