Sunday, March 6, 2011

More on 18 USC § 2(b) Liability from the Larson / Pfaff / Ruble Case

In yesterday's blog titled "The Conduct Too Remote Is Not Evasion Argument in the Larson & Pfaff Petition for Certiorari," I discussed the application of 18 USC § 2(b) to make an actor guilty as a principal of a crime committed by another who may be entirely innocent in contrast to 18 USC § 2(a) which requires another criminal actor who the defendant aids and abets. The relevant portion of the § 2(b) is:

(b) Whoever willfully causes an act to be done which if directly performed by him or another would be an offense against the United States, is punishable as a principal.
In the indictment, the Government relied upon both direct liability for their conduct under 7201 and upon 18 USC § 2. The instructions make clear that the Government was relying upon 2(b) (although it also relied on 2(a) as I shall note in a later blog). I provide the instructions below and, after doing that, will provide some further discussion of 2(b) liability from a case differentiating the 2(a) and 2(b) concepts.

Instructions from United States v. Larson, Pfaff, Ruble and Greenberg (SD NY No. RS1 05 CR 888 (LAK) 12/11/08)

[First Theory - Direct Tax Evasion Liability - 26 USC 7201; Excerpt from Transcript pp. 5223 - 5224]

The first theory is that every defendant himself committed tax evasion with respect to tax allegedly due and owing. The system of tax collection in the United States relies on the honesty of taxpayers. The law requires taxpayers to report timely, completely and honestly, income and all taxes they owe so that the government can collect the taxes due.

It is a criminal offense for a person willfully to attempt to evade income tax owed to the government, whether it is his or her own tax liability, or tax liability owed by somebody else.

Now, as I've noted, 17 of the 19 substantive counts allege evasion of taxes allegedly owed by persons other than the defendants. Two of the counts charge evasion of taxes allegedly owed respectively by Mr. Larson and Mr. Pfaff.

Now, in order to convict a defendant of tax evasion on the first of the government's theories, the government has to establish beyond a reasonable doubt, each of the following three elements with respect to the tax return in question:

The first element is that the relevant taxpayer owed substantially more federal income tax then he declared due on the income tax return for the year you are considering.

Second, that the defendant committed one or more affirmative acts of evasion described in the indictment.

Third, that the defendant acted knowingly and willfully.
[I omit the rest of this first theory instructions because they are more or less standard except for economic substance which I do not include here because I am focusing on the alternative theories of liability.]

* * * *

[Second Theory - Evasion through Acts of Others Liability - 18 USC 2(b); Transcript pp. 5239 - 5242]

Now, the government's second theory is this, even if you do not find that a defendant himself committed tax evasion as to any one of the substantive counts, you nevertheless should find that defendant guilty on the ground that he willfully caused somebody else to do something that if the defendant had directly done it himself, would have constituted tax evasion.

The reason for this is that there is a provision of the criminal code that says, whoever willfully causes an act to be done, which if directly performed by him or another, would be an offense against the United States, is punishable as if he had done it himself.

This statute makes it clear that a defendant who causes the doing of an act, which if it were done by the defendant directly, would make the defendant guilty of a crime, may be punished as a principal, even if the act in question was committed by an entirely innocent person.

In order to convict a defendant of tax evasion on this second alternative theory, the government must prove beyond a reasonable doubt four elements.

First, that the taxpayer in question on the count you are considering, would have reported substantially more tax due and owing on the relevant tax return than the taxpayer in fact reported, had the taxpayer not taken a deduction for a tax loss generated by one of these strategies.

Second, that the relevant taxpayer committed one or more affirmative acts of evasion.

Third, that the defendant caused the taxpayer to take the deduction and to commit one or more affirmative acts of evasion.

And, fourth, that the defendant did so knowingly and willfully.

So let me explain these four elements.

In considering the first element, whether the taxpayer owed substantially more tax than he reported, because he took a loss from a strategy at issue here, you will apply the instructions I've already given you. I have nothing to add.

In considering the second element, the requirement of an affirmative act of evasion, the government must prove that the taxpayer committed one or more affirmative acts which, if the taxpayer had willfully intended to evade taxes by doing that act, would have been an affirmative act of evasion by the taxpayer, if the taxpayer had that intent.

In considering whether a defendant caused the taxpayer to claim a deduction for a tax loss allegedly resulting from one of the strategies at issue in this case, and thereby substantially to understate on the taxpayer's tax return, the amount of tax owed, and caused the taxpayer to commit one or more affirmative acts, which, if willfully committed in an attempt to evade taxes, would have been affirmative acts of evasion, I instruct you that this element is satisfied if the government has persuaded you beyond a reasonable doubt that the defendant was a cause in fact of the taxpayer's actions. A defendant was a cause in fact if it appears from the evidence that the defendant played a substantial part in bringing about or actually causing the taxpayer's understatement of the taxpayer's tax due and owing on his tax return.

Furthermore, I instruct you that something may have more than one cause in fact. When multiple causes exist, the defendant is a cause in fact of a particular act, by a taxpayer, if the defendant was a substantial factor in bringing about that act.

Whether something was a cause of fact of something else is a question of fact for your determination.

In considering the fourth element, that is to say, in considering whether a defendant acted knowingly and willfully, you will apply all the instructions on that point that I gave you a few moments ago.

