Wednesday, September 2, 2015

Ninth Circuit Affirms False Claim Convictions for Tax Preparer (9/2/15)

In United States v. Defoor, 2015 U.S. App. LEXIS 15400 (9th Cir. 2015), unpublished, here, the Ninth Circuit affirmed conviction of a tax preparer for a fraudulent income tax return scheme in violation of 18 U.S.C. §§ 2 (aiding and abetting), 286 (conspiracy to defraud the government with respect to claims) and 287 (False, fictitious or fraudulent claims).  The Ninth Circuit rejected several arguments (listed at the end of this blog), but the one that I found most interesting is the argument that the trial court should have given instructions that advised the jury that, for conviction, the defendant must have intended to violate the law.

Readers will recall that the standard tax crimes (certainly those in Title 26) require that the defendant act willfully.  As interpreted, the willfulness requirement in tax crimes means intentional violation of a legal duty.  Cheek v. United States, 498 U.S. 192 (1991).  Cheek means that ignorance of the law is a defense.  Even if a defendant intended the acts (actus reus), if he does not intend to violate the law (intend to commit a crime), then he is not guilty of the crime.

The crimes for which Defoor was convicted are not Title 26 crimes.  The crimes are:
§ 287. False, fictitious or fraudulent claims 
Whoever makes or presents to any person or officer in the civil, military, or naval service of the United States, or to any department or agency thereof, any claim upon or against the United States, or any department or agency thereof, knowing such claim to be false, fictitious, or fraudulent, shall be imprisoned not more than five years and shall be subject to a fine in the amount provided in this title. 
§ 286. Conspiracy to defraud the government with respect to claims 
Whoever enters into any agreement, combination, or conspiracy to defraud the United States, or any department or agency thereof, by obtaining or aiding to obtain the payment or allowance of any false, fictitious or fraudulent claim, shall be fined under this title or imprisoned not more than ten years, or both.
Aiding and abetting is not a crime in itself, but simply makes someone as a principal who was not otherwise a principal in the substantive crime (§§ 286 and 287) who aids and abets another who is a principal and requires the same mens re for the substantive crimes.  (Technically, in this case, the defendant appears to have been a principal in the underlying substantive crimes, so it is not clear whether he could have been convicted as an aider and abettor; but putting that aside.)

Sections 287 and 297's mens rea is "knowing such claim to be false fictitious and fraudulent" in § 286 and knowing falsity is implicit in § 286.

The Ninth Circuit rejected Defoor's argument as follows:
Second, Defoor argues that the instructions were erroneous because they "did not require the jury to conclude that the defendant acted with a consciousness that he was doing something wrong or that violated the law." This argument has little merit: it is axiomatic that "ignorance of the law or a mistake of law is no defense to criminal prosecution." United States v. Liu, 731 F.3d 982, 989 (9th Cir. 2013) (quoting Cheek v. United States, 498 U.S. 192, 199 (1991)). Although we have recognized two exceptions to this rule, see United States v. Fierros, 692 F.2d 1291, 1294 (1982), as modified (9th Cir. 1983), neither we, nor the Supreme Court, has ever held that § 287 falls within either exception. n3 Accordingly, the district court's § 287 instructions were not plainly erroneous.
   n3 Defoor cites two decisions from the Fourth Circuit, United States v. Bolden, 325 F.3d 471, 494 (4th Cir. 2003) and United States v. Maher, 582 F.2d 842,847 (4th Cir. 1978), that lend some marginal support to his position. However, the district court's failure to include an instruction derived from non-binding, out-of-circuit authority is not plain error. See United States v. Bear, 439 F.3d 565, 569 (9th Cir. 2006) ("An error is plain if it is 'clear' or 'obvious' under current law." (citation omitted)).
Fierros, in relevant part, simply seems to mimick Cheek's reasoning that complex statutes might require a higher level of mens rea.  The false claims statutes involved, however, are not complex statutes.  All that is required is that the defendant know that the claims are false.

However, it could be argued that, at least where the false claims are presented on tax returns (which are only a small part of the scope of the false claims crimes), the same high level of mens rea should apply.  The cases cited in the footnote as lending some marginal support to Defoor's arguments do not seem to me even lend marginal support.  The cases do suggest that the defendant must know that he is doing something wrong (although that is not an express element of the statute), but knowingly submitting false claims easily meets that requirement.

In a brief, one-paragraph concurring opinion, Judge Reinhardt thought that the defendant's "ignorance of the law defense in this case is more complicated than the disposition suggests."  Here is the full paragraph:
I concur in the memorandum disposition, but write separately because I believe that the question whether § 287 permits an ignorance of the law defense n1 in this case is more complicated than the disposition suggests. In United States v. Fierros, we recognized that in certain kinds of cases "a defense of ignorance of law is permitted even though it is not specifically written into the criminal statute." 692 F.2d 1291, 1294 (9th Cir. 1982). We explained that one such type of case is a prosecution "under [a] complex regulatory scheme[ ] that ha[s] the potential of snaring unwitting violators." Id. at 1295. We illustrated the need for allowing a mistake of law defense in those cases using the example of tax law, which "raises problems of great complexity" and in which "innocent errors are numerous." Id (internal quotation omitted); see also Cheek v. United States, 498 U.S. 192 (1991) (recognizing an ignorance of the law defense implicit in a criminal tax statute); United States v. Bishop, 412 U.S. 346 (1973) (same).
      n1 I use the term loosely since we are actually talking about an element the government must prove, rather than a formal defense.
So, I think that for present the false claims crimes in a tax setting do not require the element of intent to violate a known legal duty -- that the defendant know of the law and intend to violate the known law.  Perhaps it should in a tax setting, because the Congress has clearly signaled that in tax specific crimes, intent to violate a known law is required.  For example, prosecutions of the complex bullshit tax shelters are generally under code provisions that do require intent to violate a known legal duty, but in some cases where the shelters may have resulted in refunds could have been prosecuted under the false claims provisions.  Can the Government avoid the higher level of proof simply by charging under false claims.  And this issue is presented in tax conspiracies where the defraud / Klein conspiracy does not have a textual requirement of willfulness.  As I have argued, however, the requirements for conviction of tax conspiracy (or its Code counterpart, tax obstruction) as applied had a functional equivalent.  See 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.

The other arguments that the NInth Circuit rejected were:

1.  The defendant argued that, in several variations, that the testifying agents, in testifying that the returns were false, impermissibly testified to an ultimate issue that should have been reserved to the jury.  Basically, the court said that the term falsity did not have a specialized meaning that the jury would have been confused by the testimony.

2.  The defendant argued that the trial court should not have unilaterally investigated and resolved a report of potential jury tampering.  Either a juror or her husband had received a call from someone "f she (or he) owed money to the IRS and, upon questioning by Juror Number 9 (or her husband), hung up."  Sounds like the person was trying to hawk debt collection services, but still the statement is so cryptic, who knows what made the call.  In any event, the  juror said that it would not affect her service on the jury.  And, apparently, another juror knew about the call or contents of the call and said it would not affect that juror's service.  The Ninth Circuit held that trial court did not plainly err by foregoing an evidentiary hearing.

3.  The Court rejected Defoor's argument that the § 286 conspiracy instruction failed to instruct the jury that it must find an agreement to defraud.  The Court said that it would presume that the failure was plain error because the Government failed to respond to it, held that the defendant had not established that the error "seriously affect[ed] the fairness, integrity, or public reputation of judicial proceedings."  Basically, the court held that there was enough evidence of the element that it was unlikely a properly instructed jury would not have found the presence of the element.  This all seems like strange, as result oriented to avoid a retrial.

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