Section 523(a)(l)(C) of the Bankruptcy Code provides that a discharge under Section 727 “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 * * * * “  A two-prong test exists for determining whether a tax debt is nondischargeable as a willful attempt to evade the tax.  First, the government must obviously prove by a preponderance of the evidence that the debtor attempted in any manner to evade or defeat the tax at issue.  Second, the government must prove that the attempt was done “willfully.”  In re Feshbach, 974 F.3d 1329, 1327 (11th Cir. 2020).  This memorandum provides a survey by Circuit of the approaches followed in evaluating Section 523(a)(l)(C) disputes, and the broad universe of evasive acts or omissions that can give rise to Section 523(a)(l)(C) exposure.

Second Circuit:

In In re Tudisco, 183 F.3d 133 (2nd Cir. 1999), the court held that the willfulness exception consists of a conduct element (an attempt to evade or defeat taxes) and a mens rea requirement (willfulness).  Id. at 136.  The Second Circuit then ruled that simple non-payment of taxes does not satisfy Section 523(a)(l)(C)’s conduct requirement.  However, the court did not consider the issue of whether the exception encompassed both acts of commission as well as culpable omissions.  In re Bruner, 55 F.3d 195 (5th Cir. 1995) (suggesting that culpable acts of omission are sufficient).  It was able to avoid this issue by noting that Tudisco had engaged in more than “mere non-payment.” In this case, the debtor’s failure to pay his taxes was accompanied by a failure to file his tax returns and his submission of a patently false affidavit to his employer, which was intended to establish Tudisco’s exemption from income tax withholding.

Third Circuit:

In re Herron, 634 B.R. 883 (Bankr. W.D.Pa. 2021) noted that in the Third Circuit, the plain language of the second part of Section 523(a)(1)(C) comprises both a conduct requirement (that the debtor sought ‘in any manner to evade or defeat’ his tax liability) and a mental state requirement (that the debtor did so ‘willfully’).  With respect to the conduct component, a debtor’s mere failure to pay taxes standing alone will not fall within the scope of the exception, “although it is relevant evidence that should be considered as part of the totality of conduct to determine whether or not the debtor willfully attempted to evade or defeat taxes.” Id. at 896.  As for the willfulness component, the court rejected the argument that some fraud by the debtor must be shown, instead holding that the standard of “civil willfulness” applies.  This means that the IRS need only show that the debtor’s attempts to avoid tax liability were “voluntary, conscious, and intentional.” Id. at 896-97.

Here, the court found that a willful evasion occurred.  In reaching this conclusion, the court noted that the debtor made unnecessary luxury purchases.  They consisted of a $3,500 ring, a Turkish rug for between $13,000 and $15,000, and another ring (a wedding ring for his wife) for $18,000.  The court noted that although the total amount of these expenditures over a 5-year period was not huge, it also stated that they were by no means de minimis either, and the purchased items were clearly luxury items rather than necessities.  The court was also troubled by the fact that the Debtor failed to report the purchase of the $18,000 ring in response to the pretrial discovery request by the IRS – such information only coming out at trial.  Id. at 897.

Another area cited in support of a willful evasion argument was involved real properties owned by the Debtor.  In 2017 or 2018 the Debtor settled a litigation claim against his former business partners for approximately $800,000.  After attorney fees were deducted from the settlement the debtor received approximately $600,000.  Even though he had known for a number of years by then that he owed a substantial tax obligation to the IRS, the debtor did not use any of the settlement proceeds to pay toward the tax debt, or even set any of it aside for a later payment.  Instead, he used the proceeds to purchase a new residence.  Debtor explained that he needed a new place to live at that time because the house in which he had been residing previously had been flooded as the result of a hurricane in 2016 and had effectively been condemned by local authorities.

Accepting the debtor’s testimony as true, the court nevertheless found this purchase to be strongly suggestive of an effort by the debtor to willfully evade his tax obligation.  It noted that the debtor did not explain why he would have had to buy a new house on a cash basis, rather than simply make a down payment and finance the balance with a home mortgage, which would have left much of the settlement freed up and available to apply toward the tax liability.  The debtor’s bankruptcy petition showed the house had a value of $344,976, allowing the court to presume that the price for which it was acquired a year earlier would have been somewhere near that amount.  “That leaves approximately $250,000 of the settlement proceeds unaccounted for.  What did the Debtor do with it?  The record does not disclose, although clearly it was not used in any way to address the tax liability.” Id. at 898.

