[2002-1 USTC
¶50,438] Somerset Limited Partnership, an
Illinois limited partnership, and Hohmann OP
Holdings, LLC, an Illinois limited liability
company, Plaintiffs v. Julian Wineberg and The
United States of America, Defendants United
States of America, Plaintiff v. Julian Wineberg
and Hohmann OP Holding, LLC, Defendants
U.S.
District Court, No.
Dist.
Ill.
, East. Div., 01-C 0190, 01 C 4095, 4/29/2002,
198 F. Supp. 2d 969
[Code
Sec. 6323 ]
Tax liens: Interpleader action.--The
government had a valid tax lien on a delinquent
individual's right to funds held by a limited
liability company (LLC) that exercised its
option to buy his interest in a limited
partnership. When the LLC exercised the option,
it withheld payment because it was uncertain of
the status of multiple tax liens on the
property. Thus, an interpleader action was filed
to determine the appropriate payee of the sale
proceeds while the government brought a separate
action to foreclose its lien against the
taxpayer's rights in the option contract. The
LLC failed to respond to the government's motion
and, thus, judgment was entered in the
government's favor; the court determined that
the tax lien against the taxpayer's right to the
funds under the contract with the LLC was valid.
[Code
Secs. 6323 and 7122
]
Offers in compromise: Delegations of
authority: Government counsel: Attorney's fees:
Interpleader action.--A limited liability
company (LLC) was not entitled to recover
attorney's fees that it incurred in connection
with a compromise allegedly made by a government
attorney in order to settle a tax case that was
the subject of an interpleader action. The
government's attorney allegedly promised the LLC
that in exchange for its assistance in the tax
case against the taxpayer, it would be entitled
to take its attorney's fees out of proceeds owed
to the taxpayer. However, even if such a promise
were made, it would be unenforceable under Code
Sec. 7122 because the government's
attorney lacked actual authority to compromise
or settle a tax case. Furthermore, equitable
estoppel did not apply because any reliance on
the government's agent that was contrary to the
law was unreasonable.
MEMORANDUM OPINION
AND
ORDER
BUCKLO,
District Judge:
Julian
Wineberg had a limited partnership interest in
Somerset Limited Partnership. In 1998, Mr.
Wineberg entered into a "Cash Option
Agreement" with Hohmann OP Holdings, L.L.C.,
giving Hohmann the option to buy Mr. Wineberg's
interest in
Somerset
for $426,822. Hohmann exercised the option on
July 1, 1999, but has not paid Mr. Wineberg
because it was uncertain about the status of
certain tax liens and levies on Mr. Wineberg's
property. The federal government has millions of
dollars of tax liens and levies on Mr.
Wineberg's property covering tax years from 1978
to 1986.
Somerset
and Hohmann (collectively "Hohmann")
filed an interpleader action against the
United States
and Mr. Wineberg to determine the appropriate
payee of the money held by Hohmann. The
government brought a separate action to
foreclose a lien against Mr. Wineberg's rights
to the proceeds of the options contract with
Hohmann. I consolidated the cases, see
Minute Order of August 15, 2001, and the
government moves for summary judgment. Hohmann
responds and moves for partial summary judgment.
I.
Summary
judgment is proper when the record "show[s]
that there is no genuine issue as to any
material fact and that the moving party is
entitled to a judgment as a matter of law."
Fed. R. Civ. P. 56(c). In determining whether a
genuine issue of material fact exists, I must
construe all facts in the light most favorable
to the non-moving party and draw all reasonable
and justifiable inferences in its favor. Anderson
v. Liberty Lobby, Inc., 477
U.S.
242, 255 (1986). Mr. Wineberg did not respond to
the government's motion, so I enter judgment in
favor of the government and against Mr. Wineberg
in the amount of $1,318,480.21, plus interest
and other statutory penalties, and I find that
the government has a valid and subsisting lien
on Mr. Wineberg's right to money under the
contract with Hohmann. Hohmann has no objection
to this disposition, but the parties dispute
whether Hohmann is entitled to attorneys' fees
out of the money it owes to Mr. Wineberg and
whether the government is entitled to interest
under 815 ILCS 205/2.
A.
The
government argues that Hohmann's attorneys' fees
may not be taken out of the $426,822 that it
will receive as a result of the lien
foreclosure. Hohmann does not contend that its
claim for attorneys' fees is superior to the
government's lien, which attached in 1990, more
than eight years before Hohmann entered into the
options agreement with Mr. Wineberg. Instead it
says that the government's attorney, Mr.
Snoeyenbos, promised Hohmann that, in return for
its assistance in providing information for the
government's suit against Mr. Wineberg, Hohmann
would be entitled to take its attorneys' fees
from the money owed to Mr. Wineberg. The
government submits an affidavit stating that
there was no such agreement, so there is a
factual question that I cannot decide here. But
even if there were such an agreement, it would
be unenforceable against the government as a
matter of law.
The
authority to compromise or settle "any
civil or criminal case arising under the
internal revenue laws" is vested in the
Secretary of the Treasury, 26 U.S.C. §7122(a),
and may be redelegated to Section Chiefs and
Assistant Section Chiefs, but may not be
redelegated to attorneys-of-record, 28 C.F.R.
Pt. 0, Subpt. Y, App. (Tax Div. Directive No.
105 §3) ("Directive 105"). There is
no dispute that Mr. Snoeyenbos is the attorney
of record, so he lacks the authority to
compromise cases arising under the tax code.
Hohmann argues that §7122 applies only to cases
against taxpayers, but it cites no
authority for that proposition, and the statute
says "any civil or criminal case."
"Any" case means any case, see
United States
v. Ballistrea, 101 F.3d 827, 836 (2d Cir.
1996); see also Lexington Ins. Co. v. Rugg
& Knopp, Inc., 165 F.3d 1087, 1089 (7th
Cir. 1999) (" '[E]very' means 'every.'
"), not just taxpayer actions. Hohmann also
argues that Mr. Snoeyenbos' signature on a
stipulation for entry of judgment against Mr.
Wineberg in the foreclosure action is evidence
that he had authority to compromise cases.
However, that stipulation did not compromise the
government's claim; it entitled to government to
all the relief it sought, unlike the claim for
attorneys' fees, which would reduce the
government's recovery. Moreover, even if it were
evidence of authority to compromise, it is
evidence only as to the foreclosure case, 1
not the interpleader case, and redelegations
under the regulations are made "on a
case-by-case basis." Directive 105 §3. In
response to the government's motion, it was
Hohmann's burden to come forward with evidence
of Mr. Snoeyenbos's authority to create a
factual issue for trial; it did not discharge or
shift that burden merely by filing a
cross-motion. On Hohmann's own motion, Mr.
Snoeyenbos' statement in his affidavit that he
never represented that he was a Section Chief or
had the power to compromise a case or claim
would be sufficient to create a question of fact
to avoid summary judgment.
Hohmann
urges that, even if Mr. Snoeyenbos lacked actual
authority to enter into an agreement about fees,
the government should be estopped from
contesting an award of attorneys' fees.
Equitable estoppel cannot apply here because
Directive 105 clearly states that mere
attorneys-of-record have no authority to
compromise cases, and "those who deal with
the [g]overnment are expected to know the law
and may not rely on the conduct of [g]overnment
agents contrary to law." Heckler v.
Community Health Servs. of Crawford County, Inc.,
467 U.S. 51, 63, 66 (1984) (holding that where
regulations clearly circumscribed the authority
of government official and party relied on oral
statement of official that exceeded authority,
any reliance was unreasonable). I grant the
government's motion and deny Hohmann's motion
with regard to attorneys' fees.
B.
Under
the Illinois Interest Act, creditors are
entitled to interest at a rate of 5% a year on
debts after they become due. 815 ILCS 205/2. An
unconditional tender of the full amount due will
stop the accrual of interest. See Yassin v.
Certified Grocers of Ill., Inc., 551 N.E.2d
1319, 1321 (Ill. 1990) (full amount); Steward
v. Yoder, 408 N.E.2d 55, 57 (Ill. App. Ct.
1980) (unconditional). Tender only tolls the
accrual of interest if it is "kept
good"; that is, it "must be kept at
all times subject to be received by the creditor
when he calls for it." Aulger v. Clay,
109 Ill. 487, 1884 WL 9815, at *4 (Ill.
Mar. 26, 18
84); see also Schmahl v. A.V.C. Enters., Inc.,
499 N.E.2d 572, 575 (Ill. App. Ct. 1986)
(defining tender as an offer to pay
"coupled with the present ability of
immediate performance").
The
facts here are not in dispute. On
July 1, 1999
, when Hohmann exercised its option to buy Mr.
