The Confluence of Willful Blindness and the Sentencing Guidelines Obstruction Enhancement (4/11/18)

In United States v. Cohen, ___ F.3d ___, 2018 U.S. App. LEXIS 8769 (1st Cir. 2018), here, Cohen appealed his his convictions, and sentencing, for one count of conspiracy to convert government property, in violation of 18 U.S.C. § 371; fourteen counts of conversion of government property, in violation of 18 U.S.C. § 641; and one count of conspiracy to commit money laundering, in violation of 18 U.S.C. § 1956(h).  This is not a tax case, but readers of this blog will know of my continuing interest in the concept of willful blindness.  Cohen presents a different facet of that issue, although, as presented, it offers no particular insight.

The jury was instructed on willful blindness.  We don't have the specific instruction.  But, in sentencing, the judge applied the obstruction of justice enhancement in calculating the Guidelines range.  The judge found that Cohen had lied in his testimony at trial.  That risk, of course, is one of the risks of a defendant testifying at trial.

On appeal, Cohen made some type of argument that the giving of the willful blindness instruction precluded a finding that he had lied for purposes of the obstruction enhancement.  Here is what the Court held:

That leaves only Cohen's argument that the imposition of the obstruction-of-justice enhancement, which requires "willful" obstruction, was erroneous given that the District Court provided the jury with a willful blindness instruction. In challenging the application of the obstruction enhancement below, Cohen argued that, in light of the willful blindness instruction, "his testimony in the eyes of the jury may have made him a damned fool, but that's not the same thing as finding that he's a damned lying fool . . . ." The District Court concluded, however, that a willful blindness instruction is not preclusive of a finding that the defendant perjured himself in testifying at trial. 

On appeal, Cohen does not develop a challenge to this conclusion but instead merely asserts that the District Court "wrongly imposed the enhancement upon one seen by the jury as willfully blind but not necessarily consciously obstructive." We, thus, deem this underdeveloped argument waived. Zannino, 895 F.2d at 17. Moreover, we note that, in any event, there is Circuit precedent that affirms sentences including such an enhancement in cases in which a willful blindness instruction was given. See, e.g., Fermin, 771 F.3d at 79-82; United States v. Camuti, 78 F.3d 738, 744-45 (1st Cir. 1996).

I attach Cohen's opening brief, here, where he makes argument and the Government's answering brief, here, essentially ignoring the argument.  Cohen's willful blindness argument starts on p. 51 of the brief.

Third Circuit Reminders on the Limits of the Cheek "Defense" (6/15/16)

In United States v. Tuka, 2016 U.S. App. LEXIS 10742 (3d Cir. 2016), unpublished here, the taxpayer was convicted for "multiple counts of tax evasion, in violation of 26 U.S.C. § 7201, and multiple counts of willful failure to file tax returns, in violation of 26 U.S.C. § 7203."  The Court of Appeals affirmed the taxpayer's conviction and sentence.

The taxpayer, an airline pilot on disability, sought to avoid including certain airline disability payments in his income and paying tax on those payments. Prior to 2003, he apparently made the claim on the notion that the tax was unconstitutional, leading the Court of Appeals to call him a "tax protestor."  In 2003, however, he lost the issue in the Tax Court and in the Third Circuit Court of Appeals.  Tuka v. Commissioner, 120 T.C. 1, aff’d 85 F. App’x 875 (3d Cir. 2003). He persisted, leaving in place instructions to the plan administrator not to withhold and then, in 2005, filing new instructions with the new plan administrator. That persistence after 2003 led to his criminal indictment, conviction and sentencing.

