South Carolina              
Administrative Law Court
Edgar A. Brown building 1205 Pendleton St., Suite 224 Columbia, SC 29201 Voice: (803) 734-0550

SC Administrative Law Court Decisions

CAPTION:
Anonymous Taxpayer vs. SCDOR

AGENCY:
South Carolina Department of Revenue

PARTIES:
Petitioners:
Anonymous Taxpayer

Respondents:
South Carolina Department of Revenue
 
DOCKET NUMBER:
97-ALJ-17-0109-CC

APPEARANCES:
For the Petitioner: C. Rauch Wise, Esquire

For the Respondent: Sarah G. Major, Esquire
 

ORDERS:

FINAL DECISION

STATEMENT OF THE CASE

This matter is before me pursuant to the request of the Petitioner (taxpayer) for a contested case hearing to review two Final Agency Determinations issued by the Respondent, South Carolina Department of Revenue (Department) on February 3, 1997. The Department seeks to impose civil fraud sanctions against the taxpayer pursuant to S.C. Code Ann. § 12-54-40 (b)(2)(d)(1)-(d)(2) (Supp. 1996), following the taxpayer's criminal conviction for income tax evasion. The taxpayer asserts that the imposition of civil fraud sanctions following a criminal conviction violates the double jeopardy and excessive fines provisions of the South Carolina and United States Constitutions, and that the Department is barred by res judicata from establishing the damages it has incurred as a result of the taxpayer's conduct. A hearing was held before the Administrative Law Judge Division on July 15, 1997.

I find that civil fraud sanctions in the amounts of Eleven Thousand Three Hundred Fourteen and 40/100 ($11,314.40) Dollars and Seven Thousand Eight Hundred and 68/100 ($7,800.68) Dollars , respectively, for a total sanction of $19,115.08, were properly assessed against the taxpayer.







STIPULATED FACTS

The parties have stipulated to the following facts:

1. Taxpayer is a South Carolina resident who filed individual income tax returns as a single taxpayer for 1987, 1988, and 1991, and who filed joint income tax returns for 1989 and 1990.

2. During 1987 through 1991, the taxpayer owned a body shop in Hodges, South Carolina, as a sole proprietorship. The income from this business was reported on Schedule C of the taxpayer's income tax returns.

3. The South Carolina Department of Revenue (Department) conducted a criminal investigation into whether or not the taxpayer had fully reported all of his income on his 1987 through 1991 tax returns.

4. As a result of the investigation of the taxpayer's income tax returns, the Department determined that the taxpayer failed to report income in the following amounts:



Tax Year Amount

1987 $61,579.76 1988 $38,159.76

1989 $61,900.00

1990 $60,352.77

1991 $69,750.00



5. On July 29, 1994, the taxpayer paid the additional income tax associated with the income listed in item #3 and the applicable interest due.

6. On August 30, 1994, the taxpayer pled guilty to five (5) counts of income tax evasion, a violation of S.C. Code Ann. § 12-54-40(b)(6)(a) (Supp. 1996) for the period January 1, 1987, through December 31, 1991. The taxpayer was sentenced to commitment to the State Department of Correction/Greenwood County Detention Center for a term of five (5) years and a fine of $10,000. This sentence was suspended to probation for five (5) years and a $5,000 fine. Other conditions of the sentencing included home detention for six (6) months and 100 hours of public service. There were no plea negotiations between the taxpayer and the solicitor's office.

7. On September 15, 1994, two preliminary audit reports of field audit were issued. One covered tax years 1987, 1988, and 1991, when the taxpayer filed as a single taxpayer. This report reflected a payment of $16,958.01 for additional tax and interest, with outstanding civil fraud penalties in the amount of $11,314.40 remaining due. The second preliminary audit report of field audit covered tax years 1989 and 1990, when the taxpayer filed joint income tax returns. This report reflected a payment of $11,445.47 for additional tax and interest, with outstanding civil fraud penalties in the amount of $7,800.68 remaining due.

8. On February 3, 1997, the Department issued two Final Agency Determinations, one for tax years when the taxpayer filed as a single individual, and one for the tax years when the taxpayer filed jointly, in which the Department concluded that the civil fraud penalties were properly assessed.

9. In the second Final Agency Determination, the Department granted the taxpayer's ex-wife innocent spouse relief.

10. Civil fraud penalties have been assessed by the Department of Revenue both in cases where there have been criminal prosecutions and in cases where there have not been criminal prosecutions.



