The taxpayer settled a case form more than 2.7 million dollars. The settlement documents were drafted in such a way that it appeared the proceeds were for her personal injury. She reported the income on an attachment to the the return and explained the non-taxable nature of the proceeds.
The IRS sent a deficiency notice three years later. The taxpayer filed for chapter 11 bankruptcy and the IRS filed a claim for the amount of the tax claimed. She later dismissed her chapter 11 and filed a chapter 7 in which she filed a complaint to determine the dischargeability of the debt.
In order to find fraud, the IRS had to establish, that hte debtor had knowledge of the falsity of the return and that the debtor had an intent to evade the tax as well has proving that there was an underpayment of the tax.
The court found based on the facts in the record that the taxpayer had an honest subjective belief that the income was not taxable. No fraud.
See In re Jones, 364 B.R. 118 (Bkrtcy.M.D.Fla. 2007)