Presence or Absence of Tax Deficiency, Although Not an Element of Tax Perjury (§ 7206(1)), Crime, May be Relevant to the Materiality Element (1/14/18)

In United States v. Huynh, 2018 U.S. App. LEXIS 767 (9th Cir. 2018), unpublished, here, the Court of Appeals affirmed Huynh's conviction for "one count of conspiracy to commit medical fraud in violation of 18 U.S.C. § 371 and eleven counts of subscribing to a false tax return in violation of 26 U.S.C. § 7206(1)."  The decision is rather cryptic and, since unpublished, does not, I think, deserve further analysis.  The decision does permit a digression over an issue that caught my attention.

The paragraph in question is (bold-face supplied by JAT):

2. Huynh also takes issue with the jury instruction stating that the prosecution was "not required to prove that any additional tax was due to the government or that the government was deprived of any tax revenues by reason of any filing of any false return." Specifically, he contends that because "a tax loss [was] the only material false statement charged in [the] tax counts," this instruction allowed the jury to convict him under Section 7206(1) without finding that his filings were incorrect as to material matters. This argument misrepresents the nature of the charges against him. Huynh was charged with and convicted of underreporting income—not underreporting tax liability. Moreover, the challenged instruction is consistent with the principle that "[t]he existence of a tax deficiency is not an element of this crime" under Section 7206(1). United States v. Marabelles, 724 F.2d 1374, 1380 (9th Cir. 1984); see also United States v. Marashi, 913 F.2d 724, 736 (9th Cir. 1990) ("Section 7206(1) is a perjury statute; it is irrelevant whether there was an actual tax deficiency."). And we are not persuaded by Huynh's citation to United States v. Uchimura, 125 F.3d 1282 (9th Cir. 1997), that the instruction took the materiality decision away from the jury.

The last sentence, bold-faced by me, caught my attention.  So, I thought I would read Uchimura and see what it offers to the § 7206(1) materiality analysis.  (By the way, cert was denied in Uchimura in 525 U.S. 863 (1998).)

It is black letter law that a tax deficiency as a result of the false statement on the return is not an element of the crime of tax perjury in § 7206(1).  It is not thought that the lack of a tax deficiency is a defense to the crime.  However, materiality is an element of the crime.  So the question is whether the lack of a tax deficiency or the presence of a tax deficiency is relevant to the issue of materiality and thus admissible and considered by the jury.

Of course, if the lie that the indictment charges is tax underreported, then tax deficiency is an element of the crime.  But, § 7206(1) charges are usually brought where there is some other lie such as gross income omitted from the return, Schedule B foreign account question answered no rather than yes, or some such.  In those other cases where underreported tax is not the lie charge, then tax deficiency is not an element of the crime.

In Uchimura, the Court addressed the materiality issue after the Supreme Court decided in United States v. Gaudin, 515 U.S. 506 (1995) that the materiality element of crimes was a question for the jury rather than for the court.  The Uchimura court then moved into the definition of materiality.  The Uchimura Court opens the discussion in relevant part (bold-face supplied by JAT):

This Circuit has never explicitly defined "material" in Section 7206(1), although our Model Jury Instructions for Section 7206(2) define it as "something necessary to a determination of whether income tax was owed." Ninth Circuit Model Jury Instructions: Criminal 9.06E (1995). The definitions applied by other Circuits, and by at least one of our Districts, employ similar language. Klausner, 80 F.3d at 60 ("essential to the accurate computation of . . . taxes"); Aramony, 88 F.3d at 1384 ("in order that the taxpayer estimate and compute his tax correctly"); U.S. v. Warden, 545 F.2d 32, 37 (7th Cir. 1976) (same); U.S. v. Rayor, 204 F. Supp. 486, 491 (S.D.Cal. 1962) (same). We now hold that information is material if it is necessary to a determination of whether income tax is owed. 

