Eighth Circuit Affirms Adult Entertainer's Conviction for Tax Perjury and Sentencing for Unreported Income for Sexual Services (3/20/16)

In United States v. Fairchild, ___ F.3d ___, 2016 U.S. App. LEXIS 4858 (8th Cir. 2016), here, the Court opens the drama:

A jury found Veronica J. Fairchild guilty on four counts of making and subscribing a false tax return, in violation of 26 U.S.C. § 7206(1). The district court n1 sentenced Fairchild to 33 months' imprisonment. On appeal, Fairchild argues that (1) insufficient evidence supports the jury's finding that Fairchild knowingly and willfully underreported her income; (2) the district court abused its discretion in failing to instruct the jury that it was required to unanimously agree on which source of income that Fairchild failed to report on her income tax return; and (3) the district court improperly calculated Fairchild's Guidelines range and imposed a substantively unreasonable sentence. We affirm.

Highly summarized, the facts are:  Fairchild was a female adult entertainer who received large sums of money (over $1,000,000) from one of her customers and smaller significant sums from another.  She failed to file timely income tax returns during the years in which she received the income but subsequently filed delinquent tax returns for the years "apparently unaware of the ongoing IRS investigation."  (The delinquent returns were apparently needed in order to obtain financing for a real estate purchase.)  In those delinquent returns, she reported about 1/2 the amount that the two customers had given her and probably most of that was from sources other than the two customers.  Fairchild claimed that the transfers from her two customers to her were gifts rather than compensation for services.

She claimed that when she met with her accountant in 2010 to prepare her tax returns, she decided to claim some of the gifts from Karlen as income to benefit him, so that he did not have to pay the taxes on all of it. To determine her income over the four years, she "decided that any time [she] spent with David [Karlen], anything that could be construed as income or considered a gray area at a thousand dollars an hour." She testified that she spent an average of two times per month with Karlen over the 48-month period, and she estimated that she spent approximately four or five hours with Karlen during each "session." She stated that she also included going out to eat with Karlen as part of the billable time. Fairchild calculated that she had earned "about $120,000 a year" for each of the four years for services that she provided to Karlen. She testified that, at the time that she filed the tax returns, she believed that the money in excess of what she reported as income was "[g]ifts." But Fairchild admitted that "Karlen never used the word 'gift' with [her]."

I am leaving out some of the details from the opinion.  I think most readers can project the general nature of the details or can read the opinion to get them from the court.

1. Sufficiency of the Evidence.

Fairchild and her customers testified differently at trial as to what the payments were for.  There was sufficient evidence that the jury could determine that she underreported her income on the delinquent returns.  The Court then rejected Fairchild's claim that the nature of the payments was sufficiently unclear that she was not willful in underreporting the income.  Arguing lack of proof of willfulness beyond a reasonable doubt is often the only ultimate defense in criminal tax cases.  Here is what the Court says:

District Court Cryptically Rejects Defendant's Arguments on Instructions (5/25/15)

Trials are messy and the legal principles deployed are often imprecise.  In United States v. Messier, 2015 U.S. Dist. LEXIS 63741 (D. ME 2015), here, the defendant was tried on Section 7212(a) tax obstruction (Count One), 18 USC 371 Klein tax defraud conspiracy (Count Two), and apparently 5 counts of substantive tax crimes (Counts Three through Seven).  He was convicted on Counts One and Two and acquitted on Counts Three through Seven.  (Although not stated in the opinion, Counts Three through Seven were for Section 7203 failure to file; for reasons apparent from the opinion, although not expressed explicitly, the acquittal was apparently based upon a jury determination that the Government had not proved willfulness a la Cheek beyond a reasonable doubt.)  The following are the portions of the opinion that interested me:

1.  The Tax Obstruction Instruction Properly Excluded a Requirement That the Defendant Must Have Intended to Violate the Criminal Law.

The defendant argued that the Count One Section 7212 instruction should have included a requirement that the defendant have intended to violate the criminal law.  The defendant apparently sought to leverage from the acquittal for lack of willfulness on Counts Three through Seven.  Willfulness, the element of most Title 26 crimes, requires a specific intent to violate a known legal duty.  Section 7212(a) does not include a textual requirement of willfulness.  Accordingly, the district court instructed the jury that conviction required only "the intention of securing an unlawful benefit," citing United States v. Floyd, 740 F.3d 22, 31 (1st Cir. 2014).  In the Order, the Court said cryptically that that is all that is required.

The issue is perhaps more subtle than one would gather from the Order.  See Tenth Circuit Opinion on Mens Rea for Tax Obstruction - What Does Unlawful Mean? (7212(a)) (3/30/14), here.

