Opinion
7350-20L
01-10-2022
ORDER
Joseph Robert Goeke Judge
On January 25, 2021, petitioner filed a motion for summary judgment in this collection due process (CDP) case challenging the propriety of the filing of a notice of Federal tax lien (NFTL) and a notice of intent to levy (proposed levy) for the collection of a criminal restitution pursuant to section 6201(a)(4). He also seeks review of a rejection of a proffered installment agreement that conforms with the payment schedule in the criminal restitution order. Respondent objects to the granting of the motion.
Unless otherwise indicated, all section and title references are to the Internal Revenue Code (Code), title 26, U.S.C., in effect for the years at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.
Background
The following background is derived from the parties' pleadings, motion papers, declarations, attachments, and the criminal case. When petitioner filed his petition, he resided in Illinois.
In October 2013 petitioner, a former attorney, was convicted in the U.S. District Court for the Southern District of New York of four counts of client tax evasion in violation of section 7201, one count of obstructing the due administration of tax laws in violation of section 7212(a), one count of conspiracy to defraud the Internal Revenue Service (IRS) under 18 U.S.C. section 371, and one count of mail fraud under 18 U.S.C. secs. 1341, in connection with his sale of fraudulent tax shelters. United States v. Daugerdas, 837 F.2d 212, 220 (2d Cir. 2016). The District Court sentenced petitioner to 180 months of incarceration followed by three years of supervised release, ordered him to pay restitution of $371,006,397 to the IRS, and entered a preliminary forfeiture order of $164,737,500. During the sentencing hearing on June 25, 2014, the District Court stated that the Mandatory Victims Restitution Act (MVRA) applied to mandate restitution and named the IRS as petitioner's victim. The Court stated that petitioner is "responsible for the full amount of the restitution" and "[y]ou will pay restitution in a total amount of $371,006,397, joint and several, with your co-conspirators". The Court did not address a payment schedule or expressly state that payment was immediately due.
On June 26, 2014, the District Court entered a written forfeiture order and the next day, filed a written judgment of the sentence using a preprinted form that included a section titled "Schedule of Payments" from which the Court could set the payment terms for the restitution by choosing from six boxes including options for payment immediately due and deferred, installment payments. The Court checked the box for "Special instructions" and wrote, as amended on October 30, 2014, that petitioner "shall make restitution payments in monthly installments of 10% of his gross monthly income over a period of supervision to commence 30 days after his release from incarceration." It also checked a box that made interest due on any unpaid restitution beginning 15 days after entry of the judgment.
CDP Hearing
On February 26, 2018, while petitioner was incarcerated, respondent made an assessment for 1994, 1998, 1999, and 2000. On April 24, 2018, respondent issued the proposed levy notice, and on May 4, 2018, the NFTL filing. Petitioner timely requested a CDP hearing. On August 1, 2018, a settlement officer (SO) from the Appeals Office conducted a telephone CDP hearing with petitioner. The SO requested that petitioner provide financial records to establish his inability to pay. In the notice of determination, the SO stated that petitioner did not provide records to substantiate his inability to pay. The SO stated that he provided an extension of several weeks for petitioner to remit the financial records.
On March 2, 2020, respondent assessed additional amounts for the years at issue, which combined with the earlier assessments equal the total amount of court-ordered restitution. On May 6, 2020, respondent issued a notice of determination sustaining the proposed levy and the NFTL filing and rejecting an installment agreement. Petitioner timely filed a petition with this Court.
Standards of Summary Judgment
The purpose of summary judgment is to expedite litigation and avoid unnecessary and time-consuming trials. Fla. Peach Corp. v. Commissioner, 90 T.C. 678, 681 (1988). The Court may grant summary judgment when there is no genuine dispute as to any material fact and a decision may be rendered as a matter of law. Rule 121(b); Elec. Arts, Inc. v. Commissioner, 118 T.C. 226, 238 (2002); Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff'd, 17 F.3d 965 (7th Cir. 1994). In deciding whether to grant summary judgment, we construe factual materials and drawn inferences in the light most favorable to the nonmoving party. Sundstrand Corp., 98 T.C. at 520. However, the nonmoving party "may not rest upon the mere allegations or denials" of his pleadings but instead "must set forth specific facts showing that there is a genuine dispute" for trial. Rule 121(d); see Sundstrand Corp., 98 T.C. at 520.
