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#2158 signed 8-1-95



In re:


Chapter 13

No. 92-22289-13



This proceeding is before the Court for a determination of the amount of David Monhollon's 1989 forgiveness-of-debt-income arising from his involvement in a corporation called Systems 3 Personnel Services, Inc. The Internal Revenue Service (IRS) is represented by counsel James J. Long and John A. Dicicco of the United States Department of Justice, Washington, D.C. Debtor David Monhollon is represented by counsel Lynn D. Lauver of Topeka, Kansas. The court has reviewed the relevant pleadings and exhibits, and is now ready to rule.


Debtor David Monhollon(1) was an incorporator, director, and secretary of Systems 3 Personnel Services, Inc. (Systems 3). He also owned Systems 3 stock, had authorization to sign its checks, and did sign its checks on occasion. His mother, JoAnn Monhollon, asked him to help her set up Systems 3, which he did by providing start-up money and co-signing debt. He was made the secretary of the corporation, but his mother held all other offices. He claims he had no continuing involvement with the business, except as an outside sales agent soliciting customers.

The debtor claims his mother handled all of Systems 3's financial affairs. Accountants kept the company's books and prepared its tax returns, always dealing directly with his mother. While she ran Systems 3, the debtor received various advances from the corporation. In return, for at least some of the advances, he signed notes prepared by Systems 3's accountants, but he claims not to know the total amount of these notes. He contends he did not learn until June 1989, when his mother told him, that the corporation needed money to pay "some taxes." He then repaid $11,000 in advances he had received from the company, and a short time later, bought a cashier's check for $8,400 which he gave to the IRS on behalf of Systems 3.

In July or August 1989, Systems 3's bank called all its loans and, ultimately, transferred all or most of the business's assets to a company owned by some of Systems 3's accountants. The corporation's records showed that the advances made to the debtor by the time the company failed totalled $61,293. Apparently because Systems 3 went out of business, it forgave the debtor's obligation to repay the advances, leading the IRS to attribute forgiveness-of-debt-income to him for 1989 in the amount of the advances.

The records submitted to the Court demonstrated that Systems 3's books showed total advances of $37,014.04 to the debtor as of December 31, 1988. By that time, he had signed promissory notes for such advances totalling $26,659.48. The notes state that they covered advances from October 1987 to September 1988. No evidence was presented about the remaining $10,354.56 shown on the books as advances to the debtor.

Sometime around the beginning of 1989, Systems 3 changed accountants. The corporation's books list additional expenditures in 1989 as advances to the debtor. However, the records show that besides payments to the debtor himself, these advances included payments to third parties identified as Commerce Bank & Trust, Pizza Hut, Mike Monhollon, Kaw Valley State Bank, Janet Schoenfeld, Med Assist, Assays, Brownies, AM Express, KPL Gas Service, Larry Hughes, "Park & Rec," and Systems 3 itself. A number of other payments were for "Via charges." One advance is identified only as "Cash," and another is identified as "Cash - IRS - David." All told, the advances attributed to the debtor but paid to third parties or "cash" total, according to his counsel, $16,593.85.

In his testimony, the debtor offered reasonable explanations why Systems 3 might have made many of these payments on its own behalf. For example, Janet Schoenfeld was a corporate employee who would have been entitled to wages and perhaps other payments. Systems 3 owed a debt to Kaw Valley State Bank at the time it made the payments to the bank. The corporation also sponsored a softball team, and so would likely have made the payments to Assays, a local sporting goods store, and the Parks and Recreation Department in connection with that sponsorship.


Federal Rule of Bankruptcy Procedure 3001(f) provides that a properly executed and filed proof of claim constitutes prima facie evidence of the claim's validity and amount. As the party objecting to the IRS's claim, the debtor had the burden to produce evidence sufficient to rebut the effect of the proof of claim, while the IRS retained the ultimate burden of persuasion. 8 Collier on Bankruptcy ¶3001.05 (15th ed. 1994). In addition, in the absence of other evidence, the Court would accept Systems 3's records as showing the amount of the debtor's obligation to it. While, the evidence in many instances refuted the corporate records of advances made during 1989, the only evidence about the advances shown before that year was consistent with the corporate records. Furthermore, since Systems 3 changed accounting firms about the end of 1988, the Court believes it has an insufficient basis to conclude the questionable attribution of payments which occurred in 1989 also occurred before that time. Consequently, the Court concludes that at the end of 1988, the debtor owed Systems 3 a total of $37,014.04 in loans advanced to him.

For 1989, however, the Court concludes the debtor has shown that $16,593.85 in corporate payments were improperly listed on the books as loans to him. As indicated, the records show the payments were not made to the debtor but to others or to cash. Apparently, the accountants simply spoke to some corporate officer or employee, possibly the debtor's mother, and accepted the assertion the payments all constituted loans to or for the benefit of the debtor, despite the third-party payees or unidentified recipients. Besides the fact they were not paid to him, the debtor has offered reasonable explanations which indicate even more clearly that many of the third-party payments probably benefited the corporation rather than him personally.

The debtor has also shown that he paid $19,400 to or on behalf of Systems 3 in June 1989. As the IRS concedes, these amounts must be credited against his debt to the corporation before determining the amount of debt the corporation forgave.

For these reasons, the Court concludes the debtor received $25,299.15 in forgiveness-of-debt-income from Systems 3 in 1989. This amount is the $61,293 the corporation reported to the IRS, minus the $16,593.85 in payments to others, and minus the $19,400 the debtor paid to or for the corporation. His 1989 income tax liability should be adjusted in accordance with this decision.


Dated at Topeka, Kansas, this 1st day of August, 1995.




1. 1Only David Monhollon received advances from Systems 3, and this decision concerns only his tax liability. Any liability Jan Monhollon might have for the taxes would apparently arise from her status as David's wife, and perhaps from having filed a joint tax return with him.


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