United States v. Kayser ( 2007 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
UNITED STATES OF AMERICA,  No. 06-50178
Plaintiff-Appellee,
v.  D.C. No.
05-CR-0288-JTM
MICHAEL KAYSER,
OPINION
Defendant-Appellant.

Appeal from the United States District Court
for the Southern District of California
Jeffrey T. Miller, District Judge, Presiding
Argued and Submitted
December 5, 2006—Pasadena, California
Filed May 31, 2007
Before: Stephen Reinhardt, Alex Kozinski, and
Sandra S. Ikuta, Circuit Judges.
Opinion by Judge Ikuta;
Dissent by Judge Kozinski
6569
6572 UNITED STATES v. KAYSER
COUNSEL
David J. Zugman, Burcham & Zugman, APC, San Diego,
California, for the defendant-appellant.
Carol C. Lam, United States Attorney; Bruce R. Castetter,
George Aguilar, Assistant United States Attorneys, San
Diego, California, for the plaintiff-appellee.
UNITED STATES v. KAYSER 6573
OPINION
IKUTA, Circuit Judge:
Michael Kayser appeals from his conviction for tax evasion
in violation of 26 U.S.C. § 7201 for the year 2000. He alleges,
among other things, that the district court erred in failing to
instruct the jury in accordance with his theory of defense. We
have jurisdiction under 28 U.S.C. § 1291 and we reverse and
remand.
BACKGROUND
From November 1998 to May 2000, A2Z USA, Inc.
(“A2Z”) employed Kayser first as a salesperson and later as
a vice president for its Internet-based shopping mall. A2Z
compensated Kayser as an independent contractor and paid
him a commission by checks made out to his name. In July
1999, Kayser incorporated Aspen Ventures Inc. (“Aspen Ven-
tures”) to receive A2Z income and take business deductions
related to that income.
After failing to file timely tax returns for 1998 through
2000, Kayser ultimately filed his delinquent individual and
corporate tax returns for those years in August 2001. Kayser
was subsequently indicted on two counts of attempted income
tax evasion (for 1999 and 2000) in violation of 26 U.S.C.
§ 7201.1
1
Section 7201 provides:
Any person who willfully attempts in any manner to evade or
defeat any tax imposed by this title or the payment thereof shall,
in addition to other penalties provided by law, be guilty of a fel-
ony and, upon conviction thereof, shall be fined not more than
$100,000 ($500,000 in the case of a corporation), or imprisoned
not more than 5 years, or both, together with the costs of prosecu-
tion.
6574 UNITED STATES v. KAYSER
At trial, the government alleged that Kayser had improperly
structured his individual and Aspen Ventures’ corporate
returns for 1999 and 2000 to evade the payment of taxes on
his A2Z activities. For the year 1999 (count 1), the govern-
ment contended that Kayser received $104,000 of A2Z
income that should have been reported on his individual
return, but Kayser improperly reported this income on Aspen
Ventures’ corporate return. For the year 2000 (count 2), the
government showed that Kayser failed to report his A2Z
income on either his individual or Aspen Ventures’ corporate
return.2
However, Kayser did report $49,026 in deductible business
expenses on Aspen Ventures’ 2000 return. These deductions
were composed of automobile expenses, office expenses, util-
ities, travel and entertainment expenses, and rents. Kayser’s
accountant testified that the deductions were calculated from
receipts and records maintained by Kayser. As reported, the
expenses generated a net operating loss of $49,026 on Aspen
Ventures’ 2000 return, which Kayser then carried back to
eliminate the corporate taxes owed by Aspen Ventures on the
income it reported for 1999.
The government alleged that Kayser willfully structured his
individual and corporate returns in the manner described
above to evade taxes, and that as a result of this improper
reporting, Kayser was able to declare virtually no tax due on
the $145,000 or more he received from A2Z as income in
1999 and 2000.
At trial, Kayser’s primary theory of defense was that he had
not willfully evaded paying taxes. During the course of the
trial, Kayser raised a second theory, namely, that the A2Z
income he failed to report on his individual return in 2000
2
Testimony at trial indicated that Kayser received either $41,765 or
$53,445 in income from A2Z in 2000 and that this income should have
been reported on Kayser’s individual return for 2000.
UNITED STATES v. KAYSER 6575
should be offset by the $49,026 in business deductions he
improperly reported on Aspen Ventures’ corporate returns in
2000 and carried back to 1999. This theory was supported by
two principal pieces of evidence. First, Kayser testified that
he incurred the entire $49,026 in business deductions in con-
nection with the production of the individual A2Z income he
received in 2000. In addition, Kayser’s accountant and the
government’s expert both testified that an independent con-
tractor’s legitimate and allowable business deductions could
generally be used to reduce business income on an individual
return.
