What Constitutes An Attempt To Evade Or Defeat Taxes For Purposes Of Section 523(a)(1)(C) Of The Bankruptcy Code: The Ninth Circuit Parts Company With Other Circuits (Part 1)

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A. Lavar Taylor of the Law Offices of A. Lavar Taylor discusses this week’s important Hawkins v Franchise Tax Board decision in the Ninth Circuit. In the first post, Lavar discusses how other courts have approached the issue. In tomorrow’s post, Lavar discusses the Ninth Circuit opinion and describes why he believes its approach is correct.

In Hawkins v. Franchise Tax Board, — F.3d – (9th Cir. No. 11-16276, Sept. 15, 2014),  an opinion released on Monday that can be found here, the Ninth Circuit addressed the question of what the IRS and other taxing agencies must prove to establish that a tax liability cannot be discharged by an individual in a chapter 11 or chapter 7 bankruptcy because the debtor/taxpayer “willfully attempted in any manner to evade or defeat” a tax liability for purposes of section 523(a)(1)(C) of the Bankruptcy Code. Breaking ranks with the other Courts of Appeal which have addressed this issue, the Ninth Circuit construed this language in pari materia with the nearly identical language contained in section 7201 of the Internal Revenue Code, as interpreted by the U.S. Supreme Court in the case of Spies v. United States, 317 U.S. 492 (1943).

The Ninth Circuit’s holding in Hawkins departs from the holdings of virtually every other Court of Appeals to consider this issue.  Before discussing prior case law and why I believe that the Ninth Circuit reached the right result,  I want to warn readers that I am no innocent bystander on this issue.  I authored a brief as amicus curiae filed in the Hawkins case, and the Hawkins majority opinion’s discussion of the Spies case and its applicability to cases involving section 523(a)(1)(C) adopts the position I advocated in the brief as amicus curiae.  For those  interested in reading that amicus brief, it can be found here. The amicus brief includes a detailed discussion of the differences between sections 7201 and 7203 and the case law construing those two provisions.

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Case Law in Other Circuits

Now to the case law in the other Circuits construing section 523(a)(1)(C) which preceded the Ninth Circuit’s holding in Hawkins. In Toti v. United States (In re Toti), 24 F.3d 806 (6th Cir. 1994), the Court was faced with a situation where the debtor had failed to timely file returns and had failed to pay the taxes owed, but, per the trial court, had not committed an “affirmative act” of evasion. The trial court held that the taxes were discharged because there was no willful attempt to evade or defeat the taxes in that situation. The Sixth Circuit on appeal, however,  reversed the trial court and held that Toti had “willfully attempted to evade or defeat the taxes” within the meaning of §523(a)(1)(C).

The Court attempted to justify its outright reversal of the finder of fact (as opposed to a remand to apply the legal standard adopted by the Sixth Circuit) by stating that the standard of “willfulness” under  section523(a)(1)(C) should be the same standard of “willfulness” used by the courts in imposing criminal liability under section 7203 of the Internal Revenue Code, as opposed to section 7201 of the Code.  The District Court’s ruling, which was affirmed by the Sixth Circuit, explicitly approved of the standard of “willfulness” used in imposing liability under section 6672 of the Internal Revenue Code.  141 B.R. 126 (E.D. Mich. 1993).

Other Courts of Appeal followed the rationale of Toti. The Eleventh Circuit, in Fretz v. United States (In re Fretz),  244 F.3d 1323 (11th Cir. 2001), reversed a finding by the trial court that the debtor had not attempted to evade or defeat the taxes in question. The debtor had failed to file his returns and had failed to pay the taxes owed. The Eleventh Circuit  held that this was sufficient to render the taxes non-dischargeable under §523(a)(1)(C) and that this section does not contain a requirement that the debtor engage in an affirmative act of evasion to render the taxes non-dischargeable. The Court stated as follows:

Thus, all the government must prove is that Dr. Fretz    (1) had a duty to file income tax returns and pay taxes; (2) knew he had such a duty; and (3) voluntarily and intentionally violated that duty.   244 F.3d at 1330.

