11th Circuit Reverses Conviction for Ineffective Assistance of Counsel for Not Filing a Rule 29 Motion re Affirmative Act of Evasion (7/13/22; 7/14/22)

As I promised yesterday, I have added substantially below for the paragraphs after paragraph 1. I made these additions on 7/14/22 3:30 pm.

The Eleventh Circuit issued the opinion in Hesser v. United States, 40 F.4th 1221 (4th Cir. 7/13/22), CA11 here and GS here. I have not fully digested the opinion and am not prepared to offer meaningful, nuanced comments that will be useful to readers of the Federal Tax Crimes Blog. I will stew on the opinion a bit before commenting. My detailed comments will come later as addenda to this blog.

Let me try to summarize at a high level what happened. A jury long ago convicted Hesser of “tax fraud under 18 U.S.C. § 287 and 18 U.S.C. § 2 and one count of attempted tax evasion under 26 U.S.C. § 7201.”  (A quibble, I would not describe § 287, labeled in the Code “False, fictitious or fraudulent claims,” as tax fraud since that term is often applied to other tax crimes, such as even § 7201.)  On Rule 29 motion after the jury verdict, the district court sustained the convictions. On direct appeal, the 11^th Cir. affirmed the convictions but remanded for further consideration of restitution. United States v. Hesser, 800 F.3d 1310 (11th Cir. 2015), GS here. Hessell then sought post-conviction relief under 28 USC § 2255 from the counts of conviction for "tax fraud" and tax evasion, alleging ineffective assistance of counsel. (Ineffective assistance of counsel is a common claim in § 2255 cases, although usually without merit.)  The district court granted the relief for the tax fraud counts but denied the relief for the tax evasion count.  Hesser appealed after obtaining a Certificate of Appealability from the 11^th Circuit. On the § 2255 appeal, the 11^th Circuit held that, on its view of the record, Hesser had been denied effective assistance of counsel because counsel failed to argue for Rule 29 judgment of acquittal at the close of the prosecution's case-in-chief on the basis that the prosecution had not adequately presented an element of the tax evasion crime – affirmative act of evasion. The 11^th Circuit reasoned that, had counsel timely requested Rule 29 relief, the district court would have erred as a matter of law in not granting that relief on the affirmative act of evasion element. So counsel’s failure to request that relief establishes that counsel’s representation was not effective, thus requiring vacation of the conviction. Whew (just trying to pack the gravamen of the case into those words wears me out; there is a lot of nuance underlying that summary).

Ninth Circuit Clarifies Affirmative Act for Evasion of Assessment After Return Filed Can Restart Statute Of Limitations (1/27/22)

In United States v. Orrock , 23 F.4th 1203 (9th Cir. 1/26/22), CA9 here and GS here, the Court resolved potential confusion in the 9^th Circuit as to whether the evasion of assessment statute of limitations runs from (i) the first date that all elements of the crime existed (often in evasion of assessment cases when the taxpayer files the return) or (ii) a later date where the taxpayer committed an affirmative action of evasion (e.g., lie in an audit or, as in Orrock, file some false related return). The Court held that the latter date could, in effect, restart the statute of limitations. In other words, if the taxpayer had done no affirmative act after filing the return, the statute of limitations applies from the date of filing the return. If the taxpayer does an affirmative act after filing the return, the statute of limitations is in effect “refreshed.”

I am surprised that this could really be a continuing issue. I think that, in the 9^th Circuit cases that appeared to create uncertainty on the point, there was just confusion that has now been clarified.

I offer on this subject the following from Michael Saltzman and Leslie Book, IRS Practice and Procedure, ¶ 12.02[1][c][iv] Affirmative act of evasion (Thomsen Reuters 2015) (some footnotes omitted) (note: I am the principal author of Chapter 12,  titled Chapter 12: Criminal Penalties and the Investigation Function):