Wineberg's interest in Somerset, it became
liable to pay Mr. Wineberg. Hohmann (through
Somerset) was aware of the liens and levies
against Mr. Wineberg's property, so, also on
July 1, 1999
, it sent a check to Mr. Wineberg, payable
jointly to Mr. Wineberg and the
IRS
, for $384,130, or 90% of the amount due under
the contract. The check was never negotiated,
and fifteen months later, on
October 10, 2000
, Hohmann stopped payment on the check. On
January 10, 2001
, Hohmann filed the interpleader action. The
government argues that the check was not legally
sufficient tender because it was for an amount
less than the total due under the options
agreement. Hohmann attaches to its response and
cross-motion the options agreement, which called
for a "holdback amount" of 10% at the
closing. §§1.3 and 1.4 The options agreement
called for only a 90% payment at closing, so the
July 1, 1999
, check was a tender of the full amount due on
that day.
The
government also argues that the check was not
sufficient to stop the accrual of interest
because it imposed a condition not contemplated
by the options agreement that the
IRS
endorse the check. The Illinois Supreme Court
stated, nearly sixty years ago, that "[a]
tender, to be effectual, must be without
conditions other than those specified in the
contract between the parties." Ortman v.
Kane, 60 N.E.2d 93, 97 (Ill. 1945). There
the extra-contractual condition imposed was
payment of interest above and beyond the amount
agreed to by the parties. Id. More recent
formulations of the definition of
"tender" suggest that it "must be
without conditions to which the creditor can
have a valid objection or which will be
prejudicial to his rights." Arrio v.
Time Ins. Co., 751 N.E.2d 221, 227 (Ill.
App. Ct. 2001) (emphasis added); MXL Indus.,
Inc. v. Mulder, 623 N.E.2d 369, 377 (Ill.
App. Ct. 1993) (same; citing 74 Am. Jur.2d
Tender §24, at 561-62 (1974)); Telemark
Devel. Group, Inc. v. Mengelt, No. 00 C
3626, 2001 WL 477219, at *2 (N.D. Ill. May 7,
2001) (Shadur, J.). In Telemark, the
court held that a creditor could have no valid
objection to a condition that the creditor admit
no greater amount was due because the amount
tendered was in fact everything the creditor was
entitled to. Id. at *4. The
"condition" imposed here, signature by
the
IRS
, did not change the amount due under the
contract. On matters of state law, I must
predict what the Illinois Supreme Court would
decide, see Mutual Service Cas. Ins. Co. v.
Elizabeth State Bank, 265 F.3d 601, 612 (7th
Cir. 2001) (diversity context), and I conclude
that the more recent appellate court cases,
relying on an authoritative standard reference,
provide a better basis for prediction than an
older Illinois Supreme Court decision that is
not directly on point. Here Mr. Wineberg could
not reasonably have objected to the fact that
the check was jointly payable to the
IRS
in light of the substantial liens and levies
against him. Nor was he prejudiced by joint
payment, because, as I have already determined,
the lien was valid. Thus the check, jointly
payable to Mr. Wineberg and the
IRS
, tolled the accrual of interest.
Nevertheless,
Hohmann failed to "keep the tender
good" when it stopped payment on the check
on October 10, 2000, because Wineberg could not
act immediately to accept the money. See
Schmahl, 499 N.E.2d at 575. Hohmann argues
that the interpleader lawsuit, filed three
months later, was valid tender. Although Hohmann
and Somerset did not contest the amount due when
they filed the interpleader action, they
effectively asked the court to decide how to
make the payment but did not deposit any funds
with the court, so action was not a valid tender
because it did not make the money immediately
available. See Aulger, 1884 WL 9815, at
*3 ("We have only to turn to any book of
precedents to find that a plea of tender must
aver a readiness, at all times after it is made,
to pay the money, and he must bring it into
court."). The government's motion and
Hohmann's motion are granted in part and denied
in part with regard to interest: Hohmann is
liable for interest from October 10, 2000.
II.
The
government's motion for summary judgment is
GRANTED as to attorneys' fees, and GRANTED IN
PART and DENIED IN PART as to interest. Somerset
and Hohmann's cross-motion for partial summary
judgment is, accordingly, DENIED as to
attorney's fees and GRANTED IN PART and DENIED
IN PART as to interest. The government shall
calculate the total interest due to it, using
the 5% interest rate provided for by the
Interest Act, beginning on October 10, 2000, and
serve it on Hohmann, who shall stipulate to the
accuracy of the calculations. The parties are
ORDERED to submit the stipulation to me no later
than noon, May 15, 2002. Judgment will be
entered on that date.
1
The stipulation was signed before the cases were
consolidated. See attachment to the
government's Response to Motion to Consolidate,
filed 8/6/01; see also Minute Order of
8/15/01 (granting consolidation).
Palladin
Precision Products, Inc. v. Commissioner
Docket No. 980-92., TC Memo. 1993-3, 65
TCM
1698, Filed January 4, 1993
[Appealable, barring stipulation to the
contrary, to CA-2.
[Code Secs.
6653 (Prior to amendment by P.L.
101-239), 7122 and 7206 ]
Additions to tax: Civil penalties: Fraud:
Collateral estoppel.--A written plea agreement
executed by a corporation's president in
connection with his alleged criminal
falsification of his corporation's income tax
returns did not collaterally estop the
IRS
from asserting a civil fraud penalty against the
corporation. The government stipulated in the
plea agreement with the president that the
corporation's false corporate tax returns were
not filed in order to facilitate evasion of tax.
However, a later disclaimer in the plea
agreement indicated that the agreement was
reached without regard to civil tax matters.
Collateral estoppel was inapplicable because the
plea agreement plainly established that the
civil fraud issue was neither presented in
substance nor actually resolved in the criminal
proceeding. Moreover, the Assistant U.S.
Attorney was without authority to bind the
IRS
in any civil tax matter involving the
IRS
since the case was not referred to the
Department of Justice.--
Richard
G. Convicer, One Corporate Center, Hartford,
Conn., for the petitioner. Carmino J.
Santaniello, for the respondent.
Memorandum
Opinion
PETERSON,
Special Trial Judge:
This
case is before the Court on petitioner's Motion
for Partial Summary Judgment under Rule 121(b),
regarding additions to tax determined by
respondent under section 6653(b) for
petitioner's taxable years ending August 31,
1986, August 31, 1987, and August 31, 1988.
Unless otherwise indicated, all section
references are to the Internal Revenue Code in
effect for the years in issue, and all Rule
references are to the Tax Court Rules of
Practice and Procedure.
Respondent
determined deficiencies in petitioner's Federal
income taxes for its taxable years ending August
31, 1986, August 31, 1987, and August 31, 1988,
in the respective amounts of $943.50, $3,126.34,
and $6,199.53. Respondent also determined
additions to tax attributable to the
deficiencies for each of the taxable years in
issue under section 6653(b)(1)(A) in the
respective amounts of $471.75, $2,344.76, and
$4,649.65, and under section 6653(b)(1)(B) in
the respective amounts of 50 percent of the
interest due on $943.50, 50 percent of the
interest due on $3,126.34, and 50 percent of the
interest due on $6,199.53.
The
sole issue for decision is whether a written
plea agreement executed in connection with the
criminal prosecution of petitioner's president
(Anthony Palladino) for violation of section
7206(1) collaterally estops
respondent from determining that petitioner is
liable for additions to tax for fraud under
section 6653(b) for each of the years in issue.
Summary
judgment is a device intended to serve judicial
economy through the avoidance of
"unnecessary and expensive trials of
phantom factual questions". Shiosaki v.
Commissioner [Dec.
32,519 ], 61 T.C. 861, 862 (1974).
Under Rule 121(b), a motion for summary judgment
is granted when it is shown that "there is
no genuine issue as to any material fact and
that a decision may be rendered as a matter of
law." The party moving for summary judgment
bears the burden of proving that there is no
genuine issue of material fact. Naftel v.
Commissioner [Dec.
42,414 ], 85 T.C. 527, 529 (1985).
In
considering a motion for summary judgment, we
view the facts in the light most favorable to
the party opposing the motion. Id.
Accordingly, the facts set forth herein are
derived from respondent's pleadings and
attorneys' affidavits in opposition to
petitioner's motion, and are viewed in a manner
most favorable to respondent. Id.; Estate of
Gardner v. Commissioner [Dec.
41,293 ], 82 T.C. 989, 990 (1984).
Background
During
each of the years in issue petitioner
manufactured screw machine products, and Anthony
Palladino was petitioner's president and
business affairs manager. During petitioner's
taxable years ended August 31, 1986, and August
31, 1987, Mr. Palladino owned 25.75 percent of
petitioner's stock. During petitioner's taxable
year ended August 31, 1988, Mr. Palladino owned
60 percent of petitioner's stock.
