UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT No. 11-1704
____________ WALTER C. ANDERSON, Appellant v. COMMISSIONER OF INTERNAL REVENUE On
Petition for Review of an Order of the United States Tax Court (Agency No.
07-20364) Administrative Judge: Honorable David Gustafson Argued on May 7, 2012
2
Before: SLOVITER and ROTH,
Circuit Judges and POLLAK*, District Judge (Opinion filed: September 7, 2012 )
Steven J. Jozwiak, Esquire (Argued)
601 Longwood Avenue Suite 300 Cherry Hill, NJ 08002 Counsel for Appellant
Gilbert S. Rothenberg, Esquire Acting Deputy Assistant Attorney General Bethany
B. Hauser, Esquire (Argued) Robert W. Metzler, Esquire Francesca U.
Tamami, Esquire United States Department of Justice Tax Division 950
Pennsylvania Avenue, N. W. P. O. Box 502 Washington, DC 20044 Counsel for
Appellee
*Honorable Louis H. Pollak,
Senior Judge of the United States District Court for the Eastern District of
Pennsylvania, sat by designation. Judge Pollak died on May 8, 2012; this
opinion is filed by a quorum of the court pursuant to 28 U.S.C. § 46 and the
Third Circuit I.O.P. 12.1(b). 2
O
P I N I O N ROTH, Circuit Judge: This appeal arises out of a civil tax
fraud proceeding in United States Tax Court. The taxpayer challenges the Tax
Court’s determination that, under the doctrine of collateral estoppel, his
previous guilty plea for criminal tax evasion conclusively established the
taxability to him of specific income that his criminal indictment charged him
with failing to report. He additionally argues on the basis of a number of
preclusion doctrines that the Internal Revenue’s (IRS) concession of all tax
deficiency and penalty issues for certain years should have prevented it from
obtaining recovery of such payments in other years because the issues for all
years were identical. As explained below, we find that these arguments are
without merit, and we will therefore affirm the Tax Court’s judgment.
I. BACKGROUND
On September 30, 2005,
Petitioner Walter Anderson was charged in a superseding indictment with federal
tax evasion for tax years 1995 through 1999, in violation of 26 U.S.C. § 7201.
During those years, Anderson was a telecommunications entrepreneur and venture
capitalist who was actively involved in the operation of several international
companies. Among these companies was Gold & Appel Transfer S.A. (G &
A), a British Virgin Islands corporation 3
which
generated hundreds of millions of dollars of income during the tax years at
issue. The government alleged that because G & A was a “controlled foreign
corporation,” under Anderson’s control, he was required to recognize a share of
its income on his tax return and that he fraudulently failed to do so. The
government alleged that for the five-year period at issue, Anderson had
fraudulently underpaid his taxes by $184 million, 99% of which stemmed from the
income of G & A. Pursuant to an agreement with the government, on September
8, 2006, Anderson pleaded guilty to the federal tax evasion charges for 1998
and 1999, while those same charges for 1995, 1996 and 1997 were dismissed.1 He was
sentenced to 108 months imprisonment.
1 Anderson had also been
charged with obstruction of the internal revenue laws of the United States, in
violation of 26 U.S.C. § 7212(a), fraud in the first degree under the laws of
the District of Columbia, specifically 22 D.C. Code § 3221(a), in relation to
D.C. income tax filings and payments for years 1995 through 1999, and evasion
of D.C. use taxes on a number of purchases made between 1997 and 2001, also in
violation of 22 D.C. Code § 3221(a). All of these charges were dismissed with
the exception of the charge of first degree fraud under D.C. law for 1999, to
which Anderson pleaded guilty.
On July 17, 2007, the IRS
issued a notice to Anderson determining civil tax deficiencies and fraud
penalties for tax years 1995 through 1999. See 26 U.S.C. §§ 6212, 6663.
