In re: Vaughn , 765 F.3d 1174 ( 2014 )

FILED
United States Court of Appeals
Tenth Circuit
August 26, 2014
PUBLISH Elisabeth A. Shumaker
Clerk of Court
UNITED STATES COURT OF APPEALS
FOR THE TENTH CIRCUIT
In re: JAMES CHARLES VAUGHN,
Debtor.
____________________
JAMES CHARLES VAUGHN,
Appellant,
v. No. 13-1189
UNITED STATES OF AMERICA
INTERNAL REVENUE SERVICE,
Appellee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
(D.C. No. 1:12-CV-00060-MSK)
Joseph J. Mellon of The Mellon Law Firm, Denver, Colorado, for Appellant.
Rachel I. Wollitzer, Attorney, Tax Division (John F. Walsh, United States
Attorney, Of Counsel; Kathryn Keneally, Assistant Attorney General; and Bruce
R. Ellisen, Attorney, Tax Division, with her on the brief), Department of Justice,
Washington, D.C., for Appellee.
Before TYMKOVICH, McKAY, and MATHESON, Circuit Judges.
McKAY, Circuit Judge.
This appeal arises from an adversary proceeding initiated by Appellant
James Charles Vaughn seeking a declaration that his taxes assessed for the years
1999 and 2000 are dischargeable under his Chapter 11 bankruptcy petition. After
a trial, the bankruptcy court determined the taxes were not dischargeable under 11
U.S.C. § 523(a)(1)(C) because Appellant had filed a fraudulent tax return and
sought to evade those taxes. The bankruptcy court’s decision was affirmed by the
federal district court on appeal. Appellant now appeals the district court’s order
affirming the bankruptcy court’s decision.
I.
The following material facts were among those presented to the bankruptcy
court at trial. In the mid-nineties, Appellant was Chief Executive Officer of a
cable television acquisition company, FrontierVision Partners, LP. Though
Appellant had little formal education beyond high school, he had significant
practical business experience. In the decade-and-a-half prior to becoming CEO of
FrontierVision, Appellant served in senior executive positions at a number of
cable and communication companies. Appellant was so effective in these
positions he was described by one of his colleagues, the Chief Financial Officer at
FrontierVision, Jack Koo, as having “as much business acumen as anyone that
[Mr. Koo had] known in [his] career.” (Supplemental App. at 591.)
Between the years 1995 and 1999, Appellant shepherded FrontierVision as
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it grew from a start-up venture into a multi-billion dollar company. In 1999,
FrontierVision was sold to another company for roughly $2.1 billion. Appellant
received approximately $20 million in cash and $11 million in the purchasing
company’s stock from this sale.
Appellant testified that around the time of the FrontierVision sale, he
realized he “was going to come into a lot of money,” and he “needed to do some
kind of tax planning, whatever it turned out to be.” (Supplemental App. at 532-
533.) In June 1999, a partner of the international accounting firm KPMG LLP
introduced Appellant to a tax strategy known as Bond Linked Issue Premium
Structure (“BLIPS”), which was a product offered by a company called Presidio
Advisory Services LLC and marketed by KPMG. FrontierVision had an
established relationship with KPMG, which had handled a number of acquisition,
tax, and accounting matters for FrontierVision since 1995.
Through a series of communications with representatives of KPMG and
Presidio, BLIPS was presented to Appellant in detail. BLIPS was described as a
structured, multi-stage program that involved investment in foreign currencies.
BLIPS’s use as a tax strategy resulted from the manner in which the program
combined a participant’s relatively small cash contribution to an investment fund
(made through a limited liability company), with a nonrecourse loan and a loan
premium, ultimately facilitating a high tax loss for the participant without a
corresponding economic loss. Through BLIPS, a desired tax loss could be
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tailored to offset a participant’s actual economic gain, and thereby shelter that
gain from tax. The BLIPS program was structured so the basis for a desired tax
loss would be achieved by closing out the investment fund after sixty days. In
fact, Appellant testified he understood that the ultimate amount he would
contribute to his BLIPS investment fund was based on the tax loss he wished to
generate to offset his capital gain from the sale of FrontierVision. He also
testified that when he entered the BLIPS program in October 1999, he did so
knowing he would withdraw by the end of the year—after roughly sixty
days—essentially guaranteeing his BLIPS transaction would generate a tax loss
covering his capital gains.
