Rendering Unto Caesar, Part 2: Other Clergy Fall (6/23/12)

I have previously discussed the tax crimes of Ronald Weinland, a pastor and self-proclaimed prophet.  See here.  Today, we have a new opinion involving other clergy.  In United States v. Jinwright, 683 F.3d 471 (4th Cir. 2012), here, the Fourth Circuit covers a lot of issues that are often presented in tax crimes prosecutions.  The facts are interesting, very interesting, and the discussion of the legal issues presented also interesting.

THE FACTS

1.  The Jinwrights, husband and wife, were "former co-pastors of Greater Salem Church in North Carolina."  They were convicted of "a tax evasion scheme" involving "millions of dollars of taxable income."

2.  The pattern of their conduct is summarized by the Court as follows:

When Mr. Jinwright first became pastor at GSC [Greater Salem Church], his salary was about $10,000. By 2001, his salary had increased to approximately $148,000. It reached about $300,000 by 2007. Between 2001 and 2007, GSC provided Mr. Jinwright with substantial benefits, in addition to his salary, that he underreported on his tax returns. He received housing allowances of between $130,000 and $160,000 per year, travel allowances of $19,000 to $48,000 per year, payments for his children's tuition and his federal income tax liability, and unlimited use of a luxury car leased by the church in addition to an annual vehicle allowance. Mr. Jinwright also received annual bonuses of $35,000 to $50,000, as well as separate Christmas bonuses. He had use of a GSC credit card and received reimbursements for purported business-related expenses that remained unsubstantiated. Taken together, Mr. Jinwright's total GSC compensation between 2001 and 2007 totaled nearly $3.9 million. During that time, Mrs. Jinwright received similar compensation from GSC in the form of salary, bonuses, allowances, and reimbursements, totaling nearly $1 million. 

The Jinwrights earned more income outside of GSC. Together they earned tens of thousands of dollars in additional income for speaking at other churches that they failed to report to the IRS. Mr. Jinwright established an organization known as A.L. Jinwright Ministries, Inc. (ALJM), purportedly to receive his income from outside speaking engagements. Mrs. Jinwright was responsible for handling ALJM's bank statements and providing the corporation's financial information to the Jinwrights' CPA. Although defendants kept the income earned through this business, GSC paid its operating expenses. Mr. Jinwright also founded the Pastors Consortium. The consortium, with a membership of other pastors, held annual events celebrating the anniversaries of the members' churches. During these celebrations the participants would exchange "gifts" to one another in the form of checks for thousands of dollars.

3.  Apparently, GSC filed for tax exempt status under Section 501(c)(3).  In the application filed in 2002, GSC understated Mr. Jinwright's total compensation.  Neverthess, the IRS denied the tax exempt status because his compensation, as reported, was too high.  A second application was filed in 2003, reporting his total compensation as $600,000, despite his reporting compensation on his personal return of $280,000.  The IRS began an investigation and determined that the Jinwrights had understated income by over $2 million for 2002-2007.  The indictments followed.  

3. a. As an aside, GSC may not have had to file for tax exempt status thus causing this sordid story to unfold for the IRS and then the public through the criminal prosecution.  This is from Publication 1828 (Rev. 11-2009), Tax Guide for Churches and Religious Organizations, p. 3:

Recognition of Tax-Exempt Status

Automatic Exemption for Churches Churches that meet the requirements of IRC section 501(c)(3) are automatically considered tax exempt and are not required to apply for and obtain recognition of tax-exempt status from the IRS . 

Although there is no requirement to do so, many churches seek recognition of tax-exempt status from the IRS because such recognition assures church leaders, members, and contributors that the church is recognized as exempt and qualifies for related tax benefits .For example, contributors to a church that has been recognized as tax exempt would know that their contributions generally are tax-deductible.

4.  The specific crimes of which they were jointly convicted are:  defraud / Klein conspiracy (18 U.S.C. § 371) and of three counts of tax evasion for the years 2005-2007 (§ 7201), and aiding and abetting the same (18 U.S.C. § 2). In addition, Mr. Jinwright was convicted (and Mrs. Jinwright acquitted) of three additional counts of tax evasion for the years 2002-2004, as well as six counts of filing a false tax return in violation of § 7206(1)."  They were acquitted of certain charges.

