Haas, In re

• Decision Date: 30 March 1995
• Docket Number: No. 93-6820,93-6820
• Citation: 48 F.3d 1153
• Parties: -1585, 63 USLW 2625, 95-1 USTC P 50,200, 33 Collier Bankr.Cas.2d 424 In re: Bernice Elizabeth HAAS; Thomas Milton Haas, Debtors. Thomas Milton HAAS; Bernice Elizabeth Haas, Plaintiffs-Appellants, v. INTERNAL REVENUE SERVICE; United States Small Business Administration; Secor Bank, Defendants-Appellees.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 1153

48 F.3d 1153

75 A.F.T.R.2d 95-1585, 63 USLW 2625,

95-1 USTC P 50,200,

33 Collier Bankr.Cas.2d 424

In re: Bernice Elizabeth HAAS; Thomas Milton Haas, Debtors Thomas Milton HAAS; Bernice Elizabeth Haas, Plaintiffs-Appellants, v. INTERNAL REVENUE SERVICE; United States Small Business Administration; Secor Bank, Defendants-Appellees.

No. 93-6820.

United States Court of Appeals, Eleventh Circuit.

March 30, 1995.

Lawrence B. Voit, Silver & Voit, Thomas G.F. Landry, Mobile, AL, for appellants.

Gary R. Allen, Chief, Edward T. Perelmuter, Loretta C. Argrett, Billie L. Crowe, William Estabrook, Appellate Section, Tax Div., Dept. of Justice, Washington, DC, for appellees.

Appeal from the United States District Court for the Southern District of Alabama.

Before EDMONDSON and BIRCH, Circuit Judges, and HILL, Senior Circuit Judge.

BIRCH, Circuit Judge:

In this case, we decide whether a debtor "willfully attempt[s] in any manner to evade or defeat [a] tax," for the purposes of 11 U.S.C. Sec. 523(a)(1)(C), when the debtor intentionally fails to pay taxes for which he or she properly filed tax returns and acknowledged were owed to the Internal Revenue Service ("IRS"). The district court determined that such conduct was tax evasion; consequently, it ruled that such taxes are nondischargeable in bankruptcy. We conclude that Congress did not intend such a result; accordingly, we REVERSE.

I. BACKGROUND

Between 1977 and 1985, debtor-appellant Thomas Haas did not pay his income or employment taxes. Although Haas accurately filed his tax returns for the years at issue, he used his income to pay his personal and business debts rather than his tax liability. In 1987, Haas pled guilty for willful failure to pay his income taxes for 1980 to 1982 and his employment taxes for the first three quarters of 1984. Haas received a one-year suspended prison term and five years of probation. One condition of Haas's probation was that he had to remain current in his estimated tax payments and to make monthly payments to be applied to his tax liabilities. Haas substantially complied with the terms of his restitution order.

In 1991, Haas and his wife filed a joint Chapter 11 bankruptcy petition. ¹ The government responded by filing a proof of claim for $705,044.25 in unpaid joint income taxes and unpaid employment taxes since 1977. Shortly thereafter, Haas filed an adversary proceeding seeking, inter alia, a determination of the dischargeability of his federal tax liabilities for taxable years ranging from 1977 to 1987. Although the general rule is that Chapter 11 debtors in bankruptcy may discharge "any debt" arising before the confirmation of a debtor's bankruptcy plan, 11 U.S.C. Sec. 1141(d)(1), Congress has excepted certain liabilities from discharge. In particular, a debtor may not discharge any tax liability "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. Sec. 523(a)(1)(C); see also 11 U.S.C. Sec. 1141(d)(2).

The bankruptcy court found that Haas's tax liabilities for the periods at issue were dischargeable. It held that section 523(a)(1)(C) applied only to the assessment of tax liability and not to the payment thereof. Because Haas did not submit any materially false or misleading tax returns, the court concluded that Haas's failure to pay his taxes did not constitute an attempt to evade or defeat his taxes under section 523(a)(1)(C).

The government appealed to the district court, which vacated the bankruptcy court's decision on the issue and remanded the case for a determination of whether Haas's failure to pay was willful. On remand, the bankruptcy court found that Haas made no affirmative attempt to evade or defeat his taxes; rather, Haas used his income to pay debts other than his tax liability. ² The court again concluded that Haas's tax liabilities did not fall within section 523(a)(1)(C)'s exception to discharge.

The government appealed the bankruptcy court's decision, and the district court reversed. Applying the civil standard for "willful" conduct applicable under the Internal Revenue Code ("I.R.C."), I.R.C. Sec. 6672, the court reasoned that

the most persuasive interpretation of the statutory language at issue is to construe the phrase "willfully attempted in any manner to evade or defeat" to mean: (1) the debtor has a duty under the law, (2) the debtor knew he or she had that duty, and (3) the debtor voluntarily and intentionally violated that duty....

... [W]here the debtor is financially able to pay the taxes due, but chooses not to do so, the government has met its burden of proof.

