Excesses of the Eighties - CPA Remains Liable on $19,000,000 Tax Debt

Originally Published on forbes.com on November 9th,2011

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The Third Circuit has upheld a district decision to not discharge the $19,000,000  tax debt of Bruce Bryen.  The circuit decision neatly summarizes why Mr. Bryen was not entitled to a discharge:

Once the Tax Court held that his tax shelters were shams, Bryen was aware he owed back taxes to the IRS. While he did not know the specific amount of the tax deficiency until 2001, he was aware that it would be substantial. Nonetheless, Bryen continued to live high on the hog. He earned income that exceeded his modest, fixed living expenses. He made no attempt to save in anticipation of the tax debt. Further, after he signed the stipulations with the IRS, he did not change his behavior. He did not make any payments to the IRS to reduce his tax liability and continued to deal in cash to avoid having creditors attach his bank accounts.  Thus, the totality of the circumstances justify finding that he was attempting to evade his taxes under § 523(a)(1)(C).

 You really have to go back to the district decision (IN RE: BRYEN, Cite as 106 AFTR 2d 2010-5835) to get the full flavor of the decision.  The interesting question is how much lower on the hog would Mr. Bryen have to have lived in order to qualify for debt discharge.  Here is the story.

The Shelter.

Mr. Bryen became involved with “employee leasing” shelters.  This was a type that escaped my notice in what turned out to be the waning days of real tax shelters.  I may not appreciate the fine points, but the deals worked something like this.  A partnership borrowed money from an operating company.  The partnership then hired all the people who worked for the operating company and leased them to the operating company.  Thelease payments were deferred and the partnership was on the cash basis. When the partnership switched to the accrual basis it adopted a four year spread.   The thing about a shelter like this is that it was pure deferral.  Real estate held out the promise of conversion.  That is that the income when it turned around on you would be a capital gain.  Regardless, Mr. Bryen and his father, also a CPA, did quite a few of these deals for their clients.  Much like Hair Club For Men President Sy Sperling, Mr. Bryen was also a customer, using leasing deals to shelter his own income.

The Tax Litigation

The IRS ended up making a project out of it.  Finally, in 1996 one test case was heard with the decision to be binding on over 120 cases.  Bealor v. Commissioner, 72 T.C.M.  730,, as you might guess found that theemployee leasing arrangement was a sham.  Among the facts noted was that the original “loan” by the corporation to the partnership was handled by a check that never was introduced into the banking system.

Waiting for the Other Shoe to Drop

The current bankruptcy decision concerns what happened after the Bealor decision.  One would expect that Mr. Bryen would have gotten a bill within a couple of months of the decision. That’s not what happened.  Here’s what happened :

Once the Bealor Decision was final, the Debtor knew that he would be subject to additional tax liability and that the IRS would send him notice of the amount the IRS believed that he owed. While the Debtor knew that he also would be subject to interest and penalties, he did not know, at that time, the precise amount of additional tax that ultimately would be assessed.

For approximately five (5) years after the Bealor Decision was issued in 1996, the Debtor did not receive any communication from the IRS regarding the specific amount of his additional tax liability.

 On June 27, 2002, the parties’ negotiations culminated in the Debtor signing three (3) stipulations with the IRS  All three (3) stipulations stated that the Debtor owed taxes due to substantial underpayment attributable to tax motivated transactions.

The total  for tax and penalties was $2,808,444.  Then they added the interest.  That brought the total tab to $13,556,124.82. Mr. Bryen’s total payments on this obligation were exactly 0.  The court noted that in the years from 1996 to 2003 Mr. Bryen’s income ranged from the mid sixties to as much as $190,000.  In 2004, when he filed for bankruptcy his projected annual income was $125,000.  He listed 23 million dollars in debts of which 19 million was due to the IRS.  (I don’t know how it got from 13 to 19.  It probably doesn’t matter).

High on the Hog ?

It is Mr. Bryen’s behaviour during the years between the Bealor decision and arriving at the actual amount owed that is denying him the debt discharge.

The court describes Mr. Bryen’s lifestyle during this period in what to me sounds like a critical tone. He spent as much as $25,000 on travel in some years and shared the expenses of a beach house owned by his girl friend, whom he subsequently married.  They spent $5,000 on their wedding the cost being evenly split between them. 

I have this real mental split about how I respond  to amounts of money.  I have a rule with my kids that they can’t use the word “only” in conjunction with any sum of money greater than four dollars (My kids are 18 and 22, by the way).  I’ve not had a particularly onerous life, but as a teenager living with my mother, I was technically below the poverty line.  When I was in VISTA, I used to consider how many cans of tuna fish I had to be a significant portion of my net worth.  To this day, I get a warm fuzzy feeling when I open the cabinet and see 10 or more cans of tuna fish. So I understand the perspective that sees Mr. Bryen living real high during that period. On the other hand I’ve lived in a business world not that far removed from Mr. Bryen’s where an income of $150,000 might be referred to as a buck and a half.  The court is criticizing Mr. Bryen because he didn’t live a frugal lifestyle for the five years that the IRS spent dithering after they won the Bealor case.  The thing is that you could have teamed up Suzie Orman and my mothers friend “Aunt” Melba, who would mix four cans of water with the frozen orange juice, to run Mr. Bryen’s life while he was waiting for the hammer to fall  and he might have been able to save up something like $300,000 or so.  In which case he would have owed more than he could ever conceivably pay.  Choosing instead to live a not frugal lifestyle he ended up owing more than he could ever conceivably pay.

I am really curious as to how much Mr. Bryen would have had to have saved up in order to have gotten out from under this.  Even more interesting is how much the IRS will ultimately collect on this assessment that relates back to the eighties.  The are still fighting with the late Harry Stonehillwhose assessments go back to the late fifties.

Back to the Eighties

Thete is another hand to my sympathy with Mr. Bryen.  The tax shelters of the 1980′s usually promised deferral and sometimes conversion to capital gains.  The employee leasing deals were pure deferral.  So Mr. Bryen should have been advising his clients to put the tax savings into an account invested in tax exempt bonds.  Then when the shelter turned around on them they would have the money to pay the taxes.  Apparently he did not do that himself.