William Hawkins, III v. the Franchise Tax Board of Cal

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

WILLIAM M. HAWKINS, III, AKA No. 11-16276

Trip Hawkins,

Appellant, D.C. No.

3:10-cv-02026-

v. JSW

THE FRANCHISE TAX BOARD OF

CALIFORNIA; UNITED STATES OF OPINION

AMERICA, INTERNAL REVENUE

SERVICE,

Appellees.

Appeal from the United States District Court

for the Northern District of California

Jeffrey S. White, District Judge, Presiding

Argued and Submitted

November 6, 2013—San Francisco, California

Filed September 15, 2014

Before: Andrew J. Kleinfeld, Sidney R. Thomas,

and Johnnie B. Rawlinson, Circuit Judges.

Opinion by Judge Thomas;

Dissent by Judge Rawlinson

2 HAWKINS V. FTB

SUMMARY*

Bankruptcy

The panel reversed the district court’s affirmance of the

bankruptcy court’s judgment that a chapter 11 debtor’s tax

debts were excepted from discharge on the basis of his willful

attempt to evade or defeat taxes under 11 U.S.C.

§ 523(a)(1)(C).

The panel held that, consistent with similar provisions in

the Internal Revenue Code, 26 U.S.C. § 7201, specific intent

is required for the discharge exception set forth in

§ 523(a)(1)(C) to apply. The panel remanded to the district

court for re-evaluation under that standard.

Dissenting, Judge Rawlinson wrote that she would follow

the lead of the Tenth Circuit and affirm the bankruptcy court

ruling denying discharge of the debtor’s substantial tax

liability due to his willful attempt to avoid payment of those

taxes through profligate spending.

COUNSEL

Heinz Binder (argued) and Wendy Watrous Smith, Binder &

Malter, LLP, Santa Clara, California, for Appellant.

Kathryn Keneally, Assistant Attorney General, Kathleen E.

Lyon, Bruce R. Ellisen, William Carl Hankla, and Rachel I.

*

This summary constitutes no part of the opinion of the court. It has

been prepared by court staff for the convenience of the reader.

HAWKINS V. FTB 3

Wollitzer (argued), Attorneys, Tax Division, United States

Department of Justice, Washington, D.C., for Appellee

United States.

Lucy Wang, California Department of Justice, San Francisco,

California, for Appellee State of California.

A. Lavar Taylor, Attorney and Adjunct Professor of Law,

Chapman University School of Law, Santa Ana, California,

for Amicus Curiae A. Lavar Taylor.

OPINION

THOMAS, Circuit Judge:

In this case, we consider what mental state is required in

order to find that a bankruptcy debtor’s federal tax liabilities

should be excepted from discharge under 11 U.S.C.

§ 523(a)(1)(c) because he “willfully attempted in any manner

to evade or defeat such tax.” Consistent with similar

provisions in the Internal Revenue Code, 26 U.S.C. § 7201,

we conclude that specific intent is required for the discharge

exception to apply and remand to the district for re-evaluation

under that standard.

I

F. Scott Fitzgerald observed early in his career that the

very rich “are different from you and me,”1 to which Ernest

1

F. SCOTT FITZGERALD, The Rich Boy, in The Short Stories of F. Scott

Fitzgerald: A New Collection 317 (Matthew J. Bruccoli ed., Scribner

1989) (1926).

4 HAWKINS V. FTB

Hemingway later rejoined, “Yes, they have more money.”2

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.

William M. “Trip” Hawkins designed and received an

undergraduate degree in Strategy and Applied Game Theory

from Harvard University, and an M.B.A. from Stanford

University. After college, he became one of the earliest

employees at Apple Computer, where he ultimately became

Director of Marketing. He left Apple to co-found Electronic

Arts, Inc. (“EA”), which became the world’s largest supplier

of computer entertainment software. Hawkins owned 20% of

EA and served as its Chief Executive Officer. By 1996, his

net worth had risen to $100 million. That year, he divorced

his first wife, Diana, and married his second wife, Lisa.

