Dalton v. I.R.S.

• Decision Date: 12 March 1996
• Docket Number: No. 95-4001,95-4001
• Citation: 77 F.3d 1297
• Parties: -1487, Bankr. L. Rep. P 76,926 Eugene DALTON, Appellant, v. INTERNAL REVENUE SERVICE, Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1297

77 F.3d 1297

77 A.F.T.R.2d 96-1487, Bankr. L. Rep. P 76,926

Eugene DALTON, Appellant, v. INTERNAL REVENUE SERVICE, Appellee.

No. 95-4001.

United States Court of Appeals Tenth Circuit.

March 12, 1996.

Rehearing Denied May 21, 1996.

Appeal From The United States District Court For The District Of Utah (D.C. No. 94-C-82-J); Bruce S. Jenkins, District Judge.

David O. Black, Black, Stith & Argyle, Salt Lake City, Utah, for Appellant.

Gary D. Gray, Tax Division, Department of Justice, Washington, D.C. (Laurie Snyder, Tax Division, Department of Justice, Washington, D.C. and Scott M. Matheson, Jr., United States Attorney, District of Utah, of Counsel, Salt Lake City, Utah, with him on the brief, for Appellee.

Before ANDERSON, KELLY, and HENRY, Circuit Judges.

STEPHEN H. ANDERSON, Circuit Judge.

Following his discharge in bankruptcy, Eugene Dalton commenced this adversary proceeding seeking a determination that certain federal tax liabilities had been discharged. The bankruptcy court held that the tax debts were not dischargeable under 11 U.S.C. § 523(a)(1)(C), ¹ and the district court affirmed. On appeal, Dalton contends that § 523 does not apply to attempts to conceal assets in order to evade or defeat the payment or collection of taxes, and he also contends that the finding that he willfully concealed assets was clearly erroneous. We affirm.

Dalton filed for Chapter 7 bankruptcy relief on December 7, 1990. On his bankruptcy schedules he reported assessed federal income tax liabilities for tax years 1976 through 1978, 1981, and 1983 through 1985 in the total amount of $13,668,866, and he listed assets worth $3,250. The government filed no claim or objection, and an order of discharge under 11 U.S.C. § 727 issued on March 18, 1991. On October 6, 1992, Dalton brought this adversary proceeding, seeking a determination that the listed federal income tax liabilities had been discharged. The government answered that Dalton had concealed assets in a willful attempt to evade or defeat the taxes, and therefore the tax debts were excepted from discharge under 11 U.S.C. § 523(a)(1)(C).

We review questions of statutory interpretation de novo. Murray v. Montrose County Sch. Dist. RE-1J, 51 F.3d 921, 928 (10th Cir.), cert. denied, --- U.S. ----, 116 S.Ct. 278, 133 L.Ed.2d 198 (1995). When interpreting a statute, we first examine the statutory language itself. Goheen v. Yellow Freight Sys., 32 F.3d 1450, 1453 (10th Cir.1994). If unambiguous statutory language is not defined, we give the language its common meaning, provided that the result is not absurd or contrary to the legislative purpose. Turner v. Davis, Gillenwater & Lynch (In re Investment Bankers, Inc.), 4 F.3d 1556, 1564 (10th Cir.1993), cert. denied, --- U.S. ----, 114 S.Ct. 1061, 127 L.Ed.2d 381 (1994). Thus, we look not only to a single sentence or member of a sentence, but to the provisions of the whole law, as to its object and policy. Kelly v. Robinson, 479 U.S. 36, 43, 107 S.Ct. 353, 357, 93 L.Ed.2d 216 (1986).

At issue in this case is 11 U.S.C. § 523(a)(1)(C) which provides that a discharge under § 727 does not discharge an individual from any debt for a tax "with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax." Since the government makes no claim regarding fraudulent returns, the only question is whether the provision's second exception applies.

Noting that exceptions to discharge are strictly construed in favor of debtors, In re Aste, 129 B.R. 1012 (Bankr.D.Utah 1991), and looking literally at § 523(a)(1)(C), Dalton contends that his conduct was not a willful attempt to evade or defeat taxes. Dalton argues that the only evidence against him concerned his attempts to avoid the payment or collection of taxes, terms which the provision does not expressly include, and he further argues that the exclusive means to raise a claim involving concealed assets is through an affirmative action under § 727.

As authority for his literal reading that § 523 does not encompass the evasion of tax payment or collection, Dalton cites Gathwright v. United States (In re Gathwright), 102 B.R. 211, 213 (Bankr.D.Or.1989). ² Specifically, the court in Gathwright compared 26 U.S.C. § 7201, which states that it is a felony to "willfully attempt[ ] in any manner to evade or defeat any tax imposed by [Title 26] or the payment thereof " (emphasis added), with 11 U.S.C. § 523(a)(1)(C), which lacks the emphasized language, and concluded that nonpayment was irrelevant to a determination of whether or not the debtor had willfully attempted to evade or defeat a tax under § 523. Id. at 213. However, the reasoning of Gathwright has been rejected by the majority of courts that have addressed the question.

