Tuesday, April 7, 2015

Seventh Circuit Holds that Trial Court Did Not Err in Admitting Other Acts Evidence (4/7/150

In United States v. Curtis, 2015 U.S. App. LEXIS 5176 (7th Cir. 2015), here, the defendant was a lawyer who could not manage his tax debts.  Over the years he was repeatedly delinquent.  The IRS had to spent significant collection resources to try to get him to pay and then stay current.  Finally, after cycling through to the third revenue officer, he was referred for criminal investigation and this prosecution ensued for 3-years of failure to file, § 7203, here.
Prior to trial, the government indicated its intention to offer evidence under Rule 404(b), including evidence of Curtis's history of failing to pay his taxes, his past dealings with the IRS and its efforts to collect back taxes, and his withdrawals of money from his law practice to pay personal expenses. Curtis did not object to any of this evidence, conceding that it was relevant to his intent and knowledge during the charged years. But he did object to the government's proposed evidence that he failed to pay payroll taxes for his law firms's employees for the third and fourth quarters of 2013. The government argued that this evidence was relevant to Curtis's intent and especially relevant to rebut his anticipated defense that he acted in good faith. Curtis objected that any violations of the tax laws subsequent to the charged years did not bear on his state of mind during the time of the charged offenses. Instead, he maintained, the government's use of this evidence demonstrated nothing other than propensity to commit the crime, a forbidden use of such evidence. Curtis also argued that the evidence was not relevant to his intent because payroll taxes are different in kind from income taxes, payroll taxes are often paid by office administrators, and the failure to pay those taxes post-dated the offense conduct by several years. The evidence would also cause undue prejudice, Curtis argued, because it would imply that he was harming his employees as well as the government. In short, he contended that the payroll tax evidence did not meet the standards for admission under Rule 404(b). The district court agreed that the evidence demonstrated propensity, and tentatively granted Curtis's motion to exclude the payroll tax evidence from the trial. 
The court later reversed course and allowed the government to bring in this evidence after Curtis testified during the defense case-in-chief that he was current on his tax obligations for 2010, 2011 and 2012. Curtis declined the court's offer of a limiting instruction on this Rule 404(b) evidence. * * * * The jury convicted on all three counts, and Curtis appeals.
The Seventh Circuit starts by stating the elements of Section 7203, the convicted counts:  "(1) that Curtis was required to pay taxes; (2) that Curtis failed to pay the taxes; and (3) that Curtis acted willfully in failing to pay."  As is often the case, the defense was solely that the Government had not proved willfulness.  Quoting Cheek v. United States, 498 U.S. 192, 201 (1991), willfulness "requires the Government to prove that the law imposed a duty on the defendant, that the defendant knew of this duty, and that he voluntarily and intentionally violated that duty."   Curtis' defense,  as I understand it, was that his years of dealing with the IRS's tolerance for his various tax delinquencies lulled him into believing that his tax delinquencies did not violate the  law.

The Government sought to use 404(b) evidence, including principally his repeated delinquencies after the criminal case was brought against him.  Specifically, the Government sought to show that he failed "to pay payroll taxes for his law business in the third and fourth quarters of 2013."  Curtis objected, arguing that what he did after the years for which he was charged was not evidence as to his willfulness or nonwillfulness for the earlier years for which he was charged.  He did not object to proof as to earlier years' delinquencies in payment.  Further, he testified that he had fully paid his 2010, 2011 and 2012 taxes.  Focusing on the subsequent unpaid payroll taxes, Curtis argued that they were remote from the charged offense of failure to file.
The [trial] court ultimately ruled that Curtis opened the door to admission of the evidence by suggesting to the jury that he had paid in full his recent tax obligations. The government then questioned Curtis about his failure to pay the payroll taxes. R. 51, Tr. at 568-72. Specifically, the government questioned Curtis regarding how he spent money that he withdrew from his law firm and how he decided which bills to pay. The focus of the questioning was that Curtis chose repeatedly to pay other obligations instead of paying taxes, including the payroll taxes.\ 
The government made no further mention of Curtis's failure to pay the payroll taxes in two quarters of 2013.
Curtis argued on appeal that the Court should not have admitted the evidence of the subsequent failure to pay the payroll taxes.

