More on Tax Due and Owing and Tax Deficiency (8/28/22)

In United States v. Green, 47 F. 4th 279, 2022 U.S. App. LEXIS 23750 (5th Cir. 8/24/22), CA5 here and GS here, the Court affirmed convictions of (i) John Green (an attorney) and Thomas Selgas for defraud conspiracy and (ii) Selgas for tax evasion.

I don't think there is anything new in the case or that the opinion presents old law in a way that even justifies making the opinion a published opinion.  Of course, the Fifth Circuit standards for publishing an opinion are not particularly high.  See generally Precedential Effect of Published Plurality Appellate Opinion That Majority of Panel Doesn't Accept (Federal Tax Procedure Blog 8/9/22), here (addressing a published Fifth Circuit opinion that 2 members of the panel disagreed with and thus was not precedent).)

There is one item that I have expressed concern about before – describing the "tax due and owing" element for evasion as "tax deficiency." (See Slip Op. 14-18.)  The Green opinion describes the evasion element as "tax deficiency," although the Court says (Slip Op. 14) that it is "also referred to in the caselaw as a 'tax due and owing.'"

I continue to be concerned about use of the term tax deficiency for the tax due and owing element for tax evasion.  I prefer the term "evaded tax" to describe the element, but the common term is "tax due and owing." Rather than recreate the wheel in describing my concern, I quote from my article, John A. Townsend, Tax Evaded in the Federal Tax Crimes Sentencing Process and Beyond, 59 Vill. L. Rev. 599 (2014), here.  In the article, I have a section discussing Tax Liability Concepts in the Criminal Tax Universe (pp. 602-611).  In that section, I discuss Civil Tax Liability and Tax Deficiency (pp. 603-604), The Tax the Taxpayer Intended to Evade - The Criminal Tax Numbers or Figures (pp. 604-606) and the Sentencing Tax Loss (pp. 606-608).  Here is the most relevant portion of the article (pp. 604-608, some footnotes omitted):

2. The Tax the Taxpayer Intended to Evade - The Criminal Tax Numbers or Figures

            I think it helpful to illustrate the concepts in an example. Assume that, for civil tax purposes, the taxpayer had $ 100,000 of income that the taxpayer failed to report and pay. Assume that the tax liability on that omitted income is $ 35,000; that liability is the deficiency. The $ 100,000 omitted income consists of two items - $ 50,000 of embezzlement income which the taxpayer knew was taxable and chose not to report and $ 50,000 of personal injury income that the taxpayer thought or could have reasonably thought was excludable under section 104 but which, for technical reasons, is not properly excludable under that section. In calculating the tax evaded as an element of tax evasion, the Government will compute the tax only on the $ 50,000 of embezzlement income and will not include the $ 50,000 of personal injury income. So, let's say the tax on $ 50,000 of embezzlement income is $ 17,500. The criminal tax number for establishing the evaded tax element in a tax evasion case is $ 17,500 (even though the deficiency is $ 35,000). The Government must prove the evaded tax beyond a reasonable doubt.

Presence or Absence of Tax Deficiency, Although Not an Element of Tax Perjury (§ 7206(1)), Crime, May be Relevant to the Materiality Element (1/14/18)

In United States v. Huynh, 2018 U.S. App. LEXIS 767 (9th Cir. 2018), unpublished, here, the Court of Appeals affirmed Huynh's conviction for "one count of conspiracy to commit medical fraud in violation of 18 U.S.C. § 371 and eleven counts of subscribing to a false tax return in violation of 26 U.S.C. § 7206(1)."  The decision is rather cryptic and, since unpublished, does not, I think, deserve further analysis.  The decision does permit a digression over an issue that caught my attention.

The paragraph in question is (bold-face supplied by JAT):

2. Huynh also takes issue with the jury instruction stating that the prosecution was "not required to prove that any additional tax was due to the government or that the government was deprived of any tax revenues by reason of any filing of any false return." Specifically, he contends that because "a tax loss [was] the only material false statement charged in [the] tax counts," this instruction allowed the jury to convict him under Section 7206(1) without finding that his filings were incorrect as to material matters. This argument misrepresents the nature of the charges against him. Huynh was charged with and convicted of underreporting income—not underreporting tax liability. Moreover, the challenged instruction is consistent with the principle that "[t]he existence of a tax deficiency is not an element of this crime" under Section 7206(1). United States v. Marabelles, 724 F.2d 1374, 1380 (9th Cir. 1984); see also United States v. Marashi, 913 F.2d 724, 736 (9th Cir. 1990) ("Section 7206(1) is a perjury statute; it is irrelevant whether there was an actual tax deficiency."). And we are not persuaded by Huynh's citation to United States v. Uchimura, 125 F.3d 1282 (9th Cir. 1997), that the instruction took the materiality decision away from the jury.

The last sentence, bold-faced by me, caught my attention.  So, I thought I would read Uchimura and see what it offers to the § 7206(1) materiality analysis.  (By the way, cert was denied in Uchimura in 525 U.S. 863 (1998).)

It is black letter law that a tax deficiency as a result of the false statement on the return is not an element of the crime of tax perjury in § 7206(1).  It is not thought that the lack of a tax deficiency is a defense to the crime.  However, materiality is an element of the crime.  So the question is whether the lack of a tax deficiency or the presence of a tax deficiency is relevant to the issue of materiality and thus admissible and considered by the jury.

Of course, if the lie that the indictment charges is tax underreported, then tax deficiency is an element of the crime.  But, § 7206(1) charges are usually brought where there is some other lie such as gross income omitted from the return, Schedule B foreign account question answered no rather than yes, or some such.  In those other cases where underreported tax is not the lie charge, then tax deficiency is not an element of the crime.

In Uchimura, the Court addressed the materiality issue after the Supreme Court decided in United States v. Gaudin, 515 U.S. 506 (1995) that the materiality element of crimes was a question for the jury rather than for the court.  The Uchimura court then moved into the definition of materiality.  The Uchimura Court opens the discussion in relevant part (bold-face supplied by JAT):

This Circuit has never explicitly defined "material" in Section 7206(1), although our Model Jury Instructions for Section 7206(2) define it as "something necessary to a determination of whether income tax was owed." Ninth Circuit Model Jury Instructions: Criminal 9.06E (1995). The definitions applied by other Circuits, and by at least one of our Districts, employ similar language. Klausner, 80 F.3d at 60 ("essential to the accurate computation of . . . taxes"); Aramony, 88 F.3d at 1384 ("in order that the taxpayer estimate and compute his tax correctly"); U.S. v. Warden, 545 F.2d 32, 37 (7th Cir. 1976) (same); U.S. v. Rayor, 204 F. Supp. 486, 491 (S.D.Cal. 1962) (same). We now hold that information is material if it is necessary to a determination of whether income tax is owed. 