In summary, the court found that the IRS made a prima facie showing that the Debtor willfully attempted to evade or defeat his tax liability.

The Debtor’s conduct in making approximately $35,000 in unnecessary, luxury purchases while owing tax liability, and more especially his diversion of the $600,000 settlement proceeds for use to buy a new house, and perhaps other undisclosed purposes, without using or setting aside any of those proceeds as a fund devoted to address his tax liability, are sufficient to meet the conduct component of Section 523(a)(1)(C).

Id. at 898.

Sixth Circuit:

In In re Blakeman, 244 B.R. 100 (Bankr. N.D.Ohio 1999), taxes were found to be nondischargeable based on the following evidence: (1) the debtor’s attendance at a “tax protest” organizational meeting, which organization advocated the non-filing of tax returns (the court noting that the fact that “plaintiff had some contact with a tax protest organization at the time that he failed to file federal income tax returns is some evidence of intent.”); (2) his failure to timely file his returns; (3) his failure to make voluntary payments towards his tax liabilities; (4) his submission of false Forms W-4 to reduce and virtually eliminate his federal income tax withholding; and (5) his repeated assertion of the privilege under the Fifth Amendment at his deposition in response to questions about his income and expenses for years 1980 through 1983. 

Of all the above factors, the court found the fourth the most significant.  The court noted that the record before it established that the plaintiff earned significant income during each of the years 1980 through 1983 and further that plaintiff had virtually no taxes withheld from his earnings for most of those years.  By statute, an employer must withhold a significant percentage of an employee’s pay unless the employee files a Form W-4 “absent the submission of a false W-4 Form, Debtor would have had significant taxes withheld from his earnings during the years 1980 through 1983.  We have no doubt, therefore, that false Forms W-4 were filed.”  With respect to the fact that the Debtor asserted the Fifth Amendment privilege against self-incrimination, the court noted that it was entitled to draw an adverse inference from litigant’s refusal to testify in civil matters.  The court stated “further, while Debtor is free to assert the Fifth Amendment privilege against self-incrimination during the bankruptcy proceeding, you may not turn the shield of the Fifth Amendment into a sword to cut his way to a discharge.”

Seventh Circuit:

In In re Thorngren, 227 B.R. 139, 142 (Bankr. N.D.Ill. 1998), the court held that to be willful, the debtor’s attempt to avoid the tax liability must be “voluntary, conscious and intentional.”  In other words, the government must show two things: (1) that the debtor knows he has a duty under the law; and (2) that he voluntarily and intentionally attempted to violate that duty.  Id.; see also In re Blakemall, 244 B.R. 100, 102 (Bankr. N.D.Ohio 1999) (utilizing a three-part test: (1) the debtor had a duty to file income tax returns; (2) the debtor knew he had such a duty; and (3) the debtor voluntarily and intentionally violated that duty).  In Thorngren, the court found that the tax liability of the debtor was non-dischargeable as having arisen from a willful attempt to avoid tax liability.  In this case, the debtor admitted that he failed to file returns for the years in question until he was contacted by the IRS’ Criminal Investigation Division.  The debtor further admitted that he paid on his tax debt only the amounts that were withheld from his payroll checks.  Evidence existed that the debtor increased the number of exemptions on his W-4 form which he submitted to his employer, so that inadequate amounts were withheld from his wages.  In this regard, the court found persuasive the fact that the debtors appeared to have filed false W-4 forms.  It stated:

Deciding whether the [debtors] acted willfully, this court can consider the pattern that [the debtors’] behavior created in the years preceding the bankruptcy filing.  This pattern will support the determination of whether or not the debtor’s failure to file was based on mistake, inadvertence or confusion.  The Plaintiffs’ own exhibit suggests that they have a history of increasing their exemptions on their W-4’s so that less tax would be withheld than was due.  Income Tax Exemption Report states, “as of September 1980 the debtors filed false W-4 statements with their respective employers.  They filed their ‘exempt’ status or with at least ten allowances for income tax withholding.”

