United States v. Michael Kayser

requires us to vacate This rule Supreme Court in judgment.

court’s that it stood “Mun-

Bonner Mall held by hap- that mootness

singwear’s dictum to va- sufficient reason

penstance provides at 25 n. 115 S.Ct. 386.

cate.” 513 U.S. “happen- one in which case is actions,

stance,” parties’ own ren- not the appeal appellants moot. The

dered the case, they nor did fail to

did not settle the Rather, this court and the Califor-

appeal. Supreme

nia Court resolved the controver-

sy the decisions in Credit Suisse and with appellants’ doing.

Jevne. That was not parties not even

NASD and NYSE were actions, if though

those it would not matter been, they could not because posi- their

required to abandon consistent merely pending litigation

tion mooting out another case.

avoid We exception

therefore hold that the identified

in Bonner Mall for settlements should not judgments by court deci-

apply to mooted in other cases. vacate the

sions We dis- judgment

trict and remand court’s to dismiss the case.

instructions

VACATED AND REMANDED. America,

UNITED STATES

Plaintiff-Appellee, KAYSER,

Michael Defendant-

Appellant.

No. 06-50178. Appeals,

United States Court

Ninth Circuit.

Argued and Submitted: Dec. May

Filed: Lam, Attorney; United States

Carol C. Castetter, George Aguilar, R. Assis- Bruce Attorneys, Diego, tant United States San CA, plaintiff-appellee. for the REINHARDT, Before: STEPHEN KOZINSKI, ALEX and SANDRA S. IKUTA, Judges. Circuit IKUTA; Opinion by Judge Dissent Judge KOZINSKI.

IKUTA, Judge. Circuit Kayser appeals Michael from his convic- in violation of 26 tion for tax evasion § alleg- 7201 for the 2000. He U.S.C. es, things, that among other jury in failing court erred in to instruct the theory of defense. We accordance with his § jurisdiction have under 28 U.S.C. and remand. and we reverse

BACKGROUND May A2Z From November 1998 (“A2Z”) USA, Kayser first employed Inc. salesperson presi- and later as a vice as shopping mall. dent for its Internet-based indepen- an compensated A2Z paid him a commission dent contractor July to his name. by checks made out incorporated Aspen Ventures Ventures”) to (“Aspen Inc. receive relat- income and take business deductions ed to that income. timely tax failing

After to file returns ultimately filed through delinquent individual and years August returns for those on two subsequently indicted Zugman, Zugman, Burcham & David J. attempted income evasion counts of 2000) (for APC, CA, of 26 Diego, for the defendant- in violation San 1999 and § U.S.C. 7201.1 appellant. willfully attempts any Any person who provides:

1. Section trial, During the government alleged paying taxes. course At trial, structured his indi- improperly theory, raised a second name- re- Ventures’ vidual ly, A2Z income he failed to that the the pay- and 2000 evade turns for 1999 individual return in 2000 should be A2Z taxes on his activities. For ment of $49,026 in offset the business deduc- (count 1), government year improperly reported Aspen tions he on $104,000 Kayser that received contended in 2000 and corporate Ventures’ returns have been re- of A2Z income that should theory carried back to 1999. This was return, Kayser but ported on his individual principal pieces two of evi- supported Aspen this income on improperly reported First, in- Kayser dence. testified that he year return. For the corporate Ventures’ $49,026 in curred the entire business de- (count 2), government showed production in connection ductions report his A2Z in- failed of the individual A2Z income he received Aspen individual or come on either his addition, in Kayser’s accountant Ventures’ return.2 government’s expert and the both testified $49,026 However, Kayser did independent legitimate that an contractor’s Aspen deductible business on and allowable business deductions could Ventures’ 2000 return. These deductions generally be used to reduce business in- composed expenses, of automobile come on an individual return. utilities, travel and enter- expenses, office trial, day On the last asked expenses, tainment and rents. the district court to approve following accountant testified jury instruction: “If the defendant had receipts were calculated from and records unclaimed deductions have which would by Kayser. reported, maintained As offset his tax such that there was expenses generated operating a net loss of no tax due and owing, then there is no tax $49,026 Aspen on Ventures’ 2000 deficiency.” government argued that Kayser then carried back to elimi- which this instruction was unwarranted because by Aspen nate taxes owed Kayser had introduced no pre- evidence of the income it reported Ventures on viously gov- “unclaimed” deductions. The argued Kayser’s theory ernment also alleged government improper of defense was under United willfully structured his individual and cor- States v. 545 F.2d 1204 Cir. porate returns in the manner described 1976), pre- which the read as taxes, above to evade and that aas result cluding Kayser arguing from that the busi- improper reporting, was reported ness deductions he on virtually able to declare no tax due negate Ventures’ returns could be used to $145,000 more he received or from tax deficiency. his individual and 2000. trial, agreed gov- The district court with the Kayser’s primary theory At of de- willfully fense that he had not evaded ernment request- and declined to both, any imposed years, together evade or defeat manner to or with the costs of shall, prosecution. payment this title or the thereof law, penalties provided by addition to other Testimony at trial indicated that re- and, guilty felony upon of a conviction $53,445 ceived either or in income thereof, shall be fined not more than from A2Z in 2000 and that this income should $100,000 ($500,000 corpo- in the of a case have been individual ration), imprisoned not more than 5 return for 2000. Marashi, States v. The district court noted United ed instruction. (9th Cir.1990). the in- the evidence did A tax deficiency occurs agreed with implicitly and also

