Prioritizing Travel and a New Business Over Paying Tax Debt Dooms Tax Discharge

(Parker Tax Publishing June 2024)

A bankruptcy court granted a government motion for summary judgment in a case where a debtor filed for bankruptcy in an attempt to get her tax debt discharged. The court held that because the debtor had the funds to pay the back taxes but instead spent her money on a bracelet business and travel expenses, she was guilty of willfully attempted to evade taxes and thus was not eligible for a discharge of her tax liability in bankruptcy. In re Narine, 2024 PTC 208 (Bankr. E.D. N.Y. 2024).

Background

Anjanie Narine was born in 1976 and has one daughter who was born in 2006. Narine, who suffered childhood trauma and was diagnosed with dissociative identity disorder, went to college at night and received a Bachelor of Business Administration in Economics from Pace University in January 2000. In 1994, while at Pace University, Narine worked part time at the accounting firm of Levine & Seltzer. While there, Narine formed a friendship with one of the firm's partners, Philip Seltzer, CPA. Seltzer prepared Narine's tax returns through 2016 (i.e., the 2015 tax year). In 2016, Narine and Seltzer had a falling out and did not speak again until 2020.

After working for Levine & Seltzer, Narine worked as an executive assistant at different financial firms where she learned how to trade securities. She started trading securities around 2013 and after losing her job, she started day trading securities using her own cash and retirement funds. From at least 2016 through January 31, 2019, Narine held accounts with Vanguard Brokerage Services including an individual brokerage account and a traditional IRA brokerage account. In the early months of 2017, she sold Tesla, Inc. and Apple, Inc. stock for a net gain of over $92,000. Before preparing her 2017 tax return, Narine received Forms 1099 reporting the capital gains as well as over $2,000 of dividends from her Vanguard account. Narine used an online tax program called E-file.com to file her 2017 return on which she reported her dividend income but not her capital gains. She subsequently testified that she did not recall seeing a prompt for capital gains and losses and that her failure to report them was a mistake.

In July of 2019, the IRS sent Narine a notice of deficiency and she subsequently consented to the assessment and collection of the deficiency. The IRS also sent her two delinquency notices because she had not filed her 2018 tax return. Narine subsequently filed her 2018 tax return in March of 2020. Also during 2019, Narine received loan proceeds of $31,500 which she did not use for paying her back taxes but instead used for day trading.

In 2020, Narine contacted Seltzer about her tax issues and asked whether she could carry back stock trading losses incurred after 2017 to offset the gains that had generated her 2017 tax debt. According to Narine, Seltzer indicated that she could file amended tax returns and, she said, he advised her over the phone on how to amend her 2017 tax return. He then, according to Narine, created amended returns for several years, including 2017, and sent her signature pages which she signed and dropped off at his apartment building. However, he also indicated that the IRS could disallow the loss carrybacks and that she would still be liable for the 2017 taxes. According to Narine, Seltzer stopped communicating with her around the same time she learned that he had not filed her amended returns and she has not heard from him since. She expressed concerns about Seltzer's well-being because, when she visited him, he had "mountains of mail, maybe many years' worth," that he did not open and because she was aware that he suffered from severe depression.

At December 31, 2019, 2020, and 2021, the fair market value of Narine's IRA portfolio was approximately $344,000, $306,000, $1,087,000, respectively. In or around 2019, Narine's teen-aged daughter's interest in climate change prompted Narine to go into business selling bracelets to raise awareness. This involved travel to Hawaii, Spain, the Dominican Republic, and the Bahamas to buy goods and jewelry for the business. Narine testified that the 13 trips she took within an 18-month period were meant to meet her daughter's emotional needs and, in come cases, to allow her to visit her sick grandfather in Florida.

As of February 2022, Narine owed the IRS over $40,000 in taxes and related interest and penalties for failing to report more than $90,000 of capital gains on her 2017 tax return. In February of 2022, she filed a chapter 7 bankruptcy petition and two months later began an adversary proceeding to obtain a judgment that her tax debt was dischargeable. The IRS and New York moved for summary judgment, arguing that Narine's tax debt is nondischargeable under 11 U.S.C. Sec. 523(a)(1)(C) because she willfully attempted to evade or defeat the taxes owed.

