Criminal Tax Manual
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8.00 ATTEMPT TO EVADE OR DEFEAT TAX
Updated May 2001
8.01 STATUTORY LANGUAGE: 26 U.S.C. § 7201
8.02 GENERALLY
8.03 ELEMENTS OF EVASION
8.04 ATTEMPT TO EVADE OR DEFEAT
8.04[1] Attempt To Evade Assessment
8.04[2] Attempt To Evade Payment
8.05 ADDITIONAL TAX DUE AND OWING
8.05[1] Generally
8.05[2] Each Year -- Separate Offense
8.05[3] Substantial Tax Deficiency
8.05[4] Method of Accounting
8.05[5] Loss Carryback -- Not a Defense
8.05[6] Methods of Proof
8.05[7] Income Examples
8.06 WILLFULNESS
8.06[1] Definition
8.06[2] Proof of Willfulness
8.06[3] Examples: Proof of Willfulness
8.06[4] Willful Blindness
8.07 VENUE
8.08 STATUTE OF LIMITATIONS
8.09 LESSER INCLUDED OFFENSES
8.01 STATUTORY LANGUAGE: 26 U.S.C. § 7201
§7201. Attempt to evade or defeat tax
Any person who willfully attempts in any manner to evade or
defeat any tax imposed by this title or the payment thereof shall, in
addition to other penalties provided by law, be guilty of a felony
and, upon conviction thereof, shall be fined* not more than $100,000
($500,000 in the case of a corporation), or imprisoned not more than 5
years, or both, together with the costs of prosecution.
*For offenses committed after December 31, 1984, the Criminal
Fine Enforcement Act of 1984 (P.L. 98-596) enacted 18 U.S.C. §
36231 which increased the maximum permissible
fines for both misdemeanors and felonies. For the felony offenses set
forth in section 7201, the maximum permissible fine for offenses
committed after December 31, 1984, is at least $250,000 for
individuals and $500,000 for corporations. Alternatively, if any
person derives pecuniary gain from the offense, or if the offense
results in pecuniary loss to a person other than the defendant, the
defendant may be fined not more than the greater of twice the gross
gain or twice the gross loss.
8.02 GENERALLY
The Supreme Court has stated that section 7201 includes two offenses:
(a) the willful attempt to evade or defeat the assessment of a tax and (b)
the willful attempt to evade or defeat the payment of a tax. Sansone v.
United States, 380 U.S. 343, 354 (1965). Evasion of assessment entails
an attempt to prevent the government from determining a taxpayer's true tax
liability. Evasion of payment entails an attempt to evade the payment of
that liability. See United States v. Hogan, 861 F.2d 312, 315
(1st Cir. 1988); United States v. Dack, 747 F.2d 1172, 1174 (7th Cir.
1984). Although Sansone has been cited for the proposition that
evasion of payment and evasion of assessment constitute two distinct crimes,
see, e.g., United States v. Hogan, 861 F.2d at 315,
several circuits have recently rejected duplicity challenges to indictments
by holding that section 7201 proscribes only one crime, tax evasion, which
can be committed either by attempting to evade assessment or by attempting
to evade payment. See United States v. Mal, 942 F.2d 682, 686
(9th Cir. 1991); United States v. Dunkel, 900 F.2d 105, 107 (7th Cir.
1990), judgment vacated, 498 U.S. 1043 (1991), ruling on duplicity
issue reinstated on remand, 927 F.2d 955, 956 (7th Cir. 1991); United
States v. Masat, 896 F.2d 88, 91 (5th Cir. 1990), appeal after
remand, 948 F.2d 923 (5th Cir. 1991). Furthermore, although the First
Circuit initially expressed some skepticism concerning whether Masat
and Dunkel were consistent with Sansone, see United
States v. Waldeck, 909 F.2d 555, 557-58 (1st Cir. 1990), it subsequently
relied on Dunkel in rejecting a duplicity claim: "No matter how one
resolves the semantic question, moreover, it is beyond reasonable dispute
that the indictment charged [defendant] with a single, cognizable crime, and
that the jury convicted him of the same crime. See United States
v. Dunkel, 900 F.2d 105, 107 (7th Cir. 1990)." United States v.
Huguenin, 950 F.2d 23, 26 (1st Cir. 1991).2 It
is the position of the Tax Division that section 7201 proscribes a single
crime -- attempted evasion of tax -- which can be committed by evading the
assessment of tax or by evading the payment of tax.
Regardless of whether they are viewed as separate offenses or as
different means of committing the same offense, both evasion of assessment
of taxes and evasion of payment of taxes require the taxpayer to take some
action, that is, to carry out some affirmative act for the purpose of the
evasion. There are any number of ways in which a taxpayer can attempt to
evade or defeat taxes or the payment thereof, and section 7201 expressly
refers to "attempts in any manner." The most common attempt to evade or
defeat assessment of a tax is the affirmative act of filing a false tax
return that omits income and/or claims deductions to which the taxpayer is
not entitled. As a result, the tax on the return is understated, and the
correct amount of tax is not reported by the taxpayer. By reporting a
lesser amount, there is an attempt to evade or defeat tax by evading the
correct assessment of the tax.
In evasion of payment cases, evading or defeating the correct
assessment of the tax is not the issue. Evasion of payment occurs only
after the existence of a tax due and owing has been established, either by
the taxpayer reporting the amount of tax due and owing, by the Internal
Revenue Service examining the taxpayer and assessing the amount of tax
deemed to be due and owing, or by operation of law on the date that the
return is due if the taxpayer fails to file a return and the government can
prove that there was a tax deficiency on that date. See United
States v. Daniel, 956 F.2d 540 (6th Cir. 1992). The taxpayer then seeks
to evade the payment of the taxes assessed as due and owing.3 As in
an attempt to evade and defeat a tax through evasion of assessment, it must
be established in an evasion of payment case that the taxpayer took some
affirmative action. Merely failing to pay assessed taxes, without more,
does not constitute evasion of payment.4 Generally, affirmative
acts associated with evasion of payment involve some type of concealment of
the taxpayer's ability to pay taxes or the removal of assets from the reach
of the Internal Revenue Service.
Historically, it is the crime of willfully attempting to evade and
defeat a tax through evasion of assessment, as opposed to willfully
attempting to evade the payment of a tax, that is the principal revenue
offense. Although the basic elements of the crime are relatively simple,
the proof can be difficult.
8.03 ELEMENTS OF EVASION
To establish a violation of section 7201, the following elements must
be proved:
1. An attempt to evade or defeat a tax or the payment
thereof. Sansone v. United States, 380 U.S. 343,
351 (1965); Spies v. United States, 317 U.S. 492,
498-99 (1943).
2. An additional tax due and owing. Sansone v. United
States, 380 U.S. 343, 351 (1965); Lawn v. United
States, 355 U.S. 339, 361 (1958);
3. Willfulness. Cheek v. United States, 498 U.S. 192,
195 (1991); United States v. Pomponio, 429 U.S. 10,
12 (1976); United States v. Bishop, 412 U.S. 346,
359 (1973); Sansone v. United States, 380 U.S. 343,
351 (1965); Holland v. United States, 348 U.S. 121,
139 (1954).
The government must prove each element beyond a reasonable doubt.
United States v. Marashi, 913 F.2d 724, 735 (9th Cir. 1990);
United States v. Williams, 875 F.2d 846, 849 (llth Cir. 1989).
8.04 ATTEMPT TO EVADE OR DEFEAT
The means by which there can be an attempt to evade are unlimited. As
noted above, section 7201 expressly provides that the attempt can be "in any
manner." The only requirement is that the taxpayer take some affirmative
action with a tax evasion motive. Conversely, failing to act or do
something does not constitute an attempt. For example, failing to file a
return, standing alone, is not an attempt to evade. See Spies v.
United States, 317 U.S. 492, 499 (1943); United States v. Nelson,
791 F.2d 336, 338 (5th Cir. 1986).
The general rule is that "any conduct, the likely effect of which
would be to mislead or to conceal" for tax evasion purposes constitutes an
attempt. Spies, 317 U.S. at 499. Even an activity that would
otherwise be legal can constitute an affirmative act supporting a section
7201 conviction, so long as it is carried out with the intent to evade tax.
United States v. Jungles, 903 F.2d 468, 474 (7th Cir. 1990)
(taxpayer's entry into an "independent contractor agreement," although a
legal activity in and of itself, satisfied "affirmative act" element of
section 7201); see also United States v. Carlson, 235
F.3d 466, 469 (9th Cir. 2000) (establishing bank accounts using false social
security numbers with intent to evade taxes), cert. denied,
121 S.Ct. 1627 (2001); United States v. Conley, 826 F.2d 551 (7th
Cir. 1987) (use of nominees and cash with intent to evade payment of taxes).
Although the government must prove some affirmative act constituting
an attempt to evade, it need not prove each act alleged. See
United States v. Mackey, 571 F.2d 376 (7th Cir. 1978), where the
government introduced evidence of six affirmative acts and the court pointed
out that proof of one act is enough. "[T]he prosecution need not prove each
affirmative act alleged." Mackey, 571 F.2d at 387. See
Conley, 826 F.2d at 556-57. Cf. United States v. Miller,
471 U.S. 130 (1985) (government's proof of only one of two fraudulent acts
alleged in mail fraud indictment was not fatal variance since indictment
would still make out crime of mail fraud even without the second alleged
act).
8.04[1] Attempt To Evade Assessment
Filing a false return is the most common method of attempting to evade
the assessment of a tax. See, e.g., United States
v. Habig, 390 U.S. 222 (1968); Sansone v. United States, 380 U.S.
