Opinion
7350-20L
08-11-2021
Paul M. Daugerdas, Petitioner v. Commissioner of Internal Revenue, Respondent
ORDER
JOSEPH ROBERT GOEKE JUDGE
On January 25, 2021, petitioner filed a motion for summary judgment in this collection due process (CDP) case challenging respondent's determination sustaining the filing of a notice of tax lien and a proposed levy to collect restitution-based assessments pursuant to section 6201(a)(4) arising from a restitution order that petitioner pay criminal restitution to the IRS and denying petitioner's request for an installment agreement that conforms to a payment schedule set forth in the District Court's restitution order.
Unless otherwise indicated, all section references are to the Internal Revenue Code (Code), title 26, U.S.C., in effect for the years at issue.
Background
For more than a decade beginning in the early 1990s, petitioner, a former tax attorney, designed, sold, and implemented fraudulent tax shelters to his clients to enabled them to evade tax. In October 2013 he was convicted in the U.S. District Court for the Southern District of New York on mail fraud, obstruction of the administration of the internal revenue laws, four counts of client tax evasion, and conspiracy to defraud the United States. United States v. Daugerdas, 837 F.2d 212, 218 (2nd Cir. 2016). He was acquitted of tax evasion for his personal income tax. At a sentencing hearing on June 25, 2014, the District Court sentenced petitioner to 180 months incarceration, 3 years of supervised release, restitution of $371, 006, 397, and preliminary forfeiture of $164, 737, 500 of petitioner's assets.
Petitioner agreed to the restitution calculations submitted by the Government, and the District Court adopted those calculations. At the sentencing hearing, the District Court stated that the restitution pursuant to the Mandatory Victims Restitution Act (MVRA) and named the IRS as petitioner's victim. It did not address a payment schedule or expressly state whether payment was due immediately. Addressing how to portion the restitution among petitioner and his co-defendants, it stated that petitioner is "responsible for the full amount of restitution" and made him jointly and severally liable with his co-defendants for $258.6 million of the restitution. The Court noted that petitioner had criminal proceeds of $97 million, i.e., tax shelter fees.
On June 26, 2014, the District Court entered the forfeiture order and on June 27, 2014, filed a written judgment using a preprinted form (judgment form). The judgment form states that if any restitution is imposed, the defendant must pay restitution in accordance with the payment schedule as a condition of supervised release. The District Court checked a box that interest on the restitution would begin 15 days after the judgment pursuant to 18 U.S.C. sec. 3612(f). It did not check a box that petitioner was unable to pay the restitution.
Sheet 6 of the judgment form is titled "Schedule of Payments" and provides choices for payment options including a lump-sum payment due immediately, payment to begin immediately, and three options for installment payments, none of which were checked. The District Court checked the box for "Special instructions regarding the payment of criminal monetary penalties" 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 required petitioner to forfeit his interest in property in accordance with the forfeiture order.
On February 26, 2018 and March 2, 2020, respondent assessed additional tax and interest against petitioner of approximately $227 million. On April 24, 2018, respondent issued to petitioner a notice of intent to levy (proposed levy), and on May 4, 2018, issued a notice of Federal tax lien filing. Petitioner remains incarcerated and the payment schedule in the District Court's written judgment has not yet begun. Upon his request, petitioner had a CDP hearing. On May 6, 2020, respondent issued to petitioner a notice of determination sustaining the proposed levy and the lien filing and denying an installment agreement. Petitioner timely filed a petition with this Court.
Statement of the Law
Section 6201(a)(4)(A) states 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 in the same manner as if such amount were such tax." It grants to respondent independent authority to assess and administratively collect restitution ordered under title 18. Carpenter v. Commissioner, 152 T.C. 202, 219 (2019), aff'd, 788 Fed.Appx. 187 (4th Cir. 2019). Respondent may not assess the restitution until the criminal defendant has exhausted all appeals and the restitution order is final. Sec. 6201(a)(4)(B).
Petitioner argues that respondent's collection actions must be in accordance with the terms of the District Court's restitution order, which he argues delays payment until 30 days after his release from prison. Respondent disagrees with petitioner's reading of the restitution order and argues that restitution is due immediately. In the alternative, he argues that he is not bound by title 18 or the District Court's restitution order if it did delay payment because his section 6201(a) authority is independent from title 18.