Most recently, the Fifth Circuit refused to base dischargeability upon a determination that the debtor may not have engaged in felonious conduct under criminal provisions of the Internal Revenue Code. Bruner v. United States (In re Bruner), 55 F.3d 195, 200 (5th Cir.1995) (finding the Bruners outside the class of honest debtors entitled to discharge, based on "pattern of non-payment ... accompanied by a pattern of failure to file returns and ... conduct ... aimed at concealing income and assets"). Similarly rejecting a debtor's argument that willful must be defined according to its use in felony statutes, thus precluding a finding of the requisite willfulness, the Sixth Circuit found a debtor's willful failure to file returns and pay taxes, even though he had the financial ability to do so, placed him outside "the category of honest debtors." Toti v. United States (In re Toti), 24 F.3d 806, 808-09 (6th Cir.), cert. denied, --- U.S. ----, 115 S.Ct. 482, 130 L.Ed.2d 395 (1994); see also Fridrich v. IRS (In re Fridrich), 156 B.R. 41, 43 (D.Neb.1993) (finding that § 523(a)(1)(C) excepts from discharge taxes that a taxpayer prevents the IRS from collecting); Commissioner v. Peterson (In re Peterson) 152 B.R. 329, 335 (D.Wyo.1993) (finding that evidence of debtor's attempts to avoid payment is relevant to court's consideration of whether tax is dischargeable); Berzon v. United States (In re Berzon), 145 B.R. 247, 250-51 (Bankr.N.D.Ill.1992) (basing nondischargeability upon unexcused late filings, together with misrepresentations to escape payment); Jones v. United States (In re Jones), 116 B.R. 810, 815 (Bankr.D.Kan.1990) (finding that § 523(a)(1)(C) encompassed debtor's attempts to conceal assets to avoid payment and collection). But cf. Haas v. IRS (In re Haas), 48 F.3d 1153, 1158 (11th Cir.1995) (holding that bankruptcy debtor's knowing failure to pay taxes, without more, was not a willful attempt in any manner to evade or defeat such tax under § 523).

We generally agree with the majority reasoning. The purpose of the Bankruptcy Code is to provide the honest, but unfortunate, debtor a fresh start. Grogan v. Garner, 498 U.S. 279, 286-87, 111 S.Ct. 654, 659-60, 112 L.Ed.2d 755 (1991). Prior to 1966, tax debts were not dischargeable. In 1966, "consisten[t] with the rehabilitory purpose of the Bankruptcy Act," amendments were enacted "to make dischargeable in bankruptcy debts for taxes which became legally due and owing more than 3 years preceding bankruptcy, and to limit the prior accorded to taxes." S.Rep. No. 1158, 89th Cong., 2d Sess. (1966), 1966 U.S.C.C.A.N. 2468, 2468, 2469. However, noting that "the purpose of this bill is to provide relief for the financially unfortunate and not to create a tax evasion device," Congress also pressed its intention to "specifically except[] from discharge taxes with respect to which [the debtor] had made a false or fraudulent return or which he had otherwise attempted to evade." Id. at 2470.

Accordingly, Congress enacted the equivalent of § 523(a)(1)(C) to make nondischargeable those taxes which the debtor "willfully attempted in any manner to evade or defeat." ³ Although the terms are not statutorily defined, the language is unambiguous. Moreover, the phrase has well-known judicial interpretation in tax cases, which Congress presumably intended to adopt. See Holmes v. Securities Investor Protection Corp., 503 U.S. 258, 267-68, 112 S.Ct. 1311, 1317-18, 117 L.Ed.2d 532 (1992). Thus, Spies v. United States, 317 U.S. 492, 499, 63 S.Ct. 364, 368, 87 L.Ed. 418 (1943) is directly on point:

Congress did not define or limit the methods by which a willful attempt to defeat and evade might be accomplished and perhaps did not define lest its effort to do so result in some unexpected limitation. Nor would we by definition constrict the scope of the Congressional provision that it may be accomplished "in any manner." By way of illustration, and not by way of limitation, we would think affirmative willful attempt may be inferred from conduct such as keeping a double set of books, making false entries or alterations, or false invoices or documents, destruction of books or records, concealment of assets or covering up sources of income, handling of one's affairs to avoid making the records usual in transactions of the kind, and any conduct, the likely effect of which would be to mislead or to conceal.

Id. (interpreting the language of 26 U.S.C. § 145(b), currently codified at 26 U.S.C. § 7201).

Clearly, the contested language is to be expansively defined. Consequently, as the court in Jones observed, "the modifying phrase 'in any manner' is sufficiently broad to include willful attempts to evade taxes by concealing assets to protect them from execution or attachment." Jones, 116 B.R. at 814. Furthermore, as Jones also noted, a contrary reading would effectively render the second exception of § 523(a)(1)(C) meaningless or superfluous. That is, unless the provision encompasses willful attempts to evade the payment or collection of taxes, then the only nondischargeable taxes under the section would be those resulting from fraudulent returns. ⁴ Finally, given Congress' express...