Friday, January 26, 2018

Opinion on Discovery in Tax Evasion Case of Reliance on Counsel Documents (1/26/18)

In United States v. Scali, 2018 U.S. Dist. LEXIS 8137 (S.D. N.Y. 2018), here, the defendant was (bold=face supplied by JAT):
charged in a ten-count indictment with (1) mail fraud in violation of 18 U.S.C. § 1341; (2) structuring to evade currency transaction reports in violation of 31 U.S.C. § 5324(a)(3); (3)—(4) false statements in violation of 18 U.S.C. § 1001; (5) corruptly endeavoring to obstruct and impede the due administration of the Internal Revenue Laws in violation of 26 U.S.C. § 7212(a); (6) tax evasion for the year 2011 in violation of 26 U.S.C. § 7201; (7) tax evasion for the year 2012 in violation of 26 U.S.C. § 7201; (8) obstruction of justice in violation of 18 U.S.C. § 1503; (9) perjury in violation of 18 U.S.C. § 1623; and (10) mail fraud in violation of 18 U.S.C. § 1341.
The Court acted on the Government's motion in limine on a number of issues.  The only issue and its resolution that interested me is the "Advice of Counsel Defense."  The discussion is short, so I excerpt it in full:
V. Advice of Counsel Defense 
The Government's motion for an order compelling Defendant to provide prompt notice and to produce all discovery relating to any advice of counsel defense he intends to advance at trial is granted in part. The question of whether the Defendant will assert an advice of counsel defense with regards to the two tax evasion counts is moot because the Defendant unequivocally admitted to it in his pleadings. (Def. Mot. 25 ("Scali intends to demonstrate that he is not guilty of tax evasion because, for the years in question, he followed counsel's advice and provided his complete books and records to the IRS").) See Royal Park Investments SA/NV v. United States Bank National Association, 14 Civ. 2590 (VM), 2017 U.S. Dist. LEXIS 157986, 2017 WL 4174926, at *9 (S.D.N.Y. Aug. 28, 2017) ("[A] defendant must clearly elect whether it will raise an advice-of-counsel defense before the close of discovery and in time to allow for such discovery") (citation and quotations omitted). As a result, the Defendant should have made pertinent disclosures during discovery, absent special considerations. See id; see also United States v. Wells Fargo Bank, N.A., 2015 U.S. Dist. LEXIS 84602, 2015 WL 3999074, *1 (S.D.N.Y. June 30, 2015) ("[T]he burden is on the party who intends to rely at trial on a good faith defense to make a full disclosure during discovery and the failure to do so constitutes a waiver of that defense") (quotations and citations omitted); Arista Records LLC v. Lime Grp. LLC, No. 06 CV 5936(KMW), 2011 U.S. Dist. LEXIS 42881, 2011 WL 1642434, at *2 (S.D.N.Y. Apr. 20, 2011) ("[A] party who intends to rely at trial on the advice of counsel must make a full disclosure during discovery; failure to do so constitutes a waiver of the advice-of-counsel defense.") (citations and quotations omitted); United States v. Hatfield, No. 06-CR-0550 (JS), 2010 U.S. Dist. LEXIS 4026, 2010 WL 183522, *13 (E.D.N.Y. Jan. 8, 2010) ("This disclosure should include not only those documents which support [the] defense, but also all documents (including attorney-client and attorney work product documents) that might impeach or undermine such a defense"). 
The parties contest whether the Defendant made full disclosure. Therefore, the Court orders as follows: (1) the Defendant produce all discovery relating to any advice of counsel defense he intends to advance at trial by January 23rd, 2018; and (2) that the parties address whether the Defendant has proffered the factual prerequisites of an advice of counsel Defense at the scheduled status conference on January 19, 2018. n4
   n4 The Government suggests that the Defendant may be precluded from asserting an advice of counsel defense, but does not make the argument forthright. Guided by efficiency and judicial economy, it behooves the Court to address this issue before trial. See United States v. Paul, 110 F.3d 869, 871 (2d Cir. 1997) ("[I]t is appropriate for a court to hold a pretrial evidentiary hearing to determine whether a defense fails as a matter of law").
The quotes portion of the opinion is cryptic, but piqued my interest.  The advice of counsel "defense" is not a defense to tax crimes requiring willfulness.  Rather, a defendant's assertion that he or she relied upon advice of counsel is just an assertion that the defendant had a good faith belief that he or she was not violating the law.  Readers will recall that it is the Government's burden to prove beyond a reasonable doubt that the defendant in the typical Title 26 tax crimes case (e.g., evasion, tax perjury) acted willfully -- that the defendant had the specific intent to violate a known legal duty.  Cheek v. United States, 498 US 192 (1991).  As the Supreme Court said in Cheek (see further below), if the defendant in good faith believed that he or she was not violating the law, the defendant did not act willfully and is not guilty of the crime.  Reliance on advice of counsel (or, indeed another type of tax practitioner, such as a tax accountant) is simply the defense of good faith.  The Government has not met its burden in a criminal tax case unless it proves beyond a reasonable doubt that the defendant did not act in good faith (specifically in the current context, on advice of counsel).

