Reducing a Restitution Order

We welcome first time guest blogger, Meagan Horn. Meagan practices in Dallas, Texas as counsel with Thompson & Knight LLP.  She focuses her practice on tax controversy matters, at both the state and federal level.  She has also assisted the tax clinic at Harvard in some amicus brief projects.  Keith   

On March 6, 2020, the Seventh Circuit affirmed a district court decision allowing the government to remove certain restitution obligations of a taxpayer arising from his tax fraud conviction. (United States v. Simon, 2020 WL 1074729 (7th Cir. 2020), aff’g United States v. Simon, 2019 WL 422447 (N.D. Indiana 2019)). At first blush, it is a fairly unremarkable case with a defendant taxpayer on the lucky side of governmental restitution amendments, yet still shooting argumentative blanks at an issue that, at this point, just needs to be paid up and moved on from. 

But just as you are about to file the case into the trusty blue filing cabinet under your desk, you see the court has slipped in a little procedural law cliffhanger.  In just five sentences near the very end of the opinion, the court introduces the most curious of questions. Specifically, the court points out that the convicted defendant can’t reduce his restitution obligations since there has not been a change in his economic situation. Then it asks, if there hasn’t been any change to the defendant’s economic situation, how is it that, under these facts, the government had statutory authority to ask the court to make the restitution amendments?

It would seem a no brainer to allow a victim to seek to reduce the restitution requirements of the defendant, but as it turns out, it’s not that easy.


A brief background is in order.  James Simon was convicted in 2010 of tax fraud and financial aid fraud. Simon was sentenced to six years in prison and three years of supervised release, and ordered to pay restitution to various parties of just over one million dollars.  Most of the ordered restitution was owed to the Internal Revenue Service, but some of the restitution was to be paid to various private schools that had been defrauded via the financial aid claims.  Several years later, the government filed a motion to amend the restitution order to reduce required payments to certain of the private schools. The court approved the motion the following day.

Approximately seven months later, Simon filed a pro se motion with the district court requesting reconsideration of the matter. He contended he did not receive a copy of the government’s motion and its attachments until several days after the district court had already granted the restitution amendments. In addition to rehashing several arguments he made at the sentencing phase, he raised concerns with the documentation that had been used to support the restitution amendments.  He further claimed his right to due process under the Fifth and Fourteenth Amendments had been violated when the court allowed the restitution order to be amended without his participation.

The district court quickly dismissed each of Simon’s concerns, noting Simon couldn’t relitigate issues raised at the sentencing phase and dismissing the documentation concerns. Further, the district court explained that for Simon to prevail on a due process claim, he must show a cognizable property interest, a deprivation of that interest, and a denial of due process.  Citing Dyab v. United States, No. 09-cr-0364 (1), 2018 WL 3031944, at *1 (D. Minn. June 19, 2018), the district court found that Simon could not have suffered a deprivation of his property interest, given the restitution order was amended to his benefit.

Simon appealed, raising new issues and rehashing old ones that could have been or should have been raised at the sentencing phase.  Without much discussion, the Seventh Circuit found each of Simon’s arguments were inappropriate at this phase and/or untimely and therefore waived. 

In concluding, however, the Seventh Circuit made an interesting observation.  What statutory avenue permitted the government to adjust the mandatory restitution order in the first place?  When the court asked the government what authority it relied on to adjust the restitution order, it cited 18 U.S.C. §3664(k). However, the court had dismissed Simon’s request to adjust the restitution order, finding that his economic situation had not changed; the Seventh Circuit observed that such section would be as inapplicable to the government as it was to Simon.  Nevertheless, the court found that Simon’s challenges were untimely, and found further comfort in the fact that Simon’s order was amended to his benefit. The issue was moot.  The end, they said.

Wait, what? Things just got juicy! I just sat up and started pushing too large of handfuls of popcorn into my mouth. And granted, I know it’s not the court’s job to answer these sorts of questions if they don’t have to.  But, still, what a cliffhanger!

In general, 18 U.S.C. § 3664 provides the procedures for issuance and enforcement of restitution.  §3664(o) declares restitution orders final judgments, with only a handful of exceptions.  Namely, the defendant has the right to file a timely appeal, and the order may be amended in certain situations when the victim’s losses are not known or quantifiable at the time of sentencing, when fines are also imposed, or when the defendant is in default on his or her restitution obligations. In addition, and this is the crux of the court’s discussion, a restitution order may be adjusted under §3664(k) when the defendant’s economic situation has changed.  So when the defendant’s economic situation hasn’t changed, and there aren’t any of the specific scenarios addressed in §3664(o), what does permit the government to request a change to a defendant’s restitution obligation?

