Civil Liability for Conduct that is Acquitted in Criminal Case (11/20/21)

 The Kyle Rittenhouse acquittal on all counts is in the news.  Acquittal or conviction (on some or all counts) was sure to become a political charged phenomenon.  I don’t deal with the political issues here. I respond to a question I was asked yesterday as to whether Rittenhouse’s acquittal absolves him of potential civil liability related to the same conduct for which he was acquitted and specifically address the criminal tax analog of the phenomenon.

For a discussion of the nontax answer, I point readers to this discussion:  Euguene Volokh, Could Kyle Rittenhouse Be Sued for Negligence? (The Volokh Conspiracy 11/20/21), here.  Professor Volokh answers the question succinctly at the beginning of the blog post:

A criminal acquittal doesn't preclude a civil lawsuit out of the same claims. First, the acquittal resolves only that guilt couldn't be proved beyond a reasonable doubt (requiring, say, a >90% confidence level); the standard for civil liability is preponderance of the evidence (which requires just >50%, or perhaps ≥50%, if the injury is easily proved and the burden is then shifted to the defendant to prove self-defense).

A similar phenomenon plays out in the criminal tax area.  A criminal tax evasion acquittal does not prevent the imposition of the civil fraud penalty in § 6663.  And, for the same reason:  the burden of proof for the civil fraud penalty is less than for the criminal penalty. so that acquittal is not issue or claim preclusive for the civil fraud penalty.  Civil liability for the civil fraud penalty requires that the Government prove civil fraud liability by clear and convincing evidence, a burden that as articulated is less burdensome (so to speak) for the Government than the beyond a reasonable doubt standard.

 Here is the key paragraph from my Federal Tax Procedure Book (2021 Practitioner Edition), p. 333 here (footnotes omitted from the quote but may be viewed at the link here):

If the taxpayer is acquitted of the tax evasion charge, however, the IRS may still assert the civil fraud penalty (the acquittal is not preclusive that there was no civil fraud).  Why?  A finding of not guilty is not necessarily a finding of innocence; it is only a finding that the government failed to prove guilt beyond a reasonable doubt.  In an ensuing civil tax case, the government must establish fraud only by clear and convincing evidence, a substantially lesser burden than the beyond a reasonable doubt requirement for criminal conviction.  Accordingly, the IRS may and usually does assert the civil fraud penalty when the taxpayer has been acquitted.

Most civil liability exposures relate to liabilities such as negligence discussed above that require proof of liability by a preponderance of the evidence.  Liability for the civil fraud penalty requires proof by clear and convincing evidence, a standard that falls somewhere between beyond a reasonable doubt (the criminal conviction standard) and preponderance of the evidence.  For discussion of the difficulties in articulating these standards, particularly in jury instructions useful to a jury, see discussion in my book pp. 331-332, here, particularly at n. 1414 and pp.601-602.

This post is cross posted on the Federal Tax Crimes Blog here.

Robert Frank Editorial on Decline in Enforcement Resources and Tax Evasion (11/3/20)

 Noted economist Robert H. Frank (Wikipedia here) has written an excellent NYT op-ed: Without More Enforcement, Tax Evasion Will Spread Like a Virus (NYT 10/30/20), here.  Excerpts

Few people enjoy paying taxes, but as Oliver Wendell Holmes Jr. reminded us, “Taxes are what we pay for civilized society.” On reflection, most of us therefore offer at least implicit support for penalties against tax evasion — penalties that have little meaning unless backed by significant enforcement resources.

Yet prodded mainly by anti-tax Republicans, Congress has cut the Internal Revenue Service budget steadily since 2011. By 2019, the agency was auditing only one in every 222 individual returns, down from one in 90 in 2011. Similar reductions have occurred for corporate returns, and were proportionately larger for the wealthiest individuals and largest corporations.

These cuts have not saved the government money. The former I.R.S. commissioner John A. Koskinen estimated, for example, that every $1 trimmed from the agency’s budget has resulted in $4 in lost revenue. But this estimate refers only to direct, or first-round, losses. Because the extent to which people comply with tax laws depends strongly on the behavior of others around them, the ultimate revenue losses are certain to be much larger.

* * * *

What the reductions in I.R.S. funding will continue to unleash, then, is a characteristic feature of all behavioral contagion processes: an explosive chain of feedback loops that greatly amplify any initial change in behavior.

The Unspotted Issue in an Audit; Ethics and Crimes (7/24/20; 8/2/20)

In an ABA Tax Section Court Procedure Virtual meeting on Wednesday, there was a one-hour discussion of ethical issues in handling a matter in the Tax Court.  The participants in the discussion were:

• Judge L. Paige Marvel, United States Tax Court, Washington, D.C.
• Elizabeth G. Chirich, Chief, Branch 1, Procedure & Administration, IRS Office of Chief Counsel, Washington, D.C.
• Guinevere Moore, Moore Tax Law Group, LLC, Chicago, IL
• Kandyce Korotky, Covington & Burling, Washington, D.C. (Moderator)
• Mitchell I. Horowitz, Buchanan Ingersoll & Rooney P.C., Tampa, FL

The discussion was excellent.  I highly recommend those who can access the recording of the event on the ABA web site to do so.  (I would provide a link but have not yet located the link, perhaps because the recording has not yet been put up.)