Here is the Seventh Circuit's resolution of that issue:
After the trial [of Curtis], we clarified the law governing Rule 404(b) evidence in an en banc opinion in United States v. Gomez, 763 F.3d 845 (7th Cir. 2014): 
In sum, to overcome an opponent's objection to the introduction of other-act evidence, the proponent of the evidence must first establish that the other act is relevant to a specific purpose other than the person's character or propensity to behave in a certain way. 
See Fed.R.Evid. 401, 402, 404(b). Other-act evidence need not be excluded whenever a propensity inference can be drawn. But its relevance to "another purpose" must be established through a chain of reasoning that does not rely on the forbidden inference that the person has a certain character and acted in accordance with that character on the occasion charged in the case. If the proponent can make this initial showing, the district court must in every case assess whether the probative value of the other-act evidence is substantially outweighed by the risk of unfair prejudice and may exclude the evidence under Rule 403 if the risk is too great. The court's Rule 403 balancing should take account of the extent to which the non-propensity fact for which the evidence is offered actually is at issue in the case. 
Gomez, 763 F.3d at 860. 
The government offered two reasons in support of admitting the payroll tax evidence, neither of which relied on a forbidden inference that Curtis had a certain character and acted in accordance with that character during the three charged counts. First, the evidence was relevant to rebut the implication that Curtis had fully paid his recent tax obligations. As his counsel conceded at oral argument, his testimony that he had fully paid his 2010, 2011 and 2012 taxes was not generally relevant to his intent for the charged years. In essence, though, that testimony implied that his recent compliance demonstrated good faith. With Curtis having opened the door to the relevance of his tax-paying behavior after the charged conduct, the district court did not abuse its discretion when it ruled that the government was free to walk through that door. See United States v. Schmitt, 770 F.3d 524, 536 (7th Cir. 2014), cert. denied, - U.S. -; 2015 WL 998658 (Mar. 9, 2015) (a defendant "opens the door" to other-wise inadmissible evidence when he affirmatively and genuinely places at issue the specific matter that the evidence is being offered to establish). And the government used that evidence in a manner that did not raise the wrongful propensity inference. Instead, the government simply noted that Curtis had used his earnings from his law firm to pay other expenses and had neglected to pay the payroll taxes. When Curtis implied that he was up-to-date with his tax obligations in 2010, 2011 and 2012 (some of which he paid in 2013), he placed at issue his non-payment of other taxes in that same time frame. 
The payroll tax evidence was also relevant to Curtis's anticipated defense that he acted with a good faith misunderstanding when he failed to pay his taxes in the charged years. Curtis contended in his defense that he mistakenly believed he was in compliance because IRS agents allowed him repeatedly to negotiate late payments through installment plans. See R. 51, Tr. at 648 (where defense counsel argued in closing: "And it is the defense in this case that George Curtis, by reason of his experience with the Internal Revenue Service, had a good faith understanding that his paying his taxes in an untimely fashion was okay. It was not a crime."). Had he known that he was violating a criminal law, he implied, he would have paid his taxes. That theory was refuted by evidence that he failed to pay his payroll taxes even after he had been charged with a crime for failing to pay income taxes, at a time when he could no longer claim a good faith belief that late payments constituted compliance with criminal laws. Although income taxes and payroll taxes are different in kind, as a sole proprietor of his law firm, Curtis was personally responsible for paying the payroll taxes in the same way he was personally responsible for paying his income taxes. And contrary to his claim that the incidents were too far apart in time to be relevant, Curtis's failure to pay the payroll taxes was essentially contemporaneous with late payments he made on his 2012 income taxes. Finally, this evidence was highly relevant to the sole issue in the trial, Curtis's intent. In short, the court did not abuse its discretion by allowing the evidence. 
True, the district court could have explained its reasoning more fully on the record. As we said in Gomez, the court must, in every case, "assess whether the probative value of the other-act evidence is substantially outweighed by the risk of unfair prejudice and may exclude the evidence under Rule 403 if the risk is too great." 763 F.3d at 860. Gomez was decided after Curtis's trial and so the district court did not have the benefit of its reasoning. The court did not expressly engage in that analysis on the record here, but any error was harmless. See Fed. R. Crim. P. 52(a); Gomez, 763 F.3d at 863 (evidentiary errors are subject to review for harmlessness). The test for harmless error is whether, in the mind of the average juror, the prosecution's case would have been significantly less persuasive had the improper evidence been excluded. Simon, 727 F.3d at 697; United States v. Klebig, 600 F.3d 700, 722 (7th Cir. 2009). The government produced substantial evidence that Curtis knew he was obligated to pay his taxes, had the money to do so, and chose to use that money to pay for other things instead. The payroll tax evidence was lost in a sea of far more damning evidence demonstrating Curtis's intent. For example, during the three charged years, Curtis had adjusted gross income of more than $1.4 million but paid none of it toward his corresponding tax liabilities of approximately $378,000 for that same time period. Instead, he spent more than $1.1 million on personal expenses that included $142,916 in life insurance premiums; $43,266 for a new Lincoln Navigator luxury SUV; $17,730 worth of wine; $32,775 in donations and political contributions; $6,945 on jewelry; and $10,891 on his pets. Presented with these expenditures and a list that also included gifts, firearms, restaurants, department stores, and other purely discretionary spending, any jury would conclude that Curtis had the money to pay his taxes (at least in part) and simply chose not to. The government's case would have been equally persuasive without the payroll tax evidence. Any error was therefore harmless. 


