Is It Too Much to Ask that the Defraud Conspiracy Crime Require Fraud? (8/3/24; 8/6/24)

In United States v. Lingat, (S.D. N.Y. No. 1:21-cr-00573 Dkt # 191 Opinion & Order 7/30/24), CL here & GS here [to come], the court rejected the defendants’ motions for acquittal after conviction. The defendants asserted as a principal basis for the motions United States v. Coplan, 703 F.3d 46 (2d Cir. 2012), here, cert. den. 571 U.S. 819 (2013) which questioned the Klein defraud conspiracy (the § 371 defraud conspiracy) for which the defendants were convicted. In affirming the Klein defraud conspiracy convictions, Coplan strongly questioned the validity of the Klein conspiracy but was compelled to follow Supreme Court opinions approving the broad interpretation of the defraud conspiracy. 

I believe that most readers of this blog are familiar with the Klein conspiracy and perhaps even the saga of Coplan. The Second Circuit in Coplan was concerned that, through an expansive reading of the text of § 371, the Supreme Court had judicially created the Klein conspiracy crime to include an object to impair or impede the function of Government without any fraud in its traditional meaning for criminal statutes to deprive another of money or property. In short, the defraud conspiracy does not require fraud, at least fraud as the word is used in other criminal statutes. For readers wanting a short summary, I link a section of my Federal Tax Procedure Book (Practitioner Ed. 2024), pp. 318-319, here. I have posted a number of blogs on the issue presented in Coplan, but here will just link to some of the more prominent blogs. Coplan #1 - Panel Questions Validity of Klein Conspiracy (Federal Tax Crimes Blog 12/1/12), here; Further on the Second Circuit Detour on the Interpretation of the Defraud / Klein Conspiracy (Federal Tax Crimes Blog 12/18/12), here; and Oral Argument in Supreme Court Case on Trump Immunity Discussing the Defraud / Klein Conspiracy (Federal Tax Crimes Blog 4/26/24), here.

The key troubling aspect of the Klein conspiracy is that the precedent going to Hammerschmidt v. United States, 265 U.S. 182 (1924) and even earlier is now certainly “settled law,” a refrain we have heard so much over the last few years as the Court’s current conservative super-majority court has “unsettled’ much “settled law.” I think the Court’s super-majority has been unsettling too much settled law. But, if the Court's super-majority really wants to fix something worth fixing, it could not find a more worthy issue than the proper interpretation of the defraud conspiracy. Since first wading into the issue in the late 1990s and early 2000s, I have been convinced that the Court went too far in Hammerschmidt and its ilk and now should fix the issue simply because the defraud conspiracy can sweep too broadly. For my ruminations on that concern, see John A. Townsend, Tax Obstruction Crimes: Is Making the IRS's Job Harder Enough, 9 Hous. Bus. & Tax. L.J. 255 (2009), here, and its online appendix with examples Tax Obstruction Crimes: Is Making the IRS's Job Harder Enough? Online Appendix, 9 Hous. Bus. & Tax L.J. A-1 (2009), here.

Oral Argument in Supreme Court Case on Trump Immunity Discussing the Defraud / Klein Conspiracy (4/26/24)

I have written many blogs over the years on the defraud conspiracy (aka Klein conspiracy) in 18 USC § 371, here. I collect at the end of this email some of the more noteworthy (in my imagination) of those blogs on the subject I discuss today. That subject is the potential breadth of the defraud conspiracy, particularly when the Supreme Court interpreted the word “defraud” in § 371 to not be limited to fraud in the usual federal law criminal sense to require some taking or intent to take property. In Hammerschmidt v. United States, 265 U.S. 182, 188 (1924), the Court held that the defraud conspiracy certainly means to cheat or attempt to cheat the Government out of property or money, but it also means to interfere with or obstruct lawful governmental functions “by deceit, craft or trickery, or at least by means that are dishonest” even if no fraud in its normal meaning is the object. As interpreted, that means defraud includes simply an object of the conspiracy to impair the lawful functions of Government. The Hammerschmidt interpretation of defraud was an outlier from the normal interpretation and was not based upon any objective indication that Congress meant the broader interpretation. But, as noted, Hammerschmidt is a long-ago case that is now entrenched in jurisprudence (perhaps even settled law, as some Justices used the term to get past confirmation hearings). (Note, however, that in the current Supreme Court settled law may not be settled after all.)

In yesterday’s oral argument in Trump v. United States, No. 23-939 (4/25/24) (Transcript here; and docket here), the defraud conspiracy came up at least briefly. That is perhaps not surprising because the indictment, CL here, alleged the defraud conspiracy as Count One. The oral argument focused on Presidential immunity for conduct alleged in various counts (including the defraud conspiracy and the two counts under 18 USC § §  1512 (Counts Two and Three). The focus was on presidential immunity rather than the contours of the statutes. 

I don’t propose to discuss the issue of presidential immunity here. My purpose is to relate the discussions of the potential scope of the defraud conspiracy, § 371, aka Klein conspiracy.

Justices Alito, Gorsuch, and Kavanaugh engaged at least glancingly with Michael R. Dreeben, Counselor to the Special Counsel, Jack Smith. I offer the excerpts (with some surrounding potentially relevant content; page numbers are indicated in brackets with asterisk (e.g. [*97]]):

[*97]

JUSTICE ALITO:

* * * *

MR. DREEBEN:

* * * *

[*98]

And making a mistake is not what lands you in a criminal prosecution. There's been some talk about the statutes that are at issue in this case. I think they are fairly described as malum in se statutes, engaging in conspiracies to defraud the United States with respect to one of the most important functions, namely, the certification of the next president.

JUSTICE ALITO: Well, I don't want to dispute the particular application of --of that, of 371, conspiracy to defraud the United States, to the particular facts here, but would you not agree that that is a peculiarly open-ended statutory prohibition? In that -that fraud under that provision, unlike under most other fraud provisions, does not have to do --doesn't require any impairment of a property interest.

District Court Rejects Claim That Supreme Court Expansion of Defraud Conspiracy Is In Error (3/24/22; 3/27/22)

In United States v. Lucidonio,   (ED PA Criminal NO. 20-211 3/9/22), GS here and CL here and g, Lucidonio was charged with the Klein / defraud conspiracy (18 USC §371) counts of aiding and assisting (§ 7206(2)). The Court denied his motion to dismiss those counts. The denial addresses some major themes in tax crimes, and it is short. I recommend that tax crimes fans read the opinion. Perhaps read even more than once.

The opinion addresses two contexts tax crimes targets should consider the potential sweep of conduct subject to the crimes. First, there is the conspiracy charge in 18 USC 371. That statute includes two types of conspiracies:

(i)                The offense conspiracy to commit a specific statutory offense. The offense conspiracy requires the Government to prove that the object was to commit the conduct that meets each element of the offense. For example, for conspiracy to commit tax evasion, the Government must prove an intent to commit each element of the crime of tax evasion. The elements are of tax evasion are:  (i) substantial tax due and owing; (ii) an affirmative attempt to evade; and a willful attempt to evade.  Sometimes proving the elements of the conspiratorial object offense can be a burden, hence we turn to the other conspiracy in § 371.

(ii)              The defraud conspiracy (often called a Klein conspiracy in a tax setting). On the face of the statute, the object of the defraud conspiracy must be “to defraud the United States.”  Defraud normally in the criminal law means to take something of value from its rightful owner (or some variation). There is no reason to believe that, upon the original enactment of the predecessor of § 371 this crime in these words, Congress had any other definition of defraud for this element of the defraud conspiracy. Yet, as interpreted by the Supreme Court, the defraud conspiracy certainly means to cheat or attempt to cheat the Government out of property or money, but it also means to interfere with or obstruct lawful governmental functions “by deceit, craft or trickery, or at least by means that are dishonest” even if no fraud is the object. Hammerschmidt v. United States, 265 U.S. 182, 188 (1924).  Through interpretation, Hammerschmidt effectively grafted into the defraud conspiracy criminalization of conduct beyond fraud onto the defraud conspiracy. For treatments showing Hammerschmidt’s embrace of a formulation of the crime beyond the normal meaning of defraud, see United States v. Coplan, 703 F.3d 46, 66 (2d Cir. 2012), cert. denied, 571 U.S. 819 (2013); John A. Townsend, Tax Obstruction Crimes: Is Making the IRS's Job Harder Enough, 9 Hous. Bus. & Tax. L.J. 255 (2009), here; see also United States v. Caldwell, 989 F.2d 1056 (9th Cir. 1993) (opening with the question: “We consider whether conspiring to make the government's job harder is, without more, a federal crime.”)  [Note: The defraud conspiracy as spun by Hammerschmidt may apply in other agency contexts, but its specific application in a tax context is usually referred to as a Klein conspiracy after the leading tax case apply the defraud conspiracy after Hammerschmidt.  See DOJ CTM 23.07[2][a] Generally.)] In short, the defraud conspiracy as currently interpreted, goes beyond the original meaning of the statutory text because the word defraud in the criminal statutes did not have that meaning until spun by the Supreme Court culminating in Hammerschmidt. 

