Defense Request of Lesser Included Offense Instruction Precludes Questioning Sufficiency of Conviction (10/3/17)

In United States v. Hurley, 2017 U.S. App. LEXIS 17217 (9th Cir. 2017) (nonpublished), CA9 here and GS here, Hurley, a former IRS agent, was convicted for receiving a gratuity under 18 USC. § 201(c).  As the Court of Appeals explains in the cryptic nonpublished decision, this conviction was for a lesser included offense to the more serious offense actually charged (solicitation of bribery).  Hurley questioned on appeal whether the evidence was sufficient to support the conviction on the lesser included offense.  The Court held

Hurley is precluded from challenging the jury's verdict regarding this crime because he asked that the jury be permitted to consider it as a lesser included offense on this count. United States v. Butler, 74 F.3d 916, 918 n.1, 924 (9th Cir. 1996) (rejecting argument that conviction on lesser included offense was improper when defendant himself requested the challenged instruction). Even if Hurley received nothing of value on the day he allegedly solicited the $20,000, his actions at trial invited any error in the verdict. See United States v. Frank, 36 F.3d 898, 903 (9th Cir. 1994) ("The doctrine of invited error prevents a defendant from complaining of an error that was his own fault." (citation omitted)).

The use of lesser included offense instructions to give the jury a point between the normal binary choice of guilt or innocence to the more serious offense charged is an interesting topic.  I discuss that topic in more detail in the chapter, Chapter 12, Criminal Penalties and the Investigation Function, for which I was principal draftsman in Michael Saltzman and Leslie Book, IRS Practice and Procedure (Thomsen Reuters 2015).  I offer the following from the introduction in ¶ 12.05[3][b][i] (footnotes omitted):

The doctrine is most frequently encountered at the close of a trial for a greater offense when one of the parties wants the jury to have a choice in addition to guilt or acquittal on the charged greater offense. Why would either the prosecutor or the defendant want to present to the jury this additional choice? The prosecutor may be concerned that he has not proved all elements of the greater offense beyond a reasonable doubt or that the jury may not be willing to convict for the charged greater offense but, the prosecutor fears, will return a verdict of acquittal unless given a lesser alternative. The defendant may assess the risks differently. The defendant may be concerned that the jury will convict of the greater offense rather than acquit, but would convict only of the lesser offense if offered that opportunity. 

Court Affirms Conviction, Rejecting Lesser Included Offense Instruction Request (7/17/19; 7/18/19)

In United States v. Rankin, 929 F.3d 399 (6th Cir. 2019), CA6 here, and GS here, Rankin was charged with (i) seven counts of failure to collect, account for and pay over payroll withholding tax in violation of  7202, (ii) six counts of tax perjury , § 7206(1), for individual tax returns, (iii) three counts of tax perjury, § 7206(1), for corporate returns, and (iv) one count of tax obstruction, § 7212(a). After trial, he was convicted on all counts and sentenced to 60 months (5 years).

On appeal, Rankin raised a number of issues and prevailed on only one relating to the timing of restitution.  I think only one issue is particularly interesting -- the lesser included offense issue.

Defendants facing felony count charges will often want a lesser included offense instruction to give the jury an alternative to conviction on the more serious offense charged.  Rankin was charged with seven counts of § 7202, a felony 5-year charged.  Rankin asked to a lesser included offense instruction for § 7203, failure to pay, which is a 1-year misdemeanor.  The district court denied the instruction.  The Court of Appeals affirmed the denial of the instruction.

The Court starts off with the guiding law (slip op., at 8, cleaned up; 929 F.3d at 406):

If a defendant asks for a lesser included offense instruction to which he is entitled, it is generally reversible error not to give it. A defendant is entitled to an instruction on a lesser-included offense if: (1) a proper request is made; (2) the elements of the lesser offense are identical to part of the elements of the greater offense; (3) the evidence would support a conviction on the lesser offense; and (4) the proof on the element or elements differentiating the two crimes is sufficiently disputed so that a jury could consistently acquit on the greater offense and convict on the lesser.

Section 7202 (cleaned up) makes it a felony for "any person required . . . to collect, account for, and pay over any tax imposed" to "willfully fail to collect or truthfully account for and pay over such tax."

