Monday, March 31, 2008

Tax lien

special estate tax lien that attached to three homes included in the gross estate of a decedent pursuant to Code Sec. 6324(a)(1) was not divested because three title companies could not prove that the proceeds from the home sales were used to satisfy the obligations of the estate and a court with proper jurisdiction did not approve the satisfaction. After the decedent died, her daughter was appointed personal representative with non-intervention powers and given the "power to transfer any and all real and personal property of decedent without further notice" of the probate court. After the estate failed to make installment payments on the taxes owed, the IRS threatened to seize and sell three homes previously owned by the decedent and later sold to purchasers unless the purchasers paid the estate tax owed. The title companies, who issued title insurance policies to the purchasers, paid approximately $189,000 in taxes and then sought a refund from the IRS. The lien was not divested under Code Sec. 6324(a)(1) because (1) the title companies could not sufficiently show by "careful tracing" that the sale proceeds from the homes were used to satisfy charges against the estate or expenses of its administration and (2) even if the title companies could show careful tracing of the sale proceeds, a court with proper jurisdiction did not allow the satisfaction. Despite the probate court's grant of non-intervention power, independent judicial evaluation was still necessary to ensure that the IRS's right and ability to collect the estate tax was protected because authorization to sell property without seeking court approval was not equivalent to receiving court approval within the meaning of Code Sec. 6324. Accordingly, divestment of the estate tax lien did not occur as the daughter's non-intervention powers were not an allowance for purposes of Code Sec. 6324(a)(1). W. Kleine, CA-5, 76-2 USTC ¶13,158, 539 F.2d 427, followed.


First American Title Insurance Co., et al., Plaintiffs v. United States of America, Defendant.

U.S. District Court for the Western District of Washington, at Seattle, C04-429JLR, May 12, 2005.

[ Code Sec. 6324]


Before: Robart, United States District Judge.




ORDER





I. INTRODUCTION


ROBART, District Judge: This matter comes before the court on Defendant's Motion for Summary Judgment (Dkt. #32). Having reviewed all the documents filed in support of and in opposition to the motion, and having heard oral argument, the court GRANTS Defendant's motion.




II. BACKGROUND


Plaintiffs First American Title Insurance Company, Commonwealth Land Title Insurance Company, and Chicago Title Insurance Company ("the Title Companies") filed suit against Defendant United States to recover federal estate taxes alleged to have been "erroneously or illegally assessed or collected" under 28 U.S.C. §1346(a). Compl. ¶5. The estate taxes at issue in this action stem from the death of Roberta C. Smith, who left an estate primarily consisting of three houses and stock in Frisko Freeze, a drive-in restaurant in Tacoma, Washington. After her death, the Pierce County Superior Court entered an order admitting Ms. Smith's will to probate and appointing Ms. Smith's daughter, Penny Jensen, as the estate's personal representative with non-intervention powers. The court's order gave Ms. Jensen the "power to transfer any and all real and personal property of decedent without further order of this court." Henry Decl. at 13.

Ms. Jensen deeded the three houses in the estate to herself and her husband. In addition, Ms. Jensen filed a federal estate tax return on behalf of her mother and paid the estate tax required. Ms. Jensen later sold the houses to purchasers who obtained title insurance policies issued by the Title Companies. During this same period, the Internal Revenue Service ("IRS") audited the Smith estate and increased the value of the Frisko Freeze stock to $911,987, almost $150,000 more than originally claimed. When the Smith Estate failed to make installment payments on the estate taxes owed, the IRS sent letters to the three new homeowners threatening to seize and sell the houses unless the homeowners paid the remaining estate tax owed in full. The homeowners tendered the letters to the Title Companies who paid $189,371.99 in taxes under protest. The Title Companies filed claims with the IRS seeking a refund of the amount paid. The IRS denied the claims and the Title Companies filed this action.

Previously, this court held that the Title Companies have standing under 28 U.S.C. §1346(a) to challenge only the IRS's attachment of the Smith estate tax lien to the homes they insured. Order, Dkt. #19 at 4-5 ( Dec. 16, 2004); Order, Dkt. #31 at 12 (Mar. 7, 2005). The IRS now moves for summary judgment on the attachment claim, arguing that the tax lien properly attached to the homes at issue and that the statute of limitations bars recovery of $50,000 of the Title Companies' refund claim. 1 Def.'s Mot. at 4-5. In response, the Title Companies contend that although the tax liens attached, they were later divested when some or all of the proceeds from the sale of the three homes were used to pay the obligations and/or administration expenses of the estate. Pls.' Resp. at 2. The Title Companies also argue that the statute of limitations does not bar recovery of the $50,000 payment. Id.




III. ANALYSIS




A. Standard of Review

Summary judgment is appropriate when the moving party demonstrates that there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c). The moving party "bears the initial responsibility of informing the district court of the basis for its motion, and identifying those portions of 'the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any,' which it believes demonstrate the absence of a genuine issue of material fact." Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986) (quoting Fed. R. Civ. P. 56(c)). Once the moving party meets its initial responsibility, the burden shifts to the non-moving party to establish that a genuine issue as to any material fact exists. Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986).

Evidence submitted by a party opposing summary judgment is presumed valid, and all reasonable inferences that may be drawn from that evidence must be drawn in favor of the non-moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986). The non-moving party cannot simply rest on its allegation without any significant probative evidence tending to support the complaint. See U.A. Local 343 v. Nor-Cal Plumbing, Inc., 48 F.3d 1465, 1471 (9th Cir. 1995); see also Anderson, 477 U.S. at 249 ("[I]f the evidence is merely colorable or is not significantly probative summary judgment may be granted."). "[A] complete failure of proof concerning an essential element of the non-moving party's case necessarily renders all other facts immaterial." Celotex, 477 U.S. at 322-23.



B. Did the Federal Estate Tax Lien Divest from the Title Companies' Properties?

26 U.S.C. §6324(a)(1) creates a special estate tax lien that attaches to the gross estate of a decedent for ten years from the date of death. Probate property, such as the property at issue here, retains the special estate tax lien upon transfer to a purchaser unless the IRS discharges the personal representative of the lien under 26 U.S.C. §2204. United States v. Vohland [ 82-1 USTC ¶13,468], 675 F.2d 1071, 1075 (9th Cir. 1982). The gross estate is divested of the special estate tax lien to the extent that the gross estate is "used for the payment of charges against the estate and expenses of its administration, allowed by any court having jurisdiction thereof." 26 U.S.C. §6324(a)(1).

The Title Companies do not dispute that a special estate tax lien attached to the gross estate of Roberta Smith at her death in 1991. Nor do they dispute that Ms. Jensen, the personal representative of the estate, failed to obtain a discharge of liability under 26 U.S.C. §2204 before selling the properties in question. Rather, the Title Companies contend that the proceeds from the sale of the three homes were used to pay charges against the estate and expenses of its administration, thereby divesting the lien under §6324(a)(1). To prove that divestment occurred under §6324(a)(1), the Title Companies must establish that (1) the sale proceeds satisfied "charges against the estate or expenses of its administration," and that (2) a court with proper jurisdiction allowed the satisfaction.

Under the first element, the Title Companies must conduct a "careful tracing" of the sale proceeds and provide evidence that the sale proceeds were used to satisfy "charges against the estate or expenses of its administration." 2 Northington v. United States [ 73-1 USTC ¶12,915], 475 F.2d 720, 723 (5th Cir. 1973) (upholding summary judgment when record did not reflect that money was used to satisfy obligations of the estate); A&B Steel Shearing & Processing, Inc. v United States [ 96-2 USTC ¶50,506; 96-2 USTC ¶60,245], 934 F.Supp. 254, 259 (E.D. Mich. 1996) (granting summary judgment when there was no evidence that "the money purportedly given to the estate was used for the payment of estate expenses"), aff'd [ 98-1 USTC ¶50,344; 98-1 USTC ¶60,309], 145 F.3d 1329 (6th Cir. 1998).

The Title Companies contend that they used the proceeds from the house sales to pay encumbrances, taxes, title insurance premiums, and real estate commissions and that these payments qualify as "charges against the estate or expenses of its administration." For example, the Title Companies allege that one of the three houses was encumbered by a $124,000 deed of trust in the name of Roberta Smith. Dahl Decl. at 5-8. After the sale of the house, the Title Companies contend that Plaintiff First American Title paid $122,829.98 from the sale proceeds to the company owning the deed of trust. The Title Companies argue that if the deed of trust "was paid out of the proceeds of the sale of the property, the special lien was automatically divested." Pls. Resp. at 6. Further, the Title Companies contend that a portion of the sale proceeds from the homes was used to satisfy loans Ms. Jensen may have incurred in "expenses of the estate" after her mother's death. 3 Id.

Nearly all of the Title Companies' evidence, however, falls short of the "careful tracing" required to establish the first element of divestment. Northington [ 73-1 USTC ¶12,915], 475 F.2d at 723. The Title Companies' arguments resound in hypotheticals: "If it was paid out of the proceeds of the sale of the property. ... If these loans were made to pay expenses of the estate. ... All of these expenditures may be additional expenses of the estate." Pls.' Resp. at 6. In general, this hypothetical-based approach is insufficient to withstand summary judgment and establish a material issue of fact. Anderson, 477 U.S. at 249 ("[I]f the evidence is merely colorable or is not significantly probative summary judgment may be granted."). Although the Title Companies' strongest evidence that Plaintiff First American Title's $122,829.98 deed of trust payment may create a material issue of fact on the first element of divestment, the Title Companies' claim ultimately fails on the second element.

Assuming arguendo that the estate or Title Companies used the sale proceeds from the three homes to satisfy the charges or expenses of the estate, the Title Companies must still establish that a court with proper jurisdiction allowed such payments. §6324(a)(1). The Title Companies contend that the Pierce County Superior Court's non-intervention probate order constitutes an "allow[ance] by any court having jurisdiction thereof" for purposes of §6324(a)(1). A non-intervention order entitles the personal representative to administer and close the estate without "court intervention or supervision." Estate of Ardell, 980 P.2d 771, 776 (Wash. 1999); RCW 11.68.010 (1991) (repealed 1997). The court's probate order conferred Ms. Jensen with the "power to transfer any and all real and personal property of decedent without further order of this court." Henry Decl. at 13. A personal representative with non-intervention powers may nevertheless petition the court for an order during the administration of the estate without waiving non-intervention powers. RCW 11.68.120; Estate of Ardell, 980 P.2d at 776.

Although Washington law governs what payments by the estate are "allowed" for purposes of §6324(a)(1), there are no state or federal cases applying Washington law under this provision. See United States v. Sec. First Nat'l Bank [ 39-2 USTC ¶9778], 30 F.Supp. 113 (S.D. Cal. 1939) ("Since [the] requirement of proper court approval casts the burden of examining the correctness of the items upon state court, state law governs."). The Fifth Circuit, however, has held that an independent executor's decision to allow a claim in Texas does not "satisfy the requirement that the expenditures be 'allowed by any court having jurisdiction thereof'" for purposes of §6324. Kleine v. United States [ 76-2 USTC ¶13,158], 539 F.2d 417 [427], 433 (5th Cir. 1976). Similar to the non-intervention statute in this case, the Texas independent administration system "authorizes an executor to proceed with the administration of an estate, without requiring court approval of specific dispositions." Id. at 429. The Fifth Circuit rejected the argument that Texas' independent administration system provided sufficient "allowance" for purposes of §6324(a)(1), reasoning that Congress intended to "interpose an independent and neutral judicial evaluation of claims as a prerequisite to any divestiture of the special estate tax lien in order to protect the right and ability of the Service to collect the estate tax." Id. at 431. The court noted that although the independent executor had legal authority to act as the probate court would in similar situations, that authority was not "ipso facto, the equivalent of judicial approval within the contemplation and meaning of §6324(a)(1)." Id. at 432.