Tripp and Lisa purchased a $3.5 million home, where she

cared for their two children and Tripp’s two children from his

first marriage. The IRS asserts they enjoyed the trappings of

wealth, such as a private jet, expensive private schooling for

the children, an ocean-side condominium in La Jolla, and a

large private staff.

In 1990, EA created a wholly owned subsidiary, 3DO, for

the purpose of developing and marketing video games and

2

ERNEST HEMINGWAY, The Snows of Kilimanjaro, in THE SNOWS OF

KILIMANJARO AND OTHER STORIES 23 (Scribner 1961) (1936).

(Hemingway, quoting the critic Mary Colum without attribution, used

Fitzgerald’s name in the original magazine version of the short story, but

altered the name to “Julian” in the later published book. See Eddy Dow,

Letter to the Editor, The Rich Are Different, N.Y. TIMES, Nov. 13, 1988,

available at http://www.nytimes.com/1988/11/13/books/l-the-rich-

are-different-907188.html.)

HAWKINS V. FTB 5

game consoles. Hawkins left EA to run 3DO, which went

public in 1993. Beginning in 1994, Hawkins sold large

amounts of his EA stock to invest in 3DO. The capital gains

from the sales were large: approximately $24 million in 1996,

$3.8 million in 1997, and $39 million in 1998. His

accountants, KPMG, advised him to shelter the gains in a

Foreign Leveraged Investment Portfolio (“FLIP”) and an

Offshore Portfolio Investment Strategy (“OPIS”). Both

strategies were designed to generate large paper losses to

shield the EA capital gain from taxation.

To execute the FLIP transaction, Trip purchased shares of

the Union Bank of Switzerland (“UBS”) for $1.5 million and

an option to acquire shares of Harbourtowne, Inc., a Cayman

Islands corporation. Harbourtowne then contracted with UBS

to purchase shares of UBS for $30 million, with UBS

receiving an option to repurchase the shares before the sale

closed. UBS exercised the option, and the UBS shares were

never transferred to Harbourtowne. Hawkins then received

a letter from KPMG stating that he could add to the tax basis

of his UBS shares the $30 million that Harbourtowne had

contracted to pay for its UBS shares. The opinion letter

stated that UBS’s repurchase of its shares would likely be

considered a distribution to Harbourtowne (which was

nontaxable because Harbourtowne was a foreign

corporation), and that Harbourtowne’s basis in its UBS shares

should be treated as a transferred to Hawkins’s basis in his

UBS shares.

OPIS worked in a similar way. Hawkins purchased

shares of UBS for $1.99 million and an option to acquire an

interest in Hogue, Investors LP, a Cayman Islands limited

partnership. Hogue contracted to purchase shares of UBS

treasury stock, with UBS retaining a call option to repurchase

6 HAWKINS V. FTB

the shares before transfer. UBS exercised the option. KPMG

issued an opinion letter to Hawkins stating that he could add

the Hogue shares to his basis in the UBS stock.

Over the next several years, Hawkins then sold various

quantities of the UBS stock and claimed losses of

approximately $6 million on his 1996 federal tax return,

$23.4 million on his 1997 return, $20.5 million on his 1998

return, $3.5 million on his 1999 return, and $8.2 million on

his 2000 return.

In 2001, the IRS challenged the validity of the tax shelters

and commenced an audit of Hawkins’s 1997 return, which

later expanded to include the 1998–2000 tax years. In 2002,

the IRS sent Hawkins’s attorney a letter stating that the losses

from the FLIP and OPIS transactions would be disallowed.

The subsequent audit report indicated that Hawkins owed

additional taxes and penalties of $16 million for tax years

1997–2000.

During this period, the financial fortunes of 3DO

deteriorated to the point where it needed a large capital

infusion. Hawkins loaned 3DO approximately $12 million,

but it was to no avail. 3DO filed a voluntary petition in

bankruptcy under Chapter 11 seeking reorganization in 2003.

It was later converted to a Chapter 7 liquidation, from which

Hawkins never received a significant distribution.

