Collection
7203: Willful
Failure to File Return, Supply Information, or Pay Tax: Collection
[2005-2 USTC ¶50,504] Billy S. Creel, Sr., Petitioner-Appellee v. Commissioner of Internal
Revenue, Respondent-Appellant.
U.S.
Court of Appeals, 11th Circuit; 04-11817, August 2, 2005.
Affirming an unreported Tax Court decision.
[ Code
Secs. 6325 and 7203]
Penalties, criminal: Civil tax liabilities: Restitution order:
Satisfaction of judgment: Release of lien. --
A
satisfaction of judgment and release of lien that concluded a taxpayer's
criminal case also discharged his civil liability for penalties and
interest. The satisfaction of judgment and release of lien were issued
after the taxpayer satisfied a restitution order to pay deficiencies
that arose from his criminal failure to file returns, but before he paid
the related interest and penalties. Generally, restitution is a
criminal, rather than a civil, penalty and civil penalties can be
recovered separately from, and in addition to, criminal penalties. Here,
however, the civil penalties and interest were expressly included in the
criminal judgement and the restitution order, and the satisfaction of
judgment and release of lien stated that the taxpayer's restitution
obligation had been paid in full. Since the government included the
penalties and interest in the taxpayer's restitution order, the
discharge of his restitution obligation also discharged his civil
liabilities.
[ Code
Sec. 7122]
Release of lien: Authority to compromise:
U.S.
Attorney. --
A
U.S. Attorney acted within the scope of his authority when he issued a
satisfaction of judgment and release of lien in a criminal case that
also discharged the taxpayer's civil tax liabilities. The taxpayer's
criminal restitution order inextricably intertwined his civil and
criminal tax liabilities, and the IRS conceded that the U.S. Attorney
had the authority to settle the taxpayer's criminal liabilities.
[Tax Court Rule 143]
Tax Court Rules: Witnesses: Failure to present. --
The
Tax Court did not improperly use the "missing witness
inference" to shift the burden of proof away from a taxpayer who
claimed that his civil tax liabilities were discharged by the U.S.
Attorney who handled his criminal case. The court assumed that the IRS's
failure to present any witnesses from the U.S. Attorney's office or the
Department of Justice indicated that their testimony would have been
unfavorable to the IRS. However, this inference was not the sole basis
for the court's decision in favor of the taxpayer, because he also
presented evidence to support his claim.
Before: Edmondson, Chief Judge, and Tjoflat and Kravitch, Circuit
Judges.
KRAVITCH, Circuit Judge: Respondent-Appellant, the Commissioner of
Internal Revenue ("the Commissioner"), appeals the Tax Court's
decision denying a proposed levy to collect federal income taxes for the
years 1987-1991 allegedly owed by Petitioner-Appellee, Billy Creel, Sr.
("Creel"). 1
I.
Background
1. Prior Criminal Tax Case
Creel failed to file timely federal income tax returns for the years
1985-1991. The Internal Revenue Service ("IRS") referred the
matter to the Department of Justice ("DOJ") for prosecution,
and the DOJ assigned the matter to the United States Attorney's Office
for the Middle District of Alabama. On April 8, 1993, Creel pleaded
guilty to both counts of a two-count criminal information charging him
with willfully failing to file federal income tax returns for 1987 and
1988, in violation of 26 U.S.C. §7203.
As part of the plea agreement, Creel agreed to file returns for the
years 1985-1991 and make full restitution of the amount of loss
resulting from his failure to file returns for the years 1986-1991. 2
Creel's returns for the years 1986-1991 showed unpaid income taxes
totaling $83,830. 3 The IRS
assessed the taxes shown on the returns, plus interest. The IRS assessed
penalties for failure to file timely returns for each year under 26
U.S.C. §6651(a),
and penalties for underpayment of estimated tax under 26 U.S.C. §6654
for the years 1985-1989. 4
On June 14, 1993, the district court sentenced Creel in the criminal
case and he was placed on probation for five years. As a condition of
probation, Creel was ordered to make restitution to the IRS for the
years 1986-1991 in the amount of "$83,830 plus any applicable
penalties and interest." 5
(emphasis added). The district court ordered the restitution pursuant to
18 U.S.C. §3663(a)(3), which provides that a "court may...order
restitution in any criminal case to the extent agreed to by the parties
in a plea agreement." To secure the restitution obligation, the
U.S. Attorney recorded a judgment lien against Creel's property.
