                         UNITED STATES COURT OF APPEALS
Office of the Clerk
                           Byron White United States Courthouse
                                    1823 Stout Street
                                 Denver, Colorado 80257



Patrick Fisher                                                         Elisabeth A. Shumaker
Clerk                                                                  Chief Deputy Clerk



                                        March 29, 1996



TO:    ALL RECIPIENTS OF THE CAPTIONED OPINION

RE:    95-4001, Dalton v. Internal Revenue Service
       Filed March 12, 1996 by Judge Anderson




       Please be advised of the following correction to the captioned decision:

              Page four, line two, the citation should be 26 U.S.C. §7201 instead of
              26 U.S.C. §7201(a).

       Please make this correction to your copy.




                                                     Very truly yours,

                                                     Patrick Fisher,
                                                     Clerk

                                                     By:

                                                     Beth Morris
                                                     Deputy Clerk
                                        PUBLISH

                      UNITED STATES COURT OF APPEALS
Filed 3/12/96
                                   TENTH CIRCUIT



 EUGENE DALTON,
                Appellant,                                    No. 95-4001
        v.
 INTERNAL REVENUE SERVICE,

                Appellee.


             APPEAL FROM THE UNITED STATES DISTRICT COURT
                       FOR THE DISTRICT OF UTAH
                            (D.C. No. 94-C-82-J)


David O. Black, Black, Stith & Argyle, Salt Lake City, Utah, for Appellant.

Gary D. Gray, Tax Division, Department of Justice, Washington, D.C. (Laurie Snyder,
Tax Division, Department of Justice, Washington, D.C. and Scott M. Matheson, Jr.,
United States Attorney, District of Utah, of Counsel, Salt Lake City, Utah, with him on
the brief), for Appellee.


Before ANDERSON, KELLY, and HENRY, Circuit Judges.


ANDERSON, Circuit Judge.



       Following his discharge in bankruptcy, Eugene Dalton commenced this adversary

proceeding seeking a determination that certain federal tax liabilities had been discharged.
The bankruptcy court held that the tax debts were not dischargeable under 11 U.S.C.

§ 523(a)(1)(C),1 and the district court affirmed. On appeal, Dalton contends that § 523

does not apply to attempts to conceal assets in order to evade or defeat the payment or

collection of taxes, and he also contends that the finding that he willfully concealed assets

was clearly erroneous. We affirm.

       Dalton filed for Chapter 7 bankruptcy relief on December 7, 1990. On his

bankruptcy schedules he reported assessed federal income tax liabilities for tax years

1976 through 1978, 1981, and 1983 through 1985 in the total amount of $13,668,866, and

he listed assets worth $3,250. The government filed no claim or objection, and an order

of discharge under 11 U.S.C. § 727 issued on March 18, 1991. On October 6, 1992,

Dalton brought this adversary proceeding, seeking a determination that the listed federal

income tax liabilities had been discharged. The government answered that Dalton had

concealed assets in a willful attempt to evade or defeat the taxes, and therefore the tax

debts were excepted from discharge under 11 U.S.C. § 523(a)(1)(C).

       We review questions of statutory interpretation de novo. Murray v. Montrose

County Sch. Dist. RE-1J, 51 F.3d 921, 928 (10th Cir.), cert. denied, 116 S. Ct. 278

(1995). When interpreting a statute, we first examine the statutory language itself.

Goheen v. Yellow Freight Sys., 32 F.3d 1450, 1453 (10th Cir. 1994). If unambiguous

statutory language is not defined, we give the language its common meaning, provided

       1
        Section 523(a)(1)(C) provides that an individual bankrupt debtor is not discharged from
any tax debt which the debtor “willfully attempted in any manner to evade or defeat.”

                                              -2-
that the result is not absurd or contrary to the legislative purpose. Turner v. Davis,

Gillenwater & Lynch (In re Investment Bankers, Inc.), 4 F.3d 1556, 1564 (10th Cir.

