First Circuit Rejects Tax Defier's Complaints About IRS Packing Heat and Improper Good Faith Defense Instructions (1/15/14)

In United States v. Adams, 740 F.3d 40 (1st Cir. 2014), here, the court affirmed the defendant's conviction, rejecting two interesting arguments -- one about IRS agents' authority to pack heat while executing a search warrant and the other, the common claim that the district court erred in rejecting the defendant's proffered good faith instruction.

The opinion is short and well written.  The introduction is as follows:

Defendant-appellant Charles Adams, an unabashed opponent of the tax laws, advances two discrete claims of error regarding his convictions on charges of conspiracy and tax evasion. One claim, which raises a question of first impression at the federal appellate level, implicates the lawfulness of a premises search conducted by armed agents of the Internal Revenue Service (IRS). The other claim challenges the district court's jury instructions. After careful consideration, we reject his claims and affirm the judgment below.

1.  Packing Heat -- Still Unsettled.

Just so the terminology is meaningful, I mean this in one of the senses I found on the Urban Dictionary, here:  "To carry a firearm. Usually refers to the act of carrying a handgun."  (There are other definitions there, some of which are only metaphorically related to guns.)  The court's discussion of this issue is:

 On March 19, 2004, a magistrate judge issued a warrant that authorized the search of the defendant's home in Wrentham, Massachusetts. Four days later, armed IRS agents executed the warrant and seized evidence that the government later used against the defendant. 

During pretrial skirmishing, the defendant moved to suppress this evidence. Pertinently, he asserted that the search was unlawful because the manner of its execution was not authorized by statute. The defendant based this assertion on 26 U.S.C. § 7608 [here], which deals with the "[a]uthority of internal revenue enforcement officers." 

The defendant's argument takes the following shape. Subsection (a) of the statute, which deals with IRS enforcement of laws pertaining to alcohol, tobacco, and firearms, explicitly allows agents enforcing those laws to carry guns. See 26 U.S.C. § 7608(a)(1). Subsection (b), which deals with IRS enforcement of other tax laws, contains no similar grant of explicit permission to carry guns. The defendant posits that the absence of any such explicit permission in subsection (b) indicates Congress's intent to prohibit IRS agents enforcing those laws from carrying firearms. See United States v. Hernández-Ferrer, 599 F.3d 63, 67-68 (1st Cir. 2010) (discussing principle of expressio unius est exclusio alterius). And because the agents who searched his home were armed and not investigating any offense involving alcohol, tobacco, or firearms, the defendant argues that the search was unlawful and the evidence seized should therefore be suppressed.

Notable Decision in SDNY Criminal Tax Shelter Case (1/14/10)

I have previously blogged that John B. Ohle was an unindictead alleged co-conspirator in the Daugerdas et al. indictment.  See here.  Ohle was indicted apart from that indictment.  He was indicted along with a guy named Bradley.  That indictment generated a significant decision from Judge Leonard Sand in United States v. Ohle, 2010 U.S. Dist. LEXIS 2150 (SDNY No. S2 08 Cr. 1109 (LBS)).  The following are the points that attracted my particular attention:

1. The Court rejected a challenge to the wire fraud count (Count One). Ohle argued that "Count One of the indictment impermissibly uses the wire fraud statute to reach an alleged criminal tax conspiracy, citing United States v. Henderson, 386 F. Supp. 1048 (S.D.N.Y. 1974)." The Court essentially took the life out of Henderson. Prosecutors have their choice of how to charge tax conspiracies. Why does it matter if a conspiracy is a conspiracy and there is a single punishment scheme in 18 U.S.C. § 371? Ah, but there are other potential consequences of wire and mail fraud -- forfeiture and even ramping up to money laundering or RICO -- which are not available for tax crimes and tax conspiracy (either offense or Klein defraud conspiracy). See fn. __ on page __. For the DOJ Tax Division policy for prosecutors to make the choice, see Directive No. 128 here (noting that virtually all tax crimes can be charged as mail or wire fraud, and attempting to provide guidance and preclearance directives so the mine-run tax cases are not willy-nilly charged as mail or wire fraud). Thus, these charging decisions are not tweedle dum / tweedle dee from the defendant's perspective.

2. The Court rejected a challenge to another conspiracy (Count Five) as duplicitous. The indictment contained a "boilerplate" allegation that appeared to allege a single conspiracy. The overt acts, however, seemed to suggest multiple conspiracies. Yet, because the apparent multiple conspiracies were related and involved players not acting in a vacuum, with compensation flowing around, the Court concluded that the allegation is of a single conspiracy and not multiple conspiracies so as to implicate duplicity concerns. In the process of getting to that holding, the Court had a nice discussion of the concerns that are implicated by duplicity in counts (case names and quotation marks omitted to easier see the logical flow):

An indictment is duplicitous if it joins two or more distinct crimes in a single count. Duplicitous pleading is not presumptively invalid; rather, it is impermissible only if it prejudices the defendant. Duplicity is only properly invoked when a challenged indictment affects one of the doctrine's underlying policy concerns: (1) avoiding the uncertainty of a general guilty verdict, which may conceal a finding of guilty as to one crime and not guilty as to other, (2) avoiding the risk that jurors may not have been unanimous as to any one of the crimes charged, (3) assuring the defendant has adequate notice of charged crimes, (4) providing the basis for appropriate sentencing, and (5) providing the adequate protection against double jeopardy in subsequent prosecution.

