What Are the Implications for Marinello on the Defraud / Klein Conspiracy? (3/24/18)

I have recently written on the Supreme Court's opinion in Marinello v. United States, ___ U.S. ___, ___ S.Ct. ___ 2018 U.S. LEXIS 1914  (2018).  See Supreme Court Holds that Omnibus Clause of the Tax Obstruction Crime (§ 7212(a)) Requires Awareness of Pending Tax-Related Proceeding (Federal Tax Crimes Blog 3/21/18; 3/22/18), here.  I write here to raise the question of how Marinello may affect the interpretation and application of the Klein conspiracy, which is a very common charge in criminal tax cases.

Marinello involved § 7212(a)'s Omnibus Clause which defines the crime I call tax obstruction as follows (from the Marinello opinion)

corruptly * * * endeavors to obstruct or impede the due administration of this title.

The defraud conspiracy (18 USC 371)--commonly referred to as a Klein conspiracy in a tax setting (see United States v. Klein, 247 F.2d 908 (2d Cir. 1957), cert. denied 355 U.S. 924 (1958)--punishes a conspiracy:

to defraud the United States, or any agency thereof in any manner or for any purpose, and one or more of such persons do any act to effect the object of the conspiracy

From the textual words used, a connection between tax obstruction and the Klein conspiracy is not direct.  But, interpretation of the Klein conspiracy suggests the connection.  The Klein conspiracy is generally described in some variation of a conspiracy to impair or impede the lawful function  of the IRS.  Indeed, given this apparent overlap, the 2001 version of the DOJ CTM 17.02 (2001 ed.) said that tax obstruction may be charged where the Klein conspiracy is “unavailable due to insufficient evidence of conspiracy.”  CTM 17.02 (2001 ed.).  In effect, the elements of the crime are the same except for the requirement that there be two or more conspirators.

Since that is true, the Court's rejection in Marinello of the Government's sweeping claim as to the scope of tax obstruction might have some similar effect--a salutary one--on the scope of the Klein conspiracy.  Of course, there is no direct link between the conspiracy statute and some other statute such as the Supreme Court found persuasive in Marinello.  But the link is in the interpretation of the Klein conspiracy as interpreted and, now, the obstruction statute.  Now, what is not clear is whether the link between the tax obstruction statute and the general conspiracy statute as interpreted in Aguilar would be sufficient to import the pending investigation limitation in the obstruction.  Or whether, given the concerns expressed in the majority opinion, the Court might be inclined to leverage a limitation into the Klein conspiracy.

In this regard, I remind readers that the now infamous Judge Kozinski asked the following pithy question about the Klein conspiracy in the opening line of a seminal case, United States v. Caldwell, 989 F.2d 1056, 1058 (9th Cir. 1993):  "We consider whether conspiring to make the government's job harder is, without more, a federal crime."  Isn't that a variation of the question asked and answered in Marinello?  And Judge Kozinski found a way to reign in expansive interpretations of the Klein conspiracy.  Maybe Marinello could presage a similar reading of the Klein conspiracy.

At this time, I won't discuss the issue further.  I do refer readers to my prior article inspired by Judge Kozinski's opening line where I get into the various facets of obstruction crimes.  John A. Townsend, Tax Obstruction Crimes: Is Making the IRS's Job Harder Enough, 9 Hous. Bus. & Tax. L.J. 255 (2009), here; and Tax Obstruction Crimes: Is Making the IRS's Job Harder Enough? Online Appendix, 9 Hous. Bus. & Tax L.J. A-1 (2009), here.

Finally, I offer a cut and paste from Klein on the defraud / Klein conspiracy:

8. The Pleadings. 2In its final form as reached in the superseding ind7ictment, the Fifth Count in its paragraph marked 1 charged the conspirators with conspiring "to defraud the United States by impeding, impairing, obstructing and defeating the lawful functions of the Department of the Treasury in the collection of the revenue; to wit, income taxes." Paragraph 2 then charges:  

"It was a part of said conspiracy that the defendants would conceal and continue to conceal the nature of their business activities and the source and nature of their income." 