struction when defendant owes more federal that Miller argument applicable year come tax for the than in this theory of defense precluded was declared due on the defendant’s in- case. Jury come tax return. See 9th Cir. Crim. (2005). trial,

Following found Instr. 9.35 but tax evasion for the guilty of a unanimous verdict on the

failed to reach A defendant negate ele concerning tax evasion in 1999. On count deficiency in tax ment of evasion case argues that appeal, Kayser unreported with evidence of deductions. proposed jury rejecting court erred his Marabelles, See States v. 724 F.2d United instruction. (9th Cir.1984); Elwert v. 1378-79 (9th States, 231 F.2d United 933 Cir. DISCUSSION 1956). Elwert in Both Marabelles and to a Kayser contends he was entitled (among volved small business owners who theory that instruction things) under-reported their income was a prove could not there government Marabelles, years. for one or more 724 deficiency in 2000 if had suffi- Elwert, 1378-79; F.2d at 231 F.2d at 933- expenses to offset cient allowable business evasion, At trial for criminal tax year. for that unreported defendants introduced evidence deduc is enti- cases hold that defendant “[a] Our tions for labor costs that had not been judge to have the instruct tled claimed on their returns in order to dis defense, that it is theory provided deficiency. element of tax Mar prove the foundation by law and has some supported Elwert, abelles, 1378-79; 724 F.2d at 231 Fejes, States v. the evidence.” United rejecting at the defen F.2d 933-34. Cir.2000) (9th (internal F.3d 702 232 sufficiency challenges dants’ to the omitted). Here, quotations respective con supporting evidence their give Kayser’s proposed court declined victions, held that “the burden is on the we namely, that grounds, on two instruction prove that he had allowable defendant as a matter the instruction was erroneous in his that were not shown Miller, v. 545 of law under United States establishes Cir.1976) once the Government (9th 1204 and that the evi- F.2d the deduc unreported income and allows insufficient to dence was examine both of these de- [his] struction. We tions claimed the defendant in turn. terminations calculate and others that it can Marabelles, 724 without his assistance.”

