Tuesday, August 31, 2010

Ninth Circuit Reverses Conviction for Failure to Grant Continuance For Last Visit with Dying Son

I write briefly on yesterday's Ninth Circuit decision United States v. Kloehn, 640 F.3d 1123 (9th Cir. 2010). In the case, the defendant was convicted of tax evasion and aiding and abetting. The defendant was the sole defense witness. The key event occurred on the evening of the fifth day of his testimony. The defendant's son suffered a massive seizure and was expected to die in a few days. Kloehn's attorney "requested a two-day continuance to allow Kloehn to see Kevin once more before his death." The prosecutor opposed, saying that the defendant could finish his testimony first and then go see his son. The trial court denied the requested extension. The defendant finished up and then was excused from attendance for the balance of the trial. The Ninth Circuit reversed.

There was a dissent. Basically, the dissent was that, in context, it was just not as bad as the majority perceived and presented in the majority opinion. The dissent concludes its analysis with this:

Insofar as the merits and the "whole record" weigh in this calculation, Gagnon, 470 U.S. at 527, Kloehn was charged with a transparent scam which anyone with an IQ over room temperature would have seen as illegal. The expenses he claimed were spurious, and the tax free laundering back to him was a smoking gun plus a bullet hole in his defense.

Bottom line? Where's the beef? Where's the prejudice? Where's the damage?

New Sixth Circuit Failure to Pay Over Case

In United States v. Blanchard, ___ F.3d ___ (6th Cir. 2010), the defendant was "convicted of fifteen counts of Failure to Account for and Pay Over Withholding and FICA Taxes, in violation of 26 U.S.C. § 7202, and three counts of Making and Causing the Making of a False Claim for a Tax Refund, in violation of 18 U.S.C. § 287." The decision in the case is useful because it covers a lot of the key issues presented in failure to pay over cases which seem to be coming more frequently in recent years

1. Statute of Limitations. The Court holds that the statute of limitations under § 6531 is 6 years. The defendant's argument was that "pay" in the 6 year statute (§ 6531(4)) was a different concept than "pay over" which is the concept in § 7202 and thus that the default tax crimes statute of limitations of 3 years applied. The defendant argued that, not only was it a different concept, but analysis of the 1954 Code predecessor -- the 1939 Code -- supported this reading of § 6531(4). The Court rejected the argument, consistent with the mainstream (but not unanimous) holdings. The Sixth Circuit provides a good discussion of the cases on the subject.

2. Admission of Evidence of Discretionary Expenditures. The Court held that the evidence of defendant's discretionary expenditures was relevant to his willfulness and thus was properly admitted at trial.

3. Ability to Pay is Not An Element. Following the Ninth Circuit's holding in Easterday (discussed here), the Court rejects the argument that the Government must prove ability to pay as an element of the offense. The essence of the holding is that a defendant cannot immunize himself or herself from criminal tax charges by avoiding having the resources to pay -- such as by spending the money otherwise available to pay.

4. Failure to Instruct on the Defendant's Theory of the Case. Failure to properly instruct on a defendant's theory of defense is viewed as reversible error (at least if not harmless), as we noted in discussing Kottwitz. But, unlike Kottwitz, the Sixth Circuit finds no reversible error because the other instructions covered the gravamen of the defense. So, let's see. The defendant's claim was that he relied upon his accountant / return preparer. There was sufficient evidence that he did so, at least sufficient to support the requested instruction on the defense. The Sixth Circuit held that there was no reversible error because the defense was subsumed in the willfulness and good faith instructions the trial court did properly give to the jury. In other words, if the jury understood those instructions, it would have known that the defendant would have a defense if he indeed relied upon the accountant / return preparer. This notion, of course, relies upon the legal construct that juries understand jury instructions as given and are able to extend the concepts beyond the instructions. Finally, the Court does state as its final sentence that there was "no error here." I read the analysis as being a no reversible error opinion. I think that in a case with the proper evidentiary predicate for a reliance defense, the defendant is entitled to the instruction and the general willfulness and good faith instructions will not cover the ground. Hence, I think the Court's concluding sentence is unfortunate.

5. The Net Wage Entitlement to Credit for Withheld Taxes. In reporting his personal income tax liability, the defendant claimed a credit for the tax he was supposed to cause his "employer" to withhold and pay over but did not; based on this notion, the defendant claimed that he could not be guilty under 18 USC § 287 (false claims) for claiming those credits. The general scheme for withholding is that, upon payment of net wages, the employee gets the credit for taxes withheld whether or not the withholding agent (the employer) ever pays over those withheld (or deemed withheld) amounts to the IRS. Of course, that is the general scheme. This general scheme was not designed to benefit the person who is responsible for the failure to pay over in the first instance. Interestingly, in this regard, the Sixth Circuit relied (or at least found persuasive) an unpublished decision affirming a § 7201 conviction in a similar circumstance. The defense is just a bit too cute.

6. Amount of Restitution for Tax Crimes. The Court reversed the imposition of restitution related to the tax crimes (as opposed to the Title 18 crimes). Restitution is just not available for tax crimes except as a condition for some benefit (such as condition of probation) conferred on the defendant.

Monday, August 30, 2010

State of IRS Criminal Investigations

I previously blogged here the TIGTA annual state of the universe on IRS's Criminal Investigation Function (that report is here). I supplement with some bullet points of interest (all relating to FY 2009 unless otherwise indicated:

1. CI spent , stated as a percentage,of "52.4 percent of its time on legal source tax and 72 percent on total tax investigations, both at a 10-year high." Those familiar with how statistics lie (or at least are misleading, should have some questions) may be able to question the desired conclusion from these statistics.

2. "[T]he number of legal source tax investigation initiations increased by 13.3 percent and the number of tax-related initiations increased by 14.4 percent. In addition, the percentage of all initiations that were legal source tax and tax-related increased by 1.3 and 2.5 percentage points, respectively. "

3. I found this statistic interesting because I now represent someone who should not have been investigated in the first place (fairly typical of my clients).  In this case, the IRS listened to an informant with misinformation and was unable to assess the credibility of the informant.  Here is the statistic: "the FY 2009 average of 413 days to discontinue a legal or illegal source investigation exceeded the 386 day average in FY 2008 by 7 percent." Draw your own conclusions as to the bare numbers of days the IRS' futzes around with bull shit investigation (OK, that's too harsh). But at least some of those being investigated should not have been in the first instance and it seems to me a bit harsh for subject them to an IRS criminal investigation for 413 days is just about 412 days too many. (OK, I will compromise at, say, 206 days too many). That period (whatever it is) is a period of unnecessary anxiety and costs that are, well, let's just say unfair.

