Appendix — Griffith v. United States, 121 S. Ct. 73 (2000) (No. 99-2052)
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APPENDIX A — PUBLISHED OPINION OF THE
UNITED STATES COURT OF APPEALS FOR THE
ELEVENTH CIRCUIT DATED MARCH 24, 2000
IN RE: Leroy Charles GRIFFITH,
Debtor.
Leroy Charles Griffith,
Plaintiff-Appellant,
v.
United States of America,
Defendant-Appellee.
No. 97-4845,
United States Court of Appeals,
Eleventh Circuit.
March 24, 2000.
*_ * *
Appeal from the United States District Court for the
Southern District of Florida.
Before ANDERSON, Chief Judge, and TJOFLAT,
EDMONDSON, COX, BIRCH, DUBINA, BLACK,
CARNES, BARKETT, HULL, MARCUS and WILSON,
Circuit Judges.
2a
Appendix A
BIRCH, Circuit Judge:
This appeal requires us to determine the scope of
nondischargeability of tax debts under 11 U.S.C.
§ 523(a)(1)(C). Specifically, we requested the parties in this
case to address the question of whether § 523(a)(1)(C)
renders a tax debt nondischargeable in bankruptcy where the
debtor has willfully attempted in any manner to evade or
defeat the payment of a tax but has not in any manner
willfully attempted to evade or defeat the assessment of a
tax. Because we find that § 523(a)(1)(C) does render
nondischargeable tax debts where the debtor has willfully
attempted in any manner to evade or defeat the payment of a
tax and because the bankruptcy and district courts did not
clearly err in finding that Debtor Leroy Charles Griffith’s
actions constituted a willful attempt to evade or defeat the
| payment of a tax, we AFFIRM the finding that Griffith’s tax
| debts are nondischargeable.
| I. Background
We adopt and reiterate the factual background as written
by the panel that originally heard this case:
Plaintiff-appellant Leroy Charles Griffith (“Griffith”)
| has long been the sole owner of several corporations
primarily involved in the adult entertainment industry. These
corporations included, among others, Gayety Theaters, Inc.
(“Gayety”), Ell Gee, Inc., and Paris Follies, Inc. As
subchapter S corporations, the income and deductions pass
through to the shareholders, so Griffith’s personal income
tax returns reflect the performance of his corporations. An
iii ian incite
3a
Appendix A
IRS audit revealed that Griffith had substantially underpaid
his taxes for the years 1969, 1970, 1972-1976, and 1978.
Griffith petitioned the Tax Court for a reconsideration of
the amount owed. In a detailed opinion issued in September
of 1988, the Tax Court found that Griffith had indeed
underpaid his taxes, but did not impose fraud penalties
because the government’s evidence with respect to fraud did
not satisfy the clear and convincing burden of proof. See
Griffith v. Commissioner, 56 T.C.M. (CCH) 220, 1988 WL
95665 (1988), modified, 56 T.C.M. (CCH) 1263, 1989 WL
11176 (1989). With interest, the amount of taxes owed at
the time that Griffith filed for bankruptcy in this case was
Close to $2,000,000. See In re Griffith, 161 B.R. 727, 730
(Bankr.S.D.Fla.1993), aff'd, 210 B.R. 216 (S.D.Fla.1997),
rev'd, 174 F.3d 1222 (11th Cir.), vacated and reh’g en banc
granted, 182 F.3d 1297 (11th Cir.1999).
Less than a month after the Tax Court issued its decision,
on October 10, 1988, NuWave, Inc., was incorporated, with
Griffith’s long-time live-in girlfriend, Linda, as sole
shareholder. On June 8, 1989, Linda and Griffith married,
and Griffith signed an antenuptial agreement in which he
transferred all of his stock in Gayety, Ell Gee, and Paris
Follies to Linda and himself as tenants in the entirety, along
with $390,000 in promissory notes. Assets from another
corporation that he owned were transferred to NuWave, Inc.
The IRS made an assessment against Griffith on September
28, 1989. However, the assets transferred pursuant to the
antenuptial agreement were insulated from being levied upon
because assets held by tenants in the entirety cannot be levied
upon without a judgment against both owners. Additionally,
Griffith no longer had any ownership interest in those assets
transferred to NuWave, Inc. ,
4a
Appendix A
On January 15, 1993, Griffith filed a Chapter 7
bankruptcy petition, as well as a complaint to determine the
dischargeability of his tax debts. The government argued that
the tax debts were nondischargeable under 11 U.S.C.
§ 523(a)(1)(C), which prohibits discharge of taxes “with
respect to which the debtor made a fraudulent return or
willfully attempted in any manner to evade or defeat such
tax.” The bankruptcy court agreed. Although there was no
evasion with respect to the assessment of the tax, the
bankruptcy court, looking to the “badges of fraud,” found
that Griffith’s conduct occurring after the Tax Court issued
its decision amounted to a willful attempt to evade or defeat
the payment of the tax debt. See In re Griffith, 161 B.R. at
733-34. The court specifically rejected Griffith’s argument
that §§ 523(a)(1)(C) applies only to conduct constituting
evasion of the assessment of a tax; the court held that the
phrase “in any manner” was sufficiently broad to include
conduct constituting evasion of the payment of a tax. See id.
at 732-33.
Subsequent to the bankruptcy court’s decision, we
decided In re Haas, 48 F.3d 1153 (11th Cir.1995). Haas had
filed accurate tax returns, but had not paid the taxes due;
instead, he used his income to pay business and personal
debts. Upon filing for bankruptcy, he sought discharge of
the tax debts, which the government opposed on the basis of
§ 523(a)(1)(C). Noting the “fresh start” policy underlying
the bankruptcy laws, the Haas panel found that a literal
reading of the statute, including the broad phrase “in any
manner,” would conflict with the goals of bankruptcy. See
id. at 1156. Thus, the panel looked to provisions of the
Internal Revenue Code (“I.R.C.”’) and found that they referred
Sa
Appendix A
to “willfully attempting in any manner to evade or defeat
any tax or the payment thereof.” See id. (quoting 26 U.S.C.
§ 6531(2)) (emphasis added); see also id. (quoting 26 U.S.C.
§§ 6653, 6672, & 7201, which contain the identical language
as that emphasized in the above quote). The panel relied on
the absence of the phrase “or the payment thereof” from
§ 523(a)(1)(C) to conclude that the provision precludes
discharge when the debtor “willfully attempted . . . to evade
or defeat” the tax at the assessment Stage, but does not
preclude discharge when there has been such evasion at the
payment stage. See id. at 1159. Thus, Haas’ debt was
dischargeable.
Griffith appealed the bankruptcy court’s decision in the
instant case to the district court, relying heavily on the
intervening decision in Haas. The district court affirmed the
bankruptcy court’s decision. See In re Griffith, 210 B.R. 216,
220 (S.D.Fla.1997), rev'd, 174 F.3d 1222 (11th Cir.), vacated
and reh’g en banc granted, 182 F.3d 1297 (11th Cir.1999).
In so doing, it distinguished Haas. The district court found
that, unlike Haas, Griffith had done more than simply pay
other debts before paying his back taxes; Griffith had
engaged in a fraudulent transfer of assets in order to prevent
collection of his tax debt. See id. at 219. Griffith appealed
to this court.’
1. The panel rejected Griffith’s contention that the bankruptcy
court abused its discretion in allowing the government to amend to
assert specifically its § 523(a)(1)(C) counterclaim. We reaffirm that
holding.
6a
Appendix A
II. Discussion
This case requires us to interpret § 523(a)(1)(C), which
states that:
(a) A discharge under section 727, 1141, 1228(a),
1228(b), or 1328(b) of this title does not discharge
an individual debtor from any debt —
(1) for a tax or customs duty —
(C) with respect to which the debtor made a
fraudulent return or willfully attempted in any
manner to evade or defeat such tax... .
We do not conduct this enterprise against an empty slate.
Several courts, including this court in Haas, have addressed
the application of § 523(a)(1)(C) to persons who failed to
pay their tax debts before entering bankruptcy. While most
of the courts that have addressed this issue agree with our
primary holding in Haas “that a debtor’s failure to pay his
taxes, alone, does not fall within the scope of section
523(a)(1)(C)’s exception to discharge in bankruptcy,” 48
F.3d at 1158, our second holding, that “the phrase ‘attempt[s]
in any manner to evade or defeat such tax’ does not imply
attempts to evade or defeat payment thereof,” id. at 1159
(alteration in original), has been more controversial. See,
e.g., In re Fegeley, 118 F.3d 979, 983 (3d Cir.1997)
(accepting first holding from Haas but finding that
nonpayment of taxes is relevant to the question of whether
aes
7a
Appendix A
tax debts are nondischargeable under § 523(a)(1)(C)); In re
Birkenstock, 87 F.3d 947, 951-52 (7th Cir.1996) (accepting
first holding from Haas but holding that “where nonpayment
is coupled with a pattern of failing to file tax returns or where
a defendant takes other measures to conceal assets or income
from the IRS, a court may reasonably find that the debtor
sought to ‘evade or defeat’ his tax liabilities”) (citations
omitted); Dalton v. IRS, 77 F.3d 1297, 1301 (10th Cir. 1996)
(accepting first holding from Haas but finding that “any
statutory interpretation of ‘evade and defeat’ which relieves
the dishonest debtor who conceals assets to avoid the
payment or collection of taxes, but which penalizes the same
dishonesty to avoid assessment, would be an absurd result”);
see also In re Tudisco, 183 F.3d 133, 137 (2d Cir.1999)
(refusing to pass on question of whether mere nonpayment
is sufficient to render tax debts nondischargeable under
§ 523(a)(1)(C) but, instead, finding that the fact that the
debtor had “engaged in more than ‘mere nonpayment’ ”
meant that he had attempted to evade or defeat his taxes).
But see In re Bruner, 55 F.3d 195, 200 (Sth Cir.1995)
(rejecting both holdings of Haas ). Because we find that
§ 523(a)(1)(C) renders nondischargeable tax debts where the
debtor willfully attempted to evade or defeat payment of
taxes and because we find that the bankruptcy court did not
err in finding that Griffith had willfully attempted to evade
payment of his taxes, we affirm the district court’s affirmance
of the bankruptcy court’s finding of nondischargeability.
A. Statutory Interpretation
Interpretation of a statute begins “with the language of
the statute itself.” United States v. Ron Pair Enters., 489
8a
Appendix A
U.S. 235, 241, 109 S.Ct. 1026, 1030, 103 L.Ed.2d 290 (1989).
As a general rule, if the language of the statute is plain, then
our interpretative function ceases and we should “ ‘enforce
[the statute] according to its terms.’ ” Id. (quoting Caminetti
v. United States, 242 U.S. 470, 485, 37 S.Ct. 192, 194, 61
L.Ed. 442 (1917)).
In interpreting the language of a statute, we generally
give “the ‘words used’ their ‘ordinary meaning.’ ” Moskal
v. United States, 498 U.S. 103, 108, 111 S.Ct. 461, 465, 112
L.Ed.2d 449 (1990) (quoting Richards v. United States, 369
U.S. 1, 9, 82 S.Ct. 585, 591, 7 L.Ed.2d 492 (1962)). We also
use interpretative tools, the “canons of construction,” which
“are no more than rules of thumb that help courts determine
the meaning of legislation.” Connecticut Nat’] Bank v.
Germain, 503 U.S. 249, 253, 112 S.Ct. 1146, 1149, 117
L.Ed.2d 391 (1992). Among these canons of construction
are the principles “that Congress is presumed to be aware of
judicial interpretations of a statute,” NLRB v. Bildisco &
Bildisco, 465 U.S. 513, 524, 104 S.Ct. 1188, 1195, 79
L.Ed.2d 482 (1984), superseded by statute on other grounds,
11 U.S.C. § 1113 (1984), that “courts should disfavor
interpretations of statutes that render language superfluous,”
Connecticut Nat’! Bank, 503 U.S. at 253, 112 S.Ct. at 1149,
and that “[w]Je assume that Congress is aware of existing
law when it passes legislation,” Miles v. Apex Marine Corp.,
498 US. 19, 32, 111 S.Ct. 317, 325, 112 L.Ed.2d 275 (1990).
“Legislative history can be a legitimate guide to a statutory
purpose obscured by ambiguity.” Burlington N. R.R. Co. v.
Oklahoma Tax Comm., 481 U.S. 454, 461, 107 S.Ct. 1855,
1860, 95 L.Ed.2d 404 (1987). 7
9a
Appendix A
The Government, focusing on the clause “in any
manner,” argues that the plain language of § 523(a)(1)(C)
renders nondischargeable tax debts where the debtor willfully
attempts to avoid either assessment or collection of a tax.
We “generally construe the statutory exceptions to discharge
in bankruptcy ‘liberally in favor of the debtor’ ” in order to
“ensure[ ] that the ‘honest but unfortunate debtor’ is afforded
a fresh start.” In re Miller, 39 F.3d 301, 304 (11th Cir.1994)
(quoting, respectively, In re Tully, 818 F.2d 106, 110 (Ist
Cir.1987) and Birmingham Trust Nat’! Bank v. Case, 755
F.2d 1474, 1477 (11th Cir.1985), superseded on other
grounds by Pub L. No. 98-353, 98 Stat. 333 ( 1984)). As we
discussed in Haas, however, the broadest possible reading
of § 523(a)(1)(C), i.e., that a tax debt is nondischargeable
whenever “a debtor had both an awareness of his duty to
pay his taxes and the present ability to pay them but
nonetheless failed to satisfy that duty,” would render virtually
all tax debts nondischargeable. 48 F.3d at 1155. To read
§ 523(a)(1)(C) to render tax debts nondischargeable in cases,
like Haas, where the debtor merely failed to pay his taxes,
would extinguish the general rule in favor of dischargeability
of tax debts. Thus, we reaffirm our first holding from Haas
that mere nonpayment of taxes is insufficient to establish
the exception found in § 523(a)(1)(C). See id. at 1158.
We turn to the question of whether § 523(a)(1 )(C) applies
to a willful attempt to evade or defeat collection of taxes
where the debtor engaged in affirmative acts other than mere
nonpayment of the taxes. Our conclusion in Haas that
§ 523(a)(1)(C) does not apply to attempts to evade or defeat
collection of taxes was premised, in part, on the phrasing of
§ 523(a)(1)(C) as compared with four provisions of the
10a
Appendix A
Internal Revenue Code. Unlike § 523(a)(1)(C), which never
mentions either “collection” or “payment,” these four
provisions each address willful attempts “in any manner to
evade or defeat any tax or the payment thereof.” I.R.C.
§ 6531(2) (emphasis added); see also I.R.C. §§ 6653(2),
6672(a), 7201. Applying the canons of interpretation that
Congress is presumed to know the content of existing,
relevant law, Haas, 48 F.3d at 1157, and that, “[w]here
Congress knows how to say something but chooses not to,
its silence is controlling,” id. at 1156, we held that Congress
must have consciously chosen not to include the language
“or the payment thereof” in § 523(a)(1)(C), id. at 1157. In
reaching this conclusion, we acknowledged that, because
§ 523(a)(1)(C) is part of a separate statute and title than the
I.R.C., where these other provisions are found, these canons
of construction are somewhat weaker, but we found that, in
light of the prominence of I.R.C. § 7201, we could presume
that Congress was aware of the language in § 7201 but
consciously chose not to mirror it. Id. at 1157.”
2. One possibility not addressed by either party is that the
language in I.R.C. § 7201 reflects the relationship between I.R.C.
§ 7201, which makes it a felony for “[a]ny person [to] willfully
attempt[ ] in any manner to evade or defeat any tax imposed by this
title or the payment thereof,” and I.R.C. § 7203, which makes it a
misdemeanor for “[a]ny person required under this title to pay any
estimated tax or tax .. . [to] willfully fail[ ] to pay such estimated
tax or tax....” The Supreme Court, addressing the predecessor
statutes to §§ 7201 and 7203, noted that there was not a bright line
between the conduct covered by the two statutory provisions. See
Spies v. United States, 317 U.S. 492, 497, 63 S.Ct. 364, 367, 87
L.Ed. 418 (1943) (“The difference between willful failure to pay a
tax when due, which is made a misdemeanor, and willful attempt to
(Cont'd)
lla
Appendix A
While we believe that the application of the canons of
construction produced a plausible interpretation of
§ 523(a)(1)(C) in Haas, we now conclude that the more
reasonable interpretation of § 523(a)(1)(C) is that it renders
nondischargeable tax debts where the debtor engaged in
affirmative acts seeking to evade or defeat collection of taxes.
This interpretation accords well with the interests that
Congress was attempting to balance in enacting the
predecessor statute to § 523(a)(1)(C): to permit “an honest
but financially unfortunate debtor [to make] a fresh start
unburdened by what may be an overwhelming liability for
(Cont'd)
defeat and evade one, which is made a felony, is not easy to detect
or define.”). By including the language “or the payment thereof” in
§ 7201, Congress ensured that courts would not incorrectly create a
sharp demarcation between the conduct covered by § 7201 (i.e.,
failure to pay a tax) and the conduct covered by § 7203 (i.e., evasion
of a tax, whether by evasion of assessment or collection), but,
instead, would use a more subtle distinction to determine whether
failure to pay constituted a misdemeanor, a felony, or neither. See
id. at 499, 63 S.Ct. 364 (“Willful but passive neglect of the statutory
duty may constitute the lesser offense, but to combine with it a willful
and positive attempt to evade tax in any manner or to defeat it by -
any means lifts the offense to the degree of felony.”); see also
Sansone v. United States, 380 U.S. 343, 351, 85 S.Ct. 1004, 1010,
13 L.Ed.2d 882 (1965) (applying Spies to §§ 7201 and 7203). In
contrast to the I.R.C., there is no provision like § 7203 in the
bankruptcy code and, thus, Congress may have deemed it less
necessary~to include the language “or the payment thereof” in
§ 523(a)(1)(C). See also In re Toti, 24 F.3d 806, 808-09 (6th
Cir.1994) (rejecting claim that § 523(a)(1)(C) only applies to
behavior covered by § 7201 and finding that § 523(a)(1)(C) renders
nondischargeable tax debts where debtor was convicted under
§ 7203).