In every practical sense, the Supreme Court added to the conduct that Congress required for the defraud conspiracy. Just stating that concept seems contrary to the oft-made statement that only Congress can create the elements of criminal statutes. Of course, it has always been the law that courts can spin the elements of criminal statutes, but just how much spinning is allowable. How far can courts wander from the statutory text?

That was the claim Lucidonio and others before him have unsuccessfully sought for the Hammerschmidt spin. The most prominent attack came in United States v. Coplan, 703 F.3d 46 (2d Cir. 2012), cert. denied, 571 U.S. 819 (2013). The Second Circuit questioned the Hammerschmidt spin on the defraud conspiracy but felt obligated to apply because it was the higher court’s spin; the Supreme Court denied cert thus carrying forward the Hammerschmidt spin as law. Coplan, 703 F.3d at 62. Recognizing that reality, Lucidonio made the argument to preserve the possibility that either his case or some other case while his was still alive might get the Supreme Court to reverse the Hammerschmidt spin. (See Slip Op. p.  6 n. 2).

Lucidonio claimed that the Hammerschmidt spin was inconsistent with United States v. Davis, ___ U.S. ___, 139 S. Ct. 2319 (2019), SC here & GS here, and the concepts discussed and applied there. I urge readers considering this issue to review that case carefully because the conclusion of the Davis majority outside the context of tax crimes seems inconsistent with the Hammerschmidt spin on the defraud conspiracy.

For those interested in the issue of how far a court, even the Supreme Court can wander from the text of the criminal law elements, I recommend careful reading of Davis. This is a teaser from the introduction of the opinion (authored by Justice Gorsuch or his clerks (I have an anecdote on that at the end of this blog entry):

S.G. Files Brief in Opp to Petition for Certiorari in Flynn (5/19/21; 6/17/21)

I noted previously that a petition for certiorari was filed in United States v. Flynn, 969 F.3d 873 (8th Cir. 2020), cert. docketed, 20-1129 (Feb. 17, 2021) and that the Government was to file an answer on May 19, 2021.  See Fifth Circuit Holds that the Defraud/Klein Conspiracy Does Not Have Pending Proceeding Element; Update on Cert Petition in Related Case (Federal Tax Crimes 5/8/21), here.  The Solicitor General filed the answer today, a Brief in Opposition, here.

Just to review the bidding as of today, the following key documents are on file per the docket entries, here (where the various documents can be reviewed and downloaded).

• The petition was filed 2/11/12.
• An amicus brief in support of the petition was filed by the New York Council of Defense Lawyers on 5/2/21. 
• The S.G. Brief in Opp was filed on 5/19/21.
• Flynn's Reply Brief filed on 6/7/21.  (Added to Blog 6/17/21)

The Brief in Opp is 26 pages long (substantially longer than the Briefs in Opp I drafted while with DOJ Tax Appellate, but word inflation has crept into my writings since then).  The key issue that I think readers of this blog would be most interest is (p. (I), p. 2 of the pdf):

2. Whether a charge of conspiring to defraud the United States in violation of 18 U.S.C. 371 is void for vagueness absent a requirement that the government prove a nexus between a defendant’s conduct and a particular administrative proceeding.

This issue is basically the Marinello issue I mentioned in my earlier blog.

Flynn, in the petition for certiorari, stated the issue as follows (p. i, p. 2 of the pdf):

II. Whether the requirement for a nexus between a particular administrative proceeding and a taxpayer’s conduct is necessary to save the constitutionality of a conviction under an 18 U.S.C. § 371 conspiracy to defraud the Internal Revenue Service (Klein Conspiracy) after this Court’s decision in Marinello v. United States, 138 S. Ct. 1101 (2018).

The Government states it arguments on pp. 15-23 (pp. 22-30 of the pdf).  Basically, the arguments are:

More on Willful Blindness (4/23/21)

I have written before on the willful blindness instruction and more broadly the willful blindness concept in the context of federal crimes requiring as an element of the crime that the actor have some knowledge of the criminal conduct.  For most IRC (Title 26) tax crimes, the statutory knowledge element is “willfully,” which, as interpreted in cases culminating in , is specific intent to violate a known legal duty, often referred to as the Cheek standard (Cheek v. United States, 498 U.S. 192, 201 (1991)).  Other crimes, as interpreted, may have a statutory “willfully” element or some other knowing element that does not require the Cheek specific intent level.  The question I have asked specifically with respect to the Cheek statutory willfully element is whether the willful blindness concept functions (or should function) as (i) an alternative element permitting the trier to convict when the Cheek specific intent cannot be found but acts of willful blindness can be found or (ii) as permitting the trier to consider acts of willful blindness as circumstantial evidence permitting it in the context of all evidence in the case to make the Cheek specific intent finding.  I have argued the latter because only Congress can enact the elements of a crime and the statute requires willful conduct which, as definitively interpreted in Cheek, means specific intent to violate a known legal duty.  Congress has not enacted text that, on its face, would permit conviction when the trier cannot find that the defendant acted willfully in the Cheek sense of specific intent to violate a known legal duty.  If  that argument is correct, a judge should be careful  to instruct the jury so that it knows that conviction is not appropriate if the jury cannot find specific intent to violate a known legal duty.

In United States v. Jeanty, 2021 U.S. App. LEXIS 11879 (11th Cir. 4/22/21) (unpublished), CA11 here, TN here, Jeanty was convicted of “one count of conspiring to steal money from the United States, in violation of 18 U.S.C. §§ 371 and 641 [apparently an offense conspiracy], and one count of stealing property from the United States, in violation of 18 U.S.C. §§ 641 and 642.”  The crimes related to an identity theft tax refund conspiracy.  Since the offense conspiracy has the same mens rea element as the crime that is object of the conspiracy, the mens rea element will be found in § 641.  Section 641 has a mens rea element that is not the strict Cheek requirement but a lesser knowing requirement.  The opinion assumes that a knowing element is required.  So, I ask the same question for a crime where Congress says in the statutory text that a knowing element is required (albeit not the Cheek specific intent level).  Does the willful blindness concept serve as an alternative to the knowing element or simply as circumstantial evidence of the knowingly element?

The district court in Jeanty gave the following willful blindness instruction (apparently using another unrelated knowing element crime to illustrate the concept for the jury):

If a Defendant's knowledge of a fact is an essential part of a crime, it is enough that the Defendant was aware of a high probability that the fact existed — unless the Defendant actually believed the fact did not exist.

“Deliberate avoidance of positive knowledge” — which is the equivalent of knowledge — occurs, for example, if a defendant possesses a package and believes it contains a controlled substance but deliberately avoids learning that it contains the controlled substance so he or she can deny knowledge of the package's contents.

So, you may find that a defendant knew about the possession of a controlled substance if you determine beyond a reasonable doubt that the defendant (1) actually knew about the controlled substance, or (2) had every reason to know but deliberately closed his eyes.

But I must emphasize that negligence, carelessness, or foolishness isn't enough to prove that the Defendant knew about the possession of the controlled substance.

I bold-face the parts of the instruction that raise the issue here.  As presented, the instruction permits conviction on finding willful blindness without a finding of knowing.  That is troubling for the same reason I noted for the Cheek specific intent standard.  Only Congress can state the elements of the crime and it has stated the element for the crimes charged in Jeanty as knowing.  As stated, knowing is not the same as not knowing but acting with willful blindness.  Of course, the district court fuzzed that issue by saying “’Deliberate avoidance of positive knowledge’ * * * is the equivalent of knowledge.”  My point is that willful blindness is not the equivalent of knowledge; it may indicate knowledge in context of all the facts, but it is not the equivalent of knowledge.

