Walter Anderson v. Commissioner of Internal Reven

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 11-1704
____________
WALTER C. ANDERSON,
Appellant
v.
COMMISSIONER OF INTERNAL REVENUE
On Petition for Review of an Order of the
United States Tax Court
(Agency No. 07-20364)
Administrative Judge: Honorable David Gustafson
Argued on May 7, 2012
1
Before: SLOVITER and ROTH, Circuit Judges
and POLLAK*, District Judge
(Opinion filed: September 7, 2012 )
Steven J. Jozwiak, Esquire (Argued)
601 Longwood Avenue
Suite 300
Cherry Hill, NJ 08002
Counsel for Appellant
Gilbert S. Rothenberg, Esquire
Acting Deputy Assistant Attorney General
Bethany B. Hauser, Esquire (Argued)
Robert W. Metzler, Esquire
Francesca U. Tamami, Esquire
United States Department of Justice
Tax Division
950 Pennsylvania Avenue, N. W.
P. O. Box 502
Washington, DC 20044
Counsel for Appellee
*Honorable Louis H. Pollak, Senior Judge of the
United States District Court for the Eastern District of
Pennsylvania, sat by designation. Judge Pollak died on May
8, 2012; this opinion is filed by a quorum of the court
pursuant to 28 U.S.C. § 46 and the Third Circuit I.O.P.
12.1(b).
2
OPINION
ROTH, Circuit Judge:
This appeal arises out of a civil tax fraud proceeding in
United States Tax Court. The taxpayer challenges the Tax
Court’s determination that, under the doctrine of collateral
estoppel, his previous guilty plea for criminal tax evasion
conclusively established the taxability to him of specific
income that his criminal indictment charged him with failing
to report. He additionally argues on the basis of a number of
preclusion doctrines that the Internal Revenue’s (IRS)
concession of all tax deficiency and penalty issues for certain
years should have prevented it from obtaining recovery of
such payments in other years because the issues for all years
were identical. As explained below, we find that these
arguments are without merit, and we will therefore affirm the
Tax Court’s judgment.
I. BACKGROUND
On September 30, 2005, Petitioner Walter Anderson
was charged in a superseding indictment with federal tax
evasion for tax years 1995 through 1999, in violation of 26
U.S.C. § 7201. During those years, Anderson was a
telecommunications entrepreneur and venture capitalist who
was actively involved in the operation of several international
companies. Among these companies was Gold & Appel
Transfer S.A. (G & A), a British Virgin Islands corporation
2
which generated hundreds of millions of dollars of income
during the tax years at issue. The government alleged that
because G & A was a “controlled foreign corporation,” under
Anderson’s control, he was required to recognize a share of
its income on his tax return and that he fraudulently failed to
do so. The government alleged that for the five-year period at
issue, Anderson had fraudulently underpaid his taxes by $184
million, 99% of which stemmed from the income of G & A.
Pursuant to an agreement with the government, on September
8, 2006, Anderson pleaded guilty to the federal tax evasion
charges for 1998 and 1999, while those same charges for
1995, 1996 and 1997 were dismissed.1 He was sentenced to
108 months imprisonment.
On July 17, 2007, the IRS issued a notice to Anderson
determining civil tax deficiencies and fraud penalties for tax
years 1995 through 1999. See 26 U.S.C. §§ 6212, 6663.
(The deficiency amounted to the $184 million of underpaid
1
Anderson had also been charged with obstruction of
the internal revenue laws of the United States, in violation of
26 U.S.C. § 7212(a), fraud in the first degree under the laws
of the District of Columbia, specifically 22 D.C. Code §
3221(a), in relation to D.C. income tax filings and payments
for years 1995 through 1999, and evasion of D.C. use taxes
on a number of purchases made between 1997 and 2001, also
in violation of 22 D.C. Code § 3221(a). All of these charges
were dismissed with the exception of the charge of first
degree fraud under D.C. law for 1999, to which Anderson
pleaded guilty.
