Dr. Olumide K. Obayemi, LL.M. in Taxation Law*
No doubt, Professor Taofeeq Abdulrazaq is an authority on Nigerian Taxation Law. He ranks along with Leye Adebiyi, Professor Oluwole Akanle, Afolabi Elebiju, Wole Obayomi, Taiwo Oyedele and others.But, we respectfully disagree with Professor Taofeeq Abdulrazaq’s novel attempt to extend the defense of insanity to corporations. Insanity, like Driving under the Influence of Alcohol and Alibi—legal
terms that specifically apply to human beings and/or natural persons can not be asserted by an artificial person. A corporation can not get drunk with alcohol, and, similarly, a corporation cannot assert the defense of alibi. We see no factual and/or legal basis to avance a novel argument that a corporation can be legally insane. The common law rules laid down in the 2 cases of MacNaghten (British) and Durham (American) do not extend to corporations.
II. Tax Fraud: Distinguishing Between “Tax Evasion” and “Tax Avoidance”
Tax Fraud is the general term used to cover all sorts of tax shenanigans by tax practitioners and taxpayers alike. While undefined in most Tax Codes, tax fraud generally refers to a willful attempt to reduce or to eliminate tax liability by paying less tax than that which is known to be due. The controlling term is “willful.”
Subjective intention to circumvent the tax laws is required for a conviction. Yet, we must note that “Tax Avoidance” differs from “Tax Evasion. Tax Avoidance is an attempt to diminish taxation in a manner which the taxpayer/tax practitioner believes to be legal Tax Evasion occurs where the taxpayer/tax practitioner attempts to do evade payment of tax in a manner which he knows to be illegal.
Therefore, tax evasion charges always require proof of an intentional (willful/subjective intention) factual misrepresentation, while a tax avoidance characterization merely denotes an attempt to construe the facts so as to minimize tax liability. We must note that this distinction between avoidance and tax evasion is critical because different consequences attach to each, respectively. Therefore, to tax practitioners, an honest but unsuccessful evasion scheme will subject the taxpayer to various civil fraud and criminal evasion penalties.
III. Insanity Defense By Corporations
Coming back to the thesis of this paper, the question is: To what extent can corporations claim the defense of insanity against charges of tax evasion in Nigeria? We answer in the negative: The novel attempt to extend the defense of insanity to corporations is untenable in fact nor in law.This issue was examined by foremost Nigerian taxation scholar, Professor Taofeeq Abdulrazaq, in his presentation “Tax Evasion, Divination and Corporate Insanity” at the 50th Birthday Lecture in honor of the President of West African Union of Tax Institutes (WAUTI), Prince Razak Quadri in Lagos, held in October 4, 2011. According to Abdulrazaq:
“Tax evasion is a crime that can be committed by individuals and companies. As a crime, insanity is available as a legitimate defense open to individual persons and companies accused of tax evasion and companies can and do suffer from insanity. Using the process of divination, corporate insanity like any other ailment can be predictably diagnosed.”
This is practically impossible. A natural person’s acts may be observed by those close to him/her, just as a person’s competence in the making of a will may be decided by witnesses to the execution of a will. For corporations, accountants, auditors and solicitors may continue to churn out necessary complying documents, it may take years for the unhealthy situation within the corporate structure to be discovered.
Second, while insanity symptoms in natural persons may be diagnosed and treated, for corporations, by the rot is discovered, it is always too late. The cases of American Enron and Nigerian collapsed/failed banks are still fresh in our minds. On these empirical factual bases, Abdulrazaq’s novel attempt to extend the defense of insanity to corporations is fatally flawed.
IV. Psychoanalysis of Corporate Insanity.
Novel as it may be that a corporation can be diagnosed of insanity, treated, and surgically operated on to cure it of insanity, Abdulrazaq further pontificated that, as a tax practitioner, he had, in the past, assumed the roles of a “tax psychoanalyst” in handling “corporate insanity, and using a tripod, Abdulrazaq maintained that insanity is a defense for both individuals and corporations faced with tax evasion charges.
Abdulrazaq then cited Lord Denning, MR thus: “…Directors and managers represent the directing mind and will of the company and control what it does. The state of mind of these managers is the state of mind of the company and is treated by the law as such”. Therefore, Abdulrazaq submitted:
“Clearly then some officials of the company are identified with the company y or are the company and not merely agents of it. It is regarded sometimes difficult to decide which official can be so regarded but once the facts are ascertained, it is a question of law whether an official can be regarded as the company or merely as its servant or agent,”
a. Large Than Life Image Affliction of the Corporation and the Directors
Continuing with his “Psychoanalysis of Corporate Insanity” Abdulrazaq stated that corporate insanity manifests where a large than life image is painted of some people in an organisation such that any affliction affecting such persons affects the organisation indirectly.
Stated otherwise, a company that has only Nigerian-trained scientists and with an income of $100,000 may publish Prospectuses stating that it has Harvard-trained nuclear scientists coupled with an income of $2billion. To Abdulrazaq, this large than life imagesyndrome is an evidence of insanity and such may be a defense in a court of law.
b. Corporate Alter Egos
Further, Abdulrazaq also argued that insanity could also manifest in the presence of alter egos in an organisation and where superior orders emanate from persons like centres of consciousness in an organisation such that whatever afflicts the superior officers, including insanity, affects the organisation as well, he added. This is easily understandable, for instance, where the founde of a company res to resign and shows signs of senility.