Despite our adoption of a materiality definition similar to the one in Klausner, we cannot agree with the Second Circuit. The logic that must be employed (whether by a judge or by a jury) to deduce that a false statement is material renders materiality a "mixed question of law and fact." Under 18 U.S.C. § 1001, deciding whether a statement is material requires the determination of "at least two subsidiary questions of purely historical fact: (a) `what statement was made?'; and (b) `what decision was the agency trying to make?'." Gaudin, 115 S.Ct. at 2314. Under 26 U.S.C. § 7206(1), deciding whether a statement is material surely requires a similar determination of (a) "what statement was made?"; and (b) "what information was necessary in this case to a determination of whether income tax was owed?".

Tax Court Again Rejects Collateral Estoppel For Some Deficiency and Civil Fraud Penalty Where No Tax is Due (7/24/16)

I recently blogged on the case of Senyszyn v. Commissioner, 146 T.C. ___, No. 9 (2016), here, referred to as Senyszyn II to distinguish from the first opinion in the case in 2013, where the Tax Court declined the IRS's invitation to apply the doctrine of equitable estoppel arising from the taxpayer's conviction for tax evasion.  See Tax Evasion Conviction Does Not Compel a Finding of Deficiency Where There is No Deficiency (Federal Tax Crimes Blog 4/2/16), here.  An element fo the crime of tax evasion to which the taxpayer pled is tax evaded (some courts say it must only be some tax evaded; others say substantial tax evaded, although the substantial modifier is not a textual element of the crime).  Accordingly, the taxpayer's plea to tax evasion included a stipulation that he willfully failed to report income of $252,726 which, in most cases would mean a tax evaded, indeed a substantial tax evaded.  In the ensuing tax case involving the year, however, the evidence demonstrated that there was no evaded tax.  The IRS nevertheless urged that the Tax Court should find some minimal amount of tax evaded pursuant to the plea agreement as to that element of the crime.  The Tax Court declined to imposed collateral estoppel against the evidence it had before it.

The IRS was not pleased.  Conjuring the horrors that might result, the IRS asked for reconsideration, urging that collateral estoppel was mandatory rather than equitable subject to the court's discretion. The Tax Court (Judge Halpern) again rejected the position.  Senyszyn v. Commissioner, T.C. Memo. 2016-137, here.  The Court has a good history of the proceedings before the Tax Court, with the first opinion in 2013 and not, apparently, the last just last week.

Judge Halpern then explained the IRS' motion for reconsideration:

In that motion, respondent alleges that, in Senyszyn II, we "did not properly apply the standard for collateral estoppel." In particular, respondent argues that our claim of "broad discretion in the application of collateral  estoppel" was a substantial error of law because it "contradicts previous holdings of the Court of Appeals for the Third Circuit, the court to which any appeal in this case would lie." Finally, respondent alleges that proper application of the standard for collateral estoppel would result in "a substantial tax deficiency for petitioners." According to respondent, that Court of Appeals allows trial courts discretion in the application of collateral estoppel only when the doctrine is asserted by a claimant who was not a party to the prior litigation (i.e., cases of "non-mutual" collateral estoppel). By contrast, in cases involving "mutual" collateral estoppel, in which the doctrine is asserted by a party to the prior litigation, courts must apply the doctrine whenever the legal conditions to its application are met.

The Tax Court noted that the IRS' argument that collateral estoppel does not permit judicial discretion in its application was based on thin authority (Jean Alexander Cosmetics, Inc. v. L'Oreal USA Inc., 458 F.3d 244 (3d Cir. 2006), and in the discussion section of the opinion demonstrates that that case is not sufficient authority on the facts in the case.  Moreover,

Respondent also suggests we "consider the breadth of * * * [our] opinion." He worries that the discretion we have claimed in the application of collateral estoppel might encourage "many more challenges to clear-cut cases" that will "waste judicial resources and the resources of the parties, thereby frustrating the entire purpose of collateral estoppel." He also professes concern that our Opinion "might be used to challenge prior criminal convictions." Finally, respondent suggests that applying collateral estoppel would "save[] the Court from having to confront the question of a requirement to arbitrarily determine some 'substantial tax deficiency' in order to afford the District Court the comity to which it is due, in a case where this Court's factual analysis shows there really is no deficiency at all." "The better course", respondent recommends, "is to accept via collateral estoppel the liability to which Mr. Senyszyn stipulated in his guilty plea as a minimum deficiency."

Daugerdas Retrial Jury Instructions - Part 07 Tax Evasion Instructions Part 3 Tax Evaded (11/25/13)

I address here what I now call the evaded element for the crime of tax evasion.  There has been loose jargon that has crept into this element.  I have used loose jargon, but I have recently seen the error of my ways.  

The key concept is that the taxpayer have evaded tax for the crime of tax evasion.  Simply because a taxpayer underpaid some or all of his tax liability, does not mean that he evaded some or all of his tax liability.  The Supreme Court and other courts, however, have described this element as a "tax deficiency" which is a tax term of art that normally means simply tax underpaid.  See Section 6211(a), here.

In his instruction, Judge Pauley describes this element as "tax due and owing."  Judge Pauley explains it to the jury as follows (again excluding the portion relevant only to Daugerdas' personal evasion):

First Element: Tax Due and Owing 

In order to establish the first element of tax evasion, the Government must prove beyond a reasonable doubt that the relevant taxpayer or the defendant Paul Daugerdas owed a substantial federal income tax for the tax year at issue.

This particular quote does not use the term tax due and owing, but rather just requires that there be a substantial federal income tax due.  Perhaps, though, the requirement of proof beyond a reasonable doubt captures the concept I want to discuss here.

There are more extensive instructions on tax due and owing and may be reviewed on a prior blog.  Daugerdas Retrial Jury Instructions - Part 06 Tax Evasion Instructions Part 1 Tax Evasion and Conspiracy to Commit Tax Evasion (Federal Tax Crimes Blog 11/25/13), here.

