Tuesday, September 15, 2015

Tenth Circuit Affirms a Tax Obstruction Charge (9/15/15)

In United States v. Sorensen, 801 F.3d 1217, 2015 U.S. App. LEXIS 16362 (10th Cir. 2015), here, the Tenth Circuit affirmed a conviction for tax obstruction, § 7212(a), here.  The opinion addresses a lot of issues.  I address only a few here.  The Court's introduction sets up the issues I want to discuss:
From 2002 to 2007, Jerold Sorensen, an oral surgeon in California, concealed his income from the Internal Revenue Service ("IRS") and underpaid his income taxes by more than $1.5 million. He did so by using a "pure trust" scheme, peddled by Financial Fortress Associates ("FFA"), an entity he found on the Internet. After attending an FFA seminar and consulting with its representatives, he began depositing his dental income into these trusts without reporting all of it to the IRS as income. Over the years, he also retitled valuable assets in the trusts' names. In 2013, after a series of proffers, the government charged him with violating 26 U.S.C. § 7212(a) for corruptly endeavoring to obstruct and impede the due administration of the internal-revenue laws. A jury convicted him of the charged offense. 
On appeal, Sorensen raises seven arguments: (1) his conduct amounts to evading taxes so it is exclusively punishable under 26 U.S.C. § 7201, and not under § 7212(a); (2) the district court erred by refusing his offered instruction requiring knowledge of illegality; (3) the district court erred by giving the government's deliberate-ignorance instruction; (4) the district court erred by instructing the jury that it could convict on any one means alleged in the indictment; (5) the district court erred by refusing to allow him to provide certain testimony from a witness in surrebuttal; (6) the prosecution misstated evidence in its closing rebuttal argument; and (7) cumulative error. Exercising jurisdiction under 28 U.S.C. § 1291, we conclude that none of Sorensen's arguments merit relief. We affirm his conviction.
Is § 7212(a) Properly Charged in a Case Where § 7201 Could Have Been Charged.

Sorenson argued that, since the facts made out a case of tax evasion, he should have been charged with tax evasion and not with tax obstruction.  The Court easily handled that by holding that the two are separate crimes and the Government has discretion as to which crimes to charge.  In so holding the Court said:
We now turn to why tax evasion and tax obstruction are not identical crimes. In Williamson, we rejected the argument that "corruptly" has the same meaning as "willfully" as used to prove tax evasion under 26 U.S.C. § 7201—the "voluntary, intentional violation of a known legal duty." 746 F.3d at 991 (emphasis in original) (quoting Cheek v. United States, 498 U.S. 192, 201 (1991)). Further, we noted that Congress chose to use two different elements—corruptly versus willfully—to define the separate mens-rea requirements in defining the separate tax crimes. Id. at 991-92. 
In addition to these differences, it is also important to consider that the two statutes provide different penalties. Willfully evading taxes is the more serious crime, punishable by up to five years of imprisonment, while corruptly obstructing or impeding the due administration of the tax laws is punishable by up to three years. The difference in penalties suggests that a violation of § 7212(a) requires different culpability and wrongdoing than a violation of § 7201.
The Court of Appeals also rejected the argument that the CTM mandates or suggests that the more appropriate charge is evasion rather than obstruction if evasion is readily provable.  The Court noted that it depends upon what is readily provable and that it is interesting that, in making the argument, Sorenson was conceding that evasion was readily provable.  In any event, compliance with such departmental guidelines is not for the courts to police, particularly when charging decisions are relegated to the Government.

Knowledge of Illegality Instruction

The instructions gave this definition for the corruptly element of the statute:
To act "corruptly" is to act knowingly and dishonestly, with the specific intent to gain an unlawful advantage or benefit either for oneself or for another by subverting or undermining the due administration of the internal revenue laws.
At trial and on appeal, Sorenson asserted that the instruction should have advised the jury that his "knowledge of illegality was required."  The Court said that the standard for review was (I omit the case references and quotation marks for easier readability):
We review de novo the question of whether a district court incorrectly instructed a jury on the law. When we review a claim of error relating to jury instructions, we read and evaluate the instructions in light of the entire record to determine if they fairly, adequately and correctly state the governing law and provide the jury with an ample understanding of the applicable principles of law and factual issues confronting them.  Even when the district court fails to include an element of the crime in the instruction (including a mens rea element), we still apply the harmless error rule, asking whether it appears beyond a reasonable doubt that the error complained of did not contribute to the verdict obtained.
I don't dwell on that standard for review but I think the last sentence is noteworthy for another time.