5.  At sentencing, the court determined the following sentencing factors:  (i) omission of income exceeding $3,000,000, causing a tax loss to the U.S. and State of North carlina of $1.3 million for the period from 1998-2008 (based on relevant conduct), thus indicating a based offense level of 22; (ii) sophisticated means enhancement (2 levels); abuse of trust enhancement (2 levels), and obstruction enhancement (2 levels, with the basis for this enhancement not explained apparently because not contested on appeal).  The overall indicated sentencing level was 28 and the Jinwrights were sentenced within the indicted Guidelines range -- 105 months for Mr. Jinwright and 80 months for Mrs. Jinwright.  (Based on my calculations, the sentencing range was 78-97, so I must have missed one of the upward adjustment; maybe I'll try to reconcile that later, but it is not relevant for the rest of the discussion.

HOLDINGS AND DISCUSSION

Willful Blindness (also sometimes called similar things such as Conscious Avoidance)

6.  The Court of Appeals sustained the Court's use of the willful blindness instruction and the contents of the instruction.

a.  The Court starts the discussion with the standard recognition that the willful blindness instruction jury instruction must be deployed with care because of its potential to mislead the jury as to what it must find to convict where willfulness -- voluntary intentional violation of a known legal duty -- is an element of the crime.  The Court thus says: 

The Jinwrights are correct that requests for willful blindness instructions should be handled with caution. Id. at 378. But they come close to seeking the categorical exclusion of such instructions while pointing to no court that has adopted so absolute a rule. There are cases where the evidence demonstrates that a defendant undertook an active and deliberate effort to avoid imbuing himself with the knowledge that would support a criminal conviction. To allow the most clever, inventive, and sophisticated wrongdoers to hide behind a constant and conscious purpose of avoiding knowledge of criminal misconduct would be an injustice in its own right. As much of one, in fact, as a conviction under a plainly impermissible recklessness or negligence standard. See Global-Tech Appliances, Inc. v. SEB S.A., 131 S. Ct. 2060, 2069 (2011) [here) ("The traditional rationale for this doctrine is that defendants who behave in this manner are just as culpable as those who have actual knowledge."). For the reasons that follow, we think the district court properly set a high bar in its instruction for the government to prove willful blindness, while simultaneously recognizing the powerful evidence of such blindness in this case.

b.  The Court says:  "The crimes for which the Jinwrights were convicted — both Jinwrights for conspiracy to defraud the United States and tax evasion, Mr. Jinwright also for filing false tax returns — each required the government to prove that the defendants acted willfully."  [JAT Note:  the defraud / Klein conspiracy does not have willfulness as an element of the crime; the Government has sometimes imagined that its burden is lighter for the Klein conspiracy, so it is nice to have a court confirm that, which I have argued, that the burden for a defraud / Klein conspiracy is the equivalent of willfulness.  See John A. Townsend, Tax Obstruction Crimes: Is Making the IRS's Job Harder Enough, 9 Hous. Bus. & Tax. L.J. 255, 277-314 (2009), here.]

c.  The Court found that the conditions for use of the jury instruction were present: 

Willfulness with respect to tax crimes has been defined in essence as a knowledge requirement, or the "intentional violation of a known legal duty." United States v. Pomponio, 429 U.S. 10, 12 (1976) (per curiam). When applied, the doctrine of willful blindness permits the government to prove knowledge by establishing that the defendant "deliberately shield[ed] [himself] from clear evidence of critical facts that are strongly suggested by the circumstances." Global-Tech, 131 S. Ct. at 2068-69. Willful blindness may satisfy knowledge in a criminal tax prosecution, where "the evidence supports an inference that a defendant was subjectively aware of a high probability of the existence of a tax liability, and purposefully avoided learning the facts pointing to such liability." United States v. Poole, 640 F.3d 114, 122 (4th Cir. 2011).  

These conditions were satisfied here. Mr. Jinwright denied knowledge of his legal obligations and testified that he and Mrs. Jinwright did not know that their tax returns contained a deficiency. But the government presented evidence to suggest that defendants were aware of a "high probability" that they were understating their income to the IRS.