A. at n. 231 F.2d F.2d 1379 Kay- whether We first consider Notwithstanding greater sophistica- was erroneous ser’s instruction tax evasion Kayser’s alleged tion of at a matter of law. The elements of scheme, ElweH are con- Marabelles and under 26 tempted income evasion Like the defen- trolling in case. (1) (2) willfulness; § 7201 are: U.S.C. cases, Kayser failed to re- in those dants (3) an deficiency; of a tax existence return and income on his individual port constituting act an evasion or affirmative at trial that he entitled to demonstrate tax. v. attempted evasion of the Sansone previ- that could offset this had deductions States, 343, 351, S.Ct. 380 U.S. 85 Marabelles, income. See (1965); ously unreported L.Ed.2d see also 882 3; Elwert, automatically n. F.2d at treat funds diverted 724 F.2d at 1379 a closely corpora- shareholder from held tion as a constructive distribu- however, argues that government, tion, pursuant to a rule in civil established prohibits v. Miller a defen- United States tax decisions. Id. the facts of Under deduc- reports dant who his income and case, Miller contended that such a distri- arguing manner from for an tions one be a bution would non-taxable return of at trial. alternative characterization Therefore, capital. Id. at 1211 & n. 9. (rejecting 545 F.2d defen- prove could not a tax deficien- “return-of-capital” dant’s defense because cy and Miller could not be convicted of tax “presented the defendant no concrete considered, evasion. Id. at 1211-12. proof the amounts were intended, on the or recorded rejected theory, holding We Miller’s capital a return of at the time records as the civil constructive distribution rules did made”); see United States automatically in a criminal apply II), (Boulware Instead, evasion case. Id. at 1214-15. Cir.2006) (same). govern- wishing held that a criminal defendant ment thus contends that decision “return-of-capital” raise a defense had to in business introduce evidence that the diverted funds Kay- prevents Ventures’ returns were, fact, capital. a return of Id. at arguing ser from now that these example, 1215. For the defendant could actually by him individually incurred demonstrate that the diverted funds were in relation to his A2Z activities as an inde- intended to a return capital by show- pendent contractor. adjustment an ing in the records Contrary government’s argument, to the indicating a reduction in his at basis the preclude Miller not a defendant in a does time of distribution. See id. asserting tax evasion case from a defense ruling, Consistent with this Miller was falsely is inconsistent with information present allowed to evidence to establish his challenged returns. return-of-capital defense at trial. id. Miller, Rather, 545 F.2d at 1215-16. Mil However, at 1215-16. the record did not ler present allows a defendant to evidence among his defense: things, regarding at trial the facts of the transac there question substantial whether issue, notwithstanding tion at the defen Miller was even a shareholder of the cor- improper dant’s reporting “scrambled” poration payments who could receive as a Miller, govern those facts. Id. In the capital. return of Id. Based on the evi- alleged ment the defendant di dence, the district court concluded the verted closely substantial sums from his diverted funds constituted additional tax- held corporation report and failed salary, able rather than a non-taxable re- funds as income. Id. at 1209. The divert capital. turn of Id. at 1215. We held that ed funds had been recorded on corpo the district court’s conclusion was not loans,” “repayments ration’s books as clearly erroneous. Id. at 1215-16. which were later shown to be non-existent 1209, 1215-16. or false. Id. at Neither we nor the district court sug- gested origi- that Miller was bound Miller tried to convince the district court funds, nal characterization of the diverted apply certain technical tax rules to i.e., corporation’s characterization of transform a taxable diversion of funds into “repayments non-taxable return of the diverted funds as capital. Id. at 1210-14. argued Miller that a court must loans” or Miller’s failure to Marabelles, 724 for tax evasion. Id. at defense his tax returns. funds on diverted Rather, n. 231 F.2d at 933. concluded F.2d at 1379 1214-16. con- Kayser improperly reported funds constitute diverted The fact “whether depends corporate distributions negate he now claims structive involved circumstances the factual the defendants deficiency, individual while consideration,” id. under each case simply failed to in Marabelles and Elwert by the defen- made the demonstration deductions, does not alter report certain trial, id. at 1215. dant at Kayser’s improper report our conclusion. corporate return does of deductions on his holding in Miller import of our underlying nature of these change present free to a defendant remains is that filing of a false expenses, although corpo from a that funds diverted evidence separate constitute a of- return itself capital, return of ration are a non-taxable 7206(1). § When fense. See U.S.C. in which he or the manner regardless of that a tax defi- Supreme Court held originally reported corporation necessary of tax eva- ciency is a element 1214-16; see also id. at transaction. See excep- it made no sion under section II, Miller at 934-35.3 F.3d where the defendant owed tion for cases and El- with Marabelles is thus consistent wert, improp- author tax to the but had controlling no provide which underlying Marabelles income and erly reported Like ity in this case. permit Elwert defendants lack of a that demonstrated this the nature of at trial to establish evidence deficiency. See Lawn including their States, 339, 361, 78 S.Ct. 355 U.S. transactions — deductions —even actual business their Sansone, (1958); U.S. at L.Ed.2d 321 trial they take at position when Therefore, Kay- 85 S.Ct. report- original with their inconsistent $49,026 of in deductions prior report ser’s 3; Marabelles, n. 724 F.2d at 1379 ings. pre- does not Aspen Ventures’ returns on Elwert, 231 F.2d at 933. arguing him from now clude to his individual are offsets deductions Elwert, and Following Marabelles income, carries the provided that he ex if had business hold that we legitimacy demonstrating the burden of against were allowable offsets penses that See allowability of these deductions. and income, right had the to he his individual (“the Marabelles, n. 3 724 F.2d 1379 of his explain part them as show them and preclud- we hold that Boulware Nor did not hold otherwise. II does Boulware II, introducing support his in limine evidence to the moved ed from Boulware Rather, introducing defendant from preclude theory. the id. we return-of-capital testimony funds could expert Miller, that the diverted was re- that under Boulware held dividend constitut- deemed constructive was in- quired that the distribution to show capital. 470 F.3d at 933-34. ing a return of capital. at 933- of Id. tended to be a return granted government’s mo- court The trial proffered evidence Boulware's 35. Because tion, proffered reasoning that the evidence question the divert- go whether did not " go question “considered, intended, of whether did not considered, intended, or re- 'were ed funds fact, were, or funds a return records as corded on the a return ” corporate records as on the recorded made,’ id. at they capital at the time of Id. capital” at the time of the distribution. 1215), we F.2d at (quoting 545 935 omitted). (internal quotation marks at 934-35 properly court concluded held the district ruling. Id. In court’s We affirmed the district lay requisite evidentia- failed to holding, that Boul- we did not conclude so return-of-capital defense. ry foundation he manner in which ware was bound Id. at 934-35. See id. reported the transaction. originally 1076 prove Fejes, on the defendant to abuse of discretion.