In addressing this issue, the Court comes back to Williamson which it mentioned in the quote above. United States v. Williamson, 746 F.3d 987, 992 (10th Cir, 2014):  Here is the relevant discussion:
In support of his argument, Sorensen relies on Williamson. In Williamson, decided under the plain-error standard, we left "to another day whether a conviction under § 7212(a) requires that the defendant knew that the advantage or benefit he sought was unlawful and, if so, whether the instruction here would adequately inform a jury of that requirement." 746 F.3d at 992. The instruction in Williamson included some of the same language as Sorensen's instruction: "To act 'corruptly' is to act with the intent to gain an unlawful advantage or benefit either for oneself or for another." Id. at 990 (alterations in original). And Williamson made the same argument as Sorensen: that the instruction was flawed because it did not instruct the jury that it must find that he knew that the advantage or benefit was unlawful. Reviewing for plain error, we concluded that Williamson did not meet the second prong of review—that the error was plain. Id. at 992-93. We explained that Williamson had not cited any decision (much less one from this court or the Supreme Court) holding that this instruction, as written, would not already require knowledge of illegality. Id. In light of his failure to demonstrate the alleged error was plain, we declined to decide this question. Id. at 992. 
Thus, Sorensen is correct that the Williamson court declined to decide whether this quoted definition of "corruptly" already requires knowledge of illegality. But as in Williamson, we need not decide that question. Here, in language beyond that given to the jury in Williamson, the district court instructed the jury that to act corruptly, the defendant must have acted "knowingly and dishonestly, with the specific intent to gain an unlawful advantage or benefit either for oneself or for another by subverting or undermining the due administration of the internal revenue laws." n8 Appellant's App. vol. I at 100 (emphasis added). Other circuits have concluded that this instruction—with "knowingly and dishonestly" added—requires proof that the defendant knew his actions were unlawful. See United States v. Dean, 487 F.3d 840, 853 (11th Cir. 2007); United States v. Saldana, 427 F.3d 298, 303 (5th Cir. 2005).
   n8 Interestingly, the Second Circuit addressed the Williamson question in United States v. Kelly, 147 F.3d 172, 176 (2d Cir. 1998). In Kelly, the district court had provided the same jury instruction on § 7212(a) as given in Williamson. Id. at 176-77. The court found that the "district court's definition of the proof required for the section 7212(a) violation was as comprehensive and accurate as if the word 'willfully' was incorporated in the statute." Id. at 177. Thus, at least one circuit has concluded that the same instruction given in Williamson—even not supplemented with the "knowingly and dishonestly" language given in Sorensen's case—is sufficient to require knowledge of illegality. 
Considering the "knowingly and dishonestly" language in Sorensen's jury instruction, we cannot perceive how the jury could have convicted him without finding that he knew that his actions were illegal. How could one act knowingly and dishonestly, with the specific intent to gain an unlawful advantage, without knowing that the advantage is unlawful? By requiring Sorensen's acts be done "knowingly and dishonestly," the district court had already required proof of knowledge of illegality.
For prior discussion of Williamson, see Tenth Circuit Opinion on Mens Rea for Tax Obstruction - What Does Unlawful Mean? (7212(a)) (Federal Tax Crimes Blog 3/30/14), here.

Does § 7212 Require Obstruction of a Pending Investigation

Embedded in the foregoing section ostensibly addressing the jury instructions, the Court addresses the separate issue of whether § 7212(a) requires a pending investigation to which the alleged obstruction is addressed.  That argument is based on a Sixth Circuit opinion in United States v. Kassouf, 144 F.3d 952 (6th Cir. 1998), that has been largely limited by the Sixth Circuit to its facts.  In any event, the Court says that it disagrees with Kassouf.  The Court holds that "§ 7212(a) does not require an ongoing proceeding when a defendant "corruptly . . . endeavor[s] to obstruct or impede the due administration of" the tax laws."  This is consistent with the trend, even in the Sixth Circuit, since Kassouf was decided.

Deliberate Ignorance Instruction

The deliberate ignorance instruction is generally disfavored because it can lighten the Government's burden of proof.  Nevertheless, it can be used in limited circumstances.  As generally articulated, it can be used where the defendant ""denies knowledge of an operant fact but the evidence, direct or circumstantial, shows that defendant engaged in deliberate acts to avoid actual knowledge of that operant fact."  Sorenson claimed that his defense was that the pure-trust program was illegal.  Is that the type of operant fact that permits the instruction?  The Court held that, under the facts of the case, the instruction was appropriate.

Instruction Unanimity Issue

Modifying a pattern jury instruction, the trial court instructed the jury that it must find one or more of the listed means of obstruction with unanimity.  "By modifying the instruction's language in this way, the court took the novel course of requiring the jury's unanimity on at least one means listed in the indictment."  The Court held that that was error, but not the type of error requiring reversal because, if anything, it helped the defendant:
Thus, we agree with Sorensen that the district court erred in giving the instruction. But we agree with the government that it helped him and did not prejudice him. Absent the instruction, the jury could have convicted without unanimously agreeing on any of the listed means. As such, the instruction effectively increased the government's burden in proving its case. While we disapprove of the instruction, we do not see how it harmed Sorensen.
Does Not Filing Returns and Paying Taxes Support an Obstruction Charge?

The Court describes the argument:
According to Sorensen, because the indictment's fifth and sixth listed means—underreporting income and not filing taxes—could not, as a matter of law, support a § 7212(a) obstruction conviction, the court's instructing the jury that these means could support such a conviction was reversible error. 
The Court assumed -- but did not decide -- that the trial court erred  The Court nevertheless affirmed because Sorenson could not show that it affected his substantial rights or the integrity of the proceeding.
Here, we are comfortable that the outcome of the trial would have remained the same even without the jury instruction and the fifth and sixth listed means of the indictment. The government presented strong evidence supporting the other four listed means: (1) Sorensen created, with FFA's assistance, a number of pure trusts that were "used as vehicles to help disguise Sorensen's" income and assets; (2) he worked with and paid Sugar to create and maintain the Northside Management account to hold the money in the name of his pure trusts, and he purposely opened it without connecting his Social Security number to it; (3) he set up the Northside Management account with himself as the administrative assistant and Sugar as the trustee, paying Sugar to make bank transactions for Northside Management on his behalf; and (4) he acted as if the pure trusts "owned assets that he actually controlled, including his personal residence, his cars, the building where he conducted his dental practice, and the equipment used by that practice" and deposited dental income in the trusts to create the appearance that the payments were legitimate deductions, thereby reducing his taxable income. Appellant's App. vol. IV at 1031-33. Additionally, the government never suggested that the jury should convict Sorensen based on underreporting income or failing to file his tax returns by themselves. Cf. Wood, 384 F. App'x at 710 (finding no substantial prejudice when "there is no indication that the prosecution described Mr. Wood's failure to file as an essential component of the § 7212(a) charge").

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