Standard of Review in CDP Proceedings
This collection action arises under respondent's authority under section 6201(a)(4)(A) to assess and collect criminal restitution ordered for tax-related crimes. Section 6201(a)(4)(C) expressly precludes taxpayers from challenging the existence or the amount of criminal restitution in a proceeding under the Code. However, taxpayers have the right to challenge actions to collect restitution-based assessments. Carpenter v. Commissioner, 152 T.C. 202, 210-211 (2019), aff=d, 788 Fed.Appx. 187 (4th Cir. 2019).
Where the validity of a taxpayer's underlying tax liability is properly at issue in a CDP hearing, we review respondent's determination de novo. Goza v. Commissioner, 114 T.C. 176, 181-182 (2000). Otherwise, we review respondent's determination for abuse of discretion, i.e., whether it is arbitrary, capricious, or without sound basis in fact or law. Murphy v. Commissioner, 125 T.C. 301, 320 (2005), aff'd, 469 F.3d 27 (1st Cir. 2006). When an error of law has occurred, the standard of review that we apply makes little difference; we must reject a determination predicated on an erroneous review of the law whether characterized as de novo or abuse of discretion. See Kendricks v. Commissioner, 124 T.C. 69, 75 (2005).
Restitution-based Assessment
Respondent can make a restitution-based assessment and initiate collection actions only to the extent authorized by section 6201(a)(4)(A), which permits the Secretary to "assess and collect the amount of restitution under an order pursuant to section 3556 of title 18, United States Code, for failure to pay any tax imposed under this title in the same manner as if such amount were such tax." Section 3556 of title 18, U.S.C., (hereinafter title 18) grants mandatory and discretionary authority to district courts to order restitution under section 3663A and 3663, title 18, respectively, and further provides that "the procedures under section 3664 [title 18] shall apply to all orders of restitution".
Respondent must wait to assess and collect restitution until "all appeals of such order are concluded and the right to make all such appeals has expired." Sec. 6201(a)(4)(B). The parties assert that "all appeals" have concluded and section 6201(a)(4)(B) does not bar assessment or collection.
Respondent's Authority to Collect Restitution for Title 18 Offenses
The District Court exercised its mandatory authority under section 3663A, title 18 to order restitution for petitioner's conspiracy conviction. We have not previously considered respondent's section 6201(a)(4) authority to assess and collect restitution that was ordered on the basis of a conviction for a title 18 offense. Section 6201(a)(4) expressly extends respondent's assessment and collection authority to mandatory restitution under the MVRA. Mandatory restitution is not available to title 26 violations. Accordingly, the plain language of the statute means that Congress intended to extend assessment and collection to tax-related, title 18 offenses to which mandatory restitution applies. Otherwise, the inclusion of mandatory discretion, through the reference to 18 U.S.C. sec. 3556, within respondent's section 6201(a)(4) authority would be meaningless.
The legislative history supports this interpretation and indicates that Congress intended for respondent's section 6201(a)(4) authority to extend to restitution ordered for tax-related, title 18 offenses. See H.R. 5552, 111th Cong., Preamble (2010) (stating that section 6201(a)(4)'s purpose is "to provide for the assessment * * * of certain criminal restitution"); see also Staff of J. Comm. on Taxation, General Explanation of Tax Legislation Enacted in the 111th Congress, at 459-461 (J. Comm. Print 2011) (stating that although restitution cannot be ordered for title 26 offenses, it is mandated in tax-related offenses under title 18 and the IRS is responsible for investigating such offenses).
Petitioner argues that conspiracy does not require a "failure to pay any tax" for purposes of section 6201(a)(4). While a pecuniary loss is not required for a conspiracy conviction, a tax loss is required for a sentencing court to order restitution to the IRS and the restitution is calculated on the basis of the failure to pay tax. See United Sates v. Silkowski, 32 F.3d 682, 689 (2d Cir. 1994) (holding that restitution may be ordered for losses that are directly caused by the conduct of the offense); see also United States v. Ballistrea, 101 F.3d 827, 831-832 (2d Cir. 1996) (holding a pecuniary loss is not required for a conspiracy conviction). Thus, there was a failure to pay tax. Petitioner seeks to distinguish a tax loss from a failure to pay any tax. For purposes of section 6201(a)(4), we find no distinction in the light of the plain language of the statute and the legislative history that establish that Congress intended to extend respondent's section 6201(a)(4) authority to tax-related title 18 offenses.
The District Court determined the amount of restitution on the basis of tax loss caused by petitioner's clients' failure to pay tax. Our caselaw has extended respondent's section 6201(a)(4) authority to tax not originally imposed on the taxpayer. See Bontrager v. Commissioner, 151 T.C. 213, 222 (2018). Thus, respondent has authority under section 6201(a)(4) to assess and collect restitution ordered for tax loss attributable to petitioner's clients.