KPMG advised Appellant that BLIPS was accompanied by the risks of an
IRS audit and the possibility of owing additional taxes. KPMG advised Appellant
that in order for a BLIPS transaction to withstand a challenge by the IRS, a
participant needed to have a legitimate profit motive in the BLIPS investment.
Appellant appreciated the risks associated with BLIPS, stating he understood the
BLIPS program “as a choice between paying $9 million of taxes currently or
claiming the benefits of [the BLIPS] losses and paying $3 million currently with
some risk of paying more taxes later.” (Appellant’s App. at 1189.) Appellant
memorialized his appreciation of these risks when he signed an engagement letter
in September 1999 which stated he “acknowledge[d] that [BLIPS] is aggressive in
nature and that the [IRS] might challenge the intended results of [BLIPS] and
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could prevail under any of various tax authorities.” (Supplemental App. at 124.)
The letter further stated Appellant “acknowledge[d] that any tax opinion issued by
KPMG would not guarantee tax results, but would provide that with respect to the
tax consequences described in the opinion, there is a greater than 50 percent
likelihood (i.e., it is ‘more likely than not’) that those consequences will be
upheld if challenged by the [IRS].” (Id. at 123.) The engagement letter also set
forth the $506,000 fee Appellant was to pay KPMG for its role in advising
Appellant regarding BLIPS.
The sale of FrontierVision closed on October 1, 1999. Shortly thereafter,
between the months of October and December, Appellant participated in a BLIPS
transaction. As a result of Appellant’s artificially high basis in his BLIPS LLC,
his $2.8 million contribution to a BLIPS investment fund, when combined with a
loan and loan premium issued to his BLIPS LLC, generated a purported tax loss
of roughly $42 million upon Appellant’s withdrawal from the BLIPS investment
and the disposition of the BLIPS LLC’s assets.
On April 11, 2000, Appellant reviewed and signed his 1999 tax return.
Appellant reported a long-term capital gain of approximately $30.6 million as a
result of the sale of FrontierVision. However, he also reported a short-term
capital loss of roughly $32.3 million as a consequence of his BLIPS transaction.
He further reported an ordinary loss of roughly $3.3 million based on his BLIPS
participation. These claimed losses were sufficient to offset Appellant’s capital
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gains from the sale of FrontierVision. Appellant admitted at his deposition—and
denied at trial—that he had been instructed by one of the partners of KPMG not to
claim the full amount of his BLIPS capital loss on his return in order to avoid
arousing suspicion. (Supplemental App. at 473-74.) Furthermore, Appellant
testified that when he signed the 1999 return, he knew he had not suffered an
economic loss corresponding to his claimed tax loss.
In September 2000, the IRS issued Internal Revenue Bulletin Notice 2000-
44, in which the IRS discussed “arrangements [that] purport to give taxpayers
artificially high basis in partnership interests and thereby give rise to deductible
losses on disposition of those partnership interests,” including schemes
“involv[ing] a taxpayer’s borrowing at a premium and a partnership’s subsequent
assumption of that indebtedness.” (Appellant’s App. at 1146.) While BLIPS was
not specifically mentioned in the notice, the type of transactional scheme
described in the notice perfectly described BLIPS. The IRS stated that purported
losses resulting from such transactions “are not allowable as deductions for
federal income tax purposes” because they “do not represent bona fide losses
reflecting actual economic consequences as required for purposes of § 165” of the
Internal Revenue Code. (Id.) In the wake of this bulletin, KPMG issued a
directive requiring BLIPS clients to be notified of Notice 2000-44. Appellant was
informed of Notice 2000-44 by KMPG and provided with a copy of the bulletin
by February 2001. (Id. at 801.)
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In March 2001, Appellant separated from his then wife, Cindy Vaughn, and
purchased a townhome for $1.4 million. In September, the couple divorced.
Pursuant to a separation agreement, Ms. Vaughn received the couple’s marital
residence—valued at $2.5 million—and five luxury and collector
vehicles—valued collectively at roughly $260,000—while Appellant received the
recently purchased townhome and a Mercedes SUV. The couple’s Morgan
Stanley investment accounts—valued at $18 million—were divided equally. The
couple’s divorce decree was entered on September 13, 2001.