During
each of the years in issue, petitioner sold
scrap metal by-products to Michael Schiavone
& Sons, Inc. (Schiavone), a scrap metal
dealer. An audit of Schiavone's books by
respondent indicated that Schiavone regularly
purchased scrap metal from suppliers, including
petitioner, with cash payments. In May, 1989,
Leanne G. Charette, a Special Agent with the
Internal Revenue Service (
IRS
), Criminal Investigation Division, was assigned
to investigate possible criminal violations
committed by Mr. Palladino in his capacity as
petitioner's president. Special Agent Charette's
investigation determined that under an agreement
between Schiavone and Mr. Palladino, each
purchase of petitioner's scrap metal by
Schiavone was paid for one-half by check and
one-half with cash. The investigation further
concluded that the cash payments were hand
delivered by a Schiavone employee to Mr.
Palladino in an envelope, and that petitioner
only reported the amount of the checks on its
returns filed for the years in issue.
In
July, 1990, Special Agent Charette recommended
that criminal proceedings be instituted against
Mr. Palladino for willfully making and
subscribing to false U.S. corporate income tax
returns filed by petitioner for each of the
years in issue, in violation of section
7206(1) . By letter dated
November 21, 1990
, respondent referred the case against Mr.
Palladino for violation of section
7206(1) to the U.S. Department of
Justice (DOJ) for prosecution. Special Agent
Charette did not recommend that any criminal
proceedings be instituted against petitioner,
and no such referral was made to the DOJ.
In
March, 1991, the U.S. Attorney, Judicial
District of Connecticut, received a referral
from DOJ requesting the U.S. Attorney to
initiate the criminal prosecution of Mr.
Palladino under section
7206(1) regarding petitioner's
corporate income tax returns filed for the years
in issue. The case against Mr. Palladino was
assigned to Joseph C. Hutchinson, Assistant U.S.
Attorney, Judicial District of Connecticut.
On
May 21, 1991
, after discussions between Mr. Hutchinson and
Mr. Palladino's attorney, the U.S. Attorney's
Office for the District of Connecticut
(Government) signed a plea agreement with Mr.
Palladino concerning Mr. Palladino's alleged
violations of section
7206(1) . Under the plea agreement,
Mr. Palladino agreed to plead guilty to a one
count information charging him with subscribing
to a false corporate income tax return filed by
petitioner for its taxable year ending
August 31, 1988
. On
July 15, 1991
, Mr. Palladino was sentenced and received no
months to serve and no probation, but was fined
$5,000.
The
plea agreement is organized by sections. The
following stipulation appears near the top of
page 3, in a section of the plea agreement
entitled "Sentencing Guidelines":
The
Government also stipulates that the false
corporate tax returns were not filed in order to
facilitate evasion of a tax.
The
following disclaimer appears near the middle of
page four, in a section of the plea agreement
entitled "Scope of Agreement":
[Mr.
Palladino] acknowledges and understands that
this agreement is limited to the undersigned
parties and cannot bind any other federal
authority, or any state or local authority. [Mr.
Palladino] acknowledges that no representations
have been made to him with respect to any civil
or administrative consequences that may result
from this plea of guilty because such matters
are solely within the province and discretion of
the specific administrative or governmental
entity involved. Finally, [Mr. Palladino]
understands and acknowledges that this agreement
has been reached without regard to any civil tax
matters that may be pending or which may arise
involving him.
Discussion
Petitioner's
motion is based on the government's stipulation
that petitioner's false corporate tax returns
were not filed in order to facilitate evasion of
tax. Petitioner argues that the stipulation
collaterally estops respondent from determining
that petitioner is liable for additions to tax
for fraud for the years in issue.
Essentially,
petitioner argues that since respondent's case
under section 6653(b) against petitioner is
based solely on the conduct of its president,
Mr. Palladino, it is fundamentally inconsistent
for the Government first to agree that Mr.
Palladino did not file false corporate tax
returns in an attempt to evade tax for the years
in issue, and for respondent later to contend
that petitioner filed false corporate tax
returns with an intent to evade tax for these
years.
In
opposition to petitioner's motion, respondent
contends that the plea agreement does not
preclude respondent from raising the issue of
petitioner's liability for additions to tax
under section 6653(b) because the stipulation
was not intended to have any effect on
petitioner's civil tax liability. Alternatively,
respondent argues that collateral estoppel does
not apply in this case, and that in any event,
Mr. Hutchinson was not authorized to compromise
petitioner's civil tax liability.
Supported
by an affidavit by Mr. Hutchinson, respondent
argues that the stipulation was incorporated
into the plea agreement for the sole purpose of
establishing Mr. Palladino's eligibility for a
non-incarcerating sentence under the Federal
Sentencing Guidelines. According to Mr.
Hutchinson's affidavit, at no time during plea
negotiations with Mr. Palladino's counsel did
the Government represent or suggest in any way
that the stipulation was intended to have civil
tax consequences. This fact, respondent argues,
is amply demonstrated by the above-quoted
disclaimer from page four of the plea agreement,
from the section entitled "Scope of
Agreement".
We
agree with respondent. Mr. Hutchinson's
affidavit and the disclaimer on page four of the
plea agreement make it clear that the plea
agreement was not intended to have any
application extending beyond the criminal matter
involving Mr. Palladino, and that the
stipulation petitioner relies upon in support of
its motion was included in the plea agreement
for the sole purpose of establishing Mr.
Palladino's eligibility for a nonincarcerating
sentence. We note that petitioner has not set
forth any facts indicating any contrary or
additional intention for the stipulation's
inclusion into the plea agreement.
In
reaching our conclusion, we reject petitioner's
argument that the parol evidence rule precludes
our consideration of Mr. Hutchinson's intent in
writing the stipulation into the plea agreement.
The parol evidence rule is inapplicable here,
particularly for the reason that petitioner was
not a party to the written plea agreement. Estate
of Craft v. Commissioner [Dec.
34,422 ], 68 T.C. 249, 260-263
(1977), affd. per curiam [80-1
USTC ¶13,327 ] 608 F.2d 240 (5th
Cir. 1979); Coven v. Commissioner [Dec.
33,824 ], 66 T.C. 295, 306 (1976).
Moreover,
we conclude that petitioner's collateral
estoppel argument in this case is misplaced.
Collateral estoppel precludes a party or his
privy to a prior suit from relitigating in a
later suit issues of fact and law which were
actually and necessarily decided by the prior
court in reaching judgment in the prior suit. United
States v. Mendoza, 464 U.S. 154, 158 (1984).
Collateral estoppel is available even though the
prior suit was resolved by plea agreement and
was not litigated through to resolution by a
trier-of-fact. Castillo v. Commissioner [Dec.
41,940 ], 84 T.C. 405, 409-410
(1985). However, collateral estoppel is
inapplicable in this case because the plea
agreement plainly establishes that the section
6653(b) issue in this case was neither presented
in substance nor actually resolved in the
criminal proceeding, and, further, because
petitioner was neither a party nor a privy to
the plea agreement. Montana v. United States,
440 U.S. 147 (1979); see American Lithofold
Corp. v. Commissioner [Dec.
30,681 ], 55 T.C. 904, 923-924
(1971); C.B.C. Super Markets, Inc. v.
Commissioner [Dec.
30,081 ], 54 T.C. 882 (1970).
Further,
besides the inapplicability of collateral
estoppel, we conclude that even if the
stipulation petitioner relies upon in support of
its motion was included in the plea agreement
with the express intent to preclude respondent
from determining additions to tax for fraud
against petitioner, and even if we were to
presume the stipulation sufficient to achieve
that end, petitioner's motion still must be
denied, because, as a matter of law, Mr.
Hutchinson is without authority in this case to
bind respondent in any civil tax matter
involving petitioner.
If
we were to accept petitioner's interpretation of
the stipulation, then the stipulation
effectively would serve as a compromise of
petitioner's civil tax liability. However, section
7122(a) , which governs the granting
of authority to compromise a case against a
taxpayer, provides that unless the taxpayer's
case has previously been referred to the DOJ, no
person in that department, including an
Assistant U.S. Attorney, is authorized to
compromise any of the taxpayer's taxes. Botany
Worsted Mills v. United States [1
USTC ¶348 ], 278 U.S. 282 (1929); Wagner
v. Commissioner [Dec.
46,813(M) ], T.C. Memo. 1990-443.
Petitioner bears the burden of ascertaining
whether a government representative is
authorized to compromise taxes. Federal Crop
Ins. Corp. v. Merrill, 332 U.S. 380, 384
(1947); Wagner v. Commissioner, supra.
In
this case, Mr. Hutchinson was not authorized to
compromise the taxes in issue since it is clear
that petitioner's case was never referred to the
DOJ. Accordingly, even if we were to accept
petitioner's interpretation of the stipulation
it relies upon in support of its motion, we must
conclude that it nonetheless did not effect a
valid compromise of petitioner's liability for
additions to tax under section 6653(b).
