Saturday, October 12, 2019

A Reminder on the Cheek Good Faith Defense -- It Usually Does Not Work (10/12/19)

The United States Attorney for Nevada announced here the sentencing of William Waller Jr., a Las Vegas real estate broker and the owner of Burbank Holdings or Platinum Properties for convictions of tax evasion and willful failure to file.  His sentence was 78 months and restitution imposed is $1,459,535.70.  Key excerpts are:
According to court pleadings and evidence presented at trial, Waller sought to evade taxes by incorporating a shell entity, opening bank accounts in its name, and directing his income into those accounts rather than accounts in his own name.  He also dealt extensively in cash and reduced his equity in his home, the only asset he held in his own name, thereby making it an unattractive asset for the IRS to seize.  
Waller testified at trial that he believed that he was not required to file tax returns or pay taxes, but acknowledged that he was influenced by the teachings of several prominent tax defiers. These included one, who had been convicted three times of tax fraud, and another, who had been stripped of his CPA license. Waller also admitted to purchasing and watching tax defier courses, including one on how to beat criminal tax charges.  Following the defendant’s testimony and the conclusion of the trial, the jury returned guilty verdicts on March 18, 2019.
The first two sentences of the second paragraph describe, somewhat cryptically, his Cheek good faith defense.  That defense is that, in effect, he, in good faith, did not intend to violate a known legal duty.  See Cheek v. United States, 498 U.S. 192 (1991), here, defining willfulness (an element of most Internal Revenue Code (Title 26) tax crimes) as voluntary, intentional violation of a known legal duty.  United States v. Pomponio, 429 U.S. 10, 13 (1976), here.  As I have conceptualized that element of the crime, (i) the duty must be knowable (the law must be clear and not ambiguous, per the line of cases going back to James v. United States, 366 U.S. 213 (1961), here) and (ii) the defendant must have known the knowable duty.  A defendant's good faith belief that he is not violating the law is a defense.  In other words, real, good faith ignorance of the law (but not feigned ignorance) is a defense.

In Cheek, the defendant was successful in establishing that he was entitled to an instruction properly advising the jury of the defense, thus entitling him to retrial where the Government must prove that he intended to violate a known legal duty.  The defendant lost on retrial.  United States v. Cheek, 3 F.3d 1057 (7th Cir. 1993), cert. denied, 510 U.S. 1112 (1994), here.

I don't have statistics on how many cases in which this defense has been raised on trial it has been successful, but my sense from watching these cases over a number of years is that it is rarely successful.  It certainly did not work for Mr. Waller in the case prompting this blog.

