Joint Committee on Taxation List of Expiring Federal Tax Provisions 2008-2020, March 10, 2009, 111th Congress
LIST OF EXPIRING FEDERAL TAX PROVISIONS 2008-2020
Prepared by the Staff of the JOINT COMMITTEE ON TAXATION
March 9, 2009
JCX-20-09
CONTENTS
INTRODUCTION
I. FEDERAL TAX PROVISIONS EXPIRING 2008-2020
A. Provisions that Expired in 2008
B. Provisions Expiring in 2009
C. Provisions Expiring in 2010
D. Provisions Expiring in 2011
E. Provisions Expiring in 2012
F. Provisions Expiring in 2013
G. Provisions Expiring in 2014
H. Provisions Expiring in 2016
I. Provisions Expiring in 2017
J. Provisions Expiring in 2018
K. Provisions Expiring in 2020
II. TEMPORARY DISASTER RELIEF FEDERAL TAX PROVISIONS EXPIRING 2008-2013
A. Temporary Disaster Relief Federal Tax Provisions that Expired in 2008
B. Temporary Disaster Relief Federal Tax Provisions Expiring in 2009
C. Temporary Disaster Relief Federal Tax Provisions Expiring in 2010
D. Temporary Disaster Relief Federal Tax Provisions Expiring in 2011
E. Temporary Disaster Relief Federal Tax Provisions Expiring in 2012
F. Temporary Disaster Relief Federal Tax Provisions Expiring in 2013
INTRODUCTION
This document, 1 prepared by the staff of the Joint Committee on Taxation, provides a listing of Federal tax provisions (other than those providing time-limited transition relief after the repeal of an underlying rule) that are currently 2 scheduled to expire in 2008-2020 (with references to the applicable section of the Internal Revenue Code of 1986 or other applicable law). Expiring Federal tax provisions providing temporary disaster relief are separately listed in Part II of the document.
For purposes of compiling this list, the staff of the Joint Committee on Taxation considers a provision to be expiring if, at some statutorily specified date in the future, the provision expires completely or reverts to the law in effect before the present-law version of the provision. Certain provisions terminate on dates that refer to a taxpayer's taxable year and not a calendar year. For these provisions, the expiration dates listed in this document apply with respect to calendar year taxpayers. The expiration dates of such provisions may differ, however, with respect to fiscal year taxpayers or taxpayers with short taxable years.
I. FEDERAL TAX PROVISIONS 3 EXPIRING 2008-2020
A. Provisions that Expired in 2008
____________________________________________________________________________________
Provision (Code section) Expiration Date
____________________________________________________________________________________
1. Reporting on certain acquisitions of interest in 8/17/08
insurance contracts in which certain exempt
organizations hold an interest (sec. 6050V)
2. Placed-in-service date for facilities eligible to 12/31/08 4
claim the Indian coal production credit (sec. 45(d))
3. Suspension of percentage limits on certain 12/31/08
contributions of food inventory by qualified farmers
and ranchers (sec. 170(b)(3))
4. Extended NOL carryback period for eligible small 12/31/08
businesses (sec. 172(b)(1)(H))
5. Special rate for qualified methanol or ethanol fuel 12/31/08
from coal (sec. 4041(b)(2)(D))
4 The credit for production of Indian coal expires December 31, 2012. The
placed-in-service date for refined coal facilities is December 31, 2009.
B. Provisions Expiring in 2009
____________________________________________________________________________________
Provision (Code section) Expiration Date
____________________________________________________________________________________
1. Airport and Airway Trust Fund excise taxes:
a. All but 4.3 cents per gallon of taxes on 03/31/09
noncommercial aviation kerosene and noncommercial
aviation gasoline (sec. 4081(d)(2)(B)) 5
b. Domestic and international air passenger ticket 03/31/09
taxes (sec. 4261(j)(1)(A)(ii))
c. Air cargo tax (sec. 4271(d)(1)(A)(ii)) 03/31/09
2. Temporary reduction in corporate rate for qualified 05/23/09
timber gain (sec. 1201(b))
3. Mineral royalties treated as qualified REIT income for 5/23/09 6
timber REITs (secs. 856(c)(2)(I) and 856(c)(8))
4. Sales by REITs of timber property held at least two 5/23/09 7
years to qualified organizations for conservation
purposes treated as sale of property held for
investment or used in a trade or business (sec.
857(b)(6)(G) and (H) and former sec. 857(b)(6)(D))
5. Period to amend returns to reduce casualty losses 7/30/09 8
later compensated by Federal relief grants, and
limited relief from interest and penalties (sec. 3082
of P.L. 110-289)
6. Personal tax credits allowed against regular tax and 12/31/09
alternative minimum tax ("AMT") (sec. 26(a)(2)) 9
7. Alternative motor vehicle credit for qualified hybrid 12/31/09
motor vehicles other than passenger automobiles and
light trucks (sec. 30B(k)(3))
8. First time homebuyer credit (sec. 36(h)) 11/30/09
9. Incentives for biodiesel and renewable diesel:
a. Income tax credits for biodiesel fuel, biodiesel 12/31/09
used to produce a qualified mixture, and small
agri-biodiesel producers (sec. 40A(g))
b. Income tax credits for renewable diesel fuel and 12/31/09
renewable diesel used to produce a qualified
mixture (sec. 40A(g))
c. Excise tax credits and outlay payments for 12/31/09
biodiesel fuel mixtures (secs. 6426(c)(6) and
6427(e)(5)(B))
d. Excise tax credits and outlay payments for 12/31/09
renewable diesel fuel mixtures (secs. 6426(c)(6)
and 6427(e)(5)(B))
10. Tax credit for research and experimentation expenses 12/31/09
(sec. 41(h)(1)(B))
11. Increase in low-income housing credit volume cap (sec. 12/31/09
42(h)(3)(I))
12. Election to substitute grants to States for low-income 12/31/09
housing projects for lowincome housing credit
allocation (sec. 42(i)(9) and sec. 1602 of Pub. L. No.
111-5)
13. Credit for electricity produced at open-loop biomass 12/31/09
facilities placed in service before October 22, 2004
(sec. 45(b)(4)(B)(ii))
14. Placed-in-service date for facilities eligible to 12/31/09 10
claim the refined coal production credit (sec. 45(d))
15. Indian employment tax credit (sec. 45A(f)) 12/31/09
16. New markets tax credit (sec. 45D(f)(1)) 12/31/09
17. Credit for construction of new energy efficient homes 12/31/09
(sec. 45L(g))
18. Credit for certain expenditures for maintaining 12/31/09
railroad tracks (sec. 45G(f))
19. Period for incurring qualified expenditures for 12/31/09
purposes of credit for production of low sulfur diesel
fuel for small refiners in compliance with EPA sulfur
regulations for small refiners (sec. 45H(c)(4))
20. Placed-in-service date for eligibility for tax credit 12/31/09
for the production of coke or coke gas (sec.
45K(g)(1))
21. Mine rescue team training credit (sec. 45N) 12/31/09
22. Employer wage credit for activated military reservists 12/31/09
(sec. 45P)
23. Issuance of clean renewable energy bonds (CREBs) (sec. 12/31/09
54M)
24. Increased AMT exemption amount (sec. 55(d)(1)) 12/31/09
25. Deduction for certain expenses of elementary and 12/31/09
secondary school teachers (sec. 62(a)(2)(D))
26. Additional standard deduction for state and local real 12/31/09
property taxes (sec. 63(c)(7))
27. Exclusion of unemployment compensation benefits from 12/31/09
gross income (sec. 85(c))
28. Suspension of applicable high-yield debt obligation 12/31/09
rules for debt issued in an exchange or as a result of
modification (sec. 163(e)(5))
29. Deduction of State and local general sales taxes (sec. 12/31/09
164(b)(5))
30. Deduction for State sales tax and excise tax on the 12/31/09
purchase of motor vehicles (sec. 164(b)(6)(G))
31. Five-year depreciation for farming business machinery 12/31/09
and equipment (sec. 168(e)(3)(B)(vii))
32. 15-year straight-line cost recovery for qualified 12/31/09
leasehold improvements, qualified restaurant buildings
and improvements, and qualified retail improvements
(sec. 168(e)(3)(E)(iv) , (v), and (ix))
33. Seven-year recovery period for motorsports 12/31/09
entertainment complexes (sec. 168(i)(15))
34. Accelerated depreciation for business property on an 12/31/09
Indian reservation (sec. 168(j)(8))
35. Additional first-year depreciation for 50 percent of 12/31/09 11
basis of qualified property (sec. 168(k)(2))
36. Election to accelerate AMT and research credits in 12/31/09 12
lieu of additional first-year depreciation (sec.
168(k)(4))
37. Encouragement of contributions of capital gain real 12/31/09
property made for conservation purposes (secs.
170(b)(1)(E) and 170(b)(2)(B))
38. Enhanced charitable deduction for contributions of 12/31/09
food inventory (sec. 170(e)(3)(C))
39. Enhanced charitable deduction for contributions of 12/31/09
book inventories to public schools (sec. 170(e)(3)(D))
40. Enhanced deduction for corporate contributions of 12/31/09
computer equipment for educational purposes (sec.
170(e)(6)(G))
41. Increase in expensing to $250,000/$800,000 (sec. 12/31/09
179(b)(7)) 13
42. Election to expense advanced mine safety equipment 12/31/09
(sec. 179E)
43. Expensing of capital costs incurred by small refiners 12/31/09
for production of diesel fuel in compliance with EPA
sulfur regulations for small refiners (sec. 179B(a))
44. Special expensing rules for certain film and 12/31/09
television productions (sec. 181(f))
45. Expensing of "brownfields" environmental remediation 12/31/09
costs (sec. 198(h))
46. Deduction allowable with respect to income 12/31/09
attributable to domestic production activities in
Puerto Rico (sec. 199(d)(7))
47. Allowance of additional IRA contributions in certain 12/31/09
bankruptcy cases (sec. 219(b)(5)(C))
48. Above-the-line deduction for qualified tuition and 12/31/09
related expenses (sec. 222(e))
49. Waiver of minimum required distribution rules for IRAs 12/31/09 14
and defined contribution plans (sec. 401(a)(9)(H))
50. Tax-free distributions from individual retirement 12/31/09
plans for charitable purposes (sec. 408(d)(8))
51. Special rule for sales or dispositions to implement 12/31/09
FERC or State electric restructuring policy (sec.
451(i))
52. Modification of tax treatment of certain payments to 12/31/09
controlling exempt organizations (sec.
512(b)(13)(E)(iv))
53. Exclusion of gain or loss on sale or exchange of 12/31/09
certain brownfield sites from unrelated business
taxable income (sec. 512(b)(19)(K))
54. Suspension of 100 percent-of-net-income limitation on 12/31/09
percentage depletion for oil and gas from marginal
wells (sec. 613A(c)(6)(H))
55. Treatment of certain dividends and assets of regulated 12/31/09
investment companies (secs. 871(k)(1)(C) and (2)(C),
and 881(e)(1)(A) and 2))
56. RIC qualified investment entity treatment under FIRPTA 12/31/09
(sec. 897(h)(4))
57. Exceptions under subpart F for active financing income 12/31/09
(secs. 953(e)(10) and 954(h)(9))
58. Look-through treatment of payments between related 12/31/09
controlled foreign corporations under the foreign
personal holding company rules (sec. 954(c)(6))
59. Basis adjustment to stock of S corporations making 12/31/09
charitable contributions of property (sec. 1367(a))
60. Empowerment zone tax incentives: 15
a. Increased exclusion of gain (attributable to 12/31/09
periods before 1/1/15) on the sale of qualified
business stock of an empowerment zone business
(secs. 1202(a)(2)(C) and 1391(d)(1)(A)(i))
b. Empowerment zone tax-exempt bonds (secs. 1394 and 12/31/09
1391(d)(1)(A)(i))
c. Empowerment zone employment credit (secs. 1396 and 12/31/09
1391(d)(1)(A)(i))
d. Increased expensing under sec. 179 (secs. 1397A 12/31/09
and 1391(d)(1)(A)(i))
e. Nonrecognition of gain on rollover of empowerment 12/31/09
zone investments (secs. 1397B and
1391(d)(1)(A)(i))
61. Tax incentives for investment in the District of
Columbia:
a. Designation of D.C. enterprise zone, employment 12/31/09
tax credit, and additional expensing (sec.
1400(f)(1))
b. Tax-exempt D.C. empowerment zone bonds (sec. 12/31/09
1400A(b))
c. Acquisition date for eligibility for zeropercent 12/31/09
capital gains rate for investment in D.C. for
gains through 12/31/14 (secs. 1400B(b)(2),
(b)(3)(A), (b)(4)(A)(i), (b)(4)(B)(i)(I), (e)(2),
and (g)(2))
d. Tax credit for first-time D.C. homebuyers (sec. 12/31/09
1400C(i))
62. Renewal community tax incentives:
a. Acquisition date for eligibility for zeropercent 12/31/09
capital gains rate for investment in renewal
communities for gains through 12/31/14 (secs.
1400F(b)(2)(A)(i), (3)(A), and (4)(A)(i),
1400F(c)(2), and 1400F(d))
b. Employment credit (secs. 1400H and 12/31/09
1391(d)(1)(A)(i))
c. Commercial revitalization deduction (sec. 12/31/09
1400I(g))
d. Increased expensing under sec. 179 (sec. 12/31/09
1400J(b)(1)(A))
63. Definition of gross estate for regulated investment 12/31/09
company stock owned by a nonresident not a citizen of
the United States (sec. 2105(d))
64. FUTA surtax of 0.2 percent (sec. 3301(1)) 12/31/09
65. Incentives for alternative fuel and alternative fuel
mixtures (excluding liquefied hydrogen): 16
a. Excise tax credits and outlay payments for 12/31/09
alternative fuel (secs. 6426(d)(5) and
6427(e)(6)(C))
b. Excise tax credits and outlay payments for 12/31/09
alternative fuel mixtures (secs. 6426(e)(3) and
6427(e)(6)(C))
66. Sixty-five percent subsidy for payment of COBRA health 12/31/09 17
care coverage continuation premiums (sec. 6432 and
sec. 3001 of Pub. L. No. 111-5)
67. Reduced estimated tax payments for small businesses 12/31/09
(sec. 6654(d)(1)(D))
68. Temporary increase in limit on cover over of rum 12/31/09
excise tax revenues (from $10.50 to $13.25 per proof
gallon) to Puerto Rico and the Virgin Islands (sec.
7652(f))
69. American Samoa economic development credit (sec. 119 12/31/09
of Pub. L. No. 109-432)
70. Use of single-employer defined benefit plan's 12/31/09 18
prior-year adjusted funding target attainment
percentage to determine application of limitation on
benefit accruals (sec. 203 of Pub. L. No. 110 458)
71. Delay of designation of multiemployer plans as in 12/31/09 19
endangered or critical status (sec. 204 0f Pub. L. No.
110- 458)
72. Extension of funding improvement and rehabilitation 12/31/09 20
periods for certain multiemployer pension plans (sec.
205 of Pub. L. No. 110-458)
73. Refundable credit for government retirees (sec. 2202 12/31/09
of Pub. L. No. 111-5)
5 The 4.3-cents-per-gallon rate is permanent.
6 The provision expires on the last day of the taxpayer's first taxable year
beginning after May 22, 2008, and before May 23, 2009.
7 The provision expires for sales after the last day of the first taxable year
beginning after May 22, 2008, and before May 23, 2009.
8 The time for amending the return expires on the later of the three-year period
for filing the return for the year of the relief grant or one year from the July
30, 2008 date of enactment.
9 The Economic Growth and Tax Relief Reconciliation Act of 2001 (Pub. L. No.
107-16, June 7, 2001) ("EGTRRA") made this provision permanent with respect to the
child tax credit and the adoption credit. The provisions of EGTRRA generally sunset
after 2010; see Part I.F., below. The allowance of the saver's credit, residential
energy efficient property credit, the credit for certain plug-in electric vehicles
(sec. 30), the credit for alternative motor vehicles, and the credit for new
qualified plug-in electric drive motor vehicles (sec. 30D) against regular tax and
minimum tax is permanent.
10 The placed-in-service date for Indian coal facilities is December 31, 2008.
11 December 31, 2010, for certain longer-lived and transportation property.
12 December 31, 2010, for certain longer-lived and transportation property.
13 The increase in expensing to $125,000/$500,000 expires December 31, 2010.
14 The waiver also applies to minimum required distributions for 2009 required to
be made by April 1, 2010.
15 The empowerment zone tax incentives may expire earlier than December 31, 2009,
with respect to an empowerment zone if a State or local government provided for an
expiration date in the nomination of an empowerment zone or the appropriate
Secretary revokes an empowerment zone's designation.
16 The related provisions for hydrogen fuel expire September 30, 2014.
17 The provision does not apply to involuntary terminations that occur after
December 31, 2009.
18 The provision applies to the first plan year that begins during the period
beginning on October 1, 2008 and ending on September 30, 2009.
19 The provision applies to the first plan year that begins during the period
beginning on October 1, 2008 and ending on September 30, 2009.
20 The provision applies to plan years beginning during 2008 and 2009.
C. Provisions Expiring in 2010
____________________________________________________________________________________
Provision (Code section) Expiration Date
____________________________________________________________________________________
1. Provisions of the Economic Growth and Tax Relief 12/31/10
Reconciliation Act of 2001 21 (Pub. L. No. 107-16)
2. Reduced capital gain rates (secs. 1(h) and 1445(e)(6) 12/31/10
and sec. 102 of Pub. L. No. 109-222)
3. Dividends taxed at capital gain rates (sec. 1(h) and 12/31/10
sec. 102 of Pub. L. No. 109222))
4. Refundable child credit floor amount (sec. 24(d)) 12/31/10
5. American Opportunity Tax credit (sec. 25A(i)) 12/31/10
6. Credit for certain nonbusiness energy property (sec. 12/31/10
25C(g))
7. Alternative motor vehicle credit for advanced lean 12/31/10 22
burn technology motor vehicles and qualified hybrid
motor vehicles that are passenger automobiles or light
trucks (sec. 30B(k)(2))
8. Alternative motor vehicle credit for qualified 12/31/10
alternative fuel vehicles (sec. 30B(k)(4))
9. Alternative fuel vehicle refueling property 12/31/10
(non-hydrogen refueling property) (sec. 30C(g)(2)) 23
10. Alternative fuel refueling property - increase in 12/31/10
credit rate and credit cap (sec. 30C(e)(6))
11. Earned income tax credit:
a. credit percentage of 45 percent for three or more 12/31/10
qualifying children (sec. 32(b)(3)(A))
b. phaseout threshold for marriage penalty relief 12/31/10
(sec. 32(b)(3)(B))
12. Enhanced credit for health insurance costs of eligible 12/31/10
individuals (sec 35(a))
13. Making work pay credit (sec. 36A) 12/31/10
14. Incentives for alcohol fuels
a. Alcohol fuels income tax credit (alcohol fuel, 12/31/10 24
alcohol used to produce a qualified mixture, and
small ethanol producers) (sec. 40(e)(1)(A),
(h)(1), and (h)(2))
b. Alcohol fuel mixture excise tax credit and outlay 12/31/10
payments (secs. 6426(b)(5) and 6427(e)(5)(A))
15. Credit for energy efficient appliances (sec. 45M(b)) 12/31/10
16. Grants for specified energy property in lieu of tax 12/31/10
credits (sec. 48(d) and sec. 1603 of Pub. L. No.
111-5)
17. Election of investment credit in lieu of production 12/31/10
tax credit (sec. 48(a)(5))
18. Work opportunity tax credit targeted group status for 12//31/10
unemployed veterans and disconnected youth (sec.
51(d)(14))
19. Qualified zone academy bonds - allocations of bond 12/31/10
authority 4(sec. 54E(c)(1))
20. School construction bonds - allocation of bond 12/31/10
authority (sec.54F(c))
21. Authority to issue Build America Bonds (secs. 12/31/10
54AA(d)(1)(B) and 6431(a))
22. Modification of AMT limitations on taxexempt bonds 12/31/10
(secs. 57(a)(5)(C)(vi) and 56(g)(4)(B)(iv))
23. Deferral and ratable inclusion of income from business 12/31/10
debt discharged by reacquisition (sec. 108(i))
24. Exclusion from income for benefits provided to 12/31/10
volunteer firefighters and emergency medical
responders (sec. 139B)
25. Parity for exclusion for employer-provided mass 12/31/10
transit and parking benefits (sec. 132(f))
26. Qualified mortgage bonds for refinancing of subprime 12/31/10 25
loans (143(k)(12))
27. Expansion of availability of industrial development 12/31/10
bonds to facilities manufacturing intangible property
(sec. 144(a)(12)(c))
28. Volume cap increase and set-aside for private activity 12/31/10
bonds for housing (sec. 146(d))
29. Bonds guaranteed by Federal Home Loan banks eligible 12/31/10
for treatment as tax-exempt bonds (sec.
149(b)(3)(a)(iv))
30. Premiums for mortgage insurance deductible as interest 12/31/10
that is qualified residence interest (sec. 163(h)(3))
31. Five-year amortization of music and music copyrights 12/31/10
(sec. 167(g)(8))
32. Natural gas distribution lines treated as 15-year 12/31/10
property (sec. 168(e)(3)(E)(viii))
33. Increase in expensing to $125,000/500,000 (indexed) 12/31/10
(sec. 179(b)(1) and (2), (c)(2), and (d)(1)(A)(ii)) 26
34. Modification of small issuer exception to tax-exempt 12/31/10
interest allocation rules for financial institutions
(sec. 265(b)(3)(G))
35. De minimis safe harbor exception for taxexempt 12/31/10
interest expense of financial institutions (secs.
265(b)(7) and 291(e)(1)(B)(iv))
36. Computer technology and equipment allowed as a 12/31/10
qualified higher education expense for section 529
accounts (sec. 529(e)(3)(A)(iii))
37. Alaska Native Settlement Trusts (sec. 646) 12/31/10
38. Special rules for qualified small business stock (sec. 12/31/10
1202(a)(3))
39. Reduction in S corporation recognition period for 12/31/10
built-in gains tax (sec. 1374(d)(7))
40. Authority to issue Recovery Zone economic development 12/31/10
bonds and facility bonds (secs. 1400U-2(b) and
1400U-3(b))
21 The sunset applies to all EGTRRA provisions otherwise in effect on the
expiration date. Pub. L. No. 107-358 repealed the sunset contained in EGTRRA with
respect to the exclusion from Federal income tax for restitution received by
victims of the Nazi Regime. The Pension Protection Act of 2006, Pub. L. No.
109-280, repealed the sunset contained in EGTRRA with respect to the pension and
IRA provisions contained in subtitles A through F of title VI of EGTRRA and with
respect to the qualified tuition program provisions in section 402 of EGTRRA.
22 In addition to this expiration date, the provision begins to phase out over a
one-year period beginning on the date the manufacturer has manufactured and sold at
least 60,000 qualified vehicles.
23 The related provision of section 30C for hydrogen refueling property expires
December 31, 2014.
24 The income tax credit expires earlier if the tax rate on gasoline and other
motor fuels drops to 4.3 cents per gallon for any period before January 1, 2011.
The rates are currently scheduled to be reduced October 1, 2011. See sections
40(e)(1)(B) and 4081(d)(1).
