distinguishing between tax avoidance a thesis in
TRANSCRIPT
DISTINGUISHING BETWEEN TAX AVOIDANCE
AND TAX EVASION
by
JERRY PAUL PEIRCE, B.B.A.
A THESIS
IN
ACCOUNTING
Submitted to the Graduate Faculty of Texas Technological College
in Partial Fulfillment of the Requirements for
the Degree of
MASTER OP SCIENCE IN ACCOUNTING
August, 1968
. so
No. l(o4
ACKNOWLEDGMENTS
I would like to thank the Accounting faculty of Texas
Technological College, for they have so unselfishly shared
their time and knowledge with me. I am indebted- to Professor
Reginald Rushing for his direction in this thesis.
ii
TABLE OF CONTENTS
ACKNOULEDGHENTS ii
I. INTRODUCTION 1
Scope and Limitations 1
Definitions 2
The Problem / . ^
Origin of the Tax System 5
The Legislative Process 8
II. REPORT OP T?rE STUDY 10
Tax Avoidance and Tax Evasion 10
DraTiing a Finer Line 1^
The Section 7201 Violation 15
The Three Elements of Tax Evasion 17
The Role of the Accountant 23
The Role of the Government -29
III. CONCLUSION 37
Suram .ry .' 37
Reconnendation 39
BIBLICGRiVPHY 45
TABLE OF CASES 1^7
APPENDIX l\8
ill
CHAPTER I
INTRODUCTION
The field of Federal taxation is perhaps the most chal
lenging and controversial aspect of the democratic process.
After subjective examination, the layman readily explains
why Federal taxes should be reduced. The most sophisticated
tax practitioner will explain that he is not avrare of all
the complex methods for reducing taxes and that a substantial
portion of his tax practice is composed of individuals who
would like to pay less Federal income tax. It is a generally
accepted fact that most taxpayers would like to be able to
pay less tax and yet maintain all the benefits of the demo
cratic process.
Scope and Limitations
Pay less and enjoy the same benefits: this idea V7ill
be developed for the individual taxpayer by taking into con
sideration the position of the Internal Revenue Service and
that of the tax practitioner. The prevailing premise is
that each taxpayer is entitled to pay as small an amount of
taxes as the law allows but is never entitled to a tax re
duction resulting from an illegal method. Tax cases, tax
services, the Internal Revenue Code of 195:-.» Income Tax Regu
lations, periodicals, and recently published books will be
used to explore the area of tax avoidance and evasion.
1
The approach to the writing of this thesis is perhaps
different than the manner which others have used; it is dif
ferent primarily from the standpoint that it does not deal .
with specific fact circumstances. The idea of this thesis
is to discuss the components which make tax evasion, the
manner and methods in which the investigative process on the
part of the Special Agent is conducted, as vrell as the ex
tent to which the tax practitioner can participate in tax
planning. With an understanding of the above, one has the
tools for taking any fact circumstance and detei*mining if it
possesses the necessary elements of tax evasion. If it does
not fall within the category of tax evasion, it must inevi
tably fall within the area of tax avoidance or legislative
tax guidelines.
Definitions
Cert, denied. Certiorari denied is the refusal by the
Supreme Court to review the records and/or holdings
of an inferior court.
Code. Code refers to the Internal Revenue Code of 19 5 .
an act which revised the income tax laws of the United
States.
Fifth Amendment to the Constitution. Any person accused of
a crime may not be compelled to make any statement,
answer any question, or present any evidence which iiay
tend to be incriminating.
Fraud, The term is used synonymously with tax evasion. See
Tax Evasion below.
Loophole. The term implies a legal passage used to escape
the strict interpretation of the Code of Federal Repcula-
tions. It is completely legal by definition of the law
but follows an interpretation other than that desired
by the Internal Revenue Service.
Regulations, Code of Federal Retaliations. "These Regula
tions are susceptible to challenge. In dealing with
the Treasury Department, they have the * force and effect
of law,» but the courts are not bound by them. Neither
is the taxpayer bound in contesting a deficiency before
the Tax Court or in suing on a refund claim if he
wishes to challenge their validity,"
Special Agent. An investigating agent for the Intelligence
Division of the Internal Revenue Service is knovm as a
Special Agent.
Tax Avoidance. Tax avoidance connotes a method of reducing
one*s taxes by following a strict interpretation of the
wording, of the law rather than the interpretation sug
gested by the Internal Revenue Sei*vice.
Tax Evasion. By definition, tax evasion is the reduction
Fred W, Norwood and Sam VJ. Chisholm, Federal Ino0!n3 Taxes; Research and Planning (Englevjood Cliffs, N,J. : FrenFice-Hali, inc.,T9"62l, p. 15.
of taxes by a method contrary to that allov ed by the
law.
Tax reduction by legislative process. A method of deter
mining one's taxes by adhering to the Federa.l Code of
Retaliations refers to tax reduction by legislative
process.
The Problem
The problem evolves from a lack of understanding of the
basic elements which when combined result in either tax
avoidance or tax evasion. To what extent is the taxpayer
able to alter the fact situation before he has engaged in
tax evasion? To what degree of meticulousness is an accoun
tant able to plan a tax situation? To what extent should a
taxpayer discuss his tax matters when intervievxed by Special
Agents? It may be discerned that there are many problems
associated with distinguishing between tax avoidance and
evasion. For this reason, this paper has been restricted
to the problems relating to individual taxpayers and to the
one criminal viol8.tion, tax evasion.
Too often the problem is only considered lightly. Too
often the taxpayer does not take seriously enough his Fed
eral tax obligation. This lack of respect for the strictness
of the law has resulted in much anxiety for those who have
dodged their obligation; and frequently, a taxpayer who has
failed in his obligation speaks freely when confronted by
the investigative agency because he does not fully understand
the severity of the situation.
Equally important is the fact that it is not uncommon
for taxpayers to pay a larger tax liability than the law re
quires. For this reason, there is a need for a better under
standing of the obligations of the taxpayer to minimize his
tax burden by a legal method. This problem, the lack of
understanding of the basic elements, can be related to most
other tax problems. The solution may be found after one has
acquired a complete knowledge of the legal requirements as
they apply to the facts and circumstances in question.
Orip:in of the Tax System
Two articles of the Constitution provide the authority
and restriction of taxation: Article I, section 8.
The Congress shall have Power to lay and collect Taxes, Duties, Imposts,'and Excises, to pay the Debts and provide for the common Defense and general Welfare of the United States. , , ,
Using Article I, section 8 as the authority. Congress enacted
the Federal income tax act of l86l to finance the Civil VJar.
Follovzing the Civil War, this act was not reenacted. In
189^, however. Congress enacted a law providing for an income
tax. This act was quickly challenged-^ by the restrictions of
2 U.S., Constitution. Art. I, sec. 8.
- Pollock V. Farmers Loan and Trust Co., 157 U.S. 429, 15 S. Ct7^73 rib95).
Article I, section 2, clause 3-
Representatives and direct taxes shall be apportioned among the several States which may be included within this Union, according to their respective Numbers, V7hich shall be deteirmined by adding to the whole Number of free Persons . . . three-fifths of all other persons.^
In the Pollock case, the taxpayer explained that a
directly imposed tax on bonds, real estate, and stocks vrould
be a "direct" tax and could only be imposed if apportioned
among the several States according to their respective popu
lation. It was argued that to tax the income from a capital
Investment was the same as taxing the underlying capital and,
consequently, it was a direct tax that should be apportioned
according to population. Pollock further explained that an
income tax could not contain an apportionment formula. Sub
sequently, the Supreme Court declared the act unconstitu
tional.
