Former IRS Attorney Loses Appeal in Tax Evasion Case

(Parker Tax Publishing February 2022)

The Ninth Circuit held that, where an individual filed an individual federal income tax return which did not report any income from his sale of property, and then several years later filed a partnership return on which gain from the sale of that property was underreported, the six-year statute of limitations for evasion of assessment of taxes under Code Sec. 7201 ran from the filing of the partnership return, which was the last affirmative act of evasion. The court also clarified that language in earlier Ninth Circuit decisions about the statute of limitations running from the "last act necessary to complete the offense" did not exclude any other later evasive acts from restarting the limitations period under Code Sec. 6531(2). U.S. v. Orrock, 2022 PTC 22 (9th Cir. 2022).

Background

On July 25, 2011, former IRS attorney Craig Orrock persuaded his friend, Roger Thompson, to purchase a vacant lot in Nevada, known as the "Arville" property. Thompson purchased the property for $80,000 and, at Orrock's direction, transferred ownership to Arville Properties, LLC, a company set up by Orrock and managed through another entity solely owned by Orrock. The government alleged that Orrock was the true owner of the Arville property as he controlled Arville Properties and was the sole signer of Arville Properties' bank account.

On February 21, 2007, Orrock, through Arville Properties, organized the sale of the Arville property for $1.5 million. As Arville Properties served as a nominee for Orrock, the government contended that Orrock received $914,433 in taxable income from the sale, resulting in a $314,483 tax liability for Orrock. Orrock filed his 2007 personal tax return on February 19, 2009, but he did not report any income from the Arville property sale. In February 2011, an IRS revenue agent began a civil audit of Orrock's 2007 personal tax return. Three months later, on May 9, 2011, Orrock filed a tax return for Arville Properties, which substantially underreported the gain from the 2007 Arville sale. The partnership return reported a sales price of about $1.4 million, a tax basis of about $1.2 million, and a gain of about only $200,000. In reality, the sale was for $1.5 million and the property only had a basis of about $90,000.

On April 12, 2016, a grand jury indicted Orrock on three tax felonies: (1) evasion of the payment of taxes under Code Sec. 7201; (2) evasion of assessment of taxes also under Code Sec. 7201; and (3) obstruction of the administration of tax laws under Code Sec. 7212(a). The evasion of tax assessment count stemmed from the 2007 sale of the Arville property. Orrock moved to dismiss the evasion of assessment of taxes count based on the statute of limitations. The district court denied his motion, holding that because the government sufficiently alleged that Orrock committed an affirmative act of evasion in May 2011, the indictment fell within the six-year statute of limitations under Code Sec. 7201. A jury convicted Orrock on all counts. Orrock appealed his conviction under Code Sec. 7201 to the Ninth Circuit.

Under Code Sec. 7201, it is a felony to willfully attempt in any manner to evade or defeat any tax or the payment thereof. A person may violate Code Sec. 7201 in two ways: (1) by evading the assessment of taxes, or (2) by evading the payment of taxes. To obtain a conviction under Code Sec. 7201 under either theory, the government must prove three elements: (1) the existence of a tax deficiency, (2) willfulness, and (3) an affirmative act of evasion or affirmative attempt to evade. Code Sec. 6531(2) provides that the statute of limitations for a violation of Code Sec. 7201 is six years. In U.S. v. Carlson, 235 F.3d 466 (9th Cir. 2000), the Ninth Circuit held that the statute of limitations on Code Sec. 7201's evasion of assessment offense may begin to run from the occurrence of the last act necessary to complete the offense. In Galloway v. U.S., 2019 PTC 42 (9th Cir. 2019), the Ninth Circuit construed Carlson to mean that the last act necessary to complete the offense is the sole method for calculating the limitations period for evasion of assessment cases. In other words, the court interpreted Carlson to exclude any other later evasive acts from restarting the limitations period.

On appeal, Orrock continued to assert that his Code Sec. 7201 conviction for evasion of assessment was barred by the statute of limitations. He contended that the six-year limitations clock started on February 19, 2009, when he filed his 2007 personal tax return without disclosing income from the sale of the Arville property. At that point, he alleged, all the elements of the Code Sec. 7201 offense were satisfied, triggering the limitations period. In Orrock's view, under Galloway any further act of evasion after completion of the offense, such as the filing of the partnership tax return, could not extend the limitations period. The government's view was that the statute of limitations can start once all the elements of the offense are satisfIed, but it can also run from the last affirmative act furthering the tax evasion. Under that interpretation, the government contended that Orrock committed another, final act of evasion on May 9, 2011, when he filed the partnership tax return.

Analysis

The Ninth Circuit agreed with the government's position and affirmed Orrock's conviction on the evasion of assessment charge. The court found that nothing in the text of Code Secs. 6531(2) or 7201 dictates that the limitations period may only begin once all the elements of the offense are satisfied. Rather, both Code sections broadly refer to the evasion of taxes "in any manner." The court reasoned that as a textual matter there is no limit to the method of evasive actions chargeable under Code Sec. 7201. Thus, under Code Sec. 7201, the government may prosecute a defendant for any acts furthering the evasion of taxes, even after all the elements of a Code Sec. 7201 offense have first been met. The court found that, concomitant with that authority, Code Sec. 6531(2) extends the statute of limitations to any evasive acts committed "in any manner" - again, even after all elements of Code Sec. 7201 are first met.

The Ninth Circuit therefore held that the statute of limitations for Code Sec. 7201 evasion of assessment offenses runs from the last act necessary to complete the offense, the later of either: (1) a tax deficiency, or (2) the last affirmative act of tax evasion. In so ruling, the court said that it was aligning evasion of assessment cases with evasion of payment cases and joining all the other circuit courts that have addressed the issue. Accordingly, the court said that it saw no bar to Orrock's prosecution for the evasion of assessment of taxes. Rather than charge Orrock with the filing of the February 2009 personal tax return that theoretically completed the Code Sec. 7201 crime, the government opted to charge him with his last affirmative act of evasion - - the filing of the May 2011 partnership tax return. According to the court, such a prosecution was timely because the indictment was filed within six years of that affirmative act.

Next, the court acknowledged that Orrock's interpretation of the law seemingly had some support from the Ninth Circuit's ruling in Galloway. But the court said that, put in context, Carlson was not meant to be construed in such a cramped manner. Rather, the court read Carlson to establish the basic proposition that, at the earliest, the limitations period begins once all the elements of Code Sec. 7201 are complete. The court said this was clear for three reasons. First, Carlson did not deal with the situation in this case - when an individual committed another act of evasion after all the elements of Code Sec. 7201 were first met. Second, the Carlson court recognized that the statute of limitations may "run from the last act of evasion" for evasion of payment cases, and the court found that the Carlson decision was not intended to create separate rules for evasion of assessment and evasion of payment cases. Finally, the court noted that Carlson cited approvingly to authorities, including U.S. v. Payne, 978 F.2d 1177 (10th Cir. 1992), U.S. v. DiPetto, 936 F.2d 96 (2d Cir. 1991), and U.S. v. Williams, 928 F.2d 145 (5th Cir. 1991), that recognize that the statute of limitations may run from the last affirmative act of evasion for evasion of assessment cases.

For a discussion of the statute of limitations 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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