Court Opinion

ID: 9499727
Source: CourtListenerOpinion
Date Created: 2023-08-05 17:56:20.690329+00
Date Added: 2024-06-11T17:59:41.688602
License: Public Domain

KOZINSKI, Circuit Judge,
dissenting.
The majority begins its analysis by dutifully reciting a well-established rule: “A defendant may negate the element of tax deficiency in a tax evasion case with evidence of unreported deductions.” Maj. op. at 1073 (citing United States v. Marabelles, 724 F.2d 1374, 1378-79 (9th Cir.1984); Elwert v. United States, 231 F.2d 928, 933 (9th Cir.1956)). But it then jumps *1078the rails by removing the word “unreported” and allowing a defendant to escape a criminal tax conviction by re-characterizing reported deductions. Id. at 1075. This new rule finds no support in our caselaw and conflicts with United States v. Miller, 545 F.2d 1204 (9th Cir.1976), and United States v. Boulware (Boulware II), 470 F.3d 931 (9th Cir.2006). Even if this new rule were permissible, defendant did not present evidence that could support such an instruction. For both these reasons, I respectfully dissent.
1. Kayser was charged with tax evasion for failing to report income on his 2000 individual return. His proposed instruction would have allowed the jury to apply the $49,026 in deductions, which he had reported on his corporate tax return, to his personal income. As the government argued at trial, this defense is foreclosed by Miller. In Miller, we dealt with a highly analogous situation, where the taxpayer wished to re-characterize a distribution from his corporation as a return of capital, rather than as a dividend. Miller’s argument, like Kayser’s, was that what mattered was the reality of the transaction, not the way he initially papered it. We rejected this contention. Our rationale for reaching this conclusion is highly instructive:
In civil tax cases the purpose is tax collection and the key issue is the establishment of the amount of tax owed by the taxpayer. In a criminal tax proceeding the concern is not over the type or the specific amount of the tax which the defendant has evaded, but whether he has willfully attempted to evade the payment or assessment of a tax. Goldberg, supra, 330 F.2d at 40; Simon, supra, 248 F.2d at 876.
The difficulty in automatically applying the constructive distribution rules to this case is that it completely ignores one essential element of the crime charged: the willful intent to evade taxes, and concentrates solely on the issue of the nature of the funds diverted. That latter aspect is not the important element. Where the taxpayer has sought to conceal income by filing a false return, he has violated the tax evasion statutes. It does not matter that that amount could have somehow been made non-taxable if the taxpayer had proceeded on a different course.12 To apply the constructive distribution rules to this situation would nullify all of the taxpayer’s prior unlawful acts.
Miller, 545 F.2d at 1214 & n. 12; see also Boulware II, 470 F.3d at 933-35 (same).
Under this rule, a defendant in a criminal tax case is bound by the way he papered the transaction at the time he earned the income in question. In Miller, the taxpayer was bound by the fact that his corporate books did not reflect the distribution as a return of capital. That he could later, as a matter of economic reality, claim that the distribution was a return of capital was of no consequence, because contemporaneously maintained records did not support that re-characterization. Miller went on to explain:
In holding that the constructive distribution rules should not automatically be applied, it is not herein asserted that diverted funds could never be a return of capital. However, to constitute the *1079latter, there must be some demonstration on the part of the taxpayer and/or the corporation that such distributions were intended to be such a return. To hold otherwise would be to permit the taxpayer to divert such funds and if not caught, to later pay out another return of capital; or if caught, to avoid conviction by raising the defense that the sums were a return of capital and hence nontaxable.
545 F.2d at 1215 (footnote omitted); see also Boulware II, 470 F.3d at 934 (“[D]e-fendant must show not merely that the funds could have been a return of capital, but that the funds were in fact a return of capital at the time of the transfer.”).
Although this rule creates some tension with Marabelles and Elwert,1 these cases can be reconciled because Marabelles and Elwert deal with the situation where the taxpayer failed to claim deductions. In such circumstances, the deductions are unreported, so the taxpayer is not bound under Miller by any prior characterization. Unlike in Marabelles and Elwert, defendant here did not fail to report business expenses on his return; he claimed the deductions on his corporate return and carried back the losses to wipe out tax liability for the prior year. Kayser’s act of claiming the deductions on his corporate return was not merely proof of the underlying reality; it teas the reality because it had a legally operative effect: Had Kayser not been audited, these deductions would have been carried back to reduce his corporate tax liability to zero for 1999; his 2000 personal tax liability would have been zero because of his failure to declare income.
The IRS, however, did audit Kayser and found that he had underreported his personal income in 2000. If the deductions are shifted from his corporate to his individual return, this would affect his 1999 corporate tax liability. The same deductions cannot be used twice: He can either use them to wipe out his 2000 personal income or he can carry them back to wipe out his 1999 corporate income. Having chosen to do the latter when he filed his returns, the deductions are used up and are not available to offset his 2000 personal income. Contrary to the majority’s holding, Marabelles and Elwert are thus not on point because Kayser does not have allowable deductions that were not reported on his return. Even if the deductions in question could have been treated as personal deductions, had Kayser claimed them as such on his individual return, the district court properly concluded that Kay-ser is stuck with the way he reported them 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 Miller sought to foreclose.
2. Even under the majority’s new rule, the district court did not abuse its discretion in refusing to give the proposed instruction because Kayser did not present sufficient evidence to warrant the instruction. Kayser needed to establish that he had enough allowable deductions to elimi*1080nate tax liability. In other words, he needed to show that he would have and could have reported sufficient deductions to offset all income. The majority strains to find “arguably weak” evidence in the record to support both propositions, see maj. op. at 1076-77, but the evidence on both counts falls far short of providing a sufficient basis “upon which the jury could rationally sustain the defense.” United States v. Jackson, 726 F.2d 1466, 1468 (9th Cir.1984) (per curiam); see also United States v. Streit, 962 F.2d 894, 898 (9th Cir.1992) (same) (“The ‘merest scintilla of evidence,’ however, will not suffice.” (quoting Jackson, 726 F.2d at 1468)).2
Kayser reported $49,026 in business expenses on his 2000 corporate return and carried back these expenses to eliminate his corporate tax liability for 1999. He was able to carry back these losses because he failed to report $41,765 of personal income from A2Z in 2000 and thus had no 2000 reported income against which to claim deductions.3 Unlike Marabelles and Ehvert, therefore, the deductions Kayser wanted to use to offset his unreported 2000 income at the time of trial were not unused. Rather, they were doing work in sheltering his 1999 corporate income. Had the 1999 tax year been beyond the government’s reach, perhaps Kayser could have argued that he had erred in assigning the deductions (for his 2000 expenses) to his corporate return and carrying them back to 1999. The majority’s new rule would allow that (though Miller would, in my view, prohibit it).