Section 7203 (cleaned up) makes it a misdemeanor for "any person required . . . to pay any estimated tax or tax, or required . . . to make a return, keep any records, or supply any information," to "willfully fail to [do so] at the time or times required by law or regulations."

Here, the Court rejected Rankin's claim that he was entitled to a § 7203 lesser included offense instruction (slip op., at pp 8-9; 929 F.3d at 406-407). The gist of the reasoning is:  While it is true that a failure to pay over withheld payroll taxes would be a crime described in both § 7202 and § 7203, § 7202, the felony did not have an extra element that would permit a jury to convict for § 7203, the misdemeanor, but acquit for § 7202, the felony.

The Court does paint in (too) broad strokes in getting there.  The Court said (929 F.3d at 407):  "all violations of § 7203 for failing to pay a tax necessarily constitute violations of § 7202."  (929 F.3d at 407) That statement is only true in the context of taxes that a person is required to collect, account for and pay over (like payroll withholding tax). My experience is that § 7203 failure to pay cases can be applied in contexts well outside withholding taxes.

JAT Comments:

Lesser Included Offense to Rescue a Conviction After Confusion of Liability as Aider and Abetter or Causer

I have recently had several blogs arising from the Larson and Pfaff petition relating to the concepts of aider and abetter liability and causer liability under 18 USC §§ 002(a) and (b), respectively.  (To review those, click on the labels below.) Contemporaneously, in the Tax Fraud and Money Laundering class that Larry Campagna and I teach at the University of Houston Law School, we recently covered the lesser included offense concept.  So, I  present today one case where these concepts came together.  I think it nicely illustrates the lesser included offense concept in a nontraditional setting where it is used to save a conviction after the prosecution blurred the roles of the two types of liability under 18 USC § 2.

In United States v. Motley, 940 F.2d 1079, 1082 (7th Cir. 1991), GS here the defendant, an income tax preparer who prepared false returns, had been charged and convicted under 18 U.S.C. §§ 287 and 2(a). The court held that the defendant was not guilty of aiding and abetting under subsection § 2(a) under which he was tried because the Government failed to prove the taxpayers committed the underlying crime. The Seventh Circuit refused to allow the Government to switch on appeal to subsection § 2(b), causer liability, which does not have the element of requiring that there be one or more other persons guilty of the underlying crime. But, the Seventh Circuit saved the day for the Government by holding the defendant liable for the lesser included offense of § 7206(2) which did not have the element requiring that another person (here the taxpayers) be guilty of the crime. The Court reasoned after giving the taxpayer his accomplice victory:

Court Affirms Defraud Conspiracy Conviction; Rejects Lesser Included Offense Argument (3/7/19)

In United States v. Bradley, 917 F. 3d 493 (6th Cir. 2019), CA6 here and GS here, the court affirmed Bradley's defraud conspiracy conviction.  Bradley made three arguments on appeal: (i) constructive amendment or variance to the indictment; (ii) improper argument by the prosecutor that misstated the Government's burden to prove guilt beyond a reasonable doubt; and (iii) failure to give a lesser included offense instruction.

I will not discuss the first two issues, but those with the time might want to look particularly at the improper argument issue where the Court found the arguments improper but not prejudicial.  The Court's discussion (including quotes from the argument) is on Slip Op. 12-16.

Now, looking at the lesser included offense issue, Bradley was convicted of the defraud conspiracy which, under the conspiracy statute (18 USC 371) is a felony.  Remember that the conspiracy statute has two types of conspiracy -- the offense conspiracy to commit a specific offense otherwise criminalize and the defraud conspiracy (also called Klein conspiracy) to impair or impede the functions of the IRS through fraud or deceit.  Bradley was charged with the felony defraud conspiracy.  He wanted an instruction on the offense conspiracy to commit a misdemeanor offense (§§ 7203 and 7204).  The felony statute says that a conspiracy to commit a misdemeanor is a misdemeanor rather than a felony.

The Sixth Circuit stated its lesser included offense requirements as requiring (p. 508):

(1) a proper request is made; (2) the elements of the lesser offense are identical to part of the elements of the greater offense; (3) the evidence would support a conviction on the lesser offense; and (4) the proof on the element or elements differentiating the two crimes is sufficiently disputed so that a jury could consistently acquit on the greater offense and convict on the lesser.