In the past, I have typically used the "tax due and owing" formulation of the element.  However, in preparing an article on sentencing, I concluded that perhaps the better concept would be "tax evaded."  Here is an except from the latest draft of that article which arises from the Villanova Symposium in which I recently participated (footnotes omitted):

E. Tax Liability Concepts in the Criminal Tax Universe. 

I stated earlier that tax evaded is the centerpiece of the sentencing in criminal tax cases and, hence, is at the forefront from the earliest steps in the criminal investigation and enforcement process where practitioners must anticipate and, if possible, shape what will happen at sentencing.  I will first state generally the varying concepts of tax liability as they play out in the criminal tax context and specifically at sentencing.  As with most financial crimes, the key determinant in the advisory Sentencing Guideline calculations is the financial loss to the victim.  For taxes, the victim is the IRS, and the tax loss is the measure of the financial loss that is considered. 

1. Civil Tax Liability / Tax Deficiency. 

A taxpayer may think of his tax liability as what he offers to the IRS.  In the case of a filed return, the return is the taxpayer’s offer.  In the case of an unfiled return, the taxpayer’s offer is nothing (except to the extent of prepayments such as withholding or estimated taxes).  In either case, the IRS may disagree and think the taxpayer owes more than he offered.  That is the context for IRS investigations into liability that may include both audits and criminal investigations. 

The taxpayer will have a civil tax liability which is imposed on the original due date of the return.  That liability is determined before application of payments.  To the extent that the liability exceeds the payments made or deemed as of the due date of the return, the taxpayer has an unpaid civil tax liability, often referred to in a civil context as a deficiency.  Taxpayers who fully pay their civil tax liability will usually not be at risk of criminal prosecution because of the phenomenon noted above that punishment is determined by evasion of the unpaid tax.  At least usually, in the tax crimes universe, if there is no tax underpaid, there is no crime – or at least no crime that the Government will have the incentive to prosecute. 

For Tax Evasion, Is the Element "Tax Deficiency" or "Tax Due and Owing" (10/14/13)

The crisp answer to the question is "yes."  

Moving past cute, I provide the following that I have just added to my ongoing draft of the Federal Tax Crimes book (some footnotes omitted).

e. Tax Due and Owing. 

(1) No Tax, No Tax Evasion. 

Where there is no tax due and owing, there is no tax evasion.  Hence, tax due and owing is an element of the offense. 

I pause here to address a point of potential semantical confusion with regard to this element of the crime of tax evasion.  This element of the crime of tax evasion is often articulated as requiring a “tax deficiency” rather than a “tax due and owing.”  What’s the difference?  Deficiency is a term of art in the tax code, which defines deficiency as meaning the tax that is due less the tax that is owed. n164  As thus defined and employed elsewhere in the Code itself, deficiency is essentially a civil tax term of art.  I have been concerned that the use of the term tax deficiency could sow unnecessary confusion with its more common use in the civil context.  I recognize that my concern is perhaps only a semantical quibble.  Elements of all crimes must be proved beyond a reasonable doubt.  Hence, this element must be proved beyond a reasonable doubt.  So, when the Government puts on evidence of the “tax deficiency” to meet that burden in an evasion case, it will not – or should not – put on evidence of the portion of the civil tax deficiency that it cannot prove beyond a reasonable doubt.  Stated otherwise, this element of the crime of tax evasion is only the portion of the civil tax deficiency that the Government can prove beyond a reasonable doubt that the taxpayer intended to evade. n165  In that sense, the use of the term tax deficiency would be correct because of the role of the burden to prove the deficiency beyond a reasonable doubt.  For purposes of this text, however, I prefer to use the term tax due and owing as a term of art meaning only the portion of the tax deficiency that, as proved beyond a reasonable doubt, the taxpayer intended to evade.  While even the term “tax due and owing” is not descriptive of the criminal concept because, read literally, it could mean the same as tax deficiency; still, as I understand that term, it has become a term of art in the tax evasion context, although I recognize that tax deficiency is also used as a term of art for this element of tax evasion. n166  Still, I prefer to avoid the use of tax deficiency because the term tax due and owing is not commonly used in any potentially confusing context.
   n164 This is a fair summary of § 6211(a) for present purposes.[§ 6211(a) is here.]
   n165 This concept of dividing the tax deficiency between the portions attributable to tax evasion and not attributable to tax evasion is recognized § 6663, the civil penalty counterpart to § 7201 evasion.  Section 6663 imposes the civil fraud penalty only on the portion of the tax attributable to fraud.  So too, as I shall explain, only the portion of the tax deficiency attributable to evasion meets this element of tax evasion.
   n166 I did a LEXIS-NEXIS federal court search in the combined federal court cases database on “7201 w/20 ‘tax due and owing’” and received 73 hits, most of which used the term tax due and owing in this sense.  E.g. United States v. Farr, 536 F.3d 1174, 1181 (10th Cir. 2008) (“ the first element of Section 7201 -- a substantial tax due and owing”).  None of the cases were Supreme Court cases.  I did the same search for tax deficiency (substituting “tax deficiency” for “tax due and owing”) and obtained 277 hits, quite a bit more, and several of the cases were Supreme Court cases.  E.g., Boulware v. United States, 552 U.S. 421, 425 (    ) (quoting Sansone v. United States, 380 U.S. 343 (1965) as follows: “[T]he elements of § 7201 are willfulness[,] the existence of a tax deficiency, . . . and an affirmative act constituting an evasion or attempted evasion of the tax.”).

Taxpayer Judicially Estopped from Refund For Taxes Admitted in Plea Agreement (9/25/13)

In Mirando v. United States, 2013 U.S. Dist. LEXIS 135659 (ND OH 2013), the taxpayer pled guilty to conspiracy and tax evasion.  The plea agreement stated that the parties:

agree and stipulate that the following facts would have been established beyond a reasonable doubt at a trial in this matter: . . . after Mirando's release from the custody of the Bureau of Prisons, the IRS assessed tax, interest and penalties for Mirando's taxes due for the 1995 and 1996 tax years as well as for unpaid liabilities for the 2000 and 2004 tax years. As of June 29, 2007, the total tax liability, including interest and penalties, amounted to $448,776.13.

The taxpayer paid and sued for refund.

