Richey v. U.S. I.R.S.

• Decision Date: 22 November 1993
• Docket Number: No. 91-36255,91-36255
• Parties: -6672, 93-2 USTC P 50,647 Lawrence M. RICHEY, Plaintiff-Appellee, v. UNITED STATES INTERNAL REVENUE SERVICE, Defendant-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1407

9 F.3d 1407

72 A.F.T.R.2d 93-6672, 93-2 USTC P 50,647

Lawrence M. RICHEY, Plaintiff-Appellee, v. UNITED STATES INTERNAL REVENUE SERVICE, Defendant-Appellant.

No. 91-36255.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Aug. 5, 1993.

Decided Nov. 22, 1993.

Kevin M. Brown, U.S. Dept. of Justice, Tax Div., Washington, DC, for defendant-appellant.

Christopher Tait, Yakima, WA, for plaintiff-appellee.

Appeal from the United States District Court for the Eastern District of Washington.

Before: BEEZER and HALL, Circuit Judges, and ARMSTRONG ^*, District Judge.

CYNTHIA HOLCOMB HALL, Circuit Judge:

The Internal Revenue Service appeals from the district court's judgment on a jury verdict in favor of Lawrence Richey in Richey's action for return and abatement of civil penalties imposed for preparing false tax returns, pursuant to 26 U.S.C. § 6694. Richey was convicted in 1987 of willfully aiding and abetting the preparation of fraudulent tax returns in violation of 26 U.S.C. § 7206 (affirmed in U.S. v. Richey, 874 F.2d 817 (9th Cir.1989) (unpublished memorandum decision)). This civil action was stayed pending the resolution of the criminal proceedings against Richey. The IRS argues that the district court erred by denying the IRS's motion for partial summary judgment on the ground that Richey was collaterally estopped from relitigating whether his conduct in preparing the fraudulent tax returns was willful. The IRS also contends that the district court erred in instructing the jury on the standard for determining whether Richey negligently understated his clients' tax liability. We agree with the IRS and therefore reverse.

I.

Lawrence Richey was employed by the Internal Revenue Service as a Revenue Agent from 1955 until 1980, when he retired. Following his retirement, Richey became involved in the tax fraud conspiracy for which he was ultimately convicted in 1987. Richey was drawn into the conspiracy by James Russell, who promoted and sold "tax shelters" for Professional and Technical Services ("PTS"), a putative trust company operated by Frank Forrester. Russell referred a number of PTS clients to Richey, who prepared their federal income tax returns in exchange for a fixed fee per return. From 1981 to 1983, Richey prepared tax returns understating the income of PTS customers by a total of $206,660.47 in accordance with PTS's income assignment and "9:1 tax shelter" schemes.

Richey was charged with one count of conspiracy to defraud the IRS under 18 U.S.C § 371 and fourteen counts of aiding and assisting in the preparation of false and fraudulent tax returns under 26 U.S.C. § 7206(2). Richey's primary defense to the criminal charges was that he did not willfully violate the tax laws because he had no fair notice of the illegality of his conduct until July 29, 1982, when the Eighth Circuit held in a civil proceeding that a similar scheme constituted illegal tax avoidance. United States v. Landsberger, 692 F.2d 501 (8th Cir.1982). The district court agreed with Richey's fair notice argument, and on Richey's motion dismissed twelve counts of the indictment. The government appealed the dismissal of those counts, and this court reversed, holding that because "anticipatory assignments of income have been recognized as ineffective to shift income for tax purposes for over fifty years," Richey and his codefendants "had fair notice of the illegality of their scheme from its inception." United States v. Russell, 804 F.2d 571, 574 (9th Cir.1986). The case was then tried to a jury, and Richey was convicted on all counts.

Richey appealed his conviction to this court, arguing, inter alia, that the district court abused its discretion by denying his motions for severance and mistrial and improperly instructing the jury. Richey argued that the district court's jury instructions deprived him of his defense of "lack of notice"--i.e., that he lacked fair notice of the illegality of the tax schemes, and that as a result his behavior was not "willful." This court determined that the instruction was proper, noting that "[i]n United States v. Russell this court specifically ruled that Richey and his codefendants had fair notice of the illegality of their scheme. It was not an abuse of discretion for the trial judge not to instruct the jury on that ground." United States v. Richey, 874 F.2d 817 (9th Cir.1989) (memorandum disposition at 10) (internal citation omitted). This court also rejected Richey's challenge to the denial of his motion for severance, explaining that his "broad allegations of prejudice are insufficient to require severance." Id. at 7.

