Opposition Brief — Sumpter v. United States, 116 S. Ct. 1673 (1996) (No. 95-1162)

Supreme Court. U.S.

4 PE ot

APR 18 1996

No. 95-1162

sae AT NAR RRR IRR set aN

1

In the Supreme Court of the Gnited States

OCTOBER TERM, 1995

JERRY L. SUMPTER, PETITIONER

v.

UNITED STATES OF AMERICA

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

BRIEF FOR THE UNITED STATES IN OPPOSITION

DREw S. Days, III

Solicitor General

LORETTA C. ARGRETT

Assistant Attorney General

GARY D. GRAY

LAURIE SNYDER

Attorneys

Department of Justice

Washington, D.C. 20530

202) 514-2217

QUESTION PRESENTED

Whether a debtor’s affirmative acts to thwart the

collection of his delinquent federal income taxes

constitute a willful attempt to evade or defeat such

taxes within the meaning of Section 523(a)(1)(C) of

the Bankruptcy Code, 11 U.S.C. 523(a)(1)(C).

(I)

TABLE OF CONTENTS

Page

SSL CESS LS ASRS eh Pe id: nt aa EE

REECE AR ERE i a aD

SES a ea ae NTS LR

Sg SEE RR Aa renee a

I

ok te

TABLE OF AUTHORITIES

Cases:

Bruner, In re, 55 F.3d 195 (5th Cir. 1995) ................. 5, 8

Collins v. United States, 848 F.2d 740 (6th Cir.

EN ER as * Ee Deke 8 oot Oe oe 5

Commissioner v. Soliman, 506 U.S. 168 (1993) ....... 4

Dalton v. IRS, 77 F.3d 1297 (10th Cir. 1996) .......... 5, 8

Domanus v. United States, 961 F.2d 1323 (7th Cir.

RAR EAE DA ean ee 20 ha 5

Haas, In re, 48 F.3d 1153 (11th Cir. 1995) ................ 7,8

Malat v. Riddell, 383 U.S. 569 (1966) ...................... 5

Toti, In re, 24 F.3d 806 (6th Cir.), cert. denied, 115

Ae LE Sa ec Oe ee 5, 6-7, 8

Statutes:

Bankruptcy Code:

I Saale chaciiniiasinnacnhioeicensksiteinet inedénlubscani

EET IES SRT ip ae aa

Internal Revenue Code (26 U.S.C.):

NERS aS SO CER Se ee eee eE

EER ae ae age aaE

Miscellaneous:

Black’s Law Dictionary (6th ed. 1990) ...................... 6

Webster’s Third New International Dictionary

SITET ischcdcubbantbetgntunnbdsinidhobstukiahocedsdulécisteasieintiednateesses 6

(IID

Jun the Supreme Court of the United States

OCTOBER TERM, 1995

No. 95-1162

JERRY L. SUMPTER, PETITIONER

Vv.

UNITED STATES OF AMERICA

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

BRIEF FOR THE UNITED STATES IN OPPOSITION

OPINIONS BELOW

The opinion of the court of appeals (Pet. App. 1-26)

is unpublished, but the decision is noted at 64 F.3d 663

(Table). The opinion of the district court (Pet. App.

27-49) is reported at 170 B.R. 908. The opinion of the

bankruptcy court (Pet. App. 50) is reported at 136

B.R. 690.

JURISDICTION

The judgment of the court of appeals was entered on

August 22, 1995. The petition for a writ of certiorari

was filed on November 20, 1995. The jurisdiction of

this Court is invoked under 28 U.S.C. 1254(1).

(1)

STATEMENT

1. In 1979, petitioner created a trust for the benefit

of his children. Other family members and friends

were designated as trustees (Pet. App. 3). Sumpter &

Perry, P.C., of which vetitioner owns nearly all the

stock, leases its office space and regularly borrows

money from the trust (Pet. 2; Pet. App. 3-4, 32). By its

terms, however, the trust is prohibited from lending

money directly to petitioner. Prior to January 1988,

petitioner had never borrowed from the trust (id. at

5).

In August 1986, the Internal Revenue Service

notified petitioner of assessments for income taxes

due from him for the years 1984 and 1985. A demand

for payment of those taxes was also made at that time.

In August 1987, the Service made assessment and

demand for payment of the taxes due from petitioner

for the years 1981 and 1982 (Pet. App. 4). Additional

notices and demands for payment were sent to

petitioner in December 1987 (ibid.). Two weeks after

receiving these last notices, petitioner and his wife

gave mortgages of their property to the trust to

secure a $90,000 loan that the trust made to them at

that time (id. at 3, 4-5).

On April 21, 1988, an IRS agent informed petitioner

that the IRS would soon file notices of tax liens with

the local registry of deeds (Pet. App. 5). Later that

same day, petitioner transferred title to the mort-

gaged properties to the trust and the trust cancelled

the underlying debt (id. at 5-6). Less than two weeks

later, the Service filed its notices of tax lien (id. at 6).

