Thursday, September 16, 2010

Sixth Circuit on Klein Conspiracy and Tax Evasion

On September 15, 2010, the Sixth Circuit decide United States v. Damra, 621 F.3d 474 (6th Cir. 2010). The decision is long (51 pages) and addresses a number of issues. I deal here only with three of them that I think are in the mainstream for readers of this blog.

1. Klein Conspiracy - Is Willfulness An Element of the Crime?

Damra was convicted of a Klein conspiracy. Most readers will know that the federal conspiracy statute, 18 USC 371, defines two types of conspiracies -- an offense conspiracy and a conspiracy to defraud, known in the tax arena as a Klein conspiracy. If the offense underlying the offense conspiracy has a willfulness element, that element is imported as an element of the offense conspiracy. Specifically, a conspiracy to commit a tax crime having a willfulness element must meet the Cheek spin of intentional violation of a known legal duty. But, the Klein conspiracy has no reference point to import a willfulness element. So the question is what is the mens rea required in a Klein conspiracy?

Damra complained on appeal that the trial court did not instruct the jury that the Government must have proved that the defendant acted "willfully." Bottom line, the Sixth Circuit held that the instructions as given sufficiently conveyed the concept to the jury that the trial court did not commit reversible error. In the process of reaching that bottom line, the Sixth Circuit reiterated a prior holding willfulness is a required element of a Klein conspiracy, quoting an earlier case (United States v. Beverly, 369 F.3d 516, 532 (6th Cir. 2004) (citations omitted)) as follows (p. 498).

To establish a conspiracy, in violation of 18 U.S.C. § 371, the government must prove beyond a reasonable doubt that there was "an agreement between two or more persons to act together in committing an offense, and an overt act in furtherance of the conspiracy." This requirement has been broken down into a four-part test, which requires the government to prove that: "1) the conspiracy described in the indictment "was wilfully [sic] formed, and was existing at or about the time alleged; 2) the accused willfully [sic] became a member of the conspiracy; 3) one of the conspirators thereafter knowingly committed at least one overt act charged in the indictment at or about the time and place alleged; and 4) that overt act was knowingly done in furtherance of some object or purpose of the conspiracy as charged."
Notwithstanding that holding, the Sixth Circuit's pattern jury instructions defined the crime in terms of "knowingly and voluntarily" participating in the conspiracy rather than willfully doing so. In effect, Court held that these terms are sufficient to convey the willfulness concept, concluding (p. 500):

As the district court's instructions tracked our pattern instructions, as we have repeatedly approved of the "knowingly and voluntarily" formulation of the second element of conspiracy to defraud the government under 18 U.S.C. § 371, and as "willful" is in fact defined in part as "voluntary," we find that the district court did not omit the willfulness element of § 371 conspiracy when it instructed the jury, and so did not commit plain error in issuing its instructions as to Count 1.
JAT Comment: I think the Court did not crisply address or resolve the issue. The issue is whether, if indeed willfulness, at least in the Cheek sense, is an element of the Klein conspiracy, the words "intentionally and voluntarily" cover the same ground adequately to inform the jury. I don't believe that the Government believes that it does. I address that notion in my article, See John A. Townsend, Is Making the IRS's Job Harder Enough?, 9 Hous. & Bus. Tax L.J. 260 (2009). As I note in that article, the Government has taken the position that the Klein conspiracy is free of the Cheek willfulness spin that the defendant intend to violate a known legal duty but simply has to intend to join the conspiracy to defraud (defraud encompassing acts that are not necessarily illegal). And, if you parse the language of Beverly quoted above, the use of the word willfully does not seem to address the Cheek willfulness requirement in the sense of an intentional violation of a known legal duty. Indeed, in a later footnote (footnote 7), the Sixth Circuit says: ""The intent element of § 371 does not require the government to prove that the conspirators were aware of the criminality of their objective . . . ." United States v. Khalife, 106 F.3d 1300, 1303 (6th Cir. 1997) (quoting United States v. Collins, 78 F.3d 1021, 1038 (6th Cir. 1996))."

2. Tax Evasion - Separate Good Faith Instruction?

The defendant argued that the trial court erred in failing to give a good faith instruction on the tax evasion charge. Bottom line, the Court said that the standard Cheek willfulness instructions adequately covered the ground. The Court reasoned (p. 502):

As the Supreme Court has held, where a trial judge "adequately instructed the jury on willfulness" in a case concerning whether the defendants had filed fraudulent tax returns,"[a]n additional instruction on good faith was unnecessary." United States v. Pomponio, 429 U.S. 10, 13 (1976). Willfulness, the Court explained, "in this context simply means a voluntary, intentional violation of a known legal duty." Id. The clear implication of Pomponio is that where a district court presiding over a criminal tax-evasion case issues an instruction defining willfulness in this fashion, the good-faith requirement is effectively bundled into the willfulness instruction. Here, the district court instructed the jury that in order to sustain its burden of proof as to Count 2, "the government must prove beyond a reasonable doubt that defendant acted willfully. To act willfully means to act voluntarily and deliberately, and intending to violate a known legal duty." (Trial Tr. at 816-17.) By matching the language approved of in Pomponio, the district court effectively and correctly instructed the jury as to this element. As we have explicitly held, moreover, a jury's conclusion that a defendant acted "willfully" in this manner "would necessarily negate any possibility" that the defendant acted in good faith. United States v. Tarwater, 308 F.3d 494, 510 (6th Cir. 2002); see also United States v. Ervasti, 201 F.3d 1029, 1041 (8th Cir. 2000) (holding that the district court did not abuse its discretion in refusing the defendant's request for a good-faith instruction where the court instructed the jury that "[a]n act is done willfully if it is done voluntarily and intentionally with the purpose of violating a known legal duty.").
3. Klein Conspiracy or Offense Conspiracy?

The defendant raised the Minarik defense. United States v. Minarik, 875 F.2d 1186 (6th Cir. 1989). The gravamen of the defense is that the Government cannot dress up what is in reality a tax offense conspiracy as a Klein conspiracy. I am sure all of us know that given the breadth of the defraud object for the Klein conspiracy, any tax offense conspiracy is also a Klein conspiracy. (As noted above, the Government imagines a lesser burden of proof for the Klein conspiracy, so it may be sorely tempted in weaker cases to charge a Klein conspiracy rather than an offense conspiracy.) The Sixth Circuit continued its retreat from Minarik, thus essentially limiting it to the Minarik facts.

As we have concluded in other cases in which defendants have made this argument, "[b]ecause the unique circumstances found in Minarik do not apply here, we decline to depart from the general rule that the defraud and offense clauses are not mutually exclusive." See United States v. Tipton, 269 F. App'x 551, 556 (6th Cir. 2008). Accordingly, we find that Damra could appropriately be charged under § 371's "defraud" clause, and that therefore Count 1 does not fail to allege an offense pursuant to 18 U.S.C. § 317.
As a result, the Government has broad latitude as to how to charge a tax conspiracy. Indeed, the Government will often charge both the offense conspiracy and Klein conspiracy in a single count -- the ubiquitous Count One -- and urge that the failure to prove the offense conspiracy can still permit conviction of the Klein conspiracy.

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