Maciel v. C.I.R.

• Decision Date: 07 June 2007
• Docket Number: No. 04-75716.,04-75716.
• Citation: 489 F.3d 1018
• Parties: George MACIEL, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

489 F.3d 1018

George MACIEL, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 04-75716.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted October 19, 2006.

Filed June 7, 2007.

David M. Kirsch, San Jose, CA, for the petitioner-appellant.

Frank P. Cihlar and Bethany B. Hauser, Tax Division, U.S. Department of Justice, Washington D.C., for the respondent-appellee.

Before: SUSAN P. GRABER, WILLIAM A. FLETCHER, and RICHARD C. TALLMAN, Circuit Judges.

OPINION

WILLIAM A. FLETCHER, Circuit Judge.

George Maciel appeals from a decision of the United States Tax Court, which upheld an Internal Revenue Service ("IRS") Notice of Deficiency for the 1990, 1991, and 1992 tax years. In a separate proceeding, Maciel pled guilty to criminal tax charges. As part of its sentencing decision in that case, the federal district court found that Maciel had not fraudulently intended to evade the payment of taxes. Maciel contends that, under the doctrine of collateral estoppel, the sentencing court's finding should have precluded relitigation of the fraud issue before the tax court. Further, Maciel contends that, even if relitigation is not precluded, the tax court erred in finding that he acted fraudulently when he failed to report income from a 1990 business sale. Finally, Maciel challenges the tax court's denial of various business deductions. We reject Maciel's preclusion and fraud claims, but we hold that he is entitled to deduct certain bona fide business expenses.

I. Background

During a routine audit in 1994, the IRS determined that Maciel had significantly understated his income on several tax returns. The agency referred Maciel's case for criminal prosecution. After initially charging Maciel with two felony counts of tax evasion in violation of 26 U.S.C. § 7201, the government filed a superseding information on September 23, 1998, charging Maciel with two felony counts of willfully filing a false return in violation of 26 U.S.C. § 7206(1). Unlike § 7201, which requires proof that the defendant "willfully attempt[ed] ... to evade or defeat" the payment of tax, § 7206(1) requires only proof that the defendant "[w]illfully ma[de] and subscribe[d]" a materially false return. 26 U.S.C. §§ 7201, 7206(1); see also United States v. Boulware, 384 F.3d 794, 810 (9th Cir.2004); Considine v. United States, 683 F.2d 1285, 1287 (9th Cir.1982).

Maciel entered a plea agreement with the government in which he pled guilty to both § 7206(1) counts and admitted signing tax returns he knew to be inaccurate for both the 1991 and 1992 tax years. The plea agreement stated that one of two Sentencing Guidelines calculations would apply. The first provided for a base offense level of ten "if the offense was committed in order to facilitate evasion of a tax." U.S.S.G. §§ 2T1.3(a)(1), 2T4.1 (1992). The second provided for a base offense level of six if "otherwise." Id. § 2T1.3(a)(2). In either case, the government agreed to include a two-point reduction for acceptance of responsibility, resulting in an adjusted offense level of either eight or four. The government also agreed to "recommend that any sentence imposed be satisfied by home detention and electronic monitoring."

The presentence report (PSR) subsequently concluded that Maciel had intended to evade taxation and therefore was subject to the higher § 2T1.3(a)(1) sentencing guideline. The PSR, however, determined that Maciel's adjusted offense level was nine, rather than eight as calculated in the plea agreement, because it considered Maciel's conduct not only in 1991 and 1992 — the tax years covered by the plea agreement — but also in 1990. Maciel's total underpayment during those three years increased his offense level by one point.

At his April 13, 1999, sentencing hearing, Maciel urged the district court to reject the PSR's conclusion that he had fraudulently intended to evade taxation or, in the alternative, to consider only the tax losses from 1991 and 1992. The government responded, without significant elaboration that there appeared to be "some intent on [Maciel's] part to do something." The government, however, agreed with Maciel that, consistent with the plea agreement, Maciel's adjusted offense level should be no higher than eight. Neither Maciel nor the government attempted to call witnesses or introduce evidence on the question of intent to evade. Instead, both sides agreed that "the Court has all the information it needs in order to make the [sentencing] determination."

The district court announced its decision at the conclusion of the sentencing hearing. With respect to Maciel's intent, the court explained:

I think on balance I am satisfied that the intent here was not primarily to avoid payment of tax. I think the intent may well have been to divert corporate money to personal use which is not a good thing and certainly is not something that the Court should countenance and particularly since it did have a consequence in terms of the accuracy of Mr. Maciel's tax returns.