As I note in the comments below, there was no basis in the normal judicial doctrines of res judicata and collateral estoppel to prevent the taxpayer from asserting that the tax was less than stipulated in the plea agreement.  And, apparently this plea agreement was not specific that it was intended to contractually bind the taxpayer to the amounts -- even as minimum amounts -- in any subsequent civil tax case.  So something else would have to apply if the taxpayer were going to be bound.

The Court applied judicial estoppel.  Here is the reasoning (footnotes omitted):

The Court finds judicial estoppel prevents Plaintiff Mirando from bringing his refund claim. First, Mirando's position that he is entitled to a refund for overpaid taxes for the years 1995, 1996, and 2000 is directly contrary to his plea agreement in his 2007 criminal case. Recall Mirando's 2007 plea agreement states that the parties: 

agree and stipulate that the following facts would have been established beyond a reasonable doubt at a trial in this matter: . . . after Mirando's release from the custody of the Bureau of Prisons, the IRS assessed tax, interest and penalties for Mirando's taxes due for the 1995 and 1996 tax years as well as for unpaid liabilities for the 2000 and 2004 tax years. As of June 29, 2007, the total tax liability, including interest and penalties, amounted to $448,776.13. 

Because Mirando initialed the page on which the total tax liability was determined and signed the entire document, Mirando specifically agreed he owed $448,776.13. Mirando cannot now dispute these figures and demand a refund from the IRS after the court accepted his plea agreement. 

Moreover if Mirando was allowed to proceed in this action, he would gain an unfair advantage. By pleading guilty to tax evasion and specifically agreeing to a total tax liability of $448,776.13, Mirando avoided the possibility of a longer sentence and the United States agreed not to prosecute Mirando's ex-wife or two children. After obtaining this benefit from the United States, Mirando cannot turn around and sue the United States for a refund. 

Plaintiff Mirando relies on United States v. Hammon [277 F. App'x 560 (6th Cir. 2008)] for its position that his refund claim is not barred by estoppel. In Hammon, the Sixth Circuit held that the defendant was not collaterally or judicially estopped from denying the accuracy of the government's assessments despite pleading guilty to tax evasion and agreeing to pay $2.39 million in restitution. However, the present case can be distinguished from Hammon. In Hammon, the plea agreement only stipulated that the defendant willfully attempted to evade taxes assessed by the government in "the amount of approximately $2.39 million." Since the plea agreement was ambiguous as to whether the defendant admitted that the $2.39 million assessment was correct, the defendant was not estopped from challenging the accuracy of the tax assessment. In contrast, Plaintiff Mirando specifically agreed in his 2007 plea agreement that "beyond a reasonable doubt ... [a]s of June 29, 2007, the total tax liability, including interest and penalties, amounted to $448,776.13." Consequently, Hammon is not controlling, and judicial estoppel prevents Mirando from bringing his refund claim.

Is the Spies Element for Evasion (i) Tax Deficiency or (ii) the Criminal Tax Number? (9/17/13)

In United States v. Ervin, 2013 U.S. App. LEXIS 7917 (11th Cir. 2013), here, an unreported per curiam decision, the court of appeals confirmed the defendant's convictions for (i) conspiracy to commit tax evasion (note that it was an offense conspiracy and not the ubiquitous defraud / Klein conspiracy and (ii) tax evasion.  In affirming, the court rejected the defendant's various arguments.  I address here only one -- that "his convictions for tax evasion were unsupported by the evidence and the law."  (Of course, logically, if his conviction for evasion fell, his convictions for conspiracy might also fall, but the court of appeals did not reach that point.)

On the  sufficiency issue, the Court of Appeals first noted the elements of tax evasion:  "(1) willfulness; (2) existence of a tax deficiency; and (3) an affirmative act constituting an evasion or attempted evasion of the tax."  I have highlighted the bone I want to pick.

The court then focused upon whether there was a "tax deficiency."  I think the Court of Appeals was sloppy in stating that element.  The issue is not whether there is a tax deficiency (although even the Supreme Court screws that up as well, see Boulware v. United States, 552 U.S. 421 (2008).  Rather, the issue is whether there is criminal tax due and owing, the actual element of the crime since Spies v. United States, 317 U.S. 492 (1943).  I have just written a draft article for the Villanova symposium here where I address the difference between a deficiency and the tax due and owing element for tax evasion.  The guts of the reasoning is that "tax deficiency" is a term of art that is used in the Code to describe the civil tax liability less taxes paid.  See Section 6211(a), here, stating the "the term 'deficiency' means  * * *."  All tax practitioners know what a deficiency is.  Fewer tax but all criminal tax practitioners know that the criminal number, which is the Spies tax due and owing element for evasion is not necessarily the deficiency; indeed the Spies tax due and owing element can be substantially less than the civil tax deficiency and even less than the tax loss number used for sentencing.  I offer two illustrations from the article:

The tax due that the Government will use to support a tax evasion prosecution is not necessarily the unpaid civil tax due.  To illustrate, assume that, for civil tax purposes, the taxpayer had $100,000 income that he or she failed to report.  Assume that the tax liability on that omitted income is $35,000.  The $100,000 omitted income consists of two items -- $50,000 of embezzlement income which the taxpayer knew was taxable and chose not to report and $50,000 of personal injury income which the Government is satisfied that the taxpayer thought or could have reasonably thought was excludable under § 104 but which for technical reasons is not properly excludable under that section.  In calculating the tax evaded as an element of tax evasion, the Government will compute the tax only on the $50,000 of embezzlement income and will not include the $50,000 of personal injury income.  So, let’s say the tax on $50,000 of embezzlement income is $17,500.  The criminal tax number for establishing tax due and owing in a criminal case is $17,500.  The Government must prove that number beyond a reasonable doubt.

And, I use a more detailed example to dig down into the subleties:

Kerr & Quiel - Denial of Post-Trial Motions - Installment #2 (8/20/13)

Actually, the opinion turns out to be less than I had originally thought.  So this will be the final installment.