The Seventh Circuit has ruled in a similar manner. See United States v. Fegley (In re Fegeley), 118 F.3d 979, 984 (3d Cir. 1997).  Most recently, the Tenth Circuit followed this logic in holding that taxes were not dischargeable.  Vaughn v. Comm’r (In re Vaughn),  – F.3d –  2014 WL 4197347 (10th Cir. 2014). [Ed note: Keith discussed Vaughn here] Additional opinions on this issue from other Courts of Appeal are discussed in the Ninth Circuit’s opinion.

The Bankruptcy Opinion

Before discussing why the Ninth Circuit reached the correct result in Hawkins, it is useful to review the opinion of Bankruptcy Judge Carlson.  Judge Carlson’ opinion can be read here. Judge Carlson wrote in part as follows:

William M. “Trip” Hawkins (Trip) is a very sophisticated businessman. He received an undergraduate degree in Strategy and Applied Game Theory from Harvard College, and an M.B.A. from Stanford University. He was an early employee of Apple Computer, where he rose to director of marketing. In 1982, he left Apple and became one of the founders of Electronic Arts, Inc. (EA), which became the largest supplier of computer entertainment software in the world. By 1996, Trip had a net worth of approximately $100 million, primarily from his holdings of EA shares.

*  * *

In 1990, EA created a wholly owned subsidiary, 3DO, for the purpose of developing and marketing the devices on which computer games are played. Trip Hawkins left EA to run 3DO. 3DO went public in 1993. In 1994, Trip began to sell large amounts of his EA common stock to invest heavily in 3DO.

The story from that point forward is not unfamiliar to practitioners who have represented those taxpayers who “invested”  in various “products” hawked by certain tax professionals. Hawkins invested in the FLIP and OPIS tax shelter products and claimed losses from these “investments.” These losses  were used to offset large gains generated from the sale of EA stock. The IRS then audited the income tax returns of Hawkins for the years 1996 through 2000, and Hawkins retained highly respected counsel to represent him in the audit. Hawkins attempted to participate in the settlement program announced in IRS Announcement 2002-97, but he was told that he was not eligible for that program.

In the meantime, Hawkins’ investment in 3DO was going south. He loaned over $12 million to this company. The net result was that 3DO filed a chapter 11 bankruptcy in May of 2003, and the bankruptcy was converted to a chapter 7 (liquidation) later that year.

There was more bad news for Hawkins. In July of 2003, he received a revenue agent’s report from IRS asserting that he owed roughly $16 million of taxes and penalties for the years covered by the audit.  Hawkins had previously divorced his first wife. Trying to make lemonade out of lemons, in July of 2003 Hawkins filed a motion in the family law court to reduce child support payments due under the existing order, citing the fact that he owed the IRS and FTB over $25 million combined and his mounting losses associated with 3DO.  The family law court granted Hawkins partial relief but required him to place certain assets in trust for his children and imposed a judicial lien on those assets in an effort to protect them from seizure by IRS and FTB.

Hawkins consented to the assessment of the IRS tax deficiencies in December, 2004, and the IRS assessed the deficiencies in March, 2005. The California FTB assessed their “piggyback” audit deficiencies in September of 2005. In October of 2005, Hawkins submitted an Offer in Compromise to the IRS. This OIC was ultimately rejected.  In July of 2006, Hawkins sold a residence, and the IRS received $6.5 million from this sale.  The FTB received $6 million as the result of levies on financial accounts in August of 2006.

In September of 2006, Hawkins filed a chapter 11 bankruptcy petition. He confirmed a plan of reorganization in July, 2007. The IRS received roughly $3.4 million under the plan. But substantial amounts remained due and owing to both the IRS and the FTB after consummation of the chapter 11 plan. Hawkins then filed suit to determine whether the unpaid taxes owed to IRS and FTB were discharged in the Chapter 11 bankruptcy.