2. In 1989, petitioner filed for relief under Chapter

7 of the Bankruptcy Code and sought a discharge of

his federal tax debts (Pet. App. 6). The government

3

brought an adversary proceeding, claiming that peti-

tioner’s tax liabilities were nondischargeable under

Section 523(a)(1)(C} of the Bankruptcy Code, which

provides that a debtor is not discharged from a tax

debt if he “willfully attempted in any manner to evade

or defeat such tax” (11 U.S.C. 523(a)(1)(C)).

Petitioner admitted that one of his reasons for

transferring the properties to the trust in April 1988

was to avoid the effect of the federal tax liens on the

r operties (Pet. App. 14, 44-45). He contended, how-

ever, that Section 523(a)(1)(C) does not apply to at-

tempts to evade or defeat the collection of a tax lia-

bility, but only to attempts to evade or defeat the

determination of the underlying tax liability (Pet.

App. 9-10, 40-41). The bankruptcy court rejected peti-

tioner’s interpretation of the statute and granted

summary judgment in favor of the government (id. at

28-29, 50).

3. The district court affirmed (Pet. App. 27-49).

The court held that “§$523(a)(1)(C)’s modifying phrase

‘in any manner’ is expansive enough to include

evading or defeating collection or payment of a tax”

(id. at 43). The court rejected as “spurious” peti-

tioner’s suggestion that his intent to avoid the tax

liens by transferring properties to the trust was not

evidence of an intent to evade or defeat taxes without

proof that he had equity in the properties (id. at 46-

49). The court held that Section 523(a)(1)(C) did not

require that the attempt to evade or defeat the tax

obligation be successful, only that it be willful (Pet.

App. 47).

4. The court of appeals affirmed (Pet. App. 1-26).

The court interpreted the words “in any manner” in

Section 523(a)(1)(C) “to encompass attempts to thwart

payment of taxes” (Pet. App. 12-13). Noting that the

4

attachment of a federal tax lien to assets “is usually

the first step taken by the IRS” to enforce payment of

a tax, the court held that petitioner’s admitted

attempt to evade the effect of these liens was

sufficient to trigger the exception to dischargeability

of Section 523(a)(1)(C) (Pet. App. 15). Noting that

petitioner had admitted that he had transferred the

property in part to avoid the federal tax liens, the

court held that petitioner had attempted to evade or

defeat collection of the taxes within the meaning of

the nondischargeability statute (id. at 17-20).

ARGUMENT

The decision of the court of appeals is correct and

does not conflict with any decision of this Court or

any other court of appeals. Further review is there-

fore not warranted.

1. Under Section 727 of the Bankruptcy Code, a

debtor in a Chapter 7 case is generally discharged

from all debts that arose before the filing of the

bankruptcy petition. 11 U.S.C. 727(b). Under Section

523(a)(1)(C) of the Code, however, an individual debtor

is not discharged “from any debt * * * for a tax

* * * with respect to which the debtor made a fraudu-

lent return or willfully attempted in any manner to

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

This case does not involve a fraudulent return; it in-

volves only the second clause of Section 523(a)(1)(C),

which denies discharge when there has been a

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

such tax.”

The language of Section 523 is straightforward.

Congress did not provide any specialized definitions

for its terms. The words are therefore to be inter-

preted with their ordinary, everyday meaning. See

—-2

Commissioner v. Soliman, 506 U.S. 168, 174 (1993);

Malat v. Riddell, 383 U.S. 569, 571 (1966) (per

curiam).'

a. The court of appeals concluded that the broad

phrase used in Section 523(a)(1)(C) — “in any manner

to evade or defeat such tax” — encompasses not only a

debtor’s attempt to evade or defeat the assessment of

a tax but also a debtor’s attempt to evade or defeat the

payment or collection of a tax already assessed by

concealing or transferring his property in an effort to

avoid the effect of the tax lien (Pet. App. 12-17). That

same interpretation of the statute has been applied in

several recent decisions. See, e.g., Dalton v. IRS, 77

F.3d 1297 (10th Cir. 1996) (tax debts nondischargeable

under Section 523(a)(1)(C) because debtor attempted

to conceal assets from IRS by placing them in his

wife’s name); In re Bruner, 55 F.3d 195 (5th Cir. 1995)

(tax debts nondischargeable under’ Section

§23(a)(1)(C) because debtor attempted to conceal

assets from IRS and engaged in pattern of non-pay-

ment and non-filing). As the court stated in Dalton v.

IRS, supra, the statutory phrase “in any manner” is

“sufficiently broad to include willful attempts to

evade taxes by concealing assets to protect them from

execution or attachment.” 77 F.3d at 1301.

1 Petitioner does not contend that the word “willfully” as it

appears in Section 523(a)(1)(C) requires a criminal state of

mind or that the government must prove the elements of

criminal tax evasion in order to satisfy the discharge exception.

Courts have consistently interpreted the term “willful” in civil

tax statutes to mean voluntary, conscious or intentional. In re

Toti, 24 F.3d 806 (6th Cir.), cert. denied, 115 S. Ct. 482 (1994).

See, e.g., Domanus v. United States, 961 F.2d 1323, 1326 (7th

Cir. 1992); Collins v. United States, 848 F.2d 740, 742 (6th Cir.

1988).

