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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition for Writ of Certiorari
- **Published:** January 1, 1996

## Text

no. + OB11 6'2 nov 20 1995

fc TL we

IN THE
SUPREME COURT OF THE UNITED STATES

October, 1995 Term

JERRY L. SUMPTER
Petitioner
Ve

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

4
:
’
7
$
4

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.

Nm

(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).

4

$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

5

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.

6

several income tax liabilities against

Cc
o

Mr. and Mrs. Sumpter for tax year 1985.

Thereafter, additional assessments were

- : } er _ 2 ©
made against the Sumpters:

C
1)
0)
(D
3
ox
(
ry
oO

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
i
g

a dl nd lam - ~
assessments

rm >So 2 7 2 ~~» one, =—-

ine years her OD 2 iwc ana LYOoo were
~~ } } ‘ T
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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.

12

The question is was one of

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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

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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.

14

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

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is that it assumes there was

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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

4h
is

. ereud AA } om FF - =f A
ry + y 4 ) Minh £ °
ite } 9U id Wid J ¥ O s IJ

4
)

Fd

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.

20

+”

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

21

—

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

25

—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.

26

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

29

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

Nm

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

a Nt

a ee ey a ee

ae

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

a

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

a
Y

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

on

(C) with
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

r
Vw

added).

‘
is

= ~
iphas

=

APPENDIX

ases that

oc

++)
. W

-
a

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

es

$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= 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’").

4

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:

Q.

(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.

a

‘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
vA
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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386007_1587%3A1. Public record. Not legal advice.