Pre-Trial Decisions on Motion to Suppress (Tweel Issue) and Dismiss Tax Obstruction Count (Marinello Issue) (11/5/17)

I offer today two interesting pre-trial opinions in a tax crimes case.  United States v. Wright, 2017 U.S. Dist. LEXIS 167300 (S.D. Ohio 10/10/2017), here (referred to as Wright 1); and United States v. Wright, 2017 U.S. Dist. LEXIS 169007 (S.D. Ohio 10/12/2017), here (referred to as Wright 2).  Wright 1 rejected Wright's suppression claim that the IRS investigation was an improper disguised criminal investigation and that the agent misled Wright.  Wright 2 dismissed in part, but inter alia rejected Wright's argument for dismissal based on the pending investigation issue currently before the Supreme Court in Marinello, albeit in a superseding indictment context.  I address these opinions in their chronological order.  But, I offer now the docket entries in the case, here, the superseding indictment, here, and the jury verdict, convicting on all counts except the tax obstruction count, Count 1, here.

Wright 1

The facts are the key to the suppression claim. Highly summarized, the facts as recounted by the Court are:

In 1997, Wright pled guilty to attempted tax evasion.  In the sentencing, the court ordered that Wright pay restitution "restitution in the amount of taxes determined by the [IRS] to be owing."  That amount was never quantified by the sentencing court.  The IRS, however, subsequently assessed taxes for a number of years and a substantial amount remained outstanding.

In 2010, the IRS started an audit of one of Wright's corporate businesses.  At that time, the auditing agent learned from her manager that Wright had a substantial outstanding tax liability.

On 11/2/10, the agent discussed with the Fraud Technical Adviser ("FTA") "possible indicators of fraud ... with all the related entities." Then

Bettelon [the agent] subsequently prepared and forwarded to Rowe a Form 13680, which allows RAs to "request research using the yK1 Link Analysis Tool. This tool provides a graphic representation of flow-through relationships created by partnerships, trusts, and S corporations. The tool uses Schedule K-1 data to depict ownership relationships and income/loss flows between payers and payees." Internal Revenue Manual ("IRM" or "Manual") § 4.10.4.3.4.3(5) (Aug. 9,2011). On November 17, 2010, Bettelon again met with Wright, and asked him "if he or [B&P] had ever been involved with any prior audits or dealings with the IRS." Doc. #52-3, PAGEID #457. Bettelon claims that in response, "Wright stated [that] he has [sic] never been involved with the IRS prior to my visit" on August 13, 2010. Id. Wright denies having ever made such a statement.

The agent then had another meeting with Wright to request credit card statements previously requested.  About two weeks later, after discussion with the FTA, the FTA instructed the agent to prepare Form 11661: Fraud Development Recommendation - Examination.  In the form, the agent listed several possible indicators of fraud and calculated a tax underpayment of more than $600,000. The Court said about the Form:

By completing Form 2797, Bettelon [the agent] was informing IRS Criminal Investigation ("IRS-CI") that there existed firm indicators of fraud as to B&P, Remnant and Wright, such that a criminal investigation was warranted. Internal Revenue Manual § 25.1.3.2(1). Upon completing the form, Bettelon was required to "suspend the examination/collection activity without disclosing to the taxpayer or representative the reason for the suspension." 

Shortly after the completion of the form, the agent contacted Wright to request a Form 872, Consent to Extend the Statute of Limitations.  The following occurred:

Wright indicated that he would not sign it, and asked for an update on the status of his audit. Bettelon replied that Rowe [the Group Manager] needed to review the credit card statements that Wright had sent to Bettelon, but that Rowe was on sick leave and had not had a chance to review them. Doc. #52-3, PAGEID #458. In her Examining Officer's Activity Record ("EOAR") for the B&P audit, Bettelon wrote that she was "postponing telling [Wright] any information regarding the criminal investigation." Id. Bettelon made a similar note in her EOAR after a conversation with Wright on May 5, 2011, as IRS-CI had not yet accepted the audit transfer requested via Form 2797. Id.; see also Internal Revenue Manual § 25.1.3.3-4 (IRS-CI's process for evaluating and accepting a criminal referral). On June 2, 2011, Bettelon met IRS-CI Agents Tony Westendorf ("Westendorf") and Thomas Buchenroth ("Buchenroth") to discuss the B&P audit and her reasons for referral. Id. On June 7, 9, 10, and 22, 2011, Wright called Bettelon to [*8]  inquire about the status of the civil audit; Bettelon did not return the calls. Id. On June 24, 2011, Bettelon talked to Rowe about Wright's "many phone calls . . . and the fact that she was running out of things to postpone" returning his calls. Id. That same day, Rowe called Wright and informed him that Bettelon was no longer working on the audit, and that the case had been transferred to IRS-CI. Id.