343 (1965). However, the requirement of an attempt to evade is met by any
affirmative act undertaken with a tax evasion motive, regardless of whether
a false return has been filed. The Supreme Court "by way of illustration,
and not by way of limitation," set out examples of what can constitute an
"affirmative willful attempt" to evade in Spies, 317 U.S. at 499:
keeping a double set of books, making false entries or alterations, or
false invoices or documents, destruction of books or records,
concealment of assets or covering up sources of income, handling of
one's affairs to avoid making the records usual in transactions of the
kind, and any conduct, the likely effect of which would be to mislead
or to conceal.
Failing to file a return, coupled with an affirmative act of evasion
and a tax due and owing, has come to be known as a Spies-evasion, an
example of which is found in United States v. Goodyear, 649 F.2d 226
(4th Cir. 1981). The Goodyears failed to file a tax return for the year in
question and later falsely stated to Internal Revenue Service agents that
they had earned no income in that year and were not required to file a
return. The false statements to the agents were the affirmative acts of
evasion supporting the Goodyears' section 7201 convictions.
Goodyear, 649 F.2d at 228. Similarly, a false statement on an
application for an extension of time to file a tax return that no tax is
owed for the year is sufficient. United States v. Klausner, 80 F.3d
55, 62 (2d Cir. 1996).
False statements to Internal Revenue Service agents are frequently
alleged as affirmative acts of evasion. See, e.g., United
States v. Higgins, 2 F.3d 1094, 1097 (10th Cir. 1993); United States
v. Frederickson, 846 F.2d 517, 520-21 (8th Cir. 1988) (holding that
repeated false statements to IRS agents were sufficient to support a jury
finding of at least one affirmative act); United States v. Ferris,
807 F.2d 269, 270-71 (1st Cir. 1986); United States v. Neel, 547 F.2d
95, 96 (9th Cir. 1976); United States v. Calles, 482 F.2d 1155, 1160
(5th Cir. 1973). But cf. United States v. Romano, 938
F.2d 1569 (2d Cir. 1991) (considering defendant's overall cooperative
attitude during customs inspection, defendant who was stopped trying to
transport $359,500 to Canada did not commit affirmative act of evasion when
he initially admitted having only $30,000 to $35,000 in cash and only
gradually acknowledged the full amount to U.S. customs officials).
It makes no difference whether the false statements are made before,
simultaneously with, or after the taxpayer's failure to file a return.
United States v. Copeland, 786 F.2d 768, 770 (7th Cir. 1985).
See also United States v. Beacon Brass Co., 344 U.S.
43, 45-46 (1952); United States v. Dandy, 998 F.2d 1344 (6th Cir.
1993); United States v. Becker, 965 F.2d 383, 386 (7th Cir. 1992)
(indictment does not fail for alleging that affirmative acts occurred on or
about filing due date when they in fact occurred earlier); United States
v. Winfield, 960 F.2d 970, 973 (11th Cir. 1992) (allegation that
defendant made false statements six years after failure to file satisfies
affirmative act element); United States v. Mal, 942 F.2d 682, 684
(9th Cir. 1991). The affirmative act must, however, have been committed
with the intent to evade taxes owed for the year charged. United States
v. Voigt, 89 F.3d 1050, 1089-91 (3d Cir. 1996).
Courts have uniformly held that the filing of a false Form W-4
constitutes an affirmative act of evasion. United States v. DiPetto,
936 F.2d 96 (2nd Cir. 1991); United States v. Williams, 928 F.2d 145,
149 (5th Cir. 1991); United States v. Waldeck, 909 F.2d 555 (1st
Cir. 1990); United States v. Connor, 898 F.2d 942, 944-45 (3d Cir.
1990); United States v. Copeland, 786 F.2d 768 (7th Cir. 1985).
Moreover, a false W-4 filed prior to the prosecution years is an affirmative
act in each year that it is maintained, since the taxpayer is under a
continuing obligation to correct intentional misrepresentations on the form.
Williams, 928 F.2d at 149 (defendant properly convicted of tax
evasion regarding years 1983-85 where false Form W-4 claiming 50 exemptions
was filed in 1983 and remained in effect through the prosecution years);
United States v. King, 126 F.3d 987, 990-93 (7th Cir. 1997); United
States v. DiPetto, 936 F.2d at 96.
In cases involving failures to file tax returns and filing false
Forms W- 4, which typically involve tax protestors, the Tax Division
determines whether to bring misdemeanor (sections 7203 and 7205) or felony
(section 7201) charges based on the totality of the circumstances of the
case. Circumstances to consider include the egregiousness of the
individual's actions (e.g., if the defendant is a tax protestor,
whether the individual is a leader or simply a follower), the extent of any
tax protest problem in the jurisdiction, and the favorableness or
unfavorableness of the relevant case law in the jurisdiction where there is
venue.
The Seventh Circuit has held that instructing an employer to pay one's
income to a warehouse bank constitutes an affirmative act of evasion.
United States v. Beall, 970 F.2d 343, 346-47 (7th Cir. 1992). The
court held also that the government need not prove the defendant received
any of the money, so long as the defendant earned it. Beall, 970
F.2d at 345. See also United States v. Carlson, 235 F.3d 466,
477 (9th Cir. 2000) (opening and using bank accounts with false social
security numbers, places of birth, and dates of birth could easily have
misled or concealed information from the IRS), cert. denied,
121 S.Ct. 1627 (2001); United States v. Valenti, 121 F.3d 327, 333
(7th Cir. 1997) (use of cash, not keeping business records, paying employees
in cash and not reporting their wages to the IRS, advising employees they
did not have to pay taxes); United States v. Jungles, 903 F.2d 468,
474 (7th Cir. 1990) (employee use of "independent contractor" agreement and
Mid-America Commodity and Barter Association warehouse bank to evade income
tax are affirmative acts).
A false return does not need to be signed to be treated as an
affirmative act of evasion as long as it is identified as the defendant's
return. United States v. Robinson, 974 F.2d 575, 578 (5th Cir. 1992)
(Fifth Circuit rejected defendant's claim of variance between indictment's
allegation that she filed a false return and evidence proving she filed an
unsigned Form 1040, stating, "[t]he government did not have to prove that
the false Form 1040 was a 'return' in order to show an affirmative act of
evasion"); United States v. Maius, 378 F.2d 716, 718 (6th Cir.
1967); Gariepy v. United States, 220 F.2d 252, 259 (6th Cir. 1955);
Montgomery v. United States, 203 F.2d 887, 889 (5th Cir.
1953). Nor does the fact that the return was signed by someone other than
the defendant preclude a finding that the defendant knew of its falsity and
had it filed in an attempt to evade. United States v. Fawaz, 881
F.2d 259, 265 (6th Cir. 1989).
A return or other tax document signed with the defendant's name
creates a rebuttable presumption that the defendant actually signed it and
had knowledge of its contents. 26 U.S.C. § 6064; United States v.
Kim, 884 F.2d 189, 195 (5th Cir. 1989); United States v. Brink,
648 F.2d 1140, 1143 (8th Cir. 1981); United States v. Harper, 458
F.2d 891, 894-95 (7th Cir. 1971); United States v. Wainwright, 413
F.2d 796, 801-02 (10th Cir. 1970).
8.04[2] Attempt To Evade Payment
The affirmative acts of evasion associated with evasion of payment
cases almost always involve some form of concealment of the taxpayer's
ability to pay the tax due and owing or the removal of assets from the reach
of the IRS. Obstinately refusing to pay taxes due and possession of the
funds needed to pay the taxes, without more, do not meet the
requirement of the affirmative act necessary for an evasion charge.
Examples of affirmative acts of evasion of payment include: placing
assets in the names of others; dealing in currency; causing receipts to be
paid through and in the name of others; causing debts to be paid through and
in the name of others; and paying creditors instead of the government.
Cohen v. United States, 297 F.2d 760, 762, 770 (9th Cir. 1962).
See also United States v. Carlson, 235 F.3d 466, 477
(9th Cir. 2000) (opening and using bank accounts with false social security
numbers, places of birth, and dates of birth could easily have misled or
concealed information from the IRS), cert. denied, 121 S.Ct.
1627 (2001); United States v. Gonzalez, 58 F.3d 506, 509 (10th Cir.
1995) (signing and submitting false financial statements to the IRS);
United States v. Pollen, 978 F.2d 78, 88 (3d Cir. 1992); United
States v. Beall, 970 F.2d 343, 346-47 (7th Cir. 1992) (defendant
instructed employer to pay income to a tax protest organization); United
States v. McGill, 964 F.2d 222, 233 (3d Cir. 1992) (defendant concealed
assets by using bank accounts in names of family members and co-workers);
United States v. Brimberry, 961 F.2d 1286, 1291 (7th Cir. 1992)
(defendant falsely told IRS agent that she did not own real estate and that
she had no other assets with which to pay tax); United States v.
Daniel, 956 F.2d 540, 543 (6th Cir. 1992) (defendant used others' credit
cards, used cash extensively, placed assets in others' names); United
States v. Conley, 826 F.2d 551, 553 (7th Cir. 1987) (defendant concealed
nature, extent, and ownership of assets by placing assets, funds, and other
property in names of others and by transacting business in cash to avoid
creating a financial record); United States v. Shorter, 809 F.2d 54,
57 (D.C. Cir. 1987) (defendant maintained a "cash lifestyle" in that he
conducted all of his personal and professional business in cash, possessed
no credit cards, never acquired attachable assets, and maintained no bank
accounts, ledgers, or receipts or disbursements journals); United States
v. Hook, 781 F.2d 1166, 1169 (6th Cir. 1986) (defendant did not file a
false return or fail to file, but concealed assets); United States v.
Voorhies, 658 F.2d 710, 712 (9th Cir. 1981) (defendant removed money
from the United States and laundered it through Swiss banks). But
see McGill, 964 F.2d at 233 (mere failure to report the
opening of an account in one's own name and in one's own locale is not an
affirmative act).
8.05 ADDITIONAL TAX DUE AND OWING
8.05[1] Generally
A tax deficiency is an essential element of an evasion case. The
absence of a tax deficiency means that there may be a false return case, or
some other kind of case, but not an evasion case.