  1. Michael J. MillerApril 8, 2015 at 9:28 AM

    UStax, since the IRS has not explained why it imposed the maximum penalty, how do you know it was arbitrary?

  2. The governemtn doesn't want to establish a bad precedent from their point of view. Had they assessed per-account per-year penalties (if he had more than one account) or the willful penalty they could well have lost the case.

  3. 4e states : "(e) the defendant may face a subsequent prosecution in Switzerland as a result of his cooperation with United States authorities bases upon Swiss law which criminalizes the disclosure of private banking information;"
    So the US government knows that it is participating in violation of Swiss law and does so anyway, yet it is prosecuting those who violated US law?

  4. Michael that is obvious....absent evidence on why it imposed the maximum penalty, the opinion warns
    then it would have no recourse but to conclude that the IRS acted
    arbitrarily and capriciously.

  5. Jack did you notice that the District Court implies incorrect FBAR triggers !

    The court seemed to muff up the FBAR reporting requirement threshold and then didn’t even acknowledge it later on: pg. 1, sec. II, “Essentially any person residing in the Unites States with foreign accounts totaling more than $550,000 [is required to file an FBAR].”

    In legal terms, the proper follow up question is “WTF?”

  6. Mr. Moore got tired of the IRS taking their time, so he left the program, and was audited under normal rules and if you read between the lines the District Court exposes why the Bank Secrecy Act of 1970 (BSA) needs to go.

  7. Thanks, I had not realized that he had simply left the program rather than opting out. I don't think any material civil tax or FBAR civil penalty consequences depend upon opting out or just leaving. In both cases, the taxpayer is subject to audit for the open years. However, if the taxpayer just leaves, I don't think that he has the assurances of no criminal prosecution offered by OVDP followed by opt out. As a practical matter, however, I doubt that the IRS would prosecute someone who joined OVDP, submitted true and correct amended returns and delinquent FBARs, and then left the program.

    Jack Townsend

  8. Thanks, Anon. I had not noticed that the judge misstated the $10,000 amount. Unfortunately, I tend to overlook matters that should be boilerplate. But, obviously, that was not boilerplate. Don't know where he cut and pasted that from.

    Jack Townsend

  9. The District Court correctly reaffirms that the Internal Revenue Manual is not the law but rather what the IRS is trained on.

    Why FBAR penalties? The IRS had slam-dunk Form 5471 penalties at $10,000 per year and blew its chance to assess them!

