DANA L. RASURE, Bankruptcy Judge.
Plaintiff Juventino Gayton Quiroz ("Gayton")
The IRS contends that the income taxes owed for tax years 2005, 2006, and 2009 are excepted from discharge because Gayton, after learning that his 2005 and 2006 tax returns were to be audited, "willfully attempted . . . to evade or defeat" payment of taxes.
The matter was tried to the Court on December 14, 2017. Upon consideration of the stipulations of fact set forth in the Pretrial Order,
The Court has jurisdiction over this proceeding pursuant to 28 U.S.C. §§ 1334, 157(a) and (b)(2)(I), and Local Civil Rule 84.1(a) of the United States District Court for the Northern District of Oklahoma.
Gayton immigrated to the United States from Mexico in 1984 at the age of 14.
At all relevant times, Gayton knew he had a legal obligation to file personal and business income tax returns with the IRS to report his income and pay any taxes due. In 2005, 2006 and 2009, Gayton conducted his business as a sole proprietorship and reported his business income and expenses on Schedule C of his individual income tax return. At some point thereafter, Gayton began operating his business through a sub-chapter S corporation, and reported the corporation's income and deductions on Form 1120-S, and reported the corporation's net business income on Schedule E of his individual tax return.
Gayton's wife, Patricia, handled the bookkeeping for Gayton's business until 2007. Gayton has no training in financial management, accounting, or tax matters, and he relied upon Patricia and various accountants to maintain records and prepare tax returns. In 1998, Gayton hired Juan Cuevas, doing business as J & J Tax and Accounting, as his accountant. Cuevas was fluent in both English and Spanish and was able to translate documents written in English for Gayton. Cuevas prepared Gayton's tax returns and otherwise assisted him with tax matters from 1998 through 2007.
When Cuevas retired in 2008, Gayton retained Paul Clarke as his accountant. In 2008, Gayton granted Clarke a power of attorney and appointed Clarke as his representative in connection with an audit of Gayton's 2005 and 2006 federal tax returns. Clarke also prepared and filed Gayton's 2009 federal return. Clarke did not speak Spanish and was not able to translate documents from English to Spanish. In 2011, Gayton again hired Cuevas as his accountant, and Cuevas prepared and filed returns for Gayton and his sub-chapter S corporation for tax years 2010 to 2014.
Gayton timely filed his 2005, 2006 and 2009 federal income tax returns.
Gayton's return for tax year 2006, prepared by Gayton's accountant and filed in October 2007, reflected a tax liability of $16,167.00.
Gayton's return for tax year 2009, prepared by Gayton's accountant and filed in October 2010, reflected a tax liability of $1,296.00.
By letter dated April 16, 2008, the IRS first advised Gayton that his 2005 tax return had been "selected for examination."
On January 16, 2009, the IRS sent Gayton a letter advising him that the audit of his 2005 and 2006 returns indicated that he had not maintained adequate books and records to correctly calculate his federal tax liability. The letter provided Gayton "official notice" that he was required by law to keep records containing the following information:
An attachment to the letter disclosed the "Reasons for Inadequate Records Notice." The IRS suggested that Gayton keep a general ledger with balance sheets and income statements, weekly time sheets for each employee or worker, weekly receipts or canceled checks to substantiate the deduction for labor costs, documentation of his gambling winnings and losses, copies of receipts for cost-of-goods-sold and materials, copies of bid sheets or billing statements Gayton issued to his customers and copies of the checks received in payment of such statements, records of his business cell phone use, and receipts or canceled checks to substantiate deductible expenses.
In addition to maintaining records, the IRS also advised Gayton to deposit all gross business receipts into his business account, deposit and keep track of gambling winnings in his personal checking account, and double check the Social Security numbers of his workers to insure that they matched the Form 1099s issued to such workers.
Based on the records Gayton had provided to the IRS, the IRS determined that Gayton lacked receipts or other written evidence to establish the full amounts of certain deductions claimed in 2005 and 2006. The IRS decreased the deductions to the amounts established by the evidence provided, and increased the amount of Gayton's self-employment tax accordingly.