4. "The number of subjects convicted of legal source tax crimes increased 2 percent from FY 2008 and has increased 17.5 percent since FY 2004."

5. "The overall publicity rate for prosecutions in FY 2009 was 81.9 percent." "Research suggests that higher levels of criminal sentences lead to greater tax compliance." And, just what research would that be? TIGTA does not identify the research.

6. CI "did not meet the long-term goal noted above or its revised conviction goal for FY 2009 of 2,135, reporting that it received only 2,105 convictions." And, here is what it says about that (footnotes omitted):

Despite not meeting some of its goals, the Division exceeded its FY 2009 goal of 4,000 by initiating 4,121 subject investigations. The FY 2009 initiations represent a 9.9 percent increase over the FY 2008 total of 3,749. In addition, the number of subject investigations open in inventory increased 7.7 percent over the FY 2008 total of 3,691 investigations. According to the FY 2009 Business Performance Review (BPR) document, the Division plans to complete 3,900 investigations and obtain 2,135 convictions in FY 2010. Division management expects that the 9.9 percent increase in initiations it experienced this fiscal year will provide for a future increase in completions and resulting convictions. Since the Division reported that it takes, on an average, less than 1 year (341 days) to refer a case for prosecution, n18 we believe the anticipated increase in initiations will likely result in an increase in completions and may allow the Division to meets it completion goals next fiscal year.

7. And here's the discussion of fraud referrals.
. The number of fraud referrals received by the Division decreased for a second consecutive year. The Division reported receiving 505 fraud referrals in FY 2009, a 13.4 percent decrease from the 583 received in FY 2008, and a 19.2 percent decrease from the FY 2005 high of 625. n25 Since fraud referrals remain a viable and important source of legal source tax investigations, we are concerned that the number of fraud referrals received has trended downward since FY 2005. During a February 2010 meeting, the Chief, Criminal Investigation, advised that this trend may change in the future since the operating divisions now have a performance commitment relating to fraud referrals.
What exactly is the "performance commitment related to fraud referrals?"

Saturday, August 28, 2010

Kottwitz -- a Long Rambling Tax Opinion Covering Most of the Major Tax Crimes (8/28/10)

I write about the Eleventh Circuit's recent decision in United States v. Kottwitz, 614 F.3d  1241 (11th Cir. 2010), here.  The decision is per curiam so we don't know which judge or which judge's clerks took the laboring oar for the opinion. Judge Birch does dissent, so the other two who formed the majority are Circuit Judge Edmondson and assigned District Judge Terrell Hodges, although I suppose Judge Birch could have written the majority opinion and dissented the part inserted at the insistence of the other two. The per curiam opens with a summary:
Defendants Theresa L. Kottwitz ["Kottwitz"], Gerard Marchelletta, Sr. ["Senior"], and Gerard Marchelletta, Jr. ["Junior"] appeal their convictions and sentences for tax fraud-related charges. We find the evidence sufficient to support the jury's verdict regarding their conspiracy convictions and that the general good faith jury instruction that was provided by the district court fully encompassed Kottwitz and the Marchellettas' theory of defense on this charge. We find, however, that the district court erred in refusing to give Kottwitz's and the Marchellettas' requested special instruction to the jury on their good faith reliance on their accountant's advice. Because the evidence was sufficient for a properly instructed jury to convict on the charges of filing materially false personal income tax returns for 2000 as to Junior and Senior and for evading taxes as to Senior, we vacate and remand for retrial in light of the jury instruction error. Because the evidence was insufficient for a properly instructed jury to convict on the charge of aiding and assisting in the filing of a materially false corporate tax return for 2001, we reverse the convictions of Kottwitz, Junior, and Senior and remand with directions to enter a judgment of acquittal on this count.
1. Conspiracy.

The Per Curiam opinion affirms the sufficiency of the evidence on the conspiracy issue. The analysis is rambling, replete with unfocused glittering generalities and string points and quotations, followed by a a summary conclusion that, well, the evidence was sufficient to present to the jury. For flavor, consider the following:

Friday, August 27, 2010

Larson, Pfaff, Ruble Convictions In KPMG Tax Shelters Case Affirmed (8/27/10)

The Second Circuit issued a Summary Order today affirming the convictions of Larson, Pfaff and Ruble the remnants of the larger KPMG criminal tax prosecution previously gutted in United States v. Stein, 541 F.3d 130 (2d Cir. 2008)(dismissal of 13 defendants because prosecutors improperly forced KPMG to stop paying their attorneys fees). The summary order for the affirmance of the convictions (I call this the Substantive Order) is here and the companion decision regarding Pfaff's bail (I call this the Bail Order), a precedential full opinion, is here.

At the outset, I am surprised, given the public interest in the convictions, that the Court relegated its substantive disposition to a Summary Order. Moreover, the case was the Government's first major initiative in the abusive tax shelter context and there are other similar tax shelter prosecutions and investigations in the pipe line that could be informed by some of the issues presented in the case.  The Second Circuit's Internal Operating Procedure Rule 32.1.1 says:

New TIGTA Report on Trends in IRS CI Investigation Activities

TIGTA has released a report, titled Trends in the Criminal Investigation Division's Enforcement Activities Showed Improvements; However, Some Goals Were Not Attained (Reference Number: 2010-30-074), which may be viewed here. The Report has some amazing information, much of it compiled in very informative charts. The following is from the Highlights section:

