Tax Issues Arise when Man Tries to Discharge Debts

Bankruptcy is a way for individuals facing overwhelming financial obstacles to discharge debts, reorganize loans and find economic stability. Anyone can find himself facing the decision to file for bankruptcy, ranging from individuals of modest means to the super wealthy. In New York and the rest of the nation, bankruptcy courts deal with people in all economic demographics.

An interesting bankruptcy case is evolving with regard to a man who made his fortune in the video game industry. The man was one of the founders of the company Electronic Arts, Inc. and is estimated to have been worth around $100 million two decades ago. After several business failings and the man’s involvement in several potentially illegal tax shelter programs, the Internal Revenue Service began investigating his tax history. In 2005, the IRS leveled a $20 million back tax request against the man.

The man had filed for bankruptcy prior to the IRS’s notice regarding owed back taxes. He sought to have his tax obligations liquidated under the bankruptcy ruling, but the court found that he spent outside of his means during that time in an attempt to avoid paying taxes. Because of his overspending, the bankruptcy court ruled that his tax obligations could not be discharged.

The man appealed the decision to the appropriate United States District Court, and that court affirmed the ruling of the bankruptcy court. He then appealed the decision again to the federal Ninth Circuit Court of Appeals which overturned the lower courts’ rulings. Finding that overspending alone is not evidence enough to demonstrate that a bankruptcy filer has attempted to evade taxes, the Circuit Court sent the matter back down to a lower court for reconsideration.

A struggling economy can affect anyone, from a wealthy business owner to a minimum wage worker. Bankruptcy can be an option for a person looking to climb out of difficult financial straits. However, individuals who choose to file for bankruptcy should be aware that how they act during such proceedings can potentially impact how the courts will rule on discharging their debts.