25 Qualified subprime loans cannot be refinanced by bonds issued after December 31,
2010.
26 The increase in expensing to $250,000/$800,000 expires December 31, 2009.
D. Provisions Expiring in 2011
____________________________________________________________________________________
Provision (Code section) Expiration Date
____________________________________________________________________________________
1. Work opportunity tax credit (sec. 51(c)(4)) 8/31/11
2. Leaking Underground Storage Tank Trust Fund financing 9/30/11
rate (secs. 4041(d)(4) and 4081(d)(3))
3. Highway Trust Fund excise tax rates:
a. All but 4.3 cents per gallon of the taxes on 9/30/11
highway gasoline, diesel fuel, kerosene, and
alternative fuels (secs. 4041(a) and 4081(d)(1))
b. Reduced rate of tax on partially exempt methanol 9/30/11
or ethanol fuel (sec. 4041(m)) 27
c. Tax on retail sale of heavy highway vehicles (sec. 9/30/11
4051(c))
d. Tax on heavy truck tires (sec. 4071(d)) 9/30/11
e. Annual use tax on heavy highway vehicles (sec. 9/30/11
4481(f))
4. Credit for electric drive motorcycles, threewheeled 12/31/11
vehicles, and low-speed vehicles (sec. 30(f))
5. Conversion credit for plug-in electric vehicles (sec. 12/31/11
30B(i)(4))
6. Treatment of military basic housing allowances under 12/31/11
low-income housing credit (sec. 142(d))
7. Disclosure of prisoner return information to the 12/31/11
Federal Bureau of Prisons (sec. 6103(k)(10))
27 After September 30, 2011, in the case of fuel none of the alcohol in which
consists of ethanol, the rate is 2.15 cents-per-gallon. In any other case, the rate
is 4.3 cents-per-gallon.
E. Provisions Expiring in 2012
____________________________________________________________________________________
Provision (Code section) Expiration Date
____________________________________________________________________________________
1. Qualified green buildings and sustainable design 9/30/12
project bonds (sec. 142(l)(8))
2. Cellulosic biofuel producer credit (sec. 40(b)(6)(H)) 12/31/12
3. Placed-in-service date for wind facilities eligible to 12/31/12 28
claim electricity production credit (sec. 45(d))
4. Credit for production of Indian coal (sec. 12/31/12 29
45(e)(10)(A)(i))
5. Election to claim the energy credit in lieu of the 12/31/12 30
electricity production credit for wind facilities
(sec. 48(a)(5))
6. Credit for prior year minimum tax liability made 12/31/12
refundable after period of years (sec. 53(e))
7. Discharge of indebtedness on principal residence 12/31/12
excluded from gross income of individuals (sec.
108(a)(1)(E))
8. Special depreciation allowance for cellulosic biofuel 12/31/12
plant property (sec. 168(l))
28 The placed-in-service date for renewable power facilities other than wind
facilities is December 31, 2013.
29 The placed-in-service date for Indian coal facilities is December 31, 2008.
30 The expiration date with respect to renewable power facilities other than wind
facilities is December 31, 2013.
F. Provisions Expiring in 2013
____________________________________________________________________________________
Provision (Code section) Expiration Date
____________________________________________________________________________________
1. Determination of low-income housing credit rate (sec. 12/31/13
42(b)(2))
2. Placed-in-service date for facilities (other than wind 12/31/13 31
facilities) eligible to claim the electricity
production credit (sec. 45(d))
3. Election to claim the energy credit in lieu of the 12/31/13 32
electricity production credit for renewable power
facilities other than wind facilities (sec. 48(a)(5))
4. Three-year depreciation for race horses two years old 12/31/13
or younger (sec. 168(e)(3))
5. Placed-in-service date for partial expensing of 12/31/13
certain refinery property (sec. 179C(c)(1)) 33
6. Energy efficient commercial buildings deduction (sec. 12/31/13
179D(h))
7. Transfer of excess pension assets to retiree health 12/31/13
accounts (sec. 420(b)(5))
31 The placed-in-service date for wind facilities is December 31, 2012.
32 The expiration date with respect to wind facilities is December 31, 2012.
33 The commencement of construction date for self-constructed property is December
31, 2009.
G. Provisions Expiring in 2014
____________________________________________________________________________________
Provision (Code section) Expiration Date
____________________________________________________________________________________
1. Incentives for alternative fuel and alternative fuel
mixtures involving liquefied hydrogen:
a. Excise tax credits and outlay payments for 9/30/14
liquefied hydrogen (secs. 6426(d)(5) and
6427(e)(6)(D)) 34
b. Excise tax credits and outlay payments for 9/30/14
liquefied hydrogen fuel mixtures (secs. 6426(e)(3)
and 6427(e)(6)(D))
2. Alternative motor vehicle credit for qualified fuel 12/31/14
cell motor vehicles (sec. 30B(k)(1))
3. Alternative fuel refueling property (hydrogen 12/31/14
refueling property) (sec. 30C(g)(1)) 35
4. Automatic amortization extension for multiemployer 12/31/14
defined benefit pension plans (sec. 431(d)(1)(C)) 36
5. Additional funding rules for multiemployer defined 12/31/14
benefit pension plans in endangered or critical status
(sec. 432, and sec. 221(c) of Pub. L. No. 109-280) 37
6. Deemed approval of adoption, use or cessation of 12/31/14
shortfall funding method for multiemployer defined
benefit pension plans (secs. 201(b) and 221(c) of Pub.
L. No. 109-280)
34 Related provisions for non-hydrogen fuel expire December 31, 2009.
35 The related provision of section 30C for non-hydrogen refueling property expires
December 31, 2010.
36 A corresponding provision is contained in section 304(d)(1)(C) of ERISA that
also expires on December 31, 2014.
37 A corresponding provision is contained in section 305 of ERISA that also expires
on December 31, 2014.
H. Provisions Expiring in 2016
____________________________________________________________________________________
Provision (Code section) Expiration Date
____________________________________________________________________________________
1. Credit for residential energy property (sec. 25D(g)) 12/31/16
2. Increased credit for business solar energy property 12/31/16
(sec. 48(a)(2)(A)(i)(II))
3. Credit for hybrid solar lighting systems (sec. 12/31/16
48(a)(3)(A)(ii))
4. Energy credit for geothermal heat pump property, small 12/31/16
wind property, and combined heat and power property
(secs. 48(a)(3)(A)(vii), 48(c)(4)(D), and
48(c)(3)(A)(iv))
5. Credit for business installation of qualified fuel 12/31/16
cells and stationary microturbine power plants (sec.
48(c)(1)(D) and (c)(2)(D))
I. Provisions Expiring in 2017
____________________________________________________________________________________
Provision (Code section) Expiration Date
____________________________________________________________________________________
1. Oil Spill Liability Trust Fund financing rate (sec. 12/31/17
4611(f)(2))
J. Provisions Expiring in 2018
____________________________________________________________________________________
Provision (Code section) Expiration Date
____________________________________________________________________________________
1. Increase in amount of excise tax on coal (sec. 12/31/18 38
4121(e)(2))
38 The increased amount of the excise tax on coal terminates the earlier of this
date or the first December 31 as of which there is no balance of repayable advances
made to the Black Lung Disability Trust Fund and no unpaid interest on such
advances.
K. Provisions Expiring in 2020
____________________________________________________________________________________
Provision (Code section) Expiration Date
____________________________________________________________________________________
1. Placed-in-service date for eligibility for the credit 12/31/20
for production from certified advanced nuclear power
facilities (sec. 45J(d)(1)(B))
II. TEMPORARY DISASTER RELIEF FEDERAL TAX PROVISIONS EXPIRING 2008-2013
A. Temporary Disaster Relief Federal Tax Provisions that Expired in 2008
____________________________________________________________________________________
Provision (Code section) Expiration Date
____________________________________________________________________________________
1. Special rule for applying income tests in 12/31/08
non-metropolitan areas under low-income housing credit
for the Gulf Opportunity Zone, the Rita GO Zone, and
the Wilma GO Zone (sec. 1400N(c)(4)) 39
2. Additional depreciation for certain Gulf Opportunity 12/31/08 40
Zone property that is nonresidential real property or
residential rental property (sec. 1400N(d)(2))
3. Increase in expensing under section 179 for certain 12/31/08
Gulf Opportunity Zone property (secs. 1400N(e))
4. Tax relief for Kiowa County, Kansas, and surrounding 12/31/08
area by reason of severe storms and tornados beginning
May 4, 2007 (sec. 15345 of Pub. L. No. 11-246)
a. additional depreciation allowance for property
other than nonresidential real property or
residential rental property 41
b. increased expensing
c. use of retirement funds
5. Tax relief for areas damaged by 2008 Midwestern severe 12/31/08
storms, tornados and flooding (sec. 702 of Division C
of Pub. L. No. 110-343)
a. employee retention credit
b. suspension of limitation on charitable
contributions for disaster relief
c. suspension of limitation on personal casualty loss
d. look-back rule for determining earned income
credit and refundable child credit
e. increase in standard mileage rate for charitable
use of a vehicle
f. exclusion for mileage reimbursement to charitable
volunteers
39 The low-income housing credit additional housing credit dollar amount for the
Gulf Opportunity Zone and certain programmatic expansions for the Gulf Opportunity
Zone, the Rita GO Zone, and the Wilma GO Zone expire December 31, 2010.
40 Certain Gulf Opportunity Zone property located in counties with greater than 60
percent housing damage is eligible for an extended placed-in-service date of
December 31, 2010, subject to a progress expenditures limit.
41 The placed-in-service date is December 31, 2009, for nonresidential real
property and residential rental property.
B. Temporary Disaster Relief Federal Tax Provisions Expiring in 2009
____________________________________________________________________________________
Provision (Code section) Expiration Date
____________________________________________________________________________________
1. Housing tax relief for individuals for areas damaged 5/01/09
by 2008 Midwestern severe storms, tornados and
flooding (sec. 702 of Division C of Pub. L. No.
110-343)
2. Work opportunity tax credit with respect to certain 8/27/09
individuals affected by Hurricane Katrina for
employers inside disaster areas (sec. 201 of Pub. L.
No. 109-73)
3. National disaster relief :
a. Losses attributable to Federally declared 12/31/09
disasters (sec. 165(h))
b. Expensing of qualified disaster expenses (sec. 12/31/09
198A)
c. Net operating losses attributable to Federally 12/31/09
declared disasters (sec. 172(b)(1)(J))
d. Waiver of certain mortgage revenue bond 12/31/09
requirements following Federally declared
disasters (sec 143(k))
e. Special depreciation allowance for qualified 12/31/09
disaster property (sec. 168(n))
f. Increased expensing for qualified disaster 12/31/09
assistance property (sec. 179(e))
4. New York Liberty Zone: special depreciation allowance 12/31/09
for nonresidential real property and residential
rental property (sec. 1400L(b)(2)(A))
5. New York Liberty Zone: tax-exempt bond financing (sec. 12/31/09
1400L(d)(2)(D))
6. Increase in rehabilitation credit for structures 12/31/09
located in the Gulf Opportunity Zone (sec. 1400N(h))
7. Tax relief for Kiowa County, Kansas, and surrounding 12/31/09
area by reason of severe storms and tornados beginning
May 4, 2007 (sec. 15345 of Pub. L. No. 11-246)
a. additional depreciation allowance for
nonresidential real property and residential
rental property 42
b. expensing for demolition and clean-up costs
c. net operating losses
42 The placed-in-service date is December 31, 2008, for property other than
nonresidential real property and residential rental property.
C. Temporary Disaster Relief Federal Tax Provisions Expiring in 2010
____________________________________________________________________________________
Provision (Code section) Expiration Date
____________________________________________________________________________________
1. Tax-exempt bond financing for the Gulf Opportunity 12/31/10
Zone (sec. 1400N(a))
2. Advance refunding of certain tax-exempt bonds (sec. 12/31/10
1400N(b))
3. Low-income housing credit additional housing credit 12/31/10
dollar amount for the Gulf Opportunity Zone and
certain programmatic expansions for the Gulf
Opportunity Zone, the Rita GO Zone, and the Wilma GO
Zone (sec. 1400N(c))
4. Placed-in-service date for additional depreciation for 12/31/10 43
specified Gulf Opportunity Zone extension property
(sec. 1400N(d)(6))
5. Treatment of residences located in the Gulf 12/31/10
Opportunity Zone, the Rita Go Zone, or the Wilma Go
Zone as targeted area residences for purposes of
mortgage revenue bond rules (sec. 1400T)
6. Waiver of first-time homebuyer rule for qualified 12/31/10
Hurricane Katrina residences financed with mortgage
revenue bonds (sec. 104 of Pub. L. No. 109-135)
7. Tax relief for areas damaged by 2008 Midwestern severe 12/31/10
storms, tornados and flooding (sec. 702 of Division C
of Pub. L. No. 110-343)
a. low-income housing tax credit relief
b. expensing for demolition and clean-up costs
c. extension of expensing for environmental
remediation costs
d. special rules for mortgage revenue bonds
8. Low-income housing tax relief for areas damaged by 12/31/10
Hurricane Ike in 2008 (sec. 704 of Division C of Pub.
L. No. 110-343)
43 Certain personal property may qualify if placed in service within 90 days
following December 31, 2010.
D. Temporary Disaster Relief Federal Tax Provisions Expiring in 2011
____________________________________________________________________________________
Provision (Code section) Expiration Date
____________________________________________________________________________________
1. Tax relief for areas damaged by 2008 Midwestern severe 12/31/11
storms, tornados and flooding (sec. 702 of Division C
of Pub. L. No. 110-343)
a. increase in rehabilitation credit
b. treatment of net operating losses attributable to
disaster losses
E. Temporary Disaster Relief Federal Tax Provisions Expiring in 2012
____________________________________________________________________________________
Provision (Code section) Expiration Date
____________________________________________________________________________________
1. Tax-exempt bond financing rules for areas damaged by 12/31/12
2008 Midwestern severe storms, tornados and flooding
(sec. 702 of Division C of Pub. L. No. 110-343)
2. Tax-exempt bond financing rules for areas damaged by 12/31/12
Hurricane Ike in 2008 (sec. 704 of Division C of Pub.
L. No. 110-343)
F. Temporary Disaster Relief Federal Tax Provisions Expiring in 2013
____________________________________________________________________________________
Provision (Code section) Expiration Date
____________________________________________________________________________________
1. Extension of replacement period for nonrecognition of 12/31/13
gain for areas damaged by 2008 Midwestern severe
storms, tornados and flooding (sec. 702 of Division C
of Pub. L. No. 110-343)
1 This document may be cited as follows: Joint Committee on Taxation, List of Expiring Federal Tax Provisions, 2008-2020 (JCX-20-09), March 9, 2009. This document can be found on the Joint Committee on Taxation website at www.jct.gov .
2 This document takes into account Federal tax legislation enacted through 2008 and the American Recovery and Reinvestment Tax Act of 2009, Pub. L. No. 111-5, enacted February 17, 2009.
3 Not including temporary disaster relief Federal tax provisions, which are listed in Part II.
NON
Tuesday, March 10, 2009
Monday, March 9, 2009
Substance over form - tax motivated transaction. It is well established that the tax consequences of transactions are governed by substance rather than form. Frank Lyon Co. v. United States [78-1 USTC ¶9370], 435 U.S. 561, 573 (1978). When taxpayers resort to the expedient of drafting documents to characterize transactions in a manner which is contrary to objective economic realities and which has no significance beyond expected tax benefits, the particular forms they employ are disregarded for tax purposes. Id. at 572-573; Helvering v. F. & R. Lazarus & Co. [39-2 USTC ¶9793], 308 U.S. 252, 255 (1939). If a transaction is devoid of economic substance, it is not recognized for Federal taxation purposes. Gregory v. Helvering [35-1 USTC ¶9043], 293 U.S. 465 (1935).
Determining the economic substance of a transaction requires an analysis of several objective factors: (1) Whether the stated price for the property was within reasonable range of its value; (2) whether there was any intent that the purchase price would be paid; (3) the extent of the taxpayer's control over the property; (4) whether the taxpayer would receive any benefit from the disposition of the property; (5) whether the benefits and burdens of ownership passed; (6) the presence or absence of arm's-length negotiations; (7) the structure of the financing; (8) the degree of adherence to contractual terms; and (9) the reasonableness of the income and residual value projections. Levy v. Commissioner [Dec. 45,152], 91 T.C. 838, 854 (1988); Rose v. Commissioner [89-1 USTC ¶9191], 88 T.C. 386, 410 (1987), affd. [89-1 USTC ¶9191] 868 F.2d 851 (6th Cir. 1989).
River City Ranches #1 Ltd., Jeffry Bergamyer, Tax Matters Partner, River City Ranches #2 Ltd., Jeffry Bergamyer, Tax Matters Partner, River City Ranches #3 Ltd., Jeffry Bergamyer, Tax Matters Partner, River City Ranches #4 Ltd., Jeffry Bergamyer, Tax Matters Partner, River City Ranches #5 Ltd., Jeffry Bergamyer, Tax Matters Partner, River City Ranches #6 Ltd., Jeffry Bergamyer, Tax Matters Partner, et al., v. Commissioner.
Dkt. Nos. 787-91 , 4876-94 , 9550-94 , 9552-94 , 9554-94 , 13595-94 , 13597-94 , 13599-94 , 14038-96 , TC Memo. 2007-171, July 2, 2007.
On remand from CA-9, 2005-1 USTC ¶50,239. [Appealable, barring stipulation to the contrary, to CA-9. --CCH.]
--
The period of limitations on assessment had not expired when notices of final partnership administrative adjustment (FPAAs) were issued. Consents to extend the periods of limitations were invalid because the tax matters partner (TMP) signed them while disabled by conflict of interests known to the IRS. However, the six-year period of limitations on assessment under Code Sec. 6229(c)(1) applied because of fraud. The record established that the TMP knew the partnership returns contained false and fraudulent deductions and that he intended income tax to be evaded at the partner level. On remand from CA-9, 2005-1 USTC ¶50,239. -
.
RIVER CITY RANCHES #1 LTD., JEFFRY BERGAMYER, TAX MATTERS PARTNER, RIVER CITY RANCHES #2 LTD., JEFFRY BERGAMYER, TAX MATTERS PARTNER, RIVER CITY RANCHES #3 LTD., JEFFRY BERGAMYER, TAX MATTERS PARTNER, RIVER CITY RANCHES #4 LTD., JEFFRY BERGAMYER, TAX MATTERS PARTNER, RIVER CITY RANCHES #5 LTD., JEFFRY BERGAMYER, TAX MATTERS PARTNER, RIVER CITY RANCHES #6 LTD., JEFFRY BERGAMYER, TAX MATTERS PARTNER, ET AL.,1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent*
SUPPLEMENTAL MEMORANDUM FINDINGS OF FACT AND OPINION
DAWSON, Judge: These cases are now before the Court on remand from the U.S. Court of Appeals for the Ninth Circuit. River City Ranches #1 Ltd. v. Commissioner [2005-1 USTC ¶50,239], 401 F.3d 1136 (9th Cir. 2005) (River City Ranches II), affg. in part, revg. in part and remanding [Dec. 55,165(M)] T.C. Memo. 2003-150 (River City Ranches I). The Court of Appeals concluded that we erred in holding that we lacked jurisdiction to make findings concerning the character of the partnerships' transactions for purposes of the penalty-interest provisions of section 6621(c) 2 and mandated that we make such findings. The Court of Appeals also directed us to permit petitioners additional discovery limited to whether Walter J. Hoyt III (Hoyt), then the tax matters partner (TMP), executed consents to extend the limitations periods while disabled by conflicts between his own interests and those of his partners, and for any necessary retrial following such discovery.
Pursuant to the remand, petitioners deposed three present and/or former employees of the Internal Revenue Service (IRS), respondent made available to petitioners his entire store of documents that had not been produced earlier, and the Court held a second trial.
OPINION
Issue 1. Whether Partnership Transactions and the Sheep Partnerships Lacked Economic Substance and Were Shams, and Whether There Were Partnership Asset Overvaluations and Basis Overvaluations
The Court of Appeals reversed our holding in River City Ranches I that we lacked jurisdiction to make factual findings as to whether the partnerships' transactions were tax-motivated for purposes of imposing section 6621(c) penalty-interest against investor-partners. Thus, the Court of Appeals remanded for us to make such findings. We have done so in our supplemental factual findings set forth herein.
We point out that many of the key facts have been stipulated by the parties and are so found. Furthermore, our prior opinion in River City Ranches #4, J.V. v. Commissioner [Dec. 53,432(M)], T.C. Memo. 1999-209, supports the conclusion that the activities of these partnerships lacked economic substance and were shams for each of the years of their existence. The findings in that case are equally applicable to these cases because the facts and evidence with respect to these partnerships' breeding activities are the same as the facts and evidence considered there. While the proceeding in River City Ranches #4, J.V. involved only three of the sheep breeding partnerships, the Court considered evidence pertaining to all of the sheep partnerships. And all the sheep breeding partnerships were operated in the same manner.
Section 6621(c) provides for an increased rate of interest with respect to any substantial underpayment of tax in any taxable year attributable to a tax-motivated transaction. Section 6621(c)(3)(A) generally lists the types of transactions which are considered "tax-motivated transactions". A tax-motivated transaction includes any valuation overstatement within the meaning of section 6659(c), and such a valuation overstatement exists, among other situations, if the adjusted basis of property claimed on any return exceeds 150 percent of the correct amount of basis. Secs. 6621(c)(3)(A)(i), 6659(c). A tax-motivated transaction further includes "any sham or fraudulent transaction." Sec. 6621(c)(3)(A)(v).
It is well established that the tax consequences of transactions are governed by substance rather than form. Frank Lyon Co. v. United States [78-1 USTC ¶9370], 435 U.S. 561, 573 (1978). When taxpayers resort to the expedient of drafting documents to characterize transactions in a manner which is contrary to objective economic realities and which has no significance beyond expected tax benefits, the particular forms they employ are disregarded for tax purposes. Id. at 572-573; Helvering v. F. & R. Lazarus & Co. [39-2 USTC ¶9793], 308 U.S. 252, 255 (1939). If a transaction is devoid of economic substance, it is not recognized for Federal taxation purposes. Gregory v. Helvering [35-1 USTC ¶9043], 293 U.S. 465 (1935).
Determining the economic substance of a transaction requires an analysis of several objective factors: (1) Whether the stated price for the property was within reasonable range of its value; (2) whether there was any intent that the purchase price would be paid; (3) the extent of the taxpayer's control over the property; (4) whether the taxpayer would receive any benefit from the disposition of the property; (5) whether the benefits and burdens of ownership passed; (6) the presence or absence of arm's-length negotiations; (7) the structure of the financing; (8) the degree of adherence to contractual terms; and (9) the reasonableness of the income and residual value projections. Levy v. Commissioner [Dec. 45,152], 91 T.C. 838, 854 (1988); Rose v. Commissioner [89-1 USTC ¶9191], 88 T.C. 386, 410 (1987), affd. [89-1 USTC ¶9191] 868 F.2d 851 (6th Cir. 1989).
Our findings reflect the consideration of these objective factors. The partnerships had no business purpose beyond generating tax benefits. The facts show that the partnerships themselves were shams and lacked economic substance. They were merely a facade used by Hoyt to provide the tax benefits he promised in his promotional materials. They had no independent economic substance beyond the purported sheep breeding transactions which were also illusory and had no economic effect.
