Monday, January 20, 2014

The New Provision for Tax Restitution and Ex Post Facto (1/20/14)

In United States v. Crim, 2014 U.S. App. LEXIS 1039 (3d Cir. 2014), here, the Third Circuit rejected as premature the defendant's claim that the order of tax restitution violated the Constitution's Ex Post Facto prohibition because, in his case, the order for restitution would invoke the new procedures for immediate tax assessment which were not in existence when the conduct of the convicted offense occurred.  In the nonprecedential decision, the Third Circuit summarily rejects the argument as premature at the sentencing phase.
Crim claims his sentence violated the Ex Post Facto Clause of the United States Constitution, which states: "No bill of attainder or ex post facto Law shall be passed." U.S. Const. art. I, § 9, cl. 3. This Clause proscribes laws that change a punishment and inflict a greater punishment than the standards in effect when the crime was committed. Peugh v. United States, 133 S.Ct. 2072, 2077-78 (2013) (quoting Calder v. Bull, 3 U.S. 386, 390 (1798)). 
After Crim's conviction, Congress passed the Firearm Excise Tax Improvement Act of 2010. Among other things, the law authorizes the IRS to use its administrative powers to collect on criminal restitution when the Government is the victim by treating the criminal restitution as a tax. See 26 U.S.C. § 6201(a)(4). Before 2010, the IRS could receive restitution payments like any other victim entitled to criminal restitution but it lacked the authority to actively collect restitution. Because the IRS lacked this authority when Crim participated in the conspiracy, he claims this subsection is an unconstitutional ex post facto law as applied to him. 
Crim's argument is best described as contingent and premature, touching as it does on an enforcement mechanism that the IRS has not yet employed to collect the restitution Crim owes to the United States. If the IRS chooses to use this power against Crim, he may challenge its legality at that time. Nothing in the restitution order before us implicates the IRS's collection authority under 26 U.S.C. § 6201(a)(4).
Restitution would implicate the Ex Post Facto clause only if it were criminal punishment.  And, if it were criminal punishment, logically, under Apprendi v. New Jersey, 530 U.S. 466 (2000), here, the factual bases for restitution would need to be determined by a jury beyond a reasonable doubt rather than by the judge by a preponderance of the evidence.

I previously blogged on the underlying issue of whether restitution is criminal punishment.  See Is Restitution a Criminal Penalty Requiring the Jury to Speak? (Federal Tax Crimes Blog 12/6/12), here, discussing United States v. Wolfe, 701 F.3d 1206 (7th Cir. 2012), here.  The issue was whether the jury was required to determine restitution.  Wolfe, adopting then then minority view, held that restitution was not criminal punishment and thus the judge rather than the jury could determine restitution.  See also DOJ Tax CTM 44.01, here (not citing Wolfe, but noting the split in Circuits).  For more recent cases citing Wolfe, see United States v. Shmuckler, 911 F. Supp. 2d 362, 370 (ED Va. 2012); and United States v. Bengis, 2013 U.S. Dist. LEXIS 83992, p. 22 fn. 40 (SDNY 2013) (citing Wolfe and United States v. Pfaff, 619 F.3d 172, 175 (2d Cir. 2010)).

My prediction is that the new provisions permitting immediate assessment of tax restitution will survive both an Ex Post Facto challenge and an Apprendi challenge.  At least as respects the immediate assessment, the new provisions merely accelerate the previous procedure requiring notice of deficiency and possible pre-assessment litigation.  One of the troubling aspects, though, is that the taxpayer may not contest the amount of the restitution and, to the extent that restitution might overstate the real tax liability, it would be punishment.  See What Can Be Done If Tax Restitution Exceeds the Tax Due (Federal Tax Crimes Blog 9/2/13), here.

A related concern about criminal punishment is the Double Jeopardy prohibition.  That prohibition does not apply if the Government exaction at issue is not a punishment.  In Helvering v. Mitchell, 303 U.S. 391 (1938), here, the Court held that the civil fraud penalty (then 50% of the entire understatement) was remedial rather than a punishment and thus did not invoke the Double Jeopardy prohibition.  It seems to me that this same analysis would apply to restitution.  Restitution merely provides a mechanism to remedy the harm done to the victim of the crime.


  1. Jack, I will be filing a petition for rehearing en banc and for panel rehearing as the opinion holds that the defendant can challenge it later. That is clearly wrong as sovereign immunity precludes any court to entertain a suit and a fed r civ p 12(b)(1) motion would have to be granted.

