Mattingly v. U.S.
| Decision Date | 13 March 1991 |
| Docket Number | No. 90-1538,90-1538 |
| Citation | 924 F.2d 785 |
| Parties | , 67 A.F.T.R.2d 91-494, 59 USLW 2489, 91-1 USTC P 50,068 Donnell R. MATTINGLY, Appellant, v. UNITED STATES of America, Appellee. |
| Court | U.S. Court of Appeals — Eighth Circuit |
Edward M. Roth, St. Louis, Mo., for appellant.
Janet Kay Jones, Washington, D.C., for appellee.
Before JOHN R. GIBSON, Circuit Judge, HENLEY, Senior Circuit Judge, and CONMY, * Chief District Judge.
This appeal arises from a jury verdict rendered in federal district court 1 resulting in the assessment of $54,000.00 in tax penalties against appellant under 26 U.S.C. Sec. 6701 (the Internal Revenue Code, or I.R.C.) for supplying valuation overstatements in connection with tax returns which claimed illegitimate investment tax credits. 2 The issues before us are ones of first impression regarding questions of (1) whether the government's evidentiary burden of proof under Sec. 6701 is by a preponderance of the evidence, (2) whether and to what extent a "willful blindness" jury instruction is permissible where the statute requires knowledge, and (3) whether a Sec. 6701 penalty may be imposed both on original and carryover year returns of the same taxpayer for related understatements. 3
For reasons to be stated, we hold that (1) the burden is on the government to prove its case by a preponderance of the evidence under Sec. 6701, (2) actual knowledge through direct involvement is required by Sec. 6701 and the willful blindness instruction given in this case, while imperfect, caused harmless, if any, error, and (3) on these facts, the government may not impose a $1,000 per return penalty on carryover returns. Therefore, the judgment of the district court is affirmed in part and reversed in part.
Appellant was a tax preparer who sold master recording audiotape and videotape tax shelters to his clients. In a typical transaction, an investor leased a tape or tapes from a corporate or partnership lessor, and the lessor "passed through" investment tax credit pursuant to an I.R.C. Sec. 38 election, usually in an amount greater than the total lease payments. The investment tax credit passed through was sometimes based on the master recording's appraised value, as opposed to its cost or basis, since many were original creations. At other times, the investment tax credit was based on a sales price agreed to by a friendly or related buyer and seller, with payment made principally in the form of long-term, unsecured or undersecured promissory notes. The IRS determined the tapes in question were greatly overvalued. As a result, the tax credits were in large part disallowed. 4
This appeal concerns only the jury's determination that appellant is liable for penalties attributable to 1983 tax year understatements. The district court determined that the penalty was assessable not only for the forty-six 1983 tax returns prepared by appellant, but also for the eight carryover returns he prepared claiming credits which originated in 1983. Mattingly, 1989 WL at 165582, * 3.
The language of Sec. 6701(a) at issue in this case states:
shall pay a penalty with respect to each such document in the amount determined under subsection (b).
Subsequent to the enactment of this section, there was a 1989 amendment to Sec. 6701(a)(2) which relaxed the knowledge requirement to "knows (or has reason to believe)...."
The parties do not appear to be aware of any circuit court opinions, or district court opinions in our circuit, that address the issues before us and we have found none. Therefore, we treat these issues as questions of first impression.
The burden of proof in a tax case depends greatly on the type of case. While a criminal tax prosecution places the traditional "beyond a reasonable doubt" burden of proof on the government, a civil tax deficiency case generally places the burden of proof on the taxpayer to disprove by a preponderance of the evidence the government's assessment which is otherwise presumed correct. Welch v. Helvering, 290 U.S. 111, 54 S.Ct. 8, 78 L.Ed. 212 (1933); Helvering v. Taylor, 293 U.S. 507, 55 S.Ct. 287, 79 L.Ed. 623 (1935); Hinckley v. Commissioner, 410 F.2d 937 (8th Cir.1969).