Three succeeding paragraphs charge as "further a part of said conspiracy" the acts of Alprin, Koerner, and Roer respectively in claiming net income as capital gains in stated years, referring obviously to the Tivoli drafts mentioned above. The final paragraph 6 charges as further a part of the conspiracy "that the defendants would make and cause to be made entries in certain books and records of Tivoli Trading Co., a Panamanian corporation, for the purpose of concealing the nature and source of the income received by the defendants herein." Then follow the "Overt Acts," of which only the first, the telephone conversation of February 29, 1952, between Klein and Alprin, went to the jury. 

It is clear from this wording that the indictment is framed to make a general charge of impeding and obstructing the Treasury Department in the collection of income taxes, with the allegations of concealment, of misreporting of the Tivoli drafts, and of misstating the Tivoli book entries as particular instances, rather than as substitute and complete allegations of the substantive crime itself. This is made doubly clear by reference to the original count it superseded, which was attacked because a broad allegation of conspiring to defraud the United States in the collection of taxes was said to be limited by the addition of twenty-five words which would supersede all that precedes them and be insufficient to charge a crime, viz., "in that the defendants attempted to conceal and continued to conceal the nature of their business activities and the source and nature of their income." Although Judge Palmieri, on pre-trial motion to dismiss, specifically rejected this contention, United States v. Klein, supra, D.C.S.D.N.Y., 124 F. Supp. 476, 480, nevertheless the Government took pains to clear up the matter in this way. 

In view of this background we find no merit in the oft-repeated contentions that the prosecution and the trial court "expanded" the count in question to cover matters not originally intended and changed the theory of the case from time to time. There was considerable chitchat between court and counsel during the long trial containing expressions which, apart from the general context, might be taken as referring only to the charge of concealment; but certainly there was never a definitive interpretation restricting the broad allegations as stated or suggesting a stricter interpretation than that of Judge Palmieri, whose conclusions were accepted in the later trial. 2Mere failure to disclose income would not be sufficient to show the crime charged of defrauding the United States under 18 U.S.C. § 371. The statute, however, not only includes the cheating of the Government out of property or money, but "also means to interfere with or obstruct one of its lawful governmental functions by deceit, craft or trickery, or at least by means that are dishonest." Hammerschmidt v. United States, 265 U.S. 182, 188, 44 S.Ct. 511, 512, 68 L.Ed. 968. The evidence recounted above appears directly in line with the crime thus outlined. 

It is true that the emphasis shifted during the trial from charges of direct tax evasion to the broader claim thus envisaged. But this was due to defendants' success in obtaining dismissal of these specific claims on the court's acceptance of their theory that the admitted vast income produced by the business operations under scrutiny was actually owned by the foreign corporations nominally in possession. When the court sustained the Fifth Count, it became necessary for the Government to broaden its attack, and the defendants cannot well complain of that which they brought about. True, they now claim prejudice because what was excluded by reason of the decision on the first four counts was so inextricably mingled with what was retained as to make impossible a fair trial based only on admissible evidence. But they did not seek a mistrial at the time; obviously they expected to press the advantage they had obtained to the point of securing judgment from either the court or the jury on the whole case. Possibly there may have been error in the court's favorable ruling; at any rate we do not think the defendants are in a position to complain or that the Government's case should be held totally destroyed by this merely partial decision against it. 

The defendants' real objection has to be, therefore, not so much to a shift in position as to the generality of allegation relied upon. It is to be noted that Judge Palmieri also passed upon their motions for bills of particulars and denied them in the decision above referred to after the United States Attorney had submitted certain particulars, including the portions of the tax returns of Alprin, Koerner, and Roer alleged to be false. He held that the defendants had obtained all the information to which they were properly entitled and that a premature disclosure of the Government's case or evidence or its theory of prosecution could not be had. He referred to the desire disclosed by the defendants "to avoid the inconvenience incident to the preparation for trial of a criminal tax case involving very large sums of money and covering a period of several years" and added appositely: "But if the prospect of trial appears burdensome, it is attributable to the defendants themselves and to their methods of doing business. The defendants are familiar with their own transactions." 124 F. Supp. 476, 479. There is nothing in the trial record to indicate any error in this diagnosis or any essential prejudice to defendants in the preparation of their case. Before they testified in late July and August at a trial beginning in April and after a five weeks' gap in presentation of evidence to the jury while the parties were deciding upon the evidence to be preserved after the excision of the four counts, they knew the prosecution's case quite thoroughly. And of course they knew the detail of facts better than the prosecution could hope to know them. Any defects in allegation must therefore rest on strictly legal principles, rather than practical lack of information. 