12a
Appendix A
accumulated taxes,” while avoiding the creation of “a tax
evasion device.” S.Rep. No. 89-1158 (1966), reprinted at
1966 U.S.C.C.A.N. 2468. As the Tenth Circuit recognized,
an interpretation of § 523(a)(1)(C) that permits a debtor to
engage in affirmative behavior in order to evade collection
of taxes serves neither of those purposes, but, instead,
advantages dishonest debtors. See Dalton, 77 F.3d at 1301.
Principles of statutory interpretation also support our
conclusion that § 523(a)(1)(C) renders nondischargeable tax
debts where the debtor engaged in affirmative acts seeking
to evade payment of taxes. As other courts have noted,
interpreting § 523(a)(1)(C) so that it does not apply to
attempts to evade payment of taxes would mean that the
phrase “willfully attempted in any manner to evade or defeat
taxes” would only apply to persons who filed a fraudulent
return. See id. at 1301 & n. 4; In re Jones, 116 B.R. 810,
815 & n. 1 (Bankr.D.Kan.1990) (noting that, because
nondischargeability of tax debts due to failure to file a tax
return is covered by § 523(a)(1)(B)(i), “this court is hard-
pressed to conceive how a debtor might willfully attempt to
evade or defeat a tax without also filing a fraudulent return’’).
Such an interpretation, however, would render the phrase
“willfully attempted in any manner to evade or defeat taxes”
superfluous because § 523(a)(1)(C) expressly renders
nondischargeable tax debts where the debtor filed a
fraudulent tax return. See Dalton, 77 F.3d at 1301; Jones,
116 B.R. at 815. Thus, concluding that § 523(a)(1)(C) renders
nondischargeable willful attempts to evade or defeat payment
of taxes conforms with the principle that we “disfavor
interpretations of statutes that render language superfluous,”
Connecticut Nat’! Bank, 503 U.S. at 253, 112 S.Ct. at 1149;
|
13a
Appendix A
see also In re Gilder, 122 B.R. 593, 595 (Bankr.M.D.Fla.
1990) (noting that prongs of § 523(a)(1)(C) should be “read
in the disjunctive”). Finally, we note that courts have
traditionally been reluctant to-limit the means by which a
taxpayer may “willfully attempt in any manner to evade or
defeat” texes. See Spies, 317 U.S. at 499, 63 S.Ct. at 368
(“Congress did not define or limit the methods by which a
willful attempt to defeat and evade might be accomplished
and perhaps did not define lest its effort to do so result in
some unexplained limitation. Nor would we by definition
constrict the scope of the Congressional provision that it may
be accomplished ‘in any manner’.”); see also Dalton, 77 F.3d
at 1301 (applying Spies to interpretation of § 523(a)(1)(C));
Toti, 24 F.3d at 809 (finding that “willfully attempted to
evade” taxes includes “voluntary, conscious, and intentional
evasions of tax liabilities,” including conscious failure to
file a return and to pay taxes).
Accordingly, while we reaffirm the primary holding of
Haas that mere nonpayment of taxes, without more, does
not constitute a willful attempt to evade or defeat taxes under
§ 523(a)(1)(C), we hold that § 523(a)(1)(C) does render
nondischargeable tax debts where the debtor engaged in
_ affirmative acts constituting a willful attempt to evade or
defeat payment of taxes.
B. Application
In light of our conclusion that § 523(a)(1)(C) does apply
to debtors who willfully attempt to evade or defeat payment
of taxes, we must address the question of whether Griffith’s
actions constitute a willful attempt to evade or defeat his
l4a
Appendix A
taxes. The Government bears the burden to prove, by a
preponderance of the evidence, that a particular claim is
nondischargeable under § 523(a). See Grogan v. Garner, 498
U.S. 279, 287-88, 111 S.Ct. 654, 659-60, 112 L.Ed.2d 755
(1991). The willful attempt to evade prong of 523(a)(1)(C)
includes “both a conduct requirement (that the debtor sought
‘in any manner to evade or defeat’ his tax liability) and a
mental state requirement (that the debtor did so ‘willfully’).”
Birkenstock, 87 F.3d at 951 (quoting § 523(a)(1)(C)). It is
undisputed that Griffith engaged in intra-family transfers of
property for little to no consideration.’ In light of our holding
in this case, we find that the district court did not err in
affirming the bankruptcy court’s finding that Griffith had
engaged in conduct covered by § 523(a)(1)(C). See id. at
952 (affirming bankruptcy court’s finding of an attempt to
evade taxes where debtors transferred property into trust for
no consideration while still maintaining control over the
property); Dalton, 77 F.3d at 1303 (holding that transfer of
property to betrothed for insufficient consideration with
knowledge of tax investigation supported finding of willful
attempt to evade or defeat taxes); In re Sternberg, 229 B.R.
238, 248 (S.D.Fla.1998) (finding that transfer of property to
wife for little consideration while maintaining control over
the property constituted a willful attempt to evade or defeat
taxes); Jones, 116 B.R. at 815 (finding that transfer of
property to others constituted an attempt to evade or defeat
taxes).
3. The bankruptcy court also noted that Griffith engaged in
“personal-corporate commingling of funds” but considered that only
as evidence of Griffith’s intent to evade his tax liability. Griffith,
161 B.R. at 733.
15a
Appendix A
Several other courts use a three-prong test to determine
whether a debtor’s failure to pay his tax liability was willful
under § 523(a)(1)(C): whether “(1) the debtor had a duty
under the law, (2) the debtor knew he had that duty, and (3)
the debtor voluntarily and intentionally violated that duty.”
Bruner, 55 F.3d at 197; see also Birkenstock, 87 F.3d at 952
(stating same test as two prongs). Applying this test, we
find that the district court did not err in affirming the
bankruptcy court’s finding of willfulness. It is undisputed
that Griffith had a duty under the law to pay taxes and that
Griffith knew that he had that duty. On the issue of whether
Griffith voluntarily and intentionally violated that duty, the
bankruptcy court, in addition to noting that both Griffith and
his wife Linda were “evasive and lacked that ring of
forthrightness reflective of an open and credible witness,”
Griffith, 161 B.R. at 734, looked to the traditional “badges
of fraud” to determine that Griffith’s conduct constituted a
willful attempt to evade his tax obligations, id. at 733. The
bankruptcy court’s finding that Griffith’s transfer of property
to Linda implicated several badges of fraud, including being
“an exchange to a family member, during a period of serious
4. We note that the fact that Tax Court found that the
Government had not proved that Griffith had engaged in fraud, see
Griffith v. Commissioner of Internal Revenue, 56 T.C.M. (CCH)
220, 1988 WL 95665, modified, 56 T.C.M. (CCH) 1263, 1989 WL
11176 (1989), does not bar the bankruptcy court’s finding of
willfulness in this case. Unlike in the bankruptcy case, where the
Government’s burden of proof is preponderance of the evidence,
the Government’s burden of proof as to the fraud claims in the Tax
Court was the clear and convincing evidence standard. See id.
Additionally, the Tax Court’s analysis does not address Griffith’s
transfers of property to Linda or other actions taken by Griffith
post-assessment of the taxes at issue in this case. See id.
16a
Appendix A
financial difficulty, for inadequate consideration,” id. at 734,
is not clearly erroneous. These findings are sufficient to
justify a finding of fraud and, thus, to support the finding
that Griffith’s conduct was willful. See Sternberg, 229 B.R.
at 246 (“While a single badge of fraud may amount to only a
suspicious circumstance, a combination of them will justify
a finding of fraud.”’).
Ill. Conclusion
We AFFIRM the district court’s order affirming the
bankruptcy court’s determination that Griffith’s tax debts
are nondischargeable under § 523(a)(1)(C).
ee ee
17a
APPENDIX B — PUBLISHED OPINION OF THE
UNITED STATES COURT OF APPEALS FOR THE
ELEVENTH CIRCUIT DATED MAY 11, 1999
In re: Leroy Charles GRIFFITH,
Debtor.
Leroy Charles Griffith,
Plaintiff-Appellant,
v.
United States of America,
Defendant-Appellee.
No. 97-4845.
United States Court of Appeals,
Eleventh Circuit.
May 11, 1999.
* * *
Appeal from the United States District Court for the
Southern District of Florida.
Before ANDERSON, DUBINA and BLACK, Circuit
Judges.
18a
Appendix B
ANDERSON, Circuit Judge:
This case raises the issue of whether certain tax debts
are dischargeable in bankruptcy despite the debtor’s efforts
to evade payment of the taxes by transferring assets to his
wife. The district court found that such tax debts are not
dischargeable. Binding circuit precedent requires us to
reverse.
I. FACTS
Plaintiff-appellant Leroy Charles Griffith (“Griffith”)
has long been the sole owner of several corporations
primarily involved in the adult entertainment industry. These
corporations included, among others, Gayety Theaters, Inc.
(“Gayety”), Ell Gee, Inc., and Paris Follies, Inc. As
subchapter S corporations, the income and deductions pass
through to the shareholders, so Griffith’s personal income
tax returns reflect the performance of his corporations. An
IRS audit revealed that Griffith had substantially underpaid
his taxes for the years 1969, 1970, 1972-1976, and 1978.
Griffith petitioned the Tax Court for a reconsideration of
the amount owed. In a detailed opinion issued in September
of 1988, the Tax Court found that Griffith had indeed
underpaid his taxes, but did not impose fraud penalties
because the government’s evidence with respect to fraud did
not satisfy the clear and convincing burden of proof. See
Griffith v. Commissioner, 56 T.C.M. (CCH) 220, 1988 WL
95665 (1988), modified, 56 T.C.M. (CCH) 1263, 1989 WL
11176 (1989). With interest, the amount of taxes owed at
the time that Griffith filed for bankruptcy in this case was
close to $2,000,000. See In re Griffith, 161 B.R. 727, 730
(Bankr.S.D.Fla.1993).
a ne
19a fi
Appendix B
Less than a month after the Tax Court issued its decision,
on October 10, 1988, NuWave, Inc. was incorporated, with
Griffith’s long-time live-in girlfriend, Linda, as sole
shareholder. On June 8, 1989, Linda and Griffith married,
and Griffith signed an antenuptial agreement in which he
transferred all of his stock in Gayety, Ell Gee, and Paris
Follies to Linda and himself as tenants in the entirety, along
with $390,000 in promissory notes. Assets from another
corporation that he owned were transferred to NuWave, Inc.
The IRS made an assessment against Griffith on September
28, 1989. However, the assets transferred pursuant to the
antenuptial agreement were insulated from being levied upon
because assets held by tenants in the entirety cannot be levied
upon without a judgment against both owners. Additionally,
Griffith no longer had any ownership interest in those assets
transferred to NuWave, Inc.
On January 15, 1993, Griffith filed a Chapter 7
bankruptcy petition, as well as a complaint to determine the
dischargeability of his tax debts. The government argued that
the tax debts were nondischargeable under 11 U.S.C.
§ 523(a)(1)(C), which prohibits discharge of taxes “with
respect to which the debtor made a fraudulent return or
willfully attempted in any manner to evade or defeat such
tax.” The bankruptcy court agreed. Although there was no
evasion with respect to the assessment of the tax, the
bankruptcy court, looking to the “badges of fraud,” found
that Griffith’s conduct occurring after the Tax Court issued
its decision amounted to a willful attempt to evade or defeat
the payment of the tax debt. See id. at 733-34. The court
specifically rejected Griffith’s argument that § 523(a)(1)(C)
applies only to conduct constituting evasion of the
20a
Appendix B
assessment of a tax; the court held that the phrase “in any
manner” was sufficiently broad to include conduct
constituting evasion of the payment of a tax. See id. at
732-33.
Subsequent to the bankruptcy court’s decision, the
Eleventh Circuit decided In re Haas, 48 F.3d 1153 (11th
Cir.1994). Haas had filed accurate tax returns, but had not
paid the taxes due; instead, he used his income to pay
business and personal debts. Upon filing for bankruptcy, he
sought discharge of the tax debts, which the government
opposed on the basis of § 523(a)(1)(C). Noting the “fresh
start” policy underlying the bankruptcy laws, the Haas panel
found that a literal reading of the statute, including the broad
phrase “in any manner,” would conflict with the goals of
bankruptcy. See id. at 1156. Thus, the panel looked to
provisions of the Internal Revenue Code (“I.R.C.”) and found
that they referred to “willfully attempting in any manner to
evade or defeat any tax or the payment thereof.” See id.
(quoting 26 U.S.C. § 6531(2)) (emphasis added); see also
id. (quoting §§ 6653, 6672, & 7201, which contain the
identical language as that emphasized in the above quote).
The panel relied on the absence of the phrase “or the payment
thereof” from § 523(a)(1)(C) to conclude that the provision
precludes discharge when the debtor “willfully attempt[ed]
... to evade or defeat” the tax at the assessment stage, but
does not preclude discharge when there has been such evasion
at the payment stage. See id. at 1159. Thus, Haas’ debt was
dischargeable.
Griffith appealed the bankruptcy court’s decision in the
instant case to the district court, relying heavily on the
2la
Appendix B
intervening decision in Haas. The district court affirmed the |
bankruptcy court’s decision. See In re Griffith, 210 B.R. 216,
220 (S.D.Fla.1997). In so doing, it distinguished Haas. The
district court found that, unlike Haas, Griffith had done more
than simply pay other debts before paying his back taxes;
Griffith had engaged in a fraudulent transfer of assets in order
to prevent collection of his tax debt. See id. at 219. Griffith
appealed to this court.'
II. DISCUSSION
A. The Scope of Haas and its Application to this Case
Our resolution of this case depends on an interpretation
of the scope of § 523(a)(1)(C). As several other appellate
courts have noted, § 523(a)(1)(C) contains both a mens rea
requirement (“willfulness”) and a conduct requirement
(“attempting to evade or defeat such tax”). See, e.g., In re
Birkenstock, 87 F.3d 947, 951 (7th Cir.1996).? In Haas, the
panel focused on the conduct requirement and determined
that Haas’s conduct did not amount to an attempt to evade
or defeat his tax liability. The conduct at issue in Haas was
as follows: Haas had not concealed assets or otherwise
evinced a motive to evade taxes; because of financial
1. We reject Griffith’s contention that the bankruptcy court
abused its discretion in allowing the government to amend to assert
specifically its § 523(a)(1)(C) counterclaim.
2. In light of our holding, infra, that the rationale of Haas
compels the conclusion that Griffith’s activities to avoid payment
do not come within the conduct requirement, we decline to address
further the mens rea requirement in this opinion.
22a
Appendix B
pressures, he had merely paid other debts, leaving the tax
debt unpaid notwithstanding his knowledge thereof and
ability to pay. In this case, the government argues that “[t]he
facts presented in Haas are readily distinguishable from the
facts presented here.” Brief for the Appellee at 34. Like the
district court, the government notes that Haas simply failed
to pay his taxes, choosing to pay other debts first, whereas
Griffith took numerous actions “pursuant to a plan to defraud
the IRS.” Id. at 35. The government extracts from the panel’s
opinion in Haas the statement that “Congress did not intend
that a failure to pay taxes, without more, should result in the
nondischargeability of a debtor’s tax liabilities in
bankruptcy.” Id. at 36 (quoting Haas, 48 F.3d at 1157).
Emphasizing the “without more” qualification, the
government contends that “more” was found in this case, so
that the conduct requirement is satisfied and nondischargeability
of Griffith’s tax debt should be upheld.
The distinction suggested by the government and the
district court between mere nonpayment and fraudulent acts
of concealment to avoid payment is an attractive reading of
§ 523(a)(1)(C), and one on which the Haas panel could have
based its holding. See infra. However, this is not the
interpretation of § 523(a)(1)(C) that the Haas panel adopted.
The above quote notwithstanding, the Haas panel made clear
that, in its view, § 523(a)(1)(C) prohibited discharge only
when the actions taken by the debtor affected the assessment
of the tax. In support of this reading, the Haas panel relied
on the omission of the phrase “or the payment thereof” from
§ 523(a)(1)(C), in contrast to the following four sections of
the I.R.C.: § 6531(2), establishing the statute of limitations
period for, inter alia, the crime of “willfully attempting in
i's Reece reat ete elle tn > a
23a
Appendix B
any manner to evade or defeat any tax or the payment
thereof;” § 6653(2), addressing stamp taxes and sanctioning
anyone who “willfully attempts in any manner to evade or
defeat any such tax or the payment thereof;” § 6672(a),
creating civil penalties for those who “willfully attempt ]
in any manner to evade or defeat any such tax or the payment
thereof;” and § 7201, imposing felony penalties on “[a]ny
person who willfully attempts in any manner to evade or
defeat any tax imposed by this title or the payment thereof.”
The Haas panel found that the striking similarities between
§ 523(a)(1)(C) and each of these provisions was persuasive
evidence that Congress deliberately omitted the language “or
the payment thereof” from § 523(a)(1)(C). The panel
continued:
We conclude that Congress has shown itself :
capable of distinguishing between the evasion of
a tax and the evasion of payment thereof; its
decision to omit the words “or payment thereof”
in section 523(a)(1)(C), despite the inclusion of
these words in four previously enacted and nearly
identical provisions of the I.R.C., must be given
effect.
Id. at 1161. Significantly, the Haas court cited the decision
of the bankruptcy court in this very Case as an example of an
erroneous reading of § 523(a)(1)(C). See id. at 1158.
3. The panel noted that § 523(a)(1)(C) was part of the
Bankruptcy Code, not the I.R.C., but still found the I.R.C. instructive
“because Congress is presumed to be aware of pertinent, existing
law when it passes legislation.” Haas, 48 F.3d at 1157.
24a
Appendix B
_ Weconclude that this case is squarely governed by Haas.
Pursuant to Haas, § 523(a)(1)(C) applies only to conduct
constituting evasion of the assessment of a tax; it does not
apply to conduct that involves evasion of the payment of a
tax debt. Therefore, pursuant to the prior panel rule, we are
compelled to reverse the decision of the district court and
remand. See United States v. Woodard, 938 F.2d 1255, 1258
(11th Cir.1991) (“The law in this circuit is emphatic that
‘only a decision by this court sitting en banc or the United
States Supreme Court can overrule a prior panel decision.’ ”
(quoting United States v. Machado, 804 F.2d 1537, 1543
(11th Cir.1986))).
