Frederick Engle v. Commissioner , 2020 T.C. Memo. 69 ( 2020 )

T.C. Memo. 2020-69
UNITED STATES TAX COURT
FREDERICK ENGLE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 15791-17L. Filed May 28, 2020.
Robert J. Gallagher, Jason A. Morton, and William Y. Webb, for petitioner.
Corey R. Clapper and Amy Dyar Seals, for respondent.
MEMORANDUM OPINION
COHEN, Judge: This case was commenced in response to an Internal
Revenue Service (IRS) Office of Appeals (Appeals) notice of determination
concerning collection action under section 6320. The notice sustained a Letter
3172, Notice of Federal Tax Lien Filing and Your Right to a Hearing Under IRC
6320 (NFTL), for balances of restitution-based assessments (RBA) pursuant to
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[*2] section 6201(a)(4) for 1984, 1986-1993, and 1995-2001, which relate to an
order of criminal restitution for tax losses.
Following our Opinion in Klein v. Commissioner, 149 T.C. 341 (2017),
respondent conceded and committed to abate the statutory interest and additions to
tax determined with respect to the years at issue. After concessions, the sole issue
for decision is whether the restitution order in this case falls within the scope of
the Firearms Excise Tax Improvement Act of 2010 (FETIA), Pub. L. No. 111-237,
sec. 3, 124 Stat. at 2497. Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect at all relevant times, and all Rule references
are to the Tax Court Rules of Practice and Procedure.
Background
The parties submitted this case fully stipulated under Rule 122. The
stipulated facts are incorporated in our findings by this reference. Petitioner
resided in North Carolina when he filed his petition.
The Underlying Criminal Case
In 2004 the U.S. Attorney’s Office (USAO) filed an information in the U.S.
District Court for the Western District of North Carolina, charging petitioner with
a single count of violating section 7201 by attempting to evade or defeat tax for
1998. The information also alleged that petitioner had evaded tax for 16 years
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[*3] between 1984 and 2002 and owed tax of more than $600,000, but those years
were not included in the charge in the information. Petitioner pleaded guilty to the
information in 2004.
The District Court held a sentencing hearing almost two years later in
February 2006. The District Court sentenced petitioner to four years of probation
including confinement for 18 months in a community corrections center. While
petitioner was to be in the community corrections center, the District Court
ordered that he would be permitted to travel to China for work. Shortly after the
sentencing hearing the District Court learned that the Bureau of Prisons would not
permit petitioner to travel internationally. The District Court vacated the sentence
and indicated that petitioner would be resentenced at a later date.
2008 Sentencing
On March 12, 2008, the District Court reconvened the sentencing
proceeding. During the 2008 hearing the District Court sentenced petitioner to
four years of probation including 18 months of home detention. The District
Court neither made a finding of the exact amount of the tax loss involved in the
case nor ordered full restitution in that amount. Instead the District Court ordered
that the exact amount of restitution would be determined by the IRS. The District
Court directed that petitioner pay $25,000 to the IRS immediately and a further
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[*4] $100,000 within 90 days of the sentencing hearing. On April 4, 2008, the
District Court issued a written judgment that stated the exact amount of restitution
was “to be determined by the IRS”.
Appeal and Remand
On May 2, 2008, the USAO appealed the District Court’s judgment of
conviction, including the sentence imposed and the order of restitution, to the U.S.
Court of Appeals for the Fourth Circuit. On January 13, 2010, the court issued its
ruling vacating the entire sentence and remanding the case for resentencing. In
that ruling the Court of Appeals concluded:
Under these circumstances, we cannot determine whether the
sentence is reasonable without a fuller explanation of the reasoning
behind the district court’s view that a term of imprisonment as
recommended by the Guidelines was not warranted and why
restitution alone would provide adequate deterrence in this case.
Because the district court’s explanation of its decision to vary
significantly from the Guidelines’ sentencing recommendation is
insufficient to permit meaningful appellate review, we must vacate
the sentence and remand for new sentencing further proceedings.
United States v. Engle, 592 F.3d 495, 503-504 (4th Cir. 2010) (citation omitted).
In a footnote to its holding the Court of Appeals specifically addressed the District
Court’s order of restitution and stated:
Engle’s failure to make any significant payment on his tax debt
during the four-year period before sentencing likewise raises
questions about the district court’s refusal to order full restitution, an
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[*5] order that would carry with it significant benefits from the
government’s perspective with regard to collection and enforcement.
On remand, the district court should reconsider this issue and provide
a more detailed explanation should it again conclude that a restitution
order is not required.
Id. at 503 n.3 (emphasis added).
2011 Sentencing
On May 23, 2011, the District Court held a hearing to resentence petitioner,
and it issued a written amended judgment on May 26, 2011. The District Court
sentenced petitioner to 60 months incarceration followed by 14 months of
supervised release. The District Court further ordered petitioner to make
restitution to the IRS of $620,549, which it ordered due and payable immediately.