Highlights
Final Report issued on July 1, 2010
Highlights of Reference Number: 201030030 to the Internal Revenue Service Chief, Criminal Investigation.
IMPACT ON TAXPAYERS
The Criminal Investigation Division's (the Division) primary resource commitment is to develop and investigate legal source tax crimes. The prosecution of these cases is key to supporting the Internal Revenue Service's (IRS) overall compliance goals, enhancing voluntary compliance with the tax laws, and promoting fairness and equity in our tax system.
WHY TIGTA DID THE AUDIT
This audit was initiated as part of TIGTA's Fiscal Year (FY) 2010 Annual Audit Plan and addresses the IRS' major management challenge of Tax Compliance Initiatives. The overall objective of this review was to provide a statistical portrayal with trend analyses of the Division's enforcement activities for FYs 2000 through 2009.
WHAT TIGTA FOUND
The Division achieved its goal, spending 52.4 percent of its time on legal source tax and 72 percent on total tax investigations, both at a 10-year high. The Division also reported that the number of legal source tax investigation initiations increased by 13.3 percent and the number of tax-related initiations increased by 14.4 percent. Further, the number of subjects convicted of legal source tax crimes increased 2 percent from FY 2008 and has increased 17.5 percent since FY 2004. Similarly, the number of subjects sentenced for legal source tax crimes also increased 10.5 percent from FY 2008 and has increased 40.6 percent since FY 2004. These percentages validate that tax cases are a priority for the Division.
However, the Division did not meet its goal to complete 3,900 investigations, and instead only completed 3,848 investigations during FY 2009. According to Division management, increased resources that were devoted to the prosecution of investigations in the pipeline inventory during FY 2008 resulted in a significant decrease in FY 2008 subject investigation initiations and a related decrease in case completions during FY 2009. The Division also uses the number of convictions and the conviction rate as budgetary performance measures. The Division did not meet either of its established goals for these measures, reporting declines in both the number of convictions and the conviction rate in FY 2009. Increased numbers of dismissals during FY 2009 (resulting from efforts to reduce the pipeline inventory) caused the drop in the overall conviction rate.
In addition, the Division continues to work on increasing its special agent staffing and coordinating with the operating divisions to strengthen the Fraud Referral Program.
WHAT TIGTA RECOMMENDED
Although TIGTA made no recommendations in this report, IRS officials were provided an opportunity to review the draft report. IRS management did not provide any report comments.
The Charts are:

Figure 1 -- Special Agent and Field Special Agent Staffing at the End of Each Fiscal Year

Figure 2 -- Special Agent Direct Investigative Time Expended Each Fiscal Year

Figure 3 -- Percentage of Direct Investigative Time Spent on Legal Source Tax and Total Tax Investigations Each Fiscal Year

Figure 4 -- Number of Subject Investigations Initiated and the Number Initiated per Field Agent Each Fiscal Year

Figure 5 -- Number of Subject Investigations Initiated Each Fiscal Year for Tax-Related or Nontax-Related Violations and the Percentage That Is Tax-Related

Figure 6 -- Number of Subject Investigations Initiated Each Fiscal Year by Compliance Strategy Program and the Percentage That Is Legal Source Tax Crimes

Figure 7 -- Number of Subject Investigations Initiated Each Fiscal Year by Source of the Allegation or Information

Figure 8 -- Number of Fraud Referrals Received Each Fiscal Year and the Percentage Accepted

Figure 9 -- Number of Open Subject Investigations and the Total of All Investigations at the End of Each Fiscal Year and the Average Number of Each per Special Agent

Figure 10 -- Number of All Types of Investigations Open at the End of Each Fiscal Year

Figure 11 -- Number of Open Subject Investigations Each Fiscal Year for Tax-Related or Nontax-Related Violations and the Percentage That Is Tax-Related

Figure 12 -- Number of Open Subject Investigations Each Fiscal Year by Compliance Strategy Program and the Percentage That Is Legal Source Tax Crimes

Figure 13 -- Average Elapsed Days of Subject Investigations Discontinued and Referred for Prosecution Each Fiscal Year

Figure 14 -- Number of Subject Investigations Referred for Prosecution Each Fiscal Year for Tax-Related or Nontax-Related Violations and the Percentage That Is Tax-Related

Figure 15 -- Number of Subject Investigations Referred for Prosecution Each Fiscal Year by Compliance Strategy Program and the Percentage That Is Legal Source Tax Crimes

Figure 16 -- Number of Subjects Convicted and Sentenced for a Crime Each Fiscal Year

Figure 17 -- Number of Subjects Convicted of a Crime Each Fiscal Year by Compliance Strategy Program and the Percentage That Is Legal Source Tax Crimes

Figure 18 -- Number of Subjects Sentenced for a Crime Each Fiscal Year for Tax-Related or Nontax-Related Violations and the Percentage That Is Tax-Related

Figure 19 -- Number of Subjects Sentenced for a Crime Each Fiscal Year by Compliance Strategy Program and the Percentage That Is Legal Source Tax Crimes

Figure 20 -- Average Number of Months a Subject Is Incarcerated Each Fiscal Year by Compliance Strategy Program

Figure 21 -- Percentage of Investigations That Received Publicity Each Fiscal Year by Compliance Strategy Program

Seventh Circuit on Speedy Trial, Prosecutor Misconduct and Statute of Limitations

In United States v. Hills, 618 F.3d 619 (7th Cir. 2010), here, the Seventh Circuit addressed many common defendant arguments for reversal of their convictions and, for the most part, rejected them on grounds familiar to practitioners. The opinion is 45 pages long so I pick out only a few items that I think worthy of calling to the attention of readers.

1. Speedy Trial. The court rejected arguments that the statutory and constitutional rights to speedy trial had been violated. During the pre-trial phase, the attorney for one of the defendants made a strategic decision that he needed more time to prepare for trial even though his client did not want him to seek a continuance.
Notwithstanding [his client's] position, however, [the attorney] thought it best to continue the trial. [The attorney] told the district court that he had explained to [his client] that seeking a continuance was within his discretion as an attorney, and that he believed it was in [his client's] best interests to have the trial continued.
The other defense attorneys also were not ready for trial, so the court continued the case. The court of appeals ultimately sustained that continuance under the speedy trial analysis. In doing go, the court said (Some text, quotation marks and case citations omitted for readability):

Wednesday, August 18, 2010

The Giffen Plea -- The Cost of Justice

James H. Giffen, the target of an extensive FCPA investigation and indictment (including two superseders), recently resolved at least criminal woes -- at least some of them -- through a plea agreement. I write on that plea agreement because the plea is to a tax count and it raises some interesting issues. The plea agreement and the information with the count of conviction pursuant to the plea are here and here. First I will just provide a summary of the plea agreement and then raise the issues that interest me.

