Friday, May 30, 2014

District Court Case on Brady Obligations and Uncertain Legal Duty (5/30/14)

The name of this case initially attracted me.  United States v. Townsend, 2014 U.S. Dist. LEXIS 70656 (ED WA 2014), here.  It  turns out the defendant is no relation to me.  But the case proved to have some interesting facets.  The first is just an interesting recitation of the Government's Brady obligations.  The second is a more interesting application of the James holding that uncertain legal obligation cannot form the basis for a criminal prosecution.

The defendant was indicted under Section 7202, here, for failing to withhold and pay over on employee's compensation.

Now the issues I report in this blog:

1.  Brady
Brady v. Maryland held "that the suppression by the prosecution of evidence favorable to an accused upon request violates due process where the evidence is material either to guilt or to punishment, irrespective of the good faith or bad faith of the prosecution." 373 U.S. at 87. In United States v. Bagley, 473 U.S. 667 (1985), the Supreme Court disavowed any difference between exculpatory and impeachment evidence for Brady purposes. Despite the Government's argument to the contrary, Bagley also held that regardless of request, favorable evidence is material, and constitutional error results from its suppression by the government, "if there is a reasonable probability that, had the evidence been disclosed to the defense, the result of the proceeding would have been different." 473 U.S. at 682 (it abandoned the distinction between the "specific-request" and "general — or no-request" situations). 
The Ninth Circuit summarized the obligation of the prosecutor concerning Brady material under Kyles v. Whitley, 514 U.S. 419 (1995): 
Moreover, as we have previously held: 
actual awareness (or lack thereof) of exculpatory evidence in the government's hands, ... is not determinative of the prosecution's disclosure obligations. Rather, the prosecution has a duty to learn of any exculpatory evidence known to others acting on the government's behalf. Because the prosecution is in a unique position to obtain information known to other agents of the government, it may not be excused from disclosing what it does not know but could have learned. 
United States v. Price, 566 F.3d 900, 909 (9th Cir. 2009) (citing Carriger v. Stewart, 132 F.3d 463, 479-80 (9th Cir. 1997) (en banc)). The Government correctly notes that Brady is not a discovery rule, but then incorrectly claims the materiality test of Rule 16 and Brady are interchangeable. ECF No. 46 at 5-9. They are not. Rule 16(a)(1)(E)(i) only requires demonstration that the "item is material to preparing the defense" not that it's materiality rise to the level of a reversible Constitutional violation for the failure to disclose it.
I don't know that any of this is new or bold, but it is useful refresher of the Brady obligation.

2.  The Uncertain Legal Duty Issue

Tax crimes afficionados will recall that (from a publication I am now working on):
A more subtle defense is that, because the law is sufficiently uncertain as to the legal duty to pay the tax, the defendant cannot even be tried for evading the uncertain legal duty.  Stated differently, if the law is unknowable in an objective legal sense, there can be no intent to violate the duty that would permit conviction, regardless of a defendant’s actual intent.  This is a legal issue to be decided by the judge and not submitted to the jury.  The key case for this concept is a Supreme Court case, James v. United States, 366 U.S. 213 (1961), which reversed a jury conviction based on the jury’s finding that the defendant intended to evade tax.  The Court held that the legal duty was sufficiently unclear that the defendant could not be convicted regardless of his intent.  In James, the Supreme Court’s earlier cases created the confusion as to whether embezzlement proceeds were taxable income.  The confusion was more apparent than real, for most authorities read the Supreme Court cases as eroding and substantially eliminating any possibility that embezzled funds were not income.  The defendant had been convicted of evasion of tax on embezzled funds.  The jury determined that he knew of the obligation to report and pay tax on the embezzled funds and intended to violate the law.  In James, as expected, the Court held that embezzled funds were income, thus resolving any doubt on the issue.  The Court held that, even though the defendant was aware that embezzled funds were income and evaded tax on the income, he could not be convicted as a matter of law because uncertain legal duties cannot be the subject of criminal evasion, regardless of the defendant’s intent.  This concept spawned other cases in lower courts, where it was applied to reverse convictions.  DOJ Tax, not surprisingly, is not enamored of this defense.
With that background, in Townsend, the defendant said, wait a minute, there is no litmus test of what is an employee, so that she is being charged with an uncertain legal duty to withhold when the persons were not certainly and unequivocally employees.

