McNichols v. IRS

• Court: Court of Appeals for the First Circuit
• Decided: December 29, 1993
• Docket: 93-1622
• Status: Published

Opinion

USCA1 Opinion

UNITED STATES COURT OF APPEALS
                                FOR THE FIRST CIRCUIT

                                 ____________________

          No. 93-1622

                                 THOMAS H. McNICHOLS,

                                Petitioner, Appellant,

                                          v.

                          COMMISSIONER OF INTERNAL REVENUE,

                                Respondent, Appellee.

____________________

                       APPEAL FROM THE UNITED STATES TAX COURT

                   [Hon. Theodore Tannenwald, Jr., Tax Court Judge]
                                                   _______________

                                 ____________________

                                        Before

                                 Selya, Circuit Judge,
                                        _____________
                            Bownes, Senior Circuit Judge,
                                    ____________________
                                 Cyr, Circuit Judge.
                                      _____________

                                 ____________________

               Philip M. Giordano, with whom Linda L. Trent, and Ricklefs &
               __________________            ______________      __________
          Giordano were on brief for petitioner.
          ________
               Francis M.  Allegro,  Counselor to  the  Assistant  Attorney
               ___________________
          General, with  whom Michael  L. Paup,  Acting Assistant  Attorney
                              ________________
          General, Gary  R. Allen,  Kenneth L. Greene,  and Alice  L. Ronk,
                   ______________   _________________       ______________
          Attorneys, Tax Division, Department of Justice, were on brief for
          respondent.

____________________

                                  December 29, 1993
                                 ____________________

BOWNES,  Senior Circuit Judge.   This is  an appeal
                      BOWNES,  Senior Circuit Judge.
                               ____________________

            from  a decision  of  the tax  court  holding the  petitioner

            civilly liable  for deficiencies in income tax  for the years

            1981 and  1982.  The  tax court also found  petitioner liable

            for additions to  the tax due.  The  amounts are substantial,

            but the  computations  are  not contested.    The  tax  court

            brushed aside  petitioner's main defense, that  imposition of

            the   deficiencies  and   additions  to   tax  violates   the

            proscription against excessive fines of  the Eighth Amendment

            and violates the Double Jeopardy protection  against multiple

            punishments  under the Fifth  Amendment.  That  contention is

            the main issue before us.

                                          I.
                                          I.

                      Petitioner  is a convicted drug dealer.  In October

            1987  petitioner was indicted along with Frederick A. Carroll

            on  a  number  of  criminal  charges:   distribution  of  and

            conspiracy  to   distribute  marijuana;  violations   of  the

            Racketeering Influenced and Corrupt Organizations Act (RICO),

            18 U.S.C.    1962 and  1963; conspiracy to defraud the United

            States; and subscribing to false tax returns.

                      In February  of 1988  the Internal  Revenue Service

            sent  a   notice  of   deficiency  to   petitioner  assessing

            deficiencies in  income and additions  to tax  for the  years

            1981 and 1982.  The interest on the tax and additions thereto

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continue to accrue.  As of January 26, 1990, petitioner's tax

            liability totalled $2,422,963.94.

                      On  June 20, 1988,  petitioner entered into  a plea

            agreement with the  United States Attorney whereby  he agreed

            to plead guilty to all the  counts in the indictment in which

            he was named.  He also agreed to forfeit all right, title and

            interest  in  the  properties described  in  the  indictment.

            Petitioner claims that the value of the forfeited property is

            "approximately $1,200,000."   (Brief  at 3.)   The  pertinent

            provisions of the plea agreement provide:

                         7.  Mr. McNichols agrees to relinquish
                      all  right,  title  or  interest  in  any
                      monies held in any  foreign bank accounts
                      (or those  located in St.  Thomas, United
                      States Virgin  Islands) held in  his name
                      or on  his behalf,  or on  behalf of  any
                      entity  as  to  which   he  is  the  true
                      beneficiary.    (The  monies so  held  on
                      behalf  of  Mr. McNichols  and  Thomas H.
                      McNichols are believed to be in excess of
                      $600,000.00).    Mr.   McNichols  further
                      agrees   promptly  to   take  all   steps
                      necessary to  place  any  of  the  above-
                      described monies  within the  custody and
                      control  of  the  United   States.    Mr.
                      McNichols  also agrees  to hold  harmless
                      any  person,  corporation or  bank  which
                      assists the  United States  in recovering
                      such monies.

