In re Tudisco v. U.S., Docket No. 98-5075

• Decision Date: 01 August 1998
• Docket Number: Docket No. 98-5075
• Parties: (2nd Cir. 1999) IN RE ROSS TUDISCO, Debtor, ROSS TUDISCO, Plaintiff-Appellant, v. UNITED STATES OF AMERICA, DEPT. OF TREASURY, INTERNAL REVENUE SERVICE, Defendant-Appellee
• Court: U.S. Court of Appeals — Second Circuit

Page 133

183 F.3d 133 (2nd Cir. 1999)

IN RE ROSS TUDISCO, Debtor,

ROSS TUDISCO, Plaintiff-Appellant, v. UNITED STATES OF AMERICA, DEPT. OF TREASURY, INTERNAL REVENUE SERVICE, Defendant-Appellee.

Docket No. 98-5075

August Term, 1998

UNITED STATES COURT OF APPEALS

SECOND CIRCUIT

Submitted June 25, 1999

Decided July 07, 1999

The plaintiff appeals from a decision of the United States District for the Eastern District of New York (Leonard D. Wexler, Judge) upholding the decision of the United States Bankruptcy Court for the Eastern District of New York (Francis G. Conrad, Judge) to dismiss plaintiff's Chapter 13 adversary proceeding.

Affirmed.

[Copyrighted Material Omitted]

ROSS TUDISCO, pro se, appellant.

VARUNI NELSON, KEVIN P. MULRY, Assistant United States Attorneys, Of Counsel, for ZACHARY W. CARTER, United States Attorney, Eastern District of New York, for defendant-appellee United States of America, Department of Treasury, Internal Revenue Service.

Before: CALABRESI and PARKER, Circuit Judges, and TRAGER,^*. Judge.

CALABRESI, Circuit Judge:

Plaintiff-appellant Ross Tudisco appeals from the judgment entered in the United States District Court for the Eastern District of New York (Leonard D. Wexler, Judge) affirming the final judgment of the United States Bankruptcy Court for the Eastern District of New York (Francis G. Conrad, Judge). The bankruptcy court had dismissed Tudisco's adversary proceeding against the United States Department of Treasury, Internal Revenue Service ("IRS"). We affirm.

BACKGROUND

On January 3, 1996, Tudisco's debts were discharged in a Chapter 7 bankruptcy action. This case arises in the aftermath of that discharge, as Tudisco sought, in two parallel Chapter 13 proceedings, to stave off tax collection efforts by the IRS.

After the termination of the Chapter 7 case, Tudisco initiated a Chapter 13 proceeding, in order to develop a plan for adjusting his debts ("plan proceeding"). During the course of the plan proceeding, which came before Judge Eisenberg, Tudisco filed an objection to a claim on his assets by the IRS. He did so on two grounds: (1) that his tax liability for the years 1985 through 1991 had been discharged in his prior Chapter 7 bankruptcy ("dischargeability issue") and (2) that his only assets -- his pension -- were exempt property and hence not subject to a tax lien ("lien issue"). After both parties had briefed these questions, Tudisco began a separate Chapter 13 adversary proceeding against the IRS before Judge Conrad. Tudisco's complaint in the adversary proceeding raised the same two issues that he had asserted in the plan proceeding.

Judge Eisenberg held a hearing on October 28, 1997, and disposed of the lien but not the dischargeability question.¹ Not surprisingly, in light of Judge Eisenberg's decision, the adversary proceeding before Judge Conrad addressed only Tudisco's dischargeability claim, and Judge Conrad's order of July 30, 1998, dismissing the adversary proceeding, made explicit reference only to this issue.

Following Tudisco's timely appeal of Judge Conrad's dismissal order, the district court considered both the dischargeability and lien issues. It affirmed the bankruptcy court's decision that Tudisco's tax debt was nondischargeable under 11 U.S.C. § 523(a)(1)(C). The district court also held that it lacked jurisdiction over the lien issue because (1) Judge Eisenberg's decision "was not embodied in a separate written order or entered as a judgment" and was therefore not a final, appealable order, and (2) had it been a final order, appeal from it would have been untimely.² In dicta, the district court went on to note that the bankruptcy court had ruled correctly on the underlying substantive issue, since, under 26 U.S.C. § 6321 and 11 U.S.C. § 522(c)(2)(B), a debtor's exempt assets, including a pension, are subject to attachment by an IRS lien.

DISCUSSION

A. STANDARD OF REVIEW

The district court's order affirming the bankruptcy court is "subject to plenary review." Shugrue v. Air Line Pilots Ass'n, Int'l (In re Ionosphere Clubs, Inc.), 922 F.2d 984, 988 (2d Cir. 1990). This court "review[s] conclusions of law de novo, and findings of fact under a clearly erroneous standard." Id.

B. DISCHARGEABILITY ISSUE

A debtor who files successfully under Chapter 7 of the Bankruptcy Code generally receives a complete discharge from pre-petition debts. See 11 U.S.C. § 727(b) (1994). Certain debts are, however, excepted from discharge. See 11 U.S.C. § 523 (1994). In particular, 11 U.S.C. § 523(a)(1)(C) excepts from discharge any tax debt "with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax." The government invokes this exception and claims that Tudisco's tax debt was not discharged in his prior Chapter 7 filing. The government does not argue that Tudisco filed a fraudulent return, but contends instead that he willfully evaded taxes.