1993), cert. denied, 114 S. Ct. 1061 (1994). Thus, we look not only to a single sentence

or member of a sentence, but to the provisions of the whole law, as to its object and

policy. Kelly v. Robinson, 479 U.S. 36, 43 (1986).

       At issue in this case is 11 U.S.C. § 523(a)(1)(C) which provides that a discharge

under § 727 does not discharge an individual from any debt for a tax “with respect to

which the debtor made a fraudulent return or willfully attempted in any manner to evade

or defeat such tax.” Since the government makes no claim regarding fraudulent returns,

the only question is whether the provision’s second exception applies.

       Noting that exceptions to discharge are strictly construed in favor of debtors, In re

Aste, 129 B.R. 1012 (Bankr. D. Utah 1991), and looking literally at § 523(a)(1)(C),

Dalton contends that his conduct was not a willful attempt to evade or defeat taxes.

Dalton argues that the only evidence against him concerned his attempts to avoid the

payment or collection of taxes, terms which the provision does not expressly include, and

he further argues that the exclusive means to raise a claim involving concealed assets is

through an affirmative action under § 727.

       As authority for his literal reading that § 523 does not encompass the evasion of

tax payment or collection, Dalton cites Gathwright v. United States (In re Gathwright),




                                             -3-
102 B.R. 211, 213 (Bankr. D. Or. 1989).2 Specifically, the court in Gathwright compared

26 U.S.C. § 7201, which states that it is a felony to “willfully attempt[] in any manner to

evade or defeat any tax imposed by [Title 26] or the payment thereof” (emphasis added),

with 11 U.S.C. § 523(1)(a)(C), which lacks the emphasized language, and concluded that

nonpayment was irrelevant to a determination of whether or not the debtor had willfully

attempted to evade or defeat a tax under § 523. Id. at 213. However, the reasoning of

Gathwright has been rejected by the majority of courts that have addressed the question.

       Most recently, the Fifth Circuit refused to base dischargeability upon a

determination that the debtor may not have engaged in felonious conduct under criminal

provisions of the Internal Revenue Code. Bruner v. United States (In re Bruner), 55 F.3d

195, 200 (5th Cir. 1995) (finding the Bruners outside the class of honest debtors entitled

to discharge, based on “pattern of non-payment . . . accompanied by a pattern of failure to

file returns and . . . conduct . . . aimed at concealing income and assets”). Similarly

rejecting a debtor’s argument that willful must be defined according to its use in felony

statutes, thus precluding a finding of the requisite willfulness, the Sixth Circuit found a

debtor’s willful failure to file returns and pay taxes, even though he had the financial

ability to do so, placed him outside “the category of honest debtors.” Toti v. United

States (In re Toti), 24 F.3d 806, 808-09 (6th Cir.), cert. denied, 115 S. Ct. 482 (1994); see


       2
        Dalton also cites Peterson v. Commissioner (In re Peterson), 132 B.R. 68, 71 (Bankr. D.
Wyo. 1991), which followed Gathwright. However, Dalton neglects to note that Peterson was
reversed on that precise ground. Id., rev’d, 152 B.R. 329, 335 (D. Wyo. 1993).

                                              -4-
also Fridrich v. IRS (In re Fridrich), 156 B.R. 41, 43 (D. Neb. 1993) (finding that

§ 523(a)(1)(c) excepts from discharge taxes that a taxpayer prevents the IRS from

collecting); Commissioner v. Peterson (In re Peterson) 152 B.R. 329, 335 (D. Wyo. 1993)

(finding that evidence of debtor’s attempts to avoid payment is relevant to court’s

consideration of whether tax is dischargeable); Berzon v. United States (In re Berzon),

145 B.R. 247, 250-51 (Bankr. N.D. Ill. 1992) (basing nondischargeability upon

unexcused late filings, together with misrepresentations to escape payment); Jones v.