The facts in this case raise issues that the parties have not adequately addressed in their motion papers, and we direct them to address those issues as explained further below. Furthermore, the Court of Appeals for the Second Circuit had jurisdiction to review the District Court's sentence. Accordingly, we will apply the precedent from that Circuit to determine petitioner's payment obligations unless the parties can direct us to a reason for not doing so. We direct the parties to address how Second Circuit authority would interpret the restitution order and specifically to address the title 18 provisions discussed below under Second Circuit authority.
1. Collection of Restitution for Nontax Crimes
The District Court ordered restitution under the MVRA for mail fraud and conspiracy, both of which are title 18 offenses, and named the IRS as the victim on the basis of loss of tax revenue. Petitioner was convicted of title 26 offenses but the restitution was not imposed for title 26 offenses. We have not yet reviewed administrative actions to collect the restitution ordered for nontax crimes.
The MVRA is codified in 18 U.S.C. secs. 3663A and 3664. In relevant part, 18 U.S.C. sec. 3663A mandates restitution for title 18 offenses. It does not authorize restitution for criminal violations of title 26. United States v. Adams, 955 F.3d 238, 250 (2d Cir. 2020); see also 18 U.S.C. sec. 3663 (authorizing discretionary restitution for title 18 offenses).
Carpenter v. Commissioner, 152 T.C. at 211-212, involved a taxpayer who pleaded guilty to title 26 offenses and agreed to pay restitution to the IRS as part of his plea agreement. The sentencing court exercised its authority under 18 U.S.C. sec. 3663(a)(3) to order restitution to the extent the defendant agreed to the restitution as part of a plea agreement. See also Bontrager v. Commissioner, 151 T.C. 213, 221 (2018) (taxpayer pleaded guilty to tax crimes); Klein v. Commissioner, 149 T.C. 341, 343 (2017) (taxpayers pleaded guilty to tax and nontax crimes); Catlett v. Commissioner, T.C. Memo. 2019-86 (restitution ordered for title 26 offenses as a condition of supervised release under the sentencing authority of 18 U.S.C. sec. 3583, thus, restitution was not yet due while the taxpayer remained incarcerated).
Section 6201(a)(4) authorizes respondent to collect restitution order "for failure to pay any tax imposed under this title [26]". Restitution is not a tax imposed by the Code. Bontrager v. Commissioner, 151 T.C. at 222. Rather, it is assessed "in the same manner as if such amount were such tax." Sec. 6201(a)(4); see United States v. Helmsley, 941 F.2d. 71, 102 (2d Cir. 1991) (stating before section 6201(a) enactment "[r]estitution is in fact and law a payment of unpaid taxes"). In Bontrager v. Commissioner, 151 T.C. at 222, we held that the "failure to pay any tax" is not limited to the defendant's personal tax and respondent has authority under section 6201(a)(4) to assess and collect restitution against a criminal defendant who aided and abetted a third person's nonpayment of tax. Accordingly, it is immaterial that petitioner to respondent's collection actions that petitioner was acquitted of personal tax evasion.
We stated in Klein v. Commissioner, 149 T.C. at 352, that the amount of restitution is treated as being the underlying tax liability for "the limited purpose of enabling the IRS to assess that amount, thus creating an account receivable on the taxpayer's transcript against which the restitution payment can be credited." (holding that section 6201(a) does not grant to respondent the authority to collect title 26 interest or failure to pay penalties that are in excess of the restitution amount). "[A]ny amount paid as restitution for taxes owed must be deducted from any judgment entered for unpaid taxes." United States v. Helmsley, 941 F.2d 71, 102 (2d Cir. 1991). And, restitution payments stop the accrual of penalties and interest and cannot result in double collection of tax. Ervin v. Commissioner, T.C. Memo. 2021-075.
We direct the parties to address whether section 6201(a) authorizes respondent to assess and collect restitution ordered for nontax crimes and whether restitution ordered for nontax crimes but payable to the IRS is restitution for "failure to pay any tax" under title 26. It is unclear from the record before us how the amount of restitution was calculated. The District Court ordered restitution of approximately $371 million but stated that the IRS's tax loss from petitioner's fraudulent schemes was in excess of $1 billion.
2. Terms of Restitution Order: Due Immediately
In the motion papers the parties disagree over whether the District Court's restitution order required payment due immediately. Petitioner argues that it did not and the payment schedule delays his payment obligations until 30 days after his release from prison. Respondent argues the opposite, i.e., payment was due immediately. Alternatively, he argues that he is not bound by the restitution order if it did delay payment.
