Petition for Writ of Certiorari — Sumpter v. United States, 116 S. Ct. 1673 (1996) (No. 95-1162)

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IN THE

SUPREME COURT OF THE UNITED STATES

October, 1995 Term

JERRY L. SUMPTER

Petitioner

UNITED STATES OF AMERICA

Respondent

Petition for Writ of Certiorari to the

United States Court cf Appeals

for the Sixth Circuit

PETITION FOR WRIT OF CERTIORARI

Jerry L. Sumpter, J.D. P21164

Petitioner and

COUNSEL OF RECORD

P.O. Box 286

Cheboygan, MI 49721

(616) 627-7167

FAX: (616) 627-9675

Did the Court of Appeals for

the Sixth Circuit err when it

expanded the language of

§523(a)(1) (Cc) of the

Bankruptcy Code to include

the word "collection" or

"payment" in defining conduct

of a debtor sufficient to

deny a Chapter 7 discharge.

TAB OF CON

Page

Question Presented for Review mo aye |

Table of Contents a 6 Sle eee

Table of Authorities = «6 Soe

Jurisdictional Statement see ee 1

Statement of the Case i .0 @ ae See

Argument ..« © »s « « @ = )6. 9: ee

Appendix Page

Sixth Circuit Opinion,

dated August 22, 1995 oe @ #8 1

U.S. District Court

Eastern Dist. of Michigan

Opinion March 10, 1994 ... + + 27

U.S. Bankruptcy Court

Eastern Dist. of Michigan

Opinion December 6, 1990 ... . 50

’

TABLE OF AUTHORITIES

Cases Page

in Re Anderson, 477 U.S. at

248 “hs iy ae se Oe ee

Goodyear Atomic Corp v Miller,

486 US 174, 184-85;

108 S. Ct. 1704,1712;

100 L. Ed. 2d 158 (1988) wiles a 25

hwright,

102 BR 211

(Bankr.D.Or, 1989) : 20, 23, aac av

In Re Haas

48 F. 3d 1153

(lith Cir 1995) ow = By aa, 34, 2

in Re Jones, 116 B.R. 810

(Bankr D. Kan. 1990) ‘ha ee Oe 19

Jordan, 915 F. 2d at 628 1 oe ate 26

Miles v Apex Marine Corp,

498 US 19, 30: 111 S. Ct. > & #

325; 112 L. Ed 2d 275 (1990) : 25

Sansone v United States,

380 US 343,350-51,

85 S. Ct. 1004, 1010;

13 L Ed 2d 882 (1965) . es 26, 27

Spies v United States,

317 US 492, 497;

63 S. Ct. 364, 367;

87 L. Ed 418 (1943) a oY ee 26

United States v James, 478 US 597,

92 L Ed 2d 483; 106 S Ct 3116

(1986) Je So = 6-6 6°} « 6 wee

Cases Page

v Toti,

24 F. 3d 806 (6th Cir),

» &£an 8. - CS:

482 (1994) “th of on it ae a eee

Vanguard Ins. Co v Bolt, 204 Mich App

og ee Be er ere a ee.

Statutes

11 USC §523 (a) (1) (C) ° a, a5. 3, 33

oe 0 ¢ 0 « Shy 33, 24, 26, BT,'-26, 29

11 USC §523, p146 .. - 8 Se he ee

11 USC §727(a) (4) (a) (2) “a Dies Ae ta 3

11 USC §727 (a) (5) Ta ee a ie fee OY 3

26 USC 7201 Se ee ee ee ae ae ee

Ce OE” pe! gt gt yh ga ey ol ee oe ee oe

Rules

a Om 38: {.3) (ayer a See SF eae

OTS ION a ti Ct al ae eS Nb rian tach RE |p Nie se aia “s

STATEMENT OF THE GROUNDS ON WHICH THE

JURISDICTION OF THIS COURT IS INVOKED

The order sought to be reviewed

herein was entered August 22, 1995 by

the United States Court of Appeals for

the Sixth Circuit. (Appendix pl).

The Court of Appeals for the Sixth

Circuit, in United States v Toti, 24 F.

3d 806 (6th Cir), ert. ied, 115 S.

Ct. 482 (1994), has rendered a decision

in conflict with In Re Haas, 48 F. 3rd

1153 (11th Cir. 1995), interpreting

Section 523 (a)(1)(C) of the Bankruptcy

Code, which conflict, because it

involves the insertion by the Sixth

Circuit into that Section of expansive

language not intended by Congress,

should be settled by this Court. (SCR

10 (.1) (a) (C)).

STATEMENT OF THE CASE

On September 27, 1989, Jerry and

Santina Sumpter, husband and wife’,

filed a voluntary petition for relief

under Chapter 7 of the Bankruptcy Code.

They sought discharge of various debts,

including a debt to the Internal

Revenue Service (I.R.S.) for unpaid

taxes emanating from a disallowed

deduction, interest, and penalties.?

In December of 1989, the

Government brought a four count

complaint against the Sumpters seeking:

; AS of April 28, 1995, the

Sumpters are now divorced.

? A judgment for $60,000 (which

has now grown to well in excess of

$300,000) was entered pursuant to

Stipulation between the I.R.s. and the

Sumpters, emanating primarily from tax

years 1981 and 1982, wherein Mr.

Sumpter made a book publishing

investment that was contested by the

I.R.S., which contest resulted in a tax

change for both years. There was not

then, nor has there ever been a claim

of tax evasion: Simply a disallowed

deduction.

(2) a denial of discharge pursuant to

Bankruptcy Code §§727(a)(4)(a)(2), and

(a)(5) (Counts I - III), and (2) a

determination pursuant to Bankruptcy

Code §523(a)(1)(C) that their federal

income tax liabilities are not

dischargeable (Count IV). Cross

motions for summary judgment were filed

on all counts in September, 1990. On

December 6, 1990, the Bankruptcy Court

dismissed Count II against the

Sumpters, and denied the I.R.S.’s

motions for summary judgment against

Santina Sumpter on all counts.

However, the Court granted the I.R.S.’s

motion on Count IV (§523(a)(1)(C) )

against Jerry Sumpter, declaring that

the I.R.S. debt was not dischargeable.

In July, 1991, subsequent to the

Bankruptcy Court’s denial of his timely

filed motion for reconsideration, Mr.

Sumpter filed notices Of appeal in the

District court. 3

The District court affirmed the

Bankruptcy Court: the Sumpters

appealed in the United States Court of

Appeals for the Sixth Circuit. On

Appellants’ motion, the cases were

consolidated for briefing and

Submission. The Court Of Appeals had

jurisdiction by virtue of 28 usc § 158.

Background Information

In the late 1970’s, the

Sumpters created trusts naming their

Children as the sole beneficiaries.

Three different trustees have served

during the life of the trusts. The

trusts have assets totalling over

; Apparently, due to confusion as

to whether his attorney had in fact

filed a notice of appeal, appellant

filed his own notice of appeal:

(number 91-10231 was filed by attorney

Donald Cadotte; number 91-10235 was

filed by Jerry Sumpter, who is 3

licensed attorney).

$190,000.00.* The District Court said,

page 3 of Memorandum Opinion that:

"(tjhe only explanation given

as to how the trusts

accumulated these assets was

that the trusts own the

building in which Mr.

Sumpter’s law firm or

professional corporation

("P.C.") is located, and that

the P.C. pays rent to the

trust. (Tr 165)"

(In fact the trusts earned additional

monies via other rents, loans, and

interest, which income is fully and

unimpeachably documented by the trusts’

bank statements and tax returns, all of

which were timely filed and all taxes

thereon timely paid by the

beneficiaries.°

* Relying on the _ Sumpters’

statement of Financial Condition, the

Bankruptcy Court found that, as of

5/6/88, the value of the trust was

$190,000.00.

‘The Government will not likely

contest the truth of this statement,

and if they do, they are challenged to

prove otherwise, from the record.

See documents of record, which

documerits the government has had since

the discovery stages of this

The District Court found that from

the creation of the trust until the

time of the trial in this matter, Mr.