But the 1999 tax year was not beyond the government’s reach. In fact, Kayser was being tried for tax evasion for both 1999 and 2000. To escape conviction, therefore, Kayser had to show that he had enough deductions to shelter both his 1999 and 2000 income. There just weren’t enough deductions to do this. On his 1999 corporate return, Kayser reported $104,532 in income; he paid taxes on none of it because he claimed $111,061 in deductions to wipe out his 1999 corporate income — including $49,026 in carryback losses from 2000. If he shifted $41,765 of these deductions to cover his unreported income for 2000, that would have left him only $69,296 in deductions for 1999 to offset the $104,532 in income reported on his corporate return. Thus, even assuming Kayser were allowed to reassign some or all of his deductions from 1999 to 2000, he would have some unsheltered income in one or both years; the majority admits as much. See maj. op. at 1077 n. 6.
*1081Which is no doubt why the record is so muddy as to whether Kayser would or could have reassigned the deductions to his personal income: Had Kayser shown unequivocally that the deductions were available in 2000, and that he would have claimed them that year, he would have exposed himself to a conviction for tax evasion in 1999. Kayser therefore hedged his testimony. On direct examination, Kayser indicated that “every deduction on [his] corporate return ... related to [his] A2Z income,” and that he would “have attempted to declare some of the deductions” on his individual return. (Emphasis added.) On cross-examination, Kayser testified that the 2000 business expenses “could have been [Aspen Ventures expenses], yeah, but they were primarily due to the consulting business [apparently referring to his employment with A2Z] as well as Image Network, or Clear Blue Media is otherwise known as.” When pressed further, Kayser testified that these were Aspen Ventures expenses “if I’m understanding — I’m getting a little confused, but yes.”
Note that Kayser made only very broad statements that the deductions relate to his personal income, and even then he hedged quite a bit: He claimed he would have attempted to declare some of those deductions on his individual return. He didn’t say what portion of the $49,026 he would have claimed; it could have been $41,765 or more, or it could have been less. It’s even less clear when we consider his backtracking on cross-examination: He admitted that some of the expenses “could have been” attributable to Aspen Ventures, and that the expenses “were primarily due to the consulting business as well as Image Network.” Again, we don’t know which portion. As the majority notes, it is defendant’s burden to show that the claimed expenses would have reduced his income to zero for the relevant tax year (here 2000). Maj. op. at 1073-74 (citing Marabelles, 724 F.2d at 1379 n. 3; Elwert, 231 F.2d at 933). On this record, a rational jury could not find that Kayser had shown sufficient business expenses that he would have used to offset all tax liability for 2000.
Even assuming Kayser had testified that he would have claimed all the deductions on his individual return, this wouldn’t have been enough. To wipe out his 2000 unreported income, Kayser also had to show that the deductions would have been allowable. See maj. op. at 1076 (citing Marabelles, 724 F.2d at 1379 n. 3; Elwert, 231 F.2d at 933). It’s a point Kayser did not address in his testimony. The question then is whether the other two witnesses— the government’s expert and Kayser’s accountant — addressed the allowability of the deductions. The government’s expert certainly provided Kayser no help. On cross-examination, the expert indicated that it was “theoretically” possible that Kayser could have claimed the deductions on his individual return “if those deductions had passed the many different requirements that the IRS imposes in order to claim the deductions related to the business incurred for furthering the business.” (Emphasis added.) A theoretical possibility, however, is not evidence, not even “arguably weak” evidence, that such deductions were indeed allowable on Kayser’s individual return. The government’s expert never said that any of the expenses were actually allowable to offset Kayser’s personal income.
This brings us down to the accountant’s testimony. Kayser’s accountant (who was the government’s witness) testified on direct that “[i]f the deductions were attributable to Mr. Kayser and had he paid those personally, he could have deducted those personally ... and the tax return for the corporation would have been nonexistent; it just would have been a zero return.” (Emphasis added.) On cross-examination, the accountant testified that “if *1082in fact the corporation was not the recipient of the income and we pick that up on Michael Kayser’s personal tax return and we pick up the expenses and all of them are — all the income is reported and all expenses are allowable, I don’t — I cannot see a significant change in the tax.” (Emphasis added.) On re-direct, he indicated that if Kayser had accurately reported his individual income, Kayser would have had to file a “new tax return or amended tax return,” and “certain other parts of the tax return [would be] inapplicable or at least [would need] to be amended.”
The majority seems to think it’s sufficient that “both the government’s expert and Kayser’s accountant testified that as a general matter, business expenses of the type reported on Aspen Ventures’ 2000 return could be used to reduce business income on an individual return.” Maj. op. at 1077. But the majority does not examine what the witnesses actually said. Significantly, the majority points to no statement by either witness that supports its watery characterization. In fact, neither witness testified that the actual business expenses reported by Aspen Ventures were allowable on Kayser’s individual return. Kayser’s accountant, like the government’s expert, assumed hypothetically that the deductions were allowable and then opined what effect this would have had on Kayser’s 2000 individual return. Even then, the accountant hedged, suggesting that other parts of the return would have to be amended. Nowhere did he say that the deductions were actually allowable under the tax code; nor did he claim that Kayser’s hypothetical individual return, when adjusted properly, would have resulted in zero tax liability.
In short, Kayser did not provide sufficient proof to enable a rational jury to find that he had enough allowable deductions to reduce his 2000 personal tax liability to zero. Nor could he, given that he needed these same deductions to shelter his 1999 income. Under these circumstances, the district court did not abuse its discretion in refusing to give the instruction. See Streit, 962 F.2d at 898. Indeed, it did exactly what a district court should do when a party proposes an instruction that’s not supported by the evidence.
* * *
In reversing defendant’s conviction, the majority creates a defense against criminal tax liability that conflicts with established circuit precedent. And it does so unnecessarily, as defendant has fallen far short of meeting his burden to warrant the erroneous instruction. 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.

