Thursday, March 24, 2022

District Court Rejects Claim That Supreme Court Expansion of Defraud Conspiracy Is In Error (3/24/22; 3/27/22)

In United States v. Lucidonio,   (ED PA Criminal NO. 20-211 3/9/22), GS here and CL here and g, Lucidonio was charged with the Klein / defraud conspiracy (18 USC §371) counts of aiding and assisting (§ 7206(2)). The Court denied his motion to dismiss those counts. The denial addresses some major themes in tax crimes, and it is short. I recommend that tax crimes fans read the opinion. Perhaps read even more than once.

The opinion addresses two contexts tax crimes targets should consider the potential sweep of conduct subject to the crimes. First, there is the conspiracy charge in 18 USC 371. That statute includes two types of conspiracies:

(i)                The offense conspiracy to commit a specific statutory offense. The offense conspiracy requires the Government to prove that the object was to commit the conduct that meets each element of the offense. For example, for conspiracy to commit tax evasion, the Government must prove an intent to commit each element of the crime of tax evasion. The elements are of tax evasion are:  (i) substantial tax due and owing; (ii) an affirmative attempt to evade; and a willful attempt to evade.  Sometimes proving the elements of the conspiratorial object offense can be a burden, hence we turn to the other conspiracy in § 371.

(ii)              The defraud conspiracy (often called a Klein conspiracy in a tax setting). On the face of the statute, the object of the defraud conspiracy must be “to defraud the United States.”  Defraud normally in the criminal law means to take something of value from its rightful owner (or some variation). There is no reason to believe that, upon the original enactment of the predecessor of § 371 this crime in these words, Congress had any other definition of defraud for this element of the defraud conspiracy. Yet, as interpreted by the Supreme Court, the defraud conspiracy certainly means to cheat or attempt to cheat the Government out of property or money, but it also means to interfere with or obstruct lawful governmental functions “by deceit, craft or trickery, or at least by means that are dishonest” even if no fraud is the object. Hammerschmidt v. United States, 265 U.S. 182, 188 (1924).  Through interpretation, Hammerschmidt effectively grafted into the defraud conspiracy criminalization of conduct beyond fraud onto the defraud conspiracy. For treatments showing Hammerschmidt’s embrace of a formulation of the crime beyond the normal meaning of defraud, see United States v. Coplan, 703 F.3d 46, 66 (2d Cir. 2012), cert. denied, 571 U.S. 819 (2013); John A. Townsend, Tax Obstruction Crimes: Is Making the IRS's Job Harder Enough, 9 Hous. Bus. & Tax. L.J. 255 (2009), here; see also United States v. Caldwell, 989 F.2d 1056 (9th Cir. 1993) (opening with the question: “We consider whether conspiring to make the government's job harder is, without more, a federal crime.”)  [Note: The defraud conspiracy as spun by Hammerschmidt may apply in other agency contexts, but its specific application in a tax context is usually referred to as a Klein conspiracy after the leading tax case apply the defraud conspiracy after Hammerschmidt.  See DOJ CTM 23.07[2][a] Generally.)] In short, the defraud conspiracy as currently interpreted, goes beyond the original meaning of the statutory text because the word defraud in the criminal statutes did not have that meaning until spun by the Supreme Court culminating in Hammerschmidt

In every practical sense, the Supreme Court added to the conduct that Congress required for the defraud conspiracy. Just stating that concept seems contrary to the oft-made statement that only Congress can create the elements of criminal statutes. Of course, it has always been the law that courts can spin the elements of criminal statutes, but just how much spinning is allowable. How far can courts wander from the statutory text?

That was the claim Lucidonio and others before him have unsuccessfully sought for the Hammerschmidt spin. The most prominent attack came in United States v. Coplan, 703 F.3d 46 (2d Cir. 2012), cert. denied, 571 U.S. 819 (2013). The Second Circuit questioned the Hammerschmidt spin on the defraud conspiracy but felt obligated to apply because it was the higher court’s spin; the Supreme Court denied cert thus carrying forward the Hammerschmidt spin as law. Coplan, 703 F.3d at 62. Recognizing that reality, Lucidonio made the argument to preserve the possibility that either his case or some other case while his was still alive might get the Supreme Court to reverse the Hammerschmidt spin. (See Slip Op. p.  6 n. 2).

Lucidonio claimed that the Hammerschmidt spin was inconsistent with United States v. Davis, ___ U.S. ___, 139 S. Ct. 2319 (2019), SC here & GS here, and the concepts discussed and applied there. I urge readers considering this issue to review that case carefully because the conclusion of the Davis majority outside the context of tax crimes seems inconsistent with the Hammerschmidt spin on the defraud conspiracy.