Despite our adoption of a materiality definition similar to the one in Klausner, we cannot agree with the Second Circuit. The logic that must be employed (whether by a judge or by a jury) to deduce that a false statement is material renders materiality a "mixed question of law and fact." Under 18 U.S.C. § 1001, deciding whether a statement is material requires the determination of "at least two subsidiary questions of purely historical fact: (a) `what statement was made?'; and (b) `what decision was the agency trying to make?'." Gaudin, 115 S.Ct. at 2314. Under 26 U.S.C. § 7206(1), deciding whether a statement is material surely requires a similar determination of (a) "what statement was made?"; and (b) "what information was necessary in this case to a determination of whether income tax was owed?".

I have added the bold face to focus attention on what the Uchimura court thinks is critical.  To repeat, income tax owed is not an element of the crime, as it is for evasion in § 7206(1).  So, let's keep going in Uchimura:

The government correctly notes that the answer to (b) is spelled out in detail in the Internal Revenue Code and Regulations. Appellee Br. at 31. The answer to (b) in Section 7206 cases is therefore not "purely" a matter of historical fact. But each case is different, and the answer to (b) in each case is necessarily different. For example, a taxpayer is required to report her Social Security number on her tax return. But willfully falsifying one's Social Security number, while it may hinder the IRS' record keeping, normally does not affect a determination of whether income tax is owed. As a more cogent example, if one's legitimate deductions exceed one's true gross income, taxable income will be zero. Failure to report all income will thus have no effect on taxes owed, at least for that year, and unreported income therefore may not be necessary to a determination of whether income tax is owed. 

We do not mean by this example that to satisfy the materiality element of Section 7206 the government must show that additional tax is owed. U.S. v. Marashi, 913 F.2d 724, 736 (9th Cir. 1990) (tax deficiency is not required by Section 7206); Marabelles, 724 F.2d at 1380 (same). That no additional tax is owed of course has a bearing on materiality, but the question is ultimately one for the jury to decide. 

Under most circumstances, this Court's pre-Gaudin statement that "any failure to report income is material" is one with which most juries would agree, since any failure to report income usually affects a determination of whether tax is owed. U.S. v. Holland, 880 F.2d 1091, 1096 (9th Cir. 1989). But just because a jury usually would agree with such a statement does not mean that a jury must agree with it, as a matter of law. Even if any failure to report income is material in most circumstances, it is not necessarily material in all circumstances, since the materiality of an underreporting of income necessarily depends on the facts of each case. The materiality of other false statements on a tax return, such as deductions, is surely just as fact-dependent. For this reason, we cannot agree with the Klausner court's observation that a false statement is "material" merely because it renders the return "inaccurate." Klausner, 80 F.3d at 61. 

The Second Circuit also noted that "the determination of materiality in the present case involved purely a question of law and was suitable for resolution by the district court . . . [because] no . . . factual questions needed to be resolved by the jury." Klausner, 80 F.3d at 60-61 (emphasis added). This reasoning bears upon plain error analysis, but it is inappropriate in determining whether materiality should be submitted to the jury. Case-by-case determinations of whether materiality is a question of law or fact are clearly foreclosed by Gaudin.

Now, I think for more perspective, let's see what DOJ Tax does with Uchimura in CTM CTM 12.10[5] Tax Deficiency Not Required, But Possibly No Longer “Irrelevant”, here (footnote omitted):

12.10[5] Tax Deficiency Not Required, But Possibly No Longer “Irrelevant” 