In the litigation, the IRS made two arguments in support of its position that the unpaid tax liabilities had not been discharged.  First, they argued that Hawkins had filed fraudulent returns by claiming the tax shelter losses on those returns. Those of you who are familiar with Jack Townsend’s excellent blog  Federal Tax Crimes know that Jack has wondered for quite some time why the IRS has not asserted the civil fraud penalty more frequently against taxpayers who “invested” in tax shelters.  In this particular case, the IRS argued that Hawkins filed a fraudulent return.   So there you go, Jack. They finally claimed that a taxpayer acted fraudulently in claiming losses from a tax shelter on their income tax return, albeit in the context of bankruptcy dischargeability litigation, where the standard of proof for proving fraud is only a preponderance of the evidence.

Judge Carlson, however, explicitly refused to decide whether Hawkins acted with intent to defraud in filing the tax returns in question. Instead, Judge Carlson held that Hawkins had attempted to evade or defeat the taxes in question.  Judge Carlson made it very clear that the basis for his holding  that Hawkins had attempted to evade or defeat the taxes in question was that Hawkins had done nothing more than engage in “unnecessary” expenditures. Here is what Judge Carlson had to say:

The Government has met the required burden with respect to Trip Hawkins by establishing that for more than two and one-half years before filing for bankruptcy protection, he caused Debtors to make unnecessary expenditures in excess of Debtors’     earned income, while he acknowledged that Debtors had a tax liability of $25 million, while he relied upon that tax liability in seeking a reduction of child support payments,    while he knew Debtors were insolvent, while Debtors paid other creditors, and while Debtors planned to file bankruptcy to discharge their tax obligations.

Judge Carlson then commented extensively on Hawkins’ lifestyle, stating as follows:

From the time of their 1996 marriage onward, Debtors maintained a lifestyle that was commensurate with the great wealth they enjoyed at the time they were first married. In 1996, Debtors purchased a home in Atherton, California for $3.5 million. In 2000, Debtors purchased an $11.8 million private jet that they used for family vacations as well as for business trips.  In 2002, Debtors purchased an ocean-view condominium in La Jolla, California for $2.6 million. From the date of their marriage to the date of their bankruptcy petition, Debtors employed various gardeners and household attendants.

Debtors altered this lifestyle very little after it became apparent in late 2003 that they were insolvent. Although they sold the private jet in 2003, they continued to maintain both the Atherton house and the La Jolla condominium until July 2006. In October 2004, Debtors purchased a fourth vehicle costing $70,000.

Debtors’ personal living expenses exceeded their earned income long after Trip had acknowledged that Debtors were insolvent. In the Collection Information Statement accompanying their October 2005 Offer in Compromise, Debtors disclosed annual after-tax earned income of $150,000 and annual living expenses of more than $1.0 million. In the schedules filed in their bankruptcy case in September 2006, Debtors disclosed annual after-tax earned income of $272,000 and annual living expenses of $277,000. The components of Debtors’ living expenses are discussed in more detail below.

* * *

Before examining Hawkins’ expenditures, it is appropriate to examine Hawkins’ earned income. For the purpose of this decision, this court assumes that it should take some account of a debtor’s earned income in determining what expenditures are culpable under section 523(a)(1)(C) as unduly lavish. 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 determining what living expenses are necessary.  Even the most nuanced approach, however, does not excuse living expenses greatly in excess of earned income over an extended period of time.

Debtors provided two snapshots of their income and expenses between January 2004 and September 2006. In October 2005, Debtors submitted a Collection Information Statement, signed under penalty of perjury, in support of their Office in Compromise. In September 2006, Debtors filed schedules in their chapter 11 case, also signed under penalty of perjury. The October 2005 Collection Information Statement indicated monthly after-tax earned income of $12,500. Bankruptcy Schedule I indicated monthly after-tax earned income of $22,180. All of this income was earned by Trip; Lisa was not employed outside the home at any time during this period.

