IN RE: HENRY FEGELEY; ANNMARIE FEGELEY, Dеbtors UNITED STATES OF AMERICA v. HENRY FEGELEY; ANNMARIE FEGELEY HENRY FEGELEY, Appellant
No. 96-5428
UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT
July 8, 1997
On Appeal from the United States District Court for the District of New Jersey (D.C. No. 95-cv-05254) Submitted Pursuant to Third Circuit LAR 34.1(a) June 12, 1997 BEFORE: COWEN, NYGAARD and GARTH Circuit Judges
COUNSEL FOR APPELLANT Henry Fegeley
Gary D. Gray, Esq. Laurie Snyder, Esq. Karen D. Utiger, Esq. United States Department of Justice Tax Division P.O. Box 502 Washington, D.C. 20044
COUNSEL FOR APPELLEE United States of America
OPINION OF THE COURT
COWEN, Circuit Judge.
Appellant Henry Fegеley appeals the judgment of the district court, which reversed the judgment of the bankruptcy court. The bankruptcy court determined that Fegeley‘s federal tax liabilities were dischargeable. Fegeley argues that in order to except federal taxes from discharge in bankruptcy pursuant to
Fegeley is a 50-year-old high school graduate who was employed as a salesman in the 1980s. He was paid both a salary and commission, and was also reimbursed for his expenses. Prior to the tax year 1983, Fegeley regularly filed his federal income tax returns and paid his tax liabilities, if any, in a timely manner.
In the years 1983, 1984, and 1985, Fegeley‘s income increased substantially. During these years, Fegeley made lavish expenditures. He failed to file federal income tax returns or to pay the taxes owed for these years. At the time the taxes were due, he had sufficient funds on deposit in his bank accounts to pay his tax liability.
Fegeley filed an application in 1985 for an extension of time to file his tax return with the IRS. In the application Fegeley substantially underestimated the amount of taxes owed. He also failed to pay the estimated tax liability when he returned the application. Also in 1985, Fegeley requested that his employer pay him as an independent contractor instead of as a salaried employee. His employеr did so and, consequently, discontinued withholding taxes from Fegeley‘s income.
Fegeley was communicated with by the Criminal Investigation Division of the IRS in 1987. After being communicated with the IRS agents, he filed his 1983, 1984, and 1985 income tax returns. The Government determined that the returns were reasonably accurate and сomplete, and has not alleged that any of the returns are fraudulent.
In 1989, the Government filed a three-count information against Fegeley, charging him with willful failure to file his income tax returns for 1983, 1984, and 1985 pursuant to
Fegeley and his wife filed a joint Chapter 7 bankruptcy petition in 1991, and were thereafter granted a discharge in bankruptcy pursuant to
The Government argued that the tax liability could not be discharged in bankruptcy because
Despite these findings, the bаnkruptcy court entered judgment for the Fegeleys holding that the Government failed to prove that the Fegeleys attempted to evade or defeat their 1983-85 income taxes and that such taxes are not excepted from discharge pursuant to
The Government appealed the bankruptcy cоurt‘s decision to the district court. The district court reversed, holding that the tax liabilities were not dischargeable under
I.
Because the bankruptcy court, rather than the district court, was the trier of fact in this case, “[w]e are in as goоd a position as the district court to review the findings of the bankruptcy court, so we review the bankruptcy court‘s findings by the standards the district court should employ, to determine whether the district court erred in its review.” Universal Minerals, Inc. v. C.A. Hughes & Co., 669 F.2d 98, 102 (3d Cir. 1981). We review basic and inferred facts under the clearly erroneous standard. Id. We exercise plenary review over legal issues. In re Siciliano, 13 F.3d 748, 750 (3d Cir. 1994). In reviewing ultimate facts, which are a “mixture of fact and legal precept“, we must “break down” the questions of law and fact and “apply the appropriate standard to each component.” Meridian Bank v. Alten, 958 F.2d 1226, 1229 (3d Cir. 1992)(quoting Universal Minerals, 669 F.2d at 102-03, and In re Sharon Steel Corp., 871 F.2d 1217, 1222 (3d Cir. 1989)).
II.
When a debtor files under Chapter 7 of the Bankruptсy Code, the debtor is generally granted a discharge from all debts arising prior to the filing of the bankruptcy petition.