On occasion, defendants in false return cases argue that the lack of a tax deficiency renders the alleged false item immaterial. For instance, in cases involving unreported income, a taxpayer might argue that she had expenses which exceeded her true gross income, thus rendering his failure to report income immaterial, because it had no bottom-line tax effect. Prior to Gaudin, such arguments fell on deaf ears. Courts held not only that proof of a tax deficiency was not required in a false return case, but also that evidence of the lack of a tax deficiency was irrelevant. See United States v. Marashi, 913 F.2d 724, 736 (9th Cir. 1990) (rejecting as “irrelevant” sufficiency of evidence challenge based on asserted lack of tax deficiency in § 7206(1) case); United  States v. Olgin, 745 F.2d 263, 272 (3d Cir. 1984) (affirming trial court’s exclusion of evidence of tax effect of unreported expenses and noting that “evidence of tax liability is generally inadmissible in prosecutions under I.R.C. 7206") (citations omitted); United States v. Garcia, 553 F.2d 432, 432 (5th Cir. 1977) (per curiam) (upholding trial court’s refusal to allow defense evidence of tax liability or lack thereof in § 7206(1) case); Schepps v. United States, 395 F.2d 749, 749 (5th Cir. 1968) (per curiam) (same); see also United States v. Citron, 783 F.2d 307, 313 (2d Cir. 1986) (rejecting argument that material falsity is one which results in substantial tax due); United States v. Fritz, 481 F.2d 644, 645 (9th Cir. 1973) (per curiam) (evidence of potential adjustments to tax liability not relevant to willfulness since no evidence presented that defendant considered making the proposed adjustments); cf. United States v. Johnson, 558 F.2d 744, 74547 (5th Cir. 1977) (where defendant claims a good-faith-reliance defense, evidence of lack of tax deficiency might be relevant to willfulness, subject to Rule 403, but disallowing introduction based on facts of case). 

While courts still maintain that proof of a tax deficiency is not required in a section 7206(1) prosecution, see United States v. Scholl, 166 F.3d 964, 979 (9th Cir.1999); United States v. Peters, 153 F.3d 445, 461 (7th Cir. 1998); United States v. Minneman, 143 F.3d 274, 279 (7th Cir. 1998), some post-Gaudin opinions indicate that the presence or lack of a tax deficiency may be relevant to a jury’s determination of materiality. 

In United States v. Uchimura, 125 F.3d 1282 (9th Cir. 1997), the Ninth Circuit held that in a Section 7206(1) case, “information is material if it is necessary to a determination of whether income tax is owed.” 125 F.3d at 1285. In deciding whether the question of materiality should be submitted to the jury as a matter of course in false return cases, the court addressed whether the false item at issue-- unreported income-- was inherently material. Id. at 1284-85 The court considered a hypothetical situation in which a taxpayer’s legitimate deductions exceed his gross income and the taxpayer thus has no taxable income. In such a circumstance, “unreported income . . . may not be necessary to a determination of whether income tax is owed.” Id. at 1285. While the Court insisted that “[w]e do not mean by this example that to satisfy the materiality element of § 7206 the government must show that additional tax is owed,” it also left no doubt that the lack of a tax deficiency is relevant to a jury’s determination of materiality and ought to be admitted: “That no additional tax is owed of course has a bearing on materiality, but the question is ultimately one for the jury to decide.” 125 F.3d at 1285, n.5 The Tenth Circuit followed suit in United States v. Clifton, 127 F.3d 969 (10th Cir. 1997). Clifton addressed the same hypothetical as Uchimura, in which the taxpayer fails to report income, but has no tax due because her deductions exceed taxable income for the year. In this situation, the “taxpayer’s failure to report all taxable income will not affect the computation of tax, which in turn might very well affect the jury’s deliberations on the element of materiality.” 127 F.3d at 971. It is hard to read this language as anything other than a mandate that evidence supporting the lack of tax deficiency must be submitted to the jury. See also United States v. Aramony, 88 F.3d 1369, 1384-85 (4th Cir. 1996). 

Prosecutors should consider arguing that if the language in Uchimara and Clifton has the effect of requiring proof of tax loss, it would no longer be true that the falsehood itself defines the crime of filing a false return. See Gaunt v. United States, 184 F.2d 284, 288 (1st Cir. 1950) (observing that the purpose of the false returns statute is “to impose the penalties for perjury upon those who wilfully falsify their returns regardless of the tax consequences of the falsehood.”). Otherwise, proof of false returns would constitute proof of evasion. 

