The Rub Between Restitution Assessed as a Tax and a Deficiency (12/18/14)

In Muncy v. Commissioner, T.C. Memo. 2014-251, here, the Tax Court addressed the procedures with respect to the new immediate assessment of restitution orders.  I cite prior blog entries below with more detail about these new statutory procedures.  Suffice it to say that the problem at which the new immediate assessment procedures are addressed may be illustrated as follows:

Assume a criminal tax crime sentencing where the judge is authorized by plea agreement to order tax restitution of $100,000.  At least in theory, that ought to be the criminal tax number provable by a preponderance of the evidence.  (Sometimes called in other settings, the tax deficiency, tax due and owing and tax evaded; in a criminal sentencing it might often be the same as the tax loss driving the guidelines calculations, but may not be the same.)  Assume further that the real civil tax liability for the years of conviction and thus years of restitution is $200,000.  The extra $100,000 is the amount which the Government did not prove was tax evaded and thus could / should not be in the order of restitution.  (OK, I know that in plea agreements the Government might negotiate for higher tax restitution than it might otherwise be able to prove at sentencing, but stick with me on this.)

Under the old procedure, the sentencing court would order restitution.  The IRS would then issue a notice of deficiency for $200,000.  That is the deficiency amount, although $100,000 of that aggregate deficiency is the same liability as for restitution.  Since the IRS must proceed for the entire amount by notice of deficiency, the prohibitions in assessment for the entire amount apply and, until the IRS assesses after those prohibitions expire or are waived by the taxpayer, the IRS cannot use the IRS collection tools.  Of course, the taxpayer does have an order of restitution, so the Government can use restitution collection tools -- not as efficient as IRS collection tools.

The new legislation (see blog entries below) permit the IRS to assess the amount of the tax restitution immediately without the necessity of a notice of deficiency and the delays attendant to the prohibition on assessment in Section 6213.

So, assume these new procedures apply to this example.  The IRS can immediately assess $100,000.  That means that the unassessed liability (the civil liability remaining after consideration of the assessed restitution) is $100,000.  The IRS still has to go through its deficiency notice procedures.  But, the issue in Muncy is what the amount is that the IRS should assert in the deficiency notice.  Keep in mind that, as compelled by the new statutory procedure, the IRS has already assessed the $100,000 representing the tax restitution.  Hence, from a liability standpoint, the only amount unassessed is the remaining $100,000 (the civil liability unassessed).

In Muncy, after going through various statutory interpretation contortions, the Tax Court held (as I understand it), that the deficiency is still $200,000 (including the $100,000 already assessed under the new procedures).  So, once the Tax Court approves that deficiency amount, the IRS will assess the entire $200,000 which will be in addition to the $100,000 assessed under the new procedures.  So the aggregate assessed liability is $300,000 when, in fact, the real liability is $200,000.  (I suppose that the IRS could credit the amount already assessed and have a new assessment of $100,000 which is $100,000 less than the deficiency determined by the Tax Court.

Is the Spies Element for Evasion (i) Tax Deficiency or (ii) the Criminal Tax Number? (9/17/13)

In United States v. Ervin, 2013 U.S. App. LEXIS 7917 (11th Cir. 2013), here, an unreported per curiam decision, the court of appeals confirmed the defendant's convictions for (i) conspiracy to commit tax evasion (note that it was an offense conspiracy and not the ubiquitous defraud / Klein conspiracy and (ii) tax evasion.  In affirming, the court rejected the defendant's various arguments.  I address here only one -- that "his convictions for tax evasion were unsupported by the evidence and the law."  (Of course, logically, if his conviction for evasion fell, his convictions for conspiracy might also fall, but the court of appeals did not reach that point.)

On the  sufficiency issue, the Court of Appeals first noted the elements of tax evasion:  "(1) willfulness; (2) existence of a tax deficiency; and (3) an affirmative act constituting an evasion or attempted evasion of the tax."  I have highlighted the bone I want to pick.

The court then focused upon whether there was a "tax deficiency."  I think the Court of Appeals was sloppy in stating that element.  The issue is not whether there is a tax deficiency (although even the Supreme Court screws that up as well, see Boulware v. United States, 552 U.S. 421 (2008).  Rather, the issue is whether there is criminal tax due and owing, the actual element of the crime since Spies v. United States, 317 U.S. 492 (1943).  I have just written a draft article for the Villanova symposium here where I address the difference between a deficiency and the tax due and owing element for tax evasion.  The guts of the reasoning is that "tax deficiency" is a term of art that is used in the Code to describe the civil tax liability less taxes paid.  See Section 6211(a), here, stating the "the term 'deficiency' means  * * *."  All tax practitioners know what a deficiency is.  Fewer tax but all criminal tax practitioners know that the criminal number, which is the Spies tax due and owing element for evasion is not necessarily the deficiency; indeed the Spies tax due and owing element can be substantially less than the civil tax deficiency and even less than the tax loss number used for sentencing.  I offer two illustrations from the article:

The tax due that the Government will use to support a tax evasion prosecution is not necessarily the unpaid civil tax due.  To illustrate, assume that, for civil tax purposes, the taxpayer had $100,000 income that he or she failed to report.  Assume that the tax liability on that omitted income is $35,000.  The $100,000 omitted income consists of two items -- $50,000 of embezzlement income which the taxpayer knew was taxable and chose not to report and $50,000 of personal injury income which the Government is satisfied that the taxpayer thought or could have reasonably thought was excludable under § 104 but which for technical reasons is not properly excludable under that section.  In calculating the tax evaded as an element of tax evasion, the Government will compute the tax only on the $50,000 of embezzlement income and will not include the $50,000 of personal injury income.  So, let’s say the tax on $50,000 of embezzlement income is $17,500.  The criminal tax number for establishing tax due and owing in a criminal case is $17,500.  The Government must prove that number beyond a reasonable doubt.

And, I use a more detailed example to dig down into the subleties: