Tuesday, March 20, 2018

Court of Appeals Affirms Exclusion of Amended Returns and Payments after Start of Criminal Investigation (3/20/18)

In United States v. Evdokimow, 2018 U.S. App. LEXIS 6564 (3rd Cir. 2018) (nonprecedential), here, the Evdokimow was convicted of 8 tax crimes counts "relating to his failure to report and pay taxes on his personal and business income."  The issues he raised on appeal arose from his attempt after learning of the criminal tax investigation to file amended return and pay the indicated tax and interest.  (The opinion refers to payment of tax, penalties and interest, but penalties are not usually paid with amended returns; I suppose he may have paid penalties with the amended returns or upon assessment by the IRS; in any event, that is not relevant and I will just refer to his payments as payments of tax.)  The underlying gambit to evade his tax liability was contorted, but not particularly interesting to the point of this blog.  After obfuscating in a civil audit, the IRS opened a criminal investigation in 2009 but, for some reason, he was not aware of that investigation until 2012.  (The under the radar screen investigation for so long is not relevant to this blog, but I suspect there is a story there.) Then:
After he became aware of the investigation, Evdokimow took steps to repay his tax deficiencies. n1 He retained lawyers and accountants to assist him to identify his taxable income for the years 2005 through 2013 * * * * Evdokimow filed an amended tax return for 2006 in June 2013, and filed amended returns for the remaining years in September 2013. Evdokimow accordingly paid all of his tax liability, including penalties and interest, totaling $3,395,394.00.
   n1 Because the District Court precluded Evdokimow from testifying regarding the remedial steps he took after receiving the subpoena in 2012, our recitation of these facts relies on counsels' proffers of what the evidence would show, were it to be admitted.
Criminal tax practitioners will recognize this gambit designed to mitigate or avoid criminal prosecution.  The standard advice (at least in my experience) is that filing amended returns and paying the tax will not mitigate or avoid prosecution because the focus in a criminal tax trial is the tax loss and intent when the original returns were filed.  Later amended returns and payments, particularly in response to a criminal investigation, are not likely to be successful in staving off prosecution.  And here, it did not do so; the defendant was indicted.  Butt the defendant still wanted to present this to the jury as bearing on his good faith intent.

In the pre-trial skirmishing, the Government moved in limine to "the Government moved to preclude Evdokimow from presenting evidence that he filed amended tax returns and paid additional taxes after learning of the criminal investigation."  The district court granted the Government's motion:
The District Court concluded that any evidence concerning Evdokimow's subsequent tax payments was "of marginal probative value" that was "substantially outweighed by its potential for prejudice and confusion to the jury." App. 156. The Court reasoned that, while subsequent payments "could have probative value," the "delay of at least 18 months" between the point when Evdokimow learned of the investigation and when he filed his amended returns eliminated any such value in this case. App. 157. The Court further concluded that the eventual payment of the taxes was "potentially confusing to the jury" and created a risk of jury nullification that was "potentially uncurable . . . by even a careful instruction as to render it admissible" because it opened the prospect of the defendant "argu[ing] to the jury that [he] pay[s] [his] taxes like anybody else." App. 157-58. Evdokimow sought reconsideration of the District Court's decision on the first day of trial, but the request was denied.
Then at closing argument:
the Government, in its summation, described Evdokimow's conduct at several points in terms of the "tax loss" that he had caused. The Government also argued that Evdokimow had benefited from and "saved" millions of dollars by underpaying his taxes. Evdokimow objected to these comments, arguing that they misleadingly suggested to the jury that he still had tax obligations outstanding, when in fact he had satisfied the tax debt before he was indicted. As a remedy, Evdokimow requested that the District Court instruct the jury that he had paid his tax obligations after learning about the investigation, which he conceded was a fact not in evidence. The Court denied the request, but instructed the Government to be careful in rebuttal to make clear that the issue before the jury related only to the time period covered by the indictment. In rebuttal, the Government mentioned Evdokimow's wealth and ability to pay his taxes between 2006 and 2012, and argued that "[s]ometimes people that have a lot of money are willing to commit crimes to get more. And that's what happened here." App. 326-27.
Evdokimow was convicted on all counts.

On appeal, Evdokimow argued that he should have been allowed to place in evidence his filing of amended returns and payment of the tax, penalties and interest.  He further argued that, because he had paid the tax (albeit belatedly), the prosecutor should not have been allowed to argue or suggest to the jury that he had not paid the tax.  Both arguments on appeal are interrelated because of the filing of returns and payment of tax.

