Tuesday, December 4, 2012

Coplan #4 - Court Approves Defraud / Klein Instruction -- Making the IRS Job Harder May Be Enough (12/4/12)

I noted in an earlier blog that the Court questioned the expansion of the expansion of the word defraud in defining the criminal conduct necessary for a defraud / Klein conspiracy.  Coplan #1 - Panel Questions Validity of Klein Conspiracy (12/1/12), here.  I quoted the entire instruction in that blog entry, so I won't repeat it here.  Some of the defendants complained that the district declined to give their requested instruction that would advise the jury of limitations on the scope of conduct that was criminalized under the expanded definition of defraud.  (I have written on that issue before and cite my article and related materials at the end of this blog.)

The Court's treatment of this argument is fairly summary, so I quote it in full (footnote containing the instruction  omitted)
In this case, the defendants proposed a jury instruction on Count One that emphasized the distinction between acts that made the IRS's job more difficult and acts that were done deceitfully or dishonestly. Their requested instruction included a number of examples that, in the defendants' view, could not constitute a conspiracy to defraud, in order to advance the defense theory that their conduct was legitimate advocacy on behalf of their clients. See, e.g., A VI: 262 (proposed jury instruction) ("It is not illegal simply to make the IRS's job harder. This is particularly true for the defendants, whose professional obligations as attorneys or certified public accountants required them to represent the interests of their clients vigorously in their dealings with adversaries, such as the IRS."). The District Court adopted the substance of the proposed charge, but declined to include the defendants' examples or to inform the jury about the special obligations of tax professionals who represent clients in an adversarial setting. 
We affirm the District Court's ruling primarily because the defendants' proposed charge did not "accurately represent[ ] the law in every respect." Feliciano, 223 F.3d at 116 (quotation marks omitted). The examples of purportedly lawful conduct proffered by the defendants included the following: "an agreement between witnesses not to tell the government something unless specifically asked about it; advice from an attorney to a client to assert his constitutional right not to speak to government investigators; an agreement not to create a document that individuals had no obligation to create." A VI: 262. Although these acts are not necessarily deceitful, no bright line rule excludes such acts from supporting a conspiracy to defraud. See Cont'l Ore Co. v. Union Carbide & Carbon Corp., 370 U.S. 690, 707 (1962) ("[I]t is well settled that acts which are in themselves legal lose that character when they become constituent elements of an unlawful scheme."). We are not unsympathetic to the defendants' view that a lay jury may struggle to fully apprehend the obligations of tax professionals zealously (and lawfully) representing clients before the IRS. Nevertheless, because the current understanding of the Klein doctrine does not categorically exclude the foregoing acts, the District Court properly omitted the proposed examples from the jury instructions.
In any event, the Court's actual instructions on Count One repeatedly emphasized the need for the jury to find that the defendants acted in a deceitful or dishonest manner in order to convict. A VI: 419/6158 ("Only conduct that both is intended to impede the lawful functions of a government agency and is fraudulent or dishonest will support a charge of conspiracy to defraud a government agency. . . . Not all conduct that impedes the lawful functions of a government agency is illegal. To be unlawful, that conduct has to entail fraud, deceit, or other dishonest means."). "[V]iewing the charge as a whole," we find no prejudicial error. Aina-Marshall, 336 F.3d at 170.
Practitioners should keep in mind that the requested instructions are important.  The Court of Appeals footfaulted the defendants' proposed instructions because they were not accurate in every respect.  In this type of case, I think such examples would be very helpful to the  jury in understanding the other amorphous defraud instruction, based on the expanded defraud definition, which is fraught with glittering generalities.  Obviously, this  is a good object lesson that the proposed instruction should be very, very carefully drafted.

And, of course, this implicitly raises concern about the expanded definition of defraud that I addressed in an  earlier blog.  Where is the dividing line?  The Supreme Court in Hammerschmidt recognized the problem and required the boundary to be that the illegal conduct must "interfere with or obstruct one of its lawful governmental functions by deceit, craft or trickery, or at least by means that are dishonest."  Hammerschmidt v. United States, 265 U.S. 182, 188 (1924).  But, the Second Circuit Panel seems to even expand on that.  I repeat the key part of the decision for emphasis:
Although these acts are not necessarily deceitful, no bright line rule excludes such acts from supporting a conspiracy to defraud. See Cont'l Ore Co. v. Union Carbide & Carbon Corp., 370 U.S. 690, 707 (1962) ("[I]t is well settled that acts which are in themselves legal lose that character when they become constituent elements of an unlawful scheme."). We are not unsympathetic to the defendants' view that a lay jury may struggle to fully apprehend the obligations of tax professionals zealously (and lawfully) representing clients before the IRS. Nevertheless, because the current understanding of the Klein doctrine does not categorically exclude the foregoing acts, the District Court properly omitted the proposed examples from the jury instructions.
That is indeed troubling.  Criminal conduct should require bright lines.  I have addressed the issue in detail in my article.John A. Townsend, Tax Obstruction Crimes: Is Making the IRS's Job Harder Enough, 9 Hous. Bus. & Tax. L.J. 255 (2009), here and in an online appendix with examples, Tax Obstruction Crimes: Is Making the IRS's Job Harder Enough? Online Appendix, 9 Hous. Bus. & Tax L.J. A-1 (2009), here.