The Court analyzed the 2d requirement (Slip. Op. 17, cleaned up; 917 F3d at 508-509):

The second criterion of the lesser-included offense analysis requires us to determine whether the elements of the lesser offense are identical to part of the elements of the greater offense. Bradley was charged and convicted for conspiring to defraud the United States—the proposed greater offense. The elements of conspiracy to defraud the United States that the district court charged to the jury are: (1) that two or more persons conspired, or agreed, to defraud the United States, or one of its agencies or departments, by dishonest means, (2) that the defendant knowingly and voluntarily joined the conspiracy, and (3) that a member of the conspiracy did one of the overt acts described in the indictment for the purpose of advancing or helping the conspiracy. The elements of the proposed lesser offense of conspiracy to fail to file W-2s would presumably be: (1) an agreement to fail to file W-2s; (2) one or more overt acts in furtherance of that illegal purpose; and (3) the intent to fail to file W-2s. Similarly, the elements of the lesser offense of conspiracy to fail to issue Form 1099s would be (1) an agreement to fail to issue Form 1099s; (2) one or more overt acts in furtherance of that illegal purpose; and (3) the intent to fail to issue Form 1099s.

Ultimately, though, the Court did not resolve the issue on the merits because Bradley had forfeited the argument because he had not properly presented or preserved the issue.

I think that this is a good reminder that when the Government charges a felony conspiracy (I don't recall it charging a misdemeanor conspiracy), counsel should think creatively about a lesser included offense charge that will permit a jury a way to compromise if the binary choice of guilty or not guilty is not palatable to the jury.  Of course, if the jury with only a binary choice would tilt toward not guilty, a defendant would not want the lesser included offense charge.  But, if the jury would tilt toward guilt, the defendant would want the charge to mitigate the damage.  And, reading the jury's mind on that can be vexing.

Judge Posner Addresses Double Jeopardy and Sentencing Financial Loss Calculations

In United States v. Peel, 595_F.3d 763 (7th Cir. 2010), Judge Posner addresses a variation of the double jeopardy issue in a nontax case. I address Peel in this blog because variations of the double jeopardy theme do arise in tax cases. I discuss my notions on the related themes -- lesser-included offense and merger -- in my text, but here devote the discussion to Judge Posner's decision in Peel.

The defendant was convicted of bankruptcy fraud and of obstruction of justice arising out of the same conduct. Unhappy with that result, the defendant argued on appeal that "to convict him of both violated the double jeopardy clause of the Fifth Amendment, because one offense is included in the other." Double jeopardy is most often encountered in successive trial situations, but, as Judge Posner noted, "with respect to cumulative sentences imposed in a single trial, the Double Jeopardy Clause prevents the sentencing court from prescribing greater punishment than the legislature intended." (Internal quotes and marks omitted.) Judge Posner reasoned that the dual charges here did violate the double jeopardy prohibition. His reasoning (stripped of quotes and case citations) is:

Inconsistent Verdicts and the Lesser Included Offense Doctrine (10/28/16)

In United States v. Armstrong, 2016 U.S. Dist. LEXIS 141192 (ED TN 2016), here, the defendant was charged with the defraud / Klein conspiracy, tax evasion, and tax perjury all related to profits from a scheme to evade Tennessee cigarette tax stamps.  The indictment is here.  "Following a jury trial, the defendant was found not guilty on Counts One and Two and guilty on Count Three."  In this opinion, the court denies the defendant's motion for acquittal or new trial related to the single conviction on tax perjury.  The defendant's motion is here; the US response is here.  I focus here principally on the relationship of the tax evasion count as to which the jury acquitted the defendant and the tax perjury count as to which the jury convicted the defendant.

The two counts are state in the indictment, here, as follows:

COUNT TWO

Attempt to Evade and Defeat Tax

1. The allegations set forth above in support of Count One are hereby re-alleged and incorporated herein by reference. [These are the usual copious allegations in the conspiracy count.]
2. On or about the 15th day of October, 2009, in the Eastern District of Tennessee, JOSEPH E. ARMSTRONG, a resident of Knoxville, Tennessee, who during the calendar year 2008 was married, did willfully attempt to evade and defeat a large part of the income tax due and owing by him and his spouse to the United States of America for the calendar year 2008, by preparing and causing to be prepared and by signing and causing to be signed, a false and fraudulent U.S. Individual Income Tax Return, Form 1040, on behalf of himself and his spouse, which was filed with the Internal Revenue Service and in that false return, it was stated that their joint taxable income for the calendar year was the sum of $152,999, and the amount of tax due and owing thereon was the sum of $36,441, in fact, as he then and there knew, his taxable income for the calendar year was the sum of $471,418, upon which taxable income there was owing to the United States an income tax of approximately $141,222. In violation of Title 26, United States Code, Section 7201. 

COUNT THREE

Fraud and False Statements

1. The allegations set forth above in support of Counts One and Two are hereby re-alleged and incorporated herein by reference.
2. That on or about October 15, 2009, in the Eastern District of Tennessee and elsewhere, JOSEPH E. ARMSTRONG, a resident of Knoxville, Tennessee, did willfully make and subscribe and did willfully aid, abet, assist, and cause to be so made and subscribed a joint U.S. Individual Income Tax Return, Form 1040, for the calendar year 2008, which was verified by a written declaration that it was made under the penalties of perjury and JOSEPH E. ARMSTRONG did not believe the return, which was filed with the Internal Revenue Service, to be true and correct as to every material matter in that the return failed to disclose that he was engaged in the operation of an investment activity from which he derived gross receipts and received income and JOSEPH E. ARMSTRONG then and there well knew that he was required by law and regulation to disclose the operation of this investment activity, the gross receipts he derived therefrom, and the income from this investment activity.

As noted, the jury acquitted on Court Two but convicted on Count Three.

The first point is the fact that the Government charged the defendant for tax evasion and tax perjury.  The allegations in the key paragraph of the tax evasion count, Count Two (paragraph 2), appear to allege that the affirmative act of evasion was the filing of the false return under-reporting gross income, thereby under-reporting and underpaying the correct tax liability.  In this regard, Count Two, paragraph 1 does incorporate the Conspiracy Count allegations by reference, but just focusing on the key charging allegations in paragraph 2, it looks like the key affirmative act -- an element of the crime of tax evasion -- was the filing of the false return under-reporting taxable income, thereby under-reporting and underpaying the tax liability.

7th Circuit Speaks on Convictions for Tax Evasion and Failure to File (7/7/12)

In United States v. Collins, ___ F.3d ___, 2012 U.S. App. LEXIS 13743 (7th Cir. 2012), here GS here, the defendant, a former city councilman and vice-mayor of East St. Louis, IL, was convicted of tax evasion (§ 7201), failure to file (§ 7203), and voter fraud (42 U.S.C. § 1973i(c)).  I focus here on the tax counts of conviction.

The key facts are that, while being investigated for voter fraud and related possible crimes, the federal agents check his IRS records and discovered that he had not filed income tax returns since March 1992.  He was indicted for tax "was indicted on nine counts: three counts of tax evasion in violation of 26 U.S.C. § 7201 (for tax years 2003, 2004, and 2005); [and] three counts of willful failure to file tax returns in violation of 26 U.S.C. § 7203 (for the same years)."  With this background, the key facets of the case are:

1.  The Cheek Instructions.  The defendant complained that the district court had given only the standard Cheek instructions from the Seventh Circuit's Pattern Jury Instructions.  These instructions were (i) "the term 'willfully' means the voluntary and intentional violation of a known legal duty," and that "defendant does not act willfully if he believes in good faith that he is acting within the law."  The additional instruction defendant sought and the district court refused to given was that willful did not include "negligence, inadvertence, justifiable excuse, mistake, or a misunderstanding of the law."  This nuance on the word willfully is, of course, a correct nuance and implicit in the instructions that the trial court did give.  The Court of Appeals held that the trial court had not abused its discretion in not giving that requested instruction, invoking standard holdings that the jury was adequately instructed by the instructions given.  The Court of Appeals said (685 F.3d at 656):

Collins's jury was properly instructed on the element of willfulness; the two pattern instructions necessarily—if implicitly—excluded a conviction based on negligent failure to file. Collins's proposed supplemental instruction regarding negligence was redundant and therefore unnecessary. It was also wholly unsupported by the evidence in this case. Collins's persistent failure to file federal and state tax returns—spanning nearly 20 years—cannot plausibly be attributed to mere "negligence."

