Steinmann: Avoiding Tax Liability

[Riser Adkisson LLP]

In re Steinmann, 2012 WL 1918524 (Bkrtcy.E.D.Wis., May 25, 2012). http://goo.gl/zxc7o

United States Bankruptcy Court,

E.D. Wisconsin.

In re Tony K. STEINMANN, Debtor.

United States of America, Plaintiff,

v.

Tony K. Steinmann, Defendant.

Bankruptcy No. 11–34164–svk.

Adversary No. 11–2917.

May 25, 2012.

LaQuita Taylor–Phillips, U.S. Dept. of Justice, Washington, DC, for Plaintiff.

Paul G. Swanson, Oshkosh, WI, for Defendant.

DECISION AND ORDER DISMISSING COMPLAINT

SUSAN V. KELLEY, United States Bankruptcy Judge.

*1 Tony K. Steinmann (the "Debtor") filed a Chapter 7 petition on September 15, 2011. On December 28, 2011, the United States of America (the "Government" or "IRS") filed a Complaint arising out of an unpaid $1,160,779.35 tax liability. The Court held a trial on May 23 and 24, 2012. The bulk of the Government's case was directed at showing that the Debtor willfully attempted to evade or defeat his tax liability; the Government sought a determination that this liability is nondischargeable under 11 U.S.C. sec. 523(a)(1)(C). The Government also contended that the Debtor failed to satisfactorily explain any loss of assets to meet his liabilities in order to deny his entire discharge under 11 U.S.C. sec. 727(a)(5).

The Court can make quick work of the latter claim. The Debtor testified credibly as to the disposition of his divorce settlement proceeds in 2005 and 2006. Accordingly, the sec. 727(a)(5) claim should be dismissed.

In order to establish under sec. 523(a)(1)(C) that the Debtor willfully sought to evade his tax liability, more than simple nonpayment of the tax is required. The Government must prove that the Debtor knew he had a legal duty to pay the tax and voluntarily and intentionally attempted to violate that duty. In re Birkenstock, 87 F.3d 947 (7th Cir.1996). While the Government's evidence certainly raised some red flags as to the Debtor's conduct (especially as to the Elite Cosmetics settlement), the Debtor presented significant credible evidence that he did not intentionally attempt to evade his tax liability.

The Court rejects the Government's claims that the Debtor's fiancé's corporation is a continuation of the Debtor's prior corporation; although the names are the same, the business models are totally different, and the fiancé testified credibly as to the inception and operation of the business. Although the Debtor is involved in the business and held himself out as the owner of the business on rare occasions, the evidence was clear that the fiancé's business neither is a continuation of the old business nor a sham intended to assist the Debtor in evading his tax liability.

As to funds the Debtor transferred to his fiancé and brother, the Debtor testified credibly that most of the funds given to his fiancé were borrowed from his home equity line of credit. (An IRA was liquidated, transferred, and used to pay living expenses.) The funds transferred to his brother in 2005 (before the tax liability was finalized by the IRS) were transferred back and used to purchase and remodel the Debtor's house. The Elite Cosmetics settlement was questionable in that the Debtor had transferred his stock in Elite Cosmetics to his fiancé, but then sued as the owner of Elite Cosmetics to recover his investment. The eventual settlement was paid to the fiancé's company.

If viewed in a vacuum, the Elite Cosmetics transaction may have substantiated the Government's argument that the Debtor had the requisite mental state to willfully attempt to evade the tax. However, the evidence was overwhelming that at the same time as this transaction was unfolding, the Debtor was engaged in significant good faith efforts to sell a valuable asset—the Marco Island property—that could have paid the tax liability in full. The Debtor owned the Marco Island property with his spouse, Rose Mennella; they divorced in 2004. In the divorce Judgment entered in April 2005, the Circuit Court valued the Marco Island property at $2,150,000, gave Ms. Mennella 30 days to buy the Debtor's interest, or the property was to be sold. The Debtor's efforts to sell the Marco Island property were thwarted by Ms. Mennella at every step. She was extremely uncooperative, even though the Circuit Court ordered the sale in the parties' contentious divorce. She refused to sign offers that would have generated significant sums to pay the tax liability or insisted on unreasonable counteroffers that caused at least one buyer to walk away. She filed a Lis Pendens against the property to prevent its sale, was held in contempt by the Circuit Court, and served six months in jail before she capitulated and removed the Lis Pendens. Due to her non-cooperation, the Circuit Court finally appointed a special master to sell the property. But it was too late; the value of the property declined with the Florida real estate market. On December 1, 2009, the Circuit Court approved a sale of the property for $750,000. The proceeds, net of closing costs, were paid to the IRS.

*2 Rose Mennella testified that all of her efforts in delaying the sale were directed at ensuring that the Debtor would not abscond with his share of the property proceeds without paying the IRS. The Court found this statement (and virtually all of her testimony) totally incredible. Copies of the pleadings from the Circuit Court divorce action and the testimony of the Debtor's divorce attorney refute Ms. Mennella's motivations. The Debtor's testimony that he was trying to sell the property as quickly as possible to pay the taxes was amply supported by testimony from his accountant and divorce attorney, documents and correspondence from the realtor, and pleadings and transcripts from the Circuit Court. Ms. Mennella's testimony, including that she had paid over $500,000 of her own money toward the tax liability at issue, was completely contradicted by the Government's own tax transcript. The Government tried to portray Ms. Mennella as the party interested in paying the tax and the Debtor as the party evading the tax. The Government failed miserably in this effort.

The Court concludes that the Debtor's efforts to sell the Marco Island property in order to pay the tax completely overwhelmed any evidence that he attempted to evade the tax by liquidating a $12,000 IRA and filing a lawsuit as the owner of Elite Cosmetics. Therefore, the Government did not meet its burden of proof on the sec. 523(a)(1)(C) claim, and the Complaint should be dismissed.

IT IS THEREFORE ORDERED: the relief sought in the Complaint is denied, and the Complaint is dismissed. Each party is to pay his or its own costs.


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Posted by Jay D. Adkisson, a co-author along with Chris Riser of Asset Protection: Concepts & Strategies (McGraw-Hill 2003) with main website http://www.assetprotectionbook.com and blog at http://www.assetprotectionblog.com see also http://www.jayadkisson.com and http://www.risad.com

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