Two Opinions on Joinder of Tax Charges and NonTax Charges (3/20/18)

I generally do not write about criminal cases where the gravamen of the case is a nontax crime but with a tax crime charge which, while an important charge, seems to be swamped by the nontax crime..  However, two such cases popped up in my searches recently.  United States v. Sabean, ___ F.3d ___, 2018 U.S. App. LEXIS 6619 (1st Cir. 2018), here, and United States v. Li, 2018 U.S. Dist. LEXIS 40411 (M.D. Penn. 2018), here.  In each case, the defendant objected to the joinder of the tax crime(s) with the nontax crime.  I focus this blog on the issue in each case of whether the tax charge should have been severed from trial from the nontax crime(s).  But, that requires some brief context.

Sabean

I wrote earlier about pre-trial skirmishing in the case.  See District Court Rejects Suppression for Interview of Target of Grand Jury Investigation Without Notifying His Counsel (Federal Tax Crimes Blog 10/4/16), here.  The trial occurred.  The First Circuit decision I write about today is from the conviction on all counts.

Judge Selya wrote the opinion.  He starts the opinion:

This case, which reads like an anthology of pain, pathos, and personal degradation, paints a grim picture of the human condition. It intertwines allegations of an incestuous relationship with criminal charges of tax evasion, unlawful distribution of controlled substances, and health-care fraud. Following a contentious trial, the jury found defendant-appellant Joel A. Sabean guilty on all of the charged counts. 

The defendant strives to convince us, through a wide-ranging asseverational array, that the jury's verdict should not stand. After careful consideration of a tangled record conspicuously free from prejudicial error, we are not persuaded. Consequently, we affirm the judgment below.

The indictment charged :

(i) "five counts corresponding to five different tax years, with knowingly evading nearly $1,000,000 in federal tax liability by claiming fraudulent medical deductions between 2009 and 2013. See 26 U.S.C. § 7201.  

(ii) "fifty-two counts, with having distributed Ambien, Lunesta, and Xanax to S.S. [S.S. is Sabean's daughter with whom he has a sexual relationship] on fifty-two separate occasions between December 15, 2010 to January 4, 2014 outside the usual course of professional medical practice and without legitimate medical purpose.1 See 21 U.S.C. § 841(a)(1); 21 C.F.R. § 1306.04(a)."

(iii) "a single count [of] health-care fraud by writing certain prescriptions meant for S.S. in his wife's name between March 28, 2010 and December 9, 2012. See 18 U.S.C. § 1347."

Sabean was convicted on all counts.  Of course, Sabean could not be charged in federal court with incest or any related crime, because those are not federal crimes.  But, the Government did sweep that conduct into the trial as other acts evidence under FRE 404(b).  The Court does discuss and affirm the use of that evidence, but I won't get into that discussion here because the detail is not directly relevant to the severance issue I discuss.

The Intersection of Conspiracy and Tax Obstruction (7212(a)) (1/16/14)

In United States v. Floyd, ___ F.3d ___, 2014 U.S. App. LEXIS 253 (1st Cir. 2014), here, the First Circuit panel affirmed the defendants' convictions and sentencings arising from their tax evading payroll tax scheme and warehouse banking scheme.  Judge Selya (Wikipedia here) wrote the decision for the panel. (More on Judge Selya at the bottom of this blog.)

The defendants were convicted of two counts of the defraud / Klein conspiracy under 18 USC 371, here -- one count for the payroll tax scheme and the second count for the warehouse banking scheme.  The Klein conspiracy is a conspiracy to impair or impede the lawful functioning of the IRS.  The defendants were also convicted of tax obstruction under Section 7212(a), here, which criminalizes impairing or impeding the lawful functioning of the IRS.

Klein Conspiracy and Tax Obstruction

The Court's affirmance of the conspiracy convictions seem fairly routine -- at least I don't think they are worthy of discussing here.  Moreover, the affirmance of the tax obstruction convictions is also routine and not otherwise noteworthy.  What is noteworthy, is the reminder that the conspiracy and the substantive counts were so closely related in the conduct involved, with the key difference that conspiracy is not the same crime as the substantive counts.  Ianelli v. United States, 420 U.S. 770, 781-2 (1974), citing Pinkerton v. United States, 328 U.S. 640, 643 n. 11 (1946).  In other words, the conspiracy is based on the agreement to obstruct rather than the obstruction itself, except of course the pesky overt act requirement.  Indeed, in this regard, some persons (including me) have referred to tax obstruction as a one-person conspiracy.  See also David F. Axelrod, Larry A. Campagna, James A. Bruton III, The “New” Tax Laws - 26 U.S.C. Section 7212(a) and the One-Person Conspiracy (Paper prepared for ABA National Institute on Criminal Tax Fraud in 1999).  The notion of a one-person Klein conspiracy is an oxymoron, of course, but the oxymoron conveys some truth.

I previously discussed the relationship between tax obstruction and the Klein conspiracy.  See Tax Obstruction Crimes -- Section 7212 and Klein Conspiracy (Federal Tax Crimes Blog 5/26/11), here.  Here are key excerpts:

2. As the Klein conspiracy is defined by the courts (a broader definition than the word defraud would normally connote), the two crimes substantially overlap in targeting conduct which impairs or impedes the lawful functions of the IRS. The difference is that the conspiracy requires two or more actors pursuant to a conspiratorial agreement whereas tax obstruction only requires a single actor (although it can include multiple actors as well). Because the interpretations overlap, tax obstruction may be viewed as a one person Klein conspiracy. (I realize that statement technically is an oxymoron, but the larger point, I think is correct; see CTM 17.02 (2001 ed.) where DOJ Tax asserted that tax obstruction may be charged where the Klein conspiracy is “unavailable due to insufficient evidence of conspiracy,” although that statement is omitted from the 2008 ed.)  