(The deficiency amounted to the $184 million of underpaid 4
taxes,
resulting in a fraud penalty of $138 million.2) On September 7, 2007, while he
was incarcerated in New Jersey, Anderson filed a petition in the United States
Tax Court to redetermine these deficiencies. See 26 U.S.C. § 6213(a). In
response to motions by both parties, the Tax Court granted partial summary
judgment to the IRS, finding that under the doctrine of collateral estoppel,
Anderson’s criminal conviction for tax evasion in 1998 and 1999 precluded him
from contesting that he fraudulently underpaid his incomes taxes in those two
years. The Tax Court denied summary judgment on the fraud issue for tax years
1995-1997, without prejudice to renew the motion “with a better record and more
focused contentions.”
2 The penalty is equal to 75% of the amount of the underpayment of tax
that is due to fraud. See 26 U.S.C. § 6663(a).
3 Anderson filed his tax return
for 1998 on September 30, 1999, and his tax return for 1999 on October 19,
2000. Without this exception to the three-year statute of limitations,
The holding on the 1998 and
1999 tax years had three principal effects. First, it established that Anderson
had underpaid his income taxes in 1998 and 1999. Second, because a fraud
penalty can only be assessed where a tax underpayment is due to fraud, it
relieved the IRS of its burden of proving this penalty was applicable to
Anderson for those two years. See 26 U.S.C. § 6663(a). Finally, because
the three-year statute of limitations on the assessment of a tax does not apply
where a tax return has been filed falsely or fraudulently with the intent of
evading tax, 26 U.S.C. § 6501(c)(1), it prevented Anderson from arguing that
the IRS’s attempts to collect taxes for 1998 and 1999 were untimely.3 5
the
IRS’s notice of tax deficiency issued on July 17, 2007, would have been
untimely.
Though this decision
established that Anderson had fraudulently underpaid his income taxes in 1998
and 1999, it left open for further proceedings the determination of the amounts
of the tax deficiencies and penalties for those years. Based on this ruling,
the IRS filed a motion to sever tax years 1995, 1996, and 1997 from the case,
stating that it “ha[d] decided to concede all tax and penalty issues for [those
years] and wishe[d] to file a motion for entry of decision as to those years.”
In its motion, the IRS explained that nearly 80% of the total deficiency and
penalties for the five-year period stemmed from just 1998 and 1999, and that
because proving fraud for 1995 through 1997 via trial would needlessly
complicate and lengthen the case for a comparatively limited additional
monetary recovery, it preferred to abandon its efforts for those years. The Tax
Court found that, given its particular procedural rules, severing the case in
this way would needlessly create clerical and administrative complexities, and
it therefore denied the motion. It stated in its order, however, that it would
“take notice of the [IRS’s] concession of all tax and penalty issues for 1995,
1996, and 1997 and [would] reflect that concession in its eventual entry of
decision in [the] case.”
This order led to the filing of
a second set of summary judgment motions. Anderson argued in his motion that,
notwithstanding the Tax Court’s earlier holding that his criminal convictions
for tax evasion collaterally estopped him from denying fraudulent underpayment
of tax in 1998 and 1999, the IRS’s subsequent concession of all tax and penalty
6
issues
for 1995, 1996, and 1997 established that the income of G & A and interest
income from an account at Barclays Bank were not taxable to him even in 1998
and 1999. The IRS, meanwhile, argued in its motion that Anderson was precluded
from contesting that the income of G & A in 1998 and 1999 constituted
taxable income to him under Subpart F of the Tax Code. The Tax Court denied
Anderson’s motion and granted partial summary judgment to the IRS. It held, in
favor of the IRS, that the concessions related to tax years 1995 through 1997
did not resolve the deficiency and penalty issues for 1998 and 1999. It further
agreed with the IRS’s position that the proceedings in Anderson’s criminal case
established that G & A’s income in 1998 and 1999 was taxable to him. The
Tax Court rejected the IRS’s argument, however, that Anderson’s guilty plea
estopped him from contesting that the income of G & A was taxable to him
specifically under Subpart F of the Tax Code. Anderson now challenges the
adverse holdings. II. DISCUSSION
This Court has jurisdiction to
review final orders of the Tax Court based on 26 U.S.C. § 7482(a)(1). 4 On March 7, 2001,
pursuant to an agreement between the parties, the Tax Court entered an order
determining the tax deficiency and fraud penalty for each year from 1995
through 1999, leaving no issues for it to decide and thus providing this Court
with jurisdiction under that statute. We review the Tax Court’s legal
conclusions de novo and its factual findings for clear
4 Venue in this Court is appropriate because Anderson was a resident of
New Jersey at the time he filed his petition for redetermination. See 26
U.S.C. § 7482(b)(1)(A). 7
error.
