Appeals Court divided in Trip Hawkins tax case

Judge and jury have disagreed on Trip Hawkins' liability for more than $20 million in tax debt. Fortunately for Hawkins, the jury was on his side.

A document filed with the US Court of Appeals last month showed that a three-judge panel agreed that, pending further action, Hawkins should be protected from his tax debts due to a bankruptcy filing back in 2006.

In March 2011, a district court judge upheld a bankruptcy court ruling that Hawkins should pay the outstanding balance, on the grounds that he intended to avoid doing so via the legal protections offered to those in financial trouble.

However, the majority of this panel disagreed, citing an over-reliance on lifestyle expenses to indicate Hawkins' conscious choice to go bankrupt. This new development puts the onus back on the government to offer more solid proof that Hawkins displayed "specific intent" in his profligate spending, as opposed to simply living beyond his means.

"A mere showing of spending in excess of income is not sufficient to establish the required intent to evade tax; the government must establish that the debtor took the actions with the specific intent of evading taxes," the majority opinion stated, according to documents sourced by Ars Technica.

"Indeed, if simply living beyond one's means, or paying bills to other creditors prior to bankruptcy, were sufficient to establish a willful attempt to evade taxes, there would be few personal bankruptcies in which taxes would be dischargeable."

The crux of the issue is how quickly people entrenched in and accustomed to wealth are expected to reduce their spending and alter their lifestyles. This is a grey area in terms of the law, and though Hawkins' lifestyle would make most people pale at the sums of money involved, it's worth remembering that, at one point, he had a net worth in excess of $100 million.

In a dissent to the panel's majority decision, Judge Johnnie Rawlinson stated that, "There is little doubt, if any, that William Hawkins deliberately decided to spend money extravagantly rather than pay his duly assessed state and federal taxes. Hawkins now seeks to discharge these taxes in bankruptcy."

"The majority opinion gives Hawkins a pass by focusing on the Bankruptcy Code's purpose of providing a 'fresh start' to debtors. However, this overly expansive interpretation of the "fresh start" policy could easily eclipse all discharge exceptions. The majority's conclusion, in my view, creates a circuit split and turns a blind eye to the shenanigans of the rich."

The case will now return to the bankruptcy court, where it will be approached in the context of possible wilful evasion on Hawkins' part. A spokeswoman for the Justice Department said that the ruling could yet stand, but that is just one possible outcome from here. Others are returning to the three-judge panel for a new decision, taking the case to the supreme court, or re-opening it before all of the judges of the district court.