During the discussion I posted two questions which, apparently because of time, the participants did not respond to.  I offer the questions and some comment here.  The questions were:

1.        Question : What if the IRS sets up only one issue in the notice of deficiency and the IRS never spotted a big issue involving omitted income. There is no real gray area in the unspotted issue; the taxpayer clearly would owe tax if the unspotted issue were fully litigated (indeed taxpayer's counsel did not think she could even make a nonfrivolous argument that the omitted income should not have been included). After filing the petition, IRS Counsel offers to concede that one issue (the spotted issue in the NOD) and sends a stipulated decision document saying that the deficiency is $0. Because the taxpayers' counsel knows that stipulation that there is no deficiency is not true, can the taxpayers' counsel sign the stipulated decision?
2.        Question: This may be a philosophical question rather than one you can answer here:  What good are ethical rules when they don't provide answers -- i.e., when different ethical lawyers acting ethically can reach different conclusions -- does that simply reward the aggressive attorney (who may even be a lawyer who charges for the benefit offered to the taxpayer by being aggressive within the ambiguities -- even creative ambiguities -- in the ethical rules) and the taxpayer engaging this ethically aggressive attorney?  And would about the more conservative ethical attorney and his client?  Is the ethically conservative attorney providing less than ethically aggressive representation then not zealously representing the client?  There is more but I'll stop there?

The second question is more philosophical, so I will focus on the first question.  Here is the key background:

Criminal Tax Evasion and Civil Fraud–If Found by the Trier, Can There be a Reasonable Cause/Good faith Defense (1/16/20; 1/17/20)

I have blogged several times on my Federal Tax Crimes Blog about how the “good faith” defense is subsumed in the definition of willfulness for tax crimes.  Willful is the intentional violation of a known legal duty.  If a trier of fact determines that the defendant intentionally violated a known legal duty, then per se that person did not have a good faith defense.  Accordingly, if the trial court in a criminal case where willfulness is an element of a tax crime properly instructs the jury on the willful element, the fact that the judge did not separately instruct the jury that good faith (such as reliance on tax professional) is a “defense” is not error or, at least not reversible error.  Simply put, proof of willfulness negates the good faith defense.  The defendant cannot have intended to violate a known legal duty and then have reasonable cause/good faith in violating that known legal duty.  Accordingly, for example, consider the following:  "[T]o prove willfulness beyond a reasonable doubt, the Government would have to negate the taxpayer's claim that he relied in good faith on the advice of his accountant.”  United States v. Stadtmauer, 620 F3d 237, 257 n. 22 (3d Cir. 2010).

Now I want to move this concept to the civil arena.  Section 6663, here, imposes a civil fraud penalty.  The conduct penalized under § 6663 is “fraud.”  Basically, the conduct penalized under § 6663 is the same conduct that is tax evasion in the criminal context – intentional violation of a known legal duty.  (There may be different verbal formulations, but that is the essence of it in both the criminal and civil arenas.)  So, if proof of tax evasion negates a reasonable cause defense, one would think that proof of civil fraud negates a reasonable cause defense.

Although I think this logic is irrefutable, some courts nevertheless act like they believe otherwise.  For example, in Purvis v. Commissioner, T.C. Memo. 2020-13, at *33-*48, here, the Tax Court found that the taxpayers committed civil fraud subject to the penalty under § 6663.  The Court concluded after 15 pages analyzing the evidence (*48):   “Accordingly, we hold that petitioners are liable for the section 6663(a) fraud penalties for the years at issue.”

The Court then  (at *49-*50) considered the reasonable cause defense.  But why did the Court do that after the Court found that the taxpayer had intended to violate a known legal duty?

One reason is the way the statutory provisions are written.  Specifically, § 6663 imposes the penalty for fraud but then, § 6664(c)(1), here, states (emphasis supplied): “No penalty shall be imposed under section 6662 or 6663 with respect to any portion of an underpayment if it is shown that there was a reasonable cause for such portion and that the taxpayer acted in good faith with respect to such portion.”  But, as established in the criminal context, the taxpayer (called defendant in a criminal context) cannot have intended to violate a known legal duty if he had a reasonable cause/good faith defense.  That surely must be true in the civil context as well.

I would appreciate readers view on this issue.  Specifically, is it possible for the Government (the IRS in a Tax Court case) to prove civil fraud by clear and convincing evidence and the taxpayer then establish a reasonable cause/good faith defense?

One other thought.  The regulations for the reasonable cause defense under § 6664 on only address the accuracy related penalty under § 6662.  See Regs. § 1.6664-4, titled "Reasonable cause and good faith exception to section 6662 penalties." I suspect that this analysis is the reason.  The reasonable cause defense is an oxymoron if § 6663 civil fraud is proved.  But § 6664(c) is not the only time that Congress has legislated an oxymoron.

Addendum 1/17/20 12:00pm:

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.