In Re: Henry Fegeley ( 1997 )

Opinions of the United
1997 Decisions States Court of Appeals
for the Third Circuit
7-8-1997
In Re: Henry Fegeley
Precedential or Non-Precedential:
Docket 96-5428
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Recommended Citation
"In Re: Henry Fegeley" (1997). 1997 Decisions. Paper 150.
http://digitalcommons.law.villanova.edu/thirdcircuit_1997/150
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Filed July 8, 1997
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 96-5428
IN RE: HENRY FEGELEY;
ANNMARIE FEGELEY,
Debtors
UNITED STATES OF AMERICA
v.
HENRY FEGELEY; ANNMARIE FEGELEY
HENRY FEGELEY,
Appellant
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
(Filed July 8, 1997)
Bruce Williams, Esq.
28 Tanner Street
Haddonfield, New Jersey 08033
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 Fegeley 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 § 523(a)(1)(C) of the Bankruptcy
Code, the Government must demonstrate that he possessed
a fraudulent intent. He asserts that willful failure to file
timely tax returns for 1983, 1984, and 1985, and willful
failure to timely pay his taxes for those years, is insufficient
to support the conclusion that he willfully attempted to
evade or defeat his taxes for those years. The Government
argues that the district court was correct in finding that the
willful failure of Fegeley to file tax returns, together with his
willful failure to pay taxes despite his financial ability to do
so, constitutes evasion under the Bankruptcy Code. The
Government asserts that the district court correctly
concluded that nondischargeability under § 523(a)(1)(C)
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does not require a finding of fraudulent intent. We will
affirm.
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 employer
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 complete,
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
I.R.C. § 7203. Fegeley pled guilty to count three which
related to the 1985 tax return. The remaining two counts
were dismissed.
Fegeley and his wife filed a joint Chapter 7 bankruptcy
petition in 1991, and were thereafter granted a discharge in
bankruptcy pursuant to § 727 of the Bankruptcy Code. In
1992, the IRS demanded payment of income tax liabilities
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for the years 1983, 1984, and 1985. On motion by Fegeley
and his wife, the bankruptcy court reopened the
bankruptcy proceeding and reimposed the automatic stay
pursuant to § 362(a) of the Bankruptcy Code. The Fegeleys
then commenced the present adversary proceeding seeking,
inter alia, a determination that the 1983, 1984, and 1985
tax liability had been discharged in bankruptcy.
The Government argued that the tax liability could not be
discharged in bankruptcy because § 523(a)(1)(C) of the
Bankruptcy Code prohibits discharge of taxes that the
debtor willfully attempted to evade or defeat in any manner.
The matter was tried before the bankruptcy court. At the
conclusion of the trial, the bankruptcy court set forth its
findings of fact and conclusions of law. The bankruptcy
court stated 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 taxes." 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.
Despite these findings, the bankruptcy 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 § 523(a)(1)(C).1 The
bankruptcy court held that Fegeley's knowing failure to file
income tax returns, in conjunction with his failure to pay
those taxes even though he had the financial resources to
do so, did not constitute an attempt to evade or defeat his
tax liability for 1983, 1984 and 1985.
The Government appealed the bankruptcy court's
decision to the district court. The district court reversed,
holding that the tax liabilities were not dischargeable under
_________________________________________________________________
1. The bankruptcy court found that there was "no support for the
proposition that Mrs. Fegeley willfully attempted to evade or defeat the
taxes." Supp. App. at 134. The Government did not appeal the
bankruptcy court's order as it related to Mrs. Fegeley. Accordingly, this
appeal relates only to the liability of Mr. Fegeley.
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§ 523(a)(1)(C). In rendering its decision, the district court
did not determine that the factual findings of the
bankruptcy court were clearly erroneous. Indeed, the
district court adopted the factual findings of the
bankruptcy court. Rather, the district court held that the
bankruptcy court erred as a matter of law by failing to
conclude that Fegeley's intentional failure to file income tax
returns when he was well aware of his obligation to do so,
together with his failure to pay taxes when he had the
resources to pay those taxes, was sufficient to prove that he
willfully attempted to evade or defeat his taxes. This appeal
followed.
I.
Because the bankruptcy court, rather than the district
court, was the trier of fact in this case, "[w]e are in as good
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 Bankruptcy
Code, the debtor is generally granted a discharge from all
debts arising prior to the filing of the bankruptcy petition.
11 U.S.C. § 727(b) (1994); see also In re Birkenstock, 87
F.3d 947, 950 (7th Cir. 1996); In re Toti, 24 F.3d 806, 808
(6th Cir. 1994). The remedial purpose of the Bankruptcy
Code is "to provide a procedure by which certain insolvent
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debtors can reorder their affairs, make peace with their
creditors, and enjoy `a new opportunity in life [and] a clear
field for future effort, unhampered by the pressure and
discouragement of pre[-]existing debt."' Grogan v. Garner,
498 U.S. 279, 286, 111 S.Ct. 654, 659 (1991) (quoting
Local Loan Co. v. Hunt, 292 U.S. 234, 244, 54 S.Ct. 695,
699 (1934)). However, this "fresh start" policy provided by
the Bankruptcy Code applies only to the "honest but
unfortunate debtor." Id. at 286-87, 111 S.Ct. at 659(quoting Local Loan, 292 U.S. at 244, 54 S.Ct. at 699).