I shall not develop further the specific further indications of the facts supporting the instruction.  I do note that the Court seems to glide past the inherent tension from the Government making two alternative seeming inconsistent claims -- i.e., that the defendants in fact had the specific required intent -- the voluntary intentional violation of a known duty -- and ignorance, albeit deliberate, of that duty.  This is a tension in the concept of willful blindness to supply willfulness defined as a specific intent.  Justice Kennedy aptly discusses this tension in his dissent in Global-Tech.  The Court's discussion of this issue is cryptic: 

The government's presentation of evidence that the Jinwrights actually knew of their tax code violations did not preclude it from seeking a willful blindness instruction. United States v. Abbas, 74 F.3d 506, 513 (4th Cir. 1996). In light of Mr. Jinwright's denial of knowledge and the evidence  supporting an inference of deliberate ignorance on the part of defendants, the court's provision of a willful blindness instruction was not an abuse of discretion. 

d.  The Court then sustains the content of the willful blindness instruction the trial court gave.  The following is its holding: 

The trial court's instruction here was thus faithful to the willful blindness standard set forth in Global-Tech.  Global-Tech synthesized the case law on willful blindness to identify "two basic requirements": "(1) the defendant must subjectively believe that there is a high probability that a fact exists and (2) the defendant must take deliberate actions to avoid learning of that fact." Global-Tech, 131 S. Ct. at 2070. The district court included this relevant language here, instructing the jury: "If you find that the defendants were aware of a high probability" that they were violating the law "and that the defendants acted with deliberate disregard to these facts, you may find the defendants acted knowingly" (emphasis added). The Jinwrights were convicted before the Global-Tech decision, but the language of the willful blindness instruction still tracks the factors enumerated there by the Supreme Court.  

At the end of the day, the trial court's instruction required that defendants' ignorance be "solely and entirely the result of a conscious purpose to avoid learning the truth." Taken as a whole, the instruction plainly conveyed the government's burden to prove beyond a reasonable doubt conduct that transcended recklessness and negligence, which the evidence shows overwhelmingly the defendants' conduct did. See United States v. Martin, 773 F.2d 579, 584 (4th Cir. 1985).

The Gift Issue

7.  One of the phenomena in churches is that clergy are given so-called love gifts.  I explain my understanding of love gifts because, from my personal experience with churches, I think many are confused about them.  For reasons that will be come apparent, there are two general ways to structure payments that are often called colloquially love gifts (and this is general, so it lacks some nuance).  First, parishioners may make payments intended to be actual gifts -- either directly to the clergy or even sometimes to the church but earmarked for the clergy as love gifts.  Those payments are not contributions to a charity, but are gifts to the clergy from detached and disinterested generosity (just accept this construct for now).  Second, parishioners may make contributions to the church not earmarked for a particular "love gift" to the clergy which the church then uses to make payments to the clergy which the church officers (often the clergy or influenced by the clergy) designate as a love gift from the church.  Those payments are deductible by the parishioner making the undesignated payment to the church, and the payments to the clergy are income to the clergy.  In one sense, the fisc pot is right -- either (i) it is not deductle to the parishioner and a nontaxable gift to the clergy; or (ii) it is deductible by the parishioner and income to the clergy.  I understand the concept because I am a tax lawyer, but I doubt, based on my experience, that many parishioners and even clergy understand it; I suspect that many think that a love gift from whomever received is not taxable to the clergy (whether or not it is deductible by the parishioner).

8.  The Jinwrights claimed that at least some of the income the Government claimed they did not report represented gifts which Section 102(a) says are not taxable.  The problem is that, in an employment context (the Jinwrights were employees of GSC), the Code provides that payments to employees cannot be treated as gifts (26 USC § 102(c)).  The Court held that it was proper for the  trial court to instruct the jury on these legal propositions.  The Jinwrights' complaint, I think, was not that the instructions did not correctly state the law but that without more careful crafting they could be read as instructing the jury to find that the Jinwrights must necessarily have known about the law.  I am not sure that the Fourth Circuit really engaged that issue -- certainly I don't think the opinion engages the issue.  The Court simply concluded (wrongly, I think):

To prevent juror confusion, the district court alerted the jury that as a matter of law, payments from an employer to an employee do not qualify as nontaxable gifts, irrespective of the employer's intent. But the jury was left to determine that the Jinwrights did in fact receive payments from their employer, GSC — an uncontroversial point which the Jinwrights essentially conceded. From this factual finding, it followed as a matter of law that GSC's payments to the Jinwrights did not constitute gifts qualifying for exclusion from gross income.

Again, that is the concluding comment.  Mere knowledge of the payment does not prove that the Jinwrights knew the proposition of law and intended to violate a known legal duty.  That is the point that the court ignores.

