District Court Rejects Motions for Acquittal and New Trial on Tax Perjury Convictions (6/29/22)

In United States v. Thompson, No. 21-cr-00279-1, 2022 U.S. Dist. LEXIS 99469 (N.D. Ill. June 3, 2022), CL here, the court denied Thompson's motions for acquittal and, in the alternative, a new trial. Thompson had been convicted of "two counts of making a false statement with the intent to influence the Federal Deposit Insurance Corporation (the FDIC) and a mortgage lending business, in violation of 18 U.S.C. § 1014, and five counts of filing a false tax return, in [*2]  violation of 26 U.S.C. § 7206(1)."

I focus on certain tax aspects of the opinion, although I note that the court held (Slip Op. 28-38) that, for the § 1014 conviction in the Seventh Circuit, literal falsity was not required. 

Special Agents Assisting the Grand Jury Make Surprise Visit.

As often happens in a tax investigation, IRS CI Special Agents make a surprise early morning visit, which is often the target's or subject's first indication of the investigation, designed to catch him or her off-guard and, even when given the modified Miranda warnings, more amenable to an interview without counsel. Here is the court's description of that interview. In this case, the Special Agents were, respectively FDIC and IRS Special agents, and were assistants to a grand jury rather than agents conducting agency administrative investigations.

             At 8:15 a.m. on December 3, 2018, Evans [Special Agent with the FDIC Office of Inspector General] and Special Agent Jason Gibson (Gibson), [*13]  with IRS Criminal Investigation, visited Thompson at his house unannounced to interview him. Tr. 935:16-936:4, 944:12-19. Evans testified that, during the interview, they discussed Thompson's loan at Washington Federal, Evans and Gibson asked him questions about the loan, and Thompson provided information about the loan. Tr. 938:16-25. Specifically, Evans told Thompson that he was investigating Washington Federal, but he never told Thompson that Thompson himself was the subject of an investigation or that Thompson's taxes or tax deductions were the subject of an investigation. Tr. 950:23-951:8. At some point during or at the end of the interview, Gibson served Thompson with a grand jury subpoena that called for Thompson to appear and provide records, including but not limited to federal tax records and records used to prepare federal tax returns, loan and credit applications, records related to the purchase of Thompson's primary residence, his rental residence, and a third property located in Michigan. Tr. 939:1-22, 941:9-942:6, 948:19-22; GX 411.

I infer that, although not expressly stated, Thompson was at least a subject of the grand jury investigation. The opinion does not state whether he was given modified noncustodial Miranda warnings or whether Thompson made incriminating admissions during the interview. I have to assume that defense counsel made whatever he could from the described event.

 Denial of Good Faith Jury Instruction for Tax Perjury.

Court of Appeals Rejects Lawyer Defendant's Proffered Instruction that Cheek Requires Knowledge that Conduct Is Criminal (12/7/20)

In United States v. Gilmore, 2020 U.S. App. LEXIS 37861 (3rd Cir. 2020), here, a nonprecedential opinion, the Court affirmed the convictions of Gilmore, a lawyer, for tax and financial crimes.  The Court rejected Gilmore’s claims that (i) the trial court erred in excluding expert testimony as to a mental-health disorder with respect to willfulness; (ii) the trial court erred in stating in the jury instruction that willfulness require only that the defendant know the conduct was unlawful rather than criminal; and (iii) the evidence was sufficient to support the convictions.

I focus only on the second holding – regarding the jury instruction.  The Court’s discussion is brief, I include it all:

Gilmore next challenges the District Court's jury instructions on willfulness. The Court instructed that willfulness could not be found if Gilmore believed in good faith that "the tax laws did not make his conduct unlawful." App. 2412. Gilmore requested the word "criminal" be used instead of "unlawful." App. 335. Gilmore claims the instruction was legally erroneous because it equated belief of "unlawful" action with belief of "criminal" action. Gilmore Br. 43.

Contrary to Gilmore's claims, willfulness in the context of tax crimes merely requires knowledge and violation of a duty. It does not require knowledge that one is committing a criminal act. As the Supreme Court has made clear, "the standard for the statutory willfulness requirement is the voluntary, intentional violation of a known legal duty." Cheek v. United States, 498 U.S. 192, 201 (1991) (internal quotation marks omitted). Thus, to prove willfulness, the Government had to show "that the law imposed a duty on the defendant, that the defendant knew of this duty, and that he voluntarily and intentionally violated that duty." Cheek, 498 U.S. at 201 (emphasis added). There is no requirement that a person must be aware that the conduct is criminal. It is enough that he knew he had a legal duty and violated it-in other words, that he acted unlawfully.

For these reasons, we hold the District Court did not err in instructing the jury on the willfulness requirement.

JAT Comments:

1. I don’t think it is uncommon for persons to transmute the Cheek willfulness requirement of intentional violation of a known legal duty to requiring that the defendant know that the conduct (violating a known legal duty) is criminal (or a crime).  For example, take the simple case of failure to file which is a crime under § 7203.  The law requires a taxpayer to file a return, assuming the predicate requirements specified in § 6012 are met.  For conviction, all that the Government must show is that the defendant knew of the obligation to file and the defendant chose not to file.  There is no requirement that the defendant know that failure to file is a crime.

First Circuit Pattern Criminal Jury Instruction on Willful Blindness (5/6/19)

I have expressed concern about the willful blindness instruction (which also goes by other names, such as deliberate ignorance, conscious avoidance and ostrich instruction).  So, I decided to look through the pattern jury instructions on willful blindness for the Circuits that have them to see what they may offer.  Among the ones I could find, I think the best one is the First Circuit's from the document titled "2019 Revisions to Pattern Criminal Jury Instructions for the District Courts of the First Circuit, pp. 47-49, from the District of Maine web site,here.  I bold face the part that I recommend readers pay attention to:

2.16 “Willful Blindness” As a Way of Satisfying “Knowingly”
[Updated: 12/15/17]

In deciding whether [defendant] acted knowingly, you may infer that [defendant] had knowledge of a fact if you find that [he/she] deliberately closed [his/her] eyes to a fact that otherwise would have been obvious to [him/her]. In order to infer knowledge, you must find that two things have been established. First, that [defendant] was aware of a high probability of [the fact in question]. Second, that [defendant] consciously and deliberately avoided learning of that fact. That is to say, [defendant] willfully made [himself/herself] blind to that fact. It is entirely up to you to determine whether [he/she] deliberately closed [his/her] eyes to the fact and, if so, what inference, if any, should be drawn. However, it is important to bear in mind that mere negligence, recklessness or mistake in failing to learn the fact is not sufficient. There must be a deliberate effort to remain ignorant of the fact.

Comment 

(1) This instruction is drawn from the instructions approved in United States v. Gabriele, 63 F.3d 61, 66 n.6 (1st Cir. 1995), and United States v. Brandon, 17 F.3d 409, 451-52 & n.72 (1st Cir. 1994). The First Circuit quoted and approved the last seven sentences (without mention of “recklessness”) in United States v. Jesús-Viera, 655 F.3d 52, 59 (1st Cir. 2011). The instruction was also approved in United States v. Denson, 689 F.3d 21 (1st Cir. 2012), where the court reiterated: “[t]he focus of [a] willful blindness instruction must be on the particular defendant and not on the hypothetical reasonable person.” Id. at 24 (quoting United States v. Griffin, 524 F.3d 71, 80 (1st Cir. 2008)). Indeed, it is erroneous to use “reasonable person” language. United States v. Bray, 853 F.3d 18, 24, 30 (1st Cir. 2017) (Although not finding plain error, the court stated that an instruction that a “reasonable person in [the defendant’s] shoes would certainly have known” mistakenly suggested that the jury could find the defendant guilty even if the defendant had not “consciously and deliberately avoided learning” about the violation.). 