Faced with these losses, Hawkins filed a motion in family

court in 2003 to reduce the child support payments he was

required to make to his first wife. He acknowledged that he

owed $25 million to the IRS, had limited income, and was

insolvent. The family court granted his request in part, but

required him to place his assets in trust. During the family

HAWKINS V. FTB 7

court proceedings, Hawkins’s attorney testified that Hawkins

intended to discharge the tax debt in bankruptcy proceedings.

In 2005, the IRS made an aggregate assessment of taxes,

penalties, and interest for tax years 1997–2000 that totaled

$21 million. The California Franchise Tax Board (“FTB”)

assessed $15.3 million in additional taxes, penalties, and

interest for the same tax years. Hawkins made an offer in

compromise to the IRS of $8 million, which was rejected.

The bankruptcy court found that Hawkins and his wife

did very little to alter their lavish lifestyle after it became

apparent in 2003 that they were insolvent and that their

personal living expenses exceeded their earned income.

In July 2006, Hawkins sold his primary residence and

paid the entire $6.5 million net proceeds to the IRS. A month

later, the FTB seized $6 million from various financial

accounts. In September of that year, the Hawkinses filed a

Chapter 11 bankruptcy petition, which the bankruptcy court

found was for the primary purpose of dealing with their tax

obligations. Shortly after filing, Hawkins sold the La Jolla

condominium for $3.5 million and paid the proceeds to the

IRS. Even after these payments and the seizure by the FTB,

the IRS filed a proof of claim for $19 million and the FTB

filed a claim for $10.4 million.

Hawkins proposed a liquidating plan of reorganization,

which was confirmed by the bankruptcy court. The IRS

received a distribution of $3.4 million from the estate. The

confirmed plan discharged the Hawkinses from any debts that

arose before the date of plan confirmation, but provided that

the Hawkinses, IRS, or FTB could bring suit to determine

whether the tax debts should be excepted from discharge.

8 HAWKINS V. FTB

The Hawkinses filed this declaratory action against the IRS

and FTB seeking a determination that the unpaid taxes were

covered by the discharge. The IRS and FTB counterclaimed,

alleging that the tax debts were excepted from discharge

pursuant to 11 U.S.C. § 523(a)(1)(c), which excepts from

discharge any debt “with respect to which the debtor . . .

willfully attempted in any manner to evade or defeat such

tax.” The primary, but not exclusive, theory of the IRS and

FTB was that the Hawkinses’ maintenance of a rich lifestyle

after their living expenses exceeded their income constituted

a willful attempt to evade taxes. The bankruptcy court

rejected most of the other government theories, but found that

the Hawkinses’ personal living expenses from January 2004

to September 2006 were “truly exceptional.” The court

estimated that the couples’ personal expenses exceeded their

earned income by $516,000 to $2.35 million during that

period. Given these facts, the bankruptcy court concluded

that, as to Trip Hawkins, the tax debts were excepted from

discharge. However, as to Lisa Hawkins, the court held that

the tax debts were discharged. The district court affirmed.

This timely appeal followed.

II

Generally, a debtor is permitted to discharge all debts that

arose before the filing of his bankruptcy petition. 11 U.S.C.

§ 727(b). However, the Bankruptcy Code provides for

certain exceptions to that general rule. 11 U.S.C. § 523.

Relevant to our case, the Code provides that a debtor may

not discharge any tax debts “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)

(emphasis added). As the district court correctly observed,

HAWKINS V. FTB 9

our Circuit has not yet construed this provision, nor

determined what mental state is required.

We begin by using the usual tools of statutory

construction, the first step of which is to determine whether

the language has a plain and unambiguous meaning with

regard to the particular dispute. Robinson v. Shell Oil Co.,

519 U.S. 337, 340 (1997). In doing so, “we examine not only

the specific provision at issue, but also the structure of the

statute as a whole, including its object and policy.”

Children’s Hosp. & Health Ctr. v. Belshe, 188 F.3d 1090,

1096 (9th Cir. 1999). If the plain language is unambiguous,

that meaning is controlling, and our inquiry is at an end.

