On Res Judicata in Criminal Case from Prior Civil Case and On Criminal Statute of Limitations (5/15/13)

In United States v. Wanland, 2013 U.S. Dist. LEXIS 64598 (ED CA 5/6/13), here, the Court denied three defense motions to dismiss.  I don't think there is anything particularly important about the holdings, but one of the issues permits me to digress on related concepts and another issue offers a good analysis of the law.  So, I offer the case and further discussion here.

1.  Res Judicata.

Prior to indictment, the defendant had received a bankruptcy court "final judgment discharging the Defendant's debts and liabilities to the Internal Revenue Service ('IRS')."  As quoted in footnote one, 11 U.S.C. § 523(a) (1) (C) provides that

[a] discharge . . . of this title does not discharge an individual debtor from any debt . . . with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax.

The defendant was not entitled to an order of discharge of his tax liabilities that he attempted to evade.  He did get the discharge.  Presumably the IRS was represented in the proceeding.  The case does not state whether the IRS asserted nondischargeability because of evasion and lost the assertion in the bankruptcy court.

The defendant argued that, based on principles of res judicata or claim preclusion, the bankruptcy discharge precluded the IRS from asserting any crime related to the taxes discharge which required that the defendant have evaded tax, an issue that the defendant urged had already been resolved against the Government in the bankruptcy case.  The Court held that the criminal prosecution could not have occurred in the bankruptcy proceeding and therefore that the Government was not precluded from bringing the counts based on evasion of the taxes discharged.  The Court reasoned:

Because the Government could not have brought its criminal charges against Defendant in the prior bankruptcy proceeding, res judicata does not prohibit the instant criminal action against Defendant. See United States v. Tatum, 943 F.2d 370, 382 (4th Cir. 1991) (holding that "a discharge in bankruptcy entered in a bankruptcy proceeding to which the IRS is a claimant does not, under the doctrine of res judicata, preclude a subsequent criminal prosecution for bankruptcy fraud when the IRS never pursued a claim to set aside the discharge in bankruptcy on grounds of fraud"); United States v. Kunzman, 125 F.3d 1363, 1366 (10th Cir. 1997) (finding that a bankruptcy court's discharge order did not preclude subsequent criminal prosecution under res judicata principles because "[t]he claims raised in defendant's bankruptcy were not identical to those raised in the criminal case") (citing Tatum); cf. In re Gruntz, 202 F.3d at 1085-87 ("The purpose of bankruptcy is to protect those in financial, not moral, difficulty. . . . The fresh start afforded debtors in bankruptcy does not include release from jail.") (citations omitted) (finding that the Bankruptcy Code's automatic stay provision, § 362(a), does not automatically extend to all state criminal proceedings).

I now digress.  This issue has been approached in a different direction for a long time now.  A taxpayer's conviction of tax evasion will preclude the taxpayer is settings other than a criminal case on the issue of evasion and specifically with respect to the civil fraud penalty in a civil case after the criminal conviction.  Helvering v. Mitchell, 303 U.S. 391 (1938).  My understanding of that holding is based on the notion that the parties had litigated the issue of evasion before, the Government had already proved evasion beyond a reasonable doubt, and therefore in a civil proceeding involving the same issue (evasion/fraud) where the Government's burden is lesser than beyond a reasonable doubt, the issue may not be litigated again.  That analysis is why the Government can assert the civil fraud penalty after an acquittal of evasion -- the criminial acquittal simply means that the Government did not prove evasion beyond a reasonable doubt and is therefore not preclusive of the same issue (evasion) where the Government's burden is less than beyond a reasonable doubt.

Now, extending that notion to the bankruptcy situation, if in fact evasion were in issue -- i.e., if the IRS had raised evasion as a ground for nondischargeability -- and the Court held against the IRS, thus ordering the taxes discharged, then it would seem that the Government has failed to meet its burden to prove evasion at some lesser standard (whether preponderance or clear and convincing) and hence should be precluded in making a claim anywhere, including in a criminal case, where its burden is at least as great in the case in which no evasion was decided.

At least that seems logical to me.

2.  Improper Levy.

The defendant urged dismissal based on an improper levy.  I won't address that issue.

3.  Statute of Limitations.

The defendant urged dismissal based on an untimely indictment, urging that the indictment was filed after the applicable 3-year statute of limitations.  Readers will recall that Section 6531, here. creates a general 3-year statute of limitations, but then excepts from the 3-year statute certain offenses for which a 6-year statute is provided.  Virtually all tax crimes are charged as crimes with a 6-year statute of limitations.  The key 6-year statute of limitations for present purposes is Section 6531(1) which applies to "offenses involving the defrauding or attempting to defraud the United States or any agency thereof, whether by conspiracy or not, and in any manner."

