Court Holds Defendant in FBAR Suit Alleging No Deficiency in Tax for Excessive Fines Argument Must Prove Deficiency Despite Tax Court No Deficiency Decision (4/1/22)

In United States v. Kerr, 2022 U.S. Dist. LEXIS 57004 (D. Az. 3/29/22), GS here and CL here, Government brought suit to collect an FBAR civil willful penalty. The Government conceded error in the calculation and submitted revised much lower calculations. The Court invoked the APA to remand the matter to the IRS for recalculation with a more robust explanation. Whether remand to the IRS can result in a valid FBAR assessment is yet to be determined.

I focus on Kerr’s claim that the FBAR civil willful penalty assessments violated the Eighth Amendment prohibition on Excessive Fines. This claim is often made in FBAR civil willful penalty cases, but it have never been made successfully so far as I am aware. Kerr also failed here.

I include the Court’s discussion in its entirety (Slip Op. 15-17, one footnote omitted) because it discusses the lack of preclusive effect for a stipulated no deficiency decision in the Tax Court without any judicial resolution of the issues behind the no deficiency stipulation.

c. Whether the Assessment Violates the Eighth Amendment

             Although the Court will only enter judgment on three of the penalties made in the Original Assessment, it will consider Mr. Kerr's argument that the FBAR penalties violate his rights under the Eighth Amendment. The Eighth Amendment provides that no “excessive fines” shall be imposed. U.S. Const. amend. VIII. A punitive forfeiture violation is excessive “if it is grossly disproportional to the gravity of a defendant's offense.” United States v. Bajakajian, 524 U.S. 321, 334 (1998). Although no court has expressly held that civil FBAR penalties constitute a fine under the Eighth Amendment, the Court will assume, without deciding, that they are. See United States v. Bussell, 699 F. App'x 695, 696 (9th Cir. 2017) (evaluating whether FBAR penalties are “grossly disproportional” to the gravity of the defense under the Eighth Amendment).

             Mr. Kerr bears the burden of showing that the civil penalties are grossly disproportional. See United States v. $132,245.00 in U.S. Currency, 764 F.3d 1055, 1058 (9th Cir. 2014). Courts show substantial deference to legislative bodies when reviewing statutorily established penalties. Bajakajian, 524 U.S. at 334; Solem v. Helm, 463 U.S. 277, 290 (1983). In Bajakajian, the Court considered several factors in determining whether a fine was excessive including the nature of the conduct, the resulting harm, and whether other penalties may be imposed. 524 U.S. at 336-38; see also United States v. Bussell, 2015 WL 9957826, at *7 (C.D. Cal. Dec. 8, 2015). The Ninth Circuit has noted that these Bajakajain [sic] factors are not “rigid” and so courts are not limited to these considerations. United States v. Mackby, 339 F.3d 1013, 1016 (9th Cir. 2003).

             Under these factors, Mr. Kerr argues that the penalty is grossly excessive because (1) the only crime he committed was willfully failing to report the accounts, (2) this failure was unconnected to other criminal activity, (3) that other criminal penalties already exist for this conduct, and (4) that “the government suffered no injury as it stipulated that [Mr.] Kerr did not underreport his tax liabilities.” (Doc. 47 at 25).

Revised Terminology: Issue Preclusion Rather than Collateral Estoppel and Claim Preclusion Rather than Res Judicata (11/29/16)

I have just read the decision in Bravo-Fernandez v. United States, 580 U.S. ___, ___ n. 1, & ___, n. 2, 137 S. Ct. 352, 356 n. 1 & 359 n. 2 (2016), here and GS here, which was decided today.  Based upon that decision I have modified the book at several points to use the terms issue preclusion instead of collateral estoppel and claim preclusion instead of res judicata.  The following is a goodnote I have added to discuss that change.

Issue preclusion is the term currently preferred for a concept previously called collateral estoppel; and claim preclusion is the term currently preferred for res judicata.  Bravo-Fernandez v. United States, ___ U.S. ___, ___ n. 1, ___________ (2016).  In Bravo-Fernandez, the Court described the related terms of issue and claim preclusion as follows (internal quotations and additions omitted):
• Issue preclusion: “In criminal prosecutions, as in civil litigation, the issue-preclusion principle means that “when an issue of ultimate fact has once been determined by a valid and final judgment, that issue cannot again be litigated between the same parties in any future lawsuit.”
• Claim preclusion: “instructs that a final judgment on the merits forecloses successive litigation of the very same claim.” 

Court Rejects Duty of Clarity Argument Where IRS Had Provided Clarity (3/26/15)

In Bombardier Aero. Corp. v. United States, 2015 U.S. Dist. LEXIS 34801 (D. Tex. 2015), here, Bombardier Aerospace Corporation ("BAC") was a  provider of "management services to aircraft owners and leaseholders of fractional interests in aircraft (collectively, "Aircraft Owners") through its Flexjet program."  BAC was compensated by various fee arrangements, including monthly management fees ("MMF") for certain fixed costs -- "costs associated with ownership of the aircraft, such as insurance, inspection, crew salaries, crew training, aircraft hangaring, and scheduling costs."  The other fees BAC charged were variable operational costs dependent upon use.

