Supreme Court to Decide Whether Tax Crimes Other Than Tax Evasion Are Aggravated Felonies Under Immigration Law (5/24/11)

On May 23, 2011, the Supreme Court granted certiorari in Kawashima v. Holder, 615 F.3d 1043 (9th Cir. 2010) about which I have previously blogged here. The question presented is:

Whether, in direct conflict with the Third Circuit, the Ninth Circuit erred in holding that Petitioners' convictions of filing, and aiding and abetting in filing, a false statement on a corporate tax return in violation of 26 U.S.C. §§ 7206(1) and (2) were aggravated felonies involving fraud and deceit under 8 U.S.C. § 1101(a)(43)(M)(i), and Petitioners were therefore removable.

The following discussion of the issue is from my Federal Tax Crimes book:

Immigration status may be affected by conviction of an “aggravated felony.” Conviction of an aggravated felony will require deportation. An aggravated felony is defined to include an offense that:

(i) involves fraud or deceit in which the loss to the victim or victims exceeds $10,000; or

(ii) is described in § 7201 of the Internal Revenue Code of 1986 (related to tax evasion) in which the revenue loss to the Government exceeds $10,000; . . . n1

Read more »

More on Tax Crimes as Aggravated Felonies for Immigration Purposes

The Ninth Circuit issued yet a third published opinion in The Kawashima cases. The first was Kawashima v. Gonzales, 503 F.3d 997 (9th Cir. 2007), withdrawn 503 F.3d 1111 (9th Cir. 2008). The second was Kawashima v. Mukasey, 530 F.3d 1111 (9th Cir. 2008), withdrawn sub nom. Kwashima v. Holder, 593 F.3d 979 (9th Cir. 2010). The third now is Kawashima v. Holder, ___ F.3d ___ (9th Cir. 2010), decided 8/4/10.  I have written on Kawashima before here, so now update those comments.

The big brouhaha in the case has been over the issue of whether tax perjury (Section 7206(1)) and aiding and assisting (Section 7206(2)) are deportable aggravated felonies under 8 U.S.C. § 1101(a)(43)(M). That section is short, defining aggravated felonies to include:

(M) an offense that—

(i) involves fraud or deceit in which the loss to the victim or victims exceeds $10,000; or
(ii) is described in section 7201 of title 26 (relating to tax evasion) in which the revenue loss to the Government exceeds $10,000;

The language sets up a nice issue of statutory interpretation. Are tax offenses included in (i) or not? If tax offenses are included in (i), then (ii) is superfluous because the capstone tax offense in (ii), tax evasion, is a crime of "fraud or deceit" covered by (i). Principally for this reason, the Third Circuit held that (i) does not cover tax offenses. Ki Se Lee v. Ashcroft, 368 F.3d 218 (3d Cir. 2004). But Ki Se Lee had a prominent dissenter -- Judge (now Justice) Alito -- who said that tax perjury fell within the plain meaning of an offense involving "fraud or deceit." I think this is an interesting issue of statutory interpretation inviting pet theories of statutory construction such as plain meaning and various canons to be marshaled in support of a desired result.

Ki Se Lee is the lone wolf holding that tax offenses other than tax evasion are not aggravated felonies under (i). The Ninth Circuit has now reiterated its prior holding that tax offenses other than tax evasion can be aggravated felonies if they involve fraud or deceit, as tax perjury and aiding and assisting do.

The majority holding on this newest opinion is a straight-forward plain meaning holding for the statute.

Three of the Ninth Circuit Judges dissented from the petition for rehearing en banc, with Judge Graber writing a dissent for the three judges. These judges, like the majority in Ki Se Lee were convinced that the majority had not properly considered that the majority's reading rendered (ii) superfluous. It is not likely, the dissenters argued, that Congress was doing a meaningless act in inserting and enacting (ii). I provide here the guts of the dissents reasoning because, quite frankly, I am persuaded even if the majority was not:

The panel's interpretation renders subsection (ii) superfluous. Subsection (i) encompasses convictions that "involve fraud or deceit" and that involve a loss exceeding $ 10,000. Subsection (ii) encompasses tax evasion convictions where the tax revenue loss exceeds $ 10,000. Importantly, because all tax evasion convictions necessarily involve fraud or deceit, Spies v. United States, 317 U.S. 492, 499, 63 S. Ct. 364, 87 L. Ed. 418, 1943 C.B. 1038 (1943), subsection (i) necessarily encompasses all convictions encompassed by subsection (ii). The panel's interpretation thus renders subsection (ii) meaningless.

