Saturday, February 9, 2013

Good Faith as a Defense to Tax Crimes (2/9/13)

I wrote earlier about a criminal case -- United States v. Haynor and Flask (WD OH No. 1:09-CR-172) -- where the defendants were acquitted.  The judge instructed the jury that the defendants' good faith could establish that they did not act "corruptly," an element of Section 7212(a), here, tax obstruction.  See Jury Instructions in Tax Obstruction and Klein Conspiracy Case (2/6/13), here.  I added an addendum to the earlier blog entry that covered some of the ground I cover in this blog, but I thought the issue addressed in the addendum was worthy of further development in a separate blog entry; hence, I offer the following and have deleted the addendum to the earlier blog with a link to this blog entry..

Tax crimes generally require that the defendant act "willfully."  E.g., Sections 7201 (evasion), 7206(1) (tax perjury), 7206(2) (aiding and assisting) and 7203 (failure to file, etc.).   In Cheek, the Supreme Court defined willfully as used in tax crimes as the intentional violation of a known legal duty.  The defendant must intend not only to commit the acts that the law requires but must also know the law and intend to violate the law.  And, a good faith belief -- whether reasonable or not -- that the law does not apply defeats the crime.  Ignorance of the law is an excuse to the crime.  That willfulness mens rea standard is the exception in Anglo-American jurisprudence where ignorance of the law does not usually excuse the crime.  Usually, crimes require mens rea, but the mens rea is only that the defendant intend to commit the acts that the law defines as a crime, regardless of whether or not the actor knew the acts were illegal.

The example I have used before -- perhaps not the best -- illustrates the point:  If the law says that knowing possession of a drug is a crime, then the possessor can be convicted of the crime if he knows he possesses the drug, regardless of whether he knows that possession is a crime.  The Government still has to prove that the defendant knew he possessed the drugs.  The question is what is the role, if any, that the actor's "good faith" may play in terms of the elements of the crime and prosecution for the crime.

Good faith makes sense in the Cheek context involving a statutory element of willfulness defined as the intentional violation of a known legal duty.  Even an objectively unreasonable good faith belief that the law did not command the conduct will defeat willfulness.  By contrast, in the drug possession situation, if the prosecution proves knowledge of possession (having nothing to do with knowledge of the law), then it would seem that possessor's good faith is irrelevant.  But, is it?  What if the possessor found the drug on the street and, knowing that it to be an illegal drug, takes possession of it for delivery to law enforcement officials?  In that case it can be said that the possession was in good faith and that good faith should defeat prosecution for the crime of possession (even if a prosecutor would have the temerity to prosecute the crime).

So, now, let's go back to the instruction in United States v. Haynor and Flask discussed in the earlier blog.  The tax crime in question was Section 7212(a) which describes the crime in relevant part as action which:
in any [] way corruptly * * * obstructs or impedes, or endeavors to obstruct or impede, the due administration of this title [26 USC, the Internal Revenue Code].
The description of the proscribed conduct is hardly self-explanatory.  Any number of actions might actually obstruct or impede the IRS, but it is not only those actions committed "corruptly" which are criminalized.  So, in Haynor, the judge gave the following instruction:
If either of the Defendants believed in good faith that he was acting within the law or that his actions complied with the law, he cannot be said to have acted corruptly with the purpose to obtain an unlawful benefit for himself or someone else. This is so even if the Defendant’s belief was not objectively reasonable. However, you may consider the reasonableness of the defendant’s belief together with all the other evidence to determine whether the defendant held the belief in good faith.
This seems to be a Cheek instruction to a crime where there is a textual requirement that the defendant act willfully.  I think what the court did was to determine that the "corruptly" element of Section 7212(a) was equivalent to the willfully element of Section 7201, et al.  I think that is the right answer for Section 7212(a), the crime in issue.  See John A. Townsend, Tax Obstruction Crimes: Is Making the IRS's Job Harder Enough, 9 Hous. Bus. & Tax. L.J. 255, 277-314 (2009), here.

