Gray was charged with three counts of tax evasion (Section 7201) for three tax years. He pleaded guilty, and was sentenced. The guilty pleas to the tax evasion charges were limited to the Section 7201 violations, and “no disposition was being made of [Gray’s] civil tax liabilities.”

Not long after, the I.R.S. informed Gray about his civil tax liabil­ity for those three tax years. At the same time, the Service also informed him about the 50% fraud penalty it had assessed. The dollars involved were substantial, so Gray went into the Tax Court to get relief. One important aspect of the tax court case was the very expensive 50% fraud penalty that had been assessed against Gray under Section 6653(b) of the Internal Revenue Code: “If any part of any underpayment. . .of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 50 percent of the underpayment....” But the tax court held that Gray couldn’t complain about the civil fraud penalty because he had earlier pleaded guilty to the criminal fraud/evasion charges.

Gray appealed.

The federal appeals court agreed joining numerous other federal courts in holding “that a conviction for federal tax evasion, either upon a plea of guilty, or upon a jury verdict of guilt, conclusively establishes fraud in a subsequent civil tax fraud proceeding....”

Although the Gray decision was 2-1, and although not all federal courts have reached the same conclusion, the case probably reflects the prevailing view. As such, Gray sounds a warning too loud to be ignored: usually, criminal tax evasion charges must be fought tooth and nail not only because of the obvious stakes in the criminal case itself, but because all too often a criminal conviction sets the stage for the defendant’s remaining assets to be picked clean by the I.R.S. in a “civil” tax proceeding.