Capital Blue Cross v. Comm’r, 431 F.3d 117, 123-24 (3d Cir. 2005).
A. The Preclusive Effect
of Anderson’s Criminal Conviction
Under the doctrine of
collateral estoppel, “once an issue is actually and necessarily determined by a
court of competent jurisdiction, that determination is conclusive in subsequent
suits based on a different cause of action involving a party to the prior
litigation.” Montana v. United States, 440 U.S. 147, 153-54 (1979). It
applies, however, only if: “(1) the issue sought to be precluded [is] the same
as that involved in the prior action; (2) that issue [was] actually litigated;
(3) it [was] determined by a final and valid judgment; and (4) the
determination [was] essential to the prior judgment.” In re Graham, 973
F.2d 1089, 1097 (3d Cir. 1992) (citations omitted). In light of these
principles, we agree with the numerous courts that have held that, under the
doctrine of collateral estoppel, a conviction for criminal tax evasion
conclusively establishes the defendant’s civil liability for tax fraud for the
same year. See Blohm v. Comm’r, 994 F.2d 1542, 1554 (11th Cir. 1993); Klein
v. Comm’r, 880 F.2d 260, 262 (10th Cir. 1989); Gray v. Comm’r, 708
F.2d 243, 246 (6th Cir. 1983); United States v. Moore, 360 F.2d 353, 356
(4th Cir. 1966). This is because the elements of evasion under 26 U.S.C. § 7201
and fraud under 26 U.S.C. § 6663 are identical. See, e.g., Gray, 708
F.2d at 246.
Anderson nevertheless argues
that the Tax Court erred in holding that his tax evasion conviction
collaterally estopped him from litigating the taxability to him in 1998 and
1999 of the income of G & A in the civil tax fraud 8
proceedings.
Where, as here, a conviction is the result of a guilty plea, its preclusive
effect extends to all issues that are necessarily admitted in the plea. See
De Cavalcante v. Comm’r, 620 F.2d 23, 27 n.9 (3d Cir. 1980); United
States v. $448,342.85, 969 F.2d 474, 476 (7th Cir. 1992); United States
v. Wight, 839 F.2d 193, 196 (4th Cir. 1987); United States v. Podell,
572 F.2d 31, 35 (2d Cir. 1978). We find that Anderson admitted in his plea that
the income of G & A was taxable to him in 1998 and 1999, and that this
admission was necessary to his conviction. Anderson pleaded guilty to a charge
that in 1998 “a substantial additional tax was due and owing to the United
States” from him and that “[s]pecifically, he failed to report . . .
$126,303,951 Subpart F investment-type income from G & A.” He also pleaded
guilty to another charge that alleged the same with respect to 1999, except
that the amount of unreported G & A income was $238,561,316. These charges
essentially allege that Anderson underpaid his taxes in 1998 and 1999 because
he did not report the income of G & A, which is comprehensible only to the
extent that such income was taxable to him in those years. By pleading guilty
to these charges, Anderson thus admitted that required premise.
This admission could be
considered necessary, though, only if Anderson’s conviction “hinge[d] on it.” Bobby
v. Bies, 556 U.S. 825, 835 (2009). To convict Anderson of tax evasion, the
Government was required to prove the existence of a tax deficiency. See 26
U.S.C. § 7201. Were the income of G & A not taxable to him in 1998 and
1999, however, Anderson’s failure to report it on his tax return would not have
given rise to a deficiency. The Government thus could not have secured his
conviction without establishing the 9
taxability
of this income. We therefore find that Anderson’s conviction did hinge on that
issue. Our conclusion is not affected by the fact that Anderson was also
charged with failing to report income from other sources in 1998 and 1999 –
including an account he held at Barclays Bank, a company called Esprit Telecom,
and various capital gains – the taxability of which could also have
substantiated his conviction. As we have previously held, all “independently
sufficient alternative findings should be given preclusive effect,” Jean
Alexander Cosmetics, Inc. v. L’Oreal USA, Inc., 458 F.3d 244, 255 (3d Cir.