Of course, courts by interpretation may engraft weird concepts onto statutory elements that the actual text does not suggest.  My favorite example of courts, the Supreme Court specifically, doing that is Hammerschmidt v. United States, 265 U.S. 182 (1924) where the Court approved a definition of defraud for the defraud conspiracy in 18 USC 371 that departed from and expanded the definition of fraud used in other criminal statutes and in the common law – so that thereafter fraud for the defraud conspiracy means both fraud in its normal sense (“to cheat the Government out of property”) but also to “to interfere with or obstruct one of its lawful governmental functions by deceit, craft or trickery, or at least by means that are dishonest” even if there were no object to cheat the Government out of money.  (The defraud conspiracy is often referred to as a Klein conspiracy.)  By Supreme Court long-standing fiat, that expansion beyond the normal meaning of fraud is now “the law,” even though it has no logical nexus to fraud as Congress used the word for statutory criminal elements and the common law used the term.  In United States v. Coplan, 703 F.3d 46, (2d Cir. 2012), cert. denied 571 U.S. 819 (2013), the Second Circuit expressed “skepticism” about the correctness as an original matter of the Supreme Court’s statutory interpretation of the defraud clause in Hammerschmidt v. United States, 265 U.S. 182, 188 (1924).  The Coplan court reasoned (p. 61):

There is nothing in the Government's brief recognizable as statutory interpretation—no discussion of plain meaning, legislative history, or interpretive canons. Indeed, in all 325 pages of its brief, the Government does not even quote the text of § 371. The Government thus appears implicitly to concede that the Klein conspiracy is a common law crime, created by the courts rather than by Congress. That fact alone warrants considerable judicial skepticism. See United States v. Lanier, 520 U.S. 259, 267 n.6, 117 S. Ct. 1219, 137 L. Ed. 2d 432 (1997) ("Federal crimes are defined by Congress, not the courts . . . ."); see also Rogers v. Tennessee, 532 U.S. 451, 476, 121 S. Ct. 1693, 149 L. Ed. 2d 697 (2001) (Scalia, J., dissenting) ("[T]he notion of a common-law crime is utterly anathema today . . . .").

While the Second Circuit’s concern did not carry the day in Coplan because of the Supreme Court precedent it questioned, the concern still exists.  That same concern should apply to the expansion of the willful blindness concept to permit conviction as an alternative to the knowledge requirement in a criminal statute (whether the knowledge is the Cheek specific intent or a more generally knowledge element).

Note:  The willful blindness concept goes by different names, such as conscious avoidance (in Second Circuit), willful ignorance, and deliberate ignorance.

Updated CTM Chapter on Tax Related Conspiracies (9/17/20)

DOJ Tax has updated its Criminal Tax Manual (“CTM”) chapter 23.00 titled Conspiracy to Commit Offense or to Defraud the United States (Revised September 2020), here.  I have reviewed the chapter very cursorily.  Although I did not compare the old and new versions, except in two instances noted below, I don’t think much has changed except to add some recent cases in chain citations or in examples.  In identifying items of interest, I leaved through the whole chapter (60 pages) and did searched for year from 2012 through 2010.  Here are my quick comments.:

1. 23.04[2][a] Limitation on Naming Unindicted Co-conspirators, p. 5.  Prosecutors should not name in the indictment unindicted co-conspirators, citing Justice Manual 9-11.30 (April 2018). “The recommended practice in such cases is to merely allege that the defendant ‘conspired with another  person or persons known’ and supply the identity, if requested, in a bill of particulars.”

2. 23.07[2][c] Overbreadth Concerns, pp. 42-43. Not sure if this is new but it is a subject I have been interested in).  Discusses the interpretation of the defraud clause which, in United States v. Coplan, 703 F.3d 46, (2d Cir. 2012), cert. denied 571 U.S. 819 (2013), the Second Circuit expressed “skepticism” about the correctness as an original matter of the Supreme Court’s statutory interpretation of the defraud clause in Haas v. Henkel, 216 U.S. 462 (1910), and Hammerschmidt v. United States, 265 U.S. 182, 188 (1924).  I discussed that aspect of Coplan in Coplan #1 - Panel Questions Validity of Klein Conspiracy (Federal Tax Crimes Blog12/1/12), here.

3. 23.07[2][d] Precedent Governing Different Statutes, pp. 43-44.  This is new, generated by the holding in Marinello v. United States, 138 S. Ct. 1101 (2018)  that tax obstruction, § 7212(a), requires knowledge of a pending proceeding.  Some defendants argued that, because of potential overlapping and overbreadth concerns, Marinello’s pending proceeding required should apply to the defraud / Klein conspiracy.  The position of the Government is that that element of § 7212(a) does not apply to defraud / Klein conspiracies.  The Government’s position has been sustained in the cases.  The section discusses two 2020 cases:  United States v. Atilla, 966 F. 3d 118 (2d Cir. 2020); and Marinello v. United States, 138 S. Ct. 1101 (2018).  I discussed the Flynn case Eighth Circuit Holds that Marinello Pending Proceeding Nexus in § 7212(a) Does Not Apply to Defraud / Klein Conspiracy (Federal Tax Crimes Blog 8/17/20), here. 

On the Klein/Defraud Conspiracy Used by Special Counsel Against Russian Targets; A Tool for Use Against Trump? (10/9/18)

In my federal tax crimes practice and writing I have often lamented the potential sweeping scope of what is called the "Klein conspiracy," which is the defraud conspiracy under 18 USC § 371.  There are two types of conspiracy in the statute -- (i) a conspiracy to commit an offense otherwise prescribed by statute, such as a conspiracy to commit tax evasion as defined in § 7201 (called an offense conspiracy) and (ii) a conspiracy to defraud the U.S., worded variously but generally stated as a conspiracy to impair or impede the lawful functions of a U.S. agency.  The second, the defraud conspiracy, is commonly called a Klein conspiracy named for a leading defraud conspiracy case.  The Klein conspiracy does not require a separate offense as the object of the conspiracy; it simply requires that two or more persons conspire together simply to impair or impede the Government agency.  The Klein conspiracy is frequently used for larger tax crimes where the alleged object is to impair or impede the IRS, but can be used in other agency settings as well.  (Klein itself was a tax case.)

A good general article on the potential dangers of the Klein conspiracy is here:  Eric Felten, A Conspiracy So Vast . . .: But where’s the crime? (The Weekly Standard 10/9/18), here.  I am quoted in the article because I have written, copiously about my concerns about the potential breadth of the Klein conspiracy.  (See links to the principal writings collected at the end of this blog entry.) Felten's article does not get into the twists and turns explored in my thrashings on the issue, but does provide a good summary overview for knowledgeable reader not otherwise steeped in the details of the law of conspiracy theories.  The particular interest of the article is the deployment of the Klein conspiracy by the special counsel in the investigation into Russian meddling in the 2016 election.

Here are some quotes from the article:

Dreeben argued that the United States needs only “to prove a conspiracy to defraud the United States.” But “we do not need to prove a criminal violation of the underlying statute,” he told the judge. In other words, the prosecution is claiming that a conspiracy to do “x” can be criminal even if “x” is not itself a criminal act. This may sound strange, but it’s not a mistake. Pressed by Judge Dabney Friedrich, the deputy solicitor general restated it: “There’s a legion of cases,” Dreeben said, that “have specifically said you don’t need to have an underlying illegality in a conspiracy to defraud.” 

He’s right. Conspiracy law is notoriously elastic. Even so, a prosecutor would rather have conspirators dead to rights on a clear, willful violation of a law than have to establish that colluding to do something not proved to be a crime is nonetheless a crime in and of itself. The latter sort of scenario is why you might need a deputy solicitor general on your team. 

The specific acts Concord is alleged to have engaged in—paying Russians to write social media posts about American politics—aren’t necessarily illegal. Such activities may violate the spirit of U.S. election law and the Foreign Agents Registration Act, but they don’t necessarily fit the elements of any crime on the books. That’s where the conspiracy charge comes in handy. Concord’s lawyers say their client has been charged “for a contrived crime not specifically defined in any statute, without notice and under a standard known only to the special counsel.” 

Yes, and so what? responds the special counsel’s office. Quoting case law, Mueller’s team asserts, “The [conspiracy to] defraud clause does not depend on allegations of other offenses.” And because of that, “even otherwise ‘lawful activity may furnish the basis for a conviction under [Section] 371’ ”—that is, the section of federal law dealing with criminal conspiracies. 

* * * * 

How did we get to a place where agreeing with someone to do something otherwise legal can be prosecuted as a criminal conspiracy? And is Concord Management likely to have any luck challenging the constitutionality of such a law?

Fifth Circuit Opinion Reversing Tax Evasion Conviction Because Evasive Acts Did Not Have Tax Evasion as Goal And Affirming on Wire Fraud (6/26/16)

In United States v. Biyiklioglu, 2016 U.S. App. LEXIS 10847, at *5 (5th Cir. June 15, 2016), unpublished, per curiam, here, Biyiklioglu appealed "his conviction and sentence for wire fraud, aggravated identity theft, tax evasion, and money laundering."  In the underlying scheme, Biyiklioglu "transferred money online among his bank accounts and numerous fraudulent PayPal accounts and then disputed certain transactions so as to cause double payments to his bank accounts and corresponding losses to PayPal."  The scheme is more complex, but that is a good summary for purposes of this blog entry.  On appeal, he raised several arguments.  I address only some of the arguments and the Court's resolution.

