Friday, November 22, 2013

Daugerdas Retrial Jury Instructions - Part 06 Conspiracy Instructions Part 2 - Defraud / Klein Conspiracy (11/16/13; revised 11/23/13)

Judge Pauley gives standard instructions on the elements of the crime of conspiracy - to summarize:
First: that an agreement existed between two or more persons to accomplish at least one of the unlawful objectives charged in the Indictment;  
Second: that the defendant you are considering knowingly and willfully became a member of, and joined in, the conspiracy; and  
Third: that a member of the conspiracy, not necessarily the defendant whom you are considering, knowingly committed at least one overt act in furtherance of the conspiracy
The Court then explains the elements, again in fairly standard instructions.  The Court then moves to the objects of the conspiracy.  I address in this blog the defraud / Klein conspiracy object.  The defraud conspiracy in a tax setting is commonly referred to as a Klein conspiracy.  See United States v. Klein, 247 F.2d 908 (2d Cir. 1957), here.  Here are Judge Pauley's instructions on the Klein conspiracy (I have added the bold face in the text (as opposed to the caption) to make a point that I shall discuss below):
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 8 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 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.
Conspiracy charges are fraught with danger for the defendant(s) for the reasons I noted in the prior blog. Daugerdas Retrial Jury Instructions - Part 06 Conspiracy Instructions Part 1 (Federal Tax Crimes Blog 11/16/13), here.  The defraud / Klein conspiracy is particularly dangerous because it is a bit squishy.  It is not like the offense conspiracy.  Daugerdas involved two offense conspiracies -- a conspiracy to commit tax evasion and a conspiracy to commit wire and mail fraud.  Offense conspiracies import the elements of the alleged offense (such as the high willfulness standard for tax evasion), although the defendants need not have succeeded in the actual commission of the object offense.  An intent to evade tax coupled with conduct to evade (affirmative act) and a tax evaded constitute the crime of tax evasion, and a conspiracy having the object to commit that crime is a crime.  The Klein conspiracy is sometimes described as simply a conspiracy "to impede, impair, defeat, and obstruct the IRS’s lawful functions of ascertaining and collecting tax revenue owed to the United States" without the additional requirement that the obstruction -- shorthand for the litany -- be by "fraud, deceit or other dishonest means," which adds a stronger intent element to the obstructive conduct.  Even the Government at one time de-emphasized or even eliminated altogether the deceit element emphasized in the text of Judge Pauley's instruction above, but the Ninth Circuit forcefully rejected the Government's argument in a landmark case, United States v. Caldwell, 998 F.2d 1056 (9th Cir. 1993), here.  As stated by Judge Kozinski in Caldwell, the crime requires that "(1) he [the defendant] entered into an agreement (2) to obstruct a lawful function of the government (3) by deceitful or dishonest means and (4) at least one overt act in furtherance of the conspiracy." (Emphasis supplied.)  Careful judges, such as a the judges in SDNY, now include that key element of the crime; indeed, as shown by the bold-faced text above, Judge Pauley -- surely a careful judge -- emphasizes that element over and over.

The provenance of this third deceit element was the Supreme Court's decision in Hammerschmidt v. United States, 265 U.S. 182 (1924), here, where it reeled in an earlier, seemingly more expansive interpretation of the defraud conspiracy that did not include this element.  Haas v. Henkel, 216 U.S. 462 (1910), here,  As the Supreme Court recognized in Hammerschmidt, without this element, the crime is expansive and problematic.  I think that the element parallels the level of mens rea required in tax crimes, willfulness.  I have argued that.  John A. Townsend, Tax Obstruction Crimes: Is Making the IRS's Job Harder Enough, 9 Hous. Bus. & Tax. L.J. 255 (2009), here.  The continuing concern I have, even with the element, is that, while it might  be comforting to lawyers and judges to know that there are some such limits to the crime, I am not not sure that the instructions language really captures the concept in a way that is  meaningful to a jury.  See Coplan #4 - Court Approves Defraud / Klein Instruction -- Making the IRS Job Harder May Be Enough (Federal Tax Crimes Blog 12/4/12), here.  So, those representing defendants in such cases who are willing to go to trial on the willfulness issue for the substantive crimes are less sanguine about the defraud / Klein conspiracy.