Restitution-based Assessment Premature
We begin by considering whether the restitution-based assessments must be abated as premature. Petitioner did not request abatement of the assessment in the four enumerated requests in his motion for summary judgment. However, he asserted that the restitution-based assessment and collection must be made in accordance with the criminal restitution order and that "any and all collection actions" should be abated and terminated.
Petitioner is not entitled to abatement of the restitution-based assessments. Respondent may make restitution-based assessments "at any time" on the condition that "all appeals of such order are concluded and the right to make all such appeals has expired." Secs. 6501(c)(11); 6201(a)(4)(B). Once the amount of restitution is set by court order, respondent may assess the full amount of the restitution even though the taxpayer has no current payment obligation under a court-ordered payment schedule. Notably, respondent may choose to delay assessment until the taxpayer has a current payment obligation. See Catlett v. Commissioner, T.C. Memo. 2019-86 (stating that where respondent had voluntarily abated an earlier assessment during the taxpayer's incarceration as premature, he may reassess the restitution upon the taxpayer's release from prison and at which time the taxpayer would not be able to challenge his liability for the total amount of restitution in this Court irrespective of a payment schedule in the criminal restitution order).
Terms of the Restitution Order
The parties advance differing interpretations of the District Court's restitution order. Petitioner argues that the criminal restitution order delayed his payment obligations until his release from incarceration pursuant to a court-ordered payment schedule. Respondent argues that the District Court ordered full payment immediately due. He relies on the Court's statements during the sentencing hearing that petitioner is "responsible for the full amount of the restitution" and "will pay restitution in a total amount of $371,006,397". Neither statement clearly imposes immediate payment, and at no time during the sentencing hearing did the District Court expressly state that payment was immediately due. Nor does the written judgment clearly impose an immediate payment obligation. Alternatively, respondent argues that his collection authority is independent from the criminal restitution order and, thus, the payment schedule in the restitution order is not controlling.
Federal Tax Lien Notice Filing
Even before section 6201(a)(4)'s enactment, a restitution order operated as a lien in favor of the United States that were essentially equivalent to a Federal tax lien. Under section 3613(c), title 18, a lien automatically arises upon entry of the judgment on all property and rights to property of the criminal defendant. The lien operates as if the restitution is a tax liability assessed under the Code and becomes valid upon filing of a notice of lien in the same manner as the filing of NFTL. Id. Upon the filing of the notice, the restitution order had the same priority, force, and effect as a Federal tax lien. See, e.g., United States v. Loftis, 607 F.3d 173, 179 n.7 (5th Cir. 2010) (stating that "a restitution order [is] enforceable to the same extent as a tax lien"); United States v. Kollintzas, 501 F.3d 796, 802 (7th Cir. 2007) (stating that restitution orders "are effective against every interest in property accorded a taxpayer by state law"). The lien lasts for 20 years after a criminal defendant's release from prison, the restitution is paid, or the defendant dies. 18 U.S.C. sec. 3613(c). The crime victim also to obtain a lien for the full amount of the restitution. See id. sec. 3664(m)(1).
The plain text of section 3613, title 18 makes clear that the lien is automatic upon the entry of the judgment and is for the full amount of the restitution. The statute does not require that that the criminal defendant have a current payment obligation under the restitution order. Thus, the lien automatically arises upon entry of the judgment under section 3613(c), title 18, irrespective of how the criminal restitution order is interpreted.
The statutory provisions governing liens do not grant any discretion to the sentencing court to determine when a lien arises or any authority to vacate the automatic lien. The issue of the timing of payment, which the parties dispute, arises under section 3664, title 18, which provides procedures for district courts ordering restitution. District courts are required to determine the total amount of restitution on the basis of the victim's total loss without regard to the criminal defendant's ability to pay. 18 U.S.C. sec. 3572(d). However, once the total amount of restitution is determined, section 3664(f), title 18, requires sentencing courts to consider the defendant's economic circumstances to determine the timing of the criminal defendant's payment obligations and allows district courts to require immediate payment or set a payment schedule. The sentencing court has "very broad discretion" when determining the timing of payment. United States v. Corbett, 357 F.3d 194, 195 (2d Cir. 2004). Section 3572(d), title 18, likewise recognizes the discretion granted to district courts. It creates a presumption of immediate payment "unless, in the interest of justice", the court provides otherwise.
