Opinion ID: 3033376
Heading Depth: 3
Heading Rank: 1

Heading: Clarity of the Law

Text: George first argues that, as a matter of law, he lacked wilfulness to commit a crime because the law governing allocation of receiver fees was not clearly established at the time of the offense. The district court’s determination that the predicate law was clearly established is a question of law which we review de novo. See United States v. Schulman, 817 F.2d 1355, 1358 (9th Cir. 1987) (citing United States v. Russell, 804 F.2d 571, 574 (9th Cir. 1986)). [1] The element of wilfulness cannot obtain in a criminal tax evasion case unless “the law clearly prohibited the conduct alleged in the indictment.” Schulman, 817 F.2d at 1359; see also James v. United States, 366 U.S. 213, 221-22 (1961) (vacating taxpayer’s conviction for failure to report embezzled funds as income because conflicting caselaw rendered the predicate tax statute ambiguous when applied to embezzled funds). Without sufficient clarity in the law, taxpayers lack the “fair notice” demanded by due process so that they may conform their conduct to the law. United States v. Dahlstrom, 713 F.2d 1423, 1427 (9th Cir. 1983) (citing United States v. Batchelder, 442 U.S. 114, 123 (1979)). However, a lack of prior appellate rulings on the topic does not render the law vague, nor does a lack of previously litigated fact patterns deprive taxpayers of fair notice. See Russell, 804 F.2d at 575 (citing United States v. Ingredient Tech. Corp., 698 F.2d 88, 96 (2d Cir. 1983) (stating that it was “immaterial” that there was no prior litigation directly on point)). Thus, criminal prosecution is permissible when it is “clear beyond any doubt UNITED STATES v. GEORGE 11245 that [the conduct] is illegal under established principles of tax law . . . .” Russell, 804 F.2d at 575. [2] The general income allocation rule provides that “[t]he amount of any item of gross income shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under the method of accounting used in computing taxable income, such amount is to be properly accounted for as of a different period.” 26 U.S.C. § 451(a). The applicable regulations further clarify this general rule by identifying the respective duties for cash-basis and accrual basis taxpayers. “Under the cash receipts and disbursements method of accounting, such an amount is includible in gross income when actually or constructively received.” 26 C.F.R. § 1.451-1 (a).3 Thus, as a cash-basis taxpayer, George would ordinarily be required to report income in the year it is received.4 According to George, the statute and regulations are ambiguous as to when receiver fees should be reported as gross income. George points to caselaw that purports to support his claim that receiver fees paid to a cash-basis taxpayer are not taxable until the time of final accounting and approval by the supervising court. According to George, the potential for subsequent disgorgement means that receiver fees are not received under a claim of right. See e.g., C.I.R. v. Indianapolis Power & Light Co., 493 U.S. 203, 209-10 (1990); American Valmar Int’l Ltd., Inc. v. C.I.R., 229 F.3d 98, 102 (2d Cir. 2000); Ahadpour v. C.I.R., 77 T.C.M. (CCH) 1210 (1999), 1999 Tax Ct. Memo LEXIS 9 at  16-17; Massey v. C.I.R., 143 F.2d 429, 430-31 (5th Cir. 1944); Parkford v. C.I.R., 133 3 We no not reproduce other provisions of 26 C.F.R. § 1.451-1 dealing with allocations under the accrual method of accounting as they do not apply to cash-basis taxpayers like George. Likewise, we do not consider 26 C.F.R. § 1.45-2 applicable as this regulation is specific to the allocation of constructively-received income. The record shows that George actually received the fees. 4 George has never claimed to be an accrual basis taxpayer. 11246 UNITED STATES v. GEORGE F.2d 249, 250 (9th Cir. 1943); Helvering v. McGlue’s Estate, 119 F.2d 167, 169 (4th Cir. 1941); C.I.R. v. Cadwalader, 88 F.2d 274, 274-75 (3d Cir. 1937). George’s reliance on these cases for such a proposition is misplaced. These cases simply suggest that receiver fees paid to cash-basis taxpayers are income in the year actually paid, and fees paid to accrual basis taxpayers are taxable in the year the applicable state law creates a right to demand the fees. Compare Cadwalader, 88 F.2d at 275 (“As 1930 was the year in which she in fact received the cash commission from the Roebling estate, that is the year in which the income was received and the tax upon its receipt due.”) (cash-basis taxpayer), and Massey, 143 F.2d at 430-31 (holding attorney’s receipt of cash payment for part of contingency fee taxable in the year actually received; remainder of fee not constructively received or taxable until settlement approved by the court) (cash-basis taxpayer), with McGlue’s Estate, 119 F.2d at 169 (stating that an accrual method taxpayer ordinarily reports executor fees only when entitlement to them attaches under applicable state law, but death of the taxpayer triggers special provision of tax code allocating income as of the date of death despite lack of entitlement under state law), and Parkford, 133 F.2d at 250 (holding an accrual basis taxpayer who was not a receiver need not report commission income for sale of a company which happened to be in receivership until the supervising court approved the sale). Other cases cited by George provide that funds received while still subject to an express obligation to repay are not income. Unfortunately, these cases have little to do with the type of income at issue here: receiver fees. See e.g., Indianapolis Power & Light, 493 U.S. at 214 (stating deposits held by utility to secure payment from customers with poor credit was not income because the utility assumed an express obligation either to apply the deposits to customers’ bills or to refund the balance); American Valmar, 229 F.3d at 102-03 (finding customer deposits