I do remind readers that, in one of the two predecessor major tax shelter prosecutions, the Coplan case, a Second Circuit panel majority opinion expressed major concern about the expansion of the Klein conspiracy beyond the statutory language beyond the word used -- defraud which connotes some intended financial loss.  United States v. Coplan, 703 F.3d 46 (2d Cir. 11/29/12), cert. den. ___ S.Ct. ___, 187 L.Ed. 2d 29 (2013), here  As the instructions are now given, even with the limiting third element, they usually include (as Judge Pauley's instructions do) some notion that financial loss to the Government need not be the intent of the crime.  That notion troubled the Second Circuit in Coplan, because that expands the meaning of the statutory term "defraud" -- see 18 USC 371 here -- beyond its historical meaning in Anglo-American jurisprudence without any reason to believe that Congress intended that expanded meaning.  The Second Circuit panel felt itself powerless to correct the expansion because, in the final analysis it is based on the Supreme Court's holding in Hammerschmidt and its own allegiance to Hammerschmidt in Klein  See Coplan #1 - Panel Questions Validity of Klein Conspiracy (Federal Tax Crimes Blog 12/1/12), here; see also Further on the Second Circuit Detour on the Interpretation of the Defraud / Klein Conspiracy (Federal Tax Crimes Blog 12/18/12), here.

In order to clarify the foregoing discussion, let's consider it in the tax shelter context.  The defendants argued in the New York Trilogy -- Larson/Pfaff, Coplan and Daugerdas -- that the shelters involved were legal or, at a minimum, under the state of the law when they were marketed, were not so clearly illegal that a substantive crime (such as evasion of taxes) was committed under principles of James v. United States, 366 U.S. 213 (1961), here, and James' progeny.  They in essence argued that there was no defrauding or intent to defraud the Government with respect to any tax; hence no financial loss, which the word fraud or defraud would normally require.  If that were true (for purposes of analysis), there is no conspiracy crime because Congress' use of the word defraud would require some intended financial loss as an object of the defraud conspiracy.  As interpreted through the lens of Hammerschmidt, however, all that is required is obstructive conduct involving a deceit element without any loss or intended loss to the Government.  That is what troubled the Second Circuit in Coplan because Hammerschmidt and its predecessor, Haas v. Henkel, seem to expand the language of the statute and thereby created a judicial crime that Congress never enacted..

I cited my article above.  By far the best article on the subject of the problems inherent in the defraud / Klein conspiracy is Abraham S.  Goldstein, Conspiracy  to Defraud the United States, 68 Yale L.J. 405 (1959). (Sorry, I do not have a link for that article.) Goldstein was a long-time distinguished professor at Yale (see Wikipedia entry here).  His contributions to the criminal law generally were and are enormous.  See Kate Stith, Abraham S. Goldstein’s Contributions to Criminal Law Scholarship, 115 Yale 511 (2005), here. Importantly, also, he served on the defense team in Klein which has created so much mischief in the defraud conspiracy area.  So he knew the subject from both an academic and a practical perspective.  But it is unfair to lay the mischief on Klein or even suggest that Goldstein contributed to the mischief; Klein was merely applying Hammerschmidt.  In his seminal article, Goldstein questions the Hammerschmidt expansion -- and thus Klein -- beyond the statutory terms.  The problems noted by the Second Circuit in Coplan are Hammerschmidt's genesis; hence, if they are corrected, it will need the Supreme Court to do it.  And the Supreme Court rejected the opportunity to correct in the Coplan case by denying certiorari.

As an aside, it is interesting to note that the author of the Coplan opinion was Judge Jose Cabranes of the Second Circuit, himself with a substantial Yale connection (see Wikipedia entry here).  He certainly knew Professor Goldstein and undoubtedly the article, cited in the Coplan opinion, had a significant influence on the opinion.

The full set of Judge Pauley's instructions on retrial in Daugerdas is linked here.  I have bookmarked the instructions for easier navigation, but the bookmarks are apparently viewable only if you download the pdf file.

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