On July 12, 1909, the Sixteenth Amendment to the Con
stitution vras passed to solve the problems described in the
Pollock case. This amendment was ratified by the States in
1913 and read as follows:
- The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regards to any consensus or enumeration, 5
4 •S., Constitution. Art. I, sec. 2, clause 3.
U.S., Constitution. Amendment XVI.
The constitutionality of this amendment was challenged,
and the Supreme Court explained the limited purpose for
which this constitutional amendment was required:
Indeed, in the light of the history which we have given and of the decision in the Pollock Case, and the ground upon which the ruling in that case was based there is no escape from the conclusion that the Amendment was drawn for the purpose of doing away for the future with the principle upon which the Pollock Case was decided. . . ,°
With the Sixteenth Amendment fiiTnly implemented, income
taxation had its beginning. From 1913 to 1939, fourteen (l4)
revenue acts were passed.' Each act nullified the prior act
and contained revisions as V7ell as the provisions of the old
acts that were carried forward. One can imagine the diffi
culty a tax practitioner must have had in trying to stay
informed. The Internal Revenue Code of 1939 'as adopted
with the idea that it could be changed or revised by chang
ing the particular section concerned.
From 1939 to 1953» there were twenty-one major
^Brushabsr v. Union Pacific R.R. Co., 240 U.S. 1,
36 s. ct. 23TI19TST; n Tariff Act of 1913» Revenue Act of I916, Revenue Act
of 1917, Revenue Act of 1918, Revenue Act of 1921, Revenue Act of 1924, Revenue Act of 1926, Revenue Act of 1928, Revenue Act of 1932, National Industrial Recovery Act of 1933, Revenue Act of 193^, Revenue Act of 19351 Revenue Act of 1937, and Revenue Act of 1938.
8 o
amendments to the 1939 Code. The 195^ Code was adopted
with the idea of Improving the quality of draftsmanship.
It is of interest to note that all tax disputes originate
with the interpretation of the Internal Revenue Code.
The Legislative Process
Article I, section 7, clause 1 of the Constitution re
lates as follows: "All Bills for raising Revenue shall orig
inate in the House of Representatives; but the Senate may 9
propose or concur with Amendments as on other Bills."
The Committee on Ways and Means of the House of Repre
sentatives is the sounding board of initial fonnal presenta
tion of ideas. These ideas can flow from the President,
House members. Senate members, or the Treasury at the public
hearings held by this Committee. Following the public hear
ings,- the House Committee begins the executive session from
which the public is excluded. Here the bills are molded and
later presented to the House members. At the time of
o The Public Salary Tax Act of 1939, Revenue Act of 1939,
First Rex enue Act of 19^0, Second Revenue Act of 19^0, Excess Profits Tax Amendments of 19^1, Revenue Act of 19-f'l, Revenue Act of 1942, Current Tax Payment Act of 19^3, Revenue Act of 1943, Individual Income Tax Act of 19^^, Tax Adjustment Act of 1945, Revenue Act of 19^5, Revenue Act of 19^8, Tax Administration Act of 19^9, Technical Changes Act of 19^9, Revenue Act of 1950, Excess Profits Tax Act of 1950, Revenue Act of 1951, Reorganization Plan No. 1 of 1952, Technical Changes Act of 1953, Excise Tax Reduction Act of 195^.
9 U,S. , Cpn,sJ_itjation, Art. I, sec. 7, clause 1.
presentation, a formal report is prepared for publication
which contains justifications for the bill and a simplified
version of the technical language contained in the bill.
The bill is debated on the floor of the House normally
in a "closed rule"- capacity. After approval by the House,
the bill is sent to the Senate where it is referred to the
Senate Finance Committee. This Committee has the authority
to hold public hearings followed by executive sessions. The
bill is introduced to the Senate concurrently with a pub
lished explanation. The Senate does not follow the "closed
rule" procedure, and all debate is recorded in the Congres-
sional Record. If the Senate adopts the bill, it is referred
to the Conference Committee composed of ranking menbers of
the Sena.te and. House committees. The Conference Committee
compromises the differences and publishes an explanation,
Nox-mally, the House and Senate accept the compromised ver
sion, and the bill is sent to the President for his signa
ture.
Amenclnents to the bill a'ly be recommended only by i:lia members of the Ways and Mc ms Coni-iiittee. The 1954 Code 'uas adopted by such a manner.
CHAPTER II
REPORT OF THE STUDY
Tax Avoidance and Tax Evasion
The system of Federal taxation is designed for volun
tary compliance. The taxpayer determines the amount of
tax liability, if any, and then files a return. The Federal
Government follows the assumption that all tax returns are
accurate until facts disclose othervrise.
Congress knows that a system of voluntary compliance
is best for the majority of the taxpayers; and for this
reason, it is best for a democratic system. However, there
will always be those people who inadvertently neglect to
pay their equitable portion and those who by some devious
means knowingly refuse to comply with the voluntary system.
For those taxpayers who inadvertently neglect to pay
their share of the Federal taxes, the Goverriment computes
the correct amount of tax as well as six percent {6^) in
terest on the deficiency and allows the taxpayer the oppor
tunity to comply with the voluntary system. This taxpayer
has engaged in neither tax evasion nor tax avoidance; an
honest mistake has been made. The taxpayer who knovfingly
and willfully reduces or eliminates his taxes by using a
• H9.11e V. Commissioner^ 175 F.2d 500, 38 APTR 91 (2d Cir, 19^-9).
10
11
fraudulent means has committed tax evasion, and he will be
required to face the criminal sanctions of the Internal
Revenue Code and then the resulting civil aspects of the
case. After the criminal and civil fraud aspects have been
resolved, he will be required to recompute his tax on the
correct taxable income and meet the test of voluntary com
pliance. From this, one can definitely infer that nondis
closure or false disclosure on the part of a taxpayer is met
with severe penalties in the form of monetary fines and/or 2
prison sentences. Perhaps this point was best said in the
case of Spies v. United States:
The penalties imposed by Congress to enforce the tax lax-js embrace both civil and criminal sanctions. The foi^er consist of additions to the tax upon determinations of fact by the administrative agency and with no burden on the Government to prove its case beyond a reasonable doubt. The latter consist of penal offenses enforced by the criminal processes in the familiar manner. Invocation- of one does not exclude resort to the other.3
To this point, nothing has been mentioned about the
reduction and/or elimination of taxes by a lawful means,
known as tax avoidance. This area is particularly inter
esting and is limited only by the knowledge and creativeness
2 Robert Milton Schmidt. Leg-al and Aceounting:^_Handbook
of Federal Tax Fraud (Englewood Cliffs, N.J,: Prentice-Hall, Inc., 19^377
^Spies V. United States, 317 U.S. 492, 63 S. Ct. 36^ . . ^ M i l II ii« I mi I • I I — — m l M i l i u m • I — < I B > ' « M I I IP I I I • I I I I «M I • • ! • • T^rBW # v • •- '
(19^3).
12
of the taxpayer. The courts have been most clear and ex
plicit in allowing the taxpayer the opportunity to fully
utilize this procedure to the extent of the law.