B. A Narrower Approach
Although we are bound by the decision in Haas, we are
troubled by its application in this case. As noted above, the
underlying facts in Haas involved mere nonpayment of the
tax, without more. By contrast, in the instant case, Griffith
fraudulently transferred assets to his wife to evade the
payment of his tax debts. We have significant doubt about
whether the Haas panel would have adopted its interpretation
of § 523(a)(1)(C), had it foreseen the application of that
interpretation in a case like this one.
In Dalton v. IRS, 77 F.3d 1297 (10th Cir. 1996), the Tenth
Circuit addressed a case identical to the instant case in all
relevant respects. In dicta, the Tenth Circuit indicated its
agreement with the result reached in Haas — i.e., that the
mere failure to pay a tax, without more, would not rise to
the level of tax evasion as required by § 523(a)(1)(C). Thus,
the result in Haas, could have been reached upon grounds
25a
Appendix B
much narrower than the ground actually adopted by the Haas
panel.‘
While acknowledging that the result in Haas was correct,
the Tenth Circuit in Dalton expressly rejected the proposition
(adopted in Haas ) that § 523(a)(1)(C) applies only to conduct
constituting evasion of the assessment of a tax and does not
apply to conduct constituting evasion of the payment or
collection thereof. Like the instant case, Dalton involved only
conduct evidencing attempts to evade the payment or
collection of taxes. Relying upon the broad language of
§ 523(a)(1)(C) — “willfully attempted in any manner to
evade or defeat such tax” — and in particular upon the broad
phrase “in any manner,” the Dalton court held that
_ §523(a)(1)(C) makes a tax nondischargeable when the debtor
4. Such narrower rationale could have been as follows. If the
mere nonpayment of a tax, without more, rendered a tax debt
nondischargeable, that would effectively make all tax debts
nondischargeable. This would be inconsistent with the Bankruptcy
Code’s purpose of allowing a fresh start for honest, but unfortunate,
debtors, and would also be inconsistent with §§ 523(a)(1)(A) and
507(a)(8)(A)(i), which together make tax debts nondischargeable
only if they become due and owing within three years of bankruptcy.
Underlying this narrower rationale is the notion that evasion requires
some measure of fraud or something more than merely intentional
nonpayment. See Blohm v. Commissioner, 994 F.2d 1542, 1554
(11th Cir.1993) (referring to liability under § 7201 for attempts to
evade or defeat tax as “a criminal tax fraud conviction” and noting
that “the elements of criminal tax evasion and of civil tax fraud are
identical” (quoting Gray v. Commissioner, 708 F.2d 243, 246 (6th
Cir.1983)) (emphases added)). See generally Harry Graham Balter,
Tax Fraud and Evasion 2.01[1] (1983) (noting that “courts do not
hesitate to use the terms fraud and evasion interchangeably and
cumulatively”). '
eee ee
26a
Appendix B
attempted to evade a payment or collection of the tax, even
though there was no evasion with respect to the assessment
thereof. Dalton, 77 F.3d at 1301. The Tenth Circuit also relied
upon the purpose of Congress to relieve only “honest”
debtors from their tax debts. Id. Finally, although noting the
contrary ruling in Haas and in a single bankruptcy court
decision, the Dalton court noted that most courts had applied
§ 523(a)(1)(C) to conduct constituting evasion of the payment
of taxes, as well as conduct constituting evasion with respect
to the assessment thereof. Id. at 1300-01.
C. Further Thoughts on the Haas Holding.
Because we are troubled by the application of the Haas
holding to the facts of the instant case, because we doubt
that this consequence was argued to the Haas panel, and
because of the conflict in the circuits arising from the
inconsistency between Haas and Dalton (and the decisions
cited therein), we think that the instant case is a candidate
for en banc reconsideration. For this reason, we add the
further thought that the Haas panel may have overemphasized
the importance of the omission of the words “or the payment
thereof” from § 523(a)(1)(C). The Haas panel assumed that
the language of 11 U.S.C. § 523(a)(1)(C) of the Bankruptcy
Code was borrowed from identical — except for the omitted
phrase — language in 26 U.S.C. § 7201 and like sections of
the Internal Revenue Code. However, our research has
uncovered numerous provisions of the I.R.C. that use
variations of the same language.° If the Haas logic applied
5. See I.R.C. § 552(b)(2) (excluding from definition of “foreign
personal holding company” certain corporations that the Secretary
(Cont’d)
27a
Appendix B
to these provisions, they would have no application where
there was only a purpose to evade the payment of the tax.
Yet there is no indication in the case law or the regulations
that the applicability of these other provisions is limited to
the assessment of a tax, to the exclusion of the payment
thereof. Congress could have borrowed from any of these
(Cont’d)
is satisfied are “not formed or availed of for the purpose of evading
or avoiding United States income taxes which would otherwise be
imposed upon its shareholders”); § 5671 (establishing penalties for
“whoever evades or attempts to evade any [beer] tax”);
§ 6111(d)(1)(A) (defining certain tax shelters in terms that include
“a significant purpose .. . of which is the avoidance or evasion of
Federal income tax. . . .”); § 6501(c)(2) (“In case of a willful attempt
in any manner to defeat or evade tax imposed by this title .. . , the
tax may be assessed, or a proceeding in court for the collection of
such tax may be begun without assessment, at any time.”);
§ 6662(d)(2)(C)(iii) (defining a tax shelter as, inter alia, an
organization “a significant purpose of [which] is the avoidance or
evasion of Federal income tax”); § 7270 (providing for enhanced
fines when any person “fails to comply” with the tax requirements
of insurance policies issued by foreign insurers “with intent to evade
the tax”); § 7341(a) (holding unenforceable certain financing
arrangements under a contract for the sale of property upon which
the seller is liable for taxes if the sale was consummated “with intent
to avoid such tax, or in fraud of the internal revenue laws”); § 7422(e)
(providing, in the context of a civil action for refund, that the
taxpayer has the burden of proof on all issues “except as to the issue
of whether the taxpayer has been guilty of fraud with intent to evade
tax”); § 7454(a) (similarly providing that “[iJn any proceeding
involving the issue whether the petitioner has been guilty of fraud
with intent to evade tax, the burden of proof in respect of such issue
shall be upon the Secretary”); and § 761 1(i)(4) (excepting from the
general rule limiting inquiries into the tax-exempt status of churches
“any willful attempt to defeat or evade any tax imposed by this title”).
28a
Appendix B
provisions, and not from the provisions relied upon by the
Haas panel.
These numerous provisions — and others using similar
language that we have not cited — argue against placing too
much weight on the particular phraseology chosen by
Congress. We do not mean to suggest that these provisions
affirmatively disprove the reading of the Haas panel. Nor do
we suggest that each of these provisions should be interpreted
in the same way. We cite these provisions merely to
demonstrate that the elimination of the phrase “or the
payment thereof,” which looks conspicuous when compared
to the specific provisions that include that phrase, looks much
less so when viewed in light of all of these provisions that
differ in relatively minor ways.
This point is reinforced when one considers that the
relevant phrase of § 523(a)(1)(C) was not enacted as part of
the same statute as the sections including the phrase “or the
payment thereof,” and is not even part of the I.R.C., but is
rather a provision of the Bankruptcy Code. The Haas panel
acknowledged this point, but relied on the presumption that
“Congress is ... aware of pertinent, existing law when it
passes legislation.” See id. (citations omitted). We suggest
that this presumption is relatively weak, however, when the
background law is the entire I.R.C., which encompasses
fifteen volumes of the United States Code Annotated, and
which includes provisions that contain language referring
both to the evasion of tax and to the payment thereof, but
which also includes numerous provisions which refer only
to the former. In short, we have some doubt about attaching
too much significance to the lack of a four-word phrase in
§ 523(a)(1)(C).
29a
Appendix B
III. CONCLUSION
For the foregoing reasons, we reverse the judgment of
the district court on the basis of the holding in Haas and
remand for further proceedings consistent with this opinion.
However, we suggest that this case might warrant en banc
reconsideration.
REVERSED and REMANDED.
30a
APPENDIX C — PUBLISHED ORDER OF THE
UNITED STATES DISTRICT COURT FOR THE
SOUTHERN DISTRICT OF FLORIDA AFFIRMING
FINAL JUDGMENT OF THE BANKRUPTCY COURT
DATED MARCH 26, 1997
In re Leroy Charles GRIFFITH,
Debtor.
Leroy Charles GRIFFITH,
Appellant,
v.
UNITED STATES of America,
Appellee.
No. 94-0147-CIV.
Bankruptcy No. 93-0361-BKC-AJC-A.
United States District Court,
S.D. Florida.
March 26, 1997.
* * *
ORDER AFFIRMING FINAL JUDGMENT
OF THE BANKRUPTCY COURT
3la
Appendix C
NESBITT, District Judge.
THIS CAUSE came before the Court upon notification
by Appellant, Leroy Charles Griffith, that the record, briefs,
and a transcript of the oral argument may be relied upon for
review of the merits of this appeal that was reassigned from
the docket of deceased District Court Judge Sidney M.
Aronovitz, in accordance with the Court’s Order entered on
February 21, 1997 and Administrative Order 97-03.
Appellee, the United States of America, has not filed a
response to the Court’s Order.
The debtor appeals the bankruptcy court’s Memorandum
Decision and Judgment, determining that his federal income
taxes for the years 1969-70, 1972-76, and 1978 are
nondischargeable, pursuant to 11 U.S.C. § 523(a)(1)(C).
ISSUES
I. Appellant raises a procedural issue, that the
bankruptcy court erred by permitting the government to
amend its Answer to assert a counterclaim under 1] U.S.C.
§ 523(a)(1)(C). Granting leave to amend the pleadings is
reviewed by this Court under the standard of abuse of
discretion. Hargett v. Valley Fed. Sav. Bank, 60 F.3d 754,
760 (11th Cir.1995).
II. Appellant’s assertions of substantive errors contend
that the bankruptcy court’s Opinion is based on an erroneous
statutory interpretation of 11 U.S.C. § 523(a)(1)(C), and that
there is an inadequate basis for the findings of fact in favor
of the government. Interpretation of the statutory provision
32a
Appendix C
.
is a question of law subject to de novo review. Haas v.
Internal Revenue Service, 48 F.3d 1153, 1155 (11th Cir.
1995). The bankruptcy court’s factual determinations are
reviewed under the “clearly erroneous” standard. In re Goerg,
930 F.2d 1563, 1566 (11th Cir.1991).
FACTUAL AND PROCEDURAL BACKGROUND
Griffith filed his Chapter 7 bankruptcy petition on
January 15, 1993. He filed a Complaint to determine the
dischargeability of certain tax liabilities, asserting the
provision of the Bankruptcy Code, 11 U.S.C. § 523(a),
without further specification. The Answer filed by the United
States was a general denial, also without reference to a
specific statutory subsection. In a pretrial discovery motion,
filed on June 29, 1993, the government raised the issue of
the debtor’s attempt to evade or defeat his tax liabilities.
At trial on July 28, 1993, the parties stipulated that the
tax liabilities met the requirements for discharge under the
provisions of Sections 507(a)(7)(A)(i1) and (ii) and
523(a)(1)(B)(ii). The debtor rested his case, and moved for
judgment or a directed verdict. The bankruptcy court allowed
the government to amend its Answer to assert a counterclaim
for nondischargeability pursuant to Section 523(a)(1)(C). At
that time. the bankruptcy court offered Griffith the
opportunity to have the trial continued, which Griffith
declined. Following the presentation of evidence on the
Section 523(a)(1)(C) dischargeability issue, the bankruptcy
court ruled in favor of the government. The bankruptcy court
found that Griffith attempted to evade and defeat taxes by
concealing and transferring his assets to reduce the assets
subject to IRS execution in order to defraud the IRS.
33a
Appendix C
The factual basis for analyzing Griffith’s transfer of
assets was considered by the bankruptcy court in reference
to the “badges of fraud”. Griffith owned corporations that
operated adult theaters. Transactions in cash were a common
practice in the operation of his businesses. Griffith transferred
to himself and his wife, Linda, as tenants by the entirety, his
stock in two of the corporations, Ell Gee and Gayety, and
promissory notes in the amount of $390,000. He also
transferred assets from another corporation, Showcase, to
Linda’s corporation, NuWave. The transfers, through an
antenuptial agreement, were made on June 8, 1989, the day
Griffith married Linda. They entered into this marriage after
maintaining a relationship and living together for at least
ten years. This marriage occurred after the Tax Court had
ruled nine months earlier that Griffith under-reported his
income for 1969-1970, 1972-1976 and 1978.
The Tax Court found that Griffith was the sole
Shareholder of the corporations for the years in question.
Griffith owed taxes in the amount of $1,984,121.66. On
September 28, 1989, the IRS made assessments against
Griffith for these taxes, and Griffith claimed he had no way
of paying the amount that was due.
DISCUSSION
I. Amendment of Answer
Griffith argues that at the time of trial, he had no
indication that Defendant was relying on Section
523(a)(1)(C). After Plaintiff rested, the Answer was amended
to allege that provision as the basis for the government’s
34a
Appendix C
counterclaim. Factors for the exercise of discretion to allow
an amendment of the pleadings are that: (1) the party has
not unduly delayed; (2) the party is not acting in bad faith or
with a dilatory motive; (3) the opposing party will not be
unduly prejudiced; and (4) the amendment is not futile.
Foman v. Davis, 371 U.S. 178, 182-83, 83 S.Ct. 227, 239,
9 L.Ed.2d 222 (1962); In re Ambulatory Medical & Surgical
Health Care, Inc., 187 B.R. 888, 900 (Bankr.W.D.Pa.1995).
Taking these factors into account, and considering that the
bankruptcy court offered to continue the trial to allow Griffith
more time to respond to the counterclaim and for additional
discovery, this Court finds no abuse of discretion by the
bankruptcy court in permitting the government to amend its
Answer.
The bankruptcy court applied Bankr.Rule 7013 to allow
the assertion of the counterclaim. There was no prejudice to
Griffith under these circumstances, based on his having
declined the offer of a continuance of the trial.
II. Substantive Issues Pursuant to Section 523(a)(1)(C)
The substantive issues concern the interpretation and
application of Section 523(a)(1)(C), and whether the facts
establish a basis to find the tax liabilities nondischargeable.
Griffith relies on In re Haas, 48 F.3d 1153, 1158 (11th
Cir.1995), to support his position that his liabilities should
be discharged.
ee ie ps a an ee ae
* fd i Me lee et ay te i ee es a rs
35a
Appendix C
STATUTORY INTERPRETATION
Section 523(a)(1)(C) provides, in part, that:
(a) A discharge under ... this title does not
discharge an individual debtor from any debt
(1) foratax...
(C) with respect to which the debtor made a
fraudulent return or willfully attempted in any
manner to evade or defeat such tax. (Emphasis
added).
Visiting Bankruptcy Judge Erwin Katz presided over the
trial and entered the Memorandum Opinion which is the
subject of this appeal. Cases are cited by the bankruptcy court
holding that nonpayment of federal taxes which the taxpayer
knows are owed is a ground for denying dischargeability of
those taxes. This liberal interpretation was rejected by Haas,
which was decided after Bankruptcy Judge Katz considered
the issues in Griffith’s adversary proceeding.
In Haas, the Eleventh Circuit referred to the distinction
between evading the assessment and the payment of taxes,
and held that “a debtor’s failure to pay his taxes, alone, does
not fall within the scope of Section 523(a)(1)(C)’s exception
to discharge in bankruptcy.” 48 F.3d at 1158.
The bankruptcy court determined that Griffith carried
out a plan through concealment and transfers of assets in
order to defraud the IRS. The bankruptcy court found that
36a
Appendix C
Griffith’s antenuptial agreement was not a mutual exchange,
as his wife gave up nothing of value. Griffith’s conduct in
making the transfers had the natural consequence of failing
to pay the taxes, and the bankruptcy court did refer to this as
attempting to evade and defeat the payment of taxes. The
bankruptcy court also based its decision on the plan carried
out by Griffith, the surrounding circumstances and the
evidence under the “badges of fraud”.
Haas recognizes that “honest debtors may fail to pay
their properly acknowledged taxes.” Id. The Court in Haas
makes reference to the bankruptcy court’s decision in Griffith
as being unpersuasive. In Haas, the government argued a
very broad interpretation of Section 523(a)(1)(C), so that
mere failure to pay the tax would constitute proof of evasion
of tax debts. The Eleventh Circuit rejected that reading of
the statute, which would effectively make all tax debts
nondischargeable. Id. at 1155-56. It is significant that the
government has taken a much narrower approach in arguing
this appeal than it had pursued in Haas.
The facts in Haas are distinguishable from Griffith’s
case, where Haas did not engage in dubious transfers of
assets, but Griffith clearly has done so. Id. at 1154 n. 2.
Griffith’s situation does not reflect poor financial
management, as in In re Sonnenberg, 148 B.R. 35 (Bankr.
N.D.II1.1992), cited in Haas at 1156 n. 4.
; Griffith’s transfer of assets constitutes more than mere
nonpayment. The bankruptcy court’s analysis includes
Griffith’s conduct of evading payment as part of the totality
of the circumstances to determine whether or not Griffith
tae ia ila aie
37a
Appendix C
willfully attempted to evade or defeat taxes. See Dalton v.
L.R.S., 77 F.3d 1297; 1301 (10th Cir.1996); Commissioner
v. Peterson, 152 B.R. 329, 335 (D.Wyo.1993). This Court
concludes that the factual findings of Griffith’s intentional
plan involved more than allocating his assets to liabilities
other than taxes. See In re Williams, 186 B.R. sai, S22
(M.D.Fla.1995) (applying Haas). Griffith’s conduct is in
contrast to innocuous behavior such as merely using income
to pay debts other than his tax liability. The debtor’s transfer
- Of assets to his wife through the antenuptial agreement is
more aptly described as lacking in substance and based on a
fraudulent intent.
