Government Avoids Hyde Amendment Fees and Expense Liability After It Blew the Criminal Statute of Limitations (8/29/16)

In United States v. Johnson, 2016 U.S. App. LEXIS 15879 (6th Cir. 2016), here, the Court of Appeals affirmed the district court's denial of recovery of attorneys fees and litigation expenses under the Hyde Amendment.  Under unusual facts (discussed in more detail below), the prosecutors obtained an indictment for tax perjury, § 7206(2), that was outside the criminal statute of limitations.  The prosecutors did not realize it at the time.  Indeed, when the defendant raised the issue before trial, the prosecutors constructed an argument that the indictment was timely.  The district court agreed with the prosecutors.  After a 5-day trial, the jury convicted the defendant.  The defendant appealed the conviction urging again that the indictment was untimely.  This time the Government confessed error in its answering appellate brief; the indictment had been untimely.  United States v. Johnson, 599 Fed. Appx. 242, 2015 U.S. App. LEXIS 5446 (6th Cir. 2015), here.  The case was remanded for dismissal. The current appeal was over the district court's denial of recovery of attorneys fees and expenses under the Hyde Amendment which "which permits an award of attorney's fees and other litigation expenses to the prevailing party in a federal criminal case if, among other requirements, the Government's position was vexatious, frivolous, or in bad faith."  As noted, the Court of Appeals affirmed the district court's disallowance of Hyde Amendment recovery.

Let's dig into the facts to set up the very nice procedural issues behind the statute of limitations in the case and why it had expired.  Students of tax procedure will understand the scenario almost instinctively.  I will set out each key fact with appropriate commentary and citation to relevant provision.

1.  The indictment for filing a false return was obtained on April 16 2013.  There is a six year statute of limitations from the date of filing.  § 6531, here.  That would mean the the filing of the return had to be on or after April 16, 2007.

2. The defendant filed his 2006 tax return in February 2007, well before the prescribed due date of April 15, 2007 prescribed in § 6072(a), here.  Section 6501(b)(1), here, provides that "a return * * * filed before the last day prescribed by law * * * shall be considered as filed on such last day."  See also DOJ CTM 7.02[1][a] General Rule, here.  If we stopped at this point, the defendant's 2006 return would be deemed filed on April 15, 2007, one day outside the statute of limitations and the indictment would be untimely.

3.  April 15, 2007, however, was a Sunday and the following day (Monday) was a holiday.  Section 7503, here, provides:  "When the last day prescribed * * * for performing any act falls on Saturday, Sunday, or a legal holiday, the performance of such act shall be considered timely if it is performed on the next succeeding day which is not a Saturday, Sunday, or a legal holiday."  (Bold face supplied by JAT.)  Now, as written, this statute does not change the last day prescribed by law, but simply says that returns filed on the next succeeding business day are deemed timely filed.  The normal due date is still the last day prescribed by law (April 15, 2007 in this case).  So, if the return had been filed by Tuesday April 18, it would not have been timely filed but would only have been considered to have been timely filed by the April 15, 2007 due date.  This analysis is confirmed in IRM 9.1.3.6.3 (02-24-2010), Running of the Statute of Limitations, here, which says:

4. If the statutory due date falls on a Saturday, Sunday, or legal holiday, the filing of the return on the next succeeding business day is considered timely (see 26 USC §7503). However, the statutory due date remains unchanged. Therefore, the calculation of the statute of limitations in investigations involving early filed returns or failures to file should use the statutory due date regardless of the day of the week on which that date falls. See Rev. Rul. 81-269, 1981-46 I.R.B.13.

All of that is pretty straight-forward statutory analysis.  The IRM is just a recognition of the straight-forward statutory analysis.

Note the same analysis now appears in the DOJ CTM DOJ CTM 7.02[1][a] General Rule (as revised through June 2016), here (although this appears to have been revised since the earlier appeal in 2015 for reasons which should be apparent) (one footnote omitted):

The statutory due date for a return remains the same even if the due date falls on a Saturday, Sunday, or a legal holiday. Section 7503 of Title 26 provides that “[w]hen the last day prescribed under the authority of the internal revenue laws for performing any act” – such as filing a return – “falls on Saturday, Sunday, or a legal holiday, the performance of such act shall be considered timely if it is performed on the next succeeding day which is not a Saturday, Sunday, or a legal holiday.” Section 7503 provides only that a return “shall be considered timely” if due on a Saturday, Sunday, or legal holiday and filed on the next business day – it does not alter the “last day prescribed for the filing” of a return within the meaning of Section 6513(a). See Hannahs v. United States, 1995 WL 230461 (W.D. Tenn. Jan. 30, 1995) (holding that Saturday, April 15, 1989 was “the last day prescribed for filing a return for purposes of § 6513,” notwithstanding § 7503); Kabotyanski v. IRS, 2007 WL 526603 (E.D.N.Y. Feb. 13, 2007); Weisbart v. IRS, 2004 WL 528442 (E.D.N.Y. Mar. 15, 2004); Rev. Rul. 2003-41. Section 7503 does not delay commencement of the statute of limitations provided for in Section 6531 when a return is filed early and the limitations period does not commence until the statutory due date of the return. See 26 U.S.C. § 6531 (providing that “[f]or the purpose of determining the periods of limitation on criminal prosecutions, the rules of
section 6513 shall be applicable”). n5
   n5  The IRS takes the same position in the Internal Revenue Manual. See I.R.M. § 9.1.3.6.3 (even if return filed on next business day would be considered timely per § 7503, “the statutory due date remains unchanged,” so “the calculation of the statute of limitations in investigations involving early filed returns or failures to file should use the statutory due date regardless of the day of the week on which that date falls”).  

