118 F.3d 979 (3rd Cir. 1997), 96-5428, In re Fegeley

Docket Nº:96-5428.
Citation:118 F.3d 979
Party Name:38 Collier Bankr.Cas.2d 451, In re: Henry FEGELEY; Annmarie Fegeley, Debtors. UNITED STATES of America v. Henry FEGELEY; Annmarie Fegeley, Henry Fegeley, Appellant.
Case Date:July 08, 1997
Court:United States Courts of Appeals, Court of Appeals for the Third Circuit
 
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Page 979

118 F.3d 979 (3rd Cir. 1997)

38 Collier Bankr.Cas.2d 451,

In re: Henry FEGELEY; Annmarie Fegeley, Debtors.

UNITED STATES of America

v.

Henry FEGELEY; Annmarie Fegeley,

Henry Fegeley, Appellant.

No. 96-5428.

United States Court of Appeals, Third Circuit

July 8, 1997

June 12, 1997.

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[Copyrighted Material Omitted]

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Bruce Williams, Haddonfield, NJ, for Appellant Henry Fegeley.

Gary D. Gray, Laurie Snyder, Karen D. Utiger, United States Department of Justice, Tax Division, Washington, DC, for Appellee United States.

Before: COWEN, NYGAARD and GARTH, Circuit Judges.

OPINION OF THE COURT

COWEN, Circuit Judge.

Appellant Henry Fegeley appeals the judgment of the district court, which reversed the judgment of the bankruptcy court. The bankruptcy court determined that Fegeley's federal tax liabilities were dischargeable. Fegeley argues that in order to except federal taxes from discharge in bankruptcy pursuant to § 523(a)(1)(C) of the Bankruptcy Code, the Government must demonstrate that he possessed a fraudulent intent. He asserts that willful failure to file timely tax returns for 1983, 1984, and 1985, and willful failure to timely pay his taxes for those years, is insufficient to support the conclusion that he willfully attempted to evade or defeat his taxes for those years. The Government argues that the district court was correct in finding that the willful failure of Fegeley to file tax returns, together with his willful failure to pay taxes despite his financial ability to do so, constitutes evasion under the Bankruptcy Code. The Government asserts that the district court correctly concluded that nondischargeability under § 523(a)(1)(C) does not require a finding of fraudulent intent. We will affirm.

I.

Fegeley is a 50-year-old high school graduate who was employed as a salesman in the 1980s. He was paid both a salary and commission, and was also reimbursed for his expenses. Prior to the tax year 1983, Fegeley regularly filed his federal income tax returns and paid his tax liabilities, if any, in a timely manner.

In the years 1983, 1984, and 1985, Fegeley's income increased substantially. During these years, Fegeley made lavish expenditures. He failed to file federal income tax returns or to pay the taxes owed for these years. At the time the taxes were due, he had sufficient funds on deposit in his bank accounts to pay his tax liability.

Fegeley filed an application in 1985 for an extension of time to file his tax return with the IRS. In the application Fegeley substantially underestimated the amount of taxes owed. He also failed to pay the estimated tax liability when he returned the application. Also in 1985, Fegeley requested that his employer pay him as an independent contractor instead of as a salaried employee. His employer did so and, consequently, discontinued withholding taxes from Fegeley's income.

Fegeley was communicated with by the Criminal Investigation Division of the IRS in 1987. After being communicated with by the IRS agents, he filed his 1983, 1984, and 1985 income tax returns. The Government determined that the returns were reasonably accurate and complete, and has not alleged that any of the returns are fraudulent.

In 1989, the Government filed a three-count information against Fegeley, charging him with willful failure to file his income tax returns for 1983, 1984, and 1985 pursuant to 26 I.R.C. § 7203. Fegeley pled guilty to count three which related to the 1985 tax return. The remaining two counts were dismissed.

Fegeley and his wife filed a joint Chapter 7 bankruptcy petition in 1991, and were thereafter granted a discharge in bankruptcy pursuant to § 727 of the Bankruptcy Code. In 1992, the IRS demanded payment of income tax liabilities for the years 1983, 1984, and 1985. On motion by Fegeley and his wife, the bankruptcy court reopened the bankruptcy proceeding and reimposed the automatic stay pursuant to § 362(a) of the Bankruptcy Code. The Fegeleys then commenced the present adversary proceeding seeking, inter alia, a determination that the 1983, 1984, and 1985 tax liability had been discharged in bankruptcy.

The Government argued that the tax liability could not be discharged in bankruptcy

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because § 523(a)(1)(C) of the Bankruptcy Code prohibits discharge of taxes that the debtor willfully attempted to evade or defeat in any manner. The matter was tried before the...

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