Criminal tax practitioners often are asked early in the representation (and often more than once) whether, if the client under investigation or being prosecuted, simply pays the tax involved -- even with interest and penalties -- will the problem simply go away. The answer that I give to this is no. (Actually, depending upon the facts and if it is early on in the investigation, the answer may be more nuanced than an outright unequivocal no, as I note later in the blog) As I have sometimes explained after giving the answer no, the investigating agent or prosecutor really does not care whether the taxes are ever paid; he or she wants a conviction.
In United States v. Quinn (D. Kansas 2/3/11), the defendant tried to make the case go away by paying the tax. The defendant was prosecuted under § 7202 Willful failure to collect or pay over tax, the criminal analog to the civil trust fund recovery penalty, § 6672. Failure to collect and pay over tax, or attempt to evade or defeat tax (sometimes called the responsible person penalty). After being indicted, the defendant paid the amount for which she was charged and moved to dismiss. The district court denied the motion to dismiss.
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Showing posts with label 7202. Show all posts
Showing posts with label 7202. Show all posts
Tuesday, February 8, 2011
Tuesday, August 31, 2010
New Sixth Circuit Failure to Pay Over Case
In United States v. Blanchard, ___ F.3d ___ (6th Cir. 2010), the defendant was "convicted of fifteen counts of Failure to Account for and Pay Over Withholding and FICA Taxes, in violation of 26 U.S.C. § 7202, and three counts of Making and Causing the Making of a False Claim for a Tax Refund, in violation of 18 U.S.C. § 287." The decision in the case is useful because it covers a lot of the key issues presented in failure to pay over cases which seem to be coming more frequently in recent years
1. Statute of Limitations. The Court holds that the statute of limitations under § 6531 is 6 years. The defendant's argument was that "pay" in the 6 year statute (§ 6531(4)) was a different concept than "pay over" which is the concept in § 7202 and thus that the default tax crimes statute of limitations of 3 years applied. The defendant argued that, not only was it a different concept, but analysis of the 1954 Code predecessor -- the 1939 Code -- supported this reading of § 6531(4). The Court rejected the argument, consistent with the mainstream (but not unanimous) holdings. The Sixth Circuit provides a good discussion of the cases on the subject.
2. Admission of Evidence of Discretionary Expenditures. The Court held that the evidence of defendant's discretionary expenditures was relevant to his willfulness and thus was properly admitted at trial.
3. Ability to Pay is Not An Element. Following the Ninth Circuit's holding in Easterday (discussed here), the Court rejects the argument that the Government must prove ability to pay as an element of the offense. The essence of the holding is that a defendant cannot immunize himself or herself from criminal tax charges by avoiding having the resources to pay -- such as by spending the money otherwise available to pay.
4. Failure to Instruct on the Defendant's Theory of the Case. Failure to properly instruct on a defendant's theory of defense is viewed as reversible error (at least if not harmless), as we noted in discussing Kottwitz. But, unlike Kottwitz, the Sixth Circuit finds no reversible error because the other instructions covered the gravamen of the defense. So, let's see. The defendant's claim was that he relied upon his accountant / return preparer. There was sufficient evidence that he did so, at least sufficient to support the requested instruction on the defense. The Sixth Circuit held that there was no reversible error because the defense was subsumed in the willfulness and good faith instructions the trial court did properly give to the jury. In other words, if the jury understood those instructions, it would have known that the defendant would have a defense if he indeed relied upon the accountant / return preparer. This notion, of course, relies upon the legal construct that juries understand jury instructions as given and are able to extend the concepts beyond the instructions. Finally, the Court does state as its final sentence that there was "no error here." I read the analysis as being a no reversible error opinion. I think that in a case with the proper evidentiary predicate for a reliance defense, the defendant is entitled to the instruction and the general willfulness and good faith instructions will not cover the ground. Hence, I think the Court's concluding sentence is unfortunate.
5. The Net Wage Entitlement to Credit for Withheld Taxes. In reporting his personal income tax liability, the defendant claimed a credit for the tax he was supposed to cause his "employer" to withhold and pay over but did not; based on this notion, the defendant claimed that he could not be guilty under 18 USC § 287 (false claims) for claiming those credits. The general scheme for withholding is that, upon payment of net wages, the employee gets the credit for taxes withheld whether or not the withholding agent (the employer) ever pays over those withheld (or deemed withheld) amounts to the IRS. Of course, that is the general scheme. This general scheme was not designed to benefit the person who is responsible for the failure to pay over in the first instance. Interestingly, in this regard, the Sixth Circuit relied (or at least found persuasive) an unpublished decision affirming a § 7201 conviction in a similar circumstance. The defense is just a bit too cute.