(2) Although in United States v. Anthony, 545 F.3d 60, 66 (1st Cir. 2008), the First Circuit said that it was not error to omit reference to “recklessness,” we have nevertheless added the statement that “recklessness” in failing to learn a fact is not enough because of the Supreme Court’s decision in Global-Tech Appliances, Inc. v. SEB S.A., 131 S. Ct. 2060 (2011). Although GlobalTech was a patent case, it described the doctrine of willful blindness as “well established in criminal law,” id. at 2068, and spoke approvingly of the circuits’ approach as “giv[ing] willful blindness an appropriately limited scope that surpasses recklessness and negligence.” Id. at 2070. In Denson, 689 F.3d at 24-25, the First Circuit recognized the authority of Global-Tech for a willful blindness instruction, but the issue there was not about recklessness. Following Global-Tech, the Fourth Circuit has agreed that recklessness is not sufficient. United States v. Jinwright, 683 F.3d 471, 480 (4th Cir. 2012); see also United States v. Goffer, 531 Fed. Appx. 8, 20-21 (2d Cir. 2013) (endorsing the standard that recklessness is insufficient, but finding that the jury instruction satisfied that standard without using the term “reckless”).  

(3) The rule in the First Circuit is that: A willful blindness instruction is warranted if (1) the defendant claims lack of knowledge; (2) the evidence would support an inference that the defendant consciously engaged in a course of deliberate ignorance; and (3) the proposed instruction, as a whole, could not lead the jury to conclude that an inference of knowledge was mandatory. Gabriele, 63 F.3d at 66 (citing Brandon, 17 F.3d at 452, and United States v. Richardson, 14 F.3d 666, 671 (1st Cir. 1994)); accord United States v. Valbrun, 877 F.3d 440, 445 (1st Cir. 2017); United States v. Figueroa-Lugo, 793 F.3d 179, 191 (1st Cir. 2015); United States v. Appolon, 695 F.3d 44, 63 (1st Cir. 2012); United States v. Mitrano, 658 F.3d 117, 123 (1st Cir. 2011); United States v. Coviello, 225 F.3d 54, 70 (1st Cir. 2000); United States v. Camuti, 78 F.3d 738, 744 (1st Cir. 1996). “The danger of an improper willful blindness instruction is ‘the possibility that the jury will be led to employ a negligence standard and convict a defendant on the impermissible ground that he should have known [an illegal act] was taking place.’” Brandon, 17 F.3d at 453 (quoting United States v. Littlefield, 840 F.2d 143, 148 n.3 (1st Cir. 1988)). “[T]he government is not required to prove willful blindness by direct evidence.” United States v. Valbrun, 877 F.3d 440, 446 (1st Cir. 2017). The government “may satisfy its burden of production by adducing evidence that red flags existed that the defendant consciously avoided investigating.” Id. 

10th Circuit Rejects Affirmative Act Challenge to Tax Evasion Convictions (5/2/19)

In United States v. Gorrell, ___ F.3d ___, 2019 U.S. App. LEXIS 12758 (10th cir. 2019), here, "Gorrell was convicted of three counts of wire fraud, 18 U.S.C. § 1343, and three counts of tax evasion, 26 U.S.C. § 7201."  Gorrell appealed only his convictions of tax evasion.  As interpreted by the Court, his argument on appeal was that "the jury was improperly instructed because the alleged affirmative acts contained in the jury instructions (as set forth in the Superseding Indictment) are legally insufficient in light of the evidence presented at trial."  The Court concludes that the alleged affirmative acts were sufficient to support the general jury verdict of guilt on the tax evasions charges.

The instruction on tax evasion was:

To find the defendant guilty of tax evasion, you must be convinced that the government has proved each of the following elements beyond a reasonable doubt: 

FIRST: The Defendant owed substantial income tax in addition to the tax liability which he reported on his income tax return for the year charged in a particular Count; 

SECOND: The Defendant intended to evade and defeat payment of that additional tax; 

THIRD: The Defendant committed an affirmative act in furtherance of this intent, as charged in the Superseding Indictment; and 

FOURTH: The Defendant acted willfully, that is, with the voluntary intent to violate a known legal duty.

The Court of Appeals presents the separate jury instruction on the affirmative acts of evasion as follows:

Jury Instruction Number 19 defines an "affirmative act of evasion" and further explains that "[t]he government needs only to prove one act of evasion to satisfy this element of the offense, but you must unanimously agree on which act or acts were committed." Id. at 118. Jury Instruction Number [*8]  17 lists six actions which the government asserts satisfy the affirmative act element of tax evasion. The same six affirmative acts are found in each count of tax evasion. n4 Gorrell argues that four of these alleged affirmative acts are legally insufficient to sustain a conviction for tax evasion based on the evidence produced at trial. The four affirmative acts at issue are:

a. GORRELL caused investor funds to be deposited into various accounts at banks and E*TRADE that he maintained in his own name and in the name of his financial services company, Gorrell Financial, Inc., thereby commingling the investor funds with his personal funds and converting them to his own use;
b. GORRELL caused the payment of personal expenses from investor funds that had been deposited into the various financial accounts that he maintained at banks and at E*TRADE;
c. GORRELL caused the withdrawal of large amounts of cash from the various financial accounts that he maintained at banks and at E*TRADE;
d. GORRELL stopped using tax preparation services provided to him for free by his father, who was an accountant in Tulsa, Oklahoma, and instead engaged new tax preparers, located in Florida, who were previously unfamiliar with his business ventures, financial accounts, personal income, and expenses . . . .

[Note that the latter listing is from the Superseding Indictment.]

The Court describes the argument as follows:

9th Circuit Affirms Convictions for Tax Perjury, § 7206(1) (3/27/19)

In United States v. Hardy, 2019 U.S. App. LEXIS 8336 (9th Cir. 2019) (unpublished), here and here, the Court affirmed the Hardy's conviction for three counts of tax perjury, § 7206(1).  The opinion is short and to the point (just over 3 pages).  Students and new tax crimes enthusiasts likely would enjoy the read, because it is informative as to some basic points.

I just pick two to cut and paste:

1. "Good faith reliance on a qualified accountant has long been a defense to willfulness in cases of tax fraud and evasion." United States v. Bishop, 291 F.3d 1100, 1106 (9th Cir. 2002). We have made clear, however, that if "the trial court adequately instructs on specific intent, the failure to give an additional instruction on good faith reliance upon expert advice is not reversible error." United States v. Dorotich, 900 F.2d 192, 194 (9th Cir. 1990) (internal quotation marks and citation omitted). The district court adequately instructed the jury on specific intent, telling it that the government was required to prove both specific intent and that Hardy did not have a good faith belief that he was complying with the law. The district court therefore did not abuse its discretion by declining to give Hardy's requested instruction about reliance on the advice of an accountant. 

* * * * 

5. The district court did not abuse its discretion in denying a new trial after its post-verdict dismissal, at the government's request, of Hardy's conviction for one count of corruptly endeavoring to obstruct the due administration of the internal revenue laws, in violation of 26 U.S.C. § 7212(a). The court appropriately rejected Hardy's argument that "spillover" evidence from the dismissed count tainted the convictions on the false tax return counts. See United States v. Lazarenko, 564 F.3d 1026, 1043-44 (9th Cir. 2009) (listing relevant factors). The court's instructions—a "critical factor," id. at 1043—delineated the different elements of each charged offense. And, the jury, although returning guilty verdicts on four of the counts in the indictment, acquitted on the remaining count. "The fact that the jury rendered selective verdicts is highly indicative of its ability to compartmentalize the evidence." United States v. Cuozzo, 962 F.2d 945, 950 (9th Cir. 1992).

