Louis v. Commissioner

T.C. Memo. 1996-257

UNITED STATES TAX COURT

JOHN R. LOUIS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 5942-92, 5943-92. Filed June 4, 1996.

Edward O.C. Ord, for petitioner.

David W. Sorensen, for respondent.

MEMORANDUM OPINION

RAUM, Judge: The Commissioner determined deficiencies in

petitioner's income taxes and additions to tax for fraud as

follows:
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Docket No. 5943-92
Addition to Tax
Year Deficiency Sec. 6653(b)

1976 $1,448 $724

1977 14,340 7,170

Docket No. 5942-92
Addition to Tax
Year Deficiency Sec. 6653(b)

1978 $74,609 $37,305

Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years at issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.

After stipulations by the parties, the remaining issue for

decision is whether additions to tax for fraud under section

6653(b) violate the Double Jeopardy and Excessive Fines Clauses

of the Fifth and Eighth Amendments where petitioner has been

criminally convicted of tax evasion under section 7201 and has

served jail time and paid fines pursuant to those convictions.

Petitioner, John R. Louis, was a resident of Modesto,

California, at the time the petition in this case was filed. He

was the subject of an investigation by a grand jury, based on

information developed by the Criminal Investigation Division of

the IRS.
 - 3 -

On or about May 24, 1984, petitioner was indicted on two

counts under section 72011 for the taxable years 1977 and 1978.

After a jury trial of approximately a week, the jury reached a

verdict of guilty on all counts. Petitioner was sentenced to 1

year in jail on Count I and 3 years on Count II, with the 3-year

term on Count II suspended on condition that petitioner serve 5

years of probation, file truthful, timely tax returns, and

cooperate fully with any requests made by the IRS. He was also

fined $5,000 on each count. Petitioner has satisfied the

sentence by payment of both fines in full, as well as serving the

jail sentence and satisfactorily completing the probationary

period.

The figures of omitted gross income and alleged unreported

income tax liabilities that were developed and charged in the

criminal prosecution indictment were also used in the statutory

notices of deficiency that were issued for the taxable years

1976, 1977, and 1978. The IRS acknowledges that, to the extent

that the investigation in this case occurred approximately 13

years ago, the records to show how much money the United States

1
Section 7201 provided:

Any person who willfully attempts in any manner to
evade or defeat any tax imposed by this title or the
payment thereof shall, in addition to other penalties
provided by law, be guilty of a felony and, upon
conviction thereof, shall be fined not more than
$10,000, or imprisoned not more than 5 years, or both,
together with the costs of prosecution.
 - 4 -

spent to investigate and prosecute the petitioner's case are no

longer in existence or are unretrievable.

Petitioner does not contest his liability for the 1976,

1977, and 1978 deficiencies. Nor does he contest his liability

for the section 6653(b) additions to tax for fraud for those

years on the merits. He instead contends that the section

6653(b) additions to tax violate the double jeopardy provisions

of the Fifth Amendment and the excessive fines provisions of the

Eighth Amendment.2

Section 6653(b) provides that "If any part of the

underpayment * * * of tax required to be shown on a return is due

to fraud, there shall be added to the tax an amount equal to 50

percent of the underpayment."3 The Double Jeopardy Clause of the

Fifth Amendment to the United States Constitution states, "nor

shall any person be subject for the same offence to be twice put

in jeopardy of life or limb."

2
As to 1976, decision will necessarily have to be entered
for respondent regardless of the other 2 years, since the Fifth
and Eighth Amendment arguments apply only to the sanctions
imposed in the prosecutions, which related solely to 1977 and
1978. See Miller v. Commissioner, T.C. Memo. 1994-249 (to
trigger double jeopardy analysis conduct must be subject of civil
and criminal punishment).
3
The revised fraud addition to tax now appears in secs.
6663 and 6651(f). Omnibus Budget Reconciliation Act of 1989,
Pub. L. 101-239, secs. 7721(a), 7741(a), 103 Stat. 2106, 2395,
2404. Current sec. 6663(a) states that "If any part of any
underpayment of tax required to be shown on a return is due to
fraud, there shall be added to the tax an amount equal to 75
percent of the portion of the underpayment which is attributable
to fraud."
 - 5 -

In Helvering v. Mitchell, 303 U.S. 391 (1938), the Supreme

Court in an income tax case held that civil fraud penalties are

remedial in nature when imposed upon a taxpayer who has been

tried, but not convicted, of criminal tax evasion. The Supreme

Court subsequently held that "under the Double Jeopardy Clause a

defendant who already has been punished in a criminal prosecution

may not be subjected to an additional civil sanction to the

extent that the second sanction may not fairly be characterized

as remedial, but only as deterrent or retribution." United

States v. Halper, 490 U.S. 435, 448-449 (1989). However, Halper

involved medicare fraud under the Civil False Claims Act, and the

First Circuit has made clear that "To use Halper as a base for

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

distort its holding." McNichols v. Commissioner, 13 F.3d 432,

435 (1st Cir. 1993), affg. T.C. Memo. 1993-61. And this Court

has held that the imposition of section 6653(b) fraud additions

after a taxpayer has been criminally convicted pursuant to

section 7201 does not violate the Double Jeopardy Clause.

Ianniello v. Commissioner, 98 T.C. 165, 183-185 (1992) ("The

additions to tax for fraud are a stated percentage of the dollar

amount of the tax deficiencies, and are therefore tailored to the

severity of the violation. * * * Thus, unlike United States v.