The parties have framed the issue as whether there is a conflict between the spoken and written judgment. The Court of Appeals for the Second Circuit states that an oral pronouncement controls where there is a "direct conflict between an unambiguous oral pronouncement of sentence and the written judgment". United States v. Truscello, 168 F.3d 61, 62-63 (2d Cir. 1999); see Carpenter, 152 T.C. at 214 (applying Fourth Circuit law that oral pronouncements control where there is a conflict). However, to the extent that the oral pronouncement is ambiguous, the written judgment may properly resolve any ambiguity. Truscello, 168 F.3d at 62-63; United States v. Pugliese, 860 F.2d 25, 30 (2d Cir. 1988); United States v. Marquez, 506 F.2d 620, 622 (2d Cir. 1974).
The oral-pronouncement-controls rule originates from the defendant's right to be present at all stages of his criminal trial including sentencing. United States v. Rosario, 386 F.3d 166, 168 (2d Cir. 2004); see Fed. Rule of Crim. Proc. 42. A sentencing court cannot impose terms in the written judgment that purport to increase the sentence orally pronounced. Rosario, 386 F.3d at 168. The Second Circuit caselaw states that a sentencing court can add an order of restitution in the written judgment as a condition of supervised release even though restitution was not imposed at the sentencing hearing. See United States v. Thomas, 299 F.3d 150, 153-154 (2d Cir. 2002); United States v. Asuncion-Pimental, 290 F.3d 91, 94 (2d Cir. 2002); Truscello, 168 F.3d at 63-64. In such a case there is no conflict between the spoken and written judgment. The written judgment is a clarification of what the oral pronouncement meant by supervised release by specifying what supervision entails. Truscello, 168 F.3d at 63-64.
On the basis of our limited research and the limited record before us, we are not convinced that there is a conflict between the spoken and written judgments or that the oral-pronouncement-controls rule adequately resolves the issue here. The District Court's spoken judgment did not expressly decline to make payment due immediately. Nor did it address a payment schedule. We stated in Carpenter v. Commissioner, 151 T.C. at 217, "Absent the sentencing court's expressly declining to order restitution payable immediately, its restitution judgment imposes an immediate obligation to pay on the defendant." In Carpenter, the sentencing court's judgment used the words "due immediately" in addition to providing a payment schedule for the period of the taxpayer's supervised release. Inclusion of a payment schedule does not mean that the District Court expressly declined to order restitution due immediately.
In United States v. Ekong, 518 F.3d 285 (5th Cir. 2007), cited by the parties, the Fifth Circuit, held that payment was due immediately, stating that "[t]here was nothing in the criminal judgment to the contrary" even though it contained a payment schedule for the period of supervised release. Id. at 286. The significant aspect of the written judgment in United States v. Martinez, 812 F.3d 1200, 1203-1205 (10th Cir. 2015), also cited by the parties, appears to be the fact that the written judgment stated only $300 of the restitution was due immediately thus it expressly declined to make the full amount due immediately. The inclusion payment schedule in the written judgment was not the determinative factor. Rather, the sentencing court expressly made only a small amount due immediately. Petitioner's reliance on Martinez seems misplaced. See also United States v. Hughes, 914 F.3d 947 (5th Cir. 2019) (involving conflicting statements at the sentencing hearing).
a. Requirements of MVRA
At the sentencing hearing, the District Court expressly stated restitution was ordered as mandated by the MVRA. Mandatory restitution imposed under the MVRA is an independent component of petitioner's sentence. See United States v. Howard, 220 F.3d 645, 647 (5th Cir. 2000). Section 3556 of title 18, which is referred to in section 6201(a)(4), grants authority to the sentencing court to order restitution as an independent component of the defendant's sentence and cites 18 U.S.C. sec. 3663A for mandatory restitution (the MVRA) and 18 U.S.C. sec. 3663 for discretionary restitution orders.
When ordering restitution, the sentencing court must follow the procedures set out in 18 U.S.C. section 3572 and section 3664. A sentencing court is required to order restitution of "the full amount of each victim's losses * * * without consideration of the economic circumstances of the defendant." 18 U.S.C. sec. 3664(f)(1)(A). The restitution must be the full amount of the loss whether the restitution is mandated or imposed under the sentencing court's discretionary authority and irrespective of the defendant's ability to pay the full loss. United States v. Walker, 353 F.3d 130, 131 (2d Cir. 2003).