burden is 232 F.3d at had deductions that were not allowable added) (cit- (emphasis shown his return” Kayser’s theory of defense was 933)).4 Elwert, ing F.2d at 231 jury $49,026 apply should initially reported deductions he on his cor B. porate tax return in 2000 to eliminate the Having concluded deficiency return for that theory represents ap of defense a correct year. Elwert, Under Marabelles and this Elwert, plication of Marabelles and theory required Kayser to establish two question next turn to the whether First, Kayser elements: show that adequate established an foundation in the $49,026 represented legitimate busi record to warrant an instruction on this expenses actually ness incurred him in theory. legal generous: is standard Second, an individual capacity. “a defendant is entitled to an instruction $49,026 had to demonstrate that theory concerning his of the case if the expenses represented business “allowable” theory legally sound and evidence in the on his individual return within applicable, case makes it if even the evi Marabelles, meaning of the Tax Code. weak, insufficient, inconsistent, dence is (citing F.2d 1379 n. 3 credibility.” of doubtful United States v. 933). F.2d at We conclude that (9th Washington, 819 F.2d Cir. evidence was sufficient to warrant a 1987). A only defendant needs to show theory. instruction upon that “there is evidence which the rationally sustain the defense.” Through testimony, his own and the tes- Jackson, United States v. 726 F.2d accountant, timony of present- Cir.1984) curiam); (per see also ed evidence that he maintained records Johnson, United States v. receipts and expenses his business (9th Cir.2006). Where, here, factual records, that from those his accountant raised, disputes are protects this standard calculated the expenses of business right questions defendant’s to have Kayser’s corporate return. evidentiary weight credibility resolved Kayser further testified that all of the Jackson, jury. 726 F.2d at $49,026 in was incurred Johnson, see 459 F.3d at 993. in connection with previously unreport- We review the district court’s ed individual A2Z conclusion income for 2000.5 On Kayser’s record, that proposed instruction was a jury not rational could have con- supported by sufficient evidence for an cluded that actually incurred $49,026 argue did not that unambiguously "every testified that deduc- reported Aspen business deductions he on Aspen tion” on Ventures’ 2000 cor- through” Ventures' 2000 porate return "flowed directly As- Kayser’s return related to pen Ventures to his individual prosecution return. The income. The made effective use government’s argument Aspen that Ventures of its cross-examination to raise doubts about flow-through entity is not a is therefore irrele- the assertions made on direct exami- vant. Kayser's stumbling nation. While answers on cross-examination further the ev- weaken defense, 5. The "Kayser supporting dissent contends that idence made under our case law, only very broad statements the deduc- entitled to his income, personal tions relate to his supporting and even struction even if the evidence hedged quite weak, insufficient, then he a theory bit.” Dissent at 1081. of defense "is incon- However, sistent, acknowledges, as the dissent on credibility.” Washing- or of doubtful examination, ton, direct Kayser specifically and F.2d 819 at 225.

1077 failing its discretion in to therefore and that abused expenses $49,026 in business theory.6 jury on this legitimate. instruct expenses were was suffi- there conclude that alsoWe C. jury a rational from which evidence cient $49,026 represented find that could requested thus conclude that We respect with expenses business allowable and supported by law jury instruction return. The record Kayser’s to in the evidence. foundation sufficient 2000 tax Aspen Ventures’ included the district court erred declin- Because business deduc- detailed which theory ing to instruct com- in the amount of tions defense, Kayser’s convic- of we reverse ex- expenses, office automobile posed of tion.7 utilities, and entertainment travel penses, REMANDED. REVERSED did and rents. expenses, character, amount, challenge either KOZINSKI, Judge, dissenting. Circuit At the same validity expenses. of the majority begins analysis its duti expert and time, both the “A fully a well-established rule: reciting that as a testified Kayser’s accountant may negate the element of defendant matter, business general a tax evasion case with evi deficiency in 2000 Ventures’ type reported Maj. op. deductions.” unreported dence of be used to reduce could (citing at 1073 United States Mara This evi- return. on an individual income belles, Cir. 1378-79 weak, F.2d dence, was suffi- though arguably States, 1984); Elwert v. United F.2d jury to sustain allow a rational cient to (9th Cir.1956)). jumps But it then court The district Kayser’s defense. give Kayser's proposed to trict court’s failure discussing evi- the weakness making sig- dence, him from separate prevented merges the two instruction the dissent deficiency challenge to the element noting nificant Kayser’s indictment counts conviction, the tax count for evasion ... had to escape "[t]o beyond a reasonable cannot be harmless thus enough deductions to shel- that he had show California, U.S. Chapman v. doubt. Dissent 1999 and 2000 income.” ter both (1967). 87 S.Ct. 17 L.Ed.2d original). There is no (emphasis in at 1080 sufficient dispute Kayser did not have wrongfully argues that he was and 2000 both his 1999 to offset sup- introducing prevented evidence from However, Kayser may still raise income. theory defense and that district port his respect deficiency with second defense Sentencing misapplied the Guidelines court (relating to the 2000 indictment of his count by refusing to loss determining the total tax conclude a rational year) when unreported Kayser’s 2000 reduce deduc- Kayser had sufficient allowable Aspen Ven- reported on negate government’s proof of defi- tions and carried back tures’ 2000 return year. ciency respect to that new remand for a reversal and Given our trial, issues. not reach these we do that his Finally, asserts indictment any error Kayser argues 7. instructional grand jury because the should be dismissed by court cannot be harmless. district However, Kay- improperly was instructed. Bright, 742 F.2d v. de States Escobar United squarely Cir.1984) precedent 1196, (9th acknowledges, our has (holding that an ser 1201-02 we rejected position and therefore affirm pro- his to defendant’s erroneous refusal Kayser's denial of motion district court’s is revers- posed theory defense instruction See United States se). dismiss indictment. de to per not revisited Escobar We have ible (9th States, Cir. F.3d 1184 Navarro-Vargas, 408 v. light v. Bright in of Neder United (en banc); 2005) 1827, States v. United Cortez-Riv 144 L.Ed.2d 35 119 S.Ct. U.S. Cir.2006). era, (9th to, F.3d 1038 (1999). the dis- Nor do we need because es, by removing “unreport- solely the rails the word and concentrates on the issue allowing escape ed” and a defendant to of the nature of the funds diverted. by criminal tax conviction re-characteriz- aspect That important latter is not the ing reported deductions. Id. element. taxpayer Where the has support This new rule finds no in our sought by filing to conceal income a false caselaw and conflicts with United States v. return, he has violated the tax evasion Miller, Cir.1976), 545 F.2d 1204 statutes. It does not matter that that (Boulware II), v. United States Boulware amount could have somehow been made (9th Cir.2006). 470 F.3d 931 if Even this if taxpayer non-taxable had proceed- permissible, new rule were defendant did ed on a apply different course.12 To not evidence that could support constructive distribution rules to this sit- such an instruction. For both these rea- nullify uation would all taxpayer’s sons, respectfully I dissent. prior unlawful acts. charged was with tax eva- failing report sion for to income on his initially At time the funds are di 2000 individual return. His verted, might argued it well be struction would have allowed the could constitute either income or a return of However, capital. taxpayer once the has as deductions, apply the which he sumed control of the funds and then fails to corporate any such funds as income or to make govern- income. As the adjustments in the books to reflect trial, argued ment this defense is fore- capital, already a return of he has violated Miller, by closed Miller. In dealt Accord, the tax Spies evasion statutes. States, 492, 498-99, 317 U.S. 63 S.Ct. situation, highly analogous where the (1943); 87 L.Ed. 418 United States v. taxpayer wished re-characterize a distri- Swallow, (10th Cir.), cert. corporation bution from his aas return of denied, 423 U.S. 96 S.Ct. 46 L.Ed.2d capital, rather than as a dividend. Miller’s (1975). argument, Kayser’s, like was what Miller, 545 F.2d at 1214 & n. see also mattered reality was the of the transac- II, (same). 470 F.3d at 933-35 tion, way initially papered not the he it. rejected We this contention. Our rationale rule, Under this a defendant in a crimi- reaching highly conclusion is in- nal tax case is way pa- bound structive: pered the transaction at the time he In civil purpose tax cases the earned question. the income in In key collection and the issue is the estab- taxpayer bound the fact that lishment of the amount of tax owed books did not reflect In taxpayer. proceed- a criminal tax distribution as a capital. return of That he ing the concern is not over type later, as a matter of economic reali- specific amount the tax which the ty, claim that the distribution was a return evaded, defendant has but whether he of capital was of no consequence, because willfully attempted has to evade pay- contemporaneously maintained did records ment or assessment of a tax. Goldberg, that re-characterization. Mil- 40; Simon, supra, 330 F.2d at supra, ler went on explain: 248 F.2d at 876. holding that the constructive distri- difficulty in automatically apply- bution rules should not automatically be ing the constructive distribution rules to applied, it is not herein this case is that it asserted that completely ignores one diverted essential element of the crime funds could never abe return charged: However, the willful intent to capital. evade tax- to constitute the in- of his failure to declare latter, demonstra- zero because must be some there come. taxpayer of the part tion on the and/or that such distributions corporation