Willfulness

Most tax crimes have an explicit statutory element of willfulness, interpreted to mean the voluntary, intentional violation of a known legal duty.  Certainly, the tax perjury counts of conviction required willfulness.  The FBAR count of conviction, although not specifically tax, also has a willfulness element.  The acquitted conspiracy count does not have an explicit element of willfulness, but as interpreted the key mens rea element substantially overlaps with willfulness.  See  John A. Townsend, Tax Obstruction Crimes: Is Making the IRS’s Job Harder Enough?, 9 HOUS. BUS. & TAX L.J. 260 (2009),  here.  Kerr argued this overlap between the acquitted conspiracy count and the convicted tax perjury and FBAR counts made the convictions defective.  Here is the court's entire discussion:

B. Willful Intent 

Kerr argues that the "overt acts of the substantive offenses were required elements of the conspiracy count." (Doc. 314 at 10). Kerr claims that the Government failed to prove "any other knowledge or intent of illegality except for that required to prove the conspiracy–that the Defendants did this to defraud the IRS." (Id. at 11). Because the jury acquitted Kerr of conspiracy, he alleges that the elements of the substantive counts cannot be proven; therefore, the government "failed  to prove the required illegal intent." (Id. at 10). 

"[I]t is well-established that 'inconsistent verdicts may stand, even when a conviction is rationally incompatible with an acquittal, provided there is sufficient evidence to support a guilty verdict.'" United States v. Suarez, 682 F.3d 1214, 1218 (9th Cir. 2012) (internal citations omitted). In this case, the jury was instructed that they must find Kerr acted "willfully" to be guilty of the substantive counts. (Doc. 287 at 25, 28). The jury could have acquitted Kerr of conspiracy for reasons unrelated to Kerr's intent. For example, the jury could have determined that the Government did not prove there was an agreement between the co-conspirators. The jury was properly instructed about Kerr's intent for the substantive counts; thus, by finding Kerr guilty, the jury found that Kerr acted willfully. Therefore, the Court denies Kerr's motion for judgment of acquittal or a new trial under this theory.

Instruction on Deductible Expenses

Gross income less deductions yields taxable income.  Positive taxable income in excess of the taxable income reported on the return is required for there to be a tax due and owing.  Tax due and owing is an element of tax evasion.  The defendants were not charged with tax evasion.  Rather, they were charged and convicted of tax perjury relating to omitted gross income.  Tax  perjury does not have a requirement of tax due and owing.  Nevertheless, Kerr wanted the jury to be instructed on deductible expenses thus reducing or eliminating tax due and owing in order to support his claim of lack of willfulness -- i.e., no motive to commit tax perjury if there is no tax due and owing.  Here is the court's discussion:

Principal Comments on Unclaimed Deductions and Losses in Sentencing Tax Loss Determinations (3/16/13)

The Sentencing Commission has received comments and testimony from principal constituents as to the issue of whether unclaimed deductions and credits should be permitted to reduce the tax loss in the critical tax loss calculation for sentencing purposes.  The sentencing tax loss, like the loss in other financial crimes, is the most influential determinant in the sentencing guidelines calculations in most cases.  I have previously discussed this and cited to an article by Messrs. Toscher and Perez.  See The Role of Unclaimed Deductions in Computing Tax Loss For Sentencing (3/1/13), here.

I offer the following comments principally to DOJ Tax's comments urging that unclaimed deductions and credits not be considered for the tax loss determination.  Here are some key excerpts from the DOJ Tax letter that should set the stage for persons generally familiar with the issue:

"Tax loss" under the Guidelines is distinct from a tax deficiency in a civil tax case or an order of restitution. Tax loss, by definition, should address the entirety of the harm intended by the defendant, including for example the harm caused by concealment through omitting certain deductions. It is only through civil enforcement that the government should be charged with determining the correct tax liability, and restitution serves merely as an aid in the collection of that liability. 

The Tax Division, along with the sentencing courts, has extensive experience in considering claims concerning uncharged expenses in Guidelines calculations. As demonstrated by several examples included below, any attempt to determine whether and when to allow a  deduction that the defendant did not report on an original tax return will require inappropriate speculation, and may implicate complex tax issues and result in unjust anomalies. At a minimum, it will turn routine sentencing hearings into tax mini-trials. Further, in civil tax enforcement, the taxpayer bears the burden of claiming and substantiating deductions, and the IRS's determinations are accorded a presumption of correctness - fundamental principles that are not incorporated into Options 1 or 3. Either of these proposed amendments runs the risk of giving convicted tax evaders advantages over taxpayers with honest disputes with the IRS.

Tax Conviction and Sentence Affirmed Under Unusual Circumstances (12/3/12)

In United States v. Moore, 2012 U.S. App. LEXIS 24621 (4th Cir.  11/28/12) (unpublished), here, the defendant raised many arguments, but I address only two here.

1.  Error in Computing Tax Due at Trial then Conceded at Sentencing.

The prosecutors used the modified bank-deposits method of proof but failed to take into account some expenditures in prosecuting the defendant for tax perjury (Section 7206(1)).  By sentencing, the Government realized the mistake and reduced the tax loss for sentencing by the amounts erroneously not considered before.  The defendant argued that the reduction was newly discovered evidence entitling him to a new trial under Rule 33, FRCrP, here.   The Court rejected the argument on the basis that the defendant  had not shown that the new evidence would have affected the verdict.  Here are the key excerpts of the opinion:

Moore also seeks a new trial based on newly discovered evidence. He argues that, at trial, the government's bank- deposits analysis overstated his taxable income for 2005 through 2007 by $191,236 because he had paid that amount in local and state taxes but did not deduct that amount from gross receipts. By the time of sentencing the government agreed that Moore should be credited with these payments, but at trial it had admitted only that the number should be decreased by about $92,000. Moore argues that Agent Rager's eventual concession at sentencing that the original calculation of Moore's unpaid tax liability was incorrect constituted newly discovered evidence, entitling him to a new trial. We disagree that this development merited a new trial.

Rendering Unto Caesar, Part 2: Other Clergy Fall (6/23/12)

I have previously discussed the tax crimes of Ronald Weinland, a pastor and self-proclaimed prophet.  See here.  Today, we have a new opinion involving other clergy.  In United States v. Jinwright, 683 F.3d 471 (4th Cir. 2012), here, the Fourth Circuit covers a lot of issues that are often presented in tax crimes prosecutions.  The facts are interesting, very interesting, and the discussion of the legal issues presented also interesting.

THE FACTS

1.  The Jinwrights, husband and wife, were "former co-pastors of Greater Salem Church in North Carolina."  They were convicted of "a tax evasion scheme" involving "millions of dollars of taxable income."

