Langlois v. US
| Decision Date | 21 April 1993 |
| Docket Number | Bankruptcy No. 90-12465.,No. 92-CV-1563,92-CV-1563 |
| Citation | 155 BR 818 |
| Parties | James LANGLOIS, Appellant, v. UNITED STATES of America, Appellee. |
| Court | U.S. District Court — Northern District of New York |
Ellen S. Ross, Johnstown, NY, for appellant.
Gary L. Sharpe, U.S. Atty., James C. Woods, Asst. U.S. Atty., James T. Foley, Albany, NY, for appellee.
U.S. Dept. of Justice, Tax Div., Mark D. Lansing, Washington, DC.
James Langlois, debtor-appellant, appeals the decision of United States Bankruptcy Judge Justin J. Mahoney granting summary judgment in favor of the Internal Revenue Service (IRS). This Court has jurisdiction over the appeal under 28 U.S.C. § 158(a). Mr. Langlois presents two issues on appeal:
The standard of review in a bankruptcy appeal is set out in Fed.R.Bankr.P. 8013 and in the cases. The Bankruptcy Court's legal conclusions receive de novo review. In re Ionosphere Clubs, 922 F.2d 984, 988-89 (2d Cir.1990), cert. denied sub nom., Air Line Pilots Assn. v. Shugrue, ___ U.S. ___, 112 S.Ct. 50, 116 L.Ed.2d 28 (1991). Factual findings "shall not be set aside unless clearly erroneous." See Fed. R.Bankr.P. 8013. The advisory committee notes to Rule 8013 indicate that the Rule "accords to the findings of a bankruptcy judge the same weight given the findings of a district judge under Rule 52 F.R.Civ. P." Id. 1983 Advisory Committee Note.
As explained below, the Court affirms the Bankruptcy Court's holding that Mr. Langlois's taxes were not discharged, but reverses the decision insofar as it permitted the IRS to reallocate payments during the period following the discharge.
The Bankruptcy Judge found the following facts. Mr. Langlois was a tax protester who filed a fraudulent income tax return in 1981 and fraudulent W-2 forms in 1982 and 1985. Mr. Langlois also consciously refused to pay federal income taxes for the years 1982, 1983, and 1984.
In 1987, Mr. Langlois changed his view regarding his obligations to pay income taxes, and filed a return for the years in dispute. Also in 1987, Mr. Langlois signed a plea agreement with the United States Attorney in which he admitted that he "knowingly and willfully failed to file income tax returns and pay said income taxes for 1982-1985 as required by law . . ."
Thereafter but prior to December 20, 1989, Mr. Langlois made substantial payments to the IRS, the allocation of which is now in dispute. Originally, the IRS applied the payments first to the unpaid tax, allocating the remainder to the accrued interest and penalties. In late 1989, the IRS officially notified Mr. Langlois that he owed no underlying taxes—only specified penalties and interest thereon.
Mr. Langlois filed a bankruptcy petition in August, 1990 for relief under Chapter 7 of the bankruptcy code. Sometime after the filing of the bankruptcy petition, the IRS reallocated Mr. Langlois's earlier payments, applying the money first to the dischargeable penalties.1 The IRS allegedly took this action so that interest on the unpaid underlying tax would continue to accrue and in order to maximize the nondischargeable portion of the overall debt. Mr. Langlois explains that the IRS's reallocation "left the underlying tax to continue to accrue interest as though the appellant had paid nothing." See Appellant's Brief at 10. The IRS explains that it reallocated the payments "in its best interest and to maximize the collection of the Appellant's income tax liabilities . . ." See United States' Appeal Brief at 6. Believing that the discharge would extinguish the penalties (in contrast to the tax itself), the IRS attempted to collect as much penalty as it could by reallocating the prior payments. See 11 U.S.C. § 523(a)(7).2
On February 1, 1991, the Bankruptcy Court granted Mr. Langlois a general discharge of his debts under 11 U.S.C. § 524. Approximately two months later, the IRS served on Mr. Langlois notices of its intent to levy in order to collect $155,609.47 that it claimed was due. Mr. Langlois claims that he owes only $469.00 to the IRS.
In September, 1991, Mr. Langlois commenced an adversary proceeding in the Bankruptcy Court, seeking a ruling that the February 1, 1991 discharge extinguished his obligation to pay the remaining taxes, interest, and penalties.