The tax deficiency need not be for taxes due and owing by the
defendant but may be for taxes due and owing by some other taxpayer.
United States v. Wilson, 118 F.3d 228, 236 (4th Cir. 1997) (attorney
convicted of attempting to evade a client's taxes); United States v.
Townsend, 31 F.3d 262, 266-67 (5th Cir. 1994) (motor fuels excise tax
owed by someone other than defendant).
For purposes of trial preparation and the trial itself, tax
computations prepared by the Internal Revenue Service are furnished to the
prosecuting attorney. In addition, a revenue agent or special agent is
assigned to the case to make any additional tax computations necessitated by
changes during preparation and at the trial. In any hard-fought case, it is
more often the case than not that trial developments will necessitate a
change in the figures set forth in the indictment.
Although a tax deficiency must be established in all section 7201
cases, the proof can often be much simpler in an evasion of payment case.
Thus, if the taxpayer has filed a return and not paid the tax reported as
due and owing, the reporting of the tax is a self-assessment of the tax due
and owing. The tax due and owing is established by the introduction of the
return. By the same token, if the Service has assessed the tax, then proof
of the tax due and owing can consist of merely introducing the Internal
Revenue Service's certificate of assessments and payments assessing the tax
due and owing. A certificate of assessments and payments is prima facie
evidence of the asserted tax deficiency, which, if unchallenged, may suffice
to prove the tax due and owing. United States v. Silkman, 220 F.3d
935, 937 (8th Cir. 2000), cert. denied, 121 S.Ct. 889 (2001);
United States v. Voorhies, 658 F.2d 710, 715 (9th Cir. 1981).
The amount of tax deficiency in a particular case may include
penalties and interest. 26 U.S.C. § 6671(a) (the phrase "'tax' imposed
by this title" also refers to the penalties and liabilities provided by this
subchapter [Subtitle F, Chapter 68B]); 26 U.S.C. § 6665(a)(2) (the
phrase "'tax' imposed by this title" also refers to the additions to the
tax, additional amounts, and penalties provided by this chapter [Subtitle F,
Chapter 68A]); 26 U.S.C. § 6601(e)(1) (the phrase "tax imposed by this
title" also refers to interest imposed by that section on such tax).
But see, United States v. Wright, 211 F.3d 233, 236
(5th Cir.) (dictum), cert. denied, 121 S.Ct. 274 (2000). As a
practical matter, the inclusion of penalties and interest as part of the tax
deficiency will be relevant only in evasion of payment cases where it can be
proved that the defendant was aware of the obligation for the additional
amount of penalties and interest. During the collection process the IRS may
send a taxpayer a notice and demand for payment setting forth the amount of
tax, penalties, and interest for which a taxpayer is liable on a specific
date.
It is not essential that the Service has made an assessment of taxes
owed and a demand for payment in order for tax evasion charges to be
brought. United States v. Daniel, 956 F.2d 540, 542 (6th Cir. 1992).
In Daniel, the defendant argued that there was no tax deficiency
since no assessment or demand for payment had been made. The court rejected
this reasoning, holding that a tax deficiency arises by operation of law on
the date that the return is due if the taxpayer fails to file a tax return
and the government can show a tax liability. Daniel, 956 F.2d at
542. See also United States v. Hogan, 861 F.2d 312,
315-16 (1st Cir. 1988) (no need to make a formal assessment of tax liability
when government finds tax due and owing).
8.05[2] Each Year -- Separate Offense
Because income taxes are an annual event, an alleged evasion of
assessment must relate to a specific year and it must be shown that the
income upon which the tax was evaded was received in that year. United
States v. Boulet, 577 F.2d 1165, 1167-68 (5th Cir. 1978).5
Consequently, in most evasion of assessment cases, each tax year charged
stands alone as a separate offense. Thus, a charge that a taxpayer
attempted to evade and defeat taxes for the years 1990, 1991, and 1992 would
constitute three separate counts in an indictment.
Evasion of payment, on the other hand, often involves single acts
which are intended to evade the payment of several years of tax due the
government. Thus, in evasion of payment cases, it is sometimes permissible
to charge multiple years of tax due and owing in one count. United
States v. Shorter, 809 F.2d 54, 56-57 (D.C. Cir. 1987). In
Shorter, the court approved the use of a single count to cover
several years of tax evaded when charged "as a course of conduct in
circumstances such as those . . . where the underlying basis of the
indictment is an allegedly consistent, long-term pattern of conduct directed
at the evasion of taxes" for those years. Shorter, 809 F.2d at 56.
For the twelve years covered by the single count in the indictment, the
defendant in Shorter had conducted all of his personal and
professional business in cash, avoided the acquisition of attachable assets,
and failed to record receipts and disbursements. These activities
demonstrated a continuous course of conduct, and each affirmative act of
evasion was intended to evade payment of all taxes owed, or anticipated, at
the time. The court noted that the same evidence used to prove one
multi-year count would be admissible to support twelve single year counts.
Shorter, 809 F.2d at 57. See also United States v.
Pollen, 978 F.2d 78 (3d Cir. 1992) (each of four counts covered the same
seven years but indictment not multiplicitous when each count alleged a
different affirmative act); United States v. England, 347 F.2d 425
(7th Cir. 1965) (defendants charged with one count of evasion of payment of
taxes owed from three consecutive years).
Questions concerning the unit of prosecution often lead to challenges
to the indictment. In United States v. Pollen, 978 F.2d 78 (3d Cir.
1992), the defendant made several international transfers of hundreds of
thousands of dollars in attempts to evade payment of seven years' taxes.
Some of these transfers were made in one year. The four counts of the
indictment each specified all seven years, but each alleged a distinct
affirmative act. The court held that "section 7201 permits a unit of
prosecution based on separate significant acts of evasion." Pollen,
978 F.2d at 86. Therefore, separate counts of an indictment may relate to
evasion of payment for the same years without raising a multiciplicity
problem, provided each count alleges a different affirmative act.
8.05[3] Substantial Tax Deficiency
Tax evasion prosecutions are not collection cases and it is not
necessary to charge or prove the exact amount of the tax that is due and
owing. United States v. Thompson, 806 F.2d 1332, 1335-36 (7th Cir.
1986); United States v. Harrold, 796 F.2d 1275, 1278 (10th Cir.
1986); United States v. Citron, 783 F.2d 307, 314-15 (2d Cir. 1986);
United States v. Buckner, 610 F.2d 570, 573-74 (9th Cir. 1979);
United States v. Marcus, 401 F.2d 563, 565 (2d Cir. 1968).
It is enough to prove that the defendant attempted to evade a
substantial income tax, even though the actual amount of tax that he owes
may be greater than the amount charged in the criminal case. Indeed, the
criminal tax figures will almost invariably be lower than the civil tax
figures since, for example, items turning on reasonably debatable
interpretations of the Tax Code which increase the tax due and owing are not
included in the criminal case. In other words, any doubts as to taxability
are resolved in favor of the defendant in a criminal case even though they
may ultimately be resolved against him or her civilly.
As noted, it is enough in a criminal case to prove that the defendant
attempted to evade a substantial income tax. And as long as the amount
proved as unreported is substantial, it makes no difference whether that
amount is more or less than the amount charged as unreported in the
indictment. United States v. Johnson, 319 U.S. 503, 517-18 (1943);
United States v. Mounkes, 204 F.3d 1024, 1028 (10th Cir.),
cert. denied, 530 U.S. 1230 (2000); United States v.
Plitman, 194 F.3d 59, 65-66 (2d Cir. 1999); United States v.
Marcus, 401 F.2d 563, 565 (2d Cir. 1968); Swallow v. United
States, 307 F.2d 81, 83 (10th Cir. 1962). See, e.g.,
United States v. Burdick, 221 F.2d 932, 934 (3d Cir. 1955), upholding
a conviction where the indictment charged $33,000 as unreported taxable
income and the proof at trial established only $14,500 as unreported.
Similarly, in United States v. Costello, 221 F.2d 668, 675 (2d Cir.
1955), aff'd, 350 U.S. 359 (1956), the court upheld a conviction
where the bill of particulars alleged $244,000 gross income as unreported
and $288,000 was proved at trial. In United States v. Citron, 783
F.2d 307 (2d Cir. 1986), the court upheld an "open-ended" 7201 indictment
that did not even allege precise amounts of unreported income or tax due but
rather alleged that the defendant had attempted to evade "a large part" of
the income tax due and that the tax due was "substantially in excess" of the
amount he reported. Citron, 783 F.2d at 314-15.
Since the government only has to prove that a substantial tax was due
and owing, any bill of particulars that is filed should note that proof of
an exact amount is not required and any figures furnished in a bill of
particulars represent only an approximation. Whether a tax deficiency is
substantial is a jury question and the cases suggest that relatively small
sums can be deemed substantial. United States v. Gross, 286 F.2d 59,
61 (2d Cir. 1961) (unreported income of $2500 deemed "substantial");
United States v. Nunan, 236 F.2d 576, 585 (2d Cir. 1956) ("A few
thousand dollars of omissions of taxable income may in a given case warrant
criminal prosecution."). See also United States v.
Davenport, 824 F.2d 1511, 1517 (7th Cir. 1987) ($3,358 in taxes due
sufficient to support taxpayer's conviction); United States v.
Cunningham, 723 F.2d 217 (2d Cir. 1983) (additional tax of $2,617 as
compared to a total tax due of $33,539 held to be substantial); United
States v. Siragusa, 450 F.2d 592, 595-96 (2d Cir. 1971) (taxes of
$3,956, $900 and $2,209 in three successive years held to be substantial).