9.  Moreover, I think there is another unstated problem with the instructions as given, although it is not addressed in the opinion (and may not have been pressed by the Jinwrights.  I think virtually everyone knows that gifts are not taxable income, regardless of whether they trace that knowledge to knowledge of Code §§ 61 and 102.  That's just general knowledge.  I would suspect that many, if not most, lay people are not aware that an employer cannot make a gift to them that qualifies for exclusion because of § 102(c).  In the real world, most employees of good employers would be stunned to think that their employer cannot give them an excludable gift meeting the tax requirement of detached and disinterested generosity.  And this is not only a lay issue, but arguments can be made the 102(c) is not as crisp on the issue as the trial court presented to the jury.  See Douglas A. Kahn, The Taxation of a Gift or Inheritance from an Employer, 64 Tax Lawyer 273 (2011), arguing that there is some room for gifts in employer-employee relationships.  Thus, I wonder whether § 102(c) had the potential for an ambiguity argument a la James-Garber-Dahlstrom.

10.  The Court also further confuses the issue in its discussion of the Jinwright's complaint that the trial court had improperly limited their ability to question about "the belief within the church community that the GSC payments were nontaxable gifts, even if mistaken on the law, was relevant to show the Jinwrights' own ignorance of their legal duties."  The court's reasoning, all of which assumes the validity of the instructions on the gift issue (which I question above), is:

The decision to limit cross-examination was a reasonable precaution, in conjunction with the jury instruction on employer-employee payments, to prevent juror confusion regarding the taxability of income from GSC. The testimony that the GSC payments were "gifts"—although offered by witnesses called by the government—was favorable to the defense and contrary to the government's effort to establish that the payments were taxable gross income. The defense's desire for the witnesses to elaborate on their beliefs under cross-examination therefore fell outside "the confrontational essence of the Confrontation Clause." Id. at 1314. Appellants mistakenly conflate a defendant's right to "challenge adverse testimony," id. at 1314, with his Sixth Amendment right "to have compulsory process for obtaining witnesses in his favor," U.S. Const. amend. VI, a right with which the district court did not interfere. In fact, the court explicitly invited the Jinwrights to recall the favorable witnesses during their case-in-chief in the event the testimony proved relevant to the defense. 

Cheek v. United States, 498 U.S. 192 (1991), is not to the contrary. Cheek held that a good faith misunderstanding of one's legal duties is a defense in a criminal tax prosecution "whether or not the claimed belief or misunderstanding is objectively reasonable." Id. at 202. The trial court in Cheek therefore ran afoul of the Sixth Amendment when it instructed the jury to disregard the defendant's testimony that he misunderstood his obligations under the tax law. Id. at 203. Here, by contrast, the district court did not impede the Jinwrights' good faith defense. In fact, the court admitted, and the jury considered, Mr. Jinwright's testimony that he and Mrs. Jinwright were ignorant that they were violating the tax law. 

Moreover, Cheek emphasized that it "would of course be proper to exclude evidence having no relevance or probative value with respect to willfulness." Id. None of the witnesses at issue claimed to have discussed with the Jinwrights his or her belief that the payments from GSC were gifts and no evidence established at that point that the Jinwrights relied on a community-wide misunderstanding of the law. The district court therefore properly concluded that testimony from these witnesses on cross-examination about their own beliefs was not relevant to the Jinwrights' ignorance of the law. Nonetheless, as appellants concede, the trial court left open the possibility of recalling these witnesses during the defense's case once Mr. Jinwright testified and a foundation had been laid for a Cheek defense. Defendants' failure to do so rests squarely on their shoulders. We shall therefore uphold the evidentiary ruling of the district court.

The Reimbursement Issue.

