This article discusses the case of United States v. Charles S. Brown, et al., Case No. C24-5021, a decision from the United States District Court for the Western District of Washington at Tacoma, offering key insights for tax practitioners dealing with clients who face both civil and criminal tax consequences arising from the same underlying actions. The court’s analysis clarifies the distinct nature of civil tax liabilities and criminal restitution orders, particularly concerning assessment and the statute of limitations on collection.

Factual Background

The case originated from Charles Brown’s fraudulent tax filings in 2004 and 2006. Brown falsely claimed income withholding, leading to improper refunds totaling $891,469.79 for 2004 and $378,843.95 for 2006.

Subsequently, the Internal Revenue Service (IRS) took the following actions:

Civil Assessments: In January 2010, the IRS assessed civil income tax liabilities against Brown for the amounts fraudulently claimed as withheld: $1,359,285 for 2004 and $824,250 for 2006. Brown made some payments but had not fully satisfied these liabilities by 2020, when the ten-year statute of limitations on collection for the civil assessments expired.
Criminal Charges and Restitution: In 2013, criminal charges were filed, and in April 2014, Brown pled guilty to four counts of violating 26 U.S.C. § 7206(1), which criminalizes knowingly filing false tax returns. As part of his plea, Brown agreed to pay $1,252,181.54 in restitution to the U.S. Treasury. The court accepted his plea and waived interest on the restitution.
Restitution Assessments: Following the expiration of Brown’s criminal appeal rights, the IRS issued restitution assessments in April 2015, treating the restitution liability "in the same manner as if such amount were a tax" under 26 U.S.C. § 6201(a)(4). The restitution liability was allocated as $873,337.59 for 2004 and $378,843.95 for 2006. The IRS created separate "Master File Tax" (MFT) module type 31 accounts to track these restitution liabilities, distinct from the existing MFT 30 accounts for Brown’s civil income tax liabilities.
Notice of Federal Tax Lien: By November 9, 2015, the IRS recorded a Notice of Federal Tax Lien (NFTL) against Brown to provide notice of the liens arising from the unpaid restitution assessments.
Government Lawsuit: In January 2024, the government sued Brown to reduce the unpaid restitution assessments to judgment and to foreclose on the restitution liens on his property.

Taxpayer’s Request for Relief

Brown did not contest the amount of money the government sought or that he received proper notice of the assessments and tax liens. However, he argued that the government could not reduce the restitution assessments to judgment because they were invalid “second assessments” of the “same tax” that the earlier civil assessments targeted. He contended that because both the civil and restitution assessments stemmed from the same fraudulent activity, the civil assessment’s limitations period on IRS collection should control. As that period had expired before the present lawsuit, Brown argued the government was barred from reducing the restitution assessments to judgment, asserting that the IRS can "only assess the same tax once" and allowing the "second" assessments would circumvent the statute of limitations on collection. He also pointed to the IRS’s creation of a separate MFT 31 module, arguing it confirmed the restitution assessment was a second assessment of the same tax.

Court’s Analysis of the Law

The court began its analysis by noting that to reduce restitution assessments to judgment, the government must provide evidence of a proper assessment and notice of the liability due, citing Oliver v. United States, 921 F.2d 916, 919 (9th Cir. 1990). The court found that the Forms 4340 (Certificates of Official Record of Separate Assessments) and the criminal restitution order submitted by the government were sufficient to establish proper notice and the correct amount due, shifting the burden to Brown to show the assessments were incorrect, referencing Hansen v. United States, 7 F.3d 137, 138 (9th Cir. 1993) and Keogh v. Comm’r, 713 F.2d 496, 501 (9th Cir. 1983).

The court then addressed Brown’s argument that the restitution assessments were invalid second assessments of the "same tax," focusing on 26 U.S.C. § 6201(a)(4)(A), which states that the Secretary shall assess and collect criminal restitution for failure to pay tax "in the same manner as if such amount were such tax". The court rejected Brown’s interpretation that this provision equates restitution to the underlying tax for all purposes, including the statute of limitations. Citing Klein v. Comm’r, 149 T.C. 341, 352 (2017), the court emphasized the use of the subjunctive mood ("as if [it] were"), indicating that restitution is not literally a tax, but rather a counterfactual hypothesis adopted to enable the IRS to assess and collect the amount.

Furthermore, the court highlighted the restriction on challenging restitution assessments under 26 U.S.C. § 6201(a)(4)(C), which prohibits challenges based on the "existence or amount of the underlying tax liability" in any proceeding under Title 26, including court suits under section 7422. The court found that Brown’s argument directly challenged the restitution assessment based on the existence of the prior civil tax liability.

