                               T.C. Memo. 2017-52



                         UNITED STATES TAX COURT



                     LEIF D. ROZIN, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 17803-14.                          Filed March 29, 2017.



      Henry Louis Sirkin, for petitioner.

      Gary R. Shuler, Jr., for respondent.



                           MEMORANDUM OPINION


      GOEKE, Judge: The parties agree that there is a deficiency in income tax of

$392,083 and a penalty pursuant to section 66631 of $294,062 for tax year 1998.


      1
       Unless otherwise indicated, section references are to the Internal Revenue
Code applicable at all relevant times. Rule references are to the Tax Court Rules
of Practice and Procedure. All monetary amounts are rounded to the nearest
                                                                       (continued...)
                                         -2-

[*2] The only question for decision is whether the deficiency and penalty are

reduced, before assessment, by petitioner’s remittances of $387,687 and $374,460

made on October 29, 2010, and July 26, 2012, respectively.

                                     Background

      The parties submitted this case fully stipulated under Rule 122. The

stipulation of facts and the facts drawn from stipulated exhibits are incorporated

herein. At the time the petition was filed, petitioner resided in Florida.

      On September 27, 1999, petitioner filed Form 1040, U.S. Individual Income

Tax Return (1998 return), reporting tax owed of $222,141 for tax year 1998.

Petitioner made total payments of $266,792 for tax year 1998. On November 8,

1999, the Internal Revenue Service (IRS) issued petitioner a refund of $44,651, as

petitioner had overpaid the tax liability reported on his 1998 return. The IRS has

not made any additional civil tax assessment for petitioner’s tax year 1998.

Criminal Proceeding

      On April 29, 2008, after a criminal trial in the U.S. District Court for the

Southern District of Ohio, a jury found petitioner guilty of: subscribing a false tax




      1
          (...continued)
dollar.
                                        -3-

[*3] return under section 7206(1); attempting to evade taxes under section 7201;

and conspiracy to defraud the Government in violation of 18 U.S.C. sec. 371.

      By letter dated October 29, 2010, petitioner made a payment of $387,687 to

the Department of the Treasury. The payment was calculated by the U.S.

Probation Department as the tax loss for 1998 in United States v. Rozin, No. 1:05-

cr-000139 SJD-1 (S.D. Ohio).

      On January 6, 2012, the U.S. Court of Appeals for the Sixth Circuit affirmed

the judgment of the District Court and upheld the convictions under sections

7206(1) and 7201 and 18 U.S.C. sec. 371. United States v. Rozin, 664 F.3d 1052

(6th Cir. 2012).

      On February 4, 2011, the District Court entered judgment ordering

petitioner to pay $775,294 in restitution to the IRS. The judgment document

stated: “As of the date of this judgment, * * * [petitioner] has paid $387,687

leaving a balance of $388,607”. On July 26, 2012, petitioner made a payment of

$374,460 to the “Department of Treasury, Internal Revenue Service, Attn MS

6261 Restitution”. Petitioner’s two restitution payments made to the Department

of the Treasury totaled $762,147.

      Petitioner and his co-defendants made restitution payments that fully paid

the restitution ordered by the District Court. On July 26, 2012, the Government
                                          -4-

[*4] filed a satisfaction of criminal judgment with the District Court and released

the lien arising from the restitution order filed against petitioner.

Examination

      At the time the restitution payments were received, the IRS’ books and

records reflected that petitioner did not have a balance due for tax year 1998.

      Respondent did not issue an examination report to petitioner until August

19, 2013, over a year after the restitution payments were received. On May 1,

2014, respondent mailed a notice of deficiency (notice) to petitioner. In the notice

respondent determined a deficiency on the basis of flowthrough adjustments to an

S corporation return for which petitioner was a shareholder, wherein income of the

S corporation was underreported. Respondent determined that petitioner was

liable for a resulting deficiency in income tax of $392,083 and a penalty under

section 6663 of $294,062.

      Petitioner has not executed a Form 4089-B, Notice of Deficiency--Waiver,

for tax year 1998. On July 29, 2014, petitioner timely filed a petition with this

Court for redetermination. Respondent has not assessed the deficiency and section

6663 penalty for tax year 1998. Respondent has not yet applied the restitution

payments against petitioner’s income tax liability and section 6663 penalty for tax

year 1998.
                                           -5-

[*5]                                  Discussion

       The parties agree that there is a deficiency of $392,083 and a section 6663

penalty of $294,062 for tax year 1998. The parties, however, disagree about the

treatment and characterization of petitioner’s restitution payments. This dispute

boils down to an issue of timing. Petitioner requests that we treat the restitution

payments as payment in satisfaction of his deficiency and section 6663 penalty for

tax year 1998. Respondent, however, is statutorily prohibited from crediting

petitioner’s account until the deficiency and the section 6663 penalty are assessed.