 I presume that the dismissal of the tax obstruction, § 7212(a), discussed in paragraph 5 was because of the lack of proof of nexus to an investigation.

Comments on Manafort Jury Day 1 Deliberation Questions (8/17/18)

I thought I would offer some quick additional comments on the four questions the jury asked after its first day of deliberation in the Manafort trial.  I will take the questions and Judge Ellis' answers as reported by WAPO in this article:  Manafort jury enters second day of deliberations (WAPO 8/17/18 10:49am), here, and will offer my comment after each question and answer:

First, jurors asked if someone was required to file a form called an FBAR — which is required of people with foreign bank accounts containing more than $10,000 — if they owned less than 50 percent of such an account and did not have signature authority but did have the ability to direct disbursement. At trial, Manafort’s lawyers suggested their client might have believed he did not have to file such forms, because the companies in question were set up under his consulting firm. After 2011, he shared ownership of the firm equally with his wife. 

In response, the judge read to them again the legal instructions he provided on that point Wednesday. He told the jury that along with the requirement for people who own more than 50 percent of a company with foreign bank accounts, a person must file FBARs if he “controls the disposition of money, funds, or other assets held in a financial account by direct communications.”

JAT Comments on First Question:  Although I don't have the specific instructions as given by Judge Ellis, the law is clear that the Government has to prove that Manafort actually knew of the FBAR obligation and specifically intended to violate the obligation.  (Students and practitioners in this area will recognize this as the Cheek requirement made applicable to FBARs by Ratzlaf.) This is a specific knowledge and intent crime.  (Of course the required intent assumes that the defendant knew the obligation.)  Since a defendant rarely admits the specific knowledge and intent, the Government usually proves knowledge and intent by circumstantial evidence.  I don't know the state of the record on knowledge and intent.  Now, on the more specific question of whether there was an FBAR filing obligation in the first place, I presume that, if WAPO reports the judge's instructions correctly, the obligation arises in the disjunctive (i) if Manafort owned more than 50% which he apparently didn't or (ii) if Manafort had control over the account as the judge instructed.  While it seems clear that Manafort did have overall control over the account, the finer question under the instruction  is whether he could exercise that control by direct communications to the financial institution.  I don't know whether the Government proved that beyond a reasonable doubt.  (I have to say, however, that if there were no evidence sufficient to prove that type of control, the judge presumably would have directed a verdict in Manafort's favor, so I assume that there is some evidence of the required level of control.)  Also, I wonder whether the FBAR obligation can be avoided by having some minion (such as Gates) be the person with direct communication authority and what the state of the evidence and the instructions were on that issue.  In any event, if the jury does not get comfortable with the requirements for knowledge and intent, it would seem that the beyond a reasonable doubt instruction would require the jury to find not guilty on the FBAR count.

Second, jurors asked if the judge could define “shelf company” and the filing requirements related to income. Witnesses testified at Manafort’s trial that he used so-called shelf companies — companies previously created by a lawyer in Cyprus that could be used to control the bank accounts in question — in order to move Manafort’s money. To that question, the judge said the jury would have to rely on their memory of the evidence presented at trial.

JAT Comments on Second Question:  This seems like a fair question that a jury might ask.  The report of Judge Ellis' answer is curious to me.  It seems to me that the question, as reported by the WAPO article, is asking both a factual question -- a definition of "shelf company" -- and a legal question -- the relationship of a shelf company to income (presumably as the income must be reported on the return).  If I am right, the judge could and should have answered that legal question.  Perhaps the witnesses spoke to that issue, but usually in trials witnesses do not testify as to the law; nevertheless, in constructing the unreported income, the summary witness (presumably an IRS agent) would have to base the construction of income on the law as to whether the item is taxable income.  Since it is a question infused with a legal issue, I think the judge could have offered the jury some guidance -- such as that cash earned in the way the Government alleges would be taxable if the jury finds that the cash was received by the company (I am not sure that the judge would have to go into assignment of income, sham corporations or the subpart F reporting rules).  But that suggested answer depends upon the state of the record; I don't know the state of the record.  As with my concluding FBAR question comment, if the jury does not get comfortable that the law required Manafort to report the income, then it should acquit.  (Note, though, that if the law did not require him to report the income, Judge Ellis should have instructed a verdict.)

Fascinating Case on Jury Instructions on Definition of Element of the Crime Beyond the Statutory Definition (5/2/17)

Today's case, United States v. Hastie, ___ F.3d ___, 2017 U.S. App. LEXIS 7237 (11th Cir. 2017), here, is a criminal case, but is not a tax case.  I offer it because the most interesting holding in the case involved a prior tax crimes case and the setting of when a jury instruction might turn into  a directed verdict.

The Driver's Privacy Protection Act ("DPPA), 18 U.S.C. § 2721(a), here, provides that "A state department of motor vehicles and any officer, employee or contractor thereof, shall not knowingly disclose "personal information," which is defined as "information that identifies an individual."

Hastie was the License Commissioner of Mobile County, Alabama.  The License Commissions issues driver's licenses and auto titles for the county.  The Commission maintains a website for online transactions.  Use of the website requires the user to provide his or her email addresses.  In addition, the tellers in the office are instructed to obtain email addresses for in-office transactions.  Both the website and the policy manual for the Commission advise about the DPPA.

Hastie, asked the Commission's information technology guy to do a mass email with her endorsement for mayor.  That, of course, was not Commission business.  He refused to do so, but did provide her a flash drive with the email addresses.  Hastie provides the email address to the candidate's campaign and the campaign emailed the endorsement.

Hastie was indicted for 18 counts.  Count 17 charged violation of the DPPA.  (I don't know the other counts.)  The statute defines "personal information" as (18 U.S.C. § 2725(3)):

information that identifies an individual, including an individual's photograph, social security number, driver identification number, name, address (but not the 5-digit zip code), telephone number, and medical or disability information, but does not include information on vehicular accidents, driving violations, and driver's status.

Note that the statutory definition does not specify email addresses as personal information.  But, the district court instructed the jury as follows (bold-face supplied by JAT):

The term "personal information" means information that identifies an individual, including an individual's E-mail address, photographs, Social Security number, driver's license, name, address, telephone number, medical or disability information. Personal information does not include information on vehicular accidents, driving violations, and a driver's status.

The Jury then asked the judge whether "whether it had to follow the definition of "personal information" found in the DPPA or the definition set forth in the jury instructions."  This interesting fact is found in the dissent's opinion in a footnote (fn. 3 on p. 29, the end of the dissenting opinion).  There is no indication of the judge's answer to the jury.  (I am surprised that this fact was not mentioned by the majority and more prominently by the dissent.)

After first determining that the License Commission was a "State Department of Motor Vehicles" as used in the statute, the Court turned to the issue of whether email addresses are "personal information" under the statute.  In fairly straight-forward statutory interpretation, the Court held that "personal information" did or at least could include emails.  I urge readers to review that portion of the decision (pp. 9-15).

The Court then turned to the subtler issue of whether the wording of the specific instruction improperly directed a verdict on that question.  On that issue, the majority and the dissent turned to a tax case,  United States v. Goetz, 746 F.2d 705 (11th Cir. 1984), here, a tax case involving whether a crank return was a return requiring that it not be a return to support a failure to file conviction.  The majority discussed that issue as follows:

Should the Indictment Be Submitted to the Jury In Determining Guilt or Innocence? (2/1/17)

In United States v. Larkin, 2017 U.S. Dist. LEXIS 10362 (D NV 2017), here, the Magistrate Judge denied a defendant's motion to strike surplusage related to a single count tax evasion indictment.  The indictment, the second superseding indictment, is here.