The only purported business purpose of these partnerships was their sheep breeding activities. Yet, as we have found, the partnerships never acquired the benefits and burdens of ownership, the promissory notes did not evidence valid indebtedness, and Barnes Ranches never performed under the sharecrop agreement. Consequently, they could not, and did not, conduct any economic activities.
There are a number of other facts supporting our conclusion that the partnerships lacked economic substance and were shams. For example, there were many irregularities in the partnerships' documents. Several of the partnerships did not have signed partnership agreements or had no partnership agreements at all. There was no separate prospectus for each of the sheep partnerships; instead Hoyt used the promotional materials he had prepared for the cattle partnerships. And not all of the sheep partnerships had all of the principal documents to evidence their purported sheep sale agreements with Barnes Ranches.
The traditional books and records expected of a partnership that has economic substance were lacking. The sheep partnerships did not maintain separate books, records, or assets. None of them had separate bank accounts.
We are persuaded that all of the above facts support our conclusion that the partnerships and their purported sheep breeding activities lacked economic substance, were shams, and existed only to provide tax benefits.
It is also significant in these cases that for section 6621(c) penalty-interest purposes the partnerships overvalued their assets and overstated their bases therein. The parties have stipulated facts that support findings of partnership asset overvaluations and basis overstatements. For example, they stipulated that: (1) The purchase prices exceeded the value of each partnership's flock because many of the sheep purportedly sold did not exist; (2) sheep sold to the partnerships for average prices ranging from $1,135 to $2,126 were nowhere near the quality of breeding sheep Barnes Ranches sold for $400 or more; (3) the partnerships never acquired the benefits and burdens of ownership; and (4) the promissory notes used to purchase the sheep did not represent valid indebtedness. Because we have determined that the partnership transactions lacked economic substance and are shams and that the partnerships never acquired the benefits and burdens of ownership, it follows that the adjusted bases in the sheep are zero. Clayden v. Commissioner [Dec. 44,684], 90 T.C. 656, 677-678 (1988); Rose v. Commissioner, supra at 426; Zirker v. Commissioner [Dec. 43,473], 87 T.C. 970, 978-979 (1986).
We conclude that the partnerships' activities are tax-motivated transactions within the meaning of section 6621(c).
Issue 2. Whether the Period of Limitations on Assessment Had Expired When the FPAAs Were Issued
The period for making assessments of tax attributable to a partnership item or affected item is set forth in section 6229. Section 6229 provides in pertinent part:
SEC. 6229. PERIOD OF LIMITATIONS FOR MAKING ASSESSMENTS.
(a) General Rule. --Except as otherwise provided in this section, the period for assessing any tax imposed by subtitle A with respect to any person which is attributable to any partnership item (or affected item) for a partnership taxable year shall not expire before the date which is 3 years after the later of --
(1) the date on which the partnership return for such taxable year was filed, or
(2) the last day for filing such return for such year (determined without regard to extensions).
(b) Extension by Agreement. --
(1) In general. --The period described in subsection (a) (including an extension period under this subsection) may be extended --
*******
(B) with respect to all partners, by an agreement entered into by the Secretary and the tax matters partner (or any other person authorized by the partnership in writing to enter into such an agreement),
before the expiration of such period.
*******
(c) Special Rule in Case of Fraud, Etc. --
(1) False return. --If any partner has, with the intent to evade tax, signed or participated directly or indirectly in the preparation of a partnership return which includes a false or fraudulent item --
(A) in the case of partners so signing or participating in the preparation of the return, any tax imposed by subtitle A which is attributable to any partnership item (or affected item) for the partnership taxable year to which the return relates may be assessed at any time, and
(B) in the case of all other partners, subsection (a) shall be applied with respect to such return by substituting "6 years" for "3 years."
Respondent issued the FPAAs at issue after the normal 3-year periods for assessment had expired. With regard to these FPAAs, however, Hoyt, as TMP, had executed consents extending the limitations periods. The partnerships argue that the extensions are invalid because Hoyt executed them while disabled by conflicts between his own interests and those of his partners. Respondent argues that the consents were valid and, alternatively, if the waivers are invalid, the 6-year limitations period under section 6229(c)(1) applies.
In River City Ranches I, we found that the partnerships did not present evidence sufficient to show that Hoyt executed the consents under disabling conflicts of interest. We concluded, therefore, that the FPAAs were timely issued.
In River City Ranches II, the Court of Appeals held that the partnerships were entitled to discovery of respondent's central Hoyt files to find out the facts concerning Hoyt's interests in his dealings with respondent and what respondent knew about Hoyt's interests and his treatment of the partners' interests. River City Ranches #1 Ltd. v. Commissioner [2005-1 USTC ¶50,239], 401 F.3d at 1141, 1143.
Pursuant to the mandate of the Court of Appeals, we granted petitioners' motions to take the depositions of Jill Page, Sue Hullen, and Norman Johnson, present or former IRS employees whom petitioners had called as witnesses during the 2001 trial of these cases. Petitioners took their depositions in April 2006. In order to make further information available to petitioners, respondent went beyond the Court of Appeals' direction regarding limited additional discovery and made available to petitioners his entire store of documents that had not been produced earlier. This consisted of approximately 160 boxes of documents and 700 linear feet of IRS central Hoyt files.
After the discovery sought by petitioners was completed, the Court held a second trial on September 11 and 12, 2006.
A. Waivers Executed by Hoyt in March 1993 Are Invalid
In River City Ranches I, we analogized these cases to Phillips v. Commissioner [2002-1 USTC ¶50,103], 272 F.3d 1172 (9th Cir. 2001), affg. [Dec. 53,769] 114 T.C. 115 (2000), in which the Court of Appeals held that the mere existence of past criminal investigations of a TMP does not prove a disabling conflict of interest. We found that, as in Phillips, Hoyt was not under active criminal investigation by the IRS when he signed any of the extensions.
In River City Ranches #1 Ltd. v. Commissioner [2005-1 USTC ¶50,239], 401 F.3d at 1142, the Court of Appeals limited the application of Phillips, stating:
The comparison to Phillips is unilluminating, however, because in Phillips "[t]he facts were stipulated by the parties in skeletal form sufficient to provide, without much flesh, what was necessary to raise the single issue relied on by Phillips." Id. at 1173. The lesson of Phillips is that the sole fact of past criminal investigations does not establish a disabling conflict of interest. But there is more to the partnerships' assertion of a disabling conflict than past criminal investigations, and the record before us in this case is not a bare skeleton.
Respondent suspected that Hoyt was selling cattle to some partnerships that had already been sold to other partnerships and that he was depreciating cattle that did not exist. Although Hoyt was not under active criminal investigation by the IRS when he signed any of the consents, at various times from 1984 through 1990 Hoyt was investigated by the CID, the DOJ, and the U.S. Attorney's Office.
Hoyt signed the consents between February 1991 and March 1993, during the period when respondent was first seeking and then performing the headcount that would prove Hoyt's crimes. Hoyt's unwillingness in late 1991 and early 1992 to consent to extensions of the limitations period for the partnerships unless the IRS delayed assessing the preparer penalty until the FPAAs were issued also indicated that Hoyt was allowing his personal interests to interfere with his fiduciary duty to the partnerships.
As early as mid-1989, the IRS suspected that Hoyt had not purchased the sheep reportedly owned by the partnerships, in breach of his fiduciary duty to the partnerships. By February 1993, the ongoing inspection and livestock count confirmed respondent's suspicion that Hoyt had greatly overstated the number of breeding animals the partnerships claimed to own and had grossly overvalued the livestock upon which the partnerships were claiming tax benefits. By February 1993, as a result of the count and inspection, respondent possessed sufficient evidence to support the issuance of prefiling notices and freezing tax refunds claimed by partners. Beginning in February 1993, respondent generally froze and stopped issuing income tax refunds to partners in the cattle and sheep partnerships and issued prefiling notices to the investor-partners advising them that, starting with the 1992 taxable year, the IRS would: (1) Disallow the tax benefits that the partners claimed on their individual returns from the cattle and sheep partnerships; and (2) not issue any tax refunds these partners might claim attributable to such partnership tax benefits. Respondent did not directly inform the investor-partners that Hoyt had greatly overstated the number of breeding animals the partnerships claimed to own and had grossly overvalued the livestock upon which the partnerships were claiming tax benefits until the Examination Division issued warning letters to all the partners on December 30, 1993 (shortly after the FPAAs were issued).
"Trust law, generally, invalidates the transaction of a trustee who is breaching his trust in a transaction in which the other party is aware of the breach." Phillips v. Commissioner, supra at 1175. By February 1993, respondent knew that "Hoyt had been taking money for non-existent cows and sheep --for which Hoyt presumably knew he was vulnerable to criminal prosecution." River City Ranches #1 Ltd. v. Commissioner [2005-1 USTC ¶50,239], 401 F.3d at 1142.
It was in the partners' interest for the FPAAs to be issued sooner rather than later because the FPAAs provided the partners a strong indication that Hoyt was looting the partnerships and that the partners had in fact claimed tax benefits to which they were not entitled. Delay would perpetuate Hoyt's concealment of his theft and result in greater penalties and interest when the taxes were collected.
By contrast, extending the limitations periods within which respondent could issue the FPAAs was in Hoyt's interest because it delayed discovery of his theft. Hoyt's interests ran toward delaying as long as possible any threat to the house of cards he had constructed "in the hope that it would put off the day of reckoning --perhaps forever, if his long run of luck held out." Id. at 1143.
We find that by February 1993, respondent knew or had reason to know that Hoyt's interest in extending the period within which respondent could issue the FPAAs was in conflict with the investor-partners' interest in not delaying the issuance of the FPAAs. Thus we conclude that the consents to extend the limitations period signed in March 1993 are invalid.12 Hoyt signed the consent to extend indefinitely the assessment period for RCR #4's 1984 tax year on August 1, 1987, before respondent knew or had reason to know that Hoyt's interest in extending the limitations period conflicted with the partners' interests. The consent is valid, and respondent timely issued an FPAA to RCR #4 for its 1984 tax year on March 24, 1996.
B. The 6-Year Limitations Period Under Section 6229(c)(1) Applies to the Sheep Partnership Returns for the Years at Issue
Notwithstanding our conclusion that the consents to extensions of the limitations periods executed by Hoyt, the TMP, on March 6, 1993, and by the IRS on March 30, 1993, were invalid because of Hoyt's disabling conflicts of interests, we must still decide the alternative issue asserted by respondent as to whether the 6-year period for assessment provided in section 6229(c)(1)(B) applies because of fraud.
Petitioners contend that respondent failed to prove that Hoyt had a specific intent to evade tax and that each sheep partnership return included false or fraudulent items. They assert that respondent cannot rely solely on petitioners' admissions that there were false items on the partnership returns. To the contrary, respondent contends that he has clearly and convincingly carried his burden of proof and met all of the necessary requirements of section 6229(c)(1)(A) and (B). We agree with respondent.
The 6-year limitations period applies if four requirements are met: (1) The entity is a partnership; (2) the partnership return includes a false or fraudulent item; (3) a partner signed or participated directly or indirectly in the preparation of the return; and (4) the partner signed or participated with the intent to evade tax. Sec. 6229(c)(1); Transpac Drilling Venture, 1983-2 v. United States [96-1 USTC ¶50,271], 83 F.3d 1410, 1414 (Fed. Cir. 1996), affg. [95-1 USTC ¶50,192] 32 Fed. Cl. 810 (1995); cf. Allen v. Commissioner, 128 T.C. 37 (2007). There is no requirement that the signer of the partnership return intend to evade his own taxes. The 6-year statute is applicable to each partner if, in signing a false or fraudulent partnership return, the signer intended to evade the taxes of the other partners. Transpac Drilling Venture, 1983-2 v. United States, supra at 1414-1415. There is also no requirement that the other partners have knowledge of the false or fraudulent deductions claimed on a partnership return. The intent of the signer of the partnership return to evade the taxes of the other partners satisfies the intent element of the 6-year statute of limitations for making additional assessments under section 6229(c)(1), which applies when the partnership return containing false or fraudulent items is signed with intent to evade tax.Id. It is the fraudulent nature of the return that extends the limitations period. Allen v. Commissioner, supra at 42.
In these cases there is no dispute that the first three requirements are satisfied. Petitioners have not contested them. Indeed, they have acknowledged by their stipulated admissions that all the sheep partnership returns contained false and fraudulent deductions, and the facts support those findings. Likewise, the fact that Hoyt, as TMP, participated in the preparation of the partnership returns and signed them with the intent to evade the taxes of the partners is established by petitioners' admissions on the workings of Hoyt's tax shelter scheme, the sham nature of the transactions and their lack of economic substance, and the methods used in preparing the individual and partnership returns. See Transpac Drilling Venture, 1983-2 v. United States, 32 Fed. Cl. at 821 (where the Court of Federal Claims looked at the sham nature of the transaction in its analysis of the 6-year fraud statute set forth in section 6229(c)(1)).
During the years at issue, Hoyt's scheme was to sell tax deductions using phoney partnerships that generated false and fraudulent flowthrough tax deductions. As reflected in our factual findings, the sheep partnership returns filed for the periods 1984, 1987, 1988, and 1989 included the following false or fraudulent items: (1) Depreciation deductions and credits attributable to nonexistent and overvalued sheep, (2) interest deductions for illusory indebtedness relating to nonexistent and overvalued sheep, and (3) false deductions for farm expenses and guaranteed payments.
Petitioners not only admitted in their pleadings that the returns signed by Hoyt included false information, but they also repeatedly referred to Hoyt's fraudulent conduct and deception in their other submissions to the Court.
We have examined the structure and workings of Hoyt's cattle and sheep partnerships in River City Ranches I, Durham Farms #1 v. Commissioner [Dec. 53,883(M)], T.C. Memo. 2000-159, affd. [2003-1 USTC ¶50,391] 59 Fed. Appx. 952 (9th Cir. 2003), and River City Ranches #4, J.V. v. Commissioner [Dec. 53,432(M)], T.C. Memo. 1999-209. River City Ranches #4, J.V. and Durham Farms #1 were test cases for Hoyt cattle and sheep partnerships tried and decided by this Court during 1996 and 1997. In 2001, we heard the remaining sheep partnership cases that resulted in our opinion in River City Ranches I, some of which are presently before us on this remand from the Court of Appeals.
Basically, our findings in River City Ranches I mirror our findings in the sheep partnership test cases in River City Ranches #4, J.V., which explain how Hoyt's scheme worked and show that the partnership returns contained false and fraudulent deductions and were prepared by Hoyt with the intent to evade the tax liability of the partners. They are incorporated by reference in our fact findings here.
There are several indicia of Hoyt's fraudulent intent to evade tax when, as a partner and TMP, he participated in the preparation of the partnership returns and signed them.
The RCR returns reported depreciation of breeding flocks calculated on cost bases that Hoyt knew were based on false and fraudulent flock recap sheets that listed nonexistent sheep, on purported purchase prices that were much greater than the fair market value of similar quality sheep, and on promissory notes that did not create bona fide indebtedness. Moreover, the entire transaction was without substance, and the partnerships did not acquire the benefits and burdens of ownership of the sheep. Similarly, Hoyt knew that other farm deductions claimed on the partnership returns for such items as feed, freight, gasoline, insurance, rent of farm pasture, repairs, supplies, utilities, veterinary fees, contract labor, and advertising expenses were false and fraudulent because the partnership did not have the livestock to require these expenses.
The interest deductions claimed on the partnership returns were purportedly claimed with respect to the promissory note each partnership issued in connection with the purported acquisition of its breeding sheep. The interest deductions claimed on the promissory notes were false and fraudulent because the promissory notes the sheep partnerships issued for their breeding flocks were not bona fide recourse debt. The notes had no economic effect to the partnerships and were not valid indebtedness. Finally, as this Court previously found in River City Ranches #4, J.V. v. Commissioner, supra, the actions of the Barnes family and Hoyt evidence that they themselves viewed the partnership notes as essentially illusory and having no practical economic effect and that the notes were merely a facade to support the tax benefits that Hoyt had promised investors in the partnerships.
The guaranteed payments claimed on the partnership returns purportedly pertain to payments made by the partnerships to Hoyt as "sheep sales incentive". However, since the partnerships never acquired the benefits and burdens of its principal product, i.e., registered sheep, it follows that the deductions claimed for guaranteed payments were false and fraudulent.
When the partnership returns were filed claiming the false and fraudulent deductions, Hoyt was an enrolled agent before the IRS. He was a sophisticated person preparing the partnership returns who had demonstrated by obtaining his enrolled agent status that he was aware of the return filing requirements and the necessity of maintaining proper books and records.
Through participation in the Hoyt partnerships, the partners received the benefits of the false and fraudulent partnership deductions. A partnership is required to file an annual information tax return even though it is not a taxable entity for Federal income tax purposes. Secs. 701, 6031; sec. 1.701-1, Income Tax Regs. Each partner is liable for income tax in his or her individual capacity with respect to his or her share of partnership items of income, loss, deduction, and credit. Sec. 701; sec. 1.702-1, Income Tax Regs. Thus, through such participation in the Hoyt partnerships, each partner received flowthrough partnership deductions that were false and fraudulent and which reduced or eliminated the partner's tax liability.
The falsity of the partnership deductions and Hoyt's intent to evade tax is further supported by the manner in which the partners "purchased" their partnership interests and the focus of the promotional materials. The partnership interest and the resulting flowthrough partnership deductions were "purchased" with 75 percent of the partner's tax savings resulting from the flowthrough partnership deductions. The 75-percent tax savings were determined first by computing the partner's tax liability without participation in a Hoyt partnership and then computing the partner's tax savings using the Hoyt partnership loss. The difference in the two calculations was the partner's tax savings, of which 75 percent was paid to the Hoyt organization and 25 percent was to be retained by the partner. In addition, in the initial year of investment, amended returns claiming refunds were often filed for the partner's prior 3 taxable years. The Hoyt organization received 75 percent of such refunds, and the partners retained 25 percent. Each year the partner's payment to the Hoyt organization was adjusted to reflect the 75/25 split. Because the investment was based on "tax savings" and not on original cash outlay, Hoyt's partnership scheme essentially paid for itself.
It is clear that the sheep partnerships were merely a facade Hoyt used to provide the fraudulent tax benefits he promised to the partnerships' investors. Hoyt's promotional materials so indicate. Hoyt did not have a separate prospectus for each of the sheep partnerships. Instead, he used the same promotional materials he had prepared for the cattle partnerships. And the promotional materials used to market the investments focused heavily on the investors' tax savings. One brochure, titled "The 1,000 lb Tax Shelter", highlighted the investors' writeoffs, refers to the investment as a tax shelter, and emphasizes that the primary return on an investment in a Hoyt partnership would be from the tax savings. See Van Scoten v. Commissioner [Dec. 55,818(M)], T.C. Memo. 2004-275 (where the Tax Court made a similar finding based on its review of the same Hoyt brochure), affd. 439 F.3d 1243 (10th Cir. 2006). In Van Scoten, we pointed out that the 1,000 lb Tax Shelter brochure spent numerous pages explaining the tax benefits of investing in a Hoyt partnership and explaining why investors should trust only Hoyt's organization to prepare their individual Federal income tax returns. Another brochure, bearing the heading "Harvesting Tax Savings by Farming the Tax Code", also emphasized tax savings and explained that the investment could be financed from the investors' tax savings, which the investors otherwise would have paid to the IRS.
The partners' individual income tax returns were often prepared first by the Hoyt Tax Office to claim partnership deductions or credits sufficient to eliminate or substantially reduce a partner's tax liability. Subsequently, the partnership returns were prepared to reflect the amounts reported on the partners' individual income tax returns. The promotional materials explained that, beginning in 1982, other members of the Hoyt Tax Office would sign the individual partners' tax returns as the preparer instead of Hoyt. If a partner needed a greater or lesser partnership loss in any year, the deductions that flowed through from the partnership were quickly adjusted within the Hoyt Tax Office without the partner's having to pay a higher fee to an outside return preparer. Hoyt routinely had the individual's Federal income tax returns prepared and filed claiming large partnership losses before the Form 1065 partnership returns were prepared and filed. Sometimes this would result in an inconsistency between the loss shown on the individual return and the amount shown on the partner's Schedule K-1. We think the workings of this scheme show that the partnership returns were signed with intent to evade the partners' individual tax liabilities through the use of false and fraudulent flowthrough partnership losses.
In summary, the record establishes by clear and convincing evidence that Hoyt knew the partnership returns contained false and fraudulent deductions and that he intended income tax to be evaded at the partner level. He was involved in every facet of the partnerships. He formed and operated the partnerships. He was involved in the alleged purchase of sheep by the partnerships from Barnes Ranches. He was involved in the unusual manner in which the partnership and individual returns were prepared. He knew that the bills of sale which purportedly identified the sheep purchased by each partnership listed large numbers of individual breeding sheep that did not exist. He knew that the total purchase price each sheep partnership agreed to pay for its sheep was far greater the fair market value of similar quality sheep. He knew that the flock recap sheets identifying the partnership sheep contained false information and that the partnership records were maintained in an unreliable manner. He knew that the deductions claimed on the partnership returns for depreciation and other farm expenses relating to the alleged sheep purchases were false and fraudulent. He knew that the deductions claimed on the partnership returns for interest on the partnership promissory notes were false and fraudulent. He knew that the guaranteed payment deductions claimed on the partnership returns were false and fraudulent. He knew that he was selling the partners false and fraudulent deductions. And he knew all these facts when he prepared and signed each of the partnership returns.
Accordingly, we hold that the 6-year statute of limitations on assessment was open under section 6229(c)(1)(B) for the 1987, 1988, and 1989 partnership returns at the time the FPAAs were issued. The FPAAs were issued within the 6-year period for assessing the tax. Therefore, it follows and we so hold that the FPAAs were timely issued for the 1987, 1988, and 1989 returns.
With respect to Hoyt, a partner and the TMP, who signed and participated in the preparation of the partnership returns containing false and fraudulent items with the intent to evade tax, the periods for assessment against him individually of tax liabilities attributable to the partnership items are open indefinitely. See sec. 6229(c)(1)(A). Therefore, it follows, and we so hold, that the FPAAs were timely issued as to Hoyt individually for the 1984, 1987, 1988, and 1989 returns.
To reflect the foregoing,
Appropriate decisions will be entered.
1 Cases of the following petitioners are consolidated herewith: River City Ranches #2, J.V., Jeffry Bergamyer, Tax Matters Partner, docket No. 4876-94; River City Ranches #3, J.V., Jeffry Bergamyer, Tax Matters Partner, docket No. 9550-94; River City Ranches #5, J.V., Stephen Hughes, Tax Matters Partner, docket No. 9552-94; River City Ranches 1985-2, J.V., Jeffry Bergamyer, Tax Matters Partner, docket No. 9554-94; River City Ranches #3, J.V., Jeffry Bergamyer, Tax Matters Partner, docket No. 13595-94; River City Ranches #5, J.V., Stephen Hughes, Tax Matters Partner, docket No. 13597-94; River City Ranches 1985-2, J.V., Jeffry Bergamyer, Tax Matters Partner, docket No. 13599-94; River City Ranches No. 4, Ltd., Jeffry Bergamyer, Tax Matters Partner, docket No. 14038-96.