Carson Harbor Vill., Ltd. v. Unocal Corp., 270 F.3d 863,

877–78 (9th Cir. 2001) (en banc). If the statutory language

is ambiguous, then we consult legislative history. United

States v. Daas, 198 F.3d 1167, 1174 (9th Cir. 1999). “We

also look to similar provisions within the statute as a whole

and the language of related or similar statutes to aid in

interpretation.” United States v. LKAV, 712 F.3d 436, 440

(9th Cir. 2013).

The key question in this case is the meaning of the word

“willful” in the statute. Unfortunately, the plain words of the

text do not answer that question because, as the Supreme

Court has observed, “willful . . . is a word of many meanings,

its construction often being influenced by its context.” Spies

v. United States, 317 U.S. 492, 497 (1943). Context matters

in this case. The Bankruptcy Code is designed to provide a

“fresh start” to the discharged debtor. United States v. Sotelo,

436 U.S. 268, 280 (1978). As a result, the Supreme Court has

interpreted exceptions to the broad presumption of discharge

narrowly. See Kawaauhau v. Geiger, 523 U.S. 57, 62 (1998).

As we have observed “exceptions to discharge should be

10 HAWKINS V. FTB

limited to dishonest debtors seeking to abuse the bankruptcy

system in order to evade the consequences of their

misconduct.” Sherman v. SEC (In re Sherman), 658 F.3d

1009, 1015–16 (9th Cir. 2011), abrogated on other grounds

by Bullock v. BankChampaign, N.A., 133 S. Ct. 1754 (2013).

Thus, the “fresh start” philosophy of the Bankruptcy Code

argues for a stricter interpretation of “willfully” than an

expansive definition. Significantly, the Supreme Court

recognized the Code’s “fresh start” object and policy in

construing the word “willfully” in considering a related

discharge exception in Kawaauhau. In Kawaauhau, the

creditors requested the Bankruptcy Court to hold a medical

malpractice claim to be non-dischargeable under 11 U.S.C.

§ 523(a)(6), which provides that a “discharge [in bankruptcy]

. . . does not discharge an individual debtor from any debt . . .

for willful and malicious injury . . . to another.” 523 U.S. at

59–61. The Supreme Court noted that, because the word

“willful” modifies the word “injury” in § 523(a)(6), “a

deliberate or intentional injury, not merely a deliberate or

intentional act that leads to injury” was required to establish

non-dischargeability. Id. at 61. The Supreme Court

analogized “willful” as the mental state required for

intentional torts, not for negligent acts. Id.

The structure of the statute also supports a narrow

construction of “willfully.” The discharge exception at issue,

§ 523(a)(1), lists tax and customs debts warranting exception

in three categories. Under § 523(a)(1)(A), numerous types of

debts are excepted from discharge on a strict liability basis.

Under § 523(a)(1)(B), tax debts for which a return was not

filed or was filed late may not be discharged. Section

523(a)(1)(C) is the grouping at issue here: no discharge is

permitted for tax debts “with respect to which the debtor

HAWKINS V. FTB 11

made a fraudulent return or willfully attempted in any manner

to evade or defeat such tax.” 11 U.S.C. § 523(a)(1)(C). The

grouping of the fraudulent return offense with the evasion

offense in subsection (C)—rather than with the other offenses

involving tax returns in subsection (B)—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.

Not only does the structure of the statute as a whole,

including its “object and policy,” indicate that the term

“willfully” is to be narrowly construed, but that interpretation

is supported by legislative history. Section 523(a)(1) is

described in the Congressional Record as a “compromise”

between the House and Senate versions of a bill. 124 Cong.

Rec. 32,398 (1978). The House version contained the

“willfully” language, H.R. Rep. No. 95-595, at 363 (1977),

while the Senate version instead excepted tax debts for which

the debtor “fraudulently attempted to evade” the tax, S. Rep.

No. 95-989, at 78 (1978) (emphasis added). If the meaning

of the Senate’s language was so drastically reduced as to

remove any bad purpose from the exception for attempted tax

evasion, it is surprising that such a change was not thought

significant enough to warrant mention in the Congressional

Record.