6

The common meaning of the word “evade”—in

connection with tax obligations—is “to fail to pay or

to minimize (taxes) in violation of law.” Webster’s

Third New International Dictionary 786 (1986). See

also Black’s Law Dictionary 554 (6th ed. 1990). The

common definition of the word defeat—in connection

with a legal obligation—is “(t]o prevent, frustrate, or

circumvent; as in the phrase ‘hinder, delay, or defeat

creditors’” (id. at 418). Applying the ordinary mean-

ing of these statutory terms, the court of appeals

correctly held in this case that petitioner’s attempt te

thwart efforts to collect his tax liabilities by

transferring his properties for the admitted purpose

of frustrating the effectiveness of the federal tax

liens was a willful attempt “in any manner to evade or

defeat” his tax liability (Pet. App. 12-17). Through

these affirmative acts, petitioner attempted to frus-

trate and defeat the collection of the tax.

2. Petitioner errs in asserting (Pet. 1) that In re

Toti, 24 F.3d 806 (6th Cir.), cert. denied, 115 S. Ct. 482

(1994)—on which the court of appeals relied in this

case (Pet. App. 12-13)—is in conflict with In re Haas,

48 F.3d 1153 (11th Cir. 1995). In Toti, the debtor

sought a discharge for taxes after he had knowingly

failed to file his tax returns and pay the taxes due.

The debtor argued in Toti that Section 523(a)(1)(C) of

the Bankruptcy Code prohibits discharge only when

the debtor has committed an affirmative act that

would be felonious under 26 U.S.C. 7201 (willful

attempt to evade or defeat tax) and does not prohibit

discharge for acts of omission that would constitute

misdemeanors under 26 U.S.C. 7203 (willful failure to

file return or pay tax). The court of appeals dis-

agreed, holding that Section 523(a)(1)(C) includes both

acts of commission and acts of omission. 24 F.3d at

7

809. The court concluded that where a debtor know-

ingly fails to file returns and pay taxes, the taxes are

nondischargeable in bankruptcy. Ibid.

Haas involved a different situation. In Haas, the

debtor simply failed to pay his tax liability. Unlike

the debtor in Toti, the debtor in Haas had properly

filed his returns and reported his taxes. In that

context, the Eleventh Circuit held in Haas that “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.” 48 F.3d at 1158. The court

noted in Haas that Section 523(a)(1)(C) of the Bank-

ruptcy Code, unlike 26 U.S.C. 7201, does not include

the phrase “or the payment thereof.” The court

reasoned that the passive act of failing to pay is

therefore not sufficient by itself to prevent discharge.

48 F.3d at 1156, 1157.

The question whether a mere omission to pay an

outstanding tax would, by itself, prohibit discharge

was not addressed either in this case or in Toti.

Neither this case nor Toti involved “mere nonpay-

ment.” Petitioner did not simply fail to pay his taxes;

2 See also 26 U.S.C. 6531(2) (establishing period of limita-

tion on criminal prosecution of various offenses arising under

Internal Revenue Code, including “the offense of willfully

attempting in any manner to evade or defeat any tax or the

payment thereof” (emphasis added)); 26 U.S.C. 6653 (imposing

penalty upon any person who “willfully attempts in any

manner to evade or defeat any such tax or the payment

thereof” (emphasis added)); 26 U.S.C. 6672 (imposing civil

penalty on person who “willfully attempts in any manner to

evade or defeat any such tax or the payment thereof”

(emphasis added)); 26 U.S.C. 7201 (making guilty of felony

person who “willfully attempts in any manner to evade or

defeat any tax imposed by this title or the payment thereof”

(emphasis added)).

8

he also acted affirmatively to defeat collection by

transferring property in an effort to shield it from the

federal tax liens.°

Under circumstances similar to those in this case

—failure to pay combined with an affirmative act to

prevent collection—the Tenth Circuit recently

agreed with Haas that mere failure to pay alone does

not prevent discharge. Dalton v. IRS, 77 F.3d at 1301.

The court in Dalton also agreed with the court here,

however, that when a failure to pay is accompanied by

an affirmative act to evade or defeat collection,

Section 523(a)(1)(C) applies to prevent discharge. 77

F.3d 1300-1301. In applying Section 523(a)(1)(C) to a

spectrum of misconduct, the courts of appeals have

thus reached consistent, not conflicting, decisions.

See Dalton v. IRS, supra; In re Bruner, supra; In re

Haas, supra; In re Toti, supra.

3 Contrary to petitioner’s contention (Pet. 11-19), the court

of appeals did not base its conclusion that he had attempted to

evade or defeat his taxes solely on the finding that he had

transferred properties to the trust for the admitted purpose of

avoiding the tax lien—although that would have been suffi-

cient. The court also relied on other undisputed facts and

permissible inferences concerning the entire sequence of events

culminating in the transfer in reaching that conclusion (Pet.

App. 18-20).

CONCLUSION

The petition for a writ of certiorari should be

denied.

Respectfully submitted.

APRIL 1996

DREw S. Days, III

Solicitor General

LORETTA C. ARGRETT

Assistant Attorney General

GARY D. GRAY

LAURIE SNYDER

Attorneys