Between these extremes are civil tax violations penalizing conduct ranging from "willful neglect" to fraud. The standard of proof in these cases is usually a preponderance of the evidence, and by statute the burden of proof is often placed on the government. See, e.g., I.R.C. Sec. 6703 (); Franklet v. United States, 578 F.Supp. 1552 (N.D.Cal.1984), aff'd, 761 F.2d 529 (9th Cir.1985) (); H & L Schwartz, Inc., supra, aff'd sub nom., Bond v. United States, 872 F.2d 898 (9th Cir.1989) ().
The major exception to the preponderance standard is for civil tax fraud cases. The burden in such cases is on the government to prove "fraud with the intent to evade tax" by clear and convincing evidence. I.R.C. Sec. 7454(a); Rechtzigel v. Commissioner, 703 F.2d 1063, 1064 n. 2 (8th Cir.1983); Menefee v. United States, 77-1 U.S. Tax Cas. (CCH) p 9413, 1977 WL 1142, * 8 (E.D.Mo.1977).
Appellant argues that Sec. 6701 "sounds in fraud" and should be judged by the more strict clear and convincing evidence standard. We have found only two cases to date that have discussed the burden of proof issue in a Sec. 6701 context, and the two courts came to opposite conclusions. Warner v. United States, 700 F.Supp. 532 (S.D.Fla.1988) (); In re Mitchell, 109 B.R. 434 (Bankr.W.D.Wash.1989), aff'd, 66 A.F.T.R.2d (P-H) p 90-5890, 90-2 U.S. Tax Cas. (CCH) p 50,495, 1990 WL 142016 (W.D.Wash.1990) ().
We find the reasoning of Mitchell more persuasive and hold that in actions brought under Sec. 6701 the burden of proof is on the government by a preponderance of the evidence. This holding is based on our view of the statutory language, the integrated enactment of Secs. 6700-03 and the overall structure of the civil tax penalty provisions.
As stated, absent fraud with the intent to evade tax pursuant to Sec. 7454(a), a preponderance standard is applicable in civil tax cases. Section 6701 requires proof of aiding or abetting with respect to a tax document, knowledge such document may be used in a material matter under the internal This treatment is consistent with the standard of proof used in the Sec. 6700 (tax shelter promoter) and Sec. 6702 (frivolous return filer) cases we mentioned earlier. While Sec. 6700 requires fraud in the context of furnishing a false or fraudulent statement, it is not fraud with the intent to evade tax but rather fraudulent representations in the promotion of a tax shelter to a taxpayer. This distinction, apparently one of the proximity of the fraud to a filing with the government, appears to be of importance in the civil tax penalty structure. We discuss the civil penalty structure more later but, in short, it appears that the more egregious the violative act and the less "distance" between the violative act and formal representations made to or actions taken towards the government, the more severe the penalty. Thus, in the tax code an aider or abettor is punished less harshly than a taxpayer for equivalent conduct, and omissions are generally punished less severely than affirmative acts.
revenue laws, and knowledge an understatement of another's tax liability will result if so used. I.R.C. Sec. 6701(a)(1)-(3) (1983). The section in question does not require proof of fraud and does not refer to the evasion of tax. Thus, Sec. 7454(a) reasoning is not directly applicable.
Prior to Sec. 6701 there was no civil penalty to punish aiding and abetting conduct. A related criminal penalty was in existence, however, which appellant suggests provides support for his position that Sec. 6701 sounds in fraud. A person can be imprisoned and fined for willfully aiding or assisting in a material falsity or fraud with respect to a document under or in connection with the internal revenue laws. I.R.C. Sec. 7206(2). Contrary to appellant's contention, the language of this section is clearly distinguishable from Sec. 6701 in that Sec. 7206 requires willful conduct, explicit fraud, and a more direct connection or proximity to a tax document being presented to the government.
Aside from the statutory language, we believe the integrated enactment of Secs. 6700-03 suggests application of a uniform standard of proof. These provisions were enacted together as part of the Tax Equity and Fiscal Responsibility Act of 1982, Pub.L. No. 97-248, Sec. 324, 96 Stat. 324. Section 6703 provides that in actions brought under Secs. 6700-02 the burden of proof as to whether a person is liable for a penalty "shall be on the Secretary." I.R.C. Sec. 6703(a). The statute does...
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