                         Any  monies recovered  in this  manner
                      shall be  held in escrow  in an interest-
                      bearing account in the name of the Office
                      or  by the  Clerk of the  District Court.
                      Should  it  be determined  by a  court of
                      appropriate  jurisdiction   (e.g.  United
                      States  Tax   Court),  or   by  agreement
                      between the  parties, that  Mr. McNichols
                      owes any taxes,  interest or penalties to
                      the United States, then the Office agrees

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that any of the  recovered monies held in
                      the above-described escrow  account which
                      were once held on behalf of Mr. McNichols
                      will  be  paid  to the  Internal  Revenue
                      Service  in partial  satisfaction of  any
                      tax debt  owed by Mr. McNichols.   Should
                      it be determined  that Mr. McNichols owes
                      no  taxes,  interest, or  penalties,  the
                      recovered  monies shall  be forfeited  to
                      the  United  States.   In that  case, Mr.
                      McNichols  will  provide  any  assistance
                      requested of him to forfeit the recovered
                      monies to the United States.

                         8.    The   United  States  Attorney's
                      Office makes no  promises with respect to
                      any civil tax  liability incurred by  Mr.
                      McNichols  (with  the  exception  of  the
                      promise  made in paragraph  7 above).  To
                      the extent permitted under all applicable
                      laws and  regulations, the  United States
                      Attorney's Office will recommend that the
                      Internal  Revenue  Service  not  seek  to
                      satisy  [sic]   any  tax   assessment  by
                      levying and forfeiting the house and real
                      property at  12 Edgemont  Street, Boston,
                      Massachusetts.   The  United States  does
                      not  in any  way  represent that  it  can
                      prevent the Internal Revenue Service from
                      levying on the above-described property.

                      On  October   21,  a  judgment  of  conviction  was

            entered.   Pursuant to that judgment petitioner was sentenced

            to ten years incarceration and is now serving  that sentence.

The case before  the tax court was  submitted fully

            stipulated  along with  joint  exhibits.   Taxpayer conceded:

            that "[d]uring the taxable years 1981  and 1982, [he] derived

            taxable  income and incurred  costs from the  importation and

            sale  of marijuana";  that  he  "did not  report  any of  the

            taxable income received  or costs incurred  from the sale  of

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marijuana . . .  on his federal  income tax returns for  [the

            1981 and 1982] taxable years"; and that "[i]n connection with

            [his] illegal  drug activities,  [he] did  not maintain  and,

            therefore, could not  submit complete and accurate  books and

            records  of his income  producing activities for  the taxable

            years 1981 and  1982 as required by the applicable provisions

            of  the Internal Revenue Code and the regulations promulgated

            thereunder."   In addition, the  taxpayer agreed that  he had

            "fraudulently,and with intent  to evade  tax omitted  taxable

            income from  his federal  tax returns for  the taxable  years

            1981 and  1982," and that  "[a] part of the  underpayments of

            tax which was required to be shown in his federal income  tax

            returns  for the  taxable  years  1981 and  1982  was due  to

            fraud."   Taxpayer also stipulated that  he had purchased two

            shell  companies, opened various  bank accounts in  behalf of

            these   companies,  and  had  "deposited,  or  caused  to  be

            deposited"  over   $1,720,565  into  these   companies'  bank

            accounts during 1981 and 1982.  

                      Based on the  stipulated facts the tax  court found

            the  petitioner  liable  for tax  deficiencies  and additions

            thereto for the  years 1981 and 1982  in the total  amount of

            $1,169,699.00.  This appeal followed.  We affirm.

                                         II.
                                         II.

                      Petitioner contends that the imposition by  the IRS

            of the  tax deficiencies  and additions  thereto on  property

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already forfeited to the  government constitutes an excessive

            fine under the Eighth Amendment and double jeopardy under the

            Fifth Amendment.