TAX EVASION - AFFIRMATIVE ACT OF EVASION

Although the gravamen of the scheme was transactions designed to defraud Pay Pal, two charges involved tax evasion which often accompanies schemes to defraud.  In furtherance of the scheme to defraud, the taxpayer undertook some evasive acts to avoid detection of the fraud.  An element of tax evasion is an affirmative act of evasion which, according to the Court, the Government attempted to prove via evasive acts to avoid detection of the fraud.  The Court held that such a showing of evasive acts to avoid detection of the fraud was not sufficient to show an affirmative act of tax evasion.  The Court's analysis was (Slip Op. 15-16):

Biyiklioglu also argues that the government did not prove the second element required for a conviction under § 7201, an affirmative act constituting an evasion or attempted evasion of tax. The indictment identifies his "affirmative acts of evasion" as "concealing and attempting to conceal from all proper officers of the United States [*23]  of America his true and correct income, opening multiple bank accounts, opening and using PayPal accounts in other people's names, and forming Big Stake Investments LLC and opening bank accounts in its name." Biyiklioglu argues that: (1) he did not file any tax returns or make false reports of any kind so as to affirmatively conceal his income; (2) the bank accounts were opened using his name and social security number, and the fact that there were multiple accounts did not result in greater secrecy; (3) opening and using PayPal accounts in other people's names did not conceal income because all of the transfers occurred between PayPal and Biyiklioglu's bank accounts and could be easily traced by reviewing his bank statements; and (4) Big Stake Investments and all of the bank accounts opened for it were opened with Biyiklioglu's name and social security number, so there was no increase in secrecy. 

"The mere failure to pay a tax voluntarily when due, even if willful, does not establish a criminal attempt to evade." United States v. Nolen, 472 F.3d 362, 379 (5th Cir. 2006). "Affirmative acts that satisfy the second element [of § 7201] may include keeping double sets of books, concealment of assets, or 'any conduct, the likely effect of which would be to mislead or to conceal.'" Miller, 588 F.3d at 907 (quoting Spies v. United States, 317 U.S. 492, 499, 63 S. Ct. 364, 87 L. Ed. 418, 1943 C.B. 1038 (1943)). "If the tax-evasion motive plays any part in such conduct the offense may be made out even though the conduct may also serve other purposes such as concealment of other crime." Spies, 317 U.S. at 499. 

The evidence at trial proved that Biyiklioglu created numerous bank accounts and structured elaborate transactions to defraud PayPal and to conceal his fraud from PayPal and the banks. The government, relying on this evidence, conclusorily argues that "[t]he evidence sufficiently established the affirmative acts supporting [Biyiklioglu's] conviction" for tax evasion. However, the government has not identified any evidence suggesting that a motive to evade taxes contributed to this deception, nor does the court's own review of the trial record reveal any such motive. Indeed, the government fails even to argue that Biyiklioglu was motivated by a desire to evade taxes. In United States v. Jones, we held that a defendant's "placing money on circuitous paths of cashier's checks and funneling it into a house purchased through a convoluted scheme designed to put it out of reach" was sufficient to support his conviction for tax evasion. 459 F. App'x 379, 384 (5th Cir. 2012). Jones, however, took these actions "while his tax file was in active collection," and the evidence supported the government's contention that the only conceivable reason for his conversion of fees into cashier's checks—which Jones failed to report in his financial statement to the IRS—was to evade taxes. Id. Here, in contrast, the obvious explanation for Biyiklioglu's complex and circuitous transactions was the perpetuation of his fraud, and there is no evidence that he took any action for the purpose of evading tax liability. Accordingly, we reverse Biyiklioglu's conviction for tax evasion as to counts 21 and 22.

JAT Comments on Tax Evasion.  Often the taxpayer's defense to evasion is that he did not willfully evade his tax liability.  This is because the Government would not make the charge if it could not show the more objective elements of tax due and affirmative act of evasion..  But all acts of evasion may not be acts of tax evasion.  Here, the evasion was of detection of the underlying fraud.  Hence, the Court reversed.

WIRE FRAUD INSTRUCTIONS - WHAT DOES DEFRAUD MEAN?

The Defraud Conspiracy and It's Expansion; The First Circuit Speaks (5/28/16)

I have blogged before about the scope of the defraud conspiracy in 18 USC § 371, here, which, principally in a tax setting is referred to as a Klein conspiracy after United States v. Klein, 247 F.2d 908 (2d Cir. 1957), a tax case that over time has been very prominent in tax crimes prosecutions.  The other conspiracy in §371 is the offense conspiracy.  The offense conspiracy is a conspiracy to commit an offense defined in another criminal statute.  The offense itself must pass constitutional muster.  Assuming that it does, the conspiracy crime to commit the offense will almost assuredly pass muster. The defraud conspiracy, however, is loosey-goosey.  (That's a term of art that I use in this context, but I think it is descriptive for the defraud conspiracy.  The statutory text is:  "to defraud the United States, or any agency thereof in any manner or for any purpose."  As interpreted, however, it is variously formulated but a standard formulation is that it is a conspiracy to impair or impede the lawful function of a Government agency.  You will notice something curious about that formulation, for, although the statute textually requires a conspiracy to "defraud," that standard formulation says nothing about fraud or defraud.  Fraud or defraud normally requires unlawfully taking something of value (property, including money).  Generally, where fraud or defraud is a textual element of a federal criminal statute, that taking or intended taking of something of value is required.  See United States v. Coplan, 703 F.3d 46, 61-62 (2d Cir. 2012).  If a person behaves badly but does not take or intend to take something of value, the crime is not fraud or defraud (at least outside the defraud conspiracy statute).  But, that is not true in the defraud conspiracy, at least as interpreted.  (Like the Bible and Constitutional interpretation, it is all about interpretation; it does not really matter what the words mean or would have meant to the drafter or, in this case, the legislature; it is how the words are interpreted and that can be something else indeed.)

The Supreme Court has pronounced that the interpretation of the defraud element in the defraud conspiracy merely means a conspiracy to impair or impeded the lawful function of the IRS.  I have noted before that this Supreme Court expansion of the meaning of the textual element of defraud has been subject to question.  United States v. Coplan, 703 F.3d 46 (2d Cir. 2012), here, cert. denied 134 S.Ct. 71 (2013); See Coplan #1 - Panel Questions Validity of Klein Conspiracy (Federal Tax Crimes Blog 12/1/12), here.  Basically, the Second Circuit panel majority opinion questioned the Supreme Court's prior interpretations culminating in Hammerschmidt v. United States, 265 U.S. 182 (1924) that expanded the scope of the defraud conspiracy beyond the usual meaning of the word fraud or defraud.  The Second Circuit panel stated that, in view of the Supreme Court's holding in Hammerschmidt and its own holding in Klein, it could do no more than express the concern that the Supreme Court's interpretation went beyond the text of the statute.

In United States v. Morosco, ___ F.3d ___, 2016 U.S. App. LEXIS 8753 (1st Cir. 2016),  here, the First Circuit was asked to consider this issue and applied the Hammerschmidt interpretation in a case not involving tax or the IRS.  The Court did address several of the issues that swirl around that Hammerschmidt interpretation, so I offer here the portions of the opinion.  The background is that the defendants were convicted of the defraud conspiracy related to HUD property inspections.  I cut and paste the key portions of the opinion (all footnotes except one (because it is important) omitted):

Void-for-Vagueness Claim 

Fitzpatrick and Morosco complain that section 371's defraud clause — criminalizing any conspiracy "to defraud the United States, or any agency thereof in any manner or for any purpose" — is unconstitutionally vague as applied to them. For those not in the know, a law is unconstitutionally vague if it fails to give ordinary people fair notice of what is forbidden, or if it fails to give the designated enforcers (police, prosecutors, judges, and juries) explicit standards (thus creating a risk of arbitrary enforcement). See Welch v. United States, 136 S. Ct. 1257, 2016 WL 1551144, at *3 (2016). Of course the requisite fair warning can come from judicial decisions construing the law. See, e.g., United States v. Lanier, 520 U.S. 259, 266, 117 S. Ct. 1219, 137 L. Ed. 2d 432 (1997). And judges have no business junking a statute simply because we could have written it "with greater precision." Rose v. Locke, 423 U.S. 48, 49, 96 S. Ct. 243, 46 L. Ed. 2d 185 (1975). 