EVIDENTIARY BASIS FOR FINDINGS
Griffith also contends that the evidence does not support
a finding that the government met its burden of proof of a
willful attempt to evade taxes. Appellant asserts the lack of
“badges of fraud,” and the specific finding of the Tax Court
that the payment of personal expenses by Griffith’s
corporations was not fraudulent. Additional facts set forth
by Griffith are that he made settlement offers, filed tax
returns, was willing to obtain third-party funding, did not
use a shell corporation to avoid government detection, and
harbored no evil motive in transferring his corporate stock.
Appellant would have this Court conclude that the
bankruptcy court erred in determining nondischargeability
because Griffith’s conduct was merely that he did not pay
the taxes.
The types of conduct from which a willful attempt to
defeat or evade taxes may be inferred may include any
38a
Appendix C
conduct the likely effect of which would be to mislead or
conceal. See Spies v. United States, 317 U.S. 492, 63 S.Ct.
364, 87 L.Ed. 418 (1943). The bankruptcy court found that
Griffith conducted his financial affairs through “corporate
legerdemain,” evaded his personal obligations through a
pattern of personal-corporate commingling of funds, made
transfers for inadequate consideration, with a state of mind
to willfully evade and defeat his tax obligations, and that
Griffith lacked credibility as a witness.
The nature of this analysis is factual, determined from
the totality of the record. See Williams, 186 B.R. at 522.
The bankruptcy court’s findings concerning Griffith’s
conduct of transferring assets and his intent are not clearly
erroneous, and the conclusion drawn from those facts is not
an error of law, pursuant to the standard in Haas, that
Griffith’s tax debts are not dischargeable.
CONCLUSION
- Upon a thorough review of the record, the briefs,
transcript and argument presented by the parties, this Court
finds that: (1) the bankruptcy court did not abuse its
discretion by permitting the government to amend its
Answer; (2) the factual findings of the bankruptcy court are
not clearly erroneous; and (3) the bankruptcy court’s analysis
of the facts demonstrates that Griffith engaged in a fraudulent
plan to evade or defeat taxes.
Griffith did not merely fail to pay his taxes, alone, and,
therefore, his taxes are nondischargeable, consistent with the
39a
Appendix C .
analysis of Haas, which is binding authority on this Court.
For the foregoing reasons, it is
ORDERED AND ADJUDGED that the Memorandum
opinion and Judgment of nondischargeability of taxes owed
by Leroy Charles Griffith, entered by the bankruptcy court
on December 9, 1993, is AFFIRMED.
40a
APPENDIX D — PUBLISHED FINDINGS OF FACT,
CONCLUSIONS OF LAW AND MEMORANDUM
OPINION OF THE UNITED STATES BANKRUPTCY
COURT FOR THE SOUTHERN DISTRICT OF
FLORIDA DATED DECEMBER 9, 1993
In re Leroy Charles GRIFFITH,
Debtor.
Leroy Charles GRIFFITH,
Plaintiff,
v.
UNITED STATES of America,
Defendant.
Bankruptcy Nos. 93-10148-BKC-AJC,
93-0361-BKC-AJC-A.
United States Bankruptcy Court,
S.D. Florida.
Dec. 9, 1993.
* * *
FINDINGS OF FACT, CONCLUSIONS OF LAW
AND MEMORANDUM OPINION'
1. Judge Erwin I. Katz, United States Bankruptcy Judge,
Northern District of Illinois, is sitting by Special Designation in
this case in the Southern District of Florida.
ee - all
4la
Appendix D
ERWIN I. KATZ, Bankruptcy Judge, sitting by special
designation.
This adversary proceeding comes before the Court on
the complaint of Leroy Charles Griffith (“Griffith”) to
determine the dischargeability of his federal income tax debt.
After considering the arguments and evidence presented, the
Court enters these Findings of Fact and Conclusions of Law.
This is a core proceeding over which the Court has subject
matter jurisdiction pursuant to 28 U.S.C. §§ 1334 and
157(b)(2)(I).
BACKGROUND
Griffith owned entertainment theaters since the early
1960's. Griffith used several corporate entities to control the
theaters. These entities include, but are not limited to:
. Gayety Theaters, Incorporated: Shareholders
are Linda Rivera Griffith (“Linda”) and Griffith,
held as tenants in the entirety, pursuant to the
antenuptial contract between Linda and Leroy
dated June 8, 1989. Griffith testified that prior to
June 8, 1989, the stock was divided between
Griffith, his son, his father, and Linda. The Tax
Court, however, found that Griffith was the sole
shareholder in the years in question.”
. Ell Gee, Incorporated: Shareholders are Linda
and Griffith, held as tenants in the entirety,
2. See the discussion of the Tax Court opinion, infra p. 730.
42a
Appendix D
pursuant to the antenuptial contract between Linda
and Griffith dated June 8, 1989. Griffith testified
that prior to June 8, 1989, the stock was divided
between Griffith, his son, his father, and Linda.
The Tax Court, however, found that Griffith was
the sole shareholder in the years in question.’
. Nu-Wave, Attractions, Incorporated: Linda is
the only shareholder but Griffith is an officer:
Nu-Wave owns real estate used in Griffith’s
businesses.
No evidence was presented regarding what each of these
businesses controlled. Griffith signed checks on the accounts
of all the corporations.
Griffith did not have a personal checking account, but
used these corporate entities to pay his personal expenses.
Griffith did not own a car or a house but drove a car owned
and depreciated by Gayety and rented a house in Miami
which was owned and depreciated by Gayety. Griffith paid
$1,200 a month rent on the house by increasing the open
loan account he maintained with Gayety. Griffith testified
he would use his income from the corporations to pay down
these loans when possible.
It was not uncommon for Griffith to withdraw large
amounts of cash from the accounts of all the corporations.
The nature of Griffith’s business made it important that a
paper trail not be created, so cash was often used in business
3. See the discussion of the Tax Court opinion, infra p. 730.
43a
Appendix D
transactions. Leftover cash was spread back into the accounts
in a manner to keep their balances above zero. Overdrafts
were common in the accounts so Griffith transferred money
between Ell-Gee and Gayety to keep the balances above zero
to avoid overdraft charges.
The Internal Revenue Service (hereinafter “IRS”)
audited Griffith in regard to the tax years 1969-1970,
1972-1976, and 1978. The IRS found Griffith understated
his tax liability and owed back taxes along with interest and
penalties. The Tax Court, in an eighty-six page opinion dated
September 19, 1988, found Griffith’s practice of having
Gayety deduct depreciation for Griffith’s residence was not
proper, but was not fraudulent. Griffith testified he read this
opinion.
NuWave was incorporated October 10, 1988. Linda
owned all the stock but did not receive a salary. Griffith took
care of the day-to-day operations. Gayety and NuWave
maintained checking accounts at Capital Bank. Capital Bank
would cash Griffith’s checks without question, i.e. Griffith
cashed a $25,000 check from NuWave on June 15, 1992.
Griffith signed the required federal form for that transaction
as the owner of NuWave. On December 31, 1992, Show
World, one of Griffith’s corporations, went out of existence
and its assets, which consisted mainly of real estate, were
merged into NuWave.
On June 8, 1989, Linda and Griffith were married after
having lived together for at least ten years. On this same
day, they entered into an antenuptial agreement. Pursuant to
that agreement Griffith assigned his capital stock in Gayety,
44a
Appendix D
Ell-Gee and Paris Follies, Inc. along with approximately
$390,000 in promissory notes from his son and Linda, to
Linda and himself as tenants by the entirety. In exchange,
Linda relinquished all potential claims against the future
earnings of Griffith. Griffith testified he did not make this
agreement with the intent of frustrating the government’s
efforts to collect his tax debt, but failed to provide any
explanation for this transfer.
On September 28, 1989, the IRS made an assessment
against Griffith. In 1991, the IRS assigned Linda Simmons,
a revenue officer for the IRS, to collect Griffith’s taxes. She
learned Gayety was Griffith’s employer from his 433(a) form,
a collection information statement for individuals, signed
by Griffith under penalty of perjury. When she attempted to
serve the levy on Gayety in May 1991, Griffith told her he
did not receive a salary from Gayety and he referred her to
his attorney. At trial, he testified he may have received one
or two checks after the IRS levied. Simmons testified she
_ did not find any evidence Griffith received a salary.
Simmons testified that she reviewed various records of
the corporations. Her review reflected that Ell-Gee deposited
$782,934.36 at Capital Bank between December 31, 1991
and January 1993, Gayety deposited $335,775.33 at Capital
Bank between May 31, 1992 and January 31, 1993, and
NuWave deposited $748,598.04 at Capital Bank between
December 31, 1991 and January 1993. Some of these deposits
may have been circular, from Ell-Gee to Gayety and vice-
versa, to inflate balances to avoid overdraft charges.
Simmons testified that the tax returns for Ell-Gee, Gayety
and Nu-Wave in 1988, 1989 and 1990 each reflected a loss.
——
i
45a
Appendix D
No payments have been made on the tax debt. The
balance due of the tax debt as of the petition date, including
interest and penalties, totals $1,984,121.66. Griffith testified
he is aware of the debt but has no way to pay it. Griffith
testified he attempted to settle this debt several times and
that he gave his attorney authority to settle this debt. No
specific settlement attempts or terms were disclosed.
ALLOWANCE OF THE COUNTERCLAIM
On January 15, 1993, Griffith filed a voluntary Chapter
7 bankruptcy petition. On or about April 17, 1993, Griffith
initiated this Adversary Proceeding seeking a determination
that his debt to the IRS was not excluded from discharge by
§ 523(a)* or any othey provision of law. In its Answer, the
IRS denied that Griffith’s tax debt was dischargeable. When
the case was called to trial on July 28, 1993, Griffith’s
attomey submitted a stipulation to the Court wherein the IRS
stipulated that the tax liability was dischargeable under
§§ 507(a)(7)(A)(i) and (ii) and 523(a)(1)(B)(ii). Griffith’s
attorney then rested his case and moved for judgment in his
favor. This Court granted the IRS’ ore tenus motion to amend
its Answer and assert a counterclaim setting forth that the
debtor’s tax liability is excepted from discharge under
§ 523(a)(1)(C) because Griffith attempted to evade or defeat
his tax liability. The IRS claimed that Griffith’s actions
whereby he entered into an antenuptial agreement which
transferred assets out of the IRS’ reach, structured his
corporations to own his residence and car in order to keep
them from the IRS’ grasp and took no salary or other
4. Allreferences herein are to the Bankruptcy Code, 11 U.S.C.,
unless otherwise noted.
46a
Appendix D
remuneration from corporations which he controlled, were
efforts to evade or defeat the payment of taxes. Griffith argues
that this Court erred by permitting the IRS to amend its
answer and assert § 523(a)(1)(C) as a counterclaim.
The burden of proving that the debtor’s tax liabilities
are nondischargeable under § 523(a)(1)(C) is on the IRS.
In re Berzon, 145 B.R. 247 (Bankr.N.D.II11.1992); In re
Fernandez, 112 B.R. 888 (Bankr.N.D.Ohio 1990); In re Kirk,
98 B.R. 51 (Bankr.M.D.Fla.1989). In the instant case, the
IRS denied Griffith’s debt was dischargeable, citing § 523(a).
Both Griffith and the IRS failed to refer specifically to
§ 523(a)(1)(C), in the Complaint or Answer, nor was
§ 523(a)(1)(C) pled as a counterclaim or an affirmative
defense, as required by Bankruptcy Rule 7008(a).° When
Griffith failed to specify the subsections of § 523(a) being
relied upon, the IRS should have moved for a more definite
statement under Bankruptcy Rule 7012(e). The ambiguity
created by the pleadings was perpetuated by both Griffith
and the IRS.
Bankruptcy Rule 7015 provides that leave to amend
pleadings “shall be freely given when justice so requires.”
Bankruptcy Rule 7013(f) provides that “[w]hen a pleader
fails to set up a counterclaim through oversight, inadvertence,
or excusable neglect, or when justice requires, the pleader
may by leave of court set up the counterclaim by
amendment.”
5. Rule 7008(a) requires that a plea in the nature of an
avoidance must be asserted as an affirmative defense.
47a
Appendix D
A party may amend if “(1) [it] has not unduly delayed,
(2) [it] is not acting in bad faith or without dilatory motive,
(3) the opposing party will not be unduly prejudiced by the
amendment, and (4) the amendment is not futile.” Storwal
Intern., Inc. v. Thom Rock Realty Co., L.P., 784 F.Supp.
1141 (S.D.N.Y.1992). Griffith argues the IRS unduly delayed
in bad faith by waiting until the trial had commenced before
attempting to amend. Griffith was put on notice that the IRS
was using § 523(a)(1)(C) as a defense at least as early as
June 29, 1993, when the IRS noted in its Motion To Reopen
Discovery that it (the IRS) was defending against the
complaint based on § 523(a)(1)(C). The Court notes that
§ 523(a), without further specification, was referenced in
Griffith’s complaint. The Complaint, therefore, placed into
issue all of the elements of § 523(a), including § 523(a)(1)(C).
The answer did not add any specificity. As previously
discussed the parties should have better defined the issues
in their pleadings. However, the Court does not find this
answer to be made with bad motive.
_ Griffith argues he was unduly prejudiced by the
amendment. Griffith’s attorneys argue they relied on the IRS’
failure to amend prior to trial, and therefore failed to
anticipate having to defend against such an argument. The
reliance argument is somewhat weakened by the pre-trial
motion history. The Court notes that the issues were argued
in the Motion to Reopen Discovery, filed on June 29, 1993.
The record will further reflect that at the outset of the trial
the Court extended to Griffith the option to continue the trial
date and allow further discovery as well as time to prepare
additional defenses. Griffith declined the offer. The claim
of surprise was waived. The Court does not find Griffith
was prejudiced by allowing this amendment.
48a
Appendix D
Finally, this amendment was not futile. This amendment
was necessary due to poor pleading, and § 523(a)(1)(C) is
the only issue in this case.
COLLATERAL ESTOPPEL
Griffith argues the IRS is collaterally estopped by the
Tax Court’s determination issued September 19, 1988. The
Eleventh Circuit has “affirmed the use of collateral estoppel
in dischargeability proceedings.” In re Powell, 95 B.R. 236,
238 (Bankr.S.D.Fla.1989); see In re Latch, 820 F.2d 1163
(11th Cir.1987); In re Halpern, 810 F.2d 1061 (11th
Cir.1987). In order for collateral estoppel to be applied in
dischargeability proceedings, three elements must be present:
(1) the issue at stake must be identical to the one
involved in the prior litigation;
(2) the issue must have been actually litigated in
the prior litigation; and
(3) a determination of the issue in the prior
litigation must have been a critical and necessary
part of the judgment in that earlier action.
Id. at 238.
The burden of proof standards are not the same. The
Tax Court used “clear and convincing evidence” as the
standard to determine whether Griffith was liable for fraud.
In this proceeding “preponderance of the evidence” is the
standard. Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654,
49a
Appendix D
112 L.Ed.2d 755 (1991), Secondly, the Tax Court only
considered whether Griffith fraudulently under-reported his
income tax for the years 1969-1970, 1972-1976 and 1978.
The allegations in this case refer to actions taken after the
entry of the Tax Court decision in an attempt to evade or
defeat the payment of the tax liabilities imposed by the Tax
Court. Accordingly, the issue at bar is not the same issue
decided by the Tax Court.
DISCHARGEABILITY
The burden of proving that the debtor’s tax liabilities
are nondischargeable is on the IRS. In re Fernandez, 112
B.R. 888 (Bankr.N.D.Ohio 1990); In re Kirk, 98 B.R. 51
(Bankr.M.D.Fla.1989). The IRS must prove nondischargeability
by a preponderance of the evidence. Grogan v. Garner, 498
U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). Thus, the
IRS will meet its burden if it Shows that it is more probable
than not that Griffith willfully attempted to evade his taxes.
In re Berzon, 145 B.R. 247, 250 (Bankr.N.D.II1.1992).
Section 523
Section 523 of the Bankruptcy Code provides that certain
tax debts are not dischargeable in a Chapter 7 case. The
language in § 523 that is relevant to the instant dispute is:
[a] discharge under section 727 ... of this title
does not discharge an individual debtor from any
debt... foratax... with respect to which the debtor
made a fraudulent return or willfully attempted
in any manner to evade or defeat such tax;
11 U.S.C. § 523(a)(1)(C).
50a
Appendix D
Does Section 523(a)(1)(C) Cover the Evasion
of the Payment of Taxes?
The IRS does not claim that Griffith made a fraudulent
return. Rather, IRS asserts that Griffith’s tax liability, as
determined by the Tax Court, is non-dischargeable due to
Griffith’s actions in attempting to place his assets beyond
the reach of the IRS.
The case law has not come to a consensus on whether
§ 523(a)(1)(C) covers the evasion of the payment of taxes.
One line of reasoning looks to the similar language used in
§ 7201 of the Internal Revenue Code (“IRC”), 26 U.S.C.
§ 7201, a criminal statute, to provide guidance. See In re
Gathwnight, 102 B.R. 211 (Bankr.D.Ore.1989), wherein that
court reasoned that since IRC § 7201 specifically provides
that it is a felony to willfully attempt to evade or defeat any
tax or the payment thereof, and § 523(a)(1)(C) does not have
the phrase “or payment thereof,” found in IRC § 7201,
§ 523(a)(1)(C) does not extend to actions to evade or defeat
the payment of a tax.
This Court disagrees with Gathwright. This Court
follows the reasoning of In re Jones, 116 B.R. 810
(Bankr.Kan.1990) and In re Berzon, 145 B.R. 247
(Bankr.N.D.I11.1992) to reject Gathwright. Section
523(a)(1)(C) is to be read in the disjunctive. In re Gilder,
122 B.R. 593, 595 (Bankr.M.D.Fla.1990). The Court finds
the modifying phrase of § 523(a)(1)(C), “in any manner,” is
sufficiently broad to include willful attempts, like Griffith’s,
to evade taxes by concealing and transferring assets to protect
them from execution or attachment.
Sla
Appendix D
What Is Meant By Willful As Used
In 523(a)(1)(C)?