the however, IRS, did audit and To such a return. intended to be were underreported per- that he had found permit be to otherwise would hold in If the sonal income deductions funds and if not to divert such taxpayer corporate are shifted from his to his indi- return pay later out another caught, to return, vidual this would affect his 1999 convic- caught, if to avoid capital; or liability. tax The same deduc- corporate defense that the sums by raising the tion can tions cannot be used twice: He either and hence non- capital a were wipe personal them to out his 2000 use taxable. carry wipe he can them back to income or (footnote omitted); Having corporate out his 1999 income. see 545 F.2d at (“[D]e- II, chosen to do the latter when he filed his 470 F.3d at 934 Boulware returns, up the deductions are used and merely not must show fendant person- are not available to offset his 2000 capital, a return of funds could have been Contrary majority’s al income. to the were in a return of that the funds but fact transfer.”). holding, Marabelles and Elwert are thus at the time of capital not have point not on because does this rule creates some tension Although report- allowable deductions were not Elwert,1 cases and with Marabelles if ed on his return. Even the deductions and because Marabelles can be reconciled question could have been treated as the situation where Elwert deal with deductions, had claimed personal claim deductions. failed to taxpayer individual them as such on his circumstances, are un- such Kay- properly district court concluded taxpayer is not bound so reported, way with the them ser is stuck characterization. by any prior under Miller de- corporate at the time—which was as defen- in Marabelles Unlike go To let him now back ductions. did not fail dant here to his applicable deductions as treat return; he claimed the expenses on his precisely income allows for personal return and heads-I-win, tails-the-government- kind wipe out carried back losses sought that Miller to fore- loses scenario Kayser’s act of liability prior year. close. claiming the deductions on his rule, majority’s new Even under the under- merely proof not return was its discre- court did not abuse reality because it reality; it teas the lying refusing Had tion legally operative a effect: because did audited, would struction these deductions not been the instruc- evidence to warrant his cor- sufficient carried back to reduce have been that he to establish tion. needed liability to zero for porate to elimi- enough allowable deductions have been had would a tax requirement of 'the existence of by Judge statute's pointed out 1. This tension was ” J., (Thomas, concurring opinion II. deficiency.’ at 938 Thomas's 470 F.3d Marabelles, it Judge criticized Miller because Thomas concurring) (quoting criminally holds that "a defendant Thomas, Nevertheless, 1379). Judge like the owing without for tax evasion sanctioned majority, concluded Boulware II government. only Not penny in taxes to favor of by Miller and ruled in bound fallacy, logical but result indicate does this government. the tax evasion contradiction with is in flat 1080 words, In liability. government’s reach,