The sentencing court is also required to make payment due immediately unless it finds that "in the interest of justice" the payment should be made on a date certain or in installments. 18 U.S.C. sec. 3572(d). If the sentencing court were to permit the defendant to pay restitution in installments, "the length of time over which scheduled payments will be made shall be set by the court, but shall be the shortest time in which full payment can reasonably be made." Id. para. (2). The sentencing court is required to "specify in the restitution order the manner in which, and the schedule according to which, the restitution is to be paid", may choose a single, lump-sum payment, partial payments at specified intervals, in-kind payments, or a combination thereof, and, when setting a payment schedule, is to consider the defendant's financial resources and other assets, his income, and his financial obligations when determining the payment obligations. Id. sec. 3664(f)(2), (3).
In Martinez, 812 F.3d at 1203-1205, the Tenth Circuit interpreted 18 U.S.C. sec. 3572(d) to imply that full payment is due immediately only if the sentencing court does not provide for payment in installment. The parties have not directed us to how the Second Circuit interprets that provision or whether it agrees with Martinez. The default rule in the Second Circuit is that full payment is immediately due where the sentencing court is silent as to the timing of restitution payment. Nunci v. United States, 364 F.3d 419, 421 (2d Cir. 2004) (finding the written judgment was ambiguous when the restitution was due and remanding). The Second Circuit has stated that the MVRA "severely curtailed" the sentencing court's discretion when ordering restitution. Walker, 353 F.3d at 131 (stating that before the MVRA courts "exercised virtually unlimited discretion" over restitution orders). The Second Circuit has stated that a sentencing court's discretion is limited to devising a payment schedule for the period during which the defendant is under sentence. Id.; see United States v. Rand, 924 F.3d 140, 143 (5th Cir. 2019) (allowing collection during the defendant's incarceration even though the restitution order did not contain due immediately language and provided a payment schedule that governed the term of supervised release).
At the sentencing hearing, the District Court did not expressly state that restitution was due immediately. Petitioner wants to use this silence to hamper respondent's collection efforts. However, other aspects of the Court's sentence supports a finding of payment due immediately. The Court ordered forfeiture of approximately $170 million of petitioner's assets, which indicates that it intended to order restitution due immediately. Thus, the payment schedule would seem to apply only to the balance of the restitution after deduction of the forfeiture amount. United States v. Bratton-Bey, 564 Fed.Appx. 28 (4th Cir. 2014) (holding property seized during the defendant's arrest must be returned and it was not subject to collection to satisfy the court-ordered restitution was not due immediately). The District Court did not find that petitioner was unable to pay the restitution (it did not check that box on the written judgment) and held petitioner liable for interest on the restitution beginning 15 days after the judgment (indicating payment was due immediately).
The District Court did not state that "the interest of justice" required delay in petitioner's payment obligations for the balance of the unpaid restitution until after his release from prison. It is unlikely that the purported payment schedule, payment of 10% of income for 3 years, would result in "full payment" as required by 18 U.S.C. sec. 3572(d). Petitioner's reading of the restitution order suggests that the District Court did not comply with the statute. The parties have not addressed 18 U.S.C. sec. 3572(d) and how it should impact the reading of the District Court's restitution order.
b. Condition of Supervised Release
Petitioner's reading of the restitution order seems to treat restitution as a condition of supervised release. Restitution ordered as a condition of supervised release cannot be due before supervised release begins. Had petitioner been convicted only of title 26 offenses, the District Court would have lacked authority to order restitution due immediately and could have not ordered restitution except as a condition of supervised release. See Adams, 955 F.3d at 250. United States v. Hassebrock, 663 F.3d 906, 924 (7th Cir. 2011) (holding that the defendant convicted only of tax crimes can only be ordered to pay restitution as a condition of supervised release and thus restitution was not immediately). However, as stated above, the District Court ordered restitution as a separate component of petitioner's sentence under the MVRA. Thus, the District Court had authority to order restitution due immediately, and we are asked to determine whether it exercised that authority.
At the sentencing hearing, the District Court ordered supervised release and stated that it was imposing all the standard conditions of supervised release. Payment of court-ordered restitution is a mandatory condition of supervised release. 18 U.S.C. 3583(d); U.S. Sentencing Guidelines Manual (U.S.S.G. sec. 5D1.3(a)(6) (U.S. Sentencing Comm'n 2013). At the hearing, the Court ordered restitution as a separate component of petitioner's sentence and not as a condition of supervised release. A plausible reading of the restitution order is that restitution was due immediately and the payment schedule, which addresses only the 3-year period of supervised release, added a payment schedule to set petitioner's payment obligations as a condition of supervised release for the unpaid balance upon his release especially in the light of the other aspects of the District Court's restitution order discussed above. See Carpenter v. Commissioner, 152 T.C. at 214-215 (involving restitution ordered in accordance with plea agreement to be due immediately and providing a payment schedule to govern the period of supervised release).