held by international broker not income UNITED STATES v. GEORGE 11247 because the broker had an obligation to use the deposits for the customers’ benefit or to repay them); Ahadpour, 1999 Tax Ct. Memo LEXIS 9 at -17 (holding earnest money advanced to sellers from escrow under the terms of a contract to sell real property was not income to the sellers in the year received because the contract created an express obligation to repay the funds if the sale did not close). [3] In contrast, two other cases specifically apply the claim of right doctrine to allocate executors’ fees in the year they are received. In United States v. Merrill, 211 F.2d 297, 299 (9th Cir. 1954), a husband who was appointed as the executor of his wife’s estate erroneously paid all of his executor fees out of his wife’s segregated share of the community funds. We held that the entire $10,000 of executors’ fees paid in 1939 were taxable to him under the claim of right doctrine despite the fact that $2,500 was repaid to the estate in a subsequent year due to the error. Id. at 303. Merrill therefore unambiguously applied the claim of right doctrine to the receipt of trustee fees even though they were subject to final court approval and were partially repaid. [4] Similarly, the Second Circuit applied the claim of right doctrine to executors’ commissions in Jacobs v. Hoey, 136 F.2d 954, 956-57 (2d Cir. 1943). The court held that such commissions were taxable in the year received, not in the year the supervising court conferred final approval. Of particular importance to the Jacobs court was the fact that the executor negotiated an arrangement with the beneficiaries that allowed advances against his ultimate commission. Because the interested parties had agreed in advance, “there was no reasonable likelihood that the [executor] would be called upon to return the sums that had been paid as commissions.” Id. at 957. Rejecting the taxpayer’s argument that the advance commissions should be treated as loans because they were subject to subsequent court approval and possible disgorgement, the Second Circuit held that the commissions were properly allo11248 UNITED STATES v. GEORGE cated to the taxpayer under the claim of right doctrine in the years they were actually paid. Id. at 956. [5] We conclude that the law clearly required George, a cash basis taxpayer, to report the receiver fees in the years he received them. We find 26 U.S.C. § 451 and the applicable cash-basis provision of 26 C.F.R. § 1.451-1 free from ambiguities regarding allocation of George’s income. As stated in the regulation, “[u]nder the cash receipts and disbursements method of accounting, such an amount is includible in gross income when actually or constructively received.” 26 C.F.R. § 1.451-1 (a). [6] The fact that George’s receiver fees were subject to possible disgorgement at the time of a subsequent final accounting does not remove them from the claim of right doctrine. To the contrary, George’s fees were taxable in the year received “even though it may [have been] claimed that he [was] not entitled to retain the money, and even though he may [have been] adjudged liable to restore its equivalent.” N. Am. Oil Consolidated v. Burnet, 286 U.S. 417, 424 (1932). Merrill and Jacobs confirm that executor fees and commissions are not exempt from the claim of right doctrine merely because they are subject to final court approval and possible disgorgement.5 Likewise, the fact that some fees were actually repaid does not insulate the fees from the claim of right doctrine. See Merrill, 211 F.2d at 303; see also Rasmus v. C.I.R., 47 T.C.M. (CCH) 829 (1984), 1984 Tax Ct. Memo LEXIS 664 at  (holding funds misappropriated from estate by the administering attorney constituted income to the attorney in 5 If anything, the fact that the courts supervising the receiverships approved George’s fees demonstrates that he, like the executor in Jacobs, faced little threat of disgorgement. See People v. Riverside Univ., 35 Cal. App. 3d 572, 587 (1973) (“It is settled that fees awarded to receivers are in the sound discretion of the trial court and in the absence of a clear showing of an abuse of discretion, a reviewing court is not justified in setting aside an order fixing fees.”). UNITED STATES v. GEORGE 11249 the year misappropriated despite subsequent repayment). These same principles apply to receiver fees like George’s. [7] Short of an express obligation to repay, a contingent obligation to repay a portion of receiver fees actually paid to a cash-basis taxpayer does not remove these payments from the claim of right doctrine. See Merrill, 211 F.2d at 303-04. This is because “a potential or dormant restriction . . . which depends on the future application of rules of law to present facts, is not a ‘restriction on use’ within the meaning of [the claim of right doctrine].” Healy v. C.I.R., 345 U.S. 278, 284 (1953). Indeed, application of the claim of right doctrine does not turn on the relative likelihood of a contingent obligation coming to fruition nor does it depend on the legitimacy of the taxpayer’s right to retain the funds. See James, 366 U.S. at 219-20 (stating illegally obtained funds are considered income and subject to the claim of right doctrine). Instead, the relevant inquiry centers on the taxpayer’s dominion and control of the funds, see Indianapolis Power & Light, 493 U.S. at 212, and the manner in which the taxpayer treats the funds, see Alexander Shokai, Inc. v. C.I.R., 34 F.3d 1480, 1485 (9th Cir. 1994). “A taxpayer receives a payment under a claim of right when he treats the payment ‘as belonging to him.’ ” Id. (quoting Healy, 345 U.S. at 282).6 [8] In sum, the district court correctly determined that the claim of right doctrine applied to George’s receiver fees. The law on this point was sufficiently clear to allow prosecution for failure to report such fees in the years received.