Grothues v. Internal Revenue Service

UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
____________________

No. 99-50837
____________________

In The Matter Of: PAUL A. GROTHUES;
MARILYN GROTHUES,

Debtors,

PAUL A. GROTHUES; MARILYN GROTHUES,

Appellees,

versus

INTERNAL REVENUE SERVICE,

Appellant.
_________________________________________________________________

Appeal from the United States District Court
for the Western District of Texas

_________________________________________________________________
___________________________
August 28, 2000

Before JOLLY, SMITH, and BARKSDALE, Circuit Judges.

RHESA HAWKINS BARKSDALE, Circuit Judge:

Primarily at issue is whether taxes owed by two corporations,

principally owned by Paul A. and Marilyn Grothues, were discharged

in the Grothues’ personal Chapter 11 bankruptcy, despite: the IRS

claiming the Grothues are the alter egos of the corporations; and

Ms. Grothues, following Chapter 11 plan-confirmation, pleading

guilty to evading part of those taxes and, as part of her plea

agreement, promising to pay all of the taxes owed. The bankruptcy
court held the taxes were not discharged; the district court, they

were. We AFFIRM in PART, REVERSE in PART, and REMAND.

I.

At issue are fuel excise taxes owed by two diesel fuel

wholesalers, Southwest Oil Company of Jourdanton (SWOJ) and

Southwest Oil Company of Eagle Pass (SWEP). The taxes were

assessed from September 1986 to November 1994, for tax periods

1986-1990.

In March 1987, the Grothues filed a joint petition for

personal bankruptcy under Chapter 11. The IRS filed proofs of

claim for employment taxes the debtors owed, as “responsible

persons”, but did not file proofs of claim for any fuel excise tax

liabilities. The plan of reorganization, confirmed in August 1992,

provided, inter alia, for payment of the employment taxes, but did

not make any provision for payment of the excise taxes.

In 1990, however, the IRS had begun a criminal investigation

regarding those (the corporations’) unpaid excise taxes. And,

approximately a year after plan-confirmation, Marilyn Grothues

pleaded guilty to one count of a multi-count indictment for evading

payment of excise taxes, in violation of 26 U.S.C. § 7201

(“willfully attempt[] in any manner to evade or defeat” payment of

tax). In her plea agreement, she agreed to pay all taxes,

penalties, and interest owed by the corporations, stipulating, for

sentencing purposes only, that the tax loss was approximately

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$716,000. (The Government claimed the corporations owed over $4

million.) Accordingly, in November 1993, the district court

ordered, as a condition of sentence, that Ms. Grothues “pay all

taxes, penalties and interest due and owed”.

Ms. Grothues failed to do so. In March 1996, in an effort to

collect the amount due, the IRS filed notices of tax liens against

the Grothues’ property, identifying the Grothues as the

corporations’ alter egos or nominees. It then issued notices of

intent to levy on some of the Grothues’ real property.

To stop the sale of their property, the Grothues filed this

adversary action in bankruptcy court, maintaining that, pursuant to

11 U.S.C. § 1141(d)(1) (general discharge of pre-confirmation debts

upon plan-confirmation), any personal liability they might have had

for the excise taxes had been discharged in 1992, when their

Chapter 11 plan was confirmed. They also challenged the legality

and amount of taxes owed.

The IRS moved for summary judgment, asserting that, pursuant

to 11 U.S.C. § 1141(d)(2) (debts listed in 11 U.S.C. § 523 non-

dischargeable as to individual debtors), the taxes-owed were

excepted from discharge. It relied upon subparts (A) and (C) of §

523(a)(1). The former is for taxes specified in 11 U.S.C. §

507(a)(8), including excise taxes; the latter, for taxes a “debtor

... willfully attempted in any manner to evade or defeat”. In

addition, the IRS moved to dismiss, for lack of jurisdiction, the

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Grothues’ challenges to the legality and amount of taxes owed,

asserting those issues were not properly before the bankruptcy

court.

Following a hearing on the motions in April 1997, the

bankruptcy court ruled in favor of the IRS. It held that, assuming

the IRS had a bona fide pre-confirmation claim for the excise

taxes, it would not have been discharged, because Ms. Grothues

could not “oppose a [§ 523(a)(1)(C)] finding of willful evasion of

tax, in the face of having pled guilty to evasion of paying a tax”.

The court dismissed, for lack of jurisdiction, the Grothues’

challenges to the legality and amount of taxes owed. And, it

denied their motion for reconsideration.

Subsequent to the bankruptcy court’s ruling, and on a date not

found in the record at hand, the IRS, based upon its alter ego

liability-theory, filed a complaint to foreclose its liens on the

Grothues’ property. United States v. Marilyn Grothues, No. SA-99-

CA-148-OG (W.D. Tex.). (As discussed infra, the IRS contends the

still-pending foreclosure action is the proper forum to determine

the validity of that theory.)

Appealing from bankruptcy to district court, the Grothues

contested the guilty-plea-precluded-discharge-holding, and pointed

out the bankruptcy court’s failure to differentiate Mr. Grothues,

who was not charged with, or convicted of, tax evasion. In re

Grothues, 245 B.R. 828, 829-30 (W.D. Tex. 1999). They also

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appealed the lack-of-jurisdiction-ruling regarding the legality and

amount of taxes owed. Id. at 830.

The district court reversed the bankruptcy court in part,

holding the IRS’ excise taxes claim had been discharged. Id. It

reasoned that the IRS’ “alter ego, nominee or related veil-piercing

theory ... place[d] [its] claim outside of the context of ... [,

inter alia,] § 523(a)(1)”, because the IRS’ claim was not for a

tax, but for “an equitable remedy” in the nature of “a declaratory

judgment that the Grothues’ assets are available to satisfy” the

corporations’ tax debts. Id. at 832. (The court noted that,

because of the non-retroactivity of the 1990 enactment of 26 U.S.C.

§ 4103, which provides for “responsible person” liability with

respect to excise taxes, there was no such liability by which the

Grothues could be held liable personally for the excise taxes, at

the time the corporations incurred them. See id. at 831-32 & n.2.)

The court affirmed the bankruptcy court’s lack-of-jurisdiction-

ruling regarding “the underlying tax liability”. Id. at 830. (As

discussed infra, that holding was not appealed by the Grothues.)

II.

The IRS challenges the district court’s holding its underlying

claim was not “for a tax” and was, therefore, discharged. “Acting

as a second review court”, we examine de novo the bankruptcy

court’s conclusions of law; its fact-findings, only for clear

error. E.g., In re Johnson, 146 F.3d 252, 254 (5th Cir. 1998).

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The IRS had the burden of proving non-dischargeability by a

preponderance of the evidence. See Grogan v. Garner, 498 U.S. 279,

287 (1991).

The principal issue is whether the IRS’ underlying claim for

the two corporations’ unpaid excise taxes, made against the

Grothues through an alter ego theory, falls within the §

523(a)(1)(C) discharge-exception, in the light of Ms. Grothues’

pleading guilty to willful tax evasion, and her concomitant plea-

agreement-promise to pay those taxes. And, if non-dischargeability

applies for that reason to Ms. Grothues, is it equally applicable

to Mr. Grothues?

A.

The district court’s analysis was fundamentally flawed,

according to the IRS, because the alter ego theory is not an

independent cause of action, but merely a remedy to enforce a

claimed substantive right – here, to payment of taxes owed and non-

dischargeable under § 523(a)(1). In this regard, the IRS notes the

discharge provisions make no distinction between taxes incurred

directly by a debtor’s corporation, and those incurred indirectly

by a debtor operating through an ineffective corporate form. It

asserts that, as a matter of common sense, a debtor who has pleaded

guilty to evading a tax should not be allowed to use bankruptcy law

to avoid paying it, especially where, as here, the debtor promises,

in a post-confirmation plea agreement, to pay the tax.

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 Concomitantly, the IRS contends the district court erred in

relying on In re Hurricane R.V. Park, Inc., 185 B.R. 610, 613-15

(Bankr. D. Utah 1995), which held the IRS violated Hurricane’s

discharge-injunction by filing post-confirmation tax liens against

that corporate debtor’s property (as the IRS did against the

Grothues’ property), based on, as here, an alter ego theory, and in

an effort to collect taxes owed by an officer of the corporate

debtor. The IRS reads Hurricane as inapplicable because, unlike

the Grothues, Hurricane was a corporate debtor; the discharge-

exception in 11 U.S.C. §§ 1141(d)(2) and 523(a)(1)(C), at issue

here, applies only to individual debtors.

While conceding the IRS’ alter ego theory is simply a remedy,

not a claim per se, the Grothues assert the district court

nevertheless correctly held the IRS’ underlying claims are not tax

claims because the Grothues had no direct liability for their

corporations’ taxes. To the Grothues, the relevant point from

Hurricane is that the IRS’ alter ego theory was not a tax claim.