2.  The pattern of their conduct is summarized by the Court as follows:

When Mr. Jinwright first became pastor at GSC [Greater Salem Church], his salary was about $10,000. By 2001, his salary had increased to approximately $148,000. It reached about $300,000 by 2007. Between 2001 and 2007, GSC provided Mr. Jinwright with substantial benefits, in addition to his salary, that he underreported on his tax returns. He received housing allowances of between $130,000 and $160,000 per year, travel allowances of $19,000 to $48,000 per year, payments for his children's tuition and his federal income tax liability, and unlimited use of a luxury car leased by the church in addition to an annual vehicle allowance. Mr. Jinwright also received annual bonuses of $35,000 to $50,000, as well as separate Christmas bonuses. He had use of a GSC credit card and received reimbursements for purported business-related expenses that remained unsubstantiated. Taken together, Mr. Jinwright's total GSC compensation between 2001 and 2007 totaled nearly $3.9 million. During that time, Mrs. Jinwright received similar compensation from GSC in the form of salary, bonuses, allowances, and reimbursements, totaling nearly $1 million. 

The Jinwrights earned more income outside of GSC. Together they earned tens of thousands of dollars in additional income for speaking at other churches that they failed to report to the IRS. Mr. Jinwright established an organization known as A.L. Jinwright Ministries, Inc. (ALJM), purportedly to receive his income from outside speaking engagements. Mrs. Jinwright was responsible for handling ALJM's bank statements and providing the corporation's financial information to the Jinwrights' CPA. Although defendants kept the income earned through this business, GSC paid its operating expenses. Mr. Jinwright also founded the Pastors Consortium. The consortium, with a membership of other pastors, held annual events celebrating the anniversaries of the members' churches. During these celebrations the participants would exchange "gifts" to one another in the form of checks for thousands of dollars.

Tax Due and Owing, Tax Loss, Restitution, Civil Tax (5/23/12)

Today, I make an offering on some legal jargon all having to do with tax evaded in a criminal case.  This article is inspired by the following article:  Jeremiah Coder, ABA Meeting: DOJ Officials Discuss Calculating Tax Loss for Restitution and Sentencing, 2012 TNT 94-8 (5/15/12), here.  Thanks to Tax Analysts for permission to post the case for review and downloading.

This article reports a discussion at the ABA Tax Section Meeting in mid-May 2012 regarding the relationship between tax loss numbers, restitution, and civil tax numbers.  For example, some courts hold that unclaimed deductions are not included in the sentencing tax loss so that, conceivably at least, the Court will calculate sentencing on a tax loss that exceeds the real tax due whereas for restitution purposes, it is the real tax loss and for civil tax purposes it is the real tax loss.  The notion is that the Sentencing Guidelines defines the tax loss as the tax loss that was intended -- the object of the offense (USSG § 2T1.1(c)(1)); where the taxpayer does not claim the deductions he or she would have been otherwise entitled to, his object or intent, presumably, is to save the tax due without the benefit of the deductions.  I certainly see the textual basis for that notion, but I personally think it is stupid.

I understand the sentencing courts and appellate courts do not want to get slowed down over tax computations.  I suppose that, since most taxpayers claim deductions that they are entitled to, the odds are that, in the bulk of the cases, there are not really credible unclaimed deductions.  But, a taxpayer desperate to lower the tax loss for the sentencing benefit will be tempted to throw marginal claims on the table and force the courts to deal with them.  So, for courts buying into this notion, it is better just not to have to deal with them.  But they thereby create the anomaly noted where the tax loss can materially exceed the restitution amount.

Even worse, at least conceptually, the tax loss can exceed the criminal tax number that the Government would have to prove in the first case in a tax evasion trial.  Let me use an example:  Say the real civil tax deficiency is $50 after all components entering the calculation (including unclaimed deductions) are considered, but that, if the unclaimed deductions are not considered, the sentencing tax loss is $100.  At the guilt or innocence phase of the trial, the Government would have to allow real unclaimed deductions (and would probably tilt in doubt in favor of the taxpayer in making the tax calculation).  The use of the real tax due is the Spies element of the offense.  So the taxpayer would be found guilty on a tax loss of $50, but will be sentenced on a tax loss of $100 and, if restitution is imposed (usually not without consent in tax crimes), at $50.

Seventh Circuit Rejects Duplicity, Multiplicity and Other Arguments (11/23/11)

In United States v. Hassebrock, 663 F.3d 906 (7th Cir. 2011), here, the Seventh Circuit addressed a number of interesting issues relate to criminal tax law and sentencing. Hassebrock was a tax protestor (or perhaps more politically correct, a tax defier). Hassebrock "consciously disobeyed his obligation to pay taxes, joined a fictitious Native American tribe to avoid his tax obligation, and attempted to pay taxes with fraudulent sight drafts." Hassebrock was indicted and convicted for one count of tax evasion and one count of failure to file for, respectively, evasion of his 2004 tax liability and failure to file with respect to 2004. (I hope that statement has your antenna raised!)

The indictment for failure to file alleged that he committed the crime by failing to file the 2004 return on or before April 15, 2005. As it turns out, however, there was "strong evidence" that he had not filed for an extension on or before April 15, 2005 (as required for a valid extension) but, on August 12, 2005, had applied for an extension which, if granted, arguably would have extended the filing date until October 15, 2005. There was some argument about the meaning of these events that, but I address it below.

The points of the opinion that I find of interest and believe readers -- at least some readers -- may also be interested in are:

Attacking the Tax Due and Owing Element of Tax Evasion and Tax Loss for Sentencing (11/18/11)

I write today on what I think is a significant new case, United States v. Tilga, 824 F. Supp. 2d 1295 133725 (D. N.M. 2011), here (for full opinion) and here (for excerpts including only the topic of this blog). The case deals with calculating the tax loss for sentencing purposes. The tax loss is the principal driver for Sentencing Guidelines calculations even if not controlling under Booker. The bottom-line in the case is that, for tax loss purposes, the defendant was entitled to accrue a foreign tax credit that she had neither claimed on the original return and, in the final analysis, did not pay. I think the way the court reached that conclusion has implications on the issue of the required tax due and owing element for the crime of tax evasion. Let me just say that the decision is rich in various facets of its holding and analysis. By way of background to the main issues discussed here, I provide the pertinent discussion from my Federal Tax Crimes book, here.