6. Amount of Restitution for Tax Crimes. The Court reversed the imposition of restitution related to the tax crimes (as opposed to the Title 18 crimes). Restitution is just not available for tax crimes except as a condition for some benefit (such as condition of probation) conferred on the defendant.
1. Statute of Limitations. The Court holds that the statute of limitations under § 6531 is 6 years. The defendant's argument was that "pay" in the 6 year statute (§ 6531(4)) was a different concept than "pay over" which is the concept in § 7202 and thus that the default tax crimes statute of limitations of 3 years applied. The defendant argued that, not only was it a different concept, but analysis of the 1954 Code predecessor -- the 1939 Code -- supported this reading of § 6531(4). The Court rejected the argument, consistent with the mainstream (but not unanimous) holdings. The Sixth Circuit provides a good discussion of the cases on the subject.
2. Admission of Evidence of Discretionary Expenditures. The Court held that the evidence of defendant's discretionary expenditures was relevant to his willfulness and thus was properly admitted at trial.
3. Ability to Pay is Not An Element. Following the Ninth Circuit's holding in Easterday (discussed here), the Court rejects the argument that the Government must prove ability to pay as an element of the offense. The essence of the holding is that a defendant cannot immunize himself or herself from criminal tax charges by avoiding having the resources to pay -- such as by spending the money otherwise available to pay.
4. Failure to Instruct on the Defendant's Theory of the Case. Failure to properly instruct on a defendant's theory of defense is viewed as reversible error (at least if not harmless), as we noted in discussing Kottwitz. But, unlike Kottwitz, the Sixth Circuit finds no reversible error because the other instructions covered the gravamen of the defense. So, let's see. The defendant's claim was that he relied upon his accountant / return preparer. There was sufficient evidence that he did so, at least sufficient to support the requested instruction on the defense. The Sixth Circuit held that there was no reversible error because the defense was subsumed in the willfulness and good faith instructions the trial court did properly give to the jury. In other words, if the jury understood those instructions, it would have known that the defendant would have a defense if he indeed relied upon the accountant / return preparer. This notion, of course, relies upon the legal construct that juries understand jury instructions as given and are able to extend the concepts beyond the instructions. Finally, the Court does state as its final sentence that there was "no error here." I read the analysis as being a no reversible error opinion. I think that in a case with the proper evidentiary predicate for a reliance defense, the defendant is entitled to the instruction and the general willfulness and good faith instructions will not cover the ground. Hence, I think the Court's concluding sentence is unfortunate.
5. The Net Wage Entitlement to Credit for Withheld Taxes. In reporting his personal income tax liability, the defendant claimed a credit for the tax he was supposed to cause his "employer" to withhold and pay over but did not; based on this notion, the defendant claimed that he could not be guilty under 18 USC § 287 (false claims) for claiming those credits. The general scheme for withholding is that, upon payment of net wages, the employee gets the credit for taxes withheld whether or not the withholding agent (the employer) ever pays over those withheld (or deemed withheld) amounts to the IRS. Of course, that is the general scheme. This general scheme was not designed to benefit the person who is responsible for the failure to pay over in the first instance. Interestingly, in this regard, the Sixth Circuit relied (or at least found persuasive) an unpublished decision affirming a § 7201 conviction in a similar circumstance. The defense is just a bit too cute.
6. Amount of Restitution for Tax Crimes. The Court reversed the imposition of restitution related to the tax crimes (as opposed to the Title 18 crimes). Restitution is just not available for tax crimes except as a condition for some benefit (such as condition of probation) conferred on the defendant.
Tuesday, May 5, 2009
Collateral Estoppel to Corporation After Conviction of President and Sole Shareholder
In Hi-Q Personnel Inc. v. Commissioner; 132 T.C. No. 13 (5/4/09), the Tax Court applied the doctrine of collateral estoppel from the conviction of the president and sole shareholder under Section 7202 (failure to withhold and pay over) to the corporation. Since collateral estoppel usually applies only to the same shareholder, the Tax Court found that there was sufficient privity between the president and sole shareholder on the one hand and the corporation on the other. The Tax Court noted the truism that corporations act through their officers and, given his relationship, the president's actions were the corporation's actions. The Tax Court alternatively made an affirmative finding independent of collateral estoppel that the corporation was guilty of fraud with respect to the failure to withhold and pay over. As a result of those alternative holdings:
1. The corporation was liable for the payroll taxes.
2. The corporation was liable for the civil fraud penalty.
3. The unlimited statute of limitations applies.
1. The corporation was liable for the payroll taxes.
2. The corporation was liable for the civil fraud penalty.
3. The unlimited statute of limitations applies.
Wednesday, April 29, 2009
Chipping Away at Potential 7202 Defenses
On April 27, 2008, the Ninth Circuit issued a revised opinion in United States v. Easterday, ___ F.3d ___ (9th Cir. 2009) and denied petition for rehearing. In Easterday, the Ninth Circuit finally and explicitly sounds the death knell for taxpayer hopes founded on United States v. Poll, 521 F.2d 329 (9th Cir. 1975). Section 7202 of the Code imposes a criminal penalty on parties having an obligation to withhold tax and pay over to the Government. Section 7202 is the criminal analog tto the civil Trust Fund Recovery Penalty in § 6672 (often called the TFRP or the responsible person penalty). The Government has ramped up the use of § 7202 recently in order to increase compliance with the underlying obligation to withhold and pay over.
Persons within an organization who failed in their responsibility to have the organization withhold and pay over perceived an opportunity in Poll to avoid criminal liability where, as is often the case, the organization does not have the cash to pay over. This can occur where the organization, facing cash flow problems, is paying net wages to the employees -- perhaps using available cash for other purposes (i.e., paying the squeakier wheels) -- and thus, from that perspective, does not have and cannot payover the actual cash representing the tax that it is deemed to have withheld from the employees. Poll held that the Government must prove that the organization did have the available cash before the person can be convicted under § 7202. This holding in Poll was addressed to the "willfully" element of the statute on the notion that the person cannot have acted willfully if the cash wasn't there.
In Easterday, the Ninth Circuit held that Poll was no longer good law, having been eroded by subsequent Supreme Court and Ninth Circuit authority. The Ninth Circuit held that the holding in Poll was effectively overturn by subsequent Supreme Court refinements -- particularly in Pomponio and Cheek -- to the definition of willfully as being the intentional violation of a known legal duty. In the particular context, paying net wages where the taxpayer is not able to pay over the amount deemed withheld is a violation of a known legal duty. The employer has the option of either not paying wages at all (hence incurring no obligation to withhold and pay over) or by reducing the net wage to the employees leaving sufficient cash to pay over to the Government.
Practition Caveat: Do not be lulled into a false sense of security by the Ninth Circuit's statement that "§ 7202 [is] a fairly rarely invoked provision." That may have been true years ago, but not recently and, with the downtown in the economy and pressing needs to stem the erosion of the federal fisc, I and many practitioners believe that § 7202 prosecutions will be a key component of the Government's criminal enforcement initiative.
Persons within an organization who failed in their responsibility to have the organization withhold and pay over perceived an opportunity in Poll to avoid criminal liability where, as is often the case, the organization does not have the cash to pay over. This can occur where the organization, facing cash flow problems, is paying net wages to the employees -- perhaps using available cash for other purposes (i.e., paying the squeakier wheels) -- and thus, from that perspective, does not have and cannot payover the actual cash representing the tax that it is deemed to have withheld from the employees. Poll held that the Government must prove that the organization did have the available cash before the person can be convicted under § 7202. This holding in Poll was addressed to the "willfully" element of the statute on the notion that the person cannot have acted willfully if the cash wasn't there.
In Easterday, the Ninth Circuit held that Poll was no longer good law, having been eroded by subsequent Supreme Court and Ninth Circuit authority. The Ninth Circuit held that the holding in Poll was effectively overturn by subsequent Supreme Court refinements -- particularly in Pomponio and Cheek -- to the definition of willfully as being the intentional violation of a known legal duty. In the particular context, paying net wages where the taxpayer is not able to pay over the amount deemed withheld is a violation of a known legal duty. The employer has the option of either not paying wages at all (hence incurring no obligation to withhold and pay over) or by reducing the net wage to the employees leaving sufficient cash to pay over to the Government.
Practition Caveat: Do not be lulled into a false sense of security by the Ninth Circuit's statement that "§ 7202 [is] a fairly rarely invoked provision." That may have been true years ago, but not recently and, with the downtown in the economy and pressing needs to stem the erosion of the federal fisc, I and many practitioners believe that § 7202 prosecutions will be a key component of the Government's criminal enforcement initiative.
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