Saturday, March 15, 2003

Joseph K. Meets the Internal Revenue Code of 1986

In a recent opinion, the defendants opposed to the I.R.S. characterized their plight as being "Kafkaesque." The court, while admitting that the facts "tend[] to support that view," nonetheless denied relief.

The case, U.S. v. Ripa, involves a claim involving an assessment dating back to 1983 (that’s not a typo). The opinion was handed down on March 12 and the case is number 01-6099. It can be downloaded off of the Second Circuit's website.

In 1983, Romano attempted to enter Canada from the U.S. with $359,000.00 in U.S. currency in his trunk. The cash was the proceeds of "wildly successful, albeit illegal, gambling activities." Unfortunately, Romano had failed to complete the required currency reporting form. As a result, the cash was immediately seized by U.S. Customs officials.

More significantly, the I.R.S., later that same day, made a "termination assessment" against Romano. That is, the Service terminated his tax year as of that date and calculated the tax due. Under such circumstances, the tax becomes immediately due and payable and the I.R.S. files a tax lien. Ultimately, Romano was found to owe $169,981.00 in taxes on his gambling winnings. By 2001, due to interest and penalties, this assessment had grown to over $750,000.00. It is perhaps worthy of note that Romano had total tax liens of over $1.5 million by the time of the trial in this matter, thus the tax due with respect to the seized monies was not the only obligation he owed the I.R.S.

Over many years, Romano, represented by his attorney, Ripa, pressed his efforts in opposition to the Government's efforts to declare that the funds would be forfeited to the Government. Ultimately, he prevailed and, in 1997, the Federal District Court ordered the Government to refund to Romano $491,236.69, representing the monies seized and interest thereon.

In the case before the Second Circuit, Ripa, Romano's attorney, claimed that he was entitled to receive his legal fee for representing Romano in the forfeiture action, equal to one-third of the award, because the legal fee represented a lien with "superpriority," with priority over the tax liens. In general, an attorney's fee constitutes a lien on assets with superpriority if the legal fee was incurred in a successful effort to obtain a judgment that produced the assets. However, there is an exception to the superpriority rule when the judgment arises out of "a claim or . . . a cause of action against the United States."

Ripa argued that because the money never belonged to the Government, there was no judgement "against the United States." In fact, an earlier district court opinion out of Massachusetts supports this position. Two other district court opinions, out of Georgia and Kentucky, had reached the same conclusion as the Second Circuit here. The Second Circuit's decision was based upon its analysis that the purpose of the statute granting superpriorty status was to encourage the realization of assets that could be applied to pay taxes due. Since the monies returned by Romano would have been in the coffers of the Government in any event, the Government was no better off by dint of Ripa's efforts.

For Romano, the horror does not end here. After all, the total amount due, including interest and penalties, with respect to the taxes on money seized was more that Romano received when the Government's forfeiture claim was denied. The reasons are that the Government was not forced to pay any penalty with respect to its misguided efforts and the interest charged on delinquent tax obligations is greater that the interest allowed on the contested fund during the time the forfeiture action was pending. The Court denied Romano equitable relief with respect to this claim.

I'm wondering whether Romano was dealt one final insult. After all, he received just over $140,000.00 in interest on the returned funds. It is entirely possible that the Service could have or did seek to tax that income in 1997, the year of receipt.

No comments: