McNichols v. Commissioner

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.

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.

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.

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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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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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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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

awarded to appellee.

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