The Title Companies attempt to avoid Kleine on two grounds. First, the Title Companies contend that Kleine is factually distinguishable because unlike the executor in Kleine, Ms. Jensen had the power to sell the properties without court approval. This distinction, however, is not dispositive; the authorization to sell property without seeking court approval is "not the same as actually receiving court approval, within the meaning of §6324." A&B Steel Shearing & Processing [ 96-2 USTC ¶50,506; 96-2 USTC ¶60,245], 934 F.Supp. at 259. Second, the Title Companies argue that the portion of Kleine that addresses the independent executor system is dictum because the appellants were unable to trace the proceeds of the sale. Pls.' Resp. at 11. This characterization is incorrect. The court relied on the express intent of Congress to hold that Texas' independent administration system failed to provide the required "allowance" under §6324 and therefore did not reach the issue of whether the proceeds were used to satisfy charges or expenses of the estate. Kleine [ 76-2 USTC ¶13,158], 539 F.2d at 431.

The court finds that the Fifth Circuit's decision in Kleine provides persuasive authority and governs the case at bar. There is no guiding Ninth Circuit authority applying §6324(a)(1), and the Fifth Circuit appears to be the only circuit court considering the precise issue. Similar to the independent administration system in Kleine, Ms. Jensen's non-intervention powers do not constitute an allowance for purposes of §6324(a)(1). Washington law provides a mechanism for personal representatives with non-intervention powers to petition the court for an order during the administration of the estate without waiving non-intervention powers. RCW 11.68.120. Petitioning the probate court for "allowance" accomplishes the purposes of §6324(a)(1) by providing an "independent and neutral judicial evaluation" of the divestment process. Kleine [ 76-2 USTC ¶13,158], 539 F.2d at 431. It is undisputed that Ms. Jensen did not petition the probate court to allow any of the sale proceeds from the three properties to satisfy "charges against the estate and expenses against its administration." Thus, the court GRANTS summary judgment in favor of the United States based on the Title Companies' inability to establish that the second element of divestment --court "allowance" --exists.




IV. CONCLUSION


For the foregoing reasons, the court GRANTS Defendant's Motion for Summary Judgment (Dkt. #32) and dismisses Plaintiffs' case.

1 In its reply brief, the IRS "acknowledges that there may be a factual issue concerning" the timeliness of the $50,000 payment. Def.'s Reply at 9. This issue is moot, however, given the court's decision to grant summary judgment in favor of the IRS.

2 The parties dispute what qualifies as "charges against the estate and expenses of its administration" under §6324(a)(1). While the IRS contends that state law governs this definition, the Title Companies argue that 26 U.S.C. §2053, which lists certain expenses that the IRS deducts when calculating estate taxes, provides "helpful" guidance. Regardless, this issue does not affect the outcome of this case and therefore the court need not resolve it.

3 The Title Companies also contend that before they made their final payment to the IRS, the estate paid state death taxes and federal taxes. The Title Companies argue that "[i]f the source of these payments was the three real properties, the special lien is divested," without providing any evidence that the properties were the source of the payments. Pls.' Resp. at 5 (emphasis added). The Title Companies, without evidence to create a genuine issue of fact, fail to satisfy their burden on summary judgment. When the moving party demonstrates that there is no genuine issue as to any material fact and judgment is warranted as a matter of law, the burden shifts to the non-moving party to establish that a genuine issue of material fact exists. Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986). The court cannot rely on conjecture alone to establish that a genuine issue of fact exists. E.g., Hernandez v. Spacelabs Med. Inc., 343 F.3d 1107, 1112 (9th Cir. 2003) ( "[Non-moving party] cannot defeat summary judgment with allegations in the complaint, or with unsupported conjecture or conclusory statements."); see also R.W. Beck & Assoc. v. City & Borough of Sitka, 27 F.3d 1475, 1481 (9th Cir. 1994) ( "Arguments based on conjecture or speculation are insufficient to raise a genuine issue of material fact ...").

Friday, March 28, 2008

26 U.S.C. §7502(c).

The statute is silent regarding whether delivery of a tax return or other document can be proved by means other than the two exceptions to the physical delivery rule set forth in §7502(a)(1) and §7502(c). Consequently, courts have reached divergent results on the question of how a taxpayer may prove delivery when the taxpayer claims to have timely mailed the document, but the agency has no record of timely receipt of the tax return or other document. Indeed, there is a split among the Circuits as to whether §7502 creates the only exception to the physical delivery rule. Some Circuits have held that §7502 supercedes the mailbox rule, and without a postmark, the physical delivery rule applies in situations where the exceptions in subsection (c) regarding registered and certified mail, and electronic filing do not apply. See Miller v. United States, 784 F.2d 728 (6th Cir. 1986); Deutsch v. Comm'r, 599 F.2d 44 (2d Cir. 1979). They reason that if the mailbox rule applied, then the exceptions explicitly stated in subsection (c) would be meaningless. By contrast, other Circuits have held that the mailbox rule still applies and that extrinsic evidence of mailing will create a rebuttable presumption of filing. See Anderson v. United States, 966 F.2d 487 (9th Cir. 1992); Estate of Wood v. Comm'r, 909 F.2d 1155 (8th Cir. 1990). They conclude that Congress did not clearly manifest an intent to displace the mailbox rule in enacting §7502, and therefore it still exists for purposes of filing a tax return.


In re John Pizzuto, Debtor. John Pizzuto, Plaintiff v. Internal Revenue Service, Defendant.

U.S. Bankruptcy Court, Dist. N.J.; CASE NO. 06-15673 (NLW), March 20, 2008.

[ Code Secs. 6871 and 7502]

Bankruptcy: Discharge of debt: Filing of return: Proof of mailing or delivery. --
The tax liability on a debtor's late filed return was not dischargeable in bankruptcy because he filed the return less than 2 years before filing his bankruptcy petition. The debtor's uncorroborated self-serving testimony that he mailed the return more than 2 years before filing for bankruptcy was insufficient to invoke the mailbox rule. Further, an IRS agent's receipt of a copy of the return did not prove that the debtor mailed the return or that he mailed the return to the proper address. The debtor did not demonstrate that the IRS agent was located at a service center or local IRS office and had the responsibility to accept a return as filed. Back references: ¶40,630.175 and ¶42,625.425.


Harry R. Poe, Esq., Poe & Freireich, Counsel for Debtor/Plaintiff; Gregory S. Hrebiniak, Esq., U.S. Department of Justice, Counsel for the United States

Before: HON. NOVALYN L. WINFIELD


APPEARANCES:



OPINION


Chapter 7 Debtor, John Pizzuto ("Debtor"), brought this adversary proceeding against Defendant seeking a determination that his 1995 federal income tax return is dischargeable pursuant to 11 U.S.C. §523(a)(1)(B)(ii). A trial was held on August 22, 2007 to consider the dischargeability of the tax liability. For the following reasons, this Court has determined that the debt is not dischargeable.


JURISDICTION


This is an adversary proceeding brought pursuant to Federal Rules of Bankruptcy Procedure 7001 et seq. and Section 523 of the Bankruptcy Code. This Court has jurisdiction to review and determine this matter pursuant to 28 U.S.C. §§157(a) and 1334, and the Standing Order of Reference issued by the United States District Court for the District of New Jersey on July 23, 1984. This is a core proceeding under 28 U.S.C. §§157(b)(2)(I). The following constitutes this Court's findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052.


ISSUE


At issue in the present matter is the means by which a debtor can prove that a mailed tax return was timely filed, when the Internal Revenue Service ("IRS") has no record of its receipt. More specifically, is a debtor limited to the methods provided by 26 U.S.C. §7502, or may the debtor adduce extrinsic evidence to prove that the return was timely filed?


BACKGROUND


Debtor filed a voluntary chapter 7 bankruptcy petition on June 22, 2006. Three months later the Debtor commenced an adversary proceeding to obtain declaratory relief fixing the filing date for his 1995 federal income tax return (the "Return") as on or about July 31, 1998. (Complaint ¶8.) In its answer the IRS maintains that the Return was not filed until July 26, 2004. (Answer ¶9.) The date on which the Return was filed is critical because the assessed liability for the Debtor's unpaid 1995 income taxes amounts to $420,369.61, plus interest, and the Debtor hopes to discharge the entire liability.

The Debtor was the only witness at the trial. His testimony focused on his remembrance of when he obtained the Return from his accountant, and the circumstances under which the Return was mailed. The Debtor testified that he did not timely file the Return because his accountant was not well. (Trial Tr. at 6, Aug. 22, 2007.) He further testified that he obtained the Return on July 31, 1998 after repeated calls to the accountant:
I kept calling him, and eventually I got a hold of him when he got a little better, and I just kept calling and saying, hey, I - this is the first time I didn't file, and, you know, when am I going to do it? And I think in "98, I think we looked it up, it was, like, July 31st, `98. I went to his house to pick up the papers, signed them.

(Trial Tr. at 6-7.) The Debtor initially recollected that he mailed the Return on July 31, 1998. (Trial Tr. at 7.) However, he subsequently speculated that he may have taken the Return home to review it, and thereafter mailed it on August 1, 1998. (Trial Tr. at 8.) On cross-examination the Debtor stated that he was able to recall July 31, 1998 as the date on which the Return was filed because that date was typed on the Return and it refreshed his memory. (Trial Tr. at 10.) However, the Debtor's memory was not as clear regarding the following year's tax return. When queried by counsel for the IRS as to when he filed his 1996 federal tax return, the Debtor guessed that he filed it on time, but stated that it was hard for him to remember. (Trial Tr. at 10.)

The Debtor testified that he personally took the Return to the post office. (Trial Tr. at 8.) He did not give the Return to a postal service employee, but instead put it in a mailbox. (Trial Tr. at 9.) The Debtor also testified that no one accompanied him to the post office. (Trial Tr. at 8.) Debtor testified that he affixed postage to the envelope and that it was a common practice between Debtor and his accountant to always ensure that proper postage was affixed to the envelope before he left the accountant's office. (Trial Tr. at 8-9.) Although not sure, the Debtor stated that he believed that his return address was placed on the envelope. (Trial Tr. at 8.) The envelope was not returned and Debtor stated that he had no reason to suspect the return was not filed. (Trial Tr. at 9.)

Debtor's counsel also contends that the court may alternatively consider the Return to have been filed on June 3, 2002 when the Debtor's counsel transmitted the Return to Special Agent Zito, of the Criminal Investigation Division of the IRS. (Plaintiff's Ex. 2.) Counsel for the IRS counters that at best the Return was filed on July 26, 2004, when it was supplied along with an Offer in Compromise to a Revenue Officer at the Collection Division, Offer in Compromise Group, in Oklahoma City. That Revenue Officer then forwarded the Return to the Memphis Service Center where it was received and date stamped July 29, 2004. (Defendant's Ex. 1.) IRS counsel stated that the IRS chose to treat the July 26th date as the filing date in order to provide a benefit to the Debtor.