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taxes, resulting in a fraud penalty of $138 million.2) On
September 7, 2007, while he was incarcerated in New Jersey,
Anderson filed a petition in the United States Tax Court to
redetermine these deficiencies. See 26 U.S.C. § 6213(a). In
response to motions by both parties, the Tax Court granted
partial summary judgment to the IRS, finding that under the
doctrine of collateral estoppel, Anderson’s criminal
conviction for tax evasion in 1998 and 1999 precluded him
from contesting that he fraudulently underpaid his incomes
taxes in those two years. The Tax Court denied summary
judgment on the fraud issue for tax years 1995-1997, without
prejudice to renew the motion “with a better record and more
focused contentions.”
The holding on the 1998 and 1999 tax years had three
principal effects. First, it established that Anderson had
underpaid his income taxes in 1998 and 1999. Second,
because a fraud penalty can only be assessed where a tax
underpayment is due to fraud, it relieved the IRS of its burden
of proving this penalty was applicable to Anderson for those
two years. See 26 U.S.C. § 6663(a). Finally, because the
three-year statute of limitations on the assessment of a tax
does not apply where a tax return has been filed falsely or
fraudulently with the intent of evading tax, 26 U.S.C. §
6501(c)(1), it prevented Anderson from arguing that the IRS’s
attempts to collect taxes for 1998 and 1999 were untimely.3
2
The penalty is equal to 75% of the amount of the
underpayment of tax that is due to fraud. See 26 U.S.C. §
6663(a).
3
Anderson filed his tax return for 1998 on September
30, 1999, and his tax return for 1999 on October 19, 2000.
Without this exception to the three-year statute of limitations,
4
Though this decision established that Anderson had
fraudulently underpaid his income taxes in 1998 and 1999, it
left open for further proceedings the determination of the
amounts of the tax deficiencies and penalties for those years.
Based on this ruling, the IRS filed a motion to sever
tax years 1995, 1996, and 1997 from the case, stating that it
“ha[d] decided to concede all tax and penalty issues for [those
years] and wishe[d] to file a motion for entry of decision as to
those years.” In its motion, the IRS explained that nearly
80% of the total deficiency and penalties for the five-year
period stemmed from just 1998 and 1999, and that because
proving fraud for 1995 through 1997 via trial would
needlessly complicate and lengthen the case for a
comparatively limited additional monetary recovery, it
preferred to abandon its efforts for those years. The Tax
Court found that, given its particular procedural rules,
severing the case in this way would needlessly create clerical
and administrative complexities, and it therefore denied the
motion. It stated in its order, however, that it would “take
notice of the [IRS’s] concession of all tax and penalty issues
for 1995, 1996, and 1997 and [would] reflect that concession
in its eventual entry of decision in [the] case.”
This order led to the filing of a second set of summary
judgment motions. Anderson argued in his motion that,
notwithstanding the Tax Court’s earlier holding that his
criminal convictions for tax evasion collaterally estopped him
from denying fraudulent underpayment of tax in 1998 and
1999, the IRS’s subsequent concession of all tax and penalty
the IRS’s notice of tax deficiency issued on July 17, 2007,
would have been untimely.
5
issues for 1995, 1996, and 1997 established that the income
of G & A and interest income from an account at Barclays
Bank were not taxable to him even in 1998 and 1999. The
IRS, meanwhile, argued in its motion that Anderson was
precluded from contesting that the income of G & A in 1998
and 1999 constituted taxable income to him under Subpart F
of the Tax Code. The Tax Court denied Anderson’s motion
and granted partial summary judgment to the IRS. It held, in
favor of the IRS, that the concessions related to tax years
1995 through 1997 did not resolve the deficiency and penalty
issues for 1998 and 1999. It further agreed with the IRS’s
position that the proceedings in Anderson’s criminal case
established that G & A’s income in 1998 and 1999 was
taxable to him. The Tax Court rejected the IRS’s argument,
however, that Anderson’s guilty plea estopped him from
contesting that the income of G & A was taxable to him
specifically under Subpart F of the Tax Code. Anderson now
challenges the adverse holdings.