The Court of Appeals held first that the evidence was sufficient to support the convictions for tax evasion and failure to file.  As is frequently the case in criminal tax cases that go to trial, the taxpayer's defense was that the Government had not proved that he acted willfully.  This is sometimes called the "Cheek" defense, after Cheek v. United States, 498 U.S. 192 (1991), also involving an airline pilot asserting that his income was not taxable.  Cheek established the principle that a subjective belief that the law does not impose income tax is not willful under the criminal tax statutes regardless that it is not an objectively reasonable belief.  But, Cheek added some twists that tax protestors do not like.  First, if it is a constitutional claim that income is not taxable, the Cheek defense does not work.  Second, in assessing whether the taxpayer had a sincerely held belief, the jury is entitled to consider the reasonableness of the belief -- the more unreasonable, the less likely it is to be sincerely held.  On this second point, the Court of Appeals held:

After this Court in 2003 affirmed the Tax Court’s decision that Tuka’s disability benefits were taxable, any subjective belief that Tuka’s disability benefits were not taxable became objectively unreasonable. And while an honestly held belief, regardless of its reasonableness, will still negate the element of willfulness in a tax prosecution such as this, the jury was free to infer from this unreasonableness that Tuka did not actually hold such a belief. Cheek v. United States, 498 U.S. 192, 203-04 (1991) (“[T]he more unreasonable the asserted beliefs or misunderstandings are, the more likely the jury will consider them to be nothing more than simple disagreement with known legal duties imposed by the tax laws and will find that the Government has carried its burden of proving knowledge.”). 

Thus, we will uphold Tuka’s convictions under 26 U.S.C. §§ 7201 and 7203.

The Court of Appeals next affirmed the sentencing court's application of the obstruction enhancement in U.S.S.G. § 3C1.1 for the Sentencing Guidelines calculation.  The Court held:

Perjury is one form of obstruction of justice. See U.S.S.G. § 3C1.1 cmt. n.4(B). A defendant qualifies for the perjury enhancement by giving “false testimony concerning a material matter with the willful intent to provide false testimony . . . .” United States v. Dunnigan, 507 U.S. 87, 94 (1993). In assessing whether Tuka’s testimony at trial satisfied the elements of perjury, the District Court was required “to accept the facts necessarily implicit in the verdict.” United States v. Boggi, 74 F.3d 470, 478-79 (3d Cir. 1996) (internal quotation marks and citation omitted). And while “it is preferable for a district court to address each element of the alleged perjury in a separate and clear finding, express separate findings are not required.” Id. at 479 (internal quotation marks and citation omitted). 

One fact “necessarily implicit” in the jury’s verdict is that Tuka did not have a good-faith belief that his disability benefits were not taxable, for if he did have such a belief, the jury would not have convicted him. Thus, his testimony asserting such a good-faith belief must have been false and material. Cf. id. (concluding that the defendant’s testimony at trial “was necessarily material” because the jury would not have convicted him if it had believed the testimony). In explaining why it was applying the enhancement, the District Court stated, “I’m disappointed in you, Mr. Tuka, to have testified in the fashion that you did . . . . I agree[ ] with th[e] finding [that you were not truthful].” App. 597. Though the court could have more clearly enunciated its findings as to each individual element, these statements sufficiently indicated that it thought Tuka’s testimony satisfied these elements. 

Thus, the court did not commit error, clear or otherwise, in applying the enhancement under § 3C1.1.

JAT Comments:

Aiding and Assisting Sentence After Extradition from Germany (5/10/16)

I received an email press release dated May 9, 2016 from IRS CI with the following information about a tax sentencing:

A former Orange County resident was sentenced this morning by United States District Court Judge Percy Anderson to a term of imprisonment of one year and one day for providing false and incomplete information to his income tax return preparer. 

Donald M. Baxi, 69, a Canadian citizen formerly residing in Ladera Ranch, was further ordered by Judge Anderson to pay restitution of $56,319. 

Baxi pleaded guilty in March to one count of aiding and abetting in the preparation of a false income tax return.  According to the plea agreement filed in the case, Baxi was responsible for having the partnership income tax returns of Vintages Wine Bar, LLC (“VWB”), prepared and filed with the Internal Revenue Service.  For each of the years 2003, 2004, and 2005, Baxi deliberately provided false and incomplete information to his tax return preparer so that VWB’s interest income would not be reported to the IRS.  During these years however, VWB received interest income from two separate sources totaling $201,142.  This unreported interest income caused a tax loss to the government of $56,319. 

