Tax Court Holds that IRS on Restitution Based Assessment Is Not Subject to Restitution Schedule Ordered by Sentencing Court (4/20/19)

In Carpenter v. Commissioner, 152 T.C. ___, No. 12 (2019), here, the Tax Court held (according to the syllabus):

P pleaded guilty to violating I.R.C. sec. 7206(1) by willfully filing false returns for 2005 and 2006. At sentencing, the District Court ordered P to pay restitution to the IRS, ordered that restitution was due immediately, and set a schedule of payments. The District Court also ordered that P pay all outstanding tax as an additional condition of his supervised release. Though P made each scheduled payment, he did not pay the full restitution amount. 

R assessed against P the full amount of restitution ordered in reliance on I.R.C. sec. 6201(a)(4). When P did not pay the assessed amount R began collection action. Before the first payment was due under the schedule set by the District Court, R sent a final notice of intent to levy and filed a notice of Federal tax lien. Following a CDP hearing IRS Appeals sustained the proposed collection actions. P contends that I.R.C. sec. 6201(a)(4) does not grant R independent administrative authority to collect amounts of criminal restitution. P also contends a schedule of restitution payments limits the amount R may administratively collect absent a further order by the sentencing court.  

Held: I.R.C. sec. 6201(a)(4) grants R independent authority to collect administratively amounts of criminal restitution assessed under that section.  

Held, further, a payment schedule included in an order for criminal restitution that is due immediately does not limit R’s authority to collect administratively unpaid amounts of such restitution. 

Held, further, Appeals did not abuse its discretion in sustaining the collection actions at issue. 

The following excerpt is important:

Petitioner failed to take advantage of the opportunities made available to him through the CDP hearing. During the CDP hearing petitioner was free to propose an installment agreement whereby he would potentially end up paying a relatively small amount per month. He might even have convinced the officer that he could in fact afford to pay no more than the $100 per month set forth in the sentencing court’s order. (Petitioner is not limited to the CDP hearing and may propose an installment payment agreement anytime. See sec. 6159). In order to secure a collection alternative like this, however, petitioner needed to do three things: (1) make an actual proposal of a collection alternative, (2) submit financial information establishing that this was all he could afford to pay, and (3) become current in his tax filing obligations. Petitioner did none of these things.  

Instead of making the required factual showings, petitioner took the extreme legal position that the IRS simply could not collect from him. That was a mistake. Petitioner, like any other taxpayer in a CDP case, must affirmatively establish what is his limited ability to pay. He cannot rely on the sentencing court’s payment plan to establish that for Federal income tax purposes. In rejecting his position, we are not ruling that the IRS can always levy to collect 100% of the restitution regardless of the taxpayer’s financial circumstances. 

Second Circuit Holds Onerous § 6707 Penalty -- $61 Million -- Based on BullShit Tax Shelter Subject to Flora Full Payment Rule (4/26/18; 5/8/18)

In Larson v. United States, ___ F.3d ___, 2018 U.S. App. LEXIS 10418 (2d Cir. 2018), here, the Second Circuit held that, in order to pursue the refund suit for the § 6707 penalty, Larson, a convicted tax shelter promoter, had to prepay the $67,661,349 penalty assessed.  Needless to say, the tax shelter was of the BullShit genre.  I had written on this litigation at the trial level.  SD NY District Court Rejects Partial Payment § 6707 Penalty Refund Suit (Federal Tax Crimes Blog 1/2/17; 1/9/17), here.

The Court of Appeals applied the Flora rule which generally requires full payment for refund suit. Flora v. United States (Flora I), 357 U.S. 63 (1958); and Flora v. United States (Flora II), 362 U.S. 145 (1960).  The opinion is straight-forward in stating the rule and rejecting Larson's claims under the Fifth Amendment, the APA and the Eighth Amendment.

The opinion does state, though, that something may be amiss quotation marks omitted):

We close with a final thought. The notion that a taxpayer can be assessed a penalty of $61 million or more without any judicial review unless he first pays the penalty in full seems troubling, particularly where, as Larson alleges here, the taxpayer is unable to do so. But, while the Flora rule may result in economic hardship in some cases, it is Congress' responsibility to amend the law. 

Larson and those similarly subject to this and other potentially onerous penalties may ultimately litigate in the following possible venues:

• In a collection suit brought by the Government to reduce the penalty to judgment, usually brought just short of the 10 year collection period. 
• A CDP proceeding, with Tax Court prepayment remedy, See IRM 8.22.8.10.5 (10-01-2012), IRC 6707 or 6707A Disclosure Penalties ("2. A taxpayer may dispute a IRC 6707 and IRC 6707A penalty in CDP if the taxpayer did not have a prior opportunity to do so")
• Perhaps in a bankruptcy proceeding, but I have not researched that issue. [See the Addendum immediately below which answers this question.]