                      Although it  could be  argued that  under the  plea

            agreement petitioner  agreed  to  accept  the  assessment  of

            income taxes  due we will  do, as the parties  have done, and

            address the merits of petitioner's appeal.  Petitioner relies

            primarily on two recent Supreme Court cases, Austin v. United
                                                         ______    ______

            States, ____  U.S. ____,  113 S. Ct.  2801 (1993)  and United
            ______                                                 ______

            States v. Halper, 490 U.S. 435 (1989).
            ______    ______

                      Austin  was a forfeiture case.  Austin was indicted
                      ______

            and subsequently pleaded guilty in a South Dakota state court

            to one count of possessing cocaine and was sentenced to seven

            years imprisonment.  Shortly after he pled guilty  the United

            States filed a forfeiture action under 21 U.S.C.    881(a)(4)

            and (a)(7)  in  the United  States District  Court for  South

            Dakota  seeking forfeiture of  Austin's mobile home  and auto

            body shop.  Austin, 113 S. Ct. at 2803.  The Court found that
                        ______

            the  Excessive Fines Clause  of the Eighth  Amendment was not

            limited  to  criminal  actions.   It  phrased  the  issue  as

            follows:   "the question is  not, as the United  States would

            have it, whether forfeiture under     881(a)(4) and (a)(7) is

            civil or criminal, but rather whether it is punishment."  Id.
                                                                      ___

            at 2806.   The Court found  that historically forfeiture  was

            viewed  as punishment.   It then found  that because Congress

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"has chosen to  tie forfeiture directly to the  commission of

            drug  offenses"  the  forfeiture  statutes were  punitive  in

            nature, and were  "subject to the  limitations of the  Eighth

            Amendment's Excessive Fines Clause."  Id. at 2812.  The Court
                                                  ___

            refused to  establish  a  multifactor  test  for  determining

            whether a  forfeiture is constitutionally excessive, but left

            that for  the lower courts to work out in the first instance.

            Id.
            ___

                      Using Austin  as a  springboard, petitioner  argues
                            ______

            that the additions to the income tax were punitive, and that,

            by  seizing  his  property  and  then  subjecting  that  same

            property to an income tax along with penalties and  interest,

            the  IRS has violated the proportionality requirements of the

            Eighth Amendment.   We  decline to take  the giant  leap that

            petitioner  urges for  several reasons.   First  there  is an

            insurmountable wall of  tax cases,  discussed infra,  holding
                                                          _____

            that  the government has a right  to do precisely what it has

            done here.   Second, the instant  case is a  civil income tax

            not a  forfeiture case as  was Austin.   And Austin  does not
                                           ______        ______

            directly  or impliedly  suggest that  either  its holding  or

            statements  to  the  effect  that  a  forfeiture  can  be  an

            excessive fine  under the Eighth  Amendment are or  should be

            applicable to  any actions  other than  forfeitures under  21

            U.S.C.    881(a)(4) and (a)(7).  Nor, under the facts of this

            case, do we perceive any  reason for applying the  principles

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of   Austin  to  petitioner.     Petitioner  agreed   to  the
                 ______

            forfeiture.  He  stipulated to the tax court  that he derived

            unreported taxable income  in 1981 and 1982 from  the sale of

            marijuana.   The plea agreement warned petitioner that income

            tax  might  be  due.    Indeed, prior  to  signing  the  plea

            agreement,  petitioner   was  sent  a  notice  of  deficiency

            assessing  taxes and penalties  for the years  1981 and 1982.

            The Supreme  Court in  James v. United  States, 366  U.S. 213
                                   _____    ______________

            (1961) made an observation that applies to petitioner:

                      We  should   not  continue   to  confound
                      confusion, particularly  when the  result
                      would be  to perpetuate the  injustice of
                      relieving  embezzlers  of   the  duty  of
                      paying  income  taxes on  the  money they
                      enrich  themselves  with   through  theft
                      while  honest people  pay their  taxes on
                      every conceivable type of income.