* This opinion supplements our previously filed Memorandum Findings of Fact and Opinion in River City Ranches #1 Ltd. v. Commissioner [Dec. 55,165(M)], T.C. Memo. 2003-150, affd. in part, revd. in part and remanded [2005-1 USTC ¶50,239] 401 F.3d 1136 (9th Cir. 2005).
2 Unless otherwise indicated, section references herein are to the Internal Revenue Code in effect for the taxable years in issue, and Rule references are to the Tax Court Rules of Practice and Procedure.
3 Normally, before deciding other issues we would decide whether the period of limitations on assessment had expired when respondent issued the notices of final partnership administrative adjustment (FPAAs). However, the parties agree that the FPAAs for the partnerships' 1986 taxable years were timely issued, and we must decide the sec. 6621(c) penalty-interest issue for that year in all events. Since findings as to whether the partnership transactions or the partnerships themselves were shams and/or whether there were asset overvaluations and basis overstatements for purposes of the sec. 6621(c) penalty-interest provisions are factors to be considered in deciding the limitations period issue, we will decide the sec. 6621(c) issue first.
4 In River City Ranches #1 Ltd. v. Commissioner [2005-1 USTC ¶50,239], 401 F.3d at 1144 n.5. (River City Ranches II), the Court of Appeals stated that the record before it did not clearly identify which FPAAs were filed within the default limitations periods and which were filed under the disputed extensions. The parties agree that the FPAAs in the above-listed dockets were issued after the expiration of the 3-year default limitations period had expired. FPAAs filed in other dockets before the Court of Appeals were issued within the 3-year default limitations period.
5 In the second amendment to the answer, respondent raised the application of the 6-year period of limitations on assessment under sec. 6229(c)(1) as an alternative to the argument that the consents were valid. The issue was tried and briefed in River City Ranches I. In River City Ranches I, we held that petitioners did not prove that the consents were invalid and, therefore, we did not decide whether the 6-year limitations period under sec. 6229(c)(1) applied. The parties have briefed the issue again on remand.
6 During the original proceedings, the Court took judicial notice of the facts and record in River City Ranches #4, J.V. v. Commissioner [Dec. 53,432(M)], T.C. Memo. 1999-209, affd. [2002-1 USTC ¶50,105] 23 Fed. Appx. 744 (9th Cir. 2001).
7 By orders of the Tax Court issued from June 22, 2000, through May 15, 2001, Hoyt was removed as TMP from the sheep partnerships. Hoyt was also a licensed enrolled agent who represented many of the investor-partners before the IRS. In 1997, the IRS removed Hoyt as an enrolled agent for alleged improprieties relating to his individual income tax returns.
8 On Oct. 13, 1989, during the CID's above-mentioned investigation, the U.S. Attorney's Office in Sacramento requested that the CID review certain information and determine whether IRS special agents from the CID should join in an ongoing grand jury investigation of Hoyt for possible violations of the internal revenue laws. On Nov. 3, 1989, the IRS Regional Counsel's Office requested that IRS special agents be authorized to participate in the grand jury investigation. On Oct. 2, 1990, the U.S. Attorney's Office ended the grand jury investigation of Hoyt without an indictment.
9 The IRS retained cattle expert Ron Daily to conduct a physical count of all cattle held by the Hoyts as of yearend 1992. The count was conducted with Hoyt personnel from October 1992 through April 1993. Martinez v. United States, 341 Bankr. 568, 571 (Bankr. E.D. La. 2006).
10 Following the IRS's freezing in February 1993 of tax refunds to partners in the cattle and sheep partnerships, the Hoyt organization experienced financial difficulties. Freezing the tax refunds greatly diminished the amount of money the Hoyt organization obtained from new and existing partners. An increasing number of investor-partners became disgruntled with Hoyt and the Hoyt organization. Many partners stopped making their partnership payments and withdrew from their partnerships.
11 On June 2, 1999, the Government filed a superseding indictment against the same defendants, which, among other things, charged Hoyt with 54 counts of conspiracy to commit fraud, mail fraud, bankruptcy fraud, and money laundering.
12 On Apr. 13, 2007, the U.S. Bankruptcy Court for the Eastern District of Louisiana held that the consents to extend the limitations period signed with respect to Hoyt cattle partnerships were invalid for similar reasons. In re Martinez, Bankr., 99 AFTR 2d 2007-2375 (Bankr. E.D. La. 2007). Apparently, the Government did not raise the application of the 6-year limitations period under sec. 6229(c)1)(B), and the Bankruptcy Court held that the FPAAs were untimely.
Determining the economic substance of a transaction requires an analysis of several objective factors: (1) Whether the stated price for the property was within reasonable range of its value; (2) whether there was any intent that the purchase price would be paid; (3) the extent of the taxpayer's control over the property; (4) whether the taxpayer would receive any benefit from the disposition of the property; (5) whether the benefits and burdens of ownership passed; (6) the presence or absence of arm's-length negotiations; (7) the structure of the financing; (8) the degree of adherence to contractual terms; and (9) the reasonableness of the income and residual value projections. Levy v. Commissioner [Dec. 45,152], 91 T.C. 838, 854 (1988); Rose v. Commissioner [89-1 USTC ¶9191], 88 T.C. 386, 410 (1987), affd. [89-1 USTC ¶9191] 868 F.2d 851 (6th Cir. 1989).
River City Ranches #1 Ltd., Jeffry Bergamyer, Tax Matters Partner, River City Ranches #2 Ltd., Jeffry Bergamyer, Tax Matters Partner, River City Ranches #3 Ltd., Jeffry Bergamyer, Tax Matters Partner, River City Ranches #4 Ltd., Jeffry Bergamyer, Tax Matters Partner, River City Ranches #5 Ltd., Jeffry Bergamyer, Tax Matters Partner, River City Ranches #6 Ltd., Jeffry Bergamyer, Tax Matters Partner, et al., v. Commissioner.
Dkt. Nos. 787-91 , 4876-94 , 9550-94 , 9552-94 , 9554-94 , 13595-94 , 13597-94 , 13599-94 , 14038-96 , TC Memo. 2007-171, July 2, 2007.
On remand from CA-9, 2005-1 USTC ¶50,239. [Appealable, barring stipulation to the contrary, to CA-9. --CCH.]
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The period of limitations on assessment had not expired when notices of final partnership administrative adjustment (FPAAs) were issued. Consents to extend the periods of limitations were invalid because the tax matters partner (TMP) signed them while disabled by conflict of interests known to the IRS. However, the six-year period of limitations on assessment under Code Sec. 6229(c)(1) applied because of fraud. The record established that the TMP knew the partnership returns contained false and fraudulent deductions and that he intended income tax to be evaded at the partner level. On remand from CA-9, 2005-1 USTC ¶50,239. -
.
RIVER CITY RANCHES #1 LTD., JEFFRY BERGAMYER, TAX MATTERS PARTNER, RIVER CITY RANCHES #2 LTD., JEFFRY BERGAMYER, TAX MATTERS PARTNER, RIVER CITY RANCHES #3 LTD., JEFFRY BERGAMYER, TAX MATTERS PARTNER, RIVER CITY RANCHES #4 LTD., JEFFRY BERGAMYER, TAX MATTERS PARTNER, RIVER CITY RANCHES #5 LTD., JEFFRY BERGAMYER, TAX MATTERS PARTNER, RIVER CITY RANCHES #6 LTD., JEFFRY BERGAMYER, TAX MATTERS PARTNER, ET AL.,1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent*
SUPPLEMENTAL MEMORANDUM FINDINGS OF FACT AND OPINION
DAWSON, Judge: These cases are now before the Court on remand from the U.S. Court of Appeals for the Ninth Circuit. River City Ranches #1 Ltd. v. Commissioner [2005-1 USTC ¶50,239], 401 F.3d 1136 (9th Cir. 2005) (River City Ranches II), affg. in part, revg. in part and remanding [Dec. 55,165(M)] T.C. Memo. 2003-150 (River City Ranches I). The Court of Appeals concluded that we erred in holding that we lacked jurisdiction to make findings concerning the character of the partnerships' transactions for purposes of the penalty-interest provisions of section 6621(c) 2 and mandated that we make such findings. The Court of Appeals also directed us to permit petitioners additional discovery limited to whether Walter J. Hoyt III (Hoyt), then the tax matters partner (TMP), executed consents to extend the limitations periods while disabled by conflicts between his own interests and those of his partners, and for any necessary retrial following such discovery.
Pursuant to the remand, petitioners deposed three present and/or former employees of the Internal Revenue Service (IRS), respondent made available to petitioners his entire store of documents that had not been produced earlier, and the Court held a second trial.
OPINION
Issue 1. Whether Partnership Transactions and the Sheep Partnerships Lacked Economic Substance and Were Shams, and Whether There Were Partnership Asset Overvaluations and Basis Overvaluations
The Court of Appeals reversed our holding in River City Ranches I that we lacked jurisdiction to make factual findings as to whether the partnerships' transactions were tax-motivated for purposes of imposing section 6621(c) penalty-interest against investor-partners. Thus, the Court of Appeals remanded for us to make such findings. We have done so in our supplemental factual findings set forth herein.
We point out that many of the key facts have been stipulated by the parties and are so found. Furthermore, our prior opinion in River City Ranches #4, J.V. v. Commissioner [Dec. 53,432(M)], T.C. Memo. 1999-209, supports the conclusion that the activities of these partnerships lacked economic substance and were shams for each of the years of their existence. The findings in that case are equally applicable to these cases because the facts and evidence with respect to these partnerships' breeding activities are the same as the facts and evidence considered there. While the proceeding in River City Ranches #4, J.V. involved only three of the sheep breeding partnerships, the Court considered evidence pertaining to all of the sheep partnerships. And all the sheep breeding partnerships were operated in the same manner.
Section 6621(c) provides for an increased rate of interest with respect to any substantial underpayment of tax in any taxable year attributable to a tax-motivated transaction. Section 6621(c)(3)(A) generally lists the types of transactions which are considered "tax-motivated transactions". A tax-motivated transaction includes any valuation overstatement within the meaning of section 6659(c), and such a valuation overstatement exists, among other situations, if the adjusted basis of property claimed on any return exceeds 150 percent of the correct amount of basis. Secs. 6621(c)(3)(A)(i), 6659(c). A tax-motivated transaction further includes "any sham or fraudulent transaction." Sec. 6621(c)(3)(A)(v).
It is well established that the tax consequences of transactions are governed by substance rather than form. Frank Lyon Co. v. United States [78-1 USTC ¶9370], 435 U.S. 561, 573 (1978). When taxpayers resort to the expedient of drafting documents to characterize transactions in a manner which is contrary to objective economic realities and which has no significance beyond expected tax benefits, the particular forms they employ are disregarded for tax purposes. Id. at 572-573; Helvering v. F. & R. Lazarus & Co. [39-2 USTC ¶9793], 308 U.S. 252, 255 (1939). If a transaction is devoid of economic substance, it is not recognized for Federal taxation purposes. Gregory v. Helvering [35-1 USTC ¶9043], 293 U.S. 465 (1935).
Determining the economic substance of a transaction requires an analysis of several objective factors: (1) Whether the stated price for the property was within reasonable range of its value; (2) whether there was any intent that the purchase price would be paid; (3) the extent of the taxpayer's control over the property; (4) whether the taxpayer would receive any benefit from the disposition of the property; (5) whether the benefits and burdens of ownership passed; (6) the presence or absence of arm's-length negotiations; (7) the structure of the financing; (8) the degree of adherence to contractual terms; and (9) the reasonableness of the income and residual value projections. Levy v. Commissioner [Dec. 45,152], 91 T.C. 838, 854 (1988); Rose v. Commissioner [89-1 USTC ¶9191], 88 T.C. 386, 410 (1987), affd. [89-1 USTC ¶9191] 868 F.2d 851 (6th Cir. 1989).
Our findings reflect the consideration of these objective factors. The partnerships had no business purpose beyond generating tax benefits. The facts show that the partnerships themselves were shams and lacked economic substance. They were merely a facade used by Hoyt to provide the tax benefits he promised in his promotional materials. They had no independent economic substance beyond the purported sheep breeding transactions which were also illusory and had no economic effect.
The only purported business purpose of these partnerships was their sheep breeding activities. Yet, as we have found, the partnerships never acquired the benefits and burdens of ownership, the promissory notes did not evidence valid indebtedness, and Barnes Ranches never performed under the sharecrop agreement. Consequently, they could not, and did not, conduct any economic activities.
There are a number of other facts supporting our conclusion that the partnerships lacked economic substance and were shams. For example, there were many irregularities in the partnerships' documents. Several of the partnerships did not have signed partnership agreements or had no partnership agreements at all. There was no separate prospectus for each of the sheep partnerships; instead Hoyt used the promotional materials he had prepared for the cattle partnerships. And not all of the sheep partnerships had all of the principal documents to evidence their purported sheep sale agreements with Barnes Ranches.
The traditional books and records expected of a partnership that has economic substance were lacking. The sheep partnerships did not maintain separate books, records, or assets. None of them had separate bank accounts.
We are persuaded that all of the above facts support our conclusion that the partnerships and their purported sheep breeding activities lacked economic substance, were shams, and existed only to provide tax benefits.
It is also significant in these cases that for section 6621(c) penalty-interest purposes the partnerships overvalued their assets and overstated their bases therein. The parties have stipulated facts that support findings of partnership asset overvaluations and basis overstatements. For example, they stipulated that: (1) The purchase prices exceeded the value of each partnership's flock because many of the sheep purportedly sold did not exist; (2) sheep sold to the partnerships for average prices ranging from $1,135 to $2,126 were nowhere near the quality of breeding sheep Barnes Ranches sold for $400 or more; (3) the partnerships never acquired the benefits and burdens of ownership; and (4) the promissory notes used to purchase the sheep did not represent valid indebtedness. Because we have determined that the partnership transactions lacked economic substance and are shams and that the partnerships never acquired the benefits and burdens of ownership, it follows that the adjusted bases in the sheep are zero. Clayden v. Commissioner [Dec. 44,684], 90 T.C. 656, 677-678 (1988); Rose v. Commissioner, supra at 426; Zirker v. Commissioner [Dec. 43,473], 87 T.C. 970, 978-979 (1986).
We conclude that the partnerships' activities are tax-motivated transactions within the meaning of section 6621(c).
Issue 2. Whether the Period of Limitations on Assessment Had Expired When the FPAAs Were Issued
The period for making assessments of tax attributable to a partnership item or affected item is set forth in section 6229. Section 6229 provides in pertinent part:
SEC. 6229. PERIOD OF LIMITATIONS FOR MAKING ASSESSMENTS.
(a) General Rule. --Except as otherwise provided in this section, the period for assessing any tax imposed by subtitle A with respect to any person which is attributable to any partnership item (or affected item) for a partnership taxable year shall not expire before the date which is 3 years after the later of --
(1) the date on which the partnership return for such taxable year was filed, or
(2) the last day for filing such return for such year (determined without regard to extensions).
(b) Extension by Agreement. --
(1) In general. --The period described in subsection (a) (including an extension period under this subsection) may be extended --
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(B) with respect to all partners, by an agreement entered into by the Secretary and the tax matters partner (or any other person authorized by the partnership in writing to enter into such an agreement),
before the expiration of such period.
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(c) Special Rule in Case of Fraud, Etc. --
(1) False return. --If any partner has, with the intent to evade tax, signed or participated directly or indirectly in the preparation of a partnership return which includes a false or fraudulent item --
(A) in the case of partners so signing or participating in the preparation of the return, any tax imposed by subtitle A which is attributable to any partnership item (or affected item) for the partnership taxable year to which the return relates may be assessed at any time, and
(B) in the case of all other partners, subsection (a) shall be applied with respect to such return by substituting "6 years" for "3 years."
Respondent issued the FPAAs at issue after the normal 3-year periods for assessment had expired. With regard to these FPAAs, however, Hoyt, as TMP, had executed consents extending the limitations periods. The partnerships argue that the extensions are invalid because Hoyt executed them while disabled by conflicts between his own interests and those of his partners. Respondent argues that the consents were valid and, alternatively, if the waivers are invalid, the 6-year limitations period under section 6229(c)(1) applies.
In River City Ranches I, we found that the partnerships did not present evidence sufficient to show that Hoyt executed the consents under disabling conflicts of interest. We concluded, therefore, that the FPAAs were timely issued.
In River City Ranches II, the Court of Appeals held that the partnerships were entitled to discovery of respondent's central Hoyt files to find out the facts concerning Hoyt's interests in his dealings with respondent and what respondent knew about Hoyt's interests and his treatment of the partners' interests. River City Ranches #1 Ltd. v. Commissioner [2005-1 USTC ¶50,239], 401 F.3d at 1141, 1143.
Pursuant to the mandate of the Court of Appeals, we granted petitioners' motions to take the depositions of Jill Page, Sue Hullen, and Norman Johnson, present or former IRS employees whom petitioners had called as witnesses during the 2001 trial of these cases. Petitioners took their depositions in April 2006. In order to make further information available to petitioners, respondent went beyond the Court of Appeals' direction regarding limited additional discovery and made available to petitioners his entire store of documents that had not been produced earlier. This consisted of approximately 160 boxes of documents and 700 linear feet of IRS central Hoyt files.
After the discovery sought by petitioners was completed, the Court held a second trial on September 11 and 12, 2006.
A. Waivers Executed by Hoyt in March 1993 Are Invalid
In River City Ranches I, we analogized these cases to Phillips v. Commissioner [2002-1 USTC ¶50,103], 272 F.3d 1172 (9th Cir. 2001), affg. [Dec. 53,769] 114 T.C. 115 (2000), in which the Court of Appeals held that the mere existence of past criminal investigations of a TMP does not prove a disabling conflict of interest. We found that, as in Phillips, Hoyt was not under active criminal investigation by the IRS when he signed any of the extensions.
In River City Ranches #1 Ltd. v. Commissioner [2005-1 USTC ¶50,239], 401 F.3d at 1142, the Court of Appeals limited the application of Phillips, stating:
The comparison to Phillips is unilluminating, however, because in Phillips "[t]he facts were stipulated by the parties in skeletal form sufficient to provide, without much flesh, what was necessary to raise the single issue relied on by Phillips." Id. at 1173. The lesson of Phillips is that the sole fact of past criminal investigations does not establish a disabling conflict of interest. But there is more to the partnerships' assertion of a disabling conflict than past criminal investigations, and the record before us in this case is not a bare skeleton.
Respondent suspected that Hoyt was selling cattle to some partnerships that had already been sold to other partnerships and that he was depreciating cattle that did not exist. Although Hoyt was not under active criminal investigation by the IRS when he signed any of the consents, at various times from 1984 through 1990 Hoyt was investigated by the CID, the DOJ, and the U.S. Attorney's Office.
Hoyt signed the consents between February 1991 and March 1993, during the period when respondent was first seeking and then performing the headcount that would prove Hoyt's crimes. Hoyt's unwillingness in late 1991 and early 1992 to consent to extensions of the limitations period for the partnerships unless the IRS delayed assessing the preparer penalty until the FPAAs were issued also indicated that Hoyt was allowing his personal interests to interfere with his fiduciary duty to the partnerships.
As early as mid-1989, the IRS suspected that Hoyt had not purchased the sheep reportedly owned by the partnerships, in breach of his fiduciary duty to the partnerships. By February 1993, the ongoing inspection and livestock count confirmed respondent's suspicion that Hoyt had greatly overstated the number of breeding animals the partnerships claimed to own and had grossly overvalued the livestock upon which the partnerships were claiming tax benefits. By February 1993, as a result of the count and inspection, respondent possessed sufficient evidence to support the issuance of prefiling notices and freezing tax refunds claimed by partners. Beginning in February 1993, respondent generally froze and stopped issuing income tax refunds to partners in the cattle and sheep partnerships and issued prefiling notices to the investor-partners advising them that, starting with the 1992 taxable year, the IRS would: (1) Disallow the tax benefits that the partners claimed on their individual returns from the cattle and sheep partnerships; and (2) not issue any tax refunds these partners might claim attributable to such partnership tax benefits. Respondent did not directly inform the investor-partners that Hoyt had greatly overstated the number of breeding animals the partnerships claimed to own and had grossly overvalued the livestock upon which the partnerships were claiming tax benefits until the Examination Division issued warning letters to all the partners on December 30, 1993 (shortly after the FPAAs were issued).
"Trust law, generally, invalidates the transaction of a trustee who is breaching his trust in a transaction in which the other party is aware of the breach." Phillips v. Commissioner, supra at 1175. By February 1993, respondent knew that "Hoyt had been taking money for non-existent cows and sheep --for which Hoyt presumably knew he was vulnerable to criminal prosecution." River City Ranches #1 Ltd. v. Commissioner [2005-1 USTC ¶50,239], 401 F.3d at 1142.
It was in the partners' interest for the FPAAs to be issued sooner rather than later because the FPAAs provided the partners a strong indication that Hoyt was looting the partnerships and that the partners had in fact claimed tax benefits to which they were not entitled. Delay would perpetuate Hoyt's concealment of his theft and result in greater penalties and interest when the taxes were collected.
By contrast, extending the limitations periods within which respondent could issue the FPAAs was in Hoyt's interest because it delayed discovery of his theft. Hoyt's interests ran toward delaying as long as possible any threat to the house of cards he had constructed "in the hope that it would put off the day of reckoning --perhaps forever, if his long run of luck held out." Id. at 1143.
We find that by February 1993, respondent knew or had reason to know that Hoyt's interest in extending the period within which respondent could issue the FPAAs was in conflict with the investor-partners' interest in not delaying the issuance of the FPAAs. Thus we conclude that the consents to extend the limitations period signed in March 1993 are invalid.12 Hoyt signed the consent to extend indefinitely the assessment period for RCR #4's 1984 tax year on August 1, 1987, before respondent knew or had reason to know that Hoyt's interest in extending the limitations period conflicted with the partners' interests. The consent is valid, and respondent timely issued an FPAA to RCR #4 for its 1984 tax year on March 24, 1996.
B. The 6-Year Limitations Period Under Section 6229(c)(1) Applies to the Sheep Partnership Returns for the Years at Issue
Notwithstanding our conclusion that the consents to extensions of the limitations periods executed by Hoyt, the TMP, on March 6, 1993, and by the IRS on March 30, 1993, were invalid because of Hoyt's disabling conflicts of interests, we must still decide the alternative issue asserted by respondent as to whether the 6-year period for assessment provided in section 6229(c)(1)(B) applies because of fraud.
Petitioners contend that respondent failed to prove that Hoyt had a specific intent to evade tax and that each sheep partnership return included false or fraudulent items. They assert that respondent cannot rely solely on petitioners' admissions that there were false items on the partnership returns. To the contrary, respondent contends that he has clearly and convincingly carried his burden of proof and met all of the necessary requirements of section 6229(c)(1)(A) and (B). We agree with respondent.