Anyone may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the treasury; there is not even a patriotic duty to increase one^s taxes.^
, , , nothing unlawful, or even mildly unethical, in the motive of petitioner to avoid some portion of the burden of taction. 3
Nothing is better settled than that persons are free to arrange their affairs to the best advantage for themselves under the lavr as it stands . . . purpose to minimize or avoid taxation is not an illicit motive.^
, . . legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits, cannot be doubted.7
The fact that there was no reason for the parties doing what they did, vihen they did it, except to escape taxes, does not make the transaction vulnerable.^
From the above it may appear that no problem exists
when distinguishing between tax avoidance and tax evasion;
Bullen V. Wisconsin. 240 U.S. 625, 630.
^Marshall v. Commissioner. 57 P.2d 633, 63 ^ (6th Cir. 1932),
Sawtell V, Commissioner, 82 F.2d 221, 222 (1st Cir. 1936).
" Hel-vering; v. Grea:ory. 293 U.S. 465, 469 (1935). o
standard Oil Co, v. United States. 130 F.SuT p. 821 (Ct, CI. 19"55T7^
13
however, this line of reasoning is far from being true.
Tax avoidance may best be described as an evolutionary process inherent in our system of tax legislation and administration. Tax laws are enacted, loopholes appear in them, taxpayers employ them, nexi tax laws are enacted to plug the loopholes, and these laws give rise to new loopholes which generate and give momentum to the never ending cycle.9
The problem exists in being able to dravr the line between
points that do not form a straight line. The ingenuous rea
soning of man can squeeze through some seemingly impenetrable
loopholes. The Internal Revenue Service has an Intelligence
Division whose job it is to show, when the facts warrant,
that the taxpayer has not squeezed through a loophole but
instead that the taxpayer has crossed the line and evaded his
taxes.
The problem is so tightly vroven that at times the courts
have used the terms "avoidance" and "evasion" as synonyms.
. . . a transaction, otherwise within an exception of the tax law, does not lose its immunity because it is actuated by a desire to avoid, or if one chose, to evade, taxation.-^^
The problem is so challenging that some tax practitioners
will not even attempt to avoid taxes by means of tax avoid
ance loopholes for fear of ending up in the courtroom. Other
practitioners feel that tax avoidance is an area that is
^Sydney A, Gutkin and David Beck, Tax_AYoidange_ vs. Tax Evasion (New York: Ronald Press Company, 1958), p. 10.
10, Helverin o; v. Gregory, 69 F.2d 809, 810 (2nd Cir. 193^).
1^
separate and apart from the normal business transaction and,
therefore, bordering on the edge of and concerning improper
ethics and immorality.
The third method of reducing taxes is by the legislative
process. This method does not approach tax avoidance and
avoids existing tax loopholes that may be closed next year.
This legislative method is most popular among the large mass-
production tax return preparers that do not want to take the
time for nor run the risk involved by an audit by the In
ternal Revenue Service.
Drawino; a Finer Line
In drawing the line betvreen tax avoidance and tax eva
sion, one must be able to verbalize the surreptitious manip
ulation of those who seek to evade taxes. Evasion has a
manner that sets it apart from the legal loopholes of avoid
ance. The tax evader must alter the" facts and attempt to
hide the exposing evidence; one who practices tax avoidance
can openly discuss his use of leg-al process and study the
possibilities of opening a new loophole while waiting for
the current legal loophole to be closed by legislation.
To dravT the legal line requires patient consideration
of the particular facts and circumstances. One cannot gen
eralize and form a conclusion; he must draw the line irre-
gardless of the infinitesimal range between avoidance and
15
evasion. Perhaps this was best stated by Mr, Justice Holmes
in Bullen v, Vli scons in:
We do not speak of evasion, because, when the law draws a line, a case is on one side of it or the other, and if on the safe side is none the worse legally that [sic] a party has availed himself to the. full of what the law permits. When an act is condemned as an evasion vxhat is meant is that it is on the wrong side of the line indicated by the policy if not by the mere letter of the law,11
The question that must be answered is this: Has the
taxpayer stayed within the framework of the law? If so,
he has achieved the desired results by lawful expedients;
however, if an illegal method has been employed, the entire
result is tainted and unlawful. This constitutes tax
evasion,
. . . if there is evasion, there will be subterfuge, camouflage, concealment, some attempt to color obscure events, or to ms ke things seem other than they are. Once the event is determined, the only question left is one of law.12
The Section 7201 Violation
Code section 7201 of the Internal Revenue Code of 195^
covers tax evasion and reads as follows:
Any person vrho willfully attempts in any manner to evade or defeat any tax imposed hj this title or the payment thereof shall, in addition to other
• • Bullen V. Wisconsin, 240 U.S. 625 (I916).
12 Randolph Paul, Studies in Federal Ta_xation (Cambridge,
Mass.: Harvard University Press, 1937), P. 13.
16
•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.13
This section is all-inclusive and has far-reaching
impact. It includes the evasion of another*s tax as well
as the evasion of one^s ot-rn taxes. The wording of this
section has changed little since 1924 when this violation
was changed from a misdemeanor to a felony.
It is understandable why this section was written in
an all-inclusive manner, since the ways of evading taxes
are limited only by the extent to which one wishes to com
plicate a circumstance. The tax evader can understate the
income, overstate the expenses, or overstate the personal
exemptions. The simplicity of the three methods is not
often evident until one recognizes the multitude of ex
penses, potential sources of income, and possibilities in
claiming unwarranted dependency exemptions. This section
was enacted to assure the taxpayer that the Government
frowns on tax evasion, and it is often said that "Section
7201 puts the teeth in the laTr. "
It is not required that there be any particular rela
tionship between the taxpayer and the person prosecuted as
long as the one v:ho is accused actually did attempt to evade
" " IBJIPI IL I ^""^-'^-mi^.^^- otJL25''. I' rch, 1964 Eiitio'-i (Engl evTood "Cliffs,' N.J. : Prclitice^Sall, Inc., 19-^).
17
taxes. An accountant or attorney participating in the f2?aud
by preparing false returns for the taxpayer is subject to
prosecution but not to payment of the tax. In addition,
persons who have knovringly "contributed" to furthering tax
evasion by a taxpayer may become "principals in the common
enterprise" under the aider and abetter statute.•'• Those
persons who have attempted tax evasion all become equal under
the law irregardless of the position of "leadership and
subordination among themselves. "
The Three Elements of Tax Evasion
Attempt
There must be an "attempt" to defeat or evade the tax.
The landmark case which expounds at defining attempt was
handed dox-m by the Supreme Court in 19^3.
It is not necessary to involve this subject with the complexities of the common law "attempt."
•^Sinkoff V. United States, 86 F. 2d 868, 878, 18 AFTR (^77 (7tF'^Ci?7T93^77"7ert. denied, 301 U.S. 689 (1937), the court said, "Nor is it any defect that the tax attempted to be evaded was that of another. The statute is so framed as to make liable any person who attempts willfully and unlawfully to evade the tax of himself or of any other person." Certified Public Accountants have been convicted for attempting to evade the taxes of another person where they had knowledge of and participated in the deduction of personal expenses of a corporate officer as business expenses. Unit ed, States V. Brill. 27O F.2d 525r ^ AFTR 2d 5550 (3d Cir. 1959).
^^U.S.C, sec. 2. United States v, Johnson, 319 U.S. 503, 30 AFTR 1295 (19^3).
•'• Unijbed State_5_v,.._Johnson, 319 U.S. 503, 30 AFTR 1295 (19^-3).
