Opinion ID: 205504
Heading Depth: 2
Heading Rank: 2

Heading: The Mental State Requirement

Text: Because the conduct requirement has been satisfied, the outcome of this case hinges on whether the Government proved by a preponderance of the evidence that Mitchell willfully attempted to evade or defeat his taxes as required by § 523(a)(1)(C). A debtor acts willfully when the debtor's attempt to avoid tax liability is `done voluntarily, consciously or knowingly, and intentionally.' Jacobs, 490 F.3d at 921 (quoting Fretz, 244 F.3d at 1330). The required mental state is shown when the Government proves that the debtor: (1) had a duty under the law, (2) knew he had that duty, and (3) voluntarily and intentionally violated the duty. Jacobs, 490 F.3d at 921 (quoting Griffith, 206 F.3d at 1396); see also In re Gardner, 360 F.3d 551, 558 (6th Cir.2004). During the trial before the bankruptcy court, Mitchell admitted he had a duty to pay income taxes and that he knew of the duty. Therefore, the only issue for this Court to decide is whether Mitchell voluntarily and intentionally violated his duty to pay his income taxes. In Fretz, we held that [t]he third or willfulness component of the mental state requirement `prevents the application of the exception to debtors who make inadvertent mistakes, reserving nondischargeability for those whose efforts to evade tax liability are knowing and deliberate.' Fretz, 244 F.3d at 1330 (quoting Birkenstock, 87 F.3d at 952). However, in Jacobs, we clarified that [a]lthough this Court did suggest in Fretz that `inadvertent mistakes' are insufficient to trigger § 523(a)(1)(C)'s exception to dischargeability, it also made clear that the necessary trigger is knowledge and deliberateness. Jacobs, 490 F.3d at 924. Accordingly, the established rule in this Circuit is that a debtor's tax debts are non-dischargeable if the debtor acted knowingly and deliberately in his efforts to evade his tax liabilities. Id. After a three day trial, the bankruptcy court found insufficient evidence to support a conclusion of willfulness as required by § 523(a)(1)(C). Specifically, the bankruptcy court found the case lacks the type of fraudulent behaviors such as hidden assets or extravagant spendingthat would support a finding of willfulness. (R.1:34). However, we have held that fraudulent intent is not required, see Fretz, 244 F.3d at 1330, and that all the Government must prove is that Mitchell acted knowingly and deliberately. See id.; Jacobs, 490 F.3d at 924. The record contains overwhelming evidence of Mitchell's willful intent to evade his taxes, and the bankruptcy court clearly erred when it concluded there was insufficient evidence to support a conclusion of willfulness. First, Mitchell testified at trial that he did not file tax returns for 1998 to 2002 until June of 2003 because he knew if he did, the IRS would try to collect the full amount that he owed. When asked why he had not paid anything towards his past due taxes even though in 2001 he earned over $170,000, Mitchell responded: [i]t doesn't take a rocket scientist to figure out that I'm going to owe somewhere around [$]300,000 plus interest and penalties. So at that point, I haven't filed anything. I don't have [$]300,000. I don't want to open this up yet. (R.3:678). Second, in 2002, despite owing four years of past due taxes to the IRS, Mitchell and Kathleen bought the Pintail House from Mitchell's friend for $200,000, but they purchased the house solely in Kathleen's name even though Kathleen had no income and Mitchell paid the mortgage, insurance, and utilities. When asked why they chose to purchase the house solely in Kathleen's name when Mitchell made all of the house payments, Mitchell told the bankruptcy court that he knew he had tax problems with the IRS and did not want to jeopardize the house. Mitchell testified that he understood the IRS could put liens and levies on the house and that it was a no-brainer to put the house in his wife's name. (R.3:680). In 2005, although Mitchell still owed five years of past due taxes, he and Kathleen sold the Pintail House and agreed to pay $465,000 for the construction of a larger house (Leafbrook House). Again the house was titled solely in Kathleen's name despite the fact that Mitchell paid the mortgage, insurance, and utilities. Third, in November of 2004 while the third offer in compromise was pending, Mitchell's attorney sent a letter to the IRS warning that Mitchell could file bankruptcy against all of the non-payroll taxes except 2002 and 2003 (and could so against 2002 in April, 2006, and against 2003 in April, 2007). (Govt. Exh. 21 Tab M at LMUSA 0418). In other words, if the IRS refused to accept Mitchell's third offer in compromise of $35,000 for over $200,000 in tax debts, Mitchell would file bankruptcy and discharge his tax debts. Although the bankruptcy court had this letter in its possession, it apparently overlooked the paragraph in which Mitchell's attorney made this threat, and therefore it did not consider the letter as evidence of Mitchell's willfulness. [9] Fourth, in August 2005, after receiving the IRS's intent to levy, Mitchell testified that he formed MI Real Estate and made his wife the sole officer, director, and shareholder so the IRS could not shut [him] down. (R.3:701). He testified that he formed MI Real Estate after he had received the IRS's garnishment [notice of intent to levy], because he had not yet worked out a compromise with the IRS and he wanted to continue selling real estate and supporting his family. In February 2006, when the IRS issued levies on Mitchell's income and on his personal bank account, Mitchell closed his bank account and began depositing his commission checks into the MI Real Estate account and Kathleen's Mary Kay account. It is clear that Mitchell understood that when his Kennon Parker commissions were deposited into his MI Real Estate account, the IRS could not touch them. Mitchell's testimony provided direct evidence of his willfulness within the meaning of § 523(a)(1)(C). Mitchell testified that he did not file tax returns because he did not want the IRS to start collection activity; that he purchased the Pintail House in his wife's name because he knew the IRS could levy his own assets; and that he formed MI Real Estate so he could continue selling real estate without the IRS garnishing his commissions. Additionally, his lawyer sent a letter to the IRS threatening bankruptcy, and ostensibly a discharge of his entire tax debt, if the IRS did not accept his offer in compromise. This direct evidence along with the circumstantial evidence of Mitchell titling homes in his wife's name and closing his personal bank account and depositing his commission checks into the MI Real Estate account or his wife's Mary Kay account when faced with the prospect of an IRS levy, provide clear evidence of Mitchell's willful attempt to evade payment of his taxes. That willful intent is further shown by Mitchell's discretionary spending, which included purchasing vacation timeshares, purchasing stock, repaying a $30,000 personal loan, and donating approximately $81,000 to his church. Moreover, the record contains no evidence that Mitchell's failure to pay his taxes was the result of inadvertence or mistake. See Fretz, 244 F.3d at 1331 (There is no evidence that Dr. Fretz' failure to file returns and pay taxes during these years was due to inadvertence or mistake; indeed, his own testimony rules out that possibility.). In Fretz and again in Jacobs, we held that the willfulness component of the mental state requirement of § 523(a)(1)(C) is satisfied if the government shows that a debtor's `efforts to evade tax liability are knowing and deliberate.' Fretz, 244 F.3d at 1330 (quoting Birkenstock, 87 F.3d at 952); see also Jacobs, 490 F.3d at 924. Mitchell's actions and testimony show that his failure to file returns or pay his taxes was based on knowing and deliberate decisions to evade or defeat his federal tax debt. Mitchell is not the honest but unfortunate debtor that Congress intended 11 U.S.C. § 727(b)'s fresh start policy of discharge to help. See Grogan, 498 U.S. at 286-87, 111 S.Ct. at 659.