DISCUSSION


In order to discharge his income tax debt, the Debtor relies on 11 U.S.C. §523(a)(1)(B)(ii) which provided at the time his case was commenced, 1 in relevant part:
A discharge under section 727...of this title does not discharge an individual debtor from any debt --(1) for a tax or a customs duty...(B) with respect to which a return, if required...(ii) was filed after the date on which such return was last due, under applicable law or under any extension, and after two years before the date of the filing of the petition;

11 U.S.C. §523(a)(1)(B)(ii). Pursuant to the statute, a debtor's tax liability is excepted from discharge if the tax return was filed after its due date, and the tax return was filed within two years of the filing of the bankruptcy petition. Conversely, if the debtor filed his tax return more than two years before the commencement of the bankruptcy case, the tax debt will be discharged despite the fact that the tax return was filed late.

Therefore, this Court must decide if the Debtor filed the Return before June 23, 2004, since his bankruptcy petition was filed on June 22, 2006. If this Court determines that Debtor filed his return in 1998 or with Special Agent Zito in 2002, his tax debt can be discharged. On the other hand, if this Court finds that the 1995 return was filed on July 26, 2004, as the IRS claims, the debt will not be discharged.



I. 26 U.S.C. §7502

The crux of both parties' arguments involves application of Internal Revenue Code §7502, and whether the statute provides the exclusive means for demonstrating that a tax return was timely mailed, and therefore, timely filed. Essentially, Debtor argues that §7502 has not supplanted the mailbox rule and that his proof of mailing the tax return is proof of receipt by the IRS. Debtor argues that his testimony that he mailed the Return on either July 31, 1998 or August 1, 1998 is sufficient for this Court to accept that it was filed on either of those dates. Alternatively, Debtor claims that the receipt in 2002 of a copy of the Return by Special Agent Zito, an agent of the IRS, was a filing for purpose of bankruptcy.

On the other hand, the IRS argues that §7502 did supplant the mailbox rule and is a tax filer's only recourse. Since Debtor can neither satisfy the statute nor fall into any exception set out in subsection (c) of the statute, the IRS contends that his 1998 mailing is not a filing of the Return. Also, the IRS contends that the receipt of a tax return by an internal revenue agent such as Special Agent Zito is not a filing. Therefore, the IRS claims, the 1995 return was filed on July 26, 2004.

Prior to passage of §7502, the Supreme Court determined that "filing...is not complete until the document is delivered and received....A paper is filed when it is delivered to the proper official and by him received and filed." United States v. Lombardo, 241 U.S. 73, 76 (1916). This ruling by the Supreme Court is commonly described as the physical delivery rule. E.g., Sorrentino v. IRS, 383 F.3d 1187, 1190 (10th Cir. 2004); Thomas v. United States, 166 F.3d 825, 829 (6th Cir. 1999). The Tenth Circuit in United States v. Peters, applied this "physical delivery rule" to a tax refund suit, rejecting application of the common law mailbox rule. 2 220 F.2d 544, 545 (10th Cir. 1955). Under Lombardo and Peters, Taxpayers were deemed late filers if their documents were received by the IRS after the due date, even if they timely mailed the documents before the due date.

Recognizing the concern of taxpayers that differences in transit time, depending on where the documents were mailed, could affect the timeliness of receipt, Congress enacted §7502 in 1954. Internal Revenue Code of 1954, ch. 736, 68A Stat. 895. Initially, the statute applied only to documents other than tax returns. See id. Congress amended the statute to include tax returns in 1966. Act of Nov. 2, 1966, Pub. L. No. 89-713, §5(a), 80 Stat. 1107, 1110. The statute essentially contains two exceptions to the physical delivery rule. Section 7502(a)(1) applies when a document is mailed prior to the due date, but received by the IRS after the date has expired. The statute provides in pertinent part that "the date of the United States postmark stamped on the cover in which such return . . . is mailed shall be deemed to be the date of delivery or the date of payment, as the case may be." 26 U.S.C. §7502(a)(1).

The second exception, §7502(c) is crafted to apply to documents sent by registered or certified mail, or by filing electronically. It states
(c) Registered and certified mailing; electronic filing.

(1) Registered mail. For purposes of this section, if any return, claim, statement, or other document, or payment, is sent by United States registered mail --

(A) such registration shall be prima facie evidence that the return, claim, statement, or other document was delivered to the agency, officer, or office to which addressed; and

(B) the date of registration shall be deemed the postmark date.

(2) Certified mail; electronic filing. The Secretary is authorized to provide by regulations the extent to which the provisions of paragraph (1) with respect to prima facie evidence of delivery and the postmark date shall apply to certified mail and electronic filing.

26 U.S.C. §7502(c).

The statute is silent regarding whether delivery of a tax return or other document can be proved by means other than the two exceptions to the physical delivery rule set forth in §7502(a)(1) and §7502(c). Consequently, courts have reached divergent results on the question of how a taxpayer may prove delivery when the taxpayer claims to have timely mailed the document, but the agency has no record of timely receipt of the tax return or other document. Indeed, there is a split among the Circuits as to whether §7502 creates the only exception to the physical delivery rule. Some Circuits have held that §7502 supercedes the mailbox rule, and without a postmark, the physical delivery rule applies in situations where the exceptions in subsection (c) regarding registered and certified mail, and electronic filing do not apply. See Miller v. United States, 784 F.2d 728 (6th Cir. 1986); Deutsch v. Comm'r, 599 F.2d 44 (2d Cir. 1979). They reason that if the mailbox rule applied, then the exceptions explicitly stated in subsection (c) would be meaningless. By contrast, other Circuits have held that the mailbox rule still applies and that extrinsic evidence of mailing will create a rebuttable presumption of filing. See Anderson v. United States, 966 F.2d 487 (9th Cir. 1992); Estate of Wood v. Comm'r, 909 F.2d 1155 (8th Cir. 1990). They conclude that Congress did not clearly manifest an intent to displace the mailbox rule in enacting §7502, and therefore it still exists for purposes of filing a tax return.

In Deutsch, the Commissioner of the IRS moved to dismiss Deutsch's letter petition to the Tax Court on various grounds, including that the petition was not timely filed. 599 F.2d at 45. In response, Deutsch offered his accountant's affidavit and testimony that the letter was timely mailed. Id. The Tax Court nonetheless dismissed the petition as untimely. Id.

On appeal to the Second Circuit Deutsch argued that his accountant's testimony established that the letter petition was timely mailed. Id. Deutsch also argued that this evidence was appropriate because where the exceptions to the physical delivery rule set out in §7502 do not apply, a taxpayer can prove timely delivery by other means. Id. at 46. In rejecting Deutsch's argument the Second Circuit noted that other courts have declined to consider testimony or other proof as evidence of mailing, and observed that "[t]he exception embodied in section 7502 and the cases construing it demonstrate a penchant for an easily applied, objective standard." Id.

In Miller, the IRS maintained that it never received the taxpayer's claim for a refund. Miller, 784 F.2d at 729. The taxpayer provided his attorney's affidavit to establish that the refund claim was timely mailed. Id. He also argued that the exceptions in §7502 did not bar him from using other exceptions created by the courts, particularly the mailbox rule. Id. at 730. The Sixth Circuit found otherwise, holding that the only exceptions to the physical delivery rule are found in §7502. Id. at 731.

Though not precisely on point, the case of Boccuto v. Commissoner, 277 F.2d 549 (3d Cir. 1960) suggests that the Third Circuit would likewise hold that §7502 provides the only exceptions to the physical delivery rule. In that matter the timeliness of the Boccutos' petition for redetermination of tax deficiencies and penalties was at issue. The Boccutos demonstrated that on the last day for filing their petition, they delivered their petition to the post office and obtained a certified mail receipt dated February 11, 1959. Id. at 551. At the hearing before the Tax Court, the Commissioner produced an envelope dated February 12, 1959. The question for resolution was whether the date of the certified mail receipt or the postmark controlled for purposes of timeliness of the petition.

At the time that the Boccutos mailed their petition by certified mail the regulations authorized by §7502(c)(2) for application to certified mail had not yet been implemented. 3 Id. at 553. Accordingly, the Third Circuit found that the certified mail receipt held no significance, and that the postmark stamped on the envelope controlled. Id. In connection with that determination, the court stated "Congress has explicitly set forth the allowable exceptions to the rule of actual receipt by the Tax Court within the specified time. Unless a taxpayer can fit himself within one of the statutory exceptions, he is bound by this rule." Id.

Courts within the Third Circuit have interpreted Boccuto as holding that mailbox rule has been supplanted by §7502. See Labendz v. IRS, No. Civ. 06-3781, 2007 U.S. Dist. LEXIS 9560, (D.N.J. Feb. 9, 2007); Philadelphia Marine Trade Ass'n/Int'l Longshoremen's Ass'n Vacation Fund v. United States, No. Civ. 04-4857, 2006 U.S. Dist. LEXIS 48263 (E.D. Pa. July 17, 2006); Poindexter v. IRS, No. Civ. 96-4404, 1997 U.S. Dist. LEXIS 6902 (E.D. Pa. Apr. 29, 1997); Bazargani v. United States, No. Civ. 91-4709, 1992 U.S. Dist. LEXIS 11448 (E.D. Pa. Jul. 29, 1992) aff'd 993 F.2d 223 (3d Cir. 1993).

Other Circuits have taken a different approach by finding the mailbox rule is not superceded by §7502. "Instead, these courts have viewed the issue as an evidentiary matter, holding a taxpayer to a strict standard of proof before invoking a presumption of receipt. Self-serving declarations of mailing, without more, are insufficient to invoke the presumption." Sorrentino v. IRS, 383 F.3d 1187, 1191 (10th Cir. 2004)(Baldock, J.). For instance, the Eighth Circuit held the testimony of both the attorney who mailed the return and the postal worker who accepted the mailing was sufficient to show a timely mailing in Estate of Wood v. Commissioner, 909 F.2d 1155 (8th Cir. 1990). In finding that Congress did not intend to eliminate the mailbox rule in cases where the postmark can be established by other means, the Court relied on the "normal rule of statutory construction...that if Congress intends for legislation to change the interpretation of a judicially created concept, it makes that intent specific." Id. at 1160 (quoting Midlantic Nat'l Bank v. New Jersey Dep't of Envtl. Prot., 474 U.S. 494 (1986)).

In adopting the reasoning of Wood, The Ninth Circuit allowed an even less rigorous evidentiary showing in Anderson v. United States, 966 F.2d 487 (9th Cir. 1992). In that case, the District Court found that proof of timely delivery was shown through (1) the direct testimony of the taxpayer that the return was mailed at the post office; and, (2) an affidavit by the taxpayer's friend stating that she accompanied the taxpayer to the post office, waited in the car, observed the taxpayer go into the post office with the tax return and later return without it. Id. at 489. Although it observed that the evidence seemed somewhat self-serving, the Ninth Circuit did not overrule the District Court's credibility determination. Id. at 492. The statements of each witness corroborated the other's.