On May 15, 2009, Gayton acquiesced in the IRS's adjustments to his 2006 tax return, and signed a consent to the assessment and collection of additional taxes, penalties, and interest in the amount of $18,184.51.
Gayton did not acquiesce in the adjustments the IRS made to his 2005 tax return, nor did he consent to the assessment and collection of additional taxes, penalties, and interest for tax year 2005. On November 9, 2009, the IRS assessed additional taxes, penalties, and interest for the 2005 tax period in the amount of $151,224.53.
On November 24, 2009, accountant Clarke, on behalf of Gayton, sent a letter to the IRS Appeals Division asserting Gayton's intent to appeal the audit findings on the ground that the auditor did not take into account certain documentation supporting expenses for labor, materials, and supplies, and requesting an appeals conference.
Sometime in 2011, the IRS audited Gayton's 2009 tax return and again proposed adjustments. The adjustments were necessary because Gayton's accountant erroneously entered business income and expenses on both Form1120-S and Gayton's Schedule C. Because of the duplication, the IRS disallowed all Schedule C income and deductions.
In June 2013, Gayton granted accountant Cuevas a power of attorney and appointed Cuevas as his representative and agent before the IRS with respect to tax years 2005, 2006, 2007, 2008, 2009, and 2011.
In filling out Forms 433-A and 433-B, Cuevas posed questions to Gayton in Spanish, to which Gayton responded either verbally or with documents. Cuevas typed the information given to him onto the forms, and calculated the amount that Gayton offered to the IRS in settlement of his tax liabilities. Gayton did not read the completed forms before he signed them, nor did he ask Cuevas to translate them into Spanish. Gayton did not understand the forms, or their contents, but he trusted Cuevas to complete the forms correctly.
The IRS requires a taxpayer making an offer in compromise to disclose on Form 433-A, under penalty of perjury, all income, assets, property, and rights in property, so that the IRS may evaluate a taxpayer's collection potential and determine whether accepting an offer in compromise is in the best interests of the United States.
When a taxpayer making an offer in compromise owns a business, the IRS also requires the taxpayer to provide, under the penalty of perjury, certain financial information for the business on Form 433-B. Gayton, as president of Juventino Gaytan Masonry, Inc., signed the Form 433-B that Cuevas had completed using financial information Gayton provided to him. In the gross monthly income and expenses portion of the form, the taxpayer has a choice of providing average monthly income derived from the last three, six, nine or twelve months. Cuevas and Gayton designated the three month period of January 1, 2013 to March 31, 2013, as the reporting period, and reported that the corporation had gross monthly receipts of $96,009.00 and gross monthly expenses of $92,069.00, resulting in a monthly profit of $3,940.00
The IRS relies on the discrepancy between the corporation's monthly profit reported on Form 433-B and Gayton's net monthly business income reported on Form 433-A to show that Gayton misrepresented his net monthly business income. It appears to the Court, however, that the amounts Cuevas entered on Form 433-B represented the corporation's gross receipts and expenses for the entire three month reporting period — from January 1, 2013 to March 31, 2013 — and that the calculated profit of $3,940.00 was not a monthly figure, but instead was the total amount accrued over the three month period. The Court notes that $3,940.00 divided by three is $1,313.33, which is within pennies of the amount Gayton reported as his net monthly business income on Form 433-A.
The Court also notes that the corporation's 2013 tax return shows gross receipts of about $43,000.00 per month, much less than the $96,000.00 per month reported on Form 433-B. The tax return also reports expenses and deductions of about $41,800.00 per month, and not $92,069.00 per month as reported on Form 433-B.
On January 28, 2014, the IRS revenue officer who was assigned to examine Gayton's OIC requested additional information and records.
On February 28, 2014, Cuevas responded to the request by stating that Gayton "has no money for an appraisal."