I understand that, in giving this instruction, the court may have been inspired by United States v. Nash, 175 F.3d 429 (6th Cir. 1999).  Nash was charged with counts of failure to file (7203) which requires that he act willfully and false tax refund claims (18 UCS 287) which requires that he file the claim "knowing such claim to be false, fictitious, or fraudulent."  Nash made the Cheek-type claim to the failure to file counts that he did not know he had a duty to file.  The false claims counts were based on claims  for refund for taxes paid back when he was filing returns; obviously, the claims made were the same type of claims he made for failure to file -- i.e., he was not subject to tax and  therefore should get the refund.  From the opinion (p. 436):
Over Nash's objection, the district court instructed the jury that good faith, although a defense to Counts 1 and 2 [the Section 7203 counts], is not a defense to making false tax refund claims as charged in Counts 3, 4, and 5 [18 USC Section 287 counts]. The jurors were told to ignore any evidence regarding good faith in deciding Nash's guilt or innocence as to these counts. The court then issued the following instructions as to Counts 3, 4, and 5:   
In order to sustain its burden of proof for the crime of making a false, fictitious or fraudulent claim as charged in Counts III, IV and V . . ., the government must prove the following four essential ingredients or elements beyond a reasonable doubt. One: That the defendant made or presented a claim to a department or agency of the United States for money or property. Two: The claim was false, fictitious or fraudulent. Three: The claim was material. And four: The defendant knew at the time that the claim was false, fictitious or fraudulent.
I guess at the outset, and just checking my gut, it seems that the Government's charging decisions may have been an attempt to assure a conviction where the Cheek would preclude it for the explicit willfulness crime of failure to file (if the jury believed the defendant acted in good faith).  Given that the Government has a smorgasbord of criminal charges it can make from the same conduct, the Government charged a crime where a Cheek defense, if believed, would be a complete defense (failure to prove willfulness) and coupled with it a charged crime that did not explicitly require willfulness, perhaps in the hope that the Government could secure a a conviction even if the defendant in filing the claim was simply asserting a good faith belief that, legally, he was entitled to the refunds.  I am troubled by the Government's charging decisions.  But, the question here is whether the defendant is entitled to some type of good faith instruction in a false claims case where the statute simply requires that the defendant have filed a claim that is false and that he knows to be false.

Here is the Nash Court's analysis:
Nash specifically argues that good faith is a defense to the charge of presenting false, fictitious, or fraudulent claims. He cites Cheek v. United States, 498 U.S. 192, 112 L. Ed. 2d 617, 111 S. Ct. 604 (1991), in support of this argument. In Cheek, the defendant was convicted of attempting to evade income taxes and of failing to file income tax returns, in violation of 26 U.S.C. §§ 7201 and 7203. In both of these statutes, "willfulness" is an element of the offense. The Supreme Court held that in order to meet its burden of proof on this element, the government had to negate the defendant's claim "that because of a misunderstanding of the law, he had a good-faith belief that he was not violating any of the provisions of the tax laws." Id. at 202. According to Nash, if good faith was a valid defense in Cheek, it is also a valid defense in this case. 
The district court attempted to distinguish Cheek, stating that the holding in Cheek "pivoted upon the presence of willfulness." Because willfulness is not expressly stated as an element under 18 U.S.C. § 287, the district court ruled that the good faith defense did not apply. This distinction, however, is not persuasive, because 18 U.S.C. § 287 requires that Nash file the claims "knowing" that they are false, fictitious, or fraudulent. If Nash truly believed in good faith that he was not obligated to pay income taxes, and that he was owed these refunds, then he could not have filed his refund claims knowing that they were false, fictitious, or fraudulent. Rather, he would have believed that they were legitimate refund claims. Moreover, various courts have held that good faith is a potential defense to 18 U.S.C. § 287. See, e.g., United States v. Upton, 91 F.3d 677, 683 (5th Cir. 1996) (holding that the defendants' good faith defense was substantially covered by the jury instructions); United States v. Dorotich, 900 F.2d 192, 193 (9th Cir. 1990) (same); Quinton v. Department of Transp., 808 F.2d 826, 828 (Fed. Cir. 1986) (deferring to the Merit Systems Protection Board's conclusion that the defendant's good faith defense was incredible). For these reasons, we conclude that good faith is a valid defense to Counts 3, 4, and 5, and that the district court erred in instructing the jury otherwise.
The Nash court nevertheless affirmed the conviction on the ground that, under the facts and the other instructions given requiring specific intent, the failure to give the good faith instruction was harmless error.  This is often the dodge used by an appellate court when a trial court has failed to give a properly requested instruction.

The Nash court reached the right conclusion as to the defendant's right to a good faith instruction in the context of false claim under 18 USC Section 287 because the good faith in question went to the statutory element that the defendant know that the claim was false.  If the jury believed that the defendant sincerely believed this protestor-type claim a la Cheek that he did not legally owe the tax for which he requested the refund, the Government failed to prove its case.