Sumpter’s P.c. of which he - owns

virtually all of the stock,°® received 12

loans from the trust totalling

$257,900.00.’ Each loan was short-term;

each loan was fully documented, and

each loan was repaid.

Further, all other trust monies

are likewise documented and accounted

for to the penny.

litigation).

‘Mr. Perry is a minority

stockholder in Sumpter & Perry, P.C.

"Later in the Court’s opinion it

found the trust "a conduit to loan the

Sumpters money". The later language is

a contradiction because if there were

12 loans that went to the P.C., then

where is this conduit of money to the

Sumpters? This finding too is

contradicted by clear and unambiguous

documents of Record.

several income tax liabilities against

Mr. and Mrs. Sumpter for tax year 1985.

Thereafter, additional assessments were

- : } er _ 2 ©

made against the Sumpters:

(

1986, for tax year 1984, and on August

19, 1987, for tax years 1981 and 1982.

. ~ ana Aon Ae lated t]) dat

By notice and demands date the ates

¢ ~~ ~ + + —— ro th

c es c cm

of each of the ssessments, the

Crimn? ~ J rec not > . ae

Sumpters were notified of sal

a dl nd lam - ~

assessments

rm >So 2 7 2 ~~» one, =—-

ine years her OD 2 iwc ana LYOoo were

<cj10n1 fF) ant loac earc ver 7 A

wmlaiWwMiliiid LUVaIILE dp wi an ae y ead & sv 4f/ &

) 2 7 ‘abe Far ssImMNT a tc Dor r~ A

miijiion) for Sumpter & Perry, P.C., Mr.

Crymnt orlc Ky) -. - Gta Tey ac

OUMNMPDLEe! S JH Us 4. [eS « Jil July 9, 1987,

Mi - o a a =

Mr. and Mrs Sumpter mortgaged the

“ik nS an i \aAarrmo ~ ~ + =" 1 -, rritek - ~ +

Subject parcels of realty with First of

fs ~ - D- Ly + oe on ~ + -

AMerica DaNnkK, hey return LoL a

Taxes then indicated as owing

were paid with each return.

Subsequently, the I.R.S. made its own

adjustment

reaction.

— 7

precipitated

a chain

Second notices”) of federal tax

liabilities were sent by the I.R.S. on

December 21, 1987, and December 28,

1987. (Tr 86) The first notices were

in August 1987 and the second notices

are well after the July 9, 1987

mortgage of the Sumpters’ property to

the First of America bank.

On January 11, 1988, a mortgage

was given by the Sumpters to the Trust

for their children, in return for a

$90,000.00 loan to the P.C.’ The

borrowed monies went into and became

operating capital for the P.C. The

proceeds of this particular loan were

used to pay-off the above referenced

$40,000.00 mortgage to First of

America, and other debts and operating

expenses of the P.C.

One reason 1S obvious, because

the bank would only loan $40,000

thereon.

Neither Mr. nor Mrs. Sumpter ever

personally received any money from the

trust. All trust hecks for all loans

from the Trust were fully documented

and paid directiy t< the PC. and

directly deposited into the P.C.’s

general account including the $90,0(

- | ’ .

loan. Within two days, the entire

$90,000.00 was used to liquidate P.¢

debt. n Aprid » as , the R.

return receipt requested, ent a fina

demand for payment t Mr 1 Myr

umpter.

nm Aprid , M Mr

sumpter transferred lieeded the

nropertile O! whict thé inual lJ

1988s, $90,000. mortgage was given, t

the trust, in return for a discharge of

—. — + } + . f

agreement wa re rded at Liber 49(

- A* -~h > ~~ } } ‘ T

Pads a iid Mui t< hy ims jaf) I .

, + ,

Records ‘al’ r f ‘ , + . + ,

rN wi . Lil Lhe Ne i A A J

of federal tax lien on May 3 1988.

’

Mr. and Mrs. Sumpter filed their

voluntary petition in bankruptcy on

September 27, 1989.

The Court of Appeals for the Sixth

Circuit affirmed as to Mr. Sumpter and

reversed ao + ¢ Cantina Cr) s+ or

- vod — WA ao & waitin lina OuUMpPTte] ©

(Appendix, pl)

ARGUMENT

anted

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admission is wrong in that it fails to

consider the existence of an issue of

material fact presented by the record

as a whole.

The specific exchange relied upon

by the trial court is as follows:

QO. [by Mr. Clark for the

government} Was the reason

for transferring the proper-

ties to the trust to protect

them from the Federal Tax

liens?

As [by Mr. Sumpter} think the

real reason was to discharge

the mortgage and to provide

what equity we could to

discharge the mortgage for

fear that it would be -- a

lien would be imposed against

it and turn into a rats nest.

QO. So that was -- well, was that

something that you considered

or thought of at the time

that you were transferring

the property and that is

well, I could pay off this

mortgage and in addition to

that I could keep the liens

from attaching to the

properties?

A. Z couldn’t pay off the

mortgage. I had no money.

The only way I could pay off

the mortgage was with the

equity in the property.

The question is was one of

eo"

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to the trust in satisfaction of the

mortgage debt”. That is what Mr.

Sumpter chose to do. Admittedly a

small part of the reason he did this

was to avoid the attachment of an

iL.R.S. tax i1ien.

However, an intent to avoid the

attachment of the lien should not

equate with an intention to evade or

-, i +h - vv ta cat all a > Crommn> - ,

defeat the tax, unless Mr. Sumpter knew

or believed there was value or equity

5 aa - ~+- at ot ad = +

in the propert in excess of the amount

ra ~~ . mmr rc ~-h- ~

que on the mortgage that he

It 1S axiomatic that there can

be no frauc if consideration is

adequate. The trial court specifically

found that $90,000 was indeed paid and

that payment constituted adequate

consideration.

'' Even this is an arguable strain

on the statute language, i.e., with or

without the attachment of the lien, the

tax debt still exists. The tax debt

itself was never evaded or defeated.

It still exists today.

The mortgage was recorded with the

Cheboygan County Register of Deeds on

January 2, 1988. There is no

discussion in the court’s ruling that

the mortgage itself shows an intent to

evade or defeat the tax (nor indeed

could there be as consideration was

paid). The tax lien was filed four

months later in May, 1988. The

mortgage was a notorious prior lien and

had to be satisfied before any value of

the subject property would be available

to tne 1.R Tne record does not

sonclusively establish the value of

that property The maxlmum value for

the property using the State Equalized

Value (SEV) method was $97,000 The

ourt itself questioned the use of that

method On Rehearing, other value

ic itions were presented The point

] the irt had r other evidence

equity available

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error in the trial court’s

is that it assumes there was

to the I.R.S.

otion was argued,

Cs Sd

Sumpter S

reasonab

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1 equity being proven

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the court’s determination is a finding

of equity in the property available to

the I.R.S., or that Mr. Sumpter

reasonably believed such equity

existed. Such a determination 1s

inappropriate on summary judgment

because it involves resolution of a

question of fact.

In Vangu ard Ins -O BC 1|t ; »OS

Mich App 2/1, 7 994), the Court

Sa 1a

"The granting of a motion [for

summary disposition Ls

especially Suspect where

motive and intent are at

issue or where a witness or

deponent’s credibility ls

crucial. Metropolitan Life

ns Co v Reist, 167 Mich App

Se 121; 42] NW2d 592

(1988); Crossley v Allstate

Ins Co, 139 Mich App 464,

468; 362 VWW2d 760 (1984).

Accordingly, where the truth

of a material factual

assertion of a moving party

depends upon a deponent’s

credibility, there exists a

genuine issue for the trier

of fact and a motion for

summary disposition should

not be granted. See Brown v

. ereud AA } om FF - =f A

ry + y 4 ) Minh £ °

ite } 9U id Wid J ¥ O s IJ

)

212 NW2d 201 (1973);

Metropolitan Life, supra.”