The 6-year limitations period applies if four requirements are met: (1) The entity is a partnership; (2) the partnership return includes a false or fraudulent item; (3) a partner signed or participated directly or indirectly in the preparation of the return; and (4) the partner signed or participated with the intent to evade tax. Sec. 6229(c)(1); Transpac Drilling Venture, 1983-2 v. United States [96-1 USTC ¶50,271], 83 F.3d 1410, 1414 (Fed. Cir. 1996), affg. [95-1 USTC ¶50,192] 32 Fed. Cl. 810 (1995); cf. Allen v. Commissioner, 128 T.C. 37 (2007). There is no requirement that the signer of the partnership return intend to evade his own taxes. The 6-year statute is applicable to each partner if, in signing a false or fraudulent partnership return, the signer intended to evade the taxes of the other partners. Transpac Drilling Venture, 1983-2 v. United States, supra at 1414-1415. There is also no requirement that the other partners have knowledge of the false or fraudulent deductions claimed on a partnership return. The intent of the signer of the partnership return to evade the taxes of the other partners satisfies the intent element of the 6-year statute of limitations for making additional assessments under section 6229(c)(1), which applies when the partnership return containing false or fraudulent items is signed with intent to evade tax.Id. It is the fraudulent nature of the return that extends the limitations period. Allen v. Commissioner, supra at 42.
In these cases there is no dispute that the first three requirements are satisfied. Petitioners have not contested them. Indeed, they have acknowledged by their stipulated admissions that all the sheep partnership returns contained false and fraudulent deductions, and the facts support those findings. Likewise, the fact that Hoyt, as TMP, participated in the preparation of the partnership returns and signed them with the intent to evade the taxes of the partners is established by petitioners' admissions on the workings of Hoyt's tax shelter scheme, the sham nature of the transactions and their lack of economic substance, and the methods used in preparing the individual and partnership returns. See Transpac Drilling Venture, 1983-2 v. United States, 32 Fed. Cl. at 821 (where the Court of Federal Claims looked at the sham nature of the transaction in its analysis of the 6-year fraud statute set forth in section 6229(c)(1)).
During the years at issue, Hoyt's scheme was to sell tax deductions using phoney partnerships that generated false and fraudulent flowthrough tax deductions. As reflected in our factual findings, the sheep partnership returns filed for the periods 1984, 1987, 1988, and 1989 included the following false or fraudulent items: (1) Depreciation deductions and credits attributable to nonexistent and overvalued sheep, (2) interest deductions for illusory indebtedness relating to nonexistent and overvalued sheep, and (3) false deductions for farm expenses and guaranteed payments.
Petitioners not only admitted in their pleadings that the returns signed by Hoyt included false information, but they also repeatedly referred to Hoyt's fraudulent conduct and deception in their other submissions to the Court.
We have examined the structure and workings of Hoyt's cattle and sheep partnerships in River City Ranches I, Durham Farms #1 v. Commissioner [Dec. 53,883(M)], T.C. Memo. 2000-159, affd. [2003-1 USTC ¶50,391] 59 Fed. Appx. 952 (9th Cir. 2003), and River City Ranches #4, J.V. v. Commissioner [Dec. 53,432(M)], T.C. Memo. 1999-209. River City Ranches #4, J.V. and Durham Farms #1 were test cases for Hoyt cattle and sheep partnerships tried and decided by this Court during 1996 and 1997. In 2001, we heard the remaining sheep partnership cases that resulted in our opinion in River City Ranches I, some of which are presently before us on this remand from the Court of Appeals.
Basically, our findings in River City Ranches I mirror our findings in the sheep partnership test cases in River City Ranches #4, J.V., which explain how Hoyt's scheme worked and show that the partnership returns contained false and fraudulent deductions and were prepared by Hoyt with the intent to evade the tax liability of the partners. They are incorporated by reference in our fact findings here.
There are several indicia of Hoyt's fraudulent intent to evade tax when, as a partner and TMP, he participated in the preparation of the partnership returns and signed them.
The RCR returns reported depreciation of breeding flocks calculated on cost bases that Hoyt knew were based on false and fraudulent flock recap sheets that listed nonexistent sheep, on purported purchase prices that were much greater than the fair market value of similar quality sheep, and on promissory notes that did not create bona fide indebtedness. Moreover, the entire transaction was without substance, and the partnerships did not acquire the benefits and burdens of ownership of the sheep. Similarly, Hoyt knew that other farm deductions claimed on the partnership returns for such items as feed, freight, gasoline, insurance, rent of farm pasture, repairs, supplies, utilities, veterinary fees, contract labor, and advertising expenses were false and fraudulent because the partnership did not have the livestock to require these expenses.
The interest deductions claimed on the partnership returns were purportedly claimed with respect to the promissory note each partnership issued in connection with the purported acquisition of its breeding sheep. The interest deductions claimed on the promissory notes were false and fraudulent because the promissory notes the sheep partnerships issued for their breeding flocks were not bona fide recourse debt. The notes had no economic effect to the partnerships and were not valid indebtedness. Finally, as this Court previously found in River City Ranches #4, J.V. v. Commissioner, supra, the actions of the Barnes family and Hoyt evidence that they themselves viewed the partnership notes as essentially illusory and having no practical economic effect and that the notes were merely a facade to support the tax benefits that Hoyt had promised investors in the partnerships.
The guaranteed payments claimed on the partnership returns purportedly pertain to payments made by the partnerships to Hoyt as "sheep sales incentive". However, since the partnerships never acquired the benefits and burdens of its principal product, i.e., registered sheep, it follows that the deductions claimed for guaranteed payments were false and fraudulent.
When the partnership returns were filed claiming the false and fraudulent deductions, Hoyt was an enrolled agent before the IRS. He was a sophisticated person preparing the partnership returns who had demonstrated by obtaining his enrolled agent status that he was aware of the return filing requirements and the necessity of maintaining proper books and records.
Through participation in the Hoyt partnerships, the partners received the benefits of the false and fraudulent partnership deductions. A partnership is required to file an annual information tax return even though it is not a taxable entity for Federal income tax purposes. Secs. 701, 6031; sec. 1.701-1, Income Tax Regs. Each partner is liable for income tax in his or her individual capacity with respect to his or her share of partnership items of income, loss, deduction, and credit. Sec. 701; sec. 1.702-1, Income Tax Regs. Thus, through such participation in the Hoyt partnerships, each partner received flowthrough partnership deductions that were false and fraudulent and which reduced or eliminated the partner's tax liability.
The falsity of the partnership deductions and Hoyt's intent to evade tax is further supported by the manner in which the partners "purchased" their partnership interests and the focus of the promotional materials. The partnership interest and the resulting flowthrough partnership deductions were "purchased" with 75 percent of the partner's tax savings resulting from the flowthrough partnership deductions. The 75-percent tax savings were determined first by computing the partner's tax liability without participation in a Hoyt partnership and then computing the partner's tax savings using the Hoyt partnership loss. The difference in the two calculations was the partner's tax savings, of which 75 percent was paid to the Hoyt organization and 25 percent was to be retained by the partner. In addition, in the initial year of investment, amended returns claiming refunds were often filed for the partner's prior 3 taxable years. The Hoyt organization received 75 percent of such refunds, and the partners retained 25 percent. Each year the partner's payment to the Hoyt organization was adjusted to reflect the 75/25 split. Because the investment was based on "tax savings" and not on original cash outlay, Hoyt's partnership scheme essentially paid for itself.
It is clear that the sheep partnerships were merely a facade Hoyt used to provide the fraudulent tax benefits he promised to the partnerships' investors. Hoyt's promotional materials so indicate. Hoyt did not have a separate prospectus for each of the sheep partnerships. Instead, he used the same promotional materials he had prepared for the cattle partnerships. And the promotional materials used to market the investments focused heavily on the investors' tax savings. One brochure, titled "The 1,000 lb Tax Shelter", highlighted the investors' writeoffs, refers to the investment as a tax shelter, and emphasizes that the primary return on an investment in a Hoyt partnership would be from the tax savings. See Van Scoten v. Commissioner [Dec. 55,818(M)], T.C. Memo. 2004-275 (where the Tax Court made a similar finding based on its review of the same Hoyt brochure), affd. 439 F.3d 1243 (10th Cir. 2006). In Van Scoten, we pointed out that the 1,000 lb Tax Shelter brochure spent numerous pages explaining the tax benefits of investing in a Hoyt partnership and explaining why investors should trust only Hoyt's organization to prepare their individual Federal income tax returns. Another brochure, bearing the heading "Harvesting Tax Savings by Farming the Tax Code", also emphasized tax savings and explained that the investment could be financed from the investors' tax savings, which the investors otherwise would have paid to the IRS.
The partners' individual income tax returns were often prepared first by the Hoyt Tax Office to claim partnership deductions or credits sufficient to eliminate or substantially reduce a partner's tax liability. Subsequently, the partnership returns were prepared to reflect the amounts reported on the partners' individual income tax returns. The promotional materials explained that, beginning in 1982, other members of the Hoyt Tax Office would sign the individual partners' tax returns as the preparer instead of Hoyt. If a partner needed a greater or lesser partnership loss in any year, the deductions that flowed through from the partnership were quickly adjusted within the Hoyt Tax Office without the partner's having to pay a higher fee to an outside return preparer. Hoyt routinely had the individual's Federal income tax returns prepared and filed claiming large partnership losses before the Form 1065 partnership returns were prepared and filed. Sometimes this would result in an inconsistency between the loss shown on the individual return and the amount shown on the partner's Schedule K-1. We think the workings of this scheme show that the partnership returns were signed with intent to evade the partners' individual tax liabilities through the use of false and fraudulent flowthrough partnership losses.
In summary, the record establishes by clear and convincing evidence that Hoyt knew the partnership returns contained false and fraudulent deductions and that he intended income tax to be evaded at the partner level. He was involved in every facet of the partnerships. He formed and operated the partnerships. He was involved in the alleged purchase of sheep by the partnerships from Barnes Ranches. He was involved in the unusual manner in which the partnership and individual returns were prepared. He knew that the bills of sale which purportedly identified the sheep purchased by each partnership listed large numbers of individual breeding sheep that did not exist. He knew that the total purchase price each sheep partnership agreed to pay for its sheep was far greater the fair market value of similar quality sheep. He knew that the flock recap sheets identifying the partnership sheep contained false information and that the partnership records were maintained in an unreliable manner. He knew that the deductions claimed on the partnership returns for depreciation and other farm expenses relating to the alleged sheep purchases were false and fraudulent. He knew that the deductions claimed on the partnership returns for interest on the partnership promissory notes were false and fraudulent. He knew that the guaranteed payment deductions claimed on the partnership returns were false and fraudulent. He knew that he was selling the partners false and fraudulent deductions. And he knew all these facts when he prepared and signed each of the partnership returns.
Accordingly, we hold that the 6-year statute of limitations on assessment was open under section 6229(c)(1)(B) for the 1987, 1988, and 1989 partnership returns at the time the FPAAs were issued. The FPAAs were issued within the 6-year period for assessing the tax. Therefore, it follows and we so hold that the FPAAs were timely issued for the 1987, 1988, and 1989 returns.
With respect to Hoyt, a partner and the TMP, who signed and participated in the preparation of the partnership returns containing false and fraudulent items with the intent to evade tax, the periods for assessment against him individually of tax liabilities attributable to the partnership items are open indefinitely. See sec. 6229(c)(1)(A). Therefore, it follows, and we so hold, that the FPAAs were timely issued as to Hoyt individually for the 1984, 1987, 1988, and 1989 returns.
To reflect the foregoing,
Appropriate decisions will be entered.
1 Cases of the following petitioners are consolidated herewith: River City Ranches #2, J.V., Jeffry Bergamyer, Tax Matters Partner, docket No. 4876-94; River City Ranches #3, J.V., Jeffry Bergamyer, Tax Matters Partner, docket No. 9550-94; River City Ranches #5, J.V., Stephen Hughes, Tax Matters Partner, docket No. 9552-94; River City Ranches 1985-2, J.V., Jeffry Bergamyer, Tax Matters Partner, docket No. 9554-94; River City Ranches #3, J.V., Jeffry Bergamyer, Tax Matters Partner, docket No. 13595-94; River City Ranches #5, J.V., Stephen Hughes, Tax Matters Partner, docket No. 13597-94; River City Ranches 1985-2, J.V., Jeffry Bergamyer, Tax Matters Partner, docket No. 13599-94; River City Ranches No. 4, Ltd., Jeffry Bergamyer, Tax Matters Partner, docket No. 14038-96.
* This opinion supplements our previously filed Memorandum Findings of Fact and Opinion in River City Ranches #1 Ltd. v. Commissioner [Dec. 55,165(M)], T.C. Memo. 2003-150, affd. in part, revd. in part and remanded [2005-1 USTC ¶50,239] 401 F.3d 1136 (9th Cir. 2005).
2 Unless otherwise indicated, section references herein are to the Internal Revenue Code in effect for the taxable years in issue, and Rule references are to the Tax Court Rules of Practice and Procedure.
3 Normally, before deciding other issues we would decide whether the period of limitations on assessment had expired when respondent issued the notices of final partnership administrative adjustment (FPAAs). However, the parties agree that the FPAAs for the partnerships' 1986 taxable years were timely issued, and we must decide the sec. 6621(c) penalty-interest issue for that year in all events. Since findings as to whether the partnership transactions or the partnerships themselves were shams and/or whether there were asset overvaluations and basis overstatements for purposes of the sec. 6621(c) penalty-interest provisions are factors to be considered in deciding the limitations period issue, we will decide the sec. 6621(c) issue first.
4 In River City Ranches #1 Ltd. v. Commissioner [2005-1 USTC ¶50,239], 401 F.3d at 1144 n.5. (River City Ranches II), the Court of Appeals stated that the record before it did not clearly identify which FPAAs were filed within the default limitations periods and which were filed under the disputed extensions. The parties agree that the FPAAs in the above-listed dockets were issued after the expiration of the 3-year default limitations period had expired. FPAAs filed in other dockets before the Court of Appeals were issued within the 3-year default limitations period.
5 In the second amendment to the answer, respondent raised the application of the 6-year period of limitations on assessment under sec. 6229(c)(1) as an alternative to the argument that the consents were valid. The issue was tried and briefed in River City Ranches I. In River City Ranches I, we held that petitioners did not prove that the consents were invalid and, therefore, we did not decide whether the 6-year limitations period under sec. 6229(c)(1) applied. The parties have briefed the issue again on remand.
6 During the original proceedings, the Court took judicial notice of the facts and record in River City Ranches #4, J.V. v. Commissioner [Dec. 53,432(M)], T.C. Memo. 1999-209, affd. [2002-1 USTC ¶50,105] 23 Fed. Appx. 744 (9th Cir. 2001).
7 By orders of the Tax Court issued from June 22, 2000, through May 15, 2001, Hoyt was removed as TMP from the sheep partnerships. Hoyt was also a licensed enrolled agent who represented many of the investor-partners before the IRS. In 1997, the IRS removed Hoyt as an enrolled agent for alleged improprieties relating to his individual income tax returns.
8 On Oct. 13, 1989, during the CID's above-mentioned investigation, the U.S. Attorney's Office in Sacramento requested that the CID review certain information and determine whether IRS special agents from the CID should join in an ongoing grand jury investigation of Hoyt for possible violations of the internal revenue laws. On Nov. 3, 1989, the IRS Regional Counsel's Office requested that IRS special agents be authorized to participate in the grand jury investigation. On Oct. 2, 1990, the U.S. Attorney's Office ended the grand jury investigation of Hoyt without an indictment.
9 The IRS retained cattle expert Ron Daily to conduct a physical count of all cattle held by the Hoyts as of yearend 1992. The count was conducted with Hoyt personnel from October 1992 through April 1993. Martinez v. United States, 341 Bankr. 568, 571 (Bankr. E.D. La. 2006).
10 Following the IRS's freezing in February 1993 of tax refunds to partners in the cattle and sheep partnerships, the Hoyt organization experienced financial difficulties. Freezing the tax refunds greatly diminished the amount of money the Hoyt organization obtained from new and existing partners. An increasing number of investor-partners became disgruntled with Hoyt and the Hoyt organization. Many partners stopped making their partnership payments and withdrew from their partnerships.
11 On June 2, 1999, the Government filed a superseding indictment against the same defendants, which, among other things, charged Hoyt with 54 counts of conspiracy to commit fraud, mail fraud, bankruptcy fraud, and money laundering.
12 On Apr. 13, 2007, the U.S. Bankruptcy Court for the Eastern District of Louisiana held that the consents to extend the limitations period signed with respect to Hoyt cattle partnerships were invalid for similar reasons. In re Martinez, Bankr., 99 AFTR 2d 2007-2375 (Bankr. E.D. La. 2007). Apparently, the Government did not raise the application of the 6-year limitations period under sec. 6229(c)1)(B), and the Bankruptcy Court held that the FPAAs were untimely.
A corporate officer convicted of failing to account for and pay over taxes in violation of Code Sec. 7202 was not entitled to a judgment of acquittal. Although the individual did not personally employ any of his company's employees, he was an officer of the company and could be held criminally liable for his willful failure to account for and pay over employment taxes. Contrary to the individual's assertion, the government was not required to impose a civil penalty, or provide a Code Sec. 6672 notice, before prosecuting him under Code Sec. 7202. The notice provisions of Code Sec. 6672(b) did not apply to prosecutions under Code Sec. 7202. The jury found that the government had proven beyond a reasonable doubt that the individual had committed the offenses for which he was indicted.
It does not appear that "willfulness" was argued in this case. I do not see payroll tax cases end up as section 7202 criminal cases because there is always a defense that there were distractions that resulted in the failure to pay payroll taxes. The DOJ is required to prove a 7202 offense "beyond a reasonable doubt." In all cases where payroll taxes are not being paid, contact www.irstaxattorney.com for assistance.
United States of America, Plaintiff v. Frances Leroy McLain, Defendant.
U.S. District Court, Dist. Minn.; 08-CR-0010 (PJS/FLN), February 17, 2009.
[
ORDER
SCHILTZ, United States District Judge: On November 18, 2008, defendant Francis Leroy McLain was convicted of nine counts of failing to account for and pay over taxes in violation of 26 U.S.C. § 7202.
A. Motion for Acquittal [Docket No. 132]
During the time period relevant to this action, McLain owned and operated a business --a business that was run under various names, including "Kind Hearts" and "Kirpal Nurses, LLC" (collectively "Kirpal") --that supplied temporary nursing staff to nursing homes and other healthcare facilities. McLain was convicted under 26 U.S.C. § 7202 of failing to account for and pay over income and Federal Income Contribution Act ("FICA") taxes on Kirpal employees. Section 7202 states:
Any person required under this title to collect, account for, and pay over any tax imposed by this title who willfully fails to collect or truthfully account for and pay over such tax shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $10,000, or imprisoned not more than 5 years, or both, together with the costs of prosecution.
McLain moves for acquittal on the basis that there is no evidence --indeed, the indictment does not even allege --that McLain personally employed any of the Kirpal staff. Instead, McLain argues, Kirpal was the employer, and under the relevant statutes only Kirpal had a duty to account for and pay over taxes on its employees. See 26 U.S.C. § 3402(a)(1) (imposing duty to withhold income taxes on the "employer"); 26 U.S.C. § 3403 (imposing liability for tax withheld under § 3402 on the "employer"); 26 U.S.C. § 3102(a) (imposing duty to withhold FICA taxes on the "employer"); 26 U.S.C. § 3102(b) (imposing liability for tax withheld under § 3102(a) on the "employer"). Because he was not the employer, McLain argues, he was not a "person required under this title to ... account for[] and pay over any tax imposed by this title" within the meaning of § 7202. 2
If it were writing on a clean slate, this Court would have some sympathy for McLain's argument, which finds support in the literal terms of the relevant statutes. But the slate has not been clean for over thirty years --not since the Supreme Court issued its decision in Slodov v. United States, 436 U.S. 238 (1978), and federal courts, in reliance on Slodov, began holding that an officer or employee of a corporate employer can indeed be convicted of violating § 7202.
Slodov itself was not a criminal case. Instead, it addressed the liability of an individual for failing to pay over income and FICA taxes under 26 U.S.C. § 6672, which is the civil counterpart to § 7202. Like § 7202, § 6672 applies to "[a]ny person required to collect, truthfully account for, and pay over any tax imposed by this title" and imposes a civil penalty equal to the amount of the tax delinquency on such persons. As the Supreme Court explained in Slodov, an officer or employee of a corporate employer can be a "person required to collect, truthfully account for, and pay over" taxes under § 6672 by virtue of 26 U.S.C. § 6671(b), which states:
The term "person", as used in this subchapter, includes an officer or employee of a corporation, or a member or employee of a partnership, who as such officer, employee, or member is under a duty to perform the act in respect of which the violation occurs.
See Slodov, 436 U.S. at 244-45. Although the Supreme Court did not explicitly dissect the language of §§ 6672 and 6671(b), the Court must have reasoned that while the employer is liable for payment of the taxes "imposed by this title" within the meaning of § 6672, a person can be required to "collect, truthfully account for, and pay over" those taxes even if that person is not himself the employer, but merely an officer or employee of the employer.
As the Supreme Court recognized, § 7202 tracks the wording of § 6672. Slodov, 436 U.S. at 245. And § 7202 incorporates a similar definition of "person." See 26 U.S.C. § 7343. Thus, just as an individual corporate officer or employee can be civilly liable under § 6672, that officer or employee can be criminally liable under § 7202. "[A]n employer-official or other employee responsible for collecting and paying taxes who willfully fails to do so is subject to both a civil penalty equivalent to 100% of the taxes not collected or paid, and to a felony conviction." Slodov, 436 U.S. at 245 (emphasis added). Under Slodov, then, McLain can be convicted under § 7202 even though he personally did not employ any of the staff at Kirpal.
McLain also argues that, even if he could be held criminally liable under § 7202, the United States must seek to impose a civil penalty against him under § 6672 before it can prosecute him under § 7202. McLain argues further that he cannot be ordered to pay a civil penalty under § 6672(a) because he did not receive the written notice required by § 6672(b). Because he received no notice under § 6672(b), McLain argues, he cannot be penalized under § 6672(a), and because he cannot be penalized under § 6672(a), he cannot be convicted under § 7202.
McLain misreads the statute. Nothing in any statute or judicial opinion requires the government to proceed against an individual civilly under § 6672(a) before bringing a criminal prosecution under § 7202. In addition, nothing in any statute or judicial opinion requires the government to provide notice under § 6672(b) before proceeding under § 7202. To the contrary, the notice provision of § 6672(b), on its face, applies only to the civil "penalty ... imposed under subsection (a) [of § 6672] ... ." Obviously, a sentence of imprisonment or fine imposed on someone convicted of violating § 7202 is not a civil "penalty ... imposed under subsection (a) [of § 6672] ... ." Moreover, both § 6672 and § 7202 provide that the penalties they authorize are "in addition to other penalties provided by law ... ." Thus, the civil and criminal penalties of the two statutes, although complementary, are separate, and the notice provision of § 6672(b) does not apply to prosecutions under § 7202.
McLain suggests that it is anomalous to require the government to provide notice before seeking a civil sanction but not to provide notice before seeking a criminal sanction. McLain overlooks the fact that a person charged with a crime enjoys numerous constitutional protections, including not only the right to specific written notice of the charges against him, but a presumption of innocence that can be overcome only by proof of guilt beyond a reasonable doubt. There is nothing anomalous about requiring notice before a civil penalty is imposed on someone who does not enjoy the protections afforded to criminal defendants, but not requiring notice before a fine or sentence of imprisonment is imposed on someone who does enjoy those protections.
