What Happens to Monetary Penalties When Convicted Defendant Dies with Pending Appeals?

This was the question in a recent Second Circuit Court of Appeals case. The defendant was convicted of securities fraud, mail and wire fraud and obstruction of justice, and entered into a negotiated guilty plea to criminal tax charges. Asset forfeiture, a fine, and a restitution order resulted, among other consequences. Bail bond had also been forfeited, due to violations of the bail order. At the time of death, appeals were pending on the criminal convictions.

The case involved the rare application of the abatement ab initio doctrine. This doctrine provides that when a convicted defendant dies while his direct appeal is pending, his death abates not only the appeal but also all proceedings in the prosecution from its inception.The effect is to leave the defendant as if he had never been indicted or convicted. This doctrine is rooted in the interests of finality and just punishment. Finality requires that a defendant not stand convicted without resolution of the merits of an appeal, and recognition of the purposes of just punishment leads to the conclusion that to the extent that the judgment of conviction orders incarceration or other sanctions that are designed to punish the defendant, that purpose can no longer be served.

The court addressed the impact of the ab initio doctrine to the following aspects of the case:

Convictions. The defendants convictions were abated, except those for which no appeal was pending. Since the defendant pled guilty to the tax evasion counts and waived his right to appeal, those did not abate.

Restitution. Other courts have split on the question whether restitution obligations abate at death, since it is usually more in the nature of making the victim whole and less about punishment. Those courts allowing abatement do so because restitution depends on a valid, final conviction, which does not occur due to the pending appeal. Others that hold that restitution does not abate do so because they consider restitution to be compensatory, not punitive in nature. The Second Circuit sided on the side of abatement at death and voided the restitution obligations. The opinion discussed whether if restitution had already been paid, then the payment and punishment would have been complete and irretreivable and thus could not be abated. However, it did not decide this issue since the restitution payments were stayed during the pendency of the appeal and thus had not been “paid.”.

Bail Bond Forfeiture. If the ab initio doctrine wipes out the conviction, is a bail bond forfeiture also eliminated? The court ruled no. The court indicated that the bail bond forfeiture was not part of the conviction but related to a violation of a civil contractual agreement – that is, it was a civil matter and nota criminal matter. Since the ab initio doctrine is a criminal doctrine, it does not apply to the bail bond forfeiture.

U.S. v. Brooks, 2017 WL 4158790 (2nd Cir. 2017)

New Useful Florida Homestead Concepts Diagram

Several years ago I prepared a table to assist practitioners in determining what restrictions apply on a transfer of homestead property at death or during lifetime. You can access it here.

Homestead status has other implications, including protections from creditors, inclusion or exclusion from the probate estate, and ad valorem tax implications. The Florida Statutes also employ the term “protected homestead” in defining some of these aspects. The whole area makes for a set of interrelated and unrelated concepts and implications that is difficult to both comprehend and apply.

To help with understanding these concepts, and how the statutory term “protected homestead” fits in, I have created a new diagram. You can download a copy here.

If you see the need for any corrections or clarifications, please email me at crubin@floridatax.com. Note that the chart does not address ad valorem tax considerations of homestead.

SUMMARY OF HOMESTEAD RESTRICTIONS ON TRANSFER AND DEVISE AND CREDITOR ASPECTS -AND- INTERPLAY OF “PROTECTED HOMESTEAD” CONCEPT

Audit of Predeceased Spouse Permitted for Purposes of DSUE Adjustment for Surviving Spouse’s Estate

A husband died in 2012, and his estate filed a gift tax return to report a deceased spousal unused exclusion (DSUE) and elected portability. The IRS sent a letter to husband’s estate accepting the estate tax return as filed. Portability allows a surviving spouse or the estate of that surviving spouse to use the unused unified credit of the predeceased spouse for estate and gift tax purposes.

His wife died in 2013. Her estate filed an estate tax return that applied the husband’s DSUE amount to reduce her estate taxes. Notwithstanding any period of limitation in section 6501, after the time has expired under section 6501 within which a tax may be assessed under chapter 11 or 12 with respect to a deceased spousal unused exclusion amount, the Secretary may examine a return of the deceased spouse to make determinations with respect to such amount for purposes of carrying out this subsection.

Under the authority of Code §2010(c)(5)(B) , the IRS examined the return of the husband’s estate. Finding unreported lifetime gifts made by the husband before 2010, the IRS reduced the DSUE amount and thus increased the estate taxes due by the wife’s estate.

