Statute Began to Run on Date Returns Were Filed, Not on Date Taxpayer Lied to IRS

(Parker Tax Publishing February 2020)

The Ninth Circuit reversed a taxpayer's conviction on tax evasion charges because the charges were brought more than six years after the taxpayer filed his 2003, 2004, and 2005 tax returns. According to the court, the statute began to run when the taxpayer filed his returns and not on the date the taxpayer lied about his income to IRS agents. Galloway, 2019 PTC 42 (9th Cir. 2019).

Background

In March of 2018, Michael Galloway went on trial for four counts of attempting to defeat assessment of a tax in violation of Code Sec. 7201. Specifically, under Counts 1-4, he was charged with underreporting his income on his 2003, 2004, 2005, and 2006 tax returns, respectively. Galloway was found guilty by a jury and sentenced by a district court to 21 months in prison and ordered to pay restitution of $128,000. Subsequently Galloway filed motions to dismiss the verdict with respect to the counts relating to his 2003-2005 tax returns on statute-of-limitations grounds. The district court denied the motions.

Galloway appealed his conviction to the Ninth Circuit. On appeal, Galloway argued that the district court erred in (1) denying his motion to dismiss Counts 1-3 of the indictment on statute-of-limitations grounds; (2) denying his motion for acquittal on Counts 1-3; (3) denying his motion to suppress his financial records; and (4) applying a sophisticated-means sentencing enhancement. According to Galloway, the indictment was brought more than six years after he filed his 2003, 2004, and 2005 tax returns and was thus beyond the statute of limitations.

The government argued that Counts 1-3 were timely because the statute of limitations began to run, not from the filing of the false tax returns, but from the date Galloway lied to IRS agents about his taxable income - i.e., the last act of evasion.

Code Sec. 6531(2) provides that no person can be prosecuted, tried, or punished for any of the various offenses arising under the internal revenue laws unless the indictment is found or the information instituted within three years next after the commission of the offense, except that the statute of limitations is six years for the offense of willfully attempting in any manner to evade or defeat any tax or the payment thereof.

Analysis

The Ninth Circuit reversed in part, affirmed in part, and remanded for resentencing. Because the indictment was brought more than six years after Galloway filed his 2003, 2004, and 2005 tax returns, the court concluded that Counts 1-3 were barred by the statute of limitations.

In reaching its conclusion, the Ninth Circuit cited its decision in U.S. v. Carlson, 235 F.3d 466 (9th Cir. 2000), in which it held that the six-year statute of limitations in Code Sec. 6531(2) begins to run in evasion of assessment cases from the occurrence of the last act necessary to complete the offense. Because tax evasion is not a continuing offense for statute of limitations purposes, the court said, the offense of tax evasion is complete as soon as every element of the crime occurs. The court went on to note that the elements of tax evasion under Code Sec. 7201 are (1) willfulness; (2) the existence of a tax deficiency; and (3) an affirmative act constituting an evasion or attempted evasion of tax. According to the court, when Galloway late-filed his 2003, 2004, and 2005 tax returns, he had already incurred a tax deficiency for each year. Therefore, each offense of tax evasion charged in Counts 1-3 was complete when Galloway willfully filed his false tax returns (i.e., each element of tax evasion was thereby satisfied). The court thus reversed the district court's denial of Galloway's motion to dismiss and vacated his convictions as to Counts 1-3.

With respect to Galloway's argument that the district court erred in denying his motion to suppress his financial documents because the IRS's warrantless inspection of his financial records violated his private-property interests under the Fourth Amendment, the court noted that Galloway never requested suppression on this ground in the district court and thus denied the motion. The Ninth Circuit also affirmed the district court's application of the sentencing guidelines.

For a discussion of the statute of limitations period on criminal prosecutions, see Parker Tax ¶265,180.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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