There’s Always Something (the IRS) There to Remind Me

There's Always Something (the IRS) There to Remind Me

Dionne Warwick Bankruptcy Case Seeks to Discharge Taxes

By: Daniel Brown

“Wishin’ and Hopin’”[2] to discharge more than $10.2 million in taxes, Dionne Warwick filed a Chapter 7 personal bankruptcy case in the United States Bankruptcy Court for the District of New Jersey on March 21, 2013.  According to her filed bankruptcy petition, the tax debts owed include $6,955,192.03 in personal income taxes due to the IRS for nine of the years between 1991 and 2007 and $3,246,500.46 in business taxes which she personally owes to the California Board of Tax Appeals for the years 1990-1998.

Ms. Ross’ attorney, Daniel Stolz, was quoted in Rolling Stone as blaming Ms. Ross’s tax problems on a former business manager.[3]  According to her attorney, Ms. Ross “filed her taxes annually”, but was unable to work out a payment arrangement with the IRS, despite several attempts over the years.

As quoted in Rolling Stone, her attorney said “The taxes are of an age where under the bankruptcy code, they’re dischargeable taxes.  We’ve found that we had no other resort other than to file bankruptcy so that we could get this off her back finally.”[4]

Dionne Warwick is not an Andreozzi Bluestein client, but we tell her tale to illustrate a point:  Contrary to common belief and what appears on many websites, taxpayers can discharge substantial amounts of certain kinds of Federal or State taxes through a bankruptcy case, provided that certain conditions are met.

Each tax obligation must be separately examined to see if they meet the following criteria:

1.  Is the Taxpayer which is seeking to discharge the taxes an individual?

Only an individual taxpayer is eligible to obtain a discharge in a bankruptcy case.  Corporate or partnership taxpayers may use a Chapter 11 bankruptcy to pay off their tax obligations over far longer time periods than would likely be available outside of bankruptcy and may be able to pay only a reduced amount of unsecured non-priority taxes, but only an individual can seek to “discharge” Federal or State taxes through a bankruptcy case.

Clearly, Dionne Warwick meets this criteria.

2.  Are the taxes which are sought to be discharged tax claims entitled to statutory “priority” status, under the Bankruptcy Code?

Generally, the Bankruptcy Code gives “priority” status to all taxes (and interest, but not penalties) for which a tax return was due (including any extensions) less than three years before the bankruptcy case was filed.  For so long as a tax is a “priority” tax, it cannot be discharged.  Unsecured penalties are never entitled to priority and can be dischargeable, regardless of how recent they are.

Congress decided, as a matter of public policy, that taxes which a taxpayer was required by law to collect, as a fiduciary, from third-parties and to then pay over to the government, will always be priority tax claims and will therefore never be dischargeable through a bankruptcy case.  Such tax claims (including sales taxes and the employees’ portion of withheld income and social security taxes), are commonly referred to as “trust fund taxes”.

A taxpayer’s own individual tax debts, however, like income taxes or an individual employer’s own one-half obligation to pay social security taxes, are not “trust fund” taxes and could potentially be dischargeable through a bankruptcy case, three years after the respective due dates for the returns.

The “three years from the due date of the return” rule is also potentially subject to extensions.  For example, if a taxpayer filed a prior bankruptcy case, or took one of several other actions which might defer collections, such as filing a Collection Due Process Appeal, such actions could also extend the time before the taxes involved will be potentially dischargeable.

All of Dionne Warwick’s personal obligations for income and business taxes appear to be non-priority and non-trust fund taxes well in excess of three years old and appear to be potentially dischargeable through a bankruptcy case.  Dionne’s bankruptcy petition lists no prior bankruptcy cases as having been filed, but we cannot tell from any public record if there is anything else that may have extended the time before her taxes become dischargeable.  Since most of her tax obligations are almost as old or older than my college-aged children, however, we will assume, for purposes of this article, that she passes this test.

3.  If the Taxpayer filed his or her tax return late, have at least two years passed since the date that the late filed return was filed?

Even if a tax debt is more than three years old, if the taxpayer filed a return late and two years has not yet passed since the return was filed, then he or she cannot discharge that tax debt until two years has passed.