The statute does not subject the lien's existence to the discretion afforded to sentencing court under section 3664, title 18, for setting a payment schedule on the basis of the defendant's ability to pay. Where we consider two statutory provisions, a basic canon of statutory construction is that a specific provision takes precedence over a general one. See, e.g., Green v. Bock Laundry Mach. Co., 490 U.S. 504, 524 (1989). Thus, the provision specific to the automatic creation of liens controls over the more general statutory provisions that grant discretion to district courts to structure restitution payments. There is no basis to extend the discretion granted to district courts for setting payment schedules to the existence of a lien.
Under title 18, the Government has a right to a lien even where the criminal defendant does not have a current payment obligation under the criminal restitution order. The sentencing court cannot delay the time that the lien arises through setting a payment schedule. Thus, the payment schedule cannot preclude a lien from arising upon entry of the judgment as required by statute. An interpretation otherwise would render the automatic lien provision ineffective. See, e.g., Regions Hosp. v. Shalala, 522 U.S. 448, 467 (1998) (stating that courts must interpret statutes in a manner that gives meaning to each provision and does not render any part superfluous); United States v. Nordic Village, Inc., 503 U.S. 30, 36 (1992).
Moreover, the existence of a lien would not accelerate petitioner's payment obligations under the restitution order or impose a current payment obligation that is inconsistent with the restitution order (assuming petitioner's understanding of the criminal restitution order is correct). In this way, the title 18 provisions are consistent with title 26 lien provisions. A Federal tax lien "is not self-executing." United States v. Nat'l Bank of Commerce, 472 U.S. 713, 720 (1985). Respondent must take some further action to collect the amount owed. The lien merely protects respondent's interests. It exists to secure the restitution obligation and to give the Government priority against other creditors. United States v. Klein, 2007 WL 2274254, at *4 (S.D.N.Y. 2007), aff'd, 297 Fed.Appx. 19 (2d Cir. 2008). A lien itself does not collect restitution in excess of amounts currently due under the restitution order. We have recognized that restitution is not a tax imposed by the Code; it is an amount assessed and collected "in the same manner as if such amount were such tax". Klein v. Commissioner, 149 T.C. at 352. The "as if" text of section 6201(a)(4) grants to respondent the authority to use lien and levy provisions under sections 6320 and 6330, respectively, to collect restitution-based assessments
We sustain respondent's determination with respect to the filing of a NFTL. The lien is automatic and does not depend on whether the defendant has a current obligation under the court-ordered payment schedule. The filing of NFTL does not usurp the authority granted to the district court to determine whether to order payment immediately due or to set a payment schedule on the basis of the defendant's economic circumstances. See United States v. Cabral, 2017 WL 2562295, at *3 (D.D.C. 2017).
Proposed Levy
The parties' different readings of the criminal restitution order may impact whether the determination to sustain the proposed levy is correct. The administrative record indicates that the SO did not evaluate whether the criminal restitution order made payment immediately due or delayed petitioner's payment obligations until his release from prison and likewise did not consider the implications of whether petitioner had a payment obligation when respondent initiated the proposed levy.
Petitioner proffered an installment agreement that conforms to the payment schedule set forth in the criminal restitution order. A payment schedule in a criminal restitution order is not an installment agreement as defined by the Code. Reynolds v. Commissioner, T.C. Memo. 2021-10. The SO rejected the proffered installment agreement and sustained the proposed levy on the basis that petitioner did not provide financial records to substantiate his inability to pay after providing petitioner additional time to provide the documentation.
Petitioner asserts that he demonstrated his inability to pay on the basis of his conviction, forfeiture of assets, and incarceration. In his petition, he asserted that he does not have access to financial records or information because of his incarceration and that he understands that he has no available assets to pay the assessment because "any available assets have been restrained, seized, frozen or forfeited by the U.S. Attorney's Office".
As explained further below, precedent from the Second Circuit indicates that the District Court determined that petitioner did not have the ability to pay the full restitution at the time the judgment was entered. The SO did not consider the District Court's decision when he rejected the installment agreement offer, which was a mistake of law and abuse of discretion. We remand to the SO for further consideration of petitioner's ability to pay. We find petitioner's claim that he cannot provide the financial documentation specious and admonish him to cooperate fully with the SO if he desires to avoid the proposed levy.