United States (In re Jones), 116 B.R. 810, 815 (Bankr. D. Kan. 1990) (finding that

§ 523(a)(1)(C) encompassed debtor’s attempts to conceal assets to avoid payment and

collection). But cf. Haas v. IRS (In re Haas), 48 F.3d 1153, 1158 (11th Cir. 1995)

(holding that bankruptcy debtor’s knowing failure to pay taxes, without more, was not a

willful attempt in any manner to evade or defeat such tax under § 523).

       We generally agree with the majority reasoning. The purpose of the Bankruptcy

Code is to provide the honest, but unfortunate, debtor a fresh start. Grogan v. Garner, 498

U.S. 279, 286-87 (1991). Prior to 1966, tax debts were not dischargeable. In 1966,

“consisten[t] with the rehabilitory purpose of the Bankruptcy Act,” amendments were

enacted “to make dischargeable in bankruptcy debts for taxes which became legally due

and owing more than 3 years preceding bankruptcy, and to limit the priority accorded to

taxes.” S. Rep. No. 1158, 89th Cong., 2d Sess. (1966), 1966 U.S.C.C.A.N. 2468, 2468,

2469. However, noting that “the purpose of this bill is to provide relief for the financially


                                            -5-
unfortunate and not to create a tax evasion device,” Congress also expressed its intention

to “specifically except[] from discharge taxes . . . with respect to which [the debtor] had

made a false or fraudulent return or which he had otherwise attempted to evade.” Id. at

2470.

        Accordingly, Congress enacted the equivalent of § 523(a)(1)(C) to make

nondischargeable those taxes which the debtor “willfully attempted in any manner to

evade or defeat.”3 Although the terms are not statutorily defined, the language is

unambiguous. Moreover, the phrase has well-known judicial interpretation in tax cases,

which Congress presumably intended to adopt. See Holmes v. Securities Investor

Protection Corp., 503 U.S. 258, 267-68 (1992). Thus, Spies v. United States, 317 U.S.

492, 499 (1943) is directly on point:

                Congress did not define or limit the methods by which a willful
        attempt to defeat and evade might be accomplished and perhaps did not
        define lest its effort to do so result in some unexpected limitation. Nor
        would we by definition constrict the scope of the Congressional provision
        that it may be accomplished “in any manner.” By way of illustration, and
        not by way of limitation, we would think affirmative willful attempt may be
        inferred from conduct such as keeping a double set of books, making false
        entries or alterations, or false invoices or documents, destruction of books
        or records, concealment of assets or covering up sources of income,
        handling of one’s affairs to avoid making the records usual in transactions
        of the kind, and any conduct, the likely effect of which would be to mislead
        or to conceal.




        3
         Notably, the provision tracks with 26 U.S.C. § 6501(c)(2) which excepts cases involving
“a willful attempt in any manner to defeat or evade” from the general three year statute of
limitations on the assessment and collection of taxes.

                                              -6-
Id. (interpreting the language of 26 U.S.C. § 145(b), currently codified at 26 U.S.C.

§ 7201).

       Clearly, the contested language is to be expansively defined. Consequently, as the

court in Jones observed, “the modifying phrase ‘in any manner’ is sufficiently broad to

include willful attempts to evade taxes by concealing assets to protect them from

execution or attachment.” Jones, 116 B.R. at 814. Furthermore, as Jones also noted, a

contrary reading would effectively render the second exception of § 523(a)(1)(C)

meaningless or superfluous. That is, unless the provision encompasses willful attempts to

evade the payment or collection of taxes, then the only nondischargeable taxes under the

section would be those resulting from fraudulent returns.4 Finally, given Congress’

express purpose of relieving only the “honest” debtor from the debt of stale taxes, any

statutory interpretation of “evade or defeat” which relieves the dishonest debtor who

conceals assets to avoid the payment or collection of taxes, but which penalizes the same

dishonesty to avoid assessment, would be an absurd result.

       Nonetheless, recognizing the general rule that exceptions to discharge are to be

strictly construed in favor of the debtor, we also agree with the narrow application of our

colleagues in the Eleventh Circuit: “[A] debtor’s failure to pay his taxes, alone, does not

fall within the scope of section 523(a)(1)(C).” Haas, 48 F.3d at 1158. Again, we

conclude that any other application would ignore the congressional intent to enact a

       4
        Tax liabilities resulting from situations in which no returns were filed or in which
specified late returns were filed are excepted from discharge under 11 U.S.C. § 523(a)(1)(B).