The Ninth Circuit has held that there is no substantiality requirement
for a section 7201 violation. United States v. Marashi, 913
F.2d 724 (9th Cir. 1990). The court held that both section 7201 and its
predecessor, section 145(b) of the 1939 Code, prohibit attempts to evade
"any tax" and impose no minimum amount in their language. Marashi,
913 F.2d at 735. As a result, the court reasoned, the trier of fact needs
to find only "some tax deficiency" to warrant a conviction. Marashi,
913 F.2d at 736.
8.05[4] Method of Accounting
The general rule is that in computing income, the government must
follow the same method of accounting as that used by the taxpayer.
Fowler v. United States, 352 F.2d 100, 103 (8th Cir. 1965);
United States v. Vardine, 305 F.2d 60, 64 (2d Cir. 1962). Conversely,
if the defendant has used a particular method of reporting income, then the
defendant is bound by that choice at trial. Thus, a defendant cannot report
his income on a cash basis and then defend at trial by showing that on an
accrual basis unreported income would be far less than the government proved
on a cash basis. Clark v. United States, 211 F.2d 100, 105 (8th Cir.
1954); see also United States v. Helmsley, 941 F.2d 71 (2d
Cir. 1991) (defendant having used one depreciation method during the
prosecution years cannot recalculate her taxes under another depreciation
method during trial).
In a similar vein, if the taxpayer has used a hybrid method of
accounting, then the taxpayer "is hardly in a position to complain when the
computation employing that method is introduced to prove specific items of
omitted income." United States v. Lisowski, 504 F.2d 1268, 1275 (7th
Cir. 1974); Morrison v. United States, 270 F.2d 1, 4 (4th Cir.
1959).
8.05[5] Loss Carryback -- Not a Defense
A defendant will sometimes argue that there is no tax deficiency and
hence no evasion because a loss carryback from a subsequent year wipes out
the tax deficiency in the prosecution year. A defendant may admit not
reporting certain income in 1989, but argue that he is not guilty of
attempting to evade, because a 1990 loss carryback eliminates any tax
deficiency for 1989. This defense is not valid; the "lucky loser argument"
was expressly rejected in Willingham v. United States, 289 F.2d 283,
287 (5th Cir. 1961). The crime was complete when, with willful intent, a
false and fraudulent return was filed -- any adjustment from a loss in a
subsequent year does not change in any way the fraud committed in the
earlier year. Any evidence of a loss in a subsequent year is therefore
irrelevant. Willingham, 289 F.2d at 288.
The same argument was rejected where the net operating loss in a
subsequent year was for a Subchapter S corporation. United States v.
Keltner, 675 F.2d 602, 604 (4th Cir. 1982). The applicable principle is
that each tax year is treated as a separate unit, and all items of gross
income and deductions must be reflected as they exist at the close of the
tax year. See United States v. Cruz, 698 F.2d 1148, 1151-52
(11th Cir. 1983), for an application of this principle to a situation
involving a claimed foreign tax credit. Cf. United States v.
Suskin, 450 F.2d 596 (2d Cir. 1971) (corporate carryforward loss not
available to individual).
8.05[6] Methods of Proof
The general rule is that unreported income may be established by
several methods of proof, and the government is free to use all legal
methods available in determining whether the taxpayer has correctly reported
his income. Holland v. United States, 348 U.S. 121, 132 (1954);
United States v. Baum, 435 F.2d 1197, 1201 (7th Cir. 1971);
United States v. Doyle, 234 F.2d 788, 793 (7th Cir. 1956).
The several methods of proof used in tax cases to establish unreported
income are discussed in detail in the sections of this Manual treating
methods of proof, Sections 30.00 - 33.00, infra. Briefly, the
specific items method of proof consists of direct evidence of the items of
income received by a taxpayer in a given year, e.g., testimony by
third parties as to monies paid to the taxpayer for goods or services. The
net worth method of proof reflects increases in the wealth of the taxpayer
as contrasted with reported income. A variation of the net worth method is
the expenditures method of proof, which reflects the expenditures made by a
taxpayer. The expenditures method is particularly appropriate in the case
of a taxpayer who does not purchase durable assets, such as stocks and real
estate, but spends monies for consumable items, such as vacations,
entertainment, food, drink, and the like. Another indirect method of proof
is the bank deposits method, which is essentially a reconstruction of income
by an analysis of bank deposits by a taxpayer who is in an income-producing
business and makes regular and periodic deposits to bank accounts.
The Seventh Circuit has approved a variation of the expenditures
method which could be called the cash method of proof. United States v.
Hogan, 886 F.2d 1497 (7th Cir. 1989). With this method, the government
compares the taxpayer's cash expenditures with his known cash sources,
including cash on hand, for each tax period. If such expenditures exceed
sources, the excess is presumed to be unreported income.
Except for the so-called cash method, which to date is limited
virtually to the Hogan case, each of these methods of proof is
discussed in detail ahead and reference should be made to these sections for
the applicable case law.
8.05[7] Income Examples
Examples of income which may be charged in criminal tax cases, which
are not expressly set out in 26 U.S.C. §§ 61, 62, and 63, are the
proceeds from:
1. Campaign contributions, when used for personal purposes.
United States v. Scott, 660 F.2d 1145, 1152 (7th Cir.
1981).
2. Gambling proceeds. The taxpayer must report winnings and may
deduct losses only to the extent of winnings. Garner v.
United States, 501 F.2d 228, 233 (9th Cir. 1974), aff'd
on other grounds, 424 U.S. 648 (1976); McClanahan v.
United States, 292 F.2d 630, 631-32 (5th Cir. 1961).
3. Embezzlement. Embezzled funds constitute taxable income to the
recipient. United States v. Guidry, 199 F.3d 1150,
1157-1158 (10th Cir. 1999); United States v. Harris, 942
F.2d 1125, 1134 (7th Cir. 1991). The funds are considered
to be income in the year of embezzlement. James v. United
States, 366 U.S. 213, 219-21 (1961); United States v.
Lippincott, 579 F.2d 551, 552 (10th Cir. 1978) (alleged loan
from embezzled funds); United States v. Milder, 459 F.2d
801, 804 (8th Cir. 1972).
4. Extortion. Money obtained by extortion is income taxable to the
extortionist. Rutkin v. United States, 343 U.S. 130, 131
(1952); United States v. Cody, 722 F.2d 1052, 1061 (2d
Cir. 1983) (income generated by union officials through
extortion and kickbacks and acceptance of valuable services);
United States v. Greger, 716 F.2d 1275, 1278 (9th Cir.
1983) (economic extortion).
5. Fraud. Moore v. United States, 412 F.2d 974, 978 (5th
Cir. 1969). See also United States v.
Dixon, 698 F.2d 445, 446 (11th Cir. 1983).
6. Alleged loans, no intention to repay. United States v.
Pomponio, 429 U.S. 10, 13 & n.4 (1976); United States v.
Swallow, 511 F.2d 514, 519 (10th Cir. 1974); United
States v. Rosenthal, 470 F.2d 837, 842 (2d Cir. 1972);
United States v. Rochelle, 384 F.2d 748, 751 (5th Cir.
1967).
7. Commercial bribes and kickbacks. United States v.
Sallee, 984 F.2d 643 (5th Cir. 1993); United States v.
Fogg, 652 F.2d 551, 555-56 (5th Cir.1981); United States
v. Wyss, 239 F.2d 658, 660 (7th Cir. 1957).
8. Bribery. United States v. Anderson, 809 F.2d 1281, 1288
(7th Cir. 1987); United States v. Isaacs, 493 F.2d 1124,
1161 (7th Cir. 1974) (racetrack stock "purchase" by government
official for a fraction of actual value).
9. Gratuities received by government employees. United States
v. St. Pierre, 377 F. Supp. 1063 (S.D. Fla. 1974),
aff'd, 510 F.2d 383 (5th Cir. 1975).
10. Corporate diversions. United States v. Helmsley, 941
F.2d 71 (2d Cir. 1991); United States v. Wilson, 887
F.2d 69, 73 (5th Cir. 1989); United States v. Thetford,
676 F.2d 170, 175 (5th Cir. 1982). The funds are taxable to the
recipient once he exercises dominion and control over them; even
when the defendant is the sole shareholder in the corporation,
dominion and control over the funds can be sufficient to give
rise to individual tax liability. United States v.
Toushin, 899 F.2d 617, 623-24 (7th Cir. 1990); United
States v. Curtis, 782 F.2d 593, 598 (6th Cir. 1986). See
also United States v. Knight, 898 F.2d 436, 437 (5th
Cir. 1990). Constructive distribution rules need not be
automatically applied in a criminal tax case. United States
v. Miller, 545 F.2d 1204, 1214 (9th Cir. 1976) ("whether
diverted funds constitute constructive corporate distributions
depends on the factual circumstances involved in each case under
consideration"). But see United States v.
D'Agostino, 145 F.3d 69, 72-73 (2d Cir. 1998). See
also United States v. Bok, 156 F.3d 157, 161-63 (2d
Cir. 1998).
11. Narcotics sales. United States v. Palmer, 809 F.2d 1504,
1505 (11th Cir. 1986) (court implicitly included narcotics sales
proceeds in income by considering concealment of those proceeds
to be affirmative act of evasion).
8.06 WILLFULNESS
8.06[1] Definition
Willfulness has been defined by the courts as a voluntary, intentional
violation of a known legal duty. Cheek v. United States, 498 U.S.
192 (1991); United States v. Pomponio, 429 U.S. 10, 12 (1976);
United States v. Bishop, 412 U.S. 346, 360 (1973). Therefore, the
taxpayer must be shown to have been aware of his or her obligations under
the tax laws. United States v. Buford, 889 F.2d 1406, 1409 (5th Cir.
1989); United States v. Conforte, 624 F.2d 869, 875 (9th Cir.
1980); United States v. Peterson, 338 F.2d 595, 598 (7th Cir.
1964). As the Seventh Circuit Court of Appeals has stated, there must be
"proof that the appellant knew he was violating a 'known legal duty.'"
United States v. Fitzsimmons, 712 F.2d 1196, 1198 (7th Cir. 1983).