Helpfully, both sides agree — rightly — that Fitzpatrick and Morosco preserved their vagueness claim below (via a motion to dismiss the indictment) and that our review is de novo. See, e.g., United States v. Hussein, 351 F.3d 9, 14 (1st Cir. 2003). Also helpfully, both sides concede that binding precedent squarely forecloses this claim.1Link to the text of the note And we second that assessment. 

Start with Fitzpatrick's and Morosco's most loudly trumpeted point. As they tell it, section 371's "defraud" clause only bans conspiracies to deprive the government of property and money by dishonest schemes, a reading (they add) that jibes with the common-law understanding of "defraud." And such a reading would help them (they continue) because they never scammed the government out of property or money. Unhappily for them, years' worth of Supreme Court precedent holds that section 371 "is not confined to fraud as that term has been defined in the common law," see Dennis v. United States, 384 U.S. 855, 861, 86 S. Ct. 1840, 16 L. Ed. 2d 973 (1966); that defrauding the government under section 371 means obstructing the operation of any government agency by any "deceit, craft or trickery, or at least by means that are dishonest," see Hammerschmidt v. United States, 265 U.S. 182, 188, 44 S. Ct. 511, 68 L. Ed. 968 (1924); and that the conspiracies need not aim to deprive the government of property or money, see id., because the act is written "broad enough . . . to include any conspiracy for the purpose of impairing, obstructing, or defeating the lawful function of any" government "department," see Haas v. Henkel, 216 U.S. 462, 479, 30 S. Ct. 249, 54 L. Ed. 569 (1910). Ever faithful to high-Court holding, our caselaw rejects the idea that section 371 only bars conspiracies to defraud the government out of property or money. See United States v. Barker Steel Co., 985 F.2d 1123, 1136 (1st Cir. 1993) (relying on Supreme-Court cases interpreting section 371 and its basically "similar predecessors"); Curley v. United States, 130 F. 1, 6-10 (1st Cir. 1904) (explaining that "defraud" in section 371's forerunner has a broader meaning than the common-law definition — and justifiably so because the statute's aim is to protect the government, and deceit can impair the workings of government even if the conspiracy does not take the government's property or money). Obviously then, this facet of Fitzpatrick's and Morosco's vagueness thesis goes nowhere.

Supreme Court Addresses the Wartime Suspension of Limitations Act (5/26/15)

In Kellogg Brown & Root Services, Inc. v. Carter, 575 US 650 (2015), here, a unanimous opinion handed down today, the Supreme Court held that the Wartime Suspension of Limitations Act (19 USC § 3287, "WSLA"), here, did not apply in a case arising under the civil False Claims Act (31 U. S. C. §3729), "FCA"), here.  Both Acts, in their own ways, dealt with fraud in war defense contracts and related frauds.  Although fraud in defense contracts and related frauds was the impetus for both Acts, as I have noted before the WSLA, is rather broad in its textual coverage and read literally includes any fraud crimes against the U.S.  I will devote this blog entry to the WSLA and what the Court said about it in Kellogg.

The WSLA provides in relevant part: that, "When the United States is at war or Congress has enacted a specific authorization for the use of the Armed Forces" under the War Powers Resolution Act, "the running of any statute of limitations applicable to any offense . . . involving fraud or attempted fraud against the United States or any agency thereof in any manner, whether by conspiracy or not."  I have previously discussed the possible application of WSLA to tax crimes.  See Is the Criminal Statute of Limitations Suspended under the Wartime Suspension Act? (Federal Tax Crimes Blog 11/20/09), here; and Wartime Suspension of Limitations Act and Tax Fraud (Federal Tax Crimes Blog 6/27/12), here.

In part relevant to the WSLA, the Court in the Kellogg opinion says (Slip Op. 5-6, footnote omitted):

III

The text, structure, and history of the WSLA show that the Act applies only to criminal offenses. 

A

The WSLA’s roots extend back to the time after the end of World War I. Concerned about war-related frauds, Congress in 1921 enacted a statute that extended the statute of limitations for such offenses. The new law provided as follows: “[I]n offenses involving the defrauding or attempts to defraud the United States or any agency thereof . . . and now indictable under any existing statutes, the period of limitations shall be six years.” Act of Nov. 17, 1921, ch. 124, 42 Stat. 220 (emphasis added). Since only crimes are “indictable,” this provision quite clearly was limited to the filing of criminal charges.  

In 1942, after the United States entered World War II, Congress enacted a similar suspension statute. This law, like its predecessor, applied to fraud “offenses . . . now indictable under any existing statutes,” but this time the law suspended “any” “existing statute of limitations” until the fixed date of June 30, 1945. Act of Aug. 24, 1942, ch. 555, 56 Stat. 747–748. 

As that date approached, Congress decided to adopt a suspension statute which would remain in force for the duration of the war. Congress amended the 1942 WSLA in three important ways. First, Congress deleted the phrase “now indictable under any statute,” so that the WSLA was made to apply simply to “any offense against the laws of the United States.” 58 Stat. 667. Second, although previous versions of the WSLA were of definite duration, Congress now suspended the limitations period for the open-ended timeframe of “three years after the termination of hostilities in the present war as proclaimed by the President or by a concurrent resolution of the two Houses of Congress.” Ibid. Third, Congress expanded the statute’s coverage beyond offenses “involving defrauding or attempts to defraud the United States” to include other offenses pertaining to Government contracts and the handling and disposal of Government property. Ibid., and §28, 58 Stat. 781. 

Congress made more changes in 1948. From then until 2008, the WSLA’s relevant language was as follows:  

“When the United States is at war the running of any statute of limitations applicable to any offense (1) involving fraud or attempted fraud against the United States or any agency thereof in any manner, whether by conspiracy or not . . . shall be suspended until three years after the termination of hostilities as proclaimed by the President or by a concurrent resolution of Congress.” Act of June 25, 1948, §3287, 62 Stat. 828.
In addition, Congress codified the WSLA in Title 18 of the United States Code, titled “Crimes and Criminal Procedure.” 

Finally, in 2008, Congress once again amended the WSLA, this time in two relevant ways. First, as noted, Congress changed the Act’s triggering event, providing that tolling is available not only “[w]hen the United States is at war,” but also when Congress has enacted a specific authorization for the use of military force. Second, Congress extended the suspension period from three to five years. §855, 122 Stat. 4545.

Sixth Circuit Holds that § 7212(a)'s Omnibus Clause Requires Knowledge of a Pending Proceeding / Action and Intent to Obstruct (12/13/14)

Section 7212(a), here, was derived from Title 18’s obstruction provisions.  The key Title 18 obstruction provision is § 1503, here.  Both of the sections have an Omnibus Clause providing:

18 USC § 1503:

corruptly influences, obstructs, or impedes, or endeavors to influence, obstruct, or impede, the due administration of justice.

26 USC 7212(a)

corruptly . . . obstructs or impedes, or endeavors to obstruct or impede, the due administration of this title.

In United States v. Kassouf, 144 F.3d 952 (6th Cir. 1998), here,  the Sixth Circuit noted that the Omnibus Clause in § 7212(a) and the Omnibus Clause in § 1503 were virtually identical  and thus held that the Supreme Court's interpretation of § 1503 in United States v. Aguilar, 515 U.S. 593 (1995), here, to require that the defendant know of a pending investigation that he intended to obstruct applied to § 7212(a) as well.   Just as this interpretation restricts the application of the same words in the Omnibus Clause of § 1503,  so this interpretation of the same words restricts the application of the words in the Omnibus Clause of § 7212(a).  Subsequently in United States v. Bowman, 173 F.3d 595 (6th Cir. 1999),  here, the Sixth Circuit restricted Kassouf to its facts and applied § 7212(a)’s Omnibus Clause where the defendant, by filing information forms, attempted to trick the IRS into investigating his creditors.  Bowman could be read as a repudiation of Kassouf’s requirement for a pending investigation and thus giving a broader interpretation to § 7212(a)’s Omnibus Clause than to § 1503’s Omnibus Clause.  United States v. Floyd, 740 F.3d 22, 32 n4 (1st Cir. 2014); United States v. Kelly, 564 F. Supp. 2d, 843, 844-45 (N.D. Ill. 2008)}}; and United States v. Willner, 2007 U.S. Dist. LEXIS 75597 (S.D.N.Y. 2007) (finding support in the defraud conspiracy interpretation).

