ORDER AFFIRMING JUDGMENT OF BANKRUPTCY COURT
Now before the Court is the appeal filed by appellant William M. Hawkins, III (“Hawkins”), of the judgment of the bankruptcy court dated April 22, 2010 excepting Hawkins’ tax liabilities with respect to tax years 1997 through 2000 from discharge under 11 U.S.C. § 523(a)(1)(C). Pursuant to Civil Local Rule 16-4 and Bankruptcy Local Rule 8010-l(b), the Court deems this case submitted on the papers without oral argument. Having carefully reviewed the administrative record and considered the parties’ papers and the relevant authority, and good cause appearing, the Court hereby AFFIRMS the bankruptcy court’s judgment.
BACKGROUND
The relevant facts are undisputed. Hawkins co-founded the video game company Electronic Arts (“EA”) in 1982 and obtained stock and/or stock options in EA. (App. to Appellant’s Br. (“App.”) at 71.) On the advice of his tax advisor, Hawkins participated in two tax sheltering transactions that allowed him to report significant losses on his tax returns for the tax years 1996 through 2000.
(Hawkins v. Franchise Tax Bd. (In re Hawkins),
Hawkins’ expenses exceeded his earned income even after he acknowledged his tax debt and insolvency in January 2004 and taxes were assessed in March and July 2005. In a monthly income and expense analysis attached to his October 2005 Offer In Compromise, Hawkins reported wages of $16,667.67/month and an “unknown” amount of interest/dividends while reporting $94,900/month in expenses. (Id. at 190 (Collection Information Statement for Wage Earners and Self-Employed Individuals).) These expenses included, among other things, $7,000/month for “Food, Clothing and Misc.,” $33,600/month for “Housing and Utilities,” $2,700/month for “Transportation,” $4,500/month for “Child/dependent care,” and $40,550/month for “Other expenses.” (Id.) The “Housing and Utilities” expense reflected payments on a $4 million loan Hawkins took out on his Atherton home in order to fund his failing 3DO venture. (See Appellant’s Br. at 21; App. at 367 (Testimony of William M. Hawkins, III, December 3, 2009).) The “Transportation” expense included monthly payments of $1,207.61 on a Cadillac Escalade, which Hawkins and his wife bought for $69,974.28 in October 2004 to serve as the fourth vehicle for their family of two drivers. (Op. at 232 & n.5; Appellant’s Reply Br., Ex. D (Testimony of Lisa Warnes Hawkins, December 1, 2009).)
In September 2006, Hawkins filed a Chapter 11 bankruptcy petition. Hawkins filed schedules reporting expenses of $3,500/month for “Food,” $1,100/month for “Recreation, clubs and entertainment, newspapers, magazines, etc.,” $2,328/ month for “Transportation” (including auto insurance and loan payments) and $3,800/ month for “Child Care.” (App. at 215-16.) The bankruptcy court found Hawkins’ housing expenses to be $24,583/month, (Op. at 238), but Hawkins argues that his actual housing expenses at that time were $7,500/month (Appellant’s Br. at 22; see also App. at 215).
The bankruptcy court concluded that Hawkins (1) knew he had substantial tax liabilities, (2) knew he was insolvent, and (3) thereafter continued to make unnecessary and unreasonable expenditures despite this knowledge of his finances. (Op. at 233.) The bankruptcy court considered this evidence sufficient to demonstrate that Hawkins “willfully attempted in any manner to evade or defeat” his 1997-2000 taxes and thus excepted them from discharge under 11 U.S.C. § 523(a)(1)(C). Hawkins now appeals the bankruptcy court’s judgment.