Secondly, Mr. Sumpter is an

attorney with 24 years experience. He

was not asked for his interpretation of

§523 (a)(1)(C). If he testifies that,

in his judgment, the word "collection"

will not be read into the act (which

interpretation is supported by In re

Gathwright, infra,) then wilfulness is

negated. Or if he researched the law

and determined Gathwright, infra to be

the law, then how could his action be

wilful at that time."

It is axiomatic that courts should

avoid legislating. Where a statute is

clear and unambiguous it should be

interpreted as such. United States v

3 Gathwright was the oniy law at

that time. In Re Jones, 116 B.R. 810

(Bankr D. Kan. 1990) was a 1990 case

discovered by the government after Mr.

Sumpter’s deposition.

+”

James, 478 US 597, 92 L Ed 2d 483, 106

S Ct 3116 (1986). Section 523 (a) (1) (C)

does not contain the word "collection"

anywhere therein and the word is

noticeably absent from the

congressional notes. How are laymen

and lawyers alike to read §523(a) (1) (C)

and conclude that the word "collection"

is in there? Amazingly even with the

word "collection" noticeably absent

from §523(a)(1)(C), and the discussion

thereunder”, and the congressional

minutes, the courts below want to

insert it where it never was before,

and then find the taxpayer "wilfully"

violated the word that isn’t there.

Finally, there is no claim or

proof of any kind to the effect that

the Sumpters ever concealed any assets,

dealt in cash, failed to keep records,

“ USC 11 §523, p 146

—

or failed to file any tax return

without all taxes paid therewith; thus

there is no scheme here, evil or

otherwise. The government is again

challenged to show otherwise from the

record. The entire tax debt here

emanated simply from a disallowed

deduction that grew beyond payment

because of penalties and interest. The

government cannot show a single hidden

asset. Nor can the government show

that the Sumpter’s business was healthy

to the extent that it didn’t need to

borrow money. The corporate tax

returns and bank accounts in the

government’s possession clearly show

the contrary, and the government is

again challenged to show otherwise.

The trial court erred in granting

summary judgment to the government

against Mr. Sumpter.

In affirming the trial court’s

judgment against Mr. Sumpter, the Court

: of Appeals for the Sixth Circuit

concluded that United States v Toti,

24 F3d 806 (6th Cir), cert denied, 115

S. Ct 482 (1994), "™ controls many

aspects of this case." (Appendix pl12)

Construing Section 523(a)(1)(C) of the

Bankruptcy Code, y BI usc § 523

(a) (1) (C), the Court found that the

words "in any manner" encompassed

attempts to thwart payment (emphasis

added) of taxes. The Sixth Circuit, as

did ene trial court, chose to insert

the word "collection" or "payment" into

§523 (a) (1)(C), ignoring In Re

Gathwright, 102 BR 211 (Bankr. D. Or,

1989), and the very recent In Re Haas,

48 F 3rd 1153 (11th Circuit, 1995).

The Sixth Circuit, in effect, has

chosen to legislate beyond what

Congress intended Section 523 (a) (1) (C)

to encompass.

In In Re Haas, the Court declared

"([tjhe sole question at issue... is

whether a debtor’s failure to pay his

taxes, without more, constitutes a

‘wilful [ ] attempt [ ] in any manner

to evade or defeat such tax’ under

section 523 (a) (1) (C)."™ The

government argued that the "plain

meaning of the phrase ‘wilfully

attempted in any manner to evade or

defeat such tax’ ... is sufficiently

broad to invoke a debtor’s ‘voluntary,

conscious and intentional’ failure to

pay taxes."

The Eleventh Circuit concluded in

Haas that such an “interpretation of

Section 523 (a)(1)(C) . . . would make

all tax debts nondischargeable,"

)

thereby contravening the Bankruptcy

Code’s purpose.

The Haas Court went on:

"Congress has on four other

occasions previous to the

enactment of section

523 (a) (1) (C) shown itself

capable of distinguishing

between evasion of a tax and

evasion of the payment of a

CAS." 26, “152355

"Where Congress knows how to

say something but chooses not

to, its silence is

contrelling.*. Ia, 2516. *

" .. . Congress is presumed

to be aware of pertinent,

existing law when it passes

legislation. Miles v. Apex Marine

Corp.,498 US 19, 30, 111 S. Ct.

327 eee 2an, ten BE 20 275

(1990); Goodyear Atomic Corp v.

Miller, 486 U.S. 174, 184-85,

166. B3.. Ct. 2704, 3742, - i090. ke

Ed. 2a 158 (1988). This

presumption is particularly

strong in the case of I.R.C.

§7201. Section 7201 is not

an obscure provision; it is

the principal enforcement

provision of the I.R.c., "

‘the capstone of a system of

sanctions which singly or in

combination were calculated

to induce prompt and

forthright fulfillmerit of

—s

every duty under the income

tax law and to provide a

penalty suitable to every

degree of delinquency.’ "

Sansone v. United States, 380 U.S.

343, 350-51, 85 8. Ct. 1004,

1010, i; Le Ba. 24 882

(1965) (quoting Spies v. United

States, 317 U.S. 492, 497, 63 S.

Ct. 364,. 367, @7 Ibe Bes 420

(1943)). As such, section

7201 was certainly pertinent

to any bankruptcy provision

intended to delineate which

unpaid taxes would be

dischargeable in bankruptcy

and which would remain with

the debtor. [footnote

omitted].

"Therefore, we must presume

that Congress was aware of

both the language and the

judicial interpretation of

section 7201 when it drafted

section 523(a)(1)(C). Jordan,

915 F. 2a at 626 ("Under

accepted rules of statutory

construction, it is generally

presumed that Congress, in

drafting legislation, is

aware of well-established

judicial construction of

other pertinent existing

statutes.") Moreover, that

the language of § section

| 523 (a) (1) (C) is nearly

identical to that used in

section 7201 indicates that

Congress was not only

constructively but also

actually aware of its I.R.C.

oe DOP MAbs

Ce ee ea. We ©

“Ree ant Wey ot is 5 EV. 0 ba

precedents when it drafted

the bankruptcy provision.

"In determining the scope of

section 7201, the Supreme

Court has recognized that the

statute "includes the offense

of willfully attempting to

evade or defeat the assessment

of a tax as well as the

offense of willfully

attempting to evade or defeat

the payment of a tax." Sansone,

380 U.S. at 354, 85 S.Ct. at

1011. Whereas section 7201

penalizes a taxpayer who

either "willfully attempts in

any manner to evade or defeat

any tax imposed by this title

or the payment thereof," section

523 (a) (1) (C) exempts from

discharge only those taxes

with respect to which the

debtor "willfully attempted

in any manner to evade or

defeat such tax." The

omission of the words "or the

payment thereof" from section

523 (a)(1)(C), in light of

Congress’s previous inclusion

of these words on four

previous occasions, indicates

that Congress did not intend

that a failure to pay taxes,

without more, should resuit

in the nondischargeability of

a debtor’s tax liabilities in

bankruptcy. In re Gathwright, 102

B.R. 211, 213 (Bankr. D.Or.

1989) (comparing section

523(a)(1)(C) to 26 U.S.C. §

7201 and concluding that

failure to pay taxes does not

constitute a willful attempt

to evade or defeat a tax

under section 523(a)(1)(C))."™

Id, 1516, 1517.

The Haas Court acknowledged

"congressional recognition that honest

debtors may fail to pay their properly

acknowledged taxes. We must give

effect to congress’s decision to omit

the words ‘or payment thereof’ in

section 523(a)(1)(C) where it has shown

itself capable oof including’ such

language." Id, 1518.

Thus, pursuant to Haas, the word

"payment" is not to be read _ into

523(a)(1)(C), consequently Sumpter, on

the facts in his case, cannot be

summarily held to have wilfully

attempted to evade or defeat a tax,

when all that he did was to deed

property to satisfy a preexisting and

properly recorded mortgage that was

NE EE a

given for valuable and adequate

consideration.