Accordingly,
we conclude that the plea agreement entered into
between the Government and Mr. Palladino does
not preclude respondent from raising the issue
of petitioner's liability for additions to tax
under section 6653(b) for the years in issue,
and petitioner's Motion for Partial Summary
Judgment will be denied.
To
reflect the foregoing,
An
appropriate order will be issued.
Richard
L. Wagner v. Commissioner
Docket No. 16849-88., TC Memo. 1990-443, 60
TCM
551, Filed August 16, 1990
[Appealable, barring stipulation to the
contrary, to CA-9.--
CCH
.]
[Code
Sec.
7122 ]
[Commissioner of Internal Revenue: Compromises:
Criminal case: Jurisdiction: United States
attorney: Authority to accept offers: Equitable
estoppel: Fact finding.]Petitioner was indicted
on 15 counts of aiding and assisting in the
preparation of false income tax returns of
others in violation of section
7206(2) . In a plea agreement letter
prepared by his attorney, he pleaded guilty to
two counts of the indictment. The plea agreement
letter also contained the statement: "The
Government acknowledges that Mr. Wagner has no
personal income tax Civil liability for purposes
of this indictment and Plea." Held:
The plea agreement letter does not relieve
petitioner of income tax liabilities on matters
not covered by the indictment and plea. Held
further: The plea agreement letter is not a
valid compromise of petitioner's civil income
tax liabilities because the government's
attorneys were not authorized to enter into a
compromise agreement. Held further:
Respondent is not estopped from denying the
binding effect of the plea agreement letter.
Richard
L. Wagner, pro se. William W. Lowrance,
for the respondent.
Memorandum
Findings of Fact and Opinion
SCOTT,
Judge:
This
case was assigned to Special Trial Judge Norman
H. Wolfe pursuant to the provisions of section
7443A(b) and Rule 180 et seq. 1
The Court agrees with and adopts the opinion of
the Special Trial Judge, which is set forth
below.
Opinion
of the Special Trial Judge
WOLFE,
Special Trial Judge: In a notice of deficiency
dated
April 5, 1988
, respondent determined the following
deficiencies in petitioner's 1979, 1980, and
1981 Federal income tax.
Additions to tax under
Year Deficiency Section 6653(b) Section 6654
1979 ............................. $ 73,447 $ 36,738.50 n/a
1980 ............................. 266,319 133,159.50 n/a
1981 ............................. 122,593 56,295.50 10,157.49
Respondent also determined that in the event the
additions to tax under section 6653(b) were not
sustained, petitioner was liable for additions
to tax for negligence under section 6653(a) in
the amount of $3,673.85 for 1979 and $13,315.95
for 1980, and under section 6653(a)(1) in the
amount of $5,629.65 for 1981. He further
determined that petitioner was liable
alternatively for additions to tax for late
filing under section
6651(a)(1) in the amount of
$18,369.25 for 1979, $66,597.75 for 1980, and
$28,148.25 for 1981. After concessions by the
parties, the only issue for decision is whether
petitioner is relieved of civil income tax
liability for the taxable years 1979, 1980, and
1981 by a plea agreement entered into between
the United States Attorney and petitioner with
respect to a criminal proceeding in which
petitioner pleaded guilty to two counts of
aiding and assisting in the preparation of false
income tax returns of others in violation of section
7206(2) .
The
parties have filed a Stipulation of Settlement
that resolves petitioner's liabilities in the
event we hold that petitioner's individual civil
tax liabilities were not compromised by the
government by the
November 12, 1986
plea agreement.
Findings
of Fact
Some
of the facts have been stipulated and are so
found. The stipulated facts and attached
exhibits are incorporated by this reference. At
the time petitioner filed his petition, he was a
resident of La Jolla, California.
Petitioner
filed his Federal income tax returns for the
years 1979 and 1980 on
August 18, 1980
and
April 5, 1982
, respectively. Petitioner did not file a return
for 1981. On both the 1979 and 1980 returns,
petitioner gave his occupation as
"investment counselor." During these
years, petitioner promoted and sold gold mining
tax shelters through his controlled corporate
entity, Monetary Economics Corporation.
On
or about
April 4, 1986
, petitioner was indicted in the Southern
District of California on fifteen counts of
violating section
7206(2) , Aiding or Assisting in the
Preparation of False Income Tax Returns of
Others. He pleaded not guilty to all counts.
Petitioner was not then or at any later date
indicted in regard to his individual income tax
liabilities for the years 1979, 1980, and 1981.
Petitioner
was represented on the criminal charges by
attorneys Clyde Munsell and Harry Steward. The
United States was represented by Martin F.
Klotz, special Assistant United States Attorney,
and by Edward Allard, Assistant United States
Attorney. The Assistant United States Attorneys
were not authorized by the Attorney General or
his delegate to settle petitioner's civil tax
liabilities. They informed Clyde Munsell that
petitioner's civil tax liabilities had not been
forwarded to the Department of Justice and that
the Department had no jurisdiction over these
liabilities.
Early
in November, when Clyde Munsell met with Martin
Klotz and Edward Allard, Edward Allard showed
him a flow-of-funds diagram that the government
planned to use in petitioner's case. Clyde
Munsell believed that the government's evidence
would be harmful to petitioner. He and the
government attorneys discussed the terms of a
plea bargain. On
November 11, 1986
, Clyde Munsell drafted a letter which purported
to summarize the agreements reached during the
plea negotiations.
A
hearing on petitioner's change of plea was held
on
November 12, 1986
. The Assistant United States Attorneys were
prepared to make a statement on the record as to
the government's understanding of the plea
bargain, since Clyde Munsell had called them
that very morning to accept the plea bargain
arrangement. However, at the hearing Clyde
Munsell produced the letter dated
November 11, 1986
, which he had completed drafting that morning.
The Government's attorneys did not see this
letter prior to the hearing. The letter states,
inter alia, that petitioner agreed to plead
guilty to two counts of the indictment. In
addition, Paragraph 6 of the plea agreement
letter (hereinafter, "Paragraph 6")
states: "The Government acknowledges that
Mr. Wagner has no personal income tax Civil
liability for purposes of this indictment and
Plea." The parties did not discuss
Paragraph 6 at the change of plea hearing. They
did discuss other provisions of the letter, and
certain modifications were made. The letter, as
modified on the record, was filed as the plea
agreement between the parties.
Immediately
after the hearing, Martin Klotz and Edward
Allard sought to obtain confirmation from
petitioner that the parties were in agreement as
to the meaning of Paragraph 6. They approached
petitioner's counsel, Clyde Munsell, and stated
that they understood Paragraph 6 to mean that
petitioner had no income tax liability with
respect to any taxes owed by the investors to
whom petitioner had supplied false information
and false documents. Clyde Munsell agreed that
the government attorneys' interpretation of the
meaning of Paragraph 6 was his interpretation as
well. Attorneys Klotz and Allard then asked
Clyde Munsell to obtain a letter from petitioner
stating that petitioner understood that the
government did not acknowledge that he had no
individual income tax liability. Petitioner
refused to sign such a statement.
On
February 17, 1987
, petitioner was sentenced to two years
imprisonment and fined $5,000 on one of the
counts to which he pleaded guilty. He was given
a suspended sentence and fined $5,000 on the
other count to which he pleaded guilty.
Petitioner was paroled after serving eleven
months of his two-year sentence.
Opinion
Petitioner
contends that Paragraph 6 of the plea agreement
letter relieves him of civil liability for his
individual income taxes. He does not state the
years that Paragraph 6 purports to cover or
explain whether he believes that Paragraph 6
relieves him of tax liability for matters
unrelated to the gold mining tax shelters. He
further claims that he relied to his detriment
on the plea agreement, so that respondent is
estopped from denying the binding effect of
Paragraph 6 and from determining the
deficiencies at issue in this case.
Respondent
asserts that Paragraph 6 of the plea agreement
does not relieve petitioner of civil liability
for his individual income tax. Respondent
further claims that even if the government's
attorneys intended to relieve petitioner of
civil liability for individual income tax by
agreeing to Paragraph 6, they lacked authority
to compromise petitioner's civil tax liabilities
and therefore Paragraph 6 has no effect. We
agree with respondent.
Paragraph
6 states in its entirety: "The Government
acknowledges that Mr. Wagner has no personal
income tax Civil liability for purpose of this
indictment and Plea." Petitioner was
indicted on fifteen counts of aiding or
assisting in the preparation of false income tax
returns of others. He pleaded guilty to two
counts. He was not indicted for filing
fraudulent individual income tax returns. His
individual civil tax liabilities were never made
a part of the indictment. He entered no plea
regarding his civil tax liabilities. The phrase
"for purposes of this indictment and
Plea" expressly limits petitioner's
liability to matters covered in the indictment
and plea. It does not relieve him of civil
liability on matters for which he was not
indicted and did not plead.