On the last day of trial, Kayser asked the district court to
approve the following jury instruction: “If the defendant had
unclaimed deductions which would have offset his tax liabil-
ity such that there was no tax due and owing, then there is no
tax deficiency.” The government argued that this instruction
was unwarranted because Kayser had introduced no evidence
of previously “unclaimed” deductions. The government also
argued that Kayser’s theory of defense was improper under
United States v. Miller, 545 F.2d 1204 (9th Cir. 1976), which
the government read as precluding Kayser from arguing that
the business deductions he reported on Aspen Ventures’
returns could be used to negate his individual tax deficiency.
The district court agreed with the government and declined
to give the requested instruction. The district court noted that
the evidence did not support the instruction and also implic-
itly agreed with the government’s argument that Miller pre-
cluded the theory of defense in this case.
Following trial, the jury found Kayser guilty of tax evasion
for the year 2000, but failed to reach a unanimous verdict on
the count concerning tax evasion in 1999. On appeal, Kayser
argues that the district court erred by rejecting his proposed
jury instruction.
6576 UNITED STATES v. KAYSER
DISCUSSION
Kayser contends he was entitled to a jury instruction on his
theory that the government could not prove there was a tax
deficiency in 2000 if Kayser had sufficient allowable business
expenses to offset his unreported A2Z income for that year.
Our cases hold that “[a] defendant is entitled to have the judge
instruct the jury on his theory of defense, provided that it is
supported by law and has some foundation in the evidence.”
United States v. Fejes, 232 F.3d 696, 702 (9th Cir. 2000)
(internal quotations omitted). Here, the district court declined
to give Kayser’s proposed instruction on two grounds,
namely, that the instruction was erroneous as a matter of law
under United States v. Miller, 545 F.2d 1204 (9th Cir. 1976)
and that the evidence was insufficient to support the instruc-
tion. We examine both of these determinations in turn.
A.
We first consider whether Kayser’s proposed instruction
was erroneous as a matter of law. The elements of attempted
income tax evasion under 26 U.S.C. § 7201 are: (1) willful-
ness; (2) the existence of a tax deficiency; and (3) an affirma-
tive act constituting an evasion or attempted evasion of the
tax. Sansone v. United States, 380 U.S. 343, 351 (1965); see
also United States v. Marashi, 913 F.2d 724, 735 (9th Cir.
1990). A tax deficiency occurs when a defendant owes more
federal income tax for the applicable tax year than was
declared due on the defendant’s income tax return. See 9TH
CIR. CRIM. JURY INSTR. 9.35 (2005).
A defendant may negate the element of tax deficiency in a
tax evasion case with evidence of unreported deductions. See
United States v. Marabelles, 724 F.2d 1374, 1378-79 (9th Cir.
1984); Elwert v. United States, 231 F.2d 928, 933 (9th Cir.
1956). Both Marabelles and Elwert involved small business
owners who (among other things) under-reported their income
for one or more years. Marabelles, 724 F.2d at 1378-79;
UNITED STATES v. KAYSER 6577
Elwert, 231 F.2d at 933-34. At trial for criminal tax evasion,
the defendants introduced evidence of deductions for labor
costs that had not been claimed on their returns in order to
disprove the element of tax deficiency. Marabelles, 724 F.2d
at 1378-79; Elwert, 231 F.2d at 933-34. In rejecting the defen-
dants’ challenges to the sufficiency of the evidence supporting
their respective convictions, we held that “the burden is on the
defendant to prove that he had allowable deductions that were
not shown in his return, once the Government establishes
unreported income and allows the deductions claimed by the
defendant in [his] return and others that it can calculate with-
out his assistance.” Marabelles, 724 F.2d at 1379 n.3; Elwert,
231 F.2d at 933.
Notwithstanding the greater sophistication of Kayser’s
alleged tax evasion scheme, Marabelles and Elwert are con-
trolling in Kayser’s case. Like the defendants in those cases,
Kayser failed to report income on his individual return and
was entitled to demonstrate at trial that he had deductions that
could offset this previously unreported income. See Marabel-
les, 724 F.2d at 1379 n.3; Elwert, 231 F.2d at 933.
The government, however, argues that United States v. Mil-
ler prohibits a defendant who reports his income and deduc-
tions in one manner from arguing for an alternative
characterization at trial. See Miller, 545 F.2d at 1215 (reject-
ing defendant’s “return-of-capital” defense because the defen-
dant “presented no concrete proof that the amounts were
considered, intended, or recorded on the corporate records as
a return of capital at the time they were made”); see also
United States v. Boulware (Boulware II), 470 F.3d 931, 935
(9th Cir. 2006) (same). The government thus contends that
Kayser’s decision to report the $49,026 in business expenses
on Aspen Ventures’ returns prevents Kayser from now argu-
ing that these expenses were actually incurred by him individ-
ually in relation to his A2Z activities as an independent
contractor.
6578 UNITED STATES v. KAYSER
[1] Contrary to the government’s argument, Miller does not
preclude a defendant in a tax evasion case from asserting a
defense that is inconsistent with information falsely reported
on his challenged tax returns. Miller, 545 F.2d at 1215-16.