After stating the relevant facts, the Court, as appellate courts often do, with determining the scope of review.  The type of rulings by the trial court are normally reviewed for abuse of discretion, and the Court so held.  In a footnote, the Court rejected Evdokimow's argument for plenary review as follows:
   n3 Evdokimow urges us to exercise plenary review over this claim, arguing that the District Court grounded its ruling on a misinterpretation of our decision in United States v. Stoehr, 196 F.2d 276 (3d Cir. 1952), which amounts to legal error. Specifically, Evdokimow argues that the District Court misread Stoehr to erroneously apply "a presumption against admitting" evidence of his subsequent tax payments, when Stoehr in fact favors admission of such evidence, and seems to argue that the District Court erroneously read Stoehr to require exclusion of such evidence in every case. Appellant's Br. at 21. This argument mischaracterizes the District Court's ruling. The District Court clearly did not read Stoehr to require exclusion of that evidence as a matter of law. Moreover, while the District Court referenced Stoehr, it did not rely on Stoehr for its analysis, but rather applied the standard for exclusion of potentially relevant evidence established by Federal Rule of Evidence 403. We therefore conclude that the District Court's ruling on the Government's motion in limine was an evidentiary ruling applying Rule 403, and we review the District Court's ruling for abuse of discretion.
The Court also rejected Evdokimow's argument that the abuse of discretion standard not apply because the trial court failed to explain properly the balancing required under FRE 403 to determine whether the evidence of his filing amended returns and payment of tax, although potentially relevant, was of such marginal value and likely to be misleading.  The Court affirmed the trial court as follows:
Here, the District Court ruled on the motion in limine only after hearing substantial argument and receiving thorough briefing from the parties concerning the evidence that the Government sought to preclude. In the course of its ruling, the Court articulated its assessments of both probative value and prejudicial effect: it explained that it found that the delay in filing amended returns reduced the probative value of that evidence to demonstrate Evdokimow's earlier mental state, and described its concern that evidence of tax payments made years after the period charged in the Indictment would confuse the jury and raise the prospect of nullification. Such analysis is sufficient to enable us "to see that the District Court conducted a Rule 403 analysis" and assess it on appeal. Id.
The Court then turned to the merits and rejected both of the arguments.  I won't cut and paste the resolution here because all of it is worth reading, so readers should just click on the link to the opinion.  But, I will cut and paste the setting for the argument -- United States v. Stoehr, 196 F.2d 276 (3d Cir. 1952).  The Court said:
Evdokimow next argues that the District Court erred in its application of our decision in United States v. Stoehr, 196 F.2d 276 (3d Cir. 1952), to assess the probative value of the evidence of his amended returns and tax payments. Stoehr, like the instant case, involved a defendant charged with and convicted at trial of willful tax evasion, who maintained in his defense that his tax payments had been made in good faith reliance on the advice of others. Id. at 279. The defendant sought to admit evidence showing that, fifteen months after being confronted about the fraud, he offered a compromise payment to the government in exchange for the release of all liability. Id. at 282. The lower court excluded this evidence; we affirmed, noting that while evidence of a prompt amended filing and payment of additional tax might have been admissible, in the case at issue the trial court could have reasonably concluded that the fifteen-month delay "destroyed whatever slight probative value a prompt offer might have had." n5 Id. at 283.
   n5 Contrary to the assertions of the dissent, Stoehr does not "indicate[] that evidence of remedial actions should generally be admitted." Dissenting Op. at 3. Rather, we emphasized in Stoehr that district courts "must consider the circumstances of the individual case" when making these determinations. Stoehr, 196 F.2d at 282. And in the sixty-five years since Stoehr was decided, other courts have agreed with that notion, becoming, if anything, more skeptical of the evidence's admissibility. See, e.g., United States v. Beavers, 756 F.3d 1044, 1050 (7th Cir. 2014) ("[S]ubsequent remedial actions may not be probative of the defendant's prior state of mind because such actions are equally consistent with (1) promptly correcting a genuine mistake and (2) trying to cover up a purposeful lie in the hope of avoiding prosecution."); United States v. Radtke, 415 F.3d 826, 841 (8th Cir. 2005) ("little, if any, probative value in . . . amended filing"); United States v. Pang, 362 F.3d 1187, 1194 (9th Cir. 2004) ("[E]vidence of belated tax payments, made while awaiting prosecution, is irrelevant.").
JAT Comments:  

1.  The dissenting opinion is obviously worth a look as well.

2.  The Court does justify its holding on its understanding that, given all the evidence, including other admitted evidence permitting Evdokimow to argue good faith, the error, if error, was harmless.

3.  I noted above that the strategy in filing the amended returns and paying the tax was to mitigate or avoid prosecution by showing the defendant's good faith.  One of the principal concerns in using that strategy is that, should it not work, the defendant in effect admitted the tax that he had evaded.  That is an element of the tax evasion crime that the Government must prove beyond a reasonable doubt.  Further, and in any event, that establishes a minimum tax loss amount for sentencing.  (Note, I suppose that, for both calculations, the amended returns may have reported amounts that go beyond the criminal numbers, because the taxpayer would not want to be too aggressive in filing amended returns to mitigate or avoid prosecution.)  Beyond admitting an element of the tax evasion crime and the tax loss for sentencing, the probative value of such belated filings and payments in most cases is minimal and rather transparent.

4.  I am surprised that, given that Evdokimow had paid the tax, the prosecutor suggested in the argument that he had not paid.  It is true that he paid belatedly and, the key point was that he did not pay with his original return which had underreported the liability.  The Court finally concluded that, in the context of the trial, it was not harmless error.

5.  I again urge readers to read the dissent.

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