Vaughn v. U.S.A. I.R.S. (In re Vaughn)

Summarized by David Little , Miller & Law, P.C
11 years 6 months ago

Citation:

No. 13-1189 (10th Cir. Aug. 26, 2014)

Tag(s):

Ruling:

AFFIRMING the district court, a three judge panel of the Tenth Circuit held that the bankruptcy court’s finding that the Debtor willfully evaded his tax obligations was not clearly erroneous. The bankruptcy court supported its finding with several facts, including that participation in a tax shelter was inconsistent with the Debtor’s business acumen and subsequently depleting his assets despite his apparent knowledge that the tax shelter was abusive for lack of any economic basis. Tenth Circuit precedent establishes that actions taken with knowledge of an anticipated tax obligation can be considered willful and thus render tax debts non-dischargeable in bankruptcy.

Procedural context:

In November 2006 the Debtor filed bankruptcy under chapter 11. The IRS filed a proof of claim for $14.3 million dollars in relation to a tax deficiency arising out of the Debtor’s participation in a tax shelter. The Debtor initiated an adversary proceeding to have the taxes declared dischargeable. The matter proceeded to trial and the bankruptcy court found that the Debtor had filed a fraudulent tax return and willfully evaded his taxes, thus the tax liability was non-dischargeable under 11 U.S.C. § 523(a)(1)(C). Vaughn v. IRS (In re Vaughn), 463 B.R. 531 (Bankr. D. Colo. 2011) (J., Romero). The district court affirmed the bankruptcy court on appeal.

Facts:

The Debtor was CEO of a company which was sold in 1999, resulting in the Debtor receiving $20 million in cash and $11 million in the purchasing company’s stock. Prior to the sale the Debtor invested in a tax shelter known as a Bond Linked Issue Premium Structure (“BLIPS”), which combined a relatively small cash contribution to an investment fund in foreign currencies with a nonrecourse loan and a loan premium to facilitate a high tax loss without a corresponding economic loss. After the sale, the Debtor claimed short-term capital loss and ordinary loss offsetting his capital gains in his 1999 tax return. The Debtor later admitted that when he signed his 1999 tax return he knew that he had not suffered an economic loss corresponding to his claimed tax loss. The Debtor explained that he chose between paying $9 million of taxes currently or claiming the benefit of the BLIPS losses and paying $3 million currently with some risk of paying more taxes later in the event of an audit. In September 2000, the IRS issued Internal Revenue Bulletin Notice 2000-44 stating that losses resulting from transactions such as BLIPS were not allowable as deductions. The Debtor first became aware of audits of BLIPS participants in 2001 and began depleting his assets until ultimately divorcing his wife in 2003, which resulted in the Debtor lacking sufficient assets to satisfy the prospective tax deficiency related to claiming the BLIPS losses. The IRS commenced a full investigation of the Debtor’s participation in BLIPS in 2002 and notified the Debtor of an $8.6 million tax deficiency in June 2004.

Judge(s):

Tymkovich, McKay, Matheson

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