On May 2, 2014, another IRS agent sent Gayton and Cuevas a letter rejecting the OIC because "[t]he amount offered is less than your reasonable collection potential."
On or about May 30, 2014, Clarke, on behalf of Gayton, submitted to the IRS a Request for Appeal of Offer in Compromise.
On February 26, 2015, Gayton filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code. The Chapter 7 Trustee filed a report stating that no assets were available for distribution to creditors. Gayton was granted a general discharge of dischargeable debts on June 2, 2015, and the case was closed on June 18, 2015.
On April 8, 2016, the case was reopened upon Gayton's motion so that an adversary proceeding could be filed to determine the dischargeability of the unpaid federal income taxes.
The IRS contends that instead of paying taxes, Gayton spent funds on unnecessary discretionary items in the categories of home improvements, luxury vehicles, horses, casino gambling, and charity. As other evidence of willful evasion, the IRS contends that Gayton has refused to sell his residence or borrow against it to pay his tax liabilities; misled the IRS about the value of the residence on the OIC and failed to disclose a prior appraisal of the residence; understated his income on tax returns in the years after the audits; and failed to keep adequate books and records.
In October 2001, Gayton purchased as his homestead a 14.5 acre tract of real property on which stood a one-story 2,200 square foot residence and a horse barn (the "Homestead").
In 2005, Gayton built a stand-alone shop/storage building on the Homestead, installed a brick wall on the barn, painted the barn, and built a handball court.
In 2006, Gayton installed wood floors, tile, and crown molding in the residence, added a jacuzzi tub, remodeled the kitchen, and built a fence and a gate.
In or about 2007, Gayton decided to add a second floor to the residence that resulted in doubling the size of the home. He began the renovation in 2007 and completed it sometime between 2012 and 2014.
In December 2009, Gayton retained an appraiser to appraise the Homestead.
Over the course of the next three to five years, Gayton continued collecting discarded and surplus materials to finish the second floor interior. The second floor currently consists of three bedrooms, two baths, a balcony, a game room, and a living room.
Gayton lives in the residence with his girlfriend and their son, and with a daughter from a previous marriage on a joint custody basis. They do not use the second floor as their living space. Gayton has four other children and a grandchild who often spend weekends with Gayton and use the second story. When Gayton's family visits from Mexico, they also reside in the second story addition.
Between 2008 and 2016, Gayton listed the Homestead for sale at various times with asking prices ranging between $575,000.00 and $899,000.00.
In 2007 and 2008, Gayton made lease payments on a 2007 Cadillac Escalade in the amount of approximately $700.00 per month.
On April 17, 2012, Gayton traded the Jaguar for a 2012 Ford Truck
Gayton testified that he purchased or leased nice vehicles to gain the respect of potential customers. Gayton admits that he could have driven less expensive vehicles, but he believed that it was important to his business to appear successful and trustworthy, and that driving a clean late model car or truck represented those attributes. He also owned a Chevy van that his crew used for transporting tools, ladders, machines, etc. to the job sites.
On his 2005 tax return, Gayton deducted from his income gambling losses in the amount of $61,700.00.
Gayton's bank records reflect that between 2010 and 2016, Gayton withdrew a total of $34,687.26 from his personal and business bank accounts through ATMs located inside casinos.
In 2010, Gayton made a $4,000.00 donation to his church
On his 2010 through 2014 personal income tax returns, Gayton reported the following adjusted gross income:
In 2010 to 2013, Gayton's adjusted gross income was the S-corporation's net business income as reported on Schedule K-1s. In 2014, the adjusted gross income included gambling winnings and capital gains as well as net business income.
On his bankruptcy schedules, Gayton reported net monthly business income of $6,136.67 and monthly expenses of $5,727.00. In his 2016 deposition, Gayton agreed that his income and expenses had been fairly consistent since 2010. The IRS contends that because the income reported on the tax returns from 2010 to 2014 is inconsistent with the income reported on the Schedule I filed with this Court, and Gayton admitted that his income and expenses had been steady for the last six years, Gayton significantly understated his income to the IRS during these tax years. The inconsistency, without more, is insufficient to establish intentional underreporting of income, however.