Luckily, Judge Hamilton could sense the discomfort that such a cliffhanger would cause and wrote a concurring opinion to fill in a few gaps to, as he put it, “offer not a fully satisfactory answer but in essence a tracing of steps so that the choices are clear.”

After analyzing the inapplicability of §3664(o) in this particular situation, Judge Hamilton first offers as possible statutory authority for the amendments the government sought, §3664(m)(1)(A), which states, “[a]n order of restitution may be enforced by the United States in the manner provided for in subchapter C of chapter 227 and subchapter B of chapter 229 of this title, or by all other available and reasonable means.”  Judge Hamilton points out that the cross-references offered in §3664(m) give the government the authority to initiate enforcement actions or modifications of restitution and clearly contemplate that district courts will hear such matters.  He then offers, “with diffidence,” an argument that the district court simply has inherent authority to hear such matters. He rightly notes that the statutory references and cross-references providing specific authority to specific fact patterns weigh against an inherent authority argument (not to mention the general hesitancy of courts to apply inherent authority).  Nevertheless, he concludes, it is clear that someone must be in charge of hearing such matters, and no one is better suited to hear such issues than the court that imposed the sanctions in the first place.  He offers that if this analysis is not satisfactory, perhaps legislation should be enacted to make it clear.

Judge Hamilton is right – there is no explicit statutory authority for the government to reduce a defendant’s restitution obligation in a situation such as Simon’s. And I’m not convinced that §3664(m) does the trick. In this case, however, I’m not troubled by an argument that the district court has inherent authority to oversee adjustments of the type at issue here.  The district court rightfully noted its limitation to adjust a restitution order to the detriment of the defendant.  Inherent authority must be exercised with restraint, but here, I have trouble seeing any harm that could ever arise from a court exercising authority to adjust its own restitution order at the request of a victim to the benefit of a defendant.  Given that, it seems entirely appropriate to read in a district court’s inherent authority to address these sorts of issues, and I see no need to bog the code down with a legislative fix. What do you think?

CIC: Supreme Court Review?

We have discussed CIC Services v IRS on the blog numerous times. As readers may recall, CIC involves an IRS Notice that imposes additional reporting obligations on captive insurance companies and their advisors. CIC, a manager of captives, and an individual who also managed captives and provides tax advice to them, sued. The suit claimed that the Notice imposed substantial costs and that the IRS in the Notice effectively promulgated legislative rules without complying with the APA’s mandatory notice and comment requirements. The plaintiffs sought an injunction prohibiting the IRS from enforcing the Notice and a declaratory judgment claiming that the notice was invalid. The Sixth Circuit, affirming the district court, held that the Anti-Injunction Act (AIA) barred an APA challenge to the Notice.

In August the Sixth Circuit denied a petition for rehearing (see here for my prior blog post discussing that denial). Judge Sutton in his concurring opinion accompanying the rehearing denial strongly encouraged that the Supreme Court grant cert to resolve open questions concerning the reach of the Anti-Injunction Act. 

Since that time CIC filed a cert petition. The Harvard Tax Clinic (through Keith, Carl and students Tyler Underwood, Lauren Hirsch and Oliver Roberts), Meagan Horn (at Thompson and Knight in Dallas serving as pro bono counsel to the clinic) and I have filed an amicus brief flagging the importance of the issue. In our amicus brief we emphasize that the implications of the case extend to low and moderate-income taxpayers. The amicus brief, as well as an amicus from the American College of Tax Counsel and the cert petition itself, can be found on the SCOTUSblog cite.  The government originally was supposed to respond by February 24th but it has asked the Court for a one- month extension.

As an aside, I, along with one of  my colleagues on the Saltzman/Book IRS Practice and Procedure treatise, Contributing Author Marilyn Ames, have posted on SSRN The Morass of the AIA: A Review of the Cases and Major Issues. The article will be published in the Summer 2020 issue of the Tax Lawyer and is based on the heavily rewritten Chapter 1.6 of the Saltzman Book treatise which likewise discusses and analyzes the AIA.  As the article is in draft form I encourage readers to offer comments. This, and other developments such as the Silver case Keith discussed here, suggest that the reach of the AIA is a very hot issue in tax procedure. Stay tuned.