2.  Conviction for Evasion and Failure to File for the Same Years.  The defendant complained about the sufficiency of the evidence to support the jury conviction on the tax evasion counts.  If that argument prevailed, the defendant would have still been guilty of the three counts of failure to file crime which is a misdemeanor and, setting aside the voter fraud, would have capped the sentence at 36 months (although the Sentencing Guidelines factors would not have been affected).  The Court of Appeals found ample evidence that established the minimal sufficiency to allow the jury's convictions to stand.  In the course of its discussion, the Court of Appeals said (685 F.3d at 656), some case citations omitted):

Good Article on Lesser Included Offense Strategy in Trump Criminal Trial in NY Court Next Week (4/11/24)

I have written on several occasions on the concept of lesser included offense, including the strategies involved for defense counsel in seeking a lesser included offense instruction. See e.g., Defense Request of Lesser Included Offense Instruction Precludes Questioning Sufficiency of Conviction (Federal Tax Crimes Blog 10/3/17), here; and Court Affirms Conviction, Rejecting Lesser Included Offense Instruction Request (Federal Tax Crimes Blog 7/17/19; 7/18/19), here; for the complete list sorted by relevance see here and sorted by date see here.

I thought readers might like the following Politico article:  Ankush Khardori, The Surprising Strategy Trump Could Use to Win His Manhattan Trial (Politico 4/11/24), here. The author, a former federal prosecutor, has a good discussion of Former President Trump’s potential use of the lesser included offense in his upcoming criminal trial in New York state court set to commence on April 15, 2024.

One key risk for the defendant is that a jury who thinks the crime(s) charged are too harsh for the conduct or might have some other reason to not convict where the binary choice is guilty or not guilty of the more serious offense charge might settle back (compromise) on a lesser included offense whereas, had the choice remained binary, the jury would acquit. 

Attempts to Commit Tax Crimes (5/23/14)

I deal today with a little discussed feature of criminal procedure.  Federal Rules of Criminal Procedure Rule 31, here, provides:

(c) Lesser Offense or Attempt. A defendant may be found guilty of any of the following: 

(1) an offense necessarily included in the offense charged; 

(2) an attempt to commit the offense charged; or 

(3) an attempt to commit an offense necessarily included in the offense charged, if the attempt is an offense in its own right.

It is well established law that a defendant may be convicted of a lesser included offense in lieu of the offense charged.  I focus on subsection (2) -- conviction of an attempt to commit the offense charged.

In United States v. Johnson, 2014 U.S. App. LEXIS 8834 (4th Cir. 2014), here, the defendant was "convicted by a jury of four counts of violating the Internal Revenue Code ("IRC"); one count of corruptly obstructing or impeding, or endeavoring to obstruct or impede, the due administration of the IRC, in violation of 26 U.S.C. § 7212(a), and three counts of willfully failing to file income tax returns, in violation of 26 U.S.C. § 7203."  On appeal, one of his claims was that the trial court had improperly constructively amended the § 7212(a) charge.  Section 7212(a), here, is tax obstruction.  The statute, here, is:

§ 7212 - Attempts to interfere with administration of internal revenue laws
(a) Corrupt or forcible interference
Whoever corruptly or by force or threats of force (including any threatening letter or communication) endeavors to intimidate or impede any officer or employee of the United States acting in an official capacity under this title, or in any other way corruptly or by force or threats of force (including any threatening letter or communication) obstructs or impedes, or endeavors to obstruct or impede, the due administration of this title, shall, upon conviction thereof, be fined not more than $5,000, or imprisoned not more than 3 years, or both, except that if the offense is committed only by threats of force, the person convicted thereof shall be fined not more than $3,000, or imprisoned not more than 1 year, or both. The term “threats of force”, as used in this subsection, means threats of bodily harm to the officer or employee of the United States or to a member of his family.