Section 4261, here, imposes an excise tax on "taxable transportation."  In this discussion this is sometimes referred to as the "FET."  BAC paid the tax on the required the users to pay it the tax on the variable services and remitted those payments to the IRS.  BAC did not collect the tax from users to pay on the MMF and thus did not initially remit those taxes to the IRS.  In two prior audits, the IRS did not require MMF to pay the FET.  During the audit in question, however, the IRS determined that BAC was liable for the FET.  BAC paid a portion of the tax and sued for refund.  The Government counterclaimed for the balance.

The tax in question was not BAC's tax - it was the user's.  In cases where a collection agent is required to collect and pay over another person's tax, Section 6415(a), here, permits the collection agent to maintain a refund suit provided that the collection agent has either refunded the collected tax to the taxpayer upon whom it was imposed or obtained the consent of that taxpayer to obtain the refund.  Of course, the taxpayer -- the user -- had never paid the portion of the tax BAC paid, so BAC could not meet the first requirement.  And BAC had not obtained the consent of the taxpayers, so BAC failed procedurally to meet that requirement for a refund.  (There is some discussion of the issue of when the consent procedural requirement must be met, but I don't want to discuss that issue in this blog.)

I focus here on certain arguments that BAC made as to IRS past practice and IRS's failure to assert the tax in prior audits of BAC.

BAC's first argument was that the IRS was precluded "by the Duty of Clarity from recovering FET on MMF."  I don't recall that I had encountered the alleged "Duty of Clarity" before.  Apparently subsumed in this rubric was the following specifics:

Taxpayer Judicially Estopped from Refund For Taxes Admitted in Plea Agreement (9/25/13)

In Mirando v. United States, 2013 U.S. Dist. LEXIS 135659 (ND OH 2013), the taxpayer pled guilty to conspiracy and tax evasion.  The plea agreement stated that the parties:

agree and stipulate that the following facts would have been established beyond a reasonable doubt at a trial in this matter: . . . after Mirando's release from the custody of the Bureau of Prisons, the IRS assessed tax, interest and penalties for Mirando's taxes due for the 1995 and 1996 tax years as well as for unpaid liabilities for the 2000 and 2004 tax years. As of June 29, 2007, the total tax liability, including interest and penalties, amounted to $448,776.13.

The taxpayer paid and sued for refund.

As I note in the comments below, there was no basis in the normal judicial doctrines of res judicata [claim preclusion] and collateral estoppel [issue preclusion] to prevent the taxpayer from asserting that the tax was less than stipulated in the plea agreement.  And, apparently this plea agreement was not specific that it was intended to contractually bind the taxpayer to the amounts -- even as minimum amounts -- in any subsequent civil tax case.  So something else would have to apply if the taxpayer were going to be bound.

The Court applied judicial estoppel [issue preclusion].  Here is the reasoning (footnotes omitted):

The Court finds judicial estoppel prevents Plaintiff Mirando from bringing his refund claim. First, Mirando's position that he is entitled to a refund for overpaid taxes for the years 1995, 1996, and 2000 is directly contrary to his plea agreement in his 2007 criminal case. Recall Mirando's 2007 plea agreement states that the parties: 

agree and stipulate that the following facts would have been established beyond a reasonable doubt at a trial in this matter: . . . after Mirando's release from the custody of the Bureau of Prisons, the IRS assessed tax, interest and penalties for Mirando's taxes due for the 1995 and 1996 tax years as well as for unpaid liabilities for the 2000 and 2004 tax years. As of June 29, 2007, the total tax liability, including interest and penalties, amounted to $448,776.13. 

Because Mirando initialed the page on which the total tax liability was determined and signed the entire document, Mirando specifically agreed he owed $448,776.13. Mirando cannot now dispute these figures and demand a refund from the IRS after the court accepted his plea agreement. 

Moreover if Mirando was allowed to proceed in this action, he would gain an unfair advantage. By pleading guilty to tax evasion and specifically agreeing to a total tax liability of $448,776.13, Mirando avoided the possibility of a longer sentence and the United States agreed not to prosecute Mirando's ex-wife or two children.37 After obtaining this benefit from the United States, Mirando cannot turn around and sue the United States for a refund. 

Plaintiff Mirando relies on United States v. Hammon [277 F. App'x 560 (6th Cir. 2008)] for its position that his refund claim is not barred by estoppel. In Hammon, the Sixth Circuit held that the defendant was not collaterally or judicially estopped from denying the accuracy of the government's assessments despite pleading guilty to tax evasion and agreeing to pay $2.39 million in restitution. However, the present case can be distinguished from Hammon. In Hammon, the plea agreement only stipulated that the defendant willfully attempted to evade taxes assessed by the government in "the amount of approximately $2.39 million." Since the plea agreement was ambiguous as to whether the defendant admitted that the $2.39 million assessment was correct, the defendant was not estopped from challenging the accuracy of the tax assessment. In contrast, Plaintiff Mirando specifically agreed in his 2007 plea agreement that "beyond a reasonable doubt ... [a]s of June 29, 2007, the total tax liability, including interest and penalties, amounted to $448,776.13." Consequently, Hammon is not controlling, and judicial estoppel prevents Mirando from bringing his refund claim.

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.