FINDINGS OF FACT

Having observed the witnesses and exhibits presented at the hearing and closely passed upon their credibility, taking into consideration the burden of persuasion by the Parties, I make the following Findings of Fact by a preponderance of evidence:

1. Notice of the time, date, place and subject matter of the Hearing was given to the Petitioner and the Respondent.

2. Alvin Garnette Bouknight, a criminal investigator for the Department, spent 498 total hours and traveled 6957 miles investigating the case against the taxpayer during 1993 and 1994.

3. Harold Brown, a criminal investigator for the Department, spent 18.5 total hours and traveled 436 miles investigating the case against the taxpayer during 1993 and 1994.

4. Based upon the hourly rate of compensation for both Bouknight and Brown, together with the applicable automobile mileage rate, the State incurred approximately $18,694.00 in expenses during the investigation of this case.



DISCUSSION AND CONCLUSIONS OF LAW

Double Jeopardy

The Department seeks to impose civil fraud sanctions against the taxpayer pursuant to S.C. Code Ann. § 12-54-40 (b)(2)(d)(1)-(d)(2) (Supp. 1996), which provides in pertinent part:

If any part of any underpayment of tax required to be shown on a return is due to fraud, there is added to the tax an amount equal to the sum of seventy-five percent of the portion of the underpayment which is attributable to fraud and an amount equal to fifty percent of the interest payable under Section 12-54-20. . . .



If the commission establishes that any portion of an underpayment is attributable to fraud, the entire underpayment must be treated as attributable to fraud, except with respect to any portion of the underpayment which the taxpayer established is not attributable to fraud.



The taxpayer does not contest that he has committed civil fraud. However, he asserts that the imposition of civil fraud sanctions against him, following his criminal conviction for tax evasion, violates the double jeopardy provisions of the South Carolina and United States Constitutions.

In Helvering v. Mitchell, 303 U.S. 391 (1938), the United States Supreme Court considered the issue of whether the imposition of civil fraud sanctions following a criminal prosecution for tax evasion constituted double jeopardy. The Court held that the imposition of a civil fraud sanction based on 50% of the tax deficiency was not a sanction intended as punishment, and therefore double jeopardy, which "prohibits merely punishing twice, or attempting a second time to punish criminally, for the same offense," id. at 399, was not implicated. The Court further found that the purpose of the civil fraud sanction was "as a safeguard for the protection of the revenue and to reimburse the Government for the heavy expense of investigation and the loss resulting from the taxpayer's fraud." Id. at 401. Thus, since the civil fraud sanction served a remedial rather than a punitive purpose, there was no double jeopardy violation.

The taxpayer asserts that the 75% civil penalty imposed by the State of South Carolina, unlike the 50% penalty in Helvering, is punitive rather than remedial and therefore is prohibited by the Double Jeopardy Clause. In support of his argument, the taxpayer cites two fairly recent United States Supreme Court decisions involving double jeopardy, United States v. Halper, 490 U.S. 435 (1990), and Department of Revenue of Montana v. Kurth Ranch, 511 U.S. 767, 114 S.Ct. 1937 (1994). In Halper, an individual was prosecuted for and convicted of submitting 65 false claims for Medicare reimbursement. The total amount of the overcharge was $585.00. The government then brought an action against the individual under the civil False Claims Act, 31 U.S.C. §§ 3729-3731. The penalty for filing a false claim was $2,000 for each of the 65 claims filed, plus twice the government's damages of $585, plus the costs of the action, resulting in a total penalty of over $130,000 for the filing of $585 in false claims. The Supreme Court held that the Double Jeopardy Clause protects a defendant who has already been punished in a criminal prosecution from the imposition of an additional civil sanction "to the extent that the second sanction may not fairly be characterized as remedial, but only as a deterrent or retribution." Halper, 490 U.S. at 449. The Court determined that the penalty imposed in Halper was so disproportionate to the damages incurred by the government (estimated by the district court to be approximately $16,000) as to constitute a second punishment barred by the Double Jeopardy Clause. However, the Court noted that its holding applied only to "the rare case . . . where a fixed penalty provision subjects a prolific but small-gauge offender to a sanction overwhelmingly disproportionate to the damage he has caused." Id. at 449. In reaching its conclusion, the Court examined, among other cases, Helvering v. Mitchell, supra, and stated that a sanction such as the civil fraud sanction imposed in that case did not run afoul of the Double Jeopardy Clause because it was "remedial, providing reimbursement to the Government for investigatory and other costs of the taxpayer's fraud." Halper, 490 U.S. at 442-43.