This court does not need to choose between the approaches that divide the Circuit Courts, because even under the evidentiary showing adopted by Woods and Anderson, the Debtor cannot meet his burden. The Debtor presents uncorroborated, self-serving testimony, and no Circuit Court has allowed such testimony to sustain a finding of timely mailing. See, e.g., Sorrentino v. IRS, 383 F.3d 1187, 1195 (10th Cir. 2004)(Baldock, J.)(finding the taxpayer's "self serving testimony, without corroborating evidence [was] insufficient"); Davis v. United States, No. Civ. 99-5073, 2000 U.S. App. LEXIS 2302, at *7 (Fed. Cir. Feb. 16, 2000)(holding the taxpayer's uncorroborated testimony would not suffice "under any view of the law"); Wade v. Comm'r, Nos. Civ. 98-9001, 98-9002, 1999 U.S. App. LEXIS 7980, at *6-7 (10th Cir. Apr. 26, 1999)(finding taxpayer's selfsupporting testimony that he remembered mailing his return immediately before lunch with his accountant was "not nearly enough evidence"). At trial, the Debtor testified that the Return was late because his accountant "had been unwell" and that in 1998 he finally picked up the Return from the accountant and delivered it to the post office for mailing. (Trial Tr. 6-8.) He provided no other evidence that the Return was mailed on time. For example, he did not provide corroborating testimony from the accountant. Accordingly, this Court cannot find that Debtor filed the Return on either July 31 or August 1, 1998.



II. McTear

At trial, and in his post-trial brief Debtor argued that McTear v. IRS, No. 93-21401, 1994 WL 389469 (Bankr. E.D. Pa. May 20, 1994) was directly on point to the issue presented here. That case, however, involved hand delivery and application of §7502 was explicitly rejected by the Court. Id. at *3. This case is not a hand delivery case and McTear is inapposite. Nevertheless, even if this Court was to follow the guidance of McTear, it could still not find for Mr. Pizzuto. The evidence produced by the debtors in that case consisted of their testimony that the return was hand delivered to the IRS and an exhibit of the IRS showing their tax return was received on time. Id.



III. Delivery of the Tax Return to Special Agent Zito

Debtor's counsel attempts to argue that counsel's forwarding of a copy of the Return to Special Agent Zito in 2002 corroborates the Debtor's claim that he mailed the Return in 1998. Id. at 29. However, this is not proof that the Debtor mailed the Return in 1998. It is not even proof that he ever mailed the return to the proper address. It is only evidence that a return had been prepared by 2002, and that a copy had been sent to Special Agent Zito.

Debtor also contends that receipt of a copy of the Return by Special Agent Zito in June 2002 is evidence that the return was filed before the deadline in 2004. There was no testimony by Special Agent Zito, but counsel for the IRS advised that Special Agent Zito was conducting a criminal investigation. Debtor's counsel did not dispute this. 4 Id. at 35-36. Special Agent Zito's receipt of a copy of the Return, however, is not a filing under either the Tax Code or Regulations. An individual's return "shall be made to the Secretary (i) in the internal revenue district in which is located the legal residence or principal place of business of the person making the return, or (ii) at a service center serving the internal revenue district referred to in clause (i), as the Secretary may by regulations designate." 26 U.S.C. §6091(b)(1)(A). The Regulations provide that the tax return of an individual "shall be filed with any person assigned the responsibility to receive returns at the local Internal Revenue Service office that serves the legal residence or principal place of business of the person required to make the return." 26 C.F.R. §1.6091-2(a)(emphasis added). Debtor has made no showing of the location for filing the return, or that Special Agent Zito was located at a service center or local IRS office and had the responsibility to accept a return as filed.

Case law also supports the holding that giving a delinquent return to an internal revenue agent is not a filing. W.H. Hill Co. v. Comm'r, 64 F.2d 506 (6th Cir. 1933); Espinoza v. Comm'r, 78 T.C. 412, 419-20 (1982); Green v. Comm'r, 65 T.C.M. (CCH) 2347 (1993). "It is no part of the duties of an internal revenue agent or of an internal revenue agent in charge to file returns for taxpayers. That is the duty which law places on the shoulders of the taxpayers." W.H. Hill Co. v. Comm'r, 23 B.T.A. 605, 607 (1931). Putting the burden of filing on the taxpayer and not on the revenue agent conducting an investigation is for the purpose of "facilitating the prompt and orderly assessment and collection of taxes." W.H. Hill, 64 F.2d at 507. Therefore, Special Agent Zito's receipt of the Return is not a filing for purposes of §523. 5


CONCLUSION


This Court finds that Debtor did not file his 1995 federal tax return until July 26, 2004 --the earliest date stamped on the copy of the return the IRS produced as evidence. Since the return was late-filed within two years of Debtor's bankruptcy petition of June 22, 2006, the debt is nondischargeable pursuant to 11 U.S.C. §523(a)(1)(B)(ii).

1 Section 523 was amended by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), Pub. L. No. 109-8, 119 Stat. 23. Mr. Pizzuto's bankruptcy case was filed before the effective date of BAPCPA and so this Court will analyze this issue under §523 as it existed at the time of filing.

2 The common law mailbox rule creates the rebuttable presumption that a mailed document that is properly addressed and carrying the proper postage is received. E.g., Anderson v. United States, 966 F.2d 487, 489 (9th Cir. 1992).

3 It appears that at the time that the Boccuto's mailed their petition, mail was certified at the post office, but returned to the sender for mailing. 277 F.2d at 552 n.2.

4 The statements of counsel of course cannot be considered evidentiary with regard to the nature of Agent Zito's investigation. However, the court considers the statement solely for the purpose of establishing that both parties agree that Special Agent Zito received a copy of the Return in June 2002.

5 With the passage of BAPCPA, §523 was amended to allow for the discharge of late filed returns that were filed or given within two years of the filing of the bankruptcy petition. Since this case arose pre-BAPCPA, there is no need to determine whether the return was given to the IRS when Special Agent Zito received it.

Thursday, March 27, 2008

No negligence penalty when reasonable cause and good faith is proven
Civil penalties: Substantial understatement of tax: Negligence: Reasonable cause. -

-
A hotel reservations company was not liable for substantial understatement or negligence penalties because it acted with reasonable cause and in good faith when it reported a value for restricted shares consistent with an asset purchase agreement. At the time of filing its return, the taxpayer reasonably believed that the price per share in the agreement was conclusive as to the fair market value of the restricted stock. The fact that the taxpayer learned, prior to filing its return, that another party to the transaction disagreed with its reporting position and had obtained a separate valuation did not make unreasonable the taxpayer's belief that it had a valid and enforceable agreement regarding the value of the stock. That belief at the time of filing was not rendered unreasonable by the fact that the taxpayer did not file an amended return after obtaining an independent valuation of the stock at a later date, by failing to file a completed Form 8594, or by changing its reporting position on later returns. There is no general requirement to file an amended return and the failure to do so did not support imposition of a negligence penalty. Moreover, the direction to file the allegedly incomplete Form 8594 came from the taxpayer's tax advisors and reasonable reliance on tax advisors prevents the imposition of a negligence penalty.








SUPPLEMENTAL OPINION AND ORDER FURTHER AMENDING TRIAL OPINION


MILLER, Judge.: This opinion addresses the one remaining issue after trial that continues to delay final entry of judgment on the claims presented. Defendant filed its status report pursuant to the court's order, see Litman v. United States, 78 Fed. Cl. 90, 146 (2007) (the "trial opinion"), 1 on December 7, 2007, advising that it seeks penalties against Hotels.com, Inc. & Subsidiaries ("Hotels.com"). Considering defendant's equivocation on taking an adversarial position on the issue of Hotels.com's liability for penalties, see Def.'s Br. filed Dec. 7, 2007, at 5, 6 (noting that two grounds for imposition of penalties against Hotels.com remain "potentially applicable"), the court conducted a status conference on December 14, 2007, and ordered post-trial supplemental briefing that concluded on January 28, 2008. At issue is Hotels.com's potential liability for penalties which, following the court's valuation of the HRN restricted shares, is totaled to $341,859.00 (twenty percent of $1,574,293.00, the amount of Hotels.com's tax underpayment). See id. at 5-7 (setting forth calculations of potentially applicable penalties based on difference in Hotels.com's reporting of value of HRN restricted shares as compared with court's valuation determined in trial opinion); see also 26 U.S.C. ("I.R.C.") §6662(a) (2000) (imposing penalty of "amount equal to 20 percent of the portion of the underpayment").




BACKGROUND


Familiarity with the facts and background of the case, discussed at length in the court's trial opinion, is presumed. See Litman, 78 Fed. Cl. at 91-105. Recitation of the facts and background germane to the issue of Hotels.com's liability for penalties is incorporated in this section and the discussion. This supplemental opinion amends the trial opinion insofar as it resolves an issue that was the subject of trial.

On August 22, 2007, this court issued its trial opinion determining the value for tax purposes of approximately ten million restricted shares of HRN stock. Id. at 145 ("[T]he court finds and concludes that the value of the restricted stock transferred to TMF Liquidating Trust was $90,818,180 and the value of the restricted stock transferred to Mr. Pells was $3,919,920."). The trial opinion also ruled that plaintiffs-counterdefendants, David S. Litman and Malia A. Litman (collectively, the "Litmans") and Robert B. Diener and Michelle S. Diener (collectively, the "Dieners") had discharged their burden to defeat the IRS's imposition of penalties pursuant to I.R.C. §6662. Id. at 142-45. The court reserved decision on Hotels.com's liability for penalties on the understanding that defendant had preserved the issue for resolution at a later time. Id. at 142-43 (citing Def.'s Br. filed Apr. 2, 2007, at 27 ("Whether Hotels.com substantially understated its tax or substantially overstated the value of HRN stock, and is subject to penalties for those reasons, is dependent on the value for the stock ultimately determined in this case.")).

The court is mindful of the procedural posture of this case. In the notice of deficiency sent to Hotels.com, dated February 10, 2006, the IRS determined that Hotels.com was liable for penalties in the amount of $491,338.00 because of its allegedly erroneous reporting of the value for the HRN restricted shares in its 2000 tax return. See JX 28 (this amount has now been reduced to $341,859.00 on the basis of the court's determination of value in the trial opinion, see Def.'s Br. filed Dec. 7, 2007, at 7). Hotels.com paid the penalties on March 9, 2006, along with the additional taxes and interest that the IRS determined were due. See Compl. ¶27, Hotels.com, Inc. and Subsidiaries (f/k/a Hotel Reservations Network, Inc.) v. United States, No. 06-285T (Fed. Cl. Apr. 10, 2006). Hotels.com then sought a refund of the additional taxes, interest, and penalties paid pursuant to the IRS's assessment. See id. ¶ ¶30-31. Hotels.com's liability for penalties, therefore, was put at issue in its complaint. Statements in the trial opinion that resolution of the penalties issue as it pertains to Hotels.com was pending defendant's perfection of a counterclaim were incorrect. Litman, 78 Fed. Cl. at 92, 142. An errata sheet substituting corrected pages is entered by separate order this date. 2




DISCUSSION


Defendant seeks penalties in the amount of $341,859.00 against Hotels.com pursuant to I.R.C. §6662. 3 Following the court's determination of the value of the HRN restricted shares, defendant now asserts that two of the three "possible bases for the imposition of penalties under §6662...remain applicable." Def.'s Br. filed Dec. 7, 2007, at 5. Based on the court's valuation of the HRN restricted shares at $90,818,180.00, Litman, 78 Fed. Cl. at 145, defendant concedes that Hotels.com's reporting of the HRN restricted shares at $159,998,400.00, id. at 103, does not meet the threshold liability for a "substantial valuation misstatement." See I.R.C. §6662(e)(1)(A) (2000) ("For purposes of this section, there is a substantial valuation misstatement under chapter 1 if...the value of any property (or the adjusted basis of any property) claimed on any return of tax imposed by chapter 1 is 200 percent or more of the amount determined to be the correct amount of any such valuation or adjusted basis...."). 4 However, defendant asserts that both a "substantial understatement of income tax" penalty, id. §6662(b)(2), (d), 5 and a "negligence or disregard of rules or regulations" penalty, id. §6662(b)(1), (c), 6 remain "potentially applicable" to Hotels.com. Def.'s Br. filed Dec. 7, 2007, at 5, 6.

1. Standards of review for assessment of penalties

When reviewing the assessment of taxes and penalties, "`[t]he ruling of the Commissioner of Internal Revenue enjoys a presumption of correctness and a taxpayer bears the burden of proving it to be wrong.' " Conway v. United States, 326 U.S. 1268, 1278 (Fed. Cir. 2003) (quoting Transamerica Corp. v. United States, 902 F.2d 1540, 1543 (Fed. Cir. 1990)); see also Welch v. Helvering, 290 U.S. 111, 115 (1933). Pursuant to I.R.C. §6664(c)(1) (2000), a taxpayer who carries his burden of showing "that there was a reasonable cause for [any portion of an underpayment] and that the taxpayer acted in good faith with respect to such portion," is immune from imposition of penalties pursuant to I.R.C. §6662 with respect to that portion. Treasury Regulation §1.6664-4(b) (2006), provides, in pertinent part:


The determination of whether a taxpayer acted with reasonable cause and in good faith is made on a case-by-case basis, taking into account all pertinent facts and circumstances....Generally, the most important factor is the extent of the taxpayer's effort to assess the taxpayer's proper tax liability. Circumstances that may indicate reasonable cause and good faith include an honest misunderstanding of fact or law that is reasonable in light of all of the facts and circumstances, including the experience, knowledge, and education of the taxpayer....Reliance on an information return, professional advice, or other facts...constitutes reasonable cause and good faith if, under all the circumstances, such reliance was reasonable and the taxpayer acted in good faith.


Id.; see Treas. Reg. §1.6664-4(c) ("[T]he taxpayer's education, sophistication and business experience will be relevant in determining whether the taxpayer's reliance on tax advice was reasonable and made in good faith."). Hotels.com bears the burden of proving that it meets the reasonable cause/good faith standard of I.R.C. §6664(c)(1) and ultimately whether it is entitled to a refund of penalties paid.

2. Proper prosecution of penalties

Hotels.com has raised an issue of "first impression" concerning the Government's proper prosecution of penalties in this case. Hotels.com's Br. filed Jan. 7, 2008, at 2. Hotels.com submits that defendant's abandonment of the positions taken in the IRS's "whipsaw" notices 7 in favor of a new litigation position on the value of the HRN restricted shares and defendant's "apparent unwillingness to inform the Court if it seeks penalties against Hotels.com," id., should constitute a waiver. Hotels.com attaches importance to the fact that, under defendant's valuation position taken in litigation, "penalties that were mathematically possible under the whipsaw Notice were no longer applicable." Hotels.com's Br. filed Jan. 28, 2008, at 3. Hotels.com also trumpets case law that rejects as waived arguments made for the first time in post-trial and post-decisional briefing. See id. at 3-4 (citing Goulding v. United States, 929 F.2d 329, 333 (7th Cir. 1991); Gingerich v. United States, 78 Fed. Cl. 164, 167-68 (2007); and Principal Life Ins. Co. & Subsidiaries v. United States, 76 Fed. Cl. 326, 328 (2007)); see also id. at 5 ("[N]owhere in the Government's Pretrial Brief does it assert that a negligence penalty should be applied to Hotels.com....In fact, in the one paragraph of its Pretrial Brief addressing penalties with respect to Hotels.com, there is no cite or reference at all to the applicable section of the Internal Revenue Code ( I.R.C. §6662(c)).")

As Hotels.com's cases demonstrate, waiver of an argument or defense in a tax refund suit generally occurs where a position is advanced for the first time at a late stage of litigation. See Gingerich, 78 Fed Cl. at 167-68 (finding Government's argument waived when raised for first time in post-trial, post-decision computational proceeding); Principal Life Ins., 76 Fed. Cl. at 328 (finding waiver of Government's set-off defense when not previously raised in litigation). In the case at bar, however, the issue of penalties always has been properly before the court. The IRS first assessed penalties against Hotels.com pursuant to I.R.C. §6662(b)(1)-(3) for negligence or disregard of rules or regulations, substantial understatement of income tax, and substantial valuation misstatement in the whipsaw notice issued on February 10, 2006. Hotels.com's own complaint put penalties at issue when it sought a refund of penalties paid. See Hotels.com's Compl. ¶ ¶27, 30-31. Furthermore, while defendant's pretrial brief equivocated as to Hotels.com's ultimate liability for penalties, which defendant conceded would be dependent on the court's valuation of the HRN restricted shares, see Def.'s Br. filed Apr. 2, 2007, at 27, it put forward as an issue for trial "whether plaintiffs are liable for penalties under §6662...[for] disregard of applicable rules, a substantial understatement of tax, or a substantial valuation misstatement, and whether plaintiffs acted with reasonable cause and in good faith with regard to any underpayment of tax." Id. at 17.

The court deems unpersuasive Hotels.com's argument that defendant waived its assertion of penalties by abandoning the whipsaw notice position in favor of a consistent litigation position on valuation. While "[u]nlike any other whipsaw case research has disclosed," Hotels.com's Br. filed Jan. 28, 2008, at 3, a rule that would require the "Government [to] maintain[] its protective whipsaw position throughout the litigation," id., would straight-jacket the Government from ever asserting a litigation position inconsistent with the values assessed in its whipsaw notices, a practice that is widely regarded as appropriate. See Litman, 78 Fed. Cl. at 111 (citing cases upholding validity of whipsaw notices procedure). Furthermore, the fact that the Government took a litigation position that was inconsistent with the position advanced in the whipsaw notice to Hotels.com has no bearing on Hotels.com's liability for penalties, which is a function of this court's determination of the value of the restricted shares. The court thus rules that the Government has put Hotels.com's liability for penalties properly at issue in this post-trial, post-opinion proceeding.

3. Liability for substantial understatement of income tax

Defendant contends, and Hotels.com concedes, see Hotels.com's Br. filed Jan. 7, 2008, at 3, that based on this court's valuation of the restricted shares, Hotels.com mathematically understated its tax by more than ten percent in 2000. See I.R.C. §6662(d); see also Def.'s Br. filed Dec. 7, 2007, at 5-6 (Hotels.com understated its income by $1,574,293.00 and the amount of tax that should have been reported on the return was $12,991,420.00 resulting in a understatement of approximately twelve percent ($1,574,293.00 / $12,991,420.00 = 0.12)). Nonetheless, Hotels.com asserts that it qualifies for exculpation under I.R.C. §6664(c)(1) because it acted with reasonable cause and good faith in computing its 2000 taxes. Hotels.com "believed the value reported on its tax return was negotiated and agreed to by the parties, and its actions were consistent with this belief." Hotels.com's Br. filed Jan. 7, 2008, at 3. Defendant disputes Hotels.com's characterization of its tax reporting position contending that "the $16 value was not initially included by [Ernst & Young] in the draft return because it believed the parties had agreed to it. Indeed it was later deleted from the Form 8594 specifically because HRN and USA knew that the Litman[s] and Dieners strenuously disagreed with it." Def.'s Br. filed Jan. 17, 2008, at 15. Because Hotels.com advanced the agreed-value theory only at trial, defendant would counsel that the theory "cannot be the basis for a finding of good faith and reasonable cause when the evidence demonstrates that the theory was not actually relied upon at the time HRN filed its return." Id. at 16.

The trial opinion determined that "while Hotels.com may have wanted Messrs. Litman and Diener to agree to a $160 million fair market value for the 9,999,900 shares of HRN restricted stock, such an agreement was never reached and/or reduced to writing." Litman, 78 Fed. Cl. at 115. Thus, this court concluded that the Amended and Restated Asset Purchase Agreement (the "ARAPA"), which Hotels.com claimed embodied an agreement as to the fair market value of the HRN restricted shares for tax purposes, in fact, did not determine the value of the restricted shares. However, though the court "agree[d] with the Litmans, the Dieners, and defendant that the ARAPA is ambiguous and is not determinative of the value of the HRN restricted stock," id. at 112, this finding does not purport to resolve whether Hotels.com actually believed that the ARAPA embodied such an agreement at the time Hotels.com filed its return.

The court's assessment of Hotels.com's intentions with regard to the ARAPA supports a finding that Hotels.com acted with reasonable cause and in good faith in its tax reporting position on its 2000 return. The trial opinion stated:


Hotels.com values the Section 7.11.3 Shares at $16.00 per share based on the language [in the ARAPA] "aggregate value (based on the price per share in the IPO)." Hotels.com's Br. filed Feb. 26, 2007, at 11. While this language is consistent with an intention that the agreement value the stock at $16.00 per share for tax purposes, the plain language of the agreement does not encapsulate this understanding....Mr. Lidji, transaction attorney for the Litmans and the Dieners, was persuasive that the ARAPA did not memorialize Hotels.com's intentions.


Id. at 114 (emphases added). Hotels.com believed upon reasonable cause and in good faith, at the time of the filing of its 2000 tax return, that the ARAPA embodied a negotiated agreement with the Litmans and the Dieners conclusive as to the fair market value of the restricted shares for tax reporting purposes. That Hotels.com learned prior to filing its 2000 tax return of Mr. Diener's disagreement with Hotels.com's reporting position and that Messrs. Litman and Diener had obtained a separate fair market valuation, see id. at 104, does not render Hotels.com's belief that it had the protection of a valid and enforceable agreement to the fair market value, embodied in the ARAPA, in bad faith or unreasonable. Thus, the court concludes that Hotels.com qualifies for the defense allowed by I.R.C. §6664(c)(1).

4. Liability for negligence or disregard of rules or regulations

Defendant seeks a twenty-percent penalty assessment against Hotels.com for the portion of its underpayment attributable to "[n]egligence or disregard of rules or regulations." I.R.C. §6662(b)(1). "[T]he term `negligence' includes any failure to make a reasonable attempt to comply with the provisions of this title, and the term `disregard' includes any careless, reckless, or intentional disregard," of applicable rules and regulations. Id. §6662(c).

Defendant asserts that Hotels.com "negligently failed to compute, report and pay its taxes for 2000 based on a fair market valuation for the restricted stock, which it knew it was required to do." Def.'s Br. filed Jan. 17, 2008, at 10 (citing I.R.C. §6662(b)(1), (c)). Defendant argues that Hotels.com's situation differs from the court's findings with respect to the Litmans and the Dieners in that Hotels.com "did not base its 2000 tax return on a fair market valuation....[a]nd when HRN later obtained a valuation, it did not actually use it for computing and paying its 2000 taxes." Id. at 11. Consequently, penalties apply not simply because Hotels.com "failed to file a completed Form 8594" 8 or because "Hotels.com guessed wrong about a fair market valuation for the stock in computing its income tax for 2000," id. at 14, but, rather, because Hotels.com's negligence and disregard of applicable rules and regulations are demonstrated by evidence that Hotels.com "knew that the assumed $16 figure was not an attempt to determine a fair market value (and was wrong for tax purposes), but computed and paid its tax on that basis anyway, and never corrected it." Id. at 13-14. To support its contention that Hotels.com knew that $16.00 was not a fair market value agreed upon by the parties for tax reporting purposes, defendant cites the fact that, in subsequent tax years, Hotels.com reported its amortization deductions at a value discounted twenty to forty percent from the $16.00 per share value reported on its 2000 tax return, in accordance with the post-filing valuation that it obtained from Deloitte & Touche. See id. at 6, 11. The Litmans and the Dieners, in their brief filed on January 17, 2008, echo this point. See Litmans/Dieners' Br. filed Jan. 17, 2008, at 4. 9

Hotels.com stands on its position that it reasonably believed that an agreement was negotiated and reached with the Litmans and the Dieners as to the fair market value of the restricted shares for tax reporting purposes. Moreover, Hotels.com counters that defendant's own expert, Francis X. Burns, testified in corroboration of the position that the parties had negotiated and agreed to a fair market valuation between $11.00 and $16.00, with full knowledge of all of the restrictions on the shares. Transcript of Proceedings Litman v. United States, Nos. 05-956T, -971T, & 06-285T, at 1689 (Fed. Cl. Apr. 30 - May 9, 2007) (Burns) (The Litmans and the Dieners "agreed to a price of anywhere between [$]11 and $16, so in my view, that's an indication that they believed, even with all the restrictions piled on top of the stock, that a price between [$]11 and $16 was fair."); id. at 1695 (the Litmans and the Dieners "did agree that it could be no less than $11 and no more than [$]16, so in my mind, that frames what they believed to be a fair market value for those shares with all the restrictions contained therein.").

The Litmans, the Dieners, and defendant are correct that the evidence establishes that, after learning that the Litmans and the Dieners obtained an independent valuation for the HRN restricted shares and reported on their respective tax returns a per share value consistent therewith, Hotels.com obtained an independent valuation from Deloitte & Touche. In subsequent tax years, Hotels.com reported its amortization deductions in accordance with the Deloitte & Touche valuation and never amended its 2000 tax return or re-filed a completed Form 8594. The Litmans, the Dieners, and defendant would have the court infer that Hotels.com never reasonably believed that an agreement existed as to the fair market value of the HRN restricted shares. However, that Hotels.com chose to adopt a more conservative tax reporting position for subsequent years in the face of a contradictory tax reporting position taken by the Litmans and the Dieners, does not assail, in and of itself, the reasonableness of the position taken by Hotels.com on its 2000 tax return.

The pertinent question is whether Hotels.com acted pursuant to reasonable cause and with good faith at the time it filed its 2000 tax return. As discussed above, Hotels.com acted upon reasonable cause and in good faith when it reported a value for the restricted shares consistent with what Hotels.com believed to be its agreement with the Litmans and the Dieners pursuant to the ARAPA. Hotels.com correctly asserts that "there is no general requirement to file an amended return and, in any event, the failure to file an amended return cannot support a negligence penalty." Hotels.com's Br. filed Jan. 28, 2008, at 8. Furthermore, because the direction to file the allegedly incomplete Form 8594 came from either Ernst & Young, Hotels.com's tax advisors, or from Mr. Diener through his tax advisors at KPMG, see Litman, 78 Fed. Cl. at 104, reasonable cause and good faith in reliance on tax advice prevent the imposition of a negligence penalty on that basis. Hotels.com has carried its burden of showing its entitlement to the defenses recognized by I.R.C. §6664(c)(1) because Hotels.com acted upon a reasonable cause and in good faith when it reported its 2000 taxes.




CONCLUSION


Accordingly, based on the foregoing,

IT IS ORDERED , as follows:

1. The opinion issued on August 22, 2007, is amended further by this supplemental opinion and order.

2. Further to ¶4 of the August 22, 2007 opinion, the Clerk of the Court shall enter judgment for Hotels.com on its claim for refund of penalties paid.

3. Pursuant to ¶5 of the order entered on December 17, 2007, the parties shall file a form of judgment by April 21, 2008, that sets forth the amount of judgment for the Litmans and the Dieners on their claim for refund, adjusted for interest due, and for Hotels.com on its claim of refund, adjusted for interest due.

1 In an opinion on cross-motions for reconsideration entered on November 16, 2007, the court enlarged the time for defendant's filing of a status report regarding its position on Hotels.com's liability for penalties from September 14, 2007, to December 7, 2007.

2 The court's reference to the posture of the penalties issue as it pertained to the Litmans and the Dieners was similarly incorrect. The trial opinion referred to defendant's counterclaims against the Litmans and the Dieners when deciding their liability for penalties. See Litman, 78 Fed. Cl, at 142 ( "Defendant filed counterclaims against the Litmans and the Dieners for penalties and interest...."). Although defendant did file amended counterclaims against the Litmans and the Dieners for additional (unpaid) taxes, interest, and penalties, these "protective" counterclaims would have been triggered only if the court's valuation of the HRN stock exceeded $16.00 per share. See Am. Counterclaim (Litmans), No. 05-956T, filed Aug. 11, 2006, ¶ ¶10-19; Am. Counterclaim (Dieners), No. 05-971T, filed Aug. 11, 2006, ¶ ¶10-19. The valuation for the HRN restricted shares determined in the trial opinion did not exceed $16.00 per share, so the decision on the merits of the Litmans' and the Dieners' liability for penalties resolved their respective claims, but did not rule on defendant's protective amended counterclaims for additional penalties. The errata sheet corrects these errors as well.

3 Section 6662(a) and (b) provides, in pertinent part:

(a) Imposition of penalty. - If this section applies to any portion of an underpayment of tax required to be shown on a return, there shall be added to the tax an amount equal to 20 percent of the portion of the underpayment to which this section applies.

(b) Portion of underpayment to which section applies. - This section shall apply to the portion of any underpayment which is attributable to 1 or more of the following:

(1) Negligence or disregard of rules or regulations.

(2) Any substantial understatement of income tax.

(3) Any substantial valuation misstatement under chapter 1.

....

4 The I.R.C. §6662(e)(1)(A) substantial valuation misstatement threshold is now 150 percent. See I.R.C. §6662(e)(1)(A) (as amended by Pub. L. No. 109-280, §1219(a)(1)(A), 120 Stat. 1083 (2006)).

5 Section 6662(d)(1)(B) provides, in pertinent part: "In the case of a corporation...there is a substantial understatement of income tax for any taxable year if the amount of the understatement for the taxable year exceeds...10 percent of the tax required to be shown on the return for the taxable year (or, if greater, $10,000)...."

6 Section 6662(c) provides, in pertinent part: "For purposes of this section, the term `negligence' includes any failure to make a reasonable attempt to comply with the provisions of this title, and the term `disregard' includes any careless, reckless, or intentional disregard."

7 The IRS prophylactically issued notices to the Litmans and the Dieners reflecting one valuation (the $16.00 per share value reported on Hotels.com's 2000 tax return, see JX 26, 27), and to Hotels.com reflecting the obverse (the $4.54 per share value reported on the Litmans' and the Dieners' respective 2000 tax returns, see JX 28), to ensure that the fisc would be made whole on the full value per share.

8 In its initial post-trial brief addressing penalties, Hotels.com focused on its liability for penalties arising from its filing of an incomplete Form 8594 along with its 2000 tax return. This focus draws on defendant's post-trial status report and pre-trial brief, which raised, as a potential ground for Hotels.com's liability for penalties, that "Hotels.com did not ...amend its return, and file a completed Form 8594" "after obtaining a valuation for the HRN restricted stock from Deloitte & Touche." Def.'s Br. filed Apr. 2, 2007, at 27; see also Def.'s Br. filed Dec. 7, 2007, at 6 (discussing Hotels.com's potential liability for a negligence penalty for filing "an incomplete (`whited-out') Form 8594"). Hotels.com argues that I.R.C. §6662 penalties cannot be imposed for failure to file a correct Form 8594 because the Government's own instructions explicitly state: "`If you do not file a correct Form 8594 by the due date of your return and you cannot show reasonable cause, you may be subject to penalties. See [I.R.C.] sections 6721 through 6724.'" Hotels.com's Br. filed Jan. 7, 2008, at 6 (quoting Instructions for Form 8594 at 1 (emphasis added)). "In other words, by referencing only these sections, the Form 8594 instructions establish that the Government itself does not consider the failure to file a correct Form 8594 an action that is attributable to an underpayment." Id. at 7.

Defendant's responsive brief does not address this argument, but states flatly:

Hotels.com's argument that the United States is trying to defend the negligence penalty under §6662 based simply on HRN's failure to file a completed Form 8594 is wrong. That incomplete Form is only one piece of evidence, along with all the other testimony and documentary evidence... showing that Hotels.com knew of its obligation to pay tax based on fair market value for the restricted stock.

Def.'s Br. filed Jan. 17, 2008, at 13 (citation omitted). The court understands defendant to restrict its argument to a claim that Hotels.com negligently failed to determine and report a fair market value for the restricted shares on its 2000 tax return, and thus the court only considers that ground for a negligence penalty.

9 The Litmans and the Dieners note at the outset that they "take no position with respect to the United States' assertion of penalties against Hotels.com," Litmans/Dieners' Br. filed Jan. 17, 2008, at 2, but nonetheless dispute that the evidence adduced at trial established that Hotels.com believed the value reported on its 2000 tax return reflected a negotiated agreement by the parties:

[T]he fact that Hotels.com obtained an appraisal of the Restricted Shares from Deloitte and used the weighted average of $10.18 per share value during the audit and in its federal income tax returns for 2001-2004...demonstrates that no such agreement existed....If Mr. Khosrowshahi[, Vice President of Strategic Planning for USA Networks, Inc., parent company to Hotels.com's predecessor,] truly believed - as Hotels.com now asserts - that he had reached an agreement with Plaintiffs to report the Restricted Shares at $16 per share, there would have been no need to obtain a fair market value appraisal from Deloitte.

Id. at 4.

Wednesday, March 26, 2008

Felony conviction under 7201 for false data in an Offer in Compromise


United States of America, Plaintiff-Appellee v. Stephen P. Miller, Defendant-
Appellant.

U.S. Court of Appeals, 5th Circuit; 06-11078, March 18, 2008.

Affirming an unreported DC Texas decision.

[ Code Sec. 7203]

Crimes: Conviction and sentence: Tax evasion: Willfulness: Offer-in-compromise: Evidence: Admissibility: Duplicitous indictment: Brady violation. --
The individual's false assertion in his offer-in-compromise (OIC) that he lacked the funds to satisfy his tax liabilities constituted an affirmative attempt to evade taxes. In addition, the individual's prior act of opening an offshore bank account under a false name was properly admitted into evidence because it demonstrated that the individual had previously attempted to hide money offshore. Therefore, the evidence was probative of his intent to hide assets from the IRS when he submitted his OIC. Finally, no Brady violation occurred when a criminal referral letter containing references to the government's possession of financial records belonging to the individual's financial advisor was not disclosed. The individual failed to establish a reasonable probability that the outcome of the trial would have been different had the suppressed evidence been disclosed.


HIGGINBOTHAM, Circuit Judge: A jury found Stephen Miller guilty of tax evasion in violation of 26 U.S.C. §7201. Miller challenges the sufficiency of the evidence, as well as a number of the district court's evidentiary rulings. He also contends that the indictment was duplicitous. Finally, Miller raises a claim of Brady error. We affirm.


