Evasion of Trust Fund Taxes and Charging Decisions (1/23/2012)

In United States v. Farr, 2012 U.S. LEXIS App. 1032 (10th Cir. 2012), here, in a nonprecedential Order and Judgment, the Tenth Circuit denied Farr's appeal of the district court's denial of bail pending appeal of her conviction for tax evasion of trust fund taxes.  The Court noted the standard as follows (emphasis supplied to highlight the conjunctive requirements for bail):

Under 18 U.S.C. § 3143(b)(1) [here], detention pending appeal is presumed unless a judicial officer finds (A) "by clear and convincing evidence that the person is not likely to flee or pose a danger to the safety of any other person or the community," and (B) "that the appeal is not for purpose of delay and raises a substantial question of law or fact likely to result in" reversal, a new trial, or a lesser sentence. The district court concluded that Ms. Farr had failed to show the required substantial question of law or fact.

The Court concluded, on appeal of the denial, it applies a de novo review to mixed questions of fact and law and a clearly erroneous review to the questions of fact.

Defendant raised several issues alleged to raise a substantial question of law or fact none of which had merit.  The one that interested me is as follows:

Proceeding under incorrect statute. Ms. Farr contends that she should have been charged under 26 U.S.C. § 7202 [here] rather than 26 U.S.C. § 7201 [here]. It appears, however, that § 7201 encompasses her conduct. See Farr I, 536 F.3d at 1186 [here] ("[T]he government has adduced ample evidence from which a jury could find Ms. Farr guilty of evading the trust fund recovery penalty."). "When a defendant's conduct violates more than one criminal statute, the government may prosecute under either (or both, for that matter, subject to limitations on conviction and punishment)." United States v. Bradshaw, 580 F.3d 1129, 1136 (10th Cir. 2009). "Absent certain allegations of impropriety, it is not the role of the jury (or the judge) to decide whether the government has charged the correct crime, but only to decide if the government has proved the crime it charged." Id. Accordingly, this issue does not present a substantial question for appeal.

This is a fairly routine holding, hence apparently, the court made it nonprecedential.  Criminal tax practitioners and students should be aware of these principles and the Government's broad charging discretion generally and for tax crimes specifically.

There is some history to the case that is quite interesting for the practitioner and student.  In United States v. Farr, 536 F.3d 1174 (10th Cir. 2008), here, referred to as Farr I in the quote, above, Farr had been indicted for tax evasion but rather than pleading just a generic tax evasion case (which the Government often does), the evasion indictment added factual particulars to the claims that were not necessary for the indictment but, as it turns out were wrong.  The trust fund tax is the employee's tax that an employer withholds from employees, holds temporarily, and then remits to the IRS.  The actual underlying tax liability is the liability of the employees with the employer serving as a withholding and remission agent.  Section 3403, here, then provides that "[t]he employer shall be liable for the payment of the tax required to be deducted and withheld under this chapter . . . ."  The employer is thus also liable for the tax.  The employer in question was a corporation owned in part by Farr.  Farr was a person employed by the employer who had the responsibility to collect and pay over the taxes and was thus liable for the trust fund recovery penalty under Section 6672, here.  That TFRP was imposed upon her.  Needless to say that she avoided paying that as well and, as noted above, that triggered the criminal problem.  In the indictment, the Government added the confusing extra language asserting that the Section 3403 liability was her liability, rather than the employer's liability.  As noted, she was not the employer.  At trial, after the problem had been called to everyone's attention, the prosecutors avoided the problem by arguing that the TFRP was the same as the underlying tax liability.  The trial court reluctantly and unhappily accepted the argument.  Farr was convicted.  On appeal, the Tenth Circuit reversed, holding that there had been an impermissible constructive amendment of the indictment from a charge that she had evaded her own underlying employer liability to one that she had evaded her TFRP.  (The Tenth Circuit also rejected a double jeopardy argument.)

