Third Circuit Affirms Conspiracies Convictions From US Virgin Island Shenanigans (2/4/15)

In United States v. Bailey, 2015 U.S. App. LEXIS 1681 (3d Cir. 2015) (nonprecedential), here, the Third Circuit affirmed the convictions of two persons -- Bailey and Haddow -- for conspiring to defraud the United States [Klein conspiracy] and to evade the U.S. Virgin Islands  of taxes [offense conspiracy].

As described in the opinion, the principal scheme appears to be just garden variety enabler tax fraud.  The defendants were principals in a Virgin Islands company that billed U.S. taxpayers for "services" never rendered and then, after the customers paid, returned most of the amounts to the taxpayers.  The U.S. taxpayers deducted the payments for "services" and treated the amounts returned as "gifts."  The defraud conspiracy charged related to this conduct. The VI company also claimed certain tax credits against it VI tax liability that it was not entitled to.  The offense conspiracy charge related to this conduct.

1.  The Court first determined that, although the defendants tried had not been specifically identified at trial as the defendants named in the indictment, there was sufficient evidence to satisfy that requirement.  Suffice it to say that identification of the defendants in the dock as the persons charged in the indictment is a check list item for the prosecutors.  No reason is given as to why this did not occur here.  But, the majority concluded, there was ample evidence that pointed to their being the individuals named in the indictment.  (The dissenting opinion concurred in all holdings excerpt the holding on identifying the defendants; the dissent would have reversed for failure to make proper identification.)

2.  The Court held that the evidence was sufficient to prove that Bailey had the required mental state for conspiracy and that Haddow joined the conspiracy.  Defraud conspiracy enthusiasts will recall the the defraud conspiracy does not have as a textual element that the defendant have acted willfully.  As recounted by the Court, the elements of the crime that must be proved are:

(1) two or more people agreed to defraud the United States; (2) the defendant became a member of that agreement; (3) the defendant joined the agreement knowing its purpose was to defraud the United States and intended to achieve that goal; and (4) a conspirator committed an overt act in furtherance of the objective. 

By contrast, the offense conspiracy charge to evade VI tax, does require that the defendant act willfully because the offense conspiracy imports the willfulness requirement from the offense (here tax evasion) that is the object of the conspiracy.

The Court's treatment of these issues is very cursory, but (at least in its mind) sufficient to show the defendants had the required mental state.

3.  The Court next rejected the defendants' claim that the 5-year statute of limitations normally applying to conspiracies under Title 18 Section 371 applied to the conspiracies they were charged with.  The key word in the foregoing sentence is normally, suggesting there might be an exception.  There is -- a six year statute of limitations for conspiracies related to conspiracies related to tax crimes.  See . § 6531(1) & (8), here.

4.  The Court held that the timely filing was not affected because the indictment was filed under seal for some period of time.  The Court acknowledged that there could be a problem if the defendants could establish "substantial prejudice," but they had not done so in this case.

5.  The Court held that venue, a constitutional requirement, was proper in the Virgin Islands.  Although a constitutional requirement, proper venue can be waived.  Here, Bailey waived venue by not timely raising the issue.

6.  The Court rejected a constructive amendment argument.  The argument was that a conspiracy was charged, but among the Government's proof was proof of a substantive tax crime committed in the course of the conspiracy.  That proof, Bailey argued, amounted to a constructive amendment permitting the jury to convict on a charge not included in the indictment.  However, the Court concluded that the proof did not change the fact that the charge was for conspiracy and that the jury was charged with and properly returned a verdict on the conspiracy charge rather than the tax offense charge.  (It is a truism that tax conspiracies will also include conduct that could be charged as substantive tax offenses and that the proof of the conspiracy could well include such proof of conduct that could have been charged.)

7.  The Court sustained the trial court's willfulness instruction.  This holding is cryptic but important, so I quote it in full:

The District Court’s willfulness jury instruction also did not amend the Indictment. Contrary to Bailey’s contention that the instruction “effectively remov[ed]” the Government’s burden to prove willfulness, the record shows that the District Court informed the jury of the Government’s burden to prove willfulness, defined the term “willfully,” and instructed the jury to apply this definition “to all of the tax offenses charged in this case.” JA 1023. These instructions “ensured that the jury would convict . . . if at all, for a crime based on conduct charged in the indictment.” Daraio, 445 F.3d at 260. Thus, the willfulness instruction did not constructively amend the Indictment. 

It is not clear precisely what the court refers to here -- was it referring to the offense conspiracy which has a willfulness element by import from § 7201, to the defraud conspiracy which textually does not have a willfulness element or to both of them?  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 (where, in developing the larger theme, I argue that, although willfulness is not a textual element, as interpreted it includes the equivalent of willfulness).

8.  The Court affirms the district court's calculation of restitution.  The trial court relied upon the fees charged the U.S. taxpayers which were designed to be included as deductions on their returns and then, apparently, applied a conservative tax rate to estimate the loss.