Tax Court Opinion with Cryptic Comment on Excessive Restitution Based Assessments (6/24/21; 6/28/21)

In Ervin v. Commissioner, T.C. Memo. 2021-75, TC here see fn * at end of blog, the Court (Judge Lauber) nicely sets up the issues and holdings in the opening paragraphs (footnote omitted):

Petitioner failed to file Federal income tax returns for 2000-2009 and was convicted of tax crimes for 2004-2006. In June 2012 he was sentenced to imprisonment and ordered to pay restitution of $1,436,508, the amount of the Government's estimated tax loss. After petitioner was remanded to custody, the Internal Revenue Service (IRS or respondent) completed a civil examination [*2] of his 2002-2007 tax years. In 2014 it sent him notices of deficiency determining deficiencies for those years based on the tax loss figures used in the sentencing. The IRS also determined additions to tax under sections 6651(a)(1), 6651(a)(2), 6651(f), and 6654.1 Petitioner timely petitioned this Court in January 2015 and (about a year later) fully satisfied his restitution obligation.

Respondent has moved for summary judgment. Petitioner does not dispute the deficiencies. But because he has fully paid the deficiencies by virtue of his restitution payments, which were credited against his tax liabilities, he insists that he should not be liable for any additions to tax. Because the additions to tax accrued before the restitution was ordered or paid, we find that petitioner is liable for these amounts, subject to certain concessions by respondent. We will therefore grant respondent's motion for summary judgment to the extent set forth in this opinion.

Something in the opinion caught my eye, so I thought I would post without definitive discussion but as an alert for persons interested in the arcana of restitution based assessments ("RBA") under § 6201(a)(4)(A).  The Court says (p. 12 n. 3) cryptically):

   n2 If petitioner's restitution payments exceed the deficiencies we have determined for 2002-2007, those payments may be available for credit against other unpaid tax liabilities he may have, including the additions to tax discussed in the text.

I will try to illustrate what I think the Court is saying by an example.  Assume that the district court at sentencing determines restitution at $100,000 and the IRS assesses that amount without further ado under § 6201(a)(4)(A).  Restitution is not the same as a deficiency as defined in § 6211(a)(1).  It may be the same, but since the two are defined differently it may not be the same.  Although they are defined differently, I think they are supposed to be roughly if not exactly the same.  But critically it may turn out that the restitution and RBA were excessive.  For example, if the IRS thereafter audits and determines, say, that there is $110,000 deficiency (the deficiency being the entire tax liability because the RBA is not an assessment of an actual tax), which is $10,000 more than the restitution amount.  Despite the RBA, the IRS must seek assessment of the entire $110,000 deficiency, despite the overlap with the RBA and go through the the usual pre-assessment requirements such as notice of deficiency.  (Note, however, that the IRS must reconcile payments of RBA and regular assessment so that it collects the underlying tax liability only once.)  Let’s say, then, that the taxpayer petitions the Tax Court to redetermine the $110,000 deficiency determined by the IRS and in the course of determining the deficiency, the IRS determines that the taxpayer’s correct liability for the year was $50,000 rather than the $100,000 restitution determined by the sentencing court and resulting RBA assessment of $100,000.  Ooops, the restitution was too high.

How does an excessive restitution and resulting excessive RBA assessment get fixed?  In the footnote quoted above, as I read it, the IRS can unilaterally work around the excessive assessment to make the pot right by crediting the resulting overpayments of restitution RBA against other unpaid tax liabilities.  That certainly is a "feel good" notion.  My understanding, however, was that the only way to fix an excessive RBA was to have the sentencing court reduce the restitution amount if there was even a way to get that done.  I would appreciate hearing from others about this.

I just alert others who may have some variations of this issue to keep in mind.

* Caveat, I have been noticing that links to Tax Court opinions under the recently implement DAWSON system seem to be temporary and thus may cease to work after some period.  I don't know why anyone would design a system where the decisions would not have permanent links.  But, I gather they have designed just such a system.

Added 6/25/21 1:15 pm and 6/28/21 11:00am.

First, I recommend to readers two blog postings:

• Keith Fogg, Imposing Penalties After Restitution Assessment (Procedurally Taxing Blog 6/25/21), here. 
• Bryan Camp, Lesson From The Tax Court: Restitution Overpayment Does Not Reduce Penalties On Deficiencies (Tax Prof Blog 6/28/21), here.