The Code excepts certain liabilities from discharge.
Section 523(a)(1)(C) provides:
(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.
11 U.S.C. § 523(a)(1)(C) (1994) (emphasis added). These
exceptions to discharge are to be strictly construed in favor
of the debtor. Dalton v. I.R.S., 77 F.3d 1297, 1300 (10th
Cir. 1996). Moreover, "the burden of proving that the
debtor's tax liabilities are nondischargeable under
§ 523(a)(1)(C) is on the United States." Berkery v.
Commissioner, 192 B.R. 835, 840 (E.D. Pa. 1996), aff'd,
111 F.3d 125 (3d Cir. 1997). The Government must prove
by a preponderance of the evidence that the debtor made
fraudulent returns or willfully attempted to evade his taxes.
See Grogan, 498 U.S. at 291, 111 S.Ct. at 661.
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 the tax years 1983, 1984, and 1985 within
the meaning of the second part of § 523(a)(1)(C).
Our analysis begins with an interpretation of the second
prong of § 523(a)(1)(C). We must interpret provisions of "the
Bankruptcy Code according to the plain meaning of [the]
individual provision as long as the provision's language is
unambiguous." Toti, 24 F.3d at 809 (citing United States v.
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Ron Pair Enters., Inc., 489 U.S. 235, 240-41, 109 S.Ct.
1026, 1030 (1989)). "Where statutory language is not
expressly defined, that language should be given its
common meaning." Id. (citing Burlington N.R.R. Co. v.
Oklahoma Tax Comm'n, 481 U.S. 454, 461, 107 S.Ct. 1855,
1860 (1987)). "The plain language of the second part of
§ 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')." Birkenstock, 87 F.3d at 951 (quoting 11
U.S.C. § 523(a)(1)(C)).
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 § 523(a)(1)(C) involve debtors
who actually did engage in some type of affirmative conduct
calculated to evade or defeat payment of their taxes, we
observe that the majority of courts have found that
affirmative conduct by a debtor designed to evade or defeat
a tax is not required. Rather, § 523(a)(1)(C) encompasses
acts of culpable omission as well as acts of commission.
See, e.g., In re Bruner, 55 F.3d 195 (5th Cir. 1995); In re
Toti, 24 F.3d 806 (6th Cir. 1994). The Court of Appeals for
the Sixth Circuit has held that "failure to file a tax return
and failure to pay a tax fall within the definition in
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§ 523(a)(1)(C) of a willful attempt to evade or defeat a tax
liability." Toti, 24 F.3d at 809. The debtor in Toti, like the
debtor in the instant case, "did not file federal income tax
returns or pay federal income taxes, despite the fact he
knew he was liable for the taxes and . . . had the
wherewithal to pay his taxes during" at least some of the
eight years in which he did not file. Id. at 807. Similar to
Fegeley, Toti "was indicted on three counts of failing to file
federal income tax returns." Id. He also pled guilty to one of
the counts relating to one of the tax years, and the
government dismissed the remaining two counts. Id.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 taxes." 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 more
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
§ 523(a)(1)(C) should be interpreted consistently with the
criminal provisions of the Internal Revenue Code, and that
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"proof of fraud is a necessary element of [that prong]."
Appellant's Br. at 15. He argues that "such fraud be proved
by `badges of fraud' whether they be in the form of
affirmative acts or culpable omissions." Id.
The majority of courts to address this issue have not
required any such showing. Instead, they have adopted the
test for "civil willfulness." In doing so, they "have
interpreted `willfully,' for purposes of § 523(a)(1)(C), to
require that the debtor's attempts to avoid his tax liability
were `voluntary, conscious, and intentional."' Birkenstock,
87 F.3d at 952 (quoting Toti, 24 F.3d at 808); see also
Dalton, 77 F.3d at 1302; Bruner, 55 F.3d at 199. Thus, to
prevail, the Government need establish only that:
(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 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 § 523(a)(1)(C)
"requires more," i.e., that the Government demonstrate a
"failure to report income, transfer of assets,[or] falsification
of records" by the debtor. Id.
Fegeley had a duty under the tax law, knew he had that
duty, and voluntarily and intentionally 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 court's August 7, 1995,
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order. The case will be remanded to the district court with
instructions to remand the matter to the bankruptcy court
with a direction that the bankruptcy court enter an order
denying the application by Fegeley that his tax liability for
1983, 1984, and 1985 be discharged.
Costs taxed against appellant.
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
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