Halper, supra, the additions imposed against petitioners are

rationally related to the governmental costs incurred by reason
 - 6 -

of their fraudulent underpayments of tax."); Barnette v.

Commissioner, 95 T.C. 341, 347-348 (1990).

Petitioner relies heavily upon the Supreme Court's recent

opinion in Department of Revenue of Montana v. Kurth Ranch, 511

U.S. , 114 S. Ct. 1937 (1994), a case that does not involve

Federal income taxes, but is concerned with a Montana forfeiture

provision relating to dangerous drugs. Petitioner argues that

Kurth Ranch has called into question the conclusion reached in

Mitchell and the cases following it. Petitioner contends,

relying upon Kurth Ranch, that since he has already been

convicted under section 7201, paid $10,000 in fines, and served 1

year in jail and 5 years of probation, imposition of the section

6653(b) additions to tax for the years at issue would violate the

Double Jeopardy Clause. However, Kurth Ranch did not overrule

Mitchell, and until the Supreme Court does so, we must treat Mr.

Justice Brandeis' opinion in Mitchell as the law of the land,

notwithstanding petitioner's unfair characterization of Mitchell

as "superannuated".

The purported applicability of Kurth Ranch to the section

6653(b) additions to tax has already been considered by this

Court. In Ward v. Commissioner, T.C. Memo. 1995-286, it was held

that Kurth Ranch did not change the status of the addition for

fraud as remedial. "Thus, the imposition of a civil fraud

penalty following the criminal conviction does not violate the

Double Jeopardy Clause of the Fifth Amendment to the U.S.
 - 7 -

Constitution." Ward v. Commissioner, supra (citing Ianniello v.

Commissioner, 98 T.C. 165 (1992)). Kurth Ranch was also

distinguished very recently in Price v. Commissioner, T.C. Memo.

1996-204, where this Court pointed out that the addition for

civil fraud "was imposed primarily to protect the revenue and to

reimburse the Government for the heavy expense of investigation

and the loss resulting from the taxpayer's fraud. Helvering v.

Mitchell, 303 U.S. 391, 398, 401 (1938); Ianniello v.

Commissioner, 98 T.C. 165, 176-185 (1992)."

Finally, two Courts of Appeals have even more recently

rejected the contention that the so-called civil fraud penalty

brings into play the double jeopardy provisions. In Grimes v.

Commissioner, F.3d , (9th Cir., Apr. 17, 1996), the

Ninth Circuit stated:

Grimes argues that the imposition of fraud penalties
renders the proceeding quasi-criminal. Two recent
Supreme Court cases addressing the definition of
"punishment" for the purposes of the Double Jeopardy
Clause give this argument a superficial appeal. See
Department of Revenue v. Kurth Ranch, 114 S. Ct. 1937,
1948 (1994) (finding that a Montana state tax on
marijuana constitutes punishment); United States v.
Halper, 490 U.S. 435 (1989) (the "civil" label does not
determine whether a sanction is punishment).

Both of these decisions, however, cite with
approval Helvering v. Mitchell, [38-1 USTC ¶ 9152], 303
U.S. 391 (1938), where the Court found the Tax Code's
civil fraud penalty remedial in nature and not punitive
for double jeopardy purposes. See Kurth Ranch, 114 S.
Ct. at 1946 n. 16; Halper, 490 U.S. at 442-43. [Fn.
ref. omitted.]
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Shortly thereafter, the Sixth Circuit in United States v.

Alt, F.3d (6th Cir., May 15, 1996), explicitly recognized

the continuing vitality of Helvering v. Mitchell, supra. The

Sixth Circuit held that the award of tax penalties was not

"punishment," explaining, at , that they are merely

compensatory for lost tax revenue and that they are higher than

the penalties for negligence because "actively fraudulent filings

are more difficult to catch than merely negligent ones."

We hold that the additions to tax as applied to the

petitioner do not result in double jeopardy.

We next turn to petitioner's Eighth Amendment argument. The

Eighth Amendment provides that "Excessive bail shall not be

required, nor excessive fines imposed, nor cruel and unusual

punishments inflicted." Petitioner contends that imposition of

the additions to tax on top of his previous fines, prison

sentence, and probation violates the Eighth Amendment prohibition

of excessive fines. The taxpayers in Ianniello also asserted

that their Eighth Amendment rights would be violated if they had

to pay the additions to tax for fraud on top of their criminal

fines and prison sentences. Ianniello v. Commissioner, supra.

The Court held otherwise. "We already have held that

petitioners' liability for Federal income tax deficiencies and

additions to tax for fraud compensates the United States for lost

revenues and costs incurred in investigating petitioners' fraud.

Accordingly, the Eighth Amendment does not apply to petitioners'
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liability for the Federal income tax deficiencies and the

additions to tax for fraud imposed against petitioners under

section 6653(b)." Id. at 187. The same reasoning applies here.

Indeed, the Sixth Circuit's opinion in Alt disposed of the Eighth

Amendment point summarily, stating at F.3d , :

Because we hold that the tax penalties awarded
against Alt are not "punishment," there is no need to
address Alt's claim that the penalties constitute an
excessive fine under the Eighth Amendment. Like the
Double Jeopardy Clause, the Excessive Fines Clause only
protects against "punishment," * * * [citations
omitted]

We hold that the petitioner's Eighth Amendment argument adds

nothing to his case.

Decisions will be entered

for respondent.