A narrow interpretation of “willfully” is also in accord

with case precedent that generally except tax debts from

discharge under § 523(a)(1)(C) only when the conduct

12 HAWKINS V. FTB

amounting to attempted tax evasion is of a type likely to be

accompanied by an evasive motivation. Acts found by other

circuits to constitute “willful[] attempt[s]” include declining

to file tax returns, shifting assets to another person or a false

bank account, shielding assets, and switching all financial

dealings to cash. See, e.g., Vaughn v. Comm’r (In re

Vaughn), __ F.3d __, 2014 WL 4197347, at *6 n.5 (10th Cir.

2014) (purchase and transfer of a house to girlfriend;

establishment and transfer of funds to a trust for a step-

daughter); United States v. Coney, 689 F.3d 365, 377 (5th

Cir. 2012) (concealment of currency transactions); In re

Gardner, 360 F.3d 551, 558 (6th Cir. 2004) (concealment of

assets through special bank accounts); United States v. Fretz

(In re Fretz), 244 F.3d 1323, 1329 (11th Cir. 2001) (failure to

file tax returns); Tudisco v. United States (In re Tudisco),

183 F.3d 133, 137 (2d Cir. 1999) (failure to file returns);

United States v. Fegeley (In re Fegeley), 118 F.3d 979, 984

(3d Cir. 1997) (failure to file returns); In re Birkenstock,

87 F.3d 947, 951–52 (7th Cir. 1996) (failure to file returns

and attempt to conceal income); Dalton v. IRS, 77 F.3d 1297,

1302 (10th Cir. 1996) (concealment of asset ownership).

With the exception of the mere failure to file a return, these

same acts satisfy the conduct requirement for criminal tax

evasion in this Circuit. See United States v. Carlson,

235 F.3d 466, 468–69 (9th Cir. 2000).

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

HAWKINS V. FTB 13

knew of this duty, and that he voluntarily and intentionally

violated that duty,” United States v. Bishop, 291 F.3d 1100,

1106 (9th Cir. 2002) (internal quotation marks omitted); that

is, a “voluntary, intentional violation of a known legal duty,”

Cheek v. United States, 498 U.S. 192, 201 (1991) (internal

quotation marks omitted). See also Edwards v. United States,

375 F.2d 862, 867 (9th Cir. 1967) (interpreting the provision

to require “willfulness in the sense of a specific intent to

evade or defeat the tax or its payment”). 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, 132 S. Ct.

1166, 1175, 1177 (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.

Similarly, in Spies, the Court considered the difference

between the misdemeanor of willfully failing to pay a tax or

file a timely return (§ 7203) with the felony of willfully

attempting to evade or defeat a tax or its payment (present

§ 7201). 317 U.S. at 498. The Supreme Court rejected the

government’s contention, which is similar to the one it takes

in this case, that a willful failure to file a return, coupled with

a willful failure to pay the tax, constituted a willful attempt to

evade or defeat a tax in violation of § 7201. Id. at 499.

Rather, it interpreted the statute as requiring some “willful

commission in addition to willful omissions.” Id. It then

provided some examples of qualifying acts, including keeping

double books, making false bookeeping entries, destruction

of records, concealment of assets, along with “any kind of

conduct, the likely effect of which would be to mislead or

conceal.” Id. Applying the logic of Spies, which was

construing language almost identical to the phrase at issue,

14 HAWKINS V. FTB

simply spending beyond one’s income would not qualify as

a “willful[] attempt[] in any manner to evade or defeat such

tax.”

Given the structure of the statute as a whole, including its

object and policy, legislative history, case precedent, and

analogous statutes, we conclude that declaring a tax debt non-

dischargeable under 11 U.S.C. § 523(a)(1)(C) on the basis

that the debtor “willfully attempted in any manner to evade or

defeat such tax” requires a showing of specific intent to evade

the tax. Therefore, a mere showing of spending in excess of

income is not sufficient to establish the required intent to

evade tax; the government must establish that the debtor took

the actions with the specific intent of evading taxes. Indeed,

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. Such 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.” U.S. Const., art. I, § 8, cl. 4.

Some of our sister circuits have read 11 U.S.C.

