One way to avoid a tax evasion conviction is to show that the underlying tax is not owed. The recent United States v. Kayser case provides a slightly different twist on this defense.
The Court Sets Out The Following Facts
From November 1998 to May 2000, A2Z USA, Inc. employed Kayser first as a salesperson and later as a vice president for its Internet-based shopping mall. A2Z compensated Kayser as an independent contractor and paid him a commission by checks made out to his name. In July 1999, Kayser incorporated Aspen Ventures Inc. to receive A2Z income and take business deductions related to that income.
After failing to file timely tax returns for 1998 through 2000, Kayser ultimately filed his delinquent individual and corporate tax returns for those years in August 2001. Kayser was subsequently indicted on two counts of attempted income tax evasion (for 1999 and 2000).”¦
The government claimed that Kayser had structured his individual and Aspen Ventures’ corporate returns for 1999 and 2000 to evade the payment of taxes on his A2Z activities.
The court noted that:
For the year 1999 (count 1), the government contended that Kayser received $104,000 of A2Z income that should have been reported on his individual return, but Kayser improperly reported this income on Aspen Ventures’ corporate return. For the year 2000 (count 2), the government showed that Kayser failed to report his A2Z income on either his individual or Aspen Ventures’ corporate return. However, Kayser did report $49,026 in deductible business expenses on Aspen Ventures’ 2000 return. These deductions were composed of automobile expenses, office expenses, utilities, travel and entertainment expenses, and rents.
Kayser raised the defense that the government could not prove that there was a tax deficiency because:
the A2Z income he failed to report on his individual return in 2000 should be offset by the $ 49,026 in business deductions he improperly reported on Aspen Ventures’ corporate returns in 2000 and carried back to 1999.
At the IRS attorney‘s request, the district court refused to instruct the jury as to this defense, because Kayser should not be able to reclassify the tax deductions contrary to how he reported them on his tax returns.
The Second Circuit Court of Appeals reversed the district court’s ruling because “the requested jury instruction was supported by law and had sufficient foundation in the evidence.”
In a strongly worded dissenting opinion, Circuit Judge Kozinski stated that the taxpayer should be:
stuck with the way he reported [the tax deductions] at the time — which was as corporate deductions. To let him now go back and treat the deductions as applicable to his personal income allows for precisely the kind of heads-I-win, tails-the-government-loses scenario that [a prior court case] sought to foreclose”¦. The majority thus eviscerates the evidentiary standard for proposed jury instructions by forcing a district court to give an instruction that’s only supported by generalities and hypothetical possibilities. I must part company with my colleagues in both of these precarious endeavors.