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Judge's Lavish Spending Precluded Discharge of Taxes in Bankruptcy

(Parker Tax Publishing May 2021)

The Sixth Circuit affirmed a district court's ruling that an individual, who made lavish purchases, frequently dined out, and purchased luxury gifts for his wife, during years in which he failed to pay federal income taxes, was precluded under 11 U.S.C. Sec. 523(a)(1)(C) from discharging the tax debts in Chapter 7 bankruptcy. The court rejected the individual's argument that the government had to prove he made the purchase with the specific intent of evading the taxes. U.S. v. Helton, 2021 PTC 112 (6th Cir. 2021).

John Helton has been a self-employed attorney practicing law since 1994. His income fluctuated over the years, approaching $100,000 in the late 1990s but spiking to $178,913 in 2004, $250,536 in 2005, and $234,359 in 2006, before declining to about $60,000 in 2007. But Helton failed to make any estimated tax payments for those years, and did not even file tax returns for years 2004-06 until several years later. And even after Helton filed his returns, he made minimal payments toward his tax debts for those years and also for the years 2009 and 2012.

Meanwhile, Helton enjoyed a comfortable lifestyle, driving a Mercedes-Benz, purchasing numerous luxury gifts for his wife, eating at restaurants almost every day, enjoying annual vacations, and spending (along with his wife) an average of $10,000 per month on discretionary purchases during some of the years at issue. Helton also donated about $34,000 to charity during the years in which he failed to pay his taxes, and in 2014 spent an unspecified sum in support of his successful campaign to become a part-time state court judge.

In 2017, the government filed suit against Helton, seeking to reduce its assessments against him for the years 2004-07, 2009, and 2012, among other requested relief. Helton filed for Chapter 7 bankruptcy two months later. The district court stayed the tax case until October 2017, when the bankruptcy court entered an order generally discharging Helton's debts, thereby lifting the stay. In the district court, the government contested the bankruptcy court order and argued that Helton's tax debts were nondischargeable under 11 U.S.C. Section 523(a)(1)(C). That provision excepts from discharge any tax debt if the debtor willfully attempted in any manner to evade or defeat such tax. The district court agreed with the government and entered a judgment against Helton in the amount of $347,479 for unpaid taxes during the years at issue. Helton appealed to the Sixth Circuit.

In 2004, the Sixth Circuit, in In re Gardner, 360 F.3d 551 (6th Cir. 2004), held that the exception in 11 U.S.C. Section 523(a)(1)(C) contains both a conduct requirement and a mental state requirement. The conduct requirement is met if the government proves that the taxpayer engaged in acts of omission or acts of commission that themselves amounted to an attempt to evade paying taxes. The mental state requirement is satisfied if the taxpayer (1) had a duty to pay taxes; (2) knew he had such a duty; and (3) voluntarily and intentionally violated that duty.

In his appeal, Helton did not dispute the district court's finding that his failure to file tax returns and to pay most of his taxes owed for the relevant years satisfied the conduct requirement of 11 U.S.C. Section 523(a)(1)(C). Helton also conceded that he knew he had a duty to pay taxes. However, Helton asserted that he was too busy with work or too depressed during some of the years at issue to pay his taxes. He also argued that under Hawkins v. Franchise Tax Bd., 769 F.3d 662 (9th Cir. 2014), the Ninth Circuit had held that the mental state element requires proof that the debtor acted with specific intent to evade the tax, meaning that the government had to show not only that Helton chose to allocate his funds to a luxury car, dinners out each night, and luxury gifts rather than his taxes, but also that he purchased those items specifically to avoid paying his taxes.

The Sixth Circuit rejected Helton's argument and affirmed the district court's ruling that Helton's tax debts were excepted from discharge under Section 523(a)(1)(C). The court found that Helton's discretionary spending, which the court said was lavish when compared to the pittance he allocated toward his taxes, amply supported the finding that Helton's violation of his duty to pay taxes was voluntary and intentional. The Sixth Circuit also agreed with the district court that Helton's excuses for not paying his taxes were belied by his ability to maintain his law practice and to run successfully for election as a state court judge. As for Helton's argument that the government had to show specific intent to evade the tax, the court found that while such a standard may apply in the Ninth Circuit, it is not the law in the Sixth Circuit.

For a discussion of the discharge of tax debts in bankruptcy, see Parker Tax ¶16,160.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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