The substantive issue relates to the Code's prescription that a taxpayer can elect to claim a foreign tax credit on an accrual basis even if the foreign tax has not been paid. The construct is that, if the election is made, there is an actual reduction in the tax owing for the year. (This is unlike the net operating loss deduction which may be carried back to an earlier year, reducing the tax otherwise due for the year; rather, the foreign tax credit is a direct credit that “relates back” retroactively to the earlier year in which the income was earned to reduce the tax liability for the year.) To use a simple example, say that the same quantum of income is subject to both U.S. tax and to foreign country X tax and both have the same effective rate. If, for any reason, the foreign country X tax is subject to a U.S. foreign tax credit, the tax will (more precisely, should) be paid to the foreign country and the U.S. foreign tax credit will eliminate the U.S. tax otherwise due. The foreign tax credit permits the taxpayer to elect to claim the foreign tax credit even in advance of it being paid.

Tax Loss Estimations for Sentencing Purposes

In United States v. Poltonowizc (3rd Cir. 2009), an unreported, nonprecedential decision, the court approved tax loss estimations for a convicted return preparer (former IRS CI analyst). His tax evasion scheme was unsophisticated. In a sting operation,

Although the agent never mentioned charitable contributions, and provided him with no evidence whatsoever of any such contributions, he included $2,190 in cash ontributions to charity and $495 in non-cash contributions to charity on the agent's return. As a result, the agent's tax return showed that she was entitled to a $12 refund, instead of reflecting that she owed $1,012 in additional taxes. Subsequently, the agent requested a meeting with Poltonowicz to discuss a letter she received from the IRS informing her that she would be audited. Again, the agent wore a recording device. He admitted to the preparation of a false tax return and that he included the false deductions to save her from paying additional taxes (as he operated under the assumption that she would not be audited). He reassured her that she would not get in trouble for the fraudulent return.

Poltonowicz pled to one count of filing a false tax return. He thereafter continued his pattern of conduct through another company in the name of a female, described as his "long-time roommate and housekeeper." In a second trial, a jury convicted him of unspecified tax crimes. Moving to the sentencing phase, the defendant's position was that a particularized inquiry should be made into the dollars included in the estimated tax loss calculation under the Sentencing Guidelines. The Government, however, calculated the tax loss in a less precise way. The Government's calculations included only tax losses for returns personally prepared by Poltonowicz. (Specifically, it excluded returns prepared by employees who had, according to the testimony, claimed similar false deductions at Poltonowicz's direction or teaching.) Of that set,

Of that subset of tax returns, the government included only those that contained one of the methods of falsifying tax returns established at trial, such as fictitious cash and non-cash charitable contributions, employee non-reimbursed expenses, and claims of eligibility for the earned income tax credit. The government filtered that subset to include two types of returns: (1) returns for which the IRS had conducted an audit and had subsequently assessed the taxpayer with additional tax liability based on the tax payer's inability to substantiate their return, or (2) returns for taxpayers interviewed, who confirmed that they did not provide any evidence of the deductions at issue or request that they be included. The estimate of $419,853.20, in the manner calculated, was actually under inclusive.

Addressing Poltonowicz's arguments on appeal, the court of appeals said:

The district court relied on evidence presented at trial and the sentencing hearing to reach its conclusion. The government established the modus operandi -- preparing tax returns with fictitious data for charitable contributions, employee non-reimbursed expenses, and claims of eligibility under the earned income tax credit. It did not err in including tax returns in the tax loss calculation which had been subject to and had failed an audit by the IRS, even if the government did not interview the tax payer. Poltonowicz is on audiotape informing a potential client that he knew exactly how to claim fictitious deductions without getting caught. Indeed, the evidence suggests a much larger tax loss. He personally prepared 20,000 to 25,000 tax returns, yet the government calculated its tax loss based on just 225 of those returns. One former employee testified that at least 25% of the returns Poltonowicz filed contained fictitious deductions. The government excluded from its calculation any returns that were prepared by employees, even though several employees testified that he directed them to add fictitious deductions to the returns they filed. On average, 50-54% of returns claim charitable contributions; whereas, 98% of Poltonowicz's clients claimed such deductions. Notably, his clients uniformly claimed to donate in one of three precise amounts: $490, $495, and $500.

Poltonowicz also challenges the government's calculation of additional losses by comparing his average claims for certain deductions, such as the charitable deduction, with that of the national average. He asserts that it was improper to compare his clients to the national average because his clients were not average tax payers; rather, his clients consisted of blue-collar, religious, conservative tax payers who were far more likely to make charitable contributions than the average tax payer. He makes a similar argument with respect to the government's comparative information on employee non-reimbursed expenses. These arguments lack merit. The District Court did not rely on the government's comparative data in reaching its conclusion that the tax loss exceeded $ 400,000. The District Court based its conclusion on the audited returns and mentioned the additional statistical evidence in noting that the government's calculation was extremely conservative. There is no error with a District Court's consideration of statistical evidence in a case involving upwards of 20,000 tax returns.

This type of estimation would appear to be appropriate under the Guidelines in setting a reasonable minimum tax loss for sentencing purposes. There is a related, but quite different, issue of whether anything less than actual proof of a substantial tax loss due for purposes of the evasion element of tax due and owing is appropriate in the case in chief. I have previously argued in my blogs in the context of criminal prosecutions of tax enablers where the taxpayers are absent such estimations are not appropriate.

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?

Josephberg #1 - Tax Due and Owing (4/11/09)

I will write a series of blogs on various aspects of the Second Circuit's decision in United States v. Josephberg, ___ F.3 ___ (2d Cir. 2009), decided on 4/9/09. This is the first installment. The subject of this installment is the tax due element for tax evasion that I have discussed before in several blogs (see here).

Josephberg was tried and convicted of all counts in a 17 count indictment. The counts broke down into the following categories:

(i) two tax evasion counts in violation of Section 7201 -- (a) evasion of payment of personal income taxes for the years 1977-1980 and 1983-1985 (Count 1) and (b) evasion of assessment of personal income taxes for 1997 and 1998 (Counts 3 and 4)

(ii) two separate conspiracies to defraud - one, the ubiquitous conspiracy to defraud the IRS in violation of 18 USC Section 371 and the second a conspiracy to defraud a health insurer in violation of 18 USC Section 1347 -- both being charged in one count (Count two);

(iii) subscribing false income tax returns for the years 1997 and 1998, in violation of Section 7206(1) (Counts 5 and 6);

(iv) failure to file personal income tax returns for 1999-2002, in violation of Section 7203 (Counts 7-10);

(v) failure to pay income tax for the years 1999-2003 in violation of Section 7320 (Counts 11-15);

(vi) tax obstruction in violation of Section 7212 (Count 16); and

(vii) health care fraud in violation of 18 USC Sections 1347 and 2 (Count 17).