At the same time, it is easy to interpret the statute to give meaning to both subsection (i) and subsection (ii). Hoffman, 101 U.S. at 115. It is an entirely reasonable interpretation that Congress intended subsection (ii), and not subsection (i), to govern tax crimes. n2 Because it is "possible" to give "significance and effect" to all parts of the statutory text, we must do so. Hoffman, 101 U.S. at 115. "We are not at liberty to construe any statute so as to deny effect to any part of its language." Id.
FOOTNOTE
n2 As the Third Circuit explained, Congress reasonably may have concluded that no tax crimes other than the most severe tax crime -- tax evasion -- should qualify as an aggravated felony, even if the less severe tax crimes happen to involve fraud or deceit. Ki Se Lee v. Ashcroft, 368 F.3d 218, 224 (3d Cir. 2004).
END OF FOOTNOTE

The panel declines to apply this mandatory analysis solely because of its speculation that Congress might have intended to enact a superfluous statutory provision. The panel's reasoning misunderstands the rule against superfluities specifically and the task of statutory interpretation more generally. It is true that no method of statutory interpretation is absolute. Indeed, even when the text is indisputably plain, we sometimes hold that Congress intended something very different (for instance, when the drafters made a typographical mistake). See, e.g., Herrera v. U.S. Citizenship & Immigration Servs., 571 F.3d 881, 886 n.5 (9th Cir. 2009). Here, Congress indeed may have intended to enact a superfluous provision. But there must be some reason to believe that this is the case. We are not at liberty to wave away an indicator of congressional intent simply because it is conceivable that Congress intended the opposite. It is always conceivable that Congress did not mean what it said, or intended to enact a superfluous provision, or intended to raise serious questions of constitutionality, and so on. The panel's observation that, here, that possibility is not beyond the conceivable does not advance the analysis.

On this point, it is extremely important that all indicators of congressional intent point in the same direction: Congress intended tax crimes to be governed only by subsection (ii), not subsection (i). The panel points to absolutely nothing that suggests that Congress did not so intend, other than the alleged "plain meaning" of subsection (i) when read alone. Is there any legislative history supporting the panel's view? No. Is there any statutory history supporting the panel's view? No. Is there a statutory purpose that supports the panel's view, such as a rule that the definition should be construed against the alien? No; in fact, the opposite presumption applies, as the panel acknowledges. Amended Op. at 11199 n.6; Kawashima, 593 F.3d at 984 n.7. Are there other canons of construction that support the panel's view? No; in fact, applicable canons of construction support the opposite view, such as the rule that the "specific governs the general." See Ki Se Lee, 368 F.3d at 223-24 (explaining the application of this canon of construction). In sum, the panel's unassailable observation that the rule against superfluities is not foolproof gets the panel nowhere; there must be some indicator that, in these particular circumstances, Congress actually intended to enact a superfluous provision. Beyond its speculation, the panel points to none.

In this regard, it is notable that the panel makes a point of reminding the reader no less than four times that it is following then-Judge, now-Justice, Alito's dissenting view in Ki Se Lee. The panel subscribes to, and applies, then-Judge Alito's view that the superfluities rule can be cast aside on the unsupported speculation that Congress may have intended to enact a superfluous provision. Just last year, now-Justice Alito advanced that same general view in Corley, 129 S. Ct. 1558, 173 L. Ed. 2d 443. Unable to convince a majority of his colleagues, Justice Alito expressed his views in dissent. Id. at 1572-73 (Alito, J., dissenting). The Supreme Court majority, however, roundly rejected this proposed mode of interpretation: "[T]he dissent's point that subsection (a) seems clear when read in isolation proves nothing, for 'the meaning--or ambiguity--of certain words or phrases may only become evident when placed in context.' When subsection (a) is read in context, there is no avoiding the question, 'What could Congress have been [*38] getting at with both (a) and (c)?' " Id. at 1566 n.5 (citation and alteration omitted).

Whatever validity the panel's method of interpretation may have had in the past, the Supreme Court clearly rejected it just last year. The panel does not explain how its opinion is consistent with Corley.

I also note that I am persuaded, at least at the margins, by the fact that the majority opinion in Ki Se Lee was written by Judge Louis Oberdoerfer was a specialist in the tax law and had headed DOJ Tax as AAG. I think this gave him unique insight, which he articulated well in his opinion and got it right. I am less enamored by then-Judge Alito's reasoning, the fall back to plain meaning that I personally find less satisfying, but understand how Court of Appeals judges may feel that it would carry the day in this Supreme Court.

