The debtors in the case were husband (now deceased) and wife, who we will refer to as Curtis and Barbara and together as the Coneys. Curtis was a lawyer operating through a sole owner S corporation. The tax liabilities arose from his law practice. Without going through all the details, the Coneys had a large amount of taxable income coming from the law firm. They apparently reported the income, but went to extraordinary lengths to prevent the IRS from discovering available assets to pay their resulting large tax liabilities. In negotiating with the IRS regarding payment of the liabilities, the debtors committed to turn over certain fees as received. They failed to turn over one large fee. Furthermore, the law firm "engaged in a high volume of cash transactions." Some of the cash proceeds it received were used to make illegal payments to runners for the law firm. In order to disguise the withdrawal of the cash, the husband debtor instructed staff to draw checks under the $10,000 reporting requirement to obtain the cash to pay the runners, thereby avoiding the CTR reporting requirement.
Things unraveled from there. Husband debtor was charged with
(a) one count of conspiracy to structure financial transactions in violation of 31 U.S.C. § 5324 from 1997 to 2001, (b) ten counts involving ten separate incidents of structuring financial transactions in violation of 31 U.S.C. § 5324 from 1997 to 2001, and (c) one count of obstruction of justice for attempting to influence [a staff member's] grand jury testimony.Barbara was charged with "one count of obstruction of justice for attempting to influence [the staff member's] grand jury testimony.
The Coneys thereafter pled to all charges. [I am sure there is a story there, but it is not given in the case.]
The IRS then moved to collect the outstanding taxes by notifying the Coneys of its intent to levy. The debtors then filed for Chapter 7 bankruptcy. The bankruptcy court discharged the debts, but made no finding as to whether the tax debts were discharged. The Government then brought this suit on the theory that the exception for willful attempt to evade applied and obtained summary judgment to reduce the tax liabilities to judgment.
This appeal followed.
The Court appeals affirmed on the following steps:
1. Section 523(a)(1)(C) has two disjunctive exceptions -- (i) the filing of a false return or (ii) the "willfully attempt[s] in any manner to evade or defeat [a] tax."
2. This willful attempt exception "contains a conduct requirement (that the debtor 'attempted in any manner to evade or defeat [a] tax'), and a mental state requirement (that the attempt was done 'willfully')."
3. The willful attempt exception is not limited to attempts to evade assessment, which had not occurred here since the Coneys reported the tax liabilities on their tax returns. The willful attempt exception also covers attempts to evade payment or collection. The Court spends considerable time discussing that proposition, although I would think the statutory text covers it. The Court apparently did that because of a prior decision which might have suggested otherwise.
4. The mental state element of the discharge exception is that the debtor have acted willfully. The Court of Appeals held that (case citations omitted):
all the Government has to establish in order to satisfy § 523(a)(1)(C)'s mental state requirement is that the debtor (1) had a duty to pay taxes under the law, (2) knew he had that duty, and (3) voluntarily and intentionally violated that duty. To satisfy the third prong of this test, the Government need only establish that a debtor voluntarily and intentionally committed or attempted to commit an affirmative act or culpable omission that, under the totality of the circumstances, constituted an attempt to evade or defeat the assessment, collection, or payment of a tax; the debtor need not have made their attempt with the specific intent to defraud the IRS.This is pretty much the definition of willfulness in that tax crimes statutes (e.g., § 7201 tax evasion). I think, however, that the notion about no requirement of an intent to defraud the IRS is perhaps unnecessary and perhaps even wrong. The elements for the exception are crisply stated in the numbered clauses in the first sentence. I think that most of us would say that fraud is necessarily involved in those elements. But, perhaps I quibble.
5. The Court then had no trouble finding the Coneys' actions sufficient to invoke the exception. After discussing the details (including the structuring to avoid the bank reports), the Court summarized as follows as to Curtis:
Here, Curtis indisputably had a duty to pay the relevant taxes. It is also undisputed that he demonstrated his knowledge of that duty by filing tax returns for the relevant tax years that expressly acknowledged his outstanding tax liabilities. Further, Curtis pleaded guilty in criminal proceedings to committing the acts which we have determined satisfied § 523(a)(1)(C)'s conduct requirement, and he specifically acknowledged in the factual basis supporting his plea that he (a) structured transactions during the relevant tax years to avoid the federal reporting requirements and (b) attempted to interfere with the grand jury's investigation of his activities. Thus, he necessarily admitted to voluntarily and intentionally committing the affirmative acts that we have concluded were attempts to evade or defeat the collection and payment of his tax liabilities for the relevant years. See Wolfson v. Baker, 623 F.2d 1074, 1077-78 (5th Cir. 1980) (holding that in both civil and criminal cases collateral estoppel "bars relitigation of an issue actually and necessarily decided in a prior action"). It does not matter if he did not commit those acts with the specific intent to defeat the collection of his taxes. See Fretz, 244 F.3d at 1330.Quite frankly, I don't understand that last sentence, since the mental state requirement is willfully which, even as the court defined it, seems to require a specific intent to evade by defeating collection. I don't understand the difference between that and fraud.
Then as to Barbara, there is a similar concluding paragraph with a similar concluding sentence:
Lastly, we conclude that Barbara's actions satisfied the third prong of § 523(a)(1)(C)'s mental state requirement—i.e., she voluntarily and intentionally violated her duty to pay her taxes. Bruner, 55 F.3d at 197; Fretz, 244 F.3d at 1330. Barbara pleaded guilty to a count of obstruction of justice based on her attempt to interfere with Martino's testimony and admitted that she committed that offense with "full knowledge" of Curtis's activities. Thus, Barbara necessarily attempted to influence Martino's grand jury testimony voluntarily and intentionally. Because we have concluded that Barbara's obstruction of justice offense was an attempt to evade or defeat the collection and payment of her tax liabilities for the relevant tax years, Barbara voluntarily and intentionally violated her duty to pay her taxes. It does not matter if she did not make her attempt to evade or defeat her taxes with the specific intent to defeat the collection of her taxes. Fretz, 244 F. 3d at 1330.6. After rejecting other miscellaneous arguments, the Court of Appeals dealt with a final claim that the Government's pleadings were improperly scandalous and that the district court should have granted a motion to strike. Essentially, the claim was of bad behavior went beyond claims required to resolve the issues presented in the complaint. The district court denied the claim as moot because the allegedly scandalous allegations were unrelated to the granting of the motion for summary judgment. The Court of Appeals, however, concluded that although unrelated to the granting of the motion, the allegations "were not immaterial or impertinent to the controversy itself." Moreover, the Court added:
Similarly, we reject Barbara's contention that the disputed pleadings were "scandalous." Although the disputed pleadings might "offend the sensibilities" of Barbara and her attorneys, those pleadings are not scandalous because they are directly relevant to the controversy at issue and are minimally supported in the record. See In re Gitto Global Corp., 422 F.3d 1, 12 (1st Cir. 2005) (holding that a pleading is not "scandalous" under Rule 12(f) merely because "the matter offends the sensibilities of the objecting party if the challenged allegations describe acts or events that are relevant to the action[;] [a]s a result, courts have permitted allegations to remain in the pleadings when they supported and were relevant to a claim for punitive damages") (quoting Hope ex rel. Clark v. Pearson, 38 B.R. 423, 424-25 (Bankr. M.D. Ga. 1984)). Thus, the district court did not abuse its discretion by denying Barbara's two motions to strike statements contained in the Government's summary judgment filings.