ANALYSIS
A. Standard of Review of Bankruptcy Court’s Judgment.
District courts have jurisdiction to hear appeals from final judgments, orders, and decrees of bankruptcy judges. 28 U.S.C. § 158. On appeal, a district court must review a bankruptcy court’s findings of fact under the clearly erroneous standard and its conclusions of law de novo. Fed. R. Bankr.P. 8013;
see also Sigma Micro Corp. v. Healthcentral.com (In re Healthcentral.com),
B. The Bankruptcy Court Did Not Err in its Conclusions of Law.
A debtor’s pre-petition debts are generally all discharged in a bankruptcy proceeding. 11 U.S.C. § 727(b). However, 11 U.S.C. § 523 excepts certain debts from discharge, including tax debt as 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).
Hawkins contends that the bankruptcy court applied an incorrect legal standard by excepting his tax obligations from discharge pursuant to 11 U.S.C. § 523(a)(1)(C) without requiring the government to prove that Hawkins acted with specific intent to evade or defeat the tax. Though the Ninth Circuit has discussed the “fraudulent return” portion of Section 523(a)(1)(C),
see, e.g., McKay v. United States,
The Eleventh Circuit has articulated the following test for the mental state requirement for a willful attempt to evade or defeat a tax under Section 523(a)(1)(C):
The mental state requirement-willfulness-is satisfied where the government shows that the debtor’s attempt to avoid tax liability was “done voluntarily, consciously or knowingly, and intentionally.” [quoting United States v. Fretz (In re Fretz),244 F.3d 1323 , 1326 (11th Cir. 2001).] That standard is met where “(1) the debtor had a duty under the law, (2) the debtor knew he had that duty, and (3) the debtor voluntarily and intentionally violated that duty.” [quoting Griffith v. United States (In re Griffith),206 F.3d 1389 , 1396 (11th Cir.2000).]
Jacobs,
Hawkins contends that Section 523(a)(1)(C) requires a showing of a “conscious effort to elude the tax by strategy or to intentionally frustrate the tax.” (Appellant’s Br. at 13.) To the extent that Hawkins argues that Section 523(a)(1)(C) requires a showing of fraudulent intent or malice, such a requirement is not supported by the plain language of the statute.
See United States v. Ron Pair Enters., Inc.,
Hawkins further contends that the bankruptcy court erred by determining that a finding of “unnecessary expenditures” is sufficient to except the tax debt from discharge. The bankruptcy court applied the Jacobs test for willfulness and determined as a matter of law that “unnecessary expenditures combined with nonpayment of a known tax can be the basis for excepting that tax from discharge.” (Op. at 234.) Hawkins argues that the bankruptcy court’s reliance on “unnecessary expenditures” to satisfy Section 523(a)(1)(C) does not set forth a clear standard for determining what expenses are “unnecessary” and would create uncertainty for insolvent tax payers.
Hawkins cites the decisions of several bankruptcy courts in support of his argument that a debtor’s payment of expenses to other creditors, rather than paying a known tax, is not sufficient to establish a willful attempt to evade or defeat the tax debt without some additional showing of an effort to conceal assets or deceive a taxing agency. (Appellant’s Br. at 16 (citing
Rhodes v. United States (In re Rhodes),
In
Sonnenberg,
the IRS alleged that the debtor, despite having the wherewithal to pay his taxes, had consistently filed his taxes late and without tax payment.
In
Rhodes,
the debtor was a wealthy businessman who found himself unable to pay his tax debts due to sudden stock market circumstances beyond his control.
In
Huber,
the IRS alleged that the debt- or transferred his company stock to his wife for no consideration in order to hide his assets, but the bankruptcy court determined that the debtor was not aware of the extent of his tax obligations at the time of the stock transfer. The bankruptcy court found that the debtor had “credibly testified that he did not anticipate the amount of the [tax] liability and was very surprised.”
The court in Rhodes noted that “[a] typical case of non-dischargeable tax liability pursuant to § 523 of the Bankruptcy Code often involves debtors who ... live a lavish lifestyle they cannot afford ... while making no effort to satisfy their tax liability.” Id. In Sonnenberg, Huber and Rhodes, the debtors were allowed to discharge their taxes only because they did not know of their tax situation at the time they spent extravagantly or transferred assets.
