Tax Court Finds That the IRS Could Assess Restitution against a Third Party Where His Tax Conviction Crime Was Aiding and Abetting His Father’s Evasion of Income Tax.

In Botrager 151 TC No. 12 (2018), the Tax Court concluded that IRC Sec. 6201(a)(4) authorizes IRS to assess restitution for a tax liability that a person had been ordered to pay, upon conviction of violating IRC Sec. 7201, when his wrongdoing consisted of aiding and abetting the evasion of payment of a third party's tax liability.

Facts. The IRS alleged that from 1998 through 2010, Bontrager had criminally aided and abetted his father in evading payment of the father’s 1994 Federal income tax liability. Bontrager was alleged to have done this by using his company and a related real estate company to help his father conceal assets, income, bank accounts, and business interests. The IRS alleged that Bontrager had, for example, issued corporate checks to his father's female acquaintance, had used corporate funds to purchase a Rolls Royce for his father's use, had allowed his father to charge personal expenditures to a corporate credit card, had titled various assets in the names of his father's nominees, and had used offshore accounts to conceal his father's income and assets.

Several months before his sentencing, on October 4, 2013, Bontrager filed a petition under Chapter 7 of the Bankruptcy Code. In 2014, the bankruptcy court closed the bankruptcy case by issuing an order of discharge. That order noted that certain types of debts are not discharged in a Chapter 7 case, including "[d]ebts for most fines, penalties, forfeitures, or criminal restitution obligations."

Relying on IRC Sec. 6201(a)(4), IRS assessed the $72,710 of restitution that Mr. Botrager had been ordered to pay and recorded this assessment as a liability for his 1994 tax year.

On June 3, 2015, after petitioner did not pay the balance of the liability on notice and demand, the IRS filed a Notice of Federal Tax Lien. Upon notification, petitioner timely requested a Collection Due Process hearing. In his hearing request, Bontrager contended that the restitution was not assessable because it was ordered for failure to pay a tax that title 26 imposed upon his father rather than upon him.

After the collection due process hearing, the settlement officer upheld the filing of the Notice of Federal Tax Lien, and Mr. Bontrager timely petitioned the Tax Court.

The Court’s Analysis:

The District Court's sentencing order stated that petitioner was adjudicated guilty of violating "26 U.S.C. § 7201.” IRC Sec. 7201 criminalizes any willful attempt “in any manner to evade or defeat any tax imposed by this title or the payment thereof.” The elements of a IRC Sec. 7201 offense are:

• willfulness;
• the existence of a tax deficiency; and
• an affirmative act constituting an evasion or attempted evasion of the tax.

The second element is equivalent to a failure to pay tax.

The sentencing order described the nature of petitioner's offense as “aiding and abetting the evasion of payment of income tax,” within the meaning of 18 U.S.C. sec. 2. which alone does not make “aiding and abetting” a distinct crime. Rather, it provides that a person who “aids, abets, counsels, commands, induces or procures” the commission of an offense against the United States “is punishable as a principal.” Restitution orders are therefore, based on the underlying crime, not on the aiding and abetting.

IRC Sec. 6201(a)(4) authorizes the Commissioner to assess and collect the amount of restitution under a sentencing order “for failure to pay any tax imposed under this title.” As Bontrager was convicted of violating IRC Sec. 7201, he was thus found guilty of attempting “to evade or defeat [a] tax imposed by this title or the payment thereof.” Because failure to pay a tax imposed by title 26 was an element of the offense with which Bontrager was charged, and because he was convicted of that offense, IRC Sec. 6201(a)(4) by its terms authorized the IRS to assess and collect the amount of restitution that Botrager was ordered to pay.

Bontrager argued that the tax, the payment of which he was convicted of evading, was not originally imposed upon him by title 26. The Court said that neither IRC Sec. 7201 nor IRC Sec. 6201(a)(4) requires that this be the case. IRC Sec. 7201 criminalizes any willful attempt to evade payment of “any tax imposed by this title.” IRC Sec. 6201(a)(4) authorizes the assessment of restitution “for failure to pay any tax imposed under this title.”

The Tax Court further held that Mr. Bontrager's restitution liability was not discharged in the bankruptcy proceeding. The Court rejected his contention that IRS waived the nondischargeability of the restitution obligation by filing a claim as a general unsecured creditor in his chapter 7 case. Contrary to the taxpayer's view, the Court found that nothing in the Bankruptcy Code prevents a creditor of a nondischargeable debt from filing a claim, and the taxpayer provided no legal authority for this proposition. Further, the Court determined that IRS properly filed its claim as a general unsecured creditor. Because IRS had not assessed the restitution obligation at the time of the taxpayer's bankruptcy, let alone filed an NFTL, it was required to file its claim as a general unsecured creditor.