§ 7202 Convictions Reversed for Improper Bad Acts Evidence (9/23/19)

In United States v. Snyder, 2019 U.S. App. LEXIS 28326 (6th Cir. 9/19/19) (unpublished), here, Snyder fell into the not uncommon trap of using company (Attevo) withheld trust fund tax for purposes other than paying over to the IRS and went one step further by using funds that should have been deposited to employee 401(k) plans.  The company failed.  The trust fund tax was not paid.  Snyder was indicted "on seven counts of willfully failing to pay over taxes, see 26 U.S.C. § 7202, and one count of embezzling from an employee-benefit plan, see 18 U.S.C. § 664."  Snyder was acquitted on two § 7202 counts and convicted on the remaining counts.

On appeal, Snyder argued that the trial court abused its discretion in allowing the introduction and use of evidence in closing argument that Snyder had failed to file personal tax returns for some number of years.  That evidence is so-called "bad acts" evidence that must run the gamut of FRE 404(b), which limits the use of such evidence, and 403, which requires exclusion of relevant evidence if prejudicial or confusing.  The court generalized the law as follows:

“The government may not use evidence of prior bad acts to show that a defendant’s character made him more likely to commit the charged crime.” United States v. English, 785 F.3d 1052, 1055 (6th Cir. 2015); see Fed. R. Evid. 404(b)(1). However, such evidence “may be admissible for another purpose, such as proving . . . intent . . . [or] absence of mistake.” Fed. R. Evid. 404(b)(2). Even if the evidence is admissible under Rule 404(b), the district court may still exclude it “if its probative value is substantially outweighed by a danger of,” among other things, “unfair prejudice, confusing the issues, [or] misleading the jury.” Fed. R. Evid. 403. 

Because the tax charges against Snyder are specific-intent offenses, this is the kind of case in which evidence of prior bad acts might be admissible. See United States v. Johnson, 27 F.3d 1186, 1191–92 (6th Cir. 1994). But that does not mean such evidence “is automatically admissible.” Id. at 1192 (emphasis added).  

Under Rule 404(b), prior bad acts are inadmissible if they “are too unrelated” to the charged conduct or “too far apart in time to be probative of” the defendant’s specific intent. United States v. Clay, 667 F.3d 689, 696 (6th Cir. 2012). Likewise, dissimilar or long-ago bad acts are usually inadmissible under Rule 403, because they have “a powerful impact on a juror’s mind” despite their “slim probative value.” Ibid. There is “too much of a risk that the jury will generalize from prior examples of bad character.” Id. at 697.

Bottom-line, the Court felt that the failure to file tax returns was too dissimilar to the crime of willful failure to pay over trust fund tax charged under § 7202.

Of course, admission of such evidence is reversible only if not harmless, as is often the case.  The Court seemed particularly troubled about the prosecutor's use of the evidence in closing argument:

If Pizzola’s testimony had amounted only to an isolated blurt, the error likely would have been harmless (as Snyder conceded at oral argument). But Pizzola’s comment was not the only reference to Snyder’s personal tax troubles: Terry, the other IRS witness, also testified about them. And to make matters worse, the government’s closing argument expressly invited the jury to make the propensity inference Rule 404(b) exists to prevent: “[Y]ou heard testimony that the defendant wasn’t even paying his own taxes. He’d done it before, and he was doing it this time.” The government’s misuse of the testimony makes it impossible to dismiss the erroneous admission of this evidence as harmless.

While the district court gave a limiting instruction, this is not “a sure-fire panacea for the prejudice resulting from the needless admission of” propensity evidence. United States v. Haywood, 280 F.3d 715, 724 (6th Cir. 2002). “As empirical studies have shown, evidence of prior bad acts influences factfinders even when the court gives a limiting instruction.” Clay, 667 F.3d at 697. A limiting instruction may be “insufficient to mitigate these potential risks,” and it does not preclude a new trial. Id. at 700–01. See also United States v. Jenkins, 345 F.3d 928, 939 (6th Cir. 2003).

 Accordingly, the Court vacated the § 7202 convictions but affirmed the embezzlement conviction.