                                              -7-
statute of limitations beyond which the honest debtor’s unpaid taxes will be discharged.5

Thus, we hold that nonpayment, by itself, does not compel a finding that the given tax

debt is nondischargeable. Rather, nonpayment is relevant evidence which a court should

consider in the totality of conduct to determine whether or not the debtor willfully

attempted to evade or defeat taxes. Peterson, 152 B.R. at 335.

       In any event, Dalton’s subsidiary argument fails under our interpretation that

§ 523(a)(1)(C) encompasses the various schemes, including concealment, by which tax

evasion may be accomplished. Thus, we reject his contention that the alleged method of

evasion, i.e., the concealing of assets, is exclusively covered by 11 U.S.C. § 727, and

must be subject to that section’s one year statute of limitations.

       Although subsection 727(a)(2) expressly allows a creditor to object to a debtor’s

discharge, if “the debtor, with intent to hinder, delay, or defraud a creditor . . . has

transferred . . . or concealed . . . property of the estate,” nothing in that subsection

precludes the government from defensively asserting concealment as a basis for the

automatic exceptions under § 523. Dalton has cited no authority, nor have we discovered

any, which indicates that Congress intended the provisions to be mutually exclusive.

Rather, it is logical and consistent with the statutory history that taxing authorities would

be able to assert the same objections to discharge that any other creditor might assert, and,

       5
         Congress was specifically concerned with the dilatory tax collectors, who, “assured of a
prior claim on the assets of a failing debtor and assured of the nondischargeability of
uncollectible tax claims, have allowed taxes to accumulate and remain unpaid for long periods of
time.” S. Rep. No. 1158, 89th Cong., 2d Sess. (1966), 1966 U.S.C.C.A.N. 2468, 2471.

                                              -8-
at the same time, that the special provisions relating to taxing authorities would provide

additional, sometimes overlapping, protections.6

       Finally, as his second claim of error, Dalton contends that the bankruptcy court

erred in finding that he willfully concealed assets. A debtor’s actions are willful under

§ 523(a)(1)(C) if they are done voluntarily, consciously or knowingly, and intentionally.

Toti, 24 F.3d at 809. The determination that a debtor willfully concealed assets is a

finding of fact which we review for clear error. See In re Yonikus, 996 F.2d 866, 872-73

(7th Cir. 1993); cf. Bradshaw v. United States, 71 F.3d 1517, 1525 (10th Cir. 1995)

(defining willful in the context of 26 U.S.C. § 6672, and noting that our cases treat the

determination of willfulness as an issue of fact). “When findings are based on

determinations regarding the credibility of witnesses, Rule 52(a) demands even greater

deference to the trial court’s findings . . . .” Anderson v. Bessemer City, 470 U.S. 564,

575 (1985). The government bears the burden of proving by a preponderance of the

evidence that the taxes are nondischargeable. Grogan, 498 U.S. at 291.

       Without making any determination of actual title to the concealed property, the

bankruptcy court found that Dalton had willfully attempted to conceal his ownership

interest in two assets: 1) his condominium residence (the “condo”), and 2) an oil

reclamation company which he organized, Petroleum Processors, Inc. (“PPI”). The court




       6
        We note that similar special automatic protections are also afforded claims for alimony,
child support, and certain educational loans under other subsections of § 523.

                                              -9-
specifically noted that it found the testimony of Mrs. Dalton, who is the primary

stockholder of PPI, to be incredible.

       Regarding the condo, Dalton argues that he could not have been evading taxes,

since at the time that it was purchased, in 1980, he was solvent and no tax assessment was

made until 1982. As to PPI, Dalton contends that, since the court did not find his

testimony to be incredible, the court clearly erred in finding that “the organization and the

operation of that company took the experience of someone like Mr. Dalton with years of

experience in the oil business and that expertise.” Oral ruling, Appellee’s App. at 13.