Rather, Miller allows a defendant to present evidence at trial
regarding the facts of the transaction at issue, notwithstanding
the defendant’s improper or “scrambled” reporting of those
facts. Id. In Miller, the government alleged that the defendant
had diverted substantial sums from his closely held corpora-
tion and failed to report the funds as income. Id. at 1209. The
diverted funds had been recorded on the corporation’s books
as “repayments of loans,” which were later shown to be non-
existent or false. Id. at 1209, 1215-16.
Miller tried to convince the district court to apply certain
technical tax rules to transform a taxable diversion of funds
into a non-taxable return of capital. Id. at 1210-14. Miller
argued that a court must automatically treat funds diverted by
a shareholder from a closely held corporation as a construc-
tive corporate distribution, pursuant to a rule established in
civil tax decisions. Id. Under the facts of his case, Miller con-
tended that such a distribution would be a non-taxable return
of capital. Id. at 1211 & n.9. Therefore, the government could
not prove a tax deficiency and Miller could not be convicted
of tax evasion. Id. at 1211-12.
We rejected Miller’s theory, holding that the civil construc-
tive distribution rules did not automatically apply in a crimi-
nal tax evasion case. Id. at 1214-15. Instead, we held that a
criminal defendant wishing to raise a “return-of-capital”
defense had to introduce evidence that the diverted funds
were, in fact, a return of capital. Id. at 1215. For example, the
defendant could demonstrate that the diverted funds were
intended to be a return of capital by showing an adjustment
in the corporate records indicating a reduction in his basis at
the time of distribution. See id. at 1215.
Consistent with this ruling, Miller was allowed to present
evidence to establish his return-of-capital defense at trial. See
UNITED STATES v. KAYSER 6579
id. at 1215-16. However, the record did not support his
defense: among other things, there was a substantial question
whether Miller was even a shareholder of the corporation who
could receive payments as a return of capital. Id. Based on the
evidence, the district court concluded that the diverted funds
constituted additional taxable salary, rather than a non-taxable
return of capital. Id. at 1215. We held that the district court’s
conclusion was not clearly erroneous. Id. at 1215-16.
Neither we nor the district court suggested that Miller was
bound by the original characterization of the diverted funds,
i.e., the corporation’s characterization of the diverted funds as
“repayments of loans” or Miller’s failure to report the
diverted funds on his tax returns. Id. at 1214-16. Rather, we
concluded that “whether diverted funds constitute construc-
tive corporate distributions depends on the factual circum-
stances involved in each case under consideration,” id. at
1214, and the demonstration made by the defendant at trial,
id. at 1215.
[2] The import of our holding in Miller is that a defendant
remains free to present evidence that funds diverted from a
corporation are a non-taxable return of capital, regardless of
the manner in which he or the corporation originally reported
the transaction. See id. at 1214-16; see also Boulware II, 470
F.3d at 934-35.3 Miller is thus consistent with Marabelles and
3
Boulware II does not hold otherwise. In Boulware II, the government
moved in limine to preclude the defendant from introducing expert testi-
mony that the diverted funds could be deemed a constructive dividend
constituting a return of capital. 470 F.3d at 933-34. The trial court granted
the government’s motion, reasoning that the evidence proffered did not go
to the question of whether the funds were, in fact, “considered, intended,
or recorded on the corporate records as a return of capital” at the time of
the distribution. Id. at 934-35 (internal quotation marks omitted). We
affirmed the district court’s ruling. Id. In so holding, we did not conclude
that Boulware was bound by the manner in which he originally reported
the transaction. See id. Nor did we hold that Boulware was precluded from
introducing evidence to support his return-of-capital theory. See id.
6580 UNITED STATES v. KAYSER
Elwert, which provide the controlling authority in this case.
Like Miller, Marabelles and Elwert permit defendants to pre-
sent evidence at trial to establish the nature of their business
transactions—including their actual business deductions—
even when the position they take at trial is inconsistent with
their original tax reportings. Marabelles, 724 F.2d at 1379
n.3; Elwert, 231 F.2d at 933.
[3] Following Marabelles and Elwert, we hold that if
Kayser had business expenses that were allowable offsets
against his individual income, he had the right to show them
and explain them as part of his defense for tax evasion. Mara-
belles, 724 F.2d at 1379 n.3; Elwert, 231 F.2d at 933. The fact
that Kayser improperly reported the deductions he now claims
negate his individual deficiency, while the defendants in
Marabelles and Elwert simply failed to report certain deduc-
tions, does not alter our conclusion. Kayser’s improper report
of deductions on his corporate return does not change the
underlying nature of these expenses, although the filing of a
false return itself may constitute a separate offense. See 26
U.S.C. § 7206(1). When the Supreme Court held that a tax
deficiency is a necessary element of tax evasion under section
7201, it made no exception for cases where the defendant
owed no tax to the government but had improperly reported
the underlying income and deductions that demonstrated this
lack of a tax deficiency. See Lawn v. United States, 355 U.S.