First, the Court notes again that Gayton is not a sophisticated business owner. He has developed expertise in multiple trades and has decades of experience in the home construction industry, but has depended on others to assist him in his financial affairs and in complying with applicable laws and regulations. In or about 2010, Gayton's accountant set up the S-corporation through which Gayton did business. Gayton maintained checking account and vendor records to account for receipts and expenses. He provided his records to his accountant, who prepared the S-corporation's 1120S returns. The corporation issued K-1 Forms representing the corporation's net income after all losses, deductions, and credits, which passed through to Gayton for income tax purposes. The pass-through income is net of depreciation and other deductions that do not correlate with actual cash expenditures, so the amount reportable on the shareholder's personal return has been reduced by the non-cash deductions for tax purposes.
The corporation's returns, the K-1s, and Gayton's personal returns were prepared by Gayton's tax professionals from records provided by Gayton. There was no evidence offered to support any inference that Gayton withheld documents or information or otherwise did anything to cause underreporting of income, if any, for income tax purposes.
Gayton did not (and does not) have a computer because he does not know how to use one, so he lacked the ability to create and print out financial reports using financial software such as Quicken. During 2005 and 2006, Gayton's wife helped with bookkeeping and maintaining records. Thereafter, Gayton maintained his business records.
After the IRS notified Gayton in 2009 that his recordkeeping was inadequate, Gayton discontinued all cash transactions.
After carefully listening to Gayton's narrative and assessing his demeanor at trial, the Court finds that Gayton was a credible witness. His demeanor was direct and non-evasive. He attempted to respond to questions posed by counsel and the Court as best as he could. He admitted when he did not know or remember events, and he readily admitted facts that were not favorable to him. For instance, he admitted to not reading documents before signing them.
The Court finds it more probable than not that Gayton did not fully understand the content of his tax returns or the representations made therein with respect to income and deductions reported. Gayton knew that he had no background in financial or tax matters, and therefore appropriately sought assistance from professionals and trusted them to properly complete the forms based on the raw financial information he provided to them. Likewise, Gayton retained professionals to assist him when the IRS gave notice of its intent to audit his returns, and again when he attempted to settle the debt through the OIC process. He provided information requested by his professionals to the extent he understood what was requested.
The Court does not condone the practice of signing documents under penalty of perjury without reading them, or in this case, without having the documents carefully translated into Gayton's native language before attesting to their accuracy. But that is what happened, and that fact is relevant to determining Gayton's state of mind when he filed his returns and submitted his offer in compromise. Because of the language barrier, Gayton's struggle to understand financial concepts (i.e., ledger, balance sheet, equity), and the byzantine nature of tax law and procedure, it is more likely than not that translating the documents into Spanish would not have assisted Gayton in understanding why his accountants entered the numbers they did on the tax returns and other statements submitted to the IRS.
Section 523(a)(1)(C) excepts from discharge any tax debt "with respect to which the debtor . . . willfully attempted in any manner to evade or defeat such tax."
The conduct component includes actions intended to avoid not only the assessment of taxes but also the collection thereof, such as "keeping a double set of books, making false entries or alterations, or false invoices or documents, destruction of books or records, concealment of assets or covering up sources of income, handling one's affairs to avoid making the records usual in transactions of the kind, and any conduct, the likely effect of which would be to mislead or to conceal."
The willfulness component is a quintessential question of fact to be determined from the totality of the record, and willful attempts to evade may be inferred from the debtor's conduct vis-a-vis the unpaid taxes.
Before evaluating whether the IRS proved that Gayton willfully attempted to evade his tax debt, the Court must resolve the parties' dispute as to what state of mind the IRS must establish in order to prevail. In denying in part the IRS's motion for summary judgment, this Court concluded that to except taxes from discharge under § 523(a)(1)(C), the IRS would have to prove at trial that Gayton "subjectively intended to evade or defeat" his tax debt.