       In making its findings, the court cited evidence which showed that when the condo

was purchased, Dalton was engaged to his present wife, and he contributed at least

$60,000 of the $106,000 condo purchase price. The court also noted Dalton’s testimony

that he did not intend to make a gift to his betrothed, that he did not report the payment as

a gift to her, that he has lived in the condo since its purchase, that he has participated in

all payments and upkeep, and that the deed naming his wife as sole grantee was not

conveyed until two years following purchase, at about the time the assessments were

made.7 Additionally, the bankruptcy court cited the testimony of an IRS agent who stated


       7
         During oral argument, Dalton’s counsel represented that the finding that there was a deed
was based on incorrect testimony given by Mrs. Dalton, and in fact, no deed has ever issued to
either Mr. or Mrs. Dalton from the seller, and the only documentation of the purchase and
transfer is an earnest money contract. This point bolsters the government’s case, inasmuch as
such contracts transfer equitable title, which presumably would reflect the proportional
contribution attributable to Dalton and his wife. See Ciet v. Kaufman, 902 P.2d 153, 155 (Ut. Ct.
App. 1995). Moreover such earnest money contracts typically reserve the precise designation of
                                                                                     (continued...)

                                              - 10 -
that during 1980, at or around the time the condo was purchased, he had informed Dalton

of a personal tax investigation which was related to an investigation and litigation in

another matter concerning Dalton and Dalton’s company, Arizona Fuels Corp.8


       7
        (...continued)
grantee(s) until the deed is executed.
       8
        In the late 1970's, the United States sued Dalton and Arizona Fuels Corp. to
recover delinquent payments which were due to the Department of Energy. At the time
he transferred the condo purchase money, Dalton was appealing a judgment in excess of
two million dollars. See United States v. Arizona Fuels Corp., 638 F.2d 239 (Temp.
Emer. Ct. App. 1980), cert. denied, 451 U.S. 985 (1981).

       While the present case is not otherwise related to the previous litigation, the
government points out that the Temporary Emergency Court of Appeals found that Dalton
had testified that “he had concealed money in nominee bank accounts because he did not
want the Department of Energy to find out about it until the money was spent.” United
States v. Arizona Fuels Corp., 681 F.2d 797, 800 (Temp. Emer. Ct. App. 1982) (“Arizona
Fuels II”). Arizona Fuels II further noted that “the financial records of Arizona Fuels
omitted some transactions, misrepresented others, and concealed the diversion of
corporate funds to Eugene Dalton’s personal use.” Id.

       Notably, after losing both Arizona Fuels appeals, and having been required to turn
over all his property, including the condo, to a receiver in Arizona, Dalton filed
bankruptcy in Colorado, in an attempt to have the disposition of his assets transferred to
another jurisdiction. See Dalton v. United States (In re Dalton), 733 F.2d 710 (10th Cir.
1984), cert. dismissed, 469 U.S. 1185 (1985). As In re Dalton sets forth, the district court
of Colorado withdrew its reference of bankruptcy proceedings and granted the
government’s motion to transfer venue to Arizona, and Dalton’s appeal to the Tenth
Circuit was dismissed for lack of jurisdiction. However, in its recitation of facts, this
court specifically noted Dalton’s ownership of property which was not located in
Arizona: “Dalton does have some assets; one of these is the San Miguel Ranch, outside of
Nucla, Colorado. Also he owns a condominium apartment in Salt Lake City, Utah and an
airplane.” Id. at 712 (emphasis added). Evidently, in his previous attempt to invoke this
Circuit’s jurisdiction, Dalton asserted ownership in the property which he now eschews.

       In any event, in concluding that mandamus was unwarranted, In re Dalton
                                                                                (continued...)