Beginning in May 1994, and continuing through June 1998, Creel made
monthly restitution payments totaling $83,830. On June 9, 1998, after
Creel made his last monthly restitution payment, the USAO informed the
district court that Creel's restitution obligation had been paid or was
otherwise settled. The U.S. Attorney filed a Satisfaction of Judgment
that stated: "The assessment, fine, and/or restitution imposed by
the Court...having been paid or otherwise settled, the Clerk...is hereby
authorized and empowered to satisfy the Judgment as to the monetary
imposition only." The U.S. Attorney also recorded a Cancellation
and Release that stated that the previously-recorded judgment lien was
"fully released, satisfied, discharged, and cancelled" because
the debt was "paid in full."
2. Administrative Proceeding
The IRS applied the restitution payments totaling $83,830 to fully
satisfy Creel's tax liability for 1986 and part of his tax liability for
1987. Claiming that Creel owed additional taxes, penalties, and interest
for 1985 and 1987-1991, in June 1998, the IRS assigned the account to
the Collection Division. The revenue officer and Creel's representative
discussed whether Creel could enter into an offer in compromise or a
deferred payment schedule. These discussions ended when the parties
disagreed as to the amount Creel could afford to pay.
On February 2, 2000, the Commissioner sent Creel a notice of intent to
levy showing unpaid amounts totaling $284,758.28 and a notice of a right
to a collection-due-process ("CDP") hearing with respect to
these unpaid amounts 6 :
Assessed Late Unassessed Late
Filing Penalties and Total Payment
Assessed Assessed Penalties
Unpaid Tax Statutory Interest Amounts as of and Statutory Total
YearPer Return as of July 24, 2000 July 24, 2000 Interest Due
$53,601.53 7 7
Includes fees
and collection
costs totaling
1985$18,772.16 $34,818.37 $11. $31,803.67 $85,405.20
$18,063.01 8 8
Includes fees
and collection
costs totaling
$11 and reflects
the application
of a $1,500
payment and a
1987$9,514.96 $10,326.78 $278.73 payment. $19,189.06 $37,252.07
1988$15,974.75 $16,720.50 $32,695.25 $28,729.02 $61,424.27
$24,751.37 9 9
Includes fee and
collection costs
1989$15,148.34 $9,592.03 totaling $11. $22,270.20 $47,021.57
$15,271.55 10 10
Includes fee and
collection costs
1990$10,425.95 $4,834.60 totaling $11. $14,026.54 $29,298.09
1991$9,479.16 $3,114.52 $12,593.68 $11,763.40 $24,357.08
$284,
Total 758.28
Creel requested a CDP hearing. Creel's counsel met with Judy Kelly, the
Appeals Officer assigned to the case, to discuss the proposed levy.
Creel's counsel argued that Creel's alleged civil tax liabilities for
the years 1986-1991 had been satisfied by virtue of his payment of
$83,830. Kelly disagreed, determining that the restitution order
required that Creel pay "83,830 plus any applicable penalties
and interest." (emphasis added). Accordingly, Kelly sustained
the Commissioner's proposal to collect the unpaid "applicable
penalties and interest."
3. Tax Court Proceeding
Creel petitioned the United States Tax Court under 26 U.S.C. §6330(d)
for review. At the trial, Creel testified that it was his understanding
that his payment of $83,830 satisfied all of his tax liabilities for the
subject years. Besides Creel, the only other witness to testify was
Kelly. The Commissioner reserved in its trial memorandum the right to
call as a witness a representative of the DOJ and/or the USAO, but never
did so.
Following the trial, the Tax Court entered an order, in which it did not
sustain the proposed levy with respect to the 1987-1991 liabilities. 11 The Tax
Court found that Creel's payment of $83,830 and the U.S. Attorney's
issuance of a satisfaction of judgment and release of lien settled the
alleged civil tax liabilities. The Tax Court found, inter alia, that
Creel testified "credibly and without contradiction that he
understood that his payment of the $83,830 would satisfy his civil tax
obligation for $83,830 plus related penalties and interest." The
court also relied on the "missing witness inference,"
inferring that the Commissioner's failure to call to the stand a
representative of the U.S. Attorney's Office suggested that "any
relevant testimony from such a witness would have been unfavorable"
to the Commissioner. Finally, the Tax Court concluded that the U.S.
