Tax Restitution and Doubt As to Amount (7/10/13)

In United States v. Wirth, 719 F.3d 911 (8th Cir. 2013), here, the court opens with.

Jeffrey John Wirth appeals from the district court's restitution order of $6,457,500, representing the amount of taxes Wirth owed but failed to pay from 2003 to 2005. He argues that the district court erred by relying on the testimony of an Internal Revenue Service (IRS) agent when calculating the amount of actual loss because the agent's calculations were not sufficiently supported by evidence and were otherwise erroneous. He also challenges the sufficiency of the evidence and argues that the district court erred by considering conduct outside the scope of the plea agreement, by failing to establish a restitution payment schedule, and by awarding restitution despite the complexity of the calculation thereof. We affirm.

I focus first on some predicate matters not in the opinion, principally for students and relatively new practitioners.

First, the defendant pled to a single count of Klein / tax defraud conspiracy, with the other tax counts dismissed.  Plea on a single count is fairly typical, and if conspiracy is one of the counts, the plea is often to the conspiracy count.

Second, the principal issue on appeal was restitution.  The defendant pled, so cannot challenge the conviction.  Restitution is generally not permitted if the offense(s) of conviction are tax crimes under title 26.  (Even though not permitted for tax crimes, the DOJ will usually require "contractual" restitution if tax crimes are pleas of conviction.)  In Wirth, the count of conviction was under Title 18, for which restitution is permitted.  Usually, even in nontax crimes, DOJ and the defendant will reach agreement as to restitution.  In Wirth, they did not reach agreement.  That meant that the Government was required to prove the amount of restitution.

In Wirth, the district court held a restitution hearing.  At sentencing, the Court sentenced the defendant to 54 months' imprisonment.  The Court also:

ordered $6,457,500 in restitution, consisting of $2,132,760 for the year ending December, 31, 2003; $1,474,011 for the year ending December 31, 2004; and $2,850,729 for the year ending December 31, 2005. The district court based its restitution order on the following findings, among others: that the restitution calculation was not so complex as to preclude the entry of such an award; that Bosshart's testimony "was thorough, exhaustive and credible"; that Wirth had improperly deducted a wide array of expenses and understated his wages; that Wirth benefitted from Bosshart's application of a 39-year straight-line depreciation method; that Wirth failed to offer credible evidence that he was entitled to the benefit of net operating losses (NOLs) from 2002 and 2007; that the government, in all likelihood, had understated Wirth's tax obligations; and that any confusion regarding the restitution calculation was a product of Wirth's poor bookkeeping. 

One of Wirth's claims on appeal is that, in calculating restitution, he was not given net operating loss (NOL) carryforwards from earlier years.  The sentencing court held that he had not proved the right to claim the NOL carryforwards and therefore denied them in calculating restitution.  The court of appeals affirmed the holding in the following discussion (emphasis supplied):

Wirth first argues that Bosshart [the IRS Agent testifying as to the tax involved] failed to afford him the benefit of NOLs from 2002 and 2007. He argues that he was given the benefit of a NOL from 2006 and that Oakes [his accountant] testified that if he were afforded the benefit of NOLs from 2002 and 2007 there would be no actual loss to the government and thus no restitution. The district court concluded that Wirth was not entitled to the benefit of the claimed 2002 or 2007 NOLs because they were "not credibly based on reliable tax return information[.]" Bosshart testified that, in making her adjustments and calculations, she did not afford Wirth the benefit of the claimed 2002 or 2007 NOLs because she did not find them credible, because the 2002 records were closed, and because Wirth could seek the benefit of the NOLs at later collection proceedings. Considering Bosshart's testimony, the scope of Wirth's tax fraud, the disarray of his accounting records, and that the NOLs were included in tax returns prepared by Murry, we cannot say that the district court clearly erred in finding that Wirth was not entitled to the benefit of the claimed 2002 and 2007 NOLs at this time.

My comments:

First, the sentencing court seemed to put the burden on the defendant to establish the NOL carryforwards.  I question whether placing that burden on the defendant is correct.  The Government is required to prove restitution at least by a preponderance of  the evidence at sentencing.  This would seem to me to require that the Government prove tax only after considering any benefits -- including NOLs -- to which the defendant is entitled.  I suppose as decided in analogous cases, a defendant claiming the benefit might have to put the issue in play by putting on some credible evidence (a production burden but not a persuasion burden).  Maybe that is what the court held -- that there was not enough evidence in play to establish a production burden with respect to the NOL carryforwards.  (Note in this regard that, since NOL carryforwards operate as deductions, so if they are not claimed, under the new rule for calculating the sentencing tax loss, the taxpayer may not get them, but restitution is not the same as the tax loss.)

Second, it seems odd that the agent would dispense with trying to confirm the denial of the NOL carryforwards on the notion that, if the defendant was entitled to them, "Wirth could seek the benefit of the NOLs at later collection proceedings."  I previously reported that restitution for failure to pay any tax can be immediately assessed.  New Statute for Civil Effect of Restitution in Tax Cases (2/11/11), here. Further as noted in the addendum below, the taxpayer defendant is barred from contesting the amount of the restitution tax assessment.  § 6201(a)(4)(C) here.  So, it is not clear to me at least that in the case discussed above, Wirth will be able to reduce the amount assessed during the subsequent administrative phase.  I suppose that the parties could go back to the court to reduce the restitution amount.

Third, viewed one way, the the sentencing court may have given the Government the benefit of the doubt.  I don't think the Government should be given the benefit of the doubt in a restitution proceeding.  The restitution amount should be the minimal amount due, not some higher number that could be constructed if the Government is given the benefit of doubt.  In this regard, in the ensuing civil audit, the IRS will be able to determine the real amount due (with, properly in an civil tax proceeding, doubts resolved against the taxpayer) and make an assessment of the correct amount after those doubts are resolved.  If the defendant then is shown to owe more than the restitution amount, what practical difference does that make?  The tax can be assessed and collected using the Code's collection measures.  As noted, where the defendant can be prejudiced is having a restitution amount in excess of what defendant owes.

Fourth, the parties usually have an incentive to agree upon the amount of restitution.  However, I wonder whether, in some cases, the Government might not agree in order to force a restitution hearing that will then permit the Government to do a data dump into the record in order to release Rule 6(e) materials for use in the ensuing civil tax proceedings.  Just a thought.

Fifth, don't you know district judges like to act as Tax Courts in this type of restitution hearing?

Addendum on 7/20/13:

With respect to the Second Comment above, consider also the following (SBSE-05-0713-0044 (7/10/13), here, reproduced at 2013 TNT 137-18):

Criminal restitution and civil tax liability are separate and distinct. The assessment of restitution under section 6201(a)(4) is not itself a determination of the actual civil tax liability for the tax period for which restitution was ordered, and is assessed only “as if such amount were such tax.”

Is it possible that restitution for the tax can exceed the amount of the tax? And, if so, is the defendant prohibited from contesting the amount of the tax via IRS processes?

Again, in my view, restitution should be only for the minimum possible amount of the tax and doubts should be resolved in the taxpayer's favor.