Thursday, February 19, 2009

Tax Crimes Student Review and Exercise (2/29/09)

I write this news item particularly for the students in the course in Tax Fraud and Money Laundering that Larry Campagna and I teach at the University of Houston School of Law. We use our Tax Crimes book (co-authored with Steve Johnson and Scott Schumacher) in the course. On the evening of 2/18/2009, we covered chapter 4 which dealt with methods of proof (direct method and indirect methods such as net worth and bank deposits / cash expenditures methods).

On 2/18/2009, the Fifth Circuit decided United States v. Adams (No. 07-60926). The panel deciding the case designated the case as not for publication and nonprecedential, but don't let that dissuade you from reading and savoring the case. All these designations mean is that (1) the opinion does not get published in the West F.3d case reports and (2) the opinion does not automatically bind another panel in the Fifth Circuit or district judge in the Fifth Circuit in another case. The Federal Rules of Appellate Procedure permit the opinion to be cited (subject to providing the court a copy of the opinion because it is not published) and while not precedential (in the binding sense), the opinion can be persuasive within and without the circuit to the extent that it is persuasive in its reasoning. I think this case is a doozy, at least for students because it reviews many of the concepts we have reviewed in the first four chapters of the book. I am not saying it was necessarily correctly decided (doubt as to its correctness as a precedent may be what compelled the nonprecedential designation); I am saying it is interesting and a good read to test a student's understanding of the matters covered.

Those wishing a more detailed discussion can download it here, in the blog itself I will try to summarize some of the key features of the case.

1. The opinion holds that the defendant cannot be prosecuted for tax perjury (Section 7206(1)) for filing an amended return (1040X) where he attached his original 1040 with a false Schedule C (understatement of gross receipts) because the 1040X amended items other than the Schedule C and thus, under IRS procedure, it was not necessary to include the false Schedule C with the 1040X. The panel got to that holding by reading the jurat on the 1040X very narrowly so as not to cover portions of the original 1040 included with the 1040X when nothing on those portions are being amended or affected by the 1040X. If that doesn't sound wholly persuasive to you, neither does it to me (or the dissenting judge on the panel). (This may be why the judges determined the opinion to be nonprecedential -- doubt as to its correctness and less than overwhelming persuasiveness, so that it will ultimately only resolve that particular case (judges do behave that way).)

2. I hope you asked why the Government did not indict for the falsity of the original 1040. Good question. Answer: the six-year criminal statute of limitations had expired on the original 1040. (Another question you may have asked and easily answered yourself is why the 1040X did not qualify for the voluntary disclosure policy. Answer: the taxpayer did not correct the material falsity on the Schedule C but, by filing the 1040X without correcting it, carried forward that problem and thus did not come clean with the IRS, a condition of the voluntary disclosure policy.)

3. In the course of meandering around the key holding based on the jurat on the 1040X, the Court was careful to say that the case was not an evasion case (at least not a charged evasion case). Although the Court did not say this explicitly, I hope you can see that, as the case is reported, the Government could have nailed the defendant for evasion on the 1040X, because he had not corrected the Schedule C problem in the 1040X thus carrying forward his understatement of tax liability. For evasion, you will recall, the Government has to prove willfulness (which, of course, it did in convicting Adams in the trial below), a tax due and owing (a simple mathematical calculation by adding the omitted gross receipts to income which it proved below and calculating the tax), and an affirmative act of evasion (there in spades in the facts). Instead, the Government chose to indict for tax perjury (Section 7206(1)), which requires a flat out bald-faced lie. In the mind of the majority of the panel, the defendant did not make a flat out bald faced lie because of the wording of jurat to which he was responding when he signed under penalty of perjury. As narrowly construed by the majority on the panel, the jurat did not cover items gratuitously attached to the 1040X but not relevant to the items being corrected by the 1040X. As noted, the 1040X did not correct the Schedule C and thus, under this notion, it was gratuitous and not required.

4. For another year, where the same type understatement on Schedule C was involved, the Court sustained the conviction because the charge was for the original 1040; thus, the Schedule C was necessary for the return and clearly covered by the jurat. In the course of so holding, the Court has good discussions of the indirect method of proving the understatement of gross receipts and how the IRS's investigation cleared the problems inherent indirect methods (identifying taxable sources and reasonably excluding nontaxable sources (including the standard opening cash hoard claim)).

5. Finally, the court dealt with issues arising from the IRS Agent's testimony. You will recall that the Agent can testify as a summary witness or expert or something in between. This Agent made the mistake of testifying that the defendant acted willfully -- a determination that is within the province of the jury alone. Defendant's counsel objected at trial, the court sustained the objection and gave a curative instruction to the jury to the effect that the jury alone decided the issue of willfulness and that, accordingly, the jury should ignore the Agent's testimony on that point. The Fifth Circuit panel held that reversible error had not occurred because of the curative instruction.

6. The dissenting judge pungently attacked the majority's forced analysis narrowly interpreting the jurat on the 1040X. Bottom line, it seems to me that the better holding would have been that, to the extent the 1040X did not correct the Schedule C misstatement, it is in effect carried forward by the 1040X. In other words, the 1040X is in effect a republication of the 1040 except as corrected. The Schedule C was not corrected. The 1040X included a lie by incorporation. I do understand the majority's narrow interpretation of the jurat, but think it was just too narrow.

All in all this is a good case for the student to test his or her understanding of these important areas addressed by the panel.

2 comments:

  1. Jack,

    I agree with your analysis of the 5th. Circuit's decision in Adams, especially, your points 5 and 6.

    I just have a few things to add:

    As for point 5, I would question whether the error and its "harmfulness" ("prejudice") component was adequately preserved inasmuch as it appears that the defendant-appellant did not move for a mistrial at the time that the actual error occurred.

    Moreover, it does not appear that a motion for mistrial was renewed at the following junctures: (1) each time the harmful error was repeated by objectionable questions; (2) at the end of the government's case in chief; (3) at the end of the defense's case; (4) at the end of any rebuttal as well as sur-rebuttal; (5) at the end of the evidentiary phase (before the "charging conference" and "summation"); and, (6) in connection with such post-trial motions as motions for new trial or to otherwise vacate the judgment (including motion for judgment as MOL or JNOV).

    The bottom line: in my humble opinion, when it comes to "preservation", one must raise/highlight the error and its harmfulness/prejudicial nature early, often, consistently and most importantly, with a large dose of persistence, in accordance with the applicable rules of evidence and rules of court procedure.

    Further, the advocate should, by all means, "constitutionalize" the error (and, of course, "federalize" them in state court proceedings) so as to open up appropriate appellate and collateral review avenues (especially, standards of appellate review that are for the most part, non-deferential to the trial court's decisions).

    While my concepts of "error" and "harmfulness" preservation might come across as "dream team" kind of thinking, I certainly believe that a trial lawyer can accomplish them if he or she sets his or her mind to it. In other words, the trial lawyer must have a "yes, I can, yes, I can" attitude.

    ReplyDelete
  2. Anonymous,

    Yet another excellent post. Thanks,

    Jack Townsend

    ReplyDelete

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