The IRS advances three main arguments in support of its position. First, it contends that the Tenth Circuit, following four other circuits, "outright reject[s] that specific, or fraudulent, intent is required in § 523(a)(1)(C) willful evasion cases."
The IRS contends that the Tenth Circuit, in the case of
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It was not error, concluded the Tenth Circuit, to infer from the debtor's conduct that the debtor acted "willfully," or with the "intent to evade tax[es]"
It cannot be, and is not, the law that simply voluntarily, knowingly and intentionally spending money while knowingly owing taxes renders the tax debt non-dischargeable. "[N]onpayment [of taxes], by itself, does not compel a finding that the given tax debt is nondischargeable."
In its Trial Brief, the IRS argues that only the Ninth Circuit requires the government to prove that the debtor actually intended to evade taxes under § 523(a)(1)(C),
In this passage, the Ninth Circuit disagreed with the government's interpretation of the holdings of these cases. It did not expressly deviate from the standard adopted by the other circuits with respect to the mental state required under § 523(a)(1)(C) as the IRS contends. In fact, the Ninth Circuit observed that its sister circuits did require proof of some purposeful evasive conduct to reach the threshold of willfulness, which was consistent with the Ninth Circuit's view.
The case law on the topic of the mental state component of § 523(a)(1)(C) is inconsistent, unsettled, and generally result-oriented. This Court finds itself generally in agreement with the majority opinion in
The IRS also contends that the mental state component of Section 523(a)(1)(C) is equivalent to that required in a civil tax proceeding, and that requiring proof that a debtor's acts or omissions were done for the purpose of evading taxation would be akin imposing a criminal standard for willfulness in a civil bankruptcy case. Under this argument, the IRS would expand the definition of willfulness to include standards used in civil tax cases, such as reckless violations of a standard
It is worth noting at this point that the language of § 523(a)(1)(C) tracks almost verbatim that of the criminal tax evasion statute, 26 U.S.C. § 7201 ("IRC § 7201"), which provides that "[a]ny person who willfully attempts in any manner to evade or defeat any tax. . . or the payment thereof shall . . . be guilty of a felony." This same phrase is also contained in 26 U.S.C. § 6672 ("IRC § 6672"), a civil tax statute that penalizes a "responsible person" who fails to collect or turn over required payroll withholding taxes (trust fund taxes) to the IRS.
In cases under IRC § 7201, the Supreme Court has held that "[w]illfulness, as construed by our prior decisions in criminal tax cases, requires the Government to prove that the law imposed a duty on the defendant, that the defendant knew of this duty, and that he voluntarily and intentionally violated that duty."
On the civil side, IRC § 6672 imposes on a responsible person, generally a corporate officer or employee, who fails to turn over withholding taxes a penalty equal to the trust funds not collected or turned over (the so-called "100% penalty").
In the context of imposing civil penalties for the diversion of trust funds, however, the Tenth Circuit still construes "willful" as a subjective state of mind. In
It is true that § 523(a)(1)(C) is not a criminal statute. But the Bankruptcy Code does not hold the IRS to the standard of proof required in a criminal case. To establish criminal tax evasion, every element of the statute must be proven beyond a reasonable doubt,
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"The normal rule of statutory construction assumes that identical words used in different parts of the same act are intended to have the same meaning" and "the presumption that a given term is used to mean the same thing throughout a statute is at its most vigorous when a term is repeated within a given sentence."
Exceptions from discharge are narrowly construed so that honest but debt-plagued debtors may reap the Bankruptcy Code's promise of a "fresh start." By requiring proof that a debtor "voluntarily, consciously or knowingly, and intentionally"
Did the IRS meet its burden of proving Gayton willfully-that is, voluntarily, consciously and intentionally-attempted to evade the payment or collection of the outstanding tax debt? The Court finds that it did not. In particular, the Court finds that certain of the facts and circumstances that the IRS relies upon to establish willful evasion were more likely than not the consequence of inadvertence, mistake, and/or confusion due to language barriers and Gayton's lack of sophistication regarding financial and accounting matters. Other circumstances, such as the Gayton's expenditures on what the IRS deemed luxuries, were more likely than not motivated by legitimate business, family support, and/or charitable reasons than by tax avoidance. Further, the Court finds and concludes that Gayton's failure to pay more of the additional tax debt assessed following the audits is more likely than not a result of the drastic decline in business opportunities and income, through no fault of his own, than tax evasion.
