A taxpayer’s guilty plea to failing to report income precludes him disputing a civil judgment requiring him to pay almost $250 million in taxes and penalties, a federal appeals court says.
The Sept. 7 ruling in Anderson v. Commissioner of Internal Revenue, No. 11-1704, is one of first impression in the U.S. Court of Appeals for the Third Circuit.
Walter Anderson was charged in 2005 with failing to pay more than $200 million in taxes on nearly $500 million in unreported income from offshore businesses for the 1995 to 1999 tax years.
Nearly all the income was from Gold & Appel Transport, a British Virgin Islands entity Anderson formed in 1992 to which he transferred his interests in three companies: Mid-Atlantic Telecom, Esprit Telecom and Telco Communications Group. The government alleged that he hid his ownership of Gold & Appel and another company also set up to evade taxes.
Facing up to 80 years in prison, Anderson pleaded guilty on Sept. 8, 2006, to failing to report a combined $365 million in income for 1998 and 1999, the years with the highest amounts. He was sentenced to nine years in prison.
Charges for the other three years were dismissed, but the Internal Revenue Service then went after him for unpaid taxes for all five years. In July 2007, it issued a notice of a $184 million tax deficiency, as well as a fraud penalty of $138 million.
Anderson challenged the assessment two months later, filing a petition in Tax Court in Washington, D.C. At the time, he was incarcerated at the federal prison in Fairton, Cumberland County.
On a motion for summary judgment, Tax Court Judge David Gustafson ruled that Anderson’s guilty plea precluded him from contesting he underpaid his taxes for 1998 and 1999 but he denied the motion without prejudice as to the other years.
As the Third Circuit pointed out, Gustafson’s decision not only established that Anderson underpaid taxes for 1998 and 1999, it meant that the IRS did not have to prove fraud in the civil case. Tax law allows a penalty of 75 percent of the amount of the underpayment due to fraud.
The presence of fraud also knocked out Anderson’s defense that the IRS was too late in light of the three-year statute of limitations for pursuing unpaid taxes.
After the summary judgment decision, the IRS asked Gustafson to sever the 1995 to 1997 tax years from the rest of the case so it could move ahead with the claims for 1998 and 1999. Taxes and penalties for those years comprised almost 80 percent of the total sought.
The IRS decided to concede all tax and penalty issues for the earlier years to avoid the complication and delay of having to prove fraud for those years in return for a relatively small added recovery.
Gustafson refused to sever but said he would take notice of the IRS’s concessions and reflect them in his ultimate decision.
The Tax Court proceedings, in which Anderson was pro se, concluded in 2011 with a stipulation and order setting the unpaid taxes and penalties for 1998 and 1999 as $141.4 million and $105.9 million, respectively, for a total of $247.4 million, with no liability for the prior three years.
On appeal, the Third Circuit rejected Anderson’s argument that his guilty plea to criminal tax evasion did not conclusively establish that the income was taxable to him.
Judge Jane Roth wrote that the preclusive effect of a guilty plea extends to all issues necessarily admitted in the plea, and Anderson’s conviction hinged on the income he admittedly failed to report being taxable to him.
Otherwise no tax deficiency would have resulted and he could not have been convicted.
Roth stated that the issue was also settled by the parties’ stipulation in Tax Court regarding Gold & Appel’s income and the tax and penalty amounts.
In addition, she disagreed with Anderson’s position that the IRS concessions on the 1995 to 1997 taxes prevented it from recovering 1998 and 1999 taxes.
Roth was joined by Dolores Sloviter. Louis Pollak, a judge for the Eastern District of Pennsylvania, was the third panel member but he did not show up for the May 7 oral argument and died a day later.
Cherry Hill solo Steven Jozwiak, who represented Anderson on appeal, says the ruling is consistent with those in other circuits and no decision has been made whether to seek certiorari or an en banc hearing.
Charles Miller, spokesman for the Department of Justice, whose Bethany Hauser argued the appeal, declines comment, as does IRS spokesman Dave Stewart.
Anderson is finishing his sentence at a halfway house in Washington, D.C., with a release date of Dec. 29.
In addition to his telecom success and tax evasion, he is known for bankrolling private space exploration, including MirCorp, a now-defunct company that leased Russia’s abandoned Mir space station for space tourism.