  2. Joe, why couldn't you contest it in a CDP hearing or a collection suit by the Government or maybe even a quiet title action?

    Did the Government argue that the claim was premature at the sentencing phase? If so, its arguments would be interesting (I think). Can you send the key briefs to me.

    My off the cuff reaction is that it is not ex post facto because reimbursing the victim is not punishment for the crime (otherwise a tort or some such damage suit would be punishment). Moreover, it is just an alternative way to assess a tax liability. Congress could certainly say, for example, that the IRS could assess immediately the tax loss, provided that the defendant would not have due process issues in getting to a forum to contest the amount of the liability. So, say, for example, that Congress said the IRS could assess the tax loss and then the taxpayer can get a refund remedy by paying 10% of the assessed amount. I think that would pass constitutional muster.

    At any rate, I wish you and your client the best.

    Jack Townsend

  3. Jack, since restitution is part of the criminal judgment of conviction it needs to be challenged within the context of the criminal case. Ex post facto challenges must be raised in the criminal case because the failure to do so will operate as a waiver in subsequent civil litigation. Plus i dont even think ex post facto challenges are cognizable in civil cases. Further, given how bullet proof sovereign immunity is in civil case makes it even more problematic.

    That is not to say that I wont raise it later, but since the Govt has now taken the position that I cant raise it at this point in time I will be able to make the argument that it is judicially estopped from taking a contrary position in subsequent civil litigation.

    One interesting wrinkle for your consideration - restitution (in this case because it was a 371 offense the restitution is not the defendant's unpaid tax, rather it is other taxpayers' unpaid tax) is to make the victim whole, but here restitution is now considered a "tax" and because it is a "tax" the Govt gets to use self-help via the collection procedures in the Code. This is a fundamental shift away from restitution that requires the Govt to sue first and obtain the money later, whereas now the Govt gets to self-help first and subsequent lawsuits are statutorily prohibited.

  4. Joe, I have not yet read the documents you sent, but will soon. Thanks for sending them.

    One question I have is whether the new scheme even applies to taxes that is not the defendant's own taxes (such as the 371 situation or even, say, an evasion conviction of an enabler). The statute, 6201(a)(4), permits assessment only for "the amount of restitution * * * for failure to pay any tax imposed under this title." Is it clear that the provision applies to those taxes that the defendant had no obligation to pay?

    As I read the provision it seems to assume that it is the taxpayer's taxes and the reason for the provision was simply to avoid having to go through the notice of deficiency procedure, which of course would not apply if it were someone else's taxes.

    I would appreciate your thoughts on that issue.

    Jack Townsend

  5. Jack, the problem is with how the restitution was (and is) ordered. The Judge asks for the amount of the restitution and the Government tells the Judge what it believes it is (which the defendant can challenge, and which I did in this case but was unable to based on the way the mandate was entered). The restitution is always (as far as I've see) entered as one amount. I've never seen restitution bifurcated into separate amounts. Practically speaking, the Judges don't want to get into the application of restitution. Further, since the "tax loss" is what the restitution is, and the restitution is now a "tax", I don't think that it matters whether it was the defendant's or another person's tax.

    So, in IRC 6201(a)(4)(A) it cross references 18 USC section 3556. Sec. 3556 makes restitution applicable based on a criminal conviction. Sec. 3556, in turn, references 18 USC sections 3663, 3663A, and 3664. So taken together, if a defendant is ordered to be jointly liability for restitution, then I think its clear that one defendant is on the hook for his tax and the tax that the other co-defendants, and the tax for the other indicted and unindicted co-conspirators.

    Finally, since restitution is part of the punishment, it should be subject to ex post facto considerations. To conclude otherwise would eviscerate the 8th amendments application to both incarceration and excessive fines.

  6. Joe, I think the statute is not clear as it should be on this. But, I think a different interpretive strategy could permit a court to conclude that the purpose of the provision was to permit immediate assessment and finality as to tax liability rather than having to go through the deficiency procedures before the assessment could be made. With that purpose in mind, since other taxpayers taxes even if included in restitution could never before have been assessed against the taxpayer as a tax and so this new provision designed to avoid the notice of deficiency procedures would only apply to taxes that could have been assessed against the taxpayer otherwise -- i.e., the taxes that taxpayer should have paid but did not.

    Also, in a related vein, didn't the court just order restitution? Did it invoke the new law? I thought it already had the authority to invoke restitution. All the new law does is give the IRS the authority to assess immediately without further ado and make it binding.

    Jack Townsend


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