Against this backdrop, the Debtors’ personal living expenses from January 2004 to September 2006 are truly exceptional. After Trip 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, Debtors spent between $16,750 and $78,000 more than their after-tax earned income each month.

In the Collection Information Statement submitted in October 2005, Debtors stated that their personal living expenses were more than seven times their after-tax earned income, and exceeded that income by more than $78,000 per month.

* * *

Several aspects of this Statement are worthy of note. The $33,600 housing expense included expenses for a 5-bedroom, 5.5 bath house in Atherton (later sold for $10.5 million), and a 4-bedroom, 3.5 bath condominium in La Jolla (later sold for $3.5 million). The transportation expense covers four vehicles for a family with only two drivers, and includes a $70,000 Cadillac SUV purchased ten months after Trip Hawkins had acknowledged Debtors’ tax liability and insolvency in the family court proceeding.

* * *

The schedules filed in Debtors’ bankruptcy case indicate that Debtors’ personal living expenses greatly exceeded their after-tax earned income until just before they filed their bankruptcy petition in September 2006. Debtors sold the Atherton house just before the bankruptcy petition was filed. Debtors sold the La Jolla condominium after the bankruptcy petition was filed. If one adds the minimum amount they could have been spending for housing before the July 2006 sale of the Atherton house, together with the income and living expenses that Debtors reported in their bankruptcy schedules, Debtors’ living expenses greatly exceeded their after-tax earned income through July 2006.

* * *

Debtors made expenditures in excess of earned income for more than two-and-one-half years after Trip Hawkins acknowledged in January 2004 that Debtors were insolvent and would not pay their tax debt in full. Debtors did not sell the Atherton home until July 2006. They did not sell the La Jolla condominium until after filing for bankruptcy protection in September 2006. 24 They reported in their bankruptcy schedules that on the petition date they were still making the expenditures for the Cadillac SUV, child care, and recreation noted above. Debtors’ high level of expenditure also continued well after they consented to assessment of tax by the IRS in the amount of $21 million in December of 2004, and well after the assessments were recorded in March 2005. The Collection Information Statement indicates that Debtors’ monthly living expenses were seven times their earned income ten months after they consented to assessment and seven months after the IRS formally assessed the additional tax. This is not a case where the taxpayers acted appropriately once the tax was formally assessed, perhaps suggesting that their earlier failure to pay was based on some innocent misconception of their duty.

There is one point not focused on by Judge Carlson but of potential relevance to the resolution of the case under the standard relied on by him.  The IRS taxes were not assessed until March of 2005, some 18 months after the family court hearing. Assuming that Hawkins did not knowingly sign  fraudulent tax returns when he claimed the tax shelter losses on those returns, his duty to pay the audit deficiency assessments did not arise until after the taxes were assessed and notice and demand for payment was sent in 2005. See, e.g., §6651(a)(3) of the Internal Revenue Code, which imposes a penalty for the taxpayer’s failure to pay a deficiency in income taxes only after the taxpayer has received notice and demand for payment after the tax deficiency has been assessed.

Based on the premise that Hawkins had no duty to pay the additional taxes until they were properly assessed, I have difficulty with Judge Carlson’s reliance on the pre-assessment conduct of Hawkins to determine that he attempted to evade or defeat the taxes in question.   Pre-assessment conduct of a taxpayer is certainly relevant for purposes of determining whether a taxpayer engaged in Spies-type evasion of taxes under section 7201.  See, e.g., United States v. Voorhies, 658 F.2d 710 (9th Cir. 1981).  But I am unaware of any case in which the IRS has ever charged or convicted a taxpayer for a failure to pay a tax under section 7203 based on the taxpayer’s conduct prior to the tax being assessed and billed to the taxpayer.