The
precise theory under which petitioner might have
been held liable for "personal income tax
civil liability" for assisting in the
filing of false returns of others is not clear.
Nevertheless, there is evidence that the
government's prosecutors and petitioner's
attorneys discussed this possibility on several
occasions. We need not consider whether any such
concerns of petitioner or his criminal defense
attorney were well founded. The language of
Paragraph 6 limits petitioner's relief from
"personal income tax civil liability"
to liability "for purposes of the
indictment and plea" on violations of section
7206(2) . We find that this language
did not constitute an agreement to waive
petitioner's civil income tax liabilities as to
his individual income tax returns for 1979,
1980, and 1981.
Even
if we were to accept petitioner's interpretation
of Paragraph 6, we would not find that it was
part of a valid compromise of petitioner's civil
tax liabilities. The procedure for compromising
tax claims is given in section
7122 , which states:
The
Secretary may compromise any civil or criminal
case arising under the internal revenue laws
prior to reference to the Department of Justice
for prosecution or defense; and the Attorney
General or his delegate may compromise any such
case after reference to the Department of
Justice for prosecution or defense.
Petitioner's
civil income tax liabilities for the years 1979,
1980, and 1981 were not referred to the
Department of Justice by respondent. The only
matter referred to the Department of Justice was
petitioner's violation of section
7206(2) .
For
tax cases which have not been referred to the
Department of Justice, sections
7121 and 7122
provide the exclusive means of
compromising the dispute. See Botany Worsted
Mills v. United States [1
USTC ¶348 ], 278 U.S. 282, 288
(1929); Shumaker v. Commissioner [81-2
USTC ¶9508 ], 648 F.2d 1198, 1200
(9th Cir. 1981); see also Estate of Meyer v.
Commissioner [Dec.
31,336 ], 58 T.C. 69, 70 (1972). Both
closing agreements under section
7121 and compromise agreements under section
7122 are required to be in writing
and to be accepted by the Secretary. Secs.
301.7121-1 and 301.7122-1, Proced.
& Admin. Regs.; secs.
601.203(a) and 601.203(b)
, Statement of Procedural Rules.
Petitioner has not shown that an agreement that
complies with these regulations and rules was
entered into with the Secretary.
Since
petitioner's civil tax case for the years here
in issue had not been referred to the Department
of Justice, no person in that department,
including the United States Attorney, had
authority to enter into a compromise agreement
with petitioner with respect to these taxes. Section
7122(a) gives the Attorney General
"or his delegate" the authority to
compromise civil and criminal tax cases referred
to the Department of Justice, but not tax cases
which have not been referred to the Department.
The burden is on petitioner to ascertain whether
a government representative is acting within the
bounds of his authority. Federal Crop Ins.
Corn. v. Merrill, 332 U.S. 380, 384 (1947); Saulque
V. United States, 663 F.2d 968, 974 (9th
Cir. 1981); Brubaker v. United States [65-1 USTC ¶9274 ], 342 F.2d 655, 662 (7th Cir. 1965).
Both
Edward Allard and Martin Klotz testified that
petitioner's civil income tax liabilities for
the years 1979, 1980, and 1981 were outside
their jurisdiction and that they did not have
authority to compromise these liabilities. They
also testified that they told petitioner's
counsel on several occasions that they did not
agree to relieve petitioner of his civil tax
liability. We find their testimony on this
matter credible. We also are convinced that,
prior to presentation of the plea bargain in the
District Court, petitioner was made aware of the
government's position through his attorney. At
the least, petitioner was on notice that he
should be careful to ascertain the scope of the
government attorneys' authority to compromise
his liabilities. Petitioner has offered no
evidence that he made any inquiry about whether
the government attorneys had authority to
compromise his civil tax liabilities or that
either government attorney affirmatively
represented to petitioner or his counsel that he
had such authority.
Petitioner's
argument that respondent is estopped from
denying the binding effect of Paragraph 6 is not
persuasive. Estoppel cannot be invoked against
the government because of the unauthorized acts
of its agents. Utah Power & Light Co. v.
United States, 243 U.S. 389, 409 (1917); Saulgue
v. United states, supra at 976. Furthermore,
the elements of equitable estoppel have not been
satisfied in this case. These elements are: (1)
there must be a wrongful statement or a
misleading silence by the party against whom the
opposing party seeks to invoke the doctrine; (2)
the error must be in a statement of fact and not
in an opinion or a statement of law; (3) the
person claiming the benefits of estoppel must be
ignorant of the true facts; and (4) the person
claiming the benefits of estoppel must be
adversely affected by the acts or statements of
the person against whom estoppel is claimed. Kronish
v. Commissioner [Dec.
44,694 ], 90 T.C. 684, 695 (1988); Estate
of Emerson v. Commissioner [Dec.
34,201 ], 67 T.C. 612, 617-618
(1977).
In
this case we are convinced that the Assistant
United States Attorneys did not make a wrongful
statement to petitioner or mislead him by their
silence. We also conclude that the failure of
the government attorneys to object to Paragraph
6 did not constitute a statement of fact, and
that petitioner was not ignorant of any material
facts when he entered his change of plea in
District Court. Finally, petitioner has failed
to convince us that he was adversely affected by
the acts or statements of the Assistant United
States Attorneys. Petitioner explicitly stated
to the District Court that he pleaded guilty to
the crimes with which he was charged because he
was in fact guilty of them, and he never sought
to change that pleading, despite ample
opportunity to do so. Respondent is not estopped
from denying the binding effect of petitioner's
interpretation of Paragraph 6.
To
reflect the foregoing,
Decision
will be entered under Rule 155.
1
All section references are to the Internal
Revenue Code, as amended and in effect for the
years in issue, unless otherwise indicated. All
rule references are to the Tax Court Rules of
Practice and Procedure.
[60-1
USTC ¶9147]United States of America v. James O.
McCue, Sr., Defendant United States of America
v. James O. McCue, Jr., Defendant
U.
S. District Court, Dist. Conn., Criminal Nos.
9798, 9799, 178 FSupp 426, 11/10/59
[1954 Code Sec. 7122(a)]
Crimes: Compromise agreement: U. S.
Attorney's authority to compromise: Estoppel.--The
taxpayers moved to dismiss 1959 indictments
against them for alleged false statements made
by them to Internal Revenue Service agents in
the course of an investigation of their income
tax liabilities because (1) the offenses charged
were the subject matter of and included within a
compromise agreement, authorized by Code Sec.
7122(a), of criminal tax liabilities under 1957
indictments, and (2) the principle of estoppel
was a bar to the 1959 indictments since
punishment had been submitted to and penalties
paid in reliance upon the U. S. District
Attorney's promise that such action would be in
full disposition and satisfaction of any and all
criminal offenses which might derive from any
material in the investigative file of those
cases. The motion was denied. The so-called
compromise agreement was invalid. The dealings
between the defense counsel and the U. S.
Attorney were "plea bargaining" to
which the court is not required to give effect.
The U. S. Attorney was not a
"delegate" of the Attorney General and
had no authority to make such a compromise.
Also, the compromise statute, Code Sec. 7122(a),
is not intended to provide for settlement of
criminal cases alone, as here, unrelated to
civil liability.
Harry
W. Hultgren, Jr., United States Attorney,
Federal Building, Hartford, Conn., John P.
Burke, Eldon F. Hawley, Charles A. McNelis, Mr.
Russo, Department of Justice, Washington, D. C.,
for plaintiffs. Francis J. McNamara, Jr., George
F. Lowman, Cummings & Lockwood, One Atlantic
Street, Stamford, Conn., David Hartfield, New
York, N. Y., for defendants.
Memorandum
of Decision on Motion to Dismiss the Indictments
ANDERSON,
District Judge:
This
is a motion to dismiss the separate indictments
brought against each of the accused in these
actions. Each defendant claims that the
indictment against him should be dismissed
because the offenses alleged were the subject
matter of and included within the terms of a
compromise agreement made on
April 15, 19
57 by defense counsel, on behalf of each of
them, with the United States Attorney for the
District of Connecticut and because the
Government is estopped to prosecute on the
charges in the indictments.
[Facts]
The
indictment against McCue, Sr., is in three
counts. The First Count alleges that in the
course of an interrogation of him by special
agents of the Internal Revenue Service on or
about
August 13, 19
54, concerning his personal income tax liability
for the years 1946 to 1952 and the corporation
income tax liability of the Stamford Rolling
Mills Co. for the years 1947 to 1951, that he,
when asked about certain travel vouchers in
connection with the business of the company,
made a false statement when he said that he was
in certain parts of the United States other than
Stamford on particular dates.