UPDATE ON 8/24/10:  Miller & Chevalier's Tax Appellate Blog has a good discussion of Kawashima here.

Further on Use of Sentencing Tax Loss Findings in Later Proceedings

This blog addresses excellent comments by Anonymous to a prior blog here. 


I focus on Anonymous' comment as follows: "But that admission [of the sentencing tax loss stipulation] itself is very persuasive and direct evidence that could clearly support a much higher burden of proof." First, let me say that stipulations are simply the basis for findings that the judge would otherwise be required to make on the basis of other evidence. Hence, for this purpose, there should be no difference between findings based on stipulations and findings based on other evidence. Paraphrasing your comment, I think you are saying that the sentencing tax loss finding could alone support a finding in a later civil (including immigration proceeding) where the Government must prove fraud and / or an amount by clear and convincing evidence. (Notice that the amount is an element of the statute for immigration purposes.)

So stated, there is actually considerable authority in the civil tax area as to the limited effect of sentencing tax loss findings. Predicate to understanding this authority, we must first focus on what the tax loss number is. The tax loss number is that number that the defendant / taxpayer intended to defraud the Government of. It is not the civil tax loss number which, in criminal tax cases, can be and often is much larger than the sentencing tax loss number (i.e., the civil tax loss, typically called the deficiency, is never less but can be more than the sentencing tax loss number). Moreover, the tax loss number is often not a crisp easily determined finite amount. Particularly when the result of stipulations, there is considerable negotiation about what the tax loss is – with the defendant’s counsel and the Government negotiation over what really was the object of criminal intent. Frequently, the amounts the Government originally asserted are whittled down substantially, and the reason that happens is often not because the tax is not due but because the Government has doubt that it can prove even by a preponderance that the disputed amount was due to fraud.  So the Government's preponderance burden plays a critical role in determining the tax loss amount and, by the same token, if the Government's burden in the sentencing phase were to prove tax loss by clear and convincing evidence, the tax loss number would or at least could be whittled down even further.

Now, let’s turn to the civil fraud tax case where this issue could arise routinely. I will assume a criminal conviction for § 7206(1). In that civil tax fraud penalty case that usually follows criminal conviction, the mainstream and universal holding is that the conviction itself is not preclusive of fraud, because all the conviction determines is that the taxpayer lied on the return and does not determine that he intended to defraud the Government of tax. But, in the sentencing hearing, the sentencing judge is required to find the tax loss and does so by a preponderance of the evidence. The tax loss has two important elements -- (1) an amount and (2) a relationship between the amount and some related (aka relevant conduct) intent to defraud the IRS of tax. The question, as in the immigration proceeding, is whether the finding of the tax loss as the first step in the Guidelines calculations is preclusive or even persuasive evidence in the civil fraud penalty proceeding where the Government must prove civil fraud by clear and convincing evidence. The answer to that question is no; the Government may introduce the sentencing finding in order to present full context for its other clear and convincing evidence of crime, but the Government could not prevail by just introducing the sentencing tax loss finding to met its burden by clear and convincing evidence that (1) the taxpayer did intend to defraud the Government and (2) the amount he or she intended to defraud.

I have addressed related themes in my article John A. Townsend, Collateral Estoppel in Civil Cases Following Criminal Convictions, 2005 TNT 4-28. My points in the article, bottom line, were (i) I accepted the universal holdings that the Government must prove by clear and convincing evidence that the taxpayer intended to defraud the Government of tax and must do so by something other than the mere sentencing findings of tax loss amount and (ii) that, once the Government shows fraud, then the sentencing tax loss finding could -- and should be -- be preclusive as to the amount. In both the civil and criminal proceedings, the amount determination is by a preponderance of the evidence. Now, as to the latter point, there is a razor-thin difference in the preponderance determinations in these proceedings -- i.e., in the sentencing proceeding, the Government is required to prove the amount by a preponderance but in the civil proceeding, the taxpayer is required to prove the amount not attributable to fraud. In my article, I argued that this razor thin difference (i.e., the difference being the state of equipoise which almost never is outcome determinative in the real world) is not significant enough to justify further litigation on the amount of the tax loss attributable to fraud.

No court has accepted my arguments (in burden language, I have not met my burden), so the state of the law as I understand it now is that, in the subsequent civil tax proceeding after a § 7206(1) conviction, (i) the IRS must prove fraud by clear and convincing evidence, (ii) (and this is my reading of the tea leaves), the IRS cannot rely only on the sentencing tax loss finding (whether the result of stipulation or an evidentiary proceeding), but must put on evidence of that breathes some persuasive life into the fraud, and (iii) if the IRS does breathe life into the taxpayer’s alleged fraud by clear and convincing evidence, the taxpayer must then whittle down the amount of the total deficiency (or the amount the IRS asserts as fraud) by the preponderance of the evidence.

The point of all this is that the stipulated tax loss, although containing both necessary “prepnderance” holdings as to the amount and as to the taxpayer's fraud, is not considered evidence sufficient alone to meet the IRS burden to prove fraud by clear and convincing evidence.

Now, moving back to Kawashima, I think the Court mouthed the right words in saying that the amount could be in play in the immigration proceeding (i.e., no preclusive effect), but I disagree with the suggestion that the stipulation / sentencing finding could alone be clear and convincing evidence as to the fraudulent amount.  I could agree that the sentencing amount determinations should be preclusive or perhaps even evidence standing alone without rebuttal of the amount if the Government in the immigration proceeding otherwise proved fraud, but as I noted, in the related context of civil tax proceedings, that is not the way the law has developed.

Ninth Circuit Joins the Parade on 7206(1) as Deportable Crime

In Kawashima v. Holder, ___ F.3d ___ (9th Cir. 2010), decided 1/27/10, the Court held that Section 7206(1), tax perjury, was a deportable crime and that, depending upon the circumstances, Section 7206(2), aiding and assisting, may be a deportable crime. I have previously written here on a petition for certiorari that was filed on the tax perjury issue. That discussion gives more detail, so I will just be more summary on the general issue and develop a nuance that I find interesting.

The petitioners in Kawashima had pled guilty as follows: (1) the husband to tax perjury and (2) the wife to aiding and assisting. At sentencing, Mr. Kawashima stipulated that the "total actual tax loss" was $245,126.  Using this evidence, the Board of Immigration Appeals ordered deportation upon finding that the crimes were "aggravated felonies."  The petitioners appealed.

The Ninth Circuit crisply states the interpretational issue as follows (the words are the Ninth Circuit's but I divide the words into subparagraphs to highlight the issue):

We are faced with the task of determining whether Mr. Kawashima's conviction for willfully making and subscribing to a false statement on a tax return, in violation of § 7206(1), and Mrs. Kawashima's conviction for aiding and assisting in the preparation of a false tax return, in violation of § 7206(2), constitute aggravated felonies.

Section 1101(a)(43)(M) defines an "aggravated felony" to include "an offense that

(i) involves fraud or deceit in which the loss to the victim or victims exceeds $ 10,000; or

(ii) is described in section 7201 of Title 26 (relating to tax evasion) in which the revenue loss to the Government exceeds $ 10,000." 8 U.S.C. § 1101(a)(43)(M)(i)-(ii).

The petitioners argued that a fair -- and the preferred -- way of reading the statute was that tax evasion was the only tax crime that met the definition of an aggravated felony. A prior case had so held. Ki Se Lee v. Ashcroft, 368 F.3d 218 (3d Cir. 2004). The Ninth Circuit itself had held otherwise in an earlier iteration of the Kawashima case and the Fifth Circuit had also. So the crisp holding of the current opinion in Kawashima is that other tax felonies involving a loss to a victim (here the United States) in excess of $10,000 are aggravated felonies subject to deportation.

The reason the Court revisited the holding was the Supreme Court's intervening decision in Nijhawan v. Holder, 129 S. Ct. 2294, 174 L. Ed. 2d 22 (2009). Nijhawan had been convicted of a "variety of federal fraud offenses" found at sentencing to involve total loss to victims in excess of $100 million. The crimes involved did not contain any element that the loss exceed $10,000. In the deportation proceeding, the Government relied upon the convictions and the sentencing stipulation.

This set up a nice definitional issue for the Supreme Court that permitted the Supreme Court to split syntactical hairs to arrive at a result to resolve the issue. Bottom line, the Supreme Court allowed the Board of Immigration Appeals to consider the facts underlying the fraud conviction to determine whether the Government had shown beyond a reasonable doubt that the loss exceeded $10,000. In the Syllabus's Supreme Court lingo, the Supreme Court held: "Subparagraph (M)(i)'s $ 10,000 threshold refers to the particular circumstances in which an offender committed a fraud or deceit crime on a particular occasion rather than to an element of the fraud or deceit crime."

