Collateral Estoppel after Tax Evasion Conviction (4/17/09)

The law is clear that, upon conviction for tax evasion, the taxpayer is estopped in the inevitable civil proceeding from asserting that civil fraud was involved. Two consequences then flow from the presence of civil fraud -- (i) liability for the civil fraud penalty in Section 6663 and (ii) an open statute of limitations if the statute of limitations for assessment is otherwise barred under the normal 3 and 6 year rules.

Normally, the application of the rule is straigtforward. For example, assume that the taxpayer is charged in the criminal case with 4 counts of tax evasion -- one count each for years 1 - 4 and that he is convicted for years 1 & 2 and acquitted for years 3 & 4. This rule says that the taxpayer is collaterally estopped to deny civil fraud for years 1 & 2, thus being subject to the penalty and an open statute of limitations for years 1 & 2. The IRS may still assert civil fraud for years 3 & 4 for which the taxpayer was acquitted of tax evasion, but the IRS will have to meet the predicate requirement that the IRS prove civil fraud by clear and convincing evidence.

In Williams v. Commissioner, T.C. Memo 2009-81, these concepts were applied in a context that I have not yet personally encountered or even seen in my readings. In that case, in the superseding indictment, the Government charged Williams with one count of conspiracy and one count of tax evasion. These charges arose from the use of offshore accounts to evade tax on large amounts of unreported income exceeding $8MM over eight years from 1993 to 2000. The tax evasion count included those 8 tax years in the single tax evasion count rather than in mutliple counts, one for each year. The taxpayer pled guilty to that single count. The straightforward application of the collateral estoppel rule suggests, that absent some other factor, Williams would be collaterally estopped as to civil fraud for those years. Williams argued otherwise. As best I understand Williams' argument, he was asserting that his plea meant only that, in one or more but less than all of the 8 years, he committed tax evasion and thus there is no collateral estoppel as to any particular year. That is not the way the tax evasion count to which he pled was worded, of course, and that ultimately made his argument untenable. (This intepretation of the wording of the count was supported by the plea allocution.)

This was a straightforward holding and hardly worthy of comment. The only reason I even mention the case at all is the inclusion of 8 years of tax evasion in a single count. I have observed tax evasion (and other tax crimes, such as Section 7206(1) charges for tax return crimes) for multiple years charged as a separate count for each tax year. Perhaps others have other experience in this regard.

I was trying to imagine why the Government would have asserted the eight years evasion in a single count. Since this was a superseding indictment it was probably the result of a plea agreement. By pleading to only two 5 year counts, Mr. Williams capped his risk of incarceration to 10 years. But, my rough and ready calculation of the sentence under the 2000 sentencing guidelines would suggest that, with a 3 level reduction for acceptance of responsibility, he would have had a Guidelines sentence (considering both the conspiracy count and the tax evasion count) well below 10 years, so he probably did not need to cap his sentence at 10 years. But, from the Government's perspective, it did not need any more than one count of tax evasion which coupled with the conspiracy count would give the court up to 10 years in which to sentence. Usually, in my experience, the way that would be done is to charge the 8 counts of tax evasion, have the defendant plead to one, and drop the remainder upon the acceptance of the plea. Then, for sentencing purposes, all of the tax losses involved in the dropped counts would be considered as relevant conduct and included in the Guidelines calculations anyway. So, the result in the criminal case was not affected at all by charging the tax evasion in one count rather than 8. Where it could make a difference is where additional counts of conviction are required in order to achieve an appropriate sentence. Let's say, for example, that three years of tax evasion are involved and $100,000,000 of tax loss is involved. The current -- i.e., 2008 -- Guidelines sentence with only a 3 level reduction for acceptance of responsibility would produce an offense level of 29 which produces a sentencing range of 87-108 months. Then, of course, more than one count of conviction would be required to achieve a Guidelines sentence (assuming, of course, that the sentencing court wanted a Guidelines sentence or wanted a Booker sentence exceeding the 5 years available for one count).

And, of course, by including the 8 counts in a single count to which the taxpayer pled, the Government did get collateral estoppel in the ensuing civil case. In my experience, the Government now imposes a restitution agreement in the plea agreement (i.e., the taxpayer is not forced to agree to restitution, but if it wants a plea deal, he must). Depending upon how the restitution agreement is worded, the taxpayer may be foreclosed from trying to avoid civil fraud with respect to any dismissed counts that are included as amounts required to be paid as restitution.