Giffen pleads to the one information count charging "willfully failing to supply information regarding foreign bank accounts, in violation of Title 26, United States Code, Section 7203" for the year 1996. The reference is to the foreign account question on Schedule B of the 1996 return. Section 7203 is a misdemeanor with a maximum incarceration period of one year and, according to the plea agreement, a maximum fine of $25,000. Giffen waives the statute of limitations for the charge to which he pleads. That statute of limitations expired normally six years after the date he filed the return (approximately March 27, 1997, according to the information).

Tuesday, August 10, 2010

More on Tax Crimes as Aggravated Felonies for Immigration Purposes

The Ninth Circuit issued yet a third published opinion in The Kawashima cases. The first was Kawashima v. Gonzales, 503 F.3d 997 (9th Cir. 2007), withdrawn 503 F.3d 1111 (9th Cir. 2008). The second was Kawashima v. Mukasey, 530 F.3d 1111 (9th Cir. 2008), withdrawn sub nom. Kwashima v. Holder, 593 F.3d 979 (9th Cir. 2010). The third now is Kawashima v. Holder, 615 F.3d 1043 (9th Cir. 2010) here, decided 8/4/10.  I have written on Kawashima before here, so now update those comments.

The big brouhaha in the case has been over the issue of whether tax perjury (Section 7206(1)) and aiding and assisting (Section 7206(2)) are deportable aggravated felonies under 8 U.S.C. § 1101(a)(43)(M). That section is short, defining aggravated felonies to include:

(M) an offense that—
(i) involves fraud or deceit in which the loss to the victim or victims exceeds $10,000; or
(ii) is described in section 7201 of title 26 (relating to tax evasion) in which the revenue loss to the Government exceeds $10,000;
The language sets up a nice issue of statutory interpretation. Are tax offenses included in (i) or not? If tax offenses are included in (i), then (ii) is superfluous because the capstone tax offense in (ii), tax evasion, is a crime of "fraud or deceit" covered by (i). Principally for this reason, the Third Circuit held that (i) does not cover tax offenses. Ki Se Lee v. Ashcroft, 368 F.3d 218 (3d Cir. 2004). But Ki Se Lee had a prominent dissenter -- Judge (now Justice) Alito -- who said that tax perjury fell within the plain meaning of an offense involving "fraud or deceit." I think this is an interesting issue of statutory interpretation inviting pet theories of statutory construction such as plain meaning and various canons to be marshaled in support of a desired result.

Ki Se Lee is the lone wolf holding that tax offenses other than tax evasion are not aggravated felonies under (i). The Ninth Circuit has now reiterated its prior holding that tax offenses other than tax evasion can be aggravated felonies if they involve fraud or deceit, as tax perjury and aiding and assisting do.

The majority holding on this newest opinion is a straight-forward plain meaning holding for the statute.

Three of the Ninth Circuit Judges dissented from the petition for rehearing en banc, with Judge Graber writing a dissent for the three judges. These judges, like the majority in Ki Se Lee were convinced that the majority had not properly considered that the majority's reading rendered (ii) superfluous. It is not likely, the dissenters argued, that Congress was doing a meaningless act in inserting and enacting (ii). I provide here the guts of the dissents reasoning because, quite frankly, I am persuaded even if the majority was not:

The panel's interpretation renders subsection (ii) superfluous. Subsection (i) encompasses convictions that "involve fraud or deceit" and that involve a loss exceeding $ 10,000. Subsection (ii) encompasses tax evasion convictions where the tax revenue loss exceeds $ 10,000. Importantly, because all tax evasion convictions necessarily involve fraud or deceit, Spies v. United States, 317 U.S. 492, 499, 63 S. Ct. 364, 87 L. Ed. 418, 1943 C.B. 1038 (1943), subsection (i) necessarily encompasses all convictions encompassed by subsection (ii). The panel's interpretation thus renders subsection (ii) meaningless.

At the same time, it is easy to interpret the statute to give meaning to both subsection (i) and subsection (ii). Hoffman, 101 U.S. at 115. It is an entirely reasonable interpretation that Congress intended subsection (ii), and not subsection (i), to govern tax crimes. n2 Because it is "possible" to give "significance and effect" to all parts of the statutory text, we must do so. Hoffman, 101 U.S. at 115. "We are not at liberty to construe any statute so as to deny effect to any part of its language." Id.
FOOTNOTE
n2 As the Third Circuit explained, Congress reasonably may have concluded that no tax crimes other than the most severe tax crime -- tax evasion -- should qualify as an aggravated felony, even if the less severe tax crimes happen to involve fraud or deceit. Ki Se Lee v. Ashcroft, 368 F.3d 218, 224 (3d Cir. 2004).
END OF FOOTNOTE

The panel declines to apply this mandatory analysis solely because of its speculation that Congress might have intended to enact a superfluous statutory provision. The panel's reasoning misunderstands the rule against superfluities specifically and the task of statutory interpretation more generally. It is true that no method of statutory interpretation is absolute. Indeed, even when the text is indisputably plain, we sometimes hold that Congress intended something very different (for instance, when the drafters made a typographical mistake). See, e.g., Herrera v. U.S. Citizenship & Immigration Servs., 571 F.3d 881, 886 n.5 (9th Cir. 2009). Here, Congress indeed may have intended to enact a superfluous provision. But there must be some reason to believe that this is the case. We are not at liberty to wave away an indicator of congressional intent simply because it is conceivable that Congress intended the opposite. It is always conceivable that Congress did not mean what it said, or intended to enact a superfluous provision, or intended to raise serious questions of constitutionality, and so on. The panel's observation that, here, that possibility is not beyond the conceivable does not advance the analysis.