            Id. at 221.  We find no Eighth Amendment violations.
            ___

                      Petitioner's   claim  that   the  tax   assessment,

            including   penalties,    violates   the    Fifth   Amendment

            proscription against multiple punishments  is based on United
                                                                   ______

            States v. Halper.   In Halper, defendant was the manager of a
            ______    ______       ______

            company which provided medical services for patients eligible

            for medicare  benefits.   He  submitted  sixty-five  separate

            false  claims for  services  rendered to  Blue  Cross &  Blue

            Shield  of  New  York City.    Blue  Cross overpaid  Halper's

            company a total  of $585 and passed the  overcharges along to

            the  federal government.   Halper was indicted  on sixty-five

            counts of  violating the False  Claims Act, 18 U.S.C.    287.

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He  was convicted  on all  sixty-five  counts as  well as  on

            sixteen  counts  of   mail  fraud.    He   was  sentenced  to

            imprisonment for two years and fined $5,000. 

                      The  government then  sued  Halper under  the civil

            False  Claims  Act.   Halper's  criminal  conviction  was, of

            course,  sufficient to  ground civil  liability.   Under  the

            provisions of the statute, Halper was subject to a penalty of

            more  than $130,000.   The  district court refused  to assess

            such  a  penalty, holding  that  to  do  so would  result  in

            punishment barred by the double jeopardy clause.  The Supreme

            Court  affirmed.   The  Court  pointed  out that  the  double

            jeopardy protection was "intrinsically personal."

                      Its violation  can be identified  only by
                      assessing  the  character of  the  actual
                      sanctions  imposed on  the individual  by
                      the machinery of the state.
                         In making this  assessment, the labels
                      "criminal"   and  "civil"   are  not   of
                      paramount  importance.   It  is  commonly
                      understood  that  civil  proceedings  may
                      advance  punitive  as  well  as  remedial
                      goals,   and,   conversely,   that   both
                      punitive and remedial goals may be served
                      by criminal penalties.

            United States v. Halper, 490 U.S. at  447.  The Court went on
            _____________    ______

            to say:

                      To that end, the determination whether  a
                      given    civil    sanction    constitutes
                      punishment in the relevant sense requires
                      a   particularized   assessment   of  the
                      penalty imposed and the purposes that the
                      penalty  may  fairly  be  said to  serve.
                      Simply put, a civil as well as a criminal
                      sanction constitutes punishment  when the

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sanction  as  applied in  the  individual
                      case serves the goals of punishment.

            Id. at 448.
            ___

                      We recognize  that the  language of  the Court  may

            play an appealing tune to one in petitioner's straits but the

            case is  inapposite.   Halper involved  a specific  statutory
                                   ______

            penalty.    The  circumstances  giving  rise  to  the  double

            jeopardy violation were unique.   To use Halper as a base for
                                                     ______

            vaulting into the tax arena would be to misapply the case and

            distort  its holding.    We  hold that  there  was no  double

            jeopardy violation.

                      Petitioner has also cited to  bits and pieces of  a

            number of other cases in  an effort to bolster his arguments.

            We have  examined them all and  find they do not  advance his

            claims by even one step.

                                         III.
                                         III.

                      We now outline the wall  of cases that bars the way

            to  any defense  by petitioner  to  the judgment  of the  Tax

            Court.   Helvering v. Mitchell,  303 U.S. 391 (1938),  is the
                     _________    ________

            foundation  stone for  the  wall.   The  Court  held that  an

            acquittal on the criminal charge of a wilful attempt to evade

            taxes does not bar assessment and collection of the 50% civil

            penalty.   The Court rejected defendant's contention that the

            50% addition to the tax was not a tax but a  criminal penalty

            intended as  punishment.  Id. at  399-400.  It held  that the
                                      ___

            50% addition was remedial:

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                                          10

The  remedial   character  of   sanctions
                      imposing additions to a tax has been made
                      clear  by  this  Court  in  passing  upon
                      similar legislation.   They  are provided
                      primarily   as   a  safeguard   for   the
                      protection   of   the  revenue   and   to
                      reimburse  the Government  for the  heavy
                      expense  of  investigation and  the  loss
                      resulting from the taxpayer's fraud.