II. DISCUSSION
This Court has jurisdiction to review final orders of the
Tax Court based on 26 U.S.C. § 7482(a)(1). 4 On March 7,
2001, pursuant to an agreement between the parties, the Tax
Court entered an order determining the tax deficiency and
fraud penalty for each year from 1995 through 1999, leaving
no issues for it to decide and thus providing this Court with
jurisdiction under that statute. We review the Tax Court’s
legal conclusions de novo and its factual findings for clear
4
Venue in this Court is appropriate because Anderson
was a resident of New Jersey at the time he filed his petition
for redetermination. See 26 U.S.C. § 7482(b)(1)(A).
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error. Capital Blue Cross v. Comm’r, 431 F.3d 117, 123-24
(3d Cir. 2005).
A. The Preclusive Effect of Anderson’s Criminal
Conviction
Under the doctrine of collateral estoppel, “once an
issue is actually and necessarily determined by a court of
competent jurisdiction, that determination is conclusive in
subsequent suits based on a different cause of action
involving a party to the prior litigation.” Montana v. United
States, 440 U.S. 147, 153-54 (1979). It applies, however,
only if: “(1) the issue sought to be precluded [is] the same as
that involved in the prior action; (2) that issue [was] actually
litigated; (3) it [was] determined by a final and valid
judgment; and (4) the determination [was] essential to the
prior judgment.” In re Graham, 973 F.2d 1089, 1097 (3d Cir.
1992) (citations omitted). In light of these principles, we
agree with the numerous courts that have held that, under the
doctrine of collateral estoppel, a conviction for criminal tax
evasion conclusively establishes the defendant’s civil liability
for tax fraud for the same year. See Blohm v. Comm’r, 994
F.2d 1542, 1554 (11th Cir. 1993); Klein v. Comm’r, 880 F.2d
260, 262 (10th Cir. 1989); Gray v. Comm’r, 708 F.2d 243,
246 (6th Cir. 1983); United States v. Moore, 360 F.2d 353,
356 (4th Cir. 1966). This is because the elements of evasion
under 26 U.S.C. § 7201 and fraud under 26 U.S.C. § 6663 are
identical. See, e.g., Gray, 708 F.2d at 246.
Anderson nevertheless argues that the Tax Court erred
in holding that his tax evasion conviction collaterally
estopped him from litigating the taxability to him in 1998 and
1999 of the income of G & A in the civil tax fraud
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proceedings. Where, as here, a conviction is the result of a
guilty plea, its preclusive effect extends to all issues that are
necessarily admitted in the plea. See De Cavalcante v.
Comm’r, 620 F.2d 23, 27 n.9 (3d Cir. 1980); United States v.
$448,342.85, 969 F.2d 474, 476 (7th Cir. 1992); United States
v. Wight, 839 F.2d 193, 196 (4th Cir. 1987); United States v.
Podell, 572 F.2d 31, 35 (2d Cir. 1978). We find that
Anderson admitted in his plea that the income of G & A was
taxable to him in 1998 and 1999, and that this admission was
necessary to his conviction.
Anderson pleaded guilty to a charge that in 1998 “a
substantial additional tax was due and owing to the United
States” from him and that “[s]pecifically, he failed to report . .
. $126,303,951 Subpart F investment-type income from G &
A.” He also pleaded guilty to another charge that alleged the
same with respect to 1999, except that the amount of
unreported G & A income was $238,561,316. These charges
essentially allege that Anderson underpaid his taxes in 1998
and 1999 because he did not report the income of G & A,
which is comprehensible only to the extent that such income
was taxable to him in those years. By pleading guilty to these
charges, Anderson thus admitted that required premise.
This admission could be considered necessary, though,
only if Anderson’s conviction “hinge[d] on it.” Bobby v.