On this point, it is extremely important that all indicators of congressional intent point in the same direction: Congress intended tax crimes to be governed only by subsection (ii), not subsection (i). The panel points to absolutely nothing that suggests that Congress did not so intend, other than the alleged "plain meaning" of subsection (i) when read alone. Is there any legislative history supporting the panel's view? No. Is there any statutory history supporting the panel's view? No. Is there a statutory purpose that supports the panel's view, such as a rule that the definition should be construed against the alien? No; in fact, the opposite presumption applies, as the panel acknowledges. Amended Op. at 11199 n.6; Kawashima, 593 F.3d at 984 n.7. Are there other canons of construction that support the panel's view? No; in fact, applicable canons of construction support the opposite view, such as the rule that the "specific governs the general." See Ki Se Lee, 368 F.3d at 223-24 (explaining the application of this canon of construction). In sum, the panel's unassailable observation that the rule against superfluities is not foolproof gets the panel nowhere; there must be some indicator that, in these particular circumstances, Congress actually intended to enact a superfluous provision. Beyond its speculation, the panel points to none.

In this regard, it is notable that the panel makes a point of reminding the reader no less than four times that it is following then-Judge, now-Justice, Alito's dissenting view in Ki Se Lee. The panel subscribes to, and applies, then-Judge Alito's view that the superfluities rule can be cast aside on the unsupported speculation that Congress may have intended to enact a superfluous provision. Just last year, now-Justice Alito advanced that same general view in Corley, 129 S. Ct. 1558, 173 L. Ed. 2d 443. Unable to convince a majority of his colleagues, Justice Alito expressed his views in dissent. Id. at 1572-73 (Alito, J., dissenting). The Supreme Court majority, however, roundly rejected this proposed mode of interpretation: "[T]he dissent's point that subsection (a) seems clear when read in isolation proves nothing, for 'the meaning--or ambiguity--of certain words or phrases may only become evident when placed in context.' When subsection (a) is read in context, there is no avoiding the question, 'What could Congress have been [*38] getting at with both (a) and (c)?' " Id. at 1566 n.5 (citation and alteration omitted).

Whatever validity the panel's method of interpretation may have had in the past, the Supreme Court clearly rejected it just last year. The panel does not explain how its opinion is consistent with Corley.
I also note that I am persuaded, at least at the margins, by the fact that the majority opinion in Ki Se Lee was written by Judge Louis Oberdoerfer was a specialist in the tax law and had headed DOJ Tax as AAG. I think this gave him unique insight, which he articulated well in his opinion and got it right. I am less enamored by then-Judge Alito's reasoning, the fall back to plain meaning that I personally find less satisfying, but understand how Court of Appeals judges may feel that it would carry the day in this Supreme Court.

UPDATE ON 8/24/10:  Miller & Chevalier's Tax Appellate Blog has a good discussion of Kawashima here.

Monday, August 9, 2010

Seventh Circuit on Hearsay and Confrontation and on Mid-Trial Summaries

In United States v. McGee, 612 F.3d 627 (7th Cir. 2010), a nontax case, Judge Easterbrook for the Seventh Circuit held that the district court had erred in allowing evidence about a wiretap, the concern being that the evidence of the procedure to obtain authorization for a wiretap, including a judge's approval, was a hearsay narration tending to establish the guilt of the defendant. The court concluded that the prosecutor had gone too far:

The right way is for the prosecutor (in an opening statement) or the judge to tell the jury that judicial permission is required and was received, and that the process of listening is subject to statutory controls. There was no legitimate reason to present hearsay about the particulars of McGee's activities or the findings of the judge who issued the warrant. Evidence must be submitted through witnesses with personal knowledge, and subject to cross-examination.
The Seventh Circuit had, prior to the trial in McGee, warned of the use of such evidence in another case, United States v. Cunningham, 462 F.3d 708 (7th Cir. 2006). Given that precedent, the Court expressed surprise that the prosecutor did what he did, that the Court did not stop the prosecutor, and that defense counsel did not object. As to defense counsel, the Court smelled a rat who, perhaps, chose not to object to preserve a right to appeal in a losing case. The Court said:

And defense counsel likewise must have understood that the testimony was out of bounds -- yet he did not object. It is unlikely that counsel was asleep; the hearsay rule is second nature to any trial lawyer. Perhaps he viewed the prosecutor's misstep as a godsend. Evidence of McGee's financial exactions was going to come in from the victims, who had personal knowledge, and their testimony would be bolstered by recordings from wiretaps plus hidden microphones and cameras. The main thing the hearsay did was create an issue for appeal. A lawyer who knows that the evidence is solidly against his client may see strategic value in allowing error to occur, despite the fact that the plain-error standard will make it hard to upset the verdict on appeal.
Nevertheless, the Seventh Circuit did not reverse: "Even if we are wrong in suspecting that counsel's silence was strategic (which would imply waiver and not just forfeiture), the standard of plain-error review has not been satisfied."

For me the more interesting discussion in the case is the use of mid-trial summaries by the counsel for the parties. In lengthy trials, periodic mid-trial summaries of the evidence are being used more often in order to hold the jury's attention and refresh the evidence. The Seventh Circuit noted:

Principle 13G of the American Bar Association's Principles for Juries and Jury Trials (2005), recommends that judges allow such interim summaries in lengthy trials, whether civil or criminal. The Seventh Circuit American Jury Project tested seven of the ABA's proposals in [*10] trials before more than a dozen participating judges; mid-trial summaries were among the tested proposals and were used in 17 civil trials. Both the judges and counsel concluded that the summaries had helped jurors organize the evidence better, improving their attention and understanding. None of the participants thought the summaries were hurtful, though 8% thought that they did not help much either. American Jury Project, Final Report 32-35, 63-65 (2008).
The Seventh Circuit noted also that such summaries have proved useful in civil trials and there was no substantial reason to believe that they could not be used effectively in criminal trials. The court distinguished an earlier case from the Second Circuit, United States v. Yakobowicz, 427 F.3d 144 (2d Cir. 2005), which had disapproved of the particular implementation of mid-trial summaries -- i.e., summaries after each witness which, the Second Circuit perceived, gave unfair advantages to the prosecution. The Seventh Circuit disagreed at least in principle with the sweeping scope of Yakobowicz's concerns:

In McGee's case the district judge allowed just one opportunity to each side, after the only weekend break. (The trial concluded before the second weekend; it was shorter than counsel had estimated.) The judge thought that a refresher would help jurors regain their focus after the break. The prosecutor spoke for seven minutes; his remarks cover five pages of the transcript. He reminded the jury that the indictment had nine counts and summarized in just a few sentences per count where the evidence stood. He did not present argument, ask rhetorical questions, or propose contestable inferences. It was a simple "just the facts" recap of the sort Joe Friday would have approved. We doubt that the second circuit would see a problem with this procedure.