Id. at 143.

In In re Crawley, 244 B.R. 121 (Bankr. N.D.Ill. 2000), the court stated that the willful evasion portion of Section 523(a)(l)(C) contains both a conduct requirement and a mental state requirement.  Id. at 129.  With respect to the mental state requirement, court noted that non-payment of taxes alone, does not constitute willful evasion.  “Courts, however, can consider the act of nonpayment in the review of the underlying circumstances to arrive at a finding of willful evasion.”  Id.  With respect to the mental state requirement, the court noted that willful evasion requires a voluntary, conscious, and intentional attempt to avoid tax liability.  “This willfulness requirement prevents the application of the exception to debtors who make inadvertent mistakes, reserving nondischargeability for those whose efforts to evade tax liability are knowing and deliberate.” Id.

In Crawley, the court concluded that the IRS had demonstrated by a preponderance of the evidence that the debtors had willfully attempted to evade paying their taxes.  The court noted that for prior tax years the debtors had filed individual income tax returns, which pattern of knowing compliance established that the debtors were aware of their duty to file tax returns.  They subsequently violated that duty for the simple reason that they were short of cash.  The Debtors’ excuse that their accountant told them not to file tax returns if they did not have the funds necessary to pay the tax liability was insufficient, as a matter of law.  Id. at 130.  “This defense undermines the basic principle that the law should generally be adhered to despite any bad advice.”  Id.

As the evidence undisputedly showed, the Crawleys had filed tax returns (and paid taxes) for many years prior to the years in issue.  The Court finds, based on the totality of the circumstances, that the Crawleys’ failure to pay any federal income taxes, coupled with a correlative ten-year pattern of failing to file tax returns, constitutes an inexcusable attempt to “evade or defeat” their tax liabilities.  Their desire not to raise a red flag by filing late because of nonpayment continued for a protracted period, which ended only because they desired to finance the acquisition of a new home, and prudent lenders asked for copies of recently filed tax returns as part of their due diligence and before lending.


In In re Geiger, 408 B.R. 788 (C.D.Ill. 2009), the court noted that Section 523(a)(l)(C) contains both a conduct requirement and a mental state requirement.  Id. at 790-91 (citing to In re Birkenstock, 87 F.3d 947, 951 (7th Cir. 1996)).  With respect to the conduct requirement, the court stated that “it is well established that the nonpayment of tax alone is not enough to bar discharge of the tax liability.” Id. at 791.  That being said, the court noted that “where nonpayment is coupled with a pattern of failing to file tax returns, or where a defendant takes other measures to conceal assets or income from the IRS, a court may reasonably find that the debtor sought to ‘evade or defeat’ his tax liabilities.”  Id. at 791 (citing to Birkenstock, 87 F.3d at 951-52).  The court noted that several situations are considered to be indicative of an attempt to evade taxes: (1) understatement of income; (2) extensive dealings in cash; (3) inadequate record keeping; (4) intra-family transfers for insufficient consideration; (5) failure to acquire significant assets relative to earnings; and (6) an extravagant lifestyle.  Id.

Geiger stated that the mental state could be established by considering the following factors: (1) recurrent understating income; (2) maintaining inadequate records; (3) failing to file tax returns; (4) giving implausible or inconsistent explanations of behavior; (5) concealing assets; (6) failing to cooperate with tax authorities; (7) engaging in illegal activities; (8) attempting to conceal illegal activities; (9) dealing in cash; (10) failing to make estimated tax payments; (11) transferring assets to family members; (12) transferring assets for insufficient consideration; (13) transfers that greatly reduced assets subject to IRS execution; and (14) transfers in the face of serious financial difficulties. Id.

