Tenth Circuit Agrees Reverses Tax Court; Upholds Civil Fraud Penalty

(Parker Tax Publishing February 2023)

The Tenth Circuit affirmed the Tax Court and held that a taxpayer's criminal conviction and payment of restitution did not extinguish the IRS's right to pursue income tax deficiencies and fraud penalties. However, citing the Second Circuit's decision in Chai v. Comm'r, 2017 PTC 124 (2d Cir. 2017), the Tenth Circuit reversed the Tax Court's holding that the IRS had not complied with Code Sec. 6751(b)(1) in assessing penalties on the taxpayer. Minemyer v. Comm'r, 2023 PTC 15 (10th Cir. 2023).

Background

In 2008, John Minemyer was indicted on two counts of tax evasion for the years 2000 and 2001. He pled guilty to the 2000 count and, in exchange, the government dismissed the 2001 count. In connection with his guilty plea, Minemyer agreed to pay restitution to the IRS in the amount of all taxes, interest, and penalties due and owing from the tax years 2000 and 2001. The district court sentenced Minemyer to one year in prison and ordered restitution in the amount of $200,918, which Minemyer paid at the time of his sentencing.

In March 2010, a revenue agent visited Minemyer in prison and obtained his signature on a form proposing certain tax deficiencies and civil fraud penalties for 2000 and 2001. Those proposed penalties and deficiencies had not been approved by the agent's supervisor. Minemyer subsequently withdrew his consent. The IRS therefore disregarded the form and in May 2010 sent Minemyer a 30-day letter proposing the same deficiencies and civil fraud penalties. That letter was approved by the revenue agent's immediate supervisor.

In August, the IRS sent Minemyer a deficiency notice determining a tax deficiency of $140,561 for 2000 and $56,944 for 2001. It also determined civil penalties under Code Sec. 6663 in the amounts of $105,421 for 2000 and $42,708 for 2001.

Minemyer disputed the deficiency notice before the Tax Court. He argued he did not owe the deficiencies because they were already part of the restitution he had paid. He further argued he was not liable for the fraud penalties because a guilty plea does not prove fraud and because the plea agreement precluded any additional penalties. The Tax Court rejected Minemyer's arguments and granted summary judgment to the government. According to the court, the plea agreement and conviction did not preclude the IRS from pursuing civil tax proceedings. The Tax Court therefore upheld the tax deficiencies for 2000 and 2001. The Tax Court further held that Minemyer's conviction for tax evasion on the 2000 count collaterally estopped him from challenging a civil fraud penalty for the same year.

The civil fraud penalty for 2001 went to trial and, in Minemyer v. Comm'r, T.C. Memo. 2020-99, the Tax Court held that the IRS had not met its burden of production with respect to the penalty. The Tax Court interpreted Code Sec. 6751(b)(1) to require written supervisory approval of an initial determination of civil fraud penalties before that determination is formally communicated to the taxpayer. The court therefore held that since the IRS agent's March 2010 visit with Minemyer and communication of the proposed deficiencies and penalties was not first approved by a supervisor, the IRS had not complied with Code Sec. 6751(b)(1).

Both parties appealed to the Tenth Circuit. Minemyer appealed the Tax Court's holding regarding the IRS's deficiency notice, arguing that his plea agreement and the district court's restitution order precluded the IRS from pursuing civil tax proceedings. The IRS appealed the Tax Court's decision that the IRS had not complied with Code Sec. 6751(b)(1).

Analysis

The Tenth Circuit affirmed the Tax Court's holding that Minemyer's criminal conviction and payment of restitution did not extinguish the IRS's right to pursue income tax deficiencies and fraud penalties. The court noted that it is well settled that a conviction for tax evasion does not preclude a later civil proceeding for the remedial purpose of determining, assessing, and collecting tax deficiencies from the same taxpayer for the same years. Also, the court said, Minemyer's plea agreement contained no language prohibiting the IRS from assessing civil fraud penalties. The only promises made by the government, the court observed, were that it would file no other federal criminal charges based on matters then known to it and that Minemyer would receive a one-level reduction in his offense level for purposes of calculating his sentence.

The court then turned to the issue presented in the IRS's cross-appeal. Citing the Tax Court's decision in Frost v. Comm'r, 154 T.C. 23 (2020), the court noted that the Tax Court has interpreted Code Sec. 6751(b)(1) to require supervisory approval before the IRS communicates an "initial determination of such assessment" to a taxpayer. In the instant case, a revenue agent gave Minemyer a form proposing civil penalties and that form had not been approved by the agent's supervisor before it was handed to Minemyer. Because the form was never introduced into evidence, the Tax Court held that it could not assess whether the form was an "initial determination" within the meaning of Code Sec. 6751(b)(1) and therefore the IRS had not carried its burden of showing it complied with the statute's requirements. The IRS argued that the Tax Court imposed a requirement that appeared nowhere in the text of the statute.

The Tenth Circuit agreed with the IRS and found its argument was supported by two recent circuit court decisions, Kroner v. Comm'r, 2022 PTC 281 (11th Cir. 2022) and Laidlaw's Harley Davidson Sales, Inc. v. Comm'r, 2022 PTC 83 (9th Cir. 2022). Both cases examined the plain language of Code 6751(b)(1) and concluded that it is not ambiguous and does not require supervisory approval before an initial determination of an assessment is communicated to the taxpayer. According to the Tenth Circuit, the plain language of Code Sec. 6751(b)(1) does not require approval before proposed penalties are communicated to a taxpayer. But, the court said, that did not end the inquiry because there remained the question of whether Code Sec. 6751(b)(1) imposes a timing requirement of any kind. The court looked to the Second Circuit's decision in Chai v. Comm'r, 2017 PTC 124 (2d Cir. 2017), where the Second Circuit concluded that if supervisory approval is to be required at all, it must be the case that the approval is obtained when the supervisor has the discretion to give or withhold it. The Second Circuit reasoned that supervisory approval would be meaningless if the statute were construed to allow such approval after the supervisor lost the authority to prevent the penalty from being assessed. The court further observed that the last moment that a supervisor still has discretion to give or withhold approval is the IRS's issuance of the notice of deficiency because after a notice of deficiency is issued, the IRS loses the discretion not to assess a penalty. Thus, the Second Circuit held that Code Sec. 6751(b)(1) requires written approval of the initial penalty determination no later than the date the IRS issues the notice of deficiency asserting such penalty.

The Tenth Circuit was persuaded by the Second Circuit's reasoning and held that with respect to civil penalties, the requirements of Code Sec. 6751(b)(1) are met so long as written supervisory approval of an initial determination of an assessment is obtained on or before the date the IRS issues a notice of deficiency. In the instant case, the court noted, it was undisputed that the proposed penalties received written supervisory approval three months before the IRS issued the notice of deficiency to Minemyer and that is all that Code Sec. 6751(b)(1) requires. The Tenth Circuit therefore reversed the holding of the Tax Court denying a civil fraud penalty for 2001 and remanded the case for the Tax Court to decide on the evidence whether Minemyer is liable for the penalty.

For a discussion of the procedural requirements for computing penalties, see Parker Tax ¶262,195.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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