Second, I offer the following numbered paragraphs to flesh out what I said rather cryptically in the original post:

1.  It is not clear from reading the Tax Court opinion how the restitution in the criminal case included amounts outside the counts of conviction.  Perhaps the conspiracy and evasion counts did cover years other than the specific years mentioned (2004-2006).  Just a mystery.  Related, the court is not clear about the distinction between tax loss (a Sentencing Guidelines concept for calculating the Guidelines sentencing range) and restitution (a victim reimbursement concept).  For the Guidelines sentencing calculation, tax loss for years other than the counts of conviction can be included under the Guidelines’ relevant conduct provision.  But that is not true for restitution.  I blogged on this issue long ago.  On Restitution, Count of Conviction and Tax Loss (10/24/13), here; Restitution Not Allowed For Losses Beyond Count(s) of Conviction Except as Agreed or for Supervised Release (1/18/14), here; Restitution, Relevant Conduct, Counts of Conviction (4/11/13), here.  This is a bit of an aside that I do not seek to further address here.

2.  The restitution included tax on the full unreported income, I presume both husband and wife tax loss thus evaded.  Both were convicted.  It is not clear whether the restitution imposed on each was (i) their separate underlying tax liabilities or (ii)  the aggregate of their separately computed tax liabilities (which would be permitted even if they did not have joint and several liability for filing a joint return).  My suspicion is that it was their separately computed individual liabilities since they file no returns and thus could not have made the joint return election.  (Although I could make an argument that it should be a joint liability because that is the liability they intended to evade by not filing a return.)  The restitution was assessed under § 6201(a)(4).  I refer to the assessment as restitution-based assessment (“RBA”).  At some point, the aggregate restitution was paid, so that may have mooted any concern about joint liabilities about whether each defendant's restitution was only their individual share or both defendants' shares in the aggregate.

3. After the subsequent IRS civil audit, “SFRs determined that petitioner's income and deductions were equal to 50% of the amounts used to compute the couple's restitution obligation.”  (A possible but not necessary reading of this is that the restitution was aggregate for each, but that is not important to the discussion I offer here.)  The IRS then conducted a civil audit and sent the taxpayer a notice of deficiency.  Going to the definition of deficiency, the deficiency is the amount of tax due less the amount of tax previously assessed.  The problem here is that the RBA is not an amount previously assessed as a tax but is assessed as if it were a tax.  As this has been interpreted, that means that the amount of the deficiency is not reduced by either the RBA or payments on the RBA.  But, of course, the IRS has to credit against any assessment of the actual tax for payments on the RBA to the extent there is overlap (i.e., the RBA includes tax which is then assessed by the IRS).  Of course, the IRS may never make any further assessments and be content with collection (or collection remedies) for the RBA.  But, where the IRS wants to collect tax, penalties or interest not included in the RBA, the IRS will have to go through the assessment procedures.  

4. Here, the IRS issued the notice of deficiency apparently to assess penalties, additions to tax and interest not included in the RBA.  The notice of deficiency used the income and deductions used in calculating the RBA, so the notice did indicate that the IRS proposed to assess an amount that would overlap with the RBA (with the requirement that the IRS collect that overlap amount only once).  In this regard, the restitution amount had been paid and, presumably, the RBAs on the IRS books reduced accordingly.  Hence, when assessed, there would be no unpaid tax liability in theory for the actual tax (as opposed to penalties, additions to tax and interest).

5. Through all of that commotion, focusing on the taxpayer’s tax liability, apparently the Court determined a tax liability for the husband that may have been less than the husband’s tax liability included in the RBA.  That is the context for the footnote I discuss above, but I will repeat the footnote here:

    n2 If petitioner's restitution payments exceed the deficiencies we have determined for 2002-2007, those payments may be available for credit against other unpaid tax liabilities he may have, including the additions to tax discussed in the text.

6. I  suppose that, for convenience, we can assume that the restitution payments in the aggregate might be split in half between the husband’s and wife’s liabilities and the husband is deemed to pay his one-half.  The footnote seems to assume that the Tax Court may determine deficiencies based on the husband's entire separate tax liability without reduction for the RBA or the payment of the RBA and that the deficiencies thus determined may be less than the RBA.  Certainly, that seems to be required by the definition of deficiency -- that tax liability less the amount previously assessed as a tax (which does not  include RBA, but with a requirement that the IRS not collect twice).

7. Whew, that just gets us to the issue raised in my original post.  Can the IRS, on its own, give the taxpayer the benefit of the excess resulting from the RBA, which has the effect of reducing the court-ordered restitution award (by credit as suggested here) or must the district court make that reduction if it even can at this stage?