Clearly, this was not Congress’s intent in drafting § 7206(1), which “charges an offense separate and distinct in itself[.]” United States v. White, 417 F.2d 89, 93 (2d Cir. 1969). As the Second Circuit explained in White, Section 7206(1) . . . is only one part in a comprehensive statutory scheme to prohibit and punish fraud occurring in the assessment and collection of taxes by the government. Section 7201 is the inclusive section, prohibiting all attempts to evade or defeat any tax in any manner, and such an attempt is punishable as a felony. There follows a series of sections prohibiting specific methods of fraud in the collection and payment of taxes, all of which are separately punishable standing alone. Among these are 7203, 7206 and 7207, all directed against the taxpayer. Other sections are directed at persons involved in the process of tax collection. . . . Section 7206(1) provides penalties for signing, under oath, false returns or statements made in the process of tax collection. The offense charged is perjury, the operative element is the signature under oath, and the felony penalties reflect the seriousness of this method of committing fraud. Thus the perjury offenses charged under 7206 may separately form the basis for an indictment[.] United States v. White, 417 F.2d at 93-94 (citations omitted). Nevertheless, in light of the recent appellate decisions, it would be prudent for the prosecutor to consider the tax loss -- or lack thereof -- as part of the overall assessment of the government’s ability to prevail in a Section 7206(1) case. 

Another doctrine that may come into question, or at least be subject to reassessment, is that of the irrelevance of the “substantiality of the understatements.” PreGaudin, some defendants appealed their false returns convictions on the basis that the material falsehoods on their returns were insubstantial. Courts rejected these arguments, holding that the issue was whether the misstatements were material, not whether they were substantial. See United States v. Helmsley, 941 F.2d 71, 92 (2d Cir. 1991); United States v. Citron, 783 F.2d 307, 313 (2d Cir. 1986); United States v. Gaines, 690 F.2d 849, 858 (11th Cir. 1982). The validity of these holdings is called into question by Uchimura and Clifton. If it is now relevant whether a tax deficiency exists in a Section 7206(1) prosecution, it would seem that the amount of any tax deficiency, and thus the degree of any misstatement, would be relevant to a jury’s determination of materiality by the rationale of these two holdings. 

JAT Comments:

1. So, in a case where it might help at the margins, a defendant or his counsel should try to assert that, since no tax was due, the alleged lie was not material and hope that the jury buys the argument.  Of course, courts in other circuits might not buy the argument.  Note in this regard that, to consider whether a tax deficiency is relevant to the materiality determination, the jury would presumably have to determine the tax deficiency beyond a reasonable doubt.  (Caveat, I use the term tax deficiency because that is a term often used to describe that tax due and owing element in a criminal tax case, even though, I think, it is a confusing term in this context and the more proper term is tax due and owing.  See For Tax Evasion, Is the Element "Tax Deficiency" or "Tax Due and Owing" (Federal Tax Crimes Blog 10/14/13), here. (urging that the term tax deficiency has a settled meaning in tax law to mean the civil tax deficiency)).

2.  And, the prosecution might want to prove a tax deficiency in order to supply the defendant's motive to lie on the return.  But, if the prosecution wants to go to the trouble of proving the tax deficiency, perhaps it would just charge tax evasion, § 7201, where tax deficiency is an element of the crime.  Maybe the prosecution was uncertain that it could prove tax deficiency beyond a reasonable doubt but enough to convince the jury that it was sufficiently proved for the materiality determination.

3. One problem with the defense is that, it is not likely that the Government would pursue a § 7206(1) prosecution unless there was a tax due and owing.  This is because a substantial tax loss, although not an element of the crime, is required for an actual sentence of incarceration under the Sentencing Guidelines (although as I have noted for perjury type crimes where no economic loss is involved, it is possible that some other Guideline might be applied, either directly or to influence a Booker variance upward (see Michael Flynn Plea Documents, Analysis and Comments (Federal Tax Crimes Blog 12/1/17; 12/4/17), here)).