Attorney had the authority to settle Creel's civil tax liabilities. The
Commissioner now appeals the Tax Court's decision.
II.
Discussion
1. Standard of Review
We review the Tax Court's factual findings for clear error and its legal
conclusions de novo. Atlanta Athletic Club v. Commissioner
[ 93-1
USTC ¶50,051], 980 F.2d 1409, 1411-12 (11th Cir. 1993).
"A finding of fact is clearly erroneous if the record lacks
substantial evidence to support it, so that our review of the entire
evidence leaves us with the definite and firm conviction that a mistake
has been committed." Atlanta Athletic Club [ 93-1
USTC ¶50,051], 980 F.2d at 1411-12 (citations and quotation
marks omitted).
2. Analysis
The Commissioner concedes that Creel's criminal restitution obligation
was satisfied, and thus, his criminal tax liabilities were discharged.
The Commissioner contends, however, that the satisfaction of Creel's
criminal restitution obligation has no bearing on the Commissioner's
ability to pursue Creel for additional civil tax liabilities.
In the abstract, the Commissioner is correct. As a general rule, the
government can recover criminal penalties from an individual in a
criminal prosecution and can recover additional civil penalties in a
civil proceeding. See generally United States v.
Barnette, 10 F.3d 1553, 1558 (11th Cir. 1994); Hickman v.
Commissioner of Internal Revenue [ 99-2
USTC ¶50,706], 183 F.3d 535, 537-38 (6th Cir. 1999).
Moreover, an order to pay restitution under 18 U.S.C. §3663 is a criminal
penalty rather than a civil penalty.
United States
v. Johnson, 983 F.2d 216, 220 (11th Cir. 1993). Indeed, the
restitution statute used in the instant case expressly contemplates that
a civil claim may be brought subsequent to a criminal conviction by
providing for an offset for the amount of restitution paid in the
criminal case against any damages recovered in the civil proceeding. 18
U.S.C. §3663(e)(2).
The key problem with the Commissioner's position is that it fails to
take into account the unique facts and the nuances of the instant case,
most notably the language of the restitution judgment and the actions of
the U.S. Attorney. As a condition of probation, the district court
ordered Creel to pay restitution to the IRS. As stated in the PSI, the
plea agreement mandated: "[a]s a condition of probation, the Court
shall impose a condition requiring restitution in the amount of $83,830
to the Internal Revenue Service, in addition to any interest and
penalties which may be imposed by the Internal Revenue Service."
(emphasis added). In turn, the judgment in the criminal case set the
amount of restitution at "$83,830 plus any applicable penalties
and interest." (emphasis added). Thus, as the Tax Court found,
the restitution amount specifically included the civil penalties that
the Commissioner now seeks to recover. 12
Creel made his monthly restitution payments totaling $83,830. As a
condition of probation, Creel still owed the "applicable penalties
and interest." Rather than pursue these additional civil penalties,
the U.S. Attorney undertook two key actions. First, the U.S. Attorney
issued a satisfaction of judgment which stated that "[t]he
assessment, fine, and/or restitution imposed by the Court in the above
styled case having been paid or otherwise settled..."
(emphasis added). Second, the U.S. Attorney signed a cancellation and
release of lien which stated that "[t]he debt secured... having
been paid in full, said lien is hereby fully released, satisfied,
discharged, and cancelled." (emphasis added).
Creel argues that because the government elected to include his civil
tax liabilities as part of the restitution order, when the U.S. Attorney
discharged the restitution obligation, Creel's civil tax liabilities
were also extinguished. We agree. Creel testified in the Tax Court
proceeding that he understood his payment of $83,830 constituted a full
payment of his tax liabilities. He also testified to the effect that he
understood the release issued by the U.S. Attorney discharged all that
he owed. The Commissioner did not refute Creel's testimony or show that
the release of lien and satisfaction of judgment should be viewed as
anything other than a release of all liabilities contained in the
restitution order.