For those interested in the issue of how far a court, even the Supreme Court can wander from the text of the criminal law elements, I recommend careful reading of Davis. This is a teaser from the introduction of the opinion (authored by Justice Gorsuch or his clerks (I have an anecdote on that at the end of this blog entry):

Today we apply these principles to 18 U.S.C. § 924(c). That statute threatens long prison sentences for anyone who uses a firearm in connection with certain other federal crimes. But which other federal crimes? The statute's residual clause points to those felonies "that by [their] nature, involv[e] a substantial risk that [*2324] physical force against the person or property of another may be used in the course of committing the offense." § 924(c)(3)(B). Even the government admits that this language, read in the way nearly everyone (including the government) has long understood it, provides no reliable way to determine which offenses qualify as crimes of violence and thus is unconstitutionally vague. So today the government attempts a new and alternative reading designed to save the residual clause. But this reading, it turns out, cannot be squared with the statute's text, context, and history. Were we to adopt it, we would be effectively stepping outside our role as judges and writing a new law rather than applying the one Congress adopted.

 The question this suggests is that, if the Supreme Court or the judiciary generally, has once stepped out its proper role by expanding on the statutory text, it should continue the error. The Davis majority said that it should not. Justice Kavanaugh in dissent (with Roberts, Alito, and Thomas joining) said this:  “A decision to strike down a 33-year-old, often-prosecuted federal criminal law because it is all of a sudden unconstitutionally vague is an extraordinary event in this Court.” Davis Kavanaugh Dissent Slip Op. 2-3 and 139 S.Ct. 2337.

I think that in light of Davis, the Coplan argument {Lucidiono’s argument may be worth a few more attempts with the disclosure that the argument is made to preserve the argument.

I should note that the Supreme Court and other courts have retreated in commonly accepted expansions of arguably related statutes. E.g.., Marinello v. United States, 138 S. Ct. 1101 (2018) (the tax obstruction statute, § 7212(a) which at one time DOJ Tax in the CTM described as a one-person defraud conspiracy); see also United States v. Caldwell, 989 F.2d 1056 (9th Cir. 1993).

Lucidonio’s other holding related to the aid and assist (§ 7206(2)0 charge. I have not done a deep think about the holding, although it is clear that an actor actually committing the substantive offense is not required for the § 7206(2) offense is not required. See generally John A. Townsend, Theories of Criminal Liability for Tax Evasion 36 (SSRN 5/15/12), SSRN

Added 3/25/22 12:00pm

I want to make the uninvited suggestion that DOJ Tax circumscribe its use of the defraud conspiracy where fraud (as generally used in the criminal law) is not an object of the conspiracy.  Almost all defraud conspiracies involve actual fraud in the traditional definition without a Hammerschmidt-like spin.  Indeed, tax crimes require tax evasion for tax loss in the determining the Sentencing Guidelines recommended sentencing ranges.  The general S.G. Base Offense base offense level with no tax loss is 6.  S.G. §2T1.1(a)(2).  The defraud conspiracy Base Offense level with no tax loss is 10. §2T1.9(a)(2).  By accepting responsibility with a plea agreement the defendant can get a 2 level downward adjustment (]S.G. §3E1.1), so the offense level for the Sentencing Table in Ch. 5, Part A with no Criminal History is 0-6 months. The judge could impose no sentence within the Guidelines range, and judges impose bottom or range or even below Guidelines range (variance) in tax cases.  The convicted offender is likely to be sentenced to no incarceration.  Is DOJ Tax really going to expend the substantial resources required to fire one of its limited tax prosecution bullets when no incarceration may be a likely outcome?  I don’t recall ever seeing a defraud conspiracy case where the offense level is 8.  (I encourage readers who aware of published opinions with a single count defraud conspiracy conviction offense level of 8 (assuming no unconvicted counts for other tax crimes so it is a clean defraud conspiracy count charged and convicted).

Of course, DOJ Tax usually does not often charge a single count defraud conspiracy and does not charge defendants with the bare characteristics I address here.  (If there is a single count of conviction for defraud conspiracy, it may have been accompanied with acquittals on substantive counts or, conceivably offense conspiracy in which, for example, the jury did not believe the Government proved tax evaded as an element of the charge for tax evasion, consistent with the judge's sentencing tax loss determination of zero); such a case would set up the issue nicely.) My point is that, if there are other bad facts, those bad facts likely include conduct that could be charged for a substantive crime (e.g., tax evasion) or an offense conspiracy (e.g., to commit tax evasion or aid and assist).  And conspiracy facts where actual fraud was the object (as it usually is in the overwhelming number of defraud conspiracy cases) could still be charged as a defraud conspiracy without the need of the suspect Hammerschmidt spin.  Why is the Hammerschmidt spin important to the Government when there is substantial doubt that the Hammerschmidt spin was intended by Congress as determined by the fraud element it enacted?  In the real world, I think all cases that I have observed (or at least recall having observed) could be charged and convicted for things Congress clearly intended to be crimes—including a defraud conspiracy with real fraud.

