Klein v. Comm'r

• Decision Date: 03 October 2017
• Docket Number: 149 T.C. No. 15,Docket No. 24596-15L.,Docket No. 24595-15L
• Parties: ZIPORA KLEIN, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent SAMUEL KLEIN, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

ZIPORA KLEIN, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentSAMUEL KLEIN, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent

149 T.C. No. 15

Docket No. 24595-15L

Docket No. 24596-15L.

UNITED STATES TAX COURT

October 3, 2017

Ps, a married couple, pleaded guilty to violating I.R.C. sec. 7206(1) by filing a false return for 2006. Ps agreed to make full restitution for the losses caused by their underreporting of income for 2003-2006. At the sentencing the Government presented a Federal tax-loss calculation of $562,179 for those years. Adopting it, the District Court ordered Ps to pay that sum as restitution to the IRS. Ps eventually paid the full amount of restitution, along with all applicable title 18 statutory additions, and the Government released the title 18 lien that had accompanied the restitution order.

Relying on I.R.C. sec. 6201(a)(4), R later assessed against Ps not only the $562,179 of restitution they had been ordered to pay, but also underpayment interest under I.R.C. sec. 6601(a) and additions to tax under I.R.C. sec. 6651(a)(3). When Ps did not pay the latter amounts, R began collection action, filing notices of Federal tax lien. Following a CDP hearing, Ps timely petitioned this Court. R contends that he can assess and collect interest and additions to tax on the restitution amount under I.R.C. sec. 6201(a)(4), which authorizes him to assess and collect restitution "as if such amount were such tax."

Held: I.R.C. sec. 6201(a)(4) does not authorize R to add underpayment interest or failure-to-pay additions to tax to a title 18 restitution award, and R may not assess or collect from Ps underpayment interest or additions to tax without first determining their civil tax liabilities.

Mark M. Hathaway, for petitioners.

Carolyn A. Schenck, Michael K. Park, and Halvor R. Melom, for respondent.

OPINION

LAUBER, Judge: In these consolidated collection due process (CDP) cases, petitioners seek review pursuant to sections 6320(c) and 6330(d)(1)¹ of the determination by the Internal Revenue Service (IRS or respondent) to uphold notices of Federal tax lien (NFTL) filing. The cases present a question of firstimpression in this Court: whether the IRS may assess and collect interest and additions to tax on amounts assessed under section 6201(a)(4)(A). That provision authorizes the Secretary, following a taxpayer's criminal conviction for failure to pay any tax imposed by title 26, to "assess and collect the amount of restitution" ordered by the sentencing court "in the same manner as if such amount were such tax."

Petitioners have fully paid the restitution ordered by the sentencing court. The only amounts remaining in dispute are the interest and additions to tax subsequently assessed by the IRS, which were the principal focus of the CDP hearing. Respondent has moved for summary judgment, urging that we sustain the NFTL filing to facilitate collection of the assessed interest and additions to tax.

Although petitioners have not filed cross-motions for summary judgment, they contend that they have fully discharged their restitution obligations and that "the collection action set forth in the notice of determination [should] not be allowed to proceed." Under these circumstances we will recharacterize as a cross-motion for summary judgment each petitioner's opposition to respondent's motion for summary judgment.² Concluding as we do that the statute does not authorizethe IRS to collect interest or additions to tax on amounts assessed under section 6201(a)(4), we will deny respondent's motions for summary judgment and grant that relief instead to petitioners.

Background

The following facts are derived from the parties' pleadings and motion papers, including the exhibits attached thereto. See Rule 121(b). Pursuant to Rule 201 of the Federal Rules of Evidence, we take judicial notice of certain filings in petitioners' criminal case. See United States v. Klein, No. 2:10-CR-00015-RGK (C.D. Cal.) (filed Jan. 7, 2010). Petitioners, who are husband and wife, resided in California when they petitioned this Court.³

Following a prosecution in the U.S. District Court for the Central District of California, petitioners pleaded guilty to one count of violating section 7206(1) by willfully making and subscribing to a false Federal income tax return for 2006. Samuel Klein also pleaded guilty to two nontax counts. On August 31, 2011, theDistrict Court sentenced Zipora Klein to 27 months in prison, followed by a year of supervised release, and Samuel Klein to 63 months in prison, followed by three years of supervised release. As a separate component of each sentence, the District Court ordered petitioners to pay restitution to the IRS.

