Kosinski v. C.I.R.

• Decision Date: 29 August 2008
• Docket Number: No. 07-2136.,07-2136.
• Citation: 541 F.3d 671
• Parties: Timothy KOSINSKI; Barbara Kosinski, Petitioners-Appellants, v. COMMISSIONER of INTERNAL REVENUE, Respondent-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

541 F.3d 671

Timothy KOSINSKI; Barbara Kosinski, Petitioners-Appellants, v. COMMISSIONER of INTERNAL REVENUE, Respondent-Appellee.

No. 07-2136.

United States Court of Appeals, Sixth Circuit.

Argued: July 24, 2008.

Decided and Filed: August 29, 2008.

ARGUED: Richard M. Lustig, Richard M. Lustig Law Office, Birmingham, Michigan, for Appellants. Bethany B. Hauser, U.S. Department of Justice, Tax Division, Washington, D.C., for Appellee. ON BRIEF: Richard M. Lustig, Richard M. Lustig Law Office, Birmingham, Michigan, for Appellants. Kenneth W. Rosenberg, Andrea R. Tebbets, U.S. Department of Justice, Washington, D.C., for Appellee.

Before: MOORE and SUTTON, Circuit Judges; ALDRICH, District Judge.^*

OPINION

SUTTON, Circuit Judge.

Timothy and Barbara Kosinski challenge a decision by the Tax Court upholding a tax deficiency and a fraud penalty. They raise two issues: that earlier findings made by a federal district court in the course of imposing a sentence on Timothy Kosinski in a criminal case precluded the Tax Court's deficiency findings, and that the government failed to show that the deficiency resulted from fraud. Because the district court's sentencing findings lack issue-preclusive effect and because the government carried its burden of proving fraud, we affirm.

I.

This case arises from a complex, multi-year tax-evasion scheme, for which the government successfully prosecuted the Kosinskis and for which it now seeks to collect one year's worth of unpaid taxes and penalties. In 1991, Timothy Kosinski founded T.J. Construction, a wholly owned S corporation, to perform construction contracts for a single customer, Thyssen Steel. T.J. Construction generally farmed out the work to subcontractors—principally Melvin Phillips and his own wholly owned company—while it focused on acquiring the contracts and handling the paperwork. Thyssen paid T.J. Construction directly for completed projects, and T.J. Construction in turn paid Phillips, deducting the payments to Phillips from its gross income as part of its cost of goods sold.

To the end of minimizing their taxes, the Kosinskis began processing the payments differently in 1996. Phillips would endorse the checks from T.J. Construction over to the Kosinskis, who would then deposit them in their personal bank accounts. In 1997, the year at issue in this case, the endorsed-back checks totaled $2,919,974. The Kosinskis left some of the money in their accounts but withdrew much of it (nearly $2 million in 1997) in cash through hundreds of less-than-$10,000 transactions.

No one knows exactly where all of the money went—save initially to the Kosinskis, who "regularly destroyed" what records they kept. JA 51. All agree that some large amount (the parties dispute how much) went back to Phillips. The Kosinskis characterize these payments as cash advances that Phillips repaid with more endorsed-back checks; the government characterizes these payments as under-the-table exchanges that allowed Phillips to handle his payroll in cash and to evade federal employment taxes and withholding requirements. The government also points out that this scheme allowed the Kosinskis to duck significant tax liability, because neither they nor T.J. Construction (their wholly owned flow-through S corporation) reported these amounts on their annual returns.

The government filed criminal charges against the Kosinskis (and Phillips) for a number of tax-related offenses. Barbara Kosinski pleaded guilty to structuring currency transactions, and a jury convicted Timothy Kosinski of several counts of filing false tax returns, one count of structuring currency transactions and one count of conspiring to defraud the IRS and structure currency transactions.

The district court sentenced Timothy Kosinski in 2003. As directed by the then-mandatory sentencing guidelines, see U.S.S.G. §§ 2T1.1, 2T4.1 (1995), the court based the sentence on its determination of the "tax loss" attributable to Kosinski's conduct, namely the amount of taxes Kosinski and others avoided paying due to the conspiracy. The government told the court that the scheme resulted in an aggregate tax loss of $2.3 million, while Kosinski argued that the loss was less than $200,000. The district court in effect split the difference, finding a loss of $973,176, after which it imposed two concurrent, 30-month (within-guidelines) sentences. We vacated those sentences in light of United States v. Booker, 543 U.S. 220, 125 S.Ct. 738, 160 L.Ed.2d 621 (2005), see United States v. Kosinski (Kosinski I), 127 Fed. Appx. 742, 751 (6th Cir. Mar.22, 2005), and we likewise vacated (for Booker-related reasons) the sentence the district court imposed on remand, see United States v. Kosinski (Kosinski II), 480 F.3d 769, 777-78 (6th Cir.2007).