The Court of Appeals for the Second Circuit has recognized that application of the duplicity doctrine to conspiracy indictments presents "unique issues." In this Circuit, it is well established that [t]he allegation in a single count of a conspiracy to commit several crimes is not duplicitous, for the conspiracy is the crime and that is one, however diverse its objects. A single conspiracy may be found where there is mutual dependence among the participants, a common aim or purpose or a permissible inference from the nature and scope of the operation, that each actor was aware of his part in a larger organization where others performed similar roles equally important to the success of the venture. Each member of the conspiracy is not required to have conspired directly with every other member of the conspiracy; a member need only have participated in the alleged enterprise with a consciousness of its general nature and extent. If the Indictment on its face sufficiently alleges a single conspiracy, the question of whether a single conspiracy or multiple conspiracies exists is a question of fact for the jury. Accordingly, courts in this Circuit have repeatedly denied motions to dismiss a count as duplicitous.

Is the Civil Audit a Set Up?

The Internal Revenue Manual directs revenue agents conducting a civil examination to refer the case to the Criminal Investigation branch ("CI") of the IRS when there is a "firm indication of fraud." Transfer of the matter to CI means that contact thereafter while there is still fraud investigation potential will be by a CI "Special Agent" who will read the taxpayer the modified Miranda warnings, including the right not to answer questions and the right to consult with an attorney. (Taxpayers are given modified Miranda warnings only because full-blown Miranda warnings are required only if the person is in the potentially coercive setting of custody, which is rarely the case in tax investigations.) Once the Special Agent is on the scene and surfaces, the taxpayer will be on notice that he has rights that he must consider exercising.

Sometimes a civil agent finding such indications of fraud may believe that he should pursue the matter further and either is oblivious to firm indications of fraud or just ignores them. Some civil agents just want to be more involved in the process of nailing the bad guy, and they will be out of the loop once the case is referred. But, for whatever reason, the civil agent may continue on despite firm indications of fraud.

From the taxpayer's perspective, he and his advisors may know that there is some fraud potential in a civil audit, but they are aware of the IRM provision requiring a fraud referral upon firm indications of fraud. The continued civil audit activity by the revenue agent may lead the taxpayer and his advisor to believe that the agent is continuing the civil examination rather than sub silentio conducting a criminal investigation. The continued civil audit activity, as they read the IRM, is an indication that the civil audit continues, and they may read that indication as some type of implicit representation by the revenue agent that the criminal investigation has not begun. The problem then arises when the civil agent develops damning admissions in an interview of the taxpayer without giving them any notice that the investigation has turned criminal -- much less the modified Miranda warning.

When the taxpayer is thereafter criminally prosecuted, the taxpayer may seek to exclude the damning admissions. In some cases, the mere exclusion of that evidence will knock out the Government's case altogether. Generally, of course, where the Government has violated constitutional rights in the process of gathering evidence in an investigation, Courts will exclude the evidence from a criminal trial. Do these exclusionary concepts extend so far to cover a revenue agent who violates the IRM by continuing to conduct the civil investigation when the revenue agent really is pursuing a criminal investigation?

The courts have been troubled by this question. The most extreme case is where the taxpayer or his advisor specifically asks if the investigation has turned criminal and, even though it has (albeit not referred to CI yet because the revenue agent is holding on and conducting his own criminal investigation), the revenue agent denies that it has. That would be an express misrepresentation, and the courts have indicated that suppression may be appropriate for such an express misrepresentation. What about any implicit misrepresentation that a taxpayer or his advisor may infer from continued civil audit activity. The clear trend in the cases is to reject a taxpayer's attempt to exclude the resulting evidence. This is an application of the so-called Caceres rule (United States v. Caceres, 440 U.S. 741 (1979)), which says that the mere failure to follow an internal rule -- here the IRM rule requiring referral upon firm indications of fraud -- does not justify suppression, absent some constitutional consideration.

These rules were announced and applied in a recent case from the Sixth Circuit Court of Appeals in United States v. Rutherford, ___ F.3d ___ (6th Cir. 2009). In Rutherford, the court rejected as dicta a prior Sixth Circuit's panel opinion in United States v. McKee, 192 F.3d 535 (6th Cir. 1999), which in a footnote had held out some possibility of suppressing such evidence. The court held that the mere continuance of the civil audit will not alone suffice for exclusion, absent some other indication of the type of coercion that would constitutionally require some type of warning such as Miranda. Rutherford is the most recent in a series of cases dealing with this issue and is must reading for practitioners as an object lesson in how they and their clients behave in a civil audit.

Bottom line, taxpayers and advisors who are cooperating in a civil audit need to be specially careful in any case with criminal potential. They should never assume that the matter cannot turn criminal, and certainly should avoid doing anything that would shoot the taxpayer in his own foot through damning admissions carelessly made. And, of course, if there is potential criminal potential against the advisor, this will give the advisor increased incentive be proceed cautiously himself.