The direct question addressed in Scali is whether there is any obligation on a criminal defendant to disclose the defense in discovery.  In civil cases, there is an obligation to disclose relevant information in discovery.  See FRCP 26.  But there is no such general obligation to disclose in a criminal case.  FRCrP 16, here, governs discovery in criminal cases.  Rule 16(b) governs the defendant's disclosure obligations.  The relevant subsection of Rule 16(b) is as follows:
(1) Information Subject to Disclosure.
   (A) Documents and Objects. If a defendant requests disclosure under Rule 16(a)(1)(E) and the government complies, then the defendant must permit the government, upon request, to inspect and to copy or photograph books, papers, documents, data, photographs, tangible objects, buildings or places, or copies or portions of any of these items if:
     (i) the item is within the defendant's possession, custody, or control; and
     (ii) the defendant intends to use the item in the defendant's case-in-chief at trial.
Presumably, the defendant in Scali made the Rule 16(a)(1)(E) disclosure request and the prosecutors complied.  Note that this disclosure obligation is based not upon the assertion of a defense but the intent to use hard evidence (documents, etc.) in his case-in-chief at trial.  So, if the defendant has a document (say, an opinion letter from an attorney) and intended to use the letter in support of the supposed defense, then I presume that the defendant would have to disclose the letter.  However, if as is usually the case, the "defense" is asserted based on oral communications between the attorney (or other tax professional) and the defendant, then there is no disclosure obligation under Rule 16(b)(1)(A), as I read it.  Indeed, I am not sure that the defendant is even required to disclose ab initio that he intends to raise this defense, much less make disclosures about it.  Of course, given how IRS CI and DOJ Tax work criminal tax investigations leading to indictment and offer the target the opportunity to assert any matter to avoid indictment (including defenses), the defendant's reliance on counsel defense would likely have been discussed earlier and, even if not discussed, if there were a tax professional involved, IRS CI or DOJ Tax would have attempted to explore the possibility of the defense.  Hence, the prosecutors should have some notice that, if the defendant takes the stand to assert the defense, they will not be surprised and will be prepared to do appropriate cross-examination and other types of attack on the defendant's testimony.

The Scali opinion does cite one criminal case, United States v. Hatfield, No. 06-CR-0550 (JS), 2010 U.S. Dist. LEXIS 4026, 2010 WL 183522, *13 (E.D.N.Y. Jan. 8, 2010), hereHatfield is a bit cryptic, but here is the relevant portion:
IV. The Government’s Advice of Counsel Motion In Limine 
On December 15, 2009, the Government filed a motion in limine demanding that Mr. Brooks and Ms. Hatfield disclose whether they intend to rely on an advice of counsel defense. Neither Mr. Brooks nor Ms. Hatfield have opposed this motion. This motion is GRANTED. By January 11, 2010, Mr. Brooks and Ms. Hatfield must disclose whether they intend to rely on an advice of counsel defense. If Mr. Brooks or Ms. Hatfield make such a disclosure, they are directed to disclose all documents concerning their intended advice of counsel defense by January 18, 2010. See U.S. v. Cooper, 283 F. Supp. 2d 1215, 1225 (D. Kan. 2003) (defendant ordered to provide advise of counsel discovery two weeks before trial). This disclosure should include not only those documents which support Mr. Brooks’ and/or Ms. Hatfield’s defense, but also all documents (including attorney-client and attorney work product documents) that might impeach or undermine such a defense.  
In addition, if either Mr. Brooks or Ms. Hatfield intends to offer such a defense, then, on January 14, 2010, all parties may file a letter (not to exceed five pages) setting forth their respective positions as to whether the assertion of the advice of counsel defense impacts the privilege determinations made in this Order. To the extent that this Order requires the Government to destroy documents or return them to Mr. Brooks, those portions of this Order are STAYED until further notice.
The Hatfield opinion cites only U.S. v. Cooper, 283 F. Supp. 2d 1215, 1225 (D. Kan. 2003), here.  That opinion in relevant part is also cryptic:
Before this case was transferred to this court, the government filed a motion pursuant to Fed.R.Crim.P. 16(b)(1)(A) requesting discovery of documents and objects from the defendant Frank Heck concerning his advice of counsel defense. The government's request stems from the defendant Heck's omnibus report in which he indicated his intention to raise this defense. The defendant responds that such matters remain privileged until he actually relies on the defense.
The court grants the government's motion insofar as the defendant Frank Heck is required to disclose no later than fourteen days before trial such documents and objects concerning this defense, if he intends to raise it at trial.
For both Hatfield and Cooper, it is not clear that the advice of counsel defense was the type of  advice of counsel defense involved in tax crimes willfulness cases where the reliance on advice of counsel is not a defense.  In any event, of  course, FRCrP 16(b) does not make discovery contingent upon whether the documents subject to disclosure relate to a defense, but rather relate to their use in the case in chief at trial.