There is no public record that discloses whether Dionne Warwick filed any of her tax returns late.  As noted above, her lawyer told the Rolling Stone that Dionne “filed her returns annually,” which we will assume, for purposes of this article, means that her returns were all timely filed.

4.  Do the tax liabilities which are sought to be discharged pass the “240-Day Test”?

Even if a tax debt is more than three years old, a taxpayer cannot discharge a tax debt which was either assessed within 240 days of a bankruptcy filing or where the tax liability was not yet assessed, but was still legally assessable, at the time that the bankruptcy case was filed.

Generally, where returns have been filed and where no fraud or attempt to evade tax is involved, the IRS gets three years from the time that a tax return is filed to assess a tax or any tax deficiency.  Assuming that a return was timely filed, the 240-day rule typically comes into play where the three-year period after filing has already passed and the statute of limitations for an assessment has been extended or tolled for some reason and the IRS is pursuing something in the nature of an audit deficiency.

In the case of Dionne Warwick, we are aware of no facts suggesting that she is seeking to discharge any tax liability which was assessed in the last 240 days or which could still be assessable.  Again invoking the “her tax obligations are almost as old or older than my college-aged children” assumption, Dionne appears to pass this test.

5.  Did the Taxpayer file all returns or file a fraudulent return or willfully attempt to evade or defeat the taxes claimed?

A taxpayer cannot discharge a tax debt if he or she filed a false or fraudulent tax return or “willfully attempted in any manner to evade or defeat such tax”.  For example, if a taxpayer willfully failed to report some material portion of his income, he cannot later seek to wipe out that tax debt through a bankruptcy discharge after getting caught.

Furthermore, a tax is not dischargeable if no return was filed by the taxpayer for the applicable tax obligation.  For purposes of the dischargeability rules, the taxpayer also must be the one who filed the tax return.  For any tax period where the IRS prepares and files a tax return, pursuant to Section 6020(b) of the Internal Revenue Code, for a taxpayer who has failed to do so, such “substitutes for a return” do not count as a “filed return”.  The taxpayer is considered to have “failed to file the return” for that tax period, for dischargeability purposes, such that the underlying tax liability will not be dischargeable through a bankruptcy case.

There is nothing in the public record suggesting that Dionne Warwick did not file returns or that she filed false or fraudulent returns.  Her lawyer contended in the Rolling Stone that the total payments she has made against these taxes exceed the original tax amount owed, but she has not been able to pay them in full only because of the accrual of interest and penalties.[5]  This sounds like someone trying to do what the law requires, so we will assume, for purposes of this article, that Dionne Warwick has not attempted to evade or defeat these taxes and that she meets this test too.

6.  Does the Taxpayer have equity in assets to which a tax lien attached prior to bankruptcy?

Even if a tax debt would meet all of the above tests and would therefore be dischargeable, as a claim against the bankruptcy debtor and all of her future assets, a bankruptcy discharge will not terminate any pre-bankruptcy liens against property of the debtor which attached to equity of the debtor prior to bankruptcy.  Stated another way, where a tax lien was filed[6]and attached to equity in an asset prior to the time the bankruptcy case was filed, a tax lien will remain as an undischarged claim against those assets, even if the applicable tax claims are otherwise dischargeable as against the debtor.

As noted above, Dionne Warwick’s lawyer specifically stated that this case was being filed to discharge her taxes.  If you accept what is listed in her Bankruptcy Petition and Schedules as being accurate, this is would seem to be possible:  Notwithstanding all of her years of success and still ongoing performances, Dionne Warwick’s Bankruptcy Schedules state that all her assets total only $25,500.00, all of which she asserts to be “exempt” from claims of her creditors, under Federal law.  She lists no “secured” creditors and, if this was accurate, all of her tax debts would appear to be fully dischargeable through her Chapter 7 bankruptcy case.

