In an issue of first impression, the Tax Court held that the IRS can assess restitution that a taxpayer was ordered to pay as part of his sentence for violating Sec. 7201 by aiding and abetting his father in evading his tax liability.
Background
In 1994, Winston Bontrager was convicted of conspiracy to commit wire fraud, ordered to pay restitution of $687,000, and sentenced to prison for several years. About the time when he was released from prison, the IRS made an assessment against him of $185,346 of income tax for 1994.
In 1997, Jason Bontrager, Winston's son, was the president and owner of his own real estate firm, Alexandria Investment Co. (AIC). After Winston got out of prison, he showed up at Jason's doorstep, offering to help him with AIC. Jason unwisely accepted his offer. Winston was eventually back up to no good, and, among other misdeeds, he evaded payment of his outstanding federal tax and restitution liabilities by using Jason's real estate business as a front to conceal his income and assets.
In connection with this, Jason was charged with one count of tax evasion under Sec. 7201. The government claimed that from 1998 through 2010, Jason criminally aided and abetted his father in evading payment of the elder man's 1994 federal income tax liability. Jason was alleged to have done this by using AIC and a related real estate company to help Winston conceal assets, income, bank accounts, and business interests. The government alleged that Jason had, for example, issued corporate checks to Winston's female acquaintance, had used corporate funds to purchase a Rolls-Royce for Winston's use, had allowed Winston to charge personal expenditures to a corporate credit card, had titled various assets in the names of Winston's nominees, and had used offshore accounts to conceal Winston's income and assets.
In 2012, Jason pleaded guilty. He was sentenced in January 2014, and, besides giving him a year in prison, the court ordered him to pay restitution (under 18 U.S.C. §3556) to the IRS equal to 10% of the tax loss (or $72,710) caused by his father. Before his sentencing, Jason filed for bankruptcy, and a few weeks after his sentencing his debts were discharged.
In June 2014, the IRS assessed Jason the amount of restitution he had been ordered to pay. On top of this, the IRS also assessed underpayment interest of $165,508, calculated from the due date of his father's 1994 tax return. Against this, the IRS applied a credit of $17,542 for the payment it had received from Jason's bankruptcy estate. Jason did not pay the remaining liability, and in June 2015 the IRS filed a Notice of Federal Tax Lien (NFTL).
In response, Jason requested a Collection Due Process hearing. In his hearing request, he contended that the restitution was not assessable because it was ordered for failure to pay a tax that was imposed upon his father rather than upon him. At the hearing, Jason argued that the assessment was invalid because: (1) the IRS had no legal authority to assess the restitution; (2) the restitution obligation had been discharged in bankruptcy; (3) the IRS had no legal authority to assess underpayment interest; and (4) the assessment was improperly recorded as a liability on his 1994 tax module.
The IRS settlement officer hearing his case rejected all four arguments and sustained the NFTL. Jason challenged the settlement officer's determination in Tax Court. In Tax Court, the IRS conceded that Jason did not owe the assessed underpayment interest (which effectively rendered his argument regarding the liability being improperly recorded on the 1994 tax module moot), leaving the Tax Court to determine two issues: (1) whether the IRS had authority under Sec. 6201(a)(4) to assess the restitution and (2) whether the restitution obligation had not been discharged in bankruptcy.
The Tax Court's decision
The Tax Court held that the IRS had the authority under Sec. 6201(a)(4) to assess the restitution that he had been ordered to pay when he was convicted of violating Sec. 7201.The court found, based on the plain language of Sec. 6201(a)(4), that the statute allows for the assessment of any tax imposed by the Code, not only a tax imposed on the taxpayer being assessed.
The Tax Court explained that under Sec. 6201(a)(4), the IRS is authorized to assess and collect the amount of restitution under a sentencing order "for failure to pay any tax imposed under this title." Sec. 6201(a)(4) is part of Title 26 (i.e., the Internal Revenue Code). Jason was convicted of violating Sec. 7201, which is also part of Title 26, and therefore he was convicted of attempting "to evade or defeat [a] tax imposed by this title or the payment thereof." Because an element of the offense under which the government charged Jason was the failure to pay a tax imposed by Title 26, and he was convicted of that offense, by the terms of the statute, the IRS could assess and collect the restitution that he had been ordered to pay. Because the statute contained no language limiting the phrase "any tax imposed under this title," the statute's text did not support his argument that Sec. 6201(a)(4) was limited to a tax that was imposed on the taxpayer the IRS was assessing.
The court also noted that its interpretation was consistent with the purpose of Sec. 6201(a)(4). Before Sec. 6201(a)(4), the IRS typically did not have an accounts receivable against which restitution payments it received could be credited, because the IRS had not completed a civil examination of the taxpayer paying the restitution and made an assessment. Sec. 6201(a)(4) was added to solve this problem by allowing the IRS to assess a restitution amount immediately as if it were a tax.
In a case where a taxpayer's restitution payment is based on a third party's tax liability, in the absence of Sec. 6201(a)(4), the IRS would never be able to assess the third party's tax liability against the taxpayer because it could not examine the taxpayer to determine the third party's tax liability. According to the court, this problem could arise not just in the context of restitution payments ordered for Sec. 7201 violations, but for violations of other Code sections including Secs. 7202 and 7203.
Jason also asserted that his restitution obligation had been discharged in his bankruptcy case. Under the Bankruptcy Code, restitution obligations imposed under Title 18 are generally excepted from discharge in a Chapter 7 bankruptcy. However, a creditor may waive the nondischargeability of a claim. Jason contended that the IRS waived the nondischargeability of the restitution obligation by filing a claim as a general unsecured creditor in his Chapter 7 case. The Tax Court, however, found that the IRS was required to file a general unsecured creditor claim at the time of Jason's bankruptcy because it had not assessed the restitution obligation at that time. Further, the court stated that "no provision of the Bankruptcy Code prevented the IRS from filing a claim or attached any adverse consequences to its doing so."
Reflections
In a footnote to the opinion, the Tax Court noted that Jason also argued that he could not be held responsible for his father's tax liability for 1994 because it arose before he and his father did business together. The Tax Court rejected this argument, saying it was an impermissible attempt to relitigate the criminal case. Having been ordered to pay restitution for his Sec. 7201 violation in the criminal proceedings, the court found that Jason could not challenge the amount of the restitution.
Bontrager, 151 T.C. No. 12 (2018)