We discuss statutes of limitations below, but it is important to note here that the statute of limitations begins to run on the date of the last affirmative act of evasion. To illustrate, assume the taxpayer files a false return with intent to evade tax. That filing alone can be the affirmative act. If it is the only affirmative act, then the statute of limitations runs from the date of filing. There can be later affirmative acts with respect to a previously filed return. For example, if, incident to an audit of the return, a taxpayer makes a false statement to the agent in order to hide the original fraud on the return, then the statute of limitations on evasion will run from the date of the false statement.n104 Although the affirmative act element and the willfulness element of tax evasion are stated as separate elements, the elements are related in that the affirmative act element requires a willful intent to evade motivating the affirmative act. Stated otherwise, if the affirmative act element is satisfied, then wouldn't the willfulness element necessarily be satisfied? The cases discussing the issue are sparse, but the logic seems compelling.
   n104 United States v. Beacon Brass Co., 344 US 43 (1952) . The false statement is also a separate crime under 18 USC 1001. The Ninth Circuit, in an opinion many practitioners believe was wrongly decided, held that where the filing of a false return was an act of evasion of assessment, the crime was complete and started the statute of limitations, so that subsequent false statements in audit to avoid assessment were not separate acts of evasion starting a new statute of limitations. United States v. Galloway, 125 AFTR2d 2020-803 (9th Cir. 2020) (unpublished). The reasoning is not consistent with Beacon Brass where a taxpayer’s later false statements in the course of an audit effectively refreshed the statute of limitations.

 I will revise that footnote in the next cumulative supplement to the Saltzman treatise.

Tenth Circuit Affirms Tax Crimes Convictions and Sentencing (3/2/19)

In United States v. Stubbs (10th Cir. 2019), here, a nonprecedential decision, the Court affirmed Stubbs' convictions and sentencing for two counts of tax evasion and six counts of failure to file.

The activity giving rise to the tax obligations involved was a rebate program, run by his company National Energy Rebate Fund, Inc.  Basically, the scheme was to sell home-improvement companies the opportunity to market a potential 50% rebate to their customers, but the rebate was well into the future and very difficult to qualify for.  Here is the description:

NRF's profit allegedly came from the "slippage" between the total number of customers eligible for rebates and the much smaller number who successfully completed the requirements. The rebate opportunity carried extremely stringent rules: customers had to register the rebate within 17 days of receiving the form; they had to send forms by registered mail only; they had to claim the rebate within the 30 days after the 47th month from the purchase; and the rebate offer would be invalid if anyone other than NRF, such as the company from which they got the rebate forms, reminded them about the deadlines. NRF set aside only a small portion of the revenues it received to pay rebates. And although the rebate program ostensibly was administered by an independent third party, that administration company actually was connected to Stubbs. Apparently, some customers received rebates, but numerous customers who failed to strictly satisfy each and every condition were denied rebates. NRF and its activities were the subject of civil lawsuits brought by Wisconsin and Colorado on behalf of their citizens, which resulted in multi-million-dollar default judgments against Stubbs.

Stubbs failed to file returns at the S-corporation level and at the individual level.  He also failed to pay the tax that would have been due.

Indictments were obtained for tax evasion and failure to file.  Convictions were obtained.  Stubbs fled to Costa Rica, was arrested and returned to U.S.  He was sentenced to 88 months.  He appealed.  He lost..

The issues resolved against Stubbs on appeal were:

1.  The evidence was sufficient to convict for tax evasion.

2.  The district court did not plainly err in admitting evidence of prior acts.

3.  In its sentencing calculation, the district court did not err in applying the criminal activity and sophisticated means enhancements.

This is a nonprecedential case so there is nothing of major significance in the opinion.  The following, however, did catch my eye.

Trial Court Rejects Ineffective Assistance Claims for Strategic Choices at Trial (11/24/16)

In Litwok v. United States, 2016 U.S. Dist. LEXIS 162715  (ED NY 2016), here, the Court denied the convicted defendants petition for relief under 28 USC 2255, here, a form of federal habeas corpus relief after conviction. Litwok had been convicted for tax evasion on retrial after her first convictions for wire fraud and tax evasion were reversed.  (I wrote on the first convictions which were reversed Second Circuit Reverses and Vacates Convictions for Wire Fraud and Tax Evasion (Federal Tax Crimes Blog 5/1/12), here.)  The conviction on retrial for one count of tax evasion was subsequently affirmed on appeal.  United States v. Litwok, 611 F. App'x 12 (2d Cir. 2015), here.  I did not write on the later affirmance but will mention  some aspects of the affirmance in this blog on the § 2255 proceeding.