And if it would -- well, we think that Yakobowicz over-stated the risks and understated the potential benefits. The majority in that decision seems to have been unaware that the use of mid-trial summaries has been studied in criminal as well as civil trials, and that the opinion's fears have not come to pass. The report of the Seventh Circuit American Jury Project had not been released when Yakobowicz was issued, but other reports predated that decision. For example, a pilot program in Tennessee used mid-trial summaries in both criminal and civil cases, and the participants found that the summaries helped jurors. See Neil P. Cohen & Daniel R. Cohen, Jury Reform in Tennessee, 34 U. Mem. L. Rev. 1, 31-34 (2003). Two psychologists concluded that mid-trial summaries should reduce the prosecutor's advantage in a criminal trial by allowing the defense to undermine the prosecution's case from the outset by narratives and not just cross-examination. See Saul M. Kassin & Lawrence S. Wrightsman, The American Jury on Trial: Psychological Perspectives 136-37 (1988). They observed that the prosecutor benefits from the primacy effect -- that people give extra weight to the first information they learn about a subject. Summaries during trial may help jurors understand that the first information is not necessarily the best, and if so the summaries will improve the accuracy of verdicts.

It is hard to see why mid-trial recaps should be allowed in civil trials but categorically forbidden in criminal trials, as McGee contends they should be. Support for summaries in civil trials is widespread. See, in addition to sources we've mentioned already, Federal Judicial Center, Manual for Complex Litigation §§ 12.21, 12.34 (4th ed. 2004); New York State Bar Association, Committee on Federal Courts, Improving Jury Comprehension in Complex Civil Litigation, 62 St. John's L. Rev. 549, 557-58 (1988); State Bar of Texas, Report of the Court Administration Task Force 54 (2008); B. Michael Dann, "Learning Lessons" and "Speaking Rights": Creating Educated and Democratic Juries, 68 Ind. L.J. 1229, 1255-56 (1993); Tom M. Dees, III, Juries: On the Verge of Extinction? A Discussion of Jury Reform, 54 SMU L. Rev. 1755, 1778-80 (2001); William W Schwarzer, Reforming Jury Trials, 1990 U. Chi. Legal Forum 119, 144-45; Douglas G. Smith, Structural and Functional Aspects of the Jury: Comparative Analysis and Proposals for Reform, 48 Ala. L. Rev. 441, 537 (1997). If there are skeptics, they have kept their silence.

Yakobowicz thought that criminal trials are different because juries are not supposed to reach conclusions until all of the evidence is concluded. That's true of both civil and criminal trials, however. In both civil and criminal trials jurors are exposed to persuasion from the start: lawyers get to make opening statements, and questions are asked in a way that lawyers hope will influence jurors, who inevitably form tentative opinions as they hear evidence. They must keep their minds open so that opinions can change as more evidence comes in, but this does not imply that jurors, civil or criminal, are supposed to be empty vessels until they hear the judge's instructions at the very end. The sort of objections to summaries advanced in Yakobowicz also have been essayed against allowing jurors to take notes or ask questions, but those procedures have been approved in this circuit, and elsewhere. See SEC v. Koenig, 557 F.3d 736, 741-42 (7th Cir. 2009).

The second circuit observed that argumentative questions (and for that matter argumentative objections to questions) are disallowed, but that's true of both civil and criminal trials -- and the reason for keeping argument out of questions is to avoid harassing witnesses and prevent an asymmetric and time-consuming presentation. Both sides can recapitulate the evidence; summaries are not windy, unilateral harangues, as argumentative questions can be. Yakobowicz also observed that there is less discovery in criminal cases than in civil, which is true, but defendants usually know more about the prosecutor's case than the prosecutor knows about the defense case, and defendants can keep it that way if they prefer. They need not use summaries to tip their hands. It is hard to see how interim summaries could change the relative informational differences established by Fed. R. Crim. P. 16.

And we just don't see why Yakobowicz perceived a constitutional problem with mid-trial summaries. The due process clause is not a code of trial procedure. Many changes have occurred since 1791. One of the principal changes is an increase in the length of trials. In the eighteenth century multiple criminal trials were held in a single day. See James D. Rice, The Criminal Trial Before and After the Lawyers: Authority, Law, and Culture in Maryland Jury Trials, 1681-1837, 40 Am. J. Legal Hist. 455, 463 (1996); John H. Langbein, Shaping the Eighteenth-Century Criminal Trial: A View from the Ryder Sources, 50 U. Chi. L. Rev. 1, 115-23 (1983). Today, by contrast, a single criminal trial can last multiple weeks or months. When trials are short, there's no need for mid-trial recapitulations; when trials are long, jurors' attention and memory may wane, and the opening and closing statements may be too far apart. Nothing in the constitutional text, or the original practice, implies that days or even months must pass without any opportunity for the lawyers to give the jurors their views about where the evidence stands.

Summaries equally available to both sides are no more objectionable than discovery, note-taking by juries, sending written jury instructions to the jurors, and the many changes to the rules of evidence that have accreted during the 219 years since the fifth amendment was approved. Some rules of trial procedure -- juries, counsel, confrontation, and cross-examination -- are in the bill of rights. Most are not. Living judges and legislatures may decide that incremental changes in trial procedure are beneficial.

