Guben v. UNITED STATES OF AMERICA

IN THE U NITED S TATES B ANKRUPTCY C OURT
F OR THE E ASTERN D ISTRICT OF P ENNSYLVANIA
I N RE : 	: CHAPTER 7
:
M ERRY B. GUBEN 	:
:
DEBTOR ( S ) 	: BANKRUPTCY NO . 07-14703 SR
M ERRY B. GUBEN 	:
PLAINTIFF 	:
VS . 	:
UNITED STATES OF AMERICA 	:
DEFENDANT 	: ADVS . NO . 07-407
OPINION
BY : STEPHEN RASLAVICH , CHIEF UNITED STATES BANKRUPTCY J UDGE .
Introduction.
The Debtor, Merry B. Guben, has filed suit against the United States seeking a
determination that certain of her tax liabilities are dischargeable. The Government opposes
discharge. A trial was held June 24, 2008. Following it the Court took the matter under
advisement. For the reasons set forth herein, judgment will be entered in favor of the
Government and against the Debtor.
The Tax Liability and
the Government’s Position
The Debtor’s Schedules estimated her federal tax liability to be $300,000. See Schedule
F. In her Complaint that figure was refined to $319,271. See Complaint, ¶ 4. It is said to
represent unpaid income taxes for 1983, 1986, and 1988 through 1995. Id. The Government, for
its part, agrees the number is correct, however it does not contend that any tax is due for 1986.
The parties’ disagreement is over whether the Debtor has attempted to evade payment of these
Case 07-00407-sr Doc 23 Filed 08/14/08 Entered 08/15/08 15:47:18 Desc Main
Document Page 1 of 14

2
taxes. The IRS contends that the Debtor has done so and, as a result, her tax debt should not be
discharged.
Applicable Law
As a general principle, tax obligations incurred more than three years before the date of a
bankruptcy filing are dischargeable under § 523. In re Schlesinger, 290 B.R. 529, 535 (Bankr.
E.D. Pa. 2002) citing In re McKay, 957 F.2d 689, 691 (9th Cir. 1992). Among the exceptions to
this general principle are provisions found in § 523(a)(1)(C):
(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.
11 U.S.C. § 523(a)(1)(C) (1994) (emphasis added). The Third Circuit has explained that willful
tax evasion under § 523 is comprised of two elements: first, conduct (that the debtor sought “in
any manner to evade or defeat” tax liability); and second, knowledge (that the attempted evasion
of payment was done “willfully") In re Fegeley, 118 F.3d 979, 983 (3d Cir.2000). Exceptions to
discharge are to be strictly construed in favor of the debtor. Id. The burden of proving that a
debtor's tax liabilities are nondischargeable under § 523(a)(1)(C) is on the United States. See
Berkery v. Commissioner, 192 B.R. 835, 840 (E.D.Pa.1996), aff'd, 111 F.3d 125 (3d Cir.1997).
This is so even where the action has been commenced by the Debtor. In re Scarpiello, 240 B.R.
203, 208 (Bankr.E.D.Pa.) It is the Government’s burden to prove its case by a preponderance of
the evidence. Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 661 (1991). The Court will
assess the conduct and knowledge elements in turn.
The Debtor’s Conduct
Case 07-00407-sr Doc 23 Filed 08/14/08 Entered 08/15/08 15:47:18 Desc Main
Document Page 2 of 14

