Sunday, August 8, 2010

Willfulness -- Amended Returns and Bank Accounts That Are Not Hidden -- and Materiality (8/8/10)

In United States v. Shellef, 2010 732 F.Supp.2d 42 (ED NY 2010), decided 8/5/10, the Court denied Shellef's motion for a motions for acquittal and retrial. This trial was actually his second, the first having been reversed on appeal because of improper joinder issues. United States v. Shellef, 507 F.3d 82 (2d Cir. 2007), here. After convictions on various counts on the second trial, Shellef moved for acquittal and retrial. The key counts of conviction were for the defraud / Klein conspiracy with respect to excise taxes on certain chemicals, tax perjury (7206(1)) for the 1999 income tax return for a Shellef company, wire fraud with respect to the chemical trading relating to payment of excise taxes, and money laundering. I discuss here only the tax perjury count.

Shellef asserted that the Government had not proved willfulness sufficient that a reasonable jury could have found guilt beyond a reasonable doubt. The hurdle he had to clear -- insurmountable it turns out -- was that the evidence showed that he had not reported "$782,781 in income, which represented the proceeds of his domestic sales of" the chemical subject to the excise tax. The court concluded that
Defendant argues that the fact that he filed an amended tax return to include the previously omitted income is evidence of a lack of willfulness. As this Court instructed the jury (see 1/21/10 Tr. 2538), the fact that a defendant files an amended return may indicate a lack of willfulness. See Dyer, 922 F.2d at 108. However, although a jury could have found that the amended return indicated a lack of willfulness, the mere fact that Shellef filed an amended return does not by itself preclude a finding of willfulness by the jury. n26 See, e.g., United States v. Tishberg, 854 F.2d 1070, 1073 (7th Cir. 1988) ("[Defendant's] subsequent conduct may demonstrate a good faith effort to correct his previous mistakes. . . . It does not, however, negate, the import of his previous action."). Shellef did not tell either of his accountants about the two bank accounts or file an amended return until after the government searched his home and the Bayonne warehouse office on October 2, 2000. n27 Thus, the circumstances surrounding the filing of the amended return provided a basis for the jury to rationally find that the amended return did not indicate a lack of willfulness in the filing of the original return.
   n26 To the extent the government argues that the jury could infer that defendant acted willfully merely because he filed the amended tax return, the Court rejects such an argument and, in fact, instructed the jury that no such inference could be drawn. (See 1/21/10 Tr. 2538.)
   n27 Defendant points out that he actually fired Kashinsky in September 2000 (1/11/10 Tr. 1703; 1/12/10 Tr. 1776), which was before he learned of any investigation. (Def.'s Br. at 42.) However, this is not necessarily indicative of a lack of willfulness. Although Shellef fired Kashinsky in September 2000, he did not speak to his new accountant about the unreported income or file an amended tax return until after he learned of the federal investigation. Thus, the jury could have concluded that Shellef fired Kashinsky not because of any issue with the unreported income, but perhaps because the accountant was late with filings. (See 1/12/10 Tr. 1754 ("A. The only dissatisfaction he expressed to me was the lateness to the due date of getting his tax return, plus our fees. Q. You didn't quarrel about the numbers on the return? A. No."); see also Tr. 1804, 1812-13, 1825-26.)
Even while rejecting the defense of the amended return, the Court did recognize that it is a defense that the jury can accept. Those practicing in this area get this question all the time after the criminal investigation has surfaced. Sometimes it is as simple as the naïve notion that all the Government wants is the money and the criminal investigation will go away if the taxpayer just files amended return and pays the tax. Once the lawyer disabuses the client of that notion, then the question is whether filing one or more amended returns and paying the tax will help, at least at the margins. I have seen situations where, to the best I could discern the Government's reasoning, amended returns (or delinquent returns in the case of failure to file) did prevent the cases from going to indictment even if they were filed after the investigation started, but I have to say that that is rare. The criminal tax docket would be depleted if the filing of amended returns caused the criminal case to go away; the threat of criminal conviction would no longer serve as an important incentive for taxpayers to file correct original returns. Still, it is important for counsel and the taxpayer to strategize about filing amended returns in order to at least present to the jury that issue with, hopefully, a good instruction like the Court gave in the Shellef case. Depending on the facts, I can see juries buying that defense.

Shellef also argued that, because the accounts were not hidden or disguised, that was evidence of lack of willfulness.  The Court disposed of that argument as follows:
Defendant also argues that, because the two bank accounts in question were openly held in the name of Poly Systems, Inc. with the correct federal tax identification numbers (1/12/10 Tr. 1799-1801), there was insufficient evidence of willfulness. Specifically, defendant argues that the "open" nature of the accounts reveals a lack of intent to conceal the income and also that his accountant should have found the accounts and reported the income contained therein. In essence, defendant argues that he cannot be guilty of a crime based on the negligence of his accountant. 28 However, given the evidence discussed above that Shellef did not provide information on the two accounts to his accountant, and the two accounts contained the income from the domestic sales of CFC, on which no excise tax had been paid, there was sufficient circumstantial evidence for the jury to conclude that Shellef acted willfully in filing a false tax return.
   n28 Defendant also points to inconsistencies in Kashinsky's testimony, such as whether Kashinsky knew about a bank account held by Shellef in Switzerland. (See Def.'s Br. at 43-45.) However, any inconsistencies in the evidence or questions of witness credibility were for the jury to decide.
The Court also addressed the other common issue for tax perjury -- materiality. The discussion is short, so I quote it in full:
Defendant argues that the misstated income resulted in an additional tax liability of only $4,000 (see Def.'s Br. at 46) and, therefore, the misstatement in the 1999 corporate tax return was immaterial as a matter of law. 29 The Court rejects this argument for the reasons set forth below. 30
   n29 The government argues that the additional tax liability was higher than $4,000. (See Govt. Br. at 33.) However, the Court need not address this issue because even assuming arguendo that the additional liability was $4,000, the evidence was sufficient for the jury to rationally find that the misstatement was material.
   n30 The government correctly points out that the materiality of a false statement in a § 7206(1) prosecution is a question of fact for the jury. See Neder v. United States, 527 U.S. 1, 19-20 (1999) ("We thus hold that the District Court's failure to submit the element of materiality to the jury with respect to the tax charges was harmless error."); see also Washington v. Recuenco, 548 U.S. 212, 219 (2006).
"In general, a false statement is material if it has 'a natural tendency to influence, or [is] capable of influencing, the decision of the decision-making body to which it was addressed." Neder v. United States, 527 U.S. 1, 16 (1999) (quoting United States v. Gaudin, 515 U.S. 506, 509 (1995)); United States v. Mittelstaedt, 31 F.3d 1208, 1221 (2d Cir. 1994) (holding that omitting information from tax return was material for purposes of § 7206(1) prosecution because it "'had the potential for hindering the IRS's efforts to monitor and verify [defendant's] tax liability'" (quoting United States v. Greenberg, 735 F.2d 29, 32 (2d Cir. 1984))); accord United States v. Klausner, 80 F.3d 55, 60 (2d Cir. 1996) ("In order to establish a violation of § 7206(2), the government must prove that a tax return is false as to a material matter. In the present case, the itemized deductions on the income tax returns of [defendant's] clients constituted material matters if they were essential to the accurate computation of the clients' taxes." (collecting cases)).

In this case, the fact that the additional tax liability may have been only $4,000 does not render the misstatement immaterial as a matter of law. See United States v. Citron, 783 F.2d 307, 313 (2d Cir. 1986) (rejecting argument that material falsity for purposes of § 7206(1) is that which results in a substantial tax due); United States v. Greenberg, 735 F.2d 29, 31-32 (2d Cir. 1984) ("[Defendant's] argument that the misstatements were not material because they resulted in, at most, minimal underpayments of taxes ignores the potential of the misstatements for impeding the IRS's performance of its responsibilities."). The misstatement, which omitted Shellef's income from the domestic sales of CFC, clearly had the potential for impeding the IRS's performance of its responsibilities regarding the collection of excise taxes on CFC-113. Thus, the Court rejects defendant's argument that the misstatement of income was immaterial as a matter of law.
I think this discussion of materiality in the context is consistent with the cases as I read them. It is curious that, if indeed the income tax liability were only $4,000, Shellef would have had the requisite willfulness.  First of all, on the unreported income amount of $782,781, it is not self-evident that the indicated tax liability would be only around $4,000.  Lawyers get pretty creative, however, in working the criminal tax numbers and perhaps Shellef's counsel could have gotten there, although the Government claimed they could not.  Second, even if arguendo $4,000 were the right number and Shellef knew that when he filed his return, the answer perhaps lies in the excise taxes which might have been exposed -- at least in Shellef's mind -- if the income were reported and a resulting audit led to the excise tax shenanigans.

A similar type of materiality issue as to the tax loss is also presented in the context of the crime of tax evasion, Section 7201. In Boulware v. United States, 552 U.S. 421, 424 (U.S. 2008), the Supreme Court noted that the Courts are in disagreement as to this issue:
The Courts of Appeals have divided over whether the Government must prove the tax deficiency is "substantial," see United States v. Daniels, 387 F.3d 636, 640-641, and n. 2 (CA7 2004) (collecting cases); we do not address that issue here.
Note that cert was denied in Daniels at 544 U.S. 911 (2005).

1 comment:

  1. Jack,

    You have written a "Masterpience" on the subject of willfulness.

    This is what I have to add to your excellent work:

    I believe that an astute white collar criminal defense attorney must address the matter of negating willfulness right from the start. This is because juries can and will often accept the defense of lack of willfulness in cases where it is clearly, consistently and logically presented.

    Our tax laws are certainly a far cry from a model of clarity. They are enacted, enforced and interpreted by fallible human beings. As such, alert criminal defense attorneys must carefully invite the various triers of the facts and the law (from the IRS's Special Agent during the administrative investigation to the US DoJ's Tax Division trial attorney to the trial judge and jury) to evaluate the taxpayer's relevant course of conduct by focusing on the "dough" in the doughnut and rather than the hole in same.


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