Court of Appeals Affirms Exclusion of Amended Returns and Payments after Start of Criminal Investigation (3/20/18)

In United States v. Evdokimow, 726 Fed. Appx. 889, 2018 U.S. App. LEXIS 6564 (3rd Cir. 2018) (nonprecedential), CA3 here & GS here, Evdokimow was convicted of 8 tax crimes counts "relating to his failure to report and pay taxes on his personal and business income."  The issues he raised on appeal arose from his attempt after learning of the criminal tax investigation to file amended return and pay the indicated tax and interest.  (The opinion refers to payment of tax, penalties and interest, but penalties are not usually paid with amended returns; I suppose he may have paid penalties with the amended returns or upon assessment by the IRS; in any event, that is not relevant and I will just refer to his payments as payments of tax.)  The underlying gambit to evade his tax liability was contorted, but not particularly interesting to the point of this blog.  After obfuscating in a civil audit, the IRS opened a criminal investigation in 2009 but, for some reason, he was not aware of that investigation until 2012.  (The under the radar screen investigation for so long is not relevant to this blog, but I suspect there is a story there.) Then:

After he became aware of the investigation, Evdokimow took steps to repay his tax deficiencies. n1 He retained lawyers and accountants to assist him to identify his taxable income for the years 2005 through 2013 * * * * Evdokimow filed an amended tax return for 2006 in June 2013, and filed amended returns for the remaining years in September 2013. Evdokimow accordingly paid all of his tax liability, including penalties and interest, totaling $3,395,394.00.
   n1 Because the District Court precluded Evdokimow from testifying regarding the remedial steps he took after receiving the subpoena in 2012, our recitation of these facts relies on counsels' proffers of what the evidence would show, were it to be admitted.

Criminal tax practitioners will recognize this gambit designed to mitigate or avoid criminal prosecution.  The standard advice (at least in my experience) is that filing amended returns and paying the tax will not mitigate or avoid prosecution because the focus in a criminal tax trial is the tax loss and intent when the original returns were filed.  Later amended returns and payments, particularly in response to a criminal investigation, are not likely to be successful in staving off prosecution.  And here, it did not do so; the defendant was indicted.  But the defendant still wanted to present this to the jury as bearing on his good faith intent.

In the pre-trial skirmishing, the Government moved in limine to "the Government moved to preclude Evdokimow from presenting evidence that he filed amended tax returns and paid additional taxes after learning of the criminal investigation."  The district court granted the Government's motion:

The District Court concluded that any evidence concerning Evdokimow's subsequent tax payments was "of marginal probative value" that was "substantially outweighed by its potential for prejudice and confusion to the jury." App. 156. The Court reasoned that, while subsequent payments "could have probative value," the "delay of at least 18 months" between the point when Evdokimow learned of the investigation and when he filed his amended returns eliminated any such value in this case. App. 157. The Court further concluded that the eventual payment of the taxes was "potentially confusing to the jury" and created a risk of jury nullification that was "potentially uncurable . . . by even a careful instruction as to render it admissible" because it opened the prospect of the defendant "argu[ing] to the jury that [he] pay[s] [his] taxes like anybody else." App. 157-58. Evdokimow sought reconsideration of the District Court's decision on the first day of trial, but the request was denied.

Then at closing argument:

the Government, in its summation, described Evdokimow's conduct at several points in terms of the "tax loss" that he had caused. The Government also argued that Evdokimow had benefited from and "saved" millions of dollars by underpaying his taxes. Evdokimow objected to these comments, arguing that they misleadingly suggested to the jury that he still had tax obligations outstanding, when in fact he had satisfied the tax debt before he was indicted. As a remedy, Evdokimow requested that the District Court instruct the jury that he had paid his tax obligations after learning about the investigation, which he conceded was a fact not in evidence. The Court denied the request, but instructed the Government to be careful in rebuttal to make clear that the issue before the jury related only to the time period covered by the indictment. In rebuttal, the Government mentioned Evdokimow's wealth and ability to pay his taxes between 2006 and 2012, and argued that "[s]ometimes people that have a lot of money are willing to commit crimes to get more. And that's what happened here." App. 326-27.

Evdokimow was convicted on all counts.

Second Circuit Summary Order Covering Batson Issue (Striking Women on Jury), Refusal to Grant Immunity to Defense Witnesses, Relevant Conduct for Co-Conspirators (4/16/15)

The Second Circuit issued a summary order (nonprecedential) that I think is good reading for law students and lawyers (at least lawyers young in their practices).  United States v. Platt, 2015 U.S. App. LEXIS 6157 (2d Cir. 2015), here.

Highly summarized, the defendants, Jill Platt and Donna Bello, organized a pyramid scheme promoted to women using the conceit of "gifts" in table offerings (such as dessert, entree, etc.)  All income is taxable, but gifts are excluded from taxable income.  Hence, the participants in the scheme (including the defendants) claimed that the cash they received were gifts and thus not taxable.  They were wrong.

The defendants were convicted for defraud / Klein conspiracy (18 USC 371, here), tax perjury (§ 7206(1), here), wire fraud (18 USC § 1343, here), and conspiracy to commit wire fraud (18 USC § 1349, here).  All except the conspiracy charges were multiple counts of conviction.

The opinion summarizes the defendants' arguments and its holdings in the following introductory paragraph:

On appeal, defendants contend that the government's use of peremptory strikes to eliminate female members of the venire violated Batson v. Kentucky, 476 U.S. 79 (1986); the district court abused its discretion by admitting the testimony of attorney William O'Connor and by declining to compel immunity for three defense witnesses, thereby also violating defendants' constitutional right to present a defense; and the district court abused its discretion in admitting the expert testimony of Dr. Kenneth Kelly. We find these arguments to be without merit and accordingly affirm the judgments of conviction. However, defendants also challenge their sentences, contending that the district court penalized them for exercising their right to trial and imposed sentences that were otherwise procedurally and substantively unreasonable. We find that the district court erred by failing to make the particularized findings required by United States v. Studley, 47 F.3d 569 (2d Cir. 1995), and remand the case for resentencing.

This disposition is a summary order, hence it is nonprecedential in the Second Circuit.  Still, it is a good presentation of the points it covers.  So, let's take a look at the analysis.

1.  The Batson Claim for Peremptory Challenge of Women.

The Supreme Court has held under Batson [Batson v. Kentucky, 476 U.S. 79 (1986), here] and its progeny that the Equal Protection Clause prohibits the government from using its peremptory challenges to exclude potential jurors for a discriminatory purpose. See 476 U.S. at 89; J.E.B. v. Alabama ex rel. T.B., 511 U.S. 127, 146 (1994) [here] (extending Batson to discrimination in the selection of jurors on the basis of gender). 

Without elaborating on the analysis further, suffice it to say that the district court accepted the prosecutor's gender neutral explanations of its strikes of women.  Finding no abuse of discretion, the Court affirmed the district court's decision.

Seventh Circuit Holds that Trial Court Did Not Err in Admitting Other Acts Evidence (4/7/150

In United States v. Curtis, 2015 U.S. App. LEXIS 5176 (7th Cir. 2015), here, the defendant was a lawyer who could not manage his tax debts.  Over the years he was repeatedly delinquent.  The IRS had to spent significant collection resources to try to get him to pay and then stay current.  Finally, after cycling through to the third revenue officer, he was referred for criminal investigation and this prosecution ensued for 3-years of failure to file, § 7203, here.

Prior to trial, the government indicated its intention to offer evidence under Rule 404(b), including evidence of Curtis's history of failing to pay his taxes, his past dealings with the IRS and its efforts to collect back taxes, and his withdrawals of money from his law practice to pay personal expenses. Curtis did not object to any of this evidence, conceding that it was relevant to his intent and knowledge during the charged years. But he did object to the government's proposed evidence that he failed to pay payroll taxes for his law firms's employees for the third and fourth quarters of 2013. The government argued that this evidence was relevant to Curtis's intent and especially relevant to rebut his anticipated defense that he acted in good faith. Curtis objected that any violations of the tax laws subsequent to the charged years did not bear on his state of mind during the time of the charged offenses. Instead, he maintained, the government's use of this evidence demonstrated nothing other than propensity to commit the crime, a forbidden use of such evidence. Curtis also argued that the evidence was not relevant to his intent because payroll taxes are different in kind from income taxes, payroll taxes are often paid by office administrators, and the failure to pay those taxes post-dated the offense conduct by several years. The evidence would also cause undue prejudice, Curtis argued, because it would imply that he was harming his employees as well as the government. In short, he contended that the payroll tax evidence did not meet the standards for admission under Rule 404(b). The district court agreed that the evidence demonstrated propensity, and tentatively granted Curtis's motion to exclude the payroll tax evidence from the trial. 

The court later reversed course and allowed the government to bring in this evidence after Curtis testified during the defense case-in-chief that he was current on his tax obligations for 2010, 2011 and 2012. Curtis declined the court's offer of a limiting instruction on this Rule 404(b) evidence. * * * * The jury convicted on all three counts, and Curtis appeals.

The Seventh Circuit starts by stating the elements of Section 7203, the convicted counts:  "(1) that Curtis was required to pay taxes; (2) that Curtis failed to pay the taxes; and (3) that Curtis acted willfully in failing to pay."  As is often the case, the defense was solely that the Government had not proved willfulness.  Quoting Cheek v. United States, 498 U.S. 192, 201 (1991), willfulness "requires the Government to prove that the law imposed a duty on the defendant, that the defendant knew of this duty, and that he voluntarily and intentionally violated that duty."   Curtis' defense,  as I understand it, was that his years of dealing with the IRS's tolerance for his various tax delinquencies lulled him into believing that his tax delinquencies did not violate the  law.

The Government sought to use 404(b) evidence, including principally his repeated delinquencies after the criminal case was brought against him.  Specifically, the Government sought to show that he failed "to pay payroll taxes for his law business in the third and fourth quarters of 2013."  Curtis objected, arguing that what he did after the years for which he was charged was not evidence as to his willfulness or nonwillfulness for the earlier years for which he was charged.  He did not object to proof as to earlier years' delinquencies in payment.  Further, he testified that he had fully paid his 2010, 2011 and 2012 taxes.  Focusing on the subsequent unpaid payroll taxes, Curtis argued that they were remote from the charged offense of failure to file.

The [trial] court ultimately ruled that Curtis opened the door to admission of the evidence by suggesting to the jury that he had paid in full his recent tax obligations. The government then questioned Curtis about his failure to pay the payroll taxes. R. 51, Tr. at 568-72. Specifically, the government questioned Curtis regarding how he spent money that he withdrew from his law firm and how he decided which bills to pay. The focus of the questioning was that Curtis chose repeatedly to pay other obligations instead of paying taxes, including the payroll taxes.\ 

The government made no further mention of Curtis's failure to pay the payroll taxes in two quarters of 2013.

Curtis argued on appeal that the Court should not have admitted the evidence of the subsequent failure to pay the payroll taxes.

Good Succinct Discussion of 404(b) Evidence (11/13/13)

In United States v. Anderson, 2013 U.S. App. LEXIS 22050 (11th Cir. 2013), here, an unpublished opinion, the Court discusses Rule 404(b), here, evidence, finding that the evidence in question had minimum probative value and thus perhaps should not have been admitted under Rule 403, here, titled "Excluding Relevant Evidence for Prejudice, Confusion, Waste of Time, or Other Reasons." Nevertheless, it was harmless.  Rule 404(b) provides:

(b) Crimes, Wrongs, or Other Acts.
  (1) Prohibited Uses. Evidence of a crime, wrong, or other act is not admissible to prove a person’s character in order to show that on a particular occasion the person acted in accordance with the character.
  (2) Permitted Uses; Notice in a Criminal Case. This evidence may be admissible for another purpose, such as proving motive, opportunity, intent, preparation, plan, knowledge, identity, absence of mistake, or lack of accident. On request by a defendant in a criminal case, the prosecutor must:
    (A) provide reasonable notice of the general nature of any such evidence that the prosecutor intends to offer at trial; and
    (B) do so before trial — or during trial if the court, for good cause, excuses lack of pretrial notice.