Using Nijhawan, the Ninth Circuit found that the BIA's use and reliance, in the absence of contravening evidence, of the sentencing stipulation was fair and sustained the proceeding. The reasoning, crisply stated, was:

Moreover, the BIA followed fundamentally fair procedures in finding that the offense for which Mr. Kawashima was convicted resulted in a loss to the government of more than $ 10,000. Specifically, Mr. Kawashima stipulated in the plea agreement that the "total actual tax loss" was $ 245,126. Given that in Nijhawan, the Supreme Court relied on such a stipulation to conclude that a petitioner's prior crime was an "aggravated felony" under subsection (M)(i), we cannot conclude that the BIA's reliance on such a stipulation in this case was improper.

The Ninth Circuit remanded Mrs. Kawashima's case for a more particularized analysis of whether her aiding and assisting plea was an aggravated felony.

I want to address here the holding for Mr. Kawashima. I ask the reader to keep in mind core concepts:

1. The Government must prove deportability by clear and convincing evidence.

2. The Government must prove tax loss for sentencing by a preponderance of the evidence, a lesser standard than clear and convincing evidence.

Technically, Mr. Kawashima's stipulation of a $245,000 loss may not have been an admission that, in absolute fact the loss was in that amount, but just a recognition that the Government could meet its burden of proving the tax loss by a preponderance of the evidence. Specifically, there is nothing inherent in that stipulation that it is an admission that the Government can show that loss by clear and convincing evidence. And, I think it defies logic that it can then be used as an admission or even persuasive evidence alone that the Government has met the burden by clear and convincing evidence.

There are variations of this that illustrate the fundamental logic. A conviction of the crime of tax evasion -- with a burden of proof of guilt beyond a reasonable doubt -- is evidence of civil tax fraud -- with a burden of proof on the Government by clear and convincing evidence. Why? Because the latter is the lesser burden, and it is necessarily included in the greater criminal burden. But a finding in a civil case by a preponderance of the evidence is not the equivalent of or does not necessarily subsume the same finding by either clear and convincing evidence or beyond a reasonable doubt. Nobody would doubt the latter truth (a finding by a preponderance of the evidence cannot suffice along to prove beyond a reasonable doubt). It necessarily and inevitably follows that a finding by a preponderance of the evidence cannot suffice to prove the same fact by clear and convincing evidence (a concept as to a burden between preponderance and beyond a reasonable doubt).

I think the Supreme Court in Nijhawan recognized the potential problem of a preclusive effect for the sentencing findings by saying that the convicted defendant / immigration petitioner may contest the loss amount at both the sentencing heraing and the deportation hearing. In other words, it is not a preclusive effect. But, what if all the Government shows at the immigration hearing is the bare sentencing stipulation of the loss amount and nothing more. I would think that the Government would have to prove more.  But, apparently, the Supreme Court says that may not be the case and effectively shifts the burden -- the risk of loss -- to the petitioner opposing immigration.

If I were on the panel in the Ninth Circuit, I would have dissented. Why dissent? Because I am not sure that the other panel members would have found this analysis persuasive by a preponderance of the evidence. (I have argued elsewhere that judicial interpretations may be analyzed similarly to fact findings; perhaps beyond a reasonable doubt is the factual equivalent of "plain meaning" for legal interpretation and so forth; if so, then one issue is what to do in legal analysis with the state of equipoise (as to which, perhaps, Chevron permits agencies some leeway).)

Addition:  The Ninth Circuit issued a good opinion a day after Kawashima addressing the circumstances in which sentencing findings must be by clear and convincing evidence.  The opinion is U.S. v. Treadwell, ___ F.3d ___ (9th Cir. 2010).  Under Ninth Circuit practice after Booker and its tentacles, sentencing findings usually are by a preponderance of the evidence, but those findings have a disproportionate impact to increase the sentence may require findings by clear and convincing evidence.  The Ninth Circuit in Treadwell hold that the extent of the financial loss in the crime, there a conspiracy, requires only fact findings by a preponderance of the evidence, even if in the aggregate the losses have a significant impact on sentencing as the Guidelines intend when the financial loss is significant.  Hence, the tax loss which is the tax equivalent of the financial loss are by a preponderance of the evidence.

