It Ain’t Over Until It’s Over- The 9th Circuit Clears Up Some Questions Regarding the Statute of Limitations for Criminal Tax Evasion by STEVEN TOSCHER, SANDRA BROWN and PHILIPP BEHRENDT
A famous baseball player once said: “It ain’t over until it‘s over.“[i] Apparently, as the 9th Circuit recently reminded us, in addressing the question of when the statute of limitation starts anew in a tax evasion case, this quote rings equally true outside of baseball.
In the case United States v. Orrock, No. 19-10388 (9th Cir. 1/26/2022),[ii] the 9th Circuit, acknowledging the need for clarification, held not only that the statute of limitation for evasion of assessment cases under § 7201 runs from the last act necessary to complete the offense but that later affirmative acts serve to refresh the applicable limitation period.
Orrock involved allegations stemming from the evasion of defendant’s personal taxes for the tax year 2007 arising from income received from the sale of a vacated lot. The defendant, a former IRS attorney, persuaded a friend to purchase a vacant lot, which defendant then directed to be transferred to a partnership set up by, and solely owned by, the defendant. The lot was sold in 2007 for $1.5 million and sometime thereafter defendant found himself under audit by the IRS. In 2011, during the audit of defendant’s 2007 personal tax return, which did not report any income from the sale of the lot, defendant took “corrective” action by filing a partnership return reporting the sale. In filing the partnership return, defendant reported a sales price of $1.4 million instead of $1.5 million and also claimed a tax base of $1.2 million instead of the basis of $90,000.
The government claimed that the defendant was the true owner of the property, and thus, the income from the sale should have been reported on his 2007 personal tax return. Ultimately, the defendant was charged, pursuant to 26 U.S.C. §7201, with evading the assessment of his 2007 personal income tax, along with other tax offenses.
On appeal, defendant argued the six year statute of limitation applicable to criminal tax offenses (26 U.S.C. §6513(2)) barred his conviction for evasion of the assessment of taxes as his 2007 personal return was filed on February 19, 2009, more than six years before the indictment was returned on April 12, 2016. As such, if the 6-year period had run from the date of filing the personal 2007 tax return, the date arguably when defendant had completed all steps necessary for a charge to be filed under Section 7201, the conviction would have been barred by the six year statute of limitation.
The 9th Circuit began its opinion in Orrock by acknowledging the arguable lack of clarity to the running of a statute of limitations for affirmative acts, an element necessary for the charge of an evasion of the assessment of a tax, under Section 7201:
“Although some language in our prior cases may seemingly support Orrock’s argument, we take this opportunity to clarify that the statute of limitations for evasion of assessment cases under § 7201 runs from the last act necessary to complete the offense, either a tax deficiency or the last affirmative act of evasion, whichever is later. See United States v. Carlson, 235 F.3d 466, 470 (9th Cir. 2000).” (Footnote omitted)
Stated another way, as the government argued, the statutes of limitation for Section 7201 can start not only once all the elements of the offense are satisfied, but, alternatively, the statute of limitations can run anew from the last affirmative act furthering the tax evasion. Thus, while defendant may have satisfied all the elements of tax evasion when he filed his 2007 personal tax return in 2009, in committing a further affirmative act in 2011 by filing the partnership tax return in furtherance of the evasion of his true 2007 personal tax liability, the defendant started the six year clock all over again from that later act.
Ultimately, agreeing with the government and with the trial court’s position that the filing of the later company’s false tax return was an affirmative act furthering the evasion of a correct assessment of the defendant’s 2007 personal tax liability which was within the six year statute of limitation, the 9th Circuit affirmed defendant’s conviction, holding that “26 U.S.C. § 6531(2) and § 7201 do not determine that the statute of limitation only starts once all element have been first met but rather can start also when a further act to evade the assessment occurs.” See also, United States v. DeTar, 832 F.2d 1110, 1113 (9th Cir. 1987) (Even if the taxes evaded were due and payable more than six years before the return of the indictment, the indictment is timely so long as it is returned in within six years of an affirmative act of evasion.)
While corrective action may be advisable in many tax situations, when it comes to tax evasion consideration of what might qualify as an “affirmative act” of evasion and thus, may ultimately refresh a limitations period merits caution. E.g., see United States v. Kassouf, 959 F. Supp. 450 (N.D. Ohio 1997), aff’d 144 F.3d 952 (6th Cir. 1998) (falsely claimed net operating loss carried forward and used in later years).
While Yogi Berra was speaking to the game of baseball when he said, “It ain’t over till it’s over”, it wasn’t his only clever baseball quote that applies when it comes to the statute of limitations for criminal tax evasion. Yogi also hit the mark when he said: “It’s like deja-vu all over again.”[iii]
Steven Toscher is a Principal at Hochman Salkin Toscher Perez P.C., and specializes in civil and criminal tax litigation. Mr. Toscher is a Certified Tax Specialist in Taxation, the State Bar of California Board of Legal Specialization and represents clients throughout the United States and elsewhere involving federal and state, civil and criminal tax controversies and tax litigation.
Sandra R. Brown is a Principal at Hochman Salkin Toscher Perez P.C., and former Acting United States Attorney, First Assistant United States Attorney, and the Chief of the Tax Division of the Office of the U.S. Attorney (C.D. Cal). Ms. Brown specializes in representing individuals and organizations who are involved in criminal tax investigations, including related grand jury matters, court litigation and appeals, as well as representing and advising taxpayers involved in complex and sophisticated civil tax controversies, including representing and advising taxpayers in sensitive-issue audits and administrative appeals, as well as civil litigation in federal, state and tax court.
Philipp Behrendt is an Associate at Hochman Salkin Toscher Perez P.C., and a graduate of University of Southern California (USC) Gould School of Law (LL.M.) and a former associate of the leading German tax firm. Philipp’s prior experience includes representing wealthy individuals and companies in global tax settings, cross-border investigations and audit matters, as well as handling complex voluntary disclosure issues for U.S. and other international companies, stemming from tax avoidance structures as well as crypto assets..