I refer readers to Judge Kozinski's opinoin in United States v. Caldwell, 989 F.2d 1056, 1058 (9th Cir. 1993), here, where Judge Kozinski opens with the question (which also opens my article):.
"We consider whether conspiring to make the government's job harder is, without more, a federal crime."
The opinion answers that question "no."  It is excellent reading in this context in order to put boundaries around the criminalization of conduct that might otherwise be viewed as legal simply because, in some way,  it impairs or impeded the IRS,  Needless to say, I am not persuaded  by the Court's example of an incorrect requested instruction.  Nevertheless, the Court does fall back on the notion that the instruction -- a long one -- was ultimately correct in emphasizing the Hammerschmidt requirement that the illegal conduct must "interfere with or obstruct one of its lawful governmental functions by deceit, craft or trickery, or at least by means that are dishonest."  Hammerschmidt v. United States, 265 U.S. 182, 188 (1924).  I am not sure in my mind  that that cured the refusal to give the requested instruction, but the key words from Hammerschmidt were repeated and, if the jury understood them, then they were correct instructions.  (This just gets back to the jury black blox myth.)

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The above addresses a charge that was not given.  Ultimately, the Court held that the defraud / Klein conspiracy charge that was given was adequate.  So here is the charge that was given (from an independent source), and ask the reader to focus on when the Hammerschmidt fraud or deceit limiter is included and when it is not and ask whether this could be confusing to a jury:

First Object – Defrauding the United States and the Internal Revenue Service 
The first object the defendants are alleged to have agreed to accomplish is to defraud the United States and its agency the IRS by impeding, impairing, defeating and obstructing the lawful governmental functions of the IRS in the ascertainment, evaluation, assessment, and collection of income taxes. 
A conspiracy to defraud the United States need not necessarily involve cheating the government out of money or property. The statute also includes conspiracies to interfere with or obstruct any lawful government function by fraud, deceit, or any dishonest means. I instruct you that the Internal Revenue Service, commonly known as the IRS, is an agency of the United States government. The term “conspiracy to defraud the United States” in this Indictment therefore means that the defendants and their alleged coconspirators are accused of conspiring to impede, impair, obstruct, or defeat, by fraudulent or dishonest means, the lawful functions of the IRS to ascertain taxes and to collect lawfully due and owing tax revenue. 
Only conduct that both is intended to impede the lawful functions of a government agency and is fraudulent or dishonest will support a charge of conspiracy to defraud a government agency. A conspiracy to impede the functions of a government agency by fraudulent or dishonest means may include such things as altering documents after they have been demanded by the government agency, creating false documents, destroying records, making false statements, attempting to induce others to make false statements, or engaging in any other fraudulent or deceptive conduct that would have the effect of impairing the ability of the government agency to determine material aspects of a transaction. By citing these examples, I certainly do not mean to suggest that these are the only actions that could impede the IRS by fraudulent or dishonest means, nor do I express any view as to whether conduct similar to these examples took place here. 
Not all conduct that impedes the lawful functions of a government agency is illegal—to be unlawful such conduct must entail fraud, deceit, or other dishonest means. Thus, it is not illegal simply to make the IRS’s job harder. Only an agreement to engage in conduct that tends to impede the IRS, and also involves fraudulent, deceitful, or dishonest means, does constitute an illegal agreement to defraud the United States. 
It is not necessary that the government or the IRS actually suffer a financial loss from a scheme. A conspiracy to defraud exists when there is an agreement to impede, impair, obstruct, or defeat, in any fraudulent or dishonest manner, the lawful functions of the IRS. One cannot use deception or dishonest means to impede, impair, defeat, or obstruct the IRS, even to protect a legitimate tax position. 
Where, however, there is an agreement to impede, impair, obstruct, or defeat the lawful functions of the IRS by fraudulent, deceptive, or dishonest means, the first element is satisfied regardless of whether the means of doing so in that particular instance are or are not unlawful in and of themselves.

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