I thought I would include some discussion of the Cheek good faith defense from Michael Saltzman and Leslie Book, IRS Practice and Procedure (Thomsen Reuters 2015), here, ¶12.05. Selected Criminal Tax Topics (of which I am the principal author):
The good faith defense — sometimes called the Cheek good faith defense — functions not as a defense, but to focus on whether the prosecution has proved willfulness.515 Willfulness does not exist if the defendant acted in good faith with a belief that the law did not impose the legal obligation he is alleged to have violated. Does that mean that the government, in order to prove willfulness, must prove that the defendant did not have a good-faith belief that there was no legal duty? Logically, it would and, certainly most of the time, the government's proof of willfulness will in fact be sufficient to permit the jury to infer beyond a reasonable doubt that the defendant lacked good faith.516 
Defendants who want to argue the good-faith defense will want an instruction to the jury making that clear to the jury. Generally, courts will give the specific good-faith instruction only if the evidence somehow affirmatively puts good faith in play — making it a real issue for the jury.517 How does the defendant do that? The most direct way is for the defendant to testify as to his or her good faith. But, in order to do that, the defendant must waive his Fifth Amendment right not to testify and be subject to cross-examination; frequently, the defense team will conclude that the potential benefits of the defendant testifying (including the good-faith opportunity) do not justify the downside risks of the defendant testifying. So, the defendant will not testify. Notwithstanding some noises that the defendant is required to testify to put good faith in play, the courts soundly reject that notion.518 Other circumstantial evidence, including perhaps lay opinion evidence as to the defendant's mental state,519 may be sufficient to put that issue in play and, if it does, the trial judge should give the instruction.520 
516 Occasionally, some courts may suggest, erroneously, that the defendant must prove good faith as if it was an affirmative defense. E.g., United States v. Favato, 2013 US App. LEXIS 16137 (3d Cir. 2013) (unpublished opinion) (“Where a defendant proves that he had a good faith belief that he did not violate the tax code, regardless of whether that belief was objectively reasonable, he establishes that he did not act willfully.”). The trier of fact — jury or judge — is not asked to find whether the defendant had a good-faith belief. Rather, it is asked whether the prosecution proved willfulness, which in the context of some record support for good faith, means that the prosecution proved the absence of good faith. This nuance is an important nuance in understanding the role of good faith.
517 See Buell, “Good Faith and Law Evasion,” 58 UCLA L. Rev. 611, 639 (2011) (“With proper record evidence, a defendant in a criminal fraud trial is entitled to a jury instruction on good faith, or at least an instruction defining fraudulent intent that sufficiently encompasses the idea that to act in good faith is to act without such intent.”).
518 United States v. Kokenis, 662 F3d 919, 929 (7th Cir. 2011) , citing United States v. Lindo, 18 F3d 353, 356 (6th Cir. 1994) ; and United States v. Phillips, 217 F2d 435, 442 (7th Cir. 1954) .
519 For example, lay opinion testimony as to the defendant's mental state, including presumably good faith, might be admissible under FRE Rule 701. See United States v. Goodman, 633 F3d 963, 968 (10th Cir. 2011) ; and United States v. Abramson-Schmeiler, 2011 US App. LEXIS 23789 (10th Cir. 2011) . For a good case where such lay opinion evidence was used by the government, see United States v. Rea, 958 F2d 1206 (2d Cir. 1992) .
520 See United States v. Wisenbaker, 14 F3d 1022, 1027 (5th Cir. 1994) . See also CTM 40.05[1][a] (2012 ed.), dealing with the reliance on professional subset of the good-faith defense: “A reliance-on-advice-of-accountant instruction may be warranted even without per se testimony that the defendant relied on the accountant's advice, so long as the circumstances support an inference that he did so rely.”
I'll add just one nuance from my collected materials:  Professor Buell's  says, Samuel W. Buell, Good Faith and Law Evasion, 58 UCLA L. Rev. 611, 639 (2011), here (footnotes omitted):
The federal courts have repeated innumerable times the black-letter principle that a defendant's good faith negates the specific intent to defraud. With proper record evidence, a defendant in a criminal fraud trial is entitled to a jury instruction on good faith, or at least an instruction defining fraudulent intent that sufficiently encompasses the idea that to act in good faith is to act without such intent. This is not an affirmative defense. A good faith claim is a factual assertion that, if believed (or, more accurately, if raising a reasonable doubt), makes it impossible to conclude that the defendant had the specific intent to defraud. 
As in Cheek, the good faith assertion means that, if believed, the defendant cannot be guilty of a tax crime requiring that he act willfully.  Professor Buell adds the key nuance (as I paraphrase it) that the jury need not necessarily affirmatively believe the defendant acted in good faith, but only that the evidence is of sufficient quality that the jury did not believe that the Government proved beyond a reasonable doubt that he did not act in good faith.  Also, note that Professor Buell says that the defendant is “entitled” to a good faith defense instruction or, at least, a specific intent instruction that fairly encompasses the defense.

If for any reason you cannot download the Buell article from SSRN which is linked above, you should be able to download from here.  I recommend getting the article from SSRN (which may require a sign-in, but it's free to register) because he will get credit on his download statistics).

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