On December 12, 2014, the Sixth Circuit in United States v. Miner, 774 F.3d 336 (6th Cir. 2014), here, held that Bowman did not change the requirement it announced in Kassouf that the conduct must be intended to obstruct an IRS investigation.  Significant to the Court’s decision was its Circuit authority that the first decision trumps a later decision that might be viewed as in conflict.   The Court made much of the point that the Government’s sweeping claims that the Omnibus Clause untethered to a pending proceeding were expressly considered and rejected in Aguilar and Kassouf, the precedential authority in the Sixth Circuit.  The Court concluded:

In summary, post-Kassouf and post-Bowman, a defendant may not be convicted under the omnibus clause unless he is "acting in response to some pending IRS action of which [he is] aware." McBride, 362 F.3d at 372 [United States v. McBride, 362 F.3d 360 (6th Cir. 2004), here] (internal quotation marks omitted). The extension of Bowman that is urged by the government in this case does not represent a path that was unconsidered by Kassouf; it represents the path that was not taken.

Raoul Weil Found Not Guilty (11/3/14; 11/6/14)

This news just flashed into my in-box.  I will post more as I get it (see below).  This is twice in just a few days that a banker has been found not guilty.

For all Federal Tax Crimes blogs on Weil, click here.

Addendum 11/4/14 8:00 am:

Susannah Nesmith and David Voreacos, Ex-UBS Executive Weil Acquitted of U.S. Tax Conspiracy (Bloomberg 11/3/14), here.  Excerpts (with bold face added by JAT):

The federal jury in Fort Lauderdale, Florida, reached its verdict after deliberating about 90 minutes yesterday. Weil, 54, was indicted in 2008 on a charge of conspiring to help as many as 17,000 U.S. taxpayers hide $20 billion from the IRS. Weil was arrested last year in Bologna, Italy, and waived extradition. Weil, who didn’t testify, had faced five years in prison. 

* * * * 

“The verdict shows you the difficulty of going after senior management who can at times blame the bank’s customers and lower-level employees for the bank’s mistakes,” Nathan Hochman, a former assistant attorney general who oversaw the Justice Department’s tax division, said in a phone interview. “It’s difficult to prove a historical case beyond a reasonable doubt when the government heavily relies on witnesses who have received very favorable treatment.” 

* * * * 

Prosecutors argued that Weil knew that UBS used sham corporate structures to help U.S. clients hide their identities from the IRS, and its bankers used cloak-and-dagger methods to deliver them cash and account statements. 

“This conspiracy lasted for years and years, all done to conceal this business and hide these clients,” Mark Daly, a Justice Department trial attorney, said yesterday in summarizing a case that began Oct. 14. “It’s a pyramid. At the top, you’ve got the senior executives who have the power to either grow or shut down this business.” 

* * * * 

Menchel [Weil's lawyer] argued in his summation that prosecutors failed to prove that Weil was part of a single conspiracy involving taxpayers. He also said that Weil was unaware of the activities of a group of bankers below him. 

Pretrial Skirmishing in Weil - the Coplan Issue of Improper Expansion of the Defraud / Klein Conspiracy (10/21/14)

As readers know, Raoul Weil, a former high ranking UBS official in charge of its U.S. tax evasion shenanigans, is being tried for tax conspiracy. United States v. Weil (SD FL No. 08-60322-CR-COHN). (See also blog entry links below.)  Before trial, Weil sought dismissal on the basis asserted the issue asserted in United States v. Coplan, et al., 703 F.3d 46 (2d Cir. 11/29/12), here.  That issue is whether the formulation of the defraud conspiracy in Hammerschmidt v. United States, 265 U.S. 182 (1924) more broadly than the scope of the word "defraud" meant at common law and thus means in other criminal statutes improperly expands the scope of the defraud conspiracy.  See the links to the Coplan issue below.  As expanded, the application in the tax context is generally referred to as a Klein conspiracy, after the leading case employing the expanded definition in a tax setting, United States v. Klein, 247 F.2d 908 (2d Cir. 1957).

In a short order, here, the Weil Court denied Weil's motion to dismiss because it was untimely and, in any event, fails on the merits of the motion.  The critical excerpts from the Court's short order are:

However, a review of the Motion demonstrates that it also fails on its merits. Weil was indicted under 18 U.S.C. § 371, which prohibits conspiracies to defraud the United States and its agencies. Indictment ¶¶ 11–13. Weil contends that the common-law definition of "defraud" is to "deprive[] another of property rights by dishonest means." Motion at 2 (quoting United States v. Coplan, 703 F.3d 46, 59 (2d Cir. 2012), cert. denied, 134 S. Ct. 71 (2013)). Weil notes that the Government does not allege that he deprived the IRS of property rights by dishonest means, and thus he is not accused of having conspired to defraud the IRS in the traditional sense. "Instead, the Indictment relies on a judicially and specially crafted definition of 'defraud' that includes 'interfer[ing] with or obstruct[ing] one of the [U.S. government's] lawful . . . functions by deceit, craft or trickery, or at least by means that are dishonest.'" Id. (quoting United States v. Klein, 247 F.2d 908, 916 (2d Cir. 1957)). This specific theory of fraud against the United States and its agencies—involving not the deprivation of property but instead the obstruction of governmental functions—has come to be known as the "Klein conspiracy." See United States v. Adkinson, 158 F.3d 1147, 1154–55 (11th Cir. 1998). 

Weil argues that the Klein conspiracy violates a prohibition on judge-made, common-law crimes. Weil also argues that any ambiguity in the text of section 371 should be interpreted in favor of defendants under the rule of lenity, and the broad interpretation of the term "defraud" that gives life to the Klein conspiracy violates this rule. Motion at 4. Finally, Weil argues that recent Supreme Court precedent rejecting a broad interpretation of honest-services fraud robs the Klein conspiracy of any remaining viability. Id. at 2–3 (citing Skilling v. United States, 561 U.S. 358 (2010)).\ 

In the Motion, Weil leans heavily upon the Second Circuit's criticisms of the Klein conspiracy in Coplan, 703 F.3d 46, to support his argument that the theory must fail as a judge-made basis for criminal liability without a foundation in the text of the criminal statutes. But in Coplan, the Second Circuit ultimately held that the Klein conspiracy was firmly entrenched in the Supreme Court's and the Second Circuit's precedents, and remained viable notwithstanding the Supreme Court's recent decision in Skilling. 703 F.3d at 61–62. Shortly thereafter, the Supreme Court declined to hear an appeal from the Second Circuit's decision. Coplan, 134 S. Ct. 71. 

Like the Second Circuit, the Eleventh Circuit has recognized the Klein conspiracy as a basis for criminal liability subsequent to the Supreme Court's holding in Skilling. See United States v. Kottwitz, 614 F.3d 1241, 1264–66 (11th Cir.), modified on other grounds, 627 F.3d 1383 (11th Cir. 2010). Therefore, though Weil may have a non-frivolous argument for the rejection of the Klein conspiracy, this Court agrees with the holding of the Second Circuit in Coplan: "such arguments are properly directed to a higher authority." 703 F.3d at 62. It is accordingly 

ORDERED AND ADJUDGED that Defendant Raoul Weil's Motion to Dismiss Indictment Pursuant to Federal Rule of Criminal Procedure 12(b)(3)(B) for Failing to State an Offense [DE 148] is DENIED both as untimely and on its merits. 

For further background on the order, Weil's motion is here and the Government's response is here (the attachment to the Government's response (the brief in opposition to certiorari in Coplan, is here).

Blog Entries on the Weil Prosecution

• Raoul Weil Has First U.S. Court Appearance (Federal Tax Crimes Blog 12/17/13), here.
• Raoul Weil Pleads Not Guilty: Thoughts and Speculations (Federal Tax Crimes Blog 1/8/14), here.
• Raoul Weil Trial Begins Next Week; Some Items for the Run-Up (Federal Tax Crimes Blog 10/9/14), here.

Blog Entries on the Coplan Issue

• Coplan #1 - Panel Questions Validity of Klein Conspiracy (Federal Tax Crimes Blog 12/1/12), here.
• Further on the Second Circuit Detour on the Interpretation of the Defraud / Klein Conspiracy (Federal Tax Crimes Blog 12/18/12), here.

The Intersection of Chevron Deference for Agency Interpretation and the Crimnal Rule of Lenity in Statutory Interpretation (12/14/13)

In Carter v. Wells-Bowen Realty, Inc., ___ F.3d ___, 2013 U.S. App. LEXIS 23852 (6th Cir. 2013), here, a nontax case, Judge Sutton in a concurring opinion addresses the intersection of the venerable rule of lenity in interpreting criminal statutes and Chevron deference in the context of interpreting statutes with criminal implications.  Chevron deference plays a prominent role in the interpretation of the Internal Revenue Code which, of course, contains criminal provisions.  Sections 7206 ff.  And, even when the IRS's statutory interpretations do not directly apply to the criminal sections, they may apply to the civil tax sections that, in a criminal case, the Government would have to claim satisfy the Cheek requirement of a known and knowable legal duty.  Let's say, for example, the IRS were to promulgate a regulation taking an IRS friendly view of the doctrine of economic substance -- either the tax common law doctrine or the statutory doctrine -- which would likely, by setting the interpretive legal duty, make it easier to convict for tax shelters violating the adopted regulatory interpretation but not the common law interpretation.  Now, let's go to the Carter opinions.