So, the case was remanded for retrial.  Farr was again convicted of evasion with the indictment corrected to make clear that the charge was that she evaded her TFRP.  Several points are clear from the case.

1. Farr's failure to pay the penalty was what turned "a civil proceeding evolved into a criminal one."  (P. 1177.)

2. The Court of Appeals noted that:

Significantly for our purposes, however, the government chose in this case not to seek a broad indictment simply reciting the generic language of Section 7201, but instead deliberately added additional detail to its charge.

Evasion charges are usually spare indeed.  (This should be compared with conspiracy where the indictment goes on ad nausuem and  courts are quite tolerant of deviations within the general scope of the allegations made.)  The Government likely could have avoided reversal with a generic evasion count, but the Government chose to add the offending factual detail.  ("Had the government simply charged Ms. Farr generically under Section 7201 with the willful evasion of a tax, we might have a different situation. But it did  not." (P. 1181.)

3. The Court also addressed the issue of whether Farr could have been charged with evasion of the employer's liability as follows:

In reaching the conclusion that the government at trial effected an impermissible constructive amendment of the indictment, we note that we have no occasion to pass on the additional -- and purely hypothetical -- question whether the government could have proceeded against Ms. Farr under Section 7201 on the theory that, while the clinic, not she, was the employer, she willfully attempted to "defeat" payment of the clinic's Section 3403 quarterly employment taxes. That is a course the government did not pursue at trial or on appeal before us (neither is it clear whether the government could have pursued such a course under the terms of its indictment in this case: again, the indictment alleged, paradoxically in light of its own witnesses' testimony that the clinic was the employer responsible for payment of quarterly taxes, that quarterly employment taxes "were due and owing by her [i.e., Ms. Farr]"). Likewise, we have no reason to pass on the parties' passing and undeveloped dispute whether Section 7201, rather than Section 7202, is an appropriate vehicle for prosecuting evasion of the Section 6672 trust fund recovery penalty. n5 Instead, we limit our analysis and holding today to the question whether a constructive amendment of the indictment occurred when the government proceeded against Ms. Farr for nonpayment of the trust fund recovery penalty in the face of an indictment that never referenced such a liability.
n5 As the government notes, while there is a linguistic distinction between the term "tax" employed in Section 7201 and the term "penalty" used in Section 6672, 26 U.S.C. § 6671 explicitly states that, "[e]xcept as otherwise provided," any Code reference to a "tax" imposed also includes penalties and liabilities such as the trust fund recovery penalty. At the same time, as the defendant notes, Section 7202 may provide a more tailored avenue for prosecution of those who fail to pay Section 6672 assessments: Section 7202 tracks the language of Section 6672 and makes a responsible employee's willful failure to pay a felony punishable by five years in prison and a $ 10,000 fine. See 26 U.S.C. § 7202.

I hope readers pick up and think about the nuances of this paragraph.  I think it is black letter law that persons other than the taxpayer can be convicted of evasion of the taxpayer's taxes.  Perhaps there is even an issue of whether the responsible person can be deemed to have evaded the employees' underlying taxes of the employers' 3404 resulting tax liability.  In any event, that a nontaxpayer can be guilty of evasion should not be an exceptional holding.  E.g., United States v. Gordon, 242 F.2d 122, 125 (3d Cir. 1957), cert. den. 354 U.S. 921 (1957); and United States v. Edwards, 230 F. Supp. 881, 883 (D. Or. 1964).   So, at least on my quick cut (perhaps superficial), there is no question that the prosecutors could have framed an evasion count directly.  They chose on remand to urge evasion of the TFRP which may not be a perfect fit for evasion (see fn 5 of the quote).  It is unclear why the prosecutors did not proceed under Section 7202, which seems like the more directed provision for their angst.  (I speculate that there could have been a statute of limitations problem for 7202; indeed as noted, the failure to pay the TFRP is what turned the case criminal, so by the time the indictment was brought maybe all they had left was some problem with respect to evading the TFRP and 7202 may not be a good fit for that.)

Fun Stuff!