Saturday, January 30, 2010

Further on Use of Sentencing Tax Loss Findings in Later Proceedings (1/10/10)

This blog addresses excellent comments by Anonymous to a prior blog here

I focus on Anonymous' comment as follows: "But that admission [of the sentencing tax loss stipulation] itself is very persuasive and direct evidence that could clearly support a much higher burden of proof." First, let me say that stipulations are simply the basis for findings that the judge would otherwise be required to make on the basis of other evidence. Hence, for this purpose, there should be no difference between findings based on stipulations and findings based on other evidence. Paraphrasing your comment, I think you are saying that the sentencing tax loss finding could alone support a finding in a later civil (including immigration proceeding) where the Government must prove fraud and / or an amount by clear and convincing evidence. (Notice that the amount is an element of the statute for immigration purposes.)

So stated, there is actually considerable authority in the civil tax area as to the limited effect of sentencing tax loss findings. Predicate to understanding this authority, we must first focus on what the tax loss number is. The tax loss number is that number that the defendant / taxpayer intended to defraud the Government of. It is not the civil tax loss number which, in criminal tax cases, can be and often is much larger than the sentencing tax loss number (i.e., the civil tax loss, typically called the deficiency, is never less but can be more than the sentencing tax loss number). Moreover, the tax loss number is often not a crisp easily determined finite amount. Particularly when the result of stipulations, there is considerable negotiation about what the tax loss is – with the defendant’s counsel and the Government negotiation over what really was the object of criminal intent. Frequently, the amounts the Government originally asserted are whittled down substantially, and the reason that happens is often not because the tax is not due but because the Government has doubt that it can prove even by a preponderance that the disputed amount was due to fraud.  So the Government's preponderance burden plays a critical role in determining the tax loss amount and, by the same token, if the Government's burden in the sentencing phase were to prove tax loss by clear and convincing evidence, the tax loss number would or at least could be whittled down even further.

Now, let’s turn to the civil fraud tax case where this issue could arise routinely. I will assume a criminal conviction for § 7206(1). In that civil tax fraud penalty case that usually follows criminal conviction, the mainstream and universal holding is that the conviction itself is not preclusive of fraud, because all the conviction determines is that the taxpayer lied on the return and does not determine that he intended to defraud the Government of tax. But, in the sentencing hearing, the sentencing judge is required to find the tax loss and does so by a preponderance of the evidence. The tax loss has two important elements -- (1) an amount and (2) a relationship between the amount and some related (aka relevant conduct) intent to defraud the IRS of tax. The question, as in the immigration proceeding, is whether the finding of the tax loss as the first step in the Guidelines calculations is preclusive or even persuasive evidence in the civil fraud penalty proceeding where the Government must prove civil fraud by clear and convincing evidence. The answer to that question is no; the Government may introduce the sentencing finding in order to present full context for its other clear and convincing evidence of crime, but the Government could not prevail by just introducing the sentencing tax loss finding to met its burden by clear and convincing evidence that (1) the taxpayer did intend to defraud the Government and (2) the amount he or she intended to defraud.

I have addressed related themes in my article John A. Townsend, Collateral Estoppel in Civil Cases Following Criminal Convictions, 2005 TNT 4-28. My points in the article, bottom line, were (i) I accepted the universal holdings that the Government must prove by clear and convincing evidence that the taxpayer intended to defraud the Government of tax and must do so by something other than the mere sentencing findings of tax loss amount and (ii) that, once the Government shows fraud, then the sentencing tax loss finding could -- and should be -- be preclusive as to the amount. In both the civil and criminal proceedings, the amount determination is by a preponderance of the evidence. Now, as to the latter point, there is a razor-thin difference in the preponderance determinations in these proceedings -- i.e., in the sentencing proceeding, the Government is required to prove the amount by a preponderance but in the civil proceeding, the taxpayer is required to prove the amount not attributable to fraud. In my article, I argued that this razor thin difference (i.e., the difference being the state of equipoise which almost never is outcome determinative in the real world) is not significant enough to justify further litigation on the amount of the tax loss attributable to fraud.

No court has accepted my arguments (in burden language, I have not met my burden), so the state of the law as I understand it now is that, in the subsequent civil tax proceeding after a § 7206(1) conviction, (i) the IRS must prove fraud by clear and convincing evidence, (ii) (and this is my reading of the tea leaves), the IRS cannot rely only on the sentencing tax loss finding (whether the result of stipulation or an evidentiary proceeding), but must put on evidence of that breathes some persuasive life into the fraud, and (iii) if the IRS does breathe life into the taxpayer’s alleged fraud by clear and convincing evidence, the taxpayer must then whittle down the amount of the total deficiency (or the amount the IRS asserts as fraud) by the preponderance of the evidence.

The point of all this is that the stipulated tax loss, although containing both necessary “prepnderance” holdings as to the amount and as to the taxpayer's fraud, is not considered evidence sufficient alone to meet the IRS burden to prove fraud by clear and convincing evidence.

Now, moving back to Kawashima, I think the Court mouthed the right words in saying that the amount could be in play in the immigration proceeding (i.e., no preclusive effect), but I disagree with the suggestion that the stipulation / sentencing finding could alone be clear and convincing evidence as to the fraudulent amount.  I could agree that the sentencing amount determinations should be preclusive or perhaps even evidence standing alone without rebuttal of the amount if the Government in the immigration proceeding otherwise proved fraud, but as I noted, in the related context of civil tax proceedings, that is not the way the law has developed.

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