Lacheen et al v. Internal Revenue Service

UNITED S TATES B ANKRUPTCY COURT
FOR T HE E ASTERN DISTRICT O F PENNSYLVANIA
In re 	: 	Chapter 7
:
JEROME H. LACHEEN and 	: 	Bankruptcy No. 04-12711DWS
ANN LACHEEN, 	:
:
Debtors. 	:
:
JEROME LACHEEN and 	: 	Adversary No. 04-0550
ANN LACHEEN, 	:
:
Plaintiffs, 	:
:
vs. 	:
:
INTERNAL REVENUE SERVICE, United 	:
States of America, Department of the Treasury, :
COMMONWEALTH OF PENNSYLVANIA 	:
DEPARTMENT OF REVENUE, 	:
CITY OF PHILADELPHIA - DEPT. OF 	:
REVENUE, 	:
:
Defendants. 	:
MEMORANDUM OPINION
BY: 	DIANE WEISS SIGMUND, Chief Bankruptcy Judge
Before the Court is the Motion of the Internal Revenue Service (the “IRS”) for
Summary Judgment (the “Motion”) and the Debtors’ response thereto, and the Cross-Motion
(the “Cross-Motion”) of Debtor Ann Lacheen (“Ann”). 	For the reasons that follow,
both motions shall be denied.
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1 As discussed more fully below, while Debtors’ Complaint also seeks a determination as to
the dischargeability of tax liabilities to the Commonwealth of Pennsylvania (the “Commonwealth”)
and the City of Philadelphia (the “City”), they have failed to prosecute these claims. 	Infra
Discussion § C.
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UNDISPUTED FACTUAL AND PROCEDURAL BACKGROUND
This is the second time the Court has addressed a summary judgment motion in this
adversary proceeding, and much of the undisputed facts can be found in the earlier
memorandum opinion. See Lacheen v. IRS (In re Lacheen), 2005 WL 1155257 (Bankr. E.D.
Pa. April 28, 2005) (Lacheen I). To briefly recap, Debtors brought the instant Complaint to
seek a determination as to the dischargeability of their federal tax liability.1 In Lacheen I,
the Court determined that the dischargeability of taxes for certain tax years was not being
challenged but the dischargeability of federal tax obligations for the years 1995 and 1996 was
in dispute. Debtors filed joint tax returns for those years indicating a tax liability of $82,279
and $36,608, respectively (the “1995-96 Taxes”), based on reported adjusted gross income
for these years of $274,694 and $152,697, respectively. Exhibits 100-101 to Motion.
Debtors 	concede 	that 	they 	were 	required 	but 	did 	not 	make 	estimated 	tax
payments during 1995 and 1996. Joint Pretrial Statement - Statement of Uncontested Facts
(“Uncontested Facts”) ¶¶ 5, 8, 9-10. Debtor Jerome Lacheen (“Jerome”), a self-employed
attorney, states that his modus operandi was not to pay estimated taxes, but rather to pay
what he could with his return. 	The IRS would subsequently bill him with penalties and
interest, and Jerome would again try to pay what he could. Deposition Transcript of Jerome
Lacheen (“Jerome Dep.”) at 15-19.
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2 The role that Ann played in handling Debtors’ finances is unclear on this record. While
Debtors’ memorandum characterizes Jerome as the person in charge of household finances, a brief
is not evidence. There are citations to Ann’s depositions, but unfortunately Debtors’ counsel failed
to place those pages into the record.
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Debtors also concede that in 1995 they spent improvidently: “95 was a good money
year so we spent it. It was stupid, but we did it.” Jerome Dep. at 65-66. Indeed, it appears
that they spent funds that could have satisfied a bulk of their 1995 tax liability on what most
would consider non-essentials: $50,000 for a swimming pool, $7,000 for window coverings,
a new patio/deck that may have cost more than $10,000 and unspecified amounts on
landscaping, a new fence, and a driveway. Uncontested Facts ¶ 4.2 Moreover, while Jerome
had no specific recollection of the 1995 expenditures, he testified that it was likely that they
took a vacation, most likely to Vienna, where Debtors had friends. Jerome Dep. at 65-66.
There is no evidence of similar excessive spending in the year 1996.
Upon this record, the IRS seeks a summary judgment determination that the 1995-96
Taxes are nondischargeable pursuant to 11 U.S.C. § 523(a)(1)(C), i.e., because Debtors
willfully attempted to evade payment of the 1995-96 Taxes.
DISCUSSION
A.
A motion for summary judgment is governed by Federal Rules of Civil Procedure
(“Fed.R.Civ.P.”) 56 applicable in this proceeding pursuant to Federal Rule of Bankruptcy
7056. 	Summary judgment, “shall be rendered forthwith if the pleadings, depositions,
answers to interrogatories and admissions on file, and affidavits, if any, show that there is no
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genuine issue of material fact and that the moving party is entitled to judgment as a matter
of law.” Fed.R.Civ.P. 56(c).
The party moving for summary judgment must overcome the initial burden of
demonstrating the absence of a material question of fact. Celotex v. Catrett, 477 U.S. 317,
325 (1986). 	The substantive law will determine which facts are material. 	Anderson v.