1See 26 U.S.C. §§ 6601 (providing for assessment of interest on underpaid, non-paid, or taxes
paid by extension, 6621 (setting forth applicable rate of interest), 6622 (providing that interest compounds
daily), 6672 (providing for assessment of penalties)
2To the extent any tax was paid, it was de minimis and done via withholding. See IRS Transcripts
3
The conduct of which the Government complains is threefold. It consists of 1) failure to
remit tax payments on a current basis, 2) the discretionary expenditure of monies that should
have been remitted as tax payments, and 3) the concealment of assets.
The Debtor (and her husband) first encountered tax problems beginning in 1983. The
problems related to Mr. Guben’s 1981 sale of his business. Acting on the advice of their
accountant, the Guben’s apparently reported income from the transaction as an installment sale
on their jointly filed tax return. Their position was challenged by the IRS in subsequent audits.
Their returns for 1982 and 1983 return were “examined” (i.e., audited) and additional taxes were
assessed. See P-2, IRS Account Transcript for 1983. Assessments for the year 1983 remain
unpaid and have accrued substantial interest and penalties. 1 Id.
Beginning in calendar year 1988, and for seven years thereafter, the Debtor and her
husband filed tax returns without remitting any tax due. 2 Taxes for those years have gone unpaid
and have likewise accrued interest and penalties. See P-3 through P-10, IRS Account Transcripts
for 1988 - 1995.
As a result of the foregoing, a principal tax debt of roughly $60,000 has grown to
upwards of $320,000. The Government argues that the Debtor’s failure to remit tax payments,
contrasted against her ability to pay something during the relevant time frame and her
concealment of assets, are probative of evasion. The Court agrees.
“[A] debtor's failure to pay his taxes, alone, does not fall within the scope of § 523.
Case 07-00407-sr Doc 23 Filed 08/14/08 Entered 08/15/08 15:47:18 Desc Main
Document Page 3 of 14

4
Fegeley, 118 F.3d at 983 quoting In re Haas, 48 F.3d 1153, 1158 (11th Cir.1995) Thus, proof of
non-payment does not equate to proof of evading payment. Instead, nonpayment is but a part of
the totality of conduct relevant to a determination of whether or not the debtor willfully
attempted to evade or defeat taxes.” Id. citing Dalton v. IRS, 77 F.3d 1297, 1301 (10 th Cir.
1996). As noted, the Government argues that the Debtor’s use of her discretionary income,
coupled with her failure to disclose certain assets prepetition to the IRS and postpetition to the
Bankruptcy Court, constitutes proof of evasive conduct. Again, the Court agrees.
Spending Habits
The IRS contends that instead of paying taxes “the Debtor chose to spend her money on
education, charity, vacations and art.” Trial Brief, ¶ 8. Mrs. Guben’s testimony confirms this.
She admits to spending about $5,000 yearly on travel. T,61. She further admits to spending
approximately $6,500 on artwork. T,67. Another $6,367 in charitable donations was made for
1994. T-58; see also D-10, 1994 Tax Return with attached Form 8283. 	Finally, the Debtor paid
toward the education of her husband and herself. Specifically, during the relevant time period,
Mr. Guben obtained a doctorate degree toward which Mr. and Mrs. Guben paid four to five
thousand dollars per year over four years. Mrs. Guben, meanwhile, obtained a law degree and
paid the first year’s tuition herself. T-83, 121.
Concealment of Assets
Besides spending money on non-essentials, it is the Government’s contention that Mrs.
Guben failed to disclose an extensive art collection when trying to settle the government tax
claim eight years ago, and again in trying to discharge that claim in this bankruptcy case. The
evidence supports this contention.
Case 07-00407-sr Doc 23 Filed 08/14/08 Entered 08/15/08 15:47:18 Desc Main
Document Page 4 of 14

5
The Third Circuit has observed that “Congress did not define or limit the methods by
which a willful attempt to defeat and evade might be accomplished and perhaps did not define
lest its effort to do so result in some unexpected limitation.” 118 F.3d at 983 citing Dalton, 77
F.3d at 1301(quoting Spies v. United States, 317 U.S. 492, 499, 63 S.Ct. 364, 368, 87 L.Ed. 418,
(1943)). Indeed, this is explained by the statute’s use of the prepositional phrase “in any
manner” to describe the myriad methods of potential tax evasion. Affirmative conduct is not
required; rather, § 523(a)(1)(C) encompasses acts of culpable omission as well as acts of
commission. Fegeley, 118 F.3d at 984.
On Schedule B, a Debtor is required to list personal property as of the date of the filing of
this bankruptcy. Item #5 on that list asks the Debtor to state whether she owns any “books,
pictures and other art objects …” Mrs. Guben indicated none. See Ex. D-12A (emphasis added).
At a hearing on a Motion for Summary Judgment in this case, the Government offered evidence
that the Gubens owned an extensive art collection. While the Court denied summary judgment,
it did order the Debtor to amend her schedules to reflect the art assets. Mrs. Guben did so,
itemizing 34 separate pieces of artwork having an estimated cost value of aproximately $6,500.
See Ex. 12B.
It appears, moreover, that this was not the first time that the Debtor failed to disclose her
art assets. At trial, the Government offered into evidence a copy of the Gubens’ Offer in
Compromise (OIC) of November 2000. Ex. D-11. An OIC is an offer to settle a federal tax
liability and may be premised on an inability to pay. See 26 C.F.R. § 301.7122-1(b)(2). It must,
therefore, be supported by a financial statement. IRS Form 433-A serves that purpose. On it the
taxpayer must list, among other things, all assets and liabilities. Nowhere on the form which the
Case 07-00407-sr Doc 23 Filed 08/14/08 Entered 08/15/08 15:47:18 Desc Main
Document Page 5 of 14

