The Relevance of the Skilling Case to Tax Obstruction Crimes (6/30/10)

A reader responded to my blog with the synopsis of the Skilling case (see here) by stating that Skilling decision was not appropriate to a Federal Tax Crimes Blog. I responded with a brief statement as to why I thought Skilling was appropriate. I want to follow through on those comments regarding at least the potential vagueness in the tax obstruction statutes – the defraud / Klein conspiracy and tax obstruction (§ 7212(a)).

In catching up with recent cases, I came across today United States v. Wood, 2010 U.S. App. LEXIS 12984 (10th Cir. 6/24/10) (Unpublished) where the defendant, Mr. Wood, did claim that§ 7212 as interpreted was vague, echoing the claims made in Skilling. The Tenth Circuit rejected the claim (and his other claims), fairly summarily, and did not even believe the resolution was worthy of being published. Focusing on the vagueness claim, the Tenth Circuit just said other courts rejected the claim and it agreed. The key parts of its slim analysis are:

The government charged Mr. Wood with deceptive techniques including using domestic non-interest-bearing bank accounts under his signature, offshore credit card accounts, and nominee entities to hide income and assets from the IRS. The jury found that Mr. Wood's actions were intended to obstruct or impede the administration of the tax code with the intent to gain an unlawful benefit, and § 7212(a) gives a reasonable person clear notice that these actions are prohibited. We conclude that § 7212(a) is not vague as applied to the particular conduct alleged in this case.

I nit-pick here, because this quote evidences a problem with a court that has not thought through the implications of what it says cryptically as the basis for a holding (not uncommon in unpublished opinions designed to resolve the case in hand but avoid the precedential effect in future cases). In the quoted portion, the Tenth Circuit says that the Government charged tax obstruction, in part, because Mr. Wood used “domestic non-interest-bearing bank accounts under his signature.” Although that is all the Tenth Circuit tells us in this critical part of its reasoning, the facts it recites earlier in the opinion show that Mr. Wood did something materially more than just create a non-interest bearing account. The cryptic analysis refers to domestic accounts (plural), but the rest of the opinion mentions only one domestic account. The account in question was an account not in Mr. Wood’s name and created and styled in the name of a Foundation for the benefit of others (“The Family Foundation”). Mr. Wood appears to have had only signatory authority and actually used the account to shuffle money overseas rather than the purposes for which the account was established.

Although the facts of the case make the case holding correct, I am concerned that, in this area, courts just are sloppy in how they describe what they are doing. In my view, it is not a crime to set up a non-interest bearing account so long as there is nothing deceptive about that. The Court was just too cryptic about what it said. The statement would have been proper had the Court elaborated that Mr. Wood created a “domestic non-interest-bearing bank accounts under his signature but in the name of a nominee in order to hide the transfer of money to offshore accounts.” But to suggest that creating “domestic non-interest-bearing bank accounts under his signature” is an action that can draw a criminal charge is just wrong.

I think a good case to set the framework for discussion is United States v. McGill, 964 F.2d 222 (3d Cir. 1992) where the Third Circuit held that creating a bank account in the taxpayer’s own name is not an act of evasion. As I said in my article (John A. Townsend, Tax Obstruction Crimes: Is Making the IRS's Job Harder Enough, 9 Hous. Bus. & Tax. L.J. 255, 334-335 (2009)).

Although McGill is an evasion case and not a conspiracy case, I think it frames the concern nicely. In terms of imposing criminal liability for conduct that defeats the lawful functions of the IRS, the government claims § 7212 to be a one-person counterpart of the defraud conspiracy. The question is whether McGill's actions, although failing the affirmative act requirement of § 7201 evasion, could be an attempt to defeat the lawful functions of the IRS under § 7212. And, if two or more people, conspired to perform the same act, they could be charged with the underlying substantive act (through § 7212) and a conspiracy framed both as an offense conspiracy (to violate § 7212) and a defraud conspiracy. Of course, McGill did not address § 7212 or either conspiracy, so any conclusion has to be an extrapolation, but the McGill court's concerns would be equally present in the context of a conspiracy or § 7212 charge. The McGill court's animating concerns are basically the same that prompted the Supreme Court in Hammerschmidt to limit the scope of criminality except where Congress has spoken clearly, which it has not in the spare language of the defraud conspiracy and § 7212. For now you might ask whether the government simply indicted McGill under the wrong statute(s), or whether, until Congress speaks more clearly than it has, there is something fundamentally wrong with the notion that legal activity which is nondeceptive can support a criminal conviction simply because an actor intended to make the IRS's job more difficult.

For those who want to consider further this issue, in addition to the article itself, I recommend looking through the Appendix to my article here.  In the Appendix, I discuss common examples in tax practice that, in some general sense make the IRS's job harder and may even give some pause as to whether they cross the line of square dealing with the Government, but hardly put anyone on notice that a crime is being committed.  In most the examples, of course, most prosecutors would not charge a tax obstruction crime, but not because some of the rhetoric would preclude the charge.  If a charge can be formulated in such a way that there is no discernible dividing line between the good and the bad, mere prosecutorial discretion (which may vary from prosecutor to prosecutor) should not be the test of criminality.