In the earlier blog on the reversal of the first convictions, I dealt with the issue of charging a defendant for tax evasion -- evasion of assessment -- where the taxpayer failed to file a tax return.  It is black letter law that a failure to file alone cannot support a prosecution and conviction for tax evasion; there must be some affirmative act of evasion.  The initial prosecution charged three years of tax evasion in a context of failure to file.  The Second Circuit held in the first appeal that, for two of the three charged years, the Government had not established the required affirmative act of evasion for tax evasion.  The Court reversed the third conviction also because of the improper joinder of the wire fraud charge.  On remand and retrial, the Government charged only the tax evasion count.  The defendant was convicted.  On appeal of that conviction, the Second Circuit in a nonprecedential order held in part as follows:

1. Litwok had waived any statute of limitations defense by not raising the issue below.

2. "Based on the evidence presented, a jury could have fairly credited Testaverde's testimony and concluded that Litwok willfully committed an affirmative act with the intent to avoid paying her taxes."

3.  "Litwok's ineffective assistance claims (failure to raise statute of limitations, failure to investigate perjured testimony and object to prosecutorial misconduct, failure to call a forensic accountant, failure to present exculpatory evidence, and failure to inquire as to whistleblower status of witnesses)" are more properly raised in a § 2255 proceeding.

4.  The record did not support Litwok's claim that the accountants testimonies were false.

5.  The record did not establish Litwok's claims of prosecutorial misconduct in referring in opening and closing arguments to allegedly perjured testimony of Government witnesses.

So, after the conviction on the second trial and while the second appeal was pending, Litwok filed the instance § 2255 proceeding.  The trial court finally reached and resolved the § 2255 proceeding by denying the claims and rejecting the request for certificate of appealability.

I recommend to readers reviewing the entire opinion.  I mention here only briefly the claims addressed with some context for claims I find particularly interesting:

1.  Failure to assert the statute of limitations Defense.

Here, petitioner's trial counsel submitted a declaration attesting that a statute of limitations argument "was not a bona fide issue or defense and there was no good faith factual basis for making such a motion." (Decl. of Robert A. Chapnick, ECF No. 16-2 ("Chapnick Decl.") at ¶ 2.) Under the deferential standard outlined above, the court must presume that counsel acted within the "wide range of reasonable professional assistance," Strickland, 466 U.S. at 689, in making that determination, and the applicable precedent indicates that a limitations defense would have been fruitless. "The law is well established that the statute of limitations for tax evasion runs from the day of the last act of evasion[, which] encompasses any act of concealment . . . ." United States v. Mui, 214 F. App'x 40, 47 (2d Cir. 2007) (emphasis in original) (and citation omitted). Petitioner was charged with tax evasion by superseding indictment dated March 19, 2003, and at trial, the government introduced acts of concealment dating to at least mid-1997, which falls within the limitations period. Those incidents include the March 1, 1997 retention of another accounting firm to replace Testaverde, a relationship that lasted for approximately two months before that accountant quit (T. at 248-50); and petitioner's April 15, 1997 submission of an extension request for the filing of her tax return (T. at 193). Had petitioner's trial attorney sought dismissal on limitations grounds, the government would have argued that those events or other post-March 19, 1997 conduct constituted acts of concealment sufficient to toll the commencement of the statutory period. Given that evidence of concealment, any motion to dismiss would have lacked merit, and counsel was not ineffective for failing to raise that argument. 

Accordingly, this branch of petitioner's ineffective counsel claim fails because she has not shown that her trial attorney was deficient for declining to make a motion that had no merit.

The Relationship Between Affirmative Act of Evasion and Willfulness (11/18/16)

In United States v. Boisseau, ___ F.3d ___, 2016 U.S. App. LEXIS 20535 (10th Cir. 2016), here, Boisseau was a lawyer who reported but did not pay a large amount of tax over a number of years.  He then set about to avoid having to pay the unpaid tax or at least delay having to pay the unpaid tax.  He was prosecuted for tax evasion.