During this adversary proceeding, the IRS contended that Mr. Langlois's general bankruptcy discharge did not relieve him of his tax liabilities because his alleged willful evasion of income tax rendered his tax liability non-dischargeable under 11 U.S.C. § 523(a)(1)(C). The scope of this provision is at the heart of this appeal. The IRS also claimed unfettered discretion to allocate payments, irrespective of any stay provisions of the Bankruptcy Code.
As a general matter, a general bankruptcy discharge gives the debtor a fresh start by relieving him of the obligation to repay many pre-petition debts, including certain debts arising under the tax laws. The discharge available in a Chapter 7 bankruptcy is quite broad:
"Except as provided in section 523 of this title 11 U.S.C. § 523, a discharge under section 727 discharges the debtor from all debts that arose before the date of the order for relief under this chapter . . . "
See 11 U.S.C. § 727(b). Section 523 contains the exception to which section 727 refers, and in relevant part provides as follows:
11 U.S.C. § 523(a)(1)(C). In the adversary proceeding below, the IRS contended that Mr. Langlois willfully attempted to defeat or evade his taxes for the years in question, and as a result, section 523(a)(1)(C) preserved his underlying tax liability.
In order to establish that a debt is non-dischargeable in bankruptcy, the creditor (here, the IRS) bears the burden of proving by a preponderance of the evidence that the claim should be exempted from the discharge. Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). Because the IRS relied on section 523(a)(1)(C), and because the IRS did not claim that Mr. Langlois acted fraudulently, the IRS had the burden of demonstrating that Mr. Langlois willfully attempted to evade or defeat his tax obligations. A debtor's willfulness is a question of fact. Judge Mahoney found that Mr. Langlois willfully attempted to evade his income taxes.
Before Judge Mahoney and now on appeal, Mr. Langlois urges the Court to adopt the definition of "willfulness" enunciated in Cheek v. United States, 498 U.S. 192, 111 S.Ct. 604, 112 L.Ed.2d 617 (1991). In Cheek, the Supreme Court held that, in a criminal tax prosecution, the Government must prove that the defendant knew of the duty to pay taxes and that he "voluntarily and intentionally violated that duty" in order to prove willfulness. Cheek, 498 U.S. at 201, 111 S.Ct. at 610, 112 L.Ed.2d at 629. If a defendant persuades the jury that he truly believed he had no duty to pay taxes, even if that belief were objectively unreasonable, then the defendant would be entitled to an acquittal. In other words, if the criminal defendant subjectively, though unreasonably, believed that he had no duty to pay taxes, then he did not commit the offense of criminal tax evasion. Mr. Langlois urges the Court to adopt this definition of willfulness, because he says he once had a good faith belief that he had no duty to pay income taxes.
The Bankruptcy Court refused to apply the definition of willfulness from the criminal case, and instead relied on civil case law, specifically Hochstein v. United States, 900 F.2d 543 (2d Cir.1990), cert. denied, ___ U.S. ___, 112 S.Ct. 2967, 119 L.Ed.2d 587 (1992), and Domanus v. United States, 961 F.2d 1323 (7th Cir.1992). In Hochstein, a civil case involving the Government's collection of employment taxes under 26 U.S.C. § 6672, the Second Circuit stated that "the individual's bad purpose or evil motive in failing to collect and pay taxes properly play no part in the civil definition of willfulness." Hochstein, 900 F.2d at 548 (citations omitted). In the adversary proceeding below, Judge Mahoney adopted a common civil definition of willfulness, observing that "if the intended result of a taxpayer's action was that the United States would not receive the income taxes, then he has acted willfully, notwithstanding a good faith belief."
Mr. Langlois urges the Court not to adopt this definition of willfulness because it has its roots in cases construing 26 U.S.C. § 6672, "a statute not applicable to this proceeding." Appellant's Brief at 18. Mr. Langlois, however, fails to explain why the Court should import the criminal definition from cases construing 26 U.S.C. § 7201—also "a statute not applicable to this proceeding." This civil bankruptcy action is more analogous to a civil action under 26 U.S.C. § 6672 than to a criminal action under 26 U.S.C. § 7201. Moreover, the Supreme Court in the Cheek case, upon which Mr. Langlois relies, carefully noted the special considerations involved in a criminal prosecution for tax evasion. See Cheek, 498 U.S. at 201, 111 S.Ct. at 610, 112 L.Ed.2d at 628 (). The high court specifically stated that its definition of willfulness in Cheek, had its roots in "prior decisions in crimin...
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