RATE’s not-so-gentle reminder
The case recently filed by Revenue Commissioner Kim Henares under the revitalized Run-After-Tax Evaders (RATE) program of the government against a tax practitioner recalls a tax evasion conviction, reported in the New York Times, that was handed down by the United States District Court in Las Vegas more than 10 years ago involving a former Internal Revenue Service (IRS) lawyer. One would have thought that someone so familiar with the tax code and how it is correctly enforced ought to know at least enough to avoid being caught. But apparently familiarity does breed contempt and the American tax lawyer’s familiarity must have bred, if not contempt, at least the daring to exploit to the hilt certain wayward legal principles that every now and then creep into the system.
The American lawyer had a master’s degree in tax law from Georgetown University and for several years worked with the national office of the IRS. His job was to work on request for individuals for private letter rulings on tax issues that they were facing. Like our National Internal Revenue Code, the US Federal Tax Code also had (and still has) a provision that gave the tax authorities, in response to queries from the taxpaying public, the opportunity to render its opinion on tax implications of their particular situations.
Because these rulings are extremely dependent on the factual circumstances laid out by the inquiring taxpayer, the rulings are technically not “law,” in the sense of being applicable to everyone else. For this reason, it is now common practice for the commissioner to end the ruling with the statement that “this ruling is based on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered as null and void.”
Still, crafting those rulings for the commissioner necessarily involves intensive knowledge of taxation, both of what the government can do to collect revenues and of what the taxpayer, who sincerely believes he is not obliged to pay what the government is collecting, can do to avoid payment. It must have been in that line of work that the American lawyer became familiar with what is known as the Cheek defense.
The Cheek defense was named after the US Supreme Court case that involved John L. Cheek, an American Airlines pilot who was charged with tax evasion. It was ruled in that case that if the accused could prove that he sincerely believed that he did not have to pay the taxes being collected from him, even if based on unreasonable or irrational grounds, he could not be convicted for tax evasion. Willful intent to evade the duty of paying one’s taxes is necessary to support a conviction for the crime of tax evasion. Tax evasion requires mens sana, or deliberate intent. Thus, while lack of willfulness does not save the taxpayer from the obligation to pay what is due, it does save the erring taxpayer from being penalized criminally for non-payment of taxes.
The American tax expert ran his operation from an office in the Empire State Building where agents made calls to prospective “investors” who were offered to invest in a company called Maid Aide. Maid Aide was a one-person business run by the cleaning woman of a stock promoter in Las Vegas, but in the lusty months of 1998, the shares were being bought and sold for nearly $10 each. The agents who were successful in persuading mostly strangers into buying Maid Aide shares were paid as much as up to 70 percent by way of commissions. More than one million and three quarters of Maid Aide shares were sold in the scam’s heydays. The gains from the sales of Maid Aide shares, which totaled to about $8 million, were sent to the Cayman Islands via Vancouver, British Columbia.
For us local tax practitioners, the RATE case against one of our colleagues is a warning that we do not cease to be obliged to pay the right amount of taxes due because we know the ins and outs of the tax system.
The most effective tax collection system is one based on the common acceptance by taxpayers that it is their duty to pay. This willingness is enhanced when the taxpayer is not harassed by complicated tax returns and filings that demand data by and large already in the hands of the government.
Ricardo J. Romulo is a senior partner of Romulo Mabanta Buenaventura Sayoc & De Los Angeles.