The standard should be made uniform

throughout the circuits. What is the

state of the law is "payment/collection"

to be or not to be read into the act? How

is Haas and Sumpter to be reconciled? Did

Congress intend for §523 (a)(1)(C) to in

some cases included the word "payment" or

"collection" and some cases not. Such

would not be a plausible state of the law.

Petitioner moves this Court to grant

the Writ of Certiorari.

Dated: November 20, 1995

Jer - Sumpter, J.D.

PejAtioner

P.O. Box 286

Cheboygan, Mich 49721

(616) 627-7167

NOT RECOMMENDED FOR PUBLICATION

Nos. 94-1439/94-1440

United States Court of Appeals

for the Sixth Circuit

In Re Jerry L. Sumpter

and Santina M. Sumpter,

Debtors

FILED Aug.22, 1995

LeonardGreen, Clerk

United States of America, )

Plaintiff-Appellee )

)

Vv )ON APPEAL FROM

)UNITED STATES

Jerry L. Sumpter, ) DISTRICT COURT

Defendant-appellant )FOR THE EASTERN

) DISTRICT OF

) MICHIGAN

Santina M. Sumpter, )

Defendant-appellant )

)

Before: MERRITT, Chief Circuit Judge;

MARTIN, Circuit Judge; and BERTELSMAN,

Chief District Judge.

MERRITT, Chief Judge. This

consolidated bankruptcy case involves

the single issue of whether the

debtors’ tax liability should . be

The Honorable William oO.

Bertelsmann, Chief Judge of the United

States District Court for the Eastern

District of Kentucky, sitting by

designation.

1 APPENDIX

Babee et Fb ne eso om -

excepted from discharge because they

“wilfully evaded" payment of taxes by

transferring real property to a trust

for the benefit of their children. To

answer this question we must interpret

Section 523(a)(1)(C) of the Bankruptcy

Code. 11 USC §523(a)(1)(C).- Unlike

most debts in a bankruptcy proceeding,

Section 523(a)(1)(C) provides that a

tax debt is nondischargeable if the

debtor "made a fraudulent return or

wilfully attempted in any manner to

evade or defeat such tax." It is clear

that filing a false return or taking

affirmative steps to evade a tax

renders the debt nondischargeable. The

question here is whether the statute

also covers conduct that avoids the

payment of taxes known to the debtor to

be owed. We affirm the Bankruptcy

Court and the District Court’s

determination as to Mr. Sumpter that

APPENDIX

his portion of the tax debt is not

dischargeable in bankruptcy due to his

willful attempt to evade payment of

taxes by se*king to avoid attachment of

assets. As to Mrs. Sumpter, however,

we reverse the Bankruptcy Court and

District Court and find that her

portion of the tax debt is

dischargeable because her actions were

not "willful" under the statute.

FACTS

In 1979 Jerry and Santina Sumpter

created a Trust naming their two

children the sole beneficiaries. The

terms of the Trust provided that it

could not make loans to the settlors,

Santina and Jerry Sumpter. The Trust

has had three trustees since its

inception, all neighbors, friends or

relatives of the Sumpters with limited

business experience. The Trust

3 APPENDIX

ltt

a EE eEeeeeeeEeEeEeeerreeerereeeeeeeeoorr

a Nt

a ee ey a ee

accumulated its assets through its

ownership of the building where Mr.

Sumpter has his law practice, Sumpter &

Perry, P.C. The Trust receives rent

from Sumpter & Perry as well as from

the other tenants in the building. The

Trust has made numerous loans to

Sumpter & Perry, P.C. over the years

amounting to several hundred thousand

dollars. These loans are documented

and have always been paid back to the

Trust by Sumpter & Perry, P.Cc.

In August, 1986, the IRS notified

Jerry and Santina Sumpter of an

assessment for joint and several tax

liability for 1984 and 1985. A year

later, the IRS notified the Sumpters of

another assessment for tax years 1981

and 1982. In December 1987, the

Sumpters received a second notice of

tax delinquency from the IRS for years

in question. Two weeks after receiving

4 APPENDIX

the second notice, in January of 1988,

the Sumpters received $90,000 from the

Trust, which they used to pay debts

incurred by Sumpter & Perry, P.C.

This is the first time the Sumpters

themselves, instead of the law firn,

had received a loan directly from the

Trust. (The terms of the Trust make it

a violation for the Sumpters, but not

for Sumpter & Perry, P.C., to receive a

loan from the Trust.) As collateral

for the loan from the Trust, the

Sumpters gave the Trust a mortgage on

Six pieces of property they own. In

April 1988, the IRS sent the Sumpters a

final demand notice by registered mail.

On April 21, 1988, Mr. Sumpter met

with an IRS agent who told him that the

IRS was about to start collection

proceedings against the Sumpters. On

the same day, the Sumpters transferred

ownership of the six pieces of property

APPENDIX

to the Trust, thereby extinguishing the

mortgage debt owed by the Sumpters to

the Trust. On May 3, 1988, the IRS

filed a notice of tax lien against the

Sumpters.

In September 1989, the Sumpters

filed a voluntary petition under

Chapter 7 of the Bankruptcy Code

seeking to discharge, among other

debts, the debt owed to the IRS. Three

months later, the United States brought

a four-count adversary proceeding

against each of the Sumpters

individually to prevent discharge of

their tax liability pursuant to 11 USC

§ 523(a)(1)(C), which prohibits

wilfully evading or defeating payment

of their federal taxes. The Bankruptcy

Court granted Summary judgment to the

government as to Mr. Sumpter under

Section 923(a)(1)(C) for wilful evasion

of taxes and therefore did not reach

6 APPENDIX

the other counts. The government’s

summary judgment motion as to Mrs.

Sumpter was denied for all counts,

including Section 523(a)(1)(C) and a

trial was held. At trial, the

Bankruptcy Court found that Mrs.

Sumpter also wilfully evaded payment of

federal taxes under Section

523(a)(1)(C) by fraudulently conveying

property and held that her portion of

the IRS debt could not be discharged.

The District Court affirmed the

Bankruptcy Court’s findings in two

separate opinions. (J.A. at 257 (Mrs.

Sumpter), J.A. at 212 (Mr. Sumpter) )

The Sumpters both appealed and their

separate appeals were consolidated for

review by this Court.

DISCUSSION

Standard of Review

We review the District Court’s

interpretation of the Bankruptcy Code

7 APPENDIX

and its conclusions of law de novo. In

re Perlin, 30 F. 34d 39, 40 (6th Cir.

1994). We review the Bankruptcy

Court’s factual determinations, in

which the District Court concurred,

under a "clearly erroneous" Standard.

Id.

Section 923 (a) (1) (C)

A debtor under Cnapter 7 of the

Bankruptcy Code generally is granted a

discharge from all debts that arise

before the filing of the bankruptcy

petition. 11 USC §72

C + .

). Section

923, however, provides exceptions t

discharge of certain debts. 11 USC §

5923(a) (1) (C) provides in pertinent

part:

(a) A discharge under

section 727 ; of this

title does not discharge an

individual debtor from any

debt -

APPENDIX

respect to

which the

debtor made a

fraudulent

6 = us GF

willfully

attempted in

any manner

to evade or

defeat such

tax;

The sole issue in this case is

whether the District Court was correct

in affirming the Bankruptcy Court’s

conclusion that the Sumpters "wilfully"

attempted to evade payment of their

taxes in violation of Section

523(a)(1)(C). There is no dispute that

returns were filed and that taxes are

owed. The debtors made three arguments

that their conduct does not fall within

the statute. First, the debtors argue

that their conduct of evading payment

is not covered by the plain language of

Section 523(a)(1)(C) because all they

Gid was fail to pay the taxes owed.

9 APPENDIX

They argue that they did not take an

affirmative step to evade or defeat the

tax. They contend that mere non-

payment cannot be construed as wilful

evasion under Section 523(a)(1)(C).

Second, the debtors argue that because

the property was already heavily

mortgaged (albeit to a trust for the

benefit of their children) and

therefore of little cash value, the

transfer did not affect the value of

their estate and therefore the IRs did

not lose anything by the transfer.