Tax Court Decides that Restitution Payments Related to a Trade or Business are Deductible

In Cavaretta v. Commissioner, T.C. Memo. 2010-4, the Tax Court held that contractual restitution paid by a Dentist to an insurance company to compensate for overcharges are deductible as ordinary and necessary business expenses rather than losses. This resolution permitted the taxpayer (the Dentist) to carry the current year losses generated by the deduction of the restitution payments back to an earlier tax year to obtain a refund.

The holding is not a broad holding that restitution payments are ordinary and necessary business expenses or are always deductible in some manner under the Code. Let's address the holding in the context of the facts.

The taxpayer was a dentist. His wife worked in his dental office. His wife began charging an insurance company for services that were not rendered to the insured patients. Under the contract between the dentist and the insurance company, the dentist was obligated to repay overpayments for services rendered. The wife was prosecuted and pled to one count of health-care fraud. The husband contractually agreed to restitution with the insurance company, and the wife asserted that restitution in seeking leniency in the sentence. At sentencing, the judge referred to the contractual restitution commitment, but did not impose any fine or restitution.

The taxpayer / dentist, who had included the wrongful charges in income in the years he received it, then paid the restitution and sought to deduct it as an ordinary and necessary business expense. The key points in the Tax Court's holding that the restitution payments to the insurance company were ordinary income were:

1. The parties agreed that the payments were deductible. The taxpayer argued they were deductible as ordinary and necessary business expenses, thus permitting carryback to an earlier year. The IRS argued that they were section 165(c)(1) losses incurred in a trade or business which could not be carried back. (Note that this key nexus between the trade or business and the payment or loss often is not present; most prominently in the context of federal tax crimes, although restitution to the IRS in tax cases is not permitted, plea agreements often contain contractual restitution to the IRS (and, of course, is a count of conviction is outside Title 26, court imposed restitution to the IRS may be permitted); there is usually, however, no nexus between the restitution payments and a trade or business.)

2. The payments were, in fact, restitution although the sentencing court did not award restitution.  The court thus would appear likely to reach the same result with court imposed restitution.  Note that, since the offense was not a tax offense and the victim had been defrauded, the court could have incorporated the agreement into a court ordered restitution.

3. Restitution payments with the required nexus to a trade or business are deductible. Often when a defendant defrauds another, it may not be in connection with a trade or business. For example, an embezzler is usually not considered to be in a trade or business, and thus restitution of embezzlement proceeds would not be a trade or business expense. (Thus, the wife could not have claimed the expenses as ordinary and necessary expenses related to her fraudulent conduct of overcharging; but the taxpayer / dentist could claim them as related to his trade or business of a dental practice.)

4. The court distinguished cases which held that payments that are punitive might be nondeductible as business expenses under § 162(f). The court noted most immediately that these particular restitution payments were not punitive but compensatory. ("[W]we have little trouble concluding that the payments are noncriminal, compensatory restitution.") The court reached this conclusion without necessarily relying on the taxpayer's contractual commitment to repay in the operative agreements with the insurance company over the period of the false charges. They still had the required nexus to the taxpayer's trade or business.

5. Finally, the court held that, given the novelty of the particular issue in the context presented and uncertainty in the law, even if the court were wrong in the ordinary and necessary business expense holding, it would not impose an accuracy related negligence penalty.

So, that is the guts of the opinion.

My comments are:

1. From a technical tax perspective, I would have thought that the concepts of Arrowsmith v. Commissioner, 344 U.S. 6 (1952) and its progeny might have played some role in the court's exegesis. In very broad strokes, the holding of Arrowsmith and its progeny is that expenses related to income take on the character of the income. The Arrowsmith fight is often about whether the character of the expense is ordinary or capital, but I am not aware that those concepts cannot be used in further characterizing the nature of the ordinary expense. That type of inquiry seems to the what the court actually did without citing Arrowsmith and its progeny. The related income here was clearly trade or business ordinary income and, at a gut level, denying a trade or business offsetting loss (albeit in a later year) just does not strike the gut -- at least my gut -- as wrong. Apparently, it did not strike Judge Holmes' gut as wrong either.

