Tuesday, May 23, 2023

6th Circuit Holds Excessive Restitution Cannot Be Reduced thus Denying IRS Authority to Reduce Excessive Restitution-Based Assessment (5/23/23)

In United States v. Asker,  2023 FED App. 0223N, 2023 U.S. App. LEXIS 11662, 2023 WL 3370440  (6th Cir. 2023) (Nonpublished) (CA6 here and GS here), the court held that where the restitution for tax loss ordered by the sentencing court for tax crimes was allegedly higher than the actual tax due, the district court had no authority to reduce the amount. At sentencing, there was confusion among the players as to the actual tax loss for restitution purposes.* In trying to determine the amount in the confusion, the court has this Q&A with counsel:

          During sentencing, however, the court asked what would happen if it were later determined he owed less than $2.5 million in taxes:

Court: You don’t anticipate that what is owed will be more than 2.5?

Government: It is hard to say at this point. It is going to depend—

Court: What if it is? Do you anticipate that 2.5 precludes your client from paying back the rest?

Asker’s Counsel: I wouldn’t think that if it comes out—I would not think that this Court’s restitution award would be conclusive on the IRS. In fact, if there was some civil basis to seek additional penalties or interests, the IRS could do that.

I suppose if it turns out the number is less, we may probably come back and apply to the Court for some relief from the restitution amount.

Government: That is correct, Your Honor.

Court: I just—my concern is that if it turns out to be more, I think that is owed.

Asker’s Counsel: Yes, Ma’am. We don’t disagree with that.

Court: Okay.

The sentencing court assessed $2.5 million in restitution.

In due course, the IRS made a restitution-based assessment ("RBA") for $2.5 million. The IRS has no authority to reduce the RBA.

After Asker's criminal appeal affirmed the judgment, Asker filed amended returns showing a $1.1 million aggregate tax liabilities, which the Government did not contest because it decided not to allocate resources to an audit of the amended returns.  

Asker then moved the district court to reduce the restitution award which would then permit the IRS to reduce the RBA.

The sentencing  court sat on the motion for 3 years and then denied it based on the Government's argument that it had no authority to grant the motion.

The Court of Appeals affirmed.

 JAT Notes:

1. This shows the dangers on the parties not working diligently to nail down good actual tax loss numbers before sentencing. Further, this shows that sentencing courts should make sure that there are real tax loss numbers for sentencing purposes because real unintended and significant harm can come from the restitution. I think the court should target for restitution purposes the lowest reasonable number.

2. I quote from Michael Saltzman and Leslie Book, IRS Practice and Procedure (Thomsen Reuters 2015), as supplemented three times a year, this from the latest online edition:

¶ 12.06[5][a] Restitution-based Assessment

** * * *

2. How do these provisions work if the restitution overstates the taxpayer's true tax liability?1277.3 Let's illustrate the problem. Assume that the court orders restitution  of tax of $100 for year 01. Later, the Service audits and determines that the taxpayer really owed only $50 of tax. The Service might still assess  the $50 tax liability and interest and assessable  penalties. But the question is what to do about the $100 restitution -based assessment  that is shown to be excessive. The answer is that the Service and courts proceeding on the civil side can do nothing because of the prohibition on contesting restitution -based assessment. The taxpayer will have to put his defendant hat on and request the sentencing court to reduce the restitution  award.

   n1277.3 This can happen through the sentencing court acting on incomplete or inaccurate information or assumptions. Thus, sometimes a sentencing court will fail to differentiate between tax loss under S.G. 2T1.1 and the actual tax loss for restitution purposes. That appears to be what happened in Klein v. Comm’r, 149 TC No. 15 (2017). Tax loss for Guidelines calculations purposes is not the same as actual tax loss, which is the calculation that must be made for restitution purposes. Thus, for example, the tax loss may include intended loss where there is no actual tax loss and may be computed by ignoring previously unclaimed deductions not related to the offense of conviction. If the sentencing court doesn't make that distinction, it will just award the tax loss as restitution. When there is adequate communication, the prosecutor and defense counsel should alert the court as to the problem and do their best to get to the correct, bottom-line, real, actual tax loss to the Service. But that did not happen in Klein and, it appears, the restitution -based assessment  was more than the real, actual tax loss to the Service. In the civil tax proceeding, in Klein, the Tax Court could not fix the problem by reducing the restitution -based assessment, but the sentencing court could do that upon motion of the defendant, particularly where consented to or not opposed by the prosecutor.

Disclosure, I am the principal draftsman of Chapter 12 on tax crimes and the supplements. I will have to include this case in the next supplement. While I have not done new research since I wrote the above quoted material, I had thought that other sentencing court could reduce the restitution upon a proper showing. I don't know whether the Government's failure to agree as to the reduced tax loss (rather than just not audit) was the issue or the proper motion to reduce had timed out. I am a bit stunned that a district court is denied authority to correct an injustice.

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