The Internal Revenue Service asked a federal appeals court Thursday to reconsider its September ruling that allowed Electronic Arts founder William "Trip" Hawkins to avoid paying $26 million in California and federal taxes.

The IRS said that Hawkins is not qualified to enjoy the tax relief benefits from his 2006 bankruptcy. The taxing agency claims that Hawkins maintained a wealthy lifestyle ahead of his bankruptcy filing instead of satisfying his tax debt. But the 9th US Circuit Court of Appeals didn't agree, and a three-judge panel of the San Francisco-based court ruled 2-1.

"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 court said. "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. Such a rule could create a large ripple effect throughout the bankruptcy system. As to discharge of debts, bankruptcy law must apply equally to the rich and poor alike, fulfilling the Constitution’s requirement that Congress establish 'uniform laws on the subject of bankruptcies throughout the United States.'"

The IRS wants the court to rehear the case against Hawkins and his wife, Lisa, with an 11-judge panel. The agency told the court (PDF):

Although they knew the IRS was investigating their returns and had determined that they owed over $16 million in taxes, debtors continued their extravagant lifestyle. They resided in a lavishly furnished and well-staffed $3.5 million home, sent four children to costly private school, and in November 2002 purchased a $2.6 million ocean-view vacation home. They used Hawkins’ $11.8 million private jet for international family vacations, and did not sell the jet, which cost $1 million annually to operate, until October 2003.

The government said the court's decision is contrary to Supreme Court precedent and conflicts with several other federal appeals courts that have addressed the issue. In its petition, the government pointed out the dissent by Judge Johnnie Rawlinson in the original September 15 opinion (PDF). Rawlinson wrote, "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' attorney, Wendy Smith, did not immediately respond for comment.

Hawkins said last month that his tax troubles began when he took the advice of his accountants at KPMG to shelter his proceeds from $60 million in sales of stock in EA, which he founded in 1982. The IRS didn't allow the shelter in return years of 1997-2000. KPMG was later charged for selling the shelters in a deferred prosecution. The IRS said in 2005 that KPMG's bogus shelters helped generate $11 billion in phony tax losses that cost the US Treasury $2.5 billion.

"Yes, before I clearly understood and accepted that I had tax problems and obligations, I did spend too much money because I presumed, like most people, that my money was my money and that I was an American living in the USA," Hawkins wrote in the comments section of a Forbes article.

The appeals court has no deadline to decide whether to revisit the case with a larger panel of judges.