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.