In Department of Revenue of Montana v. Kurth Ranch, supra, the defendants entered guilty pleas to several drug violations. Subsequently, the State of Montana attempted to collect a state tax imposed on the possession and storage of dangerous drugs. The defendants challenged the tax on double jeopardy grounds. The Supreme Court noted that a high tax rate and a deterrent purpose did not in and of themselves render the tax punitive and thus violative of the Double Jeopardy Clause. However, Montana's tax had unusual characteristics which distinguished it from most taxes. First, the tax was only imposed on persons who had committed a crime, and was only exacted after the taxpayer had been arrested for the conduct which gave rise to the tax obligation. Second, the tax was characterized as a property tax, but was only assessed after the taxpayer was no longer in possession of the drugs or property in question. Kurth Ranch, 114 S. Ct. at 1947-48. Finally, the drugs were taxed at about 400% of their market value. Id. at 1946 n. 17. The Court concluded that "[t]aken as a whole, this drug tax is a concoction of anomalies, too far-removed in crucial respects from a standard tax assessment to escape characterization as punishment for the purpose of Double Jeopardy analysis." Id. at 1948.

Applying these legal principles to the facts of this case, I conclude that neither Halper nor Kurth Ranch mandates that the civil fraud penalty at issue here be characterized as a second punishment in violation of the Double Jeopardy Clause. This case involves neither a fixed penalty such as in Halper nor a "concoction of anomalies" like those of the tax in Kurth Ranch. Moreover, the Department did not levy a sanction which is overwhelmingly disproportionate to the losses incurred by the State. Instead, South Carolina's civil fraud penalty is more akin to the civil fraud penalty imposed in Helvering, which was also based upon a percentage of the tax deficiency resulting from the fraud, and which was found to serve a remedial rather than a punitive purpose. The fact that the penalty in this case is based upon a percentage of 75% of the deficiency due to fraud rather than 50% does not change its essential remedial character. In fact, the Supreme Court in Halper noted:

[T]he Government is entitled to rough remedial justice, that is, it may demand compensation according to somewhat imprecise formulas, such as reasonable liquidated damages or a fixed sum plus double damages, without being deemed to have imposed a second punishment for the purposes of double jeopardy analysis.



United States v. Halper, 409 U.S. at 446. See also, Price v. C.I.R., 71 T.C.M. 2884 (1996) (in which the Tax Court considered the federal equivalent to § 12-54-40(b)(2)(d)(1), which also contained a civil fraud penalty of 75% of the portion of the underpayment due to fraud, and held that the section was intended to be remedial).

The conclusion that S.C. Code Ann. § 12-54-40 (b)(2)(d)(1) is remedial rather than punitive is further supported by the holdings of a number of courts, including the Fourth Circuit Court of Appeals, which have reviewed the issue of double jeopardy in connection with civil tax fraud sanctions since Halper and Kurth Ranch were decided. Without exception, these courts have found that Helvering v. Mitchell, supra, is still controlling in this area, and that the imposition of civil fraud sanctions serves a remedial purpose and is not barred by the Double Jeopardy Clause. See United States v. Alt, 83 F.3d 779 (6th Cir. 1996), cert. denied, ___ U.S. ___, 117 S. Ct. 188 (1996); Thomas v. C.I.R., 62 F.3d 97 (4th Cir. 1995); Price v. C.I.R., supra; Grimes v. C.I.R., 82 F.3d 286 (9th Cir. 1996); see also McNichols v. C.I.R., 13 F.3d 432 (1st Cir. 1993) (decided after Halper but before Kurth Ranch).

