Court Says No Fraud, So IRS Finds Friendlier Court

Say you are convicted of a tax crime and the criminal judge finds that your conduct has not risen to the level of tax fraud. Should a civil court later say that this same conduct does in fact rise to the level of tax fraud? In Maciel v. Commissioner, the Ninth Circuit Court of Appeals says that the second court can make this contradictory finding that the same conduct amounted to tax fraud.

Maciel understated his income of several of his tax returns and the understatement was discovered by the IRS during a routine tax audit. The IRS charged Maciel with two counts of tax evasion and then reduced the charges to two courts of willfully filing a false tax return.

Macel entered into a plea agreement with the Department of Justice. During the hearing, the government made this very convincing argument: “there appeared to be ‘some intent on [Maciel’s] part to do something.’”

The judge explained that:

I think on balance I am satisfied that the intent here was not primarily to avoid payment of tax. I think the intent may well have been to divert corporate money to personal use which is not a good thing and certainly is not something that the Court should countenance and particularly since it did have a consequence in terms of the accuracy of Mr. Maciel’s tax returns. But I don’t think that the conduct looked at in its totality suggests that the reason Mr. Maciel diverted the money was to avoid paying money to the Internal Revenue Service.

Maciel was sentenced to three months of home detention.

The IRS then sent Maciel a Notice of Deficiency (in 2000) showing that he owed $300,000 in back taxes for 1990-92 and nearly $250,000 in civil fraud penalties. Maciel petitioned the tax court and argued that the IRS could not impose a fraud penalty when the prior court said that he did not commit fraud and, absent fraud, the time period that the IRS had to assess the additional tax had expired.

The tax court rejected Maciel’s arguments, noting that Maciel had done the following evil acts:

Maciel regularly commingled funds among his various businesses, engaged in large unexplained cash transactions, mislabeled certain transactions as loans, failed to report any earnings from certain unincorporated business ventures, failed to keep adequate business records, and failed to inform his accountants and bookkeeper of his activities.

Marciel raised the same arguments before the Second Circuit Court of Appeals and it affirmed the tax court decision. The second circuit stated:

It is apparent that the government had virtually no incentive to litigate the fraud issue at sentencing [in the criminal trial]. In some cases, the government’s obligation to seek a sentence consonant with a criminal defendant’s culpability will be incentive enough to ensure that relevant issues are litigated vigorously.

In other words, if Marciel’s tax liability would have been larger then the IRS would be precluded from having a second court find that he committed fraud, even though the first court said that he didn’t commit fraud.