Here is the Court's analysis:
Defendant is charged in a ten count Indictment with violation of 26 U.S.C. § 7202, willful failure to pay over payroll taxes, in relevant part as follows: 
On or about the dates indicated as to each count below, in the Eastern District of Washington, MARIA ELIZABETH TOWNSEND, being the President of TCI, and a responsible person with respect to its payroll taxes, and thereby being required to collect, account for, and pay over to the IRS payroll taxes on behalf of TCI and its employees, did willfully fail to pay over to the IRS payroll taxes in the approximate amounts indicated as to each count below. . . 
ECF No. 1. 
Defendant moves to dismiss the Indictment because she claims she was not on notice that TCI's workers were employees as opposed to independent contractors for which she would have no legal duty to withhold payroll taxes. ECF No. 34 at 9-10. She contends the Government cannot prove the workers were in fact employees. Id. at 10-11. Finally, Defendant contends it would be a Due Process violation to hold her criminally responsible where the requisite knowledge of her legal duty is debatable as a matter of law. Id. at 11-14; ECF No. 62 at 7-8 (reasoning that it would be a Due Process violation to hold her criminally liable for a legal duty defined by the "murky" application of the twenty factor test to the electricians and other workers at TCI). At its base, Defendant's argument is that "The government fails to address the real question of whether electricians, and other TCI workers, were independent contractors [or employees for which Defendant would have a legal duty to withhold and pay over payroll taxes]. That critical question of whether a worker is an "employee" can only be answered by proper application of the twenty factor test." ECF No. 62 at 6. Defendant contends the Government has not applied the controlling twenty factor test, IRS Revenue Ruling 87-41, either in its investigation nor before the grand jury. Id. 
For the most part, the Government avoids the issues raised by the Defendant. It cites civil cases for responsible officer liability. ECF No. 48 at 3-5. It claims the Indictment is properly drafted to provide sufficient notice, for which there is no dispute. Id. at 5-6. It contends the statute at issue survives a Due Process challenge as it is perfectly clear what is forbidden —willfully failing to pay over employment taxes. Id. at 8. In display of its misunderstanding of the Defendant's challenge, the Government claims: 
It is unlikely in the extreme that a Defendant would continue to withhold taxes from employees' wages, file Forms 941, and issue Forms W-2 for many consecutive years if she believed those employees were independent contractors. 
ECF No. 48 at 8. Thus, it seems clear that the Government has overlooked the predicate to criminal liability in this case, i.e., that TCI workers were in fact employees as opposed to independent contractors creating a legal duty to withhold and pay over payroll taxes for which Defendant was put on sufficient notice to appreciate. It matters little what the Defendant believes if there was no legal duty to withhold taxes in the first place. 
Federal Rule of Criminal Procedure 12(b)(2) allows a defendant to "raise by pretrial motion any defense, objection, or request that the court can determine without a trial of the general issue." A pretrial motion is generally "capable of determination" before trial if it involves questions of law rather than fact. United States v. Shortt Accountancy Corp., 785 F.2d 1448, 1452 (9th Cir. 1986) (citation omitted). "[T]he district court must decide the issue raised in the pretrial motion before trial if it is 'entirely segregable' from the evidence to be presented at trial. If the pretrial claim is 'substantially founded upon and intertwined with' evidence concerning the alleged offense, the motion falls within the province of the ultimate finder of fact and must be deferred. Id. 
Here, since Defendant's motion raises both questions of fact and questions of law, the Court will defer the issue for jury consideration and renewal of the motion at the appropriate time during trial. Defendant's motion is denied.
 Generally, a James uncertainty issue is one solely for the Court to render before trial.  James' application of the principal followed trial, but that is because the principal did not exist until announced in James.  So, it seems, it should be applied at the front end, as Townsend requested it, and the Government should have been required to show some validity to its claim.  At least, seems to me.


  1. GlobalCapitalismJune 2, 2014 at 9:38 AM

    “This affair is part of Washington’s hegemonic ambition in law and commerce,” said Jacques Myard, a lawmaker from Former President Nicolas Sarkozy’s UMP Party. “Washington has the annoying habit of trying to apply its laws outside its jurisdiction and use its strength for commercial ends.”
    If the US keeps this up, expect the rest of the world to join Russia and China`s economic coalition against the US.

