Carlson v. United States

• Decision Date: 13 June 2014
• Docket Number: No. 12–13736.,12–13736.
• Citation: 754 F.3d 1223
• Parties: Frances CARLSON, Plaintiff–Counter Defendant–Appellant, v. UNITED STATES of America, Defendant–Counter Claimant–Appellee.
• Court: U.S. Court of Appeals — Eleventh Circuit

754 F.3d 1223

Frances CARLSON, Plaintiff–Counter Defendant–Appellant,

v.UNITED STATES of America, Defendant–Counter Claimant–Appellee.

No. 12–13736.

United States Court of Appeals,Eleventh Circuit.

June 13, 2014.

B. Gray Gibbs, B. Gray Gibbs, P.A., Jason P. Burrows, B. Gray Gibbs, P.A., Saint Petersburg, FL, for Plaintiff–Appellant.

Randolph Lyons Hutter, Richard Farber, Richard G. Rose, Curtis Jason Weidler, U.S. Department of Justice, Washington, DC, Robert E. O'Neill, U.S. Attorney's Office, Tampa, FL, for Defendant–Appellee.

Appeal from the United States District Court for the Middle District of Florida. D.C. Docket No. 8:10–cv–00900–SCB–TGW.

Before CARNES, Chief Judge, HULL and COX, Circuit Judges.

COX, Circuit Judge:

In this case, the Plaintiff, Fran Carlson, filed suit to determine her liability for $148,000 in penalties assessed by the InternalRevenue Service (“IRS”) for aiding and abetting understatement of tax liability in violation of I.R.C. § 6701. On appeal, Carlson contends that the district court erred by instructing the jury that the Government must prove its case by a preponderance of evidence instead of by clear and convincing evidence. Carlson also contends that the district court erred in denying her motion for judgment as a matter of law on some of the penalties because insufficient evidence supports the jury's verdict. We conclude that the Government must prove its case under I.R.C. § 6701 by clear and convincing evidence because I.R.C. § 6701 requires the Government to prove fraud. Additionally, we conclude that insufficient evidence supported the jury's verdict on the penalties Carlson challenges on appeal because the Government did not meet its burden of proving that Carlson actually knew the returns she prepared understated the correct tax.

Facts and Procedural History

The Plaintiff, Fran Carlson, worked for two companies: JH Accounting, Inc. and Simple Financial Solutions, Inc. (collectively “Jackson Hewitt”) as a tax return preparer. Both companies did business as Jackson Hewitt and were owned by Daniel Prewett. Carlson is not a certified public accountant and does not have a degree in accounting. Before working for Jackson Hewitt, Carlson held several jobs over 30 years. None of Carlson's past employment included preparing tax returns.

When she started working for Jackson Hewitt, Carlson attended an in-house tax preparation class on preparing individual tax returns. At Jackson Hewitt, Carlson began preparing tax returns even though she had no experience in tax preparation and only the in-house class for education. To prepare the individual returns, Carlson used a Jackson Hewitt software program. The program provided the preparer with a question to ask the client and the preparer would input the client's response. From this information, the program generated a tax return for the client. In the first year Carlson worked for Jackson Hewitt, she prepared between 200–300 tax returns.

In her second year, Carlson began to work on corporate tax returns. Before this time, Carlson had never prepared a corporate tax return. To prepare the returns, Carlson used a software program that automatically populated the return with information from a client's previous tax return.

In 2006, Prewett, the owner of Jackson Hewitt, was arrested for cocaine distribution and money laundering. Following the arrest, the IRS began investigating Prewett's business. At the same time, Carlson left Jackson Hewitt. Carlson had worked for Jackson Hewitt for five years and prepared approximately 1200–1500 tax returns.

During the investigation of Prewett, the IRS also audited the returns Carlson prepared. The auditors determined that deductions could not be substantiated in 40 out of about 1200–1500 tax returns that Carlson prepared. Following the audits, the IRS assessed penalties against Carlson under I.R.C. § 6701¹ for aiding and abettingunderstatement of tax liability. Carlson paid 15% of the penalties and filed for a refund. After her claim for a refund was denied by the IRS, Carlson brought this suit for a determination of her liability.

In the district court, the Government conceded 13 of the penalties in response to Carlson's summary judgment motion. The remaining 27 penalties were tried to a jury. At the close of the Government's case and prior to submission to the jury, Carlson moved for judgment as a matter of law under Fed.R.Civ.P. 50(a). Both motions were granted in part and denied in part.

Over Carlson's objection, the district court instructed the jury that the Government had the burden of proof by a preponderance of the evidence. Carlson contended that the correct standard of proof was by clear and convincing evidence. After deliberating, the jury returned a verdict for the Government on all penalties. The district court entered a $119,173.12 judgment in favor of the Government. Carlson filed a renewed motion for judgment as a matter of law under Fed.R.Civ.P. 50(b) or for a new trial under Fed.R.Civ.P. 59(e). The district court denied both motions. Carlson appeals.

