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CRIMINAL DEFENDANTS AND ABUSE OF
JEOPARDY TAX PROCEDURES

Barry Tarlow*

INTRODUCTION

Federal and California taxing agencies can exercise awesome statutory authority to summarily assess and collect taxes if they conclude that collection of the taxes is endangered.' This extraordinary authority is necessary to ensure that suspected criminals who may flee or dispose of their assets pay their share of taxes. If exercised fairly and for a legitimate revenue-raising purpose, this power would not raise constitutional problems.2 However, rc

* A.B. 1961, Boston University; J.D. 1964, Boston University. Member, California Bar. The author served as Assistant United States Attorney, Central District of California, Criminal Division in 1965. He wishes to disclose his participation as counsel in the following cases: Buker v. Superior Court, 25 Cal. App. 3d 1085, 102 Cal. Rptr. 454 (4th Dist. 1972); People v. Vermouth, 42 Cal. App. 3d 353, 116 Cal. Rptr. 675 (4th Dist. 1974); United States v. Marshall, No. CR 74-227 (C.D. Cal., May 13, 1974), appeal docketed, No. 2070, 9th Cir., June 7, 1974; United States v. Marshall, No. CR 74-228 (C.D. Cal., Sept. 25, 1974), appeal docketed, No. 3038, 9th Cir., Nov. 24, 1974. All relevant issues considered in this Article were raised in the briefs. The author gratefully acknowledges the assistance of Gordon C. Rhea (J.D. 1974, Stanford) in the preparation of this Article.

1 Under the Internal Revenue Code (hereinafter referred to in text as the Code), the District Director may immediately assess a deficiency if he "believes that the assessment or collection of a deficiency . . . will be jeopardized by delay" (INT. REV. CODE OF 1954, § 6861), or terminate the taxable year of a taxpayer if he "finds that [the] taxpayer designs . . . to do any . . . act tending to prejudice or to render wholly or partly ineffectual proceedings to collect the income tax for the current or the preceding taxable year unless such proceedings be brought without delay. . . ." INT. REV. CODE OF 1954, § 6851. For an analysis of the source of authority under which the District Director assesses a tax after termination of the taxable year see Meyers, Termination of Taxable Year: Procedures in Jeopardy, 26 TAX. L. REV. 829, 830-33 (1971) (hereinafter cited as Meyers]. In California the Franchise Tax Board is authorized to assess a deficiency immediately if it "finds [that collection] . . . will be jeopardized in whole or in part by delay . . . ." CAL. REV. & Tax. Code § 18641 (West 1970). The California Revenue and Taxation Code (hereinafter referred to in text as the California Code) authorizes termination of the taxpayer's taxable year where the tax jeopardized is for the current period. Id. § 18642.

2 Summary seizure of property for collection of federal income taxes was approved by the Supreme Court in Phillips v. Commissioner, 283 U.S. 589 (1931).

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[Vol. 22: 1191 cent cases indicate a disconcerting pattern of abuse. Taxing agencies are immediately notified of arrests for gambling or narcotics violations when funds are seized.3 With little or no investigation into the defendant's financial background, the agencies conclude that taxes from unreported illegal income are endangered unless an assessment is made immediately. An income which yields a tax equal to or exceeding the amount seized is estimated, and liens and levies are imposed on the property..

For a discussion of the post-seizure remedies required by the due process clause seo Note, Termination of the Taxable Year The Need for Timely Judicial Review, 48 S. CAL. L. REV. 184 (1974).

3 Close cooperation between the IRS and law enforcement agencies is described in Silver, Terminating the Taxpayer's Taxable Year: How IRS Uses It Against Narcotics Suspects, 40 J. TAX. 110 (1974). Silver cites an Internal Revenue Service Manual Supplement (dated Nov. 10, 1971) which sets out the procedures of the IRS Narcotics Project. Officers of this special division are instructed to "disrupt the distribution of narcotics through the enforcement of all available tax statutes. [M]aximum use. . . [is to be] made of jeopardy, quick, and transferree assessments, and termination of taxable periods." Id. at 110. See also, Taxing Tactic, The IRS Swiftly Grabs Drug Suspects' Assets In Crackdown Effort, Wall Street Journal, Apr. 10, 1974, at 1, col. 1 (West Coast ed.).

It is common for law enforcement agents to notify both the IRS and the. California Franchise Tax Board when cash is seized pursuant to a gambling or narcotics arrest, and for summary assessments to issue within hours. See affidavits from ten attorneys, United States v. Marshall, No. CR 74-227, (C.D. Cal., May 13, 1974), appeal docketed, No. 2070, 9th Cir., June 7, 1974).