Willfulness is determined by a subjective standard; thus the defendant
is not required to have been objectively reasonable in his misunderstanding
of his legal duties or belief that he was in compliance with the law.
Cheek v. United States, 498 U.S. 192 (1991); United States v.
Powell, 955 F.2d 1206 (9th Cir. 1992); United States v. Regan,
937 F.2d 823, 826 (2d Cir. 1991), amended by, 946 F.2d 188 (2nd Cir.
1992); United States v. Whiteside, 810 F.2d 1306, 1311 (5th Cir.
1987). The inquiry, therefore, must focus on the knowledge of the
defendant, not on the knowledge of a reasonable person. However, the jury
may "consider the reasonableness of the defendant's asserted beliefs in
determining whether the belief was honestly or genuinely held." United
States v. Grunewald, 987 F.2d 531, 536 (8th Cir. 1993); United
States v. Middleton, 246 F.3d 825, 837 (6th Cir. 2001).
Although ignorance and misunderstanding of the law may be asserted to
foreclose a finding of willfulness on the part of the defendant,
disagreement with the constitutional validity of the law may not. Once it
has been established that the defendant was aware of a legal duty and
intentionally violated that duty, it is no defense that the defendant
believed that the law imposing the duty was unconstitutional. Cheek v.
United States, 498 U.S. at 205-06. The constitutionality of the tax
laws is to be litigated by taxpayers in other ways established by Congress.
Cheek, 498 U.S. at 206. See also United States v.
Bonneau, 970 F.2d 929, 931-32 (1st Cir. 1992) (trial judge's redaction
of constitutionality arguments from defendant's reading materials did not
unfairly prejudice the defense). But see United States v.
Gaumer, 972 F.2d 723, 725 (6th Cir. 1992) (defendant should have been
allowed to read excerpts of court opinions upon which he relied in
determining whether he was required to file tax returns).
In some of its opinions prior to United States v. Pomponio, 429
U.S. 10 (1976), the Supreme Court spoke of willfulness in terms of "bad
faith or evil intent." United States v. Murdock, 290 U.S. 389, 398
(1933), or "evil motive and want of justification in view of all the
financial circumstances of the taxpayer," Spies v. United States,
317 U.S. 492, 498 (1943). This caused some confusion in the circuits, which
was cleared up in United States v. Pomponio, 429 U.S. 10 (1976).
In Pomponio, the court stated that its references to bad faith
or evil intent meant nothing more than that there was "an intentional
violation of a known legal duty." Id. at 12. The clarification is
important since it is the answer to defense requests for an instruction that
speaks in terms of a bad purpose or evil intent and, thus, gives the
defendant room to argue that he did not act willfully because he acted with
a good purpose or motive. Such an instruction would impose an undue burden
on the government that is counter to the teachings of the Supreme Court.
Otherwise stated, "willfully" connotes a voluntary, intentional violation of
a known legal duty, and "it does not require proof of any other motive."
United States v. Jerde, 841 F.2d 818, 821 (8th Cir. 1988) (citing
United States v. Pomponio, 429 U.S. 10, 12 (1976)); accord,
United States v. Sato, 814 F.2d 449, 451 (7th Cir. 1987) (no
need to prove "evil-meaning mind");; United States v. Schafer,
580 F.2d 774, 781 (5th Cir. 1978) (proof of evil motive or bad intent not
required); United States v. Patrick, 542 F.2d 381, 389 (7th Cir.
1976) ("bad" before "purpose" may be omitted from willfulness
instruction); United States v. Moylan, 417 F.2d 1002, 1004
(4th Cir. 1969) ("to require a bad purpose would be to confuse the concept
of intent with that of motive").
The Ninth Circuit has said that a showing of bad motive or evil
purpose can substitute for a showing of intentional violation of a known
legal duty as a means of establishing willfulness. United States v.
Powell, 955 F.2d 1206, 1211 (9th Cir. 1992). In Powell, the
court stated that bad motive or evil purpose could be used by the government
to establish that the defendants acted willfully but that such proof was not
required. Rather, the government had the alternative of showing that the
defendants had voluntarily and intentionally violated a known legal duty, in
which case proof of evil motive or bad purpose would not be necessary.
Powell, 955 F.2d at 1211.
Notwithstanding the alternative methods of proving willfulness set
forth in Powell, the fact remains that the Supreme Court has
definitively and unequivocally defined willfulness as the "voluntary,
intentional violation of a known legal duty." Thus, the government should
never rely on any "alternative method" of proof that does not establish the
defendant's voluntary and intentional violation of his known legal duty.
Similarly, juries should always be instructed that it is the government's
burden to prove such a violation.
Good motive is not a defense to a finding of willfulness, and the
Supreme Court has upheld as proper a jury instruction that "'[g]ood motive
alone is never a defense where the act done or omitted is a crime,' and that
consequently motive was irrelevant except as it bore on intent." United
States v. Pomponio, 429 U.S. at 11; accord, United States v.
Dillon, 566 F.2d 702, 704 (10th Cir. 1977).
The Supreme Court in United States v. Bishop, 412 U.S. 346
(1973), rejected the historical view that there are different types of
willfulness required in felony and misdemeanor cases, holding that the
willfulness requirement in either class of offense is the same -- "a
voluntary, intentional violation of a known legal duty." Bishop, 412
U.S. at 360-61. Thus, while some tax crimes are felonies (e.g., 26
U.S.C. § 7201, attempt to evade or defeat a tax), and others are
misdemeanors (e.g., 26 U.S.C. § 7203, failure to file an income
tax return), the word "willfully" has the same meaning in both types of
offenses. United States v. Pomponio, 429 U.S. 10, 12 (1976).
8.06[2] Proof of Willfulness
The element of willfulness is often the most difficult element to
prove in an evasion case. Absent an admission or confession, which is
seldom available, or accomplice testimony, willfulness is rarely subject to
direct proof and must generally be inferred from the defendant's acts or
conduct. United States v. Guidry, 199 F.3d 1150, 1156-1158 (10th
Cir. 1999); United States v. Kim, 884 F.2d 189, 192 (5th Cir. 1989);
United States v. Collorafi, 876 F.2d 303, 305 (2d Cir. 1989);
United States v. Marchini, 797 F.2d 759 (9th Cir. 1986);
United States v. Ashfield, 735 F.2d 101, 105 (3d Cir. 1984);
United States v. Marabelles, 724 F.2d 1374, 1379 (9th Cir. 1984);
United States v. Ramsdell, 450 F.2d 130, 133-34 (10th Cir. 1971);
United States v. Magnus, 365 F.2d 1007 (2d Cir. 1966);
Paschen v. United States, 70 F.2d 491, 498-99 (7th Cir. 1934).
Once the evidence establishes that the tax evasion motive played any role in
a taxpayer's conduct, willfulness can be inferred from this conduct, even if
the conduct also served another purpose, such as concealment of another
crime or concealment of assets from, for example, one's spouse, employer or
creditors. Spies v. United States, 317 U.S. 492, 499 (1943);
Guidry, 199 F.3d at 1157; United States v. DeTar, 832 F.2d 1110,
1114 n.3 (9th Cir. 1987). A jury may permissibly infer that a
taxpayer read his tax return and knew its contents from the bare fact that
he signed it. United States v. Olbres, 61 F.3d 967, 971 (1st Cir.
1995).
Inferring willfulness from the evidence, however, must be left to the
trier of fact. The government may not present witnesses to testify that the
circumstantial evidence proves the defendant's willfulness. United
States v. Windfelder, 790 F.2d 576 (7th Cir. 1986). In
Windfelder, IRS agents opined in their trial testimony as to the
defendant's willfulness, based on their impression of the relevant
circumstantial evidence. Although the court of appeals found the admission
of the testimony to have been harmless error, it held that it was
inadmissible under Rule 704(b) of the Federal Rules of Evidence.
Windfelder, 790 F.2d at 582-83.
There are obvious questions raised as to willfulness when the law is
vague or highly debatable, such as whether a transaction has generated
taxable income. While the case is unusual, and readily distinguishable from
most tax cases, an example of the foregoing is United States v.
Critzer, 498 F.2d 1160 (4th Cir. 1974). In Critzer, the court
found that there was a disputed question as to whether the "income" the
defendant earned from business interests operated on the Cherokee Indian
Reservation was taxable and that different branches of the government had
reached directly opposite conclusions on this question. In the light of
these findings, the court held that, "[i]t is settled that when the law is
vague or highly debatable, a defendant -- actually or imputedly -- lacks the
requisite intent to violate it." Critzer, 498 F.2d at 1162. See
also United States v. Harris, 942 F.2d 1125 (7th Cir. 1991) (law
on tax treatment of payments received by mistresses from wealthy widower
provided no fair warning that failure to report such payments as income
would be criminal activity, and case law favored proposition that payments
be treated as gifts); United States v. Heller, 830 F.2d 150 (11th
Cir. 1987) (existence of a prior case in which Tax Court approved
"case-closed method" of reporting advance payments of costs and fees
received by an attorney meant that use of the method was not proscribed in
reasonably certain terms, and therefore prior case was sufficient, as a
matter of law, to make it inappropriate to impose criminal liability upon
defendant-attorney for using the same method); United States v.
Garber, 607 F.2d 92 (5th Cir. 1979) (defendant may have lacked requisite
willfulness since proper tax treatment of money received from sale of her
exceedingly rare blood was novel and unsettled question).
Care should be taken to distinguish a case such as Garber,
which is based on "unique, indeed near bizarre, facts." United States v.