But I don't think that the conduct looked at in its totality suggests that the reason Mr. Maciel diverted the money was to avoid paying money to the Internal Revenue Service. I think that's the finding that the Court would have to make. So I think we're looking at the lower of the two calculations.

Based on the government's recommendation, the court sentenced Maciel to three months of home detention. The court also imposed three years of probation, noting that Maciel had not yet "worked out the matters with the IRS." As a special condition of his probation, Maciel was required to "comply and cooperate with the Internal Revenue Service in a good faith effort to pay any outstanding tax liability including any assessed penalty and interest ... not limited to the two tax years that are charged in the information."

The IRS informed Maciel of his outstanding liability in a Notice of Deficiency sent on June 13, 2000. According to the IRS, Maciel owed more than $300,000 in back taxes for 1990-92 and nearly $250,000 in civil penalties pursuant to 26 U.S.C. § 6663. Section 6663 imposes penalties when "any part of any underpayment of tax required to be shown on a return is due to fraud."

Maciel took issue with the Commissioner's Notice of Deficiency and petitioned the tax court for a redetermination. He subsequently filed a motion for summary judgment, asserting that the IRS was estopped from relitigating "the issue of fraud or intent to evade tax by factual determination by the District Court at [Maciel's] sentencing hearing and the judgment of the District Court based on those factual determinations." According to Maciel, absent a showing of fraud, the statute of limitations barred the IRS from assessing back taxes for the years at issue. See 26 U.S.C. § 6501(a), (c)(2). The tax court denied Maciel's motion without opinion, and a two-day bench trial followed on December 12 and 13, 2001.

In an opinion filed February 4, 2004, the tax court generally affirmed the deficiencies and penalties levied against Maciel. See Maciel v. Comm'r, 87 T.C.M. (CCH) 881 (2004), available at 2004 WL 205819. The court found "clear and convincing evidence that [Maciel] underpaid his income taxes due and owing for the years at issue," and that he "fraudulently intended to evade the payment of his tax liabilities." 2004 WL 205819, at *15, *7. In support of its fraud finding, the court relied on the collective weight of a number of factors. For example, Maciel regularly commingled funds among his various businesses, engaged in large unexplained cash transactions mislabeled certain transactions as loans, failed to report any earnings from certain unincorporated business ventures, failed to keep adequate business records, and failed to inform his accountants and bookkeeper of his activities. Id. at *16-17.

II. Preclusion

Maciel maintains that the doctrine of collateral estoppel (issue preclusion) required the tax court to adopt the finding of the district court at Maciel's criminal sentencing hearing that Maciel did not intend to evade taxation. We consider de novo the availability of collateral estoppel. See Littlejohn v. United States, 321 F.3d 915, 919 (9th Cir.2003). This circuit has not expressly decided whether, or under what circumstances, the parties to a civil suit should be bound by findings previously made at a criminal sentencing hearing. Following the Second Circuit, we now hold that it is presumptively improper for a court to give preclusive effect to the findings of a sentencing court during subsequent civil litigation.

The doctrine of collateral estoppel promotes judicial economy and protects parties from the burden of successive litigation by barring the relitigation of issues in certain circumstances. See Parklane Hosiery Co. v. Shore, 439 U.S. 322, 326, 99 S.Ct. 645, 58 L.Ed.2d 552 (1979). For example, when an issue is "actually litigated and necessarily decided, after a full and fair opportunity for litigation, in a prior proceeding," a court's decision is binding in a subsequent action between the parties (or those in privity with the parties). Shaw v. Hahn, 56 F.3d 1128, 1131 (9th Cir.1995); see also Restatement (Second) of Judgments § 27 (1982). The key question in this case is whether the parties had "a full and fair opportunity to litigate the merits of [the fraud] issue" during the sentencing hearing. Littlejohn, 321 F.3d at 923; see also Allen v. McCurry, 449 U.S. 90, 95, 101 S.Ct. 411, 66 L.Ed.2d 308 (1980) (noting that "the Court has repeatedly recognized ... that the concept of collateral estoppel cannot apply when the party against whom the earlier decision is asserted did not have a `full and fair opportunity' to litigate[an] issue in the earlier case").

In deciding whether an opportunity to litigate is "full and fair," a court must make a practical judgment based on at least two considerations. First, the court must compare the procedures in...