18
The attempt made criminal by this statute does not consist of conduct that would culminate in a more serious crime but for some impossibility of completion or interruption or fioistration. This is an independent crime, complete in its most serious form when the attempt is complete and nothing is added to its criminality by success or consummation, as would be the case, say, of attempted murder. Although the attempt succeeds in evading "tax, there is no criminal offense of that kind, and the prosecution can be only for the attempt. We think that in employing the terminology of attempt to embrace the gravest of offenses against the revenue Congress intended some willful commission in addition to the willful omissions that make up the list of misdemeanors. VJill-ful but passive neglect of the statutory duty may constitute the lesser offense " [failure to file a return] , " but to coiabine with it a xvillful and positive attempt to evade tax in any manner or to defect it by any means lifts the offense to the degree of felony,17
This case, in distinguishing between "willful but passive
neglect" and willful attempt to evade, set the precedence
that is still follo Jed today.
Congress was viell aware that when the Inteinr*l Revenue
Service discovers the attempt, it can proceed to recover the
tax; and consequently, the "perfect crime" never comes to
the attention of the Service. Therefore, the word "attenpt"
must be used to convey the message. Spies v. United States
also explained that for a Section 7201 conviction, the at
tempt must carry /iith it the connotation of an affirmative
act. This act ici}?.j te.ke the foru of keeping a double set of
boolis, alteri/ig invoices, co .-erlng assets, hiding eources of
^"^SDICS V. United States.
?P"
19
income, or any other method which misleads or conceals in the -1 o
motive of tax evasion."^ One should keep in mind the ulti
mate objective is the filing of the return or the date at
which the return is due. At this time, the attempt is com
mitted; and the criminal statute of limitations begins.^
Willfulness
The intent of the party is perhaps the most difficult
element to prove when charges are brought against the tax
payer. Section 7201 is explicit in stating, "Any person
who willfully attempts. . . . " The taxpayer must be aware
of and know that tax evasion is the motive when he commits
the offense.
Willfulness is . . . a state of mind of the taxpayer wherein he is fully aware of the existence of a tax obligation to the government which he seeks to conceal. A willful evasion of tax requires an intentional act or omission as compared to an accidental or inadvertent one. It also requires a specific vrrongful intent to conceal an obligation known to exist, as compared to a genuine misunderstanding of what the law requires or a bona fide belief that certain receipts are not taxable. A conviction cannot be sustained unless this state of mind is supported by the evidence and explained to the jury.^^
•'• SplQS V,„ U;CLlj d.,State .
• United States v. Stoehr, 100 P. Supp. l43, 1 AFTR (^7 (3rd"nr. 1951), cert, denied,
?n United States v. Martell. 199 F.2d 67O, 672, 42
AFTR 757 rSrd Cir. 195277"cert, denied, 3^5 U.S. 917 (1953).
20
The question is often asked, "How does one prove will
fulness?" It is not necessary that willfulness be proved
by direct evidence,^^ such as the defendant admitting he has
done certain things with the purpose of defeating or evading
his income tax. Willfulness is, therefore, usually decided
from circumstantial evidence that establishes a distinct
pattern. A taxpayer may deal in unusual business trans
actions or with large amounts of cash, but this does not in
itself mean that the cash transactions constitute unreported
taxable income. Similarly, the mere fact that the income
was understated over a period of years does not constitute
22
willfulness. As stated in O^Brien v. United States.
proving the willfulness of a taxpayer eventually becomes
"an attempt to probe the defendant's state of mind in the 23
light of all the circumstances. . . . "
First, one must determine the amount of tax due for
the years concerned and the item or items that caused the
underpayment. From this starting point, it is necessary
to establish a pattern of action which reflects the knowl
edge of tax evasion; this pattern of action must consist of
^^Grant v. United States. 184 P.2d 284, 39 AFTR 1045 (1st Cir7~T950l, cert, denied,
^%olland V, United States. 3^8 U,S, 121 (195^).
^^OtBrien v. United States. 51 P,2d 193 (7th Cir. 1931), cert, denied.
21
overt acts, such as altering invoices, using fictitious names
for brokerage accounts, or other acts of deception. It is
not unusual for the taxpayer to procarastinate to the Special
Agent who is investigating the situation.
Taxpayers in general are not aware of the amount of time
that is involved in checking public records which can be
examined without disclosing the name of the prospective de
fendant. The Special Agent is then able to talk with the
taxpayer and most often determine whether the taxpayer is
attempting a deception. He will continue to question the
taxpayer even when it is apparent that the taxpayer's an
swers are false. At the appropriate date, the Agent is able
to establish the truth which would indicate the taxpayer
was attempting to create an illusion. Once the taxpayer
attempts a hoax, it can be assumed that he realizes he had
done something illegal; and consequently, this establishes
the willfulness.
The above situation indicates the ease of proving vrill-
fulness when a taxpayer attempts to "cover his trail." Had
the taxpayer used the Fifth Amendment and refused to make
any statements or produce any books and records, the Special
Agent would have had a more difficult task of gathering cir
cumstantial evidence. The taxpayer's use of the Fifth Anend-
24 ment may be pointed out to the jury by the prosecution.
^^Beard v. United States, 222 F.^d 84, 47 AFTR 808 (4th Cir. f; ciTrt. de nied, 350 U.S. 846 (1955).
'" '•! h'
22
It could have a bearing on the case but most likely would
not be as detrimental as an obviously improvised fabrication.
Additional Tax Due and Owing
The Government must prove that additional tax is due
and owing, since it is by this manner that it establishes
the fact that it has suffered harm.^^
A taxpayer can neither evade nor attempt to evade a tax that is not due.^o
It is this understatement of tax th^t constitutes the corpus delicti27 of a prosecution for willful attempted tax evasion. Proof of this element injects the substantive tax law into the crimina-1 trial and makes relevant and material any evidence bearing upon the tax computation.^8 If this element is not established, either because of the failure of the Government's proof, the defendant's showing of additional deductions, the utilization of any elections available to the defendant, or for any other reason, the Government's case must fail regardless of
5Ro-bert riilton Schmidt, Legal and Accountin.g Handbook of Federal Tax Fraud (Englewood Cliffs, N.J.: Prentice-Hall, Inc., i9"S3T7'pT~Wr'
United States v. Miro. 60 F.2d 58, 61, 11 APTR 696 (2d cirruwr.
27 ^Cornus delicti: the basic facts necessary to the
commission of a crime. no
For prejudicial error caused by a trial court's refusal to allow the defense to introduce evidence that due to an error in the tax return the defendant did not o re any tr x even though the prosecution proved fraud, see Koo> tz v. United States. 277 P.2d 53, 5 APTH 2d 1353 (5th Cir. I960).
23
the weight of the evidence bearing on the other elements of the offense.^9
It is generally accepted that the crime of tax evasion
is complete with the filing of the fraudulent return, and
all events prior to this date may be taken into considera- •
tion in computing the tax. Thus loss carry-overs are taken
into consideration, but loss carry-backs will not be re
garded.
As a practical matter, the Government normally computes
the tax by using the maximum depreciation allowed and for
criminal tax purposes eliminates the controversial aspects,
such as the percent of one's residence that is used as a
business office. The Government, after giving the taxpayer
the benefit of any doubt, must show that a substantial amount
of tax deficiency does exist. Consequently, for criminal
tax purposes the Government may attempt to prove an under
statement of tax considerably less than the amount set up as
a deficiency for civil tax purposes.