Griffith argues that willful as used in § 523(a)(1)(C)
should be defined in accordance with the substantially similar
criminal IRC § 7201° which courts have held requires an
affirmative act of fraud with an evil motive. See Darrell
Dunhaham & Alex Shimkus, Tax Claims in Bankruptcy, 67
Am.Bankr.L.J. 343, 384 (1993). The IRS counters by arguing
the court should not be guided by IRC § 7201 but IRC
§ 6653’, a civil section that does not require an affirmative
act. In the alternative, the IRS argues the Court should follow
the Court in Berzon and Cinquegrani v. United States, 1993
WL 134752 (Bankr.N.D.IIl. Feb. 1, 1993), and look to the
“badges of fraud” to infer fraudulent intent and not solely
look for an affirmative act of fraud.
This Court finds willful should be read in accordance
with other civil sections. The Court will follow the principle
that “in criminal statutes willfulness generally requires bad
purpose or the absence of any justifiable excuse . . . In civil
actions, however, these elements need not be present. Rather,
willful conduct denotes intentional, knowing and voluntary
acts.” Monday v. United States, 421 F.2d 1210 (7th Cir.),
6. IRC § 7201 states:
Any person who willfully attempts in any manner to
evade or defeat any tax imposed by this title or the
payment thereof shall . . . be guilty of a felony. ...
7. IRC § 6653 does not define fraud. Case law has determined
the appropriate definition of fraud in reference to § 6653.
52a
Appendix D
cert. denied, 400 U.S. 821, 91 S.Ct. 38, 27 L.Ed.2d 48 (1970).
This same view of “willful” was recently upheld in Domanus
v. United States, 961 F.2d 1323, 1326 (7th Cir.1992). Other
courts have reached the same conclusion. See In re Gilder,
122 B.R. 593, 595 (Bankr.M.D.Fla.1990); In re Kirk, 98 B.R.
51, 55 (Bankr.M.D.Fla.1989); U.S. v. Toti, 149 B.R. 829
(E.D.Mich. 1993); In re Fernandez, 112 B.R. 888 (Bankr.N.D.
Ohio 1990); In re Langlois, No. 91- 91194 (Bankr.S.D.N.Y.
1992); In re Jones, 116 B.R. 810, 815 (Bankr.Kan.1990).
The Court may use various kinds of circumstantial
evidence to infer fraudulent intent since direct evidence of
such an intent rarely exists. Berzon, 145 B.R. at 250;
Cinquegrani 1993 WL 134752 at *5; Hagaman v.
Commissioner [92-1 USTC P 50,141], 958 F.2d 684, 696
(6th Cir.1992); Bradford v. Commissioner [86-2 USTC
P 9602], 796 F.2d 303, 307-08 (9th Cir.1986); Loftin and
Woodard, Inc. v. United States [78-2 USTC P 9645], 577
F.2d 1206, 1238-39 (Sth Cir.1978). These “badges of fraud”
include: (1) the recurrence of the understatement of income
for more than one tax year; (2) the understatement of income;
(3) implausible or inconsistent explanations of behavior; (4)
inadequate records; (4) transfer of assets to a family member;
(5) transfer for inadequate consideration; (6) transfer that
greatly reduced assets subject to IRS execution; and (7)
transfers were made in the face of serious financial
difficulties. Eyler v. Commissioner, 760 F.2d 1129 (11th
Cir.1985); Douge v. Commissioner [90-1 USTC P 50,186],
899 F.2d 164, 168 (2d Cir.1990); Bradford [86-2 USTC
P 9602], 796 F.2d at 307- 08; Loftin and Woodard [78-2
USTC P 9645], 577 F.2d at 1238-39. Griffith argues he did
not conceal assets, making his case factually distinguishable
‘io sian aamall
53a
Appendix D
from the debtors in Jones* and Berzon®. The Court does
not agree.
Parenthetically, the Court notes those issues which have
not been raised by the IRS. The IRS is not claiming in this
proceeding that any action by Griffith before the date of the
Tax Court decision constituted a non-dischargeable attempt
to evade or defeat any tax. Nor does this proceeding involve
income or taxes for any years after 1978. Thus the narrow
question before this Court is whether the IRS has shown, by
a preponderance of the evidence, that Griffith has willfully
attempted to evade or defeat the tax liability for the tax years
1969-70, 1972-76 and 1978 as determined by the Tax Court
decision of September 19, 1988.
The seeds for Griffith’s plan to evade the tax owed to
the IRS were conceived once the Tax Court issued its
determination in September 1988. After a gestatory period,
nine months later, in June 1989, after living together for more
than ten years, Griffith and Linda were married and begat
the antenuptial agreement. Griffith asserts that the antenuptial
agreement was an arms length mutual exchange wherein both
parties gave up some rights and acquired others. In reality,
Linda gave up her rights to make claims in the future against
Griffith or his estate, but these claims were de minimis. At
that time, Griffith owed the IRS a Significant amount of
money. His businesses had not made a profit in a number of
8. The debtor placed title to their home and lake property in
names of others in order to evade taxes.
9. The debtor significantly misrepresented his income by
depositing his wages into his girlfriend’s bank account.
54a
Appendix D
years and had no prospects of reversing this losing trend.
The promissory notes_assigned to Linda totalling
approximately $390,000 were all notes wherein the obligor
was either Griffith’s son or Linda. In return, Linda received,
not in her sole name but as a tenant in the entirety with
Griffith’®, stock in these corporations which had little value
due to the continuing losses of these corporations. This was
an exchange to a family member, during a period of serious
financial difficulty, for inadequate consideration to evade
and defeat payment to the IRS.
Griffith’s corporate legerdemain standing by itself would
be insufficient to establish evasion under § 523(a)(1)(C).
However, while Griffith’s pattern of personal-corporate
commingling of funds were similar in both pre-1988 and
post-1988 years, they reflect his intent to evade meeting his
personal obligations. The “badges of fraud” identified in the
case law are simply factors taken into consideration by
various courts attempting to ascertain a state of mind. The
Court notes further that Griffith’s manner as a witness, as
well as that of his wife, was evasive and lacked that ring of
forthrightness reflective of an open and credible witness.
Griffith also argues that the reasoning of the IRS would
mean that filing bankruptcy would be considered an effort
to evade taxes under § 523(a)(1)(C), resulting in taxes never
being dischargeable. Both the Tax Code and the Bankruptcy
10. By holding title to these assets as tenants in the entirety,
the IRS could not levy against these assets unless it (the IRS) had
judgments against both Linda and Griffith. See Matter of Geoghegan,
101 B.R. 329 (Bankr.M.D.Fla.1989); U.S. v. One Single Family
Residence, 894 F.2d 1511 (11th Cir.1990).
55a
Appendix D
Code provide for acceptable means to lessen or discharge
tax liability. The evade and defeat provision of § 523(a)(1 (C)
is not one of them. The Bankruptcy Code in § 507(a)(7) has
specific guidelines that determine when tax debts are
dischargeable.
Finally, Griffith emphasizes that he made several
attempts to settle this debt with the IRS, demonstrating he
was not attempting to evade this debt. Griffith testified he
attempted to settle this debt but he could not recall any
specifics regarding his attempts. There is no other evidence
of any attempts to settle this debt. Accordingly, the Court
gives little value to Griffith’s testimony that he attempted to
settle this debt with the IRS.
Looking at the Surrounding circumstance, the Court finds
Griffith willfully attempted to evade and defeat paying the
taxes due. The transfers under Griffith’s antenuptial
agreement were an attempt to willfully evade and defeat the
payment of taxes. Griffith alleges the antenuptial agreement
was a mutual exchange but, as explained previously, Linda
gave up, and received nothing of value in order to help
Griffith keep assets from the reach of the IRS. The
antenuptial transfer was an act intentionally undertaken in
the face of a large debt, to a family member, which greatly
reduced the assets subject to IRS execution in order to
defraud the IRS. Further, the transfer of assets from
Showcase, a Griffith corporation, to NuWave, Linda’s
corporation, demonstrates intent to keep assets out of the
reach of the IRS. Accordingly, Griffith had specific intent
to willfully evade and defeat a tax he knew was due and
Owing.
56a
Appendix D
CONCLUSION
For the reason stated herein, the Court finds Griffith’s
debt to the IRS is nondischargeable according to
§ 523(a)(1)(C).
57a
APPENDIX E ~— PUBLISHED MEMORANDUM
FINDINGS OF FACT AND OPINION OF THE
UNITED STATES TAX COURT
DATED AND FILED SEPTEMBER 19, 1988
T.C. Memo. 1988-445
UNITED STATES TAX COURT
LEROY C. GRIFFITH,
Petitioner
V.
COMMISSIONER OF INTERNAL REVENUE,
Respondent
Docket Nos. 22089-80, Filed September 19, 1988.
4032-85. ,
* * *
MEMORANDUM FINDINGS OF FACT
AND OPINION
PARR, Judge: In his 12] page statutory notice
respondent determined the following deficiencies against
petitioner individually:
58a
Appendix E
; Sec. 6653(b)!
Year Deficiency Additions to Tax
1969 $ 60 $ 30
1970 60 30
1972 25,968 12,984
1973 3,136 1,568
1974 105,947 52,974
1975 148,429 74,215
1976 137,275 68,638
1977 73,983 36,992
1978 122,937 61,469
Several years later respondent determined the following
deficiencies against petitioner as transferee of GTI
Productions, Inc. (sometimes hereinafter GTI):?
Sec. 6653(b)
Year Ending Deficiency Addition to Tax
March 31, 1975 $35,283 $18,251
March 31, 1976 48,532 24,266
March 31, 1977 20,051 10,026
1. Unless otherwise indicated, all section references are to the
Internal Revenue Code applicable to the year at issue and all Rule
references are to the Tax Court Rules of Practice and Procedure.
2. For convenience docket No. 22089-80, the case involving
petitioner’s individual tax liability, and docket No. 403 45, the
case involving petitioner’s tax liability as transferee of GTI were
consolidated for trial, briefing and decision.
59a
Appendix E
After concessions,’ we must decide the following issues:4
1. Whether the Forms 872 Signed by petitioner’s
accountant effectively extended the statute of limitations for
3. In his Reply Brief, filed May 27, 1987, respondent made
the following concessions:
1974 1975 1976 1977 1978
Depr. for automobiles $2,293 $2,293 $2,293
Contract labor 1075 1,250 $400 $1,000
Freight expenses 720
Loss (Paris Follies)* 15,470
Legal Fees 2,250 4,000 2,000
Travel & Entertainment* 9,649
Expenses for Operating
Climax Theater* 8,118
Loss (Ell Gee, Inc.) 14,237
No income from relief of indebtedness for Ell Gee, Inc. $13,851
No year indicated.
In addition respondent conceded that GTI’s checking account
was used by petitioner to pay expenses for other corporations after
GTI went out of business and therefore petitioner is allowed the
following deductions:
1975 1976 1977
$775 $13,467* $2,000
* Figures have been rounded to the closest dollar amount.
4. There are numerous items of income and deductions at issue.
For clarity and conciseness, the particular items appear in appendices
s (Cont’d)
60a
Appendix E
the assessment and collection of tax for the 1974 and 1975
taxable years;
2. Whether petitioner has substantiated his entitlement
to: (a) deductions respondent disallowed,* (b) unclaimed
deductions asserted in an amendment to his petition, and (c)
additional deductions for amounts which were miscategorized
as travel and entertainment expenses;
3. Whether petitioner has realized additional income
(apart from the disallowed deductions): (a) from Bee Gee,
Inc. in 1974 and 1975, in the amounts of $4,400 and $21,700;
from Cameo Productions in the amounts of $2,097, and
$3,100 in 1975 and 1976, respectively; and $3,262 from the
(Cont'd)
attached to the opinion. Appendix A sets forth the adjustments
respondent made in his statutory notice of deficiency. Appendix B
sets forth the items of disallowed deductions and previously
unclaimed deductions. Appendix C sets forth the outstanding
balances in loan accounts between petitioner and his corporations.
5. Included within the disallowed deductions were petitioner’s
claimed travel and entertainment expenses. The issue of travel and
entertainment expenses is exceedingly convoluted. Respondent has
disallowed all travel and entertainment except certain expenses
associated with the operation of Climax Theater in North Carolina.
All of the rest of petitioner’s expenses claimed as travel and
entertainment are still at issue, as is $599.48 associated with the
operation of the Climax Theater. Moreover, petitioner now claims
that many of the travel and entertainment expenses were erroneously
deducted as such but that they were nevertheless deductible. To the
extent petitioner concedes that expenses were miscategorized they
are disallowed as travel and entertainment expenses.
6la
Appendix E
Flamingo Theater in 1976, (b) from dividends received from
GTI Productions, Inc. in 1974 and 1975 in the respective
amounts of $8,254 and $38,947, and (c) from the return of a
security deposit on the Paramount Theater in 1977;
4. Whether petitioner has substantiated Gayety
Theater’s entitlement to depreciation, maintenance and repair
deductions for the residence at 4460 Bay Point Rd., Miami,
Fla.;°
5. Whether petitioner’s basis in Paris Follies, Inc. is
increased by shareholder loans, thereby entitling petitioner
to loss deductions in 1975 and 1976;
6. Whether petitioner is entitled to head of household
filing status and income averaging for all the years in issue;
7. Whether petitioner is entitled to carrybacks in 1969,
1970, 1971 and 1973 and to carryforwards in 1976 and 1978:
8. Whether petitioner sustained additional deductible
losses on the liquidation of Ninth Street Amusements, Inc..,
Adam and Eve Theaters, Inc. and Carib Theater Productions,
Inc.;
9. Whether petitioner is liable as transferee of GTI
Productions, Inc.; and
6. Petitioner argues on brief that in the event we find that
Gayety Theaters is not entitled to deductions at 4460 Bay Point Rd.,
petitioner would be entitled to deductions for interest and taxes.
62a
Appendix E
10. Whether petitioner is liable for fraud both
individually and as transferee of GTI Productions, Inc. for
all the years in question.
GENERAL FINDINGS OF FACT
The parties to these cases have submitted 122 pages of
stipulated facts in the form of a stipulation, a supplemental
stipulation and a second supplemental stipulation. To the
extent stipulated, those facts along with the related exhibits,
are found, and incorporated herein by this reference. Many
of the more important stipulated facts as well as the Court’s
additional findings are set forth below. The background
section introduces the many people involved in this complex
array of transactions and the business structure (to the extent
possible) of the numerous theaters and corporations operated
by petitioner.’ Thereafter, each issue is discussed separately
with more specific findings set forth as necessary.
7. The Court has taken much time trying to decipher what
transpired in petitioner’s businesses between 1974 and 1978. The
parties have submitted hundreds of pages of evidence and briefs to
support their respective positions. Unfortunately, neither party took
much time to convey to the Court which specific exhibits and which
witnesses’ testimony supported their positions. On numerous
occasions we were required to review the over 200 exhibits to
determine whether any of the documentary evidence supported either
petitioner’s or respondent's claim. Needless to say there are gaps as
to what transpired in petitioner’s businesses during the years in issue.
We have, however, done the best we could with the limited guidance
offered by the parties.
63a
Appendix E
Background
Petitioner lived in F lorida when he filed his individual
Original petition and his petition as transferee of GTI
Productions.
Petitioner is in his mid-fifties and has a sixth-grade
education. Petitioner started in the theater business when he
left school in 1949. He began as a projectionist, cashier and
usher at the local theater in his hometown. A short time later
he worked concessions for Oscar Markovich at the Grand
Theater in St. Louis, Mo. Petitioner was drafted into the
armed services in 1955. After an early discharge he opened
his first theater in Portland, Ore. The theater only stayed
open a short time. After limited operation of a restaurant in
Kansas City, Mo. and another period of short term
employment with Oscar Markovich, petitioner opened a
theater in Detroit, Mich. Three or four years later, in 1962,
petitioner moved to South F lorida where he started the
conglomerate of entities involved in these cases.
During the years in question, petitioner was the sole
shareholder of six electing small business (“subchapter S”)
corporations and two regular (“C”) corporations. Most of
the corporations operated more than one theater.
Petitioner’s business was devoted primarily to providing
“adult” entertainment, although a few of petitioner's theaters
provided burlesque and vaudeville type shows. All of
petitioner’s subchapter S corporations and one of his
C corporations operated movie and/or live theaters. The other
C corporation, GTI Productions, Inc., was formed to purchase
films and rent or resell them to the theaters petitioner operated.
<
64a
Appendix E
The following is a summary of the corporations wholly
owned by petitioner and the theaters each corporation
operated at some time between 1974 and 1978.
. Gayety Theaters, Inc. (Gayety), a subchapter S
corporation, operated the Gayety Burlesque Theater, the
Pussycat Theater and the Kittycat Theater all located in
Miami, Fla.
Ell Gee, Inc. (Ell Gee), a subchapter S corporation,
operated the Roxy Theater in Miami Beach, Fla., the Luv
Theater in Orlando, Fla. and the Navy Point Theater in
Pensacola, Fla. —
Paris Follies, Inc. (Paris Follies), a subchapter S
corporation, operated the Paris Follies Theater in Miami
Beach, Fla., the Pussycat Theater (a/k/a Sinerama) in New
Orleans, La. and the Capital Theater in Chattanooga, Tenn.
L. C. Griffith Productions, Inc. (L.C. Griffith), a
subchapter S corporation, operated the Ritz Theater in Miami,
Fla.
Griffco, Inc., a subchapter S corporation, operated the
Paramount Theater in Miami, Fla., the New Carrolton Theater
in New Orleans, La., the Cameo Theater in Miami Beach,
Fla.* and the Climax I and II in North Carolina.
8. Cameo Productions, Inc. was a separate subchapter S
corporation which operated the Cameo Theater in Miami Beach,
Fla. until 1975. Before 1975 Cameo Productions, Inc. had more than
"one shareholder. In 1975 petitioner became its sole shareholder, and
Cameo Theater was then operated by Griffco.
65a
Appendix E
Carib Theater Productions, Inc., a subchapter S
corporation, operated the Carib Theater in Miami, Fla.
Adam & Eve Theaters, Inc., a C corporation, operated a
theater of the same name in F t. Lauderdale, Fla.