Shortly after separating from Ms. Vaughn, Appellant entered a relationship
with another woman, Kathy St. Onge. In April 2001, Appellant purchased Ms. St.
Onge a new BMW. In mid-September 2001, Appellant became engaged to Ms.
St. Onge. Around this time, Appellant purchased a $1.73 million home with his
own funds, with the home titled in Ms. St. Onge’s name only. Appellant married
Ms. St. Onge in October 2001.
Meanwhile, in June 2001, Mr. Koo, who had also participated in BLIPS,
was notified he was to be audited in relation to his BLIPS participation. In a
proof of claim related to a subsequent lawsuit against KPMG, Appellant indicated
that Mr. Koo contacted Appellant about the audit shortly after June 2001. 1 In
1
While the bankruptcy court received conflicting testimony regarding when
Appellant was informed of Mr. Koo’s audit, the bankruptcy court ultimately
determined Appellant had learned of the audit in 2001.
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February 2002, KPMG representatives met with Appellant and informed him that
because they were being examined by the IRS in connection with BLIPS, it was
likely that Appellant would be identified by the IRS as a BLIPS participant and
his 1999 tax return would be subject to audit. Therefore, the representatives
suggested that Appellant participate in an IRS voluntary-disclosure program,
which permitted taxpayers to avoid certain penalties by voluntarily disclosing
their participation in a tax shelter. Following this meeting, KPMG sent Appellant
a letter reiterating the recommendation that Appellant voluntarily disclose his
participation in BLIPS to the IRS and reemphasizing the likelihood the IRS would
acquire information regarding Appellant’s participation in the BLIPS program.
In the month following these communications by KPMG, Appellant
established an irrevocable trust for his step-daughter, Ms. St. Onge’s daughter, on
March 4, 2002. Appellant transferred $1.5 million dollars into the trust the day it
was established. Ms. St. Onge was named as the trustee and secondary
beneficiary. Around three weeks after creating this trust, Appellant submitted a
voluntary disclosure of his participation in the BLIPS program to the IRS.
Shortly thereafter, in May 2002, the IRS notified Appellant his 1999 tax return
was to be examined. Subsequently, Appellant was notified his BLIPS investment
fund was being investigated.
Throughout this time period, Appellant and Ms. St. Onge spent money in
large amounts. For instance, between October 2001 and April 2003, the couple
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wrote checks to cash, or to themselves, totaling $157,000. Throughout their
marriage, which ended in March 2003, the couple spent thousands of dollars in
monthly charges to various credit card accounts and spent similarly substantial
sums of money on such things as home decoration, jewelry, and cars.
When the couple divorced, Ms. St. Onge received the marital home, two
luxury cars, and $3.5 million of the couple’s brokerage account. Appellant kept
his townhome (by then worth only half of its original purchase price as a result of
flood damage), a pick-up truck, a 2002 Chevy Trailblazer, and the remaining
balance of the brokerage account, which was smaller than the $3.5 million portion
received by Ms. St. Onge. While Ms. St. Onge retained counsel, Appellant did
not, nor did he dispute the division of assets.
Immediately prior to his divorce from Ms. St. Onge, the IRS notified
Appellant that his ex-wife, Cindy Vaughn, had filed a request for innocent-spouse
relief with respect to their 1999 tax return. In August of 2003, Appellant filed his
own request with the IRS for such relief, stating in a supporting affidavit that
“[b]ecause of the inequitable transfers of assets to Cindy pursuant to divorce, I do
not have the assets to pay all the deficiencies attributable to [BLIPS].”
(Appellant’s App. at 1198.) He further stated in the affidavit that he “would be
bankrupt if the IRS assesses and collects the full . . . liability” attributed to his
BLIPS participation. (Id.) He also stated that while he “received about $10.4
million of assets in the divorce [from Ms. Vaughn]. . . since then [his] net worth
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has dropped to about $4 million.” (Id.) While Appellant’s request for innocent-
spouse relief mentioned he had been remarried and divorced since his divorce
from Ms. Vaughn, he did not mention the trust set up for his step-daughter, nor
did he mention the unequal division of assets during his divorce from Ms. St.