In the event petitioner had not repaid the full amount of restitution by the start of
his term of supervised release, the District Court ordered him to pay $50 per
month beginning 60 days after the start of supervised release. In its written
amended judgment the District Court indicated that the reason for amendment was
“Correction of Sentence on Remand”. Neither the Government nor petitioner
appealed the District Court’s amended judgment.
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[*6] IRS Collection Efforts
On May 26, 2014, the IRS made RBAs against petitioner under section
6201(a)(4) for 1984, 1986-1993, and 1995-2001, which totaled the exact amount
of restitution ordered by the District Court in its 2011 amended judgment. That
same day the IRS mailed petitioner a notice and demand for the unpaid restitution.
On or about June 23, 2016, the IRS filed a Form 668(Y)(c), Notice of Federal Tax
Lien, against petitioner with the Office of the Clerk of Superior Court of
Mecklenburg County, North Carolina. On the same day the IRS sent petitioner an
NFTL, which indicated that petitioner owed $2,784,166.95, representing the total
amount of the RBAs, statutory interest, and additions to tax. The NFTL also
stated that petitioner could appeal the proposed collection action by requesting a
collection due process (CDP) hearing under section 6320 by August 1, 2016.
CDP Hearing
Petitioner’s authorized representative timely submitted a Form 12153,
Request for a Collection Due Process or Equivalent Hearing, with respect to the
NFTL. Petitioner’s representative checked the box on the Form 12153 indicating
that petitioner was unable to pay the balance of his liabilities and that he would
like to discuss collection alternatives. His representative also stated the following:
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[*7] Manger’s [sic] Conference requested to resolve this issue prior to
Appeals request; no response. The tax years listed on the taxpayer’s
liens (attached) are either (1) tax years fully dischargeable in the
taxpayer’s CH 7 BK, or (2) include tax years that are NOT the BASIS
of the taxpayer’s current Federal Restitution Order. Taxpayer only
pled guilty for one tax year, 1999 [sic] * * *. There is NO
adjudication as to the other tax years listed on the lien.
Petitioner’s case was assigned to an Appeals settlement officer (SO) who
scheduled a CDP hearing for petitioner. Before the CDP hearing, petitioner’s
representative sent the SO two letters, the first on or about January 31, 2017, and
the second on or about February 5, 2017. Both letters elaborated on petitioner’s
argument that the Court of Appeals did not reverse and remand the District
Court’s 2008 restitution order and consequently that order predates the IRS’
authority to make RBAs under FETIA. On February 6, 2017, the SO conducted a
telephone CDP hearing with petitioner’s representative. During this hearing
petitioner’s representative reiterated the arguments made in his letters.
Notice of Determination
Following the CDP hearing the SO sustained the determination. In
determining that the lien filing should be sustained, the SO made, inter alia, the
following conclusions: (1) a taxpayer cannot challenge the amount of court-
ordered restitution in a CDP hearing, (2) because the Court of Appeals vacated the
District Court’s sentencing order the 2008 restitution order was rendered void,
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[*8] meaning the ultimate restitution order was the amended judgment imposed in
May 2011, (3) interest was properly assessed on the RBAs, (4) a lien withdrawal
was not appropriate, and (5) the proper legal and procedural requirements had
been met in the assessment and collection of the restitution. Appeals sent
petitioner a notice of determination concerning collection action(s) under section
6320 and/or 6330, for the NFTL, dated June 21, 2017. When Appeals sent these
notices of determination, Klein had not been decided.
Discussion
Petitioner contends that: (1) the 2008 restitution order was neither vacated
nor voided by the later January 13, 2010, decision by the Court of Appeals and its
amended judgment, (2) the Court of Appeals decision vacated and voided only
sentencing as to petitioner, (3) the respondent erred in applying FETIA to
petitioner’s May 2011 amended judgment, which did not modify the 2008
restitution order, and (4) because the 2008 restitution order remained undisturbed
it predates the effective date of respondent’s authority to make RBAs under
section 6201(a)(4).
Section 6321 imposes a lien in favor of the United States on all property and
property rights of a taxpayer liable for tax after a demand for the payment of the
tax has been made and the taxpayer fails to pay. The lien arises when the
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[*9] assessment is made. Sec. 6322. The IRS files a notice of Federal tax lien to
preserve priority and put other creditors on notice. See sec. 6323. Section 6320(a)
requires the Secretary to send written notice to the taxpayer of the filing of a
notice of lien and of the taxpayer’s right to an administrative hearing on the
matter. Petitioner requested and was granted a CDP hearing.
CDP hearings generally shall be conducted consistent with procedures set
forth in section 6330(c), (d), (e), and (g). Sec. 6320(c). Section 6330(c) specifies
the matters to be considered at a CDP hearing, including verification that the
requirements of any applicable law or administrative procedure have been met,
challenges to the appropriateness of collection actions, and offers of collection
alternatives. The taxpayer may raise at the hearing any relevant issues relating to
the unpaid tax or the proposed levy. However, “[a] taxpayer is strictly prohibited
from challenging the existence or amount of an underlying tax liability that is
related to an order of criminal restitution.” Carpenter v. Commissioner, 152 T.C.