Comments

  1. Lavar,

    Great write up (look forward to the sequel) and congratulations on your contribution to the outcome in Hawkins. (I am not yet convinced that it is a correct holding, but I will reserve further judgment until your sequel.)

    Question, though. Why would Section 7203 not apply to unassessed taxes? The assessment is just the mechanical / ministerial recording on the IRS’s book of the debt that then authorizes the IRS to use the Code collection measures. It has nothing to do with whether the taxpayer owes the tax and whether his conduct can be viewed as either a failure to pay or a willful attempt to evade payment.

    Finally, thanks for the point on the IRS/DOJ claiming that a taxpayer in this BS shelter committed fraud. As I have noted, the taxpayer had to represent a nontax profit motive which was a false representation (at least for sophisticated taxpayers who knew that they did not have such a motive).

    Jack Townsend

  2. Judge Sidney Thomas of the 9th Circuit reminds us that we can practice tax and bankruptcy law and still be light-hearted. Generally speaking, no one gets murdered or executed. Judge Thomas begins his opinion with this:

    “F. Scott Fitzgerald observed early in his career that the very rich ‘are different from you and me,’ to which Ernest Hemingway later rejoined, ‘Yes, they have more money.’ As with many bankruptcy cases involving the wealthy, our
    saga reads like a Fitzgerald novel, telling the story of acquisition and loss of the American dream, and the consequences that follow.”

    I remembered seeing those quotes paired in a tax case elsewhere, but I couldn’t quite place them. A Google search, however, led me to Dan Smith’s blog.

    http://www.tfortaxes.com/2013/12/11/tax-court-provides-guidance-on-what-it-means-for-an-asset-to-be-placed-in-service/

    Where Dan Smith wrote on December 11, 2013:

    ==Regular readers of “T for Taxes” know that my favorite Tax Court Judge is Judge Holmes. Some inveterate readers and book lovers get excited when there is a new novel out by John Grisham, for example. I’m certainly a book lover and reader myself, and I could provide a substantial litany of writers whose books I can’t wait to read when they hit the bookstores.

    But, as a tax aficionado, I get that “can’t wait to read” attitude whenever I discover a new U.S. Tax Court opinion by Judge Holmes. Let me tell you, even if you can’t tell a deduction from a credit, you should do yourself a favor and look up one of Judge Holmes’ opinions–they read like great stories of intrigue and suspense. Each and every opinion by Judge Holmes restores a tax professional pride that he has chosen the sometimes bumpy career path of federal taxation.

    So, as you might have surmised, today I am going to highlight a new Tax Court opinion authored by Judge Holmes. The case in question is Brown v. Commissioner, Tax Court Memo 2013-275 (December 3, 2013).

    In the first couple of pages of the Brown case, Judge Holmes quotes both F. Scott Fitzgerald and Ernest Hemingway regarding the rich. Fitzgerald said that “the very rich . . . are different from you and me.” Hemingway replied that the “very rich are different from you and me. . . They have more money.”

    Judge Holmes says that the facts of this case show that both statements of Fitzgerald and Hemingway are true: “The very rich have much more money and they can use it to do things with insurance that most people can’t.”==

    What are the rules of judicial etiquette here, anyway? Certainly Judge Thomas is not guilty of plagiarism. (Is he?) Judge Holmes no doubt takes it as a compliment that a Circuit Court judge shares his liking for literary quotes from famous 20th-Century American authors.

  3. “Based on the premise that Hawkins had no duty to pay the additional taxes until they were properly assessed, I have difficulty with Judge Carlson’s reliance on the pre-assessment conduct of Hawkins to determine that he attempted to evade or defeat the taxes in question. ”

    You nailed it right there, Lavar. Great job. It is a very clever narrative the court puts forward. I can only assume this is an an appeal to base envy as a justification.

    Well, that’s the 16th Amendment for you.