In November 2010, a federal grand jury indicted Baxi on six counts of aiding and assisting in the preparation of false income tax returns.  Upon learning of those charges, Baxi fled the United States. 

Five years after being indicted by a federal grand jury on tax charges, Baxi was arrested by German authorities and extradited back to the United States to face the charges contained in the indictment. 

Baxi was convicted of garden-variety aiding and assisting, Section 7206(2).  See the plea agreement here.  The interesting part is that the inference from the press release is that he chose to flee the country, thereby becoming a fugitive after being indicted. (The facts themselves may be a bit more nuanced as I discuss below.)  His absence from the U.S. led ultimately to his extradition from Germany.  The more surprising part is that, according to the pleadings submitted by the parties, the defendant's alleged flight from the U.S. to avoid trial seems not to have been that significant a factor, if a factor at all.  The U.S. original sentencing position pleading, here, had this cryptic statement in closing:

Finally, it appears to the government that defendant deliberately attempted to avoid arrest in this case, keeping himself out of the country and attempting to remove his name from the INTERPOL watch list. See facts proffered in Government's Request for Detention (Doc. 11). This conduct too supports a sentence of 15 months incarceration.

Fifteen months was a mid-range sentence, with the Guidelines range being 12 to 18 months.

Court of Appeals Reverses Acceptance of Responsibility Downward Adjustment After Trial (10/23/13)

In United States v. Melot, 732 F.3d 1234 (10th Cir. 2013), here:

After a jury trial, appellant Bill Melot was convicted of one count of corruptly endeavoring to impede the administration of the Internal Revenue Code, one count of attempting to evade or defeat tax, six counts of willful failure to file, and seven counts of making false statements to the Department of Agriculture. Melot was sentenced to a term of sixty months' imprisonment, a significant downward variance from the advisory guidelines range of 210-262 months. He was also ordered to pay $18,493,098.51 in restitution to the Internal Revenue  Service.

His underlying misconduct, he claimed, arose from his belief in various tax protestor positions that he was not subject to tax.  The jury did not believe him and convicted.  On appeal:

His appellate argument is confined to an assertion the Government failed to prove he did so willfully. He argues he had a good-faith belief he was not violating the law. See Cheek v. United States, 498 U.S. 192, 201-02 (1991).

The Court of Appeals rejected the argument summarizing:

In sum, the Government's evidence showed Melot routinely concealed income and assets from the IRS; used cash extensively, informing others that this was a means to avoid the payment of income taxes; and acted in a manner inconsistent with his asserted belief he is not subject to federal income taxes because he is not a citizen of the United States. All of the Government's evidence, together with the reasonable inferences that can be drawn from it, is amply sufficient to support the jury's finding that Melot was aware of his obligation to file returns and pay federal taxes and negates any inference Melot acted in good faith. n9
   n9 Melot points to his own testimony that (1) he genuinely believed the information presented in the "tax protestor snake oil" documents he read, (2) did not read the disclaimers associated with that literature, and (3) did not understand the Internal Revenue Code because it was "too complex" for him, as support for his assertion he held a good-faith belief that he was not violating the law. Based on its verdict, however, the jury clearly disbelieved Melot's testimony. To the extent Melot also relies on the testimony of Dr. Samuel Roll, that reliance is misplaced. Dr. Roll, a psychologist, testified  at the sentencing hearing, not the trial.

The defendant also argued that his sentencing Guidelines calculation was incorrect because the tax loss should not have included federal and state fuel excise taxes.  Those taxes were included as relevant conduct.  The Court of Appeals affirmed their inclusion.  From my perspective, the opinion offers nothing really new on relevant conduct, so I do not discuss that aspect of the Tenth Circuit opinion.