See secs. 6201(a)(4), 6213(a), (b)(5); see also Schwartz v. Commissioner, T.C.

Memo. 2016-144.

       Our jurisdiction in a deficiency case is predicated on the Commissioner’s

issuing a valid notice of deficiency and the taxpayer’s timely filing a petition with

this Court challenging the notice. Secs. 6212, 6213, 7442; Rules 13, 20; see, e.g.,

Midland Mortg. Co. v. Commissioner, 73 T.C. 902, 907 (1980).

       Respondent is unable to reduce his deficiency and section 6663 penalty

determinations, before assessment, by amounts of restitution previously ordered by

the District Court and remitted by petitioner. Although restitution is based upon

an estimate of civil tax liability, it is not determinative of civil tax liability. See

Morse v. Commissioner, 419 F.3d 829, 833-835 (8th Cir. 2005), aff’g T.C. Memo.
                                          -6-

[*6] 2003-332; Hickman v. Commissioner, 183 F.3d 535, 537-538 (6th Cir. 1999),

aff’g T.C. Memo. 1997-566. The restitution statute specifically contemplates that

a civil claim may be brought after the criminal prosecution by providing that the

amount paid under a restitution order “shall be reduced by any amount later

recovered as compensatory damages for the same loss by the victim in * * * any

Federal civil proceeding”. 18 U.S.C. sec. 3664(j)(2) (2012). Furthermore, any

amount paid to the IRS as restitution for taxes owed must be deducted from any

civil judgment the IRS obtains to collect the same tax deficiency. See United

States v. Tucker, 217 F.3d 960, 962 (8th Cir. 2000); United States v. Helmsley,

941 F.2d 71, 102 (2d Cir. 1991). It follows that until a civil judgment is entered,

the IRS is unable to reduce a taxpayer’s liability by restitution paid. See Schwartz

v. Commissioner, T.C. Memo. 2016-144, at *12.

      Petitioner relies upon Creel v. Commissioner, 419 F.3d 1135 (11th Cir.

2005), in support of his contention that his “civil tax liabilities have been

extinguished” by the restitution paid. Petitioner’s reliance on Creel, however, is

misplaced. In Creel, the taxpayer was not contesting the assessment of tax and

penalties, but rather challenging the IRS’ collection actions post assessment of

civil tax liabilities in excess of restitution ordered. Respondent is not attempting

to collect additional amounts; he is merely attempting to officially record the fact
                                         -7-

[*7] and amount of petitioner’s administratively determined tax liability, or rather

to make an assessment.

      A deficiency must first exist before restitution remittances for taxes owed

can be applied to reduce that deficiency. In other words, the restitution

assessment, which is assessed “as if” it were a tax, cannot offset a tax assessment

until a tax assessment of the deficiency has been made. The amount of a

deficiency turns not on what payments have been applied to an account, but rather

on what assessments have been made with respect to that account. Longino v.

Commissioner, T.C. Memo. 2013-80, at *70-*71, aff’d, 593 F. App’x 965 (11th

Cir. 2014); see sec. 301.6211-1(b), Proced. & Admin. Regs. (“Payments on

account of estimated income tax, like other payments of tax by the taxpayer, shall

likewise be disregarded in the determination of a deficiency.”); see also Burke v.

Commissioner, T.C. Memo. 2009-282, slip op. at 20-21 n.11 (“[O]nce the tax

actually due has all been assessed, there is no more deficiency--whether or not the

tax due has been paid.”); Mackey v. Commissioner, T.C. Memo. 2004-70, slip op.

at 9 (holding that remittances made before issuance of notice of deficiency without

corresponding assessments did not affect amount of deficiency); Hillenbrand v.

Commissioner, T.C. Memo. 2002-303, slip op. at 11 (“Payments are not included
                                            -8-

[*8] in determining or redetermining a deficiency, simply because they do not fit

within the definition of a deficiency.”).

      The IRS is authorized to make various types of assessments. Sec. 6201.

The most common types are summary assessments, which can be immediately

assessed, and deficiency assessments. A deficiency assessment requires the IRS to

follow a number of statutory steps before it may undertake to collect the

deficiency. Murray v. Commissioner, 24 F.3d 901, 903 (7th Cir. 1994). Section

6212(a) provides that if the Secretary determines that there is a deficiency, he is

authorized to send a notice of the deficiency to the taxpayer. The IRS generally

cannot assess a deficiency unless a notice of deficiency has been issued. See sec.

6213(a). As income tax is subject to the deficiency procedures, an assessment

generally cannot be made until the taxpayer waives the restrictions prohibiting

assessment; the 90-day or 150-day period expires following the issuance of a

notice of deficiency; or, if the taxpayer timely files a petition with this Court, the

Court’s decision becomes final. Sec. 6213(a); sec. 301.6213-1(a)(2), Proced. &

Admin. Regs.

      Deficiency procedures apply to amounts attributable to a “deficiency”.

Section 6211(a) defines a deficiency as follows:
                                          -9-

[*9]         SEC. 6211(a). In General.--For purposes of this title in the
       case of income, estate, and gift taxes imposed by subtitles A and B
       and excise taxes imposed by chapters 41, 42, 43, and 44 the term
       “deficiency” means the amount by which the tax imposed by subtitle
       A or B, or chapter 41, 42, 43, or 44 exceeds the excess of--

                     (1) the sum of

                           (A) the amount shown as the tax by the taxpayer
                     upon his return, if a return was made by the taxpayer and
                     an amount was shown as the tax by the taxpayer thereon,
                     plus

                           (B) the amounts previously assessed (or collected
                     without assessment) as a deficiency, over--

                     (2) the amount of rebates, as defined in subsection (b)(2),
             made.

       In other words, a deficiency is the correct tax, minus the tax shown on the

return, minus prior deficiency assessments, plus rebates.

       Petitioner contends that respondent erred in “calculating the tax due and

owing to the IRS because the [n]otice does not account for [p]etitioner’s payments

of $387,687.00 and $374,460.48 on October 29, 2010 and July 26, 2012,

respectively.” This argument, however, assumes that respondent was required to

give petitioner credit for the restitution payments pursuant to section 6211(a).

       Petitioner’s restitution payments were not “shown as the tax” on his 1998

return. Petitioner reported tax owed of $222,141 on his 1998 return, made total
                                           -10-

[*10] payments of $266,792, and was issued a refund for the difference. The IRS

has since made no additional civil tax assessments for petitioner’s tax year 1998.

Accordingly, petitioner’s restitution payments do not discharge or reduce his

deficiency and section 6663 penalty determinations under section 6211(a)(1)(A).

      Although petitioner’s restitution payments were previously assessed,2 they

were not assessed “as a deficiency”; rather, they were summarily assessed.

Section 6213(b)(5) provides that regular deficiency procedures do not apply to

amounts of restitution assessments. A restitution order under 18 U.S.C. sec. 3664

is a criminal penalty and, even if computed by reference to civil tax liability, is not

a final determination of civil tax liability. In re Jara, No. 14-80057-G3-13, 2015

WL 542408, at *3 (Bankr. S.D. Tex. 2015). A restitution order “is a lien in favor

of the United States on all property and rights to property of the person fined as if

the liability of the person fined were a liability for a tax assessed under the Internal

Revenue Code”. 18 U.S.C. sec. 3613(c) (2006). The IRS is instructed to assess

and collect restitution for failure to pay any tax “in the same manner as if such

amount were such tax”. Sec. 6201(a)(4) (emphasis added).3 The IRS is permitted


      2
       That is, assessed before our decision. See Winter v. Commissioner, 135
T.C. 238, 276 n.4 (2010).
      3
          This section applies for restitution orders entered after August 16, 2010.
                                                                           (continued...)
                                          -11-

[*11] to immediately assess, without issuing a statutory notice of deficiency, and

collect, as if it were a tax, the restitution ordered. See secs. 6201(a)(4),

6213(b)(5). Accordingly, restitution ordered is assessed separately from a

taxpayer’s tax liability and does not provide a basis on which a tax may be

assessed.

      Thus, petitioner’s restitution payments are not included as “amounts

previously assessed * * * as a deficiency”, and respondent was not permitted to

reduce his determination by those payments under section 6211(a)(1)(B). See also

Weber v. Commissioner, T.C. Memo. 1995-125, 1995 WL 128456, at *6.

Because restitution does not fit within the definition of a deficiency under section

6211, restitution payments made do not reduce or discharge a deficiency

determination before the deficiency is assessed.

      By failing to waive restrictions on assessment and filing a petition in this

Court, petitioner has effectively prevented respondent from doing exactly what he

is requesting respondent to do--reduce the amount due by amounts remitted before

petitioner received the notice. See sec. 6213(a). After the amount of petitioner’s


      3
       (...continued)
Firearms Excise Tax Improvement Act of 2010, Pub. L. No. 111-237, sec. 3(c),
124 Stat. at 2498. The restitution order in petitioner’s District Court case was
issued on February 4, 2011.
                                        -12-

[*12] restitution order was summarily assessed, respondent determined an income

tax deficiency for petitioner’s tax year 1998. Upon making that determination,

respondent was statutorily obligated to send petitioner a notice of deficiency

before assessing the deficiency and the section 6663 penalty. See sec. 6212(a).

Respondent has stipulated that following entry of a final decision in this

proceeding, he will assess the income tax deficiency of $392,083, the penalty

pursuant to section 6663 of $294,062, and interest as provided by law for tax year

1998. And respondent will credit petitioner’s account with the restitution

payments, as of the date of those payments, against those civil tax assessments.

      To reflect the foregoing,


                                                     Decision will be entered for

                                               respondent.