As the Grothues concede, the IRS’ alter ego theory is just one

of several ways to pierce the corporate veil under the applicable

Texas law. Its use does not alter the IRS’ underlying claim for

the unpaid excise taxes. See In re S.I. Acquisition, Inc., 817

F.2d 1142, 1152 (5th Cir. 1987) (citing Castleberry v. Branscum,

721 S.W. 2d 270, 272 (Tex. 1986) (“alter ego remedy applies when

there is such an identity or unity between a corporation and an

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individual ... that all separateness between the parties has ceased

and a failure to disregard the corporate form would be unfair or

unjust”) (emphasis added)); Peacock v. Thomas, 516 U.S. 349, 353

(1996) (veil-piercing simply method of assigning liability on

“underlying cause of action”).

And, as for the weight to accord Hurricane, § 523(a)(1)’s

discharge exceptions were not before that court. They do not apply

to corporate debtors. 11 U.S.C. § 1141(d)(2) (plan confirmation

“does not discharge an individual debtor from any debt excepted

from discharge under section 523”) (emphasis added); Fein v.

United States, 22 F.3d 631, 633 (5th Cir. 1994) (as to “individual

debtors, Congress consciously opted to place a higher priority on

revenue collection than on debtor rehabilitation”) (citation

omitted).

B.

Accordingly, the IRS has a claim for taxes. The Grothues

challenge, on several fronts, the bankruptcy court’s non-

dischargeability holding, as well as asserting that, even if §

523(a)(1)(C) non-dischargeability applies to Ms. Grothues, the

underlying reasoning is not applicable to Mr. Grothues.

1.

Notwithstanding the IRS’ underlying claim being “for a tax”,

the Grothues maintain the bankruptcy court erred by basing non-

dischargeability on Ms. Grothues’ criminal conviction alone. They

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assert In re Bruner, 55 F.3d 195 (5th Cir. 1995), mandates a more

extensive analysis. To them, it requires, inter alia, determining

whether they had the ability to pay the taxes; and, in that regard,

they note the 11 U.S.C. § 523(a)(1)(C) non-dischargeability

standard is different from that for criminal tax evasion under 26

U.S.C. § 7201. Likewise, they base error on the bankruptcy court’s

holding all the taxes non-dischargeable, despite Ms. Grothues’

pleading guilty to evasion for only one of the subject tax periods.

Finally, they complain that the IRS introduced no summary judgment

evidence to support its alter ego theory.

a.

Relying on In re Bruner, 55 F.3d at 197, the Grothues contend

that, for § 523(a)(1)(C) willful evasion, the bankruptcy court must

find the debtor: (1) had a legal duty to pay the tax; (2) knew of

such duty; and (3) “voluntarily and intentionally violated” it,

having preliminarily assessed the debtor’s financial ability to pay

the tax. Id. We disagree. (We note, however, the elements of the

three-prong test – duty; knowledge; and voluntary and intentional

violation – seem implicit in Ms. Grothues’ § 7201 criminal

conviction, which required a “willful[] attempt[] ... to evade or

defeat” payment of taxes.)

The central issue in Bruner, 55 F.3d at 198-200, was whether

§ 523(a)(1)(C) willful evasion requires proof of an “affirmative

act”, a question on which the circuits are split. Compare In re

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Toti, 24 F.3d 806, 809 (6th Cir.) (§ 523(a)(1)(C) encompasses “both

acts of commission and ... omission”), cert. denied, 513 U.S. 987

(1994), with In re Haas, 48 F.3d 1153, 1158 (11th Cir. 1995)

(nonpayment of taxes “alone” not within scope of § 523(a)(1)(C)),

abrogated in part by In re Griffith, 206 F.3d 1389, 1395-96 (11th

Cir.), petition for cert. filed, 68 U.S.L.W. 3002 (U.S. 22 June

2000) (No. 99-2052). In Bruner, our court agreed with Toti, but

did so in dictum, because Bruner ruled that resolution of the issue

was not necessary, in the light of the Bruners having committed

“acts of omission and ... commission”. Bruner, 55 F.3d at 200.

To the extent the Grothues raise this point, the same is true

here. In addition to Ms. Grothues’ guilty plea conviction for

failing to file a required excise tax return and to pay taxes she

knew to be due, she pleaded guilty to

willfully attempt[ing] to evade and defeat a
tax ... by making and causing to be made false
invoices for the sale of the fuel to be shown
to the [IRS] auditors, and by collecting
excise taxes from customers, and ...
falsifying, and causing to be falsified, the
books and records of [SWOJ] and indicating
that certain of said sales were for purposes
exempt from excise taxes, and all for the
purpose of continuing the scheme to defeat the
assessment of taxes and payment of the tax, in
violation of Title 26, [U.S.C. §] 7201, and
Title 18, [U.S.C. §] 2.

(Emphasis added.)

