Friday, May 7, 2010

Willfulness - What Does It Really Mean in Tax Cases? (5/7/10)

The major tax crimes in the Internal Revenue Code require that the defendant act willfully. The standard for acting willfully is usually stated as intentional violation of a known legal duty, a statement drawn from the Supreme Court's cases culminating in Cheek v. United States, 498 U.S. 192 (1991), here, (and for this reason sometimes referred to as Cheek willfulness). In a later case, Bryan v. United States, 524 U.S. 184 (1998) dealing with a requirement in federal firearm licensing statute that the defendant act willfully, the Supreme Court said:

In certain cases [including Cheek] involving willful violations of the tax laws, we have concluded that the jury must find that the defendant was aware of the specific provision of the tax code that he was charged with violating.

The Ninth Circuit recently concluded that, well, that's not exactly what the Supreme Court meant. United States v. Mousawi, ____ F.3d ___ (9th Cir. 2010)Mousawi involved another criminal statute with a willfulness requirement, but the Ninth Circuit had to deal with this notion of willfulness from Bryan.  Here's the Ninth Circuit's analysis In discussing the cases upon which Bryan relied for the statement (Cheek and Ratzlaf v. United States, 510 U.S. 135 (1994), involving the structuring act then having a tax-like willfulness requirement) (case citations omitted):

Neither of these cases [Cheek and Ratzlaf], however, required the government to prove the defendant's knowledge of a specific provision of law. In Cheek, the Supreme Court held that “willfulness,” as used in the criminal provisions of the tax code, required the government to prove that the defendant knew of the legal duty to file an income tax return and to treat his wages as income. But the Court noted that the “jury would be free to consider any admissible evidence from any source” showing that the defendant was aware of this duty. While Cheek listed “awareness of the relevant provisions of the Code or regulations” as one source of such evidence, it did not identify it as the exclusive source. Similarly, Ratzlaff held that the government could not carry its burden to prove the "willfulness" requirement in a prosecution for illegal structuring of financial transactions merely by proving that the defendant knew of the bank's duty to report cash transactions of more than $ 10,000. Nevertheless, the government did not have to prove that the defendant was aware of the provision of the federal statute that made it illegal to structure his cash deposits to avoid triggering the bank's reporting obligation. It was sufficient if a jury could reasonably conclude that the “defendant knew of his duty to refrain from structuring," a conclusion which could be based on "reasonable inferences from the evidence of defendant's conduct.” Similarly, prior to Cheek and Ratzlaff, we indicated that "willfulness" under a complex anti-exportation statute required proof of "a voluntary, intentional violation of a known legal duty," but we considered this standard satisfied where the government proved “that the defendant [knew] that his conduct . . . is violative of the law.” These cases make clear that even in the context of “highly technical statutes that presented the danger of ensnaring individuals engaged in apparently innocent conduct,” the term “willfulness” requires the government to prove that the defendant was aware of the legal duty at issue, but not that the defendant was aware of a specific statutory or regulatory provision.


  1. STEVEN M HARRISMay 7, 2010 at 7:00 PM


    I have always thought the civil fraud burden (intention to evade a tax known or believed to be owed) is actually higher as a practical matter than the willful element for criminal tax violations (intentional violation of a known legal duty). If so, how did that happen?

    A good one for your students to ponder?

  2. Steve, I hope some other readers will weigh in on this, because I have not really considered the issue of the interpretation or application of the concept of civil fraud being different than criminal evasion. With that warning, what I have rattling around in my brain (and I am sure I have spoken or written it -- at least mispoken or miswritten it) is that the two are the same only with differing burdens of proof on the Government. But, since you raise the issue, I don't recall the Cheek standard -- intentional violation of a known legal duty -- being parroted in civil cases.

    I am sure that some of the readers have thought about it and can give an authoritative discussion, so I hope they respond.

  3. Mr. Townsend very interesting but are you sure the system works that way at least in the tax arena? From what I can tell (outside of the tax protester arena) if the Government says a tax transaction doesn’t work (thus, a tax is arguably due and owing) and the Government claims the taxpayer lies in any way about such transaction, that is criminal tax fraud. See Stein. The lie can even be the result of a transaction which is difficult for the IRS to discern (not an actual lie). See Klein. Of course the tax law provides that taxpayers can take tax positions which are nonfrivolous (10% chance of success); reasonable basis (20% to 30% chance of success); substantial authority (30% (maybe less) to 50% chance of success); more likely than not (50.1% chance of success). Note the chance of success is based on pursuing all legal remedies through the Supreme Court. Most of the structured tax transactions are based on literal readings of the tax code with deference given to case law. If it is not a crime to take a tax position with a 10% chance of success (which the law clearly allows for), how can any of the structured tax transactions be criminal especially given the SCT decision in Gitlitz where the taxpayer won based on a literal interpretation of the law notwithstanding the lack of economic substance? What transaction doesn’t have a 10% chance of success via a jury trial? There was even a case a couple of years ago in Colorado, Sala, which involved a so called SOS transaction wherein the court allowed the taxpayer a $60 million deduction from a transaction that the Government claimed was a sham and had no economic substance yet in the criminal cases regarding the exact same type of transaction many received a life of torture in a U.S. torture chamber (prison). Sala was so bad that after the fund manager had been depo’d for the civil trial, the criminal Government lawyers got him to recant his testimony but the Sala judge after reviewing the “new” depo rejected it and still decided in favor of the taxpayer. While the legal rhetoric is calming, I would submit there is no standard and if the Government is mad at you and can get others to lie (to save themselves like the fund manager in Sala), one could end up a tax criminal regardless of any standard related to willfulness.


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