In Senyszyn v. Commissioner, the Tax Court looks at the impact of a tax evasion conviction on the amount of the civil liability owed by the taxpayers and finds that the IRS cannot use collateral estoppel to impose a liability where it otherwise does not exist. The opinion in the preceding sentence follows an earlier decision of the Court in which the IRS sought summary judgment. The facts here create a bizarre result in that tax evasion convictions do not occur in situations in which the IRS cannot prove the taxpayers has evaded a tax liability and, yet, here the IRS cannot prove any tax liability in the civil case that followed the criminal conviction. Usually, Chief Counsel attorneys love to litigate Tax Court cases in which the taxpayer pled guilty to tax evasion because the conviction makes proving the civil case so much easier. When the conviction involves a lesser offense than the flagship conviction of tax evasion, the proof gets more difficult. To make matters more embarrassing for the IRS in this case, the taxpayer is a former revenue agent.
The criminal case seems pretty normal except that it involves an IRS employee. Mr. Senyszyn misappropriated funds from a business he appears to have taken over while working as a revenue agent. He stipulated in the criminal case that he failed to report $252,726 in income on the joint tax return filed for 2003 because he did not report the money that he misappropriated. The IRS always pursues criminal liability before it seeks to establish civil liability. When the IRS obtains a conviction for tax evasion under IRC 7201, case law provides that the conviction under 7201 necessarily dictates a civil liability for fraud under the principle of collateral estoppel. Here the IRS seeks to use the taxpayer’s stipulation of the amount of the unreported income as a further basis for collateral estoppel and the Tax Court draws the line at turning this stipulation into a tax amount for which it must determine liability. The Court found the decision novel enough to publish it as a case with precedent. What makes it precedential and how did the IRS lose a civil case against unrepresented taxpayers for which it obtained a criminal conviction?
Mr. Senyszyn got increasingly involved in the real estate business of David Hook during the late 1990s and early 2000s. The relationship soured, however, and Mr. Hook brought suit again Mr. Senyszyn on May 28, 2004. The complaint alleges that Mr. Senyszyn embezzled and converted a minimum of $400,000 which amount increased to $1,000,000 by the time of trial. In 2006 Mr. Senyszyn deeded his interest in all but one parcel of some property the parties had jointly purchased in partial settlement of the suit. The suit must have come to the attention of someone at the IRS who passed it along to the criminal folks who opened an investigation. A revenue agent was assigned to assist the criminal investigators and the RA tracked the transfers into and out of the business account in determining that Mr. Senyszyn netted $252,726 in 2003. The US Attorney in New Jersey charged Mr. Senyszyn with a four count indictment to which he pled guilty to tax evasion for 2003. Mr. Senyszyn later attempted to withdraw his guilty plea but his attempts to do so failed.
On June 30, 2008, Mr. and Mrs. Senyszyn filed an amended return for 2003. The amended return reports the $252,726 additional gross income but it also shows expenses in excess of that amount resulting in a net profit of -$223,279. The IRS received but did not process this amended return. The IRS argued that the reporting of the $252,726 on the amended return was an admission that petitioners received that amount of additional income in 2003. Just as it rejected the application of collateral estoppel to the amount based on the plea agreement, the Court rejected the reporting of this amount on the amended return as full agreement with the calculation of the IRS because they also claim a large deduction not calculated by the IRS. The Court states that the issue is whether the RA correctly computed the relevant amounts.
It finds that he did not. The Court found that Mr. Senyszyn returned to Mr. Hook more than $481,947 of benefits received in 2003. This meant that he returned more than he received based on the calculations provided to the Court. Because he returned more than he received, he did not have any income from his dealings with Mr. Hook. Having reached this factual conclusion, the Court next looks at the impact of collateral estoppel. The Court states that even though it concludes no deficiency exists based on the facts presented to it “we could apply the doctrine of collateral estoppel to uphold a deficiency in whatever minimum amount would justify Mr. Senyszyn’s conviction under section 7201.” The reason the Tax Court could determine some deficiency is that the conviction required at least some minimum amount of tax liability and since some minimum amount of liability had to exist for purposes of convicting him, the Tax Court could consider itself bound by the existence of that minimum amount whatever it might be.
While a 7201 conviction requires the existence of a minimum amount of tax, it does not require the existence of any specific minimum amount. So, the Court grapples with the effect of collateral estoppel in a situation in which it has found no deficiency in its own proceeding and notes that it has not previously faced this question. The Court states that “we conclude that the purposes of the doctrine would not be served by upholding a deficiency unsupported by the evidence presented. Upholding a minimum deficiency would not promote judicial economy.” A main purpose of collateral estoppel is judicial economy so that once a court determination occurs subsequent courts will not need to relitigate the same issue. Since the Tax Court needs to look at the deficiency amount even when a 7201 conviction exists, to take that look and determine no tax exists does not really require any additional resources. So, the Tax Court refuses here to make up some minimum amount of deficiency just to support that element of the criminal conviction. Because it does not find a deficiency, it also does not impose the fraud penalty.
These facts will not often occur but they do give hope to petitioners convicted of tax evasion that on the amount of the liability, they will get an opportunity to present evidence to the Tax Court in support of a different number than existed in the criminal plea agreement. Because this case involved a plea and not a trial, it is possible the outcome would differ following a conviction by trial.
The Tax Court also noted that it thought it unlikely Mr. Senyszyn had returned all of the money he took from Mr. Hook during the years 2002-2004 and stated that it only had 2003 before it. It also rejected petitioners’ claim for a refund. In rejecting the claim for refund, it cited to the fact that the filing of the petition in this case well after the time frame for filing a refund claim. It did not mention the timing of the filing of the amended return by petitioners but that also appeared to come after the period for a timely refund claim.