4 Failure of the taxing agencies to make even colorably accurate estimates of the defendant's true income has resulted in injunctions, orders to return funds, or remands to determine whether an injunction should issue. See, e.g., Lucia v. United States, 474 F.2d 565, 575 (5th Cir. 1973) (taxpayer entitled to a hearing to determine if jeopardy assessment was "arbitrary, capricious and without factual foundation" because Government estimated gross receipts for a betting season from one day's wagering slips; remanded for possible injunction); Pizzarello v. United States, 408 F.2d 579, 584 (2d Cir.), cert. denied, 396 U.S. 986 (1969)' (income over five year period was estimated from gambling receipts from three days, although Government could not establish that Pizzarello had operated as a gambler for five years, or that the slips were typical of his income in that period; remanded for possible injunction); Rinieri v. Scanlon, 254 F. Supp. 469, 474 (S.D.N.Y. 1966) (Government presented no evidence that the taxpayer had earned his money in United States; injunction granted).

5 The court in Clark v. Campbell, 501 F.2d 108 (5th Cir. 1974), petition for cert. filed, 43 U.S.L.W. 3433 (U.S. Dec. 9, 1974), noted that a summary assessment against Clark exceeded the amount seized at the time of his arrest, in conformity with a pattern indicative of arbitrary assessments. The Clark court sarcastically observed:

The cat got out of the bag in Rinieri v. Scanlon, 254 F. Supp. 469
(S.D.N.Y. 1966)

Q: To be very blunt about it, isn't it a fact that you were just
merely told to write a report that would come out with an
income tax of approximately $247.500 so that the government
would have a basis of seizing this money, isn't that the blunt
fact?...

A:

IRS agent] Yes.

501 F.2d at 117 n.28. In United States v. Rubio, 404 F.2d 678 (7th Cir. 1968), cert. denied, 394 U.S. 993 (1969), $2,796 was seized from a suspect during a narcotics arrest, and a deficiency in that precise amount was assessed upon a

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The punitive motive behind these assessments has been condemned by courts in a number of civil cases. One criminal court' ordered the Internal Revenue Services to return scized assets to a defendant, finding that the IRS had acted in "evident excess of statutory authority" after it admitted that it had failed to determine whether the defendant was delinquent in the payment of his taxes and had not even conducted a minimal investigation into his business affairs. The involuntary return filed by the IRS for the defendant was inconsistent with data available to the IRS, and it imposed penalties which were unsupported by the facts,10

Seizure of a defendant's assets by revenue authorities may severely impair his ability to defend himself and impinge on several constitutional protections." Section I of this Article describes the summary assessment and collection procedures, the traditional administrative and judicial relief from such assessment and collection, and the inadequacy of these remedies. Section II analyzes the particular problems of criminal defendants whose as

termination of the taxable year. See also Aguilar v. United States, 501 F.2d 127 (5th Cir. 1974); Willits v. Richardson, 497 F.2d 240 (5th Cir. 1974).

Sce, c.g., Willits v. Richardson, 497 F.2d 240 (5th Cir. 1974). Because the taxpayer gambled for a living and was "kept" by a narcotics suspect, her property was seized pursuant to a termination of the taxable year. The court observed that:

The IRS has been given broad power to take possession of the property of citizens by summary means that ignore many basic tenets of pre-seizure due process in order to prevent the loss of tax revenues. Courts cannot allow these expedients to be turned on citizens suspected of wrongdoing-not as tax collection devices but as summary punishment to supplement or complement regular criminal procedures. The fact that they are cloaked in the garb of a tax collection and applied only by the Narcotics Project to those believed to be engaged in or associated with the narcotics trade must not bootstrap judicial approval of such use.

Id. at 246.

7 United States v. Bonaguro, 294 F. Supp. 750 (E.D.N.Y. 1968), aff'd sub nom. United States v. Dono, 428 F.2d 204 (2d Cir. 1969), cert. denied, 400 U.S. 829 (1970).

& Internal Revenue Service will be hereinafter referred to in text as IRS.
294 F. Supp. at 754. The court reasoned that,

[t]he inference is-in short-that... [the IRS] had not acted under
the statute to protect the revenue interest and collect a tax that seemed
to be in jeopardy, but had made a merely colorable use of the statutory
forms at the suggestion of another agency of government in accordance
with a pattern of conduct that is not strange to the courts.
Id. at 753-54.

10 Id. at 754. The computations were based on the assumption that the defendant was unmarried, and a single exemption was allowed. Yet the IRS agent testified that the defendant's income was estimated on the assumption that he was married and had two children, and notification of the assessment was served on the defendant by leaving it with his wife. A 25% penalty was added for attempting to jeopardize the collection of the tax (INT. REV. CODE OF 1954, § 6658), but no facts were presented supporting this conclusion.

11 Sec notes 125-39 & accompanying text infra.

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sets have been seized, and section III considers the possibility of ensuring speedier recovery of these assets through motions in the criminal case.

