Affluent Taxpayers and the Discharge of Taxes in Bankruptcy
In these difficult times, many clients have contacted Shenwick
& amp; Associates asking whether they should file for
bankruptcy and whether the taxes they owe are dischargeable
in bankruptcy. Both bankruptcy law and tax law are code
oriented and the intersection of those two areas of the law
can create complexity and confusion.
As we have discussed in prior blog posts, “old income” taxes
are dischargeable in a Chapter 7 personal bankruptcy filing.
The term “old” generally means that the taxes must be more
than 3 years old or more than 3 years must have passed
from the date of the filing of the debtor’s tax return and the
date of the debtor’s bankruptcy filing (“3 Year Rule”). This
is a “back of the envelope” analysis for purposes of this blog
post and an actual analysis would include a review of the
Debtor’s account transcript from the IRS and an analysis of
the facts of the case.
In addition to the 3 Year Rule calculation, the bankruptcy
attorney must also determine if the debtor attempted to
evade or defeat the payment of taxes pursuant to section
523(a)(1)(c) of the Bankruptcy Code. If the debtor took
action to evade the payment of taxes, then the taxes are not
dischargeable in bankruptcy notwithstanding the fact that the
taxes are old and have met the 3 year rule discussed above.
The recent case of United States v. Harold, No. 16-05041
(Bankr. E.D. Mich. 2020) proves an example of actions by
a taxpayer/debtor that rise to the level of an attempt to evade
taxes, which result in the taxes not being dischargeable despite
the taxpayer/debtor having met the 3 Year Rule.
Dr. Harold (debtor) was a successful medical doctor with an
OB/GYN practice. The issue in the case was the discharge of
the federal tax liabilities for 2004 through 2012 and 2014 that
met the 3 Year Rule. Unless the exception for attempting to
evade the payment of taxes applied, the taxes would be
discharged in Dr. Harold’s bankruptcy filing.
Dr. Harold grossed approximately $500,000 from her practice
during the years at issue.
Despite owing taxes, Dr Harold had an affluent lifestyle: 1. She
purchased a new home in 2005 along the Detroit River
waterfront, 2. She sent her children to private grade schools
and high schools, 3. Her children attended private colleges.
4. The family took multiple family vacations to Mexico,
Alaska, Puerto Rico, Orlando, Washington, D.C., Paris,
Las Vegas, Hawaii, and Dubai and 5 the family drove
expensive cars: a Jaguar, a Mercury Mountaineer, two
Cadillacs, two Lincolns, a Lexus and a Harley
Davidson motorcycle.
In this author's experience, the IRS will subpoena the
Debtor’s bank and credit card statements for the relevant
years to determine what the Debtor spent their money on.
The Court found that the facts of the case indicated that
her expenditures were voluntary and demonstrated that
the Debtor engaged in conduct to evade or defeat the
payment of her tax liabilities for the years 2004-2012
and 2014 pursuant to 523(a)(1)(c) of the Bankruptcy
Code and the taxes were not dischargeable.
The case provides a lesson for high income earners who
file for bankruptcy and had used their money to purchase
luxury goods or services instead of paying their taxes,
the IRS will object to the discharge of their taxes in their
bankruptcy filing and the IRS will likely prevail.
James H. Shenwick, Esq. has an LLM in Taxation from
NYU Law School and counsels many clients with tax
and debtor/creditor issues.
James Shenwick
Shenwick & Associates
122 East 42nd St
Suite 620
New York, NY 10168
Bankruptcy & Creditor's Rights
“We always appreciate referrals”
W 212-541-6224
E: jshenwick@gmail.com
Fax 646-218-4600
Cell Phone: 917-363-3391
Website: https://shenwick-associates.business.site/
Website: https://sites.google.com/site/jshenwick/home
Blog: http://shenwick.blogspot.com
LinkedIn: http://www.linkedin.com/in/jamesshenwick
In these difficult times, many clients have contacted Shenwick
& amp; Associates asking whether they should file for
bankruptcy and whether the taxes they owe are dischargeable
in bankruptcy. Both bankruptcy law and tax law are code
oriented and the intersection of those two areas of the law
can create complexity and confusion.
As we have discussed in prior blog posts, “old income” taxes
are dischargeable in a Chapter 7 personal bankruptcy filing.
The term “old” generally means that the taxes must be more
than 3 years old or more than 3 years must have passed
from the date of the filing of the debtor’s tax return and the
date of the debtor’s bankruptcy filing (“3 Year Rule”). This
is a “back of the envelope” analysis for purposes of this blog
post and an actual analysis would include a review of the
Debtor’s account transcript from the IRS and an analysis of
the facts of the case.
In addition to the 3 Year Rule calculation, the bankruptcy
attorney must also determine if the debtor attempted to
evade or defeat the payment of taxes pursuant to section
523(a)(1)(c) of the Bankruptcy Code. If the debtor took
action to evade the payment of taxes, then the taxes are not
dischargeable in bankruptcy notwithstanding the fact that the
taxes are old and have met the 3 year rule discussed above.
The recent case of United States v. Harold, No. 16-05041
(Bankr. E.D. Mich. 2020) proves an example of actions by
a taxpayer/debtor that rise to the level of an attempt to evade
taxes, which result in the taxes not being dischargeable despite
the taxpayer/debtor having met the 3 Year Rule.
Dr. Harold (debtor) was a successful medical doctor with an
OB/GYN practice. The issue in the case was the discharge of
the federal tax liabilities for 2004 through 2012 and 2014 that
met the 3 Year Rule. Unless the exception for attempting to
evade the payment of taxes applied, the taxes would be
discharged in Dr. Harold’s bankruptcy filing.
Dr. Harold grossed approximately $500,000 from her practice
during the years at issue.
Despite owing taxes, Dr Harold had an affluent lifestyle: 1. She
purchased a new home in 2005 along the Detroit River
waterfront, 2. She sent her children to private grade schools
and high schools, 3. Her children attended private colleges.
4. The family took multiple family vacations to Mexico,
Alaska, Puerto Rico, Orlando, Washington, D.C., Paris,
Las Vegas, Hawaii, and Dubai and 5 the family drove
expensive cars: a Jaguar, a Mercury Mountaineer, two
Cadillacs, two Lincolns, a Lexus and a Harley
Davidson motorcycle.
In this author's experience, the IRS will subpoena the
Debtor’s bank and credit card statements for the relevant
years to determine what the Debtor spent their money on.
The Court found that the facts of the case indicated that
her expenditures were voluntary and demonstrated that
the Debtor engaged in conduct to evade or defeat the
payment of her tax liabilities for the years 2004-2012
and 2014 pursuant to 523(a)(1)(c) of the Bankruptcy
Code and the taxes were not dischargeable.
The case provides a lesson for high income earners who
file for bankruptcy and had used their money to purchase
luxury goods or services instead of paying their taxes,
the IRS will object to the discharge of their taxes in their
bankruptcy filing and the IRS will likely prevail.
James H. Shenwick, Esq. has an LLM in Taxation from
NYU Law School and counsels many clients with tax
and debtor/creditor issues.
James Shenwick
Shenwick & Associates
122 East 42nd St
Suite 620
New York, NY 10168
Bankruptcy & Creditor's Rights
“We always appreciate referrals”
W 212-541-6224
E: jshenwick@gmail.com
Fax 646-218-4600
Cell Phone: 917-363-3391
Website: https://shenwick-associates.business.site/
Website: https://sites.google.com/site/jshenwick/home
Blog: http://shenwick.blogspot.com
LinkedIn: http://www.linkedin.com/in/jamesshenwick
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