Finally, the Sumpters also contend that

the factual findings of the Bankruptcy

Court were clearly erroneous and that

the government failed to prove that

they wilfully evaded payment of taxes.

We will consider the Sumpters’

arguments separately below.

AS an initial matter, the debtors

argue that the standard of proof for

10 APPENDIX

applying the dischargeability exception

under Section 523(a)(1)(C) is clear and

convincing evidence of willful evasion,

instead of the preponderance of the

evidence standard used by the

bankruptcy court. Aichough the Sixth

Circuit has not directly ruled on this

point, debtors appear to be wrong. In

Grogan v. Garner, 498 U.S. 279, 284-86

(1991), the Supreme Court clearly

stated that "the standard of proof for

the dischargeability exceptions in 11

USC §523 (a) is the ordinary

preponderance of the evidence

standard." Id at 292. Although Grogan

concerned specifically Section

523(a) (2), not Section 523(a)(1)(C),

the language used by the Supreme Court

seems to encompass all of Section

523(a) and the other circuit courts and

bankruptcy courts from this circuit

interpreting Grogan have used _ the

APPENDIX

preponderance of the evidence standard.

See, e€.g., In re Graham, 973 F.2d 1089,

1101 ¢.: Ba te 1991) ("the text of

[Grogan] consistently refers to section

523 (a) in general") ; Levinson vy.

United States, 969 F.2d 260 (7th Cir)

cert. denied, 113 S. ct 5905 (1992);

Goff v. IRS, 180 B.R. 193, *6(Bankr.

W.D. Tenn. 1995) (unpublished) ; Ragone

Vv. United States, 170 B.R. 324 327

(Bankr. N.D. Ohio), aff’d, 179 B.R. 521

(N.D. Ohio 1994). Debtors have not

cited any case to the contrary since

As to the Sumpters first argument,

a recent Sixth Circuit case

interpreting this Part of Section 523

controls many aspects of this case.

United States v. Toti, 24 F.3d 806 (6th

Cir), cert. denied, 115 S. ct 482

(1994). In Toti, this Court concluded

that a civil definition, not criminal,

of willful should be applied to Section

523(a)(1)(C). The Court held that the

proper definition of "willfully" under

a Section 523(a)(1)(C) discharge case

is like that found in other civil tax

cases: voluntary, conscious and

intentional. Id. at 809.

Furthermore, the Court, after examining

the unambiguous language of the statute

and similar language in the tax code,

found that the words "in any manner"

are broad enough to encompass attempts

to thwart payment of taxes. id.;

accord In re Bruner, 55 F. 3d 195 (5th

Cir. 1995); Sells v United States, 92-

1 8.S.T.C. (CCH) g 50,070 (D. Colo.

1991); In re Jones, 116 B.R. 810

(Bankr. D. Kan. 1990). But see In Re

Haas, 48 F. 3d 1153 (11th Cir. 1995)

(finding that evading payment or

collection is not a violation of §

13 APPENDIX

523(a)(1)(C)); In_re Gathwright, 102

B.R. 211 (Bankr. D. or. 1989) (same).

There can be no question here that

the Bankruptcy Court correctly found

that Mr. Sumpter wilfully evaded paying

his taxes. Mr. Sumpter admitted in his

deposition that he attempted to thwart

attachment of the federal tax liens by

transferring property to the Trust:

Q. (by the Government) Was the

reason for transferring the

properties to the trust to

protect them from the Federa]

Tax Liens?

A. (by Mr. Sumpter) I think the

real reason was to discharge

the mortgage and to provide

what equity we could to

discharge the mortgage for

fear _ it would be -- a lien

would be imposed against it

and turn into a rat’s nest.

Q. The question is "was one of

the purposes or an additional

purpose for transferring the

properties to prevent the

Federal Tax liens from

attaching to the properties?"

A. Yes.

14 APPENDIX

added).

‘

= ~

iphas

APPENDIX

ases that

++)

. W

is to allow a fresh start for the

"honest but unfortunate" debtor. ee

Grogan v. Garner, 498 U.S. 279, 285

(1991). Mr. Haas took no affirmative

steps to avoid paying his taxes, he

Simply did not pay them and continued

to pay other debts. In contrast, Mr.

Sumpter took the affirmative step of

transferring property to avoid its

attachment as a tax lien, an act to

which he admits. By taking this

affirmative step, Mr. Sumpter attempted

to “wilfully evade or defeat" payment

of his tax debt and he is excepted from

discharge of that debt under Section

523(a)(1)(C).

In addition to the statutory

interpretation argument made above,

Mr. Sumpter also argues that certain

facts make it impossible for his

conduct to fall within the statute. It

1s true, as Mr. Sumpter argues, that

17 APPENDIX

the transfer arguably did not affect

the worth of the Sumpters’ estate due

to the mortgage on the transferred

property. Mr. Sumpter argues that due

to the mortgage on the property held by

the Trust there was no value that the

IRS could recover from the property

even if it attached the lien. As there

was arguably no monetary value that the

IRS could recover, Mr. Sumpter asserts

that there is no way he could be

evading collection or payment of taxes.

This argument is flawed, however,

because the value of the property is

not the touchstone. The issue is the

conduct of the taxpayer. The timing

and sequence of events here makes it

arguable that the Sumpters specifically

took the $90,000 loan from the Trust

explicitly so they could make a

"legitimate" transfer of the property

to the Trust to avoid attachment of the

18 APPENDIX

property. They had never taken a

personal loan from the Trust before

(all the loaiis had been to Mr.

Sumpter’s law practice), and, moreover,

they were prohibited by the terms of

the trust agreement from doing so. The

loan was taken in January, 1988, right

after they received the second

delinquency notice from the IRS. Also,

the transfer was to a Trust from which

Mr. Sumpter’s business took regular

loans for operating expenses, including

presumably Mr. Sumpter’s Salary.

Indeed, the evidence showed that Mr.

Sumpter, through Sumpter & Perry, had a

great deal of control over the assets

of the Trust and the Trust was

regularly used to pay Sumpter & Perry

expenses. Therefore, arguing that

transfer of the property to the Trust

did not affect the value of the estate

is without much force because he has

19 APPENDIX

shown by previous conduct that he often

reapS business and personal benefit

from the Trust monies.

In addition, had the IRS been able

to attach the property when it was

Still mortgaged to the Trust it is

unclear that the IRS would have had

lower priority than the Trust/mortgagor

to any proceeds from the sale of the

property. Given these facts, we affirm

the grant of Summary judgment to the

IRS against Mr. Sumpter.

Mrs. Sumpter

As to Mrs. Sumpter, the IRS argued

that Mrs. Sumpter fraudulently

transferred real estate to her

Children’s trust to evade taxes she

knowingly owed. She first contends,

Similar to Nr. Sumpter, that a

fraudulent conveyance intended to

thwart collection of taxes is not

covered by Section 223(a) tl) (C). The

20 APPENDIX

same legal arguments used against Mr.

Sumpter, outlined above, also defeat

Mrs. Sumpter’s proposed construction of

the statute. Because Mrs. Sumpter did

not admit to attempting to avoid

payment of taxes as did Mr. Sumpter,

the government bore the burden at trial

of proving that her actions were the

type that satisfy the "wilful" language

of the statute.

The IRS used a traditional “badges

of fraud" inquiry to attempt to prove

Mrs. Sumpter’s intent wilfully to evade

taxes through the transfer of property.

Here the bankruptcy court found the

following facts were badges of fraud

supporting a finding of willful

evasion: (1) the transfer was made to

a family member as the Trust is held in

favor the Sumpter’s children; (2) the

transfer was made at a time when a

large liability, here a tax payment,

21 APPENDIX

was fixed; (3) the transfer was for no

consideration because the $90,000 loan

received by the Sumpters in exchange

for the mortgage went directly to

Sumpter & Perry, P.C., a corporation in

which Mrs. Sumpter has no. direct

financial interest. Mr. Sumpter,

however, owns more than 99% of the

stock of Sumpter & Perry, P.C.,;3 (4)

the transfer was made when Mrs. Sumpter

was insolvent, as the Sumpters had only

$100-200 in their checking account when

the transfer was made; (5) Mrs.

