Archive for the ‘ Bankruptcy Procedure ’ Category

A Dream Job

A Dream Job


I love what I do. Intervening on behalf of my clients in tax audits, or helping people shed crippling debt, allows me to (1) draw on prior professional experience at the IRS and elsewhere, (2) use my detective and people skills in finding and negotiating with the right auditors and revenue officers, and (3) helps me solve people’s problems and move them forward in their lives.  As a small business owner, I also get complete discretion over my time and, of course, full responsibility for all my successes and failures. I’m sure I’ll be doing this for another 20 years, at least.


However, every now and then, I daydream about alternative careers. I recently read an article about the razor manufacturer, Gillette, and how it has half a dozen highly-trained men who have a gig testing razors and shaving techniques.  They leave home and stop at Gillette headquarters on their way to work, where they shave. Their daily shave is done according to a strict protocol; they are testing different shaving creams and razors against each other, so every shave has to be done exactly the same way. These guys know about shaving. “Way cool,” I announced to the wife and daughter, both of whom dismissed my excitement with barely-concealed eye-rolling.


But I was serious. About a decade ago, I started using shaving soap, rather than canned lather. I like the closer shave, and the soaps generally smell better and feel somehow richer. As I read about the Gillette shavers, I envied that they get to try new soaps and razors on a daily basis. They get to be experts in shaving. Me – I invest in one cake of shaving soap, and it lasts 18 months. Neither my wife nor daughters appreciate how silky smooth I get my face – it’s always too bristly for them, no matter what I do. I suspect at Gillette, the shave scientists get well-deserved praise.


Another thing I like about the job is the attention to process. At the IRS, I learned the importance of process: thinking about the steps toward getting a job done. In my law firm, even though each case is different, I always look for the uniform elements so that I can create a check list and get all the steps done.

If the government can prove that you “willfully attempted in any manner” to “evade or defeat” a tax, then you cannot discharge that tax debt in bankruptcy. 11 U.S.C. 523(a)(1)(c).   I’ve always seen this as a very low bar for the IRS to prove, because the elements are simple: 1) the taxpayer had a duty to pay a tax; 2) the taxpayer knew that he had this duty; and 3) the taxpayer voluntarily and intentionally violated that duty. Payment of any expense beyond subsistence, such as a child’s college tuition, at a time when taxes remain unpaid, could meet the standard. That’s what the cases around the country teach.

The 9th Circuit, however, has changed the standard here in California and elsewhere in its domain. In Hawkins v. FTB, Case No. 11-16276, decided on September 15, 2014, the court has held that the taxpayer needs to have a specific intent of evading tax for this discharge exception to apply. Outside the 9th Circuit, a “willful attempt “ to intentionally violate the duty to pay tax means a deliberate act that results in nonpayment of tax. Here in the 9th Circuit, the “willful attempt” means a deliberate act with the intent of evading tax.

The facts in Hawkins are rather shocking to this former IRS attorney. The debtor-taxpayer made a fortune in Silicon Valley enterprises, and tried to shelter some of his capital gains through sophisticated yet dubious transactions. A large tax bill ensued, and then his enterprises lost a great deal of money. Yet he continued to live large: in the face of of a $25 million tax bill, he continued to maintain two residences worth a total of more than $6 million, and bought a fourth family car (in a two-driver family) for $70,000. The family spent between $17,000 and $78,000 more per month than its income for several years.

I think that the result in Hawkins is wrong. This kind of spending by a taxpayer who knows he owes $25 million in taxes is dishonest. As a taxpayer, I do not want my fellow Americans to get away with this by saying “gee, I wasn’t trying to avoid paying the taxes, but I just couldn’t stop myself from spending.  But I do salute the attorneys who reached this result. It is a good result for my clients, and I intend to use it until the Supreme Court reverses the 9th Circuit.

It’s Not Easy Dealing with the Franchise Tax Board

My clients owed the California Franchise Tax Board (FTB) $8,000 for the  2011 tax year; they filed their return late, and couldn’t pay it all at once.

The FTB sent a notice that it was about to levy – standard procedure, it wants to get paid, let’s scare the taxpayers into making an agreement to pay it over time.

If you look at the FTB website, it really discourages people from calling up to make an installment agreement, and my clients feared doing this themselves. So, armed with their banking information, I went online and made the installment agreement for them.  The FTB spat back a confirmation number and thanked me for making these arrangements. The client was going to pay $300 per month until the debt was paid off.

Just to be sure that the levy was going to be stopped, I called the FTB. The collection officer had no record of an installment agreement. I said “but I’ve even got a confirmation number from your website.” The officer told me that this meant nothing, that the FTB wouldn’t do an online installment agreement for an old tax year. But it looked like everything was okay on the installment agreement; if I hadn’t called him, how would I have found this out? The officer said that I would have found out when my client got levied.