339, 361 (1958); Sansone, 380 U.S. at 351, 354. Therefore,
Kayser’s prior report of $49,026 in deductions on Aspen Ven-
tures’ returns does not preclude him from now arguing that
Rather, we held that under Miller, Boulware was required to show that the
distribution was intended to be a return of capital. Id. at 933-35. Because
Boulware’s proffered evidence did not go to the question whether the
diverted funds “ ‘were considered, intended, or recorded on the corporate
records as a return of capital at the time they were made,’ ” id. at 935
(quoting Miller, 545 F.2d at 1215), we held the district court properly con-
cluded that Boulware failed to lay the requisite evidentiary foundation for
a return-of-capital defense. Id. at 934-35.
UNITED STATES v. KAYSER 6581
these deductions are offsets to his individual A2Z income,
provided that he carries the burden of demonstrating the legit-
imacy and allowability of these deductions. See Marabelles,
724 F.2d at 1379 n.3 (“the burden is on the defendant to prove
that he had allowable deductions that were not shown in his
return” (emphasis added) (citing Elwert, 231 F.2d at 933)).4
B.
[4] Having concluded that Kayser’s theory of defense rep-
resents a correct application of Marabelles and Elwert, we
next turn to the question whether Kayser established an ade-
quate foundation in the record to warrant an instruction on
this theory. The legal standard is generous: “a defendant is
entitled to an instruction concerning his theory of the case if
the theory is legally sound and evidence in the case makes it
applicable, even if the evidence is weak, insufficient, incon-
sistent, or of doubtful credibility.” United States v. Washing-
ton, 819 F.2d 221, 225 (9th Cir. 1987). A defendant needs to
show only that “there is evidence upon which the jury could
rationally sustain the defense.” United States v. Jackson, 726
F.2d 1466, 1468 (9th Cir. 1984) (per curiam); see also United
States v. Johnson, 459 F.3d 990, 993 (9th Cir. 2006). Where,
as here, factual disputes are raised, this standard protects the
defendant’s right to have questions of evidentiary weight and
credibility resolved by the jury. Jackson, 726 F.2d at 1468;
see also Johnson, 459 F.3d at 993.
We review the district court’s conclusion that Kayser’s pro-
posed instruction was not supported by sufficient evidence for
an abuse of discretion. Fejes, 232 F.3d at 702.
[5] Kayser’s theory of defense was that the jury should
4
Kayser did not argue that the $49,026 in business deductions he
reported on Aspen Ventures’ 2000 return “flowed through” Aspen Ven-
tures to his individual return. The government’s argument that Aspen Ven-
tures is not a flow-through entity is therefore irrelevant.
6582 UNITED STATES v. KAYSER
apply the $49,026 in deductions he initially reported on his
corporate tax return in 2000 to eliminate the deficiency on his
personal return for that year. Under Marabelles and Elwert,
this theory required Kayser to establish two elements: First,
Kayser had to show that the $49,026 represented legitimate
business expenses actually incurred by him in an individual
capacity. Second, Kayser had to demonstrate that the $49,026
of business expenses represented “allowable” deductions on
his individual return within the meaning of the Tax Code.
Marabelles, 724 F.2d at 1379 n.3 (citing Elwert, 231 F.2d at
933). We conclude that Kayser’s evidence was sufficient to
warrant a jury instruction on this theory.
[6] Through his own testimony, and the testimony of his
accountant, Kayser presented evidence that he maintained
records and receipts of his business expenses and that from
those records, his accountant calculated the $49,026 of busi-
ness expenses reported on Kayser’s corporate return. Kayser
further testified that all of the $49,026 in business expenses
was incurred in connection with his previously unreported
individual A2Z income for 2000.5 On this record, a rational
jury could have concluded that Kayser actually incurred
$49,026 in business expenses and that these expenses were
legitimate.
[7] We also conclude that there was sufficient evidence
5
The dissent contends that “Kayser made only very broad statements
that the deductions relate to his personal income, and even then he hedged
quite a bit.” Dissent at 6590. However, as the dissent acknowledges, on
direct examination, Kayser specifically and unambiguously testified that
“every deduction” reported on Aspen Ventures’ 2000 corporate return
related directly to Kayser’s A2Z income. The prosecution made effective
use of its cross-examination to raise doubts about the assertions Kayser
made on direct examination. While Kayser’s stumbling answers on cross-
examination may further weaken the evidence supporting his defense,
under our case law, Kayser is entitled to his proposed instruction even if
the evidence supporting his theory of defense “is weak, insufficient, incon-
sistent, or of doubtful credibility.” Washington, 819 F.2d at 225.