2. The court discussed an earlier case, Stephens v. Commissioner, 905 F.2d 667 (2d Cir. 1990), distinguishing between punitive and compensatory restitution. I had generally thought that restitution is compensatory rather than punitive even when imposed at sentencing.  I did a quick LEXIS-NEXIS search and located perhaps some differences, which I think may be semantical, over this the distinction between punitive and compensatory restitution. See United States v. Leahy, 438 F.3d 328, 334 (3d Cir. 2006) (citing the opposing holdings on the issue, which I think may be reconciled by context; it just goes to show that what appear to be sweeping holdings in cases need to be filtered through the context in which they are made); see also Brian Kleinhaus, Serving Two Masters: Evaluating the Criminal or Civil Nature of the VWPA and MVRA Through the Lens of the ex Post Facto Clause, the Abatement Doctrine, and the Sixth Amendment, 73 Fordham L. Rev. 2711 (2005) (arguing for a general rule that restitution is criminal in nature, but again I think that a more refined approach evidenced by Judge Holmes in Cavaretta gets the right tax result rather than glittering generalities about criminal v. civil or compensatory).

Collateral Consequences of Conviction (or Even Investigation or Acquittal)

Criminal tax lawyers know that, after their job is done, whether successful or not, the IRS usually comes after the defendant / taxpayer to collect taxes. Usually, the IRS waits -- perhaps not patiently -- while the criminal proceeding plays out. But once the criminal case is over, the IRS gets in gear.

That's precisely what happened to the Girls Gone Wild guy, Joe Francis. The IRS filed a lien for $33,8190,087.14 for three years of unpaid taxes. For more on this, see the Tax Prof Blog entry on 'Girls Gone Wild' Founder Joe Francis Sues IRS for Retaliatory Tax Lien.  (By the way, the Tax Prof Blog entry does have a link to the Girls Gone Wild web site.)
 
For tax procedure enthusiasts, the Tax Prof Blog links to a good discussion of the IRS's use of the tax lien at The Tax Lawyer Blog entry for Joe Francis Sues IRS For Wrongful Collection Action – UPDATED.

Collateral Consequences of Tax Crimes for Professionals

Practitioners need to anticipate and attempt to mitigate potential professional or licensing issues that may arise as a result of a tax crimes conviction. I present an object lesson of such consequences.

The WSJ Law Blog reports today here about a case of a lawyer who failed to file federal, state and city taxes for over 10 years. In its opinion here, the panel found that the bad facts outweighed the good. The opinion is short and is worth reading in its entirety here, but here is the court's succinct key findings:

In the within matter, while there are some mitigating factors, we find aggravating factors vastly more compelling. Specifically, while at his law firm and receiving a substantial income, respondent purchased a five bedroom house in New Jersey and a four bedroom house in Florida. He also owned a Lincoln Town car, a Nissan Mini Van, a BMW SUV, and paid for his children to attend private school. In addition, respondent lied to his wife by telling her that tax matters had been taken care of and did not notify his partners of the pending criminal investigation before resigning from the firm to take a position as president of two corporate entities engaged in energy operations in the Philippines. According to the Hearing Panel, his failure to inform his law partners was to insure collection of full compensation and early capital account distribution. We agree with the Hearing Panel's finding that the psychiatric claim is not credible.

While respondent's extensive pro bono work on behalf of defendants facing the death penalty and his dedication to his alma mater is commendable, it does not excuse his failure to file returns or pay taxes during this time. Although respondent has paid all the taxes owed to the State, and has worked out a plan with the Internal Revenue Service, the picture that emerges is that respondent, without any justification, and while enjoying a lavish life style, disregarded his tax obligations. Having considered all of the factors set forth above, we find, as we have found in Matter of Goldman decided herewith, that failure to file tax returns and pay taxes for an extended period of time in these circumstances warrants suspension. A law.com article on the matter is here.

Tax Perjury, § 7206(1), as Aggravated Felony for Immigration Purposes

This morning a petition for certiorari caught my eye in reviewing Tax Notes Today and think it is an issue that Tax Crimes practitioners and students need to be aware of. I checked the Supreme Court's docket here and find that the case will go to conference on November 24, 2009. I don't have a link to the petition itself, but here is the link to the Solicitor General's brief in opposition to the petition. The brief fairly presents the issues and is a good background discussion, although from an advocate's perspective. The Solicitor General states the issues as:

QUESTIONS PRESENTED

In 8 U.S.C. 1101(a)(43)(M), the term “aggravated felony” is defined as including an offense that—

(i) involves fraud or deceit in which the loss to the victim or victims exceeds $10,000; or

(ii) is described in section 7201 of title 26 (relating to tax evasion) in which the revenue loss to the Government exceeds $10,000.