The Role of the Accountant
The tax practitioner plays an important part in shaping
the tax practices of his clients. He usually participates
•^k taxpayer who deliberately understates gross receipts for the explicit reason of tax evasion cannot be succes^fally convicted under this statute if he has inadvertently or for some other reason omitted an equal amount of deductions. Hanson v. United States. 254 P.2d 359, 1 AFTR 2d I516 (6th Cir. 195^).
24
in the tax planning, prepares the tax returns, and repre
sents the client before the Internal Revenue Service and
in the Tax Court. The practitioner is expected to provide
the quality of service that is a credit to the profession.
He explains to his client the appropriate tax-reducing pro
cedures that fit within the overall general plan of the
client's business. The practitioner is expected to recom
mend another member of the profession when it is evident
that he cannot provide the necessary services. For this
recommendation the accountant reaps his rewards from knowing
that he has upheld the high standard.s of his profession.
This quality of service should not stop when a client
is being investigated for fraud. If the accountant believes
that the client has intentionally concealed information
necessary to prepare an accurate return, he may vxish to
terminate the engagement. The usual practice is for the
accountant to represent the client until the current fraud
investigation is complete. Assuming th^t the accountant
still believes the client deliberately concealed information,
it is expected that he will discontinue any further business
activities with this client. During the investigation, the
accountant is expected to do everything within his ethical
power to protect the client's interest; and if he cannot
25
provide this service, he should resign from the engage
ment , -
While the investigation is pending, the practitioner
should exercise care in order not to become so involved in
the investigation that it appears appropriate to resort to
unethical methods, . It is not uncommon for a tax practi
tioner to be convicted of a Federal tax offense. Some prac
titioners feel it imperative tha,t their clients receive a
larger refund each year, and they often find it necessary
to resort to tax evasion. Practitioners have been knoTm to
provide misleading documents, alter the date of a trans
action, alter the facts of a transaction, and then tell
half-truths to substantiate the dealings, believing that
• the clients look upon these alterations with admiration.
The taxpayer may be pleased to receive- a large refund
check, but it is quite another story, when he finds he is
about to be audited by the Internal Revenue Service. The
taxpayer who has relied on a qualified tax accountant has
little to fear when being audited, for he can feel sure that
the law has not been broken. Problems often arise when deal-
ing with an unqualified tax consultant who has been known to
stretch the law too far. It is vrell to note that a tax
^^Texas Technological College Tax Institute. Praceel-inn:s of Tax Institute (Lubbock, Texas, I963), PP. 33-53.
26
practitioner is not immune from prosecution once he sets up
a tax evasion scheme.
There is no privileged communication between the client
and the accountant, as the accountant may be compelled by
law to relate t? e most minute details of an avoidance plan
as well as an evasion scheme. It is often revealed in court
that the taxpayer has relied heavily on the advice of his
accountant; this may prove to be most embarrassing to the
practitioner should his client be convicted of tax evasion.
An unsuccessful tax scheme may prove to be time-consuming
and expensive as well as distressing. The following excerpt
casts some light on the role of the accountant and the ex
tent to which he is able to employ the tax loopholes in
behalf of his client.
V7hy this extraordinary confusion? A reasonable degree of predictability is possible in other aspects of Federal tax law. Upsets are constant, it is true, but parts of the law of wills, trusts, corporations, and evidence have jelled in the moulds. Not so the law of tax avoidance. It is almost always difficult, and often impossible, to know in advance what the law is. Uncertainty was never greater and the wisest is full of misgiving as to any step he may take. Indeed, wisdom may be in direct proportion to misgiving.3i
The accountant carries a great responsibility when
considering a new tax plan for his client. The plan must
•'-Randolph Paul, Studies in Pederal_ a-:atio}i (Cambridge, Mass.: Harvard University Press, 1937), P. 73.
27
be "reasonably sound" and have "a reasonably good chance of
success. " If the plan is attacked by Internal Revenue
Service, the client must not be subjected to criminal or
civil penalties. In addition, the client should be fore
warned that the plan is a "reasonable business risk," con
sidering current court decisions and the Internal Revenue
Service's reaction or acquiescence. It is recommended by
some practitioners that a conservative approach is the best
approach. The "audacious tax consultant" might suggest a
tax plan with a short-lived financial and business advan
tage, but the client will only be living in a "fool's para
dise. "3^
In most instances, the client has resolved some doubtful
issues prior to bringing the records to the tax practitioner.
Those issues that do arise must be resolved on the basis of
the facts irregardless of the detriment to the taxpayer.33
The tax practitioner must warn the client when .approaching
the evasion line and furnish no encouragement, since the
client is the more vulnerable. The experienced lational
practitioner can distingu.ish between tax evasion and tax
avoidance, but the inexperienced might rationalize the law
for fear of losing a client.
^ Schwartz, "Functions of a Tax Consultant," BNA Practical Aspects of Federal Taxation. XX C (1946), l4,
33 Harry Graham Baiter. Tax Pr' a d and Evasion (New York:
Ronald Press Company, I963), P. 232",
28
It may be said with a certain amount of authority that
the accountant should be more concerned with helping the
client to be monetarily successful than avoiding taxes.
Advocates suggest the accountant's time be invested in im
proving the client's business,^ This line of thinking is
sound as long as the consen^ative attitude is practiced with
moderation and the client reaps the benefits that the law
allows.
Once that tax evasion has been suggested, and the
Intelligence Division of the Internal Revenue Service be
comes involved in the situation, the role of the tax practi
tioner becomes more important. It is most important that
the accountant not attempt to advise the client on legal
matters. Should the taxpayer call the accountant for advice
when the Special Agents arrive, he should inform the tax
payer to arrange an inte2?view with the Agents after obtaining
the services of a competent tax attorney. Any comments the
taxpayer wishes to make to the Agents should be made after
obtaining the benefit of legal coimsel. The following should
be noted by the accountant who finds his client involved in
a criminal tax case:
)f It is extremely unfortunate that in spite o: a spate of warnings by ma.ny tax attorneys knowledgeable in the fraud field, extending over a
3^ Cochran, "Tax Avoidance Schemes End in Disaster,"
Miami Law Quarterly. V (1951), 35.
29
•decade at least, accountants continue in many instances to take it upon themselves to act and to speak for the taxpayer, without proper knowledge or guidance, in areas which they do not and • are not expected fully to understand, to the serious and often fatal detriment of their client.35
After a fraud investigation has begun, the accountant's
services become increasingly important primarily from the
standpoint of the Government's emphasis on the net worth
method of proving income. The attorney may request that the
accountant prepare a net worth statement, and they will com
bine their efforts to maximize the wealmesses due to infor
mation not considered by the Goverrmient. The accountant will
prepare most of the charts, graphs, and schedules which will
be used during the trial to prove the taxpayer's innocence.-'
The Role of the Government
The Government with its many channels of information
may determine that a particular taxpayer's affairs are worthy
of review. When a case is received by the Intelligence Divi
sion, it may be assumed that fraud is suspected; otherwise,
the case would be handled by another division of the Internal
Revenue Service. The Intelligence Division assigns the
- • Harry Graham Baiter, "How to Defend a Tax Evasion Case Before Criminal Charp es Are Brought, ' The^ Journal of Taxation, CLXII {September, I963), I65.