Bies, 556 U.S. 825, 835 (2009). To convict Anderson of tax
evasion, the Government was required to prove the existence
of a tax deficiency. See 26 U.S.C. § 7201. Were the income
of G & A not taxable to him in 1998 and 1999, however,
Anderson’s failure to report it on his tax return would not
have given rise to a deficiency. The Government thus could
not have secured his conviction without establishing the
8
taxability of this income. We therefore find that Anderson’s
conviction did hinge on that issue. Our conclusion is not
affected by the fact that Anderson was also charged with
failing to report income from other sources in 1998 and 1999
– including an account he held at Barclays Bank, a company
called Esprit Telecom, and various capital gains – the
taxability of which could also have substantiated his
conviction. As we have previously held, all “independently
sufficient alternative findings should be given preclusive
effect,” Jean Alexander Cosmetics, Inc. v. L’Oreal USA, Inc.,
458 F.3d 244, 255 (3d Cir. 2006). The taxability to Anderson
of the income of G & A in 1998 and 1999 was independently
sufficient to establish the existence of a tax deficiency in
those years and was thus a fact that was necessary to his
conviction. His admission to it in his guilty plea accordingly
precludes him from contesting that issue in his civil tax fraud
case.5
Finally, that the income of G & A is taxable to
Anderson specifically under Subpart F of the Tax Code is
also settled for purposes of this case. The Tax Court rejected
the IRS’s argument that Anderson’s guilty plea estopped him
from contesting this tax treatment of G & A’s income. It
reasoned that, although G & A’s income was described as
5
Pursuant to this reasoning, we also find that Anderson
was collaterally estopped from disputing that the income from
his Barclays account was taxable to him in 1998 and 1999.
Based on this additional finding and on our analysis relating
to the income of G & A, we reject Anderson’s argument that
the Tax Court erred in denying him summary judgment on the
issues of the taxability of income from the Barclays account
and from G & A in 1998 and 1999.
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“Subpart F income” in the charges of the indictment to which
Anderson pleaded guilty, this detail was not essential to his
judgment of conviction and thus could not be given
preclusive effect in subsequent proceedings. Regardless of
this holding, however, the parties’ subsequent stipulation of
the nature and composition of G & A’s income, designating
amounts for Deficiency and Penalty for 1998 and 1999,
necessitate the determination that it is taxable to Anderson
under Subpart F because the figures would not support
Anderson’s alternate theory that the income was capital gains.
This conclusion, along with the preclusive effect of
Anderson’s conviction for tax evasion described above,
effectively resolve his civil tax deficiency stemming from the
income of G & A.
A. The Preclusive Effect of the IRS’s Concession of
All Deficiency and Penalty Issues for 1995-1997
Anderson argues that because the IRS conceded all tax
deficiency and penalty issues for 1995, 1996, and 1997, the
Tax Court was required to find in his favor on those issues for
the 1998 and 1999 tax years as well. He specifically
advances this argument in relation to the income of G & A
and the interest income of his account at Barclays Bank. He
relies on three separate legal doctrines to support this
argument - collateral estoppel, law of the case, and judicial
admission – but each is inapplicable.
1. Collateral Estoppel
Anderson claims that when the Tax Court issued its
order denying the IRS’s motion to sever, in which it stated
that it “takes notice of [the IRS’s] concession of all tax and
10
penalty issues for 1995, 1996, and 1997 and will reflect that
concession in its eventual entry of decision in [the] case,” it
decided those issues in his favor. He further claims that all
deficiency and penalty issues for 1995 through 1997,
including those related to G & A and his Barclays account,
are “identical in all respects” to those for 1998 and 1999. On
this basis, Anderson argues that, by virtue of collateral
estoppel, it is conclusively established in his civil tax fraud
proceeding that the income from G & A and from his
Barclays account gave rise to no tax deficiency or fraud
penalty in 1998 and 1999.
As we have already noted, an issue is conclusively
established in future litigation through the doctrine of
collateral estoppel only when it is determined by a final
judgment. Graham, 973 F.2d at 1097. This principle is
firmly established and beyond question. See, e.g., G. & C.
Merriaman Co. v. Saalfield, 241 U.S. 22, 28 (1916) (“[I]t is
familiar law that only a final judgment is res judicata . . .”);
Wilson v. City of Chicago, 120 F.3d 681, 687 (7th Cir. 1997)
(“[I]f there is no judgment, there is no preclusion.”); Clausen
Co. v. Dynatron/Bondo Corp., 889 F.2d 459, 465-66 (3d Cir.
1989) (finding collateral estoppel did not apply to an
interlocutory disposition). The Tax Court’s denial of the
IRS’s motion to sever can therefore have no preclusive effect
under that doctrine. It does not constitute a final judgment on
any issue, including on that of whether Anderson was liable
for tax deficiencies or fraud penalties for any year in relation
to income from G & A or from his account at Barclays.