6
Gubens submitted is artwork listed among their assets.
All of the above conduct raises serious questions as to the Debtor’s motivations.
The Debtor’s State of Mind
The Third Circuit “ha[s] interpreted ‘willfulness’, for purposes of § 523 (a)(1)(C), to
require that a debtor’s attempts to avoid tax liability were ‘voluntary, conscious, and
intentional.’” Fegeley, 118 F.3d at 984 citing In re Birkenstock, 87 F.3d 947, 952 (7th Cir.1996).
In order to prevail the Government need establish only that the Debtor: (1) had a duty to pay the
assessed tax liability; (2) knew of the duty; and (3) voluntarily and intentionally violated that
duty. Id.
The testimony of Mary Biddle, bankruptcy specialist for the IRS, established that the
Government assessed a tax liability against the Debtor for 1983 and 1988 through 1995. See
T,11 - 23; Ex. D-1 through D-9. On cross-examination, the Debtor admitted that she knew she
had a duty to pay taxes. T,52-53. This leaves for the Court the question of whether the Debtor
voluntarily and intentionally violated that duty.
A taxpayer's state of mind may be inferred from his or her conduct. See U.S. v. Weiss,
2000 WL 1708802 *3 (E.D.Pa.) (“A court may properly consider a debtor's conduct after the
return and payment were due to determine whether the evasion of payment was willful.”); see
also U.S. v. Voigt, 89 F.3d 1050, 1090 (3d Cir.1996) (explaining that intent to evade payment of
tax may be inferred from circumstances).
The Government argues, correctly, that Mrs. Guben’s intent to evade may be inferred
from both her spending on non-essentials and concealing assets. The Debtor’s attempt to refute
the Governments’s proof consisted, essentially, of attempts to focus the Court’s attention
Case 07-00407-sr Doc 23 Filed 08/14/08 Entered 08/15/08 15:47:18 Desc Main
Document Page 6 of 14

7
elsewhere. Cross-examination of Ms. Biddle was aimed at showing that taxes due for the years
prior to 1988 were ultimately paid (except, that is, for 1983) and that since 1995 all taxes have
been paid in full and on time. T,37-46. As to the unpaid taxes, Mrs. Guben emphasizes that she
and her husband made two offers to settle and that they twice agreed to extend the statute of
limitations to accommodate the Government. T,85, 39,40 The Debtor also stresses that after she
and her husband were audited by the IRS they borrowed money and liquidated real estate and
investments to pay down their taxes. T,74-75.
The transcripts reveal that of the nine years for which they still owe taxes, the Debtor and
husband filed timely returns on but three occasions. When pressed for an explanation as to why
she and her husband filed their many extension requests over they years, Mrs. Guben testified
that this was done in order to accommodate their accountant. T,79. After the IRS rejected the
couple’s last offer to settle—an offer which the IRS kept under consideration for six years—the
Debtor testified that she felt that there was no point in further trying to settle with the
Government. T,89. She believed that this bankruptcy case and the related dischargeability
action were her last hope. T,90.
The Court finds the Debtor’s arguments to be, for the most part, unpersuasive. What
matters here are the years 1988 through 1995 (T, 149): an eight year period during which the
Debtor enclosed no payment whatever with her tax returns. It is clear that she had the means to
and simply chose not to. It is reasonable to infer from that conduct that Mrs. Guben was trying
to avoid paying taxes. Indeed, at trial the Government pressed this point with Mrs. Guben,
seeking her admission that she knew that she could have been paying down her tax debts when
she decided, instead, to buy works of art:
Case 07-00407-sr Doc 23 Filed 08/14/08 Entered 08/15/08 15:47:18 Desc Main
Document Page 7 of 14

