Big Spender Gets To Discharge Debts.

The debtor founded a company which supplied computer entertainment software.   The debtor lived a profligate lifestyle and, upon advice of CPAs, got involved in tax shelters which resulted in huge disallowed losses and ultimately resulted in his company's wholly-owned subsidiary filing Chapter 11 bankruptcy which was later converted to Chapter 7.  Ultimately, by 2005, the debtor owed the IRS $25 million, the state of California over $15 million, had limited income and was insolvent.  However, the debtor failed to change his lifestyle in any significant manner.  In 2006, the debtor sold his home for $6.5 million (net) and the state of CA seized the bulk of the funds.  A few days later, the debtor filed bankruptcy and sold a condominium for $3.5 million with the proceeds going to the IRS.  The debtor's confirmed reorganization plan discharged pre-plan confirmation debts and the debtor claimed that the taxes were discharged.  Both IRS and CA claimed that the tax debts were excluded from discharge by virtue of 11 U.S.C. Sec. 523(a)(1)(C) on the basis that the debtor continued to live lavishly in a manner that exceeded their income and that such behavior constituted a willful attempt to evade taxes.  The bankruptcy court agreed that the taxes were not discharged.  The federal district court affirmed.  On appeal, the appellate court reversed on the basis that it could not be shown that the debtor was not shown to have the specific intent to evade the taxes.  The mere fact that expenses exceeded income is insufficient, by itself, to establish a specific intent to evade tax.  The appellate court remanded the case for an application of the specific intent standard to the facts.  Hawkins v. California Franchise Tax Board, et al., No. 11-16276, 2014 U.S. App. LEXIS 17925 (9th Cir. Sept. 15, 2014).

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