As the Tax Court noted:
Although
the record does not establish why the USAO treated the restitution order
satisfied for the lesser amount, the record does establish that the
sentencing court considered petitioner to be a man of limited wealth. A
reasonable inference is that the USAO believed that the receipt of
petitioner's civil taxes (exclusive of penalties and interest) in the
amount of $83,830 was the most that it could recover from petitioner and
agreed with him following his sentencing that his timely payment of that
amount would serve to settle his civil tax liability of $83,830 plus
related penalties and interest.
Upon review of the record, we conclude that the Tax Court did not err in
finding that Creel's civil tax liabilities were settled by virtue of the
$83,830 payment and the actions of the U.S. Attorney. Thus, although not
compelled to do so, the government discharged Creel's civil tax
liabilities as part of the criminal case.
The Commissioner also argues that the Tax Court erred in applying
certain legal principles. The Commissioner first contends that the Tax
Court erred in concluding that the U.S. Attorney had the authority to
compromise Creel's civil tax liabilities. Without such authority, the
U.S. Attorney's actions would not bind the government, even if he
intended to compromise Creel's civil tax liabilities. United States
v. Beebe, 180
U.S.
343, 351 (1901); Klein v. Commissioner [ 90-1
USTC ¶50,251], 899 F.2d 1149, 1152 (11th Cir. 1990).
"It is well settled that persons dealing with a governmental agent
must take notice of the agent's authority and that any unauthorized acts
taken by the agent do not bind the government.
United States
v. Killough, 848 F.2d 1523, 1526 (11th Cir. 1988).
Under 26 U.S.C. §7122(a),
"the Attorney General or his delegate may compromise" any
"civil or criminal case arising under the internal revenue
laws" after "reference to the Department of Justice for
prosecution or defense." In turn, the Attorney General's authority
to compromise any "civil or criminal case arising under the
internal revenue laws" has been delegated to the Assistant Attorney
General, Tax Division. 28 C.F.R. §§.70, 0.160. Moreover, some civil
claim settlement authority has been re-delegated to U.S. Attorneys. Tax
Div. Directive No. 105, §7, 60 Fed. Reg. 31244 (1995), 28 C.F.R.,
Appendix to Subpart Y of Part O. 13
Although the Commissioner acknowledges that some civil settlement
authority has been re-delegated to U.S. Attorneys, he argues that Creel
fails to show that the formal requirements of a re-delegation were
satisfied.
Under the unique facts of this case, we are not persuaded by the
Commissioner's position. Importantly, the Commissioner concedes that the
U.S. Attorney had authority to settle Creel's criminal restitution
obligation. And here the restitution obligation was drafted such that
Creel's civil tax liabilities were inextricably intertwined with his
criminal tax liabilities, which together formed a condition of his
probation. Because the U.S. Attorney had the authority to settle the
criminal side of the case, and the civil penalties were consolidated
within the criminal case, the U.S. Attorney acted within the scope of
his authority. Cf. In re Knopf v.
United States
, 190 B.R. 647, 651-52 (Bankr. D. Mont. 1995) (noting that "it
does not bode well for an IRS attorney to ... challenge the authority of
the Assistant U.S. Attorney to settle a tax prosecution case by a court
accepted Plea Agreement.").
Finally, the Commissioner argues that the Tax Court erred in applying
the missing witness inference. The Tax Court inferred from the
Commissioner's failure to present a witness from the DOJ or U.S.
Attorney's Office that any relevant testimony from such a witness would
have been unfavorable to the Commissioner. The Tax Court noted that the
failure to call such a witness was peculiar given that the Commissioner
listed a representative from the U.S. Attorney's Office or DOJ on its
pre-trial witness list.
"It is well settled that the production of weak evidence when
strong is available can lead only to the conclusion that the strong
would have been adverse." Raley, Inc. v. Kleppe, 867 F.2d
1326, 1329 (11th Cir. 1989); see also Mammoth Oil Co. v.
U.S.
, 275
U.S.
13, 52 (1927). The Commissioner argues that the use of the inference was
improper because Creel had the burden to show that his civil tax
liabilities were compromised, and the Commissioner's failure to call a
witness cannot by itself satisfy Creel's burden. 14 That
argument assumes that the Tax Court relied solely on the missing witness
inference. A review of the record reveals that such an assumption is
incorrect. The Tax Court simply relied on the missing witness inference
along with the other evidence presented in the case. See Steiner v.
