Friday, July 10, 2009

Help from Readers - Quantifying the Evaded Tax (7/10/09)

I received an inquiry from a reader about a variation of the theme discussed in the Stadtmauer post here. Stadtmauer held that, for sentencing guideline calculations, tax loss from claiming a current deduction for an item that could properly be claimed in later years was the time value of money and not the entire tax loss in the year from claiming the entire deduction. The reader raised the issue of whether a similar analysis could apply to the predicate guilt or innocence phase in determining whether there is a "tax deficiency" which is an element of the crime of tax evasion. The reader and I would like some input from other readers of this blog.

Tax due and owing is an element of the crime of tax evasion. Courts (including the Supreme Court in Boulware and Sansone) have stated this element as requiring a deficiency. (I believe that the courts using the term deficiency did not mean to adopt the technical definition of deficiency in § 6211, but simply used deficiency as a short hand for tax due and owing element of the crime; I will use the term deficiency in this more generic sense.)

Stepping back from a technical analysis, what should the crime of tax evasion require for the deficiency element? To use a very simple example, suppose a taxpayer willfully claims a deduction in year 1 for a tax reduction of $100 that he is entitled to take in year 2 with a tax reduction of $100. Has that taxpayer evaded tax? If so, is the quantum of tax evaded the entire $100 wrongfully claimed in year 1 even though in real economic terms the tax evaded is zero and the larger "deficiency" is only the result of the artificial but necessary concept of an annual accounting system?

The actual context that the reader raised is illustrated as follows: Suppose a taxpayer willfully evaded $25,000 of alternative minimum tax (AMT) in year 1 but he is entitled to a dollar-for-dollar "minimum tax credit" (under Section 53) of $25,000 in year 2 (which carries forward indefinitely) which can be offset against his regular income tax liability. In a sense, the design of the AMT is to have the year 1 AMT payment serve as a prepayment of the year 2 tax. Same questions: Has a taxpayer who willfully failed to report the AMT obligation and thus did not pay it in year 1 evaded tax? If we conceptualize the AMT consistent with its actual design and effect, the AMT is simply a prepayment or deposit (if you will) toward a future tax liability designed to assure over the years that the taxpayer pays a minimum level of tax on his or her real economic income. What has been evaded is not the tax but the interim use of the money which is not evasion of tax but simply a borrowing from the Government without paying interest. Certainly any taxpayer “evading” payment of the AMT knows that he or she is not evading any tax liability, but solely borrowing from the Government without interest. If so, is the quantum of tax evaded the entire $ $25,000 of AMT even though in real economic terms the tax evaded is zero and the larger deficiency is only the result of the artificial but necessary concept of an annual accounting system?

In terms of quantifying the tax loss for sentencing purposes, Stadtmauer held the tax loss was not the entire amount but only the time value. Is tax loss for sentencing purposes the same as the deficiency for the predicate crime of evasion? I think a good argument can be made that they are or should be the same concepts and thus interpreted consistently. For example, add some zeros to the dollar amounts noted above, and you can see that real world sentencing consequences can turn on the difference between the full amount and the time value amount. Would it make sense for a taxpayer to be convicted for evading say $100,000,000 for year 1 when in real dollar terms the tax loss after netting the year 2 benefit to the Government was zero or, considering time value of money, say $40,000 (depending upon the interest rate assumed)?

And, an additional overlay is that tax evasion does not consider penalties or interest. Thus, both for the substantive crime and for sentencing tax loss number purposes (at least for evasion of assessment which is involved here), interest and penalties on the tax are not considered. See e.g., United States v Wright, 211 F.3d 233, 236 (5th Cir. 2000). It would seem the some notion of symmetry should also apply -- that even the time value / interest factor should not be considered in quantifying the tax evaded, so that only the year of evasion principal tax dollars net of the principal tax saving in future years should be considered.

I also throw out for what it is worth the possible application of the rule of lenity. The statute itself is cryptic in terms of the tax due and owing requirement. I have noted above the courts' short-hand use of the term deficiency which the statute does not use and can be confusing and incorrect in some cases. See United States v. Schoppert, 362 F.3d 451, 454-456 (8th Cir. 2004). Tax due and owing is the more correct term, I think. Given the intent of § 7201 to punish when the taxpayer intends to cheat the Government out of tax dollars, it would seem that Section 7201 ought not apply when the taxpayer is entitled to a later year offsetting benefit. In this regard, the Government has more refined criminal enforcement tools to deal with this problem -- i.e., tax perjury (§ 7206(1)) which can be used even in the absence of evasion and perhaps even tax obstruction (§ 7212(a)), depending upon the facts. It is not necessary to give a distorted reading of section 7201 given its purpose to punish attempts to steal the real tax dollars from the Government forever. (I should note that, under Staudtmauer, the tax loss for sentencing purposes would be calculated net of the later year benefit with an interim interest factor, so that the Government would have far less dollars at play in sentencing and, depending upon the amounts involved, a prosecution would not even get incarceration which, in turn, might mitigate against prosecution ab initio.)

Finally, it would seem to me that the future year benefit could in any event be used in jury argument (provided the predicate showing of future year benefit is in the record) and perhaps persuade the jury not to find the requisite into to evade (i.e., cheat the Government).

I would appreciate receiving comments from readers on this subject either by way of comment to the blog (so that all can share) or by email to me at

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