The facts summarized from the Second Circuit opinion relevant to the tax issues I will discuss here and in later blogs were:

Shumacher Article on Boulware (4/9/09)

Scott Schumacher, co-author of the Tax Crimes book in the Lexis-Nexis series, has published an article in Tax Notes discussing the Ninth Circuit's decision in Boulware. Scott A. Schumacher, The Ninth Circuit Says Aloha to Boulware - Again, 121 Tax Notes 1631 (3/30/09). I have previously discussed the opinion here, but Scott's article adds nuances well beyond my previous discussion.

Tax Due - Tax Loss; Critical Differences For Sentencing (3/28/09)

Tax Due - Tax Loss; Critical Differences For Sentencing

I have previously discussed here and here the element of tax due and owing for tax evasion under Section 7201. Since tax due is an element of the crime, the defendant may assert items not previously claimed that would eliminate tax due, thus defeating this element of the crime. Generally, a defendant will assert unclaimed deductions to eliminate the tax due and owing, but the defendant may assert other tax attributes such as a favorable filing status. (There is the further, more subtle issue, which we discussed in another context here, as to whether the Government must disprove that the defendant had the unclaimed tax attributes in order to meet this element of the crime; but let's forego that for purposes of the present discussion.)

The Sentencing Guidelines have a related but different concept called tax loss that is a principal driver in calculating the sentence. Tax is a financial crime and, as with other financial crimes, the monetary quantum is the principal driver in the sentencing calculation. The tax loss is "the tax loss is the total amount of loss that was the object of the offense (i.e., the loss that would have resulted had the offense been successfully completed)." U.S.S.G. § 2T1.1(c)(1). Can the defendant assert items not previously claimed in order to reduce or eliminate the tax loss, thereby reducing his or her sentence?

The Eleventh Circuit recently addressed this issue in United States v. Clarke, ___ F.3d ___ (11th Cir. 2008). The defendant was charged with tax perjury under § 7206(1). (The court itself misspoke in calling the charge tax fraud.) He had filed his original return as married filing separately. The Government asserted that the defendant must be sentenced based on a calculation under that status. The defendant asserted that the tax loss should be calculated on the basis of married filing jointly, as if he had filed an amended joint return, which would reduce the tax loss sufficiently to fall into a lower Guidelines offense level. The judge sentenced on the basis of the tax loss calculated under the married filing separately status. The defendant appealed that issue, among others. The Court of Appeals held that the tax loss was not the actual tax loss to the Government but the tax loss the defendant intended when he filed his return. Since he filed using the status married filing separately, he intended that his omissions in reporting would generate a tax loss based on the status he used in reporting. In so holding, the Court noted that there was a split among the courts as to whether the tax loss could be reduced or eliminated by unclaimed items -- in this case an unclaimed status, but more often unclaimed deductions. In so holding, the Court of Appeals said it was joining the "majority of the circuits."

Does it seem right that a defendant could be convicted of tax evasion on the basis of a tax evaded that is less than the tax loss used in his sentencing? For example, assume that, at trial in the guilt determination phase, the Government indicted and tried the defendant on the basis of a criminal tax number of $100,000, but that through proof of unclaimed deductions, the defendant whittled that number down to $20,000 and even forced the Government’s summary witness to so testify based on the strength of the proof of unclaimed deductions. Assume that the defendant is convicted because $20,000 tax evaded is still material. Then, at sentencing, the Government seeks to sentence based on $100,000 tax loss without giving the defendant the benefit of the $80,000 proved unclaimed deductions. Under the line of authority cited in Clarke, the Government may do that. Does that sound right to you?

Boulware Wins the Battle Only to Lose the War (3/9/09)

In Boulware v. United States, 552 U.S. 421 (2008), here, the Supreme Court rejected the Ninth Circuit's holding that a dividend required some type of intent. The definition of dividend in the Internal Revenue Code requires a corporate distribution up to but not in excess of current or retained earnings and profits (E&P), which roughly -- but only roughly -- equates to retained earnings or deficits. Further, the Code provides, if there is no such E&P, the distribution is not taxable up to the shareholder's basis in the stock and only thereafter is taxable as capital gain. By rejecting a requirement that taxpayer "intend" a return of capital distribution, the Supreme Court moved the criminal rule in line with the civil tax rule, which of course is logical since the tax evasion can only exist if there is a tax due and owing and there is no tax due and owing (at least no tax on a dividend) if there is no E&P.

The Supreme Court remanded the case to the Ninth Circuit to determine whether the taxpayer's offer of proof as to the return of capital defense was sufficient. The Ninth Circuit held that the offer of proof was not sufficient, so the Ninth Circuit affirmed the taxpayer's conviction. The decision may be reviewed here. Before moving to that, I should explain the function of the offer of proof or the actual proof if the judge sustains the offer in a criminal case. In a criminal case, the Government must prove the elements of the crime beyond a reasonable doubt. The element of tax evasion in question in Boulware was the element of a tax due and owing. From one perspective, one might think that the Government must prove that (1) there was sufficient E&P to prove a taxable dividend or (2) insufficient basis to cover the total amount of the distributions. But, the law has developed with respect to the return of capital defense (and some other defenses) that the defendant has to put the elements of the defense in play in order to require the Government to have to meet the noted dual burdens beyond a reasonable doubt. The defendant puts the defense in play by meeting a production burden with actual trial evidence or at least an offer of proof as to such evidence; only then does the Government have to meet the dual burdens beyond a reasonable doubt. Hence, at trial, Boulware's lawyer made an offer of proof as to what the proof, if he were allowed to present it to the jury, would show. The offer of proof has to establish the key elements of the defense -- in this case, no E&P and sufficient basis to cover the distributions so that there is no net taxable income and therefore no tax due and owing. The question before the Ninth Circuit on remand was whether the offer of proof met the minimal requirements.

I will try to thumbnail the basis for the Ninth Circuit's holding: