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TAX / FRAUD

Fraud convicts cannot argue in Tax Court that payments did not result from fraud

 

By Alistair M. Nevius, J.D.
August 8, 2012

Taxpayers who had been convicted of fraud were precluded from later arguing that payments they received were not the result of fraud, the Tax Court held in two related cases (Atkinson, T.C. Memo. 2012-226, and Boultbee, T.C. Memo. 2012-227). The court invoked the doctrine of collateral estoppel to prevent the taxpayers from claiming the payments involved in their conviction for pecuniary fraud did not result from fraud. However, a different fraud conviction that was vacated did not bar the taxpayers from arguing that the payments involved in that circumstance did not result from fraud.

Peter Atkinson owned nearly 1% of Ravelston Corp. Ltd., which held a controlling interest in Hollinger International Inc. Hollinger owned the Chicago Sun-Times, the Daily Telegraph in the United Kingdom, the National Post in Toronto, the Jerusalem Post, and many other smaller newspapers. Atkinson was an executive vice president of Hollinger. John Boultbee indirectly owned approximately 1% of Ravelston and was its CFO. He was also a Hollinger executive vice president.

From 1998 through 2001, Hollinger implemented a plan to sell its community newspapers. Each member of Hollinger’s management received a share of the sales proceeds, purportedly in exchange for entering into a noncompete agreement with the purchasers and/or with a Hollinger subsidiary. The taxpayers each received $602,500 from these transactions. The payments were never reported to Hollinger’s audit committee.

The U.S. government charged Atkinson and Boultbee with fraud arising from these transactions, alleging that the payments were unauthorized bonuses and were characterized as compensation for noncompete agreements to avoid Canadian tax. The government pursued two distinct legal theories: (1) pecuniary fraud, which involved the fraudulent appropriation of money to which Hollinger was legally entitled, and (2) honest services fraud, which involved a scheme to deprive Hollinger of its right to honest services.

The jury found Atkinson and Boultbee guilty of fraud, but did not specify which type of fraud (or both) it found them guilty of (Black, No. 05-CR-727 (N.D. Ill. 8/18/05)). The case eventually wound up in the Supreme Court, which held that a conviction for honest services fraud requires proof that the individual solicited or received a bribe or kickback (Skilling, 130 S. Ct. 2896 (U.S. 2010)). On remand, the Seventh Circuit vacated the taxpayers’ convictions for some of the payments, holding that it was possible the jury had convicted them only under the honest services fraud theory. It affirmed their convictions for the other payments under the pecuniary fraud theory (Black, 625 F.3d 386 (7th Cir. 2010)).

The IRS determined tax deficiencies in Atkinson’s and Boultbee’s income tax in the amount of $686,535 (each) for 2000 and in the amount of $140,049 (each) for 2001. The taxpayers are both Canadian citizens and residents and did not file U.S. tax returns for those years. Canadian citizens’ income from a noncompete agreement is not taxable, under the U.S.-Canada income tax treaty, but income derived from a fraudulent scheme is.

In Tax Court, the taxpayers moved for summary judgment, arguing that the payments were not taxable by the United States because they were compensation for personal services performed outside the United States. The IRS argued that they were barred by the doctrine of collateral estoppel from disputing that the payments were obtained by fraud. Collateral estoppel precludes a party from relitigating previously decided issues of fact or law.

The Tax Court examined the six conditions that must be met for collateral estoppel to apply. The court decided that, for the payments relating to the vacated conviction, there had been no final judgment, and therefore collateral estoppel did not apply. It granted the taxpayers’ petitions for summary judgment as to those payments.

For the other payments, the court found that all the elements of collateral estoppel were satisfied and that Atkinson and Boultbee are precluded from arguing that those payments were not the result of fraud. The case will now go to trial to resolve the outstanding issues.

Alistair M. Nevius (anevius@aicpa.org) is the JofA’s editor-in-chief, tax.

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