In Geiger, the debtors failed to file timely returns in 1993, 199 and 1997.  The debtor testified that he knew that he had an obligation to file these returns and that he knew he would owe income tax for each of these years.  Nonetheless, he made no attempt to file these returns until 1999 and included no payment of tax owed with any of these returns.  The debtor did file his 1998 return timely, but the return was not accompanied by any payment of the tax owed.  In tax year 2000, the debtor admittedly paid estimated tax payments totaling $56,252 toward his $324,483 liability.  However, the bankruptcy court ruled that given the enormity of his financial windfall that year, the failure to make any additional effort to pay the tax due evidenced a conscious disregard for his know tax liabilities, “particularly as he had nearly $500,000 in spending that he could not account for.” Id.

The court found significant the fact that even when the debtor reaped “an unexpected windfall” with gross income of $1,000,000, he made no attempt to repay the back taxes that he knew he owed and paid only 6% of his income toward satisfying his current tax liability.  The court noted that with this income, the debtor bought a Cadillac, purchased a new house that he titled in the names of his wife and mother, paid for more than $75,000 in renovations and improvements to this house, and transferred money to family members that he claimed to be in need of financial assistance.  Id. at 792 (citing to In re Volpe, 377 B.R. 579, 588-89 (Bankr. N.D.Ohio 2007) (finding that when a debtor uses disposable income for leisure activities, knowing that he has a significant tax liability, he has made a voluntary decision to spend the money on himself rather than pay his taxes and that placing title to property in which he clearly had an interest in the name of another person weigh in favor of finding willfulness.).

Ninth Circuit:

In In re Hawkins, 769 F.3d 662 (9th Cir. 2013), the debtor’s tax liability arose after he sold sell large amounts of a common stock, thereby recognizing large capital gains.  The debtor’s accountant suggested an investment that would create capital losses that the debtor would use to offset those capital gains.  Following this advice, the debtor invested in a FLIP transaction.  Subsequently, the IRS challenged the validity of basis-shifting shelters, such as the FLIP.  On July 23, 2003, faced with an IRS audit report and investment losses, the debtor filed a motion in family court to reduce the child support payments that he was required to make to his first wife.  The court granted his motion but required the debtor to place additional assets in a trust that had been previously established for the support of his children.  The court also imposed a judicial lien on all the assets of that trust, to ensure that those assets could not be seized by taxing authorities.  In March 2005, the IRS made an aggregate assessment of taxes, penalties, and interest for tax years 1997-2000 totaling $21 million.

In addition to the above, in 1996 the debtor purchased a home in Atherton, California for $3.5 million.  In 2000, the debtor purchased an $11.8 million private jet that he used for family vacations as well as for business.  In 2002, the debtor purchased an ocean-view condominium in La Jolla, California for $2.6 million.  The debtor altered his lifestyle very little after it became apparent in late 2003 that he was insolvent.  Although he sold the private jet in 2003, he continued to maintain both the Atherton house and the La Jolla condominium until July 2006.  In October 2004, the debtor purchased a fourth vehicle for $70,000.  The debtor’s personal living expenses exceeded his earned income long after he acknowledged that he was insolvent.  The debtor disclosed annual after-tax earned income of $150,000 and annual living expenses of more than $1.0 million.

The bankruptcy court stated that the case law applying Section 523(a)(1)(C) “has consistently held section 523(a)(1)(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.”  Id. (quoting Lynch v. U.S. (In re Lynch), 299 B.R. 62, 64 (Bankr. S.D.N.Y. 2003) and Hamm v. U.S. (In re Hamm), 356 B.R. 263, 285-86 (Bankr. S.D.Fla. 2006).  The court then noted that the debtor by January of 2004 had acknowledged in writing several times that the debtor owed federal and state income taxes in the amount of $25 million.  Id. at 235. The debtor also knew that his liabilities exceeded his assets, and that any dissipation of his assets would reduce his ability to pay his tax liabilities.  Id. at 236.

The bankruptcy court then evaluated whether the debtor lived an “unduly lavish” lifestyle.  Here, the court stated that it may not be appropriate to require a CEO earning hundreds of thousands of dollars per year to live in an apartment suitable for a clerical employee, even if that CEO is insolvent.  The effort and skill required to earn such sums require a nuanced approach in establishing what living expenses are necessary.  However, even with the most nuanced approach did not excuse living expenses greatly in excess of earned income over an extended period of time.  Id. at 237.  In this case, after the debtor represented to the family court that he was liable for $25 million in federal and state taxes and that he was insolvent as a result, the debtor spent between $16,750 and $78,000 more than his after-tax earned income each month.

