William Hawkins, III v. the Franchise Tax Board of Cal, 769 F.3d 662

Background

William M. “Trip” Hawkins, former EA CEO, claimed large losses from FLIP and OPIS tax‑shelter transactions advised by KPMG and reported multi‑million dollar tax losses on 1996–2000 returns.
IRS audited Hawkins, disallowed the shelter losses, and assessed roughly $21 million (IRS) plus $15.3 million (California FTB) for 1997–2000; Hawkins offered compromise of $8 million which was rejected.
After 3DO’s collapse and significant personal losses, Hawkins acknowledged insolvency in family court in 2003 and testified his plan was to discharge tax debt in bankruptcy.
Despite awareness of large tax liabilities, Hawkins and his wife maintained a lavish lifestyle and made large expenditures; bankruptcy and district courts relied heavily on these spending habits to deny discharge of Trip Hawkins’s tax debts under 11 U.S.C. § 523(a)(1)(C).
The Ninth Circuit majority reversed and remanded, holding the discharge exception requires specific intent to evade tax (a narrow construction of “willfully”), and instructed the lower courts to reexamine the record under that standard.

Issues

Issue	Plaintiff's Argument (Hawkins)	Defendant's Argument (IRS/FTB)	Held
Meaning of “willfully attempted ... to evade or defeat such tax” in § 523(a)(1)(C)	"Willful" need not mean specific intent to evade; intentional acts (e.g., continued lavish spending) suffice	Requires only intentional conduct that substantively evades tax; lifestyle choices can show willfulness	Specific intent to evade tax required; mere spending beyond income is insufficient
Applicability of lifestyle expenditures to establish nondischargeability	Profligate spending alone does not prove intent to evade taxes	Lavish, continued spending after knowledge of tax liability shows willful attempt to evade payment	Lifestyle evidence may be relevant but government must prove specific intent; remand to apply that standard
Use of criminal tax‑evasion analogy (26 U.S.C. § 7201) in bankruptcy context	Bankruptcy exception is distinct; should not import criminal specific‑intent elements wholesale	Analogous language and policy justify requiring knowledge-and-voluntary‑violation elements	Court adopts analogous specific‑intent requirement (duty, knowledge, voluntary intentional violation) for § 523(a)(1)(C)
Burden on fresh‑start policy vs. preventing abuse by wealthy debtors	Fresh‑start policy counsels narrow construction of exceptions to discharge	Preventing abuse by sophisticated debtors supports broad reading to deny discharge	Fresh‑start principle supports narrow reading; exceptions limited to conduct demonstrating evasive motive

Key Cases Cited

Robinson v. Shell Oil Co., 519 U.S. 337 (use plain‑meaning statutory interpretation tools)
Spies v. United States, 317 U.S. 492 (distinguishing willful omissions from affirmative deceptive acts for tax evasion)
Kawaauhau v. Geiger, 523 U.S. 57 (narrow construction of “willful” in discharge exceptions)
United States v. Bishop, 291 F.3d 1100 (9th Cir.) (criminal evasion requires duty, knowledge, and voluntary intentional violation)
Cheek v. United States, 498 U.S. 192 (specific intent described as voluntary, intentional violation of known legal duty)
Kawashima v. Holder, 565 U.S. 478 (Supreme Court) (evading tax typically involves deceit or concealment)
United States v. Carlson, 235 F.3d 466 (9th Cir.) (acts constituting criminal evasion)
In re Vaughn (Vaughn v. IRS), 765 F.3d 1174 (10th Cir.) (upholding denial of discharge based on spending plus other badges of evasion)
In re Gardner, 360 F.3d 551 (6th Cir.) (concealment of assets as badge of evasion)
United States v. Fretz (In re Fretz), 244 F.3d 1323 (11th Cir.) (failure to file returns as evasion)
United States v. Fegeley (In re Fegeley), 118 F.3d 979 (3d Cir.) (failure to file returns and evasion)
In re Birkenstock, 87 F.3d 947 (7th Cir.) (failure to file and concealment supports nondischargeability)
Dalton v. IRS, 77 F.3d 1297 (10th Cir.) (concealment of ownership as evasion)