Larkin was charged with tax evasion, § 7201, here, of Trust Fund Recovery Penalties assessed against her under § 6672, here.  (While I have not researched the issue, I presume that the reason evading the TFRP can be tax evasion is that § 6671(a), here, provides that the TFRP is "assessed and collected in the same manner as taxes" and "any reference in this title to “tax” imposed by this title shall be deemed also to refer to the penalties and liabilities provided by this subchapter.")

By way of background, tax evasion is usually -- in my experience -- charged in an indictment without elaboration of the facts.  See, for example, the DOJ CTM form indictments in the DOJ Criminal Tax Manual ("CTM"), here.  by way of example,

26 U.S.C. § 7201
GOVERNMENT PROPOSED Jury Inst. No. 26.7201-1 

Tax Evasion –The Nature of the Offense Charged 

 Count ___ of the indictment charges that on or about the ___ day of _______,
20___, in the __________ District of _________, Defendant _________ willfully
attempted to evade and defeat a substantial income tax which was due [in addition to any
income tax declared on the defendant’s tax return] [in addition to any income tax the
defendant paid]. 

GOVERNMENT PROPOSED JURY INST. NO. 26.7201-3 

The Essential Elements Of Attempt To Evade Or Defeat A Tax 

 To establish the offense of attempting to evade and defeat a tax, the government is
required to prove beyond a reasonable doubt the following three elements: 

First, a substantial income tax was due and owing from the defendant in addition to that
declared in his [her] income tax return; 

Second, [after _______,]1 the defendant made an affirmative attempt, in any manner, to
evade or defeat an income tax, and 

Third, the defendant willfully attempted to evade and defeat the tax. 

The burden is always upon the prosecution to prove beyond a reasonable doubt every
essential element of the crime charged; the law never imposes upon a defendant in a
criminal case the burden or duty of calling any witnesses or producing any evidence.

Some of the other forms have more language to discuss the elements of the crime, such as willfulness.  But, generally, the indictments are straight-forward allegations of the elements without detail, even for example the specific affirmative acts of evasion.  By contrast, indictments of tax conspiracies are often embellished with much of the background of the conspiracy and the overt acts of the conspiracy, often presenting a sinister story indeed.

In Larkin, the indictment went substantially beyond the bare bones suggested in the DOJ CTM.  The actual indictment is linked above, but the Magistrate Judge covers the salient points in the opinion as follows:

Sixth Circuit Affirms Tax Protestor Conviction, Rejecting Evidence and Reasonable Doubt Arguments (10/22/16)

In United States v. Myr, 2016 U.S. App. LEXIS 18963 (6th Cir. 2016) (unpublished), here, the Court affirmed the Myr's conviction for "count of tax evasion, 26 U.S.C. § 7201, and four counts of willful failure to file individual income tax returns, 26 U.S.C. § 7203."  Myr was "a self-employed auto mechanic with a professed interest in tax-protester theories."

Myr ran an auto-repair and brokerage business specializing in rare and exotic cars from a farm in Port Huron, Michigan. When he was not fixing luxury vehicles, Myr spent his free time studying the federal income tax laws. His reading list included the Internal Revenue Code as well as various tax-protester pamphlets and books which opined that the income tax applied to corporations but was "voluntary" or "unconstitutional" as applied to individuals.

Myr put those theories into action as he was earning substantial income from his business.  As in most supposed tax protestor cases, the ultimate issue in a criminal case is whether the taxpayer (or nontaxpayer) really believed that he was not subject to tax or was just hiding behind supposed tax protestor theories to disguise his "willful" conduct.  This is the so-called cheek willfulness issue, named for Cheek v. United States, 498 U.S. 192 (1991).  For many protestors, the objective elements of the charged crime -- e.g., for failure to file, he did not file -- is the only potential defense.  Myr's defense at trial was that the Government's proof did not meet the mens rea element beyond a reasonable doubt.  The jury rejected the defense.

Apparently realizing a frontal attack on the jury's holding was a loser, the issues Myr raised on appeal were (i) that the district court erred in excluding from evidence a civil complaint filed by DOJ Tax against the return preparer for the corporate return (the suggestion being that the preparer did the dastardly deed of preparing the false return and not the taxpayer); and (ii) the jury improperly instructed the jury on beyond a reasonable doubt.  The latter issue although applying to all elements of the crime is in the facts of these types of cases directed at the mens rea element, since the other objective elements of the crime are proved beyond a reasonable doubt.

So, let's look at the issues he did raise and the Court of Appeals rejected.

Exclusion of the Complaint Against the Tax Preparer

Myr uses the district court's decision to exclude the Pope complaint from evidence as the basis for two challenges to his conviction. The first asks us to consider the decision as an evidentiary matter under Rule 401. The second asks us to address it as a constitutional issue. Although these challenges differ somewhat conceptually, both rely on common propositions: that the complaint supported Myr's defense and its exclusion possibly affected the trial's outcome. We find no reversible error under either theory because the complaint offered—if anything—equivocal evidence on an insignificant point. 

* * * * 

As an initial matter, it is important to keep in mind that Myr was not charged with filing a false return. Rather, he was charged with willfully evading the tax obligation assessed in May 2007 for tax years 2000 to 2003. The On Track tax return—which was prepared by Pope, underreported the $610,000 proceeds from the engine sale, and took unjustified deductions—was simply one piece of evidence offered in support of the Government's theory that Myr hid assets to avoid paying the amounts assessed for back taxes and penalties. The On Track return had no relevance to the charges that Myr willfully failed to file his individual income tax returns, and thus the Pope complaint also had no relevance to those charges. 

Assuming arguendo that the Pope complaint would have decreased the evidentiary value of the On Track return in relation to the evasion charge, it is clear that the complaint's exclusion, even if erroneous, was harmless. Myr equates the complaint's exclusion to a total inability to offer a defense on willfulness. See United States v. Canty, 499 F.3d 729, 734 (7th Cir. 2007) (holding that the decision to forbid defendant in a counterfeiting trial from even testifying about his motive for printing fake bills was harmful when intent was the only issue at trial). At multiple points in his briefing, he asserts that the complaint was "critically important" or related "directly" to his intent. And evidence going to intent should particularly matter here, he reminds us, because lack of intent was his only defense. See id. 

But these bare assertions belie what actually happened at trial. The jury heard Myr's intent defense in detail and received instructions on his theory. They also heard him testify about his role in the filing of On Track's return—an event that played a minor role in the proceedings. The indictment alleged three intentionally evasive acts as part of the tax-evasion charge: (1) conveying his property to a nominee entity after notice that the IRS intended to place a tax lien on it; (2); using nominee entities, including On Track and Hosea Holdings, to conceal his income and assets; and (3) dealing in cash. The allegations surrounding the Ferrari transaction—the use of nominee entities, the dealing in gold coins, the bank-account withdrawals with checks written to cash, and, yes, the On Track return—merely evidenced a single act that satisfied the evading charge. The government presented overwhelming evidence on all three alleged intentionally evasive acts. And it specifically offered voluminous evidence that Myr violated a known legal duty—to pay his tax debt—in bad faith: it presented multiple direct communications where-by the IRS informed Myr that, indeed, he was liable for the federal income tax. 

The falsity of the On Track tax return was offered by the government as one piece of evidence showing that Myr had used nominees to conceal income, itself one of three core allegations underlying the single tax-evasion charge. Had the complaint been admitted into evidence, it would have been—at most—evidence that minimally rebutted minor evidence related to the tax-evasion charge. On this record, admitting the complaint into evidence would not have affected the verdict on this or any other charge.

The Reasonable Doubt Issue

Eighth Circuit Affirms Adult Entertainer's Conviction for Tax Perjury and Sentencing for Unreported Income for Sexual Services (3/20/16)

In United States v. Fairchild, ___ F.3d ___, 2016 U.S. App. LEXIS 4858 (8th Cir. 2016), here, the Court opens the drama:

A jury found Veronica J. Fairchild guilty on four counts of making and subscribing a false tax return, in violation of 26 U.S.C. § 7206(1). The district court n1 sentenced Fairchild to 33 months' imprisonment. On appeal, Fairchild argues that (1) insufficient evidence supports the jury's finding that Fairchild knowingly and willfully underreported her income; (2) the district court abused its discretion in failing to instruct the jury that it was required to unanimously agree on which source of income that Fairchild failed to report on her income tax return; and (3) the district court improperly calculated Fairchild's Guidelines range and imposed a substantively unreasonable sentence. We affirm.

Highly summarized, the facts are:  Fairchild was a female adult entertainer who received large sums of money (over $1,000,000) from one of her customers and smaller significant sums from another.  She failed to file timely income tax returns during the years in which she received the income but subsequently filed delinquent tax returns for the years "apparently unaware of the ongoing IRS investigation."  (The delinquent returns were apparently needed in order to obtain financing for a real estate purchase.)  In those delinquent returns, she reported about 1/2 the amount that the two customers had given her and probably most of that was from sources other than the two customers.  Fairchild claimed that the transfers from her two customers to her were gifts rather than compensation for services.

She claimed that when she met with her accountant in 2010 to prepare her tax returns, she decided to claim some of the gifts from Karlen as income to benefit him, so that he did not have to pay the taxes on all of it. To determine her income over the four years, she "decided that any time [she] spent with David [Karlen], anything that could be construed as income or considered a gray area at a thousand dollars an hour." She testified that she spent an average of two times per month with Karlen over the 48-month period, and she estimated that she spent approximately four or five hours with Karlen during each "session." She stated that she also included going out to eat with Karlen as part of the billable time. Fairchild calculated that she had earned "about $120,000 a year" for each of the four years for services that she provided to Karlen. She testified that, at the time that she filed the tax returns, she believed that the money in excess of what she reported as income was "[g]ifts." But Fairchild admitted that "Karlen never used the word 'gift' with [her]."

I am leaving out some of the details from the opinion.  I think most readers can project the general nature of the details or can read the opinion to get them from the court.

1. Sufficiency of the Evidence.

Fairchild and her customers testified differently at trial as to what the payments were for.  There was sufficient evidence that the jury could determine that she underreported her income on the delinquent returns.  The Court then rejected Fairchild's claim that the nature of the payments was sufficiently unclear that she was not willful in underreporting the income.  Arguing lack of proof of willfulness beyond a reasonable doubt is often the only ultimate defense in criminal tax cases.  Here is what the Court says:

In Tax Willfulness Crime, Should the Jury Be Instructed that Willfulness Does Not Include Negligence, Inadvertence, Accident, Mistake or Recklessness? (7/10/15)

In United States v. Kupfer, ___ F.3d ___, 2015 U.S. App. LEXIS 11689 (10th Cir. 2015), here, the defendant argued that the Judge had correctly instructed the jury that the willfulness element of Section 7201 required "the voluntary intent to violate a known legal duty."  That formulation of the mens rea element in Section 7201 is virtually straight out of Cheek v. United States, 498 U.S. 192 (1991), here.  The defendant, however, asked for an embellishment that the required intent did not include "negligence, inadvertence, accident, mistake, and recklessness." While the embellishment is a true statement of the law, the Court of Appeals held that the district court had not violated its discretion in instructing the jury because the instruction on intent to violate a known legal duty necessarily informed the jury that "negligence, inadvertence, accident, mistake, and recklessness" would not have met the willfulness intent requirement.  The Court said:

In telling the jury that willfulness was required for guilt and defining the term "willfully," the court implicitly told the jury that any mental state short of willfulness would not have sufficed for a finding of guilt. In similar circumstances, other courts have rejected similar challenges to jury instructions based on a failure to describe mental states falling short of willfulness. E.g., United States v. Collins, 685 F.3d 651, 655-56 (7th Cir. 2012); United States v. Colacurcio, 514 F.2d 1, 8 (9th Cir. 1975).

The Tenth Circuit did not  hold that, had the trial court included the instruction embellishment, it would have erred.  As noted, the embellishment is a correct statement of the law.  All the Tenth Circuit held is that the embellishment is not required.

Obviously, defense counsel will usually want to press for the embellishment in most cases.  And, if requested, I think a trial court should give the instruction because it does properly frame the willfulness element for tax evasion (as well as for most other tax crimes).  How does it hurt to give this correct instruction?

I think it is helpful to consider the willfulness element in the offshore account area.  The FBAR criminal and civil penalties require willfulness, and the definition parallels the definition of willfulness for tax crimes.  See IRM 4.26.16.4.5.3  (07-01-2008), FBAR Willfulness Penalty - Willfulness, here ("The test for willfulness is whether there was a voluntary, intentional violation of a known legal duty").  It is interesting that, in the Streamlined Filing Compliance Procedures for nonwillful actors (both as to income tax and FBAR noncompliance), the IRS includes a variation of the embellishment requested by the defendant in Kupfer.  The taxpayer must thus certify:

My failure to report all income, pay all tax, and submit all required information returns, including FBARs, was due to non-willful conduct. I understand that non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.

Obviously, the IRS thought that in addressing the certification of nonwillfulness to lay people, it was important and helpful to give the embellishment.  I would think that it would be equally important in criminal cases where criminal conviction is being considered by a lay jury.

The Charge to the Jury on the Defraud / Klein Conspiracy in the Weil Case (12/8/14)

I write today on the single charge made in the Weil case -- the charge for the defraud conspiracy (also known as a Klein conspiracy, from United States v. Klein, 247 F.2d 908 (2d Cir. 1957), cert. denied 355 U.S. 924 (1958).  John A. Townsend, Tax Obstruction Crimes: Is Making the IRS’s Job Harder Enough?, 9 HOUS. BUS. & TAX L.J. 260 (2009) Article available here; Appendix to article available here (discussing, among other things, the Klein conspiracy).

Weil was head of UBS's wealth management business which included the services rendered to U.S. taxpayers for which UBS entered a deferred prosecution agreement with DOJ, paid $780 million and undertook other obligations.  Some UBS employees and related enablers have been charged with and convicted of conspiracy.  So there would seem to be some evidence of a conspiracy -- or perhaps more than one conspiracy -- involving UBS personnel.  The question, as I see it, presented in Weil was how far up the executive chain the conspiracy went.  Conspiracy cases often have indicted and unindicted co-conspirators.  In the closing argument, the Government attorney claimed as follows:

The Defendant can be found guilty only if all of the facts are proved -- if the Government proves beyond a reasonable doubt that it has met the elements. First -- and these are before you, and the judge read them to you -- two or more people in some way agreed to try to accomplish a shared unlawful plan.

Who are those people? The Government submits they are Mr. Weil, the defendant, Marcel Rohner, the former CEO, Peter Kurer, the former general counsel, Martin Liechti, who testified before you, Michel Guignard, client advisers like Gadola and Marti, outside enablers, Beda Singenberger and Matthias Rickenbach, the clients themselves, Mr. Goldberg, Mr. McCarthy and Mr. Stedman.

Some, but not all of those named, have been indicted and some have pled.  So the scope of the conspiracy alleged was very broad, but the ultimate object of the conspiracy was to assist the U.S. taxpayers evade U.S. tax.  As the Court instructed the jury:

He is on trial only for a conspiracy to defraud the Internal Revenue Service by assisting U.S. clients to evade their income tax obligations.