Finally, we are not persuaded by the second circuit's conclusion that any misstep with respect to interim summaries is a structural error. Circuit Judge Sotomayor was willing to assume that the district judge in Yakobowicz erred by allowing argumentative summaries after each witness. But she disagreed with the majority's conclusion that such an error is "structural." See 427 F.3d at 154-58 (dissenting opinion). Judge Sotomayor's view was vindicated by the Supreme Court's decision in Marcus, which stressed that errors are "structural" only when they change the fundamental framework of the trial -- when, for example, the judge is biased, the defendant lacks counsel, or a vital phrase such as "reasonable doubt" is misdefined, so that the jurors do not understand their task. The Justices regularly declare that errors of trial management are not structural. See, e.g., Rivera v. Illinois, 129 S. Ct. 1446, 173 L. Ed. 2d 320 (2009) (improper denial of peremptory challenge); Washington v. Recuenco, 548 U.S. 212, 126 S. Ct. 2546, 165 L. Ed. 2d 466 (2006) (improper failure to submit a sentencing factor to the jury); Arizona v. Fulminante, 499 U.S. 279, 306-07, 111 S. Ct. 1246, 113 L. Ed. 2d 302 (1991) (collecting many other examples). Allowing lawyers to be too argumentative is a problem of trial management, and it is subject to the usual doctrines of harmless error and plain error.

Yakobowicz is inapplicable to non-argumentative summaries, is mistaken in concluding that criminal trials differ categorically from civil trials with respect to mid-trial summaries (both kinds of trials permit for the exercise of wise discretion by district judges in jury management), and has been overtaken by the Supreme Court's decision in Marcus. It does not assist McGee. The district judge did not abuse his discretion in allowing one short non-argumentative summary as the trial resumed after a weekend break.

Sunday, August 8, 2010

Willfulness -- Amended Returns and Bank Accounts That Are Not Hidden -- and Materiality (8/8/10)

In United States v. Shellef, 2010 732 F.Supp.2d 42 (ED NY 2010), decided 8/5/10, the Court denied Shellef's motion for a motions for acquittal and retrial. This trial was actually his second, the first having been reversed on appeal because of improper joinder issues. United States v. Shellef, 507 F.3d 82 (2d Cir. 2007), here. After convictions on various counts on the second trial, Shellef moved for acquittal and retrial. The key counts of conviction were for the defraud / Klein conspiracy with respect to excise taxes on certain chemicals, tax perjury (7206(1)) for the 1999 income tax return for a Shellef company, wire fraud with respect to the chemical trading relating to payment of excise taxes, and money laundering. I discuss here only the tax perjury count.

Shellef asserted that the Government had not proved willfulness sufficient that a reasonable jury could have found guilt beyond a reasonable doubt. The hurdle he had to clear -- insurmountable it turns out -- was that the evidence showed that he had not reported "$782,781 in income, which represented the proceeds of his domestic sales of" the chemical subject to the excise tax. The court concluded that

Tuesday, August 3, 2010

More on the Confrontation Clause and Tax Liabilities of Out of Court Witnesses

United States v. Jewell, 614 F.3d 911 (8th Cir. 2010), here, discussed in the last two blogs, is a jewel of many facets. This one is near and dear to my heart.  The issue is whether, in proving the crime of tax evasion which requires a tax due and owing, the Government can introduce the tax returns and resulting tax liabilities of other taxpayers who are not before the court so that they can be confronted as to the claims of tax loss for their taxes, an essential element of the crime. I have discussed this issue previously here (with a downloadable memo on the subject).

The key facts in Jewell are that the defendant, a tax lawyer, assisted husband and wife in evading the husband and wife's taxes.  As is often the case, one spouse was the principal player in the scheme, and in this case it was the husband, Carl Evans.  The Court summarized the proof of tax evasion as follows (case citation and quotation marks omitted):

The elements of tax evasion are willfulness, the existence of a tax deficiency, and an affirmative act constituting evasion or attempted evasion of the tax.  [Carl] Evans testified at trial that Jewell concocted the venture capital agreement as a means of significantly reducing the amount of personal income tax reported by Carl and Patricia Evans in the tax year 2000. An IRS agent testified the difference between the tax liability the Evanses actually paid in 2000 and the amount they should have paid resulted in a tax deficiency of $ 737,436. This evidence was clearly sufficient for a reasonable jury to have found the government presented evidence to satisfy all three elements of aiding and abetting tax evasion.
The defendant argued that the proof was insufficient to establish the tax due and owing.  The Jewell court responded with this jewel (perhaps overdoing the metaphor) at fn 6:

n6 Jewell also claims the evidence was insufficient because the admission of the Evanses' 2000 tax return violated Crawford v. Washington, 541 U.S. 36 (2004). Jewell contends a tax return is "testimonial" because it is signed by taxpayers under penalty of perjury. The government offered the tax returns prior to trial as business records, and Jewell did not object to them except as to relevancy, so we review this claim for plain error only. We find no plain error. Because Carl Evans testified, Jewell had an opportunity to challenge the accuracy of the tax returns. In addition, in United States v. Garth, 540 F.3d 766 (8th Cir. 2008), abrogated on other grounds, United States v. Villareal-Amarillas, 562 F.3d 892 (8th Cir. 2009), we rejected the argument that admission of tax returns, even as to non-testifying witnesses, violated Crawford. Id. at 778 (noting Crawford did not consider business records to be testimonial, and that the defendant stipulated the tax returns were business records).
Note that the Jewell Court encountered several problems with Jewell's Confrontation claim. His counsel's failure to object real time at trial made it subject to the plain error rule. More importantly, one of the taxpayers did in fact testify and could have been fully cross-examined on the of the tax liability in question. Finally, the Eighth Circuit is correct that, in Garth, it had held that tax returns are not testimonial as to the non-testifying taxpayers. I therefore serve up the cryptic discussion from Garth (p. 778):