The Court's discussion is a good succinct summary of key features of Rule 404(b),. so I thought I would offer that discussion

Anderson argues that the district court improperly admitted into evidence under Federal Rule of Evidence 404(b) a pro se "letter" that she mailed to the district court before trial. In this "letter," Anderson asserted that a magistrate judge had "convert[ed]" the magistrate judge and an Assistant U.S. Attorney "into accommodated parties with respect to [a] debt," which Anderson thereby purported to "discharge." Anderson contends that this document had no probative value and was highly prejudicial, as it could only be perceived as bad-character evidence. 

We review a district court's Rule 404(b) rulings for an abuse of discretion. United States v. Matthews, 431 F.3d 1296, 1311 (11th Cir. 2005). Under this standard, we must affirm, even if we might have decided the issue differently, so long as the trial court's decision was not based on a clear error of judgment or application of the wrong legal standard. See id. at 1312. Rule 404(b) prohibits the admission of evidence of a person's crimes or other wrongful acts except in certain circumstances. Fed.R.Evid. 404(b). Nevertheless, Rule 404(b) is a "rule of inclusion," and relevant Rule 404(b) evidence "should not lightly be excluded" when it is central to the government's case. United States v. Jernigan, 341 F.3d 1273, 1280 (11th Cir. 2003) (internal quotation marks omitted); see also United States v. Sanders, 668 F.3d 1298, 1314 (11th Cir. 2012) (explaining that Rule 404(b) allows extrinsic evidence "unless it tends to  prove only criminal propensity" (internal quotation marks omitted)). In order to be admissible under Rule 404(b) the evidence must be relevant to an issue other than the defendant's character, the government must offer sufficient proof for the jury to find by a preponderance of evidence that the defendant committed the act, and its probative value must not be substantially outweighed by its undue prejudice, satisfying Rule 403. Matthews, 431 F.3d at 1310-11 (quoting United States v. Delgado, 56 F.3d 1357, 1365 (11th Cir. 1995)).

Evidence Rulings in Sprawling Criminal Case with Tax Charge Add On and Some Sex (8/29/12)

I just read United States v. Dimora, 843 F. Supp. 2d 799 (ND OH 1/4/12).  It is a fascinating case involving charges in the Third Superseding Indictment for,

among other things, RICO conspiracy, conspiracy to commit mail fraud and honest services mail fraud, Hobbs Act conspiracy and Hobbs Act substantive violations, conspiracy to commit bribery in programs receiving federal funds, and conspiracy to obstruct justice. Dimora is also charged with conspiracy to commit wire fraud and honest services wire fraud; destruction, alteration or falsification of records in a federal investigation; mail fraud; and false statements on tax returns."  

Whew, that is quit a bunch of charges.

Dimora offers lessons primarily for students of federal white collar crimes.  Remember, that tax crimes are just a subset of white collar crimes, and many  of the issues presented in the trial of tax crimes are often present in white collar crimes (and vice versa).  It is a very long opinion, and I really don't recommend that even students read it except to address a particular interest piqued by reading my summary of the key points.

So, here are the points I think are key for students:

1.  The Function of the Motion in Limine

The Court resolves key evidentiary issues in advance of trial.  The parties asked the court to resolve these issues by motions in limine.  The Court describes motion in limine procedure as follows (case citaions other than Supreme Court omitted):

Although not explicitly authorized by the Federal Rules of Evidence or the Federal Rules of Criminal Procedure, the practice of ruling on motions in limine "has developed pursuant to the district court's inherent authority to manage the course of trials." Luce v. United States, 469 U.S. 38, 41 n.4 (1984). Motions in limine allow the court to rule on evidentiary issues prior to trial in order to avoid delay and to allow the parties to focus remaining preparation time on issues that will in fact be considered by the jury.  