The Government cross-appealed the sentencing calculation.  That cross-appeal is the focus of this blog on acceptance of responsibility.  I quote this portion of the opinion in full:

Tax Protestor Convictions Affirmed (2/11/13)

In United States v. Hopkins, 2013 U.S. App. LEXIS 2488 (10 Cir. 2013), here, the defendants, husband and wife, were convicted of tax evasion and Klein conspiracy.  The Court offers a good summary of the facts leading to the indictments (footnote omitted):

After becoming increasingly involved in tax-protester groups, Defendants decided to stop "volunteering" to pay federal and state taxes. From 1996 to 2009, they paid no income tax. Instead, Defendants created several trust accounts, which they believed were tax proof, and designated family members and friends as trust beneficiaries and themselves as trust managers. The trusts were "sovereign trusts" sold to them by tax-protester seminar leaders who touted the trusts as tax exempt. Mark Hopkins, an emergency-room doctor, had his employers (medical institutions) pay his earnings to a trust, Shalom Enterprises, an entity incorporated under Oregon nonprofit law. According to Defendants Shalom Enterprises was a nonprofit ministry corporation, but in fact its funds were used to finance their living expenses. Defendants transferred funds and property among their numerous trusts to evade detection by the Internal Revenue Service (IRS). Predictably, Defendants faced mounting difficulties with the IRS, and on April 9, 2009, they were indicted on seven counts of tax evasion under 26 U.S.C. § 7201 and one count of conspiracy to defraud the United States under 18 U.S.C. § 371.

Most tax protestors are not charged criminally; the IRS deals with their cases on the civil side (if not always, perhaps, civilly).  But some are charged, and when charged they usually go down (are convicted).  For example, Cheek went down, ultimately.  The Hopkinses went down in this case.

On appeal, they complained about an IRS levy preventing them from obtaining certain proceeds that they had paid into the court registry in connection with their pretrial release.  Prior to trial, upon motion by them, the district court ordered that the funds be released to them.  Whereupon, having previous tax assessments against the defendants, the IRS levied on the clerk of court to deliver the funds to the IRS rather than the defendants.  The defendants did not appreciate that and complained.  Their complaints at the trial and appellate levels were for naught.

One facet of their complaints was the the levy interfered with their Sixth Amendment right to counsel.  When the district court sustained the levy, their first counsel moved to withdraw for nonpayment of fees.  The district court granted the motion.  The district court then granted Mrs. Hopkins ("Wife") appointed counsel, but she somehow quickly retained Tommy Cryer, a well know tax-protestor type lawyer (even has a Wikipedia entry describing his adventures, here).

A White Collar Crime Case with Issues Relevant to Tax Crimes (10/10/12)

The White Collar Crime Prof Blog has an interesting post on a petition for certiorari filed recently in United States v. Brooks, 681 F.3d 678 (5th Cir. 2012), here.  See Defense Witness Immunity & Global Tech - Important Issues on Cert (White Collar Crime Prof Blog 10/7/12), here.  These issues presented for certiorari arise in many white collar crimes cases, including tax crimes.

In Brooks, allegedly in order to manipulate commodity prices, Defendants, commodity traders with an energy company, provided false information on commodity trades to an trade publication widely used to indicate prices and price movements, thus potentially having a disruptive effect on the markets in those commodities.  They were prosecuted and convicted for false reporting in violation of the Commodities Exchange Act and the federal wire fraud statute.

The Fifth Circuit addressed many issues in affirming their convictions.  I will discuss in separate blogs later the two issues being presented on petition for writ of certiorari.  Those issues are (i) the holding that the Government did not have to grant immunity to witnesses who might be exculpatory to defendant and (ii) the blessing of the deliberate ignorance instruction given to the jury.

I will summarize here the remaining issues in the Fifth Circuit opinion that I think of particular relevance to tax crimes.  Keep in mind that tax crimes are just a subset of white collar crime, so many of the skirmishes in white collar crime cases generally will often appear in tax crimes cases.

