Tax Cheating

Illegal--But Is It Immoral?

Donald Morris

• Publisher: Excelsior Editions
• Year: 2012
• ISBN:
  9781438442723
• Topic: Commerce
• Subtopic: Fiscalité

Silver Winner, ForeWord Book of the Year in the Political Science Category
Finalist for the 2013 Eric Hoffer Book Awards presented by Hopewell Publications From unreported gambling winnings and inflated claims of the value of clothing donated to charity to money hidden in Swiss bank accounts and high-profile tax schemes plotted by celebrities and business leaders, the range of tax cheating opportunities is wide and the boundaries and moral status can be hazy. Considering the behavior of individuals and small businesses as well as the involvement of congress and the IRS, Donald Morris combines insights from law, psychology, sociology, criminology, accounting, economics, and philosophy to examine the ethical issues surrounding tax cheating and implications for tax policy.

NOTES

Chapter One. Tax Cheating—The Problem

1. Oliver Wendell Holmes Jr., The Common Law (Mineola, NY: Dover, 1991), 50. Richard Posner calls Holmes “the leading figure in American jurisprudence.” Richard A. Posner, Problems of Jurisprudence (Cambridge: Harvard University Press, 1990), 19.

2. Posner, Problems of Jurisprudence, 334. For background on this issue see the author's, “Establishing Basis for Gambling Losses,” The Tax Advisor (June 2007).

3. U.S. Department of Justice Press Release, Erik C. Peterson United States Attorney Western District of Wisconsin, May 22, 2009. “Jerome M. Koosman, 66, of Osceola, Wis., pleaded guilty today in U.S. District Court in Madison to a charge that he failed to file his 2002 federal tax return…. Koosman faces a maximum penalty of one year in prison and a $25,000 fine…. Koosman was required to file federal tax returns for 2002, 2003, and 2004, and he willfully failed to file those returns. Koosman, [is] a retired major league baseball player who played in the major leagues from 1967 through 1985 for the New York Mets, Minnesota Twins, Chicago White Sox, and Philadelphia Phillies.”

4. U.S. Department of Justice press release, September 22, 2009. “Orlando, Florida—United States Attorney A. Brian Albritton announces that Jimmie L. Thorpe, a/k/a Jim Thorpe (age 60, of Heathrow, Florida) today pleaded guilty to two counts of failing to pay income taxes. Thorpe faces a maximum penalty of two years in federal prison and a $4,125,152.54 fine…. According to the plea agreement, Thorpe was a professional golfer on the Professional Golf Association (PGA) Champions Tour…. In 2002, 2003, and 2004, Thorpe received gross income of approximately $1,610,460.01, $1,916,209.13, and $1,838,485.31, respectively, on which he owed, but did not pay, income taxes in the amount of $659,286.74, $717,384.18, and $685,905.35, respectively.”

5. In 1990 Willie Nelson reportedly owed the IRS $23 million. At least part of this amount was the result of disallowed losses arising from tax shelters Nelson claimed his former accountants at Price Waterhouse had recommended. In negotiations with the Internal Revenue Service on how Nelson's tax bill would be paid it was decided that Nelson would release a new CD, The IRS Tapes: Who'll Buy My Memories. According to the agreement, part of the proceeds from the CD's sales would be allocated to paying Nelson's past due taxes. New York Times, Sept. 2, 1991.

6. U.S. Department of Justice press releases, May 7, 2009, and May 30, 2007.

7. U.S. House of Rep., Committee on Ways and Means, Statement of the Internal Revenue Service on Tax Proposals Related to Legislation to Legalize Internet Gambling, May 19, 2010, Appendix.

8. U.S. Department of Justice press release, April 13, 2009, “Justice Department Highlights FY 2008 Tax Enforcement Results” WWW.USDOJ.GOV. Petition filed in U.S. District Court, Southern District of Florida.

9. Ibid.

10. IRS Information Release 2011-14. “The Internal Revenue Service announced today a special voluntary disclosure initiative designed to bring offshore money back into the U.S. tax system and help people with undisclosed income from hidden offshore accounts get current with their taxes. The new voluntary disclosure initiative will be available through Aug. 31, 2011.” The program assesses a 25 percent penalty and requires filing of eight years of tax returns.

11. Frank A. Cowell, Cheating the Government: The Economics of Evasion (Cambridge: The MIT Press, 1990), 195.

12. Aristotle, Politics, trans. Benjamin Jowitt, 5:8.

13. IRS, “Reducing the Federal Tax Gap: A Report on Improving Voluntary Compliance,” August 2, 2007.

14. IRS News Release 84-123 (Nov. 30, 1984).

15. Harvey S. Rosen, Public Finance, 7th ed. (Boston: McGraw-Hill Irwin, 2005), 349.

16. Internal Revenue Code § 6015(b)(1)(B) “Relief from joint and several liability on joint return” and Internal Revenue Service Reg. § 1.6015-1(h)(4). According to IRS Regulations, “An erroneous item is any item resulting in an understatement or deficiency in tax to the extent that such item is omitted from, or improperly reported (including improperly characterized) on an individual income tax return.”