I. SUMMARY ASSESSMENT PROCEDURES AND REMEDIES

A. Procedures

Summary collection procedures constitute a radical departure from normal methods of assessment and collection. Typically, in federal taxation, the collection process is initiated by receipt of the taxpayer's annual return.12 If the IRS determines that additional tax is due, it is required to send the taxpayer a notice of deficiency,13 and cannot assess or collect the tax for 90 days.14 During these 90 days the taxpayer may stay collection by petitioning the Tax Court to redetermine the deficiency.15 If the taxpayer does not petition the Tax Court, the IRS may assess the additional tax. From the moment of assessment, a federal tax lien applies to all of the taxpayer's real and personal property.16 If the taxpayer still refuses to pay the tax, the IRS may send a "notice and demand" letter, wait ten days, and then levy upon the taxpayer's. property.11

The California assessment and collection procedure resembles the federal practice. If the Franchise Tax Board determines that the taxpayer's return underestimates the tax due, a notice of proposed deficiency is mailed.18 The taxpayer must file a written protest with the Board within 60 days or the assessment becomes final. If the taxpayer files this protest, the Board must grant a hearing.20 The taxpayer must appeal an adverse Board decision. within 30 days to the Board of Equalization, 21 and then petition for a redetermination of that higher forum's decision. 22 The assessment then becomes final, and the tax must be paid ten days after the mailing of a notice and demand letter.23

Summary assessment procedures, in contrast, prevent the taxpayer from litigating the validity of the assessment before collec

[blocks in formation]

18 CAL. REV. & TAX. CODE § 18583 (West 1970). The Board has four years in which to act. Id. § 18586.

10 Id. §§ 18590 & 18591.

20 Id. § 18592.

21 Id. § 18593.

22 ld. § 18596.
28 Id. § 18597.

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tion. The two federal summary assessment procedures are jeopardy assessment and termination of the taxable year. The jeopardy assessment procedure applies only when the tax in question is due and payable.20 The District Director is authorized to assess the tax immediately27 if he "believes" that assessment or collection would be "jeopardized by delay."28 The District Director's determination of jeopardy is presumptively correct and nonreviewable:20 payment is due the moment the assessment is made. No prior notice is required,30 and the 90 day ban on collection is inapplicable. A tax lien arises with the assessment,32 and the IRS may levy upon the taxpayer's property without the formality of ten days notice.33 Within 60 days of the assessment, the IRS must send a deficiency notice, which entitles the taxpayer to Tax Court review of the assessment, but the liens and levies remain in force, and the taxpayer is denied the use of his property.35 One

31

24 INT. REV. CODE OF 1954, § 6861(a).

25 Id. § 6851(a). Termination of the taxable year may hereinafter be referred to in text as termination assessment.

20 Section 6861 applies only to a "deficiency" as defined in section 6211. Section 6211 defines a "deficiency" as,

the amount by which the tax imposed . . . exceeds . . .

(1) the sum of

(A) the amount shown as the tax by the taxpayer upon his
return, if a return was made by the taxpayer and an
amount was shown as the tax by the taxpayer thereon,
plus

(B) the amounts previously assessed (or collected without

assessment) as a deficiency.

INT. REV. CODE OF 1954 § 6211(a). For an analysis of whether a “deficiency” may exist before the tax is due and payable see Meyers, supra note 1, at 833-43. Even if a "deficiency" may exist before the tax is due and payable, section 6861 cannot be used to assess the "deficiency" until the taxpayer's taxable year has been terminated under section 6851. Taxes are due and payable four and one half months after the end of the taxable year. INT. REV. CODE OF 1954, § 6072(a).

27 INT. REV. CODE OF 1954, § 6861(a).

28 Id.

20 Transport Mfg. & Equip. Co. v. Trainor, 382 F.2d 793 (8th Cir. 1967). See Note, Jeopardy Assessment: The Sovereign's Stranglehold, 55 GEO. L.J. 701, 702 n.13 (1967). See also Kaminsky, Administrative Law and Judicial Review of Jeopardy Assessments Under the Internal Revenue Code, 14 Tax. L. Rev. 545, 556-60 (1959) (contending that the Secretary's "belief" should be reviewable under principles of administrative law as a nondiscretionary act, since the Director is mandated to bring a jeopardy assessment once he forms a "belief").

Although a reviewing court is precluded from considering the soundness of the District Director's decision, it can determine whether he had facts from which to form a "belief." United States v. Bonaguro, 294 F. Supp. 750, 753 (E.D.N.Y. 1968). Sec Odell, Assessments: What Are They-Ordinary? Immediate? Jeopardy?, N.Y.U. 31ST INST. ON FED. Tax. 1495, 1509 (1973). 30 Yanicelli v. Nash, 354 F. Supp. 143 (D.N.J. 1973).

81 INT. REV. CODE OF 1954, § 6861(a).

82 Id. §§ 6321, 6322.

88 Id. § 6331(a).

34 Id. § 6861(b).

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