UNITED STATES v. KAYSER 6583
from which a rational jury could find that the $49,026 repre-
sented allowable business expenses with respect to Kayser’s
personal return. The record included Aspen Ventures’ 2000
tax return, which detailed that the business deductions in the
amount of $49,026 were composed of automobile expenses,
office expenses, utilities, travel and entertainment expenses,
and rents. The government did not challenge either the char-
acter, amount, or validity of the expenses. At the same time,
both the government’s expert and Kayser’s accountant testi-
fied that as a general matter, business expenses of the type
reported on Aspen Ventures’ 2000 return could be used to
reduce business income on an individual return. This evi-
dence, though arguably weak, was sufficient to allow a ratio-
nal jury to sustain Kayser’s defense. The district court
therefore abused its discretion in failing to instruct the jury on
this theory.6
C.
We thus conclude that the requested jury instruction was
supported by law and had sufficient foundation in the evi-
dence. Because the district court erred in declining to instruct
the jury on Kayser’s theory of defense, we reverse Kayser’s
conviction.7
6
In discussing the weakness of Kayser’s evidence, the dissent merges
the two separate counts of Kayser’s indictment by noting that “[t]o escape
conviction, . . . Kayser had to show that he had enough deductions to shel-
ter both his 1999 and 2000 income.” Dissent at 6589 (emphasis in origi-
nal). There is no dispute that Kayser did not have sufficient deductions to
offset both his 1999 and 2000 income. However, Kayser may still raise a
deficiency defense with respect to the second count of his indictment
(relating to the 2000 tax year) when a rational jury could conclude that
Kayser had sufficient allowable deductions to negate the government’s
proof of deficiency with respect to that year.
7
Kayser argues that any instructional error by the district court cannot
be harmless. See United States v. Escobar De Bright, 742 F.2d 1196,
1201-02 (9th Cir. 1984) (holding that an erroneous refusal to give defen-
dant’s proposed theory of defense instruction is reversible per se). We
6584 UNITED STATES v. KAYSER
REVERSED and REMANDED.
KOZINSKI, Circuit Judge, dissenting:
The majority begins its analysis by dutifully reciting a well-
established rule: “A defendant may negate the element of tax
deficiency in a tax evasion case with evidence of unreported
deductions.” Maj. op. at 6576 (citing United States v. Mara-
belles, 724 F.2d 1374, 1378-89 (9th Cir. 1984); Elwert v.
United States, 231 F.2d 928, 933 (9th Cir. 1956)). But it then
jumps the rails by removing the word “unreported” and allow-
ing a defendant to escape a criminal tax conviction by re-
characterizing reported deductions. Id. at 12. This new rule
finds no support in our caselaw and conflicts with United
States v. Miller, 545 F.2d 1204 (9th Cir. 1976), and United
States v. Boulware (Boulware II), 470 F.3d 931 (9th Cir.
2006). Even if this new rule were permissible, defendant did
have not revisited Escobar De Bright in light of Neder v. United States,
527 U.S. 1 (1999). Nor do we need to, because the district court’s failure
to give Kayser’s proposed instruction prevented him from making a signif-
icant challenge to the deficiency element of the tax evasion count for the
year 2000, and thus cannot be harmless beyond a reasonable doubt. See
Chapman v. California, 386 U.S. 18 (1967).
Kayser also argues that he was wrongfully prevented from introducing
evidence to support his theory of defense and that the district court misap-
plied the Sentencing Guidelines in determining the total tax loss by refus-
ing to reduce Kayser’s 2000 unreported income by the deductions he
reported on Aspen Ventures’ 2000 return and carried back to 1999. Given
our reversal and remand for a new trial, we do not reach these issues.
Finally, Kayser asserts that his indictment should be dismissed because
the grand jury was improperly instructed. However, as Kayser acknowl-
edges, our precedent has squarely rejected his position and we therefore
affirm the district court’s denial of Kayser’s motion to dismiss the indict-
ment. See United States v. Navarro-Vargas, 408 F.3d 1184 (9th Cir. 2005)
(en banc); United States v. Cortez-Rivera, 454 F.3d 1038 (9th Cir. 2006).
UNITED STATES v. KAYSER 6585
not present evidence that could support such an instruction.
For both these reasons, I respectfully dissent.
1. Kayser was charged with tax evasion for failing to report
income on his 2000 individual return. His proposed instruc-
tion would have allowed the jury to apply the $49,026 in
deductions, which he had reported on his corporate tax return,
to his personal income. As the government argued at trial, this
defense is foreclosed by Miller. In Miller, we dealt with a
highly analogous situation, where the taxpayer wished to re-
characterize a distribution from his corporation as a return of
capital, rather than as a dividend. Miller’s argument, like
Kayser’s, was that what mattered was the reality of the trans-
action, not the way he initially papered it. We rejected this
contention. Our rationale for reaching this conclusion is
highly instructive:
In civil tax cases the purpose is tax collection and the
key issue is the establishment of the amount of tax
owed by the taxpayer. In a criminal tax proceeding
the concern is not over the type or the specific
amount of the tax which the defendant has evaded,
but whether he has willfully attempted to evade the
payment or assessment of a tax. Goldberg, supra,
330 F.2d at 40; Simon, supra, 248 F.2d at 876.
The difficulty in automatically applying the con-
structive distribution rules to this case is that it com-
pletely ignores one essential element of the crime
charged: the willful intent to evade taxes, and con-
centrates solely on the issue of the nature of the
funds diverted. That latter aspect is not the important
element. Where the taxpayer has sought to conceal
income by filing a false return, he has violated the
tax evasion statutes. It does not matter that that
amount could have somehow been made non-taxable
if the taxpayer had proceeded on a different course.12
To apply the constructive distribution rules to this
6586 UNITED STATES v. KAYSER
situation would nullify all of the taxpayer’s prior
unlawful acts.
12
At the time the funds are initially diverted, it might well be
argued that they could constitute either income or a return of
capital. However, once the taxpayer has assumed control of the
funds and then fails to report such funds as income or to make
any adjustments in the corporate books to reflect a return of
capital, he has already violated the tax evasion statutes. Accord,
Spies v. United States, 317 U.S. 492, 498-99, 63 S. Ct. 364, 87
L. Ed. 418 (1943); United States v. Swallow, 511 F.2d 514, 521
(10th Cir.), cert. denied, 423 U.S. 845, 96 S. Ct. 82, 46 L. Ed. 2d
66 (1975).
Miller, 545 F.2d at 1214 & n.12; see also Boulware II, 470
F.3d at 933-35 (same).
Under this rule, a defendant in a criminal tax case is bound
by the way he papered the transaction at the time he earned
the income in question. In Miller, the taxpayer was bound by
the fact that his corporate books did not reflect the distribution
as a return of capital. That he could later, as a matter of eco-
nomic reality, claim that the distribution was a return of capi-
tal was of no consequence, because contemporaneously
maintained records did not support that re-characterization.
Miller went on to explain:
In holding that the constructive distribution rules
should not automatically be applied, it is not herein
asserted that diverted funds could never be a return
of capital. However, to constitute the latter, there
must be some demonstration on the part of the tax-
payer and/or the corporation that such distributions
were intended to be such a return. To hold otherwise
would be to permit the taxpayer to divert such funds
and if not caught, to later pay out another return of
capital; or if caught, to avoid conviction by raising
the defense that the sums were a return of capital and
hence non-taxable.
UNITED STATES v. KAYSER 6587
545 F.2d at 1215 (footnote omitted); see also Boulware II,
470 F.3d at 934 (“[D]efendant must show not merely that the
funds could have been a return of capital, but that the funds
were in fact a return of capital at the time of the transfer.”).
Although this rule creates some tension with Marabelles
and Elwert,1 these cases can be reconciled because Marabel-
les and Elwert deal with the situation where the taxpayer
failed to claim deductions. In such circumstances, the deduc-
tions are unreported, so the taxpayer is not bound under
Miller by any prior characterization. Unlike in Marabelles
and Elwert, defendant here did not fail to report business
expenses on his return; he claimed the deductions on his cor-
porate return and carried back the losses to wipe out tax liabil-
ity for the prior year. Kayser’s act of claiming the deductions
on his corporate return was not merely proof of the underlying
reality; it was the reality because it had a legally operative
effect: Had Kayser not been audited, these deductions would
have been carried back to reduce his corporate tax liability to
zero for 1999; his 2000 personal tax liability would have been
zero because of his failure to declare income.
The IRS, however, did audit Kayser and found that he had
underreported his personal income in 2000. If the deductions
are shifted from his corporate to his individual return, this
would affect his 1999 corporate tax liability. The same deduc-
tions cannot be used twice: He can either use them to wipe out
his 2000 personal income or he can carry them back to wipe
out his 1999 corporate income. Having chosen to do the latter
1
This tension was pointed out by Judge Thomas’s concurring opinion in
Boulware II. Judge Thomas criticized Miller because it holds that “a
defendant may be criminally sanctioned for tax evasion without owing a
penny in taxes to the government. Not only does this result indicate a logi-
cal fallacy, but is in flat contradiction with the tax evasion statute’s
requirement of ‘the existence of a tax deficiency.’ ” 470 F.3d at 938
(Thomas, J., concurring) (quoting Marabelles, 724 F.2d at 1379). Never-
theless, Judge Thomas, like the Boulware II majority, concluded that they
were bound by Miller and ruled in favor of the government.
6588 UNITED STATES v. KAYSER
when he filed his returns, the deductions are used up and are
not available to offset his 2000 personal income. Contrary to
the majority’s holding, Marabelles and Elwert are thus not on
point because Kayser does not have allowable deductions that
were not reported on his return. Even if the deductions in
question could have been treated as personal deductions, had
Kayser claimed them as such on his individual return, the dis-
trict court properly concluded that Kayser is stuck with the
way he reported them at the time—which was as corporate
deductions. To let him now go back and treat the deductions
as applicable to his personal income allows for precisely the
kind of heads-I-win, tails-the-government-loses scenario that
Miller sought to foreclose.