As recounted by the Court of Appeals, § 7212(a) "criminalizes both successful and unsuccessful attempts to impede the IRS."  In this case, the § 7212(a) Count, Count One, was titled "Corrupt Endeavor To Obstruct, Impede, and Impair the Due Administration Of the Internal Revenue Code" but the text of Count One charged that the defendant "did corruptly obstruct and impede the due administration of the Internal Revenue Code."  [Actually, there was a typo, but I include what the correct text should have been.]  So, focusing only on the text of the charge and not the title (like a caption which usually is not controlling), the defendant was charged with a completed act of obstruction.  The court nevertheless:

instructed the jury on the meaning of the word "endeavor," defining it as "any effort or any act or attempt to effectuate an arrangement or to try to do something, the natural and probable consequences of which is to obstruct or impede the due administration of the Internal Revenue laws." 

The defendant complained that this broadened the scope of the charge actually made.

Seventh Circuit Rejects Duplicity, Multiplicity and Other Arguments (11/23/11)

In United States v. Hassebrock, 663 F.3d 906 (7th Cir. 2011), here, the Seventh Circuit addressed a number of interesting issues relate to criminal tax law and sentencing. Hassebrock was a tax protestor (or perhaps more politically correct, a tax defier). Hassebrock "consciously disobeyed his obligation to pay taxes, joined a fictitious Native American tribe to avoid his tax obligation, and attempted to pay taxes with fraudulent sight drafts." Hassebrock was indicted and convicted for one count of tax evasion and one count of failure to file for, respectively, evasion of his 2004 tax liability and failure to file with respect to 2004. (I hope that statement has your antenna raised!)

The indictment for failure to file alleged that he committed the crime by failing to file the 2004 return on or before April 15, 2005. As it turns out, however, there was "strong evidence" that he had not filed for an extension on or before April 15, 2005 (as required for a valid extension) but, on August 12, 2005, had applied for an extension which, if granted, arguably would have extended the filing date until October 15, 2005. There was some argument about the meaning of these events that, but I address it below.

The points of the opinion that I find of interest and believe readers -- at least some readers -- may also be interested in are:

Money Laundering Provisions of FERA

I have previously noted that, in enacting the Fraud Enforcement and Recovery Act of 2009 (FERA), Congress, in its wisdom, dropped the Senate proposal to include tax crimes (§§ 7201 and 7201) to transportion money laundering. Of course, the IRS still considers that money laundering is "tax evasion in progress." See IRS Web Page here; for other references to this statement, see the cites at the bottom of this blog. I also cautioned that Senator Grassley seems intent on giving Congress other opportunities to pass the proposal, so stay tuned.

In all events, given the real or perceived connection between money laundering and tax crimes, practictioners are well advised to stay abreast of money laundering developments. The following are the key points from FERA as enacted:

1. The legislation overrides the Supreme Court's restrictive interpretation of the term "proceeds" as meaning the profits rather than gross revenue of specified unlawful activity. For further discussion, see Ellen Podgor's discussion on the White Collar Crime Prof Blog here.

2. Congress stated a "Sense of Congress" [not intended as an oxymoron] and reporting requirement regarding the following subject:

It is the sense of the Congress that no prosecution of an offense under section 1956 or 1957 of title 18, United States Code, should be undertaken in combination with the prosecution of any other offense, without prior approval of the Attorney General, the Deputy Attorney General, the Assistant Attorney General in charge of the Criminal Division, a Deputy Assistant Attorney General in the Criminal Division, or the relevant United States Attorney, if the conduct to be charged as ‘‘specified unlawful activity’’ in connection with the offense under section 1956 or 1957 is so closely connected with the conduct to be charged as the other offense that there is no clear delineation between the two offenses.

I am not sure exactly what Congress perceives the problem to be. From the "sense" of the stated "Sense of Congress," Congress appears to believe that the underlying substantive crime (the SUA) might be so coterminous with the money laundering offense itself that charging both presents a problem. I know courts have expressed concern about that. This have overtones of the doctrine of merger dealing with conviction of a greater and lesser offense with overlapping elements of conviction, and its cousin, the lesser included offense concept. But even if that is the concern, of course, the prosecutors could simply charge the greater offense (here money laundering) without charging the lesser offense, so that merger is not presented and thereby avoid the lesser included offense problem by making sure that the contested elements are overlapping. I will try to find out more on this and fill in later.