^ Texas Technological College Tax Institute. Proceedings of Tax Institute (Lubbock, Texas, I963), PP. 33-53.
30
preliminary investigation to a Special Agent who normally
informs the taxpayer at the initial interview that under the
Fifth Amendment he cannot be compelled to produce any books
or records or make any statements which he feels may tend to
be incriminating.
At this point, the taxpayer faces a dilemma. If he
were following a tax avoidance plan and if he produces the
books and records and is at a later date convicted of tax
evasion, one might say he contributed to his own conviction.
If he does not produce any books and records, might one con
clude that he has something to hide? This is a point which
must be resolved initially, perhaps vrithin five minutes
after the taxpayer becomes aware of the investigation.
The Special Agent is highly trained and skilled at
instigating an interview when the taxpayer least expects it.
At the time he is being advised of the right to remain silent,
the taxpayer is also advised as to his right to an attorney.
This initial intervievr may very well be the most important
time during an investigation. The surprise of the taxpayer
is frequently mixed with panic, and he might ask himself
these questions: "Why are they really here? v:hat have I
done wrong?" During these moments of mental turmoil on t'.e
part of the taxpayer, the skilled Special Agent vrill com
mence with a statement similar to the following: "Nr. Tax
payer, shall we sit do.'3n and begin our discussion? If VOM
31
feel that you need an attorney or that you have done anything
wrong, we will skip the question, " Thus the questioning be
gins with the taxpayer confused about his need for an attor
ney. If the taxpayer is reluctant and states that perhaps
he should call- his attorney, the Special Agent may reply,
"Mr. Taxpayer, if you haven't done anything wrong, why do
you need an attorney?" Occasionally, the taxpayer must
be insistent and often rude to invoke the rights explicitly
guaranteed by the Constitution. The average taxpayer may
make very damaging statements due to his being unaware of
the implications of his answers during this surprise inter-
View.
The initial interview is frequently long and covers a
wide variety of points. Appendix A consists of a general
outline of the points covered in the initial interview.
The intei'view is terminated after the Special Agent has
given the taxpayer a receipt for all books and records
that are turned over to him. Obtaining these books and
records at the time of the initial interview is of impor
tance. It has been emphasized in a preceding section of
this writing that oftentimes willfulness may be shown by
the manner in which a transaction has been entered in the
taxpayer's records.
Following the initial intei^iew, the Agent writes a
complete memorandum and prepares photographic copies of
32
all the records, vnth these records and the taxpayer's
statements, the Special Agent is able to determine the po
tential of the case. The Special Agent has from forty to
eighty hours to determine if the case should be referred to
another division or transfered to a numbered status. Once
a case is numbered, it is more difficult to discontinue the
investigation due to the amount of time, money, and effort
that has been invested by the Government. The conviction of
such a case is highly publicized with the hope of encour
aging a higher degree of voluntary compliance with the tax
laws.
The importance of the first few hours of the investiga
tion cannot be emphasized enough. More often than not the
taxpayer fuses the criminal tax evasion case together when,
in effect, the element of willfulness could not have been
proved notwithstanding his conduct during and following the
initial interviex-j.
The taxpayer deteinnines the amount of cooperation he
will provide during the course of the investigation. There
are varying degrees of cooperation, and the competent crimi
nal tax lawyer will advise his client to coopera.te only to
the extent that the facts warrant; however, the taxpayer may
wait too long before engaging counsel. The point being made
is blind cooperation contains the potential for turning tax
avoidance into tax evasion, for once a statement is made and
33
recorded there is rarely an opportunity for striking it from
the record. It is imperative that the taxpayer avail him
self of the benefits of counsel before the initial interview.
With the assistance of qualified counsel, a taxpayer is made
aware of any existing problems. It may be.assumed that a
competent investigator will locate the following during the .
preliminary investigation even if the taxpayer refuses to
cooperate and remains silent: (l) purchase and sale of real
estate recorded in the county records, (2) stock brokerage
transactions with local brokers, and (3) bank records on
microfilm with local banks. The above might just as well
be given to the Special Agent for the items in the name of
the taxpayer or his immediate family, for they will probably
be located. The attorney may advise the taxpayer to sur
render copies of certain other records in the hands of third
parties. This may be advisable if the investigator is aware
of the records.
There are distinct advantages to be gained by creating
an impression of cooperation, as the Agent may feel that the
case, lacks willfulness. This cooperation may weigh heavily
if the Agent is having difficulty determining whether or not
to number the case and recommend prosecution. This attitude
of having nothing to hide may influence the jury and the
judge.^'
37Harry Graham Baiter, "When Should a Taxpayer Cooperate with the IR3 in a 'Tax Evasion' Case?" T ve Jour IlIl- iu; Taxation. XX (February, 1964), 93-95.
3^
The disadvantages of non-cooperation should be con
sidered. It may be assumed that the. taxpayer who has done
nothing wrong has nothing to hide. Refusing to give the
Special Agent the books and records he requests might result
in the Agent using an indirect method of proving a tax de
ficiency which often is inaccurate and is, at best, a good
estimate. Failure to cooperate might cause the fifty per
cent (50^) civil fraud penalty to be imposed. Refusal to
cooperate will be so stated in the Special Agent's report
and may have a bearing on whether or not the case is prose
cuted. Non-cooperation may prolong the investigation and
may be brought to the attention of the jury, assuming there
is a trial. -
While weighing the advantages and disadvantages for
cooperation, the taxpayer may be advised by counsel as to
the following: (l) There are no rewards for cooperation;
if the facts warrant, the Agent will definitely recommend
prosecution. If tax evasion has occurred, the investigator
may be able to prove it; and if it has not occurred, the
investigator will make this determination.^^ (2) Cooperation
during the prosecution does not negate willfulness that can
• 38Harrv Graham Baiter, "When Should a Taxpayer Cooporr.te with the IRS in a 'Tax Evasion' Case?" The Journ?! of Ta-:.-tion. XX (February, 196^-). 93-95.
39 Ibid.
35
be proven by another means. (3) The investigator's purpose
is to find an example to publicize the consequences of tax
evasion.
Once the degree of cooperation has been established,
there is no excuse for inadvertently submitting to any
additional demands. Books and records can be summoned from
third parties, and the competent tax attorney vrill quickly
obtain all these records which may have a bearing on the
case. The competent attorney will not allow the taxpayer
to waive his rights even though the taxpayer exercises a
40 policy of limited cooperation.
To briefly summarize, it is a necessity that a taxpayer
have the benefit of "competent" counsel who will quickly
immobilize the situation until the facts are interpreted.
The taxpayer should make no comnients until the situation is
determined as to its strengths and weaknesses. The weak
nesses of a potential case must be developed properly. A
competent accountant may then be engaged to detei'Taine the
amount of any tax due and the extent to which income can be
shifted to non-applicable years. It'is imperative that the
non-qualified accountant and/or attorney be replaced
4o « Harry Gra.ham Baiter, "VJ'ien Should a Taxpayer Cooper
ate with the IRS in a 'Tax Evasion' Case?" The Journ?! of Taxation, XX (February, 1964), 93-95.
36
immediately and that the taxpayer have access to all that
the law allows.^-^
41 Harry Graham Baiter, "?'0W to Defend
Case Before Criminal Charges Are Brought," Taxation. XIX (September, 1963), T:63-166.
a Tax Evasion The Journ .l of
CHAPTER III
CONCLUSION
Summary
The system of Federal taxation is based on the founda
tion of voluntary compliance. The tax laws are enacted,
interpreted, and carried out as is the will of the majority.