The district court determined that Mr. Boisseau willfully evaded paying his taxes by (1) placing his law practice in the hands of a nominee owner to prevent the Internal Revenue Service (IRS) from seizing his assets; (2) causing his law firm to pay his personal expenses directly given an impending IRS levy, rather than receiving wages; and (3) telling a government revenue officer that he was receiving no compensation from his firm when in fact the firm was paying his personal expenses.

Boisseau's "affirmative acts" of tax evasion were:  (1) he had his son's father-in-law appear as the nominal owner of the LLC through which he practiced law (the opinion does not state whether the father-in-law was a lawyer, but does state that he "had no daily involvement with the firm, performed no work for it, and received no salary."); (2) he altered his compensation from the firm from a salary to paying his personal expenses, so that the IRS would be less able to levy; and (3) he represented -- misrepresented -- to the collection officer that his expenses were being paid by children and family members rather than by the firm (he sought to avoid the inference from this fact by arguing that his lawyer had corrected the representation and that he reported by payments as Schedule C income).  The Court of Appeals held that the evidence was sufficient to permit the trial judge to find that these were affirmative acts of evasion, one of the three element of tax evasion.

And, basically on the same fact pattern, the Court of Appeals held that the evidence was sufficient to permit the trial judge to find willfulness, one of the three elements of tax evasion.

The next part of the opinion is the most interesting.  I quote it in full:

Mr. Boisseau also argues that his conviction was the product of two legal errors. He argues that proof of an affirmative act of tax evasion cannot be established without evidence that the act was designed to conceal or mislead, and that proof satisfying the affirmative act element is not sufficient, in and of itself, to prove the willfulness element. 

Regarding his first challenge, Mr. Boisseau relies upon United States v. Meek, in which we stated, "An affirmative act requires more than the passive failure to file a tax return; rather, it requires a positive act of commission designed to mislead or conceal." 998 F.2d 776, 779 (10th Cir. 1993). In light of this precedent, Mr. Boisseau contends that the district court erred in stating that the government did not need to prove that he misled or concealed assets from the IRS. See Boisseau, 116 F. Supp. 3d at 1257. The government argues, inter alia, that the district court properly recognized the Supreme Court's recent decision in Kawashima v. Holder demonstrates that "the elements of tax evasion pursuant to § 7201 do not necessarily involve fraud or deceit" and that "it is possible to willfully evade or defeat payment of a tax under § 7201 without making any misrepresentation." 565 U.S. 478, 132 S. Ct. 1166, 1175, 182 L. Ed. 2d 1 (2012). Mr. Boisseau asserts that this language in Kawashima is dicta and does not overturn this court's decision in Meek requiring a positive act designed to mislead or conceal. 

We need not resolve this issue, however, because Mr. Boisseau lacks the factual predicate to make it given the district court's evaluation of the evidence. The district court addressed Mr. Boisseau's contention that the affirmative acts must mislead or conceal, and clearly stated that "[Mr.] Boisseau did mislead or conceal." Boisseau, 116 F. Supp. 3d at 1257. It found that Mr. Boisseau's conduct in using a nominee, altering his compensation, and misrepresenting his compensation to the IRS was not only intentional but also inherently misleading. Id. In light of its findings, there was simply no need to expressly state that Mr. Boisseau's conduct was "designed to conceal or mislead." 

As to Mr. Boisseau's second argument, he asserts that because the willfulness and affirmative act elements are distinct, the district court erred in relying on the Second Circuit's decision in United States v. Romano to conclude "if the affirmative act element is satisfied, there is no question that willfulness is also present." Boisseau, 116 F. Supp. 3d at 1256 (quoting Romano, 938 F.2d at 1572). The government responds that this argument was not preserved, and that the district court clearly stated that the elements were separate, defined willfulness in accordance with Supreme Court precedent to mean "the voluntary, intentional violation of a known legal duty," Cheek, 498 U.S. at 201, and found that each component of that definition was satisfied here. 

Regardless of whether the error was preserved, and having considered each of Mr. Boisseau's contentions, we conclude the government has the better argument. The district court's opinion, taken as a whole, demonstrates that the court treated the affirmative act element and the willfulness element as distinct. It defined the elements separately, and separately discussed which facts in the record proved each element beyond a reasonable doubt. Thus, the error, if any there be, was harmless because the district court simply did not conflate the affirmative act and willfulness elements of § 7201.