Fegeley, In re, 96-5428

• Decision Date: 12 June 1997
• Docket Number: No. 96-5428,96-5428
• Citation: 118 F.3d 979
• Parties: -5268, 97-2 USTC P 50,544, 38 Collier Bankr.Cas.2d 451, Bankr. L. Rep. P 77,455 In re: Henry FEGELEY; Annmarie Fegeley, Debtors. UNITED STATES of America v. Henry FEGELEY; Annmarie Fegeley, Henry Fegeley, Appellant. . Submitted Pursuant to Third Circuit LAR 34.1(a)
• Court: U.S. Court of Appeals — Third Circuit

Page 979

118 F.3d 979

80 A.F.T.R.2d 97-5268, 97-2 USTC P 50,544,

38 Collier Bankr.Cas.2d 451,

Bankr. L. Rep. P 77,455

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.

Submitted Pursuant to Third Circuit LAR 34.1(a)

June 12, 1997.

Decided July 8, 1997.

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 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 bankruptcy court. At the conclusion of the trial, the bankruptcy court set forth its findings of fact and conclusions of law. The bankruptcy court stated that Fegeley "clearly knew that he had to file. He clearly neglected to file, failed to file, suffered criminal consequence[s] for his failure to file. And he failed to pay the taxes." App. at 14. The bankruptcy court also found that Fegeley "probably had enough money to pay th[e] taxes[,] ... spent too much[,] ... was much too lavish[, and] ... didn't make good judg[ ]ments about the allocation of his resources." App. at 17.

Despite these findings, the bankruptcy court entered judgment for the Fegeleys holding that the Government failed to prove that the Fegeleys attempted to evade or defeat their 1983-85 income taxes and that such taxes are not excepted from discharge pursuant to § 523(a)(1)(C). ¹ The bankruptcy court held that Fegeley's knowing failure to file income tax returns, in conjunction with his failure to pay those taxes even though he had the financial resources to do so, did not constitute an attempt to evade or defeat his tax liability for 1983, 1984 and 1985.

The Government appealed the bankruptcy court's decision to the district court. The district court reversed, holding that the tax liabilities were not dischargeable under § 523(a)(1)(C). In rendering its decision, the district court did not determine that the factual findings of the bankruptcy court were clearly erroneous. Indeed, the district court adopted the factual findings of the bankruptcy court. Rather, the district court held that the bankruptcy court erred as a matter of law by failing to conclude that Fegeley's intentional failure to file income tax returns when he was well aware of his obligation to do so, together with his failure to pay taxes when he had the resources to pay those taxes, was sufficient to prove that he willfully attempted to evade or defeat his taxes. This appeal followed.

II.

Because the bankruptcy court, rather than the district court, was the trier of fact in this case, "[w]e are in as good a position as the district court to review the findings of the bankruptcy court, so we review the bankruptcy court's findings by the standards the district court should employ, to determine whether the district court erred in its review." Universal Minerals, Inc. v. C.A. Hughes & Co., 669 F.2d 98, 102 (3d Cir.1981). We review basic and inferred facts under the clearly erroneous standard. Id. We exercise plenary review over legal issues. In re Siciliano, 13 F.3d 748, 750 (3d Cir.1994). In reviewing ultimate facts, which are a "mixture of fact and legal precept", we must "break down" the questions of law and fact and "apply the appropriate standard to each component." Meridian Bank v. Alten, 958 F.2d 1226, 1229 (3d Cir.1992)(quoting Universal Minerals, 669 F.2d at 102-03, and In re Sharon Steel Corp., 871 F.2d 1217, 1222 (3d Cir.1989)).

III.

When a debtor files under Chapter 7 of the Bankruptcy Code, the debtor is generally granted a discharge from all debts arising prior to the filing of the bankruptcy petition. 11 U.S.C. § 727(b) (1994); see also In re Birkenstock, 87 F.3d 947, 950 (7th Cir.1996); In re Toti, 24 F.3d 806, 808 (6th Cir.1994). The remedial purpose of the Bankruptcy Code is "to provide a procedure by which certain insolvent debtors can reorder their affairs, make peace with their creditors, and enjoy 'a new opportunity in life [and] a clear field for future effort, unhampered by the pressure and discouragement of pre[-]existing debt.' " Grogan v. Garner, 498 U.S. 279, 286, 111 S.Ct. 654, 659, 112 L.Ed.2d 755 (1991) (quoting Local Loan Co. v. Hunt, 292 U.S. 234, 244, 54 S.Ct. 695, 699, 78 L.Ed. 1230 (1934)). However, this "fresh start" policy provided by the Bankruptcy Code applies only to the "honest but unfortunate debtor." Id. at 286-87, 111 S.Ct. at 659 (quoting Local Loan, 292 U.S. at 244, 54 S.Ct. at 699).

The Code excepts certain liabilities from discharge. Section 523(a)(1)(C) provides:

(a) A discharge under section 727 ... of this title does not discharge an individual debtor from any debt--

(1) for a tax or a customs duty--

(C) with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax.

11 U.S.C. § 523(a)(1)(C) (1994) (emphasis added). These exceptions to discharge are to be strictly construed in favor of the debtor. Dalton v. I.R.S., 77 F.3d 1297, 1300 (10th Cir.1996). Moreover, "the burden of proving that the debtor's tax liabilities are nondischargeable under § 523(a)(1)(C) is on the United States." Berkery v. Commissioner, 192 B.R. 835, 840 (E.D.Pa.1996), aff'd, 111 F.3d 125 (3d Cir.1997). The Government must prove by a preponderance of the evidence that the debtor made fraudulent returns or willfully attempted to evade his taxes. See Grogan, 498 U.S. at 291, 111 S.Ct. at 661.

The Government does not allege that Fegeley filed fraudulent returns. The sole issue before us is whether Fegeley "willfully attempted ... to evade or defeat" his income taxes for the tax years 1983, 1984, and 1985 within the meaning of the second part of § 523(a)(1)(C).

Our analysis begins with an interpretation of the second prong of § 523(a)(1)(C). We must interpret provisions of "the Bankruptcy Code according to the plain meaning of [the] individual provision as long as the provision's language is unambiguous." Toti, 24 F.3d at 809(citing United States v. Ron Pair Enters., Inc., 489 U.S. 235, 240-41, 109...