Burton, 737 F.2d 439, 444 (5th Cir. 1984); see also United States
v. Daly, 756 F.2d 1076, 1083 (5th Cir. 1985). In Burton, the
court explained and limited its opinion in Garber. The court stated
that "apart from those few cases where the legal duty pointed to is so
uncertain as to approach the level of vagueness, the abstract question of
legal uncertainty of which a defendant was unaware is of marginal
relevance," explaining that "[e]vidence of legal uncertainty, except as it
relates to defendant's effort to show the source of his state of mind, need
not be received, at least where . . . the claimed uncertainty does not
approach vagueness and is neither widely recognized nor related to a novel
or unusual application of the law." Burton, 737 F.2d at 444. And,
in United States v. Curtis, 782 F.2d 593, 599-600 (6th Cir. 1986),
the Sixth Circuit rejected Garber for the following reasons: (1)
Garber allows juries to find that uncertainty in the law negates
willfulness even if the defendant was unaware of the uncertainty; (2) it
distorts the expert's role and intrudes upon the judge's duty to inform the
jury about the law; and, (3) requires the jury to assume the judge's
"responsibility to rule on questions of law".
In those few courts which recognize uncertainty in the law as a
potential defense, the court must find that the law clearly prohibited the
defendant's alleged conduct. United States v. Solomon, 825 F.2d
1292, 1297 (9th Cir. 1987); United States v. Dahlstrom, 713 F.2d
1423, 1428 (9th Cir. 1983). In Dahlstrom, the court reversed
the convictions of the defendants, who had instructed investors on creating
and carrying out abusive tax shelters, because the legality of the shelters
was "completely unsettled." Dahlstrom, 713 F.2d at 1428. Taxpayers
have fair notice of a scheme's illegality if it is clear that it is illegal
under established principles of tax law, regardless of whether an appellate
court has so ruled. United States v. Krall, 835 F.2d 711, 714 (8th
Cir. 1987). Compare United States v. Mallas, 762 F.2d 361
(4th Cir. 1985) (coal mining tax shelter providing deductions of advance
minimum royalty payments raised novel questions of tax law so vague that
defendant lacked requisite specific intent) with Krall, 835
F.2d at 714 (although precise foreign trust arrangement had not yet been
declared illegal, the sham trusts used to avoid taxation violated
well-established principles of tax law, thus defendant could not claim that
his conviction violated due process); United States v. Tranakos, 911
F.2d 1422 (10th Cir. 1990) (illegality of sham transactions to avoid tax
liabilities is well-settled); United States v. Schulman, 817 F.2d
1355, 1359-60 (9th Cir. 1987) (illegality of tax shelters based on sham
transactions is a settled legal issue); United States v. Crooks, 804
F.2d 1441, 1449 (9th Cir. 1986) (requirement of transaction substance over
form is well-ensconced in tax law).
To aid in establishing willfulness at trial, items turning on
reasonably debatable interpretations of the Tax Code and questionable items
of income should be eliminated from the case, and, whenever possible,
complicated facts should be simplified. This is advantageous both for
purposes of presentation to the jury and to strengthen the government's
argument that there is no doubt that the defendant committed criminal acts
to evade taxes, because the taxability and tax consequences were known to
the taxpayer.
The Supreme Court has furnished excellent guidance on the type of
evidence from which willfulness can be inferred. In the leading case of
Spies v. United States, 317 U.S. 492, 499 (1943), the Supreme Court,
"by way of illustration and not by way of limitation," set forth the
following as examples of conduct from which willfulness may be inferred:
[K]eeping a double set of books, making false entries or alterations,
or false invoices or documents, destruction of books or records,
concealment of assets or covering up sources of income, handling of
one's affairs to avoid making the records usual in transactions of the
kind, and any conduct, the likely effect of which would be to mislead
or to conceal.
Particularly noteworthy is the Court's reference to "any conduct, the
likely effect of which would be to mislead or to conceal." It is apparent
that the Court was intent on making it clear that there are no artificial
limits on the type of conduct from which willfulness can be inferred, and
that evidence is admissible of any conduct at all, as long as the "likely
effect" of the conduct would be to mislead or conceal.
8.06[3] Examples: Proof of Willfulness
1. Willfulness may be inferred from evidence of a consistent
pattern of underreporting large amounts of income. United
States v. Kim, 884 F.2d 189, 192 (5th Cir. 1989) (evidence
of willfulness was sufficient where taxpayer failed to report
$182,601 of income over three years); United States v.
Kryzske, 836 F.2d 1013, 1019-20 (6th Cir. 1988) (willfulness
found where taxpayer failed to file complete tax returns over a
four-year period and underreported his income by $940.50 for one
of those years); see also United States v. Guidry, 199
F.3d 1150, 1157 (10th Cir. 1999); United States v.
Klausner, 80 F.3d 55, 63 (2d Cir. 1996); United States v.
Skalicky, 615 F.2d 1117 (5th Cir. 1980); United States v.
Larson, 612 F.2d 1301 (8th Cir. 1980); United States v.
Gardner, 611 F.2d 770 (9th Cir. 1980).
2. Failure to supply an accountant with accurate and complete
information. United States v. Samara, 643 F.2d 701, 703
(l0th Cir. 1981) (taxpayer kept receipt books for cash received
but did not supply them to accountant, thus concealing cash
receipts); see also United States v. Guidry, 199
F.3d 1150, 1157 (10th Cir.1999); United States v.
Brimberry, 961 F.2d 1286, 1290 (7th Cir. 1992); United
States v. Chesson, 933 F.2d 298, 305 (5th Cir. 1991);
United States v. Michaud, 860 F.2d 495, 500 (1st Cir. 1988);
United States v. Meyer, 808 F.2d 1304, 1306 (8th Cir.
1987); United States v. Ashfield, 735 F.2d 101, 107 (3d
Cir. 1984); United States v. Conforte, 624 F.2d 869 (9th
Cir. 1980); United States v. Scher, 476 F.2d 319 (7th
Cir. 1973).
3. Taxpayer who relies on others to keep his records and prepare
his tax returns may not withhold information from those persons
relative to taxable events and then escape criminal
responsibility for the resulting false returns. United
States v. Simonelli, 237 F.3d 19, 30 (1st Cir. 2001);
United States v. O'Keefe, 825 F.2d 314, 318 (11th Cir.
1987); United States v. Garavaglia, 566 F.2d 1056 (6th
Cir. 1977).
4. False statements to agents; false exculpatory statements,
whether made by a defendant or instigated by him. United
States v. Chesson, 933 F.2d 298, 304 (5th Cir. 1991);
United States v. Frederickson, 846 F.2d 517, 520-21 (8th
Cir. 1988) (taxpayer falsely stated that she did not receive
income from other employees who worked in her massage parlor and
that she deposited most of her income in the bank); United
States v. Walsh, 627 F.2d 88 (7th Cir. 1980);
United States v. Tager, 481 F.2d 97, 100 (10th Cir.
1973); United States v. Callanan, 450 F.2d 145, 150 (4th
Cir. 1971); United States v. Jett, 352 F.2d 179,
182 (6th Cir. 1965); see also United
States v. Klausner, 80 F.3d 55, 63 (2d Cir. 1996); United
States v. Pistante, 453 F.2d 412 (9th Cir. 1971); United
States v. Adonis, 221 F.2d 717, 719 (3d Cir. 1955).
5. Keeping a double set of books. United States v. Daniels,
617 F.2d 146 (5th Cir. 1980).
6. Hiding, destroying, throwing away, or "losing" books and
records. United States v. Walker, 896 F.2d 295, 300 (8th
Cir. 1990) (taxpayers hid records and assets in an attempt to
conceal them from the IRS). See United States v.
Chesson, 933 F.2d 298, 304-05 (5th Cir. 1991) (taxpayer
altered and destroyed invoices after undergoing a civil audit
for underreporting income); United States v. Pistante,
453 F.2d 412 (9th Cir. 1971); United States v.
Holovachka, 314 F.2d 345, 357 (7th Cir. 1963); Gariepy v.
United States, 189 F.2d 459, 463 (6th Cir. 1951).
7. Making or using false documents, false entries in books and
records, false invoices, and the like. United States v.
Wilson, 118 F.3d 228, 236 (4th Cir. 1997); United States
v. Chesson, 933 F.2d 298, 304 (5th Cir. 1991); United
States v. Walker, 896 F.2d 295, 298 (8th Cir. 1990)
(defendants submitted false invoices to their family company so
that the company would treat their personal expenses as business
expenses).
8. Destruction of invoices to customers. United States v.
Garavaglia, 566 F.2d 1056, 1059 (6th Cir. 1977).
9. Nominees. Placing property or a business in the name of
another. United States v. Daniel, 956 F.2d 540 (6th Cir.
1992); United States v. Peterson, 338 F.2d 595, 597
(7th Cir. 1964); United States v. Woodner, 317 F.2d 649,
651 (2d Cir. 1963); Banks v. United States, 204
F.2d 666, 672 (8th Cir. 1953), vacated and remanded, 348
U.S. 905 (1955), reaff'd, 223 F.2d 884 (8th Cir. 1955).
10. Extensive use of currency or cashier's checks. United States
v. Daniel, 956 F.2d 540 (6th Cir. 1992) (defendant used cash
extensively, immediately converted checks to cash, and paid
employees and insurance policies in cash); United States v.
Holovachka, 314 F.2d 345, 358 (7th Cir. 1963); Schuermann
v. United States, 174 F.2d 397, 398 (8th Cir. 1949).
11. Spending large amounts of cash which could not be reconciled
with the amount of income reported. United States v.
Simonelli, 237 F.3d 19, 30 (1st Cir. 2001); United States
v. Olbres, 61 F.3d 967, 971 (1st Cir. 1995); United
States v. Kim, 884 F.2d 189, 192 (5th Cir. 1989); or
engaging in surreptitious cash transactions, United States v.
Skalicky, 615 F.2d 1117 (5th Cir. 1980). See
also United States v. Holladay, 566 F.2d 1018,
1020 (5th Cir. 1978) United States v. Mortimer, 343 F.2d
500, 503 (7th Cir. 1965) (money orders and cashier's
checks);.