2. Even under the majority’s new rule, the district court did
not abuse its discretion in refusing to give the proposed
instruction because Kayser did not present sufficient evidence
to warrant the instruction. Kayser needed to establish that he
had enough allowable deductions to eliminate tax liability. In
other words, he needed to show that he would have and could
have reported sufficient deductions to offset all income. The
majority strains to find “arguably weak” evidence in the
record to support both propositions, see maj. op. at 6581-83,
but the evidence on both counts falls far short of providing a
sufficient basis “upon which the jury could rationally sustain
the defense.” United States v. Jackson, 726 F.2d 1466, 1468
(9th Cir. 1984) (per curiam); see also United States v. Streit,
962 F.2d 894, 898 (9th Cir. 1992) (same) (“The ‘merest scin-
tilla of evidence,’ however, will not suffice.” (quoting Jack-
son, 726 F.2d at 1468)).2
2
Nor did the district court prevent defendant from presenting evidence
to support the proposed instruction. The majority does not reach this issue,
see maj. op. at 6583-84 n.7, but it’s worth noting that the district court
gave defendant ample opportunity to introduce such evidence. When
defendant first raised the issue on the penultimate day of trial, the court
noted that “you may have a problem given the state of the evidence if you
argue that, but you may not. It just depends on how everything comes in
UNITED STATES v. KAYSER 6589
Kayser reported $49,026 in business expenses on his 2000
corporate return and carried back these expenses to eliminate
his corporate tax liability for 1999. He was able to carry back
these losses because he failed to report $41,765 of personal
income from A2Z in 2000 and thus had no 2000 reported
income against which to claim deductions.3 Unlike Marabel-
les and Elwert, therefore, the deductions Kayser wanted to use
to offset his unreported 2000 income at the time of trial were
not unused. Rather, they were doing work in sheltering his
1999 corporate income. Had the 1999 tax year been beyond
the government’s reach, perhaps Kayser could have argued
that he had erred in assigning the deductions (for his 2000
expenses) to his corporate return and carrying them back to
1999. The majority’s new rule would allow that (though
Miller would, in my view, prohibit it).
But the 1999 tax year was not beyond the government’s
reach. In fact, Kayser was being tried for tax evasion for both
1999 and 2000. To escape conviction, therefore, Kayser had
to show that he had enough deductions to shelter both his
1999 and 2000 income. There just weren’t enough deductions
to do this. On his 1999 corporate return, Kayser reported
and what the arguments are, what the objections are. And I can’t rule
hypothetically on every permutation of argument that we might hear in the
case. We’ll just have to defer that until the time of argument.” When
defendant presented his proposed instruction the next day, the court simi-
larly noted, “Well, I’m going to decline to give this instruction at this
point; the evidence doesn’t support it.” Defendant thus cannot blame the
district court for his failure to present the requisite evidence.
3
At trial, the IRS case agent testified that Kayser underreported his 2000
personal income by $53,445, but the government’s expert calculated the
figure more conservatively at $41,765. See maj. op. at 6574 n.2. The dis-
trict court relied on the more conservative calculation at sentencing, and
the government relies on the same figure on appeal. While we also must
rely on the conservative calculation here, it’s worth noting that Kayser
concedes that he’d have no defense if the jury bought the higher calcula-
tion because he wouldn’t have had sufficient deductions to eliminate all
tax liability.
6590 UNITED STATES v. KAYSER
$104,532 in income; he paid taxes on none of it because he
claimed $111,061 in deductions to wipe out his 1999 corpo-
rate income—including $49,026 in carryback losses from
2000. If he shifted $41,765 of these deductions to cover his
unreported income for 2000, that would have left him only
$69,296 in deductions for 1999 to offset the $104,532 in
income reported on his corporate return. Thus, even assuming
Kayser were allowed to reassign some or all of his deductions
from 1999 to 2000, he would have some unsheltered income
in one or both years; the majority admits as much. See maj.
op. at 6583 n.6.
Which is no doubt why the record is so muddy as to
whether Kayser would or could have reassigned the deduc-
tions to his personal income: Had Kayser shown unequivo-
cally that the deductions were available in 2000, and that he
would have claimed them that year, he would have exposed
himself to a conviction for tax evasion in 1999. Kayser there-
fore hedged his testimony. On direct examination, Kayser
indicated that “every deduction on [his] corporate return . . .
related to [his] A2Z income,” and that he would “have
attempted to declare some of the deductions” on his individual
return. (Emphasis added.) On cross-examination, Kayser testi-
fied that the 2000 business expenses “could have been [Aspen
Ventures expenses], yeah, but they were primarily due to the
consulting business [apparently referring to his employment
with A2Z] as well as Image Network, or Clear Blue Media is
otherwise known as.” When pressed further, Kayser testified
that these were Aspen Ventures expenses “if I’m
understanding—I’m getting a little confused, but yes.”