The majority panel decision opens as follows:

Under the Real Estate Settlement Procedures Act, a title services company may not pay a real estate agent a fee in exchange for a referral. 12 U.S.C. § 2607(a). Exempted from this prohibition are "affiliated business arrangements." Id. § 2607(c)(4). The statute establishes three prerequisites for this safe harbor, and everyone agrees that the defendants in this case (several realty companies and title companies) satisfied them. The plaintiffs (three home buyers) claim that the defendants nevertheless fall outside the safe harbor's coverage because they failed to satisfy a fourth condition announced by the Department of Housing and Urban Development through a policy statement. As that policy statement is not binding on the Department or anyone else and as it is not otherwise entitled to deference, it does not supplement the Act's existing safe-harbor conditions. We affirm.

The majority then telescopes its holding and analysis as follows:

The buyers claim that the profits earned by the owners of Welles-Bowen and WB constitute prohibited referral fees due to their relationship with WB. There is an easy way to look at this claim and a more complicated way to look at it.\ 

The easy way turns on the safe harbor provisions spelled out in § 2607(c)(4). Welles-Bowen's relationship with WB qualifies as an "affiliated business arrangement." The buyers agree that Welles-Bowen had an "affiliate relationship" with WB, that Welles-Bowen made referrals to WB, and that WB in turn provided settlement services. 12 U.S.C. § 2602(7). This relationship also satisfied the three safe-harbor conditions. Welles-Bowen disclosed the arrangement to the buyers, Welles-Bowen allowed them to reject the referrals, and neither Welles-Bowen nor its owners received anything of value from the arrangement apart from a return on their ownership interests. Id. § 2607(c)(4). Welles-Bowen and WB in short did everything the Act asked of them. They thus qualify for the affiliated business arrangement exemption. 

Daugerdas Retrial Jury Instructions - Part 06 Conspiracy Instructions Part 2 - Defraud / Klein Conspiracy (11/16/13; revised 11/23/13)

Judge Pauley gives standard instructions on the elements of the crime of conspiracy - to summarize:

First: that an agreement existed between two or more persons to accomplish at least one of the unlawful objectives charged in the Indictment;  

Second: that the defendant you are considering knowingly and willfully became a member of, and joined in, the conspiracy; and  

Third: that a member of the conspiracy, not necessarily the defendant whom you are considering, knowingly committed at least one overt act in furtherance of the conspiracy

The Court then explains the elements, again in fairly standard instructions.  The Court then moves to the objects of the conspiracy.  I address in this blog the defraud / Klein conspiracy object.  The defraud conspiracy in a tax setting is commonly referred to as a Klein conspiracy.  See United States v. Klein, 247 F.2d 908 (2d Cir. 1957), here.  Here are Judge Pauley's instructions on the Klein conspiracy (I have added the bold face in the text (as opposed to the caption) to make a point that I shall discuss below):

First Object: To Defraud the United States and its agency, the IRS 

The first object of the conspiracy is to defraud the United States by impeding, impairing, defeating and obstructing the lawful functions of the Internal Revenue Service in the ascertainment, evaluation, assessment and collection of income taxes. To prove the first object of the conspiracy, the Government must prove beyond a reasonable doubt that the defendant you are considering and one or more co-conspirators unlawfully, willfully and knowingly agreed to defraud the United States by fraud, deceit or other dishonest means.

I instruct you that the Internal Revenue Service is an agency of the United States Government which is responsible for the collection of tax revenue. The term “conspiracy to defraud the United States” therefore means that the defendants and other co-conspirators are accused of conspiring to impede, impair, defeat, and obstruct the IRS’s lawful functions of ascertaining and collecting tax revenue owed to the United States. It is not necessary that the United States suffer a financial loss from the conspiracy. Indeed, even if the taxpayer’s ultimate legal position on some issue (such as a tax shelter loss) is correct, and he owes no additional taxes, that is not a defense to the crime charged. One cannot use deception and dishonest means—such as making false statements to the IRS—to impede, impair, obstruct, or defeat the 8 IRS, even to protect a legitimate tax position.  

A conspiracy to impede the functions of the IRS by fraud or dishonest means may include, by way of example, such things as agreements to destroy documentation of income, to destroy records, to transfer money or take other action in an attempt to conceal ownership of income or property, to create false documentation, to attempt to influence witnesses, or to engage in any other fraudulent or deceptive conduct that would have the effect of impairing the ability of the IRS to collect tax revenue. Such conduct can also include falsifying the date of a transaction for tax purposes. In this regard, I instruct you that the income tax laws are administered on the basis of an annual accounting system which prohibits the reopening of a prior year’s tax return to take account of events occurring in later years. By citing such examples, of course, I am not suggesting that these are the only actions that could impede the IRS by fraudulent or dishonest means. Nor am I expressing any view as to whether conduct similar to the examples I have mentioned took place here.  

Moreover, it is critical for you to recognize that not all conduct that impedes the lawful functions of a Government agency is illegal. To be unlawful, the conduct must entail fraud, deceit, or other dishonest means. It is not illegal simply to make the IRS’s job harder. Only an agreement to engage in conduct that tends to impede the IRS and that also involves fraudulent, deceitful, or dishonest means, constitutes an illegal agreement to defraud the United States.

Significant Tax Shelter Defendant Sentence After Acquittal of Co-Conspirators (5/27/13)

DOJ Tax recently announced, here, that Michael Parker had been sent to prison for 54 months pursuant to his plea of guilty to one count of conspiracy (a Klein Conspiracy).  Some readers may recall that Mr. Parker had been originally indicted along with David Haynor and Jon Flask to charges, including conspiracy, related to tax shelters which they promoted.  In 2009, Mr. Parker pled guilty to the one count of conspiracy.  See DOJ Tax Press Release, here, and Guilty Plea in SLOTS Tax Shelter (Federal Tax Crimes Blog 12/19/09), here.  Messrs. Haynor and Flask went to trial and were acquitted.  See my prior blogs on facets of that trial and acquittal, Good Faith as a Defense to Tax Crimes (Federal Tax Crimes Blog 2/9/13), here, and Jury Instructions in Tax Obstruction and Klein Conspiracy Case (Federal Tax Crimes Blog 2/6/13), here.

The key excerpts from  the press release are (emphasis supplied by JAT):

According to the plea agreement and statements made during trial and related proceedings before U.S. District Judge Sandra S. Beckwith in Cincinnati, Ohio, Parker admitted to conspiring with others to defraud the IRS with regard to tax shelter transactions. Parker, a CPA and an attorney, acted as the Chief Operating Officer of TransCapital Corporation during the alleged conspiracy. Parker testified at the trial of an accountant who was a tax partner at KPMG, LLC, at its Tysons Corner, Va., office, and an attorney for TransCapital, both of whom were acquitted of conspiracy charges after a four-week jury trial. 

According to the plea agreement, trial testimony and other statements, from 1998 through 2006, Parker and others marketed and implemented a tax shelter to KPMG clients called the Sale Leaseback of Tenant Improvements Strategy (SLOTS). The SLOTS shelter enabled client corporations to claim tax deductions totaling more than $240 million on corporate income tax returns filed with the IRS. During 2002 through 2004, the IRS audited three U.S. corporations that had claimed losses generated by SLOTS transactions, including The Kroger Company. Parker identified Kroger as the Fortune 500 corporation that did the largest SLOTS tax shelter transaction, and which claimed over $178 million in loss deductions, causing over $64 million in tax loss to the IRS. Parker admitted that he and the others conspired to impede and impair the IRS by making false and misleading statements to IRS agents and attorneys during these audits, including the Kroger audit. Additionally, Parker admitted that he and others concealed certain aspects of the tax shelter transaction from SLOTS clients, including Kroger, for the purpose of impeding and impairing the IRS. Parker further acknowledged that the SLOTS tax shelter and related transactions were themselves nothing more than devices to disguise and conceal mere financing transactions.