Finally, I offer an excerpt from a recent law review article (Samuel W. Buell, Good Faith and Law Evasion, 58 UCLA L. Rev. 611, 639 (2011), here) that develops these concepts in the context of a crime requiring a specific intent to defraud.  One of the key points Professor Buell makes is that the jury does not even have to believe that the defendant acted in good faith (although I suspect that an acquitting jury will usually believe that); all the jury must determine is that the evidence of good faith is of sufficient quality to cast doubt on whether the Government has proved the specific intent beyond a reasonable doubt.  Now, here are the excerpts from the article (footnotes omitted):
The federal courts have repeated innumerable times the black-letter principle that a defendant's good faith negates the specific intent to defraud. With proper record evidence, a defendant in a criminal fraud trial is entitled to a jury instruction on good faith, or at least an instruction defining fraudulent intent that sufficiently encompasses the idea that to act in good faith is to act without such intent. This is not an affirmative defense. A good faith claim is a factual assertion that, if believed (or, more accurately, if raising a reasonable doubt), makes it impossible to conclude that the defendant had the specific intent to defraud. 
 * * * * 
Some courts have defined good faith as "a belief or opinion honestly held, an absence of malice or ill will, and an intention to avoid taking unfair advantage of another." The idea of an "honest" belief or opinion gets at something. A "dishonest belief" is nonsensical. One cannot believe something that one knows not to be true (or even, of course, believes not to be true). But one can disingenuously purport to have, or act as if one has, a particular state of mind. One can manipulate state of mind in order to achieve a desired end, such as by adopting or professing a secondary, pretextual purpose for one's conduct that the law might say makes conduct permissible.
JAT comment, the circumstances discussed in the last paragraph or even just the defendant's request for a good faith instruction might permit the Government to request a conscious avoidance instruction on the factual issue of the state of the defendant's sincerely held, good faith belief, so there might be some danger in insisting on a good faith belief instruction.
Courts have held that reliance on counsel in such contexts can negate the state of mind required for liability only if the actor relied on the lawyer in good faith. Good faith reliance means more than consulting an attorney. It requires selection of a competent lawyer before acting, disclosure of relevant facts to the lawyer, receipt of a legal opinion based on those facts, belief that the opinion was given in good faith, and reasonable reliance on that opinion. 
Addendum 2/11/13:

While preparing for the UH Law Tax Fraud class tonight, I realized that a similar issue of the level of mens rea has been also address in the false statement crime in 18 USC Section 1001, here.  The statute provides in relevant part:
Sec. 1001.  Statements or entries generally 
(a)  . . . . whoever, in any matter within the jurisdiction of the executive, legislative or judicial branch of the Government of the United States, knowingly and willfully
(2) makes any materially false, fictitious, or fraudulent statement or representation; or
shall be fined under this title or imprisoned not more than 5 years or both.
The crime requires both knowinigly and willfully.  Knowingly generally connotes some lesser degree of mens rea than willfully, at least as willfully is interpreted for tax crimes a la Cheek.

