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).

[JAT note:  It is not clear what this paragraph means since it refers to relief from fines and restitution, neither of which was involved in the discussion in the case; rather what was involved was what is sometimes considered a substitute for restitution -- an order to pay taxes without naming a specific amount which is required for restitution. Perhaps the concept was that the sentencing court might need to be involved to compromise the obligation to file returns and pay taxes during the period of supervised release]

The Ninth Circuit affirmed the conviction and the defendant served his time.

The taxpayer then sought to compromise his liability with the IRS during the period of his supervised release while he was still under the general obligation to "timely file and pay taxes."  The question addressed in the context of a CDP hearing was whether the IRS could even accept an OIC without DOJ's approval (which neither party had sought to obtain).  The taxpayer argued that DOJ's involvement was over and therefore the IRS did have exclusive authority to enter an OIC.  The IRS argued that it did not.

The resolution turned upon the interplay of Section 7122(a), here, which states that, after referral, DOJ "may compromise any such case after reference to the Department of Justice for prosecution or defense" and Section 6330(c), here, permitting CDP hearings to consider offers in compromise  Section 7122(a) is interpreted to mean that DOJ has exclusive authority to settle.  The finer question addressed only in dicta is how long that authority is exclusive -- i.e., is it forever or only during the period that DOJ still could have involvement with respect to the referral (which, to project in this case, would include the period of any terms of the JPC).

The Tax Court held that, since the taxpayer was still within the period of the condition of supervised release that he file returns and pay taxes, DOJ's approval was needed.   Here is the relevant part of the holding (one footnote omitted; bold face supplied by JAT):

As respondent notes: "The language of section 7122(a) is clear on its face * * * [and] there is no evidence, statutory or otherwise, that Congress intended for sections 6320 and 6330 to supersede section 7122(a)." As respondent also notes, to treat section 6330(c) as carving out an exception to the application of section 7122(a) would be to violate an established rule of statutory construction that amendments by implication are not to  [*30] be favored. See Estate of Morgens v. Commissioner, 133 T.C. 402, 421 (2009) (citing United States v. Welden, 377 U.S. 95, 103 n.12 (1964)), aff'd, 678 F.3d 769 (9th Cir. 2012). 

Moreover, it makes perfect sense from a policy standpoint that DOJ's primacy in compromising tax liabilities that have been referred to the Attorney General for prosecution should continue until the terms of the court's judgment (or of any settlement authorized by the Attorney General or his delegate) have been satisfied. In this case, any compromise by respondent of petitioner's liabilities would have violated the express terms of the JPC order, which requires that, during the three-year probationary period, petitioner make full payment of "taxes owed for the years of conviction". 

It is also clear that there is nothing in section 7122(a) that would have prevented petitioner, either on his own or in conjunction with Mr. August acting on behalf of respondent, from asking the District Court and/or the Attorney General or his delegate to modify the full payment requirement contained in the JPC order, which, by its terms, provides that the court, upon notification by the defendant (i.e., petitioner), the Government, or the victim (respondent, in either case), or on its own motion "may * * * adjust the manner of payment of * * * restitution". Although that provision, arguably, does no more than permit the payment terms in the JPC order to be revised, we do not doubt the Attorney General's or the District Court's right to settle or compromise (as well as extend the time for payment of) a defendant's restitution obligation. n10 See Creel v. Commissioner, 419 F.3d 1135, 1140-1142 (11th Cir. 2005). In Creel, the Court of Appeals for the Eleventh Circuit affirmed our decision rejecting an Appeals officer's determination, after a CDP hearing, to sustain a proposed levy where a restitution order, arising out of the taxpayer's prior criminal case, that required the taxpayer to pay the IRS "$83,830 plus any applicable penalties and interest" was deemed, by the U.S. Attorney's Office, to have been satisfied after the taxpayer's payment of $83,830. The Commissioner had sought approval of a levy to collect the unpaid penalties and interest. On the basis of what we had found, the Court of Appeals found that the U.S. Attorney's Office
believed that the receipt of petitioner's civil taxes (exclusive of penalties and interest) in the amount of $83,830 was the most that it could recover from petitioner and agreed with him following his sentencing that his timely payment of that amount would serve to settle his civil tax liability of $83,830 plus related penalties and interest. * * * Thus, although not compelled to do so, the government discharged Creel's civil tax liabilities as part of the criminal case.
Id. at 1141.
   n10 Sec. 7122(a) appears to explicitly grant that right to the Attorney General or his delegate where the case has been referred to DOJ for prosecution or defense. 

Thus, we do not consider section 7122(a) to be an absolute bar to an Appeals officer's consideration, pursuant to section 6330(c), of an offer to compromise a taxpayer's assessed liabilities, after referral of those liabilities to DOJ for prosecution. It does, however, require prior approval by the Attorney General or his delegate of the proposed compromise, which, in this case, was not sought by either petitioner or the Appeals officer. 

As noted supra, section 301.7122-1(d)(2), Proced. & Admin. Regs., provides: "The IRS may not accept for processing any offer to compromise a liability following reference of a case involving such liability to the Department of Justice for prosecution or defense." (Emphasis added.) The emphasized language makes clear that the Attorney General's exclusive right of compromise applies only to liabilities that have been referred to DOJ for prosecution or defense, in this case, petitioner's assessed liabilities for the conviction years. But the notices of levy cover 2003 in addition to the conviction years, and the NFTLs cover 2003, 2004, and 2006. Therefore, section 7122(a) did not negate Mr. August's authority, pursuant to section 6330(c), to compromise petitioner's assessed liabilities for 2003, 2004, and 2006. Nonetheless, because both petitioner's OIC and his amended OIC would have compromised his unpaid liabilities for the conviction years as well for the subsequent years, section 7122(a) barred Mr. August from unilaterally accepting either.

So, the question that has not been definitively decided in a real holding is whether DOJ authority ends when the need for its involvement in the referral ends -- i.e., (i) after return to the IRS without prosecution, (ii) after prosecution and acquittal or (iii) after prosecution and conviction and the passage of all time and conditions in the JPC.

The cited regulation 301.7122-1(d)(2) is here.

For an earlier blog on this issue without the nuance discussed above, see IRS Has No Authority To Settle Cases Referred to DOJ Tax Even After They Are Returned (Federal Tax Crimes Blog 8/3/13), here.