Onge.
In March 2004, Appellant filed an amended 1999 tax return from which he
did not remove his BLIPS-generated losses. In May 2004, the IRS issued an
announcement regarding a settlement initiative for participants in BLIPS-type tax
shelters. While Appellant sought to participate in this settlement program, he was
ineligible because he was unable to make full payment of his tax liabilities related
to his participation in BLIPS.
In June 2004, the IRS notified Appellant of an approximately $8.6 million
tax deficiency arising from the IRS’s determination that Appellant had overstated
his losses as a result of his BLIPS participation. In a subsequent notice, the IRS
notified Appellant of an additional tax deficiency of roughly $120,000 for the
year 2000 relating to the carryforward of a disallowed investment-interest
expense arising out of Appellant’s BLIPS participation.
II.
In November 2006, Appellant filed his Chapter 11 bankruptcy petition.
The IRS subsequently filed a proof of claim in that action for tax assessments for
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the years 1999 and 2000 in the amount of $14,359,592. 2 Appellant initiated an
adversary proceeding seeking a declaration that the taxes were dischargeable.
The matter proceeded to trial, whereupon the bankruptcy court found that
Appellant had both filed a fraudulent tax return and willfully evaded his taxes,
which provided two independent grounds for finding his tax liability non-
dischargeable under 11 U.S.C. § 523(a)(1)(C). Under this section, statutory
discharges do “not discharge an individual debtor from any debt [] for a tax or
customs duty . . . 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).
Appellant appealed the bankruptcy court’s decision to the federal district
court, which affirmed the bankruptcy court’s order. However, finding “no error
with regard to the Bankruptcy Court’s determination that [Appellant] willfully
attempted to evade his 1999 and 2000 tax obligations,” thereby rendering his tax
obligations non-dischargeable, the district court declined to address the question
of whether Appellant filed a fraudulent tax return. Vaughn v. IRS, No. 12-CV-
2
We note the IRS initially filed its “proof of claim for $14,359,592 as an
unsecured claim, stating at that time the taxes were not entitled to priority under
11 U.S.C. § 507(a)(8)(A).” Vaughn v. IRS (In re Vaughn), 463 B.R. 531, 539
(Bankr. D. Colo. 2011). However, realizing this to be an error, the “IRS abated
the 2004 Assessment as unlawful, and on April 10, 2008, . . . filed its amended
proof of claim, asserting the taxes were entitled to priority.” Id. at 540.
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00060-MSK, 2013 WL 1324377 (D. Colo. Mar. 29, 2013) (unpublished) at *2. 3
In the course of its opinion, the district court stated that the bankruptcy court
“engaged in a comprehensive and holistic review . . . of the evidence,” id. at *5,
when faced with the difficulty of “attempt[ing] to follow the elemental approach”
to willful evasion under § 523(a)(1)(C), which generally requires that “two,
discrete elements . . . be proved in order to reach a ‘willful evasion’
determination: (i) a conduct requirement; and (ii) a mental state requirement,” id.
at *5 n.8.
III.
Appellant now raises two primary issues on appeal. First, Appellant argues
the district court impermissibly employed “a ‘holistic’ review of the evidence to
support its affirmance of the Bankruptcy Court’s willful evasion determination”
in order to avoid determining whether the evidence before the bankruptcy court
satisfied “the two discrete elements of willful evasion.” (Appellant’s Opening Br.
at 2.) Second, Appellant argues the bankruptcy court’s finding that Appellant
willfully attempted to evade his tax obligations was erroneously based on
negligent, rather than willful, conduct.
3
Despite numerous allusions to the bankruptcy court’s fraudulent return
finding in Appellant’s briefing to this court on appeal, Appellant urges that
“[b]ecause the District Court did not rule on [it], the fraudulent return finding by
the Bankruptcy Court was not argued in Appellant’s opening brief.” (Appellant’s
Reply Br. at 1.) Therefore, we limit our review to the issue of whether Appellant
willfully attempted to evade his tax obligations.
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“Our review of the bankruptcy court’s decision is governed by the same
standards of review that govern the district court’s review of the bankruptcy
court. Accordingly we review the bankruptcy court’s legal determinations de
novo and its factual findings under the clearly erroneous standard.” Conoco v.