Liberty Lobby, 477 U.S. 242, 248 (1986). A court’s function is not to weigh the evidence
and determine the truth of the matter, but to determine whether there is a genuine issue for
trial. Id. at 255. A court must find that the motion alleges facts which, if proven at trial,
would require a directed verdict. 	6 J. Moore, Moore's Federal Practice, ¶ 56.26 (2d ed.
1988). If so, the respondent “must set forth specific facts showing there is a genuine issue for
trial,” and may not “rest upon the mere allegations or denials of the pleading.” Fed.R.Civ.P.
56(e). If the non-movant’s evidence “is merely colorable, or is not significantly probative,
summary judgment may be granted. 	Anderson, 477 U.S. at 250. 	However, as it is the
moving party’s burden to demonstrate the absence of genuine issues of material fact, even if
the opposing party fails to file contravening affidavits or other evidence that establishes
a genuine issue of material fact, summary judgment must still be warranted and will be
denied where the movant’s own papers demonstrate the existence of material factual issues.
Drexel 	v. 	Union 	Prescription 	Centers, 	Inc., 	582 	F.2d 	781, 	790 	(3d 	Cir. 	1978)
(citing Adickes v. S.H.Kress & Co., 398 U.S. 144, 159-61 (1990) (citations omitted).
See Maldonado v. Ramirez, 757 F.2d 48, 51 (3d Cir. 1985). The absence of a genuine issue
for trial is evident where the record, taken as a whole, could not lead a rational trier of fact
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to find for the non-moving party. Mashusita Electrical Industrial Co. v. Zenith Radio Corp.,
475 U.S. 574, 586 (1986).
B.
As has been often stated, exceptions to discharge are to be strictly construed in
favor of the debtor. United States v. Fegley (In re Fegley), 118 F.3d 979, 983 (3d Cir. 1997).
The burden of proof in a non-dischargeability action is borne by the creditor seeking to have
its debt excepted from discharge, notwithstanding that it is Debtors who have brought this
dischargeability proceeding. The IRS relies upon § 523(a)(1)(C), which provides that:
(a) A discharge under section 727... of this title does not discharge an
individual debtor from any debt–
(1) for a tax or a 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;
The IRS does not contend that Debtors engaged in any fraud with respect to the 1995-1996
Taxes, but rather that the record facts taken as a whole evidence Debtors’ willful attempt to
evade their payment. The IRS must prove its assertion by a preponderance of the evidence.
118 F.3d at 983.
The Third Circuit Court of Appeals in Fegley takes a plain language approach to
§ 523(a)(1)(C), concluding that the provision includes both a conduct requirement (i.e., that
the debtor sought in any manner to evade or defeat his tax liability) and a mental state
requirement (i.e., that the debtor did so willfully). In Fegley, the evidence showed that the
debtor had a duty to file income tax returns, knew he had that duty and voluntarily and
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intentionally violated it. He also had the financial ability to pay the taxes. The foregoing
was a sufficient basis to conclude that Fegley willfully attempted to evade or defeat his taxes.
Unlike the debtor in Fegley, Debtors did in fact file returns for 1995 and 1996.
Mere nonpayment of the 1995-96 Taxes, without more, is insufficient under § 523(a)(1)(C).
Id. 	The IRS thus points out the following facts to argue that the Fegley standard is met
in this case: 	(1) Debtors’ income for the years at issue was over $300,000; (2) Debtors’
concede that they were aware of their duty to pay the 1995-96 Taxes; (3) Debtors made
significant expenditures on non-essentials in 1995, such as the pool and house expenses and
vacations. The IRS correctly notes that there is case law holding that a failure to pay taxes
combined with a demonstrated preference for 	nonessential spending over satisfying tax
obligations will meet both the conduct and mental state requirements of § 523(a)(1)(C).
Simone v. United States (In re Simone), 2001 Bankr. LEXIS 1091, *14-15 (Bankr. E.D. Pa.
Aug. 14, 2001); United States v. Angel (In re Angel), 1994 WL 69516, (Bankr. W.D. Okl.
1994).
On the record on summary judgment, I cannot conclude that the pattern of exorbitant
spending apparent in Simone and Angel occurred during the entire tax period at issue in this
case. While there is evidence of significant nonessential purchases, they appear limited to
1995. The IRS does not address why this conduct should justify holding the 1996 taxes to
be nondischargeable.
Moreover, unlike the above-cited authority, which involved a single debtor/tax payer,
the case before me involves two debtors who filed joint tax returns. 	The IRS seeks a
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3 The deadline for such complaints expired June 1, 2004. Nor was there a request that the
court order the trustee to investigate this lack of disclosure. See 11 U.S.C. § 727(c).
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determination of nondischargeability as to the tax liability of both debtors/taxpayers.