Here, by contrast, Hawkins acknowledged in family court no later than January 2004 that he knew of his tax debt and insolvency but continued to spend lavishly thereafter. The bankruptcy court found that Hawkins “willfully avoided the collection of tax by making unreasonable and unnecessary discretionary expenditures at a time when he knew he owed taxes and knew he would be unable to pay those taxes.” (Op. at 234 (emphasis added).) “This is not a case where [Hawkins] acted appropriately once the tax was formally assessed, perhaps suggesting that [his] earlier failure to pay was based on some innocent misconception of [his] duty.” (Id. at 239.) “[Hawkins wasted] assets through unnecessary personal spending after [he] decided to discharge [his] tax liabilities.” (Id. at 240.) The Court concludes that the bankruptcy court’s analysis of the mental state prong under the Jacobs test was sufficient to demonstrate the culpability of Hawkins’ actions.
In determining that unnecessary expenditures combined with nonpayment of a known tax satisfied Section 523(a)(1)(C), the bankruptcy court relied in part on the holding of
Lynch v. United States (In re Lynch),
The bankruptcy court below also relied on
Wright,
where the district court affirmed the bankruptcy court’s decision to deny discharge of tax debts. The
Wright
court held that Section 523(a)(1)(C) is satisfied “if the debtor ‘had the wherewithal
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to file his return and pay his obligation,’ but ‘voluntarily, consciously, and intentionally’ decided to pay other creditors instead.”
Quoting Lynch, the bankruptcy court articulated the standard for unnecessary expenditures in the face of a known tax as follows:
“[T]he caselaw applying section 523(a)(1)(C) has consistently held section 523(a)(l)(C)’s requirements to be satisfied in situations where the debtor-even without fraud or evil motive-has prioritized his or her spending by choosing to satisfy other obligations and/or pay for other things (at least for non-essentials) before the payment of taxes, and taxes knowingly are not paid.”
(Op. at 235 (quoting
Lynch,
C. The Bankruptcy Court Did Not Err in its Findings of Fact.
Hawkins argues that the bankruptcy court made several errors in its characterization of his spending between 2004 and 2006. Hawkins concedes that these findings are purely factual. (Appellant’s Br. at 2.) The Court therefore reviews them for clear error. Fed. R. Bankr.P. 8013;
see also Healthcentral.com,
The bankruptcy court found that Hawkins’ living expenses between 2004 and 2006 were “truly exceptional.” (Op. at 237.) The court cites numerous examples that support this finding. Hawkins maintained two multimillion dollar residences until July 2006. (Id. at 232.) In October 2004 the Hawkinses bought a $70,000 vehicle to serve as the fourth automobile for a family containing only two drivers. (Id. & n.5.) In both an October 2005 Collection Information Statement and a September 2006 debt schedule, Hawkins reported significantly greater personal expenses than earned income and, among other things, spent at least $3,500/month on food/clothing/etc. and $3,800/month on child care although, as the bankruptcy court noted, Hawkins’ wife was a stay-at-home mother. (Id. at 237-39; see App. at 71 (Undisputed Fact 12).) Taken together, these expenditures supported the bankruptcy judge’s finding that Hawkins had engaged in “unnecessary” spending between 2004 and 2006.
Hawkins appeals the bankruptcy court’s finding on the grounds that the court erred by omitting his unearned income from its analysis of his income and expenses. He cites no authority, and the Court is aware of none, for the proposition that a bankruptcy court must take account of an insolvent debtor’s income at any point in an analysis of alleged extravagant spending. The bankruptcy court relied on earned income as a proxy to determine what standard of living might be reason
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able to expect from Hawkins.
1
(Op. at 236-37.) However, Hawkins was insolvent. Even if his total income, including unearned income, exceeded his expenditures, such a fact could not justify extravagant spending in the face of insolvency. To hold otherwise “would create special rules for the wealthy,” in that insolvent debtors with significant income would be permitted to live lavishly while insolvent debtors with less income would be required to abstain from similar comforts.
Lynch,
Hawkins next asserts that the court erred in characterizing his housing expenses as “unnecessary.” His housing and utility expenses were $33,600/month in October 2005. (Op. at 237-38.) A major component of these costs was loan payments to service a $4 million loan on the Atherton home, which loan was used to infuse capital into Hawkins’ failing 3DO venture. This loan constituted part of the $12 million Hawkins loaned to 3DO between October 2002 and January 2003, (Op. at 230; Appellant’s Br. at 5 & n.13.), when Hawkins had already received notice from the IRS that it had a “strong case” for disallowing his tax shelters (App. at 111 (IRS Letter, dated July 11, 2002)).
Hawkins maintains that the loan “was not ‘voluntary,’ but, according to the investors in 3DO, a contract obligation.” (Appellant’s Br. at 21.) As understood by Hawkins himself, these loans were “necessary” only in the sense that he was the only possible source of capital for his badly failing company at that time. (App. at 367.) Contrary to Hawkins’ suggestion that the bankruptcy court “ignore[d] that the debt on the property was not to purchase it, but to pay the loan made to 3DO,” (Appellant’s Br. at 21), the bankruptcy court acknowledged the purpose of the debt and would have considered it as evidence of fraud except that “the evidence of evasion of tax via unnecessary spending [was] so strong” that Section 523(a)(1)(C) was satisfied already. (Op. at 240-41 (comparing Hawkins’ loan to 3DO to an insolvent debtor’s purchase of lottery tickets).) The bankruptcy court did not, as Hawkins alleges, “ignore[] that the debt on the property was not to purchase it, but to pay the loan made to 3DO.” (Appellant’s Br. at 21.) The bankruptcy court’s conclusion that Hawkins’ housing expenses were unnecessarily high was plausible in light of the entire record, and the court therefore did not clearly err.
Hawkins next argues that the bankruptcy court erred when it reported that the Atherton home sold for $10 million and that the Cadillac Escalade was worth $70,000. In fact, as the government concedes, the Atherton home sold for $6.5 million. (Appellee’s Br. at 21; see also App. at 77 (Undisputed Fact 70).) Though the selling price of the home was in error, it was mentioned only in passing and was not material to the bankruptcy court’s analysis. (See Op. at 237-38.) While Hawkins argues that the Escalade was worth only $45,000, Hawkins’ wife testified that the purchase price was $69,974.28. (Appellant’s Reply Br., Ex. D.) On this record, the bankruptcy court made no error in its assertion that the Hawkinses *299 purchased “a $70,000 Cadillac SUV ... ten months after [Hawkins] had acknowledged [his] tax liability and insolvency.” (Op. at 238.)
Hawkins further contends that his “other expenses,” reported to be $40,550/ month in October 2005, included legal expenses and were therefore not discretionary. (Appellant’s Br. at 22 (“It is self evident that legal expenses are not ‘living expenses,’ and are not discretionary.”).) However, the bankruptcy court did not label these “other expenses” as unnecessary or discretionary. (See Op. at 237-38 (noting only that the “other expenses [were] not broken down”).) The identity or purpose of the “other expenses” was irrelevant to the bankruptcy court’s analysis, which used the “other expenses” only to the extent that they rendered Hawkins’ expenses greater than his earned income. Moreover, Hawkins’ expenses in October 2005 would have exceeded his earned income even without considering the “other expenses.” 2 Therefore, the bankruptcy court did not err in its consideration of Hawkins’ “other expenses.”