11.  The Jinwrights also argued that at least some of the payments could not be considered income if they were made to them to reimburse them for legitimate employer-related expenses.  The point of difference between the Government and the Jinwrights was over burden of proof.  The Jinwrights argued that, in order to establish that they omitted income, the Government must prove that the payments they received were not reimbursements.  The Government argued that, in order to prove income beyond a reasonable doubt, it must merely prove the payments and the Jinwrights were then required to prove that the payments were reimbursements in order to exclude those payments from the computation of the element of tax due and owing.  There are some semantical problems.  If they are reimbursements, the payments are not income; it is not the same as saying that the taxpayer receives income and then must claim deductions.  Nevertheless, the court of appeals deployed deduction analysis to resolve the question.  (I am not particularly offended by that, but the Court does not acknowledge the difference.)  The Court thus held that once the Government proves the income (here the payments), the taxpayer must prove the deductions reducing or eliminating the tax due and owing. (The Court does not state that quite so crisply, but that is the point.)  I just think that that is a wrong proposition of law - whether deductions or any other similar method is used.  If the element of tax due and owing must be proved beyond a reasonable doubt, then it does not suffice to say that the Government can shift the burden of proof to the taxpayer to prove that there is no tax due and owing because of deductions.  In similar areas of law (e.g., whether corporate distributions may not be dividends because of lack of E&P), the defendant may have a production burden that requires the defendant to just introduce prima facie evidence, but the defendant should not carry any burden of ultimate persuasion on an element of the crime.  I think the Court's discussion of this issue is (i) inadequate and (ii), in my opinion, wrong as articulated by the Court.

The Sentencing Issues


12.  Mrs. Jinwright complained about the inclusion of tax loss with respect to some years for which she was acquitted.  The Fourth Circuit rejected the argument on 2 bases (i) conduct for which the defendant can be acquitted can be included in the relevant conduct calculation and (ii) in any event, she was convicted of a conspiracy covering the years for which she was acquitted of the substantive crime, so that those losses were includible because within the scope of the conspiracy.

13.  The Jinwrights complained that the restitution award was improperly based on the tax loss attributable to years beyond the year of conviction.  Remember that, although restitution cannot be awarded, absent agreement, for counts of convictions of Title 26 tax crimes, it can for Title 18 crimes.  Here, the Jinwrights were convicted also for the defraud / Klein conspiracy which permits an award of restitution to the United States as the primary victim.  Citing its own precedent, the Fourth Circuit held  "a district court is authorized  to include in restitution the 'losses that result from a criminal scheme or conspiracy, regardless of whether the defendant is convicted for each criminal act within that scheme.'"

14.  The Jinwrights complained that the district court relied in part on details from the voluminous trial record (including the exhibits) in sustaining the PSR's recommendation of the two level enhancement for sophisticated means even though those details were not in the PSR.  The Fourth Circuit said, in effect, that there was no requirement that the PSR be as detailed in supporting the recommendation as the underlying trial record might be and that, therefore, the sentencing judge could rely upon that record.

15.  The Jinwrights complained that the district court imposed the enhancement for abuse of a position of trust.  The Fourth Circuit rejected the complaint, noting:

It is undisputed that as spiritual leaders of the GSC community and custodians of the church's finances, the Jinwrights held a position of trust with respect to GSC's membership. The district court found that they abused their position when committing relevant criminal conduct under U.S.S.G. § 1B1.3, specifically the embezzlement of money from GSC to facilitate the tax evasion offense.

The Fourth Circuit said that, although for the crimes of conviction which were tax crimes, the primary victim was the United States with respect to whom the Jinwrights held no position of trust, there were secondary victims as noted.  The Fourth Circuit reviewed various measures that, while facilitating the tax crimes, also "also victimized the GSC congregation, which was financially burdened by the Jinwrights' acts of concealment.."  The Court concluded:

The abuse of trust enhancement enables the sentencing court to punish those who wield their power to criminally take advantage of those who depend upon them most. As leaders of GSC, the Jinwrights were entrusted with the spiritual well-being and financial stewardship of their religious community. They exploited the trust of their unsuspecting congregation to conceal criminal acts from the government, as well as the church, and to maintain an extravagant lifestyle lived at the church's expense. We thus affirm the district court's application of the abuse of trust enhancement.

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I end my comments for now by noting that the opinion was written by J. Harvie Wilkinson III, whose Wikipedia page is here. With no dissents.  Judge Wilkinson is bright, very bright.  (Judge Wilkinson also recently published a book titled Cosmic Constitutional Theory: Why Americans Are Losing Their Inalienable Right to Self-Governance (Oxford 2012), here.  His constitutional views are different; and his views of justice are different.  See Elmore v. Ozmint,.661 F.3d 783 (4th Cir. 2011) (here), where his dissenting opinion starts on p. 164, after 163 pages of majority opinion.  (For more on the Elmore case, see Raymond Bonner, Anatomy of Injustice: A Murder Case Gone Wrong (Knopf 2012), here.  I will probably have more to write in this blog about the case and the book.