Bankruptcy can wipe out old income taxes. People are often surprised by that, and it is true. But the Bankruptcy Code has a set of exceptions, and one of them is aimed squarely at people who play games with the IRS. In re Griffith is the Eleventh Circuit decision that defines that exception for anyone filing bankruptcy in Florida, Georgia or Alabama. The short version: not paying is not enough to keep a tax alive. Hiding is.
The Facts
An IRS audit found that Leroy Griffith had substantially underpaid his taxes for a string of years in the 1960s and 1970s. He took the dispute to the Tax Court. In September 1988, the Tax Court agreed that he had underpaid, but it did not impose fraud penalties, because the government's evidence did not meet the clear and convincing standard required for fraud. With interest, the tax debt was close to $2,000,000 by the time Griffith filed bankruptcy.
What happened after the Tax Court decision is what mattered. Less than a month later, on October 10, 1988, a new company called NuWave, Inc. was incorporated, with Griffith's long-time live-in girlfriend, Linda, as its sole shareholder. Assets from another corporation Griffith owned were transferred to NuWave. On June 8, 1989, Griffith and Linda married. Under an antenuptial agreement, he transferred all of his stock in three corporations to Linda and himself as tenants by the entirety, along with $390,000 in promissory notes.
The IRS assessed the tax on September 28, 1989. By then, the court noted, the assets moved under the antenuptial agreement were insulated from levy, because property held by tenants by the entirety cannot be levied upon without a judgment against both owners. And Griffith no longer owned the assets that went to NuWave.
On January 15, 1993, Griffith filed a Chapter 7 petition and asked the bankruptcy court to declare his tax debts discharged. The government argued the debts were nondischargeable under 11 U.S.C. § 523(a)(1)(C). The bankruptcy court agreed with the government, and the district court affirmed. A panel of the Eleventh Circuit reversed, but the full court vacated that decision and reheard the case en banc.
The Issue
Section 523(a)(1)(C) excepts from discharge any tax "with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax." The question was whether that language reaches only efforts to dodge the assessment of a tax, or also efforts to dodge paying a tax that has already been determined. A second question was whether simply not paying counts.
The Holding
Judge Birch wrote for the en banc court: "while we reaffirm the primary holding of Haas that mere nonpayment of taxes, without more, does not constitute a willful attempt to evade or defeat taxes under § 523(a)(1)(C), we hold that § 523(a)(1)(C) does render nondischargeable tax debts where the debtor engaged in affirmative acts constituting a willful attempt to evade or defeat payment of taxes."
Applying that rule, the court affirmed the finding that Griffith's tax debt could not be discharged.
The Reasoning
Nonpayment alone is not evasion
The court kept the first part of its earlier decision in In re Haas. Reading § 523(a)(1)(C) to cover every debtor who simply failed to pay would swallow the general rule that many tax debts can be discharged. Almost everyone in bankruptcy has failed to pay someone. If that alone were enough, the exception would become the rule.
Evading payment counts, not just evading assessment
The court overruled the second part of Haas, which had said the statute did not apply to attempts to evade collection. The words "in any manner" are broad. The court found no good reason to protect a debtor who hides assets to avoid paying a tax while punishing a debtor who lies to avoid having the tax assessed in the first place. Both are dishonest. Both defeat the tax.
Two requirements: conduct and mental state
The court explained that the evasion prong includes "both a conduct requirement (that the debtor sought 'in any manner to evade or defeat' his tax liability) and a mental state requirement (that the debtor did so 'willfully')." The government carries the burden of proof by a preponderance of the evidence.
On conduct, it was undisputed that Griffith made intrafamily transfers for little or no consideration. That was enough.
On mental state, the court used the test many courts apply: whether the debtor had a duty under the law, knew he had that duty, and voluntarily and intentionally violated it. Griffith plainly had a duty to pay and knew it. On the third element, the bankruptcy court found that Griffith and his wife were "evasive and lacked that ring of forthrightness reflective of an open and credible witness," and it relied on the traditional badges of fraud. The transfer to Linda was, in the bankruptcy court's words, "an exchange to a family member, during a period of serious financial difficulty, for inadequate consideration." The Eleventh Circuit held those findings were not clearly erroneous.
The Tax Court's no-fraud finding did not save him
Griffith argued that because the Tax Court had declined to impose fraud penalties, the bankruptcy court could not find willful evasion. The Eleventh Circuit disagreed. The burdens were different: clear and convincing evidence for civil fraud in the Tax Court, a preponderance in bankruptcy. And the Tax Court's opinion never addressed the transfers to Linda or the other post-decision conduct, because those events happened after it ruled.
What It Means for Taxpayers Today
Here's the part most people miss. The bankruptcy rules for tax discharge are timing rules first. The three-year, two-year and 240-day rules in the Bankruptcy Code decide whether a tax is old enough to discharge. Our page on Young v. United States covers how those clocks work, and In re Fahey covers the late-return problem. Griffith adds a conduct rule on top of the timing rules. A tax can pass every clock and still survive the bankruptcy if the debtor tried to put assets out of the IRS's reach.
The kinds of conduct courts look at are not exotic. Transfers to a spouse, a girlfriend, a child or a new entity for little or no value. Retitling property so it becomes harder to reach. Keeping control of assets that are now in someone else's name. Timing those moves to land right after a tax bill becomes real. The court in Griffith pointed to other decisions finding evasion where debtors moved property into trusts or to a spouse while keeping control of it.
The flip side matters just as much. If you simply could not pay, and you did not move assets around, Griffith itself says that nonpayment "without more" is not evasion. Plenty of honest people fall behind. The Bankruptcy Code does not treat them as evaders.
Notice also what the government did not need here. It did not need a fraud penalty. It did not need a criminal case. It needed a preponderance of the evidence and a bankruptcy judge who did not believe the explanations. Credibility carried real weight in this opinion.
Practical Takeaways
If you owe the IRS and are thinking about bankruptcy, do not start moving property first. Transfers to family, new companies, or new forms of ownership made while a tax debt is pending or coming are exactly the facts that sank Mr. Griffith. They can also create separate problems under fraudulent transfer law and the IRS's own collection tools.
Before filing, line up the timing rules for each tax year, check that every return has been filed, and take an honest look at any transfers made in the years before the petition. The question is not only "is this tax old enough?" It is also "will a judge look at my conduct and see an attempt to evade?" Our overview of bankruptcy and tax debt covers the broader rules.
The Bottom Line
In re Griffith draws a clean line. Failing to pay a tax you cannot afford is not evasion, and bankruptcy can still help. Taking affirmative steps to keep your assets away from the IRS is evasion, and the debt will follow you out of bankruptcy. The law forgives inability. It does not forgive hide-and-seek.