Unfortunately, there are questions whether Dionne’s Bankruptcy Schedules are fully accurate.  That the IRS would have been trying to collect tax liabilities against her for more than 20 years without filing a lien against her seemed unlikely.  In fact, a quick New Jersey public records search reflects that the IRS has filed Notices of Federal Tax Lien against her in all 21 New Jersey counties, which presumably would have attached prior to bankruptcy to all assets listed on her Bankruptcy Schedules, notwithstanding that those assets were claimed as “exempt” in the bankruptcy case.

It’s not clear from online records whether Dionne Warwick’s Chapter 7 Trustee questioned the limited amount of assets listed on her Bankruptcy Schedules.  Subsequent to her bankruptcy filing, however, the IRS has put this into question.

“Déjà Vu”?[7]

On May 24, 2013, the U.S. Department of Justice, Tax Division, on behalf of the IRS, filed a motion in the United States Bankruptcy Court, seeking court authority to file liens and to apply against Dionne Warwick’s tax obligations funds received from levies relating to amounts due to two corporations, Star Girl Productions, Inc. and KMBA Productions.  The IRS is asserting that these companies are “alter egos” of Dionne Warwick, such that the IRS could properly regard their assets to be property subject to its liens and could properly levy upon assets held by those companies in satisfaction of her income tax liabilities.[8]  As of the time this is being written, that motion has not yet been heard and it is likely that the legal questions raised by the Government’s motion will not be resolved for some time.

Going forward, assuming Dionne Warwick ultimately gets her bankruptcy discharge, her tax debts and all of her future income would no longer be subject to old tax claims, even though any assets held in other names which are ultimately determined to belong to her likely will be deemed subject to tax liens and could potentially be liquidated to pay her tax obligations.

The Government’s assertion that Dionne Warwick has been secretly hiding assets in the names of two corporations that she does not own, however, opens the possibility that the IRS will have grounds to argue that she has taken actions “to evade or defeat” the IRS taxes, which, as noted above, could be a grounds for denying her bankruptcy discharge altogether.

None of which changes the premise of this article, that taxes can be discharged through a bankruptcy case, if a taxpayer meets all of the tests described above.  Recent and future events may greatly affect whether Dionne Warwick will be able to discharge her taxes, however.

So what should Dionne Warwick say now to her bankruptcy lawyer about her ability to discharge all of her taxes?

“Promises, Promises”?[9]


[1] “(There’s) Always Something There to Remind Me” is a song written by Hal David and Burt Bacharach which was originally recorded as a demo by Dionne Warwick in 1963 and which was rerecorded and released as a single by Warwick in 1968.  In 1983, a technopop version of the song was released by Naked Eyes under the name “Always Something There to Remind Me”  Wikipedia

[2] “Wishin’ and Hopin'” is a song written by Hal David and Burt Bacharach, originally recorded by Dionne Warwick in 1963, which was a Top 10 hit for Dusty Springfield in 1964. Wikipedia

[3] “Dionne Warwick Files for Bankruptcy”, Rolling Stone (Online Edition), March 25, 2013, viewed 06/01/2013 http://www.rollingstone.com/music/news/dionne-warwick-files-for-bankruptcy-20130325#ixzz2TJJdxYz3.

[4] Id.

[5] Rolling Stone, supra.

[6] Although a Federal Tax Lien arises at the time that a tax assessment is made, it is not effective against a bankruptcy estate unless a Notice of Federal Tax Lien has been filed prior to bankruptcy, consistent with the requirements of 11 U.S.C. Section 6323 and 11 U.S.C. Section 546.

[7] “Déjà Vu” is a song written by Isaac Hayes and Adrienne Anderson and recorded by Dionne Warwick in 1979.  The song went to number 15 on the Billboard Hot 100. Wikipedia

[8]  “IRS Targets Dionne Warwick’s Tax Debt”, Wall Street Journal (Online Edition), May 24, 2013, viewed 06/01/2013, http://blogs.wsj.com/bankruptcy/2013/05/24/irs-targets-dionne-warwicks-tax-debt/.

[9] “Promises, Promises” is the title song (music by Burt Bacharach, lyrics by Hal David) from a Neil Simon musical based on the 1960 film The Apartment.  Not a part of the Broadway production, Dionne Warwick released a single of the title song in 1968 which became a Top Twenty Hit. Wikipedia

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