The Ninth Circuit reversed and remanded.  It did so noting that the “fresh start” philosophy of the Bankruptcy Code argued for a stricter interpretation of “willfully” than an expansive definition.  The court stated that the grouping of the fraudulent return offense with the evasion offense in subsection (C) suggests that it is more akin to attempted tax evasion than to failing to file a timely return.  “If a willful attempt to evade taxation requires mere knowledge of the tax consequences of an act, and no bad purpose, then it is difficult to see how such acts resemble the filing of a fraudulent return.  By contrast, if a willful attempt requires bad purpose, then such acts are naturally grouped with other acts requiring bad purpose, such as filing a fraudulently false return.”  The court went on to state:

A specific intent construction of “willfully” in the bankruptcy tax context is also supported by the Internal Revenue Code. In language almost identical to that used in § 523(a)(1)(C), the Internal Revenue Code makes it a felony to “willfully attempt[ ] in any manner to evade or defeat any tax.” 26 U.S.C. § 7201.  The specific intent required for felonious tax evasion “requires the Government to prove that the law imposed a duty on the defendant, that the defendant knew of this duty, and that he voluntarily and intentionally violated that duty,”; that is, a “voluntary, intentional violation of a known legal duty”.  The Supreme Court has clarified that such an attempt “almost invariably” will “involve[ ] deceit or fraud upon the Government, achieved by concealing a tax liability or misleading the Government as to the extent of the liability.” Kawashima v. Holder, ––– U.S. ––––, 132 S.Ct. 1166, 1175, 1177, 182 L.Ed.2d 1 (2012).  If attempted evasion under §523(a)(1)(C) is interpreted in a similar manner, then it would require fraudulent, or at least specific, intent.

Id. at 668.

The court concluded, therefore, that a mere showing of spending in excess of income is not sufficient to establish the required intent to evade tax.  Rather, the government must establish that the debtor took the actions with the specific intent of evading taxes.  Indeed, the court stated that if simply living beyond one’s means, or paying bills to other creditors prior to bankruptcy, were sufficient to establish a willful attempt to evade taxes, there would be few personal bankruptcies in which taxes would be dischargeable.  Id. at 669.  The court noted that ‘[s]uch a rule could create a large ripple effect throughout the bankruptcy system.  As to discharge of debts, bankruptcy law must apply equally to the rich and poor alike, fulfilling the Constitution’s requirement that Congress establish ‘uniform laws on the subject of bankruptcies throughout the United States.’ Id.

Eleventh Circuit:

In In re Huber, 213 B.R. 182 (Bankr. M.D.Fla. 1997), the court noted that Section 523(a)(1)(C) is intended to except from discharge taxes as to which a debtor made a fraudulent return or taxes which the debtor attempted in any manner to willfully evade or defeat.  The purpose is to prevent the use of the Bankruptcy Code as a way to avoid tax liability.  Id. at 184.  The court stated that the question of willful evasion should be decided by using the civil standard of fraud under which a showing of evil motive or sinister purpose is not required.  However, the type of willfulness required under Section 523(a)(1)(C) is not the result of inadvertence, carelessness or honest misunderstanding.  Id.  Further, the failure to pay taxes, without more, does not except a debtor from discharge.  In other words, there is a distinction between evasion of a tax and payment of a tax.  The court noted that “[e]ven if the debtor is aware of the taxes due and owing and allocates his or her money to something else other than the payment of taxes, the taxes due and owing are not excepted from discharge pursuant to §523(a)(1)(C).”  Id.