1. Government Interference with Payment of Legal Fees.

The defendants alleged that the Government's actions, direct and indirect, caused their employer to withhold attorneys fees for their defense and thereby violated their Fifth and Sixth Amendment privileges.  Defendants relied upon the landmark decision in United States v. Stein, 541 F.3d 130 (2d Cir. 2008), a criminal tax prosecution of tax shelter promoters, where the Second Circuit affirmed dismissal of most of the defendants because the Government had put undue pressure on KPMG to withhold attorneys fees for those defendants.  The Court noted in this regard that the case was distinguishable from Stein because:  "The district court's factual findings bound the Second Circuit, and on such findings, the Second Circuit held KPMG's actions were state actions that violated the defendants' right to counsel of their choice."   No such findings were made in Brooks.

Sentencing Enhancement for Defendant Perjury at Trial (9/20/120

In United States v. Frase, 2012 U.S. App. LEXIS 19216 (3d Cir. 2012), here, a nonprecedential decision, the Third Circuit affirmed the defendant-appellee's convictions for "one count of conspiring to defraud the United States in violation of 18 U.S.C. § 371, nine counts of tax evasion in violation of 26 U.S.C. § 7201, and three counts of filing false tax returns in violation of 26 U.S.C. § 7206(1)."  The defendant appealed pro se (without benefit of an attorney).  I address only the defendant's claim that the district court had improperly applied a sentence enhancement for his perjury at trial.

The Court's analysis of that claim is:

Finally, Frase contends that the District Court erred at sentencing by applying a two-level enhancement under U.S.S.G. § 3C1.1 for perjury. "We review the factual findings underlying the District Court's perjury determination for clear error, while exercising plenary review over the District Court's conclusions of law." United States v. Miller, 527 F.3d 54, 75 (3d Cir. 2008). In United States v. Dunnigan, 507 U.S. 87 (1993), the Supreme Court instructed that sentencing courts applying the perjury enhancement must "make independent findings" for "each element of the alleged perjury." Id. at 94. The three elements are: (1) "false testimony," (2) "concerning a material matter," (3) "with . . . willful intent to provide false testimony." Id. 

Frase asserts that the District Court erred because it did not make the requisite findings of fact and because it applied the enhancement simply because the jury did not believe his testimony. A sentencing court's failure to make explicit findings, however, is not always fatal. For example, in United States v. Gricco, we instructed that "express findings" are not required if false testimony is obvious from the record. 277 F.3d 339, 362 (3d Cir. 2002) (citing United States v. Boggi, 74 F.3d 470, 479 (3d Cir. 1996)), overruled on other grounds, as stated in United States v. Cesare, 581 F.3d 206, 208 n.3 (3d Cir. 2009). After consideration of Frase's testimony, we conclude that the District Court did not err in applying the perjury enhancement. Frase's testimony that he did not know that he was liable for taxes was obviously false, as the District Court noted, in light of his extraordinary efforts over the years to conceal the funds to which he had access.

The Guideline referred to is:

First Sentencing in Offshore Case that Went to Trial (2/5/11)

Maricio Cohen Assor and Leon Cohen-Levy, previously blogged here, were sentenced yesterday. I include below links to the SD FL USAO press release and some articles, but here are the bullet points I found interesting:

1. Each was convicted of one count of conspiracy (Klein conspiracy) under 18 USC 371 and 2 counts of filing false tax returns under 26 USC 7212.  The maximum permissible sentence for those counts of conviction was 11 years each.

2. Each received 10 years incarceration (mitigated only if they qualify for the rather minimal good time benefit).

When is Producing False Documents Under Compulsion Obstruction?

In United States v. Thorson, 633 F.3d 312 (4th Cir. 2011), the Court (at least the majority) rejected the defendant's attempt to avoid the sentencing enhancements imposed by the sentencing court. I thought one of defendant's argument was worth commentary here.