So, if it is correct that raising the advice of counsel "defense" to willfulness invokes disclosure duties under Rule 16(b), then raising any good faith or even nonwillfulness defense could invoke the duties and require disclosures of not only documents supporting the "defense" but also documents, per Hatfield, "also all documents (including attorney-client and attorney work product documents) that might impeach or undermine such a defense."  I find that somewhat troubling but have not done sufficient research to say whether my concern is justified.


For readers' further consideration, I offer the DOJ CTM's proposed jury instructions on advice of counsel and on good faith.  I then offer my discussion of good faith in the Saltzman treatise.  (I was the principal draftsman of this chapter in Saltzman).

Excerpts from DOJ CTM, here, Proposed Jury Instructions:
Good Faith Reliance Upon Advice of Counsel 
Good faith is a complete defense to the charge in the indictment if good faith on the part of the defendant is inconsistent with the existence of willfulness, which is an essential part of the charge.The burden of proof is not on the defendant to prove his good faith, of course, since he [she] has no burden to prove anything. The government must establish beyond a reasonable doubt that the defendant acted willfully as charged in the indictment. 
So, a defendant would not be "willfully" doing wrong if, before taking any action with regard to the alleged offense, he [she] consulted in good faith an attorney whom he [she] considered competent, made a full and accurate report to her [his] attorney of all material facts of which he[she] had the means of knowledge, and then acted strictly in accordance with the advice given to him [her] by his [her] attorney. 
Whether the defendant acted in good faith for the purpose of seeking advice concerning questions about which he [she] was in doubt, and whether he [she] made a full and complete report to her[his] attorney, and whether he [she] acted strictly in accordance with the advice he [she] received,are all questions for you to determine.  
Good Faith Belief of Accused 
To establish a violation of (26 U.S.C. 7201, 7202, 7203, 7206), as charged in Count(s) ____ of the indictment, the government must prove beyond a reasonable doubt that the defendant acted willfully. “Willfully” means a voluntary and intentional violation of a known legal duty. The defendant’s conduct was not willful if he [she] acted through negligence -- even gross negligence -- mistake, or accident, or due to a good-faith belief or misunderstanding as to the law. Defendant claims that he [she] acted in good faith. 
* * * * 
Ultimately, if the evidence in the case leaves you, the jury, with a reasonable doubt as to whether the defendant made a good-faith effort to comply with the law or acted with willful intent to violate the law, you must acquit the defendant.
Remember that the burden of proving good faith does not rest with the defendant, because the defendant has no obligation to prove anything to you. The government has the burden of proving to you beyond a reasonable doubt that the defendant acted willfully.
Excerpts from Michael Saltzman and Leslie Book, IRS Practice and Procedure (Thomsen Reuters 2015) (footnotes omitted):
¶ 12.05[2][b] Willfulness and Good Faith 
Consider this also from Cheek
[C]arrying this burden [of proving intent to violate a known legal duty] requires negating a defendant's claim of ignorance of the law or a claim that because of a misunderstanding of the law, he had a good-faith belief that he was not violating any of the provisions of the tax laws. This is so because one cannot be aware that the law imposes a duty upon him and yet be ignorant of it, misunderstand the law, or believe that the duty does not exist. In the end, the issue is whether, based on all the evidence, the Government has proved that the defendant was aware of the duty at issue, which cannot be true if the jury credits a good-faith misunderstanding and belief submission, whether or not the claimed belief or misunderstanding is objectively reasonable. In this case, if Cheek asserted that he truly believed that the Internal Revenue Code did not purport to treat wages as income, and the jury believed him, the Government would not have carried its burden to prove willfulness, however unreasonable a court might deem such a belief. Of course, in deciding whether to credit Cheek's good-faith belief claim, the jury would be free to consider any admissible evidence from any source showing that Cheek was aware of his duty to file a return and to treat wages as income, including evidence showing his awareness of the relevant provisions of the Code or regulations, of court decisions rejecting his interpretation of the tax law, of authoritative rulings of the Internal Revenue Service, or of any contents of the personal income tax return forms and accompanying instructions that made it plain that wages should be returned as income. 