The criminal restitution order should be read harmoniously with title 18 as applied in accordance with precedent from the Second Circuit. While petitioner resided in Illinois when he filed his petition, he was sentenced in the Southern District of New York and precedent from the Second Circuit informed the District Court's decision in setting the terms of the restitution order. Accordingly, the restitution order should be read in the light of the statutory requirements for criminal restitution orders under title 18 as interpreted by the Second Circuit.
Caselaw from the Second Circuit suggests that the District Court's decision to include a payment schedule means that the District Court determined that petitioner lacked the ability to pay the restitution in full immediately. District courts have authority to devise a payment schedule only for the periods of incarceration and supervised release. See United States v. Walker, 353 F.3d 130, 131 (2d Cir. 2003). Second Circuit precedent requires district courts to provide payment schedule where the criminal defendant lacks the ability to pay and has held that it is abuse of discretion for a district court to order restitution immediately due when the criminal defendant lacks the ability to pay the full restitution. See United States v. Benton, 765 Fed.Appx. 477, 482 (2d Cir. 2019) (holding that the district court erred by ordering immediate payment where the defendant did not have the ability to pay); United States v. Kinlock, 174 F.3d 297, 301 (2d Cir. 1999); United States v. Mortimer, 52 F.3d 429, 436 (2d Cir. 1995) (holding that the district court abused its discretion by ordering immediate payment).
Respondent cites cases from the Seventh Circuit, to which this case is appealable absent a stipulation to the contrary, as well as other circuits to argue the restitution order requires immediate payment. The Seventh Circuit appears to take a different approach than the Second Circuit and may not find abuse of discretion for the sentencing court to order immediate payment when the criminal defendant lacks the ability to pay. We direct the SO to consider Second Circuit precedent.
Furthermore, the Court of Appeals for the Second Circuit has also required a district court to set a payment schedule for the period of incarceration where it has ordered restitution immediately due. See Kinlock, 174 F.3d at 300. The SO should consider this precedent when determining whether the District Court intended to order payment immediately due. This precedent from the Second Circuit is also relevant to whether we would read the criminal restitution order as making payment immediately due.
We presume that the District Court considered the statutory requirements of restitution orders and was mindful of the overall statutory goal of fully compensating crime victims without regard to the defendant's financial circumstances. Notably, the District Court set the payment schedule on the basis of the criminal defendant's economic circumstances and had full view of the facts after it ordered forfeiture of $167 million of petitioner's assets, which clearly diminished his ability to pay, and sentenced him to a 15-year prison sentence, which significantly impairs his ability to improve his financial condition. The District Court had petitioner's financial information before it as part of the presentence report when it set the payment schedule.
Respondent has cited numerous cases from other circuits that seem to take a different approach to the inclusion of a court-ordered payment schedule than the Second Circuit. The cited cases generally involve sentencing courts that allowed the Government to collect amounts in excess of the amounts due under the court-ordered payment schedules. Notably, each of the cases involved criminal restitution orders that made payment immediately due and contained payment schedules or criminal defendants who otherwise had a current payment obligation under the restitution order. None of the cases that respondent cites appear relevant in the light of Second Circuit precedent that district courts should not order payment immediately due and must set a payment schedule where the criminal defendant lacks the ability to pay the full restitution. Under Second Circuit precedent, inclusion of a payment schedule indicates that the sentencing court determined that the criminal defendant lacked the ability to pay the full amount. Respondent has not cited any cases from the Second Circuit where a district court has ordered payment immediately due and set a payment schedule or that has allowed collection against an incarcerated defendant who is under a payment schedule only after his release from prison.
Respondent has raised numerous issues that we have not addressed including whether the criminal restitution order imposed an immediate payment obligation, whether his collection authority is limited to the payment schedule in the criminal restitution order, and whether he will be able to collect any unpaid balance of the restitution when petitioner's supervised release ends.
Accordingly, we sustain the restitution-based assessment for the full amount of the restitution ordered by the District Court and the determination to sustain the NFTL filing and hold the motion in abeyance with respect to the proposed levy for the SO to consider an installment agreement on the basis of petitioner's asserted inability to pay the restitution in full.
Accordingly, it is
ORDERED that petitioner's Motion for Summary Judgment is denied in part with respect to the abatement of the restitution-based assessment and the NFTL filing. Petitioner's motion is held in abeyance with respect to the proposed levy. It is further
ORDERED that this case is remanded to respondent's Office of Appeals for the purpose of conducting a further administrative hearing to be held no later than July 6, 2022, for determination of petitioner's proffered installment agreement for review of petitioner's ability to pay. It is further
ORDERED that the parties are directed on or before August 5, 2022, to file with the Court a joint written report as to the then current status of this case.