Sumpter retained hidden control over

the asset. The Sumpters apparently

used the Trust as a conduit for payment

of Sumpter & Perry’s expenses, and, in

turn, for their own personal expenses

and (6) Mrs. Sumpter engaged in other

questionable practices during the same

period. Examples of these practices

include the Sumpters receiving the

2? APPENDIX

$90,000 loan from the Trust even though

they were prohibited from receiving

loans from the Trust under the Trust

Agreement. Furthermore, all the other

loans had been made directly from the

Trust to Sumpter & Perry, not to the

Sumpters directly. The government

argued that the Sumpters made this loan

to themselves so that they could then

"legitimately" transfer the property to

the Trust. United States v. Sumpter,

136 B.R. at 701 (J.A. at 487-96). The

district court affirmed these findings.

(J.A. at 265-72).

While some of these findings,

standing alone, are not clearly

erroneous, the ultimate conclusion that

Mrs. Sumpter’s actions and mental state

were "willful" under the statute is not

supported by the facts. Mrs. Sumpter

was raised in Italy and has only a high

school education. The Bankruptcy Court

23 APPENDIX

found that she defers to’her husband on

most issues and has very little, if

anything, to do with his business.

Findings of Fact and Conclusions of Law

(filed July 9, 1991) at 13. There is

no evidence that she had any real

control over the Trust assets when she

Signed the document to receive the loan

from the Trust or that she understood

that transfer to be any different from

the earlier transfers. Mrs. Sumpter

Simply signed the document at the

direction of her husband. ia. The

transfer was, in effect, another

business transaction by Mr. Sumpter of

which Mrs. Sumpter had little knowledge

or control.’

' While not directly applicable

here, the tax code Provides some

guidance in examining this issue. The

Standard under the "innocent spouse"

exception, 26 U.S.c. § 6013(e)(1), is

"whether a reasonable person under the

circumstances of the taxpayer at the

time of Signing the [tax] return could

be expected to know of the omissions."

24 APPENDIX

The government does not dispute

this but states that because. she

voluntarily signed over her property to

the Trust and knew that she and her

husband owed the IRS a considerable sum

of money, her actions were "willful".

Neither we nor the IRS want’ to

encourage a spouse to turn a "blind

eye" to the couple’s tax situation and

even minimal involvement in the

family’s financial affairs can be

sufficient in some circumstances. In

this case, however, where the conduct

primarily concerned Mr. Sumpter’s

business affairs, which were fairly

complex, Mrs. Sumpter’s actions cannot

be said to be "willful" under Section

523 (a) Ci) Ce, On balance, the

Bankruptcy Court and the District

Court’s conclusion that Mrs. Sumpter

Shea _v. Commissioner, 780 F. 2d 561,

566 (6th Cir. 1986).

25 APPENDIX

"“Wilfully evadeqn Payment of taxes

under Section 923(a)(1)(C) is in error

and is reversed.

For the foregoing reasons, we

AFFIRM the judgment as to Mr. Sumpter

and REVERSE the judgment as to Mrs.

Sumpter.

2 APPENDIX

UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF MICHIGAN

NORTHERN DIVISION

In Re:

Jerry L. Sumpter,

Debtor / Filed 3/10/94

United States of America,

Plaintiff/appellee

Vv. Case No.

Jerry L. Sumpter, 91-CV-10231-BC

Defendant/appellant/

MEMORANDUM OPINION AND ORDER AFFIRMING

BANKRUPTCY COURT

6 Introduction

This case is before the Court on

Jerry Sumpter’s appeal from the

bankruptcy court’s determination, on

summary judgment, that his liabilities

owed to the Internal Revenue Service

were nondischargeable pursuant to 11

U.mo.C. §523 (a) (1) (C) and that,

therefore, these liabilities should be

excepted from the discharge issued

uncer i1 U.8.C. §727ta). For the

reasons stated herein, the judgment is

affirmed.

7 APPENDIX

II. PROCEDURAL POSTURE

On September 27, 1989, Jerry and

Santina M. Sumpter filed a voluntary

petition for relief under Chapter 7 of

the Bankruptcy Code. In addition to

seeking discharge of various debts,

they also sought discharge of a debt to

the Internal Revenue Service sought

discharge of a debt to the Internal

Revenue Service ("I.R.S.") for unpaid

income taxes, interest and penalties.

In December of 1989, the Government

brought a four-count complaint against

the Sumpters seeking (1) a denial of

discharge pursuant to Bankruptcy Code

§727(a) (4), (a) (2), and (a) (5) (Counts

I-III) and (2) a determination pursuant

to Bankruptcy Code §523 (a) (1) (C) that

their federal income tax liabilities

are not dischargeable (Count IV).

Cross motions for Summary judgment were

filed on all counts in September 1990.

28 APPENDIX

On December 6, 1990 the bankruptcy

court dismissed Count II against the

Sumpters and denied the I.R.S.’s

motions for summary judgment against

Santina Sumpter on all counts.

However, the Court granted the I.R.S.’s

motion on Count IV (§523(a)(1)(C))

against Jerry Sumpter declaring that

the I.R.S. debt was not dischargeable.

‘T?} _- te ~e . yr . ~ ,

Thereafter, Jerry impter timely filed

. ¢ ~ . an =4, =

a motion for reconsideration of the

. " - fo onl - Tr Tar ldap : =~

court’s order. In July of 1991, after

} . » Le 21 ~% “411 lf @- } . 7 : (oe

the bankruptcy court’s denial of his

+ ~ _ 7 ,

motior ror reconsideration, Jerry

" aa 4 To 7 ~ 4 - - | : .

Sumpter filed notices of appeal in this

Court

On November 7, 1991, having never

received a transmittal of the record on

' Apparently, due to confusion as to whether

his attorney had in fact filed a notice of appeal,

appellant filed his own notice of appeal (number 91-

10231 was filed by attorney Donald Cadotte; number

91-10235 was filed by Jerry Sumpter, who ts a licensed

attorney)

29 APPENDIX

appeal, this Court dismissed without

prejudice Jerry Sumpter’s previously

filed appeals (civil case numbers 91-

CV-10231, 10235). Subsequently, Jerry

Sumpter moved for this Court to

reinstate these appeals. The motion

7 : : 1 = - \

was uitimately granted and an order was

- BE Cac +1) 917=<-CV-107921-n07

Singuiar case number (9 : IZ31—-BC

» |

(Ty

()

ba)

“y

~ The issue of the dischargeability of Santina

Sumpter’s debt to the I.R.S. was presented before the

bankruptcy court in a trial on the merits in March,

1991. The bankruptcy court determined that,

pursuant to §523(a)(1)(C) of the Bankruptcy Code,

Mrs. Sumpter’s debt did not qualify for discharge. See

United States v. Sumpter, 136 BR 690 (Bankr. E.D

Mich. 1991). Judgment was entered on July 9, 199]

Santina Sumpter’s appeal of this decision was affirmed

by this Court in a separate order.

30 APPENDIX

sole beneficiaries. (TR 27-28)°> The

trust document that created both of the

trusts provided that the trustees could

not make loans from the trust to the

settlors, Mr. and Mrs. Sumpter. Three

different trustees have served during

the life of the trusts. All three have

been either family, friends or

neighbors of Mr. and Mrs. Sumpter. (TR

156-59). The trusts have assets

totalling over $190,000.* The only

explanation given as to how the trusts

accumulated these assets was that the

trusts own the building in which Mr.

Sumpter’s law firm or _ professional

corporation ("P.c.") is located and

> "TR" refers to the transcript of Santina

Sumpter’s trial, located at Record 2 ("R’").