§ 523(a)(1)(C) differently, interpreting the statute to require

the government to show that the debtor “(1) had a duty to pay

taxes under the law, (2) knew he had that duty, and

(3) voluntarily and intentionally violated that duty.” Vaughn,

2014 WL 4197347 at *6; Coney, 689 F.3d at 371; Gardner,

360 F.3d at 558; Fretz, 244 F.3d at 1330; Fegeley, 118 F.3d

at 984; Birkenstock, 87 F.3d at 952; Dalton, 77 F.3d at 1300.

HAWKINS V. FTB 15

To the extent that these cases can be construed, as the

government does, as holding that a tax debt can be considered

dischargeable if the acts were committed intentionally, but

not necessarily for the purpose of evading taxation, we

respectfully disagree. However, most of the cases involve

intentional acts or omissions designed to evade taxes, such as

criminal structuring of financial transactions to avoid

currency reporting requirements (Coney, 689 F.3d at 369);

concealing assets through nominee accounts (Vaughn, 2014

WL 4197347 at *6; Gardner, 360 F.3d at 559; Birkenstock,

87 F.3d at 952); concealing ownership in assets (Vaughn,

2014 WL 4197347 at *6; Dalton, 77 F.3d at 1302); and

failing to file tax returns and pay taxes (Fretz, 244 F.3d at

1329; Fegeley, 118 F.3d at 984). These actions are not

inconsistent with a specific intent requirement. And, although

lavish lifestyle and ability to pay taxes have been mentioned

by some Circuits, see, e.g., Vaughn, 2014 WL 4197347 at *6,

no Circuit has held that living beyond one’s means alone

constitutes willful tax evasion, and no circuit has held that

failure to pay taxes, by itself, constitutes willful tax evasion

within the meaning of that clause in § 523(a)(1)(C).

III

Absent circuit law on this question, the district and

bankruptcy courts held that specific intent to evade taxes was

not required in order to except a tax debt from discharge

under 11 U.S.C. § 523(a)(1)(C) and relied in large part on the

Hawkinses’ spending beyond their income as the basis for

denying tax debt discharge. Aside from the KPMG

transactions, most of the expenditures on which the

government relies were made consistent with Hawkins’s past

spending practices, and investments were made in property

that would be subject to tax liens. As far as the record

16 HAWKINS V. FTB

discloses thus far, there were no financial transfers into

nominee accounts or concealment of assets, although the

government claims that some funds ordered paid into trust by

the family court were done so with the intent of tax evasion.

The government rightly points out that there were other

facts that supported a finding of a willful failure to evade

taxes that were cited as part of the decisions. However, given

the heavy reliance on lifestyle choices in the decisions, it is

not possible for us to determine if the district or bankruptcy

court decisions would have been different without that

consideration, and we decline to evaluate the other evidence

tendered by the government in the first instance on appeal.

Because neither the district court nor the bankruptcy court

had the benefit of our conclusion that denial of discharge for

“willfully attempt[ing] in any manner to evade or defeat” a

tax debt requires that the acts be taken with the specific intent

to evade the tax, we vacate the judgment and remand so that

the courts can reanalyze the case using the specific intent

standard. We need not, and do not, reach any other issue

urged by the parties. Each party shall bear its or their own

costs on appeal.

REVERSED AND REMANDED.

RAWLINSON, Circuit Judge, dissenting:

I respectfully dissent. I agree with the majority that the

rich are different in many ways, but that difference should not

include an unfettered ability to dodge taxes with impunity.

HAWKINS V. FTB 17

There is little doubt, if any, that William Hawkins

deliberately decided to spend money extravagantly rather

than pay his duly assessed state and federal taxes. Hawkins

now seeks to discharge these taxes in bankruptcy.

The Bankruptcy Code precludes discharge of tax debts

“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). We must now decide

whether Hawkins’ actions avoiding payment of the taxes was

“willful.” I disagree with the majority on this point.

The proceedings before the bankruptcy court are telling.