[Garth] argues her rights under the Confrontation Clause were violated when the district court admitted tax returns of non-testifying witnesses. We review de novo alleged violations of the Confrontation Clause. United States v. Heppner, 519 F.3d 744, 751 (8th Cir. 2008), cert. filed, 08-5334 (U.S. July 12, 2008) [cert. denied, 129 S. Ct. 250, 172 L. Ed. 2d 188 (2008)]. The Confrontation Clause applies only to testimonial statements, such as prior testimony at a preliminary hearing, former trial, or before a grand jury and statements made in the course of police interrogations. Crawford v. Washington, 541 U.S. 36, 68, 124 S. Ct. 1354, 158 L. Ed. 2d 177 (2004). "'Testimony,' in turn, is typically '[a] solemn declaration or affirmation made for the purpose of establishing or proving some fact.'" Id. at 51 (quoting 2 N. Webster, An American Dictionary of the English Language (1828)). The Court observed, "Most of the hearsay exceptions covered statements that by their nature were not testimonial -- for example, business records or statements in furtherance of a conspiracy." Id. at 56; see also id. at 76 (Rehnquist, C.J., concurring in the judgment) ("[T]he Court's analysis of 'testimony' excludes at least some hearsay exceptions, such as business records and official records."). Garth stipulated at trial that the tax returns were business records to avoid the "need to bring in a business records witness[]." She makes no attempt, in her brief, to argue that the tax returns were testimonial. And, in fact, the returns were not prepared for litigation, as is expected of testimonial evidence. See United States v. Torres-Villalobos, 487 F.3d 607, 613 (8th Cir. 2007) (holding that warrants of deportation were "properly characterized as non-testimonial official records that were prepared independent of this litigation" and were not prepared "to prove facts for use in future criminal prosecutions.") Consequently, the admission of tax returns did not violate Garth's right to confront her accusers.
I am not persuaded. Tax returns are quintessentially testimonial. Taxpayers are required to sign under oath to reinforce that the Government needs the truth and will rely upon the oath to establish the truth until and unless an audit proves the contents of the return are not truthful and then the Government may prosecute for tax perjury -- yes, that's perjury, of the tax perjury variety in Section 7206(1) -- if they are not truthful. Perjury is the punishment for false testimonial statements.  Beyond being quintessential "testimony" in this respect, I had thought that Crawford made clear that some exception to exclusion of hearsay does not alone suffice to meet Confrontation concerns, yet the Eighth Circuit seems to suggest that the business record exception suffices. In this regard, I think the Garth court reads the Crawford majority's passing comment to business records far too broadly:  merely because some business records may not be testimonial does not mean that all are not testimonial and thus pass Confrontation scrutiny.  The Crawford court was going back to basics of constitutional interpretation which, I doubt, would read into the Confrontation guaratee a business records exception created to address hearsay issues for what is plainly testimonial statements in a tax return.  And what does preparation for litigation have to do with whether or not statements made under oath are testimonial and prosecutable for perjury?  Perhaps the Court's final holding is that the Garth did not timely raise the objection, but it seems to me that the error in Garth is plain and the holding is wrong. At least I have seen nothing in the reasoning of the defendant losses on this issue that is persuasive to me. But, then, I am not the judge.

Of course, the taxpayer's testimony in Jewell does satisfy the Confrontation concerns because only a single couple's tax returns were involved and the principal of those taxpayers -- Carl Evans -- did testify and was subject to confrontation to the extent the defendant and his counsel chose to confront him.

Court Rejects the Temporary Evasion Defense

In United States v. Jewell, 614 F.3d 911 (8th Cir. 2010), here, which I discussed in the addendum to last blog here, the Eighth Circuit rejected a notion in an earlier Ninth Circuit case that, a taxpayer intending only a temporary diversion of tax revenue but not a permanent one might not be guilty of tax evasion. Jewell was convicted of assisting his clients evade their taxes.  The Court said:
Jewell also claims he cannot be guilty of tax evasion because the Evanses eventually paid their taxes. Jewell relies upon a case from the Ninth Circuit for the proposition a defendant must intend a permanent escape from paying a tax and not merely a postponement. See Edwards v. United States, 375 F.2d 862, 867 (9th Cir. 1967) ("[E]vasion and defeat . . . contemplate an escape from tax and not merely a postponement of disclosure or payment."). The Eighth Circuit has not adopted such a position, however, and the Ninth Circuit itself has limited Edwards to the unique facts involved in that case, where there was no evidence at all of an intent to avoid payment of taxes, but merely to delay. See United States v. Huebner, 48 F.3d 376, 380 (9th Cir. 1994) (indicating the escape not postponement "statement in Edwards must be read in the light of the facts of that case."). The fact that the Evanses eventually reconciled their tax deficiency with the IRS does not exonerate Jewell where a reasonable jury could determine he had the intent to assist the Evanses with evading taxes in the tax year 2000.

Seventh Circuit Sounds the Death Knell for Inextricable Intertwinement as End-Run Around Rule 404 and 403 (8/3/10)

Courts have developed the notion that evidence inextricably intertwined with the criminal offense charged may be introduced free of the constraints of FRCrP Rule 404(b) and perhaps even of CRCrP Rule 403 (excluding certain types of evidence including evidence otherwise admissible under Rule 404(b) if unfairly prejudicial). In United States v. Gorman, 613 F.3d 711 (7th Cir. 2010), here, the Seventh Circuit sounded the death knell of the inextricable intertwinement doctrine. Although Gorman is not a tax case, Rule 404(b) does loom large in many criminal tax cases (both at trial and in consideration of whether a plea is advisable). Accordingly, I excerpt there the guts of the Seventh Circuit's holding and reasoning (some case citations omitted):
This circuit has also traditionally allowed the admission of evidence under the "inextricable intertwinement" or "intricately related" doctrine. See United States v. Conner, 583 F.3d 1011, 1018 (7th Cir. 2009). The inextricable intertwinement doctrine is based on the notion that evidence inextricably intertwined with charged conduct is, by its very terms, not other bad acts and therefore, does not implicate Rule 404(b) at all. "In other words, evidence admitted under this doctrine lie[s] outside the purview of the Rule 404(b) character/propensity prohibition, and is not subject to its constraints regarding the manner in which the evidence may be used." Conner, 583 F.3d at 1019 (internal quotation marks and citations omitted) (alteration in original).

Even if evidence is initially deemed admissible under any of these three doctrines, however, that evidence must still pass muster under Rule 403's balancing test to actually be admitted against a defendant. To make this determination, a court must weigh whether the evidence's probative value is substantially outweighed by the danger of unfair prejudice to the defendant. Only if the court determines that Rule 403's balancing test weighs in favor of admission is the disputed evidence then placed before the jury.