[JAT Note:  As stated, this could be viewed as an offense conspiracy, but it was charged as a defraud / Klein conspiracy; I won't get into that now, but the differences between an offense conspiracy and a defraud / Klein conspiracy are covered in my article cited above,]

The following are the conspiracy charges given to the jury (bold-faced supplied by JAT):

 Now, Count 1 in the indictment charges that the defendant knowingly and willfully conspired to defraud the Internal Revenue Service of the U.S. Department of Treasury. The indictment charges that it was an object of the conspiracy that the defendant and other alleged co-conspirators acted to increase the profits of UBS by providing unlicensed and unregistered banking services and investment advice in the United States and by other acts intended to conceal from the Internal Revenue Service the identities of the bank's U.S. clients who willfully evaded their income tax obligations by, among other things, filing false income tax returns and failing to disclose the existence of their UBS accounts to the Internal Revenue Service. 

Please note that the defendant is not charged with a substantive violation of the tax laws. 

Now, it is a federal crime for anyone to conspire or agree with someone else to defraud the United States or any of its agencies.  

To defraud the United States means to cheat the Government out of property or money or to interfere with any of its lawful Governmental functions by deceit, craft or trickery.  

A conspiracy is an agreement by two or more persons to commit an unlawful act. In other words, it is a kind of partnership for criminal purposes. Every member of the conspiracy becomes the agent or partner of every other member. 

The Government does not have to prove that all the people named in the indictment were members of the plan or that those who were members made any kind of formal agreement.

Update on Zwerner Case - Subsequent Filings (4/16/14)

I previously posted a blog on the US Motion for Summary Judgment in Zwerner.  See U.S. Motion for Summary Judgment in Zwerner (Federal Tax Crimes Blog 3/5/14), here.  I post now the subsequent documents, including Zwerner's response on the motion and the US reply to Zwerner's response.  I also post (i) Pretrial Stipulation with related proposed jury instructions and jury verdict forms and (ii) Motions in Limine that are pending.  I have bookmarked these documents in Adobe format.  I think readers will have to download the file to take advantage of the bookmarks.

• 20140307 Zwerner - D Response on US MSJ (TJ001).pdf, here.
• 20140317 Zwerner - US Reply on US MSJ (TJ001).pdf, here.
• 20140407 Zwerner - Pretrial Stipulation (TJ001).pdf, here.
• 20140407 Zwerner - Proposed Jury Instructions (TJ001).pdf, here.
• 20140407 Zwerner - US Proposed Jury Verdict Form (TJ001).pdf, here.
• 20140407 Zwerner - D Proposed Jury Verdict Form (TJ001).pdf, here.
• 20140407 Zwerner - US Motion in Limine (TJ001).pdf, here.
• 20140407 Zwerner - D Motion in Limine (TJ001).pdf, here.

I may post more on these documents when and if I have time.

Good Opinion on Error in Not Giving Requested Good Faith Belief Instructions (3/29/14)

Tax practitioners and students cannot be reminded too often on the importance of Cheek's definition of willfulness - voluntary intentional violation of a known legal duty -- and Cheek's holding that a sincerely held even if objectively unreasonable belief that the conduct is lawful requires acquittal because the defendant did not knowingly violate the law.  Cheek v. United States, 498 U.S. 192 (1991), here.  In a case where the defendant claims the defense of good faith belief and it is supported in the record, the defendant is entitled to have the jury instructed that good faith belief even if objectively unreasonable requires acquittal.  I have previously reported the standard appellate dodge in cases where district courts have denied a Cheek good faith instruction but the instruction should have been given -- i.e., by holding that lack of good faith is subsumed in the otherwise adequate willfulness instructions.  See e.g., Fourth Circuit Reverses Tax Obstruction Conviction Because of Bad Instruction and Affirms Denial of Good Faith Instruction for False Claim Conviction (Federal Tax Crimes Blog 11/20/13), here.  (For a variance on that dodge, see First Circuit Rejects Tax Defier's Complaints About IRS Packing Heat and Improper Good Faith Defense Instructions (Federal Tax Crimes Blog 1/15/14), here.)

In United States v. Montgomery, 747 F.3d 303 (5th Cir. 2014), here, the Fifth Circuit held that it is error not to give the good faith instruction if properly presented in the record.  The Court, rightly I think, held that otherwise adequate willfulness instructions did not cure the problem.  But, the Court held, that the conviction should nevertheless be affirmed because, although error, the error was harmless in the case because the evidence of willfulness (and, presumably, lack of good faith) was  "so overwhelming that the error could not have contributed to the jury's decision to convict."

The majority and the concurring decisions are useful to practitioners and students, so I excerpt substantial portions below.  In considering the excerpts, a key fact is that both the prosecution and the defendant had each requested a good faith instruction with the concept that a good faith belief even if objectionably unreasonable required acquittal.  The district court judge thought the concept was included in the willfulness instruction.  Here are the excerpts, first from the majority decision (footnote omitted), then from the concurring opinion.

Although ignorance of the law or a mistake of law generally does not provide a defense to criminal prosecution, that is not so with regard to federal tax offenses. Cheek, 498 U.S. at 199-200. "[D]ue to the complexity of the tax laws," certain federal criminal tax offenses require, as an element of the offense, the establishment of a defendant's willfulness. Id. at 200. In United States v. Pomponio, 429 U.S. 10, 12 (1976), the Supreme Court defined willfulness in this context as "a voluntary, intentional violation of a known legal duty." 

Fifteen years later, in Cheek, 498 U.S. at 201, the Court clarified Pomponio's definition of willfulness. There, the district court instructed the jury that an "honest but unreasonable belief is not a defense and does not negate willfulness." Id. at 197. The Supreme Court held that the district court's instruction was incorrect. Id. at 202. It reasoned that the government cannot carry its burden to prove willfulness in a criminal tax prosecution if the jury believes that the defendant, in good faith, did not understand the law. Id. That is true regardless of "however unreasonable a court might deem such a belief." Id.; see also United States v. Simkanin, 420 F.3d 397, 410 (5th Cir. 2005) ("[A] defendant's good-faith belief that he is acting within the law negates the willfulness element."). 

Here, the Montgomerys argue that the district court's jury instruction did not comport with Cheek because it did not advise the jury that a defendant's good-faith misunderstanding of tax law may be objectively unreasonable. In response, the government argues that, despite the fact that its own proposed jury instruction included the unreasonableness language from Cheek, it was unnecessary in light of the Supreme Court's decision in Pomponio, 429 U.S. 10, and our own decision in Simkanin, 420 F.3d 397. They reason that, pursuant to those decisions, where a district court correctly instructs the jury as to willfulness an additional instruction on the good-faith defense is unnecessary. In any event, the government argues that the error was harmless due to the overwhelming evidence of the Montgomerys' guilt. 

We agree with the Montgomerys that the jury instruction was erroneous. The import of Cheek, as applied to this case, is clear: if the Montgomerys truly believed that they were not obligated to report their income, then the jury could acquit, however objectively unreasonable the Montgomerys' belief was. Both parties agreed to instruct the jury along those lines by explaining that the Montgomerys' beliefs regarding tax law could be "unreasonable or irrational." Yet the jury instruction, given sua sponte by the district court, did not explain that point. Rather, it only included a portion of Cheek's good-faith defense:

First Circuit Rejects Tax Defier's Complaints About IRS Packing Heat and Improper Good Faith Defense Instructions (1/15/14)

In United States v. Adams, 740 F.3d 40 (1st Cir. 2014), here, the court affirmed the defendant's conviction, rejecting two interesting arguments -- one about IRS agents' authority to pack heat while executing a search warrant and the other, the common claim that the district court erred in rejecting the defendant's proffered good faith instruction.

The opinion is short and well written.  The introduction is as follows:

Defendant-appellant Charles Adams, an unabashed opponent of the tax laws, advances two discrete claims of error regarding his convictions on charges of conspiracy and tax evasion. One claim, which raises a question of first impression at the federal appellate level, implicates the lawfulness of a premises search conducted by armed agents of the Internal Revenue Service (IRS). The other claim challenges the district court's jury instructions. After careful consideration, we reject his claims and affirm the judgment below.