I


The jury could have concluded from the evidence the following. During the 1990s, Stephen Miller accumulated large tax deficiencies. According to the Government, Miller had tax liabilities - including deficiencies, penalties, and interest - of more than $2 million. Miller was associated with Charles Matich, a "financial planner." Matich helped wealthy individuals like Miller decrease their tax exposure by moving their funds overseas. Matich's business came to an end when the Government seized his records in 2000 and then charged him with conspiracy to impede income tax collection and personal tax evasion. Matich pled guilty.

Miller had over $1 million in an Individual Retirement Account (IRA). Rather than satisfy his tax obligations, and fearful that the IRS might seize the funds, Miller and Matich concocted a scheme to protect the funds. In January 1999, Miller began transferring money from his IRA overseas to a shell company called Euromex Leasing Limited, which Miller had previously formed and Matich then controlled. Miller transferred approximately $600,000 under the guise of repaying a loan to Euromex. Matich arranged to have Euromex send Miller a "demand payment letter." After Miller had "repaid" the loan, Euromex sent Miller a letter saying his debt was satisfied. After Miller had "repaid" the loan, he continued transferring money from his IRA overseas to accounts controlled by Matich. He transferred more than $1 million from his IRA in 1999, and he did report the IRA withdrawals on his tax return. Unbeknownst to Miller until later, however, the money he transferred disappeared.

On March 25, 2000, the IRS received a Form 656 Offer in Compromise from Miller, in which he proposed settling his tax liabilities for $7,500. On the Offer form, Miller checked the box for "Doubt as to Collectibility --`I have insufficient assets and income to pay the full amount.' " Miller offered the following explanation: "At my age and unavailability of assets, I do not feel that I, nor my spouse, will live long enough to ever be able to pay the liabilities and additional taxes assessed on our account." The IRS requested more information. Miller submitted a Form 433-A, which stated that he had a checking account worth $15,000 and an IRA with a balance of $25,000; Miller did not list any foreign accounts. The IRS again requested more information, and specifically asked about the money withdrawn from his IRA. Miller responded that he used the funds to repay the Euromex loan, and further explained, "I have no idea what happened to the proceeds. I assume the funds were repaid to the lenders of the funds." Miller repeated the story again in a subsequent correspondence with the IRS:
I repaid those loans back to a Euromex Leasing corporation formed in the Isle of Mann which had invested in some disastrous investments in Mexico in which I lost $1,000,000 and was personally responsible for....These funds represented return of principal and interest on funds borrowed. I have absolutely no idea what the present officers of that corporation have done with those proceeds. I do not have these funds nor do I have access to them.

Subsequent to the submission of the Offer, Matich, who was working with the Government, called Miller. Investigators recorded the conversation. A fair interpretation of the call is that Miller transferred the money to shield it from the IRS, believed the money was still his, and wanted it back. The call indicated that Miller was only then learning that his money was gone. Miller and Matich also discussed how they could characterize their various transactions if questioned.

Miller was charged with one count of tax evasion in violation of 26 U.S.C. §7201. The Government's theory was that Miller's Offer in Compromise constituted an attempt to evade his income taxes in that he lied by stating that because of unavailability of assets he could only pay $7,500 to satisfy his tax liabilities. This was a lie because Miller believed that he had over $1 million overseas, which he did not reveal to the IRS. The case went to trial, and Matich testified as a Government witness. The jury found Miller guilty, and the district court sentenced him to 46 months' imprisonment and three years supervised release, and ordered him to pay $968,836.27 in restitution. Miller appealed.

After Miller filed his opening brief, the Assistant U.S. Attorney notified him that she had become aware of a criminal referral involving Matich by the U.S. Trustee in Montana. The referral referenced the Government's possession of Matich's business records. We abated Miller's appeal so he could file a motion for a new trial in the district court. Miller did so, arguing that the Government violated Brady by failing to disclose the criminal referral and turn over all of Matich's business records. The district court denied Miller's motion, and he filed a supplemental brief in this court raising the Brady issue.


II


Miller challenges the sufficiency of the evidence. We review the evidence in the light most favorable to the Government, drawing all reasonable inferences and credibility determinations in favor of the jury's verdict. 1 "If any rational trier of fact could have found proof of the essential elements of the crime beyond a reasonable doubt, the verdict will stand." 2

26 U.S.C. §7201 provides that "[a]ny person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall...be guilty of a felony." "The crime of tax evasion as defined in 26 U.S.C. §7201 has three essential elements: (1) the existence of a tax deficiency; (2) willfulness; and (3) an affirmative act constituting evasion or attempted evasion of the tax." 3 "[W]illfulness is `a voluntary, intentional violation of a known legal duty.' Evidence is usually circumstantial as direct proof is rarely available." 4 Many kinds of conduct can constitute a willful attempt to evade taxation:
keeping a double set of books, making false entries or alterations, creating false invoices or documents, destroying books or records, concealing assets or covering up sources of income, handling one's affairs to avoid making the records normally accompanying transactions of a particular kind, any conduct likely to mislead or No. 06-11078 conceal, holding assets in others' names, providing false explanations, giving inconsistent statements to government agents, failing to report a substantial amount of income, a consistent pattern of underreporting large amounts of income, or spending large amounts of cash that cannot be reconciled with the amount of reported income. 5

There is no question that Miller had a tax deficiency. Miller's argument is a hybrid of the second and third elements: he claims that the Government failed to prove that he had access to, or control of, the money he transferred out of his IRA and, therefore, his Offer in Compromise, which was based on his claim of unavailability of assets, was not fraudulent. Put differently, the Government failed to prove that the funds he transferred were "available" to him. This proof, his argument goes, is necessary for conviction. We are not persuaded.

Where Miller's money was located, and who had access to and control of it, matters, on the facts here, only to the extent that it bears on Miller's knowledge and belief as to the state of his financial affairs when he submitted his Offer; that is, what Miller's intent was in submitting his Offer.

The evidence was sufficient for the jury to conclude that when Miller submitted his Offer, he believed that he had $1 million squirreled away overseas. The recorded phone call with Matich, which occurred after submission of the Offer, makes clear that Miller continued to believe that the money he transferred was his. The call further reveals that, while Miller had an inkling that there was a problem with his money, he did not know his money was in fact gone. Moreover, Miller's responses to the IRS's requests for further information after he submitted his Offer are compelling evidence that he was trying to hide his assets from the IRS. Miller did not say that the money transferred from his IRA had disappeared or that he could not retrieve it; rather he twice told the IRS that he used the money to satisfy the fictitious Euromex loan obligation, which Miller knew did not exist and, in fact, had helped to concoct.

The irony in Miller's argument is that he transferred his money to Matich precisely because he believed this would shield it from the IRS. Despite his understanding that he had $1 million overseas, Miller stated in his Offer that he could only afford to pay $7,500 in satisfaction of his tax liabilities. One can understand his submission of the Offer as, inter alia, "concealing assets," "conduct likely to mislead or conceal," "providing false explanations," or some combination thereof. The Government proved the required affirmative act.

The Government also introduced sufficient evidence to support a finding of willfulness, including admissions made by Miller during the recorded phone call; Miller's statements to the IRS, both written and oral, including his telling the IRS that he used the IRA funds to pay off the fictitious Euromex debt; and, other documentary evidence, such as Miller's and Matich's various letters, emails, and faxes.

There is sufficient evidence to support the jury's verdict.


III


Miller challenges some of the district court's evidentiary rulings. We review the district court's evidentiary ruling for abuse of discretion. 6 "If this court finds an abuse of discretion in admitting or excluding evidence, this court will `review the error under the harmless error doctrine, affirming the judgment, unless the ruling affected substantial rights of the complaining party.' " 7


A


Miller argues that the district court erred by limiting the testimony of his witness, Donald Williams, a former IRS employee. The district court ruled that it would exclude three areas of Williams's testimony: (1) because Miller's Offer was "incomplete," the IRS ran afoul of its internal policies by assigning it to an offer specialist; (2) the offer specialist assigned to Miller's Offer was unusually knowledgeable; and, (3) Williams's opinion regarding whether Miller had access to the funds that were transferred to Euromex when Miller submitted his Offer.

The first and second areas of testimony are plainly irrelevant. Rule 402 provides that "[e]vidence which is not relevant is not admissible." Rule 401 defines "relevant evidence" as "evidence having any tendency to make the existence of any fact that is of consequence to the determination of the action more probable or less probable than it would be without the evidence." Neither the IRS's adherence to its internal procedures nor the offer specialist's knowledge bears upon what Miller did, knew, or intended. The testimony is not probative of any fact of consequence and was properly excluded.

Assuming Williams's opinion about Miller's access to the money is relevant, the exclusion was harmless. The excluded evidence does not bear on the contested issue at trial: Miller's intent in submitting his Offer. Williams would have testified only that he believed Miller did not have access to the money when he submitted his Offer because the documents Williams reviewed did not show where the money was or even if it still existed. Williams would not have testified about what Miller knew.

Moreover, Matich testified that the money "disappeared" shortly after Miller transferred it, which of course means that Miller could not access it. The evidence further demonstrated that Matich had control of the overseas bank accounts into which the money was transferred. Finally, the evidence of Miller's guilt was substantial. The "exclusion was harmless because it could not have affected the jury's determination [on] any of the charged counts." 8


B


Miller next urges that the district court erred by admitting evidence of a past act of his under Rule 404(b). Our review of the admission of Rule 404(b) evidence is "heightened." 9 The Rule provides that
[e]vidence of other crimes, wrongs, or acts is not admissible to prove the character of a person in order to show action in conformity therewith. It may, however, be admissible for other purposes, such as proof of motive, opportunity, intent, preparation, plan, knowledge, identity, or absence of mistake or accident....

Our decision in United States v. Beechum creates a two-step inquiry for analyzing the admissibility of Rule 404(b) evidence. "`First, it must be determined that the extrinsic offense evidence is relevant to an issue other than the defendant's character. Second, the evidence must possess probative value that is not substantially outweighed by its undue prejudice and must meet the other requirements of [R]ule 403.' " 10

The district court admitted evidence that in 1997 Miller opened a bank account under a false name and with fraudulent identification for the purpose of, as Miller euphemistically told investigators, "financial privacy." Miller had attempted to deposit $5,000 in cash in the account. The evidence was admitted as intent evidence.

A large part of Miller's defense turned on his mental state, that he lacked an unlawful intent in submitting his Offer. Miller also based his defense on a claim that he was innocently following Matich's orders. Yet, in 1997, Miller was caught attempting to hide money under false pretenses, and he did so, according to Matich's testimony, even though Matich told him not to. Miller's acts in 1997, therefore, are probative of his intent.

Miller argues that the past act is too remote in time to be admissible. While the length of time is relevant to our analysis, the past acts occurred shortly before Miller began transferring money from his IRA and his involvement in developing the sham Euromex loan, the course of conduct that culminated in Miller's submission of his Offer. And, there were common actors, Miller and Matich, involved in both schemes. The time lapse on these facts does not render the past acts inadmissible. 11 Nor was the other evidence of Miller's intent so substantial that it was error to admit the past acts. Thus, the evidence was relevant to an issue other than Miller's character, and its probative value was not substantially outweighed by undue prejudice.

Finally, the district court instructed the jury - orally after the jury heard the evidence and in its written charge - that the evidence could be used only for the limited purpose of evaluating Miller's intent, which minimizes any prejudicial effect. 12 Accordingly, the district court did not abuse its discretion.