8
Q. 	You could have decided not to buy art and instead pay
down your taxes?
A. 	I suppose I could have paid taxes.
Q. 	So you chose to buy the art rather than pay your taxes?
A. 	No, I wouldn’t characterize it that way at all. The way I
viewed that period of time was that the point of the things
was to come to a resolution because without a resolution it
didn’t really matter. I mean it’s not that it didn’t matter
whether or not I pay taxes, I was paying current taxes at
that point. But I think to the extent that any payments
really would have little or no effect on the overall question
of whether or not we could come to a reasonable number.
I mean it would be - - I didn’t say all of them go out and
buy this thing because I’d [sic] don’t want to pay my taxes.
It was never like that. I never did that. I never said oh I’m
going to go to my nieces graduation in Kansas City so I
don’t have to pay money on my taxes I can use that as an
excuse, it wasn’t like that. It was never like that.
…
Q. 	You owed your taxes for 1983 and 1988 to 1995?
A. 	Those are the taxes that the IRS says are still outstanding, yes.
Q. 	And those taxes are based on how much money you and your
husband made?
A. 	Well I’d [sic] know that they started out with tax returns that we
filed and we showed a certain amount of money, or the account
[sic] determined a certain amount of money that we owed and then
some times I guess for whatever reason there was another
assessment after that because maybe the IRS had a different idea of
what, how something was calculated I don’t know. I don’t know
what the IRS based their numbers on exactly.
Q. 	For 1988 to 1995 there was no audit, correct?
A. 	No that I recall, no. I don’t remember anybody not like it was in
‘83, ‘84 or whenever it was in the early ‘80s.
T, 94-96 (emphasis added).
Case 07-00407-sr Doc 23 Filed 08/14/08 Entered 08/15/08 15:47:18 Desc Main
Document Page 8 of 14

9
The “resolution” of which the Debtor speaks in the above exchange alludes to the still
unpaid tax liability resulting from the sale of her husband’s business. The IRS had assessed
liability in amounts different than determined by the Gubens’ accountant and they did not know
how the IRS had arrived at its figures. Instead of bringing closure to the issue through
administrative procedures, or even an appeal of the Service’s decision, the Debtor and her
husband simply stopped paying taxes altogether. Their thinking apparently was that the original
amount due had compounded to such a substantial number that any tax payments would not
materially amortize the amount due. They apparently decided that the Government would have
to “come to a reasonable number” before they would start paying their taxes again. That seems
to have been a counterproductive strategy then, and it is a very unpersuasive argument for
present purposes.
The Debtor operates under the mistaken notion that she could offset her unpaid taxes for
1988 through 1995 against any unresolved debt dating back to the early 1980's. There is no legal
basis for this; the duty to pay ongoing income taxes is unconditional. See 26 U.S.C. § 1. That is
not to say, however, that the IRS is always right: there are procedures—both administrative and
judicial—for review of tax assessments. See www.irs.gov (explaining internal hearing
procedures); see also 26 U.S.C. § 6214(a) (providing tax court jurisdiction over appeals of
assessments). The record does not demonstrate that either the Debtor or her husband fully
availed themselves of these processes. Notwithstanding, the Court might nevertheless ascribe
some good faith to the Debtor had she escrowed an amount of her income equal to her tax
liability while battling on with the government. However, Mrs. Guben did not do so. 	She spent
that income on other priorities. Contrary to what she may insist, the Debtor rather clearly
Case 07-00407-sr Doc 23 Filed 08/14/08 Entered 08/15/08 15:47:18 Desc Main
Document Page 9 of 14