Instead, all the Tax Court did in that order was advise the
parties that it was taking notice of the IRS’s desire not to
litigate tax years 1995 through 1997 and state that it would
factor that position into its eventual final judgment. When
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that final judgment was issued, it showed deficiencies and
penalties for 1998 and 1999 that implicitly included amounts
related to G & A and the Barclays account. Anderson
identifies no previous final judgment making a determination
in conflict with this result, and his argument that the Tax
Court should have held that it had been conclusively
established via the doctrine of collateral estoppel that he was
not liable for deficiencies or penalties in relation to these two
items in 1998 and 1999 thus cannot be accepted.
2. Law of the Case
Anderson makes a similar argument that the Tax
Court’s denial of the IRS’s motion to sever forecloses
litigation of the taxability to him of the income G & A in
1998 and 1999 under the law of the case doctrine. Under that
doctrine, “when a court decides upon a rule of law, that
decision should continue to govern the same issues in
subsequent stages of the same case.” Arizona v. California,
460 U.S. 605, 618 (1983). Anderson asserts that the Tax
Court’s statement that it was “taking notice” of the IRS’s
desire not to litigate tax years 1995 through 1997 was actually
a holding that he was not liable for tax deficiencies or
penalties for those years, and that because the IRS had alleged
that he should have recognized income from G & A on his tax
return for those years, it is additionally a legal determination
that such income was not taxable to him in any year –
including 1998 and 1999. We disagree. The Tax Court’s
statement that it took notice of the IRS’s desire to concede tax
and penalty issues for 1995 through 1997 simply does not
represent any sort of decision. Even if it did constitute a
decision as to those three years, there is no merit to
Anderson’s argument that it necessarily implies that the Tax
12
Court determined as a matter of law that income from G & A
is not taxable to him, as the “decision” could be supported by
any number of rationales. For example, a finding that
Anderson was not liable for deficiencies or penalties for 1995
through 1997 could just as easily rest on a lack of evidence of
fraud in those years, which as discussed earlier, would bar the
IRS’s claims on statute of limitations grounds. Anderson’s
argument asks the Court to read more into the Tax Court’s
“tak[ing] notice” than is warranted or possible, and it must be
rejected.
3. Judicial Admission
Finally, Anderson argues that the statement in the
IRS’s motion to sever conceding deficiency and penalty
issues for 1995 through 1997 constitutes a judicial admission
that prevents the IRS from arguing “that there is United States
tax liability for [G & A]” or that interest income from his
Barclays account was intentionally omitted from his tax
return in 1998 or 1999. Judicial admissions are “admissions
in pleadings, stipulations [or the like] which do not have to be
proven in the same litigation.” Giannone v. U.S. Steel Corp.,
238 F.2d 544, 547 (3d Cir. 1956). To be binding, judicial
admissions “must be statements of fact that require
evidentiary proof, not statements of legal theories.” In re
Teleglobe Commc’ns Corp., 493 F.3d 345, 377 (3d Cir.
2007). For this reason, even if this Court were to accept the
dubious claim that the IRS conceded in its motion to sever
that income from G & A was not taxable to Anderson, that
concession would not be binding on it because it would be a
statement of a legal proposition. Additionally, to be binding,
judicial admissions must be unequivocal. Id. The IRS’s
motion to sever very clearly relates only to tax years 1995,
13
1996 and 1997, and thus cannot be deemed to unequivocally
state that the income of G & A was not taxable to Anderson
or that he did not intentionally omit the interest on his
Barclays account from his tax return in subsequent years.
The doctrine of judicial admissions therefore has no
application here.
III. CONCLUSION
We hold that Anderson’s conviction for tax evasion in
1998 and 1999 precludes him, by virtue of the doctrine of
collateral estoppel, from contesting in subsequent civil fraud
proceedings that the income of G & A was taxable to him in
those years. We additionally conclude that the IRS’s
concession of all deficiency and penalty issues for the years
1995, 1996, and 1997 has no preclusive effect on those issues
for 1998 and 1999. For these reasons, we will affirm the Tax
Court’s judgment.
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