The questions presented are:

1. Whether a conviction for a felony tax offense other than tax evasion in violation of 26 U.S.C. 7201 qualifies as an aggravated felony under 8 U.S.C. 1101(a)(43)(M)(i), where the offense involves fraud or deceit in which the loss to the victim or victims exceeds $10,000.

2. Whether a conviction for filing a false tax return qualifies as an aggravated felony under 8 U.S.C. 1101(a)(43)(M)(i), where petitioner did not dispute a finding in the pre-sentence investigation report that petitioner owed $75,982 in additional taxes during the year in which the false tax return was filed.

JAT Comments:

The first issue is one that most practitioners will face at some point in a career where tax crimes is a significant part of their practice. I cover this point in my book and just cut and past that discussion here (without the footnotes):

The second subpart [of the statute quoted above] thus makes clear that a conviction under § 7201 (tax evasion) is an aggravated felony. The question arises, however, whether other tax crimes that, in general parlance, might be viewed to include fraud or deceit are covered in the first subpart. For example, as we have noted, the Government often charges § 7206(1) (tax perjury) in a case where it could have charged tax evasion, and then the sentencing phase will require proof of a tax loss number that is the number the taxpayer fraudulently sought to avoid reporting or paying. ICE, the government agency charged with administering the immigration laws, takes the position that § 7206(1) may constitute an aggravated felony as defined in the first subpart. There is currently a split in the circuits as to whether tax felonies other than evasion (such as § 7206(1) ) can constitute an aggravated felony.

Finally, a note of caution for practitioners. The attorney should advise or obtain another qualified attorney to advise the defendant of the collateral consequences, including the immigration consequences, of the charges and a plea to the charges if the defendant considers making a plea (as will usually be the case). Certainly, at least as to this immigration collateral consequence, courts have noted that the attorney has a professional duty to make sure the client is advised. So there will be a malpractice issue involved where the attorney fails to do so. In terms of a defendant’s attack on a conviction based in ineffective assistance of counsel, the courts have historically made a distinction between the attorney who failed to advise on immigration consequences and an attorney who gives erroneous advice on the immigration consequences. Failure to advise alone is not ineffective assistance of counsel, but erroneous advice is ineffective assistance of counsel. However, courts have at least suggested that they may be willing to reconsider this historical distinction because, in view of the attorney’s duty to the client, it makes no sense; if the courts do reconsider, I predict that they will hold that failure to advise is ineffective assistance of counsel also. Cover this point with your clients.

I should note that the conflict among the circuits is an interesting conflict for criminal tax practitioners. The court of appeals' decision that held that § 7206(1) is not an aggravated felony is a Third Circuit decision in Lee v. Ashcroft, 368 F.3d 218 (3d Cir. 2004). The majority decision in Lee was written by Judge Lou Oberdorfer, a D.C. District Judge, sitting by designation. Judge Oberdorfer was formerly AAG in charge of the Tax Division, and thus has considerable background in interpreting and applying the tax laws upon which the immigration issue turned. The dissent in Lee was written by Judge, now Supreme Court Justice, Alito. Maybe Justice Alito at least will have some interest in this issue and could influence the decision as to whether to accept certiorari. I have a lot of respect for Judge Oberdorfer and think he has the better position, but we will see.

The second issue is also one worthy of the practitioners' attention. The issue is whether the tax loss amount found by the sentencing judge (sometimes by inference if the defendant fails to object to that part of the Probation Office's PSR) is preclusive in the immigration proceeding. The Government must prove the amount in the immigration proceeding by clear and convincing proof, rather than just a preponderance. By contrast, in the sentencing phase the proof the tax loss is generally thought to be by a preponderance, although there may be some dispute about that generally or specifically if the tax loss dramatically increases the sentence. At any rate, it seems to me that the petitioner has the better part of this issue. I have asserted in a publication that the findings in the sentencing proceedings should be preclusive in the civil tax case following criminal conviction (John A. Townsend, Collateral Estoppel in Civil Cases Following Criminal Convictions, 2005 TNT 4-28) but in both of those proceedings (the criminal sentencing and the civil tax case) the findings are by a preponderance of the evidence with the outcome affected by the burden of proof only where the finder is in equipoise which is rare enough to be negligible. But, in the immigration proceeding, the required finding is by clear and convincing evidence. I am troubled that the use of the PSR in that context where the sentencing judge makes no explicit findings, and certainly would not have in any case required clear and convincing evidence on the state of the law now.