ADDENDUM 5/8/18 4:10PM:

Compromises of Nonrestitution Assessments with Restitution Assessments Unpaid (1/24/17)

This blog entry will principally serve as a reminder to readers on the subject of tax assessments related to tax restitution awarded at sentencing in criminal cases. Readers recall that in 2010 Congress enacted several Code provisions the net effect of which is (i) to permit the IRS to assess immediately any restitution in a criminal case awarded for unpaid taxes and (ii) prohibit the person (usually a taxpayer) from contesting the amount of the tax restitution assessment.  (At the bottom of this blog entry, I list the Code Sections involved and various blog entries on the subject.)

I call readers attention to a very good article, Robert Horwitz, The Tax Court Issues a Reminder that You Cannot Compromise Criminal Tax Restitution (Tax Litigator Blog 1/15/16), here, which discusses Rebuck v. Commissioner, T.C. Memo. 2016-3, here.  Rebuck and 10 other co-defendants were convicted of tax conspiracy under 18 U.S.C. § 371, here, for promoting offshore and domestic trust packages falsely representing that the trusts permitted taxpayers to avoid paying tax.  The sentencing court imposed tax restitution of $16,339,199, jointly and severally, on the 11 convicted defendants.  The restitution amount appears to be for then outstanding unpaid taxes avoided by taxpayers purchasing the trust schemes. (I make this assumption since it would be odd to have joint and several liabilities for the defendants' own personal income taxes.)  After the restitution award, the outstanding restitution amount would be reduced as payments against those liabilities were made either by the taxpayers themselves or by the defendants.  (It may be that the IRS did not seek payment from the taxpayers, either because their statutes had closed or for other reasons.)  The IRS then assessed the tax restitution amount against Rebuck and presumably against the other co-defendants.

In 2009, the IRS assessed against Rebuck civil penalties under § 6700, in the aggregate amount of $130,000.  Rebuck and  the IRS subsequently entered an installment agreement to pay these § 6700 penalties.

Rebuck was also assessed his own income taxes for a number of years, including some of the same years involved in the tax restitution assessment (which, to remind readers, was for other persons' income tax liabilities).  Rebuck then commenced a CDP appeal with regard to his income taxes, but asked that the § 6700 penalty assessments subject to the installment agreement be considered along with his own income tax assessments in an offer in compromise based on doubt as to collectibility.   Rebuck did not ask relief in the CDP proceeding for the tax restitution assessments, apparently because relief for those assessments comes, if at all, from the sentencing court.  During the CDP process, the § 6700 penalty installment agreement was reversed for default.  The IRS rejected the offer in compromise based on the IRS's position that such offers were not available for the same years in which there is unpaid tax restitution assessments.  The IRS did suggest that, without resolving the unpaid restitution, the IRS could enter a Partial Payment Installment Agreement ("PPIA") with respect to the income tax and § 6700 penalties for $540 per month.  Rebuck declined.

The taxpayer raised two issues:

(1) whether the IRS abused its discretion in rejecting petitioner’s OIC because it did not include full payment of petitioner’s criminal tax restitution; and (2) whether the Appeals officer abused his discretion in proposing to petitioner a PPIA of $540 per month.

The only issue I address in this blog entry is the first issue.  The Court's analysis of the first issue is short, so I quote it in full (one footnote omitted):

Post Conviction Collateral Consequences - Payment of the Tax and CDP Proceedings (3/12/16)

Tax crimes enthusiasts will recall the case of Boulware v. United States, 552 U.S. 421 (2008), here.  The Supreme Court opinion in Boulware reaffirmed some key tax crimes sound bites such as (i) the Spies holding that tax evasion is the capstone of the federal tax crimes regime and (ii) no tax evasion without a "tax deficiency" (really evaded tax due and owing *).  The Supreme Court remanded to the Ninth Circuit to deal with the nettlesome issue of E&P and return of capital.  On remand, Boulware lost in the Ninth Circuit.  United States v. Boulware, 558 F.3d 971 (9th Cir. 2009), here.  (See Boulware Wins the Battle Only to Lose the War (Federal Tax Crimes Blog 3/9/09), here.)