Hawkins next argues that the court erred in its calculation of his housing expenses as reported in September 2006. While the court asserted that Hawkins’ housing expenses at that time were $24, 583/month, Hawkins argues that the court failed to consider that he had sold the Atherton home by then and was no longer making loan payments on it. Hawkins says he was only paying $7,500/month on a rental home at the time he filed his bankruptcy petition. The government concedes this point. (Appellee’s Br. at 22.) However, such error was of minimal significance because the bankruptcy court used the September 2006 debt schedules to demonstrate that Hawkins was spending lavishly more than two years after acknowledging his tax debt and insolvency. As the Ather-ton home was not sold until July 2006, (App. at 77 (Undisputed Fact 70)), any error in describing Hawkins’ September 2006 housing expenses did not distort the bankruptcy court’s picture of Hawkins’ expenses between January 2004 and June 2006. Even though the bankruptcy court erred in its calculation of housing expenses from July to September 2006, the bankruptcy court’s finding that Hawkins caused “Debtors to deplete their assets on large unnecessary expenditures for an extended period of time” (Op. at 241) was not clearly erroneous in the context of Hawkins’ housing expenses throughout the 2004-2006 span into which the bankruptcy court inquired.
Hawkins further argues that the court erred in failing to consider his attempts to conserve assets for the IRS. He does not cite to any part of the record in which any of these considerations were presented to the bankruptcy court,
(see
Appellant’s Br. at 23-24; Appellant’s Reply Br. at 13-14), nor does he respond to the government’s contention that he failed to present evidence to the bankruptcy court of his efforts to preserve assets for the government (Appellee’s Br. at 20 n.10). Hawkins is precluded from raising this argument for the first time on appeal.
Gold Coast Asset Acquisition, L.P. v. 1441 Veteran St. Co. (In re 1441 Veteran St. Co.),
D. Hawkins’ Tax Debt Is Excepted from Discharge Under Section 523(a)(1)(C).
Hawkins’ final contention is that the evidence presented was insufficient to find
*300
that Hawkins willfully attempted to evade or defeat his taxes. This contention addresses a mixed question of law and fact, as “the issue is whether the facts satisfy the legal rule,” and the Court therefore reviews the bankruptcy court’s holding de novo.
Murray v. Bammer (In re Bammer),
The bankruptcy judge determined that the evidence showed that Hawkins understood by January 2004 that he owed $25 million in taxes, that he did not have the means to pay his tax liabilities, planned to discharge those taxes in bankruptcy, and, having seen his finances collapse around him, nonetheless continued to spend money extravagantly with knowledge of his tax liabilities. (Op. at 235-39.) The bankruptcy court concluded that Hawkins planned to defeat his taxes via bankruptcy and continue living the lifestyle to which he had grown accustomed. (Id. at 236-37.) The evidence considered by the bankruptcy court was sufficient to show that Hawkins “willfully attempted in any manner to evade or defeat” his tax debts.
1. Hawkins satisfied the mental state requirement.
The record demonstrates that Hawkins satisfied the mental state requirement of Section 523(a)(1)(C). “The mental state requirement-willfulness-is satisfied where the government shows ... ‘(1) the debtor had a duty under the law, (2) the debtor knew he had that duty, and (3) the debtor voluntarily and intentionally violated that duty.’”
Jacobs,
Hawkins acknowledged his insolvency and considerable tax debt in papers filed in family court in January 2004. During those proceedings, he further acknowledged that he intended to discharge those taxes in bankruptcy. After revealing his knowledge and his plans, Hawkins continued for over two years to spend at least $3,500/month on food for a family of six and $3,800/month on child care while his wife was a stay-at-home mother. He maintained two multimillion dollar homes with no apparent attempt to sell either one as soon as practicable, whether in a “fire sale” or in a more measured way. He purchased a fourth vehicle for a family of two drivers at a cost of nearly $70,000, thus incurring further debt and the costs attendant to owning four vehicles. Clearly, Hawkins had a duty to pay his tax debt under the law, knew he had that duty, and voluntarily and intentionally violated that duty by choosing to pay for nonessential expenses at a time when he knew he was unable to pay back his debt and had planned not to do so.