There is no question that Hawkins was aware of the

substantial sums he owed in taxes as early as 2004. See

Bankruptcy Court Memorandum Decision, p. 7 (noting that

during family court proceedings to reduce child support

payments, Hawkins acknowledged owing $25 million in

taxes). Even after acknowledging the tax debt, Hawkins

maintained a home worth well over $3.5 million, and an

ocean-view condominium worth well over $2.6 million. See

id., pp. 9–10. Although there were only two drivers in the

family, Hawkins purchased a fourth vehicle that cost

$70,000.00. See id., p. 10. At the family court hearing,

Hawkins’ bankruptcy attorney “testified that Hawkins’ intent

was not to pay the tax debt, but to discharge it in

bankruptcy. . . .” Id., p. 19. This testimony is a strong

indication of a willful intent to avoid the payment of taxes by

hook or by crook. Indeed, the bankruptcy court noted that the

personal living expenses of the Hawkins family during the

period in question were “truly exceptional.” Id., p. 20.

Incredibly, the family “spent between $16,750 and $78,000

more” each month than their income. Id. The bankruptcy

court determined that the wasting of assets through profligate

18 HAWKINS V. FTB

spending indicated willful evasion of tax payments. See id.,

p. 27. Ultimately, the bankruptcy court relied upon the

following “badges of evasion”: 1) Hawkins’ “exceptional

business sophistication”; 2) his “open acknowledgment of his

tax debt and insolvency”; 3) the lengthy period of wasteful

spending; 4) the amount of wasteful spending; and 5) “the

extent to which the wasteful expenditures exceeded . . .

earned income.” Id., p. 29.

The majority opinion gives Hawkins a pass by focusing

on the Bankruptcy Code’s purpose of providing a “fresh

start” to debtors. However, this overly expansive

interpretation of the “fresh start” policy could easily eclipse

all discharge exceptions. The majority’s conclusion, in my

view, creates a circuit split and turns a blind eye to the

shenanigans of the rich.

I am persuaded by the reasoning of a recent decision in

the Tenth Circuit involving similar circumstances, Vaughn v.

IRS (In re Vaughn), No. 13-1189, 2014 WL 4197347 (10th

Cir. Aug. 26, 2014). In that case, the Tenth Circuit cited to

the district court decision in this case to support its ruling.

See id. at *6 (citing Hawkins v. Franchise Tax Bd., 447 B.R.

291, 300 (N.D. Cal. 2011). In Vaughn, as in Hawkins, a

wealthy taxpayer sought to discharge through bankruptcy a

substantial amount of taxes owed. See id. at *4.

The Tenth Circuit held that the determination of “whether

or not a debtor willfully attempted to evade or defeat a tax

under 11 U.S.C. § 523(a)(1)(C) is a question of fact

reviewable for clear error. . . .” (citation, footnote, reference

and alterations omitted). Id. at *6. The court articulated the

following elements required to satisfy the mental state

requirement: “1) the debtor had a duty under the law; 2) the

HAWKINS V. FTB 19

debtor knew he had the duty; and 3) the debtor voluntarily

and intentionally violated the duty.” Id. (citing Vaughn v. IRS

(In re Vaughn), 463 B.R. 531, 546 (Bankr. D. Colo. 2011);

Hawkins, 447 B.R. at 300).

The Tenth Circuit incorporated a number of findings from

the bankruptcy court to support the conclusion that Vaughn

acted willfully to evade taxes, including failure to preserve

assets despite knowledge of substantial tax liability, and

“numerous large expenditures.” Id. n.5.1 The Tenth Circuit

also adopted the observation made in Hawkins that

“nonpayment of a tax can satisfy the conduct requirement

when paired with even a single additional culpable act or

omission.” Id. (quoting Hawkins, 447 B.R. at 301).

I would follow the lead of the Tenth Circuit and affirm

the bankruptcy court ruling denying discharge of Hawkins’

substantial tax liability due to his willful attempt to avoid

payment of those taxes through profligate spending. The

bankruptcy court’s findings were not clearly erroneous and

were consistent with the persuasive rationale articulated by

the Tenth Circuit in Vaughn. Providing a fresh start under the

Bankruptcy Code should not extend to aiding and abetting

wealthy tax dodgers. I respectfully dissent.

1

Notably, these same findings also were made by the bankruptcy court

in this case.