Now, I am sure readers of this blog already know the defendant's arguments for suppression.

The Court starts its analysis with the following caption and statement of Wright's argument (I omit the record references for easier readability):

A. Failure to Follow Internal Revenue Manual does not Mandate Suppression of any Evidence Obtained in Violation Thereof 

Wright argues that "[f]rom the outset, the IRS's audit of the B&P Company was an illicit and unconstitutional ruse devised to trick and deceive Wright into providing incriminating documents, information, and personal statements in service of an ongoing IRS criminal investigation." He claims that Bettelon was coached by Rowe, Fromer, Buchenroth and Westendorf to obtain statements from Wright that would tend to incriminate him. Wright takes issue with Bettelon's asking him, on November 17, 2010, about whether he had had any past dealings with the IRS. He argues that his answer to the question would have yielded no meaningful information with respect to the civil audit, but that Wright's lack of truthfulness could be used as an indicator of fraud for a criminal investigation. Most seriously, Wright claims, Bettelon continued the civil audit even after suspecting criminal activity and completing Forms 2797 and 11661, soliciting credit card statements from Wright, speaking with him via telephone, and attempting to persuade him to toll the statute of limitations as to the civil audit of B&P's tax year 2007. Wright's alleged statement from November 17, 2010, was a key element in the Government's allegation that he had violated 26 U.S.C. § 7212(a), and the credit card statements Wright provided after Bettelon completed From 11661 were used by the Government as evidence that Wright was using a tiered scheme to under-report income. Thus, Wright argues, that evidence should be suppressed as a violation of his Fourth and Fifth Amendment rights. 

The Court then finds that the agent's statement to Wright that the audit was routine prior to becoming aware of the past IRS difficulties was a misrepresentation invoking Tweel.  The Court then finds:

As discussed above, Wright argues that Bettelon's question on November 17, 2010, about his past interactions with the IRS was an affirmative misrepresentation. Yet, even assuming that Bettelon, by asking the question, was hoping to catch Wright in a lie, which would in turn serve as an indicator of fraud, Wright has failed to prove by clear and convincing evidence that he was prejudiced by such deceit. At least one of Wright's past dealings with the IRS is a matter of public record, No. 1:97-cr-64, and Wright cannot reasonably claim that providing misinformation about a public record in the context of a civil audit was somehow appropriate in a way that providing such misinformation in the context of a criminal investigation would not be. Further, Bettelon's interview of Wright took place at least two months before she completed Form 11661; thus, any suspicions of criminal activity that Bettelon had at that time were not the firm indicators of fraud required to refer the case to IRS-CI.1 The mere fact that Bettelon used that statement as an indicator of fraud in completing Form 11661 was not improper; as discussed above, it is neither inappropriate nor even uncommon for a civil audit to become a criminal investigation. U.S. v. Wadena, 152 F.3d 831, 851-52 (8th Cir. 1998). Thus, the allegedly false statement made by Wright to Bettelon on November 17, 2010, was not obtained in violation of Wright's Fourth and Fifth Amendment rights, and will not be suppressed.

Then, as to the request for credit card statements made after the preparation of the Forms 2797 and 1161, the Court found that they were merely follow-through requests for requests actually made earlier and thus did not warrant suppression.

The Court finally said that the request for the Form 872 was "ill-advised" but did not warrant suppression, particularly since Wright had not signed it.

However, Wright did not sign the Form 872; in other words, even if Bettelon's request that he toll the statute of limitations constituted an affirmative misrepresentation, Wright took no action in reliance on that misrepresentation. Similarly, Bettelon's conversation with Wright on May 5, 2011, and Wright's subsequent, unreturned phone calls to Bettelon, did not prejudice Wright; Wright produced no evidence that he undertook any action with respect to the B&P audit after refusing, on March 29, 2011, to toll the civil statute of limitations. Thus, even assuming that Bettelon's refusal to disclose that she had referred the case to IRS-CI constituted misrepresentation by omission, the lack of prejudice means that the exclusionary rule does not apply.

Wright 2

In this opinion, the Court addressed Wright's claim that the original indictment did not make the proper allegation of a pending investigation to support the tax obstruction, § 7212(a), count.  The key allegations and supporting overt acts were improperly asserted for the first time in the Superseding Indictment, filed after the Government realized the defects.

The issue was whether the Superseding Indictment filed after, allegedly, the statute of limitations improperly expanded the original indictment.  The Court said:

However, any superseding indictment may charge a violation of 26 U.S.C. § 7212(a), even if all the acts occurred more than six years prior to the superseding indictment, as long as the superseding indictment does not materially broaden or substantially amend the original indictment. A superseding indictment will be considered to "relate back," as long as "the original indictment fairly alerted the defendant to the subsequent charges against him and the time period at issue." U.S. v. Salmonese, 352 F.3d 608, 622 (2d Cir. 2003); accord: U.S. v. Smith, 197 F.3d 225, 228-29 (6th Cir. 1999). Thus, if the superseding indictment fails to meet [*8]  this criteria, and no obstructive act occurred within six years of the superseding indictment, a charge of violation of 26 U.S.C. § 7212(a) is time-barred.