Prior to Richey's conviction, the IRS in 1984 assessed civil penalties against him under 26 U.S.C. §§ 6694(a) and (b) ¹ for his preparation of the same returns at issue in the criminal case as well as additional similar returns. Specifically, Richey was assessed a $100 penalty per return pursuant to section 6694(a) for negligent disregard of internal revenue rules and regulations, and a $500 penalty per return pursuant to section 6694(b) for willful understatement of tax liabilities. Richey subsequently paid $7,380 (15% of the total penalties of $49,200) and filed a claim for refund and abatement of the remaining penalties under section 6694(c)(1). ² The IRS denied his claim, and Richey then commenced this action for refund and abatement. This action was stayed pending the outcome of the criminal proceedings.

Richey's civil action resumed in September of 1989, and the government moved for partial summary judgment on grounds of collateral estoppel. The government asserted that, because Richey admitted that he prepared the returns in question and that the liabilities on those returns were understated, United States v. Richey, 874 F.2d 817 (memorandum disposition), the only remaining issue under section 6694(b) was whether he "willfully" understated the liabilities on the returns. Moreover, the government argued that if Richey acted willfully under Section 6694(b), then he was also liable for the negligence penalties under Section 6694(a). The government maintained that Richey was collaterally estopped from relitigating the issue whether he "willfully" prepared the returns based on his criminal conviction under section 7206(2) of the Code, which necessarily established such "willfulness" beyond a reasonable doubt. Richey opposed the government's motion, once again contending that he lacked notice of the illegality of the tax scheme, and that he had been prejudiced by the denial of his motion for severance.

The district court denied the government's motion for partial summary judgment, based on the Supreme Court's ruling in Cheek v. United States, 498 U.S. 192, 111 S.Ct. 604, 112 L.Ed.2d 617 (1991). The district court ruled that Cheek constituted an intervening change in the law on the issue of willfulness, barring the application of collateral estoppel. The government moved for reconsideration of the district court's order, contending that Cheek had not changed the law of the Ninth Circuit with regard to the issue of willfulness, and that in the criminal trial, the jury instructions on "willfulness" (which were upheld by this court) were consistent with Cheek. The district court denied the government's motion.

At trial, the court gave the jury the following instruction (Instruction No. 14) on willfulness and negligence over the government's objection:

If you find that the plaintiff believed in good faith that the tax returns he prepared were proper and lawful and not submitted in violation of any rule or regulation, then you must find that the plaintiff did not act willfully or negligently in preparing the tax returns, and your verdict will be for the plaintiff. Such a good faith belief need not be objectively reasonable. You must decide whether this plaintiff held such a good faith belief, irrespective of wether [sic] you or some other person would have held such a belief, and irrespective of whether you find such good faith belief was reasonable.

(Emphasis added). The jury returned a verdict for Richey, finding that he had not willfully understated tax liabilities on the returns at issue and had not negligently disregarded IRS rules and regulations in preparing the returns. This appeal followed.

II.

Whether the district court erred in denying the government's motion for summary judgment is a question of law subject to de novo review. Davis v. United States, 861 F.2d 558, 560 (9th Cir.1988), aff'd, 495 U.S. 472, 110 S.Ct. 2014, 109 L.Ed.2d 457 (1990). See also Ayers v. City of Richmond, 895 F.2d 1267, 1270 (9th Cir.1990) ("The availability of collateral estoppel is a mixed question of law and fact in which legal issues predominate. We review these legal issues de novo.")

Whether jury instructions correctly state the law is a question of law subject to de novo review. United States v. Pemberton, 853 F.2d 730, 734 (9th Cir.1988).

III.

The government argues that the district court should have granted its motion for partial summary judgment on the ground of collateral estoppel because the only question in the civil action was whether Richey "willfully" understated tax liabilities on the returns he prepared, and this question was conclusively answered in the criminal action. See Considine v. United States, 683 F.2d 1285, 1286 (9th Cir.1982) ("A prior conviction will estop a party from contesting in a later civil suit any element necessarily established in the criminal trial.").

To determine the applicability of collateral estoppel in this case, we apply the standard which the Supreme Court set forth in Montana v. United States, 440 U.S. 147, 99 S.Ct. 970, 59 L.Ed.2d 210 (1979). The Court established that determining when to apply collateral estoppel requires three inquiries: (1) whether the issues presented are in substance the same in the present and prior litigation; (2) whether controlling facts or legal principles have changed significantly...