The ultimate success of any lav7 is determined by the degree
of public trust in the fairness and quality of the writing.
VJith any system so designed, there are those who knowingly
attempt to defeat the law by illegal processes as well as
those who work diligently to follow the meaning of the law.
Distinguishing between tax avoidance and tax evasion
is a problem in interpretation of the Code, l^x avoidance
is a process of planning one's affairs in order to pay the
least amount of tax that the law allows. There is abso
lutely nothing immoral, illegal, or unethical about tax
avoidance. The tax practitioner is engaged by the client
primarily to achieve this end. Tax practitioners in some
instances have failed to provide the best service in their
eagerness to spare their client from a large tax liabilit?/;
however, by far the largest number have labored industri
ously to provide the quality of tax interpretation that is
a merit to the profession.
Tax evasion constitutes the willfijl attempt by a taxpayer
37
38
to evade and defeat a substantial amount of income tax due
and owing to the United States; it may be restricted to
three major elements. The first, "attempt," can be divided
into two essential components: the first component is the
intent to elude the tax; and secondly, there must be an
overt act associated with furtherance of the intent. These
two must be proven beyond a reasonable doubt.
The second element of tax evasion is the taxpayer
knowingly and willfully committing the attempt. It must be
proved beyond a reasonable doubt that the taxpayer was aware
at the time of filing the tax return that he was understating
his tax liability.
.u The third element is the Government proving beyond a
reasonable doubt that a substantial amount of tax is due and
owing. The Government is. not required to prove the amount
of the tax liability indicated in the indictment; it is only
necessary to show there has been a substantial understate
ment. It is necessary for the Government to prove the three
elements of tax evasion for each count in the indictment; and
if any one of the elements is not proved, the taxpayer cannot
be convicted.
The law does not restrict this offense to the person or
persons responsible for paying the tax; instead, it provides
for the conviction of anyone who has coi:i iitted the three ele
ments constituting tax evasion.
39
The criminal aspects of tax evasion are separate and
apart from the civil aspects of a tax case. One may be fined
and/or sent to prison for violating the criminal sanctions
of the Code. Once the criminal phase is concluded, the civil
aspects begin; they encompass the establishment of a tax
liability from the taxpayer's books and records. The tax
payer is not able to invoke the Fifth Amendment, as there is
no criminal action pending. After the establishment of the
civil tax liability, assuming the facts warrant, the civil
fraud penalty is asserted. Once the total tax deficiency
is determined, six percent {6%) interest per year is computed
and added to the amount of the tax.
Re c omjii e nda tion
The importance of distinguishing between tax avoidance
and tax evasion has been thoroughly emphasized throughout
this paper. The Internal Revenue Service has strived dili
gently to erase the distinction by encouraging new legis
lation and resisting any interpretations that do not conform
to the Regulations. New lav;s have been written which re
strict tax planning that has no business purpose other than
the purpose of tax avoidance. The folloxfing sections of the
Code use the terms tax avoidance and tax evasion as if they
hold the same meaning: sections 482, 552(b), 704(b), and
269(a). It is reasonable to expect additional legislation
in this area, but legislation alone cannot remove the bsisic
40
differences between the terms. The courts have ruled for a
number of years that it is perfectly legal for a taxpayer
to plan his tax affairs to his OT'in benefit. This idea has
been challenged strongly in recent years. Taxpayers in
general have recognized the need for competent tax advice.
Few individuals are able to cope with complex Federal tax
laws J and for this reason, tax consultants have been faced
with ever-increasing problems. Complex situations in addi
tion to the desire to minimize the tax burdens have caused
much concern in recent years. Most of the larger companies
have recognized the need for improving the quality of their
tax departments, and the more qualified tax consultants
sponsor tax conferences in order to become acquainted with
'the current multitude of tax developments. The challenge is
elevated by the often over-zealous Internal Revenue Service
V7hich spares no methods and has fevr ethics in the never-
ending cycle of creating more revenue through taxation. The
Service is not bound by a particular code of ethics other
than the moral ethics of the individual Agents.
Not time or money is spared in an effort to create new
tax revenue. The history of court decisions suggests that
the Service has lost cases in a particular field several
times J but still, if the point of law can produce beneficial
results, the Service may attempt a prosecution with the hope
of winning a new, more favorable ruling. This line of
^1
thinking often may be seen in the area of criminal tax law.
The Service may decide that a point of law needs to be set
tled y the search begins then to find a particular set of
circumstances that hopefully will prove the point. Often it
is hidden in the search for circumstances. The search, if
productive, will often disclose a set of circumstances that
will carry the burden of guilt and allow the desired point
to follow. This, in its simplest form, relates to the Trea
sury Department's desire to prosecute the "underworld char
acters" who have a reputation that carries the burden of
guilt. It is of interest to note that many controversial
and important decisions result from the prosecution of in
dividuals with reputations that provide the necessary in
fluence during a trial. This may be exemplified by a decision
mentioned earlier in this thesis which held that a prose
cuting attorney may comment to the effect that a defendant
refused to produce books and records or cooperate vjith the
Special Agents. In the particular case of Beard v. United
42 States, the defendant was a bookie. The precedence arising
from this case opened the door for additional decisions which
might tamper with one's use of the Fifth Amendment.
The Internal Revenue Service is particularly concerned
with the area of tax avoidance; and it is apparent that the
42 Beard v. United States.
42
search has beguji to find a particular set of circumstances
that will carry the burden of guilt with the expectation of
eroding the once-steady ground of tax avoidance in tax plan
ning. The race in order to find the circumstances may prove
to be most interesting for the tax planner. Unless the
Service can find the seemingly perfect case, it is not un
reasonable to expect the area of tax avoidance to be com
pletely sheltered once again by the Supreme Court. Should
the Service find the ideal case, the term tax avoidance may
be short-lived. Extreme care should be exercised by tax
attorneys to probe for the right case which will inevitably
stop the erosion. This case should be developed even if
necessary at the expense of an interested group. The idea
of tax planning and tax avoidance is basic to the democratic
process, for the laws are indirectly made by the people for
the people. Consider the far-reaching implications if by
chance the precedence is set which holds that a taxpayer
cannot plan his affairs with the ultimate objective of re
ducing an operating expense. This in effect would suggest
that an individual should plan his affairs to produce the
greatest tax liability, and this line of thinking does not
conform to the basic concepts of democracy.
The Internal Revenue Service appears primarily to be
in conflict over terminology? it has strived to defir.e tax
avoidance in the same manner as others define tax evasion.
43
It may be that the ultimate results will be in the favor of
the definition desired by the Internal Revenue Service? but
even if the tv7o terms, avoidance and evasion, were to carry
the same connotation, the basic problem vjould still exist.
As long as men write tax laws, the laws will be subject to
the errors that result from the choice of the words that are
used to express them. These errors will result in loopholes
that enable tax avoidance to thrive. It would not be un
reasonable to expect the future to hold a new term for "the
use of tax loopholes," but the use of the loopholes will
prevail.
It is suggested that careful consideration be given to
the terminology of "tax avoidance" and "tax evasion." The
professional tax societies are urged to recognize the con
flict of terminology that has prevailed over the years with
little hope of relief in the imminent future. Perhaps a
vrritten pronoimcement or statement is necessary to give uni
formity to terminology. The sections of the Code which refer
to tax avoidance and tax evasion as synonyms need to be ex
pounded upon so as to explain their impact on tax planning.