Finally, McLain cites the recent case of United States v. Farr, 536 F.3d 1174 (10th Cir. 2008), contending that it supports his argument that only employers may be criminally liable under § 7202. McLain reads too much into Farr. In Farr, the defendant was indicted for evading income and FICA taxes "due and owing by her" under 26 U.S.C. § 7201, a generic taxevasion provision. Id. at 1177-78. The defendant argued that, because she personally was not the employer, the taxes were not "due and owing by her." Id. at 1178. At trial, the government did not attempt to prove that the taxes were "due and owing by" the defendant, but instead offered proof that she had failed to pay the civil penalty that had been assessed against her under § 6672. Id. at 1178. The Tenth Circuit reversed the defendant's conviction because she had not been charged with failure to pay the civil penalty; thus, the district-court proceedings impermissibly amended the indictment. Id. at 1179.
The question in Farr, then, was whether the defendant was convicted of the same crime with which she was charged. Farr did not have occasion to consider whether the defendant could have been convicted for failing to account for and pay over taxes under § 7202 despite the fact that she was not the "employer." To the extent Farr is relevant at all, it suggests that the defendant could have been found criminally liable under § 7202. After all, she had been held civilly liable for a penalty under § 6672, the civil counterpart to § 7202. But rather than indicting the Farr defendant under § 7202, the government chose to indict her under § 7201 for failure to pay taxes "due and owing by her."
Section 7202 does not require that the taxes be "due and owing" by the person charged. 3 Instead, § 7202 requires that the person be required to "account for" and "pay over" taxes. Again, as a number of courts have held, an individual who works for the "employer" can be a person required to "account for" and "pay over" taxes under § 7202 and can be held criminally liable for a willful failure to perform those duties. See, e.g., United States v. Thayer, 201 F.3d 214, 219-20 (3d Cir. 1999). McLain's motion for acquittal is therefore denied.
McLain's motion for acquittal (which, again, was filed by his attorney shortly before McLain decided to represent himself) was meritless, but certainly not frivolous. The same cannot be said of McLain's pro se motions. For the most part, those motions rely on tired taxprotester arguments that have been rejected on countless occasions by the federal courts. The Court now turns to these motions.
B. Motion to Dismiss for Lack of In Personam and Territorial Jurisdiction [Docket No. 142]
McLain moves to dismiss the charges against him because, he argues, (1) he is a "natural human being" and the United States therefore does not have jurisdiction over him; (2) the United States lacks jurisdiction over crimes not committed on federal property; and (3) the Court lacks jurisdiction over crimes codified in Title 26 of the United States Code. McLain is wrong on all three counts. Under 18 U.S.C. § 3231, the Court has original jurisdiction over "all offenses against the laws of the United States," including offenses under Title 26 of the United States Code. United States v. Schmitt, 784 F.2d 880, 882 (8th Cir. 1986). The argument that the United States lacks jurisdiction over McLain because he is a "natural human being" is similarly frivolous. Id. Finally, as federal courts have held time and again, it is simply not true that the United States cannot prosecute crimes that are not committed on federal property. See United States v. Mundt, 29 F.3d 233, 237 (6th Cir. 1994).
C. Motion to Dismiss for Due Process Violations [Docket No. 144]
McLain moves to dismiss the indictment against him for violations of due process and the Fourth Amendment. In his motion, McLain alleges a number of procedural defects in the prosecution of his case. The Court will specifically address two of McLain's arguments.
First, McLain argues that the indictment is defective because no Fed. R. Crim. P. 3 complaint appears on the docket. This argument misconstrues the nature and purpose of a criminal complaint. The purpose of a complaint is to establish probable cause for an arrest; it is not a prerequisite to the issuing of an indictment. United States v. Wash. Water Power Co., 793 F.2d 1079, 1085 (9th Cir. 1986) ("an indictment can be brought in lieu of filing a complaint"). Nor is it necessary, as McLain seems to argue, for a criminal complaint to be filed as a prerequisite to the issuance of a search warrant, as opposed to an arrest warrant. Cf. Fed. R. Crim. P. 4 (setting forth standards for issuing an arrest warrant on a criminal complaint); see also Giordenello v. United States, 357 U.S. 480, 485 (1958) ("Criminal Rules 3 and 4 provide that an arrest warrant shall be issued only upon a written and sworn complaint ... ."); 1 Charles Alan Wright & Andrew D. Leipold, Federal Practice and Procedure: Criminal § 41 at 33 (4th ed. 2008) (criminal complaint's "main function is to serve as the basis for an application for an arrest warrant"). Moreover, even if his arrest or the searches of his property were illegal, McLain does not identify any evidence that he thinks should have been suppressed, and he cites no authority for the proposition that the proper remedy for an illegal search or seizure is the dismissal of the indictment.
Second, McLain argues that the indictment is defective because the docket does not include a grand-jury concurrence form. McLain, of course, was convicted because twelve of his fellow citizens --jurors who were polled in open court in front of McLain --found that the government had proven beyond a reasonable doubt that McLain had committed the offenses for which he was indicted. But McLain argues that the indictment was defective because there is no grand-jury concurrence form on the docket to prove that at least twelve members of the grand jury concurred in the indictment --i.e., to prove that twelve of his fellow citizens found that the government had established probable cause to believe that McLain had committed the offenses for which he was indicted.
Under Fed. R. Crim. P. 6(c), the grand-jury foreperson is required to record the number of jurors concurring in every indictment and file that record with the Clerk of Court. But Rule 6(c) also states that the record of concurring jurors "may not be made public unless the court so orders." To be entitled to disclosure of the grand-jury concurrence form, a defendant must meet the standards articulated in Rule 6(e)(3)(E)(ii), which requires the defendant to make a particularized showing that grounds for dismissal might exist because of matters occurring before the grand jury. McLain has made no such showing. See United States v. Broyles, 37 F.3d 1314, 1318 (8th Cir.1994) ("A long line of cases in this Circuit note that 'a bare allegation that the records [of a grand jury] are necessary to determine if there may be a defect in the grand jury process does not satisfy the "particularized need" requirement.' United States v. Warren, 16 F.3d 247, 283 (8th Cir. 1994)."). McLain's motion to dismiss for due process violations is therefore denied. 4
D. Motion to Arrest Judgment for Unconstitutionality of Title 18 [Docket No. 150]
This motion reiterates the argument that the Court lacks jurisdiction over crimes codified in Title 26, which the Court has rejected, and adds the new argument that Title 18 was not constitutionally enacted into law. This argument, too, is frivolous. See United States v. Abdullah, 289 Fed. Appx. 541, 543 n.1 (3d Cir. 2008); United States v. Miles, 244 Fed. Appx. 31, 33 (7th Cir. 2007); United States v. Martinez, Nos. 04-0157, 05-0423, 2006 WL 1293261, at *5-6 (S.D. Tex. May 6, 2006). This motion is therefore denied.
E. Motion to Arrest Judgment for Lack of Federal Jurisdiction [Docket No. 152]
In this motion, McLain argues that the federal government's taxing authority is coextensive with its power to regulate, and argues that, because the United States lacks the power to regulate him or his company, it therefore lacks the power to require him or his company to account for and pay over taxes. Although McLain's argument is somewhat difficult to follow, it seems to rest on at least three contentions: (1) the employment taxes at issue are "indirect" taxes on activities rather than "direct" taxes on individuals because, according to McLain, the federal government lacks the power to tax individuals directly; (2) the federal government lacks the power to tax activities that it cannot regulate; and (3) the federal government cannot regulate McLain's business activities because they do not take place on federal property.
All of McLain's premises are wrong. The federal government indeed has the power to tax income directly, even if that income is neither earned on federal property nor through federal employment. See Mundt, 29 F.3d at 237; United States v. Sloan, 939 F.2d 499, 501 (7th Cir. 1991) ("All individuals, natural or unnatural, must pay federal income tax on their wages, regardless of whether they requested, obtained or exercised any privilege from the federal government." (citation and quotations omitted)); United States v. Collins, 920 F.2d 619, 630 (10th Cir. 1990) ("For seventy-five years, the Supreme Court has recognized that the sixteenth amendment authorizes a direct nonapportioned tax upon United States citizens throughout the nation, not just in federal enclaves ... ."). Likewise, the United States has the authority to regulate McLain's business, even though its activities did not take place on federal property. That authority is found in, among other places, the Commerce Clause (Article 1, Section 8, Clause 3) and the Necessary and Proper Clause (Article 1, Section 8, Clause 18) of the United States Constitution. Moreover, even if McLain were correct that the United States has no direct authority to regulate his business activities --and he is not --the Supreme Court long ago recognized that Congress can tax activities that it lacks the power to regulate directly. See License Tax Cases, 72 U.S. (5 Wall.) 462, 471-75 (1866) (upholding federal law imposing a tax on activities that the federal government had no direct power to regulate). McLain's motion to arrest judgment for lack of federal jurisdiction is therefore denied.
F. Motion to Dismiss for Lack of Subject-Matter Jurisdiction [Docket No. 160]
In this motion, McLain argues generally that the Court has a duty to determine whether it has jurisdiction, but he adds nothing substantive to his other jurisdictional arguments. This motion is therefore denied for the same reasons that his other motions are denied.
G. Motion to Dismiss for Defective Indictment [Docket No. 162]
In this motion, 5 McLain argues that the failure to collect, account for, and pay over income and FICA taxes cannot give rise to criminal liability under 26 U.S.C. § 7202. As noted above, § 7202 imposes criminal penalties on "[a]ny person required under this title to collect, account for, and pay over any tax imposed by this title" who willfully fails to perform those duties. McLain argues that income and FICA taxes are not taxes "imposed by this title" because, according to McLain, "this title" refers to something other than Title 26 of the United States Code.
Specifically, McLain claims that the phrase "this title" in § 7202 is intended to refer to Title I of the Revenue Act of 1938, ch. 289, 52 Stat. 447 (1938). According to McLain, § 145 of the 1938 Act, which contains language similar to § 7202, is the original Statute at Large upon which § 7202 is based. And because Title I of the 1938 Act does not impose any income or FICA taxes, McLain argues, income and FICA taxes are not "imposed by this title" for purposes of § 7202.
McLain acknowledges that the Statute at Large which serves as the basis of Title 26 of the United States Code (including the modern-day version of § 7202) is the Internal Revenue Code of 1954. 6 See Internal Revenue Code of 1954, ch. 736, 68A Stat. 3 (1954). But according to McLain, the 1954 Code is not particularly relevant because it was intended to serve mostly as a reorganization --rather than revision --of existing tax law. Specifically, McLain cites the legislative history of the 1954 Code to argue that § 7202 of the Code was not intended to change existing law. With respect to § 7202 of the 1954 Code, the Senate and House Committee Reports state:
This section provides that, in the case of any tax imposed by this title which any person must collect and pay over to the United States, it is a felony punishable by a fine of not more than $10,000, or imprisonment for not more than 5 years, or both, willfully to fail to collect or truthfully account for and pay over such tax. This provision corresponds to numerous sections of existing law which cover this offense.
S. Rep. 83-1622 (1954), as reprinted in 1954 U.S.C.C.A.N. 4621, 5251; H.R. Rep. 83-1337 (1954), as reprinted in 1954 U.S.C.C.A.N. 4017, 4572. McLain relies on the last sentence to argue that § 7202 is merely a restatement of previous law and that no change in its scope was intended.
McLain's reliance on this sentence of legislative history is misplaced. When the text of a statute is clear, courts do not look to legislative history --at all. Ratzlaf v. United States, 510 U.S. 135, 147-48 (1994) ("we do not resort to legislative history to cloud a statutory text that is clear"). 7 And an examination of the Internal Revenue Code of 1954 makes plain that the phrase "this title" in § 7202 refers to the entire 1954 Code, including the income and FICA taxes imposed thereunder. The 1954 Code states that "[t]he provisions of this Act set forth under the heading 'Internal Revenue Title' may be cited as the 'Internal Revenue Code of 1954'." Ch. 736, 68A Stat. 3, 3 (1954). In other words, the "Internal Revenue Code" is another name for the "Internal Revenue Title" that forms the basis of Title 26. The phrase "this title" in § 7202 of the 1954 Code thus refers to the entire 1954 Code, and likewise the identical phrase in 26 U.S.C. § 7202 refers to all of Title 26.
The Court therefore rejects McLain's argument that it is necessary (or even permissible) to refer to the 1938 Act, or any other prior version of the tax laws, in order to interpret the meaning of § 7202. The Internal Revenue Code of 1954 is the correct Statute at Large to consider when construing the meaning of "this title" in § 7202, and § 7202 plainly applies to income and FICA taxes imposed under Title 26. For these reasons, McLain's motion to dismiss for defective indictment is denied.
ORDER
Based on the foregoing, and on all of the files, records, and proceedings herein, IT IS HEREBY ORDERED that:
1. Defendant's motion for acquittal [Docket No. 132] is DENIED.
2. Defendant's motion to dismiss for lack of in personam and territorial jurisdiction [Docket No. 142] is DENIED.
3. Defendant's motion to dismiss for due process violations [Docket No. 144] is DENIED.
4. Defendant's motion to arrest judgment for unconstitutionality of Title 18 [Docket No. 150] is DENIED.
5. Defendant's motion to arrest judgment for lack of federal jurisdiction [Docket No. 152] is DENIED.
6. Defendant's motion to dismiss for lack of subject-matter jurisdiction [Docket No. 160] is DENIED.
7. Defendant's motion to dismiss for defective indictment [Docket No. 162] is DENIED.
8. Defendant's motion for disclosure of grand-jury transcripts and concurrence form [Docket No. 164] is DENIED.
1 McLain hand-delivered several of these motions to Court personnel during the course of his trial. Only some of the hand-delivered motions were also filed electronically. Motions that were not filed electronically include a motion to dismiss for lack of subject-matter jurisdiction and a motion to dismiss for defective indictment. These motions have now been docketed and are addressed in this order.
2 McLain concedes the possibility that he could be a person required to "collect" federal income and FICA taxes, but points out that the indictment does not charge him with a failure to collect.
3 Similarly, § 7201 does not contain language requiring that the taxes be "due and owing by" the defendant. The "due and owing by" language, which caused the government so much trouble, appeared in the Farr indictment. As Farr noted, "[h]ad the government simply charged Ms. Farr generically under Section 7201 with the willful evasion of a tax, we might have a different situation." Farr, 536 F.3d at 1181.
4 For the same reason, the Court also denies McLain's most recent motion for disclosure of the concurrence form and transcripts of the grand-jury proceedings. Docket No. 164.
5 This motion was signed by McLain's attorney, but only after the attorney explained to the Court that McLain had prepared the motion and was insisting that it be filed, and only after the attorney sought and received the Court's permission to file the motion on McLain's behalf. For all practical purposes, the motion was filed by McLain pro se.
6 McLain also contends that the Internal Revenue Code of 1954 is prima facie evidence of the law on which Title 26 is based. Docket No. 163 at 4. McLain is incorrect. The Internal Revenue Code of 1954 was enacted into positive law in the form of a separate code and, as amended, is the authoritative statement of the law. 1 U.S.C. § 204(a) & note; ch. 736, 68A Stat. 3, 3 (1954); Pub. L. No. 99-514, 100 Stat. 2085, 2095 (1986) (stating that the Internal Revenue Title enacted in 1954, as amended, may be cited as the Internal Revenue Code of 1986); Tax Analysts v. IRS, 214 F.3d 179, 182 n.1 (D.C. Cir. 2000). Moreover, while McLain is technically correct in arguing that Title 26 is merely prima facie evidence of the law, the distinction is largely academic because the relevant sections of Title 26 are identical to the relevant sections of the Internal Revenue Code. 1 U.S.C. § 204(a) note; O'Boyle v. United States, No. 07-10006, 2007 WL 2113583, at *1 & n.1 (S.D. Fla. July 23, 2007).
7 Even if the Court did look to legislative history, that history would not necessarily compel the conclusion suggested by McLain. The ambiguous statement on which McLain relies merely states that § 7202 corresponds to existing law; it does not say that it is identical to existing law or that no substantive change was intended. In contrast, the Congressional reports repeatedly use some variation of the phrase "[t]his section contains no material change from existing law" when no substantive change was intended. See, e.g., H.R. Rep. 83-1337 (1954), as reprinted in 1954 U.S.C.C.A.N. 4017, 4572, 4573.
Willful Failure to File Return, Supply Information, or Pay Tax: Motion for acquittal
Taxpayer not having interposed a motion for judgment of acquittal at the close of all the testimony, the court could not consider the question of sufficiency of the evidence to sustain the judgment and sentence of conviction.
R.D. Leeby, CA-8, 51-2 USTC ¶9497, 192 F2d 331.
There was no reversible error in refusing to direct a verdict for taxpayer at the close of all the evidence.
P. Dillon, CA-8, 55-1 USTC ¶9131, 218 F2d 97. Rem'd, SCt, 56-1 USTC ¶9111, 350 US 906.
Bostwick, CA-5, 55-1 USTC ¶9170, 218 F2d 790.
E.P. Black, CA-8, 62-2 USTC ¶9792, 309 F2d 331. Cert. denied, 372 US 934.
G.M. Michals, CA-10, 72-2 USTC ¶9737, 469 F2d 215.
Motion to direct an acquittal on a count dealing with defendant's wife's separate return should have been granted. However, a new trial is ordered instead of reversal with directions to acquit on this count.
Steele, CA-5, 55-1 USTC ¶9438, 222 F2d 628; conviction for 1948 aff'd after new trial, CA-5, 57-1 USTC ¶9607, 243 F2d 712.
Motion for acquittal properly granted on two counts because of insufficient evidence.
W.A. Mousley, CA-3, 63-1 USTC ¶9245, 311 F2d 795. Cert. denied, 372 US 966.
The court granted the taxpayer's motion for judgment of acquittal where the government did not present evidence to prove intent to evade taxes and no conviction for understatement of income with intent to evade taxes could be sustained.
D.O. Hestnes, DC, 80-2 USTC ¶9669, 492 FSupp 999.
Court of Appeals, in granting new trial because of numerous errors in decision of court below, did not see fit to direct acquittal.
J.V. Gikas, CA-1, 58-1 USTC ¶9147, 250 F2d 858.
Under the broad conspiracy allegations of the indictment, it was proper for the Court to refuse to limit the Government's case to specific acts of concealment or particular theories, so long as it properly emphasized that a common unity of purpose among the defendants had to be established.
H.H. Klein, CA-2, 57-2 USTC ¶9912, 247 F2d 908.
A motion for acquittal was improperly denied as to a count involving 1954 taxes where the taxpayer was charged with stating that "the amount of taxes due and owing ... was the sum of zero dollars," and the form used did not contain such a statement nor any computation or determination of tax.
J.W. Janko, CA-8, 60-2 USTC ¶9580, 281 F2d 156.
Motion for acquittal was properly denied where the evidence was sufficient to warrant submission to the jury of an indictment for tax evasion. A reconstruction showed substantial tax to be owing for taxable years and deficiency assessments had also been made against the taxpayer for earlier years.
J.J. Burke, Jr., CA-1, 61-2 USTC ¶9617, 293 F2d 398. Cert. denied, 368 US 930.
Motion for acquittal granted where the evidence indicated that taxpayer had no knowledge of the contents of business records and that his mother and sister maintained them. The evidence also indicated that his mother forged his name on the tax returns.
N. Melillo, DC, 67-2 USTC ¶9717, 274 FSupp 314.
Motion for acquittal granted where evidence indicated that the taxpayer's failure to file was due to lack of funds and that he submitted W-2 forms disclosing his tax liability.
R.R. Power, DC, 68-2 USTC ¶9443.
Although the trial court erroneously failed to rule on the taxpayer's motion for acquittal before requiring the taxpayer to proceed with his case, such error was not prejudicial because the government's evidence at that stage of the case was sufficient to support the jury verdict.
J.L. Sullivan, CA-9, 69-2 USTC ¶9533, 414 F2d 714.
Motion for acquittal was denied because government's use of net worth method was reliable, and evidence of willfulness was sufficient to put case before a jury. Therefore, taxpayer's conviction for willful failure to file tax returns, where he admitted receiving gambling income, was proper.
I.L. Shy, DC, 75-1 USTC ¶9206, 383 FSupp 673.
A motion for acquittal was granted. The government failed to establish the existence of deficiencies in that it did not show that the cash-basis taxpayers received certain checks in time to deposit them before the end of the years in question. Furthermore, there was insufficient evidence to show that certain checks that were negotiated by the taxpayer-husband rather than deposited were excluded from reported gross receipts.
E.F. House, CA-3, 75-2 USTC ¶9782, 524 F2d 1035, rev'g in part and rev'g and rem'g in part, DC, 75-1 USTC ¶9285. Reh'g denied by CA-3, 76-2 USTC ¶9616.
The district court's order granting the taxpayers' post-verdict motions for judgments of acquittal based on a finding that venue in the Northern District of West Virginia was improper was reversed and remanded with directions to reinstate the jury's verdict of guilty.
B.F. Goodyear, CA-4, 81-1 USTC ¶9423, 649 F2d 226.
A federal district court improperly granted a married couple's motion for judgments of acquittal after a jury had convicted the couple for income tax evasion. The government produced sufficient evidence for a jury to conclude that the couple had knowledge of the contents of their return and that the income figure reported on the return was vastly understated. The couple's expenditures greatly exceeded their reported income, and they failed to record business receipts, withheld material from their accountant, and deliberately understated rental income.
A.G. Olbres, CA-1, 95-2 USTC ¶50,401, 61 F3d 967. Cert. denied, 116 SCt 522.
The evidence overwhelmingly supported the jury's verdict of failure to file and the court denied the taxpayer's motion for acquittal, asserted on the grounds of vindictive prosecution and on the grounds that his Fifth Amendment rights were violated.
J.M. Grabinski, CA-8, 84-1 USTC ¶9201, 727 F2d 681.
Although there were signs that the taxpayer was merely careless in preparing his returns, the court refused to overturn a jury's conviction of the taxpayer for intentionally evading income taxes by filing false tax returns. One evidence of intent was the taxpayer's request for and receipt of a salary raise that he failed to report on his returns.
M.S. Tishberg, CA-7, 88-2 USTC ¶9492, 854 F2d 1070.
Defendant, who dealt in bets on sporting events, was entitled to acquittal on the charge of failing to file information returns.
Carroll, DC, 54-1 USTC ¶9335, 117 FSupp 209.
Motion for acquittal upon grounds that the verdict was based only upon circumstantial evidence was denied as there was sufficient evidence to support the verdict.
C.R. O'Day, DC, 60-2 USTC ¶9605, 186 FSupp 572.
A motion for judgment of acquittal or, in the alternative, for a new trial were denied, there being sufficient evidence to show willfulness.
Dr. F.L. Benus, DC, 61-2 USTC ¶9669, 196 FSupp 601.
R.R.P. Perna, DC, 61-2 USTC ¶9621, 197 FSupp 853.
H.W. Polk, CA-9, 72-1 USTC ¶9127, 446 F2d 1401.
R.F. Wilson, CA-5, 71-1 USTC ¶9391, 440 F2d 1103. Cert. denied, 404 US 882.
R.F. Wilson, CA-5, 72-1 USTC ¶9262, 450 F2d 795. Cert. denied, 405 US 1016.
J.W. Greenlee, DC, 75-1 USTC ¶9192.
