Wealthy Doctor Who Lied and Hid Assets Can't Get Tax Debts Discharged

(Parker Tax Publishing January 2022)

The Bankruptcy Appellate Panel for the Ninth Circuit affirmed a bankruptcy court's order granting the U.S. Trustee (UST) summary judgment and denying a debtor's discharge of tax debts under Sections 727(a)(3) and 727(a)(4)(A) of chapter 7 of the Bankruptcy Code. The court found that, given the amount of uncontroverted evidence that the debtor failed to keep or maintain financial records, falsified a court order, and made false oaths in connection with his bankruptcy case, the bankruptcy court did not err in granting the UST summary judgment and denying the debtor's discharge. In re Kresock, 2021 PTC 400 (B.A.P. 9th Cir. 2021).

Background

Dr. Frank Kresock is a cardiologist and the sole owner and operator of his medical practice, The Cardiovascular Center, LLC (CVC), which has been in operation since 2009. Before that, in 2000, Dr. Kresock was convicted on felony counts of various tax crimes for which he served a prison sentence and was subsequently placed on probation. With respect to his medical practice,

Dr. Kresock did not pay himself wages or a salary. Instead, CVC paid all of his personal expenses. Since 2009, Dr. Kresock's girlfriend, Janine Smith, lived with him and worked at CVC. Ms. Smith is not paid a salary from CVC, but Dr. Kresock pays all of her expenses, including the mortgage interest payments on four homes titled in her name. For the period from 2010 to 2015, Dr. Kresock gave Ms. Smith annual gifts of $100,000 and had his CPA prepare gift tax returns to reflect these gifts.

Dr. Kresock filed a chapter 11 bankruptcy petition in July of 2016, seeking to discharge his debts, including a proof of claim that he owed the IRS almost $2.3 million in taxes. As of his petition date, Dr. Kresock had not filed income tax returns for tax years 2010 through 2015. On his original bankruptcy schedules, he did not schedule any income tax debt for tax years 2010 through 2015. Over the first 20 months of the case, the United States Trustee (UST), the Arizona Department of Revenue (ADOR), and the IRS undertook significant efforts in trying to obtain financial information and records from Dr. Kresock. Dr. Kresock failed to respond in any meaningful way and most of the documents necessary to assess his financial condition and business transactions had to be subpoenaed from third parties. Dr. Kresock's case was converted to chapter 7 for failure to comply with an order granting the UST's motion to compel, failure to timely file operating reports, failure to timely provide information reasonably requested by the UST, and failure to timely file tax returns. In February of 2017, Dr. Kresock filed his federal tax returns for years 2010 through 2015.

In its litigation with Dr. Kresock, the ADOR requested that he produce a journal or spreadsheet of any transfers made by CVC to Ms. Smith with an explanation of each transfer, for the periods from January 1, 2010, to December 31, 2015. Dr. Kresock replied that he could not produce what the ADOR requested because he did not keep, and did not have, a spreadsheet or journal that listed any such transfers.

Dr. Kresock objected to a proof of claim filed by the IRS which, in part, included income taxes relating to 2007. In his objection, Dr. Kresock argued that he was not required to file a tax return in 2007, based on an agreement he had with the federal government.

During discovery, the IRS reviewed Dr. Kresock's federal tax returns for 2011 through 2015 and questioned their accuracy. While Dr. Kresock reported that he had no taxable income for each of those years, the IRS maintained that his income representations were implausible since the amount he paid in mortgage interest alone greatly exceeded his reported net income. Based upon Dr. Kresock's stated income, the IRS argued that it was impossible for him to have purchased the numerous homes, vehicles, boats, and other personal property that he owned. On no fewer than eight occasions, and on at least one occasion under oath at his Sec. 341(a) meeting, Dr. Kresock represented to the court, the UST, and creditors that, as a condition of his probation, he was not required to file income tax returns. To support his assertion, Dr. Kresock filed a copy of a portion of the document he maintained relieved him of his tax filing obligation - an excerpt from his criminal judgment. The excerpt listed six conditions of supervision numbered 14 through 19. Dr. Kresock cited to condition number 19 ("Condition 19") in support of his position, which provided: "the defendant is to pay federal and state income tax at the estimated statutory rate but is not required to file a federal or state income tax return." The UST asserted that Condition 19 was added by Dr. Kresock because it was in a type of font that differed from the type font of the other conditions on the page; the semi-colon at the end of condition number 18 appeared to have been handwritten; and Condition 19 was the only condition that used "is to" rather than "shall" to convey a directive. Scott Reardon, Dr. Kresock's probation officer, testified that, while his signature did appear on the document, Dr. Kresock's excerpt of the criminal judgment was falsified.