We thus disagree with the Court of Appeals' requirement that a claimed good-faith belief must be objectively reasonable if it is to be considered as possibly negating the Government's evidence purporting to show a defendant's awareness of the legal duty at issue. Knowledge and belief are characteristically questions for the fact finder, in this case the jury. Characterizing a particular belief as not objectively reasonable transforms the inquiry into a legal one and would prevent the jury from considering it. It would of course be proper to exclude evidence having no relevance or probative value with respect to willfulness; but it is not contrary to common sense, let alone impossible, for a defendant to be ignorant of his duty based on an irrational belief that he has no duty, and forbidding the jury to consider evidence that might negate willfulness would raise a serious question under the Sixth Amendment's jury trial provision. It is common ground that this Court, where possible, interprets congressional enactments so as to avoid raising serious constitutional questions. It was therefore error to instruct the jury to disregard evidence of Cheek's understanding that, within the meaning of the tax laws, he was not a person required to file a return or to pay income taxes and that wages are not taxable income, as incredible as such misunderstandings of and beliefs about the law might be. Of course, the more unreasonable the asserted beliefs or misunderstandings are, the more likely the jury will consider them to be nothing more than simple disagreement with known legal duties imposed by the tax laws and will find that the Government has carried its burden of proving knowledge.   [END OF CHEEK QUOTE]
The good faith defense — sometimes called the Cheek good faith defense — functions not as a defense, but to focus on whether the prosecution has proved willfulness. Willfulness does not exist if the defendant acted in good faith with a belief that the law did not impose the legal obligation he is alleged to have violated. Does that mean that the government, in order to prove willfulness, must prove that the defendant did not have a good-faith belief that there was no legal duty? Logically, it would and, certainly most of the time, the government's proof of willfulness will in fact be sufficient to permit the jury to infer beyond a reasonable doubt that the defendant lacked good faith. 
Defendants who want to argue the good-faith defense will want an instruction to the jury making that clear to the jury. Generally, courts will give the specific good-faith instruction only if the evidence somehow affirmatively puts good faith in play — making it a real issue for the jury. How does the defendant do that? The most direct way is for the defendant to testify as to his or her good faith. But, in order to do that, the defendant must waive his Fifth Amendment right not to testify and be subject to cross-examination; frequently, the defense team will conclude that the potential benefits of the defendant testifying (including the good-faith opportunity) do not justify the downside risks of the defendant testifying. So, the defendant will not testify. Notwithstanding some noises that the defendant is required to testify to put good faith in play, the courts soundly reject that notion. Other circumstantial evidence, including perhaps lay opinion evidence as to the defendant's mental state, may be sufficient to put that issue in play and, if it does, the trial judge should give the instruction. 
The next question is whether, when there is a record predicate for the good-faith defense, the trial court's refusal to give the separate good-faith instruction is reversible error. Courts of Appeals are reluctant to reverse because, they reason, the Cheek willfulness instructions will advise the jury that the defendant must violate a known legal duty and if the defendant acted in good faith (certainly as to whether or not he or she had a known legal duty), then the jury would know willfulness could not exist. Hence, these courts reason, it is not reversible error for the trial judge to decline to give a separate good faith defense instruction. This holding is not that the good-faith defense instruction may not be given if a proper foundation is laid; it is just that there is no reversible error if a proper good-faith defense instruction is not given. But we believe most judges will give the instruction with the proper foundation. 
Finally, what if the defendant knew the law and intended to violate the law for reasons that, in good faith, he felt were compelling to him? For example, what if the defendant gave false social security numbers to casinos to report his winnings because he was afraid of identity theft and thereafter did not report the winnings? That is not Cheek good faith, which requires that in good faith, the defendant not know the law and not intend to violate the law.

Finally, as I indicated, this reliance on counsel "defense" is not limited to reliance on an attorney.  Any tax professional will do.  Consider the following quote from Burgess J.W. Raby and William L. Raby, Penalty Protection for the Taxpayer: Circular 230 and the Code, 2005 TNT 105-65.:

First man: I have a CPA do my income tax return.
Second man: Why do you do that?
First man: It saves me time.
Second man: How much time?
First man: Maybe 5 to 10 years.
-Old Joke

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