While both Debtors concede knowledge of their duty to pay the 1995-96 Taxes and
awareness that they were not paying them, Uncontested Facts ¶¶ 5, 8, 9-10, I cannot find on
this record that either or both Debtors were responsible for the nonessential purchases in
1995. The Cross-Motion argues that Jerome made all financial decisions and seeks summary
judgment in Ann’s favor, but neither the deposition testimony of Jerome nor Ann supports
this assertion. 	Contrary to Debtors’ memorandum, the fact upon which Ann relies for
absolution is anything but established on this record. Moreover, since the IRS relies on the
taxpayer’s choice to make nonessential purchases to tip the scales in its favor, the identity
of the decision maker(s) is a material unproven question of fact. For the foregoing reasons,
the granting of summary judgment on the Motion and the Cross-Motion is unwarranted.
C.
Finally, the IRS has pointed to evidence indicating that Debtors possess stamps,
antiques, and artwork, none of which was disclosed in their Schedule B. Motion ¶¶ 22-27.
Notably there has been no complaint filed under § 727(a). 3 The IRS fails to identify
how these nondisclosures are relevant to the instant complaint under § 523(a)(1)(c), and
accordingly I find them to have no bearing upon the matters presently before me. I am not
aware of whether the IRS brought this information to the Chapter 7 trustee for investigation
which would be the appropriate step to take upon a discovery of this nature. Since I do not
in any way make light of such charges, I suggest that the IRS do so forthwith.
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I also raise the following case management issue sua sponte. Notwithstanding that
the Complaint also seeks a determination as to the dischargeability of Debtors’ tax liabilities
to the Commonwealth and the City, Debtors have failed to prosecute these claims. Summons
were issued directing that any answer or responsive pleading be filed on or before
September 30, 2004. The Commonwealth filed an Answer to the Complaint. The City has
not. While Debtors have filed dispositive motions and a joint pretrial statement addressing
the IRS claims, they have completely ignored the Commonwealth and the City in the course
of this litigation. Debtors will take appropriate action vis a vis the non-responsive City and
file an amended Joint Pretrial Statement which includes the Commonwealth or the Complaint
will be dismissed as to the Commonwealth and the City (as the case may be) for lack of
prosecution.
An Order consistent with the foregoing Memorandum Opinion shall be entered.
DIANE WEISS SIGMUND
Chief U.S. Bankruptcy Judge
Dated: 	December 7, 2005
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UNITED S TATES B ANKRUPTCY COURT
FOR T HE E ASTERN DISTRICT O F PENNSYLVANIA
In re 	: 	Chapter 7
:
JEROME H. LACHEEN and 	: 	Bankruptcy No. 04-12711DWS
ANN LACHEEN, 	:
:
Debtors. 	:
:
JEROME LACHEEN and 	: 	Adversary No. 04-0550
ANN LACHEEN, 	:
:
Plaintiffs, 	:
:
vs. 	:
:
INTERNAL REVENUE SERVICE, United 	:
States of America, Department of the Treasury, :
COMMONWEALTH OF PENNSYLVANIA 	:
DEPARTMENT OF REVENUE, 	:
CITY OF PHILADELPHIA - DEPT. OF 	:
REVENUE, 	:
:
Defendants. 	:
ORDER
AND NOW, this 7th day of December 2005, upon consideration of the Motion of
Defendant the Internal Revenue Service (the “IRS”) for Summary Judgment (the “Motion”)
and the response thereto of the Debtors and Cross-Motion of Debtor Ann Lacheen
(the 	“Cross-Motion”), 	after 	notice 	and 	hearing, 	and 	for 	the 	reasons 	stated 	in 	the
accompanying Memorandum Opinion;
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Adversary No. 04-0550
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It is hereby ORDERED that:
1. The Motion and the Cross-Motion are DENIED.
2. On or before December 29, 2005, Plaintiffs shall file (1) the appropriate
motion under Bankr.R. 7055 as to Defendant City of Philadelphia, Dept. of Revenue and
(2) an amended joint pretrial statement including Defendant Commonwealth of Pennsylvania,
Dept. of Revenue. Upon the failure to file such motion and amended pretrial statement, this
adversary proceeding will be dismissed as to the Commonwealth and the City, as the case
may be, for lack of prosecution without further notice or opportunity for a hearing.
3. 	Trial 	of 	the 	above-captioned 	adversary 	proceeding 	shall 	be 	held 	on
FEBRUARY 17, 2006 at 9:30 A.M. in Courtroom #3, Robert N.C. Nix, Sr. Courthouse,
second floor, 900 Market Street, Philadelphia, PA 19107.
DIANE WEISS SIGMUND
Chief U.S. Bankruptcy Judge
Copies to:
Joseph A. Diorio, Esquire
808 Bethlehem Pike - Rear
Erdenheim, PA 19038
Jerome H. & Ann Lacheen
8460 Limekiln Pike, Apt. 213-1
Wyncote, PA 19095
Russell K. Stewart, Esquire
701 Market Street, Suite 2200
Philadelphia, PA 19106
Nicholas J. Lamberti, Esquire
PA Department of Revenue
Dept. 281061
Harrisburg, PA 17128-1061
Dave P. Adams, Esquire
Office of the U.S. Trustee
833 Chestnut Street, Suite 500
Philadelphia, PA 19107
City of Philadelphia - Dept. of Revenue
P.O. Box 1630
Philadelphia, PA 19105-1630
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