                                           - 11 -
       Finally, the bankruptcy court quoted from Dalton’s settlement of the Arizona Fuels

litigation in 1984, which specifically provided that the Arizona receiver who had taken

control of all Dalton’s property, would quitclaim the condo to Dalton “‘subject to any and

all claims of the United States or any tax liability now validly assessed or hereafter validly

assessed against Dalton.’” Appellee’s App. at 10. Nonetheless, as the bankruptcy court

noted, immediately upon receiving the deed, Dalton recorded a quitclaim deed from

himself to his wife prior to recording the receiver’s deed to himself.

       Thus, in making its ultimate finding of willful concealment in order to evade or

defeat taxes, the court first found that at the time of the purchase, Dalton knew of the tax

investigation which was likely to result in a significant assessment, his transfers of money

to his betrothed’s account were accomplished without any documentation which would

properly account for the transaction, and that these circumstances, combined with his

actions respecting the settlement of the Arizona Fuels litigation indicated an intent to

conceal his interest in the condo to avoid attachment of the IRS liens. This finding is not

clearly erroneous.

       With regard to PPI, the evidence shows that Dalton, an engineer, possessed the

necessary expertise and contacts to get the business started, and, at that time, he knew he



       (...continued)
       8

observed that “Dalton is searching for a court that has not had extensive exposure to his
problems, and at the same time is seeking to avoid facing up to the ultimate decision.” Id.
at 718. Apparently, the passing years have effected little change in Dalton’s character.


                                            - 12 -
owed millions of dollars in taxes. Moreover, the court specifically found Mrs. Dalton’s

assertions that expertise was not required to be unbelievable. This finding is supported

by Dalton’s own testimony, which confirmed that setting up PPI was his idea, based on a

professional contact, and that his expertise was necessary to gain the permits and to assure

compliance with the legalities such as reporting to the EPA. Furthermore, Dalton

testified that he used his expertise and contacts to identify and obtain necessary

equipment, and that he consulted with his wife regarding PPI on a daily basis. And

finally, the evidence showed that he signed numerous documents related to the company,

and that at various times he was represented to hold positions such as director, vice

president, manager, and agent. Nonetheless, he received no stock in the company and he

advised PPI that he required no payment for his services.

       Essentially, Dalton contends that the work he performed for PPI was no different

from the consulting work he performed for other companies in which he held no interest.

At oral argument, Dalton’s counsel stressed that no assets were diverted to PPI, and that

Dalton merely donated his time, expertise, and ideas. However, the argument ignores the

obvious fact that the arrangements he allowed or directed gave his wife most of the

company’s stock and assured her of a full time salary with benefits, while at the same

time, nothing of value was distributed or attributed to Dalton, despite the essential

services he rendered.




                                            - 13 -
       We are mindful of Dalton’s testimony that “other motives animated him in these

matters.” Spies, 317 U.S. at 500. Given the evidence, however, this is not a case of tax

or business planning designed to minimize taxes (or achieve some other lawful objective)

with bankruptcy and unfunded tax liability occurring later. Instead, Dalton gave

contradictory testimony that his contribution to the condo purchase price was not a gift,

but was because he had so much property, his wife had so little, and “[s]he wanted

something in her name.” Appellant’s App. at 13. In light of the strong motive for tax

evasion, the bankruptcy judge could also reject Dalton’s testimony that the arrangement

with PPI was solely an effort to give his wife a business opportunity, notwithstanding his

extensive and essential involvement in the technical and regulatory aspects of the

business. Appellee’s App. at 35-37.

       “To permit the true nature of a transaction to be disguised by mere formalisms,

which exist solely to alter tax liability would seriously impair the effective administration

of the tax policies of Congress.” Commissioner v. Court Holding Co., 324 U.S. 331, 334

(1945); cf. Helvering v. Horst, 311 U.S. 112, 116-17 (1940) (taxpayer who receives no

actual payments for services or interest may not escape taxation by diverting right to

income to family member). Accordingly, the bankruptcy court’s finding that Dalton acted

willfully to conceal his interest in PPI in order to evade or defeat taxes is not clearly

erroneous.

       AFFIRMED.


                                             - 14 -