Issues on Appeal

Carlson raises two principal issues on appeal. First, Carlson contends that the district court erred by instructing the jury that the standard of proof is by a preponderance of the evidence. Second, Carlson contends that the district court erred by denying her motion for judgment as a matter of law on a subset of the total penalties at issue.²

Standards of Review

We review de novo statements of law (including the standard of proof) in jury instructions. Fidelity Interior Const., Inc. v. Southeastern Carpenters Regional Council, 675 F.3d 1250, 1259 (11th Cir.2012). We review de novo the district court's ruling on a motion for judgment as a matter of law. Jones v. UPS Ground Freight, 683 F.3d 1283, 1291–92 (11th Cir.2012).

Discussion

I. The Government must prove violations of I.R.C. § 6701 by clear and convincing evidence.

At trial, the parties disputed the correct standard of proof. Carlson contends the correct standard should be clear and convincing evidence while the Government contends the correct standard is a preponderance of the evidence. The district court agreed with the Government and instructed the jury that the Government must prove its case by a preponderance of the evidence. We conclude that this instruction misstated the law.

Under the Eleventh Circuit's longstanding precedent, the Government must prove fraud in civil tax cases by clear and convincing evidence. See, e.g., Ballard v. Comm'r of Internal Revenue, 522 F.3d 1229, 1234 (11th Cir.2008) ( “The Commissionerhas the burden of proving allegations of fraud by clear and convincing evidence.”); Korecky v. Comm'r of Internal Revenue, 781 F.2d 1566, 1568 (11th Cir.1986) (“The IRS bears the burden of proving fraud, which must be established by clear and convincing evidence.”); Marsellus v. Comm'r of Internal Revenue, 544 F.2d 883, 885 (5th Cir.1977) (holding fraud must be proved by clear and convincing evidence); Webb v. Comm'r of Internal Revenue, 394 F.2d 366, 378 (5th Cir.1968) (same); Goldberg v. Comm'r of Internal Revenue, 239 F.2d 316, 320 (5th Cir.1956) (“The Commissioner has the burden of proving fraud by clear and convincing evidence.”); Jemison v. Comm'r of Internal Revenue, 45 F.2d 4, 5–6 (5th Cir.1930) (“Fraud is not to be presumed, but must be determined from clear and convincing evidence, considering all the facts and circumstances of the case.”). Our sister courts of appeals follow the same rule. See, e.g., Grossman v. Comm'r of Internal Revenue, 182 F.3d 275, 277 (4th Cir.1999) (holding that a finding of fraud must be supported by clear and convincing evidence); Lessmann v. Comm'r of Internal Revenue, 327 F.2d 990, 993 (8th Cir.1964) (same); Davis v. Comm'r of Internal Revenue, 184 F.2d 86, 86 (10th Cir.1950) (same); Rogers v. Comm'r of Internal Revenue, 111 F.2d 987, 989 (6th Cir.1940) (“Fraud cannot be lightly inferred, but must be established by clear and convincing proof.”); Duffin v. Lucas, 55 F.2d 786, 798 (6th Cir.1932) (same); Griffiths v. Comm'r of Internal Revenue, 50 F.2d 782, 786 (7th Cir.1931) (“Fraud is never presumed but must be determined from clear and convincing evidence, considering all the facts and circumstances of the case.”).

Thus, the inquiry is whether I.R.C. § 6701 requires the Government to prove fraud. If I.R.C. § 6701 requires the Government to prove fraud, then under our precedent the Government must prove its case by clear and convincing evidence. I.R.C. § 6701 penalizes an individual

(1) who aids or assists in, procures, or advises with respect to, the preparation or presentation of any portion of a return, affidavit, claim, or other document, (2) who knows (or has reason to believe) that such portion will be used in connection with any material matter arising under the internal revenue laws, and (3) who knows that such portion (if so used) would result in an understatement of the liability for tax of another person....

The third element embodies a scienter requirement. As other courts have recognized, the third element of I.R.C. § 6701 requires the Government to prove that the preparer acted with actual knowledge that the document would deprive the Government of tax it is owed. See Mattingly v. United States, 924 F.2d 785, 791 (8th Cir.1991); Sansom v. United States, 703 F.Supp. 1505, 1511 (N.D.Fla.1988); Warner v. United States, 698 F.Supp. 877, 882 (S.D.Fla.1988).

Were the level of scienter required by I.R.C. § 6701 not so high, we might face a difficult task in deciding whether I.R.C. § 6701 requires proof of fraud. However, under this standard the IRS must prove that the preparer actually knew the return understated tax. In other words, the IRS must prove that the preparer deceitfully prepared a return knowing it misrepresented or concealed something that understates the correct tax. This is a classic case of fraudulent conduct. The standard could be accurately paraphrased as requiring the IRS to...