Aegis Convictions Affirmed Installment #5 - IRS Notices and Harmless Error (10/1/12)

IRS Notice 97-24, here, issued in April 1997, expressed the opinion of the IRS that trusts akin to the Aegis trusts were an unlawful means of tax avoidance.   The evidence established that the defendants were aware of the notice and continued their behavior anyway.  "The defendants proposed an instruction that would have advised the jury on the relative legal weight of IRS regulations, revenue rulings, letter rulings, and public notices, the last of which "have no force of law.'"  The question is what exactly was the role of the Notice that the defendant's ignored.  Was it like a regulation which usually does have the force of law or just an IRS opinion?  What was the jury to make of the defendants not taking heed of the Notice?

We study the various forms of IRS pronouncements in the UH Tax Procedure Class.  Here is the portions of the Federal Tax Procedure text (as revised for the next edition) discussing Notices ( most footnotes omitted):

The IRS issues “Notices” that are less formal than Regulations.  These notices are used to provide quicker notice to the public than allowed by the other forms of pronouncement. 

A notice, which is published in the Internal Revenue Bulletin and compiled annually in the Cumulative Bulletin, contains guidance that involves substantive interpretations of the Code or other provisions of law.  Topics can include changes to forms or to other previously published materials, solicitation of public comments on issues under consideration, and advance notice of rules to be provided in regulations when the regulations may not be published in the immediate future. Increasingly, notices have served as a critical component of the Service's efforts to combat abusive tax avoidance transactions, as they have been used to identify transactions about which the Service has concerns. Given the rapid pace of developments in this area, notices have proven particularly useful for quickly disseminating information that allows taxpayers to understand exactly which transactions will be of  interest to the Service, including so-called “listed transactions” and “transactions of interest,” both of which are "reportable transactions" under section 6011. fn

     fn Mitchell Rogovin and Donald L. Korb, The Four R's Revisited: Regulations, Rulings, Reliance and Retroactivity in the 21st Century: A View from Within, 46 Duq. L. Rev. 323, 339-340 (2008). [The article is here.]

For example, the IRS may used the Notice format to alert the public that certain types of tax shelters are will not sustain the tax benefits hawked by promoters.  These do not have any formal status as interpretations of the substantive provisions of the Code, but merely state the IRS’s interpretation of the law and that it intends to enforce that interpretation.

I think the Vallone defendants' point, if not to add a layer of complexity to confuse the jury, was to urge that their mere notice that the IRS was taking this interpretation did not mean that they were bound to follow the interpretation.  Here is what the Sevent Circuit said.

Although it did not cite the Aegis trust by name, IRS Notice 97-24, issued in April 1997, expressed the opinion of the IRS that trusts akin to the Aegis trusts were an unlawful means of tax avoidance. As we noted in our summary of the facts, there was evidence that the defendants were very much aware of this IRS notice, and the government, of course, cited the notice as one piece of evidence that the defendants knew the Aegis system was illegal. The defendants proposed an instruction that would have advised the jury on the relative legal weight of IRS regulations, revenue rulings, letter rulings, and public notices, the last of which "have no force of law." R. 528 at 2; R. 940 Tr. 6770-72. The district court declined to give the instruction. Without such an instruction, the defendants argue, the jury was left with the impression that IRS Notice 97-24 was an authoritative statement of the law, and that mistaken impression undermined the defendants' contention that they genuinely believed that the Aegis trusts were a permissible means of tax avoidance. 

Because reasonable minds might differ as to the propriety of this instruction, we find no abuse of discretion in the district court's refusal to give it. The government does not quarrel with the legal accuracy of the proposed instruction, and one might argue that given the government's reliance on Notice 97-24 as proof that the defendants knew that the Aegis system was unlawful, it would be appropriate to inform the jury that the Notice was not an authoritative statement of the law. On the other hand, we are pointed to no evidence that the government ever suggested that it was authoritative; and an IRS agent accurately testified before the jury that the Notice "expresses the IRS's opinion of the law." R. 971 Tr. 4580-81.  Even if we were persuaded that it was an abuse of discretion for the court not to give this instruction, any error in refusing to give it was harmless, given the overwhelming evidence showing that the defendants appreciated the illegality of their conduct.

So, the harmless error doctrine saved the day for the Government.  I think the trial judge should have given the instruction.  I therefore disagree with the Court's conclusion that reasonable minds could differ.  But, the Court saves the day for iteslf by applying the harmless error doctrine.