Relying on trial exhibit 4 (the Sumpters’

Statement of Financia] Condition, which was signed by

the Sumpters), the bankruptcy court found that, as of

My 6, 1988, the value of the trust was $190,000. This

exhibit, while not included in the designated

documents, is not objected to by either party.

3] APPENDIX

that the P.c. Pays rent to the trusts.

(TR 165). From the creation of the

trusts until the time of the trial in

this matter, mr. Sumpter’s P.C., of

which he owns virtually all of the

stock, received 12 loans from the

trusts totalling $257,900.

On August 25, 1986, the I.R.s.

made an assessment for joint and

Several income tax liabilities against

Mr. and Mrs. Sumpter >°

for tax year

1985. Thereafter, additional

assessments were made against the

Sumpters. On December 8, 1986 an

assessment was made for tax year 1984

and on August 19, 1987 an assessment

Was made for tax years 1981 and 1982.

By notices and demands dated the dates

of each of the assessments, the

> As stated, Mrs. Sumpter’s liabilities are not at

issue in this appeal.

32 APPENDIX

Sumpters were notified of said

assessments. (TR-83-88).

On January 12, 1988, within a

short time after second notices of the

federal tax liabilities were sent by

the I.R.S. (notices were sent December

21, and 28, 1987; Tr 86) a mortgage

(R.23) was filed (TR 40, 133) with

respect to six parcels of property

owned by the Sumpters, naming the

childrens’ trusts as the mortgagees and

the Sumpters as mortgagors. In

exchange for the mortgage on the six

pieces of real property, the trust

loaned the Sumpters $90,000. On April

7, 1988, the I.R.S. sent by certified

mail, return receipt requested, a final

demand for payment to Mr. and Mrs.

Sumpter (Tr 86-88). Mrs. Sumpter

Signed the green card noting receipt of

such notice on April 12, 1988. (Tr 87).

On April 23, nine days after receiving

33 APPENDIX

this notice, Mr. and Mrs. Sumpter

transferred (i.e. deeded) the six

parcels of property to the trusts. (TR

25-37, 133).° On April 26, 1988, the

trust agreement that allegedly created

the trusts in the late 1970’s was

recorded for the first time (TR 34-40).

At her trial, Mrs. Sumpter

testified that $40,000 of this was used

to pay off a loan that was previously

secured to fund Mrs. Sumpter’s business

(TR 137); $12,000 went to pay off an

undocumented loan from an employee of

the P.c. (Tr 150); and the remaining

$38,000 was transferred to the P.c. (TR

137). There is no evidence that any

promissory note was ever issued by the

P.C. to Mr. or Mrs. Sumpter for the

moneys they gave the P.C. At this

® The properties were conveyed to the trust in

payment of the indebtedness secured by the mortgages

-- In essence, deeds in lieu of foreclosure.

34 APPENDIX

time, the Sumpters’ liabilities were in

excess of their assets. Additionally,

the Sumpters had only one personal bank

account with an average balance of $100

- $200 "... for groceries and stuff...

"and no other visible means of

support. (TR 153-54).

IV. ISSUES

1) Whether the bankruptcy court

erred in holding that even fraudulent

transfers intended to thwart’ the

government’s collection actions ecan

constitute an attempt to "evade or

defeat" a tax under 11 U.S.C.

§523(a)(1)(C).

2) Whether the bankruptcy court

6érred in finding that, as a matter of

law, the tax liabilities of Jerry

Sumpter are nondischargeable under 11

USC §523(a)(1)(C) due to his willful

attempt to evade or defeat such

liabilities.

APPENDIX

V. STANDARD OF REVIEW

On review of an order granting

summary judgment the appellate court

applies the same standard as the trial

court. Under Fed. R. Civ. P. 56,

summary judgment should be entered only

when there is no genuine issue as to

any material fact and the moving party

is entitled to judgment as a matter of

law. "Where the moving party has

carried its burden of showing that the

pleadings, depositions, answers to

interrogatories, admissions and

affidavits in the record construed

favorable to the non-moving party, do

not raise a genuine issue of material

fact for trial, entry of summary

judgment is appropriate." Gutierrez v.

Lynch, 826 F. 2d 1534, 1536 (6th Cir.

1987), citing, Celotex Corp. v Catrett,

477 U.S. 317 (1986). Furthermore,

summary judgment is not appropriate

36 APPENDIX

when "the evidence presents a

sufficient disagreement to require

submission to a jury." Anderson Vv.

Liberty Lobby, Inc., 477 U.S. 242, 251-

52 (1986). The existence of some

factual dispute does not defeat a

properly supported motion for summary

judgment; it is required that there be

no genuine issue of material fact. The

burden placed upon the movant’ for

summary judgment is to show that the

non-moving party has failed to

establish an essential element of his

case upon which he would bear the

ultimate burden of proof at trial.

Celotex Corp v. Catrett, 477 U.S. at

322. The non-moving party must show

that there is doubt as to the material

facts and that the record, taken as a

whole, does not lead to a judgment for

the movant. Street v. J.C. Bradford &

Co., 886 F. 2d 1472 (6th Cir. 1989).

37 APPENDIX

The non-moving party must show that

there is sufficient evidence for a jury

to return a verdict in its favor.

Street at 1476. The non-moving party

must also present affirmative evidence

on critical issues. Street, at 1477.

When the moving party has carried its

burden under Rule 56(c), its opponent

must do more than Simply show that

there is some metaphysical doubt as to

the material facts. Matsushita

Electric Industrial Co. v. Zenith Radio

Corp., 475 U.S. 574 (1986). Thus, it is

this Court’s role to "pDlierce the

pleadings and to assess the proof in

Order to see whether there is a genuine

need for trial." Id at 587.

Vas DISCUSSION-

aa 28: §523(a)(1)(C) provides in

pertinent part:

§523 Exceptions to discharge

38 APPENDIX

(a) A discharge under section

727 ... Of this title does

not discharge an individual

debtor from any debt -

(1) for a tax or

customs duty -

f¢} with

respect to which

the debtor made a

fraudulent return

or willfully

attempted in any

manner to evade or

defeat such tax;

Id. (emphasis added). A party seeking

an exception to the bankruptcy

Gischarge of the debtor (i.e., the

government) must establish the elements

for such an exception by a

preponderance of the evidence. Grogan

v. Garner, 498 U.S. 279, 287-88 (1991).

A. FRAUDULENT TRANSFERS

In its motion, the government

argued, inter alia, that Mr. Sumpter

attempted to evade or defeat taxes he

owed under $323 (a) (1) (C) by

fraudulently conveying real estate to

his children’s trust before the I.R.S.

39 APPENDIX

eel

could levy on the property. On appeal

Mr. Sumpter contends that even

allegedly fraudulently transfers

intended to thwart the government’s

collection actions do not constitute an

attempt to "evade or defeat" the tax

under §523(a)(1)(C). In support of

this argument, appellant relies or In

Re Gathwright, 102 B.R. 211 (Bankr

D.Or. 1989), where the court held that

§523(a)(1)(C) did not apply to willful

attempts to evade Or defeat the

collection of taxes. In Gathwright,

the court stated that:

"Under §720l(a), which

provides that it is a felony

to ‘wilfully attempt []} in

any manner to evade or defeat

any tax imposed by [Title 26]

or the payment thereof,’ the

IRS must prove a willful and

positive attempt to evade or

defeat tax oe6 Although

sections 523 (a)(1)(C) makes

nondischargeable tax

liabilities which the debtor

has willfully attempted to

evade or defeat, it does not

include willful attempts to

evade or defeat ‘payment’ as

40 APPENDIX

a baosiés ..2@ 2

nondischargeability .

[Bjecause the Bankruptcy Code

exception to discharge lacks

the language ‘or the payment

thereof,’ evidence regarding

any willful attempt to evade

or defeat payment of the tax

is not relevant to a

determination of

nondischargeability.

Consequently, I will

disregard evidence presented

by the IRS regarding debtor’s

alleged attempt to frustrate

collection of the taxes at

issue in this case.

i Oe | ee S&P The bankruptcy court in

the instant case, relying on In _ re

Jones, 116 B.R. 810,815 (Bankr. D. Kan.