3 The Court does not give Mrs. Guben credit it might otherwise have for having to wait six years
for a response to her OIC, because the OIC misrepresented her financial condition. See 26 C.F.R. §
301.7122-1(b)(3)(iii),(c) (explaining that IRS has discretion to reject offer if acceptance would
“undermine compliance by taxpayers with the tax laws.”)
10
appears to have been consciously avoiding her tax payments.
Equally if not more illuminating as to Mrs. Guben’s state of mind is her conduct relative
to the couple’s art collection. 	When Mrs. Guben tried to settle with the IRS, she failed to
disclose this asset. 3 She did this a second time when she filed this bankruptcy. The Government
contends that this was no oversight; rather, it was intended to conceal an extensive collection
from the Service. The evidence supports this contention. To demonstrate that the Debtor and
her husband were art collectors, the IRS introduced two magazine articles. The first is entitled
“Home is Where the Art Is” (emphasis in original) and is undated. Ex. D-18. The article’s
subject is Mark Sherman, a Philadelphia real estate developer. The article describes his plans to
develop certain former industrial sites in the East Falls section of the city. The development was
to be known as the Mills at East Falls and was to contain 26 loft apartments situated within an
artistic community. While the article does not mention the Gubens, it contains a photograph of
their loft apartment in Mr. Sherman’s development. T,110-111. The Debtor identified the
furniture and artwork appearing in the photograph as hers. T, 98-102.
A second article about the Mills at East Falls does reference the Gubens. It discusses
the collaboration of Mr. Guben with Mr. Sherman to develop the project along the lines
explained in the first article. The apartments would be set inside a crafts village with galleries,
studios, and restaurants. Ex. D-19. Entitled “Lofty Dreams,” the article features the loft
apartment in which the Gubens lived. According to the article, the Debtor and her husband set
about decorating it with “a sizeable collection of art furniture, paintings and crafts” albeit within
Case 07-00407-sr Doc 23 Filed 08/14/08 Entered 08/15/08 15:47:18 Desc Main
Document Page 10 of 14

4 The photograph from the second article is of the same loft apartment featured in the first. The
shot is taken from a different angle and the Debtor noted that some of the furniture has been rearranged.
T,98.
11
their budget. Id. Some pieces they paid for over time and others they obtained by barter. The
Debtor confirmed that the pieces of art and furniture featured in the article belonged to her and
her husband. 4 T, 98-102.
These articles demonstrate that artwork is central to the lives of the Debtor and her
husband. Indeed, it is clear that the Gubens are serious art collectors. For this reason, the Court
squarely addressed to the Debtor the question of how it was that she would neglect to list
artwork on her offer in compromise and on her bankruptcy schedules:
Q. 	You prepared the offer and [sic] compromise, isn’t that what you
said?
A. 	Yes, I did.
Q. 	What explanation do you have for the fact that there’s no artwork
listed on either the offering [sic] compromise or on the original
bankruptcy schedules that you filed?
A. 	Yes. Well in the original 2000 one at that point my feeling was or
my understanding of what we had and the condition it was in and
what art I had at that point before 2000 it was worth little to
nothing actually because most of the furniture was - -
Q. 	I’m talking about the art.
A. 	Yes. The art was - - some of the paintings that Jay Guben had for
many years were not in good condition. Like I said the one we
tried to get cleaned was destroyed. It just didn’t - - I don’t know, I
just didn’t think it was valuable in the same way that stock is
valuable or a house is valuable or a car you can sell or you know
that that stuff has a particular kind of value or particular market.
What we had was, it didn’t seem to me to be like that. I guess it
didn’t seem to either one of us to be like that.
T, 103-104.
Case 07-00407-sr Doc 23 Filed 08/14/08 Entered 08/15/08 15:47:18 Desc Main
Document Page 11 of 14