The Wife’s estate contested the adjustment and raised numerous arguments why the DSUE reduction by the IRS was not permitted. Finding for the IRS, the Tax Court rejected all of the arguments of the taxpayer and upheld the IRS’ reduction of the DSUE amount.

Code Section 2010(c)(5)(B) authorizes a review of the estate of a predeceased spouse to determine the DSUE amount available to the surviving spouse. It reads:

Notwithstanding any period of limitation in section 6501, after the time has expired under section 6501 within which a tax may be assessed under chapter 11 or 12 with respect to a deceased spousal unused exclusion amount, the Secretary may examine a return of the deceased spouse to make determinations with respect to such amount for purposes of carrying out this subsection.

Argument – The Estate Tax Closing Document Is a Closing Agreement Under Code §7121, and the IRS is Estopped from a Further Review of the Husband’s Estate

Under Code §7121(a) the IRS may enter into written agreements with any person relating to the liability of such person. Agreements under Code §7121 are final. The IRS cannot reopen a matter for which a closing agreement has been executed unless there is a showing of fraud or malfeasance or misrepresentation of a material fact. Under Treas. Regs. §601.202(b) & 301.7212-1(d)(1), only the prescribed forms, Form 866, Agreement as to Final Determination of Tax Liability, and Form 906, Closing Agreement on Final Determination Covering Specific Matters, qualify as closing agreements. No such forms were used here.

In extraordinarily rare cases, courts have bound the Commissioner to an agreement in the absence of a properly executed Form 866 or Form 906. In such cases, there has been a period of negotiation between the parties and a clear exchange of offer and acceptance. Here, no such negotiation took place and thus the court held there was no closing agreement.

As to estoppel, cases where courts have held that a taxpayer was adversely affected and the Commissioner was estopped, the adversely affected parties would have been forced to bear the cost of taxes that they would not otherwise have borne. Estoppel may also apply when a party with a withholding responsibility that acted in reliance on a previous Government position and received no benefit from a failure to pay a tax is now required to pay a tax that would normally be borne by another. Here, there was no risk of double taxation, and there were no facts showing that either estate acted in reliance on the Estate Tax Closing Document. Therefore, estoppel could not be applied.

Argument – The Examination of Husband’s Estate was an Improper Second Examination

Code §7605(b) protects taxpayers from an impermissible second examination. The Commissioner does not conduct a second examination when he does not obtain any new information. The Commissioner did not request additional information from the husband’s estate, and consequently, there was no second examination. Even if the Commissioner had conducted a second examination of the return for Franks estate, he would not have violated Code §7605(b) as to Minnies estate. The Tax Court and others have found that only the examined party is protected from second examinations. Here,  the party that is claiming protection against the effects of a purported second examination (i.e., the wife’s estate) was not the party that underwent the examination (i.e., the husband’s estate).

Argument – Code §2010(c)(5)(B) Effective Date Precludes DSUE Adjustment for Gifts Made Before 2010

The estate argued that because the gifts at the center of this case were given before the effective date of Code §2010(c)(5)(B), the Commissioner cannot make adjustments to the DSUE as a result of those gifts. The Tax Court noted it is clear that the effective date of Code §2010(c)(5)(B), the estate tax amendment, is for decedents dying after December 31, 2010. Because both husband and wife died after December 31, 2010, Code §2010(c)(5)(B) applies to both their estates and that is the end of the story – there is no exclusion for gifts made before the effective date of the statute.

Argument – Code §2010(c)(5)(B) As Applied is Contrary to Congressional Intent and is a Due Process Violation since It Overrides the Statute of Limitations

The Supreme Court has held that the statutory text is the most persuasive evidence of congressional intent. Congress adopted a statute that explicitly gave the Commissioner the power to examine the returns of the predeceased spouse and adjust the amount of the DSUE outside of the period of limitations under Code §6501. This is a clear indication that the Commissioners exercise of this power is not in violation of congressional intent.

The wife’s estate also argued that Code §2010(c)(5)(B) is unconstitutional for want of due process of law in that there is no statute of limitations. However, while the IRS may adjust or eliminate the DSUE amount reported on such a return, the IRS may assess additional tax on that return only if that tax is assessed within the period of limitations on assessment under Code §6501 applicable to the tax shown on that return. Thus, the statute is not unconstitutional.

Estate of Minnie Lynn Sower et al. v. Commissioner, No. 32361-15, 149 T.C. No. 11