I set up the installment agreement with the collection officer over the phone. It costs $34 to do this; I asked if the FTB was going to charge that fee twice, once for the online agreement and once for the phone agreement. He said no, that the online agreement didn’t exist, my clients aren’t being charged for it, and even though the FTB has all their banking records from that interaction, it won’t make automatic withdrawals based on the online agreement.

I don’t quite trust it.

The state taxation system is dysfunctional, fraught with cronyism and unfair laws. There is little oversight. If the FTB goes ahead and levies on my clients, there is little recourse; the clients owe the tax money, and they aren’t legally damaged if they pay that amount quicker through a levy than peacefully through an installment agreement.

So I’m asking my clients to watch their accounts very carefully: if they see the FTB removing two automatic payments, then I’ve got more work to do.

Bankruptcy works in unexpected ways.  That’s how a colleague sells his potential clients on hiring him to get a discharge in bankruptcy.  And he’s right.

My client opened a fast-food restaurant with a partner in 2008 and personally guaranteed debts to suppliers.  Time went by, the suppliers brought the potatoes to make into French fries, the restaurant paid the suppliers.

My client, meanwhile, moved out of state and no longer managed the restaurant.  But he didn’t turn in his ownership interest, and he didn’t stop the guarantee.

In 2012, the client got a bankruptcy discharge.

This year, the restaurant stopped paying one of the suppliers.  The supplier sued the restaurant for nonpayment, and sued my client on the guarantee.

I wrote back to say that the debt was discharged in bankruptcy.  The supplier’s attorney laughed at me: “the debt was incurred after the discharge.  Your guy needs to pay up!” At first, I thought he was right: a bankruptcy petition only discharges debts that are incurred prior to the petition.  A 2012 discharge does not get rid of a 2014 debt.

Some legal research, however, set me straight. The discharge gets rid of all claims existing prior to the petition date.  A guarantee of paying future debts is a claim that exists at the moment it’s signed.  Claims can arise long before there is a dollar value attached to them. My client isn’t on the hook for the guarantee made before his bankruptcy.  It was an unexpected benefit of bankruptcy.

As an example of a bankruptcy wiping out not just existing debt, but future claims, Piper Aircraft was able to disavow liability for product liability claims due to defective aircraft manufactured before it filed its bankruptcy petition. Think about it: someone gets in a plane, the plane falls out of the sky, the pilot’s family sues because the plane was built wrong, and Piper Aircraft is not liable because it went through bankruptcy a few years earlier.  Case law is very clear that the guarantee is discharged along with actual debts.


So you want to buy something from a bankruptcy estate

More than 99 percent of all bankruptcy estates are “no-asset” cases, meaning that the trustee opens the case, talks to the debtor, looks at the schedules, and determines that the debtor truly has nothing.  (Or almost nothing: California law allows debtors to come out of bankruptcy with relatively small amounts of exempt property – see this site for a more complete explanation.

When representing debtors, I cringe at the notion that the trustee will sell some of my debtor’s property.  I generally try to avoid that result.

But some of the bankruptcy cases involve assets that the trustee can sell, and use the proceeds to pay creditors for pennies on the dollar.

Generally, people can buy assets at a discount from the bankruptcy court.  But how does one find out what is for sale?  Trustees need to give notice to all the creditors in the bankruptcy case of their intent to sell property, and they need to post a public notice on the court’s website.

Houses and apartment buildings are sold by realtors hired by the trustee.  Automobiles are usually sold by auctioneers, again hired by the trustee.   All sales need to be confirmed by the bankruptcy court.  The trustee does some marketing and advertising of the property, then conducts an auction in the bankruptcy court.  You can find out what’s being sold when by consulting the local court’s webpage.  Be sure to bring cash.

One debtor thought that the bankruptcy court’s jurisdiction didn’t extend to Mexico: she intended to file bankruptcy in Fresno, then fly to her fully-paid condo in Mulege to live out her days debt-free.  The debtor could not evade the long arm of bankruptcy law just by owning a condo outside the country: the trustee, whom I represented, sold the condo for $150,000, most of which went to pay off the debtor’s creditors.

In another case, a writer’s festival’s owners filed bankruptcy.  The festival’s website was the main asset in the case.  Charles Shulz’s (of Peanuts fame) son purchased the website from the trustee for $20,000.

If you know of someone going through bankruptcy, and you want some of his assets, you can call the trustee in the case and make an offer on the property you want.  I have helped debtors unload their unwanted property through bankruptcy, and I have helped creditors purchase corporate assets like equipment, trademarks, and licenses to gain control of a business.  If you want to buy an asset in bankruptcy, I can help you.