GTI Productions, Inc., a C corporation, organized to
purchase films and rent them or sel] them to petitioner’s other
corporations filed its last corporate income tax return on
March 31, 1975. GTI Productions, Inc. filed no Federal
income tax return for any subsequent fiscal years. On
December 1, 1977, the State of Florida canceled GTI’s
corporate charter for “nonpayment of the 1977 annual
report.”
Petitioner had a few key employees who helped him run
this enormous business. Harriet Miltenberg was petitioner’s
secretary during most of the years in question. She wrote
out checks for the daily expenses of each of the theaters and
petitioner si gned them. Otherwise, she wrote checks only at
the direction of petitioner and his accountant, Richard
Reisenberg. Only petitioner had signatory authority.
George Luther was petitioner’s “number two” man.
When petitioner was not available Luther was the boss. He
hired and fired people, paced advertisements, booked dates
and wrote out checks, although only petitioner had signatory
authority. Petitioner made the final decision on live acts and
certain film purchases.
Luther did a great deal of film purchasing for petitioner.
Every two to three months he would purchase 15-30 films at
66a
- Appendix E
a cost of approximately $500-$1,500 apiece. The payments
were usually made 50 percent in cash and 50 percent by
check.
Lou Hollander was a theater manager. He had other
responsibilities too. Either Mr. Hollander or Ms. Miltenberg
would collect the box office receipts every weekday morning.
The receipts were brought back to the main office and entered
on deposit slips.
Not all of petitioner’s theaters operated at the same point
in time. Often petitioner’s theaters would stay open for a
few months and then close.
There were several business reasons to maintain this type
of corporate structure in the adult entertainment business.
The obscenity laws take into account the mores of the local
community. Petitioner’s corporate structure prevented all of
his theaters from being shut down if there was an isolated
violation of an obscenity law. Furthermore, since petitioner’s
theaters opened and closed frequently, the multi-corporate
structure prevented all of petitioner’s operations from being
liable for the expenses and lease liabilities of a theater which
went out of business.
Each of the corporations maintained separate books and
records. Each corporation also maintained separate checking
accounts. Despite the appearance of independence, however,
there were a multitude of intercorporate financial transactions
as well as numerous financial transactions between the
corporations and petitioner, their sole shareholder.
67a
Appendix E
An idiosyncrasy of the adult entertainment business is
that many of the transactions occur after business hours and
many are conducted strictly in cash. Petitioner often paid
movie distributors and entertainers with cash. There were
three main reasons for this. First, both the entertainers and
the distributors traveled and they needed cash to meet their
expenses. Second, knowing the risky, and often temporary
nature of the adult entertainment business, film distributors
would not always be willing to accept a check which might
be returned for insufficient funds. Third, the film distributors
were reluctant to accept checks, in order to avoid the creation
of a paper trail which could Possibly be used against them if
charged with a violation of pornography laws.
The problems associated with using cash were amplified
in petitioner’s business. If one of petitioner’s checks
bounced, rather than deposit cash to cover the check,
petitioner would most often pay the check outright in cash.
This caused bookkeeping problems because many times the
check was lost and there was no record of which bills were
paid. This meant relying on memory to account for many
business expenses,
Another common practice connected with the use of cash
in the operation of petitioner’s business was that petitioner
would cash checks in order to pay expenses. Therefore, rather
than making the check payable to the creditor, petitioner
would make the check payable to himself, an employee or
to cash. The check was then either cashed at a bank or bya
petty cash fund of one of petitioner’s corporations. Then
petitioner paid the creditor in cash. Obviously, the use of
this method for Paying bills added to the disallowance of
68a
Appendix E
numerous deductions for lack of substantiation, and to the
general confusion in these cases.
The disarray of the corporate books also affected
petitioner’s personal finances. The reason for this is two-fold.
First, petitioner maintained open loan accounts with all of
the corporations. Second, petitioner was the sole shareholder
of six subchapter S corporations and, as such, the
corporations’ taxable income or net operating losses flowed
through to him as an individual. Sections 1373 and 1374.
Petitioner used the open loan accounts as a method both
for infusing a corporation with capital and a method of
withdrawing cash from his corporations. None of the loan
transactions between petitioner and the corporations were
evidenced by promissory notes or repayment schedules.
Between 1974 and 1975 petitioner withdrew almost $130,000
in shareholder loans from his corporations and through 1978
he withdrew a total of over $2,000,000 from his corporations.
During this same period petitioner declared only $35,000 in
taxable income from the same corporations.’ (See Appendix
C) Petitioner also advanced several hundred thousand dollars
in loans to the corporations.”
9. Petitioner received a salary of $35,000 in 1974. He did not
receive a salary in 1975 through 1978. During 1974 through 1978
petitioner did not net any subchapter S income because his reported
losses and carryovers of net operating losses from loss corporations
exceeded the gains earned in petitioner’s profitable corporations.
10. The disarray of petitioner’s books makes it impossible for
the Court to determine exactly how much money was either loaned
(Cont'd)
nn
69a
Appendix E
Petitioner also borrowed money from other sources. At
times he borrowed money from his long-time associates
Oscar Markovich, William Berger or Joseph Savino. In total
he probably borrowed several thousand dollars. Most of the
time the money was borrowed either to go into another
venture or to start another theater.
The interdependence between personal and business
funds was even further entwined. In the early 1970’s
petitioner was involved in the production of a movie entitled
“My Third Wife, George.”"' In connection with the movie,
petitioner opened a bank account to cover expenses and to
collect profits. “My Third Wife, George” was never part of
any of petitioner’s existing corporations, nor did it ever file
any tax returns. The record is unclear as to whether any
profits were ever made by the film. Thus, it is also unclear
whether any profits were or should be included in petitioner’s
income.
The “My Third Wife, George” account became the
personal checking account of petitioner. Between August 29,
| (Cont’d)
to petitioner or borrowed from petitioner at any particular point in
time. Moreover, in many Cases loans from one corporation to another
corporation were filtered through petitioner’s loan accounts. Thus,
the circuitry of the transactions presents another obstacle in our
determination of how much money was contributed or invested by
petitioner.
11. Monique Productions produced the film “My Third Wife,
George.” The record is unclear as to petitioner's ownership interest
in Monique Productions.
70a
Appendix E
1975 and August 31, 1976 alone, $143,150 was deposited
into this account and $142,800 was expended from it.
Petitioner had a reputation as a card player. He played
cards with William Berger, Joe Savino and Hyman Lazar.
He also had a reputation as a gambler. Petitioner traveled to
the Bahamas and Las Vegas on several occasions. In fact
petitioner paid as much as $42,500 to seven different casinos
out of the “My Third Wife, George” account between August
29, 1975 and August 31, 1976. The checks paid off
petitioner’s outstanding lines of credit at the casinos.
During the years in question, petitioner was living at
4460 Bay Point Rd., Miami, Fla. This was a fairly affluent
section of Miami. Petitioner, who was single, lived in the
home with his girlfriend Linda Rivera and three of his
children, Kimberly, Cash and Sean. Gayety, one of
petitioner’s S corporations, owned the home.
At the time petitioner was living at Bay Point Rd.,
petitioner’s sister, Margaret Jenkins, and her five children
were living rent free at 539 Euclid Ave., an apartment
building owned by another of petitioner’s corporations. Floyd
and Shirley Griffith, petitioner’s father and stepmother, were
also living at 539 Euclid Ave.
Petitioner is the father of four children, Kimberly, Cash,
Sean and Charles. He has been married at least once to
Monique (Juanita) Lauderville, who worked for petitioner
for a short time and is the mother of Kimberly. Joy Griffith
Maci is the mother of two of petitioner’s other children and
Maryanne Tobin is the mother of petitioner’s fourth child.
71a
Appendix E
Maryanne Tobin also occasionally worked for petitioner in
some Capacity. Petitioner’s father F loyd and his stepmother
Shirley also Worked for him. F loyd Griffith was a handyman
at all of the local theaters and Shirley helped F loyd as well
as filling in elsewhere as needed.
OPINION
Consents to Extend the Statutory Period
Jor Assessment and Collection of Tax
Petitioner executed two powers of attorney on behalf of
himself individually, in favor of Richard Reisenberg, his
accountant, for the 1970 through 1976 taxable years on
February 22, 1977; and on June 15, 1979 for the 1970 through
1977 taxable years. Petitioner utilized respondent’s Form
2848 to grant these powers of attorney. The preprinted form
provides five specific powers that are granted by signing the
Form 2848. The taxpayer is advised to strike through any of
the five powers which are not granted. One of the enumerated
powers is the authority “to execute consents extending the
Statutory period for assessment or collection of taxes.”
Petitioner did not strike through any of the enumerated
powers and thus granted Reisenberg an unlimited power of
attorney. Reisenberg is neither a certified public accountant
nor an enrolled agent before the Internal Revenue Service.
Side two of Form 2848 requires the signature of the
person(s) receiving the power of attorney. If the person is an
attorney, certified public accountant or an enrolled agent they
must attest that they are not currently suspended or disbarred
from practice and state their designation. A person who does
72a
Appendix E
not fall into one of the three enumerated categories must
have his or her signature witnessed and notarized.
Richard Reisenberg signed the first form under the
designation of accountant on February 23, 1977. Two persons
signed the witness portion of side two of the form on
February 22, 1977, the date it was signed by petitioner.
Reisenberg signed the second form under the designation of
accountant on June 15, 1979 and two persons signed as
witnesses on that date. Neither form was notarized.
This raises the question of ihe validity of the powers of
attorney. Petitioner unquestionably granted Reisenberg a
power of attorney on side one of Form 2848. Reisenberg
unquestionably signed the form in acceptance of the power.
Moreover, petitioner does not argue that the power of
attorney is invalid because the Form 2848 was not properly
witnessed or notarized. Therefore, we need not decide this
issue. Petitioner’s contention is that the consent to extend
the statute of limitations, Form 872, was invalid for reasons
hereinafter discussed.
There were a total of four consents to extend the statutory
period (Forms 872) for the 1974 taxable year and three such
consents for the 1975 taxable year.
The first consent to extend the statutory period for the
1974 taxable year was signed by Richard Reisenberg, under
the power of attorney, on March 29, 1978. The form extended
the time for assessment of tax for the 1974 taxable year until
December 31, 1978.
a
73a
Appendix E
November 2, 1979, extended the period of assessment, first
~ through December 31, 1979, and ultimately through
December 31, 1980. The statutory notice was mailed to
petitioner on September 19, 1980.
In his pleadings petitioner alleged that the Statutory
notice of deficiency as to 1974 and 1975 was invalid because
with the Secretary in writing, before the running of the
Statute, to extend the Statutory period. Sec. 6501(c).
In this case petitioner claims that the statute of
limitations bars the assessment and collection of tax for 1974
and 1975 because the consents extending the time period
were invalid.
74a
Appendix E
After the party successfully establishes this prima facie
case, the opposing party must then go forward and present
evidence that one of the four above enumerated exceptions
exists. If the opposing party can do this the burden of going
forward shifts back to the party claiming the defense to prove
the alleged exception is invalid or inapplicable. Adler v.
Commissioner, 85 T.C. 535, 540 (1985).
Here the petitioner presented a prima facie case that the
notice of deficiency was untimely. Petitioner filed his 1974
tax return on June 13, 1975 and his 1975 tax return on April
27, 1976. The statutory notice of deficiency was issued on
September 19, 1980, more than three years after the returns
were filed.
Respondent has shown that consents were signed
“Richard Reisenberg, Power of Attorney,” extending the
statutory period until December 31, 1980; and that the
statutory notice of deficiency was mailed within the time of
the last consent extending the period for the assessment and
collection of tax. Petitioner argues that the consents are
invalid “on their face” and therefore respondent retains the
burden of proving the validity of the consents. We disagree.
It is not apparent from the face of the consent,'? as opposed
12. Face of instrument is defined as:
~ That which is shown by the language employed, without
any explanation, modification, or addition from extrinsic
facts or evidence. /nvestors ' Syndicate v. Willcuts, D.C.
Minn., 45 F.2d 900, 902. Thus, if the express terms of
the paper disclose a fatal legal defect, it is said to be
“void on its face.”-* * * [Black’s Law Dictionary (1979).]
Since there is no evidence of a fatal legal defect on the “face of the
instrument,” the consent cannot be said to be invalid on its face.
75a
Appendix E
to the Form 2848, that Reisenberg is authorized to extend
the period for the assessment and collection of tax under
respondent’s reguiations. Rather, this fact can only be
discerned by reference to other documents in conjunction
with the consent. Respondent has presented evidence,
discussed below, that an exception to the statute of limitations
exists and therefore, the burden of going forward shifts back
to petitioner who must prove the consents extending the
Statutory period were invalid.
Petitioner argues that the consents signed by Richard
Reisenberg are invalid because under respondent’s own
regulations a person who is not an attorney, certified public
accountant or an enrolled agent is not authorized to sign a
consent extending the period for assessment and collection
of taxes, and that respondent’s agent knew that petitioner’s
accountant was not a certified public accountant or an
enrolled agent.!3 Furthermore, petitioner argues that
respondent’s agent misled petitioner and Reisenberg into
Signing the consents because he informed Reisenberg in
writing that failure to sign would result in a notice of
deficiency being issued and a loss of all of petitioner’s appeal
rights within the Internal Revenue Service. F inally, petitioner
argues that Reisenberg lacked the actual authority to sign
the consents to extend the period for assessment and
collection of tax, because he did not seek and receive
petitioner’s permission before signing.
Respondent answers that the regulations issued by the
Treasury Department are directory rather than mandatory,
13. 'See discussion of Circular 230, 31 C.F.R., Part 10, 1966-1
C.B. 1171, and Rev. Proc. 68-20, 1968-1 C.B. 812, infra.
76a
Appendix E
and so the fact that Reisenberg is not an attorney, certified
public accountant or enrolled agent does not automatically
invalidate the consents. Further, petitioner specifically
granted Reisenberg the power to execute the consents at issue
by giving him an unlimited power of attorney. Finally, even
if Reisenberg did not have the actual authority to execute
the consents, petitioner should be equitably estopped from
claiming Reisenberg lacked authority.
We note parenthetically that both parties use the term
“regulation” in referring to Circular 230, 31 C.F.R., Part 10,
1966-2 C.B. 1171, which, as noted, appears in the Code of
Federal Regulations. For purposes of this discussion we adopt
their terminology.
Circular 230, issued by the Treasury Department in 1966,
sets forth the revised rules of practice before the Internal
Revenue Service for the years in issue. Section 10.7 provides
that persons who are not attorneys, certified public
accountants or enrolled agents may practice before the
Service in a limited manner. Section 10.7(a)(7), the
applicable provision to this case, specifically provides:
(7) Any person, who is not under disbarment
or suspension from practice before the Internal
Revenue Service or from practice of his profession
by any other authority (in the case of attorneys,
certified public accountants, and public
accountants) and who signs a return as having
prepared it for the taxpayer, or who prepared a
return with respect to which the instructions or -
regulations do not require that it be signed by the
77a
Appendix E
person who prepared the return for the taxpayer,
may appear without enrollment as the taxpayer’s
representative, with or without the taxpayer,
before revenue agents and examining officers of
the Audit Division in the offices of District
Directors (but not at the district conference in a
District Director’s office) with respect to the tax
liability of the taxpayer for the taxable year or
period covered by that return. Proper authorization
from the taxpayer will be required. All such
persons will be subject to such rules regarding
standards of conduct, the extent of their authority,
and other matters as the Commissioner of Internal
Revenue shall prescribe. Such persons will be
permitted to represent taxpayers within those
limits without enrollment, except that the
Commissioner may deny permission to engage in
such limited practice to any person who has
engaged in conduct which would justify
Suspension or disbarment of any attorney,
certified public accountant, or enrolled agent
under the provisions of this part. [1966-2 C.B.
1177-1178. Emphasis added. ]
Pursuant to this provision, respondent issued Revenue
Procedure 68-20, 1968-] C.B. 812. Section four of the
Procedure specifies the limitations on the Practice privilege
for those who are not enrolled to practice before the Service.
Section four, Subpart .02(c), specifically states that executing
consents to extend the Statutory period for assessment or
collection of tax is beyond the scope of authority of an
unenrolled preparer.
78a
Appendix E
Both petitioner and respondent focus their arguments
on the regulation and what it “requires” respondent to do.
But the regulation has not been violated by either party. The
only limitation actually specified in the regulation is that
unenrolled preparers may not appear at the district conference
in a District Director’s office. That did not occur in this case.
The real question, instead, is “who violated the revenue
procedure promulgated pursuant to Circular 230, and what
consequences flow from that violation?”
Here, Reisenberg, an unenrolled preparer, signed a
consent. Under the revenue ruling, this act was beyond the
scope of his authority. Even though respondent erroneously
accepted the consent, it is petitioner’s accountant, armed with
an unlimited power of attorney, who violated the revenue
procedure. The revenue procedure does not require
respondent to do anything. It requires the taxpayer to do
something, i.e., to be represented by a person with certain
credentials.
The fact that respondent’s agent knew Reisenberg was
not an enrolled agent does not change the result. The revenue
procedure is directory, not mandatory. Respondent would
have been justified in refusing to accept the consents signed
by Reisenberg. The converse is not true. Petitioner cannot
ignore the revenue procedure by allowing his accountant to
sign the consents and then claim the consents are invaiid
because respondent accepted them. The bottom line is that
respondent did not take any action contrary to either the
regulation or the revenue procedure. Petitioner’s duty of
consistency mandates that he be bound by the consequences
of his own actions. See, e.g., Arkansas Best Corp. v.
79a
Appendix E
Commissioner, 83 T.C. 640, 659 (1984), affd. in part, revd.
in part 800 F.2d 215 (8th Cir. 1986) affd. __U.S.__ (March
7, 1988); Southern Pacific Transportation Co. y.
Commissioner, 75 T.C. 497, 838-839 (1980). We find that
the consents are valid.
This brings us to petitioner’s next argument — namely
that he and Reisenberg were misled into signing the waivers
and as a result, they are invalid. In essence petitioner is
claiming the waiver was signed either under mistake or
duress. In either event, we do not agree that respondent’s
actions invalidate the waivers.