nate tax he perhaps Kayser could to that he argued needed show would have and have in assigning he had erred (for reported could have sufficient deductions 2000 expenses) deductions his to majority to offset all income. The strains his corporate return and them carrying “arguably to weak” evidence in find back to 1999. The majority’s new rule support propositions, would, record to both see would that (though allow Miller in maj. 1076-77, it). op. view, at but the my prohibit evidence on both counts falls far short of providing a But beyond the 1999 tax was not “upon sufficient basis which the fact, reach. rationally sustain the defense.” United being was tried for tax evasion for both Jackson, (9th States v. 726 F.2d 1468 conviction, escape and 2000. To Cir.1984) curiam); (per see therefore, Kayser had to show that he had Streit, States v. enough deductions to shelter both his Cir.1992) (same) (“The ‘merest scintilla of and 2000 just income. There weren’t evidence,’ however, will not (quot- suffice.” enough deductions do this. On Jackson, 1468)).2 ing 726 F.2d at corporate return, Kayser reported reported $49,026 $104,532 income; in business ex- paid he taxes on none penses on his 2000 corporate $111,061 return and itof he because claimed in deduc- carried back these to eliminate tions to out wipe his 1999 in- $49,026 for 1999. including He carryback loss- come— carry able back losses $41,765 be- es from 2000. If he shifted $41,765 cause he failed to report person- these deductions to cover his unreported al from A2Z in income 2000 and thus had income for that would have left him reported $69,296 no against income which only in deductions for 1999 to off- claim deductions.3 Unlike Marabelles and set the

Ehvert, therefore, Thus, corporate return. even assuming to use to unreported Kayser wanted offset his reassign were allowed to some 2000 income at the time of trial were not all of his deductions from 1999 to Rather, they unused. were doing work in would have some unsheltered income in sheltering his 1999 corporate income. years; one or majority both admits as Had the 1999 tax year beyond been maj. the much. op. See at n. 1077 6. prevent did the Nor district court defendant decline to point; instruction at this presenting support pro- from evidence to the evidence doesn't it.” Defendant posed majority instruction. The does not thus cannot blame the district court for his issue, maj. op. reach this see at n. requisite 1077-78 failure to evidence. noting but it’s worth that the court district gave ample defendant opportunity to intro- trial, agent At the IRS case testified that duce such evidence. When defendant first Kayser underreported his 2000 penultimate day raised the issue on the $53,445, come government's expert but the trial, "you court noted that have a figure calculated the conservatively more problem given the you state of the $41,765. evidence if maj. op. at 1072 n. that, argue you may but just depends not. It district court relied on the more conservative everything on how comes in and what the sentencing, calculation and the are, arguments objections what the are. And figure relies appeal. on the same While hypothetically I rule every permuta- can't rely we also must on the conservative calcula- argument tion of might that we here, hear in the tion noting it's worth con- just case. We'll have to defer until the cedes that he’d have no defense if the argument.” present- time When bought higher defendant calculation because he ed day, instruction the next wouldn’t have had sufficient deductions to noted, "Well, similarly going court liability. I’m eliminate all Marabelles, Elwert, 3; 724 F.2d at 1379 n. is so why the record no doubt Which 933). record, a ration- or 231 F.2d On Kayser would to whether muddy as Kayser not find that to al could deductions reassigned the have expenses business that he shown shown sufficient income: Had personal his liability to offset all tax were would have used deductions that unequivocally have for 2000. that he would and available have year, he would them that claimed Kayser had testified that assuming Even a conviction for himself to exposed he would have claimed all the deductions hedged in 1999. therefore evasion return, this wouldn’t have on his individual examination, testimony. On direct

