Sunday, September 9, 2012

Case on Collateral Estoppel [Issue Preclusion] as to Civil Fraud (9/9/12)

I have just posted on my Federal Tax Crimes Blog a short discussion of the recent case of Anderson v. Commissioner, 2012 U.S. App. LEXIS 18831 (3d Cir. 2012), here.  The blog entry for that discussion is Walter Anderson Re-Appears But Unsuccessfully (9/9/12), here.  Anderson involves the collateral consequences of a conviction for tax evasion.

We study in Tax Procedure two key collateral civil tax consequences of a conviction of tax evasion.  These consequences both flow from the taxpayer convicted of tax evasion under Section 7201, here, being collaterally estopped [precluded by issue preclusion] as to civil fraud, an estoppel which invokes the 75% civil fraud penalty in Section 6663, here, and the unlimited statute of limitations in 6501(c)(1), here.   The statute of limitations consequence is straight-forward.  The application for the civil fraud penalty is a little more complex.

The amount subject to the civil fraud penalty must be quantified.  The conviction for tax evasion does not necessarily establish the amount subject to the 75% civil fraud penalty.  Unless the taxpayer stipulates the amount in the plea agreement, all a conviction will establish is the elements of the crime of tax evasion -- (i) willfulness, (ii) some amount of tax due and owning (most courts required it to be significant but not quantified), and an affirmative act of evasion.

Section 6663(b) provides a sequential burden of proof requirement in order to impose the civil fraud penalty.  First, the IRS must establish by clear and convincing evidence that the taxpayer committed fraud as to some portion of the underpayment.  The conviction will be collateral estoppel [issue preclusion] as to this IRS burden.  Second, once the first step is met, all of the underpayment is deemed attributable to fraud except for the portion that the taxpayer shows by a preponderance of the evidence is not due to fraud.

I should note that I said that the IRS must prove fraud in the first step by clear and convincing evidence.  Section 6663(b) does not say that.  Section 7454(a), here, provides that the IRS must prove fraud; that the IRS prove fraud by clear and convincing evidence is nonstatutory, but has developed as a consistently applied rule consistent with historic pleading and proof rules.  See e.g., Tax Court Rule 142(b).

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