Agent Crane informed Reisenberg in two separate letters
that failure to extend the Statute of limitations would force
Crane to issue a Statutory notice of deficiency based upon
the information from the audit, and that petitioner’s appeal
rights within the Revenue Service would be lost. This
statement was only partially true. Typically, when a case is
docketed in this Court and it has not yet been through the
Appeals Office, respondent sends the case to Appeals for a
taxpayer’s conference before it is sent to district counsel.
See sections 601.105 and 601.106, Statement of Procedural
Rules. Although petitioner would not typically forfeit his
rights to an Appeals Conference, after a petition is filed in
this Court a case may not be settled administratively. The
Court must agree with the settlement and enter the decision.
Moreover, to protect the statute of limitations respondent
could lawfully issue a deficiency notice if petitioner refused
to extend the statute. Threatening lawful action, even if
contrary to stated policy, is not duress. Burnet v. Chicago
80a
Appendix E
Ry. Equipment Co., 282 U.S. 295 (1931). There is nothing
in either the Constitution or the Internal Revenue Code which
requires appellate review within the Internal Revenue
Service. The lack of appellate review, without at least a
showing of harm from the denial of the appellate review, is
not a violation of due process. See Rosenberg v.
Commissioner, 450 F.2d 529, 533 (1971). (Taxpayer received
a hearing de novo in the Tax Court and failed to show what
would have been gained by a conference with the Appellate
Division.) Thus respondent could have lawfully carried out
precisely what Crane “threatened.” Petitioner’s claim of
duress or mistake must fail.
Finally, we address petitioner’s argument that
Reisenberg lacked actual authority to sign the consents.
Petitioner claims that Reisenberg signed the last two consents
that extended the statutory period without petitioner’s
approval. The fact is, however, that petitioner executed an
unlimited power of attorney in favor of Reisenberg in
February 22, 1977. This gave Reisenberg actual authority to
act on petitioner’s behalf. See 1 Restatement, Agency 2d,
sec. 26 (1958). That power of attorney was delivered to and
accepted by respondent. This created an apparent authority
in Reisenberg to act on petitioner’s behalf. See 1
Restatement, Agency 2d, sec. 27 (1958). Whatever the actual
arrangement between Reisenberg and petitioner, there was
never any indication made to respondent that Reisenberg’s
authority to act on petitioner’s behalf was limited.'* The fact
14. The 1 Restatement, Agency 2d, sec. 124A provides that
the termination of authority does not thereby terminate apparent
authority. In addition, as a general rule, the third party must receive
(Cont’d)
8la
: Appendix E
that petitioner now claims that he never intended to have
Reisenberg sign the consents is not controlling. Petitioner is
bound by and liable for the acts of his agent until such time
as his apparent authority was effectively terminated. Thus,
we cannot find the consents invalid for lack of authority since
petitioner has not shown that Reisenberg’s authority was
effectively terminated. The consents are valid.
Substantive Issues
We now must address the substantive issues in this case.
As a preliminary matter, respondent’s determination in the
notice of deficiency is presumed correct and petitioner has
the burden of proving either his entitlement to any deductions
or any erroneous inclusions in income. Welch y. Helvering,
290 U.S. 111 (1933); Rule 142(a). This is true in this case,
even though the reasons for respondent’s adjustments are
not specified in any greater detail than is depicted in the
chart at Appendix A. As a result of the lack of precision, we
are able only to consider on redetermination those specific
items raised by petitioner." Any item or amount of the
(Cont'd)
notice in order to effectively terminate an agent’s apparent authority.
See 1 Restatement, Agency 2d, secs. 125-132. Additionally, the
Internal Revenue Service has issued rules on the revocation of power
of attorney. The rules require the taxpayer to send a signed statement
to those offices of the Internal Revenue Service where the taxpayer
has filed copies of the power of attorney which is to be revoked listing
the names and addresses of the representatives whose authority is
revoked. Section 601.505(c)(2), Statement of Procedural Rules.
15. Petitioner could have used the Court’s discovery rules to
obtain a more definite basis for respondent’s determination.
82a
Appendix E
deficiency not addressed by petitioner is deemed to be
conceded and found in respondent’s favor.
(1) Substantiation of Deductions
(a) Film Expenses
The first substantive issue we address is petitioner’s
substantiation of film expenses. Petitioner has the burden of
proving entitlement to those film expenses disallowed by
respondent and those film expenses he now claims he failed
to deduct or miscategorized as travel and entertainment
expenses. Rule 142(a); Welch v. Helvering, supra. In 1974
petitioner claimed $159,149 in film expenses. Respondent
allowed $127,299. During 1974 petitioner operated seven
theaters for the entire taxable year and one theater for
approximately six months. In 1975 petitioner claimed
$197,014 in film expenses for the operation of ten theaters
for the entire taxable year. Respondent allowed $64,114. In
1976 petitioner claimed $152,464 in film expenses for the
operation of twelve theaters. Respondent allowed only $3,064.
In 1977 petitioner claimed $39,364 in film expenses for the
operation of six theaters. Respondent allowed $16,589. Finally,
in 1978 petitioner claimed $24,553 in film expenses for the
operation of five theaters, and respondent allowed $3,886.
The deductions respondent disallowed were payments
in 1974 and 1975 to “My Third Wife, George”; payments in
1975, 1976 and 1977 to GTI"* and payments to “cash” during
all the years in question.
16. Respondent maintains inconsistent positions regarding the
film expenses paid by the corporations to GTI. In docket No.
(Cont'd)
83a
Appendix E
Petitioner contends that the payments to “My Third Wife,
George” and to “cash” represent cash expenditures for films.
Petitioner further asserts that his business purchased a large
Portion of its films for cash. Cash payments were used
Petitioner further asserts that payments to GT] were
legitimate film rental expenses. GT] was incorporated for
the stated purpose of purchasing films and then renting them
to petitioner’s theaters.
In addition to the disallowed deductions, petitioner
alleges he is entitled to deduct cash expenditures for films
and other items which he previously miscategorized as travel
(Cont’d)
22089-80 respondent disallowed all the film expenses paid to GT]
after it filed its final return on March 31, 1975, on the ground that
he includes all of the amounts paid as film expenses by the
Corporations in the Toss income of GTI in 1975, 1976 and 1977.
17. See Jolar Cinema, Inc. y. Commissioner, T.C. Memo.
1983-403.
84a
Appendix E
were really cash expenditures for films. All of these “missed
deductions” were in 1977.
Petitioner also claims that in 1974 five of his
corporations paid $21,000 to Sol Abrams as film expenses
but that the deduction was erroneously shown on returns as
travel and entertainment expenses.
Finally, petitioner suggests an alternative approach to
deal with all the 11lm deductions. Petitioner suggests that
rather than look at particular items, we could look to 1974
and 1975 when respondent allowed petitioner to deduct an
average film expense of $20,000 per theater. Using this as a
guide we should allow $20,000 for each theater in operation
during each of the five tax years in question. Petitioner
contends that even though this results in his losing the bene-it
of cash expenditures made during 1974 and 1975 because
he would not be entitled to any additional previously
unclaimed film expenses, it provides a fair and easy way to
estimate expenses.
We begin by examining whether petitioner is entitled to
the deductions he actually claimed. First, petitioner has not
convinced us that the “My Third Wife, George” account ever
actually was used for film rentals to his corporations.
Therefore, those deductions taken in 1974 and 1975 for
payments to “My Third Wife, George” were properly
disallowed. Second, payments to cash could have been for
anything. The testimony at trial did not convince us that these
part.wiar checks were for film expenses. Therefore checks
payabic to cash were also properly disallowed.
85a
Appendix E
Third, petitioner has failed to convince us that GTI
continued in existence after March 31, 1975. Conspicuously
missing from evidence are canceled checks from GTI to film
vendors after March 31, 1975. There is no question that
petitioner purchased hundreds of films. He has failed to convince
us, however, that GTI purchased the fiims and that the films
were then rented to the Separate corporations. Respondent was
correct in disallowing deductions for payments to GTI after
March 31, 1975. :
It is not our intention to totally disregard reality. From the
evidence presented at trial we know the following facts: (1)
petitioner showed films in his theaters; (2) petitioner, through
his corporations, operated one theater for six months in 1974
and seven theaters for all of 1974, ten theaters during 1975, 12
theaters during 1976, six theaters during 1977 and five theaters
during 1978; (3) films were shown at one theater and then
transported to and shown at another of petitioner’s theaters; (4)
petitioner typically ran two shows in each theater; and (5)
petitioner paid between $500 and $1,500 for each adult film.
Several witnesses testified that petitioner’s practice was to have
two different films in each theater and to not repeat the same
film to cost $500, petitioner, through his Corporations, expended
at least $52,000 per year on films ($500 x 104 films).'*
18. We have considered how many theaters were in operation
to determine the amount of allowable film deductions. The theaters
were owned by petitioner’s wholly owned S corporations. Therefore,
the total $52,000 per year deduction for films is allocated between
the corporate owners.
86a
Appendix E
In summary, after taking account of the film expenses
respondent has allowed, petitioner’s corporations are not
entitled to any additional film expense deductions for 1974
or 1975. Petitioner’s corporations are entitled to additional
deductions of $48,936, $35,411 and $48,114, respectively
for the 1976, 1977 and 1978 taxable years. Moreover, using
the amounts claimed on the corporate returns as a guide, the
following percentages of the increased allowable deductions
are allocated to various corporations: ;
1976 1977 1978
Gayety 34.4 16.0 70.0
Griffco 15.6
Paris Follies 36.4 10.5 20.0
L.C. Griffith 9.1 6.0 8.0
Ell Gee 4.6 3.5 2.0
Carib 64.0
(b) Finder's Fee
On August 30, 1961, Ninth Street Amusement Company,
Inc. (Ninth Street) entered into a lease with Stanley Company
of America, Inc. (Stanley) as lessor. The lease was for a
burlesque theater located in Washington, D.C. Oscar
Markovich operated the concessions at the burlesque theater.
Petitioner was always interested in starting new theaters.
On Nc» ember 4, 1963 petitioner sent a letter to Ella Davis,
Oscar Markovich’s girliriend. The letter referred to the
assumption of the lease existing between Ninth Street and
Stanley and provided:
87a
Appendix E
This letter will confirm that you are arranging
for the undersigned to assume the lease presently
existing between Stanley Company of America,
Inc., as lessee, and the 9th Street Amusement
Company, Inc. as lessor. In view of your bringing
this deal to my attention and indicating that the
operation will be financially beneficial, and
further considering your assignment to be entered
into, I feel that you are entitled to a finder’s fee.
Therefore, if the assignment is entered into
and I assume the above lease, and if | operate
under the said lease for the full term and duration,
and if the said operation is financially successful
as you indicated, I will pay to you at the expiration
of the said lease the sum of $50,000.00 as a finders
fee.
Between 1968 and 197] several payments were made to
Ella Davis. On June 12, 1972 Leroy Griffith executed a
mortgage deed on Gayety Theater to Davis securing a
$50,000 promissory note, without interest, whereby Davis
was to be paid $200 per week until paid in full. Payments
began in July 1972. During the years which are before the
Court, petitioner, through Gayety, paid Davis $10,400 in
1974, 1975 and 1976, and an additional $4,200 in 1977. In
1978 Davis was paid $5,200 recorded via an adjusting journal
entry on Gayety’s books.
Petitioner argues that he had a Personal obligation to
pay Davis $50,000 for the assignment of the lease and that
Gayety only entered the transaction to provide security.
88a
Appendix E
Petitioner also argues that he is entitled to the ordinary
deduction for the finder’s fee payment because he was
engaged in the business of operating theaters and that the
payments were related to his business. Finally, petitioner
asserts the payments were deductible whether claimed on
Gayety’s corporate tax return or petitioner’s individual tax
return.
Respondent argues that the payments to Davis are not
deductible. Respondent relies on two arguments in making
this determination. First, petitioner has failed to prove the
$50,000 payment was an ordinary and necessary business
expense within the meaning of section 162. Second, the
transaction was a sham. The agreement between petitioner
and Davis provided that part of her consideration for the
$50,000 was an “assignment to be entered into.” There is no
evidence in the record indicating to what this statement refers.
Respondent argues that since petitioner presented no
evidence of the “assignment” he has not shown that Davis
fulfilled her obligation and he has not met his burden of proof
as to the deductibility of the payments. Further, respondent
asserts the agreement was a sham because although petitioner
purports to paying a “finder’s fee” to Davis, he fails to
mention that he was president of Ninth Street at the time of
the assignment. Thus, it is apparent petitioner both knew of
the lease and owned the lease before the assignment for which
Davis was paid.
The evidence supports respondent’s claim. The facts
clearly indicate that Ella Davis was not paid a fee for
“finding” the theater in Washington, D.C. Petitioner has not
presented any additional evidence which would justify
89a
Appendix E
payments of $50,000 to Davis either as his own business
expense or as a business expense of Gayety. Therefore,
petitioner is not entitled to a deduction under section 162.
(c) Auto Expenses
Petitioner used two automobiles in his businesses. He
traveled between the theaters on a regular basis to monitor
their operations. Certain of petitioner’s employees also used
petitioner’s automobiles to pick up entertainers at the airport
and to drop films off at other theaters and the bus terminal.
Petitioner and Linda Rivera also used the two automobiles
for their personal needs.
Between 1974 and 1977 L. C. Griffith, Ell Gee and
Gayety all claimed deductions for auto expenses. Respondent
conceded a depreciation deduction in the amount of $2,292
for Gayety in 1974 through 1976, inclusive. Gayety did not
claim any additional auto expenses. Petitioner claims that
Ell Gee and L. C. Griffith are entitled to the following
additional deductions as reported on the corporate returns
which respondent disallowed.
1974 1975 1976 1977
Ell Gee
auto & truck expenses $640 $1,629 $1,320 $670
depreciation 1,801 2,202
insurance 592.50 1290 833
L. C. Griffith
repairs 114
90a
Appendix E
In addition, since petitioner’s corporations failed to claim
depreciation and actual expenses on two cars for all the years
before the Court, petitioner claims the corporations are
entitled to previously unclaimed deductions.'®
Petitioner presented no evidence at trial concerning
either petitioner’s, nor any of the corporation’s, bases in the
two automobiles. He also failed to present any evidence
concerning when the vehicles were put in service and when
they were taken out of service. Respondent has conceded
that Gayety is entitled to depreciation on one vehicle in 1974,
1975 and 1976. There is no evidence which indicates Gayety
is entitled to depreciation in 1977 or 1978. Similarly, since
petitioner failed to prove Ell Gee had any basis in the second
automobile and failed to prove when it was in service, we
have no reason to allow Ell Gee to depreciate an automobile.
Petitioner also contends Ell Gee is entitled to the auto
expenses it claimed on its return. These include general
expenses and insurance. Petitioner failed to present any
evidence such as canceled checks, the policy itself, or
testimony of an insurance company employee to substantiate
insurance expenses. Petitioner’s failure to produce this
evidence leads us to conclude that this type of evidence would
not have supported petitioner’s claim. Wichita Terminal
Elevator Co. v. Commissioner, 6 T.C. 1158, 1165, (1946),
affd. 162 F.2d 513 (10th Cir. 1947).
19. Petitioner’s argument on these previously unclaimed auto
expenses is very vague and general. We are unsure of exactly what
amount of previously unclaimed deductions he is presently claiming.
9la
Appendix E
Likewise, petitioner failed to present any evidence to
substantiate the general automobile expenses. He failed to
maintain any type of mileage log which would have entitled
him to use the optional method for computing automobile
expenses. Therefore, Ell Gee is not entitled to either the
general auto expenses or the insurance expense.2°
Petitioner did not submit any evidence substantiating
the $114 repair €xpense taken by L. C. Griffith. We do not
know to which vehicle the alleged repair was made or that
the repair was an ordinary and necessary business expense.
Therefore, we cannot allow L. C. Griffith’s repair deduction.
(d) Contract/Casual Labor
After concessions by respondent the following
deductions remain in dispute:
1974 1976 1977
Griffco $ 50 $ 650
Ell Gee 100 2,500 $800
Carib 100
All of these deductions were for payments made to F loyd
and Shirley Griffith. There Was a great deal of testimony at
trial substantiating contributions made both by Floyd and
has failed to provide us with such a basis.
EEE
92a
Appendix E
Shirley Griffith to petitioner’s operation. In fact, respondent
has conceded the portion of the claimed contract/casual labor
payments made to Floyd and Shirley Griffith attributable to
Gayety.
The evidence presented at trial convinced us that Floyd
and Shirley Griffith provided services to many of petitioner’s
theaters located in the Miami area. The above three
corporations all operated theaters in and around Miami and
we believe that Floyd and Shirley Griffith provided services
to these theaters too. These corporations are entitled to the
above-mentioned additional labor expenses under section
162.
(e) Miscellaneous Itemized Deductions
There are two miscellaneous itemized deductions at
issue. Petitioner claims he is entitled to an $8,500 deduction
in 1974 and a $2,700 deduction in 1977.
In 1974 petitioner attempted to get a loan of $640,000.
In connection with this loan, which he never received, he
claims he paid the person who brought the deal to his
attention $8,500. Of this amount, $3,500 was in the form of
a cashier’s check and $5,000 was in cash. Petitioner never
got his money back even though the loan was not made.
In support of this deduction petitioner introduced the
customer copy of the $3,500 cashier’s check. He also
submitted an unsigned agreement that calls for a
nonrefundable $3,500 application fee which is applied
towards costs if the loan is approved. Petitioner failed to
93a
Appendix E
produce any evidence of a business purpose for the loan.
Absent such a showing, even if petitioner actually paid the
money, he is not entitled to this deduction under section 162.
Petitioner claims the $2,700 payment in 1977 was to
Manuel Uriate and was the cost to produce “Cabaret” with a
female impersonator at the Roxy Theater and the Carib
Theater. To substantiate his entitlement to this deduction
petitioner submitted an unsigned, uncashed check payable
to Manuel Uriate drawn on the “My Third Wife, George”
bank account. The notation on the check reads “For Cabaret
Cast Roxy 3/29-4/3.” Also, across the check it reads “paid
by cash.” This evidence combined with petitioner’s
testimony convinces us that $2,700 was paid for this
production. Under normal circumstances this evidence would
be insufficient, but several witnesses at trial corroborated
petitioner’s practice of writing unsigned checks to use as
receipts for cash payment. Therefore, petitioner is entitled
to a $2,700 miscellaneous deduction in 1977.