Although this court has yet to interpret the willfulness exception under § 523(a)(1)(C), we benefit from the analysis of six other circuits. See United States v. Fegeley (In re Fegeley), 118 F.3d 979 (3d Cir. 1997); In re Birkenstock, 87 F.3d 947 (7th Cir. 1996); Dalton v. Internal Revenue Service, 77 F.3d 1297 (10th Cir. 1996); Bruner v. United States (In re Bruner), 55 F.3d 195 (5th Cir. 1995); Haas v. Internal Revenue Service (In re Haas), 48 F.3d 1153 (11th Cir. 1995); Toti v. United States (In re Toti), 24 F.3d 806 (6th Cir. 1994). The interpretations given to this exception by the other circuits, while not completely uniform, compare Haas, 48 F.3d at 1156, with Bruner, 55 F.3d at 200, see infra, all support the conclusion that the exception bars discharge of Tudisco's tax debt.

The willfulness exception consists of a conduct element (an attempt to evade or defeat taxes) and a mens rea requirement (willfulness). See Griffith v. United States (In re Griffith), 174 F.3d.1222, 1224 (11th Cir. 1999); In re Fegeley, 118 F.3d at 983; In re Birkenstock, 87 F.3d at 951. We address each of these in turn.

Most circuits have held that a simple nonpayment of taxes does not satisfy §523(a)(1)(C)'s conduct requirement. Thus, the Eleventh Circuit concluded that mere knowledge of a tax debt, accompanied by nonpayment, could not render a tax debt nondischargeable under the exception. See In re Haas, 48 F.3d at 1156. As the In re Haas court noted, "the defining characteristic of all debtors -- honest and dishonest, alike -- [is] insufficient resources to honor all of [their] obligations." Id. A broad reading of the exception -- rendering nondischargeable any tax debts, except those "discovered . . . in the course of . . . bankruptcy proceedings," id. at 1155 -- would eviscerate the basic "fresh start" policy of the Bankruptcy Code for the "honest but unfortunate debtor." Id at 1156. The court buttressed this conclusion by contrasting the language of the Chapter 7 exception with that of provisions of the Internal Revenue Code, which penalize "attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof." Id. at 1156-57 (quoting 26 U.S.C. § 7201 (1994) and also looking to language of 26 U.S.C. §§ 6531(2), 6653, 6672 (1994)). "The omission of the words 'or payment thereof,'" from the bankruptcy exception, the In re Haas court concluded, "indicates that Congress did not intend that a failure to pay taxes, without more, should result in the nondischargeability of a debtor's tax liabilities in bankruptcy." In re Haas, 48 F.3d at 1157. Other courts have reached similar conclusions. See In re Fegeley, 118 F.3d at 983; In re Birkenstock, 87 F.3d at 951; Dalton, 77 F.3d at 1301.

In re Haas has, however, received some criticism. See In re Bruner, 55 F.3d at 200. After disapproving of the In re Haas court's analysis, insofar as it contrasted § 523(a)(1)(C) with provisions of the Internal Revenue Code, the Fifth Circuit in In re Bruner took the position that the bankruptcy exception "surely encompasses both acts of commission as well as culpable omissions." Id.³

To the extent that In re Haas and In re Bruner actually do conflict, we need not, however, decide between them. Because Tudisco engaged in more than "mere nonpayment," his conduct constitutes an attempt to evade or defeat taxes under either standard. His failure to pay his taxes was accompanied by a failure to file his tax returns, at least until 1992. While he may not have transferred assets or created shell corporations, cf. In re Birkenstock, 87 F.3d at 952 (finding the conduct element satisfied based on a failure to pay, a failure to file, and the creation of a shell trust); Bruner, 55 F.3d at 200 (finding the conduct element satisfied based on a failure to pay, a failure to file, a resort to an "inordinate number of cash transactions," and the creation of a "shell entity"), Tudisco did submit a patently false affidavit to his employer. On its face, the affidavit was clearly intended to establish Tudisco's exemption from income tax withholding. Under the circumstances, we conclude that the bankruptcy court's finding -- that Tudisco attempted to evade or defeat federal income taxes -- is not clearly erroneous.

Similarly, the finding that Tudisco "willfully" evaded taxes is not reversible. The mens rea requirement of § 523(a)(1)(C) mandates that the debtor's conduct be undertaken "voluntarily, consciously or knowingly, and intentionally." Dalton, 77 F.3d at 1302; see also In re Bruner, 55 F.3d at 197; In re Toti, 24 F.3d at 809.

Tudisco himself conceded that he knew that he had to pay taxes. At his trial, he retracted this statement and instead claimed that several years of research had led him to believe that he was not obliged to pay taxes. When asked to identify the sources that supported this conclusion, he responded with evasive answers such as "books" or "people that I met, travelers from different parts of the country," whose names he had long since forgotten....