Styler (In re Peterson Distrib., Inc.), 82 F.3d 956, 959 (10th Cir. 1996) (citations
omitted).
Regarding the first issue, Appellant argues that the district court
impermissibly construed our opinion in Dalton v. IRS, 77 F.3d 1297 (10th Cir.
1996) to allow a “holistic” review of the evidence before the bankruptcy court.
While the district court included a lengthy footnote in its opinion discussing the
expediency of such a “holistic” review in light of Dalton, see Vaughn v. IRS,
2013 WL 1324377, at *5 n.8, no such “holistic” review was mentioned or applied
by the bankruptcy court. Because “[o]ur review [is] of the bankruptcy court’s
decision,” Conoco, 82 F.3d at 959, we need not consider the district court’s
application of holistic review. The bankruptcy court explicitly noted that “[t]he
most recent appellate decision addressing § 523(a)(1)(C) identified two
components to a showing of willful evasion: 1) a conduct requirement; and 2) a
mental state requirement.” Vaughn v. IRS (In re Vaughn), 463 B.R. 531, 545
(Bankr. D. Colo. 2011) (citing United States v. Storey, 640 F.3d 739, 744 (6th
Cir. 2011)). The bankruptcy court applied this two-element approach, citing
factual findings in support of the conduct and mental state requirements
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separately, with each requirement commanding its own subsection of the
bankruptcy court’s opinion. Since the bankruptcy court, which is the subject of
our ultimate review, applied the two-element approach in determining that
Appellant willfully attempted to evade a tax, we need not determine whether the
district court’s application of a “holistic” review of the evidence before the
bankruptcy court is permissible under our decision in Dalton.
Turning to whether the bankruptcy court properly found the Appellant
willfully, rather than negligently, attempted to evade or defeat his tax liability, we
note that “[w]hether or not a debtor willfully attempted to evade or defeat a tax
[under 11 U.S.C. § 523(a)(1)(C)] is a question of fact reviewable for clear error.” 4
United States v. Jacobs (In re Jacobs), 490 F.3d 913, 921 (11th Cir. 2007) (citing
Dalton, 77 F.3d at 1302). “A finding of fact is clearly erroneous if it is without
factual support in the record or if, after reviewing all of the evidence, we are left
with the definite and firm conviction that a mistake has been made.” Conoco, 82
F.3d at 959. Where, as here, certain “findings are based on determinations
regarding the credibility of witnesses, Rule 52(a) [of the Federal Rules of Civil
Procedure] demands even greater deference to the trial court’s findings.”
4
Appellant argues we ought to review the bankruptcy court’s willful
evasion determination de novo, claiming the bankruptcy court erred as a matter of
law by applying a negligence standard to find that Appellant evaded his tax
obligation. For the reasons discussed below, we are not persuaded the bankruptcy
court based its finding of willful evasion on negligent, rather than willful,
conduct.
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Anderson v. Bessemer City, 470 U.S. 564, 575 (1985).
