Inconsistent Verdicts and the Lesser Included Offense Doctrine (10/28/16)

In United States v. Armstrong, 2016 U.S. Dist. LEXIS 141192 (ED TN 2016), here, the defendant was charged with the defraud / Klein conspiracy, tax evasion, and tax perjury all related to profits from a scheme to evade Tennessee cigarette tax stamps.  The indictment is here.  "Following a jury trial, the defendant was found not guilty on Counts One and Two and guilty on Count Three."  In this opinion, the court denies the defendant's motion for acquittal or new trial related to the single conviction on tax perjury.  The defendant's motion is here; the US response is here.  I focus here principally on the relationship of the tax evasion count as to which the jury acquitted the defendant and the tax perjury count as to which the jury convicted the defendant.

The two counts are state in the indictment, here, as follows:

COUNT TWO

Attempt to Evade and Defeat Tax

1. The allegations set forth above in support of Count One are hereby re-alleged and incorporated herein by reference. [These are the usual copious allegations in the conspiracy count.]
2. On or about the 15th day of October, 2009, in the Eastern District of Tennessee, JOSEPH E. ARMSTRONG, a resident of Knoxville, Tennessee, who during the calendar year 2008 was married, did willfully attempt to evade and defeat a large part of the income tax due and owing by him and his spouse to the United States of America for the calendar year 2008, by preparing and causing to be prepared and by signing and causing to be signed, a false and fraudulent U.S. Individual Income Tax Return, Form 1040, on behalf of himself and his spouse, which was filed with the Internal Revenue Service and in that false return, it was stated that their joint taxable income for the calendar year was the sum of $152,999, and the amount of tax due and owing thereon was the sum of $36,441, in fact, as he then and there knew, his taxable income for the calendar year was the sum of $471,418, upon which taxable income there was owing to the United States an income tax of approximately $141,222. In violation of Title 26, United States Code, Section 7201. 

COUNT THREE

Fraud and False Statements

1. The allegations set forth above in support of Counts One and Two are hereby re-alleged and incorporated herein by reference.
2. That on or about October 15, 2009, in the Eastern District of Tennessee and elsewhere, JOSEPH E. ARMSTRONG, a resident of Knoxville, Tennessee, did willfully make and subscribe and did willfully aid, abet, assist, and cause to be so made and subscribed a joint U.S. Individual Income Tax Return, Form 1040, for the calendar year 2008, which was verified by a written declaration that it was made under the penalties of perjury and JOSEPH E. ARMSTRONG did not believe the return, which was filed with the Internal Revenue Service, to be true and correct as to every material matter in that the return failed to disclose that he was engaged in the operation of an investment activity from which he derived gross receipts and received income and JOSEPH E. ARMSTRONG then and there well knew that he was required by law and regulation to disclose the operation of this investment activity, the gross receipts he derived therefrom, and the income from this investment activity.

As noted, the jury acquitted on Court Two but convicted on Count Three.

The first point is the fact that the Government charged the defendant for tax evasion and tax perjury.  The allegations in the key paragraph of the tax evasion count, Count Two (paragraph 2), appear to allege that the affirmative act of evasion was the filing of the false return under-reporting gross income, thereby under-reporting and underpaying the correct tax liability.  In this regard, Count Two, paragraph 1 does incorporate the Conspiracy Count allegations by reference, but just focusing on the key charging allegations in paragraph 2, it looks like the key affirmative act -- an element of the crime of tax evasion -- was the filing of the false return under-reporting taxable income, thereby under-reporting and underpaying the tax liability.

The key allegation in Count Three, the tax perjury count, is that the defendant under-reported his gross income,  thereby under-reporting his taxable income and tax liability and underpaying his tax liability.  The paragraph does also allege that he "failed to disclose that he was engaged in the operation of an investment activity from which he derived gross receipts and received income."  It is true that a false affirmative statement of the source of the income would alone constitute tax perjury, but I am not sure that failure to report the source is tax perjury.  (Would a failure to answer a question under oath be perjury?  I doubt it.)  I think the key failure is to report the income, thereby making the representation as to the under-reported taxable income and tax, so that the "perjury" in the return is the under-reported taxable income and tax.  That failure with the resulting underpayment is, of course, the affirmative act of evasion forming that key element of the crime of tax evasion.

One question that persons new to the subject of tax crimes may ask would be why the Government (acting through the grand jury) charged both crimes -- tax evasion and tax perjury?  Well, because it could but that may not be a satisfactory answer.  Tax evasion is a five-year felony. and tax perjury is a three year felony.  In addition, the Government charged conspiracy, a five year count.  By stacking, the maximum sentence for conviction of all charged crimes would be 13 years.  But, the possibility of achieving a 13 year sentence was not the reason for the charging decisions in Armstrong, because, given the tax loss, the sentencing guidelines will produce a sentence of less than 3 years.  Probably the easiest count for the Government to prove out of all the counts was tax perjury (although, for reasons noted later in this blog, tax perjury was probably only marginally less difficult to prove than tax evasion in this particular case).  (The final jury verdicts prove that point.)  Actually, under the Sentencing Guidelines, the sentence is likely to be the same with a conviction on a single count as it would have been for all the charged counts, but adding the conspiracy count often makes the Government's case easier to prove for a host of reasons.  See my discussion of this issue in Michael Saltzman and Leslie Book, IRS Practice and Procedure (Thomsen Reuters 2015), (¶ 12.03[1][c][i][A].  And, for the cynical, by larding up the indictment with three counts, perhaps the Government made it easier to convict for at least one count, perhaps as a compromise, even though it might not had a single count, say of tax perjury, been charged.  I don't want to discuss the conspiracy charge further in this blog, but instead, as noted earlier, want to focus on the tax evasion and tax perjury charges.

