Opinion on Effect of Parallel Civil Proceedings, Statute of Limitations on Tax Crimes, and Kassouf (Again) (10/22/16)

In United States v. Ogbazion, 2016 U.S. Dist. LEXIS 143358 (SD OH 2016), here, the Court addressed several claims by the defendant for dismissal of counts in his criminal indictment.  The defendant was a principal in a national franchisor of tax preparation services.  The IRS first proceeded against the franchise operation with an IRS civil investigation and an ensuring civil case to enjoin the business operations.  The defendant apparently cooperated to some extent in that investigation and case, including giving a deposition.  In that case, the court entered a civil injunction and order of permanent injunction against the defendants in the case.  Approximately one and one-half years after the civil case was fully resolved, the indictment was filed.  The criminal indictment charged the defendant with

engaging in a corrupt endeavor to obstruct and impede the due administration of the Internal Revenue Code, in violation of 26 U.S.C. § 7212(a) (Count 1); conspiracy to commit wire fraud, in violation of 18 U.S.C. § 1349 (Count 2); [*2]  wire fraud, in violation of 18 U.S.C. § 1343 (Counts 3-7); money laundering, in violation of 18 U.S.C. § 1956(a)(1)(A)(ii) (Counts 8-13); bank fraud, in violation of 18 U.S.C. § 1344 (Count 14); tax evasion, in violation of 26 U.S.C. § 7201 (Count 15); and failure to collect and pay over payroll tax, in violation of 26 U.S.C. § 7202 (Counts 16-23). (Doc. 6).

The defendant moved to dismiss the criminal indictment and certain counts therein.  Briefly, the motion sought the following relief:

1. Parallel Civil Proceeding; Dismissal of the indictment or certain counts or, in the alternative, suppression of evidence.  This gravemen of the claims here is that the civil case was improperly used to obtain evidence for the criminal case.  Basically, after detailed consideration of the facts,

the Court finds that the civil proceedings were not a ruse undertaken to obtain evidence for the criminal prosecution and, further, finds that the Government's representations and actions throughout the civil investigation did not constitute trickery or deceit. The Government's conduct throughout the course of the parallel proceedings did not amount to bad faith such that the use of evidence obtained through Defendant's voluntary cooperation would amount to a constitutional violation or a "departure from the proper administration of criminal justice." See Kordel, 397 U.S. at 11-13 [United States v. Kordel, 397 U.S. 1 (1970)]. Accordingly, neither the dismissal of the Indictment in its entirety, nor the suppression of evidence, is warranted.

For more on parallel proceedings, see Parallel Civil Proceedings and Criminal Proceedings - The Balancing Act (Federal Tax Crimes Blog 10/12/12), here; and Assertion of the Fifth Amendment by a Taxpayer in a Tax Court Deficiency Redetermination Proceeding (Federal Tax Crimes Blog 12/21/15), here.

In addition, on a more subtle point, the defendant complained about the Government using information in the civil proceeding to levy on assets which might have otherwise been available to pay timely the payroll taxes.  The Court rejected that claim as well.  Finally, the Court rejected a claim that the Government had improperly used certain information from a deposition in the civil case to indict him for bank fraud.  Again, the Court confirmed that, in launching and pursuing the civil proceeding to conclusion, the Government had not acted in bad faith.

2. Dismissal of certain counts based on the statute of limitations.  All of the tax crimes  counts have a six-year statute of limitations under § 6531, here.  The Court first determined the date that the statute runs for the § 7202 offense of willful failure to pay over payroll taxes as alleged in counts 16 and 20.  The troubling point was when the offense occurred.  The Government argued that § 6513, here, which deems a return filed on or before April 15, to be due on April 15.  Defendant argued that § 6513 did not apply and the due date of the quarterly return in issue was July 31 rather than April 15 of the succeeding year.  If defendant's theory were correct, the counts were untimely.  The Court found little authority and such authority there was not particularly helpful or consistent.  So, the Court made its own analysis going through the following steps:  (i) the indictment must be filed within six years "after the commission of the offense;" (ii) as to failure to pay over, the payment is due when the return is due, § 6151(a), here; (iii) the criminal event must be at the point that the lack of payment became willful; (iv) § 6513 did not apply in a case like this to prolong the running of the statute of limitations; but (v) nevertheless the jury must decide when, if ever, the defendant's failure became willful.  (My reading of the analysis suggests that the payment was due on July 31, the payment due date when, presumably, the failure to pay was willful; so the Court punted on the bottom line; there is a good chance that the statute may be closed on the counts involved.)

As to the tax obstruction count, § 7212(a), here, the defendant argued that acts preceding the 6 year period could not be considered for the charge.  The Government's response was that the charges could stand "so long as the charge includes some obstructive conduct or act occurring within six years of the return of the indictment."  The Court held that the alleged obstructive acts were all part of the same crime, making the charge timely if at least one obstructive act was within the six-year period.  I think this is standard analysis under § 7212(a).

Finally, as to a tax evasion count for failure to pay, the Court held, based on the general rule, that the last act of evasion within the six-year period applied.

3. Failure to State an Offense.  The defendant moved to dismiss certain counts on the grounds that they failed to incorporate the necessary elements of the offense.  The most interesting holding on this issue relates to the Kassouf issue that I have mentioned several times in earlier blog entries, but I refer readers particularly to Second Circuit Rejects Aberrational Sixth Circuit Opinion in Kassouf on Requirements for § 7212(a) Tax Obstruction (Federal Tax Crimes Blog 10/15/16), here.  Briefly, Kassouf held that, based on analogy to the obstruction in 18 USC § 1503, here, tax obstruction under § 7212(a) requires an intent to obstruct a known IRS investigation.  Almost all courts other than the Sixth Circuit considering the issue have rejected rejected the Kassouf holding and even the Sixth Circuit has severely limited the holding.  But the holding, as limited, is still precedent in the Sixth Circuit.  The Ogbazion court is in the Sixth Circuit.  The Court thus held that, since the indictment failed to allege that critical element, as interpreted by the Sixth Circuit in Kassouf, the indictment was defective and the Count was dismissed.

The defendant also made an argument as to the insufficiency of the money laundering count as to the required predicate act, but the Court held that the count allegations considered in context of the wire fraud counts was sufficient.