As evidence of indifference and defiance on tax matters, the IRS contends that Gayton "ha[d] a long history of ignoring his obligations" to pay taxes; "understated his income on tax returns for subsequent years"; "fail[ed] to keep adequate books and records"; and "willfully undervalued his residence by several hundred thousands of dollars" in statements made in connection with an offer in compromise of the unpaid taxes.
The totality of the evidence negates that Gayton had a "long history of ignoring his obligations" to pay taxes. Gayton filed his tax returns on time in every relevant year except 2007, remitted thousands of dollars to the IRS in payment of taxes with his returns, paid installments in conjunction with the OIC, and hired professionals to assist him in complying with the complexities of the tax laws. Gayton did not engage in tax avoidance schemes or shelters. On the whole, Gayton was an attentive and compliant taxpayer who relied in good faith on professionals, and he followed their advice.
The IRS failed to prove that Gayton intentionally "understated his income" in the years after the audit to "conceal[] a potential collection source."
With respect to Gayton's maintenance of books and records, the Court concludes that at all relevant times after the 2009 IRS "official notice" letter, Gayton maintained records that enabled him to calculate his tax liabilities.
Gayton did in fact misrepresent the value of and equity in his Homestead in the statements supporting his offer in compromise. Gayton, having a limited comprehension of written English, did not read the OIC or Forms 433-A and 433-B before signing them. Gayton also lacked sophistication regarding technical financial and accounting concepts. Gayton trusted Cuevas to complete the forms correctly. Mistakes were made. The evidence is not sufficient to infer that Gayton knew the documents were not accurate when he signed them and submitted them to the IRS.
With respect to the IRS's allegation that Gayton continued to hide the actual value of the Homestead by refusing to provide the IRS with an appraisal, Gayton admitted at trial that he could have obtained an appraisal in response to the IRS's request in 2014, but he did not do so. He also admitted that he did not tell Cuevas or the IRS about the 2009 appraisal. The IRS, however, already possessed evidence that the Homestead was worth at least $317,000.00, and the revenue officer told Cuevas that without an appraisal, the IRS would use the $317,000.00 figure in evaluating the OIC. Thus, the IRS left Gayton with a choice — he could provide an appraisal or not. Gayton did not "refuse" to obtain an appraisal for the IRS; he simply chose one of two options presented by the IRS.
Based on its own valuation, the IRS rejected the OIC. The fact that Gayton did not hire an appraiser or provide the IRS with the five-year-old appraisal did not interfere with and had no material effect upon the IRS's ability to evaluate the OIC.
As stated above, while the IRS contends Gayton spent extravagantly on luxury items as a means to willfully avoid paying his taxes, its evidence is not compelling. First, Gayton could not have had tax evasion in mind when he chose to add a second story to his residence. The Court notes that the IRS first gave Gayton notice that it was auditing his 2005 and 2006 tax returns in April 2008. In 2005 and 2006, Gayton had already invested about $40,000.00 making improvements on the Homestead, building a shop and storage facility, installing fencing and gates, remodeling the kitchen, installing wood floors and crown moldings, and adding a jacuzzi bath. In 2007, again, well before Gayton was aware that he might owe additional taxes, he started on the second story expansion. Thereafter, Gayton, and the construction and housing sector in general, experienced a sudden loss of business, and consequently, an unexpected decline in income. In order to finish the renovation, Gayton scavenged discarded materials from job sites and obtained defective materials that builders could not use in their construction projects, bought discontinued materials and discounted supplies, found inexpensive appliances on Craigslist, and performed the labor himself and with the help of friends and relatives. The renovation took at least six years to complete. Instead of borrowing against the Homestead to complete the remodeling, Gayton engaged in belt-tightening. In the end, the value of the Homestead increased substantially, but Gayton was extremely frugal, and the amount actually spent to improve the Homestead was modest.
