Hawkins v. FTB

Specific intent is required for a showing of willful attempt to evade or defeat taxes when assessing in bankruptcy whether tax debt is dischargeable.

Trip Hawkins co-founded Electronic Arts, Inc. (“EA”) in the late 80’s, early 90’s. He created a wholly owned subsidiary called 3DO to develop and market video games. With his second wife Lisa, they purchased their home for $3.5 million and lived a lavish lifestyle. By the advice of his accountant Hawkins sheltered his gains from tax liability in a Foreign Leveraged Investment Portfolio and an Offshore Portfolio Investment Strategy. Over the next years Hawkins claimed large losses on his tax returns and was audited for his 1997-2000 returns. Around the same time, 3DO deteriorated and filed a voluntary petition in bankruptcy court in 2003. While insolvent there was no change in lifestyle for the Hawkins’ and they continued to live lavishly. They filed a personal chapter 11 bankruptcy in 2006. The IRS and California Franchise Tax Board (“FTB”) argued that the Hawkins’ maintenance of their lavish lifestyle while insolvent was a willful attempt to evade taxes and thus unpaid taxes should be excepted from discharge in bankruptcy. The key question for the court here is the meaning of the word “willful”. The bankruptcy court, affirmed by the district court, concluded that the Hawkins’ lifestyle immediately prior and during bankruptcy was a willful attempt to evade taxes and held that Mr. Hawkin’s tax debt would not be dischargeable. The panel reviewed the statutory construction, legislative history, and case precedent to conclude that the term willful was to be narrowly construed. Simply spending beyond one’s means would not qualify as a willful attempt to evade tax because the willful attempt requires the specific intent to evade the tax. The government must establish that the debtor took the actions with the specific intent to evade the tax debt. Merely living beyond one’s means does not suffice to meet the specific intent required to evade tax. REVERSED and REMANDED.