2006). The taxability to Anderson of the income of G & A in 1998 and 1999
was independently sufficient to establish the existence of a tax deficiency in
those years and was thus a fact that was necessary to his conviction. His
admission to it in his guilty plea accordingly precludes him from contesting
that issue in his civil tax fraud case.5
5Pursuant to this reasoning, we also find that Anderson was collaterally
estopped from disputing that the income from his Barclays account was taxable
to him in 1998 and 1999. Based on this additional finding and on our analysis
relating to the income of G & A, we reject Anderson’s argument that the Tax
Court erred in denying him summary judgment on the issues of the taxability of
income from the Barclays account and from G & A in 1998 and 1999.
Finally, that the income of G
& A is taxable to Anderson specifically under Subpart F of the Tax Code is
also settled for purposes of this case. The Tax Court rejected the IRS’s
argument that Anderson’s guilty plea estopped him from contesting this tax
treatment of G & A’s income. It reasoned that, although G & A’s income
was described as 10
“Subpart
F income” in the charges of the indictment to which Anderson pleaded guilty,
this detail was not essential to his judgment of conviction and thus could not
be given preclusive effect in subsequent proceedings. Regardless of this
holding, however, the parties’ subsequent stipulation of the nature and
composition of G & A’s income, designating amounts for Deficiency and
Penalty for 1998 and 1999, necessitate the determination that it is taxable to
Anderson under Subpart F because the figures would not support Anderson’s
alternate theory that the income was capital gains. This conclusion, along with
the preclusive effect of Anderson’s conviction for tax evasion described above,
effectively resolve his civil tax deficiency stemming from the income of G
& A.
A. The Preclusive Effect
of the IRS’s Concession of All Deficiency and Penalty Issues for 1995-1997
Anderson argues that because
the IRS conceded all tax deficiency and penalty issues for 1995, 1996, and
1997, the Tax Court was required to find in his favor on those issues for the
1998 and 1999 tax years as well. He specifically advances this argument in
relation to the income of G & A and the interest income of his account at
Barclays Bank. He relies on three separate legal doctrines to support this
argument - collateral estoppel, law of the case, and judicial admission – but
each is inapplicable.
1. Collateral Estoppel
Anderson claims that when the
Tax Court issued its order denying the IRS’s motion to sever, in which it
stated that it “takes notice of [the IRS’s] concession of all tax and 11
penalty
issues for 1995, 1996, and 1997 and will reflect that concession in its
eventual entry of decision in [the] case,” it decided those issues in his
favor. He further claims that all deficiency and penalty issues for 1995
through 1997, including those related to G & A and his Barclays account,
are “identical in all respects” to those for 1998 and 1999. On this basis,
Anderson argues that, by virtue of collateral estoppel, it is conclusively
established in his civil tax fraud proceeding that the income from G & A
and from his Barclays account gave rise to no tax deficiency or fraud penalty
in 1998 and 1999.