    As more than a 10% owner of a foreign corporation, Mr. Moore (who actually owned 100%) had a Form 5471 reporting obligation. I would assume he didn’t file these fairly onerous forms.
    If you don’t file a Form 5471, the IRS has forever to assess them, unless of course, they close out your tax audit, which the IRS did.

  10. The court basically said “you are totally off the farm” to the IRS about the 2005 assessment. The IRS may well lose on that year when the court decides on that it was “arbitrary and capricious” for jumping the gun and making the assessment earlier than it said it would for no reason.

    Yet, the IRS is determined to win at any cost on these FBAR cases.

    The IRS is trying to make an example of Mr. Moore. Again, they must have had slam-dunk Form 5471 penalties they could have easily slapped him with and for more years. But Form 5471 doesn’t have the same zing as FBAR I suppose. The IRS is throwing all of its resources to making these penalties stick. Recall in Williams, they went after the defendant even though he went to jail for tax evasion on the exact unreported foreign accounts he did not file an FBAR on (that is the IRS knew full well of the foreign accounts even though an FBAR was not filed), and in McBride, that defendant didn’t even have control over the accounts, and in fact the money in the accounts was stolen from him!

    On the other side, I can’t imagine that Mr. Moore and his legal team are fighting this because they think it is financially worth it. I doubt it could be. But rather, and also it is Mr. Moore who is suing the federal government and not the other way around, they are taking a stand.

  11. "Even if it is a slam dunk winner for the taxpayer and the Government". Jack, the only "taxpayers" who consistently link their financial winnings to those of the Government are those who get paid out of the loot that the IRS and the Fed have stolen. That would of course include the entire IRS but also the entire the tax compliance industrial complex which could not exist without their big brother, the IRS.

    Here is a just released secretly filmed clip of Moore's first appointment with the IRS:


  12. It's more that just the money, anon. This blog serves major purposes for the IRS.

    It serves as a honey pot to attract IP addresses to those who might later be prosecuted as "willful" due to having read this blog. Perhaps the NSA would provide the IRS a few thousand IP to SSN visitor links in return for the persecution foes to its spying? Just think of all those hundreds of visits of Lerner to the white house and the coverup of leaked tax returns for opponents of the Obama administration.

    But even worse, this blog illustrates why the Government likes to put the interrogation chambers near the holding cells: so that those about to face government "justice" will be forced to hear the cries of agony of those who dared attract the ire of the state. This leads to a form of Stockholm syndrome where people become obsessed with learning about this obscene system while it sucks them up and destroys them..

  13. Swiss Bank
    Accounts. April. 2015.

    Is your monies safe
    in these accounts ---- definitely NOT.

    Would you get your
    money back if every body decided to withdraw all their accounts –
    NO WAY.

    Economic Experts
    say that there would only enough money to repay 50% of their clients.

    Are you going to be
    in the 50% --- that loose your money.-- Get it out NOW.

    2012 -- - June.
    -- Published in Anglo INFO .Geneva.--- USA Trust Fund Investors were
    sent false and fraudulent documents by Pictet Bank.Switzerland. in
    order to collect large fees. ( Like MADOFF) ---Even after the SEC in
    the USA uncovered the fraud Pictet continued to charge fees and drain
    whatever was left in these accounts. Estimated that $90,000,000
    million lost in this Pictet Ponzi scheme.

    2012 - - - July.
    -- De – Spiegel. -- states – Pictet Bank uses a letterbox
    company in

    and a tax loophole involving investments in London to gain

    millionaires as clients.

    - - - August ---- German Opposition Leader accuses Swiss Banks of
    "organised crime."

    the fines that crooked Swiss banks have incurred in the last few
    years exceeds £75.Billion.

    is also calculated that the secrecy " agreements" with
    regards to tax evation by their clients will cost the banks another
    £450 Billion.( paid out of your monies.).

    banks are panicking --- the are quickly restructuring their banks
    ---- from partnerships --

    " LIMITED COMPANIES." ----- this will probably mean that
    in the future --- they could

    you only 10% of your monies " if you are one of the lucky ones"
    ---- and it be legal.

    ---- The Crimes of ---- Pictet & Cie Bank.


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