Note that Kayser made only very broad statements that the
deductions relate to his personal income, and even then he
hedged quite a bit: He claimed he would have attempted to
declare some of those deductions on his individual return. He
didn’t say what portion of the $49,026 he would have
claimed; it could have been $41,765 or more, or it could have
been less. It’s even less clear when we consider his backtrack-
UNITED STATES v. KAYSER 6591
ing on cross-examination: He admitted that some of the
expenses “could have been” attributable to Aspen Ventures,
and that the expenses “were primarily due to the consulting
business as well as Image Network.” Again, we don’t know
which portion. As the majority notes, it is defendant’s burden
to show that the claimed expenses would have reduced his
income to zero for the relevant tax year (here 2000). Maj. op.
at 6577 (citing Marabelles, 724 F.2d at 1379 n.3; Elwert, 231
F.2d at 933). On this record, a rational jury could not find that
Kayser had shown sufficient business expenses that he would
have used to offset all tax liability for 2000.
Even assuming Kayser had testified that he would have
claimed all the deductions on his individual return, this
wouldn’t have been enough. To wipe out his 2000 unreported
income, Kayser also had to show that the deductions would
have been allowable. See maj. op. at 6582 (citing Marabelles,
724 F.2d at 1379 n.3; Elwert, 231 F.2d at 933). It’s a point
Kayser did not address in his testimony. The question then is
whether the other two witnesses—the government’s expert
and Kayser’s accountant—addressed the allowability of the
deductions. The government’s expert certainly provided
Kayser no help. On cross-examination, the expert indicated
that it was “theoretically” possible that Kayser could have
claimed the deductions on his individual return “if those
deductions had passed the many different requirements that
the IRS imposes in order to claim the deductions related to the
business incurred for furthering the business.” (Emphasis
added.) A theoretical possibility, however, is not evidence,
not even “arguably weak” evidence, that such deductions
were indeed allowable on Kayser’s individual return. The
government’s expert never said that any of the expenses were
actually allowable to offset Kayser’s personal income.
This brings us down to the accountant’s testimony.
Kayser’s accountant (who was the government’s witness) tes-
tified on direct that “[i]f the deductions were attributable to
Mr. Kayser and had he paid those personally, he could have
6592 UNITED STATES v. KAYSER
deducted those personally . . . and the tax return for the corpo-
ration would have been nonexistent; it just would have been
a zero return.” (Emphasis added.) On cross-examination, the
accountant testified that “if in fact the corporation was not the
recipient of the income and we pick that up on Michael
Kayser’s personal tax return and we pick up the expenses and
all of them are—all the income is reported and all expenses
are allowable, I don’t—I cannot see a significant change in
the tax.” (Emphasis added.) On re-direct, he indicated that if
Kayser had accurately reported his individual income, Kayser
would have had to file a “new tax return or amended tax
return,” and “certain other parts of the tax return [would be]
inapplicable or at least [would need] to be amended.”
The majority seems to think it’s sufficient that “both the
government’s expert and Kayser’s accountant testified that as
a general matter, business expenses of the type reported on
Aspen Ventures’ 2000 return could be used to reduce business
income on an individual return.” Maj. op. at 6582-83. But the
majority does not examine what the witnesses actually said.
Significantly, the majority points to no statement by either
witness that supports its watery characterization. In fact, nei-
ther witness testified that the actual business expenses
reported by Aspen Ventures were allowable on Kayser’s indi-
vidual return. Kayser’s accountant, like the government’s
expert, assumed hypothetically that the deductions were
allowable and then opined what effect this would have had on
Kayser’s 2000 individual return. Even then, the accountant
hedged, suggesting that other parts of the return would have
to be amended. Nowhere did he say that the deductions were
actually allowable under the tax code; nor did he claim that
Kayser’s hypothetical individual return, when adjusted prop-
erly, would have resulted in zero tax liability.
In short, Kayser did not provide sufficient proof to enable
a rational jury to find that he had enough allowable deduc-
tions to reduce his 2000 personal tax liability to zero. Nor
could he, given that he needed these same deductions to shel-
UNITED STATES v. KAYSER 6593
ter his 1999 income. Under these circumstances, the district
court did not abuse its discretion in refusing to give the
instruction. See Streit, 962 F.2d at 898. Indeed, it did exactly
what a district court should do when a party proposes an
instruction that’s not supported by the evidence.
* * *
In reversing defendant’s conviction, the majority creates a
defense against criminal tax liability that conflicts with estab-
lished circuit precedent. And it does so unnecessarily, as
defendant has fallen far short of meeting his burden to warrant
the erroneous instruction. The majority thus eviscerates the
evidentiary standard for proposed jury instructions by forcing
a district court to give an instruction that’s only supported by
generalities and hypothetical possibilities. I must part com-
pany with my colleagues in both of these precarious endeav-
ors.