In this case, the debtor owned stock in a corporation which serviced the space coast industry.  In 1992, prior to the receipt of his 1991 tax returns, the debtor transferred this stock to his wife who was never involved in day-to-day operations of the company.  At the time, the debtor testified that the stock had only negligible value and that he transferred the stock in order for the company to maintain its minority status, not to avoid tax liability.  The debtor’s 1991 tax return reflected an unexpected tax liability of $86,067 due to the realization of capital gain taxes.  The debtor filed his 1991 tax return in March 1993, but he did not pay the taxes due.  “Since the filing of the return, the [debtor] maintained constant contact with the IRS through his attorney in an attempt to negotiate a payment arrangement.  He [ ] provided the [IRS] with all requested information, and he has not transferred or hidden any assets since he learned of the tax liability in July 1991.” Id. at 184.

The IRS argued that the debtor attempted to evade or defeat the tax by transferring ownership of stock to a family member, his wife, for no consideration prior to filing his 1991 return.  However, the court found the IRS’s position “not plausible.”   The court noted that when the transfer occurred, the debtor honestly believed the stock had a negligible value.  The debtor credibly testified that he transferred the stock to maintain minority ownership status for the company.  He did not believe that he was reducing assets subject to the claims of his creditors but was instead trying to save his business.  The court stated that “[a]lthough one may question the propriety of the reason for the transfer, the [debtor’s] motive does not indicate a willful intent to evade or defeat his 1991 federal tax liability and has no bearing on the dischargeability of the [debtor’s] tax debt pursuant to §523(a)(1)(C).” Id. at 185.  Further, at the time of the transfer, the debtor did not know the extent of his tax obligation for 1991.

In In re Fleck, 242 B.R. 188 (M.D.Fla. 1999), the court held that nondischargeability under Section 523(a)(l)(C) may be proven by establishing a pattern of willful concealment of assets; dealings in cash; the shielding of income; and frustration of tax collection efforts.  Other “badges of fraud” are significant and repeated understatements of income; failure to file tax returns; implausible or inconsistent taxpayer behavior; and failure to cooperate with the IRS.  Id. at 191.  Under the facts of its particular case, Fleck concluded that the taxes were dischargeable.  The court noted that (1) the revenue agent who audited the taxpayer determined that a civil fraud penalty was not warranted; (2) the taxpayer provided underlying documentation for a portion of his deductions; (3) the taxpayer made several payments to the IRS toward his outstanding tax liabilities; and (4) the taxpayer responded to and cooperated with the IRS.  Id.

In In re Griffith, 206 F.3d 1389 (11th Cir. 2000), the court held that a fair interpretation of §523(a)(l)(C) is that it renders nondischargeable tax debts where the debtor engaged in affirmative acts seeking to evade or defeat connection of taxes.  Id. at 1395.  In Griffith, the taxes at issue were found to be nondischargeable because the debtor engaged in intra-family transfers of property for little to no consideration.  In this case, the debtor, after an adverse Tax Court ruling, signed an antenuptial agreement in which he transferred all of his stock in certain companies and assigned certain promissory notes to his new wife and himself as tenants in the entirety.

In In re Lindros, 459 B.R. 842 (Bankr. M.D.Fla. 2011), the court noted that in order to satisfy the “evasive conduct” prong, the court must establish that the debtor “engaged in affirmative acts to avoid the payment or collection of taxes.  Mere nonpayment of taxes, without more, was not enough.  “Instead, affirmative acts of culpable omission or acts of commission are required.” Id. at 848.  Here, the government was unable to establish its burden of proof.  The court noted that the debtor did not transfer any property for little or no consideration or otherwise attempt to hide his assets.  Nor did the debtor use his income to finance an extravagant lifestyle rather than pay his delinquent taxes.  Here, the court noted the distinction between living an expensive lifestyle prior and after he was assessed.  The court noted as follows:

To be sure, Lindros live an expensive lifestyle between 1999 and 2001: he owned or leased several vehicles, including a Ford Expedition, a Nissan Xterra, a Porsche, and a Yamaha motorcycle.  He also put down a deposit on a Ferrari.  In addition, Lindros (i) owned two homes at one time; (ii) spent $2,250 on flying lessons; $3,000 on elective eye surgery, $5,000 on cycling equipment, $2,000 on a kayak, $4,500 on a pool table, and $6,000 on a game room; and (iii) enjoyed several nice vacations.