Jury Instructions in Tax Obstruction and Klein Conspiracy Case (2/6/13)

In  the Tax Fraud and Money Laundering class that Larry Campagna and I teach at UH Law School, in Monday's class, we covered tax obstruction, Section 7212(a), here.  Next week we will cover the defraud conspiracy in 18 USC Section 371, here, commonly called a Klein conspiracy in a tax setting.  Both of these crimes are described by the statutes and their interpretations as crimes where the conduct does or is intended to impair or impede the lawful function of the IRS.  Hence, the tax obstruction crime has been called a one person Klein conspiracy.  But, as articulated in the text of Section 371, the conspiracy is not an offense conspiracy to commit tax obstruction under Section 7212(a) (meaning that it is not an offense conspiracy), but is rather a conspiracy having as its object tax obstruction rather than a statutory offense.  (I won't dig any further into that now, since it gets into more esoterica than I need to for the scope of this blog.)

I have just become aware of a recent acquittal where defendants were charged with both of these crimes.  I am not sure why both overlapping crimes were charged.  I suppose, perhaps, it was to protect against the possibility that the jury would find tax obstruction generally, but would not find a conspiracy to obstruct.  Setting that aside, I thought it might help students to see the instructions in the case.  So, I provide the entire instructions here.  I include the entire instructions because students should see a complete set to understand the specific instructions I focus on here -- the Klein conspiracy instruction and the tax obstruction instruction.  So, I do encourage students to read the entire instructions just to get a feel what a complete set does.

I quote immediately below  the instructions related to the two counts of the indictment (pp. 19-25 of the instructions; I have added bold face to draw your particular attention to parts of the instruction I discuss below after presenting the instructions; I also insert in brackets the paragraph number of the corresponding comment, e.g., [1], etc.):

Further on the Second Circuit Detour on the Interpretation of the Defraud / Klein Conspiracy (12/18/12)

I write today on the Second Circuit's detour in Coplan to question the foundations of the expansive reading in Hammerschmidt of the defraud conspiracy (a Klein conspiracy in a tax setting).  Readers of this blog will know that I have a long-term interest in the subject -- see e.g., my earlier post on the Coplan case, Coplan #1 - Panel Questions Validity of Klein Conspiracy (Federal Tax Crimes Blog 12/1/12), here, and my 2009 article covering the scope of the Klein conspiracy and its Code counterpart, tax obstruction under Section 7212(a), John A. Townsend, Is Making the IRS's Job Harder Enough?, 9 Hous. & Bus. Tax L.J. 260 (2009), here).

Tax Notes Today has an article on the topic, Shamik Trivedi, Is Klein on the Ropes?, 2012 TNT 244-1 (12/19/12).  I thought I would use this pulpit -- not a bully pulpit, but my pulpit -- to address some of the issues raised in the article.

To state the obvious, the issue is all about interpretation.  In Hammerschmidt, the Supreme Court interpreted the word "defraud" in the defraud conspiracy statute (now 18 USC 371, here) broadly and atypically to the usual meaning of the word "defraud."  The "atypicalness" of the interpretation is what prompted the Second Circuit's detour in Coplan.  In hindsight, that expansive interpretation cannot be justified by the normal techniques of interpreting a statute, but the Supreme Court clearly so interpreted the statute.  The Supreme Court's interpretations are the law until overruled.  It is all about interpretation, and the Supreme Court has interpreted.  (Sorry for the redundancy, but it is important.)

I am reminded of a similar process of interpreting the Bible.  In his monumental work, Professor Jim Kugel addresses that process in a way that, I think parallels what happens in this type of interpretation process.  James L. Kugle, How to Read the Bible: A Guide to Scripture, Then and Now (Free Press 2008), here.  Professor Kugel makes the point that the process of interpretation could -- and I think he would say should -- involve giving words meanings not necessarily intended by the original drafters.  I know that will strike religious fundamentalists and constitutional originalists as blasphemy, but it happens both in the context of religion and law (Justice Scalia notwithstanding).  Just to pick a quote from Professor Kugel's book to illustrate:

Coplan #8 - Summary (12/6/12)

I have finished my trip through Coplan.  I thought a good summary, without the details, but the gravamen of the  Court of Appeals approach and concerns is this "cut and paste" from the excellent blog of a colleague.  Peter D. Hardy, Second Circuit Vacates Part of Tax Shelter Case (White Collar Crime Prof Blog 12/4/12), here.  Mr. Hardy's commentary is focused principally on the sufficiency of the evidence claims.  Here are some excerpts:

The opinion is lengthy and complex, and resists easy summarization.  It is well worth reading because it discusses in detail a kaleidoscope of issues relevant to any "white collar" criminal trial, from evidentiary rulings to jury instructions to sentencing.  This commentary is limited to the sufficiency of evidence claims, and some of their implications for lawyers as potential defendants. 

The panel in Coplan displayed a remarkable willingness to comb through an extremely complicated trial record and test every nuanced inference that the government urged could be drawn from the evidence in support of the verdicts.  The bottom-line holding of the panel was that, after making all inferences in favor of the government, the convictions had to be vacated because the evidence of guilt was at best in equipose. 

Although this general principle can be stated easily, its practical application in Coplan involved the panel conducting a particularized review of the evidence that appellate courts often forego.  For example, one important fact for Shapiro was that a tax opinion letter provided to shelter clients stated that, for the purposes of the "economic substance" test governing tax-related transactions, the clients had a "substantial nontax business purpose" (OK, per the Coplan panel), rather than stating, as it had before Shapiro’s revisions, that the clients had a "principle" (sic - principal) investment purpose.  Likewise, although Shapiro had reviewed letters and attended phone conferences deemed incriminating by the government, his involvement in such conduct was not "habitual" or otherwise substantial.  As for Nissenbaum’s Section 7212(a) conviction, his response to the IDR that the government characterized as obstructive – a partial explanation of the clients’ subjective business reasons for participating in the　tax shelters – could not sustain the conviction because the IDR drafted by the IRS had sought all reasons held by the clients, rather than their primary reason.  If this sounds somewhat murky and convoluted, it is.  The point is that multiple convictions for very significant offenses were vacated after much effort at extremely fine line-drawing.

Coplan #4 - Court Approves Defraud / Klein Instruction -- Making the IRS Job Harder May Be Enough (12/4/12)

I noted in an earlier blog that the Court questioned the expansion of the expansion of the word defraud in defining the criminal conduct necessary for a defraud / Klein conspiracy.  Coplan #1 - Panel Questions Validity of Klein Conspiracy (12/1/12), here.  I quoted the entire instruction in that blog entry, so I won't repeat it here.  Some of the defendants complained that the district declined to give their requested instruction that would advise the jury of limitations on the scope of conduct that was criminalized under the expanded definition of defraud.  (I have written on that issue before and cite my article and related materials at the end of this blog.)

The Court's treatment of this argument is fairly summary, so I quote it in full (footnote containing the instruction  omitted)

In this case, the defendants proposed a jury instruction on Count One that emphasized the distinction between acts that made the IRS's job more difficult and acts that were done deceitfully or dishonestly. Their requested instruction included a number of examples that, in the defendants' view, could not constitute a conspiracy to defraud, in order to advance the defense theory that their conduct was legitimate advocacy on behalf of their clients. See, e.g., A VI: 262 (proposed jury instruction) ("It is not illegal simply to make the IRS's job harder. This is particularly true for the defendants, whose professional obligations as attorneys or certified public accountants required them to represent the interests of their clients vigorously in their dealings with adversaries, such as the IRS."). The District Court adopted the substance of the proposed charge, but declined to include the defendants' examples or to inform the jury about the special obligations of tax professionals who represent clients in an adversarial setting. 

We affirm the District Court's ruling primarily because the defendants' proposed charge did not "accurately represent[ ] the law in every respect." Feliciano, 223 F.3d at 116 (quotation marks omitted). The examples of purportedly lawful conduct proffered by the defendants included the following: "an agreement between witnesses not to tell the government something unless specifically asked about it; advice from an attorney to a client to assert his constitutional right not to speak to government investigators; an agreement not to create a document that individuals had no obligation to create." A VI: 262. Although these acts are not necessarily deceitful, no bright line rule excludes such acts from supporting a conspiracy to defraud. See Cont'l Ore Co. v. Union Carbide & Carbon Corp., 370 U.S. 690, 707 (1962) ("[I]t is well settled that acts which are in themselves legal lose that character when they become constituent elements of an unlawful scheme."). We are not unsympathetic to the defendants' view that a lay jury may struggle to fully apprehend the obligations of tax professionals zealously (and lawfully) representing clients before the IRS. Nevertheless, because the current understanding of the Klein doctrine does not categorically exclude the foregoing acts, the District Court properly omitted the proposed examples from the jury instructions.