Source: https://law.justia.com/cases/federal/appellate-courts/F3/55/195/579133/
Timestamp: 2019-08-20 01:44:18
Document Index: 579938823

Matched Legal Cases: ['§ 7203', '§ 523', '§ 727', '§ 523', '§ 523', '§ 523']

In the Matter of James Russell Bruner and Judith Ann Jonesbruner, Debtors.james Russell Bruner and Judith Ann Jones Bruner, Appellants, v. United States of America, Appellee, 55 F.3d 195 (5th Cir. 1995) :: Justia
Justia › US Law › Case Law › Federal Courts › Courts of Appeals › Fifth Circuit › 1995 › In the Matter of James Russell Bruner and Judith Ann Jonesbruner, Debtors.james Russell Bruner and J...
In the Matter of James Russell Bruner and Judith Ann Jonesbruner, Debtors.james Russell Bruner and Judith Ann Jones Bruner, Appellants, v. United States of America, Appellee, 55 F.3d 195 (5th Cir. 1995)
US Court of Appeals for the Fifth Circuit - 55 F.3d 195 (5th Cir. 1995)
In 1988, Dr. Bruner was indicted under 26 U.S.C. § 7203 on three counts of willfully failing to file federal income tax returns for 1981, 1982, and 1983. He pled guilty to one count of willfully failing to file his 1981 tax return. The district court ordered, inter alia, that Dr. Bruner pay a $10,000 fine, pay back taxes, penalties, and interest for the 1981 tax year, and file back income tax returns for 1981, 1982, 1983, 1984, 1985, 1986, 1987, and 1988.
The bankruptcy court conducted a trial on the dischargeability issue. The court held, inter alia, that the Bruners' tax liabilities for 1981, 1983, 1986, 1987, and 1988 were excepted from discharge pursuant to 11 U.S.C. § 523(a) (1) (C) because the Bruners had willfully attempted to evade or defeat their taxes for those years.3 The district court affirmed the bankruptcy court's determination. The Bruners have appealed to this court.
We review questions of statutory interpretation de novo. Penn v. Howe-Baker Engineers, Inc., 898 F.2d 1096, 1101 (5th Cir. 1990). Thus, we review de novo the district court's interpretation of the Bankruptcy Code. See Matter of Texas Research, Inc., 862 F.2d 1161, 1163 (5th Cir. 1989). We review the bankruptcy court's factual determinations, in which the district court concurred, under the "clearly erroneous" standard. See Matter of Webb, 954 F.2d 1102, 1103-1104 (5th Cir. 1992).
When a Chapter 7 debtor obtains bankruptcy relief, the general rule is that all debts arising prior to the filing of the bankruptcy petition will be discharged. See 11 U.S.C. § 727(b). However, Congress has excepted certain liabilities from discharge. For example, Sec. 523 of the Bankruptcy Code enumerates several situations in which tax liabilities are not dischargeable in bankruptcy. The pertinent statutory provision relevant to this dispute is 11 U.S.C. § 523(a) (1) (C). It provides:
11 U.S.C. § 523(a) (1) (C) (emphasis added).
The sole issue in this case is whether the district court correctly affirmed the bankruptcy court's conclusion that the Bruners "willfully attempted" to evade or defeat their taxes, such that their tax liabilities are excepted from discharge. The parties agree that the government bore the burden of proof on this issue. In concluding that the Bruners' tax liabilities for 1983, 1986, 1987, and 1988 were excepted from discharge under Sec. 523(a) (1) (C), the bankruptcy judge employed a three-prong test to determine whether the debtors had "willfully attempted in any manner to evade or defeat" their tax liabilities. The court concluded that the proper test is whether, in the case of a debtor who is financially able to pay his taxes but chooses not to do so, (1) the debtor had a duty under the law, (2) the debtor knew he had that duty, and (3) the debtor voluntarily and intentionally violated that duty.4
As to the third prong of the test, the bankruptcy judge carefully considered the relevant cases which have construed the willfulness aspect of Sec. 523(a) (1) (C) (discussed below) and concluded that the Bruners did indeed "willfully attempt [ ] to evade or defeat" their tax liabilities. In particular, the bankruptcy court noted that, not only did the Bruners fail to pay their taxes, they also engaged in a pattern of failing to report their income and file returns. Thus, their conduct indicated they were willfully attempting to evade or defeat the assessment of taxes against them. Moreover, the bankruptcy court also concluded that the Bruners had conceded that Three-L Ministries was a shell entity for hiding income and assets, because they agreed to accept the returns filed for them by the Service for 1981 through 1983, in which income passing through Three-L was imputed to them. The bankruptcy judge also referred to the numerous cash transactions in which the Bruners had engaged, implicitly indicating that these cash transactions constituted attempts to hide income and assets.