We are not satisfied that the caselaw cited by the parties thus far is helpful in resolving whether the District Court ordered restitution due immediately especially given the parties' failure to cite Second Circuit law. The District Court did not use the phrase "due immediately" at the sentencing hearing. Nor did it address a payment schedule. It ordered forfeiture of assets. None of the cases cited by the parties address how to resolve the issues.
3. Collection Procedures under Title 18
Respondent argues that his section 6201(a)(4) authority is broader than that addressed in Carpenter. In that case, respondent sought to collect the unpaid balance of the restitution after the taxpayer's supervised release had ended. Respondent argues that he is not bound by title 18 or the District Court's restitution order if restitution was not due immediately under the order. He further argues that any statements to the contrary in Carpenter were unnecessary to the decision and we should reconsider any such holding. According to respondent, section 6201(a) refers to title 18 only for the amount of the restitution-based assessment. We do not express an opinion as to these arguments but direct the parties to further address the provisions of title 18 discussed below including Second Circuit authority.
The MVRA and title 18 grant broad authority to the Department of Justice (DOJ) to enforce restitution. Title 18 reserves enforcement responsibility for the DOJ. It provides the DOJ with the power to enforce restitution in the same manner as the enforcement of a civil judgment under Federal or State law and to enforce restitution using "all other available and reasonable means". 18 U.S.C. secs. 3613, 3664(m)(1)(A), (2) (granting authority to enforce restitution in accordance with the provisions of 18 U.S.C. secs. 3571 to 3574 and secs. 3611 to 3615). The caselaw in the Second Circuit suggests that a court-ordered payment schedule is merely one means available under title 18 for the DOJ to enforce a restitution order and it is not precluded from pursuing other collection means by the inclusion of a payment schedule in the sentencing court's order.
Under title 18, a lien in favor of the United States automatically arises upon entry of the judgment and encumbers all the defendant's assets with certain enumerated exceptions. 18 U.S.C. sec. 3613(a), (c), (f). The lien is not limited to tax-related crimes. The lien is treated "as if the liability * * * were a liability for tax assess under the Internal Revenue Code". Id.
The enforcement provisions of title 18 also allow the victim of the title 18 offense to file a lien and may do so even where the sentencing court has provided a payment schedule. A victim of a crime may immediately convert the restitution order into an abstract of judgment for the full amount of the restitution without regard to a payment schedule in the written judgment and the abstract of judgment "shall be a lien on the property of the defendant". 18 U.S.C. sec. 3664(m)(1)(B). The Court of Appeals for the Second Circuit has stated that the significance of a court-ordered payment schedule is diminished by the victim's ability to convert the restitution order into a lien for the full amount of the restitution immediately upon the entry of the judgment. Walker, 353 F.3d at 132. The parties have not adequately addressed these provisions or the caselaw of the Second Circuit specifically whether title 18 allows the filing of a lien when payment is not due immediately.
Conclusion
The parties are directed to address whether respondent has authority under section 6201(a) to assess and collect restitution ordered solely for nontax crimes payable to the IRS as the victim of tax loss and whether respondent has authority under sections 6320 and 6330 to collect such restitution. Further, we are not satisfied that the caselaw cited by the parties adequately addresses what the District Court's restitution order required. Neither party has cited Second Circuit authority. The parties must specifically address the District Court's restitution order in consideration of the above discussion. The parties should consider: (1) whether the oral pronouncements made payment due immediately in the light of the Court's silence as to a payment schedule, forfeiture order, and imposition of interest, and apparent finding that petitioner had the ability to pay the restitution, (2) how to resolve any ambiguity in the District Court's spoken and written judgment in addition to the oral-pronouncement-controls rule, (3) the effect of the MVRA which required restitution as a component of petitioner's sentence separate and independent from his prison sentence and supervised release, and (4) whether the District Court intended that the payment schedule only covered the period of supervised release as a mandatory condition of supervised release. Finally, the parties should consider how the title 18 enforcement provisions, specifically the lien provisions, relate to respondent's collection authority under the Code. Accordingly, it is
ORDERED that the parties are directed on or before October 1, 2021, to file with the Court separate memoranda addressing the issues raised above.