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Can You Put a Price on Political Influence? Designated Orders, February 24 – 28, 2020

Posted on Mar. 24, 2020

We don’t usually introduce designated order posts because the team of authors is a part of PT team. I am making an exception here because I have been following the case that Caleb discusses since he was in law school. I have written several posts about this taxpayer because he received a tremendous amount of ink from the Philadelphia Inquirer when I was teaching at Villanova. So, I followed his political demise and criminal trial over a long period of time in my local press. Then, after following the long arc of the criminal case the matter moved into its tax phase resulting in a jeopardy assessment followed by what must be the slowest jeopardy determination ever.

This is one of the first cases I blogged back when we started in 2013. Imagine a jeopardy assessment case where the IRS makes the rare determination of the need to move past the normal assessment process of notice of deficiency followed by a Tax Court hearing in order to quickly make an assessment, file notices of federal tax lien and preserve the government’s position in the taxpayer’s assets. This is a jeopardy case the IRS took four years to put together. Now imagine it’s almost seven years after the IRS finally put its jeopardy case together (that’s eleven years after starting to work on the jeopardy case!) and the Tax Court has just denied summary judgment. The trial and the decision on the liability remain in the future. That the Tax Court now has its most efficient jurist on the case provides some hope for an outcome before the case reaches an age where it would enter middle school. I am curious what has happened to the taxpayer’s assets after the district court declined to allow the jeopardy assessment. If you want to read more about this remarkably slow moving case and my thoughts about the case from several years ago, read the posts here, here, here and here, before starting Caleb’s excellent explanation of the designated order the court entered last month. Keith

There were three designated orders the week of February 24, 2020, but one stole the show: an order pertaining to former Pennsylvania state Senator Vincent J. Fumo (here). (The remaining two orders can be found here and here.)

Aside from the natural allure of political intrigue (one may fairly say, corruption), the Fumo order was particularly compelling because of its discussion of “collateral estoppel.” For those who remember “collateral estoppel” as something learned in a first-year Civil Procedure course, briefly re-learned for the bar, and then filed away in their brain under “never useful again: going into tax law,” this order may change your mind. Procedurally Taxing has definitely raised the issue before in numerous contexts (see here, here, and here).

To understand how collateral estoppel plays out in this case, one must first understand the nature of Mr. Fumo and his previous run-ins with the law. For those unfamiliar with the workings of Pennsylvania state politics, a quick google search will bring up numerous stories of varying length and detail on the rise and fall of Mr. Fumo in the halls of political power. At the apex of his power, he certainly seemed to carry a lot of influence.

And then came the fall. Charges of defrauding both the Pennsylvania State Senate and the non-profit Citizens Alliance for Better Neighborhoods. Mr. Fumo harmed both of these parties in numerous ways, including using their money and services for personal purposes (rather than the public interest purposes he presumably presented). But he also made sure these parties spread the wealth (in self-serving ways), by ensuring payment of “excessive salaries to employees who were promoted solely because of loyalty to [Mr. Fumo].” The Feds brought an indictment with 139 different counts, of which Mr. Fumo was convicted of 137.

When you have that many indictments, with that powerful a person, you can all-but guarantee there is going to be a lot of litigation. And this case is no exception. For those with Westlaw access, a look at the “history” tab in U.S. v. Fumo gives a taste with 17 separate entries from the district court and court of appeals (3 of which principally concern a party related to the Fumo matter, the aide who destroyed email evidence.). For our purposes, the court decisions that matter most pertained to money, including: (1) a finding that Mr. Fumo had to pay restitution, and (2) a finding against issuing a forfeiture judgment of the property “derived from proceeds traceable to the commission” of the offenses.

As it turns out, the IRS thinks that the first court finding entitles them to summary judgment and Mr. Fumo thinks that the second issue entitles him to summary judgment, both on theories of collateral estoppel. Cross motions ensue, both of which are denied. Let’s see why.

Judge Lauber neatly lays out the test for the application of collateral estoppel in Tax Court: (1) final judgment by court of competent jurisdiction, (2) identical issues from suits, (3) the assertion of collateral estoppel can only be asserted against parties to the prior judgment, (4) the parties must have actually litigated the issues, which were “essential” to the prior decision, and (5) the controlling facts and applicable rules need to be unchanged from the prior litigation. See Atkinson v. C.I.R., T.C. Memo. 2012-226. Oh, and if there are any special circumstances that warrant it, the Court can decide against applying collateral estoppel.