2.  Counts One and Two Did Not Require the Cheek Instruction.

This argument may be a variation of the first, but is presented separately.  The Court's discussion is:

The instructions were not unclear, and properly charged the jury on corrupt endeavor (Count One) and conspiracy to defraud (Count Two) in accordance with First Circuit precedent. So far as Cheek is concerned, the defendant secured a not guilty verdict on Counts Three through Seven, the only counts where I gave a Cheek-related instruction. In other words, he prevailed on this issue. Nothing in the instructions suggests any Cheek issues on Counts One and Two. To the extent that the defendant now is arguing that a Cheek defense applied to those two counts, he failed to make that objection to the jury charge. Moreover, the Cheek defense derives from the specific "willfulness" language in certain provisions of the criminal tax laws, such as 26 U.S.C. § 7203. There is no such "willfulness" requirement in the corrupt endeavor crime, 26 U.S.C. § 7212(a), or in the conspiracy to defraud crime, 18 U.S.C. § 371. Several circuits have held specifically that Cheek is not an available defense to the corrupt endeavor or conspiracy to defraud crimes. United States v. Williamson, 746 F.3d 987, 991-92 (10th Cir. 2014) (regarding 26 U.S.C. § 7212(a)); United States v. Kelly, 147 F.3d 172, 176 (2d Cir. 1998) (same); United States v. Damra, 621 F.3d 474, 501 n. 7 (6th Cir. 2010) (regarding 18 U.S.C. § 371); United States v. Derezinski, 945 F.2d 1006, 1012 (8th Cir. 1991) (same).

I refer readers to the blog noted above for further discussion of this issue.   Note that the Kelly case cited by the Court seemed to equate the obstruction charge of intent to seek a lawful benefit with the willfulness requirement of intending to violate a known legal duty.  Kelly at p. 177 (the obstruction instruction was ""was as comprehensive and accurate as if the word 'willfully' was incorporated in the statute.")

Aegis Convictions Affirmed Installment #4 - the Conspiracy Conviction (10/1/12)

The Aegis defendants were convicted of conspiracy which, as Judge Easterbrook has lamented, are “inevitable because prosecutors seem to have conspiracy on their word processors as Count I; rare is the case omitting such a charge.”   United States v. Reynolds, 919 F.2d 435, 439 (7th Cir. 1990).  At the end of this blog, I address the role of the conspiracy charge in white collar crime, of which tax crimes are a subset.  First, I want to deal with the Seventh Circuit's affirmance of conspiracy in the Aegis case, Vallone.

Sure enough, as Judge Easterbrook presciently noted, Count one of the indictment alleged conspiracy, specifically that the defendants violated 18 U.S.C. § 371 by conspiring to:

(a) defraud the United States by impeding, impairing, obstructing and defeating the lawful government functions of the IRS of the Department of the Treasury, an agency of the United States, in the ascertainment,  [*94] computation, assessment, and collection of revenues, namely income taxes; and (b) commit offenses against the United States, namely: to willfully aid and assist in, and procure, counsel, and advise the preparation and presentation, to the IRS, of returns and claims on behalf of others which were fraudulent and false as to various matters, in violation of Title 26, United States Code, Section 7206(2).

Tax and white collar crimes afficionados will recognize that, as framed, there is a single conspiracy with two objects.  The first object is what is called an offense conspiracy.  The second object is a defraud conspiracy, in a tax setting commonly referred to as a Klein conspiracy to impair or impeded the lawful functioning of the IRS.  (Note, the word defraud in the conspiracy statute is broader than the normal definition of defraud and reaches mere attempts to impair or impeded.)  A conspiracy can have a single object to violate one or more specific statutes (that is more technically an offense conspiracy) or to defraud (that is more technically a defraud conspiracy).  But the conspiracy can be to do both -- both to violate one or more statutes and to defraud.  The latter is the type involved in Vallone.

Seventh Circuit Rejects Duplicity, Multiplicity and Other Arguments (11/23/11)

In United States v. Hassebrock, 663 F.3d 906 (7th Cir. 2011), here, the Seventh Circuit addressed a number of interesting issues relate to criminal tax law and sentencing. Hassebrock was a tax protestor (or perhaps more politically correct, a tax defier). Hassebrock "consciously disobeyed his obligation to pay taxes, joined a fictitious Native American tribe to avoid his tax obligation, and attempted to pay taxes with fraudulent sight drafts." Hassebrock was indicted and convicted for one count of tax evasion and one count of failure to file for, respectively, evasion of his 2004 tax liability and failure to file with respect to 2004. (I hope that statement has your antenna raised!)

The indictment for failure to file alleged that he committed the crime by failing to file the 2004 return on or before April 15, 2005. As it turns out, however, there was "strong evidence" that he had not filed for an extension on or before April 15, 2005 (as required for a valid extension) but, on August 12, 2005, had applied for an extension which, if granted, arguably would have extended the filing date until October 15, 2005. There was some argument about the meaning of these events that, but I address it below.

The points of the opinion that I find of interest and believe readers -- at least some readers -- may also be interested in are:

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.

Duplicity in Government Charging of Evasion of Assessment Counts

The Third Circuit issued an important opinion in United States v. Root, 585 F.3d 145 (3d Cir. 2009). The major issue in the opinion is the application of the criminal law concept of "duplicity." Duplicity is defined as "an indictment where the Government charges two or more distinct offenses in one count. In the latter situation, it cannot be determined if the jury's verdict was unanimous as to each distinct offense.)." 1A Charles Alan Wright et al., Federal Practice and Procedure § 142 (3d ed. 1999) (cited in fn. 7 of the concurring opinion in Root). The majority cites a longer list of concerns in duplicity:

The purposes of the prohibition against duplicity include: (1) avoiding the uncertainty of whether a general verdict of guilty conceals a finding of guilty as to one crime and a finding of not guilty as to another; (2) avoiding the risk that the jurors may not have been unanimous as to any one of the crimes charged; (3) assuring the defendant adequate notice; (4) providing the basis for appropriate sentencing; and (5) protecting against double jeopardy in a subsequent prosecution.

(Note that some of these concerns overlap the recent Rigas discussion here.