U.S. v. Cruz, 81-5371

• Decision Date: 22 February 1983
• Docket Number: No. 81-5371,81-5371
• Citation: 698 F.2d 1148
• Parties: 83-1 USTC P 9216 UNITED STATES of America, Plaintiff-Appellee, v. Jose Medardo Alvero CRUZ, Defendant-Appellant.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 1148

698 F.2d 1148

83-1 USTC P 9216

UNITED STATES of America, Plaintiff-Appellee, v. Jose Medardo Alvero CRUZ, Defendant-Appellant.

No. 81-5371.

United States Court of Appeals, Eleventh Circuit.

Feb. 22, 1983.

Benedict P. Kuehne, Donald I. Bierman, Marc Cooper, Charles L. Ruffner, Miami, Fla., for defendant-appellant.

Joel N. Rosenthal, Asst. U.S. Atty., Miami, Fla., for plaintiff-appellee.

Appeal from the United States District Court for the Southern District of Florida.

Before KRAVITCH, HATCHETT and CLARK, Circuit Judges.

HATCHETT, Circuit Judge:

In this criminal case, with prosecution under 26 U.S.C.A. Sec. 7201, we must decide whether a jury instruction regarding establishment of a foreign tax credit under 26 U.S.C.A. Sec. 901 was correct. Finding the instruction correct, we affirm.

In May, 1979, a grand jury investigation focused on the appellant, Jose Medardo Alvero Cruz, because information provided by a reliable government source indicated that Cruz was involved with narcotics and tax fraud activities. The investigation led to inquiries in Spain where information showed that Cruz lived a lavish lifestyle and maintained large bank accounts. In order to verify this information, the government addressed Letters Rogatory and a Request for Judicial Assistance to the Spanish authorities through the State Department. These letters requested the Spanish authorities to assist in obtaining the original records of Cruz's bank accounts in Spain. The government also sought records of Spanish merchants from whom Cruz and his wife had purchased merchandise or services and public records concerning ownership of a condominium in Madrid.

The first set of Letters Rogatory and Requests for Judicial Assistance yielded defective evidence and a second set was required. The first set, however, did yield sufficient information to provide a basis on which Cruz was indicted on four counts of tax evasion under 26 U.S.C.A. Sec. 7201. The indictment alleged that Cruz had tax deficiencies for the years 1975, 1976, 1977, and 1978.

Before the second set of Letters Rogatory were presented to the Spanish authorities, a hearing was held in the district court. Over the objection of Cruz, the district court granted the government's request for the presentation of the Letters Rogatory and Requests for Judicial Assistance, but with changes. One change required the government to attach a copy of the income tax evasion indictment. Upon request of the Letters Rogatory and Request for Judicial Assistance, the Spanish authorities complied. Provided with this information, consisting mostly of the bank account statements, the government's prosecution followed.

During a pre-trial conference, Cruz objected to the use of all evidence obtained through the Letters Rogatory and Requests for Judicial Assistance. The district court again overruled the objections, but admonished the government that such evidence would be subject to "a rigid test of scrutiny" to insure that it was properly obtained. In addition to the Spanish bank accounts, the government also sought to utilize the testimony of an informant who allegedly knew of Cruz's source of income for the year 1975. Cruz, upon learning of this testimony and its possible marijuana crime implications, stipulated that the government's income figures for the 1975 tax year were correct. As a result of the stipulation, the informant did not testify.

During the trial, the government sought to prove tax fraud through the "net worth method." Cruz's defense, based on 26 U.S.C.A. Sec. 901 of the Internal Revenue Code, attacked the tax deficiency assessed by the Internal Revenue Service. Cruz contended that no tax deficiency existed because as a citizen of the Dominican Republic, a country which taxes income earned worldwide, his tax liability to it had accrued. Cruz asserted this defense in spite of the fact that he had filed no Dominican tax return for the years in question, and had not paid the tax at the time of trial. Because this tax liability had accrued to the Dominican Republic under 26 U.S.C.A. Sec. 905, and the Dominican Republic's statute of limitations had not expired for collecting the tax, he asserted that the availability of this foreign tax credit would mitigate any tax liability owed to the United States.

At the close of the trial, the district court gave the following jury instruction on the issue of the foreign tax credit:

For a foreign tax credit to accrue under United States tax laws you must find that with regard to the foreign tax all events have occurred which fix the amount of the tax and determine the liability of the taxpayer to pay it. That is, you must find that the foreign government is aware of the income that is taxable in their country; that the foreign government has computed the tax due on that income, and that the Defendant has acquiesced to or failed to contest that amount of tax due to the foreign government.

Cruz objected to the instruction.

The jury found Cruz guilty on all four counts of tax evasion. He was sentenced to four years of imprisonment on Count I, and two years of imprisonment on each of Counts II, III, and IV, to run consecutively. After trial, Cruz made partial payment to the Dominican Republic taxing authorities.

