Report No. 29
The intent must be specific, that is to say, a mere general intention to perform an illegal act is not sufficient. Nor is it presumed or inferred merely from the filing of an incorrect or understated tax return. The concealment of an obligation known to exist, as distinct from a genuine misunderstanding of what the law requires, is essential1. It is something more than "intentionally" and requires an evil motive as well as want of justification. Honest mistake and belief in good faith are complete defences to a prosecution for evasion. And negligence can never amount to wilfulness.
But since intention can never be gathered by direct evidence, all relevant circumstances are taken into account, including the background and education of the accused, the nature of the acts involved, his professional experience etc.2
Mere possession of large amounts of unaccounted cash, while it may be some evidence, does not alwaysestablish the taxability of the amounts involved3. It has been held by the Supreme Court that an "affirmative act" is required in proof of "wilful evasion". This, it is stated, is implied from the word "attempt"4.
Affirmative acts.-Many of the "affirmative" acts have been enumerated by the United States Supreme Court in the Spies case5, though the court took care to observe that what it enunciated was merely by way of illustration, and pointed out that Congress had not defined or limited the methods by which a wilful attempt to defeat and evade might be accomplished and, that perhaps the Congress did not define lest its effort to do so result in "some unexpected limitation". The illustrations given by the Supreme Court in the Spies case are quoted below.
"...........affirmative wilful attempt may be inferred from conduct such as keeping a double set of books, making false invoices or documents, destruction of books or records, concealment of assets or covering up sources of income, handling of one's affairs to avoid making the records usual in transactions of the kind, and any conduct, the likely effect of which would be to mislead or conceal. If the tax-evasion motive plays any part in such conduct the offence may be made out.........."
Besides the enumeration given in the Spiets case, the following have been used as evidence of wilful intent to defraud:-
(a) use of large amounts of currency;6
(b) a much visited safety deposit box;7
(c) purchase of property in the names of others;8
(d) bank accounts in fictitious names;
(e) diversion of funds from business; and
(f) failure to keep books and records coupled with under statement of income.9
False return.-Since the illustrative list given in the Spies case does not say anything about filing false income-tax return, the question has been raised whether that would amount to attempt to evade tax. The question seems to have been answered in the affirmative by Appellate Courts. The Supreme Court has also held, that the positive act of wilfully filing a false claim in order to defeat the tax supports a charge under this section10. The question, however, cannot be regarded as absolutely settled.
Understatement.-Mere understatement of income does not support an inference of wilfulness, etc., but a consistent pattern of under-reporting large amounts of income may support it11.
Attempt.-As regards the expression "attempt" to evade tax, it has been decided12 that the attempt need not consist of conduct which would have culminated in a more serious crime but for some impossibility etc. The prosecution can only be for the attempt. The attempt itself is an independent crime. Nothing is added to its criminality by success or consuma tion.
"Evade" and "defeat".-Though both the words "evade" and "defeat" have been used, and they are divided by the conjunction "or", the two are usually treated as synonymous, and indicate cheating on taxes by any devise. It must be added that an attempt to defeat the payment of taxes by obstructing the processes for collection has also been regarded as evasion13.
Failure to pay tax by itself, however, is not "evasion"14.
Failure to file a return.-Similarly, mere failure to file return would not ordinarily amount to an offence under this section15, in the absence of some affirmative act showing "wilfulness". A mere passive neglect of the statutory duty of filing a return does not fall under section 7201. Prior failure is, however, sometimes regarded as evidence of an attempt to evade, though the position on this point is not very clear. Courts usually treat section 7201 as one intended to secure enforcement of the substantive provisions of the tax law, and section 7203 as one intended merely to secure the enforcement of its administrative provisions.
Taxes avoided.-Prosecutions under section 7201 are mostly in respect of income-tax, but prosecutions have been instituted for attempted evasion of the following taxes, namely, excess profits tax, social security taxes, estate duties, admission taxes, etc.
The limitation period for prosecution is six years16 from the date of the wilful attempt. Ordinarily, the filing of the false return is the mode of evasion charged, and the time therefore runs from the date of the return.
While penalties for making false or fraudulent returns with intent to defeat or evade tax have been there in American law since the first Income-tax Law passed on 5th August, 1861, the two World Wars focussed attention on the need for an efficient machinery for investigating tax frauds. The Intelligence Bureau of the Internal Revenue was formed in 1919. In 1924, wilfully attempted tax evasion was changed from a misdemeanour to a felony. The discovery of rackets in business and operations in black-market after the Second World War led to increased activities in prosecution of offenders for tax evasion also. In recent years, the investigating staff of the Internal Revenue Service has been strengthened.
Principle followed.-A prosecution for evasion of tax is not ordinarily instituted, unless (i) there is a proof that the tax-payer is guilty beyond reasonable doubt, and (ii) there is a reasonable probability of securing a conviction. "Civil" penalties charging extra tax can also be imposed, and in most cases only the civil penalty is applied. The distinction between civil and criminal fraud may depend on the flagrancy of the offence, the available evidence and the Government's burden of proof17.
1. United States v. Mandl, 199 Federal 2d 670, cert. denied (1953) 345 US 917.
2. Capone v. U.S, 56 Federal 9d 296, cert. denied (1232) 286 US 593.
3. United States v. Malan, 236 Federal 2d 576, cert. denied, (1957) 353 US 912.
4. Spies v. U.S., 1943 US 492 (498).
5. Spies v. United States, (1943) 317 US 492 (499), (Jackson delivering the opinion of the Court).
6. Schuermann v. United States, (1949) 174 F 2d 397; certiorari denied, 338 US 831.
9. Holland v. U.S., (1954) 348 US 121 (137 & 139).
10. Achili v. United States, (1957) 358 US 373.
11. Holland v. U.S., (1954) 348 US 121.
12. Spies v. United States, (1943) 317 US 492.
13. United States v. Bardin, 224 Federal 2d 225 cert. denied, (1956) 350 US 883.
14. Failure to pay tax or file return may however fall under section 7203, Internal Revenue Code.
15. Spies v. U.S., (1943) 317 US 492.
16. Section 6531 of the Internal Revenue Code.
17. Crockett Federal Tax System of United States, (1955), p. 136.