Because, with its summary judgment motion, the IRS submitted

Ms. Grothues’ plea agreement and a transcript of her sentencing

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hearing, including the above, describing acts of omission and

commission (such as falsifying records), this evidence was more

than sufficient. Moreover, Ms. Grothues is estopped from denying

she engaged in the charged conduct. E.g., Johnson v. Sawyer, 47

F.3d 716, 722 n.13 (5th Cir. 1995) (§ 7201 conviction necessitates

finding “defendant ... acted willfully and knowingly with specific

intent to evade [a tax]” (citation and quotation marks omitted),

estopping defendant from taking inconsistent position in civil

action). See In re Goff, 180 B.R. 193, 199-200 (Bankr. W.D. Tenn.

1995) (debtor estopped from claiming discharge of certain taxes in

the light of his plea bargain admission he willfully attempted to

evade them). In short, Ms. Grothues “do[es] not qualify as the

sort of ‘honest debtor’ the Bankruptcy Code is designed to

protect”. Bruner, 55 F.3d at 200 (emphasis added).

As to the lack of a finding that the Grothues had the ability

to pay the taxes, the key § 523(a)(1)(C) determination is whether

debtor’s conduct is willful. Whether debtor has the ability to pay

is, of course, an appropriate factor in making that determination,

but it is not a litmus test. In any event, the Grothues have not

asserted they could not pay the taxes.

b.

Regarding the non-dischargeability of the taxes for which Ms.

Grothues did not plead guilty to evading, the IRS maintains that,

despite her pleading guilty to such evasion for only one taxable

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period, she admitted her “willful” conduct extended beyond that

period. The IRS bases its position on Ms. Grothues’ stipulating in

her plea agreement that she caused a tax loss to the Government

greater than for that one period. In this regard, and although the

record evidence focuses on Ms. Grothues’ willful conduct in the

second quarter of 1988, she stipulated her conduct caused a loss of

approximately $716,000, well above the $80,000 associated with her

one-tax-period conviction and obviously encompassing other tax

periods (other taxes). And, in her plea agreement, she promised to

pay all of the corporations’ unpaid excise taxes, an integral

provision made a condition of her sentence.

In the light of these unique circumstances, we hold that, as

to Ms. Grothues, these other taxes are also non-dischargeable.* As

a general matter, holding otherwise might — indeed, probably would

— encourage unscrupulous debtors to use bankruptcy law as a shield

against enforcement of criminal proceedings promises they had no

intention of keeping, but nevertheless made, in order to gain a

more favorable plea agreement/sentence.

c.

*
Accordingly, we need not address the IRS’ alternative
reliance on the discharge-exception in § 523(a)(7) (debts “for a
fine, penalty, or forfeiture payable to and for the benefit of a
governmental unit”). In any event, we would not consider it,
because the IRS did not raise this issue in its opening brief here,
thereby abandoning it. See infra.

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 In addition to pointing to the IRS’ not submitting summary

judgment evidence supporting its alter ego theory, the Grothues

assert Ms. Grothues was ordered only to pay taxes “due and owing”

to the IRS, and maintain there has been no determination she owed

any taxes due.

The Grothues’ liability for the taxes – and, concomitantly,

the validity of the IRS’ alter ego theory – are not before us. As

noted, the Grothues did not appeal the district court’s affirming

the bankruptcy court’s no-jurisdiction-holding as to the legality

and amount of taxes owed. These issues are for the earlier-

referenced foreclosure proceeding.

2.

Finally, all parties agree Ms. Grothues’ plea agreement and

guilty-plea conviction do not support § 523(a)(1)(C) non-

dischargeability of Mr. Grothues’ tax debt (if any). Nevertheless,

the IRS urges holding its tax claim non-dischargeable for him as

well, pursuant to the discharge exception for certain excise taxes

under 11 U.S.C. §§ 523(a)(1)(A) and 507(a)(8). As discussed supra,

the former is a discharge-exception for taxes specified in the

latter. Under § 507(a)(8), excise taxes are a priority claim if

they concern a “transaction occurring before the date of the filing

of the petition for which a return, if required, is last due, under

applicable law or under any extension, after three years before the

date of the filing of the petition”. 11 U.S.C. § 507(a)(8)(E)(i).

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 The IRS advanced this contention in bankruptcy, as well as in

district, court; neither addressed it. The IRS, however, did not

raise this issue in its opening brief here. Therefore, it is

deemed abandoned. E.g., Yohey v. Collins, 985 F.2d 222, 225 (5th

Cir. 1993).

III.

For the foregoing reasons, we REVERSE that part of the

district court’s judgment as to Marilyn Grothues; AFFIRM the

remainder; and REMAND this action for entry of a revised judgment

or for such other proceedings as may be appropriate.

AFFIRMED in PART; REVERSED in PART; and REMANDED

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