IV


Miller contends that the indictment is duplicitous because it describes both the transfer of money from his IRA and the submission of his Offer, which created the danger of a nonunanimous verdict. Miller's argument runs thus. The Government, under its theory of the case, had to prove that Miller's submission of his Offer was the affirmative act of evasion. But, because of the wording of the indictment, some jurors might have viewed Miller's transfer of money as the affirmative act while others viewed his submission of his Offer as the affirmative act. Thus, there is a danger of a nonunanimous verdict.

We review de novo a claim that an indictment is duplicitous. 13 Duplicity occurs when a single count in an indictment contains two or more distinct offenses. 14 Even if an indictment is duplicitous, a defendant must be prejudiced to receive relief; 15 the risk of a nonunanimous verdict is one recognized source of prejudice, 16 and it is the only prejudice Miller alleges. Assuming that the indictment is duplicitous, an assumption that is not without problems, there was no danger of a nonunanimous verdict.

"The danger of a nonunanimous jury verdict may be avoided by proper jury instructions." 17 The district court instructed the jury that
[t]he phrase "attempts in any manner to evade or defeat any tax" involves two things: first, the formation of an intent to evade or defeat a tax; and, second, willfully performing some act to accomplish the intent to evade or defeat that tax.

The phrase "attempts in any manner to evade or defeat any tax" contemplates and charges that the Defendant knew and understood that during the calendar years 1993, 1995, 1996, and 1997, he owed a substantial additional federal income tax and then tried in some way to avoid that additional tax.

In order to show "attempts in any manner to evade or defeat any tax," therefore, the government must prove beyond a reasonable doubt that the Defendant Miller intended to evade or defeat the tax due, and that the Defendant Miller also willfully submitted the Offer in Compromise in order to accomplish this intent to evade or defeat that tax. (emphasis added)

The court did not simply charge the jury that it had to find that Miller committed "an act" to accomplish his unlawful intent; rather, the instruction specifically required that the jury find that Miller's submission of his Offer was the affirmative act of evasion. The jury also received a general unanimity instruction. The instructions thus required the jury to agree unanimously that the Government proved beyond a reasonable doubt that Miller willfully submitted the Offer to accomplish his intent of evading his taxes. In other words, the jury was required to find exactly what Miller says the Government had to prove.

Miller contends that the instructions are insufficient because "one without a legal mind" could have voted to convict based on Miller's transfer of money from his IRA. This argument is without merit. The "legal mind" does not describe a closed universe of intelligence, and certainly not common sense. The instructionswere plainly worded and clear. The instructions dovetailed with the Government's theory of the case and squarely framed the contested issue at trial: whether Miller willfully submitted his Offer to accomplish his intent to evade his tax obligations. Indeed, during closing the Government succinctly explained to the jury that "in order to convict, you must find beyond a reasonable doubt...that there was an affirmative attempt to evade - in this case, it's the submission of the Offer in Compromise - and, third, that the Defendant made the affirmative attempt in a willful manner." Because Miller was not prejudiced, his duplicity claim fails.


V


Finally, we turn to Miller's allegation of Brady error. "While the standard of review for a motion for a new trial is typically abuse of discretion, if the reason for the motion is an alleged Brady violation then we review the district court's determination de novo." 18 We have cautioned that, as we review Brady claims "at an inherent disadvantage" because of the cold record, we must accord due deference to the trial court's ruling on the alleged Brady error. 19

To make out a Brady violation, "a defendant must show that (1) evidence was suppressed; (2) the suppressed evidence was favorable to the defense; and (3) the suppressed evidence was material to either guilt or punishment." 20 "Evidence is material under Brady when there is a `reasonable probability' that the outcome of the trial would have been different if the suppressed evidence had been disclosed to the defendant." 21 The Supreme Court has explained that
the materiality inquiry is not just a matter of determining whether, after discounting the inculpatory evidence in light of the undisclosed evidence, the remaining evidence is sufficient to support the jury's conclusions. Rather, the question is whether "the favorable evidence could reasonably be taken to put the whole case in such a different light as to undermine confidence in the verdict." 22

"When there are a number of Brady violations, a court must analyze whether the cumulative effect of all such evidence suppressed by the government raises a reasonable probability that its disclosure would have produced a different result." 23 Impeachment evidence falls within Brady's reach. 24

Miller bases his claim on the criminal referral letter sent by the Office of the U.S. Trustee to the U.S. Attorney in Montana regarding Matich's petition for bankruptcy. The letter references the Government's possession of Matich's business records, not all of which were given to Miller. We agree with the district court that, assuming the evidence was suppressed, Miller has failed to establish a "reasonable probability" that the outcome of trial would have been different had the evidence been disclosed.

Miller claims that the evidence would have established beyond peradventure that Matich had control of his money. However, this would have been cumulative of other evidence introduced at trial. "`[W]hen the undisclosed evidence is merely cumulative of other evidence [in the record], no Brady violation occurs.' " 25 The trial evidence established that Miller's money "disappeared" soon after Miller transferred it overseas, which of course means Miller had no access to it; that Matich controlled the overseas bank and trust accounts; and that Miller wanted his money overseas and out of his control so the IRS could not seize it. More fundamentally, that Matich may have stolen Miller's money, as opposed to someone else stealing it or the banks losing it, and how Matich stole the money is relevant only to the extent that it sheds light on what Miller knew and intended when he submitted his Offer. Miller has not shown that the suppressed evidence speaks to these critical issues.

Miller also contends that his ability to cross-examine Matich was impeded by his lack of access to the suppressed evidence. It is true that Matich's testimony was less than a paradigm of specificity. But Miller's allegations regarding the value of the suppressed documents are, as the district court noted, "conclusory," and some of those allegations are flatly contradicted by the record. Even assuming the documents could fill factual gaps in Matich's testimony, those details would not bear on what Miller did, knew, and intended - the documents would have revealed what Matich did and knew. And, while Miller states, without any elaboration, that the documents would reveal his good-faith reliance on Matich's advice, the trial evidence reveals that Miller was a full partner in the scheme, developing it alongside of Matich and fully aware of what he was doing.

Nor does the impeachment value of the evidence establish materiality. Although the suppressed evidence may well have impeached Matich's testimony about what happened to Miller's money after Miller transferred it overseas and Matich's financial holdings, that does not touch upon the critical issues at trial: what Miller did and intended. Moreover, Miller probed Matich's credibility at trial, examining him based on his guilty plea, his plea agreement and cooperation with the Government, his financial holdings, and his control of his clients', including Miller's, money.

Wholly apart from Matich's testimony, there was a substantial body of evidence establishing Miller's guilt that is left unscathed by the suppressed evidence, including, Miller's admissions in the recorded phone call; Miller's statements, both written and oral, to the IRS regarding why he transferred the money; Miller's acts in 1997; and the documentary evidence presented by the Government. 26 While the criminal-referral letter would have presented Miller a new angle from which to impeach Match, the impeachment value of the evidence does not cast sufficient, if any, doubt on the verdict.

The cumulative effect of the suppressed evidence does not undermine confidence in the verdict, and therefore, Miller's Brady claim fails.


VI


Accordingly, we AFFIRM.

1 United States v. Bishop, 264 F.3d 535, 549 (5th Cir. 2001).

2 Id.

3 Id. at 545.

4 Id. at 550 (quoting United States v. Kim, 884 F.2d 189, 192 (5th Cir. 1989)) (citations omitted).

5 Id.

6 United States v. Sharpe, 193 F.3d 852, 867 (5th Cir. 1999).

7 United States v. Ragsdale, 426 F.3d 765, 774-75 (5th Cir. 2005) (quoting Bocanegra v. Vicmar Servs., Inc., 320 F.3d 581, 584 (5th Cir. 2003)).

8 United States v. Harms, 442 F.3d 367, 377 (5th Cir. 2006), cert. denied, 127 S. Ct. 2875 (2007).

9 United States v. Mitchell, 484 F.3d 762, 774 (5th Cir. 2007), cert. denied, 128 S. Ct. 297 (2007), and cert. denied, 128 S. Ct. 869 (2008).

10 Id. (quoting United States v. Beechum, 582 F.2d 898, 911 (5th Cir. 1978) (en banc)).

11 See United States v. Arnold, 467 F.3d 880, 885 (5th Cir. 2006) ( "We have upheld the admission of Rule 404(b) evidence where the time period in between was as long as 15 and 18 years."), cert. denied, 127 S. Ct. 2445 (2007); United States v. Adair, 436 F.3d 520, 527 (5th Cir. 2006) ( "Third, Adair's prior money-laundering scheme was temporally significant [under Rule 404(b)], as it occurred less than three years before the conduct at issue in the instant appeal."), cert. denied, 126 S. Ct. 2306 (2006).

12 See, e.g., Adair, 436 F.3d at 527 (explaining that one reason the admitted Rule 404(b) evidence "had little opportunity of creating unfair prejudice" was that "the district court mitigated any prejudicial effect by giving the jury a limiting instruction").

13 United States v. Caldwell, 302 F.3d 399, 407 (5th Cir. 2002).

14 Id.

15 See, e.g., United States v. Lampazianie, 251 F.3d 519, 526 (5th Cir. 2001) ( "We have held that even when an indictment is duplicitous, reversal is not required if no prejudice results."); United States v. Baytank (Houston), Inc., 934 F.2d 599, 608 (5th Cir. 1991) ( "If an indictment is duplicitous and prejudice results, the conviction may be subject to reversal.").

16 See United States v. Cooper, 966 F.2d 936, 939 n.3 (5th Cir. 1992) ( "The ban against duplicitous indictments derives from four concerns: prejudicial evidentiary rulings at trial; the lack of adequate notice of the nature of the charges against the defendant; prejudice in obtaining appellate review and prevention of double jeopardy; and risk of a jury's nonunanimous verdict." (emphasis added)).

17 United States v. Fisher, 106 F.3d 622, 633 (5th Cir. 1997), abrogated in part on other grounds by Ohler v. United States, 529 U.S. 753 (2000); see also Baytank (Houston), Inc., 934 F.2d at 609 ( "Thus, the complaint comes down to whether the jury instructions were sufficient, as it is clear that this aspect of a duplicity problem [danger of a nonunanimous verdict] can be cured by appropriate special instructions which, for example, inform the jury that it must unanimously agree on the specific basis (e.g., a given date or the like) on which it finds the defendant guilty under the count in question.").

18 United States v. Martin, 431 F.3d 846, 850 (5th Cir. 2005).

19 United States v. Sipe, 388 F.3d 471, 479 (5th Cir. 2004).

20 United States v. Runyon, 290 F.3d 223, 245 (5th Cir. 2002).

21 Id.

22 Strickler v. Greene, 527 U.S. 263, 290 (1999) (quoting Kyles v. Whitley, 514 U.S. 419, 435 (1995)) (citations omitted).

23 Sipe, 388 F.3d at 478.

24 Id. at 477, 478.

25 Id. at 478 (quoting Spence v. Johnson, 80 F.3d 989, 995 (5th Cir. 1996)).

26 See United States v. Weintraub, 871 F.2d 1257, 1262 (5th Cir. 1989) ( "Courts have found, for example, that impeachment evidence improperly withheld was not material where the testimony of the witness who might have been impeached was strongly corroborated by additional evidence supporting a guilty verdict.").