-------------

Other references to money laundering as tax evasion in progress. DOJ Press Release; see also TIGTA, The Criminal Investigation Function Provides Adequate Guidance to Field Offices for Money Laundering Investigations, Report No. 2002-10-150 (8/21/02). The IRS likes this catchy phrase and repeats it for emphasis, particularly when justifying its enforcement efforts against money laundering E.g., Richard Speier, IRS Civil and Criminal Enforcement Statement, reproduced at 2006 TNT 8-31 (1/11/06); see also Martin A. Sullivan, Sex, Drugs and Tax Evasion, 115 Tax Notes 1098 (June 18, 2007).

And while we are on catchy phrases, I throw out this one: "The only think to fear is FERA itself,' from this web site. The phrase is a play on FDR's famous line about the depression at the start of his presidency.

Tax Attorney Convicted of Employment Tax Fraud (9/8/16; 9/10/16)

This DOJ Tax press release, here, caught my eye because the title was:  Pittsburgh Tax Attorney and Owner of Iceoplex Convicted of Employment Tax Fraud.  The 16 counts are for convictions under § 7202, here, titled "Willful failure to collect or pay over tax."  Don't know the details or,  really anything else noteworthy, except the following excerpted from the press release:

According to the evidence presented at trial, between 2004 and 2015, Steven Lynch, a tax attorney, co-owned and operated the Iceoplex at Southpointe, a recreational sports facility located in Washington County, Pennsylvania.  The Iceoplex included a fitness center, ice rink, soccer court, restaurant and bar.  Lynch controlled the finances for these businesses and was responsible for collecting income and employment taxes withheld from employee wages, accounting for these taxes and filing Forms 941, payroll tax returns, and paying these taxes over to the Internal Revenue Service (IRS).  The jury found that between 2012 through 2015, Lynch failed to timely pay over to the IRS more than $790,000 in taxes withheld from the wages of the employees for these businesses. 

JAT Comments:

1.  For some years, the IRS and DOJ Tax have been stepping up their criminal enforcement efforts in the employment tax area.  The point the IRS and DOJ Tax wants to make that those who think that this is just a civil tax issue may be mistaken, and may be criminally investigated, charged, convicted, sentenced and spend some time in jail, all the while remaining liable for the taxes evaded (and  a host of related costs, including other penalties and fines).  And, even if they are lucky enough to avoid all those criminal related costs, they are still subject to potential trust fund recovery penalty liability under § 6672, here, titled "Failure to collect and pay over tax, or attempt to evade or defeat tax."  (Readers should note that, although the titles of the criminal and civil provisions are slightly different, the substantive language is virtually the same, with the criminal statute simply requiring proof for conviction beyond a reasonable doubt.  Not a comforting thought for those who play this game, as the IRS and DOJ Tax increase their criminal enforcement efforts.

2.  Based solely on the sentencing factors noted  in the press release (indicated tax loss over $790,000, no acceptance of responsibility downward adjustment, and presuming the pre-2015 Guidelines), the indicated Guidelines level is 20 (according to my Guidelines spreadsheet) and the indicated sentencing range is 33-41 months.  (By contrast, had Lynch pled guilty to achieve an acceptance of responsibility downward adjustment (or, in the rare even he might otherwise qualify for acceptance of responsibility) the sentencing level would have been 17 with an indicated range of 24-30 months, so that he could have achieved a 9 month lesser sentence at the bottom of each Guidelines range.) Of course, the judge can always do a Booker variance, which, in tax cases, is almost always downward.  But that will depend upon factors not evident from the press release.  Those additional factors are produced for the court in the Pre-Sentence Report ("PSR") and the parties sentencing submissions after review the PSR.  When the sentence is announced, I will dig around what is the in public report (usually not the PSR, but perhaps some contested portions of it) and report back.