  4. Lavar Taylor says:

    Jack-

    If a taxpayer files a return believing that the contents of the return are accurate (even if the belief is due to negligence), and later learns that the return was incorrect, I do not believe that there is a legal duty to pay a deficiency in tax prior to the date on which the tax is assessed, followed by a timely notice and demand for payment under section 6303. Generally speaking, there is no legal duty of the taxpayer to file an amended return under those circumstances. (Nor is there a duty of a tax practitioner under Circular 230 to advise a taxpayer that they MUST file an amended return and/or pay the tax.)

    If, under the facts as stated above, there is no duty to pay the tax until it is assessed and a timely notice and demand has been issued to the proper address, I don’t see how a violation of section 7203 can occur prior to assessment followed by timely notice and demand. Compare sections 6151 and 6155 of the Code, along with sections 6161(a) and 6161(b) of the Code. See also 6651(a)(2), which imposes the FTP penalty only on amounts shown as tax on the return. If someone disagrees with me on the question of whether there is a duty to pay the tax prior to the assessment and notice and demand under these facts, I’ll gladly listen to what they have to say. But I don’t see a duty to pay based on this fact pattern.

    If the taxpayer knows that the taxes are owed and files a fraudulent return, understating the taxes which they know are owed, without paying the tax that they know is owed, and thus knowing they have a duty to pay the taxes when the return is due and choosing to not pay that tax, I can see how a taxpayer can be charged with a failure to pay under 7203 as a lesser included offense, along with evasion under 7201.

    • Lavar,

      I think you are positing a situation where, although the taxpayer owes tax from the original due date of the return, the taxpayer in good faith does not think he owes tax. In that case, the taxpayer can file the original return and not be guilty of evasion and, of course, he can behave thereafter as if the tax is not due until he reaches a point where he knows the tax is due. You say that is the point of the subsequent assessment. I disagree.

      Assessments can be delayed for a lot of reasons. Say the IRS audits and the taxpayer knows he owes the tax the IRS puts into a proposed assessment. Can the taxpayer waste his assets simply because he can delay an assessment (e.g., appeal and then Tax Court proceeding)? Somehow that strikes me as incorrect.

      And, on the broader point that the taxpayer has no legal duty to pay until assessment, I just disagree. Certainly, as to the original return when there is a legal duty to pay, the assessment is often not made until after 4/15 (say for a return filed by mail on 4/15. Does the taxpayer have the legal duty to pay on 4/15? Of course.

      And, the taxpayer has the legal duty to pay the correct amount of tax on 4/15. This is true whether he knows he owes the tax or not. Of course, if he does not know he owes the tax, then his failure to pay it cannot be evasion. But, if he knows he owes the tax, his failure to pay can be evasion, for both 7201 and bankruptcy purposes. But how could he be guilty of evasion is he had a valid claim that he did not owe because the tax had not been assessed?

      Think of it still another way. If a client walks into your office and says that he failed to pay $100,000 on his 2013 return filed 4/15/14. Are you going to tell him that he does not owe it because it has not been assessed? (Note in this regard that the Code does treat a late assessment as if the tax debt were not owed, but that does not occur until the statute of limitations passes).

      Jack Townsend

      • Lavar Taylor says:

        Jack-

        As I mentioned in the blog post, pre-assessment conduct is clearly relevant to determine whether a taxpayer has committed Spies-type evasion of a tax liability. So clearly a taxpayer can commit Spies-type evasion in a situation where they file a return not knowing additional tax is owed, they then learn that additional taxes are owed, and they then engage in actions with the necessary intent to evade or defeat the later-discovered tax liability before it is assessed. Those actions can include “wasting” their assets, to use your terminology, if the “wasting” is done with the requisite intent to evade or defeat the tax.

        I also agree that the tax liability does not “disappear” just because it is not assessed. So to reiterate, it is possible to attempt to evade or defeat an unassessed liability under 7201.