The bankruptcy court explicitly found that “[Appellant’s] actions meet the
state of mind test to show intent to evade tax” under § 523(a)(1)(C). In re
Vaughn, 463 B.R. at 548. In making this finding, the bankruptcy court quoted
this court’s holding that a “debtor’s actions are willful under § 523(a)(1)(C) if
they are done voluntarily, consciously or knowingly, and intentionally.” Dalton,
77 F.3d at 1302. The bankruptcy court also noted that § 523(a)(1)(C)’s mental
state requirement is generally satisfied “where the government shows the
following three elements: 1) the debtor had a duty under the law; 2) the debtor
knew he had the duty; and 3) the debtor voluntarily and intentionally violated the
duty.” In re Vaughn, 463 B.R. at 546 (citing Jacobs, 490 F.3d at 921 and
Hawkins v. Franchise Tax Bd., 447 B.R. 291, 300 (N.D. Cal. 2011)). Applying
these principles, the bankruptcy court found Appellant knew he “had a duty under
the law” which he “voluntarily and intentionally violated,” thus satisfying §
523(a)(1)(C)’s mental state requirement. Id. The bankruptcy court cited several
facts in support of this finding, including the following: the fact Appellant
“exhibited behavior which was inconsistent with his business acumen” by
“participat[ing] in the BLIPS investment” and subsequently depleting his assets,
“knowing as he must have, the BLIPS investment constituted an improper abusive
tax shelter with no economic basis and no reasonable expectation of profit”;
Appellant’s knowledge of Mr. Koo’s BLIPS-related audit in 2001; Appellant’s
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receipt of the IRS’s Notice 2000-44 in early 2001; Appellant’s receipt of
notification from KPMG in early 2002 regarding the IRS’s investigation into
BLIPS and KPMG’s opinion that the investigation would likely lead to Appellant
being audited for his BLIPS participation; and Appellant’s “purchas[e of]
expensive homes, automobiles, and jewelry, following a divorce which
significantly depleted his assets,” “as if there would be no additional tax to pay,”
despite the aforementioned facts. In re Vaughn, 463 B.R. at 547. The bankruptcy
court likewise found Appellant’s actions, taken in light of Appellant’s knowledge
of his impending tax liability, satisfied the conduct requirement of §
523(a)(1)(C). 5
Appellant offers four primary arguments in support of his assertion that the
5
The bankruptcy court cited a number of facts supporting its finding that
Appellant’s actions satisfied § 523(a)(1)(C)’s conduct requirement. For instance,
the bankruptcy court found that even though “he had transferred approximately
one-half of his post-Frontier[]Vision sale assets to Cindy Vaughn as part of their
divorce settlement, he failed to take any actions to preserve his remaining assets
for the payment of additional taxes,” notwithstanding the fact that he “knew he
had a potential [tax] liability on the full amount of his gain from the
Frontier[]Vision sale.” In re Vaughn, 463 B.R. at 546. Instead he made
numerous large expenditures, including the “purchase[] of a $1.7 million home . .
. [the title of which was] in the sole name of . . . Kathy St. Onge,” the creation
and funding of “a $1.5 million trust for his step-daughter” shortly before
disclosing his participation in BLIPS to the IRS, and several purchases of jewelry
and other luxury items. Id.; see Hawkins, 447 B.R. at 301 (“[L]arge discretionary
expenditures, combined with nonpayment of a known tax, contribute[] to the
conduct analysis. Moreover nonpayment of a tax can satisfy the conduct
requirement when paired with even a single additional culpable act or
omission.”); see also Jacobs, 490 F.3d at 926-27 (stating that large discretionary
expenditures are relevant to the § 523(a)(1)(C) conduct element).
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bankruptcy court’s willful evasion finding was based on negligent conduct rather
than the willful conduct required by the text of § 523(a)(1)(C). First, Appellant
argues that a finding of “willful evasion requires knowledge that a tax is
owed—not just knowledge of a possibility that the IRS might assess tax liability
sometime in the future.” (Appellant’s Opening Br. at 32.) Appellant argues that
because the spending and asset disposition cited by the bankruptcy court in
support of its willful evasion finding “took place long before the IRS assessed a
tax penalty,” the willful evasion finding is, at best, “premised on [Appellant’s]
disposition of his assets when he arguably should have known that the IRS might
assess a tax in the future, if it rejected [Appellant’s] BLIPS transaction.” (Id. at
25 (emphasis in original).) Appellant argues that such a “determination of
evasion based upon a potential tax liability is really just a . . . negligence
finding.” (Id. at 27 (internal quotation marks and brackets omitted).)
Contrary to Appellant’s assertions, we have previously held that the
assessment of a tax is not required in order for a debtor’s conduct to be
considered willful. In Dalton, we held that the actions of a debtor— including the
purchase of a condominium and the transfer of funds to his fianceé— taken when
he “knew of [a] tax investigation which was likely to result in a significant
assessment,” but prior to an actual tax assessment, were willful for purposes of §
523(a)(1)(C). 77 F.3d at 1303. Additionally, a number of courts have
unequivocally stated that the failure to file a tax return, which necessarily occurs
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before a tax is assessed or concretely known, is considered a willful omission
under § 523(a)(1)(C). See, e.g., United States v. Fretz (In re Fretz), 244 F.3d
1323, 1329 (11 Cir. 2001); United States v. Fegeley (In re Fegeley), 118 F.3d
979, 983-84 (3d Cir. 1997); In re Birkenstock, 87 F.3d 947, 951 (7th Cir. 1996).