5 At trial the Court inquired of Debtor’s counsel as to the content of the schedules in the Debtor’s
prior case, however, her counsel had no knowledge of them.
6 The Court may and shall take judicial notice of the schedules from the Debtor’s prior case. See
F.R.E. 201 made applicable by B.R. 9017. There is no dispute as to what appears in that earlier
(continued...)
12
The Court finds the Debtor’s explanation to be without credibility. Moreover, whether or
not Mrs. Guben believed that her artwork lacked value or a ready market is irrelevant. The
instructions on Schedule B are clear: she was to list all personal property of whatever kind.” See
Schedule B; 11 U.S.C. § 521(a)(1)(B)(i); B.R. 1007(b)(1); Official Form 6; see also In re Okan’s
Foods, Inc., 217 B.R. 739, 752 (Bankr.E.D.Pa.1998) (stating that debtor has affirmative duty to
fully disclose all asset and interests in property). The existence of an item of property and the
value of that property are two different concepts. Because she owned artwork, Mrs. Guben was
required to disclose it and then state its value. She had no discretion to do otherwise. See In re
Darby, 376 B.R. 534, 541 (Bankr.E.D.Tex.2007) (revoking discharge for failure to disclose
artwork); In re Unger, 333 B.R. 461, 469 (Bankr.M.D.Fla. 2005) (denying discharge for failure
to disclose artwork); In re Bursztyn, 366 B.R. 353, 373 (Bankr.D.N.J. 2007) (granting Trustee’s
request for order to search debtor’s home for artwork not disclosed in bankruptcy schedules
based on evidence in state court divorce case that jewelry and art existed).
However, circumstances make it difficult to credit Mrs. Guben’s testimony concerning
her ignorance of the law. 	The Debtor is not unsophisticated in such matters; she has a law
degree. Moreover, this is not her first bankruptcy filing. Considering it to be highly relevant,
the Court, at the conclusion of the trial, reviewed Mrs. Guben’s 1997 bankruptcy file. 5 The
Court’s purpose in doing so was to ascertain whether she had disclosed owning artwork in the
previous proceeding. 6 As it turns out, she did: Schedules B and C from that case listed artwork,
Case 07-00407-sr Doc 23 Filed 08/14/08 Entered 08/15/08 15:47:18 Desc Main
Document Page 12 of 14

6(...continued)
disclosure, therefore there is no prejudice posed to the Debtor in considering it here. See In re Indian
Palms Assoc., 61 F.3d 197, 205 (3d Cir.1995) citing F.R.E. 201(f) advisory committee note (1972
proposed rules)).
13
albeit valued it at a nominal $500, and claimed it as exempt. See Case No. 97-19408, Schedules
B and C. 	Having disclosed the ownership of $500 in artwork ten years ago it is, in the opinion
of the Court, utterly disingenuous for Mrs. Guben to claim that she didn’t think she was required
to disclose the ownership of artwork costing $6500 now. Her failure to disclose owning any
artwork rather compellingly demonstrates Mrs. Guben’s willful attempt to evade payment of her
taxes.
Summary
A fundamental purpose of the Bankruptcy Code is to permit an honest debtor to reorder
his or her financial affairs and obtain a fresh start free from the weight of oppressive, preexisting
debt. In re Giquinto, 388 B.R. 152, 164 (Bankr. E.D.Pa. 2008). Certainly, Mrs. Guben is not the
stereotypical “tax cheat” whose financial dealings occur within what is sometimes referred to as
the “underground economy.” See, e.g., U.S. v. McGill, 964 F.2d 222, 230 (3d Cir.1992)
(offering as examples of systematic, intentional evasion: placing assets in the name of others;
dealing in currency; causing receipts to be paid through and in the name of others; and causing
debts to be paid through and in the name of others) Indeed, the Court notes that the Gubens
apparently made significant payments against their tax obligations over the years. That,
however, does not compel the conclusion that Mrs. Guben has dealt honestly with the
Bankruptcy Court or her creditors. To the contrary, the evidence shows Mrs. Guben to have
wilfully failed to remit tax payments and wilfully acted untruthfully with regard to both the IRS
Case 07-00407-sr Doc 23 Filed 08/14/08 Entered 08/15/08 15:47:18 Desc Main
Document Page 13 of 14

14
as well as the Bankruptcy Court. It would appear that Mrs. Guben elected to take the law into
her own hands in an effort to compel the IRS to compromise her tax debt. This was a misguided
decision and outweighs the fact of her having tried, via negotiation and payment, to retire the
debt. The totality of her conduct demonstrating wilful evasion, Mrs. Guben’s tax debt will be
declared non-dischargeable.
By the Court:
Stephen Raslavich
Chief U.S. Bankruptcy Judge
Dated: August 14, 2008
Case 07-00407-sr Doc 23 Filed 08/14/08 Entered 08/15/08 15:47:18 Desc Main
Document Page 14 of 14