A motion for acquittal notwithstanding the verdict was denied because there was sufficient evidence to support the verdict.
J.R. Crocker, DC Del., 92-1 USTC ¶50,008.
A motion for acquittal raised by a diamond sawblade seller who had been convicted of tax evasion was denied. The motion was untimely filed, and the evidence at trial showed that he earned substantial taxable income. Further, his argument that income described in the Sixteenth Amendment and subject to tax was limited to profit proceeding from property was meritless.
N.H. Rhodes, DC Pa., 96-2 USTC ¶50,341, 921 FSupp 261.
An individual was not entitled to a judgment of acquittal or for a new trial with regard to his indictment for several counts of willful tax evasion. The government's evidence at trial clearly showed that he operated his business under a false name, that he took elaborate steps to conceal his true identity and income, and that he had not filed a tax return for any of the tax years at issue. Further, the individual's motion for a mistrial on the ground that the government failed to provide him with copies of third-party summonses it issued to witnesses for production of requested documents was rejected because the government was not required to provide a notice of third-party summonses issued with regard to criminal investigations.
N. Stierhoff, DC R.I., 2007-2 USTC ¶50,626.
An individual convicted of willful failure to collect or pay over tax was not entitled to a judgment of acquittal or a new trial. The individual controlled and operated the company that was his employer and he freely chose to spend corporate funds on non-essential goods and entertainment rather than paying the taxes. Further, the individual failed to prove that a new trial was required. The jury instructions were appropriate and, contrary to the individual's argument, the ability to pay was not an essential element of the crime required to be included in the jury instruction. Additionally, a special verdict form was not required because it was presumed that the jury followed the instructions.
R. Blanchard, DC Mich., 2008-2 USTC ¶50,535.
A federal district court properly convicted and sentenced an individual for income tax evasion. The individual operated his business under a false name, concealed his identity and income, and did not file a tax return for any of the tax years at issue. A rational jury could easily infer that the individual knew of his obligation to file federal income tax returns and that his failure to do so was an intentional violation of a known legal duty.
N. Stierhoff, CA-1, 2009-1 USTC ¶50,103.
An individual was not entitled to an acquittal or a new trial with respect to his indictment for willful failure to file returns. The individual did not introduce into evidence a purported IRS letter that allegedly excused the individual from filing returns for the years charged, and an IRS agent stated he had never seen such a letter during his decades as an IRS employee. The jury had sufficient evidence to conclude that the individual was obligated to file tax returns. The government's characterization of testimony at the closing argument, although inaccurate, was not prejudicial. The jury was properly instructed that statements and arguments by counsel were not evidence and that it had to base its decision solely on the evidence presented before the court. Finally, the individual was not prevented from presenting his defense and was not entitled to a new trial on the basis of the alleged prosecutorial misconduct because the prosecutorial errors were not significant and did not deprive the individual of his right to a fair trial.
W. Orr, DC Colo., 2009-1 USTC ¶50,221.
A federal district court improperly acquitted an individual after a jury found him guilty of tax evasion. The government produced sufficient evidence for a jury to conclude that the individual transferred his house to avoid an IRS lien and made false statements to IRS agents about his income to deter them from pursuing further collection efforts. However, the court acted within its discretion in conditionally granting a new trial.
C.V. Herrera, CA-5, 2009-1 USTC ¶50,226.
Willful Failure to File Return, Supply Information, or Pay Tax: Willful failure to pay over withheld taxes
The president and sole shareholder of a computer consulting company was properly convicted of willful failure to pay over withheld employment taxes. He knew about his obligations regarding the withheld taxes, and his testimony established that he voluntarily and intentionally violated his known legal duty to remit the taxes. Further, the prosecution was brought in a timely manner because the six-year, rather than the three-year, statute of limitations applied to violations of Code Sec. 7202.
R. Gollapudi, CA-3, 97-2 USTC ¶50,978, 130 F3d 66. Cert. denied, 118 SCt 1190.
Related taxpayers who owned and operated several businesses were properly convicted of willful failure to pay over withheld payroll taxes. Resolving an issue of first impression, the court concluded that Code Sec. 7202 creates a dual obligation to both truthfully account for and to pay over the taxes. Thus, even though the taxpayers truthfully accounted for the taxes by submitting the necessary forms to the IRS, they committed a crime when they neglected to pay over the funds.
P. Evangelista, CA-2, 97-2 USTC ¶50,608, 122 F3d 112.
A debtor who co-owned two corporations with his wife was properly convicted of failing to pay over federal withholding and FICA taxes on behalf of the businesses. As the president and majority owner of the corporation, he qualified as a person required to pay over withheld taxes under Code Sec. 7202. Moreover, the fact that the taxpayer collected and accounted for the withheld funds did not preclude his conviction since his failure to pay over the taxes was sufficient to support his conviction.
W.H. Thayer, CA-3, 2000-1 USTC ¶50,136, 201 F3d 214. Cert. denied, 6/19/2000.
The taxpayer was properly convicted of failing to pay over employment taxes.
T.L. Gilbert, CA-9, 2001-2 USTC ¶50,655.
C.D. Morrison, CA-4 (unpublished opinion), 2002-1 USTC ¶50,231, aff'g, per curiam, an unreported District Court decision.
A.S. Adam, CA-5, 2002-2 USTC ¶50,502.
D.G. Pflum, CA-10 (unpublished opinion), 2005-2 USTC ¶50,603, aff'g an unreported District Court decision.
An individual's conviction for tax evasion and willful failure to account for and pay over payroll taxes was affirmed. Although the taxpayer withheld taxes from his employees' wages, he failed to pay over those taxes to the IRS and retained the funds in a corporate bank account that he controlled and accessed for personal expenditures.
M.W. May, CA-6 (unpublished opinion), 2006-1 USTC ¶50,260, aff'g, per curiam, an unreported DC Ohio decision.
A federal district court did not err by admitting evidence relating to a defendant's prior noncompliance with federal tax laws for purposes of proving her intent to commit the crime of knowingly and willfully attempting to evade the payment of her corporation's payroll tax liability by directing its clients to pay their outstanding balances to a successor corporation. The evidence of prior misconduct was properly admissible under Federal Rule of Evidence 404(b) to establish the requisite intent to commit the charged crime and did not amount to a constructive amendment of the terms of the indictment or a prejudicial variance from the allegations in the indictment. The district court's repeated and precise instructions to consider this evidence solely for purposes of determining intent ensured that the jury could convict her only for a crime based on the wrongful conduct charged in the indictment.
D. Daraio, CA-3, 2006-2 USTC ¶50,544.
The owner of a corporation was properly convicted and sentenced by a federal district court for several counts of willful failure to pay employment tax, and embezzlement from his company's 401(k) plan and its health benefits plan. The evidence presented at trial sufficiently showed that the owner retained significant, if not exclusive, control over the company's finances during the tax periods at issue. Moreover, the owner was entrusted with control of employee contributions to the 401(k) and health care benefits plans and he wrongfully diverted those amounts for his own purposes.
A.M. Armstrong, CA-8 (unpublished opinion), 2007-1 USTC ¶50,105, aff'g, per curiam, an unreported DC Iowa decision.
Evidence pertaining to married businessowners' indictments for willful failure to pay withheld income and FICA taxes was not prejudicial and was, therefore, admissible at a jury trial. The evidence pertaining to the couple's expenditures from the intermingled personal and company funds for the lease of two automobiles, amounts spent on gambling at a casino, and the husband's purchase of firearms and a compact disc player, was relevant to the issue of the existence of sufficient funds to satisfy the couple's tax obligations.
R. Blanchard, DC Mich., 2007-2 USTC ¶50,596.
An individual was properly convicted and sentenced for willful failure to pay over withheld employment taxes to the IRS for the years at issue. The government's evidence at trial sufficiently showed that the individual, as the responsible person to pay withheld payroll taxes, willfully failed to make such payment.
M.D. Cordell, CA-5 (unpublished opinion), 2007-2 USTC ¶50,628, aff'g, per curiam, an unreported DC Texas decision.
An individual was not entitled to a jury instruction contending that his failure to pay over employee payroll taxes was not willful because he did not have money to pay the taxes. In order to establish willfulness, the government was not required to prove that the individual had the ability to meet his tax obligations. Instead, the failure to pay was willful because the individual knew that he owed taxes and did not pay them.
J.E. Easterday, CA-9, 2008-2 USTC ¶50,512.
An individual convicted of willful failure to collect or pay over tax was not entitled to a judgment of acquittal or a new trial. The individual controlled and operated the company that was his employer and he freely chose to spend corporate funds on non-essential goods and entertainment, rather than paying the taxes.
R. Blanchard, DC Mich., 2008-2 USTC ¶50,535.
It does not appear that "willfulness" was argued in this case. I do not see payroll tax cases end up as section 7202 criminal cases because there is always a defense that there were distractions that resulted in the failure to pay payroll taxes. The DOJ is required to prove a 7202 offense "beyond a reasonable doubt." In all cases where payroll taxes are not being paid, contact www.irstaxattorney.com for assistance.
United States of America, Plaintiff v. Frances Leroy McLain, Defendant.
U.S. District Court, Dist. Minn.; 08-CR-0010 (PJS/FLN), February 17, 2009.
[
ORDER
SCHILTZ, United States District Judge: On November 18, 2008, defendant Francis Leroy McLain was convicted of nine counts of failing to account for and pay over taxes in violation of 26 U.S.C. § 7202.
A. Motion for Acquittal [Docket No. 132]
During the time period relevant to this action, McLain owned and operated a business --a business that was run under various names, including "Kind Hearts" and "Kirpal Nurses, LLC" (collectively "Kirpal") --that supplied temporary nursing staff to nursing homes and other healthcare facilities. McLain was convicted under 26 U.S.C. § 7202 of failing to account for and pay over income and Federal Income Contribution Act ("FICA") taxes on Kirpal employees. Section 7202 states:
Any person required under this title to collect, account for, and pay over any tax imposed by this title who willfully fails to collect or truthfully account for and pay over such tax shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $10,000, or imprisoned not more than 5 years, or both, together with the costs of prosecution.
McLain moves for acquittal on the basis that there is no evidence --indeed, the indictment does not even allege --that McLain personally employed any of the Kirpal staff. Instead, McLain argues, Kirpal was the employer, and under the relevant statutes only Kirpal had a duty to account for and pay over taxes on its employees. See 26 U.S.C. § 3402(a)(1) (imposing duty to withhold income taxes on the "employer"); 26 U.S.C. § 3403 (imposing liability for tax withheld under § 3402 on the "employer"); 26 U.S.C. § 3102(a) (imposing duty to withhold FICA taxes on the "employer"); 26 U.S.C. § 3102(b) (imposing liability for tax withheld under § 3102(a) on the "employer"). Because he was not the employer, McLain argues, he was not a "person required under this title to ... account for[] and pay over any tax imposed by this title" within the meaning of § 7202. 2
If it were writing on a clean slate, this Court would have some sympathy for McLain's argument, which finds support in the literal terms of the relevant statutes. But the slate has not been clean for over thirty years --not since the Supreme Court issued its decision in Slodov v. United States, 436 U.S. 238 (1978), and federal courts, in reliance on Slodov, began holding that an officer or employee of a corporate employer can indeed be convicted of violating § 7202.
Slodov itself was not a criminal case. Instead, it addressed the liability of an individual for failing to pay over income and FICA taxes under 26 U.S.C. § 6672, which is the civil counterpart to § 7202. Like § 7202, § 6672 applies to "[a]ny person required to collect, truthfully account for, and pay over any tax imposed by this title" and imposes a civil penalty equal to the amount of the tax delinquency on such persons. As the Supreme Court explained in Slodov, an officer or employee of a corporate employer can be a "person required to collect, truthfully account for, and pay over" taxes under § 6672 by virtue of 26 U.S.C. § 6671(b), which states:
The term "person", as used in this subchapter, includes an officer or employee of a corporation, or a member or employee of a partnership, who as such officer, employee, or member is under a duty to perform the act in respect of which the violation occurs.
See Slodov, 436 U.S. at 244-45. Although the Supreme Court did not explicitly dissect the language of §§ 6672 and 6671(b), the Court must have reasoned that while the employer is liable for payment of the taxes "imposed by this title" within the meaning of § 6672, a person can be required to "collect, truthfully account for, and pay over" those taxes even if that person is not himself the employer, but merely an officer or employee of the employer.
As the Supreme Court recognized, § 7202 tracks the wording of § 6672. Slodov, 436 U.S. at 245. And § 7202 incorporates a similar definition of "person." See 26 U.S.C. § 7343. Thus, just as an individual corporate officer or employee can be civilly liable under § 6672, that officer or employee can be criminally liable under § 7202. "[A]n employer-official or other employee responsible for collecting and paying taxes who willfully fails to do so is subject to both a civil penalty equivalent to 100% of the taxes not collected or paid, and to a felony conviction." Slodov, 436 U.S. at 245 (emphasis added). Under Slodov, then, McLain can be convicted under § 7202 even though he personally did not employ any of the staff at Kirpal.
McLain also argues that, even if he could be held criminally liable under § 7202, the United States must seek to impose a civil penalty against him under § 6672 before it can prosecute him under § 7202. McLain argues further that he cannot be ordered to pay a civil penalty under § 6672(a) because he did not receive the written notice required by § 6672(b). Because he received no notice under § 6672(b), McLain argues, he cannot be penalized under § 6672(a), and because he cannot be penalized under § 6672(a), he cannot be convicted under § 7202.
McLain misreads the statute. Nothing in any statute or judicial opinion requires the government to proceed against an individual civilly under § 6672(a) before bringing a criminal prosecution under § 7202. In addition, nothing in any statute or judicial opinion requires the government to provide notice under § 6672(b) before proceeding under § 7202. To the contrary, the notice provision of § 6672(b), on its face, applies only to the civil "penalty ... imposed under subsection (a) [of § 6672] ... ." Obviously, a sentence of imprisonment or fine imposed on someone convicted of violating § 7202 is not a civil "penalty ... imposed under subsection (a) [of § 6672] ... ." Moreover, both § 6672 and § 7202 provide that the penalties they authorize are "in addition to other penalties provided by law ... ." Thus, the civil and criminal penalties of the two statutes, although complementary, are separate, and the notice provision of § 6672(b) does not apply to prosecutions under § 7202.
McLain suggests that it is anomalous to require the government to provide notice before seeking a civil sanction but not to provide notice before seeking a criminal sanction. McLain overlooks the fact that a person charged with a crime enjoys numerous constitutional protections, including not only the right to specific written notice of the charges against him, but a presumption of innocence that can be overcome only by proof of guilt beyond a reasonable doubt. There is nothing anomalous about requiring notice before a civil penalty is imposed on someone who does not enjoy the protections afforded to criminal defendants, but not requiring notice before a fine or sentence of imprisonment is imposed on someone who does enjoy those protections.
Finally, McLain cites the recent case of United States v. Farr, 536 F.3d 1174 (10th Cir. 2008), contending that it supports his argument that only employers may be criminally liable under § 7202. McLain reads too much into Farr. In Farr, the defendant was indicted for evading income and FICA taxes "due and owing by her" under 26 U.S.C. § 7201, a generic taxevasion provision. Id. at 1177-78. The defendant argued that, because she personally was not the employer, the taxes were not "due and owing by her." Id. at 1178. At trial, the government did not attempt to prove that the taxes were "due and owing by" the defendant, but instead offered proof that she had failed to pay the civil penalty that had been assessed against her under § 6672. Id. at 1178. The Tenth Circuit reversed the defendant's conviction because she had not been charged with failure to pay the civil penalty; thus, the district-court proceedings impermissibly amended the indictment. Id. at 1179.
The question in Farr, then, was whether the defendant was convicted of the same crime with which she was charged. Farr did not have occasion to consider whether the defendant could have been convicted for failing to account for and pay over taxes under § 7202 despite the fact that she was not the "employer." To the extent Farr is relevant at all, it suggests that the defendant could have been found criminally liable under § 7202. After all, she had been held civilly liable for a penalty under § 6672, the civil counterpart to § 7202. But rather than indicting the Farr defendant under § 7202, the government chose to indict her under § 7201 for failure to pay taxes "due and owing by her."
Section 7202 does not require that the taxes be "due and owing" by the person charged. 3 Instead, § 7202 requires that the person be required to "account for" and "pay over" taxes. Again, as a number of courts have held, an individual who works for the "employer" can be a person required to "account for" and "pay over" taxes under § 7202 and can be held criminally liable for a willful failure to perform those duties. See, e.g., United States v. Thayer, 201 F.3d 214, 219-20 (3d Cir. 1999). McLain's motion for acquittal is therefore denied.
McLain's motion for acquittal (which, again, was filed by his attorney shortly before McLain decided to represent himself) was meritless, but certainly not frivolous. The same cannot be said of McLain's pro se motions. For the most part, those motions rely on tired taxprotester arguments that have been rejected on countless occasions by the federal courts. The Court now turns to these motions.
B. Motion to Dismiss for Lack of In Personam and Territorial Jurisdiction [Docket No. 142]
McLain moves to dismiss the charges against him because, he argues, (1) he is a "natural human being" and the United States therefore does not have jurisdiction over him; (2) the United States lacks jurisdiction over crimes not committed on federal property; and (3) the Court lacks jurisdiction over crimes codified in Title 26 of the United States Code. McLain is wrong on all three counts. Under 18 U.S.C. § 3231, the Court has original jurisdiction over "all offenses against the laws of the United States," including offenses under Title 26 of the United States Code. United States v. Schmitt, 784 F.2d 880, 882 (8th Cir. 1986). The argument that the United States lacks jurisdiction over McLain because he is a "natural human being" is similarly frivolous. Id. Finally, as federal courts have held time and again, it is simply not true that the United States cannot prosecute crimes that are not committed on federal property. See United States v. Mundt, 29 F.3d 233, 237 (6th Cir. 1994).
C. Motion to Dismiss for Due Process Violations [Docket No. 144]
McLain moves to dismiss the indictment against him for violations of due process and the Fourth Amendment. In his motion, McLain alleges a number of procedural defects in the prosecution of his case. The Court will specifically address two of McLain's arguments.
First, McLain argues that the indictment is defective because no Fed. R. Crim. P. 3 complaint appears on the docket. This argument misconstrues the nature and purpose of a criminal complaint. The purpose of a complaint is to establish probable cause for an arrest; it is not a prerequisite to the issuing of an indictment. United States v. Wash. Water Power Co., 793 F.2d 1079, 1085 (9th Cir. 1986) ("an indictment can be brought in lieu of filing a complaint"). Nor is it necessary, as McLain seems to argue, for a criminal complaint to be filed as a prerequisite to the issuance of a search warrant, as opposed to an arrest warrant. Cf. Fed. R. Crim. P. 4 (setting forth standards for issuing an arrest warrant on a criminal complaint); see also Giordenello v. United States, 357 U.S. 480, 485 (1958) ("Criminal Rules 3 and 4 provide that an arrest warrant shall be issued only upon a written and sworn complaint ... ."); 1 Charles Alan Wright & Andrew D. Leipold, Federal Practice and Procedure: Criminal § 41 at 33 (4th ed. 2008) (criminal complaint's "main function is to serve as the basis for an application for an arrest warrant"). Moreover, even if his arrest or the searches of his property were illegal, McLain does not identify any evidence that he thinks should have been suppressed, and he cites no authority for the proposition that the proper remedy for an illegal search or seizure is the dismissal of the indictment.
Second, McLain argues that the indictment is defective because the docket does not include a grand-jury concurrence form. McLain, of course, was convicted because twelve of his fellow citizens --jurors who were polled in open court in front of McLain --found that the government had proven beyond a reasonable doubt that McLain had committed the offenses for which he was indicted. But McLain argues that the indictment was defective because there is no grand-jury concurrence form on the docket to prove that at least twelve members of the grand jury concurred in the indictment --i.e., to prove that twelve of his fellow citizens found that the government had established probable cause to believe that McLain had committed the offenses for which he was indicted.
Under Fed. R. Crim. P. 6(c), the grand-jury foreperson is required to record the number of jurors concurring in every indictment and file that record with the Clerk of Court. But Rule 6(c) also states that the record of concurring jurors "may not be made public unless the court so orders." To be entitled to disclosure of the grand-jury concurrence form, a defendant must meet the standards articulated in Rule 6(e)(3)(E)(ii), which requires the defendant to make a particularized showing that grounds for dismissal might exist because of matters occurring before the grand jury. McLain has made no such showing. See United States v. Broyles, 37 F.3d 1314, 1318 (8th Cir.1994) ("A long line of cases in this Circuit note that 'a bare allegation that the records [of a grand jury] are necessary to determine if there may be a defect in the grand jury process does not satisfy the "particularized need" requirement.' United States v. Warren, 16 F.3d 247, 283 (8th Cir. 1994)."). McLain's motion to dismiss for due process violations is therefore denied. 4
D. Motion to Arrest Judgment for Unconstitutionality of Title 18 [Docket No. 150]
This motion reiterates the argument that the Court lacks jurisdiction over crimes codified in Title 26, which the Court has rejected, and adds the new argument that Title 18 was not constitutionally enacted into law. This argument, too, is frivolous. See United States v. Abdullah, 289 Fed. Appx. 541, 543 n.1 (3d Cir. 2008); United States v. Miles, 244 Fed. Appx. 31, 33 (7th Cir. 2007); United States v. Martinez, Nos. 04-0157, 05-0423, 2006 WL 1293261, at *5-6 (S.D. Tex. May 6, 2006). This motion is therefore denied.
E. Motion to Arrest Judgment for Lack of Federal Jurisdiction [Docket No. 152]
In this motion, McLain argues that the federal government's taxing authority is coextensive with its power to regulate, and argues that, because the United States lacks the power to regulate him or his company, it therefore lacks the power to require him or his company to account for and pay over taxes. Although McLain's argument is somewhat difficult to follow, it seems to rest on at least three contentions: (1) the employment taxes at issue are "indirect" taxes on activities rather than "direct" taxes on individuals because, according to McLain, the federal government lacks the power to tax individuals directly; (2) the federal government lacks the power to tax activities that it cannot regulate; and (3) the federal government cannot regulate McLain's business activities because they do not take place on federal property.
All of McLain's premises are wrong. The federal government indeed has the power to tax income directly, even if that income is neither earned on federal property nor through federal employment. See Mundt, 29 F.3d at 237; United States v. Sloan, 939 F.2d 499, 501 (7th Cir. 1991) ("All individuals, natural or unnatural, must pay federal income tax on their wages, regardless of whether they requested, obtained or exercised any privilege from the federal government." (citation and quotations omitted)); United States v. Collins, 920 F.2d 619, 630 (10th Cir. 1990) ("For seventy-five years, the Supreme Court has recognized that the sixteenth amendment authorizes a direct nonapportioned tax upon United States citizens throughout the nation, not just in federal enclaves ... ."). Likewise, the United States has the authority to regulate McLain's business, even though its activities did not take place on federal property. That authority is found in, among other places, the Commerce Clause (Article 1, Section 8, Clause 3) and the Necessary and Proper Clause (Article 1, Section 8, Clause 18) of the United States Constitution. Moreover, even if McLain were correct that the United States has no direct authority to regulate his business activities --and he is not --the Supreme Court long ago recognized that Congress can tax activities that it lacks the power to regulate directly. See License Tax Cases, 72 U.S. (5 Wall.) 462, 471-75 (1866) (upholding federal law imposing a tax on activities that the federal government had no direct power to regulate). McLain's motion to arrest judgment for lack of federal jurisdiction is therefore denied.