The district court reviewed the bankruptcy court's interpretation of Sec. 523(a) (1) (C) de novo, and reviewed its findings of fact for clear error. The district court affirmed the bankruptcy court in all respects and concurred in the bankruptcy court's factual finding. The district court noted the application of the three-prong test and rejected the Bruners' contention that proof of an affirmative act is required in order to find that a debtor "willfully attempted" to evade or defeat a tax. The court noted in its Memorandum Ruling that the purpose of Sec. 523(a) (1) (C) is to prevent the use of the Bankruptcy Code as part of a dishonest scheme to avoid liability, while at the same time providing relief to the honest debtor. Because the Bruners failed to file tax returns and pay their income tax liability when financially able to do so, the district court concluded that the Bruners did not qualify as the sort of "honest debtor" the Code was designed to protect.
On appeal, the Bruners forward essentially the same arguments as presented below. They contend that the bankruptcy court erred in employing the three-part test forwarded in Toti and other cases. They assert that this court instead should follow In re Gathwright, 102 B.R. 211 (Bankr.D. Or. 1989), and require proof of an "affirmative act" on the part of debtors to evade or defeat their taxes. Because the Bruners contend that they committed no affirmative act, they urge that, under Gathwright, their tax liabilities should be discharged. They also argue that if mere non-payment is construed to constitute willful evasion under Sec. 523(a) (1) (C), then all tax debts will be non-dischargeable. Thus, proof of some affirmative act should be required.
We have carefully considered the arguments forwarded by the Bruners. However, we are not persuaded that any relief should be granted. Because we can deal with the Bruners' alternative arguments swiftly, we will address them first before turning to their argument regarding the proper interpretation of Sec. 523(a) (1) (C).
Next we will address the Bruners' argument that In re Gathwright, supra, should apply such that we should require proof of an affirmative act on the part of debtors to evade or defeat the imposition of the tax against them. Gathwright is the Bruners' sole support for this proposition. We note at the outset that Gathwright has been rejected by the majority of courts to address the issue. See, e.g., In re Griffith, 161 B.R. 727, 732 (Bankr.S.D. Fla. 1993); In re Jones, 116 B.R. 810, 815 (Bankr.D.Kansas 1990); In re Berzon, 145 B.R. 247, 250 (Bankr.N.D. Ill. 1992).
Because of the dearth of Fifth Circuit or Supreme Court cases on the interpretation of Sec. 523(a) (1) (C) in this regard, for instruction we must look to the other circuit courts which have addressed the "willfulness" issue under Sec. 523(a) (1) (C).
The Sixth Circuit, in In re Toti, supra, 24 F.3d at 809, held that Sec. 523(a) (1) (C) includes acts of commission and acts of omission. In Toti, the debtor had failed to file tax returns or pay taxes from 1974 to 1981, although he knew he had a duty and had the ability to do so. He was subsequently indicted on three counts of willful failure to file. He pled guilty to one count, and the other two counts were dropped. As part of his sentence, Toti agreed to file his delinquent returns and to pay some of his tax liability. He later stopped making payments as agreed upon, due to financial problems. When he later filed for bankruptcy, Toti sought discharge of his tax liability and forwarded the same argument that the Bruners assert here, i.e., that proof of an affirmative act is required. The Sixth Circuit rejected Toti's argument, noting that a plain reading of Sec. 523(a) (1) (C) includes both acts of commission and omission. 24 F.3d at 809. The Court held that Toti's tax debts were excepted from discharge because Toti did not fall within the category of "honest debtors" the Bankruptcy Code was designed to protect. He had the wherewithal to file his return and pay his taxes, but he voluntarily, consciously, and intentionally did not fulfill his obligation.