So where does that go awry here? Let’s start with the easier of the two motions: Mr. Fumo’s.

To Mr. Fumo’s mind, the summary judgment in his favor is appropriate because the IRS is collaterally estopped “by the District Court’s decision not to enter a judgment of forfeiture, from asserting that petitioner received gross income.” Pretty simple, really: if the District Court already ruled I don’t have gross income, you can’t argue I have a deficiency based on omitted income. But is that what the District Court really said in its denial of forfeiture?

Judge Lauber focuses on the “identical issues” prong in dooming this motion. Is the inability to find “proceeds traceable to” specific criminal actions the same as saying there is an inability to find “income” as defined by the Internal Revenue Code? Not quite. One (proceeds) is fairly narrow and demanding, whereas the other (gross income) is extremely broad. The U.S. suit lost its motion for a judgment of forfeiture because they couldn’t sufficiently link specific property to the criminal acts. It is doubtful that the District Court found (or even considered) whether Mr. Fumo’s criminal activity had resulted in “accessions to wealth, clearly realized, over which [Mr. Fumo has] complete dominion.” Commissioner v. Glenshaw Glass Co. 348 U.S. 426 (1955).

Petitioner’s summary judgment motion denied. What about the IRS’s summary judgment motion? This one is a bit less of an easy call.

The IRS really wants collateral estoppel to apply in two ways: (1) to preclude Mr. Fumo from relitigating the fact that he misappropriated benefits from his victims, and (2) to preclude Mr. Fumo from relitigating that the misappropriations constitute taxable benefits as a matter of law.

One of these is a far heavier lift than the other. Or maybe they both are heavy lifts, and it really just depends on exactly what the IRS wants to do with the preclusion. Judge Lauber agrees that “collateral estoppel will prevent [Mr. Fumo] from relitigating numerous facts that were indisputably litigated and resolved against him in the criminal case.” But exactly what facts, and more importantly what legal conclusions they bring about, are not as well defined at the moment. Particularly, the Tax Court is wary of using collateral estoppel (at this point) to get to the heart of what the IRS is asking: preclusion from disputing “the amounts of unreported income[.]” Because ultimately, for summary judgment to make sense here, the IRS would be looking for a knock-out blow: preclusion on issue that the proceeds were taxable, and preclusion on the amount of the proceeds. But do they have enough in the District and Appellate Court records to get there?

Probably not. One overarching issue is Mr. Fumo’s particular brand of corruption. This isn’t a politician just taking bags of money under the table. This is a politician using his influence for personal benefit, often through jobs and salaries that went to other people (loyal to him, of course). The tax consequence of theft or embezzlement is usually straightforward, and the restitution judgments usually align one-to-one with the taxable income.

Beyond that, the amount of Mr. Fumo’s benefit (to say nothing of his taxable benefit) was clouded even in the deciding courts, because there was a co-defendant. The court of appeals originally suggested up to 96% culpability to Mr. Fumo. The district court, however, ended up at 75% culpability for the restitution award (originally, they only found 50%). How the IRS came to the numbers on their Notice of Deficiency from the restitution award isn’t immediately clear either. The court ordered restitution in the amount of $4,083,802 and the IRS ultimately determined unreported income of $2,133,956, and later amended their answer to increase the amount to $2,304,364. Lots of moving parts and not a lot of science to the numbers, as far as this admittedly poor mathematician can tell. (The IRS says they changed the numbers based on a “different averaging computation,” but that honestly sounds like “fancier guess-work” to me.)

Ultimately, however, the biggest issue remains the nature of the benefits and how inappropriate it is for a summary judgment motion. Judge Lauber sums it up: “there may be disputes of material fact as to whether petitioner derived a dollar-for-dollar benefit from the additional salary received by employees for whom he secured promotions for higher positions.” And where there is a (genuine) dispute of material fact, summary judgment does not result. Collateral estoppel is sure to apply in this case on some (probably many) facts, but at this point not enough to pin-point the amount of taxable income -which is never what the District Court was concerned with in the first place. Assuming Mr. Fumo did not candidly report some of his ill-gotten gains on his tax return, he will owe something: exactly how much, however, may well require yet another trial.

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