Summary of a Recent
Judicial Development in
Bankruptcy

Internal Revenue Service Objections in
Farmer Bankruptcy Rejected

Joshua Thomas Crain
National AgLaw Center Graduate Assistant

Summary of Decision

In In re Petersen, 312 B.R. 385 (N.D. Iowa 2004), the United States Bankruptcy Court for the Northern District of Iowa rejected Internal Revenue Service (I.R.S.) objections regarding a farmer-debtor's discharge under 11 U.S.C. § 727(a)(2)(A), or in the alternative, excepting the I.R.S. tax claim from discharge under 11 U.S.C. § 523(a)(1)(C).

Background

On March 1, 1954, the Debtor Orville Peterson purchased two parcels of land from his parents. See id. The debtor farmed the land and was never employed off the farm. See id. On May 26, 1978, the debtor deeded one of the parcels to his wife for no consideration. See id. On January 22, 1999, the debtor's wife deeded the property back to debtor. See id. On that same day the debtor deeded to his wife a 10-acre section of land that included their homestead. See id. On March 25, 1999, the debtor sold all of his land aside from the 10-acre tract including their homestead for $369,000. See id. The debtor did not realize any of the proceeds from the sale of the land as it was paid directly to the Farm Service Agency (FSA) and Heritage Bank, both of whom had mortgages against the property. See id.

On the debtor's 1999 federal income tax return he filed a separate return so that his wife would not be liable for the capital gains tax liability from the sale of the land. See id. Around June 15, 1999, the debtor took out a loan with the FSA in order to pay off the mortgage held by Heritage Bank on their homestead. See id. On April 23, 2003, the debtor filed a Chapter 7 bankruptcy petition. See id. Upon filing bankruptcy the debtor reaffirmed his debt to the FSA. See id. At the time, the debtor owed approximately $100,000 to the I.R.S. See id. The I.R.S. objected to the debtor's discharge from Chapter 7 under Bankruptcy Code § 727(a)(2)(A), or in the alternative, to have their claim excepted from discharge pursuant to Bankruptcy Code § 523(a)(1)(C). See id.

Analysis and Holdings

The court explained that Bankruptcy Code § 727(a)(2)(A) provides that a debtor may not receive a discharge under Chapter 7 if a debtor "with intent to hinder, delay, or defraud a creditor, has transferred or concealed his property within one year before the date of the filing of the bankruptcy petition." Id. at 391. The court explained that because the transfer of the homestead took place more than one year before the date of the petition, denial of discharge could not be based on that ground. See id.

The court then explained that under the doctrine of continuing concealment a "concealment that originated outside the one-year limitation period is within the reach of § 727(a)(2)(A) if the concealment continued into the year preceding the filing coupled with the requisite intent." Id. at 392. The court stated, however, that it did not find the requisite fraudulent intent by the debtor. See id. It explained that because the debtor relied in good faith on the advice of his attorney in preserving his homestead, the fraudulent intent necessary under § 727(a)(2)(A) was not present. See id. The court held therefore that the I.R.S. claim under § 727(a)(2)(A) was not proven. See id.

The court next addressed the argument by the I.R.S. that their claim should be excepted from discharge under § 523(a)(1)(C). See id. The court explained that § 523(a)(1)(C) provides that a debtor may not discharge a debt for a tax "with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax." Id. at 392-93. It stated that factors such as "understatements of income, failure to file tax returns, implausible or inconsistent behavior by the taxpayer, the failure to cooperate with the tax authorities, concealment of assets, dealing in cash, shielding income and otherwise frustrating collection efforts" were indications of intent to evade taxes. Id. at 393. However, the court noted that it did not find any of the factors in the present case. See id. It explained that there was a plan by the debtor to preserve his homestead from a claim by the I.R.S., but that there was no indication of fraud or intent to evade taxes. See id. Rather, the court held that the debtor followed the advice of his attorney and the I.R.S. failed to prove the necessary elements of their case. See id. Thus, the court dismissed the I.R.S.'s objections. See id.

The case was decided on July 20, 2004; this summary was posted Jan. 6, 2005.