Paul L. Caron

Tuesday, September 23, 2014

Camp: 9th Circuit on 'Willful Attempts to Evade or Defeat Taxes' Under Bankruptcy Code § 523(a)(1)(C)

From Bryan Camp (Texas Tech), Hawkins v. Franchise Tax Board, No. 11-16276 (9th Cir. Sept. 15, 2014):

The bankruptcy court had refused to allow the discharge of certain tax debts, holding that the debtor’s actions pre-bankruptcy were “willful attempts to evade or defeat taxes” within the meaning of 11 U.S.C. § 523(a)(1)(C). The basis for the holding was that the debtor lived a life of luxury even in the face of overwhelming tax liabilities that had accrued because the Service disallowed losses from the taxpayer’s tax shelters. The bankruptcy court found that the debtors personal living expenses from January 2004 to September 2006 exceeded their earned income by up to $2.35 million during that period. The district court affirmed.

In a 2-1 decision, the 9th Cir. panel reversed, holding that the discharge exception in § 523(a)(1)(C) required proof of specific intent before it could apply. The main basis for that holding was the Court’s view that the § 523(a)(1)(C) language almost exactly matches language in 26 U.S.C. § 7201, a criminal statute imposing felony punishments to anyone who “willfully attempts to evade or defeat any tax.” The Supreme Court had decided that the term willfully in 7201 required proof of specific intent. The panel majority believed what was true for § 7201 should be true for true for §523(a)(1)(C). The dissent disagreed and would have followed the standard interpretation of §523(a)(1)(C) adopted by all the other circuits to have considered the matter, which requires only actions that, objectively, amount to avoiding tax payments with the term “willful” meaning only knowing, deliberate and conscious, as opposed to accidental or unknowing.

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