Court Opinion

ID: 2962334
Source: CourtListenerOpinion
Date Created: 2015-09-21 20:56:30.040484+00
Date Added: 2024-06-11T15:01:54.507179
License: Public Domain

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                                         -2-                                          2            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                                         -3-                                          3                      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                                         -4-                                          4            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                                         -5-                                          5            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                                         -6-                                          6            "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                                         -7-                                          7            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.                                         -8-                                          8            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                                         -9-                                          9                      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:                                         -10-                                          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.)            ___                                         -11-                                          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                                         -12-                                          12            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.                                         -13-                                          13            Id. at 375-76.            ___                                         -14-                                          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.            ____________________                                         -15-                                          15