Fifth Circuit Erroneously Describes Defraud Conspiracy as Conspiracy to Commit Tax Fraud (3/19/20)

In United States v. Scully, ___ F.3d ___ (5th Cir. 3/4/20), here, the Fifth Circuit affirmed Scully’s convictin for “(1) conspiracy to defraud the United States, (2) conspiracy to commit wire fraud, and (3) three individual counts of wire fraud.” (Scully was acquitted of “preparing false tax returns,” § 7206(2).)  The district court had sentence Scully to “concurrent, below-guidelines sentences of 180 months on the wire-fraud counts and 50 months on the tax-conspiracy count.”  The CourtListener docket entries are here.

In very broad strokes, Scully was in a business with two others that imported shrimp for use in frozen meals the business sold.  He cheated his partners and, in the process, apparently he or related parties reported and paid less tax than they should have.  One of his partners turned him into the IRS.  IRS CI investigated.  Scully was indicted, and was tried on the second superseding indictment, here.  The jury verdict is here.

The arguments Scully raised on appeal do not directly implicate the tax related charge on which he was convicted (Count One, conspiracy to defraud).  Scully does raise a Fourth Amendment argument to suppress the results of the search warrant obtained and conducted incident to the IRS CI investigation.  Nothing particularly unique there.  The Court rejects this and Scully’s other arguments.

The case is not particularly noteworthy, but I posted it principally to complain about the Court's loose language in describing the defraud conspiracy.  Count 1 of the superseding indictment (incorporated from the original indictment) was a conspiracy to defraud under 18 USC § 371.  Section 371actually describes two type of conspiracy: (i) an offense conspiracy, “to commit any offense against the United States;” and (ii) a defraud conspiracy, “to defraud the United States, or any agency thereof.”  The Court of Appeals describes the charged defraud conspiracy in two different ways: “conspiracy to commit tax fraud” (Slip Op. 6); and “conspiracy to defraud the United States.” (Slip Op. 9.)  The correct description is the latter rather than the former.
In the former description–”conspiracy to commit tax fraud"–the Court uses offense conspiracy lingo–”conspiracy to commit.”  Worse, that language suggests that there is an offense called tax fraud.  There is no such tax offense.  Many people equate tax fraud with tax evasion, but the correct term is tax evasion rather than tax fraud.  Others may think of tax perjury, § 7206(1) as tax fraud, but that too is an incorrect use of the term.  See my discussion in a prior blog entry (Anesthesiologist Sentenced for Tax Perjury (Federal Tax Procedure Blog 1/16/20), here, the relevant portions of which is:

4.  Note that the “headline” on the DOJ Tax press release was that Allen was sentenced for tax fraud.  Actually, he was sentenced for tax perjury, § 7206(1).  Tax perjury does not require tax due and owing as an element of the crime, so it is not technically a “fraud” crime.  It is true that the title of § 7206 is “Fraud and false statements,” which at least suggests that false statement is not the same as fraud.  And, indeed, subsection (1), the one governing the tax perjury crime is titled “Declaration under penalties of perjury” and the text does not mention fraud.  For this reason, for example, a tax perjury conviction is not collateral estoppel (or issue preclusion) in a civil case involving the same year(s).  See e.g., Tax Court Case Shows That the IRS Burden to Prove Fraud by Clear and Convincing Evidence Is Formidable Indeed (Federal Tax Crimes Blog 12/17/18), here.  So, I question whether the tax perjury crime should be called fraud.

Also, those wishing to look at my longer and more in context discussion of the law that has established that the defraud conspiracy does not necessarily involve “tax fraud” in its more general sense or any aim to underpay tax, see John A. Townsend, Tax Obstruction Crimes: Is Making the IRS's Job Harder Enough?, 9 Hous. Bus. & Tax L.J. 260 (2009), on SSRN here and the companion online appendix, on SSRN here.

(Note: I just found that the links I previously used to that article and the appendix on the Houston Business and Tax Law Journal site no longer work, so, starting today, I will link to the SSRN where the articles are offered as originally printed.   As I have time, I will try to go back to past citations of these two offerings and correct the links to the SSRN offerings.)

Besides the defraud conspiracy, Scully was charged the specific tax offense of“aiding and assisting” under § 7206(2), which punishes the preparation or presentation of a document which is “ fraudulent or is false as to any material matter, whether or not such falsity or fraud is with the knowledge or consent of the person authorized or required to present such return, affidavit, claim, or document.”  That section is most immediately directed at tax return preparers, but sweeps much broader.  Scully was acquitted of those counts (Counts 2-4).  I won’t get into the details here, but I just want to discourage others from referring to the defraud conspiracy as a conspiracy to commit tax fraud as the Fifth Circuit does earlier in Scully.