Example: April 15, 2007, was a Sunday, and Monday, April 16, 2007, was a legal holiday in Washington, DC (Emancipation Day). Accordingly, a return filed on Tuesday, April 17, 2007, would be deemed timely filed. But if a taxpayer filed her return on Friday, April 13, 2007, her return would be deemed filed on Sunday, April 15, 2007. As such, the six year limitations period for charging 26 U.S.C. § 7206(1) would begin on April 16, 2007, and expire on Monday, April 15, 2013. An indictment returned after that date would be time-barred. 

Note that this example seems to have been drawn from the Johnson case facts.

That is pretty much the end of the matter because that is what the statute commands.  Apparently, when the issue was first raised before the original trial in Johnson, the prosecutors urged and the court accepted that the effect of April 15, 2007 being a weekend followed by a holiday was to extend the time prescribed by law to file the return.  That, however, is not what the statute says.

In terms of the Hyde Amendment, recovery requires that the prosecution have been "vexatious, frivolous, or in bad faith."  My sense is that the vexatious and in bad faith prongs for recovery were not seriously in play.  The question is whether the prosecution one day out of time was frivolous.  The Court of Appeals fuzzes the rather clear statutory analysis by saying that "Because of the day of the week on which April 15 fell in 2007, it was not immediately apparent which day was 'the last day prescribed for the filing' of 2006 tax returns."  I am not sure what the court meant by immediately apparent.  Just read the statutes.

In its appellate brief, the following was the summary of the Government's argument in support of the district court's denial of fees and expenses under the Hyde Amendment:

SUMMARY OF THE ARGUMENT 

It is undisputed that the United States filed the indictment a day late. Mr. Johnson cannot demonstrate entitlement to fees and expenses for this mistake under the rigorous standard of the Hyde Amendment.  

A defendant may not show that a legal issue was frivolous for the purpose of the Hyde Amendment if it concerned “an issue of first impression.” United States v. Gilbert, 198 F.3d 1293, 1303 (11th Cir. 1999). The statute of limitations issue that supports Mr. Johnsons’ Hyde Amendment claim was a matter of first impression for this Circuit. Mr. Johnson cites two provisions in the Internal Revenue Manual that confirm that the United States filed the indictment a day late. Because this manual is not controlling legal authority, Mr. Johnson cannot show that the position of United States was frivolous. 

Mr. Johnson, who cites no relevant evidence of improper purpose, also cannot show that the position of the United States was vexatious or in bad faith. Mr. Johnson does not allege, nor can he, that the United States had actual knowledge of the provisions in the Internal Revenue Manual. The United States’ previous concession that the indictment was untimely demonstrates its good faith. 

Now, going to the detailed argument and focusing on the frivolous standard, the Government argued:

On the first direct appeal, in response to new legal citations by Mr. Johnson, the United States conceded that section 7503 did not alter the term “last day prescribed for [] filing” for the purpose of section 6513. The United States argued that under section 7503, Mr. Johnson’s return would have been considered timely if filed on April 16 or 17, 2007, but that the “date prescribed for [] filing” was nevertheless April 15, 2007 for the purpose of section 6513, making the indictment here untimely. (Brief of the United States, Sixth Circuit No. 14-3760, at 12.) 

Basically, the Government's argument was that it was not frivolous because it was an issue of first impression in the Sixth Circuit.

Because the legal error of the United States concerned an issue of first impression in this Circuit—whether 26 U.S.C. § 7503 modifies the “day prescribed for [] filing” in 26 U.S.C. § 6513—Mr. Johnson cannot show that “the position was foreclosed by binding precedent or so obviously wrong as to be frivolous.” Gilbert, 198 F.3d at 1304.

But, as shown above, the holding is a straight-forward reading of the statute that the Government did not even attempt to defend on the first appeal.

The Government does divert attention by arguing that the defendant's argument was based on the IRM, which is not binding authority.  I am not sure that the Hyde Amendment should be denied simply because the defendant misfocused his argument when the straight-forward interpretation of the statute shows that the Government's argument was patently wring.

I think that the issue is closer than acknowledged by the Government or the Sixth Circuit.  Indeed since the statute seems pretty clear on the issue, even if the defendant did not cite and rely upon the plain language of the statute, the Government was remiss in bringing this prosecution.  And, note that, even without any earlier precedent in the Sixth Circuit, the Government made no attempt to defend the prosecution on the first appeal.  I think the defendant should have gotten his attorneys fees and other expenses.  But, of course, I am not the judge.

I link here for readers the Government's brief in the first appeal where it concedes the issue and the Government's brief in the second appeal where it opposes Hyde Amendment fees and expenses.

• Government's brief in first appeal, here.
• Government's brief in second appeal, here.