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Carlson v. United States

September 23, 1997





Appeal from the United States District Court for the Northern District of Illinois, Eastern Division.

No. 96-C-1660 Suzanne B. Conlon, Judge.

Before ROVNER, DIANE P. WOOD, and EVANS, Circuit Judges.

EVANS, Circuit Judge.

Argued May 27, 1997

Decided September 23, 1997

Herbert Carlson, a lawyer with his own office in downtown Chicago, reported adjusted gross income of $765,433 on his federal tax returns for 1990-92. His taxable income for the three years was reported to be $493,424 with a tax due of $153,824. But Carlson didn't pony up with even a red cent, so the IRS got on his tail, adding interest and penalties to his tax tab. Now, on this appeal from the district court (which affirmed a decision of the bankruptcy court), he warns us that there will be "a taxpayers' revolt coming" if the IRS is allowed to run "roughshod" over people like him. Although that may be a bit melodramatic, we can only hope he's wrong, for we conclude that he must lose his appeal.

Carlson and his wife Margaret filed a voluntary petition for bankruptcy under Chapter 11 of the Bankruptcy Code in February of 1994. The IRS filed a proof of claim for the unpaid taxes plus penalties and interest. This appeal stems from the allowance, over the Carlsons' objections, of the majority of the IRS' Second Amended Proof of Claim.

Margaret Carlson is not employed. But Herbert, as we noted, made a fair amount of money practicing law in downtown Chicago. And they lived in a home commensurate with Mr. Carlson's income: a $1 million condominium on North Lake Shore Drive (ironically, for a tax case, the address is 1040) in Chicago. The property, subject to a $425,000 mortgage, is held in an Illinois land trust and titled in the name of the trustee. Due to the Carlsons continued failure to pay up, the IRS filed tax lien notices against the Lake Shore property on December 16, 1992, December 13, 1993, and February 9, 1994. On February 9, 1994, the IRS also seized the Carlsons' residence, although they continued to reside there because the property was never sold. A federal tax lien duplicating the February 9, 1994, notice was filed by the IRS on April 29, 1994, but it was released 7 months later in November.

Unbeknownst to the IRS, the Carlsons also owned a house in LaPorte County, Indiana, valued at $125,000. Two days after the IRS seized the Lake Shore Drive condo the Carlsons transferred title of the Indiana property to their son Peter for zero consideration; the warranty deed was recorded on February 15, 1994. A little more than a week later the Carlsons filed their bankruptcy petition. The IRS then filed its claim.

Meanwhile, the Carlsons also failed to pay all of the social security and Medicare taxes (FICA taxes) and federal unemployment taxes (FUTA taxes) due in connection with people who worked at Mr. Carlson's law office. In February 1995 the IRS notified Mr. Carlson that his 1993 and 1994 returns regarding FICA and FUTA taxes were selected for audit. In the bankruptcy court the IRS amended its proof of claim twice, adding unsecured priority claims stemming from unpaid FICA and FUTA taxes for 1992 and 1993 and unsecured general claims for related interest and penalties.

According to Mr. Carlson, the sole reason he and his wife did not pay their 1990-1992 tax bills was the financial and mental strain caused by the medical condition of their youngest son, who apparently is a manic depressive schizophrenic.

The Carlsons eventually paid their tax bills for the 3 years in question. They refused, however, to pay the accrued interest and penalties and the FICA and FUTA assessments. On December 5, 1995, the bankruptcy court held that the IRS' secured claim for interest and penalties was valid and that, with some exceptions relating to attorneys at Mr. Carlson's firm, the FICA and FUTA tax claims were valid as well. On appeal by the Carlsons, the district court affirmed the bankruptcy court's decision in all respects. The Carlsons, with Mr. Carlson himself at the wheel, appeal that decision. Having reviewed the bankruptcy court's findings of fact for clear error and the conclusions of law, by the district court, de novo, In re Love, 957 F.2d 1350, 1354 (7th Cir. 1992); Fed. R. Bankr. P. 8013, we affirm. *fn1

Pursuant to 26 U.S.C. sec. 6601(a), the IRS assessed interest on the Carlsons' unpaid tax liabilities. Section 6601(a) states

[i]f any amount of tax imposed by this title . . . is not paid on or before the last date prescribed for payment, interest on such amount . . . shall be paid for the ...

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