Basically, the Court held that the Superseding Indictment did not run afoul of these requirements.  Some key excerpts:

Pursuant to Kassouf, knowledge of a proceeding is a necessary element of a charge of violating 26 U.S.C. § 7212, and the original Indictment failed to allege such knowledge. However, none of the cases cited by Wright stand for the proposition that failure to allege a specific element of the offense in the initial indictment prevents a superseding indictment including that element from relating back for statute of limitations purposes. See, e.g., Smith, 197 F.3d at 229 (citing U.S. v. Freidman, 649 F.2d 199, 203-04 (3d Cir. 1981) (discussing how "a facially invalid original indictment, which did not allege the proper $5000 minimum amount for prosecution under the applicable statute, was corrected by a superseding indictment properly alleging the $5000 minimum without being troubled by the statute of limitations."); see also Russell v. United States, 369 U.S. 749, 764, 82 S.Ct. 1038, 8 L.Ed.2d 240 (1962) ("whether the indictment contains the elements of the offense intended to be charged" is just one "of the criteria by which the sufficiency of an indictment is to be measured."). Indeed, such a rigid standard would be contrary to this Circuit's binding precedent. Smith, 197 F.3d at 229 (citing U.S. v. Grady, 544 F.2d 598, 601 (6th Cir. 1976) ("[n]otice to the defendants of the charges, so that they can adequately prepare their defense, is the touchstone in determining whether a superseding indictment has broadened the original indictment."); see also Fed. R. Grim. P. 7(c)(1) ("indictment or information must be a plain, concise, and definite written statement of the essential facts constituting the offense charged[.]"). 

Further, this case is factually distinct from U.S. v. Ogbazion, in which the Court dismissed a charge of violation of 26 U.S.C. § 7212(a) because the indictment failed to allege that the defendant was aware of any IRS proceeding when he undertook the allegedly obstructive acts. No. 3:15-cr-104-TSB-1, 2016 U.S. Dist. LEXIS 143358, 2016 WL 6070365, at *17 (S.D. Ohio Oct. 17, 2016) (Black, J.) (quoting Kassouf, 144 F.3d at 957)). The Ogbazion indictment did not allege any interaction between the defendant and an IRS agent, No. 3:15-cr-104-TSB-1,, and the Court noted that it was undisputed that "there [was] no evidence that Defendant was aware of any pending IRS actions prior to November 2011." 2016 U.S. Dist. LEXIS 143358, 2016 WL 6070365, at *17. In this case, Wright's allegedly false statement to Bettelon on November 17, 2010, was in both the original and Superseding Indictments. Moreover, both Indictments allege that Wright made that false statement "to an IRS revenue agent[,]" The allegations in the original Indictment were sufficient to put Wright on notice that: (a) there were IRS active proceedings; (b) Wright was aware of those proceedings; and (c) he allegedly made a false statement in an effort to obstruct one or more of those proceedings. In other words, "the essential facts constituting the offense charged[,]" Fed. R. Cram. P. 7(c)(1), were all present in the original Indictment. The Superseding Indictment made no new allegations that changed or broadened the circumstances surrounding that supposed obstructive act. The addition of the phrase "conducting an audit of B&P Company, Inc.'s corporate income tax returns[,]" did nothing more than clarify the proceeding that was implicitly referenced in the original Indictment. 

Finally, Wright's argument that the addition of three alleged overt acts constitutes a material broadening of the Superseding Indictment, is unavailing. It is well settled that the addition of new overt acts to a superseding indictment does not bar that later indictment from relating back to the original indictment, as long as it does not alter the scope of the offense being charged and "the original indictment clearly put [the] defendants on notice of the charges against which they were to defend themselves at trial." U.S. v. Lash, 937 F.2d 1077, 1082 (6th Cir. 1991). For the reasons discussed above, the Superseding Indictment did not alter the scope of Count One, and the addition of the three overt acts did not deprive Wright of adequate notice of the charge against him. 

As the Superseding Indictment did not materially broaden or substantially amend the essential portions of the charge of violating 26 U.S.C. § 7212(a), it relates back to the original Indictment. Smith, 197 F.3d at 228. As Wright's last alleged obstructive act occurred [*17]  within six years of the original Indictment, and "the unit of prosecution remains the corrupt endeavor and not the pending proceeding," even after Kassouf, Count One is not time-barred.

The Court did hold that certain actions related to the ambiguous original indeterminate restitution amount could not be asserted in support of the tax obstruction count.