Our colleagues of the Eleventh Circuit were presented with a slightly different scenario in In re Haas, supra. The taxpayer/debtor in Haas had accurately reported his income and had timely filed his tax returns but had not paid his taxes, choosing instead to apply his funds to his other liabilities. The Eleventh Circuit rejected Toti and held that the language of Sec. 523(a) (1) (C) ought to be construed consistently with the criminal provisions of the Internal Revenue Code. 48 F.3d at 1155-57. In the Internal Revenue Code, heavier criminal liability is imposed for willfully attempting to evade or defeat a tax than for simply not paying it. The Eleventh Circuit reasoned that Sec. 523(a) (1) (C) should follow the usage of the Internal Revenue Code. Moreover, the court noted that if "mere" non-payment of taxes is sufficient to render them non-dischargeable under Sec. 523(a) (1) (C), then, as a practical matter, tax debts will always be non-dischargeable in bankruptcy, because the existence of an unpaid tax debt is the necessary prerequisite for the dischargeability issue to arise in a bankruptcy case. Otherwise, the court noted, discharge of tax liabilities will only be available "to those very few debtors who discovered their debts to the IRS in the course of their bankruptcy proceedings." Haas, 48 F.3d at 1155.
Having carefully considered both Toti and Haas, we conclude that Toti expresses the preferable view. Section 523(a) (1) (C) surely encompasses both acts of commission as well as culpable omissions. The language of the statute itself reveals that a willful attempt "in any manner" to evade or defeat a tax precludes discharge. Moreover, we conclude that the Bruners' activities were more akin to those of Toti than those of Haas. Toti, like the Bruners, had failed to file tax returns or pay taxes for eight years in a row. He only filed his returns when the threat of criminal sanctions became a reality, and even then he did not pay his entire tax obligation. In Haas, the debtor had honestly and diligently filed his tax returns, but had used his income to pay his personal and business debts rather than his tax liability. Thus, Haas involved a properly acknowledged tax liability which the debtor simply did not pay. By contrast, the Bruners were involved in much more flagrant conduct aimed at avoiding even the imposition of a tax assessment against them. They were engaged in a pattern of failing to report income, failing to file tax returns, and failing to pay taxes. Moreover, they apparently conducted an inordinate number of cash transactions and even created a shell entity designed to conceal their income and assets. The Bruners were engaged in both acts of omission and acts of commission, all designed to willfully evade the imposition of taxes against them. This is not a case of "mere" non-payment like that in Haas. Thus, we need not squarely resolve the "affirmative act" argument forwarded by the Bruners, because the Bruners did engage in affirmative acts designed to evade their tax liabilities.
A pattern of non-payment such as is present here, particularly when accompanied by a pattern of failure to file returns and coupled with conduct obviously aimed at concealing income and assets, certainly constitutes a willful attempt to evade or defeat taxes for purposes of Sec. 523(a) (1) (C). Undoubtedly, the Bruners do not qualify as the sort of "honest debtor" the Bankruptcy Code is designed to protect.
The court found that the penalties for these years were dischargeable, pursuant to 11 U.S.C. § 523(a) (7)
This three-prong test for civil willfulness has been enunciated by other courts to consider the issue, including In re Haas, 173 B.R. 756 (S.D. Ala. 1993), reversed, 48 F.3d 1153 (11th Cir. 1995), and U.S. v. Toti, 149 B.R. 829 (Bankr.E.D. Mich. 1993), affirmed, 24 F.3d 806 (6th Cir. 1994)