his wipe To out his 2000 unre enough. been “every that deduction Kayser indicated income, Kayser had to show ported to [his] ... related return [his] al that the deductions would have been income,” that he would “have and maj. op. (citing at 1076 Mar lowable. See of the deduc- to declare some attempted abelles, 724 F.2d at 1379 n. (Emphasis individual return. tions” 933). did not point F.2d at It’s added.) cross-examination, Kayser On testimony. question address his expenses 2000 business that the testified then is whether the other two witnesses— ex- [Aspen have been Ventures “could Kayser’s ac government’s expert and due primarily yeah, but were penses], allowability of countant —addressed re- [apparently consulting business expert government’s the deductions. The as employment A2Z] ferring to help. certainly provided Kayser no On Network, Blue or Clear Image as well cross-examination, expert indicated as.” When known Media is otherwise “theoretically” that possible that it was further, that testified pressed claimed the deductions Kayser could have “if expenses Aspen were Ventures those deduc on his individual “if a little understanding getting I’m many different re passed tions had —I’m confused, yes.” but imposes in order that the IRS quirements to the busi the deductions related to claim very only made broad Note that business.” furthering incurred for ness relate to statements added.) possibili A theoretical (Emphasis income, even then he and personal evidence, however, not even “ar is not ty, claimed he would quite a bit: He hedged evidence, that deduc such guably weak” of those attempted to declare some have indeed allowable on tions were return. He on his individual ex government’s individual return. $49,026 he portion of the say didn’t what any expenses said pert never claimed; have been it could would have to offset actually allowable more, it could have been less. or personal income. we consider his less clear when It’s even He backtracking on cross-examination: accountant’s brings us down to the This (who expenses “could that some of the testimony. Kayser’s admitted accountant witness) Ven- attributable to on di- have been” testified tures, primar- attrib- expenses that the “were the deductions were rect that “[i]f paid as well had he consulting to Mr. ily due to utable don’t have deducted Again, personally, he could Image Network.” those tax return for majority ... and the portion. personally As the those know which nonexis- have been would notes, corporation to show it is defendant’s burden a zero re- tent; have been just it would would have reduced claimed added.) cross-ex- (Emphasis On turn.” the relevant income to zero for amination, testified 2000). the accountant (here (citing Maj. op. at 1073-74 “if corporation recipi- in fact the was not the reduce his 2000 pick up he, and we ent of the income on zero. Nor could given that he needed tax return Kayser’s personal Michael and these same deductions to shelter his 1999 and all of them pick up expenses circumstances, income. Under these are—all the and all district court did not abuse its discretion in allowable, expenses are I don’t—I cannot refusing to the instruction. See (Em- significant change see a in the tax.” Streit, Indeed, 962 F.2d at 898. it did added.) re-direct, he phasis On indicated exactly what district court do should accurately reported that if his when a party proposes an instruction income, Kayser individual would have had supported that’s not the evidence. to file a “new tax return or amended tax return,” parts and “certain other of the tax * * * inapplicable or at least [would be] conviction, In reversing defendant’s [would to be amended.” need] majority creates a against defense crimi- majority think seems to it’s suffi- nal that conflicts with estab- cient that “both the expert lished circuit precedent. And it does so Kayser’s accountant testified that as a unnecessarily, as defendant has fallen far matter, general business meeting short of his burden to warrant the type reported Ventures’ 2000 erroneous instruction. majority thus return could be to reduce used evidentiary eviscerates the standard for Maj. income on an individual return.” op. instructions forcing a majority at 1077. But the does not exam- district court to give an instruction that’s actually Sig- ine what the witnesses said. only supported by generalities hypo- nificantly, majority points to no state- possibilities. thetical part I must compa- ment either that supports witness its ny my colleagues both of these fact, watery characterization. In neither precarious endeavors. witness testified that the actual business expenses reported by Aspen Ventures Kayser’s

were allowable on individual re- accountant, Kayser’s

turn. gov- like the expert,

ernment’s assumed hypothetically GARCIA-JIMENEZ, Petitioner, deductions were allowable and Jose opined then what effect this would have had on 2000 individual return. GONZALES, Attorney Alberto R. then, Even the accountant hedged, sug- General, Respondent. gesting parts of the return No. 03-74625. would have to be amended. Nowhere did say actually that the deductions were Appeals, States Court of code; allowable under the tax nor did he Ninth Circuit. claim that hypothetical individual Submitted Dec. 2006.* adjusted properly, when would Filed Jan. have tax liability. resulted zero May Amended short, provide did not suffi- cient proof to enable a rational to find

that he had enough allowable

* panel unanimously 34(a)(2). This R.App. finds this case suit- Fed. P. argument. able for decision without oral

Case Details

Case Name: United States v. Michael Kayser

Court Name: Court of Appeals for the Ninth Circuit

Date Published: May 31, 2007

Citation: 488 F.3d 1070

Docket Number: 06-50178

Court Abbreviation: 9th Cir.