It has now been a decade since Congress began allowing the IRS to make restitution based assessments. This area of the law is still in the growing phase. We have blogged about issues regarding restitution based assessments here, here, here, here, here and here if you want more background on this. The Saltzman-Book treatise also covers this topic extensively at ¶ 10.01[e] (addressing assessments generally) and ¶ 12.05[e][vi] (addressing criminal penalties) along with a stand-alone chapter on restitution based assessments at ¶ 12.06[a].
The recent case of Le v. Commissioner, T.C. Memo 2020-17 brings us back to the issues presented in a deficiency case following a restitution based assessment. As is essentially required in these cases one of the petitioners, here the husband, Dung T. Le, was criminally prosecuted giving rise to a restitution order. He was convicted of tax evasion under IRC 7201 pursuant to a plea agreement for the year 2006. The prosecution occurred for the years 2004, 2005 and 2006 following an indictment on March 20, 2013.
Because the criminal investigation process is slow, because the IRS defers civil action until the completion of the criminal aspects of the case conclude and because this case took four years to resolve in the Tax Court we discuss a case today involving years prior to the birth of around 30% of the world’s population. The length of a case going through the criminal tax process provides the greatest reason for allowing assessment of some of the tax following the restitution phase of the criminal case. As we will see, however, that assessment marks the beginning rather than the end of the assessment process in a case such as this.
In connection with Petitioner Le’s plea agreement, he also agreed to pay restitution of $33,332 for 2006. He paid that amount. After he paid the restitution, the IRS finished the examination of the couple’s returns it had begun prior to the criminal case. The examination resulted in a notice of deficiency for 2004, 2005 and 2006 in the amounts of $31,944, $44,178 and $40,706, respectively. The IRS also asserted fraud penalties for each of the years.
Petitioner Le argued that the doctrine of collateral estoppel barred respondent from relitigating his 2006 liability since the criminal court determined the amount of his liability in the restitution order. He loses this argument which came as no surprise. The Court held that the order for criminal restitution did not comprise an essential part of the criminal conviction and was not an element of the conviction. The Court also pointed out that the law is well settled that a restitution order has no effect on the authority of the IRS to determine a taxpayer’s correct civil tax liability citing Morse v. Commissioner, 419 F.3d 829, 833-835 (8th Cir. 2005).
After swatting away the argument that the restitution order in any way stopped the IRS from pursuing the correct liability in a follow up civil proceeding, the Court then marched through all of the reasons that he owed the additional tax. That the taxpayer wanted to go through this after declining to go through it for criminal tax purposes surprises me but apparently he thought a sufficient chance existed that the IRS would not put on its proof to cause the creation of an opinion detailing the many ways in which he cheated on his federal taxes. The Court also had little trouble finding that Mr. Le deserved to have the fraud penalty apply.
So, this case shows in a simple, straightforward manner the ability of the IRS to pursue civil assessment of additional taxes after making a restitution based assessment. It offers very little, if anything, new.
Two other aspects of the case deserve quick mention. First, the Court finds that Mr. Le’s wife does not owe the accuracy related penalty. The fact that the IRS asserted the accuracy related penalty against Mrs. Tran also surprises me since I would have expected the government to know better. Aside from hoping that the IRS attorneys read our blog posts explaining that if it cannot prove fraud against the spouse the Court can impose no lesser included penalties against her, because doing so would create an impermissible stacking of penalties as set out in Said v. Commissioner, T.C. Memo 2003-148, aff’d 112 F. App’x 608 (9th Cir. 2004), I hope that government attorneys know the law. Seems like someone should have caught this argument unless the IRS seeks to change the law in which case perhaps we will see an appeal. This is the second opinion within six months in which the IRS attorneys have made an argument that appears contrary to both the regulation, Treas. Reg. 1.6662-2(c), and the IRM, IRM 220.127.116.11.3.1 No Stacking Provision (12-13-2016). Either the review of the IRS attorneys is lax or a change in position is afoot.
Second, the case contains an order sealing part of the record. The order is unusual and its language caused me to read this passage a few times: “Pursuant to the Court’s Order dated July 10, 2018, portions of the exhibits were not properly redacted in accordance with Tax Court Rule 27(a), and the exhibits were not marked in accordance with Tax Court Rule 91(b).” After reading the prior order, I came to understand this language as an odd way to refer back to an earlier order requiring redaction.
Next the Court determines that since the material was not properly redacted, it is going to seal it. It appears the Court sealed the record sua sponte. Nothing in the order makes clear how the sealing of the record here meets the criteria for sealing discussed eloquently in a post by Sean Akins. In its order dated July 10, 2018, the Court pointed out to the parties that they failed to properly redact documents in the stipulation in accordance with the Tax Court rules. I am troubled that the remedy for failing to properly redact material in a stipulation, in which both parties were represented by counsel, would be to deny the public the right to the material in order to prevent the public from seeing material the parties were required to redact rather than to order the parties a second time to redact the material properly and resubmit it.
It is quite possible that I am missing something in the order or outside of the order that drives the decision, but the order itself leaves me quite puzzled. I doubt that any non-party cares what was in the stipulated documents, but if a non-party did care, it seems to me that non-party should have a right to see the documents following appropriate procedures without having to go through the lengthy and difficult process to unseal the record. Counsel to the parties in this case could have been sanctioned for failing to follow the redaction rules and the prior specific order of the Court. The sanction instead falls on the person with a lawful right to see the records of the case.