1.  Packing Heat -- Still Unsettled.

Just so the terminology is meaningful, I mean this in one of the senses I found on the Urban Dictionary, here:  "To carry a firearm. Usually refers to the act of carrying a handgun."  (There are other definitions there, some of which are only metaphorically related to guns.)  The court's discussion of this issue is:

 On March 19, 2004, a magistrate judge issued a warrant that authorized the search of the defendant's home in Wrentham, Massachusetts. Four days later, armed IRS agents executed the warrant and seized evidence that the government later used against the defendant. 

During pretrial skirmishing, the defendant moved to suppress this evidence. Pertinently, he asserted that the search was unlawful because the manner of its execution was not authorized by statute. The defendant based this assertion on 26 U.S.C. § 7608 [here], which deals with the "[a]uthority of internal revenue enforcement officers." 

The defendant's argument takes the following shape. Subsection (a) of the statute, which deals with IRS enforcement of laws pertaining to alcohol, tobacco, and firearms, explicitly allows agents enforcing those laws to carry guns. See 26 U.S.C. § 7608(a)(1). Subsection (b), which deals with IRS enforcement of other tax laws, contains no similar grant of explicit permission to carry guns. The defendant posits that the absence of any such explicit permission in subsection (b) indicates Congress's intent to prohibit IRS agents enforcing those laws from carrying firearms. See United States v. Hernández-Ferrer, 599 F.3d 63, 67-68 (1st Cir. 2010) (discussing principle of expressio unius est exclusio alterius). And because the agents who searched his home were armed and not investigating any offense involving alcohol, tobacco, or firearms, the defendant argues that the search was unlawful and the evidence seized should therefore be suppressed.

Daugerdas Retrial Jury Instructions - Part 07 Tax Evasion Instructions Part 3 Economic Substance (11/27/13; 11/29/13)

I address in this blog the relationship to the defendants served as enablers and the taxpayers whose taxes were allegedly evaded.  In the prior cases, as I recall it, the Government conceded that the taxpayers themselves were innocent.  That would mean that the enabler defendants could not have aided and abetted the taxpayers' tax evasion.  It is not clear to me that the Government made that concession in this Daugerdas retrial.  So, I suppose, the jury could have applied an aiding and abetting construct to say that the enabler defendants aided and abetted some or all guilty taxpayers, but I think on the instructions given which did not develop the aiding and abetting concept, they would have had to find the defendants directly guilty of the crime of tax evasion which they could do because tax evasion can apply to enablers directly without the help of derivative liability provisions.

But, I want to focus on the taxpayers because it was their taxes that had to be evaded in all events for the crime of tax evasion as charged in Daugerdas.  What would it require for their taxes to have been evaded via the tax shelters promoted by the enabler defendants?  In the Tax Due and Owing instruction, Judge Pauley explained that the critical issue as to whether there was a tax due and owing was whether the shelters lacked economic substance.  (I have previously written on what I perceive as major difficulties in presenting the concept of economic substance to juries; they can be reviewed via the "Economic Substance" link.)  One uncertainty is whether the two component tests commonly applied to determine economic substance are in the disjunctive or the conjunctive.  That uncertainty has existed for a long time.  So, Judge Pauley asked the jury to apply the test in the conjunctive -- the most defendant-friendly application of the economic substance test.

Judge Pauley explained in explaining Tax Due and Owing:

The Government claims that the reason the taxpayers * * * * owed more taxes than they reported is that the losses they claimed on their tax returns as a result of the Short Sale, SOS, Swap, or HOMER tax shelters were not allowable. The Government contends that these losses were not allowable because they stemmed from transactions that lacked “economic substance.” 

A transaction that lacks economic substance cannot enter into tax computations. Any deduction claimed for a tax loss allegedly sustained in such a transaction is not properly claimed on a tax return. 

In order to establish that a transaction lacks economic substance, the Government must prove, beyond a reasonable doubt, two components. 

The first component is that the relevant taxpayer had no genuine business purpose for engaging in the transaction in question apart from the creation of the tax deduction.  

The second component is that there was no reasonable possibility that the transaction would result in a profit.

Daugerdas Retrial Jury Instructions - Part 06 Tax Evasion Instructions Part 1 Tax Evasion and Conspiracy to Commit Tax Evasion (11/25/13)

I provide here the instructions relevant to the Tax Evasion and the object element of the conspiracy to commit tax evasion.  The relevant instructions are quite long, so in this blog, I will just present the instructions.  In later blogs I will discuss key components in these instructions.

I will bold-face certain items, without further explanation in this blog, that I hope you will think about as you read the instructions.  I will probably discuss most of the bold-faced instructions in later blogs.  Keep in mind that the text headings are bold-face simply to show that they are headings.  The bold-face to which I particularly draw attention will be in the body of the text.  That bold-facing is mine and not Judge Pauley's.

I start with the discussion of the second object of the conspiracy, tax evasion.  The court gave this instruction before instructing as to what tax evasion was.  I think the court did that simply because the order of presentation in the indictment was with conspiracy as the first count.

Also, readers should be aware of that two types of tax evasion were charged.  First, there was tax evasion with respect to unindicted taxpayers, the notion being that the defendants allegedly conspired to commit and themselves did commit, under various derivative liability theories (that I will discuss in a later blog).  Second, there was Daugerdas' personal tax evasion with respect to his own returns.  In the following discussion, I omit the instructions relevant to this second type of evasion, since it is garden-variety (although he used exotic aggressive tax shelters of his own crafting).  I am much more interested in the first type of evasion -- evasion on the returns of unindicted and perhaps even nonculpable -- at least not criminally culpable -- taxpayers.  So, in order to make the instructions more readable as to the first type of tax evasion, I am omitting all references to Daugerdas' person alleged evasion.  I show those omissions with ellipses -- * * *.

Second Object: Tax Evasion  

The second object of the alleged conspiracy is the attempted evasion of income taxes of Jenkens & Gilchrist clients who participated in the Short Sale, SOS, Swaps, and HOMER tax shelters. To prove the second object of the conspiracy, the Government must prove beyond a reasonable doubt that the defendant you are considering and one or more co-conspirators unlawfully, willfully and knowingly agreed to commit the crime of tax evasion with respect to the clients who participated in the tax shelters. The elements of tax evasion are:  

First, that a substantial tax was due and owing to the United States by the relevant taxpayer client;  

Second, that the defendant you are considering committed, or caused to be committed, one or more affirmative acts of evasion described in the Indictment; and  

Third, that the defendant you are considering acted willfully and knowingly in attempting to evade the taxes owed by the taxpayer client.  

I will discuss the elements of tax evasion in more detail later in my charge, when I discuss Counts 2 through 11 * * * of the Indictment, which charge substantive counts of tax evasion. The law that I am going to explain in connection with those substantive counts should be applied by you when you are considering whether either of the defendants conspired to commit the tax evasion object of the conspiracy. 