But those expenses are not extravagant considering Lindros’ income at the time and his belief that his stock options were worth millions. . . . In any event, the bulk of those expenses came before he received his 2000 tax assessment.  More importantly, mere nonpayment is not enough to satisfy the conduct requirement, “nonpayment in conjunction with a failure to file tax returns has been deemed to constitute evasive conduct. there is no evidence that Lindros maintained these expenses after he learned of his 2000 tax delinquency and the value of his stock collapsed.

Id. at 848.  The court noted that the government did not satisfy the second prong (i.e., a mental state consistent with willfulness) either.  To satisfy this second prong, the government needed to show that the debtor voluntarily, consciously, or knowingly, and intentionally attempted to evade his tax liability.  Id. at 849.  The debtor’s conduct is willful under this standard if he (i) had a duty under the law; (ii) knew he had that duty; and (iii) voluntarily and intentionally violated that duty.  The court found that this prong was not satisfied because the debtor credibly testified that he thought that he would be able to offset his 2000 tax liability with capital losses from later years and that he increased his W-4 exemptions because of increased itemized deductions.  Second, he did not continue maintaining his expensive lifestyle after he learned that he was unable to offset his 2000 tax liability with his capital losses from later years.  Third, he initiated contact with the IRS in 2002 and attempted to work with the IRS to resolve his tax delinquency.  Fourth, the debtor believed his 2000 tax delinquency was discharged in 2004.

In In re Barto, 2016 WL 7472740 (Bankr. N.D.Ga. Dec. 16, 2016), the court noted that it needed to follow the two-prong test espoused in United States v. Mitchell (In re Mitchell), 633 F.3d 1319, 1327 (11th Cir. 2011), i.e., the debtor engaged in (1) evasive conduct with (2) a mental state consistent with willfulness.  With respect to the “evasive conduct” prong, the court noted that while mere nonpayment is not enough to satisfy the conduct requirement, nonpayment in conjunction with a failure to file tax returns has been deemed to constitute evasive conduct.  Id. at *4.  In this case it was undisputed that the debtors failed to file returns for the years 2004–2007 until November 2008 and that no payments were made for those taxes.  The court therefore found that the conduct prong has been met and turned next to whether the IRS established willfulness.

With respect to the “willfulness” prong, the court stated a debtor’s attempt to avoid his tax liability is considered willful under Section 523(a)(1)(C) if it is done voluntarily, consciously or knowingly, and intentionally.  The required mental state is shown when the Government proves that the debtor: (1) had a duty under the law, (2) knew he had the duty, and (3) voluntarily and intentionally violated the duty.  Id.  The first and second prongs of the willfulness requirement were established by the fact that the joint filings were actually made, albeit late, and that those filings reflected liability.  With respect to the “voluntary and intentional” test, the court stated that because direct evidence was rarely available to prove the intent of the debtor, the court should rely on certain types of conduct – sometimes referred to as “badges of fraud” – that provide indicia of “willful evasion.”

The Court finds that several badges of fraud are present in this case, indicating voluntary and intentional action.  First, the audit review indicated both that the income shown on the returns as filed was understated and that certain deductions were in excess of those allowed.  Next, the Debtors failed to cooperate with the IRS as evidenced by their failure to cooperate with the IRC in the collection proceeding and tax court case.  Specifically, the Bartos failed to provide the documentation requested by IRS agents.  This failure, along with Mr. Bartos’ testimony indicating that he believed he and the corporation were the same, also indicate inadequate record keeping.  Last, the Court finds there was conduct likely to mislead or conceal.  First, the Bartos transacted business using substantial amounts of cash for no apparent reason.  Next, the Bartos used Apex funds to pay personal expenses, and by 2009 they had closed their personal bank account and were using a different corporate account as a personal account.  Last, the Bartos availed themselves of IRS procedural vehicles that resulted in a suspension of collection activities for a significant portion of the time between assessment and the bankruptcy filing.

Id. at *5.