Commissioner [ 65-2
USTC ¶9550], 350 F.2d 217, 223 (7th Cir. 1965). Creel
proffered other evidence to support the existence of a compromise: (1)
Creel's uncontradicted testimony that he believed his payment of $83,830
fully satisfied all of the amounts he owed to the government; and (2)
evidence showing that the U.S. Attorney issued a release of lien and
satisfaction of judgment. Under these circumstances, we hold that there
was nothing improper about the use of the missing witness inference.
For the foregoing reasons, we AFFIRM.
AFFIRMED.
1 The Tax
Court sustained the Commissioner's proposed collection with respect to
Creel's tax liabilities for 1985. Thus, the 1985 tax liabilities are not
at issue in this appeal.
2 The plea
agreement itself is not in the record. The Presentence Investigation
Report (PSI) issued by the U.S. Probation Office states the terms of the
plea agreement.
3 The tax
returns showed the following unpaid taxes:
Year Tax Unpaid
1986 $23,287.00
1987 $9,514.96
1988 $15,974.75
1989 $15,148.34
1990 $10,425.95
1991 $9,479.16
Creel also filed a return for 1985 showing unpaid taxes of $18,772.16.
4 The
assessed penalties and interest were as follows:
Year §6651(a) §6654 Interest Total
1985 $4,223.74 $1,396.73 29,197.90 34,818.37
1986 $5,239.65 $1,267.57 $23,477.31 $29,984.53
1987 $2,140.87 $578.13 $7,607.78 $10,326.78
1988 $3,594.32 $3,594.31 $9,531.87 $16,720.50
1989 $3,408.37 ----- $6,183.66 $9,592.03
1990 $2,345.83 ----- $2,488.77 $4,834.60
1991 $2,132.81 ----- $981.71 $3,114.52
5 The
amount of restitution was computed as follows:
Year Tax Amount
1986 $23,287
1987 $9,514.96
1988 $15,974.75
1989 $15,148.34
1990 $10,425.95
1991 $9,479.16
Total $83,830.00
The judgment stated that the restitution should be paid to the DOJ in
monthly installments according to a schedule determined by the U.S.
Probation Office.
6 Prior to
a levy, the IRS must give the taxpayer notice of an opportunity for a
CDP hearing before the IRS Appeals Office. 26 U.S.C. §6330(a).
11 The Tax
Court sustained the proposed levy for the 1985 tax year because that
year was not included in the restitution order. Thus, as noted earlier,
the 1985 tax liabilities are not at issue in this appeal. The court also
held that the Appeals Office did not abuse its discretion in rejecting
Creel's proposal to make minimal monthly payments of $250.
12 The
Commissioner also argues that the "any applicable penalties and
interest" portion of the restitution judgment was too vague to be
legally enforceable. The fact that penalties and interest might be
undetermined at sentencing does not make them legally ineffective, so
long as the amount is eventually agreed upon by the parties or
adjudicated. See United States v. Stoehr [ 52-1
USTC ¶9299], 196 F.2d 276, 284 (2d Cir. 1952). Here, there
was no such need for agreement or adjudication because the penalties and
interest were waived.
13 The
full text of the regulation states:
Section 7. Subject to the conditions and limitations set forth in
Section 8 hereof, United States Attorneys are authorized to:
(A) Reject offers in compromise of judgments in favor of the United
States, regardless of amount;
(B) Accept offers in compromise of judgments in favor of the United
States where the amount of the judgment does not exceed $300,000; and
(C) Terminate collection activity by his or her office as to judgments
in favor of the United States which do not exceed $300,000 if the United
States Attorney concludes that the judgment is uncollectible:
provided that such action has the concurrence in writing of the agency
or agencies involved, and provided further that this authorization
extends only to judgments which have been formally referred to the
United States Attorney for collection.
14 The
Commissioner also argues that a witness was not called because he did
not have adequate notice prior to the trial of Creel's theory of the
case. Creel's pre-trial memorandum, however, specifically stated the
relevant issue as whether "[he had] paid his tax liability in
full" and argued that he paid as restitution the total amount of
taxes owed in the amount of $83,830 and had received a satisfaction of
judgment. Thus, there is no merit to this argument.