As we have already noted, an
issue is conclusively established in future litigation through the doctrine of
collateral estoppel only when it is determined by a final judgment. Graham,
973 F.2d at 1097. This principle is firmly established and beyond question. See,
e.g., G. & C. Merriaman Co. v. Saalfield, 241 U.S. 22, 28 (1916) (“[I]t
is familiar law that only a final judgment is res judicata . . .”); Wilson
v. City of Chicago, 120 F.3d 681, 687 (7th Cir. 1997) (“[I]f there is no
judgment, there is no preclusion.”); Clausen Co. v. Dynatron/Bondo Corp.,
889 F.2d 459, 465-66 (3d Cir. 1989) (finding collateral estoppel did not apply
to an interlocutory disposition). The Tax Court’s denial of the IRS’s motion to
sever can therefore have no preclusive effect under that doctrine. It does not
constitute a final judgment on any issue, including on that of whether Anderson
was liable for tax deficiencies or fraud penalties for any year in relation to
income from G & A or from his account at Barclays. Instead, all the Tax
Court did in that order was advise the parties that it was taking notice of the
IRS’s desire not to litigate tax years 1995 through 1997 and state that it
would factor that position into its eventual final judgment. When 12
that
final judgment was issued, it showed deficiencies and penalties for 1998 and
1999 that implicitly included amounts related to G & A and the Barclays
account. Anderson identifies no previous final judgment making a determination
in conflict with this result, and his argument that the Tax Court should have
held that it had been conclusively established via the doctrine of collateral
estoppel that he was not liable for deficiencies or penalties in relation to
these two items in 1998 and 1999 thus cannot be accepted. 2. Law of the Case
Anderson makes a similar
argument that the Tax Court’s denial of the IRS’s motion to sever forecloses
litigation of the taxability to him of the income G & A in 1998 and 1999
under the law of the case doctrine. Under that doctrine, “when a court decides
upon a rule of law, that decision should continue to govern the same issues in
subsequent stages of the same case.” Arizona v. California, 460 U.S.
605, 618 (1983). Anderson asserts that the Tax Court’s statement that it was
“taking notice” of the IRS’s desire not to litigate tax years 1995 through 1997
was actually a holding that he was not liable for tax deficiencies or penalties
for those years, and that because the IRS had alleged that he should have
recognized income from G & A on his tax return for those years, it is
additionally a legal determination that such income was not taxable to him in
any year – including 1998 and 1999. We disagree. The Tax Court’s statement that
it took notice of the IRS’s desire to concede tax and penalty issues for 1995
through 1997 simply does not represent any sort of decision. Even if it did
constitute a decision as to those three years, there is no merit to Anderson’s
argument that it necessarily implies that the Tax 13
Court
determined as a matter of law that income from G & A is not taxable to him,
as the “decision” could be supported by any number of rationales. For example,
a finding that Anderson was not liable for deficiencies or penalties for 1995
through 1997 could just as easily rest on a lack of evidence of fraud in those
years, which as discussed earlier, would bar the IRS’s claims on statute of
limitations grounds. Anderson’s argument asks the Court to read more into the
Tax Court’s “tak[ing] notice” than is warranted or possible, and it must be
rejected. 3. Judicial Admission
Finally, Anderson argues that
the statement in the IRS’s motion to sever conceding deficiency and penalty
issues for 1995 through 1997 constitutes a judicial admission that prevents the
IRS from arguing “that there is United States tax liability for [G & A]” or
that interest income from his Barclays account was intentionally omitted from
his tax return in 1998 or 1999. Judicial admissions are “admissions in
pleadings, stipulations [or the like] which do not have to be proven in the
same litigation.” Giannone v. U.S. Steel Corp., 238 F.2d 544, 547 (3d Cir.
1956). To be binding, judicial admissions “must be statements of fact that
require evidentiary proof, not statements of legal theories.” In re
Teleglobe Commc’ns Corp., 493 F.3d 345, 377 (3d Cir. 2007). For this
reason, even if this Court were to accept the dubious claim that the IRS
conceded in its motion to sever that income from G & A was not taxable to
Anderson, that concession would not be binding on it because it would be a
statement of a legal proposition. Additionally, to be binding, judicial admissions
must be unequivocal. Id. The IRS’s motion to sever very clearly relates
only to tax years 1995, 14
1996 and 1997, and thus
cannot be deemed to unequivocally state that the income of G & A was not
taxable to Anderson or that he did not intentionally omit the interest on his
Barclays account from his tax return in subsequent years. The doctrine of
judicial admissions therefore has no application here. III. CONCLUSION We
hold that Anderson’s conviction for tax evasion in 1998 and 1999 precludes him,
by virtue of the doctrine of collateral estoppel, from contesting in subsubsequent
civil fraud proceedings that the income of G & A was taxable to him in
those years. We additionally conclude that the IRS’s concession of all
deficiency and penalty issues for the years 1995, 1996, and 1997 has no
preclusive effect on those issues for 1998 and 1999. For these reasons, we will
affirm the Tax Court’s judgment.
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