12. Use of bank accounts held under fictitious names. United
States v. Ratner, 464 F.2d 101, 105 (9th Cir. 1972);
Elwert v. United States, 231 F.2d 928 (9th Cir. 1956);
cf. United States v. White, 417 F.2d 89, 92 (2d
Cir. 1969).
13. Checks cashed and the currency deposited in an out-of-town bank
account. United States v. White, 417 F.2d 89, 92 (2d
Cir. 1969).
14. Unorthodox accounting practices with deceptive results.
United States v. Slutsky, 487 F.2d 832, 834 (2d Cir.
1973); United States v. Waller, 468 F.2d 327, 329 (5th
Cir. 1972).
15. Repetitious omissions of items of income, e.g., income
from various sources not reported. United States v.
Walker, 896 F.2d 295, 299 (8th Cir. 1990) (over a two-year
period taxpayer failed to report interest income totaling
$20,476); United States v. Tager, 479 F.2d 120, 122 (10th
Cir. 1973); Sherwin v. United States, 320 F.2d 137, 141
(9th Cir. 1963).
16. Prior and subsequent similar acts reasonably close to the
prosecution years. United States v. Middleton, 246 F.3d
825, 836-837 (6th Cir. 2001); Matthews v. United States,
407 F.2d 1371, 1381 (5th Cir. 1969); United States v.
Johnson, 386 F.2d 630 (3d Cir. 1967); United States v.
Magnus, 365 F.2d 1007 (2d Cir. 1966); United States v.
Alker, 260 F.2d 135 (3d Cir. 1958); cf. Fed.
R. Evid. Rule 404(b).
17. Alias used on gambling trip -- relevant to an intent to evade
taxes. United States v. Catalano, 491 F.2d 268, 273 (2d
Cir. 1974).
18. The defendant's attitude toward the reporting and payment of
taxes generally. United States v. Hogan, 861 F.2d 312
(1st Cir. 1988); United States v. Stein, 437 F.2d 775
(7th Cir. 1971); United States v. O'Connor, 433 F.2d
752, 754 (lst Cir. 1970); United States v. Taylor, 305
F.2d 183, 185 (4th Cir. 1962);
19. Background and experience of defendant. General educational
background and experience of defendant can be considered as
bearing on defendant's ability to form willful intent.
United States v. Guidry, 199 F.3d 1150, 1157-1158 (10th
Cir.1999)(willfulness inferred from defendant's expertise in
accounting via her business degree and her work experience as
comptroller of a company); United States v. Klausner, 80
F.3d 55, 63 (2d Cir. 1996) (defendant's background as a CPA, and
extensive business experience including that as a professional
tax preparer); United States v. Smith, 890 F.2d 711, 715
(5th Cir. 1989) (defendant's background as an entrepreneur
probative of willfulness); United States v. Segal, 867
F.2d 1173, 1179 (8th Cir. 1989) (defendant was a successful and
sophisticated businessman); United States v. Rischard,
471 F.2d 105, 108 (8th Cir. 1973); . See
United States v. Diamond, 788 F.2d 1025 (4th Cir. 1986);
United States v. MacKenzie, 777 F.2d 811, 818 (2d Cir.
1985) (willfulness inferred from the fact that each defendant
had a college degree, one in economics and the other in
business).
20. Offer to bribe government agent. Barcott v. United
States, 169 F.2d 929, 931-32 (9th Cir. 1948) (attempt to
bribe revenue agent).
21. Use of false names and surreptitious reliance on the use of
cash. United States v. Walsh, 627 F.2d 88, 92 (7th Cir.
1980); United States v. Holladay, 566 F.2d 1018, 1020
(5th Cir. 1978).
22. Backdating documents, such as receipts, contracts, and the like,
to gain a tax advantage. United States v. Drape, 668
F.2d 22 (1st Cir. 1982); United States v. Crum, 529 F.2d
1380 (9th Cir. 1976); United States v. O'Keefe, 825 F.2d
314 (llth Cir. 1987).
23. Illegal sources of income. United States v. Palmer, 809
F.2d 1504, 1505-06 (llth Cir. 1987) (sale of narcotics).
8.06[4] Willful Blindness
It is a defense to a finding of willfulness that the defendant was
ignorant of the law or of facts which made the conduct illegal, since
willfulness requires a voluntary and intentional violation of a known legal
duty. However, if the defendant deliberately avoided acquiring knowledge of
a fact or the law, then the jury may infer that he actually knew it and that
he was merely trying to avoid giving the appearance (and incurring the
consequences) of knowledge. See United States v. Ramsey, 785
F.2d 184, 189 (7th Cir. 1986).6 In such a case, the use of an "ostrich
instruction" -- also known as a deliberate ignorance, conscious avoidance,
willful blindness, or a Jewell instruction (see United
States v. Jewell, 532 F.2d 697 (9th Cir. 1976) -- may be appropriate.
A number of courts have approved the use of such instructions under
proper circumstances. See, e.g., United States v.
Bussey, 942 F.2d 1241, 1246 (8th Cir. 1991) (post-Cheek
decision); United States v. Fingado, 934 F.2d 1163, 1166-1167 (10th
Cir. 1991); United States v. Dube, 820 F.2d 886, 892 (7th Cir.
1987); United States v. Picciandra, 788 F.2d 39, 46 (1st Cir. 1986);
United States v. MacKenzie; 777 F.2d 811, 818-19 (2d Cir. 1986);
United States v. Callahan, 588 F.2d 1078 (5th Cir. 1979).
However, it has also been said that the use of such instructions is "rarely
appropriate." United States v. deFrancisco-Lopez, 939 F.2d 1405,
1409 (10th Cir. 1991) (relying on several Ninth Circuit cases).7 Thus,
it is advisable not to request such an instruction unless it is clearly
warranted by the evidence in a particular case. Furthermore, the language
of any deliberate ignorance instruction in a criminal tax case must comport
with the Government's obligation to prove the voluntary, intentional
violation of a known legal duty. The deliberate ignorance instruction set
forth in United States v. Fingado, 934 F.2d at 1166, appears to be
suitable for a criminal tax case.8 Further, to avoid potential
confusion with the meaning of "willfulness" as it relates to the defendant's
intent, it may be wise to avoid use of the phrase "willful blindness," using
instead such phrases as "deliberate ignorance" or "conscious avoidance."
9
8.07 VENUE
Venue in an evasion case lies in any district where an affirmative act
occurred. As previously noted, the most common attempt to evade involves
the filing of a false return. Thus, venue can always be laid in the
district where a false return was filed. United States v. King, 563
F.2d 559, 562 (2d Cir. 1977); Holbrook v. United States, 216 F.2d 238
(5th Cir. 1954).
In addition to the district of filing, venue will also lie in the
district where a false return was prepared or signed, even though the return
is filed in a different district. United States v. Humphreys,
982 F.2d 254 (8th Cir. 1992); United States v. Marrinson, 832 F.2d
1465, 1475 (7th Cir. 1987); United States v. Marchant, 774 F.2d 888,
891 (8th Cir. 1985); United States v. King, 563 F.2d 559, 562 (2d
Cir. 1977); United States v. Slutsky, 487 F.2d 832, 839 (2d Cir.
1973); 18 U.S.C. § 3237(a). This is also true in cases in
which the affirmative act of evasion is the filing of a false withholding
Form W-4 rather than a false tax return: venue is proper where the false W-4
was prepared and signed, or where it was received and filed. United
States v. Felak, 831 F.2d 794, 798-99 (8th Cir. 1987).
Venue is not limited, however, to the district of signing, filing, or
preparation. The rule is that venue will lie in any district where an
attempt to evade took place, e.g., the district where a false
statement was made to an I.R.S. agent, United States v. Goodyear, 649
F.2d 226, 228 (4th Cir. 1981), where the making of false records or the
concealment of assets took place, Beaty v. United States, 213 F.2d
712, 715 (4th Cir. 1954), vacated and remanded, 348 U.S. 905,
reaff'd, 220 F.2d 681 (4th Cir. 1955), where false returns were
prepared, United States v. Albanese, 224 F.2d 879, 882 (2d Cir.
1955), or where there was a concealment of assets, Reynolds v. United
States, 225 F.2d 123, 128 (5th Cir. 1955).
Reference should also be made to the discussion of venue in Section
6.00, supra.
8.08 STATUTE OF LIMITATIONS
The statute of limitations is six years "for the offense of willfully
attempting in any manner to evade or defeat any tax or the payment thereof."
26 U.S.C. § 6531(2). For a discussion concerning the measurement of
the six-year period of limitations, see Section 7.00, supra.
The general rule is that the six-year period of limitations begins to
run from the last affirmative act constituting an attempt to evade. Thus,
if the filing of a false return is the method of attempting to evade, the
statute will usually start running on the day the return is filed. However,
where a false return is filed before the statutory due date, the statute of
limitations does not start running until the statutory due date. United
States v. Habig, 390 U.S. 222, 225 (1968); United States v.
Ayers, 673 F.2d 728, 729 (4th Cir. 1982); United States v.
Silverman, 449 F.2d 1341, 1346 (2d Cir. 1971). When the affirmative act
occurs before a tax deficiency is incurred, the statute of limitations
begins to run at the time the tax deficiency arises. United States v.
Carlson, 235 F.3d 466, 470 (9th Cir. 2000), cert. denied,
121 S.Ct. 1627 (2001); United States v. Payne, 978 F.2d 1177, 1179
(10th Cir. 1992).
In all evasion cases, affirmative acts of evasion carried out after
the statutory due date renew the limitations period and allow it to extend
beyond six years from the time filing was required (or unpaid taxes were
due). Carlson, 235 F.3d at 470-471; United States v.
Hunerlach, 197 F.3d 1059, 1065 (11th Cir. 1999) (hiding rental income by
purchasing property in nominee name within six years of indictment was
timely affimative act of evasion for limitations purposes); United
States v. Dandy, 998 F.2d 1344 (6th Cir. 1993) ("To hold otherwise would
only reward a defendant for successfully evading discovery of his tax fraud
for a period of six years subsequent to the date the returns were
filed"); United States v. DeTar, 832 F.2d 1110, 1113 (9th Cir.