The
Second Count alleges that in the course of the
same interrogation he made a false statement
when he said that he had forbidden the
Independent Oil Company to continue billing the
Rolling Mill for fuel oil delivered to his own
personal estate.
The
Third Court alleges that during the same
interrogation he made a false statement when he
asserted that he had nothing to do with
procuring the services of the Stephen B. Church
Co. in drilling a well on his own personal
estate.
The
indictment against McCue, Jr., is in three
counts. The First Count alleges that in the
course of an interrogation of him by special
agents of the Internal Revenue Service on or
about
August 31, 19
54, concerning his personal income tax liability
for the years 1946 to 1952 and the corporation
income tax liability of the Stamford Rolling
Mills Co. for the years 1947 to 1951, he when
asked about certain travel vouchers in
connection with the business of the company,
made a false statement in representing that he
was in certain parts of the United States other
than Stamford on particular dates.
The
Second Count alleges that in the course of the
same interrogation he made a false statement
when he said that he had no knowledge that fuel
oil delivered at his own home was charged to the
company as a business expense and deduction.
The
Third Count alleges that during the same
interrogation he made a false statement when he
declared that he knew nothing about who
negotiated for the services of a well drilling
company which drilled a well on his personal
estate at the expense of the Stamford Rolling
Mills Co.
Prior
to the present indictments, McCue, Sr., had been
indicted on
March 13, 19
57 in Criminal No. 9476 in two counts for
willfully and knowingly attempting to evade and
defeat his income taxes due for the calendar
years 1950 and 1951, respectively, by filing
false and fraudulent income tax returns for
those years on
March 15, 19
51 and
March 10, 19
52. The offenses charged in that indictment
against McCue, Sr., were alleged violations of
Title 26, U. S. C. §145(b).
McCue,
Jr., had similarly been indicted on
March 13, 19
57 in Criminal No. 9477 in two counts of
willfully and knowingly attempting to evade and
defeat his income taxes due by filing false and
fraudulent income tax returns for the calendar
year 1950, by return of
March 15, 19
51, and for the calendar year 1951, by his
return of
March 14, 19
52.
Subsequent
to the return of these 1957 indictments certain
conferences were held between counsel for both
of the McCues and Simon S. Cohen, Esquire, then
U. S. Attorney for the District of Connecticut.
Thereafter on
April 15, 19
57, after two chambers conferences with the
court attended by defense counsel and the U. S.
Attorney, McCue, Sr., pleaded nolo contendere to
a lesser offense included in the indictment and
was found guilty of a violation of §145(a). 160
F. Supp. 595. He was fined $10,000 on each of
the two counts and was sentenced to one year
imprisonment on each count, sentences to run
concurrently; the execution of the sentences was
suspended and he was placed on probation for two
years. The indictment in Case 9477 against
McCue, Jr., was dismissed by the court on
representation by the U. S. Attorney that the
Government did not have evidence to convict
McCue, Jr., as he was nothing more than the
innocent agent of McCue, Sr.
Among
the items, in the 1951 and 1952 Income Tax
returns of both McCues, on which the charges
were based in the indictments and in the lesser
included offense, were failures to disclose
income derived from charging to the corporation,
in the years 1950 and 1951, the cost of wells
drilled on their own respective properties for
the use of their own residences; fuel oil
delivered to and used in their respective
personal residences; and payments for travel
claimed to have been performed on the business
of the corporation but never in fact performed.
While the Internal Revenue agents were
investigating the McCues' returns for the years
1946-1952, an investigator interviewed McCue,
Sr., on
August 13, 19
54 and McCue, Jr., on August 31st, 1954 and, to
a number of questions about their 1951 and 1952
tax returns each gave answers which, in the
present indictments, are alleged to be false.
After the charges under the 1957 indictments had
been disposed of, the present indictments, based
upon the 1954 false statements, were procured as
violations of Title 18, U. S. C. §1001, a
general statute which forbids the making of
false statements or representations to any
department or agency of the United States in any
matter within its jurisdiction.
[Contentions
of Parties]
The
defendants have moved for the dismissal of these
indictments on the grounds: (1) that the
offenses charged in them were a part of and
included within a compromise agreement,
authorized by Title 26 U. S. C. §7122(a), and
made on
April 15, 19
57 just prior to the plea and disposition in
McCue, Sr.'s case under the 1957 indictment; and
(2) that the Government is estopped from
prosecuting the present indictments because
McCue, Sr., submitted himself to punishment and
paid his penalties in reliance upon the District
Attorney's promise that McCue, Sr.'s plea to the
lesser included offenses on
April 15, 19
57 was in full disposition and satisfaction of
any and all criminal offenses which might derive
from any material in the investigative file of
those cases based on acts of McCue, Sr., or
McCue, Jr., or both.
The
Government says in reply: (1) that no such
compromise was made; (2) that the United States
District Attorney was not a "delegate"
of the Attorney General and had no authority to
make any such compromise; (3) that Title 18 U.
S. C. §1001 is not "an internal revenue
law" within the provisions of Title 26 U.
S. C. §7122(a); and (4) that the Government is
not and cannot be estopped from prosecuting on
the present indictments.
[Compromise
Agreement As Bar]
Taking
up first, the question of whether or not the
present indictments are barred by a compromise
agreement under §7122(a) between the defendants
and the Government, it is apparent that there is
conflicting evidence both as to the making of
any compromise agreement on
April 15, 19
57 and, if it in fact had been made, what its
terms were. These are matters which, absent the
formal waiver required by the rules, would have
to be determined by a jury. Rau v. United
States, 260 Fed. 131. Therefore, for the
purpose of this motion to dismiss, the court
must assume the facts to be what the defendants
say they are. The defendants claim that on
April 15, 19
57 they and the then U. S. Attorney for the
District of Connecticut, under the authority of
Title 26, U. S. C. §7122(a), entered into a
compromise agreement which generally provided
that in return for pleas of nolo contendere by
McCue, Sr., to two counts of Title 26 U. S. C.
§145(a) misdemeanor charges, the 1957 tax
evasion indictments against both McCue, Sr. and
Jr. would be dismissed and that McCue, Sr. and
Jr. would, except for the misdemeanor charges
against McCue, Sr., be granted immunity from
prosecution on all possible criminal offenses
disclosed in the investigative file then in the
possession of the U. S. Attorney.
The
interpretation placed upon these facts by the
defendants and what was intended to be
accomplished by the claimed agreement are
reflected in their memorandum filed
April 2, 19
59 in support of this motion to dismiss the
indictments where, on page 16, the defendants
say:
"Relying
upon the government's promise that he would
thereby be able to settle his and his son's
criminal liability arising out of the tax
investigation, the defendant, James O. McCue,
Sr., pleaded nolo contendere to a
crime."
and
in their supplemental memorandum filed
April 14, 19
59, page 4, where they refer to the agreement as
follows:
".
. . the dismissal of the charges against him,
[McCue, Jr.] was a part of the compromise
agreement between the government and the
defendants. One of the government's contractual
obligations under the agreement was to consent
to the dismissal of the charges against Mr.
McCue, Jr. Underlying this bargain, of course,
was the government's substantial doubt as to its
likelihood of obtaining a conviction of Mr.
McCue, Jr. But the dismissal was a direct result
of the compromise, not of the doubt alone. The
government made no indication that it would
consent to the dismissal of the charges against
Mr. McCue, Jr., until Mr. McCue, Sr., agreed to
plead nolo contendere. The compromise
covered both McCues and it protects both from
further prosecution for the same alleged
criminal acts."
Had
a valid compromise agreement been entered into
under §7122(a), it would have bound the
parties, and the court would have been obliged
to give it full recognition and force, save for
the matter of penalty which cannot be made a
part of such an agreement. U. S. v. Sabourin,
157 F. 2d 820 (2nd Cir. 1946) [46-2 USTC ¶9380].
But the so-called compromise agreement as
claimed by the defendants is invalid on its
face. First, it should be made clear that McCue,
Sr., was arraigned, found guilty, fined and
sentenced on the same day and only a matter of
two or three hours after the claimed compromise
agreement was made. Yet at that time, neither in
the court proceedings nor in the chambers
conferences with defense counsel and the U. S.
Attorney immediately preceding the court
session, was any mention made of a
compromise--much less a compromise under §7122(a)
of Title 26 U. S. C.
As
represented to the court at the time of the
chambers conferences and the court session which
immediately followed, the posture of the cases
was that there had been negotiations between the
U. S. Attorney and defense counsel for
disposition of McCue, Sr.'s case on the basis of
certain provable guilt on his part, which the U.