The generality of allegation now permitted is well settled, see, e.g., Glasser v. United States, 315 U.S. 60, 66, 62 S.Ct. 457, 86 L.Ed. 680; United States v. Achtner, 2 Cir., 144 F.2d 49, and cases cited. The defendants are in substance contending for what has been referred to as the "baleful" theory-of-the-case doctrine, which has been repudiated in the civil rules and which is said to have no place in criminal procedure. United States v. Pape, 2 Cir., 144 F.2d 778, 781, certiorari denied 323 U.S. 752, 65 S.Ct. 86, 89 L.Ed. 602, upholding submission of alternate theories of fact to the jury; United States v. Groopman, 2 Cir., 147 F.2d 782, 785, 786, certiorari denied 326 U.S. 745, 66 S.Ct. 29, 90 L.Ed. 445. If this is so in the ordinary criminal cause, it seems peculiarly so here both legally and practically. Legally and logically the specific detail in the evidence supports the broad charge made. And practically the defendants, who caused the problem by their business ingenuity, if not criminal intent, have all the knowledge at hand. To hold otherwise is to offer a premium to prospective tax evaders in making their business operations so complicated that the Government cannot unravel them sufficiently to make allegations of purely factual detail. 

The situation is well illustrated by the problem raised by the various versions as to the Tivoli drafts. We have detailed the versions presented by the prosecution of the drafts as either liquidating dividends of the corporation or as commissions paid the three men: Roer, Koerner, and Alprin. The issue eventually came to the question which set of witnesses was to be believed: the three or against them Klein and Rokoff. This was not a choice for the prosecution; it was for the jury. And since either way would contribute to the scheme for obstructing the Government's knowledge and collection of revenue due, the prosecution was entitled to the alternative submission to the jury. United States v. Pape, supra, 2 Cir., 144 F.2d 778, certiorari denied 323 U.S. 752, 65 S.Ct. 86, 89 L.Ed. 602. Actually the court presented the matter to the jury, allowing it to find that the drafts were either a liquidating dividend or compensation or a gift, but with a condition attached, that they were to be given the appearance of a legitimate corporate expenditure until Klein's tax difficulties were over. In effect the court thus provided for the additional contingency that the jury might find both sets of witnesses lying. But it stressed the ultimate fact to be found of concealment and misleading and thus correctly made the proper submission. The defendants claim that this was a shift to the theory of three conflicting conspiracies. But the over-all purpose remained the same, even though there may have been divergencies in intent and purpose among the conspirators in the carrying out of some details. Nor did the split in view among the conspirators constitute an end of the conspiracy, for the concealment was not disavowed; it was the same conspiracy and there was no new one merely to hide the past, as in Grunewald v. United States, 353 U.S. 391, 77 S.Ct. 963, 1 L.Ed.2d 931. A limitation of the prosecution to one only of the theories advanced by the parties would have been an unfair limitation on proof of the ultimate fact in issue where the defense, and not the prosecution, had the evidence at command. For the income whose source and nature were being concealed was not primarily the drafts, but the Harwood's profits received much earlier by Klein and the three Canadians. 

We shall not try to lay down any broad principles of criminal pleading, but, since a practical purpose is being subserved, cf. United States v. Lamont, 2 Cir., 236 F.2d 312, 317, shall hold that, under the circumstances here disclosed, the defendants were fully and adequately informed by the indictment of the crime which they were called upon to answer. And the evidence being adequate to convict, the next question must be whether or not the judge's charge was fair and adequate.