Although petitioners were convicted for tax crimes committed in 2006, Samuel Klein admitted in his plea agreement that he had underreported income on joint returns with his wife "during the period 2003 through 2006." At sentencing, the Government presented a "Calculation of the Federal Tax Due and Owing for Criminal Purposes" for petitioners' 2003-2006 tax years. Under the U.S. Sentencing Guidelines, this is generally referred to as the "tax loss calculation." See U.S. Sentencing Guidelines Manual (U.S.S.G.) sec. 2T1.1(c)(1) (U.S. Sentencing Comm'n 2006) (defining tax loss in the case of a fraudulent or false return as "the total amount of loss that was the object of the offense").

Relying on the bank deposits method, the Government reconstructed petitioners' income for 2003-2006 and calculated an aggregate Federal tax loss of $562,179. Objecting to that calculation, petitioners' counsel argued that the "[G]overnment formula does not allow deductions for all business expenses, only [for] business expenses reported on filed income tax returns." According to Samuel Klein's counsel, allowing all permissible deductions would have yielded tax losses for only two years: a tax loss of $17,701 for 2003 and a tax loss of $4,467 for 2006.

The sentencing court disregarded those objections and accepted the Government's tax-loss calculation for determining petitioners' custodial sentences under the Sentencing Guidelines. Those Guidelines acknowledge that "the amount of the tax loss may be uncertain" and contemplate that the court "will simply make a reasonable estimate based on the available facts." Id. sec. 2T1.1, app. n.1. The District Court based Samuel Klein's sentence on the $562,179 tax loss calculated by the Government and based Zipora Klein's sentence on a smaller tax loss for 2006 alone. Separately, the court ordered petitioners to pay, with joint and several liability, $562,179 as restitution to the IRS.

During the sentencing hearing the District Court indicated that it would consider modifying the restitution order if petitioners' 2003-2006 Federal tax liabilities were determined to be less than $562,179. With that proviso, the court ordered petitioners to pay this sum within 12 months of sentencing, i.e., by August 31, 2012. The Court ordered that petitioners' "liability for restitution ceases" if and when the IRS received full restitution.

Pursuant to their plea agreements petitioners executed with the IRS a Form 906-C, Closing Agreement, acknowledging that their overall Federal income tax liabilities for 2003-2006 remained indeterminate.⁴ Petitioners agreed that the IRS was free to conduct audits for those years at any time, "waiv[ing] all defenses against and restrictions on assessment and collection" and waiving "any defense based on the expiration of the period of limitations." Six years later, the IRS does not appear to have completed, or even commenced, a civil examination for petitioners' 2003-2006 tax years.

In June 2012 petitioners filed amended individual returns for 2003-2006 showing aggregate additional tax due of $106,578. On August 31, 2012, the date their restitution payment was due, they moved the District Court to vacate their sentences under 28 U.S.C. sec. 2255, urging that the tax-loss calculation underlying their sentences was erroneous. In support of that contention, they pointed to IRS spreadsheets, of which they had recently become aware, indicating that they could be entitled to substantial additional deductions against their 2003-2006income, which the Government had failed to take into account when calculating the $562,179 tax loss. If all proper deductions were allowed, petitioners contended, the tax loss for 2003-2006 would be only $106,578, i.e., the aggregate additional tax liabilities shown on their recently filed amended returns. In October 2012 petitioners delivered to the IRS four checks totaling $106,578.

In December 2012 petitioners filed a notice with the District Court reporting that, by making this $106,578 payment, they had fully discharged their proper restitution obligation to the IRS. In March 2013 the District Court denied on procedural grounds their motion to vacate sentence, explaining that they had neglected to pursue a direct appeal challenging the tax-loss calculation on which their sentences had been based. The court referred to the spreadsheets showing allowable deductions for 2003-2006 as "being used to resolve the ongoing civil dispute, not the criminal matter which has already been determined." The court noted that, "more than a year after sentencing, the civil dispute has not settled, indicating the depth of factual inquiry necessary to resolve the issues of deductions and income."

After Zipora Klein was released from custody, the Government asked the District Court to revoke her supervised release for failure to comply with the restitution order. To prevent that outcome she delivered to the Los Angeles U.S. Attorney's Office in August 2014 payment for the $455,601 balance of the restitu- tion (i.e., $562,179 minus the $106,578 paid in October 2012), plus post-judgment interest imposed on restitution awards by title 18. See 18 U.S.C. sec. 3612(f)(2) (2012). The U.S. Attorney's Office thereupon released a previously filed notice of...