|
 |
Announcements
| Articles | The
Counselor
SUMMER 2008
- Must a person owe tax to be guilty
of Tax Evasion
- Welcome New Partners & Associates
- The Firm Highlights
- Firm News, Appearances & Articles
Must a Person Owe Tax to be Guilty of Tax Evasion?
By Barry C. Feldman
The United States Supreme Court has resolved a
split in the circuits on what would seem to be an elemental
rule of tax law – to be guilty of Federal income tax
evasion, there must be a tax due that the person sought
to evade. In a recent case, the defendant was charged with
tax evasion based upon his having diverted funds from his
closely-held (though not solely owned) corporation. At trial,
he tried to introduce evidence to establish that the corporation
had no earnings and profits, either current or retained,
at the close of the years in issue, so that the distributions
or diversions of funds amounted to a non-taxable return
of capital, as provided in the Internal Revenue Code of
1986. The District Court refused to permit the introduction
of such evidence, relying upon a 1976 decision which held
that a defendant must first establish an intent to make
a return of capital at the time of diversion before he can
argue that the diversion was such a return of capital.
The Supreme Court unanimously reversed the decision and
sent the case back to the District Court for a new trial.
The Court pointed out that the 1976 opinion was inconsistent
with the Internal Revenue Code which says that a distribution
is a dividend only to the extent that there are corporate
earning and profits. If the distribution exceeds earnings
and profits (current and retained), the excess is treated
as a non-taxable return of capital to the extent of the
shareholder’s basis in his stock, with any excess
above that constituting capital gain. Thus, intent is irrelevant
in determining the nature of the distribution, as it is
computational in nature.
The Court’s decision is in agreement with a 1998 opinion
which noted that, in the absence of a tax deficiency, there
is merely an intent to evade taxation and the Internal Revenue
Code does not punish bad intentions alone. This avoids convicting
a person of tax evasion where the distributions did not
result in a deficiency in tax, and therefore no tax being
evaded.
The Supreme Court’s decision puts to rest a controversy
which should have been obvious – a person cannot be
guilty of tax evasion unless there was a tax to be evaded
and the determination of whether there was a tax due rests
not with anyone’s intent, but rather lies with the
provision of the Code dealing with the computation of tax
for civil purposes.
|
|
|