If thus self-limited by DOJ Tax and care in charging the counts, ad hoc fixes of the type Judge Kozinski imposed in Caldwell or the Court imposed in Marinello would not be needed.  And, if  thus self-limited by DOJ Tax, the result in Davis in another context could be avoided.

Finally, I ask this, since words in criminal statutes are supposed to be understandable to the general affected public, how many even well-educated persons (other than lawyers who have wallowed around in the criminal tax cases) would really have a clue a defraud conspiracy does not require fraud?

Added 3/27/22 1:00pm:

I just recalled that I would add an anecdote at the end of the blog.  I remember the anecdote but don't now recall why I thought the anecdote was particularly pertinent.  Nevertheless, I will share the anecdote.

While with DOJ Tax Appellate in the early 1970s, I was assigned an appeal to the Seventh Circuit.  The case as reported by the Seventh Circuit after the anecdote below was  Grinstead v. United States, 447 F. 2d 937 (7th Cir. 1991), here.

The issue was whether a payment made by a corporate employer was a taxable gift or some type of taxable income.  The principal authority was Commissioner v. Duberstein, 363 US 278 (1960), here, which I am sure all tax law students are familiar with through: the following (pp. 285-286, case citations, quotation mark, and footnotes omitted, a variation of a cleaned-up process, as cleaned up would be the way the authority would be presented to the jury in jury instructions):
The mere absence of a legal or moral obligation to make such a payment does not establish that it is a gift. And, importantly, if the payment proceeds primarily from the constraining force of any moral or legal duty or from the incentive of anticipated benefit of an economic nature, it is not a gift. And, conversely, where the payment is in return for services rendered, it is irrelevant that the donor derives no economic benefit from it. A gift in the statutory sense, on the other hand, proceeds from a detached and disinterested generosity, out of affection, respect, admiration, charity or like impulses.  And in this regard, the most critical consideration is the transferor's intention.  What controls is the intention with which payment, however voluntary, has been made. 
The trial judge in the case, Judge James Benton Parsons, here,  At the end of trial, the Government asked for jury instructions straight out of Duberstein.  The judge refused the Government's requested Duberstein instruction.  Rather than just refusing the requested instruction and moving on, Judge Parsons pronounce that he knew that Duberstein was not the law because he knew that the Duberstein opinion had been written by a clerk and that none of the Justices agreed with it.  He fashioned his own jury instruction (which in our view tilted too much in favor of gift in favor of the widow).  The jury held for widow.  The Government appealed.

On appeal, my draft of the opening brief included the episode about Judge Parsons charging the jury with his own preferred definition of gift and why he had refused to give the Duberstein instruction.  My reviewer struck that portion of the draft. He said it did not matter why the judge refused to give the Duberstein instruction, for the question on appeal is whether the instruction that he did give was adequate (regardless of the reason). The reviewer was right, of course.

At oral argument, one of the panel members asked whether Judge Parsons explained his reasoning for denying the Government's instruction virtually straight out of Duberstein. That was my opportunity to get that anecdote in. So, I did.At least two members on the panel seemed to smile and chuckle. (Judge Parsons was somewhat notorious for off-the-wall comments and actions; I am confident that the question was asked in the expectation it might elicit another good Judge Parsons anecdote.)

The Government lost on appeal. The 7th Circuit panel held (p. 940):
The Government also argues that the jury instructions were improper. While conceding that there was no misstatement of law, it contends that the form of some of the individual instructions was such as to mislead the jury. Reading the charge as a whole, we find that no harmful error was committed. Accordingly, the judgment is affirmed.
I don't recall that we conceded that Judge Parsons' jury instructions were a misstatement of law, which I distinguish from incomplete instructions not telling the jury the whole story under Duberstein. As such, I just don't recall conceding that issue. If the Court had asked me whether the Judge Parsons' instructions actually contained some of the factors for gift status, I would have answered yes, but one of the main arguments we made and did not concede was that the instructions as given were not fair and balanced in the Duberstein sense. The short shrift the panel gave our argument was just a path to ending the case without retrial and without embarrassment to Judge Parsons in a way that did not create bad precedent going forward.

Finally, in the end, the 7th Circuit panel said this (p. 940):
      Viewing the evidence as a whole, we find ourselves (to paraphrase Judge Parsons) firmly "convinced that, had we been the jury, we would have ruled against Mrs. Grinstead" but being reminded that "appellate review of determinations in this field must be quite restricted," Duberstein, supra, at 290, 80 S.Ct. at 1199, we find that we cannot say that the evidence adduced at trial so preponderated against Mrs. Grinstead that reasonable men could not have found for her. 

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