I now offer the relevant instructions on the substantive crime of evasion:

Daugerdas Retrial Jury Instructions - Part 06 Conspiracy Instructions Part 2 - Defraud / Klein Conspiracy (11/16/13; revised 11/23/13)

Judge Pauley gives standard instructions on the elements of the crime of conspiracy - to summarize:

First: that an agreement existed between two or more persons to accomplish at least one of the unlawful objectives charged in the Indictment;  

Second: that the defendant you are considering knowingly and willfully became a member of, and joined in, the conspiracy; and  

Third: that a member of the conspiracy, not necessarily the defendant whom you are considering, knowingly committed at least one overt act in furtherance of the conspiracy

The Court then explains the elements, again in fairly standard instructions.  The Court then moves to the objects of the conspiracy.  I address in this blog the defraud / Klein conspiracy object.  The defraud conspiracy in a tax setting is commonly referred to as a Klein conspiracy.  See United States v. Klein, 247 F.2d 908 (2d Cir. 1957), here.  Here are Judge Pauley's instructions on the Klein conspiracy (I have added the bold face in the text (as opposed to the caption) to make a point that I shall discuss below):

First Object: To Defraud the United States and its agency, the IRS 

The first object of the conspiracy is to defraud the United States by impeding, impairing, defeating and obstructing the lawful functions of the Internal Revenue Service in the ascertainment, evaluation, assessment and collection of income taxes. To prove the first object of the conspiracy, the Government must prove beyond a reasonable doubt that the defendant you are considering and one or more co-conspirators unlawfully, willfully and knowingly agreed to defraud the United States by fraud, deceit or other dishonest means.

I instruct you that the Internal Revenue Service is an agency of the United States Government which is responsible for the collection of tax revenue. The term “conspiracy to defraud the United States” therefore means that the defendants and other co-conspirators are accused of conspiring to impede, impair, defeat, and obstruct the IRS’s lawful functions of ascertaining and collecting tax revenue owed to the United States. It is not necessary that the United States suffer a financial loss from the conspiracy. Indeed, even if the taxpayer’s ultimate legal position on some issue (such as a tax shelter loss) is correct, and he owes no additional taxes, that is not a defense to the crime charged. One cannot use deception and dishonest means—such as making false statements to the IRS—to impede, impair, obstruct, or defeat the 8 IRS, even to protect a legitimate tax position.  

A conspiracy to impede the functions of the IRS by fraud or dishonest means may include, by way of example, such things as agreements to destroy documentation of income, to destroy records, to transfer money or take other action in an attempt to conceal ownership of income or property, to create false documentation, to attempt to influence witnesses, or to engage in any other fraudulent or deceptive conduct that would have the effect of impairing the ability of the IRS to collect tax revenue. Such conduct can also include falsifying the date of a transaction for tax purposes. In this regard, I instruct you that the income tax laws are administered on the basis of an annual accounting system which prohibits the reopening of a prior year’s tax return to take account of events occurring in later years. By citing such examples, of course, I am not suggesting that these are the only actions that could impede the IRS by fraudulent or dishonest means. Nor am I expressing any view as to whether conduct similar to the examples I have mentioned took place here.  

Moreover, it is critical for you to recognize that not all conduct that impedes the lawful functions of a Government agency is illegal. To be unlawful, the conduct must entail fraud, deceit, or other dishonest means. It is not illegal simply to make the IRS’s job harder. Only an agreement to engage in conduct that tends to impede the IRS and that also involves fraudulent, deceitful, or dishonest means, constitutes an illegal agreement to defraud the United States.

Fourth Circuit Reverses Tax Obstruction Conviction Because of Bad Instruction and Affirms Denial of Good Faith Instruction for False Claim Conviction (11/20/13)

In United States v. Jaensch, 2013 U.S. App. LEXIS 22977 (4th Cir. 2013), here, an unpublished decision, the Fourth reversed a conviction for tax obstruction, Section 7212, here, because of an erroneous instruction that did not adequately present the specific intent required for the crime.

The facts are of the tax protestor type -- failing to file returns based on tax protestor notions.  The defendant did file a return for one year -- extending his protest -- by claiming a refund of $774,052.  The IRS rejected the claim and notified him that he was required to file a return in 30 days to avoid a civil penalty.  The defendant then filed a return reporting $113 taxable income and, obviously, no tax due.

He was convicted for "one count of corruptly endeavoring to impede the due administration of the tax laws under 18 U.S.C. § 7212(a), ("Count 1"), one count of filing a false claim for a refund under 18 U.S.C. § 287, ("Count 2"), and four counts of willful failure to file a tax return under 26 U.S.C. § 7203, ("Counts 3-6")."   He appealed on several grounds.  Here are the parts of the opinion I find interesting:

Tax Obstruction / Section 7212

As noted, the court reversed this conviction because of a defect in the instructions.  Here is the Court's discussion:

In this case, the district court's instruction on Count 1 misled the jury as to the controlling law and we cannot say that the error was harmless. To prove a violation of § 7212(a), "the government must prove that the defendant: 1) corruptly; 2) endeavored; 3) to obstruct or impede the administration of the Internal Revenue Code." United States v. Wilson, 118 F.3d 228, 234 (4th Cir. 1997). To act corruptly is to act "with the intent to secure an unlawful benefit either for oneself or for another." Id.\ 

The district court's instructions do not properly explain the Government's burden to the jury. Violation of § 7212(a) is a crime of specific intent. A defendant must not only endeavor to impede due administration but must do so with the specific intent to secure an unlawful benefit. See Wilson, 118 F.3d at 234. Although the district court correctly defined "due administration," "obstruct or impede," and "corruptly," it instructed the jury that it could convict Jaensch by finding that he committed acts listed in the indictment without finding that he committed those acts with the requisite intent to secure an unlawful benefit. 

The jury instructions state, in relevant part, that: 

If the jury concludes that the government did prove beyond a reasonable doubt that one, the defendant employed at least one act set forth in Section 1-M through U of the indictment and that the defendant did commit an act identified in Section 1-V through Y of the indictment, and two, that the defendant acted knowingly and intentionally, then the jury must find the government [sic] guilty of the offenses in Count 1 of the indictment. 

J.A. 608.

Daugerdas Retrial Jury Instructions - Part 05 General Criminal Tax Instructions (11/14/13)

Judge Pauley's general criminal tax law instruction is:

General Instructions on Criminal Tax Law 

I will now turn to the charges in this case. The charges all relate to the federal tax laws and to the defendants’ design, marketing and implementation of the tax shelters that you have heard about at trial.  

I instruct you first that the income tax laws are constitutional and valid and everyone has a legal obligation to pay income taxes. However, as I told you at the outset, a taxpayer is entitled to arrange his or her affairs in any lawful manner to minimize the payment of taxes. One of the ways that people minimize the payment of taxes is through a tax shelter. The term “tax shelter” simply refers to a series of financial and related transactions that offer substantial tax savings as one of its main benefits. Some tax shelters are legal; others are not. It all depends on the facts about the individual taxpayer and the tax shelter involved. It is perfectly proper for a taxpayer to file his or her returns based on an aggressive or debatable tax position. If that position turns out to be incorrect, the taxpayer may be required to pay certain penalties. But this case is not about the actual collection of any income taxes that may be due to the United States or penalties imposed on any of the tax shelter clients. This is a criminal case.  

The Government brings this case to enforce laws that make it a crime to attempt to defeat or evade the payment of income taxes or to conspire to commit tax evasion or other related crimes. In a little while, I will instruct you in detail on the elements of a criminal violation of the tax laws. Overall, what you should keep in mind is that a person cannot be guilty of violating the federal tax laws if he believed that his conduct was lawful, even if it turns out that he was wrong about the law. 

JAT Comment:  The following key points are made:

1. Taxpayer can arrange his affairs to pay the minimum tax.
2. Tax shelters are defined as "simply" referring "to a series of financial and related transactions that offer substantial tax savings as one of its main benefits."
3. The jury is told that some tax shelters are legal, some are not -- with the distinction being dependent "on the facts about the individual taxpayer and the tax shelter involved."
4. The Court says that it will instruct as to the "criminal violation of the tax laws," which is presumably how the jury will distinguish between a legal tax shelter and an illegal tax shelter.
5. The Court ends with the short-form Cheek instruction.  The Court does have a Cheek "good faith" defense instruction later, after instructing about the crimes charged.  I will present a separate blog on that instruction.

The full set of jury instructions is linked here.