Based on the above, since insanity negates means rea—guilty intent, then it would be difficult to obtain convictions under present Nigerian tax laws which did not define tax evasion outside of “intent” Thus, from the prescribed penalties in various statutes, it could be deduced that tax evasion could only mean “failure to make returns for income tax or capital gains tax, failure to make returns for corporation tax and incorrect returns or accounts”. Such acts, to Abdulrazaq, to underlie a conviction must be fraught with “fraud, willful default or neglect and knowingly” for them to constitute an offence under tax evasion.
V. The Defense of Insanity in the United States: The Requirement for Collateral Relationship
Tax practice and tax litigation is centered around two (2) issues: (a) Determining the Realization of Income and/or (b) the Deductibility of Losses or Expenditures. Stated otherwise, has the corporation realized an income that is not disclosed, or, has the corporation deducted a loss or expenditure that is not allowed by the law.
Upon ascertaining either of the above issues, legal issues of knowledge, intent, insanity or incompetence of the taxpayer must be ordinarily be collateral to the question presented in each case:
“Save in those instances where the statute itself turns on intent, a matter so real as taxation must depend on objective realities, not on the varying subjective beliefs of individual taxpayers.”
Lynch v. Commissioner, 273 F.2d 867, 872 (2d Cir. 1959).
Generally, in tax litigation, where the determination of fraud is at issue, the burden of proof with respect to fraud is placed upon the government by statute and by the rules of practice before the Tax Court.
(a). Standard of Proof
In the United States, the standard of proof required of the government is that the taxpayer’s fraud must be proven to the satisfaction of the court by “clear and convincing evidence.” In case law, this burden can not be lightly regarded.
Further, there is an essential element at the very heart of the fraud issue, namely, “the intent to defraud the Government by calculated tax evasion.”
The element of fraud entails the actual “intent to evade,”—the same willful intent that then brings up the plea of insanity or incompetency by the taxpayer.
(b). The British MacNaghten Case: Mental Defect and Mental Disease Leading to the Inability to Understand the Nature and the Quality of the Act Being Committed.
R. vs Macnaghten, 10 Clark & Fin. 200, 8 Eng. Rep. 718 (H.L. 1843) involved a murder case. There, the English House of Lords held that even though everyone is considered to be sane and responsible for his acts, a successful defense of insanity could clearly prove that, at the time of the commission of the act, the defendant was laboring under such a defect of reason, due to a mental disease, that he did not know the nature and the quality of the act he was committing.
The House of Lords further went on to hold that even if a defendant was aware of the nature of his act, he may not have known that the act was wrong.
However, if the defendant was aware that the act was one which he should not have committed, and if the act was simultaneously contrary to established law, he was then subject to punishment.
Concluding, the House of Lords held that the question of whether the defendant’s reason was sufficient to enable him to know that the act was wrong was for the jury’s determination based upon explanations and observations.
It remains a matter of conjecture and speculation as to how the jury can observe the actions of an artificial person as a corporation.
(c). The American Durham Rule and Its Progenitors: the Overwhelming of a Defendant’s Reasoning—Unlawful Act that is the Product of Mental Disease or Defect.
The early 1900’s and the end of the Second World War witnessed a great influx of European Psychoanalysts and Social Scientists, such as Sigmund Freud, Albert Einstein, etc, into the United States. Thus, the MacNaghten rule was modified in Durham v. United States, 214 F.2d 62 (D.C. Cir. 1954), where Hon. Judge Bazelon’s instructive and erudite opinion replaced and supplemented the right-wrong criteria with the irresistible impulse standard. The Court recognized that reason is only one element of man’s integrated personality and that it is not the sole determinant of his conduct
A successful plea of insanity must show an urge to act which is overwhelming, so overriding over the defendant’s reason and judgment that he could no longer choose between right and wrong. A defendant acting under irresistible impulse was still required to remain capable of distinguishing right from wrong. Thus, an accused is not criminally responsible if his unlawful act is the “product of mental disease or defect.
The Durham test was later expanded in McDonald v. United States, 312 F.2d 847 (D.C. Cir. 1962), where the court held that, in a trial involving the plea of insanity, the jury must be instructed that a mental disease or defect includes any abnormal condition of the mind which substantially affects mental or emotional processes and which substantially impairs behavioral controls.
Further, the jury was required to evaluate all expert and lay testimony in arriving at its decision.
Finally, the McDonald court excluded the possibility that specific disease might constitute insanity per se.
(d). A Corporation Can Not Be Held Liable for Offenses That Can Only Be Committed by a Natural Person
Even at common law, it is trite law that a company is a separate legal person subject to criminal law and is capable of committing an offence except for offences that require a natural person such as bigamy, sexual offences and perjury. Lennard’s Carrying Co Ltd v. Asiatic Petroleum Co [1915 AC] 713
Clearly, as stated herein, since bigamy, sexual offences and perjury are not crimes that can be committed by a corporation, it follows that insanity, mental disease, mental defect, irresistible impulse and abnormal condition of the mind can not afflict an artificial person as a corporation.
Insanity is innately an affliction that affects a natural person—it is inconceivable that a corporation can successfully claim insanity as a defense.
Cases that might evince complete domination by a controlling shareholder/director such as to render the corporation a mere tool or shell in the hands of the shareholder/director will entail piercing the veil of the corporation and for holding the dominating shareholder/director personally liable. Such can never avail the corporation itself an insanity defense.
* Dr. Olumide K. Obayemi, LL.M. in Taxation Law is admitted to practice before the United States Tax Court in Washington, DC