  2. I don't understand how a French bank should be fined for violating US sanctions, anymore than they could be fined by Arab countries for dealing with Israel, North Korea for dealing with South Korea etc.

  3. The Court reserved the Eighth Amendment issue and will presumably address that at the hearing later this week. If it issues an opinion, that may come later, presumably in June some time.

    The Eight Amendment is a legal issue for judges to decide. It is not submitted to juries who decide facts and sometimes mixed fact - law questions pursuant to proper instructions from the judge on the law.

    Jack Townsend

  4. GlobalCapitalismJune 2, 2014 at 3:22 PM

    BNP is guilty of one thing: having used the USD in as their transaction vehicle.

  5. GlobalCapitalismJune 3, 2014 at 7:46 AM

    Keep in mind that France’s central bank has said the transactions did not violate French or European laws. The U.S. is claiming jurisdiction because the transactions were processed in USD.

    To explain a couple of things let me use an example. When I receive a US dollar wire transfer from a foreign customer (let’s say somebody in Australia) the process goes like this:
    1. First the money leaves the Australian bank
    2. Goes to the Australian bank’s correspondent bank in New York
    3. Goes to my French bank’s correspondent bank in New York
    4. Goes into my US dollar account at my local bank in France

    So technically when you do a US dollar wire transfer the money does
    end up under US jurisdiction.

  6. GlobalCapitalismJune 3, 2014 at 7:51 AM

    Push back from the French govt. !!

  7. GlobalCapitalismJune 3, 2014 at 7:57 AM

    protecting against the effects of the extra-territorial
    application of legislation adopted by a third country....the US, and actions based
    thereon or resulting therefrom

  8. GlobalCapitalismJune 4, 2014 at 11:54 AM

    It seems that the Justice Department and everyone else only care a little that BNP bank had the best of intentions when it decided to get into bed with genocidal governments.

    BNP showed prosecutors a memo that the bank thought would explain and possibly mitigate the conduct, according to people briefed on the matter. The memo, drafted around 2004 by an outside law firm, essentially authorized the bank to process certain transactions for Sudan, as long as BNP’s employees in New York were not involved in the arrangement. The identity of the law firm could not be learned, but the people briefed on the matter said that it was a well-respected firm based in the United States.

    BNP argued that it lacked the intent to commit a crime, according to the people, saying that it followed the law firm’s directive. That legal argument, known as the “advice of counsel” defense, prompted prosecutors to pore over the single-page memo and weigh the bank’s argument.

    Ultimately, the people said, the prosecutors concluded that the memo alleviated only a small fraction of the wrongdoing. The prosecutors — Cyrus Vance Jr., the Manhattan district attorney; Preet Bharara, the United States attorney in Manhattan; and the Justice Department’s criminal division in Washington — decided that the legal defense applied to transactions that occurred during a brief period of time, according to the people briefed on the matter who spoke on condition of anonymity.

  9. GlobalCapitalismJune 6, 2014 at 6:15 AM

    Zwerner is 87 years old. I wish no ill-health on him but this issue may
    be of great importance to his family. It seems to me that the extent of the FBAR penalties push the
    scale towards nonsurvivability under Reiserer and Hudson. Woods’ Forbes post notes that the Zwerner court will likely be considering an 8th
    Amendment challenge based upon the penalties being excessive and
    disproportionate to the conduct. Even if it withstands constitutional
    scrutiny, Title 31 FBAR penalties are of a different kind than other
    penalties that taxpayers face. The excessive penalty and punitive aspect
    that triggers payment potentially well in excess of the balance in the
    account will likely imo. contribute to this penalty not surviving
    death. The Hudson standard is far from clear, however, and I would not be surprised if this issue pops up in FBAR cases down the road.

  10. GlobalCapitalism,

    On your issue of survivability of the FBAR penalty, Leslie Book of the Tax Procedure Blog has a good introduction to the issue, concluding that he would not be surprised if it did not arise in the FBAR area. I will post a separate blog on the issue, but the link to the Procedurally Taxing article, titled Death Taxes and Civil Penalties: Does the Taxpayer's Death End IRS's Ability to Collect Penalties? is as follows:

    Thanks for the Comment.

    Jack Townsend


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