Regarding the statute of limitations, the court pointed to the express provision in 26 U.S.C. § 6501(c)(11), which allows the IRS to assess a restitution order for failure to pay tax "at any time". The court found Brown’s argument that this exception does not permit "two assessments of the same tax" to be reliant on his incorrect theory that the restitution order is literally the same tax as the civil liability.

The court also dismissed Brown’s arguments related to the IRS’s use of an MFT 31 module, stating that it is merely an internal IRS process and neither Title 26 nor Treasury Regulations restrict the use of MFT 30 versus 31. Additionally, the court cited Ninth Circuit precedent, Urban v. Comm’r, 964 F.2d 888, 890 (9th Cir. 1992) and Fargo v. Comm’r, 447 F.3d 706, 713 (9th Cir. 2006), holding that the Internal Revenue Manual (IRM) does not have the force of law and does not confer rights on taxpayers, thus the alleged IRM violation was of no legal consequence.

Finally, the court underscored the established legal principle that a restitution liability is legally separate from civil liability and does not constitute a determination of civil obligation, citing Kelly v. Robinson, 479 U.S. 36, 53 (1986) and Klein, 149 T.C. at 361. The court rejected Brown’s attempt to distinguish these cases based on the timing of the assessments, finding no legal basis to prevent the IRS from assessing both a civil tax liability and a restitution-based assessment for the same underlying conduct.

Regarding the foreclosure of the restitution liens, the court noted the established law under 26 U.S.C. §§ 6321 and 6322 that federal tax liens arise on the date of assessment upon notice and demand and attach to all property and rights to property belonging to the taxpayer, citing United States v. Hemmen, 51 F.3d 883, 887 (9th Cir. 1995). As the government had established the liens and Brown conceded notice and demand, the court found foreclosure appropriate, rejecting his sole argument against it as the same one previously dismissed.

Application of Law to the Facts

The court applied the plain language of 26 U.S.C. §§ 6201(a)(4) and 6501(c)(11), along with relevant case law, to the facts presented. Brown’s argument that the restitution assessment was the "same tax" as the civil assessment was directly contradicted by the statutory language treating restitution "as if" it were a tax, the explicit restriction on challenging restitution based on the underlying tax liability, and the provision allowing assessment of restitution orders "at any time." The court found no legal basis to equate the two liabilities for statute of limitations purposes or to invalidate the restitution assessment due to the prior civil assessment.

Court’s Conclusions

The court concluded that Brown failed to provide competent and relevant evidence to show that the restitution-based assessments were incorrect. Therefore, the government’s motion for summary judgment was GRANTED, allowing the government to reduce the restitution-based assessments to judgment and to foreclose on the restitution liens on Brown’s property.

Significance for Tax Practitioners

This case underscores the distinct nature of civil tax liabilities and criminal restitution orders, even when they arise from the same underlying fraudulent activity. Tax practitioners should be aware of the following key takeaways:

Restitution is not the same as the underlying tax liability: While 26 U.S.C. § 6201(a)(4) allows the IRS to assess and collect restitution in the same manner as tax, it does not transform restitution into the underlying tax liability for all legal purposes, particularly concerning the statute of limitations.
Restitution assessments can occur even after civil assessments: The existence of a prior civil tax assessment does not preclude the IRS from subsequently assessing a criminal restitution order related to the same tax conduct.
The statute of limitations for civil tax collection does not bar restitution assessments: 26 U.S.C. § 6501(c)(11) provides a specific exception to the general statute of limitations for assessing restitution orders related to failure to pay tax, allowing such assessments "at any time."
Challenges to restitution assessments based on the underlying tax liability are restricted: 26 U.S.C. § 6201(a)(4)(C) limits the ability of taxpayers to challenge restitution assessments based on the existence or amount of the related tax liability.
Internal IRS procedures do not create taxpayer rights: The IRS’s internal procedures, such as the use of specific MFT modules or guidance in the IRM, generally do not confer substantive rights on taxpayers, and deviations from these procedures do not necessarily invalidate an assessment.
Civil and criminal tax consequences serve different purposes: Civil tax remedies aim to collect unpaid taxes, penalties, and interest, while criminal restitution serves penal and rehabilitative interests.

Understanding these distinctions is crucial for advising clients who may face both civil and criminal repercussions for tax violations. The Brown case reinforces the IRS’s broad authority to pursue both civil tax liabilities and criminal restitution obligations, even when they stem from the same actions.

Prepared with assistance from NotebookLM.