1990), rejected the Gathwright court’s

holding. (R.3, Transcript of summary

judgment hearing, p.62). As the Jones

court noted, Ss §523 (a) (1) (C) is

construed to mean that only debtors who

commit affirmative acts of tax evasion

(e.g. filing a fraudulent tax return or

keeping two sets of books) are

disqualified from discharge, then

debtors who elude taxes through acts of

41 APPENDIX

Omission would be left with a

"tenaciue device" for avoiding

payment. Id. at 815. It is not likely

that the framers of the Bankruptcy Code

intended such a result.

This court has recently concluded

that a civil case (and not a criminal)

definition of "willfully" must be

applied to §523(a)(1)(C). In United

States v. Toti, 149 BR 829 (E.D. Mich.

1993), the court rejected the

suggestion that §523(a)(1)(C) should be

interpreted in a manner consistent with

§7201. The court instead held that

"the proper definition of ‘willfully

attempted to evade’ in the context of

an ll U.S.C. §523(a)(1)(C) discharge

case is that found in other civil tax

caseS -- voluntary, conscious’ and

intentional." Id at 834. Other courts

have reached the same conclusion. See

e.g., United States v Hedgecock, 160

42 APPENDIX

B.R. 380 (D.Or. 1993); Berzon v. United

States, 145 B.R. 247 (Bankr N.D. Ill.

1992); Sells v. U.S., 92-1 U.S.T.C.

CCH § 50,070 (D.Col. 1991). These

cases are persuasive as they adopt a

plain reading of an unambiguous

statute. Thus the court holds that

§523(a)(1)(C)’s modifying phrase "in

any manner" is expansive enough to

include evading or defeating collection

or payment of a tax. In re Jones, 116

B.R. 810, 815 (Bankr. D. Kan. 1990).

Accordingly, if proved, the transfers

in the instant case -- allegedly

intended to thwart the government’s

collection of taxes owed -- would

constitute a willful attempt to evade

or defeat such taxes under

B. 11 U.S.C. §523(a) (1) (C)

The government, in its attempt to

show a willful attempt to evade or

43 APPENDIX

defeat

taxes owed, relied on

appellant’s own deposition testimony.

The specific exchange relied on by the

bankruptcy court is as follows:

(by the government) Was the

reason for transferring the

properties to the trust to

protect them from the Federal

Tax liens?

(by appellant) I think the

real reason was to discharge

the mortgage and to provide

what equity we could to

discharge the mortgage for

fear that it would be -- a

lien would be imposed against

it and turn into a rats nest.

So what was -- well, was that

something that you considered

or thought of at the time

that you were transferring

the property and that is

well, I could pay off this

mortgage and in addition to

that I could keep the liens

from attaching to the

properties?

I couldn’t pay off the

mortgage. I had no money.

The only way I could pay off

the mortgage was with the

equity in the property.

The question is was one of

the purposes or an additional

purpose for transferring the

properties to prevent the

44 APPENDIX

Federal Tax liens f

attaching to the prop

A. Yes.

R. 5, deposition of J&rry Sumpter, p50-

51 (emphasis added). Based on this

testimony, the bankruptcy court

determined that appellant willfully

attempted to evade or defeat a tax

under §523(a)(1i)(C). R.3, hearing on

motion for summary judgment, pp 66-67.

The court’s reasoning was as follows:

"., . . willfully attempted

funder $523 (a) (1) (C) }

obviously includes some kind

of mental state. It’s not --

it doesn’t say did an act

which in retrospect look what

it caused. (Or that the

debtor] did in fact evade a

tax or defeated a payment of

the tax. The question is

what was the debtor’s intent.

Willful means intentional.

Intentionally attempted to

evade or defeat the tax.

The debtor answers that

question yes. One of the

reasons I did this deed was

to defeat the tax. Therefore

the Government’s motion for

summary judgment- on [the

§523 (a) (1) (C) Count] is

granted as to Jerry Sumpter.

45 APPENDIX

id. (emphasis added) Appellant argues

that the bankruptcy court erred because

Se enir0a to consider the value of the

properties that he (along with: his

wife) transferred to the trust. ‘It the

value of the properties did not exceed

the amount of the mortgage the I.R.S.,

according to appellant, "lost nothing

in the conveyance." Appellant’s Brief

8. Appellant further maintains that if

this were in fact the case (or,

alternatively, > he reasonably

believed it to be the case), that his

transfer -- which admittedly was

effected with an intent to avoid the

tax lien -- was somehow not committed

with an intent to evade or defeat the

tax. Appellant’s Brief 8. Appellant

cites no authority in support of this

unique construction of what appears on

its face to be an ambiguous statute.

‘6 APPENDIX

OT Pee ET ON AL SANE EEO INT ae OB

The Court rejects appellant’s

argument as it is spurious. As stated,

§523(a)(1)(C) provides for an exception

to discharge if the debtor "willfully

attempted in any manner to evade or

defeat" a tax. this provision does not

require, as appellant suggests, that an

attempt to evade or defeat a tax to be

successful; but only that it was

"willful". Although the word "attempt"

is not defined by the Bankruptcy Code,

in the non-criminal context it

generally means an intent combined with

an act falling short of the thing

intended. Black’s Law Dictionary

(Sixth Ed. 1990). Moreover, even in

the criminal context, appellant’s

argument of "factual impossibility"

would be without merit. In the

criminal law, factual impossibility

denotes conduct where the okjective is

illegal but a circumstance unknown to

47 APPENDIX

the actor prevents him from bringing it

about. United States v. Conway, 507 F.

2d 1047, 1050 (5th Cir. 1975). The

Classic example is the thief who picks

an empty pocket. Id. However,

"factual impossibility may fall away as

a defense to an attempt charge when

adequate proof of intent to commit a

specific crime exists." United States

vy. Johnson, 767 F. 2d 673, 675 (10th

Cir. 1985).

In the instant case, the statute

requires only that the government prove

that appellant "willfu)’ly attempted in

any manner to evade or defeat" the

taxes he owed. §523(a) (1) (C).

Appellant concedes that his purpose in

transferring the properties to the

trust was to prevent the Federal Tax

liens from attaching to the properties.

This evidence supports the finding

that, irrespective of the value of the

48 APPENDIX

properties that were transferred,

appellant willfully attempted to evade

or defeat taxes he owed under

§523(a)(1)(C). Accordingly, summary

judgment on this count was proper.

VII. CONCLUSION

The bankruptcy court determined

that, as a matter of law, appellant had

willfully attempted to evade or defeat

taxes he owed when he (along with his

wife) transferred properties to his

children’s trust. 11 ¥.8.C.

§523(a)(1)(C). For the aforementioned

reasons, this Court holds that the

summary judgment was proper.

Accordingly, the bankruptcy court’s

‘decision is affirmed.

IT IS SO ORDERED..

Dated: March 9, 1994

/s/_ Robert H. Cleland

United States District Judge

49 APPENDIX

UNITED STATES BANKRUPTCY COURT

FOR THE EASTERN DISTRICT OF MICHIGAN

NORTHERN DIVISION

IN re:

JERRY & SANTINA SUMPTER,

Debtor

Case No. 89-09791

UNITED STATES OF AMERICA,

Plaintiff

Vv A.P. No. 89-9090

JERRY & SANTINA SUMPTER,

Defendants

R NTING P FF’S MOTION

FOR SUMMARY JUDGMENT ON COUNT

4 AS TO DEFENDANT JERRY SUMPTER

For the reasons stated from the

bench,

IT IS HEREBY ORDERED that the

Plaintiff’s motion for summary judgment

on Count 4. is. GRANTED as-° ‘against

Defendant Jerry Sumpter, but DENIED as

against Defendant Santina Sumpter.

Dated: December 6, 1990

/S/ ARTHUR J. SPECTOR

U.S. Bankruptcy Judge

FILED Dec 6, 2:55 pm ’90

50 APPENDIX

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.