After the case was converted, the chapter 7 trustee (Trustee) filed a motion to compel Dr. Kresock to turn over an undisclosed vehicle identified as a green Hummer, which the Trustee discovered in a garage on one of Dr. Kresock's properties. Dr. Kresock said that he acquired it postpetition in 2017 and thus it was not property of the estate. When the Trustee asked for a copy of the title, Dr. Kresock produced an illegible bill of sale which appeared to indicate that the purchase date was February 26, 2017. However, a legible bill of sale obtained from the dealership showed that the Hummer was purchased on February 26, 2011. The bankruptcy court granted the Trustee's motion to compel the turnover of the green Hummer.

Dr. Kresock's Schedules and Statement of Financial Affairs (SOFA) filed with the bankruptcy court contained numerous falsehoods. For example, he did not disclose his $100,000 annual payments to Ms. Smith. Instead, he said under oath that he had not gifted anything with a value of $250 or more to anyone in the 12 months before the petition date. He also failed to disclose three open and active bank accounts in his SOFA and he filed an objection to the Trustee's seizure of several items of personal property. Some of the items seized had also not been listed on his SOFA and had significant value, such as a Rolex Presidential man's watch in the original box with authenticating papers.

Sections 727(a)(3) and 727(a)(4)(A) of chapter 7 of the Bankruptcy Code provide that a debtor will not be granted a bankruptcy discharge where the debtor has concealed, destroyed, mutilated, falsified, or failed to keep or preserve any relevant records and knowingly or fraudulently made false statements and claims. The UST moved for summary judgment under these provisions arguing that Dr. Kresock had: (1) unjustifiably failed to keep or preserve records from which his financial condition or business transactions might be ascertained; (2) unjustifiably falsified a document and submitted it to the court to conceal his financial condition and business transactions; and (3) knowingly and fraudulently made numerous false oaths.

In In re Kresock, 2020 PTC 370 (D. Ariz. 2020), an Arizona bankruptcy court agreed with the UST and denied Dr. Kresock's bankruptcy discharge. Dr. Kresock appealed to the Bankruptcy Appellate Panel (B.A.P.) of the Ninth Circuit. In his appeal, Dr. Kresock did not identify any material fact that was genuinely disputed. Instead, he argued that (1) his former attorneys and his CPA were to blame for the numerous financial errors and omissions in his bankruptcy papers, and (2) the bankruptcy court erred by considering the testimony from Mr. Reardon about his criminal judgment.

Analysis

The B.A.P. affirmed the district court's decision. The court noted that the provisions of the Bankruptcy Code cited by the UST make a bankruptcy discharge dependent on the debtor's true presentation of his or her financial affairs, and complete disclosure is a condition precedent to the granting of the discharge. The court highlighted the fact that the UST, the ADOR, and the IRS expended significant amounts of time and effort attempting to obtain basic financial records from Dr. Kresock. Further, the court noted, Dr. Kresock admitted that for the five years preceding his bankruptcy filing he did not maintain records of the transfers made from CVC. The transfer of substantial amounts of money to a third party, without documentation, the court concluded, established a prima facie violation of Sec. 727(a)(3).

With respect to Dr. Kresock's assertion that he relied on third parties to maintain his financial records for him, the court noted that he did not submit any admissible evidence to support this argument and his CPA testified that the accounting firm did not retain any books furnished by Dr. Kresock. According to his CPA, all Dr. Kresock produced for preparation of his tax returns was a billing statement and handwritten notes providing business income and expenses. In any case, the court said, the duty was on Dr. Kresock, not his CPA, to keep and maintain records.

With respect to his argument regarding Mr. Reardon, the court said Dr. Kresock filed no admissible evidence that controverted the UST's statements of fact about the criminal judgment or controverted Mr. Reardon's testimony. The court noted that, in opposition to the motion for summary judgment, Dr. Kresock asserted that the presiding judge amended the criminal judgment to add Condition 19 because the judge "did not want to monitor" Dr. Kresock's tax issues. The B.A.P found this argument highly unlikely given that Dr. Kresock's conviction was for attempted tax evasion.

For a discussion of the discharge of tax debts in bankruptcy, see Parker Tax ¶16,160.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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