In re Feshbach, 974 F.3d 1320 (11th Cir. 2020), arose out of a joint Chapter 7 case filed by Matthew and Katheen Feshbach.  The husband was an investment professional and former hedge-fund manager.  Beginning in the 1980s, he employed a strategy called “selling short against the box” that allowed him to delay the recognition of his taxable income from investments.  The strategy worked well for several years.  Without having to pay taxes on their “boxed-in” capital gains, they were able to build a $14 million home and live a lavish lifestyle.  The bankruptcy court found their tax debt to be nondischargeable under Section 523(a)(1)(C), predicating that conclusion on both their spending lavishly on personal luxuries instead of paying their taxes, and their use of the offer-in-compromise process to delay collection.

With respect to the first component, the court found, for example, that while the Feshbachs were paying $1,000 monthly to the IRS in 2002 and 2003, their total personal expenditures were over $1.5 million.  That included the expenses listed above in 2002, and then, in 2003, another $106,150.42 on clothing and care, $16,283.58 on entertainment, $40,080.94 on groceries, and $56,497.01 on personal travel.  While their third offer-in-compromise was pending from September 2008 to August 2009, the Feshbachs spent between $1,400 and $1,500 per month on entertainment, more than $4,000 per month for groceries, $4,000 per month for domestic help, and $4,500 per month on rent, in addition to other expenses.  In 2009 and 2010, the Feshbachs spent a total of about $90,000 on household employee wages and $143,000 in charitable contributions.  Mr. Feshbach made about $40,000 of those charitable contributions through his business in his son’s name.

As noted, the bankruptcy court also found that the Feshbachs used the offer-in-compromise process to delay collection.  That subsidiary finding was crucial to its analysis of the mental state prong and its determination that the Feshbachs acted willfully.  But the finding also touched on the conduct prong as well, as the bankruptcy court inferred willfulness from the Feshbachs’ actions.  In this regard, the Eleventh Circuit noted that “[a]pproaching the IRS with an offer-in-compromise is not, by itself, an act to evade taxes or evidence of attempted evasion.”  That is true even if the IRS rejects the taxpayer’s offer.  The court recognized that “[t]he negotiation process is flexible, and taxpayers must have leeway to present good faith offers, even if the IRS concludes that an offer is too low or otherwise not acceptable.  If we are quick to interpret rejected offers-in-compromise as bad-faith attempts to evade, then we risk discouraging settlement.”

Id. at 1328-29.

However, with respect to the Feshbachs, this was not a case of the IRS rejecting good-faith or facially reasonable offers-in-compromise.  The court noted that there was ample evidence that the Feshbachs approached the IRS with inadequate and unrealistic offers given their income and spending, and that they used the offer-in-compromise process to delay the payment of their taxes.  The Eleventh Circuit noted that “[t]he bankruptcy court found that the Feshbachs were more sophisticated than the average taxpayer.  Mr. Feshbach, for example, testified that he did his “homework” and was familiar with the Tax Code and IRS regulations.  He would have understood, then, that a pending offer would halt IRS collection efforts.” Id. at 1329.

The Feshbachs took advantage of the offer process by continuing to maintain an extravagant lifestyle.  Before entering into the permanent installment agreement, for instance, they paid only $1,000 a month under a temporary agreement while spending hundreds of thousands of dollars on personal luxuries.  It is true that they were abiding by the temporary agreement insofar as they were making the required payments.  But they represented that they would reduce their expenses and sell their Florida home as a condition of the temporary arrangement.  They never lowered their expenses and it took them several years to sell the home.  In the two years governed by the temporary agreement, the Feshbachs spent over $1.5 million on personal expenditures.  For that reason, the IRS rejected the second offer-in-compromise: the Feshbachs, “[w]hile paying a token $1,000.00 monthly to [the] IRS[,] * * * * continued to maintain the same lavish lifestyle.”

Id. at 1329.  The court also noted that there was some suggestion that the Feshbachs obfuscated their financial picture to the IRS during the offer-in-compromise process.

Although we cannot say with 100% certainty that the Feshbachs deliberately lied about their income or expenses, we cannot ignore the vast disparities between the income they reported to the IRS during the settlement process and the income they actually earned.  The inference that the Feshbachs clouded their income and spending bolsters the bankruptcy court’s finding that the Feshbachs used the offer-in-compromise process as a delay tactic.

Id. at 1329-30.


Matthew T. Gensburg
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