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Taxes in Your Practice: Lawyer's spending and lifestyle preclude discharge of tax liabilities in bankruptcy

Vol. 77, No. 3 / May - June 2021

Scott VincentScott E. Vincent

Scott E. Vincent is the founding member of Vincent Law, LLC in Kansas City. 


The United States Court of Appeals for the Sixth Circuit recently affirmed a district court decision determining that federal tax debts were not dischargeable in bankruptcy due to willful evasion of payment.

In U.S. v. Helton, 2021 PTC 112 No. 20-5686 (April 14, 2021), the Sixth Circuit found that the taxpayer’s lifestyle and expenditures during periods when he had outstanding tax liabilities precluded the taxpayer from discharging those tax liabilities in bankruptcy.

The taxpayer, John C. Helton, was a self-employed lawyer in private practice starting in 1994. The taxpayer’s income fluctuated, but generally ranged from under $100,000 in the late 1990s to over $200,000 in 2005 and 2006, before declining in subsequent years. The taxpayer failed to make estimated tax payments for the years in question and filed his tax returns several years late for some of the years. After filing tax returns, the taxpayer made only minimal payments toward his tax debts for earlier years and continued his pattern of late filing and minimal payment in more recent years.

During the periods at issue, the taxpayer enjoyed what the court described as a “comfortable lifestyle,” driving a Mercedes-Benz auto, purchasing luxury gifts for his spouse, eating at restaurants almost every day, vacationing annually, and spending around $10,000 per month on discretionary purchases during some years in question. He also made substantial charitable donations during years when he failed to pay his taxes, and he spent an unspecified sum supporting a successful campaign to become a part-time state-court judge. The court described the taxpayer’s expenditures and lifestyle as “lavish” compared to the amounts he spent on payment of his tax liabilities.

The United States brought a collection suit against the taxpayer in 2017, and he filed for bankruptcy two months later. The district court stayed the collection case until the bankruptcy court entered an order generally discharging the taxpayer’s debts and lifting the bankruptcy stay, and then found in favor of the United States. The issue before the Sixth Circuit was the district court’s finding that the taxpayer’s tax debts were not dischargeable under Bankruptcy Code 11 U.S.C. §523(a)(1)(C), which is an exception to discharge for any tax debt “with respect to which the debtor … willfully attempted in any manner to evade or defeat such tax.”

Sixth Circuit Analysis
The Sixth Circuit reviewed the district court’s fact findings for clear error and its interpretation of § 523(a)(1)(C) de novo. The court found that prior Sixth Circuit cases interpret § 523(a)(1)(C) to have both a “conduct requirement” and a “mental state requirement.” The conduct requirement is met if the government proves that a taxpayer engages in “acts of omission” or “acts of commission” that amount to an attempt to evade paying taxes. The taxpayer in this case did not dispute the district court finding that his failure to file tax returns and failure to pay most of his taxes for the relevant years satisfied the conduct requirement of § 523(a)(1)(C).

The taxpayer made some assertions that he did not meet the mental state requirement under § 523(a)(1)(C). He asserted that he was too busy with work and had depression during some of the years in question to pay the taxes. The district court rejected these excuses based on the taxpayer’s ability to maintain his law practice and run for judicial election, and the Sixth Circuit did not find error with this finding.

The taxpayer primarily argued that § 523(a)(1)(C) requires proof that he acted with “specific intent to evade the tax” based on a Ninth Circuit case. The Sixth Circuit framed this taxpayer and the Ninth Circuit position as requiring that the government prove not only that the taxpayer chose to allocate funds to vehicles, dinners, and luxury gifts rather than tax payments, but also as requiring that the government must prove that the taxpayer purchased those items specifically to avoid paying his taxes. Importantly, the Sixth Circuit declined to follow this higher Ninth Circuit standard for the government under § 523(a)(1)(C), and the court rejected the taxpayer’s argument on the facts in this case.

Based on these findings, the Sixth Circuit affirmed the district court judgment that the taxpayer willfully evaded paying his federal tax debts. As a result, the tax debts were not dischargeable in bankruptcy under § 523(a)(1)(C).

The Helton case is an important reminder for lawyers to prioritize compliance with tax obligations. The lawyer in question received very little sympathy from the courts and was found to have evaded payment of tax liabilities by paying other obligations and generally maintaining his lifestyle, resulting in the tax liabilities being excepted from bankruptcy discharge. Notably, Helton also appears to indicate a split in the circuits on the extent of the government’s burden to show intent to evade tax, at least in the context of bankruptcy under § 523(a)(1)(C).