These authorities establish that actions taken with knowledge of an anticipated tax
obligation can be considered willful, rather than negligent, thus rendering tax
debts non-dischargeable in bankruptcy. To the extent Appellant ultimately
disputes that he did not know of the anticipated tax obligation, the bankruptcy
court found to the contrary and that conclusion was not clearly erroneous.
Second, Appellant argues his “reliance on the advice of KPMG, his
longtime tax advisor, that the BLIPS transaction was an aggressive but ultimately
legitimate tax position might have been at worst unreasonable under the
circumstances, making [Appellant] negligent,” but not willful. (Appellant’s
Opening Br. at 23.) Appellant contends that because he innocently, even if
unreasonably, relied on KPMG’s advice, he cannot be found to have acted
willfully. We find this argument unpersuasive under all of the circumstances in
this case, particularly in light of the bankruptcy court’s finding that Appellant’s
assertion of innocent reliance was “simply not credible.” In re Vaughn, 463 B.R.
at 548.
Third, Appellant suggests our recent opinion in Blum v. Commissioner, 737
F.3d 1303 (10th Cir. 2013), must control our review of this case. The facts in
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Blum are similar to those in Appellant’s case. The plaintiff in Blum was a self-
made business man who participated in a different tax shelter marketed by
KPMG. The IRS sent the Blum plaintiff a notice disallowing the losses he
claimed in connection with the tax shelter and imposing “two accuracy-related
penalties for underpayment of taxes,” id. at 1306, including a penalty for
“negligent underpayment” under I.R.C. § 6662(b). The tax court upheld this
decision. On appeal, we affirmed the imposition of the negligent underpayment
penalty, despite the Blum plaintiff’s assertion that he merely relied on KPMG’s
representations regarding the validity of the tax shelter. In the case before us,
Appellant argues our decision affirming a negligent underpayment penalty in
Blum “confirms[ that Appellant’s] decision to rely on KPMG’s tax advice is not
blameless, but . . . does not rise to the level of intentional or knowing conduct
either.” (Appellant’s Reply Br. at 17.) Appellant’s suggestion that Blum controls
our decision in this case is unpersuasive. Our decision to uphold a negligent
underpayment penalty in Blum does not prove that Appellant’s conduct in this
case failed to rise above the level of negligence. The fact that the conduct in
Blum was sufficient to support a finding of negligence does not require us to find
the bankruptcy court’s finding of willful evasion in this case to be clearly
erroneous.
Finally, Appellant argues the bankruptcy court’s order “couched all of its
criticism of [Appellant’s] conduct with terms generally used to describe negligent
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conduct.” (Appellant’s Reply Br. at 9.) Appellant particularly mentions the
bankruptcy court’s use of the terms “reasonably” and “known or should have
known” as terms that he claims generally convey negligence rather than
willfulness. While the bankruptcy court did use those terms in its opinion, it did
not do so in a way suggesting Appellant’s actions were merely negligent. Rather,
in the context of the bankruptcy court’s opinion as a whole, such language was
simply used to express the bankruptcy court’s conclusions that Appellant “must
have been aware,” In re Vaughn, 463 B.R. at 544, of the circumstances
demonstrating the invalidity of his BLIPS losses, and that Appellant chose to
claim those losses on his tax returns and to deplete his remaining assets,
“knowing, as he must have, the BLIPS investment constituted an improper
abusive tax shelter,” id. at 547. Therefore, the language identified by Appellant
as suggesting a negligence-based finding, when read in context, actually
buttresses the bankruptcy court’s finding that Appellant willfully attempted to
evade his tax obligations.
IV.
Ultimately, none of Appellant’s arguments persuade us the bankruptcy
court’s determination that Appellant willfully attempted to evade his tax
obligations is clearly erroneous. Appellant fails to demonstrate why we should
not defer to the bankruptcy court’s factual finding that Appellant willfully
attempted to evade his tax liability under § 523(a)(1)(C). For the foregoing
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reasons, we AFFIRM the district court’s decision to affirm the order of the
bankruptcy court.
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