I thought I would offer the relevant discussion from my Federal Tax Crimes book:
c. Knowingly and Willfully. 
The false statement must be made knowingly and willfully.  As I noted earlier in the text, willfully is a word of many nuances.  Certainly, in a tax crimes context, willfully means at a minimum knowing that the conduct is illegal.  So, the question is which nuance applies to § 1001?  Does the speaker commit the crime by making a knowingly false statement to a federal agent or must the speaker also know that making a knowingly false statement to a federal agent is a crime?  The CTM says cryptically on this issue: “As used in Section 1001, the term "willful" simply means that the defendant did the forbidden act (e.g., made a false, fictitious, or fraudulent statement) deliberately and with knowledge.”  With knowledge of what – the falsity or the falsity and its criminality?  I think the CTM fairly read intends the former rather than the latter. 
In a recent case, Judge Kavanaugh in a concurring opinion focused on this issue although siding with the majority because the defendant had not properly raised the issue at trial.  The facts, highly summarized, are that, incident to a drug investigation, the USPS intercepted a drug package addressed to "Karen White" and then, after substituting white powder for the drug, had a USPS employee deliver it to the address.  At the address, the USPS employee delivered the package to the defendant, a male, upon his representation that he was Karen White's boyfriend and upon his signing the receipt with a false name.  The defendant was thereafter first charged with drug crimes and the jury hung.  He was tried a second time for the same charges but with a false statement charge added for his conduct in accepting the package.  In the second trial, the jury hung again on the drug charges but convicted on the false statement charge.  On appeal, Moore urged that the falsity was not “materially false” (another element in § 1001).  The panel unanimously handily rejected that argument.  Speaking to the substantive issue of whether "knowingly and willfully" requires knowledge of criminality, Judge Kavanagh echoed the concerns of Judge Kozinski of the Ninth Circuit in dealing with the somewhat amorphous crime of the defraud conspiracy (the Klein conspiracy in tax context).  That is not surprising because, as Judge Kavanaugh cites,  Judge Kozinski has addressed this concern in the context of 18 USC § 1001.  I quote (quotations are indicated with double tab indents: 
Proper application of statutory mens rea requirements and background mens rea principles can mitigate the risk of abuse and unfair lack of notice in prosecutions under § 1001 and other regulatory statutes. In § 1001 cases, that means proof that the defendant knew that making the false statement would be a crime. To be sure, “ignorance of law is no defense” is a hoary maxim. But it does not automatically apply to today's phalanx of federal regulatory crimes. See WAYNE R. LAFAVE, CRIMINAL LAW § 5.6, at 298-311 (5th ed.2010). For some regulatory offenses -- particularly statutes like § 1001 that proscribe only “willful” conduct -- the Supreme Court has recognized an ignorance-of-law or mistake-of-law defense, or has required affirmative proof of the defendant's knowledge that his or her conduct was unlawful. See Bryan v. United States, 524 U.S. 184 (1998); Ratzlaf v. United States, 510 U.S. 135, 141-49 (1994); Cheek v. United States, 498 U.S. 192, 199-201 (1991); Lambert v. California, 355 U.S. 225, 229-30 (1957);  cf. Liparota v. United States, 471 U.S. 419 (1985); Dan M. Kahan, Ignorance of Law Is an Excuse -- But Only for the Virtuous, 96 MICH. L. REV. 127, 150 (1997) (noting that “courts permit mistake of law as a defense [] selectively across malum prohibitum crimes”).  For criminal statutes prohibiting "willful" violators, those cases together require proof that the defendant was aware that the conduct was unlawful. 
In Bryan, the Supreme Court summarized the rule quite clearly: “[I]n order to establish a willful violation of a statute, the Government must prove that the defendant acted with knowledge that his conduct was unlawful.” 524 U.S. at 191-92 (internal quotation marks omitted). Since Bryan, the Court has reiterated this formulation on several occasions. See also Safeco Ins. Co. of America v. Burr, 551 U.S. 47, 57 n.9 (2007) (“we have consistently held that a defendant cannot harbor such criminal intent unless he acted  with knowledge that his conduct was unlawful”) (internal quotation marks omitted); Dixon v. United States, 548 U.S. 1, 5, 126 S. Ct. 2437, 165 L. Ed. 2d 299 (2006) (the term “willfully” “requires a defendant to have acted with knowledge that his conduct was unlawful”) (internal quotation marks omitted). n*
  n* To say that the Government must prove the defendant knew the conduct was a crime is not necessarily to say that the Government must prove the defendant knew the specific code provision proscribing the conduct, except with respect to certain highly technical statutes. See Bryan, 524 U.S. at 194; cf. Ratzlaf, 510 U.S. at 141 (anti-structuring statute); Cheek, 498 U.S. at 200 (tax statute). 
It is true that our Court many years ago seemed to assume (in addressing a mens rea issue under a different statute) that proving the defendant's knowledge of the law may not be required in § 1001 cases. See United States v. Hsia, 176 F.3d 517, 522 n.3 (D.C. Cir. 1999). In so doing, Hsia referenced a 1994 Third Circuit opinion that pre-dated the Supreme Court's clarifying decisions in Bryan and later cases. That assumption may not endure in light of those subsequent Supreme Court precedents. In a future case, we therefore may need to consider the appropriate mens rea requirements and defenses for § 1001 prosecutions under those Supreme Court decisions. 
Here, however, there is no legal obstacle to our affirming Moore's § 1001 conviction: Moore did not contend that the term "willfully" in § 1001 requires proof of the defendant's knowledge of the law, and he did not challenge the jury instructions on that basis. But in a case where the issue is raised, the Supreme Court's precedents arguably require district courts in § 1001 cases to give a willfulness instruction that requires proof that the defendant knew his conduct was a crime. To be sure, in many false statements cases the Government will be able to easily prove that the defendant knew his conduct was unlawful. But in some cases, it will not be able to do so -- and those of course are precisely the cases where it would seem inappropriate and contrary to § 1001's statutory text to impose criminal punishment.
Notice that Judge Kavanaugh repeats in the footnote the notion that Bryan requires proof that the defendant knew of the specific Code provision he or she intended to violate.  Readers might review again, the discussion of this issue on page 11, above.  Setting that aside, it is clear that Cheek requires the element that the defendant knew the conduct was illegal and intended to do the illegal act.  That is the point to which Judge Kavanaugh focuses his fire.

Finally, as to the knowingly and willfully element, the CTM says that “several courts” permit the element to be met by proof of “willful blindness” or “conscious avoidance.”

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