Under Bankruptcy Code Section 523(a)(1)(C), a chapter 7 discharge does not discharge an individual debtor from any debt with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax. The creditor to whom the tax is owed bears the burden of proof on the issue of dischargeability. Section 523(a)(1)(C) is written in the disjunctive and the creditor to whom the tax is owed need only prove either a "fraudulent return" or "willful evasion." The "willful evasion" prong consists of a conduct element (i.e., an attempt to evade or defeat taxes) and a willfulness requirement.

Analysis

The bankruptcy court held that Narine willfully evaded her 2017 tax obligations and thus her tax debt for 2017 is nondischargeable. With respect to the conduct element in Bankruptcy Code Section 523(a)(1)(C), the court cited In re Tudisco, 1999 PTC 315 (2d Cir. 1999) for the premise that the nonpayment of taxes itself does not satisfy the conduct element. Rather, the court said, other circumstances, such as paying creditors or paying a child's private school tuition, together with the nonpayment of taxes is required to prove evasion.

The court found Narine's explanation that her failure to disclose $93,000 of capital gains on her 2017 tax return was just a mistake was undermined by her inability to explain how she missed reporting a relatively large portion of her 2017 income. Further, her failure to pay any portion of the liability even though she had the money to do so established to the court an attempt to evade or defeat the payment of taxes. Her discretionary spending from 2019 to 2021, the court observed, was significant relative to the debt she owed to the IRS, not to mention the fact that she borrowed over $30,000 but used none of that to pay her tax debts.

With respect to Narine's claims that she relied on Seltzer to file her tax returns, the court noted that she knew Seltzer did not open his mail and suffered from debilitating depression and yet she failed to verify that her tax returns had been filed. Further, the court said, Narine also disregarded Seltzer's warning that the IRS might not accept the 2017 loss carryback.

Finally, while the court believed Narine's explanation that the bracelet business and travel expenses were motivated by her love and concern for her daughter, it emphasized that the test for whether a taxpayer willfully evaded taxes is not whether the taxpayer believed she used disposable income for a purpose more righteous or rational than paying taxes. Rather, at its core, the test is whether the taxpayer knew of the duty to pay taxes, had the ability to pay, and chose not to. The court observed that if it and other courts were to permit every debtor to receive a discharge of his or her tax liabilities every time a debtor decided to spend income on discretionary personal expenses at the expense of tax obligations, then Section 523(a)(1)(C) would be meaningless.

For a discussion of the discharge of taxes in bankruptcy, see Parker Tax ¶16,160.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com

We hope you find our professional tax research articles comprehensive and informative. Parker Tax Pro Library gives you unlimited online access all of our past Biweekly Tax Bulletins, 22 volumes of expert analysis, 250 Client Letters, Bob Jennings Practice Aids, time saving election statements and our comprehensive, fully updated primary source library.

Try Our Easy, Powerful Search Engine

A Professional Tax Research Solution that gives you instant access to 22 volumes of expert analysis and 185,000 authoritative source documents. But having access won’t help if you can’t quickly and easily find the materials that answer your questions. That’s where Parker’s search engine – and it’s uncanny knack for finding the right documents – comes into play

Things that take half a dozen steps in other products take two steps in ours. Search results come up instantly and browsing them is a cinch. So is linking from Parker’s analysis to practice aids and cited primary source documents. Parker’s powerful, user-friendly search engine ensures that you quickly find what you need every time you visit Our Tax Research Library.

Dear Tax Professional,

My name is James Levey, and a few years back I founded a company named Kleinrock Publishing. I started Kleinrock out of frustration with the prohibitively high prices and difficult search engines of BNA, CCH, and RIA tax research products ... kind of reminiscent of the situation practitioners face today.

Now that Kleinrock has disappeared into CCH, prices are soaring again and ease-of-use has fallen by the wayside. The needs of smaller firms and sole practitioners are simply not being met.

To address the problem, I’ve partnered with a group of highly talented tax writers to create Parker Tax Publishing ... a company dedicated to the idea that comprehensive, authoritative tax information service can be both easy-to-use and highly affordable.

Our product, the Parker Tax Pro Library, is breathtaking in its scope. Check out the contents listing to the left to get a sense of all the valuable material you'll have access to when you subscribe.

Or better yet, take a minute to sign yourself up for a free trial, so you can experience first-hand just how easy it is to get results with the Pro Library!

Sincerely,

James Levey

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com