        But your original comment and question dealt with the crime of section 7203 failure to pay, not evasion under 7201, and I believe the analysis is different for section 7203. In a situation where there is no intent to evade or defeat the tax as defined in Spies, but there is spending by the client that many people would consider “excessive” (or a “wasting of assets”), I think it makes a difference for purposes of section 7203 whether the tax has been assessed or not.

        Suppose a client comes to you with the following problem. The client just changed CPAs because they moved into your geographic area. The client’s new CPA has reviewed his/her prior years’ income tax returns and discovered that the prior CPA did not accurately track his/her basis in their Subchapter S corp stock. Their new CPA says that the prior CPA improperly claimed (and used to offset other income) a total of $1 million of Subchapter S losses in excess of his/her stock basis on returns where the statute of limitations on assessment remains open. No IRS audits of these returns are pending. And client lacks any culpability for the errors of the prior CPA.

        Are you going to advise the client that, unless they promptly (i.e., right away, without waiting to see whether the IRS begins an audit) stop his/her “excessive” spending , they can be convicted of willful failure to pay under section 7203 based on any “excessive spending” that occurs prior to the tax being assessed, if there is a future audit and the tax is later assessed? Are you going to advise the client that they must both stop the excessive spending and pay the “excess” funds to the IRS to be applied towards the taxes that are owed for prior years in order to eliminate the possibility that they could be prosecuted under 7203?

        Assume that they stop their “excessive” spending immediately after learning that they owe taxes for prior years and consulting with you, and going forward they set aside in a savings account the “excessive” amounts that they were previously spending. Have they violated section 7203 by failing to send the amounts in the savings account to the IRS to pay the taxes that their new CPA has said they owe for prior years?

        (If you conclude that the client has violated 7203 if they do not pay the “excess” funds over to the IRS to be applied towards the taxes owed for prior years, how do you square that conclusion with the fact that the client did not have a duty to file amended returns for the prior years reflecting the additional taxes owed? )

        My own view is that there is no violation of 7203 if the excessive spending stops and the “excess” funds are set aside in a savings account. Furthermore, if there is no violation of 7203 if the excessive spending stops and funds are set aside in a savings account, there similarly cannot be a violation of 7203 if the client keeps spending in an “excessive” fashion between the date of their meeting with you and the date on which any taxes are assessed as the result of the disallowance of the S corp losses from prior years’ tax returns.

        For section 7203 failure to pay purposes, in both situations, the client has intentionally chosen to not pay the taxes owed for prior years after they have learned that they owe taxes for those prior years, and in both situations the taxes had not been assessed at the time the the client learned that they owed taxes for the prior years.

        There is a potentially significant distinction between the two scenarios for purposes of section 7201 evasion, for obvious reasons. But in our make believe hypothetical world, we are focusing only on section 7203. And under section 7203, in this type of scenario, I think that the duty to pay the tax owed for prior years does not arise until after the tax is assessed. (The fact that there is no duty to pay the tax until after the tax is assessed does not eliminate the duty to not evade the unassessed tax.)

        Also, we are ignoring for the moment what a competent tax professional would advise the taxpayers is the most prudent course of action. I am focusing only on whether a crime occurred under section 7203, based on what you argue is duty to pay an unassessed tax liability once you learn that the liability exists.

        The reason I went down this rabbit hole is because Judge Carlson refused to conclude that Hawkins filed a fraudulent return and instead focused only on the “evade or defeat” exception to discharge. In doing this, he relied on the legal standard used in section 7203 failure to pay prosecutions for his “attempt to evade or defeat” analysis. I think it is incongruous to a) use a section 7203 standard to determine whether there has been an attempt to evade or defeat under section 523 and b) use the 7201 standard by looking to pre-assessment conduct to determine whether the standard imposed by section 7203 has been violated.

        It is entirely appropriate to look to pre-assessment conduct to determine whether the standard imposed by section 7201 has been violated. So on remand (barring reversal of the 9th Circuit’s opinion by an en banc Court or by the Supremes), it will be entirely appropriate for the trial Court to review Hawkins’ pre-assessment conduct.

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