Thursday, May 26, 2011

Tax Obstruction Crimes -- Section 7212 and Klein Conspiracy (5/26/11)

Today, I pick up a thought I threw out in a comment in my blog entry titled "Jury speaks in the Daugerdas Case -- Guilty! (5/24/11)" regarding the overlapping tax obstruction under Section 7212 and the Klein conspiracy crimes and convictions. Here are Judge Pauley's instructions on these crimes in Daugerdas. I present the tax obstruction charge first, although it was presented second in the charge to the jury:

Tax Obstruction Charge (Section 7212)
Counts 20 and 21: Corruptly Endeavoring to Obstruct and Impede the Functions of the IRS

Count 20 of the Indictment charges that, from in or about 1994 to in or about October 2005, defendants Guerin, Field, Brubaker, and Parse corruptly obstructed and impeded, and endeavored to obstruct and impede, the due administration of the Internal Revenue Laws.

Count 21 charges that, from in or about 1994 to in or about October 2005, defendant Daugerdas corruptly obstructed and impeded, and endeavored to obstruct and impede, the due administration of the Internal Revenue Laws.
To satisfy its burden of proof with respect to the offenses charged in Counts 20 and 21, the Government must prove each of the following elements beyond a reasonable doubt for each defendant:

First, the Government must prove that the defendant you are considering acted corruptly. To act corruptly is to act intentionally, voluntarily, and deliberately to secure an unlawful advantage or benefit either for one’s self or for another. Acting corruptly requires consciousness of unlawfulness.

Second, the Government must prove beyond a reasonable doubt that the defendant you are considering acted with the specific intent to impede or obstruct the due enforcement of the Internal Revenue laws. This simply means any effort to obstruct the administration of the tax code. There is no requirement that a defendant’s actions actually succeeded or had an adverse effect on the Government’s investigation or process, nor is the statute limited to situations in which a defendant attempts to impede the IRS on his or her own behalf.
Klein Conspiracy Charge
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 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 [*34]
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.
My comments are:
1. As is common, I refer to the defraud conspiracy in 18 USC Section 371 as the Klein conspiracy which is a short hand often used for the defraud conspiracy in a tax context. See United States v. Klein, 247 F.2d 908 (2d Cir. 1957), cert. denied 355 U.S. 924 (1958). The other crime in the Daugerdas instructions quoted above is tax obstruction in 26 USC Section 7212(a). I sometimes refer to Section 7212(a) as tax obstruction. (I realize that the calling this particular crime tax obstruction is perhaps not the best description because all tax crimes, one way or the other, are obstruction crimes, see generally John A. Townsend, Is Making the IRS's Job Harder Enough?, 9 Hous. & Bus. Tax L.J. 260 (2009), here (I won't cite this article again in this blog entry, but the article and the research underlying the article substantially inform my comments here)).

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

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

4. Are these comments practical in the real world?. Probably not.

5. Nevertheless, as thus articulated, where the Government can formulate a conspiracy for obstructive tax conduct (whether an offense to violate Section 7212(a) or a Klein conspiracy or both), the Government should also be able to (i) allege direct Section 7212 liability for actors in the conduct and (ii) Pinkerton derivative substantive liability for Section 7212(a) for the persons joining the conspiracy. In the Daugerdas indictment, in alleging Section 7212 tax obstruction, the Government alleged only direct liability under (i), since the court did not even allow a Pinkerton instruction for the evasion substantive offenses. But, as we all know, piling on charges (as was the case in Daugerdas in other contexts and was the case in the two preceding tax shelter cases (Larson and Coplan), piling on charges and offenses of conviction will probably not affect the sentencing (kudos for the Sentencing Guidelines and reasonable judges exercising their Booker discretion).

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