(2) Previously Unclaimed Deductions
According to petitioner there are five general categories
of previously unclaimed deductions still at issue (in addition
to the previously unclaimed auto expenses discussed above).
These categories are set out separately below.
(a) Additional Rent Deductions for Paris Follies’
Pussycat Theater (New Orleans)
for 1976, 1977 and 1978
Paris Follies operated the Pussycat Theater in New
Orleans, La. during 1976, 1977 and 1978. Petitioner claims
94a
Appendix E
Paris Follies is entitled to accrue $75,000 for rent expenses
on the Pussycat Theater for 1976 and 1977; and $73,350 for
1978. On its corporate return Paris Follies deducted the
following amounts, which respondent allowed in full:
1976 $51,499
1977 25,802
1978 71,550
Thus, the amounts in issue are $23,501 for 1976, $49,198
for 1977 and $1,800 for 1978.
In support of his assertion petitioner submitted an
unsigned copy of a lease agreement between Trans-Lux, a
New Orleans corporation as lessor and BGNO (which stood
for Berger Griffith New Orleans), a New Orleans corporation,
as lessee. According to petitioner Paris Follies assumed the
lease which existed between Trans-Lux and BGNO; the lease
required $75,000 in annual rent in 1976 and 1977; and the
rent was reduced in 1978 from $75,000 to $54,600 in
consideration of forfeiture of the $18,750 security deposit
Paris Follies paid on the lease.
The document which petitioner submitted is an unsigned
copy of a lease. We do not consider this document to be
evidence of a final agreement between Trans-Lux and
BGNO, the apparent original parties to the lease. Even if we
did accept the lease as the final agreement between the
parties, under the terms of the lease the lessee must get
written consent to assign the lease. Thus while petitioner
claims Paris Follies assumed the lease, he has failed to
introduce the documentary evidence to support his position.
95a
Appendix E
The lease in evidence extends for six months from May
16, 1975 to November 15, 1975. According to the terms of
the document the lessee was required to give written notice
of its intent to renew the lease. Petitioner has not submitted
any evidence which indicates that Paris Follies or BGNO
renewed tie lease.
In sum, we have not received any evidence which proves
Trans-Lux actually entered into a lease agreement with
BGNO or that Paris Follies assumed the lease liabilities of
$75,000 annual rent of BGNO.
The parties have Stipulated that Paris Follies operated
the pussycat Theater in New Orleans. We do not doubt that
fact. We do, however, doubt that Paris Follies was legally
liable for $75,000 rent in 1976 and 1977 or $73,350 rent in
1978. Therefore, we see no reason to allow Paris Follies to
deduct rent expenses beyond those it ori ginally claimed and
which respondent Originally allowed.
(b) Additional Deduction for Payments
Made With Regard to the Liberty Bank
and Trust Company Account
Petitioner and Donald James, one of petitioner’s
employees, had a bank account at Liberty Bank and Trust
Co. in New Orleans, La. Petitioner Claims he is now entitled
to the following deductions in 1977 for payments made from
the Liberty Bank account to pay expenses for the Pussycat
Theater in New Orleans:
96a
Appendix E
Film Rental $ 500.00
Rent 5,000.00
Travel and Entertainment 650.00
Legal 1,220.00
Taxes - 305.00
Utilities 547.85
In addition petitioner claims he is entitled to the
following additional deductions for payments ultimately paid
in cash, but which were represented by uncashed checks from
the same account:
Film Rental $ 400.00
Salary 1,681.83
Petty Cash 44.41
Petitioner has the burden of proving his entitlement to
these deductions. Rule 142(a). He has failed to do this.
Petitioner has simply placed copies of the checks into
evidence. He has not shown a business purpose for the
payments, nor has he shown that the items, if deduciible,
were not previously deducted in 1977 by Paris Follies, the
corporation which operated the theater. Petitioner’s
testimony without more, does not convince us that he is
entitled to deduct any of these additional amounts.
(c) Additional Deductions for Legal Fees.
In 1976 petitioner paid $9,000 in legal fees to Mr.
Silvers, an attorney in New Orleans. Respondent has
conceded that $4,000 of this amount is deductible.
Respondent has also conceded that the total amounts claimed
97a
Appendix E
for 1975 and 1977 are deductible. Petitioner lived in F lorida
and it is likely that any personal matters requiring legal
advice would arise in Florida. We find the payments to Mr.
Silvers in New Orleans were business related. Moreover, we
See no reason why respondent would have conceded the other
amounts but not this $5,000. Respondent has not suggested
any reason why this $5,000 was not treated like the other
amounts paid to Silvers. Therefore, petitioner is entitled to a
$5,000 deduction for legal fees in addition to the amounts
conceded by respondent.
(d) Additional Checks Disbursed From
Intercontinental Bank
Petitioner claims he is entitled to the following
previously unclaimed deductions in 1977 for expenses paid
out of checking account no. 0101-405-502 at the
Intercontinental Bank of Miami Beach:
Advertising $21,651.33
Taxes 4,489.45
Legal and Accounting 2,462.54
Utilities \ 1,124.49
Salary 500.00
Film Purchases 1,500.00
Repairs & Maintenance 200.00
Mr. Silverman, an accountant hired to assist in the trial
of this case, testified that the Intercontinental account was
for Griffco. Griffco went out of business in 1976. Therefore,
amounts paid from the account were not deducted in 1977
by Griffco. At trial petitioner submitted copies of the checks
98a
Appendix E
at issue. There is no indication on the face of the checks that
they were issued from a Griffco account. Other checks in
evidence drawn in 1978 from the same account have “Griffco,
Inc.” imprinted on the face of those checks. We find;
however, that the 1977 checks were in fact written from the
Griffco account, and, since no returns were filed for Griffco
after 1976, none of the allowable deductions were previously
taken. Petitioner used funds left in the Griffco account to
pay expenses of other theaters. The types of expenses
incurred are business expenses. We thus find petitioner has
substantiated the following additional deductions in 1977:
Advertising
Miami Herald 20,997.57
All Night Show 150.00
Showcase 405.00
The Weekly 100.00
Total $21,651.57
Taxes
Internal Revenue Service 953.24
Fla. Dept. of Revenue 2,277.48
La. Dept. of Revenue 581.15
Total $3,811.87
Legal and Accounting
Mincberg, Atty. 1,400.00
Reisenberg, Accountant 312.54
Total $1,712.54
99a
Appendix E
Petitioner has failed to prove his entitlement to any
additional deductions. Checks he claims were for taxes were
made out to the City of New Orleans. There is not a clear
enough indication, even combined with petitioner’s
testimony, that those checks were in fact for taxes. We are
also unconvinced that a $350 payment to Alan Pinkwasser,
an attorney in the Miami area, and legal fees paid to Louis
Merhige were business related. Petitioner provided us with
no proof as to the business purpose of the payments. We are
similarly unable to allow the additional $200 paid in 1977
to the attorney Mike Silvers because we do not know that
the amount has not already been included in the sum
conceded by respondent.
=
Petitioner also claimed utility expenses. We have no way
of knowing, based on the evidence before us, exactly which
of petitioner’s utility bills were paid out of this account.
Absent a clear showing that these were valid business
expenses we cannot allow the deduction. Similarly, we
cannot allow a deduction for claimed maintenance and repair
expenses and a salary expense without a showing that these
were incurred in the course of business.
Finally, in 1977 petitioner claimed an additional film
expense of $1,500. We have already discussed our treatment
of petitioner’s film purchases. Since petitioner’s allowed
deductions are based on an estimate, we will not allow any
additional specific items which were previously unclaimed.
(3) Travel and Entertainment
There are two categories of travel and entertainment
expenses to consider in this case. The first category are those
100a
Appendix E
disallowed travel and entertainment expenses. The second
category of travel and entertainment are those which
respondent disallowed and petitioner claims he
miscategorized but were nevertheless deductible expenses.
Petitioner claimed the following travel and entertainment
expenses between 1974 and 1978:
Entity 1974 1975 1976 1977 1978
Paris Follies 3,306 3,305 2,025 3,689 641
Griffco 6,720 7,884 3,212 — —
Ell Gee 13,953 7,861 6,920 7,487 —
Gayety 17,846 16,442 12,722 3,819 6,318
The bulk of petitioner’s proof of his entitlement to these
travel and entertainment expenses is testimony at trial that
petitioner did a large amount of traveling in his business.
The fact that petitioner operates theaters in many states helps
to substantiate this claim. Petitioner also took a trip to Europe
in 1977 with Linda Rivera, Bud Luther and Luther’s wife.
Petitioner claims that all four of them were in Europe
primarily for business reasons and therefore the costs are
deductible.
There is, however, a problem with petitioner’s evidence.
He has failed to produce any evidence which shows exactly
which travel and entertainment expenses were for business
purposes. He kept no kind of contemporaneous log indicating
the time, place, amount or business purpose of any expenses.
A portion of petitioner’s claimed travel and entertainment
expenses were obviously for travel (i.e., checks payable to a
iii ili denial
10la
Appendix E
travel agency) or entertainment (i.e., checks payable to
restaurants). However, without any evidence of the business
purpose of the trip or meal, we cannot permit any deduction.
Travel and entertainment are subject to the restrictions
on all business expenses. See sec. 162. Additionally, travel
and entertainment €xpenses must satisfy the substantiation
requirements of section 274(d). In order to meet the
requirements of section 274(d) petitioner must not only show
a business purpose for the expenditure, he must also prove
the amount, time and place of travel or entertainment and,
for the entertainment expenses, the business relationship to
the taxpayer of every person entertained. Sec. 274(d); sec.
1.274-5(b), Income Tax Regs. Thus even though we believe
petitioner did travel between his businesses, and that he
entertained many of the live performers he hired, section
274(d) precludes us from estimating what expenses he may
have incurred.
Furthermore, the European trip, which petitioner
specifically addressed, is not a deductible travel expense.
Section 1.162-2, Income Tax Regs., provides in pertinent
part:
Only such travel expenses as are reasonable and
necessary in the conduct of the taxpayer’s
business and directly attributable to it may be
deducted. If the trip is undertaken for other than
~ business purposes, the travel fares and expenses
incident to travel are personal expenses and the
meals and lodging are living expenses * * *,
laa
102a
Appendix E
We believe that petitioner got ideas for his business while in
Europe, but we remain unconvinced that business was the
primary reason he went to Europe. Therefore, he is not
allowed to deduct the cost of the trip. Furthermore, even if
the trip to Europe was directly related to petitioner’s business,
petitioner has failed to produce any evidence to substantiate
the deduction as required by section 274(d).
Petitioner also contends that several of his travel and
entertainment expenses were miscategorized, and that a
substantial amount of travel and entertainment expenses were
really film expenses. We are not convinced that any greater
deduction than we have allowed above for film expenses is
warranted.
The other amounts petitioner claims were miscategorized
as travel and entertainment expenses were payments made
to the following people or entities:
Lana Lake, stripper
Mary Brown, employee
Melody Euchman, employee
Bingis Associates, sign company
Alan Weinstein, attorney
Petty Cash
BAC, Inc. (Georgeanna Spellman)
Night Owl Show
The only evidence presented at trial substantiating the
deductibility of these expenses was petitioner’s self-serving
testimony. He has failed to convince us that these payments
were ordinary and necessary business expenses. There is,
PTI ENE Gia hes eh it
103a
Appendix E
however, one exception in all of the above-mentioned
expenses — the payment to Bingis Associates, a sign
company. We find this expense to be business related.
Therefore, Gayety is entitled to a deduction of $125 in 1975.
Additional Income
We now must decide whether petitioner received the
following amounts of previously unreported income in the
following years:
Source 197 1975 1976 1977
onium —
Paramount Theater $24,930
(return of security
deposit)
Bee Gee, Inc. $4,400 $21,700
Cameo Productions 2,097 3,100
Flamingo Theater 3,262
GTI (dividends) 8,254 38,947
(1) Paramount Theater
Griffco was incorporated on September 1, 1972 and
operated on a calendar year basis. Griffco is the corporation
which operated the Paramount Theater. In 1977 petitioner
received $24,950 as the return of a security deposit on the
Paramount Theater. We must decide if this amount
constitutes income to Griffco and therefore to petitioner as
its sole shareholder.
Generally, a recovery of a prior payment does not result
in income unless there was a tax benefit in a prior year.
104a
Appendix E
Sec. 111; Hillsboro National Bank v. Commissioner, 457
U.S. 1103 (1982). The question, therefore, is whether petitioner
or Griffco received a tax benefit in a prior taxable year.
Respondent claims that petitioner did enjoy a prior tax
benefit. He claims petitioner deducted the security deposit
from taxable income in 1972. Respondent’s determination
is based on two facts: (1) Petitioner did not include the
security deposit as an asset in 1972 even though he did
include the security deposit of $335 held by Southern Bell
as an asset; and (2) Petitioner deducted $33,612.80 in rent
for 1972 while his annual rental expense for 1973 and 1974
was $50,918 and $51,917, respectively. Since the corporation
did not exist until September 1972, at most the 1972 rental
payment covered a four-month period.
Petitioner argues that the security deposit is not a
deductible item and since there is no evidence that the
security deposit was deducted, petitioner did not realize any
prior tax benefit. Moreover, petitioner argues that he was
audited in 1972 and that if he had previously deducted the
security deposit it would have been disallowed on audit.
There is no direct proof that petitioner previously
deducted the security deposit. Respondent would like us to
conclude that a substantial rental payment in 1972 for at most
four months of operation indicates that petitioner previously_
deducted the security deposit. Based upon the 1973 and 1974
annual rental deductions petitioner should have incurred a
rental expense of approximately $17,000 over a four-month
period in 1972. If we accept respondent’s argument, i.e., that
$24,950 of the $33,612.80 deducted as rent in 1972 was in
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fact a security deposit, it would mean that petitioner only
paid approximately $9,000 in rent in 1972. If we accept
petitioner’s argument it would mean petitioner paid over
$33,000 in rent in 1972. Neither party has done much to
convince us that they are correct. We do note, however, that
petitioner did not introduce any evidence as to the terms of
the lease which would have done much to support his case.
In light of petitioner’s failure to present this evidence, we
assume it would not have supported his position. Wichita
Terminal Elevator Co. y. Commissioner, supra. Petitioner has
failed to prove that he did not receive a prior tax benefit in
1972 by deducting the security deposit. As a result petitioner
must include the return of that deposit in his 1977 income.
(2) Bee Gee, Inc.; Cameo Productions, Inc.
and Flamingo Theater
Respondent determined that petitioner had additional
income from Bee Gee, Inc., Cameo Productions, Inc. and
the Flamingo Theater. His determination is based on the
disallowance of claimed film expenses. The payments which
respondent has included in petitioner’s income were
payments made by these entities, directly to petitioner or to
GTI after March 31, 1975 (the date respondent determined
GTI went out of business). Petitioner claims the payments
made to him from these entities were for reimbursement of
film expenses. Petitioner also contends that the amounts paid
to GTI were properly included in GTI’s income and did not
constitute dividends to him.
Regarding the direct payments to petitioner, he points
out that during the periods in question he did not wholly
own any of the above-named theaters and that it is therefore
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illogical to assume that the payments to him were anything
other than reimbursement for film expenses. He claims the
“other co-owners would not have allowed him to take out these
amounts as dividends without being charged with them.
There are flaws in petitioner’s logic. First, none of the other
co-owners’ tax returns are currently before the Court so there
is no way for us to determine whether the other co-owners
received similar payments from the entities in question.
Second, noting petitioner’s extensive experience in
operating adult and family theaters, it is not inconceivable
that the payments to petitioner could have represented some
kind of payment for services. If this were the case, the other
co-owners are not likely to have objected to the payments
made to petitioner.
Although petitioner could have been reimbursed for film
expenses by these entities, he has not convinced us that these
particular payments were for reimbursements of film
expenses. Testimony from his co-owners as to the nature of
the payments might have constituted sufficient proof. In light
of petitioner’s failure to produce this evidence we assume
the evidence would not have supported his position. Wichita
Terminal Elevator Co. v. Commissioner, supra.
Moreover, since petitioner has earned additional income
from these theaters, he is subject to self-employment tax on
the income.?!
21. Petitioner also failed to address the self-employment issue.
He did address the substantive income issue which we decide against
him. We take his failure to raise the self-employment issue in the
alternative to be a concession of the self-employment tax.
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Petitioner also must include in his income the amounts
respondent disallowed for payments made by these entities
to GTI. Since petitioner has failed to convince us that GTI
was in existence after March 31, 1975, all deductions taken
for payments to GTI after that date are disallowed. Since the
payments went to GTI, petitioner’s wholly owned
corporation, which we have determined was not in existence,
the amounts paid to GTI after March 31, 1975 must be
included in petitioner’s income. Moline Properties y.
Commissioner, 319 U.S. 436 (1943).
(3) Dividend Income from GTI in 1974 and 1975
GTI was in existence for 12 months in 1974 and three
months in 1975. Between April 1, 1974 and December 31,
1974 petitioner withdrew $53,061.94 in shareholder loans
from the corporation. Between January 1, 1975 and March
31, 1975, petitioner withdrew $43,094.84 in shareholder
loans, but made loans to GTI totaling $65,497.88.
Based upon these transactions, respondent determined
that the shareholder loans in excess of the contributions made
by petitioner amounted to dividend income. Respondent also
determined an additional $12,373.68 and $61,349.75 of
payments deducted by GTI in 1974 and 1975, respectively,
were for petitioner’s benefit and therefore constituted
dividend income to him. According to respondent, the net
result is that petitioner had $56,682 in dividend income in
1974 and long term capital gain income of $8,254 and
$38,946.71, in 1974 and 1975, respectively.
Petitioner contends that the withdrawals constituted bona
fide shareholder loans. He further asserts that it was his
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practice to borrow money from one corporation to pay bills
of another corporation. Sometimes these loans were recorded
directly to the other corporation. Other times the loan was
recorded to his loan account and then he gave the money to
the cash poor corporation.
Petitioner also contends that the amounts respondent
claims were expended by GTI on his beha
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