202, 219 (2019) (citing section 6201(a)(4)(C)), aff’d, 788 F. App’x 187 (4th Cir.
2019).
Because petitioner is precluded from raising the issue of his underlying tax
liabilities, the Court reviews the IRS’ determination for abuse of discretion. See
id. at 220-221; Klein v. Commissioner, 149 T.C. 348; Sego v. Commissioner,
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[*10] 114 T.C. 604, 610 (2000); Goza v. Commissioner, 114 T.C. 176, 182
(2000). To establish an abuse of discretion, the taxpayer must show that the
decision complained of is arbitrary, capricious, or without sound basis in fact or
law. Giamelli v. Commissioner, 129 T.C. 107, 111 (2007) (citing Woodral v.
Commissioner, 112 T.C. 19, 23 (1999)). Where a determination by Appeals is
predicated upon an error of law, that determination constitutes an abuse of
discretion. Alessio Azzari, Inc. v. Commissioner, 136 T.C. 178, 191 (2011);
Swanson v. Commissioner, 121 T.C. 111, 119 (2003) (citing Cooter & Gell v.
Hartmarx Corp., 496 U.S. 384, 405 (1990) (abuse of discretion occurs if ruling
was based on erroneous view of the law)); see also Kendricks v. Commissioner,
124 T.C. 69, 75 (2005) (“Whether characterized as a review for abuse of discretion
or as a consideration ‘de novo’ (of a question of law), we must reject erroneous
views of the law.”).
The IRS can make a restitution-based assessment only to the extent
authorized by section 6201(a)(4)(A). That section provides that the Secretary
“shall 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 [title 26] in the same manner as if such amount were such tax.”
The Secretary’s collection authority under section 6201(a)(4) applies only to
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[*11] criminal restitution ordered after August 16, 2010. See FETIA sec. 3(c), 124
Stat. at 2498. The parties do not dispute that such a restitution obligation is at
issue in this case; however, they disagree as to whether the restitution was ordered
after the effective date of section 6201(a)(4).
The crux of the dispute is whether the Court of Appeals intended to include
the 2008 restitution order in its mandate to the District Court when it reversed and
remanded petitioner’s sentence. It is well settled that the mandate of a higher
court is “controlling as to matters within its compass”. Sprague v. Ticonic Nat’l
Bank, 307 U.S. 161, 168 (1939). “[I]t is indisputable that a lower court generally
is ‘bound to carry the mandate of the upper court into execution’”. United States
v. Bell, 5 F.3d 64, 66 (4th Cir. 1993) (quoting Sprague, 307 U.S. at 168). “[W]hen
* * * [a higher] court remands for further proceedings, a district court must, except
in rare circumstances, ‘“implement both the letter and spirit of the . . . mandate,
taking into account [our] opinion and the circumstances it embraces.”’” Id. at 66
(third and fourth alterations in original) (quoting United States v. Bell, 988 F.2d
247, 250 (1st Cir. 1993)).
In this case the Government appealed the District Court’s judgment of
conviction including the sentence imposed and the order of restitution to the Court
of Appeals. The Court of Appeals considered both petitioner’s efforts to make
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[*12] restitution before sentencing and the District Court’s reasoning for imposing
a lesser sentence of incarceration in favor of petitioner’s making restitution. The
Court of Appeals concluded that the District Court’s explanation of its decision
was insufficient to permit meaningful appellate review. As a result the Court of
Appeals vacated petitioner’s entire sentence and remanded “for new sentencing
[and] further proceedings.” Engle, 592 F.3d at 504. In doing so the Court of
Appeals included a footnote stating that “[o]n remand, the district court should
reconsider * * * [the issue of restitution] and provide a more detailed explanation
should it again conclude that a restitution order is not required.” Id. at 503 n.3.
We conclude that the Court of Appeals expressly intended to include the 2008
restitution order in its decision to vacate and remand petitioner’s sentence. This
decision rendered the 2008 restitution order null and void.
Consistent with the Court of Appeals mandate, the District Court
reconsidered the amount of restitution owed and issued a new restitution order
with its May 2011 amended judgment. Accordingly, the date of the May 2011
restitution order controls for the purposes of determining whether section
6201(a)(4) applies. The May 2011 restitution order was imposed after the
effective date of section 6201(a)(4) specified under FETIA. The SO’s conclusion
that the RBA was not in error and his determination to sustain the NFTL filing
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[*13] were not an abuse of discretion. Except with respect to the conceded
amounts of interest and additions to tax, we sustain the IRS NFTL filing insofar as
the amounts do not exceed the amount of criminal restitution.
We have considered all of the parties’ arguments and, to the extent not
discussed above, conclude that those arguments are irrelevant, moot, or without
merit. To reflect the foregoing,
An appropriate decision will
be entered.