In the case, the defendant was charged with violation of Section 7206(4), titled "Fraud and false statements," which creates a crime for "Any person who --":

(4) Removal or concealment with intent to defraud
Removes, deposits, or conceals, or is concerned in removing, depositing, or concealing, any goods or commodities for or in respect whereof any tax is or shall be imposed, or any property upon which levy is authorized by section 6331, with intent to evade or defeat the assessment or collection of any tax imposed by this title;

The Court's analysis is a good presentation of the state of the law:

In United States v. Workinger, 90 F.3d 1409 (9th Cir. 1996), the Ninth Circuit addressed the scope of 26 U.S.C. § 6531(1), specifically as it applied to Internal Revenue Code crimes categorized as, "Attempts to interfere with administration of internal revenue law." See 26 U.S.C. § 7212(a). The Ninth Circuit explained that: 

Section 6531(1), by its own terms, does not require that a defendant be expressly indicted for tax fraud. Indeed a reading which so limited it would be inconsistent with the overall structure of the statute. The § 6531 exceptions start out with two very broad formulations. The first broad exception, as already mentioned, is any offense which "involves" defrauding the United States in any manner. See § 6531(1). . . . These two exceptions appear to cover most acts that a person could perform in an attempt to avoid paying taxes. . . . Nevertheless, § 6531 does go on and list other more specific exceptions . . . . [because] Congress wanted to be sure that mere technical distinctions would not make a difference in the statute of limitations. That underscores rather than undercuts the breadth of § 6531(1). Thus, in § 6531(1) Congress applied the six-year limitations period to offenses other than those mentioned in sections which were labeled "fraud," if those offenses did reflect fraudulent activity. . . . § 6531(1) covers all offenses where fraud is an essential ingredient. 

Workinger, 90 F.3d at 1413-14. 

The Ninth Circuit's reasoning in Workinger appears dispositive as to the question of whether 26 U.S.C. § 7206(4) falls within the ambit of 26 U.S.C. § 6531(1), and thus, carries a six-year statute of limitations. That is, because the Circuit determined that the breadth of § 6531(1) went beyond merely encompassing defendants "expressly indicted for tax fraud," and extended to "offenses other than those mentioned in sections which were labeled 'fraud,'" then those defendants indicted for tax crimes that fall within the sections specifically labeled "fraud," such as 26 U.S.C. § 7206 (4) ("Removal or concealment with intent to defraud"), surely fall under the umbrella of § 6531(1) as well. 

Defendant correctly notes that the Ninth Circuit has provided that "where the meaning of a statutory provision is clear, we do not rely upon the location the legislature chose for it in its system of codification . . . just as we do not rely upon the headings and titles of sections in such circumstances." Deutsch v. Turner Corp., 324 F.3d 692, 707-08 (9th Cir. 2003) (finding that, for purposes of federal preemption, a statute located within the "Code of Civil Procedure, in Title Two: Time of Commencing Civil Actions" was not "purely procedural," but was, instead "substantive in nature"). Nevertheless, where, as here, it is not made explicit whether the element of § 7206 (4) requiring an "intent to evade or defeat the assessment or collection of any tax imposed by this title" sufficiently "involv[es] the defrauding or attempting to defraud the United States . . . in any manner," § 6531(1), the title of § 7206(4) is, at least, instructive. 

Defendant makes a worthy point in arguing that such an interpretation of § 6531(1) causes the assumed breadth of the six-year statute of limitations exceptions to swallow the general rule of § 6531, providing a three-year statute of limitations. The Ninth Circuit in Workinger, however, did not appear particularly troubled by this reading of the statute, and instead merely noted the ineffectual nature of the three-year statute of limitations and forged ahead. See Workinger, 90 F.3d at 1413 ("Although [§ 6531] states the general rule as being a 3-year period, there are numerous exceptions which render the 3-year period almost irrelevant.") (citing Patricia T. Morgan, Tax Procedure and Tax Fraud in a Nutshell, § 13.1.7 (1990)). 

Thus, this court finds that the tax crime of "Removal or concealment with intent to defraud"), 26 U.S.C. § 7206(4), falls under this Circuit's broad interpretation of § 6531(1), and therefore the six-year statute of limitations applies. The Government's Superseding Indictment is not untimely filed.

JAT Note: The Court's reference to the Superseding Indictment may mean that the Counts in issue were added by the Superseding Indictment and were not in the original indictment.