In the meantime, the government in 2004 sent the Kosinskis a deficiency notice for 1997, alleging a tax underpayment of $1,205,548 and imposing a $904,161 fraud penalty. The Kosinskis filed a petition for redetermination of their deficiency with the Tax Court, in which they claimed they "owed no tax" for 1997. JA 8. After a trial, the Tax Court upheld the government's original calculation of the deficiency, as modified by the government's concession that $1 million of the alleged understatement was legitimate, as well as the modified fraud penalty.

II.

The Kosinskis first challenge the Tax Court's deficiency determination on issue-preclusion grounds, maintaining that the district court's findings of fact at Timothy's criminal sentencing hearing barred the Tax Court in his civil tax-deficiency proceeding from imposing a $812,182 deficiency. To invoke issue preclusion successfully, a litigant must show four things:

(1) the precise issue raised in the present case must have been raised and actually litigated in the prior proceeding; (2) determination of the issue must have been necessary to the outcome of the prior proceeding; (3) the prior proceeding must have resulted in a final judgment on the merits; and (4) the party against whom estoppel is sought must have had a full and fair opportunity to litigate the issue in the prior proceeding.

United States v. Cinemark USA, Inc., 348 F.3d 569, 583 (6th Cir.2003) (internal quotation marks omitted).

These requirements demand more than the Kosinskis can supply. First, their claim stumbles over the initial demand that they identify the "precise issue" decided by the sentencing court that purportedly estops the government here. While they maintain that the government "is collaterally estopped from using other numbers that were previously determined in the criminal conviction in the Tax Court," Br. at 17, they never clarify what "other numbers" they are talking about. As best we can tell, they contend that the district court's assessment of the "tax loss" attributable to Timothy Kosinski's crimes foreclosed the Tax Court's determination of the amount of their tax underpayment. Yet how the district court's decision could do so remains a mystery, not least because it made only aggregate findings for several years combined, while the Tax Court case concerned just 1997. In the absence of a finding by the sentencing court on the "precise issue" before the Tax Court, preclusion is a guessing game.

Second, the Kosinskis have not shown that the sentencing court's relevant fact findings—whatever they were—were "necessary" to its judgment. As we explained in rejecting a similar request to tie a Tax Court's hands after a related criminal proceeding, the sentencing court's determination of the underpayment "was not essential to the district court's judgment because it was not an element of the crime of conviction." Hickman v. Comm'r, 183 F.3d 535, 538 (6th Cir.1999). The same thing happened here. See Kosinski I, 127 Fed.Appx. at 751. Kosinski's conviction cannot preclude the Tax Court from making findings on an issue the jury never had any reason to decide.

It is true that the district judge estimated the tax loss in determining Kosinski's guidelines range. And it is true that the guidelines direct the district judge to gauge the tax loss in ascertaining a criminal's base-offense level. See U.S.S.G. § 2T1.1. But the broad tax-loss bands of the guidelines diminish the contention that a given tax-loss finding was necessary to the sentence. Here, for example, the district court could have reached the same within-guidelines, 30-month sentence so long as the tax loss fell anywhere between $550,000 and $2,500,000. See id. §§ 2T4.1, 5A. The sentencing judge himself appeared to appreciate this fact, adopting Kosinski's calculation of the tax loss for one charge, instead of the government's much higher figure, apparently because the difference would not have affected Kosinski's base-offense level.

But that is only half the problem. In the aftermath of Booker, the guidelines could not constitutionally cause his sentence to turn on the district court's tax-loss finding. That indeed is why we vacated Kosinski's initial sentence, explaining that the use of non-jury-found facts in applying mandatory guidelines presented the same constitutional problem at issue in Booker. Kosinski I, 127 Fed.Appx. at 750-51. And when the district court on remand resentenced Kosinski without making any findings whatsoever regarding the tax-loss amount—laboring "under the misapprehension that it simply could not do so" after Booker—we vacated the sentence again, clarifying that the district court "should recognize and exercise its discretion to consider—or not to consider—[Kosinski's] tax loss." Kosinski II, 480 F.3d at 777. That discretion undermines the Kosinskis' contention that the district court's tax-loss finding was necessary to the final judgment. Cf. Hickman, 183 F.3d at 538 (holding that a district court's discretionary determination of the amount of restitution a criminal tax-evasion defendant had to pay was unnecessary to the judgment and thus could not be given preclusive effect); Morse v. Comm'r,...