Wednesday, September 2, 2009

Confusion about the Defraud Conspiracy (9/2/09)

Conspiracy is a frequent charge in tax related indictments. Indeed, Judge Easterbrook of the Seventh Circuit has lamented, with some hyperbole, that, in federal crimes generally, a conspiracy charge is “inevitable because prosecutors seem to have conspiracy on their word processors as Count I; rare is the case omitting such a charge.” United States v. Reynolds, 919 F.2d 435, 439 (7th Cir. 1990) (Reynolds is important in the tax crimes area for other reasons, but I won't digress).

The general conspiracy statute (18 U.S.C. § 371) defines two types of conspiracy -- an offense conspiracy and a defraud conspiracy. The offense conspiracy is a conspiracy to commit an act otherwise defined in the law as an offense. A tax example is a conspiracy to commit tax evasion; tax evasion is a substantive offense defined in 26 U.S.C. § 7201. The defraud conspiracy is not a conspiracy to commit a substantive offense, but in a tax setting is a conspiracy to impair or impede the lawful functioning of the IRS in the administration of the tax law. In a tax setting, the defraud conspiracy is often referred to as a Klein conspiracy, named after the leading case of United States v. Klein, 247 F.2d 908, 920 (2d Cir. 1957), cert. denied 355 U.S. 924 (1958).

In a recent article (cited at the end of this blog), I note the importance of distinguishing between the two types of conspiracy in tax crimes because the offense conspiracy requires the same proof of mens rea as the substantive offense that is the object of the conspiracy. Although the conspiracy statute says nothing about willfulness, when tax crimes are the object of the offense conspiracy, a willfulness element is imported as an element of the offense conspiracy because tax crimes require willfulness. Willfulness is a high standard of proof -- that the defendant knew the law and intended to violate the law. (By contrast to other areas of the law, the crime is committed if the defendant knew he was doing the activity that the law defines as criminal whether or not he knew that the law so defined the activity as criminal; ignorance of the law is no excuse; in tax crimes, however, ignorance of the law is an excuse.) The defraud conspiracy, like the offense conspiracy, has no textual requirement of willfulness but, unlike the offense conspiracy, has no referrant from which to import a requirement of willfulness.

For purposes of this blog, I just want the reader to understand that the offense conspiracy requires an offense as the object of the conspiracy whereas the defraud conspiracy does not. So, with that background, consider the following statement in a case I read today:

To establish conspiracy to defraud the United States in violation of 18 U.S.C. § 371, "there must be proof (1) of an agreement among two or more persons (2) to accomplish something that constitutes an offense against the United States, and (3) an overt act by one of them in furtherance of the conspiracy." United States v. Lichenstein, 610 F.2d 1272, 1276 (5th Cir. 1980). Furthermore, "the government must prove the requisite intent to commit the substantive offense." United States v. Charroux, 3 F.3d 827, 831 n.4 (5th Cir. 1993) (internal quotation and citation omitted).
United States v. Blockett, 324 Fed. Appx. 402 (5th Cir. Miss. 2009) (unpublished opinion). Blockett was not a tax case, but the distinction between offense and defraud conspiracies applies to the general conspiracy statute. Basically, the court blew it. The defraud conspiracy does not require proof of an agreement "to accomplish something that constitutes an offense against the United States." The case cited by the court for the proposition (Lichtenstein) was an offense conspiracy case. (Lichtenstein was a very interesting case, but I won't digress here to discuss it.) This error by the court was not outcome determinative in the case, and the error was committed in a nonprecedential decision so that, hopefully, the error will not have a life beyond the case. (One of the dangers that commentators have note about nonprecedential decisions is that, perhaps, judges are less careful about what they say in nonprecedential cases.)

The key point for students of the tax crimes, of course, is not to make this rather elementary mistake about the defraud / Klein conspiracy. For nuance, however, as I develop in my article, the defraud conspiracy, as interpreted, does have some significant requirement of proof that one might not discern from simply reading the statute – a requirement that deceit be involved in the attempt to impair or impede the administration of a government agency. This requirement serves an important limiting role for the defraud conspiracy, much as the willfulness element at least in tax crimes serves an important limiting role for the offense conspiracy.

My article that I cite in this blog is John A. Townsend, Is Making the IRS's Job Harder Enough?, 9 Hous. & Bus. Tax L.J. 260 (2009) and may be viewed on line here.

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