Now as never before, this confusion needs to be distinctly
eliminated by definition.
History has reiterated time and time again that the
coui ts follow prior decisions as well as the current mood
of the judicial process. The pronouncements of the
44
professional societies carry a great deal of weight, for
it most often reflects the long-range thinking of most of
its members, A pronouncement by the societies should
standardize the thinking of its members and alleviate the
overlapping of terminology. The pronouncements are normally
read by the members of the judicial process, and often the
members of the societies are part of the judicial process.
It is apparent that now is the time for action; waiting will
result in additional court decisions based on insecure pre
cedence. To clear the air, a dynamic force must have the
initiative and command the lead.
BIBLIOGRAPHY
Baiter, Harry Graham. "How to Defend a Tax Evasion Case Before Criminal Charges Are Brought." The Journal of Taxation, XIX (September, I963), 163-166";
Baiter, Harry Graham, Tax Fraud and Evasion. 3rd ed New York: Ronald Press Compa ny, I963.
Baiter, Harry Graham, "Tax Fraud and Evasion." Journal of Taxation. XX (April, 1964), 250-252.
Baiter, Harry Graham. "When Should a Taxpayer Cooperate with the IRS in a 'Tax Evasion' Case?" The Journal of Taxation. XX (February, 1964), 93-95.
Cochr-an. "Tax Avoidance Schemes End in Disaster. " Miami Law Quarterly. V (1951), 35.
Committee on Federal Taxation of The. American Institute of Certified Public Accountants. Statements on Responsibilities in Tax Practice. Signature of Preparer. New York: American Institute of Certified Public Accountants, Inc., 1965.
Committee on Federal Taxation of the American Institute of Certified Public Accountants. Statements on Responsibilities in Tax Practice. Sip-nature of Reviewer: Assumption of_. Prepg.rer's Responsibility. New York: American Institute of Certified Public Accountants, Inc., 1965.
Gutkin, Sydney A,, and Beck, David. Tax Avoidance vs. Tax Evasion. New York: Ronald Press Company, 1*958.
Internal Revenue Code of 19 4. Englewood Cliffs, N.J.: Prentice-Hall, Inc., Z1964/.
Norwood, Fred W,, and Chisholm, Sam W. Federal Income Taxes; Re search,, and . Plannin.p;. Englewood Cliffs, N,J, : Prentice^ HallT Inc., 1962,
Paul, Randolph, StLud_i.eg__ih-_Federal Taxation. Cambridge, Mass, : Harvard University Press, 1937.
Schmidt, Robert Milton, Lercal and Accounting: H?,ndboo' of Federal Tax_Praud. Encclewood Cliffs", N.J,'r "jPrentice-Hall, inc,"", 1963.
45
46
Schwartz, "Functions of a Tax Consultant," Practical Aspects of Federal Taxation. Bureau of I ational Affairs. 19 !+ ;
Texas Technological College Tax Institute. Proceeding;s of The Fourth Annual Texas Tech Tax Conference. Lubbock, Texas, 1956.
Texas Technological College Tax Institute. Proceedings of Tax Institute. Lubbock, Texas, I96I.
Texas Technological College Tax Institute. Proceedings of Tax Institute. Lubbock, Texas, I963.
U.S. Constitution. Art. I, sec. 2, clause 3.
U.S. Constitution. Art. I, sec. 7, clause 1.
U.S. Constitution. Art. I, sec. 8.
U.S. Constitution. Amendment XVI.
TABLE OF CASES
Beard v. United State.g.
Bullen V. Wisconsin.
Brushaber v. Union Pacific R.H. Co.
Grant v. United States.
Halle V. Comraissioner.
Hanson v. United States.
Helvering; v. Greg:ory.
Holland v. United States.
Koontz V. United States.
Marshall v. Commissioner.
O'Brien v. United States.
Pollock V. Fanners Loan and Trust Co.
Sawtell V. Coi?:nissioner.
Spies V. United States.
Standard Oil Co. v. United States.
Tinkoff V. United States.
United States v. Brill.
United States y. J_o_hnscin.
United States v. I-artell.
United S19. t e s v _ jji ro.
United State? v. Stoehr.
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APPENDIX I
The Initial Interview
I. Introduction of Special Agents and purpose of Intervievr A. Explain constitutional rights B. Explain purpose of visit
II. Proper identification of taxpayer A. Name
1. Personal names used 2. Business names used
B. Place and date of birth C. Marriages
1. W'ife's maiden name 2. Ex-wife's name 3. Determine non-community property
D. Addresses (appropriate years) 1. Business address 2. Residence
E. Occupation and business (principal and spouse) 1. Years involved 2. Partners and/or associates 3. Percent of ownership
F. Education 1, Determine knowledge of tax laws 2. Highest grade of education obtained
G. Health H, Dependents
1. Names and ages 2. Relationship to interviewee
III. Location of monies on deposit A. Banks (names and locations)
1. Personal accounts 2. Business accounts 3. Savings accounts 4. Loans (amounts, dates, purposes, balances) 5. Determine other ba.nks used 6. Safe deposit bozes
a. Names and locations b. V7hen last opened c. Contents
B. Savings and loan associations C. Stockbrokers
1. Names used 2. "Street" names used
D. Determine other funds on deposit
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IV. Books and records A. Business records maintained
1. Where maintained 2. Who keeps records 3. What type of records ^. Detennine availability of records
B. Personal records maintained 1. Type of records 2. V7ho keeps records 3. Where maintained k. Determine a v a i l a b i l i t y of records
C. Accounting method used 1. Cash 2. Accrual
D. Determine extent of control over records V. Assets: Taxpayer and spouse
A. Loans receivable B. Stocks and bonds C. Real estate and residences
1. When purchased 2. Location 3. Cost and later improvements 4. Determine source of funds for payment
D. Equipment and automobiles E. Other assets valued over established minimum
VI. Liabilities A. Loans and notes payable B. Personal charge accounts C. Estimate of personal living expenses
VII. Receipts: .Taxpayer and spouse A. Taxable
1. Wages 2. Dividends 3. Interest 4. Rents and royalties 5. Sale of assets 6. Farm income 7. Other receipts
B. Non-taxable 1. Collections on notes 2. Inheritances (vrhen and from whom) 3. Gifts (vrhen and from vrhom) 4. Insurance proceeds
C. Funds belonging to taxpayer held by others D. Funds belonging to others held by taxpayer E. Determine cash on hand
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VIII. Determine financial practices A. All funds deposited B. Separate business and non-business C. Cash on hand D. Expenses paid in cash E. Business expenses paid from personal funds P. Funds borrowed from business G. Use of casMers' checks H. Checks cashed for others I. Redeposits J. Extent of use of cash
IX. Tax returns A. Identification
1. Signature 2. Where prepared, signed, and mailed 3. By whom prepared
E. Information used to prepare return 1. Records used 2. Work papers used 3. Oral instructions 4. Determine if completed return was discussed
between taxpayer and accountant C. Discuss pertinent items on return D. Determine if all income was reported
E. Determine if all expenses were deducted
X. Inventory of safe deposit box
XI. Obtain books and records and present receipt
XII. Conclude inters;lew A. Discuss allegations B. Carefully record allegations C. Develop fabricated stories completely
XIII, Arrange for another interview at a later date