Opinion
No. 80-3268.
March 13, 1981.
Appeal from the Decision of the United States Bankruptcy Court, Eastern District of Pennsylvania.
Former Bankruptcy Act — Discharge of Debts — Taxes — Willful Failure to File
A bankrupt's debt to the United States for unpaid income taxes arising from his failure to file returns for five years was not dischargeable because he willfully attempted to evade the payment of taxes within the meaning of section 17a(1)(d) of the Bankruptcy Act. Intent to willfully evade was inferred from the bankrupt's filing of false returns for two years prior to his failure to file any returns for five years. See Sec. 17a(1)(d) at ¶ 2145 and Sec. 523(a) at ¶ 9227.
Former Bankruptcy Act — Discharge of Debts — Taxes — False Returns
A bankrupt's debt to the United States which arose from an assessment for unpaid income taxes was not dischargeable because the bankrupt had filed false returns within the meaning of Section 17a(1)(d) of the Bankruptcy Act. Since "false" under Section 17a(1)(d) of the Act means inaccurate or not true, with no proof of intent to defraud necessary, the bankrupt's returns were false because he had substantially underestimated his income. See Sec. 17a(1)(d) at ¶ 2145 and Sec. 523(a) at ¶ 9227.
[Digest of Opinion]
The matter before the court was the appeal of a bankrupt from an order that his tax debt was not dischargeable under Section 17a(1)(d) of the Bankruptcy Act. These debts were not dischargeable since the bankrupt had filed false tax returns for two years, and had failed to file any returns for five years under circumstances which supported the finding that he had willfully attempted to avoid payment.The bankrupt's business between 1960 and 1966 was tracing heirs. He also traded in the securities markets and gambled during that time period. The bankrupt and his wife filed no tax returns for the years 1962 to 1966. In 1967, they filed a joint return for the years 1960 and 1961. Subsequent to an investigation by the IRS, the bankrupt was indicted in 1971 for failure to file tax returns for the years 1964 and 1965. He pleaded guilty to one of these counts.
In November, 1973, the bankrupt was assessed $488,217.78 for federal income taxes for the years 1960 through 1966. In July, 1975, the bankrupt and his wife filed a joint petition in bankruptcy listing a debt owed by both of them for federal income taxes for the years 1960 and 1961, and by the husband for income taxes for the years 1962 through 1966. The IRS received due notice of the filing of the petition and of the adjudicationof bankruptcy. On October 28, 1975, the bankruptcy court entered an order discharging the bankrupts from their dischargeable debts. The IRS received notice of the discharge. The IRS then attempted to collect the assessments, and the bankrupts sought an injunction against the IRS on the grounds that the debt had been discharged. The IRS counterclaimed that the tax debt was non-dischargeable under Section 17a (1)(d) of the Act. Bankrupts then claimed that the application for determination of dischargeability had not been timely filed by the IRS. After the trial, the parties stipulated to the entry of a directed verdict in favor of the wife, as she had not been involved in the husband's business or in the filing of the tax returns.
The court considered three questions: (1) the timeliness of the IRS's application for determination of the dischargeability of the tax debt owed by the bankrupt; (2) the meaning of "false" as used in Section 17a(1)(d) of the Bankruptcy Act as applies to the Bankrupt's tax returns filed for 1960 and 1961; and (3) the meaning of the phrase "willfully attempted in any manner to evade or defeat" taxes as applied to the bankrupt's failure to file tax returns for 1962-1966.
The court determined that since the questions presented were clearly questions of law, the "clearly erroneous" standard of review did not apply, and that it must make an independent determination of the correctness of the bankruptcy court's legal conclusions.
Regarding the contention that the IRS had not timely objected to the discharge, the court agreed with the Bankruptcy Judge that the argument lacked merit. Citing Bankruptcy Rule 409(a)(1), the court held that a determination of the dischargeability of a debt may be made at any time, even after the case has been closed.
The court then examined the meaning of the words "false and fraudulent" as used in Section 17a(1)(d) of the Bankruptcy Act. It arrived at the conclusion that according to the rule of statutory construction that each word must be given effect, the words should have independent meanings as they are separated by a conjunction, otherwise, one or the other would be superfluous. The court thus rejected the meaning given to "false" by the only Circuit Court of Appeals that had interpreted it in this context. The Fifth Circuit had held that "false" required proof that the bankrupt had a conscious intent to defraud the government by the filing of a false return. This meaning would render "false" meaningless, as it is also the meaning of "fraudulent". The court held that "false" means "inaccurate or not true," and that the bankrupt's tax returns for the years 1960-61 were false because they substantially underestimated his actual income. The tax debt for these years therefore cannot be discharged.
The court agreed with the bankruptcy judge that the tax debt for the years 1962 through 1966 was not dischargeable because the bankrupt had failed to file tax returns for those years. Such conduct amounts to willful attempt to evade payment of taxes for those years within the meaning of Section 17a(1)(d) of the Act when accompanied by an affirmative act from which intent to evade may be inferred. From the bankrupt's filing of false returns for two years it can be inferred that he intended to evade payment by failing to file returns for the next five years. The bankruptcy court's ruling of non-dischargeability was upheld.