Opinion ID: 765233
Heading Depth: 2
Heading Rank: 5

Heading: Alleged Admission of Fraud

Text: 22 The two record documents the IRS relies upon to show a concession or finding of fraud are: (1) a compromise agreement between the parties, the essential figures of which were adopted by the Tax Court; and (2) a bare citation to 26 U.S.C. §6653 in the Tax Court's Order. J.A. at A119; J.A. at A128.According to the IRS, the agreement constituted a stipulation by the taxpayers in the Tax Court that fraud penalties applied to their case, and therefore, that they had committed fraud. The compromise agreement settled the penalty demand by Mrs. Cotler agreeing to make, and the government agreeing to accept, payment of an amount equal to only about one-half of the penalty amount the government could have been entitled to collect if it had proven fraud. The government argues that it was not required to collect the entire amount of the penalty amounts to allege fraud now, because, as stated in the agreement, Mildred Cotler is an innocent spouse; fraud penalty does not apply to her. J.A. at A122.Such a bare reference to fraud penalty, without further explanation is insufficient to establish a concession of fraud on the part of the taxpayers. In the instant case the IRS expressly stated that Mrs. Cotler was innocent of fraud. While alive, Mr. Cotler repeatedly denied any fraud and refused to pay noticed fraud penalties. His representative appealed the tax fraud allegations to the IRS and, after his death, to the Tax Court. 6 Nowhere in the agreement does Mrs. Cotler abandon her late husband's denial and admit to fraud on his part. Nor is it clear she would have had the right and capacity to do so on behalf of her deceased husband. 23 It is true that Form 5278 as prepared by the IRS listed for each year in dispute as Addition to the tax a certain amount, accompanied by the notation Section 6653(b), IRC (per settlement.). Below this notation appears another, stating Mildred Cotler is innocent spouse -- fraud penalty does not apply to her. Further, Form 870 AD, as prepared by the IRS, listed DEFICIENCIES[:] Sect. 6653(b) IRC with an amount by each year in dispute. These amounts, moreover, total just over $25,000, the penalty payment tendered by Mrs. Cotler in June, 1984. These documents were all sent to the Cotlers' then-attorney with a covering letter dated February 2, 1984, which requested that they Please return the signed original as soon as possible. From all these documents, read together, it could be argued, and in essence it is argued by the government, that the agreement contained a stipulation that the returns were fraudulent. Undermining such an argument, however, is the fact that from the very first assertion of penalty by the IRS, Mr. Cotler denied fraud, and never abandoned this position. 24 Finally, in the Closing Agreement on Final Determination Covering Specific Matters, another document the IRS sent, was a stipulation that the taxpayer agrees, notwithstanding the period of limitations on assessment and collection to the assessment and collection of this deficiency with penalty and interest as set forth in this agreement. We question whether this stipulation would have been necessary if the taxpayers, as asserted by the government now, were stipulating to filing fraudulent returns, as opposed to agreeing to pay a reduced penalty as part of a compromise settlement agreement. Therefore, we think the agreement to pay such penalty amounts was analogous to a plea of nolo contendere in a criminal case or a consent decree in a court proceeding agreeing to restitutionary or remedial actions without admitting any violations. Indeed,at page two of the Closing Agreement on Final Determination Covering Specific Matters, Mrs. Cotler and the Commissioner: 25 [d]etermined and agreed for Federal income tax purposes that . . . except to the extent expressly determined in this agreement, this agreement does not determine the applicability or inapplicability of penalties or interest. In the preceding sentence penalties includes additions to tax or additional amounts authorized by Subchapter A of Chapter 68 of the Code. 26 The penalties the IRS now asserts are pursuant to 26 U.S.C. § 6653(b) and are due to the filing of fraudulent returns. As such they are penalties of the clearest kind. That the parties took pains to cover all additions to tax and not merely fraud penalties actually underscores their concern that the agreement was not to operate by implication but only by express provision as to any amounts in addition to the taxes themselves. Further, the agreement as summarized in the Tax Court Order made specific reference to certain time bars and expressly waived them. For example, it stipulated that petitioners waive the restriction contained in I.R.C. § 6213(a) prohibiting assessment and collection of the deficiencies in tax and additions to tax (plus statutory interest) until the decision of the Tax Court has become final. We think that if taxpayers had likewise agreed to waive the time bar of section 6501(a) prohibiting respecting assessment and collection after three-years, the agreement would have cited this section in express and parallel language, or else it would have expressly referred to the exception to the three-year time bar of section 6501(c). But it did neither. Accordingly, we are unpersuaded by the government's argument that the agreement stipulated to fraud so as to invoke the fraud exception to the limitations period of section 6501. 27 In addition, the Tax Court made no finding of fraud at all.In its half-page stipulated decision, the Tax Court merely recited the settlement amounts reached by the parties. Specifically, where the settlement agreement contained a section entitled Additions to the tax and noted Section 6653(b), IRC (per settlement), the Tax Court Order listed such deficiencies under a column headed Additions to the Tax I.R.C. §6653 (b). J.A. at A120; J.A. at A128.Nowhere in its opinion is the word fraud mentioned. Nor are any facts concerning Mr. Cotler's alleged fraud discussed. The only arguable reference to fraud is a simple citation, without explanation, to the fraud penalty statute, 26 U.S.C. §6653, in the Tax Court Order. This is an insufficient substitute for clear and convincing proof of fraud. Nor can the citation constitute an implied finding of fraud, for no evidence of fraud was received, discussed, or accepted in any way by the Tax Court. Furthermore, the citation cannot constitute an acceptance by the Tax Court of an admission of Mr. Cotler's fraud by Mrs. Cotler, for no such expression by her can be found in the agreement. Indeed the only relevant reference in the agreement is to fraud penalty but it does not admit fraud by Mr. Cotler; it merely denies fraud by her, stating that even the IRS agreed Mrs. Cotler is an innocent spouse. In short, the references to §6653(b) in the settlement documents are ambiguous. One cannot tell whether they constitute an admission of fraud by the taxpayer, or simply a reference to the statute giving rise to the claim that is being settled without an admission of fraud. 28 Therefore, the fraud exception to the three-year statute of limitations on assessment and collection of the overdue taxes is not invoked on the facts of this case.