If you find, with respect to a particular defendant, that the government has proved beyond a reasonable doubt that the defendant committed tax evasion on this second alternative theory, with respect to a particular count, then you should find the defendant guilty on that count.
Now, for the case. In United States v. Motley, 940 F.2d 1079 (7th Cir. 1991), the defendant was charged with aiding and abetting violation of the false claims act (18 U.S.C. § 287) by preparing false refund claims on a contingency fee basis. The Government tried the case under a theory of liability under § 2(a) without proving that the taxpayers were guilty of filing false claims. The defendant was convicted. On appeal, the Government realized its error and argued no harm, no foul because the proof established his guilt under § 2(b). The Court said:

The government claims that such proof was unnecessary in this case because 18 U.S.C. § 2 covers both traditional aiding and abetting, which requires proof that the principal committed some underlying offense, as well as a second type of aiding and abetting. The traditional notion of aiding and abetting is found in subsection (a) of 18 U.S.C. § 2: “whoever commits an offense . . . or aids, abets, . . . or procures its commission, is punishable as a principal.” A variation of the traditional rule appears in subsection (b) of 18 U.S.C. § 2: “whoever willfully causes an act to be done which if directly performed by him or another would be an offense against the United States, is punishable as a principal.” Motley could thus be found guilty of causing a taxpayer to commit the crime even though the taxpayer did not have the criminal intent necessary to sustain a conviction. Whether the taxpayer committed a specific criminal offense becomes irrelevant; the question is whether the act Motley caused the taxpayer to perform (i.e., mailing a false claim to the government) would be actionable if performed directly by Motley. “It is . . . clear that under 18 U.S.C. § 2(b) one who causes another to commit a criminal act may be found guilty as a principal even though the agent who committed the act is innocent or acquitted.” Ruffin, 613 F.2d at 412; see also United States v. Cook, 745 F.2d 1311, 1315 (10th Cir. 1984) (“it is well established that an individual is criminally culpable [under § 2(b)] for causing an intermediary . . . to commit a criminal act or to fail to perform a legally imposed duty, even though the intermediary has no criminal intent and itself is innocent of the substantive crime”). The record in this case clearly supports the argument that the government entered evidence sufficient to sustain a conviction under section 2(b).

The problem with the government's section 2(b) argument, however, is that it never requested (and the court never gave) a jury instruction on section 2(b). The jury instructions on aiding and abetting related solely to section 2(a) -- traditional aiding and abetting that requires proof of an underlying offense. Motley's conviction under section 2(a) was thus improper because the government failed to offer any proof that the taxpayers in question committed some offense against the federal government.
As amended on 3/10/11 to note that the Government also relied upon aiding and abetting / accomplice liability, as I shall discuss in a later blog.


  1. Nice summary Jack. However, I believe the substance over form position may be the only element that will grab the Supremes' attention. And that chance has to be thin at best--I want to be the person's bookie who believes the other positions have a real chance.

  2. Thanks, Anonymous. I don't think the petition is about substance over form. The issue is the James issue of whether there is sufficient certainty in the law to permit criminal conviction. That does segue into the economic substance / substance over form issue because that is the law that is allegedly sufficiently uncertain so that it cannot support a criminal prosecution.

    By taking the case, the Supreme Court would not have to define the contours of the economic substance doctrine but instead would only define the criminal line in that doctrine.

    Even so, the Supreme Court could botch even that up in terms of guidance for future cases (Frank Lyon is the poster child for that, although not in a criminal context).

  3. Thank you Jack. You stated clearly what I inarticulately alluded to. To define the criminal contours though they would get into the civil discussion. I believe, without fully understanding the implications of what they might be doing (remember they are not tax lawyers and the only one who seems to fully grasp tax issues on their face is Mr. Scalia).

    In fact, if I were the petitioner, that is road that I would try to entice them on in the hope, just like in Frank Lyon and Tufts, that I would be able to bamboozle them with detail. The position would run: how can you define the criminal elements of the doctrine without first discussing in detail the civil side. It presents a neat dilemma, if they take the case.

  4. Actually, from my perspective, the Supreme Court got it half right in Tufts but all wrong in Frank Lyon. Better for the taxpayer or defendant that the Supreme Court get it all wrong if these are the analogs we use.

    Of course, they are probably not the proper analogs. I think a persuasive case can be made that the law exploited in these shelters was sufficiently uncertain not to allow criminal prosecution. But, even if the defendants were to clear that hurdle, I wonder if they will stumble on the facts. As I have said before, the problem in these cases is the big lie and not some esoteric legal concepts. As the prosecutor said in the Arthur Anderson case, it is not about esoteric accounting concepts, it is about lying and cheating. Juries can wrap themselves around those everyday concepts. So where is the big lie in these cases? One may start with the taxpayers' representations that they were motivated by some profit motive for the underlying transaction rather than the tax consequences. Of course, that too gets back to some legal issue of what does profit motive mean and how much of it relative to tax motivation do you need (what the definition of is is). That becomes imbued with legal issues. So I am not sure that is a complete answer. But I do suspect that a jury hearing that the whole shelter was predicated on a representation by the taxpayers of their profit motives dominated over their tax motives would smell a rat, almost regardless of what judge instructed them about profit motive.

  5. Agreed. And that is precisely why the Supremes may decline to grant cert in this case. With the public practically baying for retribution for Wall Street wrongdoing, it is difficult to see the Supreme Court wading into a situation where the result was precisely right, IMHO at least, but the technicals through which that result obtained might be debatable. In other words, the merits do not favor the defendants even if the uncertainty of the law might, which is not a great place to be for a Supreme Court cert application. The Supremes are supposed to look at the bigger picture of overall respect for US law, and letting off these characters on a technicality, and one without deeper consequence, would achieve exactly the opposite, I submit.

    It is wickedly ironic they are appealing a situation that is now clear, if it was not before, due to the very situation they are appealing--they are deeply dissatisfied with their jurisprudential contribution. Oh well....

    Interesting nonetheless, but I would wager a guinea to a penny (252/1 in old sterling) that the Supreme Ct declines cert here.


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