            Id. at 40l.  (Footnote omitted.)
            ___

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                                          11

In James v. United States, the Court stated:
                         _____    _____________

                         When  a  taxpayer  acquires  earnings,
                      lawfully  or   unlawfully,  without   the
                      consensual   recognition,   express    or
                      implied, of  an obligation  to repay  and
                      without   restriction    as   to    their
                      disposition,  "he  has   received  income
                      which he  is  required  to  return,  even
                      though it may still be claimed that he is
                      not  entitled  to retain  the  money, and
                      even though  he  may  still  be  adjudged
                      liable to restore its equivalent."  North
                                                          _____
                      American Oil v. Brunet, supra, at p. 424.
                      ____________    ______  _____

            366 U.S. at 219.  Further, the Court  noted that Congress did

            not  intend to treat a law-breaking taxpayer differently from

            a law-abiding one.  Id. at 220.
                                ___

                      There  are  also  some  significant  circuit  court

            cases.  In Karpa v. C.I.R., 909 F.2d 784 (4th Cir. 1990), the
                       _____    ______

            Fourth Circuit held that the retroactive  imposition of a tax

            penalty for  substantial understatement of  tax liability did

            not violate  the ex  post facto  clause of  the Constitution.

            After discussing Halper,  the court ruled that  the increased
                             ______

            tax penalty  was a civil  sanction and therefore the  ex post

            facto prohibition  was not implicated.   Karpa,  909 F.2d  at
                                                     _____

            788.  

                      In  Traficant v.  C.I.R., 884  F.2d  258 (6th  Cir.
                          _________     ______

            1989),  the petitioner  argued that  his  prior acquittal  on

            criminal  charges of  bribery precluded  the  tax court  from

            finding that he  took bribes.  Relying heavily  on Helvering,
                                                               _________

            the Sixth Circuit upheld the  tax court's ruling that neither

            issue  preclusion  nor  double  jeopardy  foreclosed  such  a

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finding because the  tax case was a civil  proceeding and the

            burden of proof different than the one required in a criminal

            case.

                      Wood  v.  United  States, 863  F.2d  417  (5th Cir.
                      ____      ______________

            1989), is very similar to the case at bar.  As  here, the IRS

            had imposed a tax on proceeds that had been  forfeited to the

            government.    Wood  argued   that  this  was  "fundamentally

            unfair."   In  words that  are directly applicable  here, the

            court rejected Wood's claim:

                      There is  no dispute that  Wood exercised
                      complete  dominion and  control over  the
                      proceeds  from the  drug  smuggling.   It
                      does not matter that  by operation of law
                      all  right  and   title  vested  in   the
                      government  as  soon  as  the  money  was
                      earned.

                                        . . .

                      The  legal  test  for  taxable income  is
                      dominion and  control, and  that test  in
                      its terms excludes  consideration of what
                      happens to income after it flows from the
                      taxpayer's hands.

            Id. at 419.
            ___

                      Our  final case is  Kenney v. C.I.R.,  111 F.2d 374
                                          ______    ______

            (5th Cir. 1940).  Its holding speaks for itself:

                         The   imposition   of    civil   fraud
                      penalties is not prohibited by the  Fifth
                      Amendment to  the Constitution  by reason
                      of  the  petitioner's  having  previously
                      plead guilty to  such indictment, because
                      the penalty imposed  by Section 293(b) is
                      a  civil  and  not  a  criminal  penalty.
                      Helvering v.  Mitchell, 303 U.S.  391, 58
                      _________     ________
                      S.Ct. 630, 82 L.Ed. 917.

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Id. at 375-76.
            ___

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                                          14

IV.
                                         IV.

                      As a final issue, petitioner argues that the public

            policy that supports  rehabilitation outweighs the  pecuniary

            interests of  the IRS.   It is  difficult to  understand what

            this means  and how it is  relevant.  We can  only conjecture

            that  petitioner suggests  that if  he does  not have  to pay

            income tax and additions thereto on his  ill-gotten gains, he

            will be better  prepared to again live in the  style that his

            drug dealing made possible after he finishes his prison term.

            This is  somewhat akin to  the defendant who had  killed both

            his parents  asking mercy  from the court  because he  was an

            orphan.

                      The judgment of  the Tax Court is  affirmed.  Costs
                      The judgment of  the Tax Court is  affirmed.  Costs
                      ___________________________________________________

            awarded to appellee.
            awarded to appellee.
            ____________________

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