3. With this overlap in interpretation, the Government could take the standard formula of the Klein conspiracy (impair or impede, etc.) and turn the alleged conspiracy into an offense conspiracy to violate Section 7212 rather than couching it in defraud conspiracy lingo. That's not the way the Government does it, but it seems to me that that is the practical effect of this overlap. Or, I suppose, a conspiracy to impair or impede can simultaneously be both an offense conspiracy to violate Section 7212(a) and a Klein / defraud conspiracy.

Second Circuit Reverses and Vacates Convictions for Wire Fraud and Tax Evasion (5/1/12)

In  United States v. Litwok, 678 F.3d 208 (2d Cir. 2012), here, the Second Circuit  upset convictions for wire fraud and tax evasion, applying seeming settled principles.

I address first the tax evasion convictions, although the Court addressed first the wire fraud conviction.  The defendant's tax evasion convictions for 3 years arose from her failure to file income tax returns for those years where she omitted substantial income unrelated to the wire fraud.  Normally, a failure to file income tax returns establishes only the crime of failure to file, Section 7203, a misdemeanor.  In order to prove tax evasion in the context of failure to file, the Government has to prove some affirmative element other than just failure to file.  The Second Circuit held, cryptically, that, for two of the years, the evidence was insufficient to support conviction for two of the three years but was sufficient for the third year, reasoning as follows (case citations and quotations omitted):

(i) 1995 Tax Count 

We have previously described as examples of affirmative acts conduct such as making false statements to the IRS for the purpose of evading taxes, establishing accounts in the names of other entities to conceal income, and handling of one's affairs to avoid making the records usual in transactions of the kind, More broadly, we have held that an affirmative act includes any conduct, the likely effect of which would be to mislead or to conceal.

With these principles in mind, we review the evidence relating to the tax evasion count for 1995 (Count Two). The most significant testimony relating to that count was that of Peter Testaverde [an accountant]. As set forth above, Testaverde testified that Litwok barred him from verifying the accuracy of the trading account statements that she claimed were inaccurate and thereby prevented him from preparing 1995 K-1 tax forms for Kohn Investment I LP's partners — including its general partner, Kohn Investment Management, which Litwok owned. Without K-1 tax forms, the company's partners could not determine their income and file their returns. Based on Testaverde's testimony, a rational juror could find that Litwok actively prevented the filing of her returns that year. On a sufficiency challenge, her conduct constitutes an affirmative act sufficient to sustain her conviction on Count Two.

(ii) 1996 and 1997 Tax Counts 

In contrast to the evidence relating to the calendar year 1995, there was no evidence at trial  of any affirmative act beyond a mere failure to file tax returns for calendar years 1996 and 1997. For the first time at oral argument on appeal, the Government sought to defend the convictions for tax evasion for 1996 and 1997 (Counts Three and Four) in two ways. First, it claimed that Litwok had an affirmative, fiduciary duty to prepare K-1 tax forms for Kohn's partners, and that her failure to do so constituted the requisite affirmative acts. Second, it argued that Litwok's refusal to allow Testaverde to verify financial documents for 1995 constituted an affirmative act of tax evasion in 1996 and 1997 because it prevented the calculation of accurate income for those later years. Because it did not raise either of these arguments in its brief or before the District Court, these arguments were forfeited, and we decline to consider them. Accordingly, we reverse the judgment of conviction as to Counts Three and Four.

Tax Crimes and Money Laundering (Particularly Defense Attorney Fees) (9/24/11)

In United States v. Blair, 661 F.3d 755 (4th Cir. 2011), here, cert. denied 2012 U.S. LEXIS 4469 (U.S. 2012), the Fourth Circuit opens with a high level summary of the case:

Walter L. Blair, a Maryland attorney, concocted and executed a scheme to launder drug proceeds that he obtained from a client. Blair was tried and convicted on eight counts of concealment money laundering in violation of 18 U.S.C. § 1956(a)(1)(B)(i); one count of laundering in violation of 18 U.S.C. § 1957(a); one count of tampering with a witness in violation of 18 U.S.C. § 1512; one count of obstructing justice in violation of 18 U.S.C. § 1503(a); one count of making a false statement in violation of 18 U.S.C. § 1001(a)(2); and two counts of failing to file an income tax return in violation of 26 U.S.C. § 7203.1 He received a 97-month sentence. Blair appeals several counts of conviction for money laundering as well as his obstruction of justice conviction. Blair also challenges the ruling of the district court denying his motion to sever the failure-to-file counts. We affirm the convictions for money laundering under §§ 1956 and 1957, and we affirm the district court's denial of Blair's motion to sever. We reverse, however, Blair's conviction on the obstruction-of-justice charge (Count 11 of the superseding indictment) for insufficient evidence. We remand for resentencing in light of this opinion.

The facts were, in their essence (at the expense of detail and nuance): (1) a drug dealer left the proceeds of the drug dealing with a third party otherwise uninvolved in the drug dealing; (2) after much violence related to the drug dealer's associates and the drug dealer's disappearance, the third party contacted Blair, a lawyer and, at his request, delivered the proceeds to his office; (3) Blair then orchestrated the deployment of the proceeds, in part in ways to (a) launder a portion of the proceeds and in part to pay for the legal representation of two of the drug dealer's associates. Blair was charged with a panoply of money launder, tax and obstruction offenses. Blair was convicted on these charges and appealed.

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.