Gayton did not conceal his ownership of the Homestead, or transfer the property to his wife or a relative, or otherwise attempt to impede the IRS from exercising an interest in the Homestead. Instead, he invested his own labor to increase the value of an asset that to this day remains available to satisfy tax debts.
The cost of feeding and maintaining the family's two horses was inconsequential and thus the Court cannot infer from that conduct any intent to evade taxes.
The $700.00 monthly payments Gayton made to lease a 2007 Cadillac Escalade in 2007 and 2008 again predated the point in time that Gayton became aware that the IRS intended to audit his 2005 and 2006 returns. Those taxes were not assessed until 2009. Accordingly, the Court cannot infer that those payments were made in an attempt to avoid paying taxes.
In 2011 and 2012, after additional taxes had been assessed, Gayton paid approximately $800.00 per month for a 2011 Jaguar. Rather than intending to avoid paying taxes, however, Gayton intended, by driving a nice vehicle, to represent himself as successful and reputable in order to attract business. Gayton would have made installment payments for some vehicle in some amount in any event, and the Court cannot find that paying $800.00 per month rather than, say, $500.00 per month, over the period of about a year is so excessive that an intent to evade paying taxes may be inferred.
Gayton contributed $4,000.00 to his church because the church was in need of materials to build housing for homeless immigrants. Gayton's charitable motivation is corroborated by the fact that he also volunteered his labor to help with the remodeling.
Both before and after additional taxes were assessed, Gayton gambled occasionally at casinos for entertainment. After the assessment, the total amount Gayton withdrew from bank accounts at ATM's located in casinos was $34,687.26 — an average of less than $5,000.00 per year. Occasional gambling for entertainment is not, by itself, indicative of an intent to evade paying taxes.
To summarize, these discretionary expenditures were not so unusual, excessive, or extravagant as to make it more likely than not that Gayton made them with the intent to avoid paying his tax debts. Significantly, there is no evidence that Gayton transferred assets to others, or intentionally concealed assets from the IRS, or attempted in any manner to render his assets unreachable. The evidence that was offered to show that Gayton lived large and dissipated his estate in order to stymie the IRS's collection efforts is thin and unpersuasive.
The IRS claims that Gayton "refused to sell [his residence] or borrow against the equity in the property to pay his tax liabilities" and "failed to make any meaningful attempt to pay his federal tax liabilities."
At his deposition, Gayton testified that he wanted to keep the property as a home for himself and his family, and did not want to sell it to pay the IRS. The IRS presented evidence, however, that Gayton had listed his Homestead for sale at various points in time after the taxes were assessed. Gayton also testified that he never envisioned borrowing against his Homestead to pay the taxes. His bankruptcy filing has now foreclosed his ability to borrow. Gayton's expressed preference for keeping his Homestead is not indicative of tax evasion.
Finally, at no time did Gayton have the resources to pay in excess of $250,000.00 in back taxes from his income or from financial assets. Gayton's efforts to reduce the burden, by challenging the audit findings, pursuing a compromise of the overwhelming tax debt, and appealing the rejection of the OIC, were made in good faith, and do not evidence an intent to evade or defeat payment of the taxes.
Gayton paid his bills as they came due to maintain an ordinary, perhaps frugal, lifestyle. He paid current taxes to the best of his financial ability, and made installment payments to the IRS until the OIC was rejected. Gayton's efforts to pay his taxes were consistent with his ability to pay them.
For the reasons stated above, the IRS did not meet its burden of establishing that Gayton's debt to the IRS for tax years 2005, 2006 and 2009 should be excepted from discharge. A judgment in favor of Gayton will be entered contemporaneously herewith.
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IRS Exhibit 16.