In re Haas, 173 B.R. 756, 758-59 (S.D.Ala.1993). The district court noted that Haas chose not to pay his taxes "and instead used his financial resources for other purposes," in spite of having both an awareness of his duty and the ability to pay. Id. at 759. According to the district court, Haas therefore willfully attempted to evade his taxes, thus rendering his tax liabilities nondischargeable in bankruptcy.

II. DISCUSSION

The sole question at issue in this case is whether a debtor's failure to pay his taxes, without more, constitutes a "willful[ ] attempt[ ] in any manner to evade or defeat such tax" under section 523(a)(1)(C). The proper construction of the Bankruptcy Code, whether by the bankruptcy court or by the district court, is a matter of law; accordingly, we subject such interpretations to de novo review. In re Colortex Industries, Inc., 19 F.3d 1371, 1374 (11th Cir.1994); In re Taylor, 3 F.3d 1512, 1514 (11th Cir.1993).

A. Plain Language Interpretation

Generally, the plain meaning of a statute controls, "except in the 'rare cases [in which] the literal application of a statute will produce a result demonstrably at odds with the intentions of its drafters.' " United States v. Ron Pair Enters., Inc., 489 U.S. 235, 242, 109 S.Ct. 1026, 1031, 103 L.Ed.2d 290 (1989) (alteration in original) (quoting Griffin v. Oceanic Contractors, Inc., 458 U.S. 564, 571, 102 S.Ct. 3245, 3250, 73 L.Ed.2d 973 (1982)). In the present case, the government maintains that the plain meaning of the phrase "willfully attempted in any manner to evade or defeat such tax," Sec. 523(a)(1)(C) (emphasis added), is sufficiently broad to include a debtor's "voluntary, conscious, and intentional" failure to pay taxes, Appellee's Brief at 16. See In re Toti, 24 F.3d 806, 809 (6th Cir.) (holding that a debtor's voluntary, conscious, and intentional failure to file income tax returns and to pay his taxes fell within plain meaning of section 523(a)(1)(C)'s exception to discharge), cert. denied, --- U.S. ----, 115 S.Ct. 482, 130 L.Ed.2d 395 (1994). The government argues that if a debtor had both an awareness of his duty to pay his taxes and the present ability to pay them but nonetheless failed to satisfy that duty, then the tax liability is nondischargeable under section 523(a)(1)(C).

The difficulty with the government's "plain meaning" interpretation of section 523(a)(1)(C) is that it effectively would make all tax debts nondischargeable. If every knowing failure to pay taxes constituted an evasion of taxes under section 523(a)(1)(C), then discharge of tax liability would be available only to those very few debtors who discovered their debts to the IRS in the course of their bankruptcy proceedings. ³ Moreover, every debtor, at least in theory, has the present ability to pay his income or employment taxes; if a debtor did not have positive net income, then he would not have been assessed income or employment taxes in the first instance. The government's reading of section 523(a)(1)(C) would allow an exception to swallow the general rule of discharge for tax liabilities.

Such an expansive reading of section 523(a)(1)(C)'s exception to discharge would contravene the Bankruptcy Code's purpose of allowing a fresh start for the honest but unfortunate debtor. See Grogan v. Garner, 498 U.S. 279, 285, 111 S.Ct. 654, 659, 112 L.Ed.2d 755 (1991); In re Miller, 39 F.3d 301, 304 (11th Cir.1994). Under the IRS's interpretation of section 523(a)(1)(C), the only honest debtor would be a debtor who is wholly unaware of her debt to the IRS. However, she also is an honest debtor who, fully cognizant of the debt that she owes to the IRS, uses her income to pay other debts instead. Her failure to pay the IRS is the result of not dishonesty but of the defining characteristic of all debtors--honest and dishonest, alike--insufficient resources to honor all of her obligations. Similarly, Haas technically had the financial ability to pay his taxes, but he still lacked the resources to pay all of his debts. That he decided to use his limited funds to satisfy obligations other than his properly acknowledged income taxes does not render him a dishonest debtor, simply a debtor. ⁴ A literal application of the government's "plain language" interpretation of section 523(a)(1)(C) would thus render the general rule of dischargeability of tax liabilities an empty letter and defeat the central purpose of the Bankruptcy Code. Consequently, we must look to other sources to guide our interpretation of the ambiguous provision.

B. Analogous Internal Revenue Code Provisions

Haas argues that, had Congress intended that the failure to pay, without more, would except tax liabilities from discharge, it could have written such a provision into section 523(a)(1)(C). In fact, using language almost identical to that found in section 523(a)(1)(C), Congress has on four other occasions previous to the enactment of section 523(a)(1)(C) shown itself capable of distinguishing between evasion of a tax and evasion of the payment of a tax. See I.R.C. Sec. 6531(2) (establishing periods of limitation on criminal prosecutions for various offenses arising under the I.R.C., including "the offense of willfully attempting in any manner to evade or defeat any tax or the payment thereof ") (emphasis added)); I.R.C. Sec....