Jacobs,
Hawkins contends that the bankruptcy court erred by inferring willfulness from his actions without finding particular “badges of evasion,”
ie.,
acts taken as evidence of evasive intent. Specifically, Hawkins argues that the bankruptcy court’s failure to identify any one act taken for the purpose of evading a tax precluded a finding that his badges of evasion, taken
*301
together, supported an inference of culpability. The Ninth Circuit has not articulated a test regarding “badges of evasion” in the context of the willfulness requirement of Section 523(a)(1)(C). In the context of fraud, however, the Ninth Circuit has held that fraudulent intent may be inferred from individually innocent “badges of fraud.”
See, e.g., Maciel v. Comm’r of Internal Revenue,
The bankruptcy court recognized that in some cases, courts have found particular badges of evasion, or indicia of willful tax evasion: “failure to file returns; concealment of income; failure to pay the amount shown on the returns; or transfer of assets without consideration.” (Op. at 241 (citing
Lynch,
Hawkins contends that the bankruptcy court’s failure to identify a particular badge of evasion would “ ‘convert’ otherwise innocent actions into to [sic] guilty ones.” (Appellant’s Reply Br. at 7.) To satisfy the test for willfulness, “it is not necessary to prove that the debtor was inspired by ‘bad purpose or evil motive’ in failing to pay his taxes.”
Wright,
2. Hawkins satisfied the conduct requirement.
The conduct requirement is satisfied where the government shows that “ ‘the debtor engaged in affirmative acts to avoid payment or collection of the taxes,’ either through commission or culpable omission.”
Jacobs,
Hawkins characterizes the bankruptcy court’s analysis of the conduct prong as resting solely on Hawkins’ allegedly innocent failure to pay his taxes. (See, e.g., Appellant’s Br. at 17.) Hawkins misreads the bankruptcy court’s opinion, which repeatedly stressed that nonpayment of taxes was just one factor in a decision that also rested on Hawkins’ spending patterns and his knowledge of his debt and insolvency. The bankruptcy court inferred from this behavior that Hawkins, having planned to discharge his taxes in bankruptcy, nevertheless lived extravagantly to the detriment of the IRS and FTB as creditors. The Court rejects Hawkins’ contention that “[tjhere is not a single finding, or even suggestion, that Hawkins acted in anything other than an honest and forthright manner at all times.” (Appellant’s Br. at 17.) Rather, the bankruptcy court only avoided the “difficult question” of whether Hawkins “acted with intent to defraud” because it did not need to reach that issue in light of its other holdings. (Op. at 233-34.) The bankruptcy court’s finding that Hawkins “avoided the collection of tax by making unreasonable and unnecessary discretionary expenditures at a time when he knew he owed taxes and knew he would be unable to pay those taxes,” (Op. at 234), is sufficient to satisfy the conduct requirement of Section 523(a)(1)(C).
Hawkins satisfied both the mental state and conduct requirements of 523(a)(1)(C). His tax debts must therefore be excepted from discharge.
E. FRAUDULENT RETURNS
Because the Court affirms the bankruptcy court’s determination that Hawkins “willfully attempted ... to evade or defeat” his taxes, it need not reach the government’s contention on alternate grounds that Hawkins’s taxes should be excepted from discharge under § 523(a)(1)(C) based on allegations that Hawkins made fraudulent returns as to those taxes.
CONCLUSION
For the reasons stated above, the judgment of the bankruptcy court is hereby AFFIRMED.
IT IS SO ORDERED.
Notes
. It is worth noting that Hawkins claims he had approximately $50,000/month of unearned income during the relevant time period. (Appellant’s Br. at 21.) The bankruptcy court concluded that Hawkins' expenses exceeded his earned income by $78,232/month. (Op. at 237-38.) Thus, even if the court had included his unearned income in the calculation Hawkins’ expenses would have exceeded his income by $28,232/month.
. The bankruptcy court found that Hawkins' expenses in October 2005 exceeded his earned income by $78,232/month. (Op. at 237-38.) Had the court omitted the $40,550/ month of "Other expenses” from the analysis entirely, Hawkins’ expenses still would have exceeded his earned income by $37,682/ month.