S. Attorney represented as calling for a §145(a)
misdemeanor charge. The U. S. Attorney then
stated that McCue, Jr., had done nothing more
than act as the innocent agent of McCue, Sr.,
that there was no evidence available of willful
wrong-doing on the part of McCue, Jr., and that
the indictment against him should be dismissed.
As then presented to the court, the dealings
between defense counsel and the U. S. Attorney
were solely in the nature of what is sometimes
referred to as "plea bargaining",
something to which the court is in no sense
required to give effect; and the conferences
which followed with the Court were for the sole
purposes of determining whether the court would
hear and dispose of the cases that same
afternoon and, a dismissal of indictment being
involved, whether the court, upon the
representations made by counsel, would approve
of the disposition of the cases in that manner
without, of course, there being any discussion
of what penalties might be imposed upon McCue,
Sr. The defendants now claim that at the time of
the making of the compromise agreement entered
into a few hours earlier and undisclosed to the
court, the U. S. Attorney, though somewhat
doubtful that he could secure a conviction of
McCue, Jr., did not concede McCue, Jr.'s
innocence but agreed to accept the submission by
McCue, Sr. to punishment as full consideration
for any guilt of McCue, Jr., as well as that of
McCue, Sr. Had the terms of the claimed
compromise agreement been fully disclosed to the
court on April 15, 1957, the court could not
have approved of it because an agreement by the
terms of which, one person assumes punishment
for the guilt of himself and another is improper
and void. U. S. v. Doe, 101 F. Supp. 609.
Therefore,
although McCue, Sr., having submitted himself to
punishment under the 1957 tax evasion indictment
could obviously not again be prosecuted for the
charges contained in that indictment, the
claimed agreement cannot avail to bar the
present indictment.
[Authority
of U. S. Attorney to Compromise]
The
Government asserts that the U. S. Attorney had
no inherent, express, implied or apparent
authority to enter into a compromise agreement
with the defendants under §7122(a) of Title 26,
U. S. C. because he was not the
"delegate" of the Attorney General for
this purpose.
¶12
of §7701 of Title 26 U. S. C. provides:
"(12)
DELEGATE.--The term 'Secretary or his delegate'
means the Secretary of the Treasury, or any
officer, employee, or agency of the Treasury
Department duly authorized by the Secretary
(directly, or indirectly by one or more
redelegations of authority) to perform the
function mentioned or described in the context,
and the term 'or his delegate' when used in
connection with any other official of the United
States shall be similarly construed."
The
pertinent portion of §5 of Executive Order No.
6166 is as follows:
"The
functions of prosecuting in the courts of the
United States claims and demands by, and
offenses against, the Government of the United
States and of defending claims and demands
against the Government, and of supervising the
work of United States attorney, marshals, and
clerks in connection therewith, now exercised by
any agency or officer, are transferred to the
Department of Justice.
"As
to any case referred to the Department of
Justice for prosecution or defense in the
courts, the function of decision whether and in
what manner to prosecute, or to defend, or to
compromise, or to appeal, or to abandon
prosecution or defense, now exercised by any
agency or officer, is transferred to the
Department of Justice."
It
is, therefore, clear that to compromise such a
case the U. S. District Attorney must have
actual authority from the Attorney General. This
plain requirement of an actual delegation of
authority negatives the idea that the U. S.
District Attorney has the authority simply by
virtue of his office. U. S. v. Beebe, 180
U. S. 343, 351, holds that there is no such
inherent authority in the office of U. S.
District Attorney. It is uncontradicted that the
U. S. Attorney had no express authority; and
there is no evidence at all that he had implied
authority, for that would require a showing that
the Attorney General intended that he had the
authority and that the surrounding circumstances
made that intention and the grant of power
necessary and manifest. 2 C. J. S. §99.
"Public
officers have only such power and authority as
are clearly conferred by law or necessarily
implied from the powers granted . . ." [See
Federal Trade Commission v. Raladam Co.,
283 U. S. 643; and Brown v. U. S., 102 F.
Supp. 132] 67 C. J. S. §102.
Further
consideration of the proper construction of the
compromise statute shows that it is unavailable
to the defendants as a recourse in these cases,
for §7122(a) is not intended to provide for
settlement of criminal cases alone, unrelated to
civil liability. The cases, i.e. those based
upon the 1957 tax evasion indictments, discussed
by the United States Attorney with defense
counsel on
April 15, 19
57 were entirely criminal cases; there was no
civil aspect or settlement involved, nor at that
time had any disposition been made of the civil
claims arising out of the errors found in the
1951 and 1952 Income Tax Returns on which the
indictments were based. Although the statute (§7122)
empowers the Attorney General or his delegate to
compromise any civil or criminal case
arising under the internal revenue laws after it
has been turned over to the Department of
Justice, reference has not been made nor has
research disclosed any case where, as in the
present instance, the criminal phase alone was
involved. The decided cases have all, directly
or indirectly, been concerned in whole or in
part with the settlement of civil claims as
well.
There
is no logic or reason for authorizing the
compromise of a criminal case under the Internal
Revenue laws, which would not apply with equal
force to all other statutes in the criminal
code, except for the distinguishing feature of
the criminal laws under the Internal Revenue
laws, which is that they are coupled with a
civil liability for the payment of money. They
are a part of a section of the federal statutes,
the one increasing purpose of which is the
protection and collection of revenue. The
"agreement" for compromise presupposes
some special consideration moving to the
Government, other than that which is in every
non-Internal Revenue criminal case, and that
consideration is only supplied by the civil
aspect of the case. The purpose of the statute
was to facilitate the money settlement of tax
liabilities. The use of the disjunctive in the
phrase "to compromise any civil or
criminal case" was intended to take care of
circumstances where criminal charges have been
brought or a criminal prosecution has actually
been commenced, but no formal action has been
taken with regard to the civil liabilities and
an agreement has been reached covering both the
civil and criminal aspects. It is significant
that this statute and its predecessors go back
for more than 91 years and in that long period
of time no case appears to have arisen where an
attempt was made to agree on a compromise of a
criminal case standing alone and unrelated to
any disposition of civil liabilities.
The
same words "compromise any civil or
criminal case" are used in the statute in
giving authority to the Secretary of the
Treasury, and the statute requires him, whenever
such a compromise is made "in any
case" to record the tax assessed,
additional charges made and "the amount
actually paid in accordance with the terms of
the compromise". The inference to be drawn
from this is that the purpose of the compromise
statute was to facilitate money settlements of
tax liability and the settlement of criminal
charges are contemplated only when they are
ancillary thereto.
Moreover,
although the same formal record is not required
of the Attorney General or his delegate, it is
hardly to be supposed that Congress intended
that compromise agreements on behalf of the
Government could be entered into by the U. S.
District Attorney in an unrecorded informal oral
conversation. In all of the cases in which this
compromise statute has been invoked there has
been a written agreement entered into by the
Attorney General or his delegate or, absent such
writing, there has been a formal record of money
paid in satisfaction of tax liability. U. S.
v. Wainer, 240 F. 2d 596 (7th Cir. 1957)
[57-1 USTC ¶9280]; U. S. v. Sabourin,
157 F. 2d 820 (2nd Cir. 1946) [46-2 USTC ¶9380];
Burr v. U. S., 86 F. 2d 502 (7th Cir.
1936) [36-2 USTC ¶9498]; Oliver v. U. S.,
267 F. 544 (4th Cir. 1920); and U. S. v.
Willingham, 208 F. 137 (5th Cir. 1913).
[Estoppel]
The
defendants also invoke the principle of estoppel
as a bar to the 1959 indictments. It is their
contention that the Government through the
United States District Attorney entered into an
agreement with the defendants, in reliance upon
which McCue, Sr., submitted himself to
punishment and paid the penalty, and that,
therefore, the Government, whether or not the
compromise statute applies and whether or not
the U. S. Attorney had actual authority, is now
estopped to prosecute the defendants on charges
which were within the scope of the plenary
immunity granted by the agreement. The claim of
estoppel is in effect the same as a claim of
apparent authority. That is to say, the
defendants assert that the Government left it to
the U. S. Attorney to deal with these cases; he
had the investigative file and he talked with
defense counsel about them; that these things
gave the defendants reasonable grounds to
believe that the U. S. Attorney had full power
in the premises, that they relied upon his
having that power and in consequence McCue, Sr.,
subjected himself to the penalties which he
suffered.
There
is a substantial body of authority which holds
that where actual authority in a governmental
officer is called for, its absence will prevent
the arising of an estoppel. Under this line of
precedent, as there was no evidence in the
present case of actual authority to compromise,
the Government could not be estopped by any acts
of the United States Attorney which were beyond
the scope of his authority. McDonald v. U.
S., 89 F. 2d 128 (8th Cir. 1937); Buie v.