F. Motion to Dismiss for Lack of Subject-Matter Jurisdiction [Docket No. 160]
In this motion, McLain argues generally that the Court has a duty to determine whether it has jurisdiction, but he adds nothing substantive to his other jurisdictional arguments. This motion is therefore denied for the same reasons that his other motions are denied.
G. Motion to Dismiss for Defective Indictment [Docket No. 162]
In this motion, 5 McLain argues that the failure to collect, account for, and pay over income and FICA taxes cannot give rise to criminal liability under 26 U.S.C. § 7202. As noted above, § 7202 imposes criminal penalties on "[a]ny person required under this title to collect, account for, and pay over any tax imposed by this title" who willfully fails to perform those duties. McLain argues that income and FICA taxes are not taxes "imposed by this title" because, according to McLain, "this title" refers to something other than Title 26 of the United States Code.
Specifically, McLain claims that the phrase "this title" in § 7202 is intended to refer to Title I of the Revenue Act of 1938, ch. 289, 52 Stat. 447 (1938). According to McLain, § 145 of the 1938 Act, which contains language similar to § 7202, is the original Statute at Large upon which § 7202 is based. And because Title I of the 1938 Act does not impose any income or FICA taxes, McLain argues, income and FICA taxes are not "imposed by this title" for purposes of § 7202.
McLain acknowledges that the Statute at Large which serves as the basis of Title 26 of the United States Code (including the modern-day version of § 7202) is the Internal Revenue Code of 1954. 6 See Internal Revenue Code of 1954, ch. 736, 68A Stat. 3 (1954). But according to McLain, the 1954 Code is not particularly relevant because it was intended to serve mostly as a reorganization --rather than revision --of existing tax law. Specifically, McLain cites the legislative history of the 1954 Code to argue that § 7202 of the Code was not intended to change existing law. With respect to § 7202 of the 1954 Code, the Senate and House Committee Reports state:
This section provides that, in the case of any tax imposed by this title which any person must collect and pay over to the United States, it is a felony punishable by a fine of not more than $10,000, or imprisonment for not more than 5 years, or both, willfully to fail to collect or truthfully account for and pay over such tax. This provision corresponds to numerous sections of existing law which cover this offense.
S. Rep. 83-1622 (1954), as reprinted in 1954 U.S.C.C.A.N. 4621, 5251; H.R. Rep. 83-1337 (1954), as reprinted in 1954 U.S.C.C.A.N. 4017, 4572. McLain relies on the last sentence to argue that § 7202 is merely a restatement of previous law and that no change in its scope was intended.
McLain's reliance on this sentence of legislative history is misplaced. When the text of a statute is clear, courts do not look to legislative history --at all. Ratzlaf v. United States, 510 U.S. 135, 147-48 (1994) ("we do not resort to legislative history to cloud a statutory text that is clear"). 7 And an examination of the Internal Revenue Code of 1954 makes plain that the phrase "this title" in § 7202 refers to the entire 1954 Code, including the income and FICA taxes imposed thereunder. The 1954 Code states that "[t]he provisions of this Act set forth under the heading 'Internal Revenue Title' may be cited as the 'Internal Revenue Code of 1954'." Ch. 736, 68A Stat. 3, 3 (1954). In other words, the "Internal Revenue Code" is another name for the "Internal Revenue Title" that forms the basis of Title 26. The phrase "this title" in § 7202 of the 1954 Code thus refers to the entire 1954 Code, and likewise the identical phrase in 26 U.S.C. § 7202 refers to all of Title 26.
The Court therefore rejects McLain's argument that it is necessary (or even permissible) to refer to the 1938 Act, or any other prior version of the tax laws, in order to interpret the meaning of § 7202. The Internal Revenue Code of 1954 is the correct Statute at Large to consider when construing the meaning of "this title" in § 7202, and § 7202 plainly applies to income and FICA taxes imposed under Title 26. For these reasons, McLain's motion to dismiss for defective indictment is denied.
ORDER
Based on the foregoing, and on all of the files, records, and proceedings herein, IT IS HEREBY ORDERED that:
1. Defendant's motion for acquittal [Docket No. 132] is DENIED.
2. Defendant's motion to dismiss for lack of in personam and territorial jurisdiction [Docket No. 142] is DENIED.
3. Defendant's motion to dismiss for due process violations [Docket No. 144] is DENIED.
4. Defendant's motion to arrest judgment for unconstitutionality of Title 18 [Docket No. 150] is DENIED.
5. Defendant's motion to arrest judgment for lack of federal jurisdiction [Docket No. 152] is DENIED.
6. Defendant's motion to dismiss for lack of subject-matter jurisdiction [Docket No. 160] is DENIED.
7. Defendant's motion to dismiss for defective indictment [Docket No. 162] is DENIED.
8. Defendant's motion for disclosure of grand-jury transcripts and concurrence form [Docket No. 164] is DENIED.
1 McLain hand-delivered several of these motions to Court personnel during the course of his trial. Only some of the hand-delivered motions were also filed electronically. Motions that were not filed electronically include a motion to dismiss for lack of subject-matter jurisdiction and a motion to dismiss for defective indictment. These motions have now been docketed and are addressed in this order.
2 McLain concedes the possibility that he could be a person required to "collect" federal income and FICA taxes, but points out that the indictment does not charge him with a failure to collect.
3 Similarly, § 7201 does not contain language requiring that the taxes be "due and owing by" the defendant. The "due and owing by" language, which caused the government so much trouble, appeared in the Farr indictment. As Farr noted, "[h]ad the government simply charged Ms. Farr generically under Section 7201 with the willful evasion of a tax, we might have a different situation." Farr, 536 F.3d at 1181.
4 For the same reason, the Court also denies McLain's most recent motion for disclosure of the concurrence form and transcripts of the grand-jury proceedings. Docket No. 164.
5 This motion was signed by McLain's attorney, but only after the attorney explained to the Court that McLain had prepared the motion and was insisting that it be filed, and only after the attorney sought and received the Court's permission to file the motion on McLain's behalf. For all practical purposes, the motion was filed by McLain pro se.
6 McLain also contends that the Internal Revenue Code of 1954 is prima facie evidence of the law on which Title 26 is based. Docket No. 163 at 4. McLain is incorrect. The Internal Revenue Code of 1954 was enacted into positive law in the form of a separate code and, as amended, is the authoritative statement of the law. 1 U.S.C. § 204(a) & note; ch. 736, 68A Stat. 3, 3 (1954); Pub. L. No. 99-514, 100 Stat. 2085, 2095 (1986) (stating that the Internal Revenue Title enacted in 1954, as amended, may be cited as the Internal Revenue Code of 1986); Tax Analysts v. IRS, 214 F.3d 179, 182 n.1 (D.C. Cir. 2000). Moreover, while McLain is technically correct in arguing that Title 26 is merely prima facie evidence of the law, the distinction is largely academic because the relevant sections of Title 26 are identical to the relevant sections of the Internal Revenue Code. 1 U.S.C. § 204(a) note; O'Boyle v. United States, No. 07-10006, 2007 WL 2113583, at *1 & n.1 (S.D. Fla. July 23, 2007).
7 Even if the Court did look to legislative history, that history would not necessarily compel the conclusion suggested by McLain. The ambiguous statement on which McLain relies merely states that § 7202 corresponds to existing law; it does not say that it is identical to existing law or that no substantive change was intended. In contrast, the Congressional reports repeatedly use some variation of the phrase "[t]his section contains no material change from existing law" when no substantive change was intended. See, e.g., H.R. Rep. 83-1337 (1954), as reprinted in 1954 U.S.C.C.A.N. 4017, 4572, 4573.
Willful Failure to File Return, Supply Information, or Pay Tax: Motion for acquittal
Taxpayer not having interposed a motion for judgment of acquittal at the close of all the testimony, the court could not consider the question of sufficiency of the evidence to sustain the judgment and sentence of conviction.
R.D. Leeby, CA-8, 51-2 USTC ¶9497, 192 F2d 331.
There was no reversible error in refusing to direct a verdict for taxpayer at the close of all the evidence.
P. Dillon, CA-8, 55-1 USTC ¶9131, 218 F2d 97. Rem'd, SCt, 56-1 USTC ¶9111, 350 US 906.
Bostwick, CA-5, 55-1 USTC ¶9170, 218 F2d 790.
E.P. Black, CA-8, 62-2 USTC ¶9792, 309 F2d 331. Cert. denied, 372 US 934.
G.M. Michals, CA-10, 72-2 USTC ¶9737, 469 F2d 215.
Motion to direct an acquittal on a count dealing with defendant's wife's separate return should have been granted. However, a new trial is ordered instead of reversal with directions to acquit on this count.
Steele, CA-5, 55-1 USTC ¶9438, 222 F2d 628; conviction for 1948 aff'd after new trial, CA-5, 57-1 USTC ¶9607, 243 F2d 712.
Motion for acquittal properly granted on two counts because of insufficient evidence.
W.A. Mousley, CA-3, 63-1 USTC ¶9245, 311 F2d 795. Cert. denied, 372 US 966.
The court granted the taxpayer's motion for judgment of acquittal where the government did not present evidence to prove intent to evade taxes and no conviction for understatement of income with intent to evade taxes could be sustained.
D.O. Hestnes, DC, 80-2 USTC ¶9669, 492 FSupp 999.
Court of Appeals, in granting new trial because of numerous errors in decision of court below, did not see fit to direct acquittal.
J.V. Gikas, CA-1, 58-1 USTC ¶9147, 250 F2d 858.
Under the broad conspiracy allegations of the indictment, it was proper for the Court to refuse to limit the Government's case to specific acts of concealment or particular theories, so long as it properly emphasized that a common unity of purpose among the defendants had to be established.
H.H. Klein, CA-2, 57-2 USTC ¶9912, 247 F2d 908.
A motion for acquittal was improperly denied as to a count involving 1954 taxes where the taxpayer was charged with stating that "the amount of taxes due and owing ... was the sum of zero dollars," and the form used did not contain such a statement nor any computation or determination of tax.
J.W. Janko, CA-8, 60-2 USTC ¶9580, 281 F2d 156.
Motion for acquittal was properly denied where the evidence was sufficient to warrant submission to the jury of an indictment for tax evasion. A reconstruction showed substantial tax to be owing for taxable years and deficiency assessments had also been made against the taxpayer for earlier years.
J.J. Burke, Jr., CA-1, 61-2 USTC ¶9617, 293 F2d 398. Cert. denied, 368 US 930.
Motion for acquittal granted where the evidence indicated that taxpayer had no knowledge of the contents of business records and that his mother and sister maintained them. The evidence also indicated that his mother forged his name on the tax returns.
N. Melillo, DC, 67-2 USTC ¶9717, 274 FSupp 314.
Motion for acquittal granted where evidence indicated that the taxpayer's failure to file was due to lack of funds and that he submitted W-2 forms disclosing his tax liability.
R.R. Power, DC, 68-2 USTC ¶9443.
Although the trial court erroneously failed to rule on the taxpayer's motion for acquittal before requiring the taxpayer to proceed with his case, such error was not prejudicial because the government's evidence at that stage of the case was sufficient to support the jury verdict.
J.L. Sullivan, CA-9, 69-2 USTC ¶9533, 414 F2d 714.
Motion for acquittal was denied because government's use of net worth method was reliable, and evidence of willfulness was sufficient to put case before a jury. Therefore, taxpayer's conviction for willful failure to file tax returns, where he admitted receiving gambling income, was proper.
I.L. Shy, DC, 75-1 USTC ¶9206, 383 FSupp 673.
A motion for acquittal was granted. The government failed to establish the existence of deficiencies in that it did not show that the cash-basis taxpayers received certain checks in time to deposit them before the end of the years in question. Furthermore, there was insufficient evidence to show that certain checks that were negotiated by the taxpayer-husband rather than deposited were excluded from reported gross receipts.
E.F. House, CA-3, 75-2 USTC ¶9782, 524 F2d 1035, rev'g in part and rev'g and rem'g in part, DC, 75-1 USTC ¶9285. Reh'g denied by CA-3, 76-2 USTC ¶9616.
The district court's order granting the taxpayers' post-verdict motions for judgments of acquittal based on a finding that venue in the Northern District of West Virginia was improper was reversed and remanded with directions to reinstate the jury's verdict of guilty.
B.F. Goodyear, CA-4, 81-1 USTC ¶9423, 649 F2d 226.
A federal district court improperly granted a married couple's motion for judgments of acquittal after a jury had convicted the couple for income tax evasion. The government produced sufficient evidence for a jury to conclude that the couple had knowledge of the contents of their return and that the income figure reported on the return was vastly understated. The couple's expenditures greatly exceeded their reported income, and they failed to record business receipts, withheld material from their accountant, and deliberately understated rental income.
A.G. Olbres, CA-1, 95-2 USTC ¶50,401, 61 F3d 967. Cert. denied, 116 SCt 522.
The evidence overwhelmingly supported the jury's verdict of failure to file and the court denied the taxpayer's motion for acquittal, asserted on the grounds of vindictive prosecution and on the grounds that his Fifth Amendment rights were violated.
J.M. Grabinski, CA-8, 84-1 USTC ¶9201, 727 F2d 681.
Although there were signs that the taxpayer was merely careless in preparing his returns, the court refused to overturn a jury's conviction of the taxpayer for intentionally evading income taxes by filing false tax returns. One evidence of intent was the taxpayer's request for and receipt of a salary raise that he failed to report on his returns.
M.S. Tishberg, CA-7, 88-2 USTC ¶9492, 854 F2d 1070.
Defendant, who dealt in bets on sporting events, was entitled to acquittal on the charge of failing to file information returns.
Carroll, DC, 54-1 USTC ¶9335, 117 FSupp 209.
Motion for acquittal upon grounds that the verdict was based only upon circumstantial evidence was denied as there was sufficient evidence to support the verdict.
C.R. O'Day, DC, 60-2 USTC ¶9605, 186 FSupp 572.
A motion for judgment of acquittal or, in the alternative, for a new trial were denied, there being sufficient evidence to show willfulness.
Dr. F.L. Benus, DC, 61-2 USTC ¶9669, 196 FSupp 601.
R.R.P. Perna, DC, 61-2 USTC ¶9621, 197 FSupp 853.
H.W. Polk, CA-9, 72-1 USTC ¶9127, 446 F2d 1401.
R.F. Wilson, CA-5, 71-1 USTC ¶9391, 440 F2d 1103. Cert. denied, 404 US 882.
R.F. Wilson, CA-5, 72-1 USTC ¶9262, 450 F2d 795. Cert. denied, 405 US 1016.
J.W. Greenlee, DC, 75-1 USTC ¶9192.
A motion for acquittal notwithstanding the verdict was denied because there was sufficient evidence to support the verdict.
J.R. Crocker, DC Del., 92-1 USTC ¶50,008.
A motion for acquittal raised by a diamond sawblade seller who had been convicted of tax evasion was denied. The motion was untimely filed, and the evidence at trial showed that he earned substantial taxable income. Further, his argument that income described in the Sixteenth Amendment and subject to tax was limited to profit proceeding from property was meritless.
N.H. Rhodes, DC Pa., 96-2 USTC ¶50,341, 921 FSupp 261.
An individual was not entitled to a judgment of acquittal or for a new trial with regard to his indictment for several counts of willful tax evasion. The government's evidence at trial clearly showed that he operated his business under a false name, that he took elaborate steps to conceal his true identity and income, and that he had not filed a tax return for any of the tax years at issue. Further, the individual's motion for a mistrial on the ground that the government failed to provide him with copies of third-party summonses it issued to witnesses for production of requested documents was rejected because the government was not required to provide a notice of third-party summonses issued with regard to criminal investigations.
N. Stierhoff, DC R.I., 2007-2 USTC ¶50,626.
An individual convicted of willful failure to collect or pay over tax was not entitled to a judgment of acquittal or a new trial. The individual controlled and operated the company that was his employer and he freely chose to spend corporate funds on non-essential goods and entertainment rather than paying the taxes. Further, the individual failed to prove that a new trial was required. The jury instructions were appropriate and, contrary to the individual's argument, the ability to pay was not an essential element of the crime required to be included in the jury instruction. Additionally, a special verdict form was not required because it was presumed that the jury followed the instructions.
R. Blanchard, DC Mich., 2008-2 USTC ¶50,535.
A federal district court properly convicted and sentenced an individual for income tax evasion. The individual operated his business under a false name, concealed his identity and income, and did not file a tax return for any of the tax years at issue. A rational jury could easily infer that the individual knew of his obligation to file federal income tax returns and that his failure to do so was an intentional violation of a known legal duty.
N. Stierhoff, CA-1, 2009-1 USTC ¶50,103.
An individual was not entitled to an acquittal or a new trial with respect to his indictment for willful failure to file returns. The individual did not introduce into evidence a purported IRS letter that allegedly excused the individual from filing returns for the years charged, and an IRS agent stated he had never seen such a letter during his decades as an IRS employee. The jury had sufficient evidence to conclude that the individual was obligated to file tax returns. The government's characterization of testimony at the closing argument, although inaccurate, was not prejudicial. The jury was properly instructed that statements and arguments by counsel were not evidence and that it had to base its decision solely on the evidence presented before the court. Finally, the individual was not prevented from presenting his defense and was not entitled to a new trial on the basis of the alleged prosecutorial misconduct because the prosecutorial errors were not significant and did not deprive the individual of his right to a fair trial.
W. Orr, DC Colo., 2009-1 USTC ¶50,221.
A federal district court improperly acquitted an individual after a jury found him guilty of tax evasion. The government produced sufficient evidence for a jury to conclude that the individual transferred his house to avoid an IRS lien and made false statements to IRS agents about his income to deter them from pursuing further collection efforts. However, the court acted within its discretion in conditionally granting a new trial.
C.V. Herrera, CA-5, 2009-1 USTC ¶50,226.
Willful Failure to File Return, Supply Information, or Pay Tax: Willful failure to pay over withheld taxes
The president and sole shareholder of a computer consulting company was properly convicted of willful failure to pay over withheld employment taxes. He knew about his obligations regarding the withheld taxes, and his testimony established that he voluntarily and intentionally violated his known legal duty to remit the taxes. Further, the prosecution was brought in a timely manner because the six-year, rather than the three-year, statute of limitations applied to violations of Code Sec. 7202.
R. Gollapudi, CA-3, 97-2 USTC ¶50,978, 130 F3d 66. Cert. denied, 118 SCt 1190.
Related taxpayers who owned and operated several businesses were properly convicted of willful failure to pay over withheld payroll taxes. Resolving an issue of first impression, the court concluded that Code Sec. 7202 creates a dual obligation to both truthfully account for and to pay over the taxes. Thus, even though the taxpayers truthfully accounted for the taxes by submitting the necessary forms to the IRS, they committed a crime when they neglected to pay over the funds.
P. Evangelista, CA-2, 97-2 USTC ¶50,608, 122 F3d 112.
A debtor who co-owned two corporations with his wife was properly convicted of failing to pay over federal withholding and FICA taxes on behalf of the businesses. As the president and majority owner of the corporation, he qualified as a person required to pay over withheld taxes under Code Sec. 7202. Moreover, the fact that the taxpayer collected and accounted for the withheld funds did not preclude his conviction since his failure to pay over the taxes was sufficient to support his conviction.
W.H. Thayer, CA-3, 2000-1 USTC ¶50,136, 201 F3d 214. Cert. denied, 6/19/2000.
The taxpayer was properly convicted of failing to pay over employment taxes.
T.L. Gilbert, CA-9, 2001-2 USTC ¶50,655.
C.D. Morrison, CA-4 (unpublished opinion), 2002-1 USTC ¶50,231, aff'g, per curiam, an unreported District Court decision.
A.S. Adam, CA-5, 2002-2 USTC ¶50,502.
D.G. Pflum, CA-10 (unpublished opinion), 2005-2 USTC ¶50,603, aff'g an unreported District Court decision.
An individual's conviction for tax evasion and willful failure to account for and pay over payroll taxes was affirmed. Although the taxpayer withheld taxes from his employees' wages, he failed to pay over those taxes to the IRS and retained the funds in a corporate bank account that he controlled and accessed for personal expenditures.
M.W. May, CA-6 (unpublished opinion), 2006-1 USTC ¶50,260, aff'g, per curiam, an unreported DC Ohio decision.
A federal district court did not err by admitting evidence relating to a defendant's prior noncompliance with federal tax laws for purposes of proving her intent to commit the crime of knowingly and willfully attempting to evade the payment of her corporation's payroll tax liability by directing its clients to pay their outstanding balances to a successor corporation. The evidence of prior misconduct was properly admissible under Federal Rule of Evidence 404(b) to establish the requisite intent to commit the charged crime and did not amount to a constructive amendment of the terms of the indictment or a prejudicial variance from the allegations in the indictment. The district court's repeated and precise instructions to consider this evidence solely for purposes of determining intent ensured that the jury could convict her only for a crime based on the wrongful conduct charged in the indictment.
D. Daraio, CA-3, 2006-2 USTC ¶50,544.
The owner of a corporation was properly convicted and sentenced by a federal district court for several counts of willful failure to pay employment tax, and embezzlement from his company's 401(k) plan and its health benefits plan. The evidence presented at trial sufficiently showed that the owner retained significant, if not exclusive, control over the company's finances during the tax periods at issue. Moreover, the owner was entrusted with control of employee contributions to the 401(k) and health care benefits plans and he wrongfully diverted those amounts for his own purposes.
A.M. Armstrong, CA-8 (unpublished opinion), 2007-1 USTC ¶50,105, aff'g, per curiam, an unreported DC Iowa decision.
Evidence pertaining to married businessowners' indictments for willful failure to pay withheld income and FICA taxes was not prejudicial and was, therefore, admissible at a jury trial. The evidence pertaining to the couple's expenditures from the intermingled personal and company funds for the lease of two automobiles, amounts spent on gambling at a casino, and the husband's purchase of firearms and a compact disc player, was relevant to the issue of the existence of sufficient funds to satisfy the couple's tax obligations.
R. Blanchard, DC Mich., 2007-2 USTC ¶50,596.
An individual was properly convicted and sentenced for willful failure to pay over withheld employment taxes to the IRS for the years at issue. The government's evidence at trial sufficiently showed that the individual, as the responsible person to pay withheld payroll taxes, willfully failed to make such payment.
M.D. Cordell, CA-5 (unpublished opinion), 2007-2 USTC ¶50,628, aff'g, per curiam, an unreported DC Texas decision.
An individual was not entitled to a jury instruction contending that his failure to pay over employee payroll taxes was not willful because he did not have money to pay the taxes. In order to establish willfulness, the government was not required to prove that the individual had the ability to meet his tax obligations. Instead, the failure to pay was willful because the individual knew that he owed taxes and did not pay them.
J.E. Easterday, CA-9, 2008-2 USTC ¶50,512.
An individual convicted of willful failure to collect or pay over tax was not entitled to a judgment of acquittal or a new trial. The individual controlled and operated the company that was his employer and he freely chose to spend corporate funds on non-essential goods and entertainment, rather than paying the taxes.
R. Blanchard, DC Mich., 2008-2 USTC ¶50,535.
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