Furthermore, the government is not required to prove its actual damages in order to establish that the civil fraud sanctions do not violate double jeopardy. Only where the "civil penalty sought in the subsequent proceeding bears no rational relation to the goal of compensating the Government for its loss, but rather appears to qualify as 'punishment' in the plain meaning of the word," is the taxpayer entitled to an accounting of the government's damages and costs. Halper, 490 U.S. at 449-50. In this case the sanction imposed achieves the goal of providing the government with "rough remedial justice" since it is based upon a percentage of the deficiency rather than being a fixed sanction. Because the sanction serves a remedial purpose, the Department is not required to present evidence of actual damages to avoid double jeopardy. See Thomas v. C.I.R., supra; United States v. Alt, supra; Ianniello v. Commissioner, 98 T.C. 165 (1992); and Price v. C.I.R., supra (all holding that sanctions based upon a percentage of the deficiency are remedial and do not require proof of actual damages to avoid double jeopardy). Moreover, even if the Department were required to present evidence of actual damages, I conclude that the sanction of $19,115.08 imposed in this instance is rationally related to the expenses incurred by the State in pursuing this case (approximately $18,694). Therefore, the sanction does not constitute a second punishment in violation of double jeopardy.

Since the civil fraud sanctions imposed upon the taxpayer pursuant to S.C. Code Ann. § 12-54-40 (b)(2)(d)(1) - (d)(2) (Supp. 1996) are remedial rather than punitive in nature, I conclude that they do not violate the double jeopardy clauses of the South Carolina and United States Constitutions.



Excessive Fines

The taxpayer also contends that the civil fraud sanctions assessed against him violate the excessive fines provisions of the South Carolina and United States Constitutions. At the close of the hearing in this case, the taxpayer conceded that this argument was not sufficiently supported by the evidence. Furthermore, the standard for determining whether a sanction violates the prohibition against excessive fines is the same as that for determining whether it violates double jeopardy. If a sanction is found to be remedial in nature rather than punitive, there is no excessive fine. See United States v. Alt, supra; Thomas v. C.I.R., supra; and McNichols v. C.I.R., supra (all holding that civil tax fraud sanctions do not violate the Excessive Fines Clause). For the reasons discussed in the double jeopardy section above, I conclude that the civil fraud sanctions imposed on the taxpayer in this case do not violate the excessive fines clauses of the South Carolina and United States Constitutions.



Res Judicata

Finally, the taxpayer argues that the Department is barred by res judicata from presenting evidence concerning the costs of the investigation, since the issue was not raised at the time of the taxpayer's guilty plea. This argument is without merit. First, as discussed above, the Department was not required to present evidence of its damages in order to avoid double jeopardy. Second, even if such proof were required, res judicata does not bar the Department from asserting its damages in this action.

The doctrine of res judicata operates to bar a claim which has previously been litigated, or which might have been litigated, in a prior action between the parties. Beall v. Doe, 281 S.C. 363, 315 S.E.2d 186 at 189 n.1 (Ct. App. 1984). "Essential to a decision that one suit in its entirety is barred by a judgment in a former suit is a determination that both suits rest upon the same cause of action." Stewart, Res Judicata and Collateral Estoppel in South Carolina, 28 S.C.L. Rev. 451, 453 (1977). Although one transaction may give rise to both a criminal prosecution and a civil action, these proceedings are considered separate causes of action which may be independently pursued without the restrictions imposed by the doctrine of res judicata, even though the government is the plaintiff in the civil action. Restatement (Second) of Judgments § 85 (1982). Therefore, the Department is not barred by res judicata from asserting its damages in this action.

Furthermore, the Department is not collaterally estopped from presenting evidence of its damages in this case. Collateral estoppel applies to preclude relitigation of issues which were "actually and necessarily litigated and determined in the first suit." Beall v. Doe, 315 S.E.2d at 189 n. 1. The issue of the government's damages was not litigated in, nor was it relevant to, the taxpayer's guilty plea hearing. Accordingly, collateral estoppel is inapplicable to this situation.



CONCLUSION

For all the foregoing reasons, the imposition of civil fraud sanctions against the taxpayer pursuant to S.C. Code Ann. § 12-54-40 (b)(2)(d)(1)-(d)(2) (Supp. 1996) does not violate the double jeopardy or excessive fines provisions of the South Carolina and United States Constitutions. Therefore, the Department may assess sanctions against the taxpayer in the total amount of Nineteen Thousand One Hundred Fifteen and 08/100 Dollars ($19,115.08).

AND IT IS SO ORDERED.



_________________________________

Ralph King Anderson, III

Administrative Law Judge



Columbia, South Carolina

September 11, 1997




























Brown Bldg.

 

 

 

 

 

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