As I noted earlier, it appears that the common elements, as charged, for the tax evasion count and the tax perjury count in this case was the false under-reporting of income and resulting under-reporting and underpayment of tax, which constituted the affirmative act of evasion and the perjury (at least the under-reporting).  In other words, the affirmative act of evasion and the false statement for perjury were both via the false tax return.  Evasion does require a tax evaded -- meaning an actual tax due which the defendant intended to evade via the affirmative act of evasion.  But, in many evasion cases, because of the way the Government develops and presents the cases, the actual tax due may not really be in issue and the only real issue is likely willfulness as to the affirmative act of evasion, here the false return.  And, for the conviction of the crime of tax perjury, it was the same willfulness in issue as to the false return, which is, coincidentally, the affirmative act of evasion.  So, what is the point?

Let's approach the issue from the concept of the lesser included offense, which is applicable in many contexts throughout the criminal law and in some contexts for tax crimes.  Basically, a lesser included offense is an offense that, in a sense is lesser than another offense (the greater offense) with some overlapping elements but, at least as to the greater offense, at least one element not overlapping, so that a jury could rationally acquit a defendant of the greater offense because of the absence of the nonoverlapping element but guilty of the lesser offense because of the presence of all of the overlapping elements.  See Schmuck v. United States, 489 U.S. 705, 716 n.8, (1989).

So, to focus on the present charges, the conventional wisdom is that tax perjury, although a lesser offense in the sense that it is a three-year felony, is not a lesser offense within the scope of the tax evasion offense, a five-year felony.  That is because the crime of tax evasion does not require a false return, the crime of tax perjury, as the means to commit the affirmative act of evasion for the crime of tax evasion.  Hold that thought for a minute.

What is the consequence being characterized as a lesser included offense?  From the defense perspective, that would mean that, if the Government charged only the greater offense, the defendant could request that the lesser offense be submitted to the jury, which would give the jury an alternative to a binary guilty or not guilty verdict to the greater offense charge.  (Some might call this a compromise alternative or, if not a compromise, a better option for justice than the binary alternatives.)  Where the Government's case on the sole greater offense charge is weak, of course, a defendant would generally not want the jury to have the intermediate alternative offered by a lesser included offense charge to the jury.  But, where the Government's case for conviction is strong but the case has some factors that might cause a jury some concern, an intermediate opportunity might be helpful.

From the Government's perspective, the Government can just charge both the greater offense and the lesser offense in the indictment and perhaps then, if appropriate, dismiss the lesser offense before submitting the case to the jury.  And, if one offense is lesser than the other -- but not included within the greater offense -- the Government can just charge both and move the case merrily to the verdict (sort  of like the process of throwing against the wall and seeing  what sticks).  As noted above, on a strict elements test of lesser included offense, the crime of tax perjury is not an offense included in the crime of tax evasion because the tax evasion element for the affirmative act of evasion does not require a false return.

The CTM makes the latter point in a DOJ Tax Memorandum dated February 12, 1993, titled "Lesser Included Offenses in Tax Cases,", here.  In relevant part, the memorandum says (emphasis supplied):

[I]n evasion cases where the filing of a false return (Section 7206) is charged as one of the affirmative acts of evasion (or the only affirmative act), it is now the Tax Division's policy that a lesser included offense instruction is not permissible, since evasion may be established without proof of the filing of a false return. See Schmuck v. United States, 489 U.S. 705 (1989) (one offense is necessarily included in another only where the statutory elements of the lesser offense are a subset of the elements of the charged greater offense). Therefore, as with Spies-evasion cases, prosecutors should consider charging both offenses if there is any chance that the tax deficiency element may not be proved but it still would be possible for the jury to find that the defendant had violated Section 7206(1). But where a failure of proof on the tax deficiency element would also constitute a failure of proof on the false return charge, nothing generally would be gained by charging violations of both Section 7201 and 7206.

Thus, DOJ Tax's position is that tax perjury is not a lesser included offense to tax evasion even where the false return is the only affirmative act of evasion and the tax due and owing element is not contested.  I am not sure whether the tax due and owing element was contested in Armstrong, but let's assume that it wasn't contested and the only issue that was contested was the willfulness element inhering in the false return which was common to both crimes.  Then Schmuck would seem to require that tax perjury is not a lesser included offense to tax evasion.

But, the more subtle issue that the Armstrong case presented in my mind was whether the jury's acquittal of the crime of tax evasion was inconsistent with its conviction of the crime of tax perjury.  It seems to me that, if as may have been the case, only the willfulness element was in issue (i.e., did the defendant intend to lie on the return and thereby commit an affirmative act of evasion, thereby under Cheek intending to violate a known legal duty) the acquittal of the crime of evasion is conceptually inconsistent with conviction of tax perjury.  But, then the general rule is that inconsistent verdicts do not require the result most favorable to either party.

Moreover, the jury may just have intended to compromise, by rejecting the greater offense (in this case offenses) and moving to the lesser offenses.  Unbeknownst to the jury the compromise would not affect sentencing under the Sentencing Guidelines because of the tax loss involved (barring other unusual sentencing factors).

Finally, going back to Armstrong, and setting aside the conspiracy charge, it seems to me that charging both tax evasion and tax perjury just gave the Government two bites at the apple.  If it was uncertain as to its ability to convict for tax evasion (which is why the CTM says charge both), then it should have just charged tax perjury.  At least that is my story from the defense perspective.  That way (again setting aside the conspiracy charge), the jury would have had up or down without the prospect of a compromise verdict.