The Code excepts certain liabilities from discharge. Section
(a) A discharge under section 727 . . . of this title does not discharge an individual debtor from any debt--
(1) for a tax or a customs duty--
(C) with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax.
The Government does not allege that Fegeley filed fraudulent returns. The sole issue before us is whether Fegeley “willfully attempted . . . to evade or defeat” his income taxes for thе tax years 1983, 1984, and 1985 within the meaning of the second part of
Our analysis begins with an interpretation of the second prong of
Looking first to the conduct requirement, it is evident that “`Congress did not define or limit the methods by which a willful attempt to defeat and evade might be accomplished and perhaps did not define lest its effort to do so result in some unexpected limitation.“’ Dalton, 77 F.3d at 1301 (quoting Spies v. United States, 317 U.S. 492, 499, 63 S.Ct. 364, 368 (1943)). We must give weight to the fact that Congress included the phrase “in any manner” in the statute. Nonetheless, we should abide by the limitation set out by the Court of Appeals for the Eleventh Circuit in In re Haas, 48 F.3d 1153, 1158 (11th Cir. 1995):“[A] debtor‘s failure to pay his taxes, alone, does not fall within the scope of section 523(a)(1)(C)‘s exception to discharge in bankruptcy.” See also Dalton, 77 F.3d at 1301. Instead, we should look to nonpayment of taxes as “relevant evidence which [we] should consider in the totality of conduct to determine whether or not the debtor willfully attempted to evade or defeat taxes.” Id.
Although many of the published decisions excepting taxes from discharge under
The Court of Appeals for the Sixth Circuit held that because Toti “had the wherewithal to file his return and pay his taxes, but . . . did not fulfill his obligation,” he did “not fall within the category of honest debtors.” Id. at 809. In the instant case, the bankruptcy court found that Fegeley “clearly knew that he had to file. He clearly neglected to file, failed to file, suffered criminal consequence[s] for his failure to file. And he failed to pay the taxеs.” App. at 14. The bankruptcy court also found that Fegeley “probably had enough money to pay th[e] taxes[,]. . . spent too much[,] . . . was much too lavish[, and] . . . didn‘t make good judg[ ]ments about the allocation of his resources.” App. at 17.
Based upon the factual findings of the bankruptcy court, the district court correctly held that Fegeley‘s intentional failure to file his tax returns, together with his failure to pay taxes when he had the resources to do so, was sufficient to prove that he attempted to evade or defeat his tax liabilities for the tax years at issue. By adopting this rule of law, we need not address the remaining factual findings of the bankruptcy court. Therefore, we need not evaluate other conduct of Fegeley, such as underestimation of tax liability by 50% and changing of filing status from that of employee to independent contractor, which mоre properly may have been construed as affirmative steps in a scheme to evade taxes.
We now turn to the required mental state. Fegeley argues that the willfulness language in the second prong of
The majority of courts to address this issue have not required аny such showing. Instead, they have adopted the test for “civil willfulness.” In doing so, they “have interpreted `willfully,’ for purposes of
- [the] debtor had a duty to file income tax returns;
- [the] debtor knew he had such a duty; and
- [the] debtor voluntаrily and intentionally violated that duty.
In re Semo, 188 B.R. 359, 362 (Bankr. W.D. Pa. 1995); see also Bruner, 55 F.3d at 197.
It is undisputed that Fegeley had a duty to file tax returns. The bankruptcy court found that he knew that he had this duty and voluntarily failed to file his returns. App. at 12, 14. The bankruptcy court also found that Fegeley “should have paid [his] taxes . . . [and] probably had enough money to pay those taxes.” App. at 17. The bankruptcy court erred by concluding that
Fegeley had a duty under the tax law, knew he had that duty, and voluntarily and intеntionally violated that duty. He also had the financial ability to discharge that duty. The district court correctly found this to be a sufficient basis to prove that Fegeley willfully attempted to evade or defeat his taxes for 1983, 1984, and 1985.
III.
We will affirm the May 10, 1996, judgment of the district court reversing the bankruptcy cоurt‘s August 7, 1995,
Costs taxed against appellant.
A True Copy: Teste:
Clerk of the United States Court of Appеals for the Third Circuit