Since that time, Mr. Boulware has popped up again in the case reporters.  E.g., HIE Holdings v. Commissioner, 521 F. App'x 602, 2013 U.S. App. LEXIS 6952 (9th Cir. 2013), here, cert. denied 134 S. Ct. 712 (2013). (HIE is Boulware's company, and his personal case was consolidated on appeal, see Boulware Redux - Attorneys Fees from Shareholder's Criminal Case Not Deductible by Corporation (Federal Tax Crimes Blog 4/14/13), here.

Just yesterday, Mr. Boulware showed up again in a Collection Due Process ("CDP") case on appeal.  Boulware v. Commissioner, ___ F.3d ___, 2016 U.S. App. LEXIS 4502 (D.C. Cir. 2016), here. The issues in the case are not tax crimes issues per se, but the case does serve as a reminder that there are civil tax consequences that attend criminal tax prosecutions.  I will briefly address the case to illustrate that point.

After HIE Holdings and Boulware lost on the merits in the prior Tax Court case and failed to post bond while appealing, the IRS was permitted assess the tax determined by the Tax Court while the appeal was pending.  § 7485(a)(1).  The IRS did so and moved to collect.  § 7485(a)(1).  Boulware filed a CDP request in issue here.

In the CDP proceeding, the Settlement Officer ("SO") placed the following conditions on an installment payment agreement for Boulware:

First, Boulware would have to agree to pay $29,000 per month, which Martin calculated was his "ability to pay" based upon Boulware's most recent tax returns and other financial documents. Second, Boulware would have to become compliant with all current tax obligations, including his estimated taxes for 2012. Finally, he would have to liquidate various personal assets, including a 401K account and two life insurance policies all together worth approximately $950,000, and put the proceeds toward his deficiency.

Boulware then counteroffered (on counteroffers, see My Cousin Vinny, here)

IRS Authority to Settle After Referral to DOJ Tax (11/11/13)

I point readers to an excellent blog by Peter Reilly -- An Isley Brother In Tax Court - Does Tax Crime Pay (Forbes Taxes 11/10/13), here.  Peter discusses the recent decision in Isley v. Commissioner, 141 T.C. No. 11 (2013), here.  I refer readers to Peter's excellent discussion of the issues in the case.  I address here only the issue I think most relevant to Tax Crimes enthusiasts.  However, the case does have some other tax procedure issues that I recommend to readers.

The taxpayer, Ronald Isley, was one of the famous Isley Brothers (Wikipedia entry here) whose:

musical genres included rhythm and blues, doo-wop, funk, and contemporary R&B. Various versions of the group had top 40 singles and/or top 20 albums during a period stretching from 1962 to 2006, which ultimately led to various accolades including the induction of petitioner and four of his brothers into the Rock and Roll Hall of Fame. Late in his career, petitioner focused on solo work, and as late as 2011 he was still performing with his younger brother Ernie.

Over the many years, the taxpayer made a lot of money and was a chronic tax delinquent.  I won't get into the taxpayer's skirmishes with the IRS and ultimately DOJ Tax; suffice it to say that IRS referred his case to DOJ Tax for criminal prosecution, he was prosecuted, convicted by a jury, and was sentenced on 9/1/06 "to 37 months' imprisonment and, upon release from imprisonment, placing petitioner on "supervised release for a term of three years" (three-year probationary period)."  The following are the pertinent terms of the sentencing court's judgment and probation commitment order (JPC order) which

Petitioner was indicted, tried, and convicted in the District Court for the Central District of California on five counts of tax evasion and one count of willful failure to file a tax return covering tax years 1997-2002 (conviction years). Following the guilty verdict, the court, on September 1, 2006, issued a judgment and probation commitment order (JPC order) sentencing petitioner to 37 months' imprisonment and, upon release from imprisonment, placing petitioner on "supervised release for a term of three years" (three-year probationary period). The JPC order set forth a number of terms and conditions with respect to the three-year probationary period, including the following: 

2. The defendant shall truthfully and timely file and pay taxes owed for the years of conviction; and shall truthfully and timely file and pay taxes during the period of community supervision. Further, the defendant shall show proof to the Probation Officer of compliance with this order; 

* * * * * * * 

10. The Defendant shall pay all taxes when due, and, if necessary, sell assets to satisfy his tax obligations.

The JPC order also provided for the adjustment of petitioner's restitution obligation as follows:

The defendant shall notify the Court through the Probation Office, and notify the United States Attorney of any material change in the defendant's economic circumstances that might affect the defendant's ability to pay a fine or restitution, as required by 18 U.S.C. § 3664(k). The Court may also accept such notification from the government or the victim, and may, on its own motion or that of a party or the victim, adjust the manner of payment of a fine or restitution-pursuant to 18 U.S.C. § 3664(k).