17. To anticipate one objection from the outset, I am using the terms moral and ethical as interchangeable. As a result there may be readers who believe I have used moral when I should have used ethical or vice versa. My reason for not distinguishing between ethical and moral is in part because common usage does not clearly distinguish between them and also because, as Sidgwick noted, “the term ‘moral’ is commonly used as synonymous with ‘ethical’ (moralis being the Latin translation of [the Greek term] ethikos).” Henry Sidgwick, Outlines of the History of Ethics (Indianapolis: Hackett, 1988), 11.

18. Readers interested international perspectives on the ethics of tax evasion are directed to Robert W. McGee, ed., The Ethics of Tax Evasion (South Orange, NJ: The Dumont Institute of Public Policy Research, 1998), and Robert W. McGee, “Three Views on the Ethics of Tax Evasion,” Journal of Business Ethics 67 (2006): 15–35.

19. There are many discussions of the legitimacy of government and of what obligations citizens owe to their government. For example, see Ruth C. A. Higgins, The Moral Limits of Law: Obedience, Respect, and Legitimacy (Oxford: Oxford University Press, 2004).

20. Cowell, Cheating the Government, 24.

21. Rosen, Public Finance, 349.

22. Comm v. Newman, 159 F2d 848 (2d Cir 1947).

23. See Gunn, who argues that employing a motives test for some tax avoidance and not for others is a problem. In particular he argues that “the question of whether particular conduct was tax-motivated should be irrelevant to the decision whether that conduct should be taxed in a certain way.” Alan Gunn, “Tax Avoidance,” Michigan Law Review 76 (1978): 733.

24. The Supreme Court set out three tests to determine when tax avoidance becomes an issue of tax cheating in Frank Lyon Co. v. US, 435 US 561 (1978). The Patient Protection and Affordable Care Act of 2010 codified the concept of economic substance in Internal Revenue Code § 7701(o). To have economic substance a transaction must change the taxpayer's economic position in a meaningful way (apart from federal income tax) and the taxpayer must have a substantial purpose (aside from the federal income tax) for entering into the transaction. References to the Code throughout are to the Internal Revenue Code of 1986 as amended (hereinafter abbreviated IRC) unless indicated otherwise. References within the Internal Revenue Code are to section numbers (hereinafter abbreviated §).

25. J. W. von Goethe, Faust, trans. Barker Fairley, in Selected Works (New York: Random House, 2000), 882.

26. Rosen, Public Finance, 349.

27. John Dewey, The Quest for Certainty (New York: G. P. Putnam's Sons, [1929] 1960), 7.

28. John Dewey,Logic: The Theory of Inquiry (New York: Holt, Rinehart and Winston, 1938), 107.

29. Edward M. Schur, Our Criminal Society: The Social and Legal Sources of Crime in America (Englewood Cliffs, NJ: Prentice-Hall, 1969), 164.

30. Benno Torgler, Tax Compliance and Tax Morale (Northampton, MA: Edward Elgar, 2007), 104.

31. Denis M. Hanno and George R. Violette, “An Analysis of Moral and Social Influences on Taxpayer Behavior,” Behavioral Research in Accounting, vol. 8, supp. (1996).

32. Philip M. Reckers, Debra L. Sanders, and Stephen J. Roark, “The Influence of Ethical Attitudes on Taxpayer Compliance,” National Tax Journal 47, no. 4 (Dec. 1994).

33. Tom R. Tyler, Why People Obey the Law (Princeton: Princeton University Press, 2006), 45.

34. John L. Mackie, Ethics: Inventing Right and Wrong (New York: Penguin Books, 1977), 210.

35. Richard D. Schwartz and Sonya Orleans, “On Legal Sanctions,” University of Chicago Law Review (1967): 274.

36. Adam Smith, The Theory of Moral Sentiments (Indianapolis: Liberty Fund reprint of Oxford University Press edition [1759] 1976), 134.

37. Tyler, Why People Obey the Law, 64–65.

38. Henry David Thoreau, Civil Disobedience (New York: Quill Pen, 2008), 8.

39. IRS Fact Sheet 2002-07 (2002).

40. John Stuart Mill,Principles of Political Economy, abridged by J. Laurence Laughlin (New York: Appleton and Company, 1884), 539.

41. R. E. Hall and A. Rabushka, The Flat Tax, 2d ed. (Stanford, CA: Hoover Institution Press, 1995), 57.

42. For an overview of the meaning of distributive justice, including five common alternatives (equality, need, merit and achievement, contribution or “due return,” and effort), see Joel Feinberg, Social Philosophy (Englewood Cliffs, NJ: Prentice-Hall, 1973), 107–17. According to Feinberg, distributive justice “is reserved for economic distributions, particularly the justice of differen...