The defendant, a lawyer, assisted in a bogus tax shelter.  Key elements of the bogus shelter involved (i) the backdating of documents to make cemetery lots contributed to charity appear as if they had been purchased and held for longer than a year and (ii) the inflation of the values of the donated cemetery lots. Defendant routed his share of the ill-gotten gains through a corporation and created various documents, some backdated, related thereto. In 1998, in response to the IRS "formal request" (presumably an IDR), the defendant produced documents, one of which he prepared after receiving the IDR. Thereafter, a grand jury investigation started and, in response to a grand jury subpoena, the defendant produced that false document and another false document that had been prepared before either the IRS or the grand jury investigation started. Stated otherwise, none of the documents produced in response to the grand jury subpoena were falsified after the date of the grand jury subpoena.

My Lawyer Did Not Advise Me of the Consequences of My Perjuring Myself in My Defense

Clecker v. United States (11th Cir. 2011) (Unpublished) is a good reminder of the dangers of a defendant testifying in a criminal case. Cleckler was charged with "conspiracy to defraud the United States, in violation of 18 U.S.C. §§ 2(b) and 371 (Count 1), and corrupt or forcible interference with the administration of the internal revenue laws, in violation of 26 U.S.C. § 7212(a) and 18 U.S.C. § 2 (Count 2)." The Government presented a number of witnesses and, apparently, Cleckler's counsel advised him that he had the right not take the stand but, given the evidence, he was at high risk if he did not. If he took the stand, the jury verdict would almost certainly turn on his credibility. The jury convicted, apparently because the jury did not find Cleckler credible. At sentencing, the judge found that Clecker perjured himself and imposed the two level obstruction of justice enhancement U.S.S.G. § 3C1.1.

Cleckler sought in a Section 2555 proceeding to vacate the sentence based on ineffective assistance of counsel -- to wit, that his trial attorney had not warned or properly warned Cleckler about the potential consequences of lying as respects exposure to the sentencing enhancement for obstruction. The district court dismissed the claim but issued a certificate of appealability on the issue of "[w]whether the district court erred by denying Cleckler's claim that his attorney failed to advise him of the consequences of testifying on his own behalf at trial." On appeal, the Eleventh Circuit affirmed in an unpublished opinion. While the opinion itself may not be worthy of publication, the circumstances are worthy of practitioners' attention.  A good, quick read.

Obstruction of Justice At Trial

In United States v. Dehlinger, 2010 U.S. App. LEXIS (4th Cir. No. 09-4099 2010) (unpublished opinion, here), the Fourth Circuit gives a cautionary lesson for practitioners as to the risks of going to trial and mounting a defense that the jury does not accept. Here's the lesson (case citations omitted):

As to the second of Dehlinger's sentencing issues, the district court did not err in increasing Dehlinger's offense level by two levels for obstruction of justice. The Sentencing Guidelines allow a two level increase if "the defendant willfully obstructed or impeded, or attempted to obstruct or impede, the administration of justice with respect to the investigation, prosecution, or sentencing of the instant offense of conviction and any relevant conduct." U.S.S.G. § 3C1.1. Obstruction of justice includes committing perjury at trial. U.S.S.G. § 3C1.1, comment (n.4(b)). A district court applying an enhancement based on obstruction of justice must necessarily find, by a preponderance of the evidence, that the defendant (1) gave false testimony, (2) concerning a material matter, (3) with the willful intent to deceive while under oath.

The district court found that Dehlinger committed perjury when he testified (extensively) under oath that he relied on others, taking advice from his accountant and financial planner, as well as Dr. Chari, regarding the legality and soundness of the AAA programs. Specifically, Dehlinger claimed that he took certain deductions "because Richard Marks and George Benoit said they were appropriate deductions." Tr. 108. As an initial matter, the district court's enhancement for perjury did not constitute double counting (even though Dehlinger's crime constituted lying to the IRS) because the crime for which he was convicted was completed by the time he went on trial. Indeed, his crime was complete after he had filed the fraudulent tax returns. Lying under oath constitutes a new and different circumstance designed to hide the already completed crime. In short, the conduct underlying Dehlinger's conviction is different from the conduct upon which the district court based its enhancement.