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Hawkins v. The Franchise Tax Bd. of California

United States Court of Appeals, Ninth Circuit

September 15, 2014

WILLIAM M. HAWKINS, III, AKA Trip Hawkins, Appellant,
v.
THE FRANCHISE TAX BOARD OF CALIFORNIA; UNITED STATES OF AMERICA, INTERNAL REVENUE SERVICE, Appellees

Argued and Submitted, San Francisco, California November 6, 2013.

As Corrected September 17, 2014.

Appeal from the United States District Court for the Northern District of California. D.C. No. 3:10-cv-02026-JSW. Jeffrey S. White, District Judge, Presiding.

SUMMARY[*]

Bankruptcy

The panel reversed the district court's affirmance of the bankruptcy court's judgment that a chapter 11 debtor's tax debts were excepted from discharge on the basis of his willful attempt to evade or defeat taxes under 11 U.S.C. § 523(a)(1)(C).

The panel held that, consistent with similar provisions in the Internal Revenue Code, 26 U.S.C. § 7201, specific intent is required for the discharge exception set forth in § 523(a)(1)(C) to apply. The panel remanded to the district court for re-evaluation under that standard.

Dissenting, Judge Rawlinson wrote that she would follow the lead of the Tenth Circuit and affirm the bankruptcy court ruling denying discharge of the debtor's substantial tax liability due to his willful attempt to avoid payment of those taxes through profligate spending.

Heinz Binder (argued) and Wendy Watrous Smith, Binder & Malter, LLP, Santa Clara, California, for Appellant.

Kathryn Keneally, Assistant Attorney General, Kathleen E. Lyon, Bruce R. Ellisen, William Carl Hankla, and Rachel I. Wollitzer (argued), Attorneys, Tax Division, United States Department of Justice, Washington, D.C., for Appellee United States.

Lucy Wang, California Department of Justice, San Francisco, California, for Appellee State of California.

A. Lavar Taylor, Attorney and Adjunct Professor of Law, Chapman University School of Law, Santa Ana, California, for Amicus Curiae A. Lavar Taylor.

Before: Andrew J. Kleinfeld, Sidney R. Thomas, and Johnnie B. Rawlinson, Circuit Judges. Opinion by Judge Thomas; Dissent by Judge Rawlinson.

OPINION

Page 663

THOMAS, Circuit Judge:

In this case, we consider what mental state is required in order to find that a bankruptcy debtor's federal tax liabilities should be excepted from discharge under 11 U.S.C. § 523(a)(1)(C) because he " willfully attempted in any manner to evade or defeat such tax." Consistent with similar provisions in the Internal Revenue Code, 26 U.S.C. § 7201, we conclude that specific intent is required for the discharge exception to apply and remand to the district for re-evaluation under that standard.

I

F. Scott Fitzgerald observed early in his career that the very rich " are different from you and me," [1] to which Ernest Hemingway later rejoined, " Yes, they have more money." [2] As with many bankruptcy

Page 664

cases involving the wealthy, our saga reads like a Fitzgerald novel, telling the story of acquisition and loss of the American dream, and the consequences that follow.

William M. " Trip" Hawkins designed and received an undergraduate degree in Strategy and Applied Game Theory from Harvard University, and an M.B.A. from Stanford University. After college, he became one of the earliest employees at Apple Computer, where he ultimately became Director of Marketing. He left Apple to co-found Electronic Arts, Inc. (" EA" ), which became the world's largest supplier of computer entertainment software. Hawkins owned 20% of EA and served as its Chief Executive Officer. By 1996, his net worth had risen to $100 million. That year, he divorced his first wife, Diana, and married his second wife, Lisa. Tripp and Lisa purchased a $3.5 million home, where she cared for their two children and Tripp's two children from his first marriage. The IRS asserts they enjoyed the trappings of wealth, such as a private jet, expensive private schooling for the children, an ocean-side condominium in La Jolla, and a large private staff.

In 1990, EA created a wholly owned subsidiary, 3DO, for the purpose of developing and marketing video games and game consoles. Hawkins left EA to run 3DO, which went public in 1993. Beginning in 1994, Hawkins sold large amounts of his EA stock to invest in 3DO. The capital gains from the sales were large: approximately $24 million in 1996, $3.8 million in 1997, and $39 million in 1998. His accountants, KPMG, advised him to shelter the gains in a Foreign Leveraged Investment Portfolio (" FLIP" ) and an Offshore Portfolio Investment ...


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