1987) (affirmative acts of both placing assets in names of nominees and
conducting business in cash within six years prior to indictment made
indictment timely, even though taxes evaded were due and payable over six
years ago); United States v. Ferris, 807 F.2d 269, 271 (1st Cir.
1986) (false statements by defendant to revenue agents and prosecutor
regarding income from prior year in question were affirmative acts which
triggered the statute of limitations computation);
In Spies evasion cases, where no return is filed, the statute
of limitations period runs from the later of the due date of the tax return
at issue or the commission of the affirmative act. Carlson, 235 F.3d
at 470; United States v. Winfield, 960 F.2d 970, 974 (11th Cir.
1992); United States v. DiPetto, 936 F.2d 96, 98 (2d Cir. 1991);
United States v. Williams, 928 F.2d 145, 149 (5th Cir. 1991).
Thus, if the defendant committed the affirmative act during the tax year
(e.g., filed a false Form W-4), then the limitations period runs from
the due date of the tax return. If the defendant committed the affirmative
act after the filing due date (e.g., lied to investigating agents),
then the limitations period does not start until the date of the affirmative
act.
8.09 LESSER INCLUDED OFFENSES
Tax Division Memorandum dated February 12, 1993, regarding Lesser
Included Offenses in Tax Cases (hereinafter "Memorandum") explains the Tax
Division's policy on lesser included offenses, which adopts the strict
"elements" test of Schmuck v. United States, 489 U.S. 705, 709-10
(1989). This test makes one offense included in another only when the
statutory elements of the lesser offense are a subset of the elements of the
greater offense. Id. The policies relevant to tax evasion are:
(Section 7203)
1. In cases charged as Spies-evasion (i.e., failure to
file, failure to pay, and an affirmative act of evasion) under section
7201, it is now the government's position that neither party is
entitled to an instruction that willful failure to file (section 7203)
is a lesser included offense of which the defendant may be convicted.
Thus, if there is reason for concern that the jury may not return a
guilty verdict on the section 7201 charges (for example, where the
evidence of a tax deficiency is weak), consideration should be given
to including counts charging violations of both section 7201
and section 7203 in the indictment. [Note, however, that a
willful failure to pay is a lesser included offense of a willful
attempt to evade the payment of tax.]
The issue whether cumulative punishment is appropriate where a
defendant has been convicted of violating both section 7201 and
section 7203 generally will arise only in pre-guidelines cases. Under
the Sentencing Guidelines, related tax counts are grouped, and the
sentence is based on the total tax loss, not on the number of
statutory violations. Thus, only in those cases involving an
extraordinary tax loss will the sentencing court be required to
consider an imprisonment term longer than five years. In those cases
in which cumulative punishments are possible and the defendant has
been convicted of violating both sections 7201 and 7203, the
prosecutor may, at his or her discretion, seek cumulative punishment.
However, where the sole reason for including both charges in the same
indictment was a fear that there might be a failure of proof on the
tax deficiency element, cumulative punishments should not be sought.
Memorandum at 2.
(Section 7206)
2. Similarly, in evasion cases where the filing of a false return
(section 7206) is charged as one of the affirmative acts of evasion
(or the only affirmative act), it is now the Tax Division's policy
that a lesser included offense instruction is not permissible, since
evasion may be established without proof of the filing of a false
return. See Schmuck v. United States, 489 U.S. 705
(1989) (one offense is necessarily included in another only when the
statutory elements of the lesser offense are a subset of the elements
of the charged greater offense). Therefore, as with Spies
evasion cases, prosecutors should consider charging both offenses if
there is any chance that the tax deficiency element may not be proved
but it still would be possible for the jury to find that the defendant
had violated section 7206(1). But where a failure of proof on the tax
deficiency element would also constitute a failure of proof on the
false return charge, nothing generally would be gained by charging
violations of both sections 7201 and 7206.
Where the imposition of cumulative sentences is possible, the
prosecutor has the discretion to seek cumulative punishments. But
where the facts supporting the statutory violations are duplicative
(e.g., where the only affirmative act of evasion is the filing
of the false return), separate punishments for both offenses should
not be requested.
(Section 7207)
Although the elements of section 7207 do not readily appear to
be a subset of the elements of section 7201, the Supreme Court has
held that a violation of section 7207 is a lesser included offense of
a violation of section 7201. See Sansone v. United
States, 380 U.S. 343, 352 (1965); Schmuck v. United States,
489 U.S. at 720, n.11. Accordingly, in an appropriate case, either
party may request the giving of a lesser included offense instruction
based on section 7207 where the defendant has been charged with
attempted income tax evasion by the filing of a false tax return or
other document. Memorandum at 3.
(Other Offenses)
6. In tax cases, questions concerning whether one offense is a lesser
included offense of another may not be limited to Title 26 violations,
but may also include violations under Title 18 (i.e.,
assertions that a Title 26 charge is a lesser included violation of a
Title 18 charge or vice-versa). The policy set out in this memorandum
will also govern any such situations -- that is, the strict elements
test of Schmuck v. United States, 489 U.S. 705, should be
applied. Memorandum at 4.
(General Warning)
5. Prosecutors should be aware that the law in their circuit
may be inconsistent with the policy stated in this memorandum.
See, e.g., United States v. Doyle, 956 F.2d 73,
74-75 (5th Cir. 1992); United States v. Boone, 951 F.2d 1526,
1541 (9th Cir. 1991); United States v. Kaiser, 893 F.2d 1300,
1306 (11th Cir. 1990); United States v. Lodwick, 410 F.2d
1202,1206 (8th Cir. 1969). Nevertheless, since the government has now
embraced the strict "elements" test and taken a position on this issue
in the Supreme Court, it is imperative that the policy set out in this
memorandum be followed. Memorandum at 3.
The policy statement was issued partially in response to appellate
court decisions on the issue of whether section 7203 is a lesser included
offense of section 7201. The Seventh Circuit held in United States v.
Becker, 965 F.2d 383 (7th Cir. 1992), that failure to file was not a
lesser included offense of tax evasion. "Section 7203 does not require 'an
affirmative act, whereas a § 7201 offense requires some affirmative
act. Failure to file without more will not sustain a conviction under
§ 7201. Conversely, while someone attempting to evade or defeat tax
will often fail to file a return, this is not necessary for the completion
of the offense. . . .'") Becker, 965 F.2d at 391 (quoting United
States v. Foster, 789 F.2d 457, 460 (7th Cir. 1986)).
In United States v. McGill, 964 F.2d 222, 239-40 (3d Cir.
1992), however, the Third Circuit held that failure to pay was a lesser
included offense of evasion of payment. McGill was charged with five counts
of evasion of payment. The jury convicted the defendant of three counts of
evasion of payment and of failure to pay regarding the other two years.
McGill argued that section 7203 is not a lesser included offense of section
7201 "because one element of the misdemeanor -- failure to pay a tax --
requires different proof than the parallel affirmative act of evasion under
§ 7201 which as the court held in Spies cannot be the mere
failure to pay". The court disagreed: "McGill's argument overlooks the
fact that it is exactly in the situation where proof of the affirmative act
to evade payment fails, that the lesser included offense of willful failure
to pay may become relevant." McGill, 964 F.2d at 239.
Prosecutors dealing with tax cases involving lesser included offense
issues are encouraged to consult with the Tax Division's Criminal Appeals
and Tax Enforcement Policy Section at (202) 514-3011.
1. Changed to 18 U.S.C. § 3571, commencing Nov. 1, 1986.
2. The First Circuit also rejected the defendants' duplicity claims in
both Huguenin and Waldeck on the grounds that the defendants
in those cases were clearly apprised that the government was proceeding on
an evasion of assessment theory. See Huguenin, 950 F.2d at
26; Waldeck, 909 F.2d at 558.
Although the court in Waldeck stated (909 F.2d at 558) that
"the indictment could have been clearer by specifying that the crime charged
was attempting to evade and defeat the assessment of taxes," the Tax
Division believes that an indictment which tracks the first part of the
statute and alleges an attempt to evade and defeat a tax clearly charges an
attempt to evade tax by evasion of assessment. Similarly, an indictment
which tracks the second part of the statute and alleges an attempt to evade
payment of a tax clearly alleges an attempt to evade tax by evasion of
payment. This analysis is consistent with the result in both
Huguenin and Waldeck.
3. This is not to imply that an affirmative act to evade payment of a tax
can never occur prior to its assessment. See United States v.
McGill, 964 F.2d 222, 231 (3d Cir. 1992).
4. Willfully failing to pay taxes, however, is a misdemeanor covered by
26 U.S.C. § 7203 of the Internal Revenue Code.
5. The government's proof of additional tax in a given year cannot be
based upon income which should have been reported in an earlier or later
year. United States v. Wilkins, 385 F.2d 465, 469 (4th Cir. 1967).
6. Even if the defendant successfully avoided actual knowledge of the
fact, "[t]he required knowledge is established if the accused is aware of a
high probability of the existence of the fact in question unless he actually
believes it does not exist." United States v. Fingado, 934 F.2d
1163, 1166 (10th Cir. 1991). But see United States v.
MacKenzie, 777 F.2d 811, 818 n.2 (2d Cir. 1986).
7. But see United States v. Rodriguez, 983 F.2d 455, 457
(2d Cir. 1993) (Second Circuit more willing than Ninth Circuit to authorize
use of this type of instruction).
8. Out of an abundance of caution, however, a prosecutor may wish to
utilize the instruction set out in United States v. MacKenzie, 777
F.2d 811, 818 n.2 (2d Cir. 1985).
9. It is suggested that any time a deliberate ignorance or conscious
avoidance instruction is given, the prosecutor should also insure that the
jury is expressly directed not to convict for negligence or mistake.