United States v. Harold (In re Harold)

611 B.R. 835

IN RE: Patrice Lynnette HAROLD, Debtor.

United States of America, Plaintiff,

v.Patrice Lynnette Harold, Defendant.

Case No. 16-40659

Adversary Proceeding No. 16-5041-PJS

United States Bankruptcy Court, E.D. Michigan, Southern Division.

Signed February 19, 2020

Philip Bednar, Jordan Andrew Konig, Washington, DC, for Plaintiff.

Guy T. Conti, The Law Offices of Guy T. Conti, PLLC, Ann Arbor, MI, Michael Charles Van Huysse, MCV Law PLLC, Okemos, MI, for Defendant.

CORRECTED¹ OPINION DETERMINING TAX DEBT IS EXCEPTED FROM DISCHARGE

Phillip J. Shefferly, United States Bankruptcy Judge

Introduction

This matter is before the Court following a trial on a complaint to determine whether a Chapter 7 debtor's tax debt to the IRS is excepted from discharge under § 523(a)(1)(C) of the Bankruptcy Code. For the reasons set forth in this opinion, the Court holds that the IRS has proven all the elements necessary to except the debt from discharge under § 523(a)(1)(C).

Jurisdiction

This is a core proceeding under 28 U.S.C. § 157(b)(2)(I) over which the Court has jurisdiction under 28 USC §§ 1334(a) and 157(a).

Procedural history

Patrice Lynette Harold ("Debtor") filed a Chapter 7 bankruptcy petition on January 15, 2016 and received a discharge. On November 15, 2016, the Internal Revenue Service ("IRS") initiated this adversary proceeding by filing a three-count complaint seeking to determine that taxes owed by the Debtor for 2004 through 2012 and 2014 are excepted from the Debtor's discharge under § 523(a)(1)(A), (B) and (C) of the Bankruptcy Code.

At the request of the parties, the Court stayed the prosecution of this adversary proceeding because the IRS and the Debtor are also parties to a separate lawsuit ("District Court Lawsuit") in the United States District Court for the Eastern District of Michigan ("District Court"). The IRS filed the District Court Lawsuit to determine the amount of taxes, penalties and interest owed by the Debtor, and to enforce a federal tax lien that it had filed against the Debtor's home to collect that debt. For a time, the IRS and the Debtor thought that the proceeds received by the IRS from enforcement of that lien might be enough to pay all the Debtor's debt to the IRS, which would obviate the need for this Court to determine the dischargeability of that debt. Eventually, it became apparent to the parties and to this Court that regardless of the outcome of the District Court Lawsuit, there would still be some amount owed by the Debtor to the IRS, and this Court would have to decide whether that amount is nondischargeable. Therefore, the Court terminated the stay so that this adversary proceeding could go forward.

By agreement of the parties, this Court is not asked to determine in this adversary proceeding how much the Debtor owes to the IRS. The parties agree that the amount of the debt will be determined by the District Court in the District Court Lawsuit. This Court is asked in this adversary proceeding only to decide whether the debt owed by the Debtor to the IRS — in whatever amount the District Court determines — is excepted from the Debtor's Chapter 7 discharge.

The Court has already granted the IRS a summary judgment on counts I and II of its complaint, holding that the Debtor's tax debt for 2012 and 2014 is excepted from discharge under § 523(a)(1)(A), and the Debtor's tax debt for 2008 and 2010 is excepted from discharge under § 523(a)(1)(B). That just leaves count III, which requests that the Court except from discharge the Debtor's tax debt for 2004 through 2012 and 2014 under § 523(a)(1)(C).

The Court held a trial on count III over four days, November 6 through 8, and November 13, 2019. Prior to the trial, on the stipulation of the parties, the Court signed a Joint Final Pretrial Order ("Pretrial Order") that contains 50 stipulations of fact. At the trial, the IRS called three witnesses: the Debtor, the Debtor's husband, Thomas Barrow ("Barrow"), and an IRS revenue officer, Christopher Smith ("Smith"). The Debtor called three witnesses: the Debtor, Barrow and an accountant, Akono Gross ("Gross"). The Court admitted into evidence exhibits 1 through 34, 38 through 45, 60 through 63, 77, 79, 84 through 87, 91 and 93. The IRS and the Debtor have fully briefed all issues and the matter is now ready for decision.

Findings of Fact

The Court finds the following facts from the testimony at trial, the exhibits admitted at trial, and the stipulation of facts in the Pretrial Order.

The Debtor is a practicing doctor who specializes in obstetrics and gynecology. She enjoys a successful and busy practice, and works long hours.

In 1993, the Debtor married Barrow. At that time, Barrow was a certified public accountant. However, he later lost his license after he was convicted in 1994 of filing a false statement in connection with a bank loan application, bank fraud, tax evasion and filing a false tax return. The conduct that was the subject of the conviction occurred in the 1980's, prior to when Barrow married the Debtor. No longer practicing as an accountant, Barrow now owns Fidelity Refund Services ("Fidelity"), a consulting firm.

The Debtor and Barrow have two children together, one daughter and one son. The Debtor is the primary source of income for the family.

From February, 2000 until she filed her Chapter 7 case, the Debtor conducted her medical practice through Patrice L. Harold, M.D., PLC ("Harold PLC"), a professional liability company in which the Debtor was the sole member. Shortly after its formation, Harold PLC became one of the two members of a professional limited liability company known as Harold Hinton Physicians for Womens Health, PLLC. In December, 2010, that entity changed its name to Southfield OB/GYN Associates, PLLC ("Southfield OBGYN"). From then until sometime after the Debtor filed her Chapter 7 case, Southfield OBGYN received revenues both from the Debtor's medical practice at Harold PLC and from the medical practice of Dr. Michele Thomas ("Thomas"), whose own professional liability company is the other member of Southfield OBGYN. Throughout all this time, Southfield OBGYN paid the rent, payroll, and other common expenses both for Harold PLC and for Thomas's professional liability company.

Although Harold does not have a financial background, she had check signing authority for Harold PLC and for Southfield OBGYN throughout the years that are the subject of this adversary proceeding and wrote checks for both entities throughout that time. She also regularly reconciled the bank accounts for both entities. Harold is also identified as the "tax matters partner" on the federal income tax returns for Southfield OBGYN.

At all times during their marriage, Barrow has handled all the Debtor's tax matters. The Debtor and Barrow filed joint tax returns for the years 2004 through 2014, which Barrow prepared from information that Harold provided him and from QuickBooks reports for Harold PLC. After preparing each return, Barrow would discuss the return with Harold and give her the return to sign. Sometimes Harold reviewed the return before signing, other times not. Harold trusted Barrow to handle the tax returns because of his accounting and financial background.

During these years, it was not uncommon for Barrow to request an extension of time to file a return. For example, the 2004 return (ex. 14) was not received by the IRS until October 31, 2006, and the 2005 return (ex. 15) was not received by the IRS until December 11, 2006. During other years, returns were not filed timely. In granting a partial summary judgment for the IRS earlier in this adversary proceeding, the Court found that the returns that Barrow prepared for 2008 (ex. 18) and 2010 (ex. 20) were not filed until January, 2016.

The returns for the Debtor and Barrow for the years 2004 through 2012 and 2014 (exs. 14-23) show that the Debtor's medical practice was lucrative. Harold PLC's gross revenues during those years averaged over a half million dollars annually with a low of $423,829.00 in 2004 and a high of $613,125.00 in 2007. The returns for those years show an annual net profit for Harold PLC, ranging from a low of $174,971.00 in 2006 to a high of $364,946.00 in 2008. Even after reducing the net profit by Harold PLC's allocable share of Southfield OBGYN's flow through losses, the returns for those years show that the net income for Harold PLC averaged over $170,000.00 annually. With the exception of the 2004 return, which shows that the Debtor was entitled to a refund of $3,971.00, the returns show a tax liability owed by the Debtor and Barrow for each year in the following amounts: $42,696.00 for 2005; $23,829.00 for 2006; $28,298.00 for 2007; $28,768.00 for 2008; $22,187.00 for 2009; $15,704.00 for 2010; $25,759.00 for 2011; $4,604.00 for 2012; and $5,003.00 for 2014.

In March, 2009, knowing that they were behind in their taxes, the Debtor and Barrow engaged Lothamer Tax Resolution, Inc. ("Lothamer") to negotiate an installment agreement with the IRS for their tax debts for the years 2003 through 2007. Barrow and the Debtor each signed a power of attorney authorizing Lothamer to represent them with the IRS. Gross, a certified public accountant at Lothamer, was assigned to their file. Barrow handled all the communications with Gross. Gross did not meet or speak with the Debtor.

On July 6, 2009, Gross sent the IRS a proposed installment payment agreement (ex. 38). It covered tax years 2003 through 2008 and provided for payments of $1,000.00 per month that would increase to $5,000.00 per month beginning in July, 2010. On July 10, 2009, the IRS wrote a letter (ex. 39) to the Debtor and Barrow to inform them that the IRS approved the installment agreement, but the letter specified that it covered only tax years 2003 through 2007. The Debtor and Barrow did not realize at the time that the IRS approval did not include tax year 2008, as they had proposed. They later learned that the reason why 2008 was not included was...