Courts should exclude evidence on a motion in limine only when it is clearly inadmissible. If the court is unable to determine whether certain evidence is clearly inadmissible, it should defer ruling until trial so that questions of foundation, relevancy, and potential prejudice can be evaluated in proper context. Id. Ultimately, the determination whether to grant or deny a motion in limine is within the sound discretion of the trial court. In limine rulings are preliminary, and the district court may change its ruling at trial for any reason it deems appropriate.

Seventh Circuit Sounds the Death Knell for Inextricable Intertwinement as End-Run Around Rule 404 and 403 (8/3/10)

Courts have developed the notion that evidence inextricably intertwined with the criminal offense charged may be introduced free of the constraints of FRCrP Rule 404(b) and perhaps even of CRCrP Rule 403 (excluding certain types of evidence including evidence otherwise admissible under Rule 404(b) if unfairly prejudicial). In United States v. Gorman, 613 F.3d 711 (7th Cir. 2010), here, the Seventh Circuit sounded the death knell of the inextricable intertwinement doctrine. Although Gorman is not a tax case, Rule 404(b) does loom large in many criminal tax cases (both at trial and in consideration of whether a plea is advisable). Accordingly, I excerpt there the guts of the Seventh Circuit's holding and reasoning (some case citations omitted):

This circuit has also traditionally allowed the admission of evidence under the "inextricable intertwinement" or "intricately related" doctrine. See United States v. Conner, 583 F.3d 1011, 1018 (7th Cir. 2009). The inextricable intertwinement doctrine is based on the notion that evidence inextricably intertwined with charged conduct is, by its very terms, not other bad acts and therefore, does not implicate Rule 404(b) at all. "In other words, evidence admitted under this doctrine lie[s] outside the purview of the Rule 404(b) character/propensity prohibition, and is not subject to its constraints regarding the manner in which the evidence may be used." Conner, 583 F.3d at 1019 (internal quotation marks and citations omitted) (alteration in original).

Even if evidence is initially deemed admissible under any of these three doctrines, however, that evidence must still pass muster under Rule 403's balancing test to actually be admitted against a defendant. To make this determination, a court must weigh whether the evidence's probative value is substantially outweighed by the danger of unfair prejudice to the defendant. Only if the court determines that Rule 403's balancing test weighs in favor of admission is the disputed evidence then placed before the jury.

The Reliance Defense as Bearing on Willfulness: Expert Testimony (3/20/10)

The issue in a tax crimes case having a willfulness element (all of the significant ones except the tax obstruction crimes) is whether the defendant intentionally violated a know legal duty. Defendants will often try to deflect the blame other orthers, particularly the accountants and tax return preparers. In US v. St. Pierre, 599 F.3d 19 (1st Cir. 2010), here, the defendant sought to introduce expert testimony that the acountant/tax return preparer's failure to meet standards of care at least raised a reasonable doubt as to the defendant's state of mind. The district court denied the attempt, citing tangential relevance of the proffered expert testimony to the issue of the defendant's state of mind, and, in any event, FRCrP 403 that the evidence might not be helpful to the jury. Rule 403 provides: "Although relevant, evidence may be excluded if its probative value is substantially outweighed by the danger of unfair prejudice, confusion of the issues, or misleading the jury, or by considerations of undue delay, waste of time, or needless presentation of cumulative evidence." The Court of Appeals rejected the defendant's appeal on the issue.

The Court of Appeals went through the steps as follows:

1. Defendant was charged with tax evasion for 2000-2002 and tax obstruction under Section § 7212(a).

2. At trial, St. Pierre's underpayment of her personal taxes was undisputed; the central issue was whether St. Pierre had the requisite state of mind for the various offenses.

3. One of the accountants testified "that St. Pierre had been told to deposit company income into Staab's corporate bank account, as such deposits would enable the accountants to track Staab income that had to be reported on Staab's corporate and St. Pierre's personal income tax returns." There was apparently other "evidence that St. Pierre's accountants had explained to her -- in connection with past failures that she had claimed to be inadvertent -- the obligation to report company income on Staab's books."