Cruz offers a number of arguments which are of an evidentiary nature and which we find without merit. On the primary issue, Cruz argues that the district court erred in its instruction to the jury because it misdefined "accrued." We do not agree.

Before an accused can be convicted of tax fraud in violation of 26 U.S.C.A. Sec. 7201, the government must prove three elements: (1) a tax deficiency, (2) an affirmative act, and (3) willfulness. Sansone v. United States, 380 U.S. 343, 351, 85 S.Ct. 1004, 1010, 13 L.Ed.2d 882 (1965); United States v. Dwoskin, 644 F.2d 418, 419 (5th Cir.1981). Because section 7201 defines a criminal offense, the government must prove each element beyond a reasonable doubt. Dwoskin, 644 F.2d at 419. In this case, Cruz sought to strike at the very heart of the government's tax fraud case. Instead of concentrating on the willfulness element, as is usually the situation, Cruz attacked the tax deficiency utilizing sections 33(a) and 901(b) of the Internal Revenue Code.

Section 33(a) provides: "The amount of taxes imposed by foreign countries and possessions of the United States shall be allowed as a credit against the tax imposed by this chapter to the extent provided in section 901." Section 901(b)(3) provides: "In the case of an alien resident of the United States and in the case of an alien individual who is a bona fide resident of Puerto Rico during the entire taxable year, the amount of any such taxes paid or accrued during the taxable year to any foreign country ...." In this instance, it is undisputed that Cruz, a Dominican Republic citizen, is a resident alien in the United States. He argues that therefore he is entitled to take a foreign tax credit against taxes imposed by the United States.

Section 905(a) provides when a foreign tax credit may be taken and allows the taxpayer the option of electing between the cash or accrual method of reporting. See United States v. Campbell, 351 F.2d 336, 338 (2d Cir.1965); 2 R. von T. Rhoades & M.J. Langer, Income Taxation of Foreign Related Transactions, Sec. 5.03[a]. Cruz, a cash basis taxpayer, elected to accrue his foreign tax credit. The right to take the foreign tax credit is open for ten years. 26 U.S.C.A. Sec. 6511(d)(3); Hart v. United States, 585 F.2d 1025 (Ct.Cl.1978) (en banc). Cruz contends that since he elected the accrual method of reporting, he is entitled to the credit at any time within the ten year statute of limitations. The problematic aspect of this case is in determining whether Cruz is entitled to a credit for a Dominican Republic tax which has not been reported, determined, paid, or contested.

The Supreme Court established the general rule relating to the accrual of income, deductions, or credits for income purposes in United States v. Anderson, 269 U.S. 422, 46 S.Ct. 131, 70 L.Ed. 347 (1926); and Dixie Pine Products Co. v. Commissioner of Internal Revenue, 320 U.S. 516, 64 S.Ct. 364, 88 L.Ed. 270 (1944). That rule provides that a tax is deemed to accrue when all events have occurred which fix the amount of the taxpayer's income, deductions, or credit, and determines the liability of the taxpayer for tax, although there has not yet been an assessment or maturity. Anderson, 269 U.S. at 441, 46 S.Ct. at 134; Dixie Pine Products Co., 320 U.S. at 519, 64 S.Ct. at 365. The accrual of the foreign tax credit is essentially governed by this rule. 2 R. von T. Rhoades & M.J. Langer, Income Taxation of Foreign Related Transactions, Sec. 5.03.

In the case of the foreign tax credit, the final event which fixes the amount of the credit is the levy of the tax. Campbell, 351 F.2d at 338; Cuba Railroad Co. v. United States, 124 F.Supp. 182 (S.D.N.Y.1954), 135 F.Supp. 847 (S.D.N.Y.1955), aff'd 254 F.2d 280 (2d Cir.1958), cert. denied, 358 U.S. 840, 79 S.Ct. 64, 3 L.Ed.2d 75 (1958); see Russell-Miller Milling Co. v. Helvering, 69 F.2d 392, 393 (D.C.Cir.1934). In the event the taxpayer decides to contest the foreign government's assessment, the taxpayer must claim the foreign tax liability as a credit against the United States tax in the year in which the liability has been finally determined. Cuban Railroad Co., 124 F.Supp. 182. Once the liability becomes fixed, after the dispute has been resolved, the accrued foreign tax liability "relates back" to the year in which it was levied. Revenue Ruling 58-55, 1958-1 C.B. 266; see Campbell, 351 F.2d at 338. In the instant case, Cruz did not contest his tax liability to the Dominican Republic. He took no action relating to the Dominican Republic tax (before trial).

In construing the requirements of section 905, we will not be constrained by intricate technicalities which would create a haven for federal...