. At the time the funds are initially diverted, it might well be argued that they could constitute either income or a return of capital. However, once the taxpayer has assumed control of the funds and then fails to report such funds as income or to make any adjustments in the corporate books to reflect a return of capital, he has already violated the tax evasion statutes. Accord, Spies v. United States, 317 U.S. 492, 498-99, 63 S.Ct. 364, 87 L.Ed. 418 (1943); United States v. Swallow, 511 F.2d 514, 521 (10th Cir.), cert. denied, 423 U.S. 845, 96 S.Ct. 82, 46 L.Ed.2d 66 (1975).

. This tension was pointed out by Judge Thomas's concurring opinion in Boulware II. Judge Thomas criticized Miller because it holds that "a defendant may be criminally sanctioned for tax evasion without owing a penny in taxes to the government. Not only does this result indicate a logical fallacy, but is in flat contradiction with the tax evasion statute's requirement of 'the existence of a tax deficiency.’ ” 470 F.3d at 938 (Thomas, J., concurring) (quoting Marabelles, 724 F.2d at 1379). Nevertheless, Judge Thomas, like the Boulware II majority, concluded that they were bound by Miller and ruled in favor of the government.

. Nor did the district court prevent defendant from presenting evidence to support the proposed instruction. The majority does not reach this issue, see maj. op. at 1077-78 n. 7, but it’s worth noting that the district court gave defendant ample opportunity to introduce such evidence. When defendant first raised the issue on the penultimate day of trial, the court noted that "you may have a problem given the state of the evidence if you argue that, but you may not. It just depends on how everything comes in and what the arguments are, what the objections are. And I can't rule hypothetically on every permutation of argument that we might hear in the case. We'll just have to defer that until the time of argument.” When defendant presented his proposed instruction the next day, the court similarly noted, "Well, I’m going to decline to give this instruction at this point; the evidence doesn't support it.” Defendant thus cannot blame the district court for his failure to present the requisite evidence.

. At trial, the IRS case agent testified that Kayser underreported his 2000 personal income by $53,445, but the government's expert calculated the figure more conservatively at $41,765. See maj. op. at 1072 n. 2. The district court relied on the more conservative calculation at sentencing, and the government relies on the same figure on appeal. While we also must rely on the conservative calculation here, it's worth noting that Kayser concedes that he’d have no defense if the jury bought the higher calculation because he wouldn’t have had sufficient deductions to eliminate all tax liability.