U. S., 76 F. 2d 848 (5th Cir. 1935).
".
. . All persons dealing with public officers
must inform themselves as to their authority,
[See U. S. v. Foster, 131 F. 2d 3, cert.
denied 318 U. S. 767], and are bound, at their
peril, to ascertain and know the extent and
limits of their authority, [See U. S. v.
Jones, 176 F. 2d 278; Continental
Casualty Co. v. U. S., 113 F. 2d 284, cert.
denied, 311 U. S. 696; Northern Pac. Ry. Co.
v. U. S., 70 F. Supp. 836, affirmed 188 F.
2d 277]; and acts which are within the apparent,
but in excess of the actual, authority of
officers will not bind the government which they
represent . . ." [See Foster, supra; U.
S. v. Buescher, 131 F. 2d 3, cert. denied,
318 U. S. 767 and cases cited supra.] 67
C. J. S. §102, pp. 366, 367.
Even
if this statement of the law is regarded as too
broad, there are several considerations which
militate against a conclusion of estoppel in
this case:
First,
assuming that the negotiations with the U. S.
Attorney were as the defendants claimed they
understood them to be, the policy reason which
rendered the so-called compromise agreement
itself ineffective as a bar to the 1959
indictments would also prevent the arising of an
estoppel, for an estoppel cannot stem from
reliance upon an agreement which is illegal and
void.
Second,
although the question of the existence of a
compromise agreement under §7122(a), as a bar
of the 1959 indictments, in itself, requires a
determination of the facts by a jury, the facts
connected with the claimed making of the
compromise agreement on the equitable issue of
estoppel rest with the court. The court's own
finding is that, in fact, no compromise
agreement under §7122(a) was at any time
entered into between the Government and the
defendants in connection with the 1957 tax
evasion indictments or any other charges or
possible charges against them. The negotiations
and discussions between the U. S. District
Attorney and defense counsel in 1957 amounted to
nothing more than so-called "plea
bargaining".
Third,
there is the matter of constructive notice
derived from the compromise statute itself.
An
element of estoppel is that there has been a
reasonable reliance by the party claiming it,
upon some representation by the other party.
Here the defendants were on notice from Title 26
U. S. C. §7122(a) and Title 26 U. S. C. §7701,
¶12, and Executive Order 6166 that actual
authority delegated by the Attorney General to
the U. S. District Attorney was required. They
alone are notice that actual authority must be
specifically delegated; and, at the very least,
put the defendants upon inquiry.
There
is also notice from the wording of the statute
itself. §7122(a) says "the Attorney
General or his delegate may compromise any such
case".
The
compromise statute must be narrowly construed
for it is in derogation of the general rule that
the interests of the sovereign in the
enforcement of its criminal code is not
something to be contracted or bargained away and
is not a proper subject of compromise. It can
only be done where in a particular area some
public interest justifies it and then it can
only be done by special statutory authority. Buie
v. U. S., supra. Therefore the word
"case" as used in Title 26 §7122(a)
must be given a construction which keeps it
within the narrow walls of the purpose of the
statute, which is to settle a particular
formulated charge, before or after indictment.
Assuming
arguendo, that the defendants and the U. S.
District Attorney attempted to enter into a
compromise agreement under §7122(a), surely the
word "case" can refer only to charges,
formulated in the Attorney General's office,
which the U. S. Attorney had been directed by
the Attorney General to prosecute. The only
"cases" then in his hands for this
purpose were the 1957 tax evasion indictments.
But the compromise agreement claimed here by the
defendants goes far beyond a compromise of the
1957 indictments. The defendants claim that the
U. S. Attorney granted to them a plenary
immunity from prosecution of all possible
offenses (of which the U. S. Attorney said there
were many) disclosed in the investigative file
which was then in his possession. Possible
offenses which have been mentioned in the
records of these cases are conspiracy,
obstructing justice and false statements to an
agency of the United States. The defendants have
left no doubt about the scope of the agreement:
"The
compromise was understood by the attorneys for
the defendants and the U. S. Attorney as
encompassing all criminal matters then known to
the Government arising out of the tax
investigation." Defendants' memorandum
filed
April 2, 19
59, page 2.
".
. . Mr. Cohen's intention at the time of the
negotiations preceding the disposition of the
earlier indictments was to settle all criminal
matters arising from the investigative file then
before him." Defendants' 2nd supplemental
memorandum filed
September 23, 19
59, page 13.
".
. . The Government emphasizes the fact that no
false statement charges were instituted or
suggested in connection with the §145(b)
criminal proceedings against the McCues. It is
not clear what importance the Government seeks
to attach to this proposed finding of fact.
Perhaps it wishes to counter, thereby, any
argument by the defense that there was an
express compromise of criminal charges involving
false statements. If so, we want to make it
clear that we are not asserting that there was
an agreement in haec verba that 'criminal
charges under 18 U. S. C. §1001 based on false
statements made in 1954 are hereby compromised.'
Rather, our contention is that we compromised,
generally, all possible criminal offenses
disclosed in the McCue file in the possession of
United States Attorney Cohen . . ."
Defendants' memorandum filed
October 3, 19
59, pp. 3, 4.
Even
if the statutes and Executive Order were
construed not to require actual authority and
power were held to be inherent in the office of
the United States Attorney to compromise,
without express authority from the Attorney
General, pending charges which the Attorney
General has ordered him specifically to proceed
upon, such as the tax evasion charges of 1957,
the "cases" then in his hands, still
they were on notice that he had no authority to
grant a complete immunity from prosecution for
any criminal acts mentioned or suggested in the
investigative file. The Whiskey Cases, 99
U. S. 594; Wilbur Nat'l Bank v. U. S.,
294 U. S. 120 (1935); U. S. v. Shotwell,
225 F. 2d 394 (7th Cir. 1955) [55-1 USTC ¶9511];
Sanders v. Comm'r, 225 F. 2d 629 (10th
Cir. 1955) [55-2 USTC ¶9636], cert. den. 350 U.
S. 967 (1956); and McDonald v. U. S., 89
F. 2d 128, 138 (8th Cir. 1937).
Moreover,
the defendants are themselves barred from
raising the issue of an estoppel based upon the
claimed agreement because the carrying out of
the agreement involved the dismissal of two
indictments which necessitated action by the
court. Under these circumstances the court is
entitled to a full and complete disclosure of
all of the circumstances surrounding the motion
for dismissal. It is apparent from the face of
the record and the defendants' claims that there
was not disclosed to the court at the time the
motion was made to dismiss the indictments, two
features of the agreement which would have vital
consequences: first, that McCue, Sr. had agreed
to submit himself to punishment, both for
himself and for McCue, Jr.; and, second, that
the U. S. Attorney had agreed to grant plenary
immunity from prosecution on any and all charges
which might be derived from the investigative
file. U. S. v. Doe, supra.
In
view of the foregoing it is unnecessary for the
court to discuss the point urged by the
Government that Title 18 U. S. C. §1001 is not
"an Internal Revenue Law" within the
provision of the compromise statute.
If,
however, on
April 15, 19
57 a legal and valid compromise agreement
relating to the 1957 tax evasion indictments and
any charges which might be based upon the 1954
false statements had been entered into in
connection with a civil settlement and the U. S.
Attorney had been appointed the delegate of the
Attorney General for the purpose, it may be said
by way of dictum that such an agreement would
probably bar the 1959 indictments based upon the
1954 false statement charges, because at the
time of the claimed agreement the Government had
a choice of charging the defendants for the 1954
false statements either under §1001 or §145(b).
The mere fact that the Department of Justice in
1959 decided to call it a §1001 violation and
thus not an Internal Revenue offense would not
relate back to make it a non-Internal Revenue
violation. The defendants would be entitled to a
conclusive presumption that at the time of the
compromise agreement the charges being then
unlabeled as either §1001 or §145(b), it was
the latter and not the former. As the elements
required to be proven for §1001 and §145(b)
would, under the circumstances, be identical,
the disposition of the case under §145(b) would
bar a future §1001 prosecution as double
jeopardy.
[Proper
Compromise Could Be a Bar]
The
defendants protest that if, after making an
agreement for the disposition of a criminal
charge under the Internal Revenue laws, the
Government can the next day commence prosecution
against the same defendants for another charge
arising out of the same course of investigation,
no defendant would enter into an agreement under
§7122(a) and the statute would as a practical
matter be rendered completely nugatory. The
answer to this is that if a proper compromise
agreement is entered into with a properly
authorized officer of the Government and there
is some evidence, informal as it may be or
inferred as it may be from aspects of the civil
settlement, that the particular violation of the
Internal Revenue laws has been included, then
the compromise statute will operate as a bar to
a prosecution for that violation.
The
motions to dismiss are denied.