Addendum on 9/10/16 12:30pm:

3. Robert Horwitz, a seasoned criminal tax attorney, here, called my attention to a typo on the blog and to a more substantive issue.  I have corrected the typo.  More important is the substantive question he raised.  Paraphrased, he asked whether, as specifically stated in the press release, the jury found that Lynch failed to timely pay over $790,000.  Readers will recall that, in tax evasion cases, the jury finds only that the defendant committed tax evasion, but does not find a specific amount.  (This was the issue addressed in the blog entries on the Senyszen case discussed in 3 blogs, here.)  The conviction here was for willful failure to collect and pay over, § 7202, here.  The amount involved is not an element of this crime, so Robert's question was whether the DOJ press release was correct that the jury made a finding on amount of over $790,000.

So, I went to Pacer and pulled down the jury verdict form, here.  From the jury verdict, the following went to the jury:

• Tax obstruction, § 7212(a) (one count, presented as Count 1): Jury verdict:  NOT GUILTY.
• 2. Failure to collect and pay over, § 7202 (28 counts, one per employer per quarter, presented as Counts ___ - ___, with one in  that series dismissed):  NOT GUILTY ON 11 COUNTS, GUILTY ON 16 COUNTS. 

Most importantly for the present discussion, the jury verdict does not find any amount of tax involved.  But, the jury verdict does find the defendant guilty of 16 counts and the counts, as alleged in the superseding indictment, here, does contain the approximate numbers for each quarter.  So, the jury verdict although not explicit as to amounts might make the finding by incorporation from the superseding indictment.  Since, however, the amount of tax involved is not an element of the crime, I presume that the authority for § 7201 might be applicable here as well/

My calculations from the superseding indictment shows the following:  tax amount for 16 counts of conviction  $725,728; tax amount for 11 not guilty counts $694,044, tax amount dismissed count (count 12) $24,998, aggregate tax amount $1,444,260.  I am not sure where the reported $790,000 amount comes from, but I do note that the amounts could have been refined in the presentations at trial.  In any event, the key break point for the sentencing calculations is $1,000,000.

As readers know, the intended tax loss ("tax loss") is determined at the sentencing phase for the first, most critical, step in the sentencing guidelines calculation.  Importantly, in terms of the guidelines calculations, though, the tax loss for the guidelines calculations also includes the tax loss for "relevant conduct."  See §1B1.3.  Relevant Conduct (Factors that Determine the Guideline Range), here.  The tax loss involved in not guilty counts may well be in play in calculating the guidelines range because the standard of proof is preponderance of the evidence rather than beyond a reasonable doubt.  Using the indicated tax loss for the counts of not guilty verdicts, the aggregate loss will move the calculation to the next bracket (which covers the range from $1,000,000 to $2,500,000, so that is a comfortable conclusion for the not guilty counts).  That will move the sentencing table calculation to offense level 22 and an indicated sentencing range of 41-51 months.

Finally, with 16 counts of conviction for the 5 year § 7202 felony, the maximum sentence could be 80 years.  As indicated, even with relevant conduct, the guidelines calculations will produce a sentence of far less than that.

More on the Marinello Transcript of Oral Argument (12/9/17)

On Wednesday, I posted First Comments on the Marinello Oral Argument Transcript (Federal Tax Crimes Blog 12/6/17), here.  I had then anticipated a later offering a more detailed analysis of the transcript, here.  After reading the transcript through more I decided to offer some general comments rather a comprehensive discussion or try to predict the outcome.  In these comments, I often add my own thoughts and these thoughts may or may not be correct or may or may not be known to the Justices having to decide the case.  I will try to indicate the part that reflects my own thoughts.

1.  There was some discussion as to the role of the tax obstruction crime, § 7212(a)'s Omnibus Clause, in relation to other lesser or greater tax crimes.  Most pertinent was the concern expressed by Marinello's lawyer that a crime defined as a misdemeanor (such as failure to file a return, § 7203, or filing a false W-4 to lessen the withholding, § 7205) could be charged as felony tax obstruction at the discretion or whim of the prosecutor.  See e.g., Tr. 8-10 & 63-64.  The related concern is that Congress, by providing for the lesser misdemeanor for the described conduct, could not have meant to have the conduct charged as felony tax obstruction.  JAT Comment:  This genre of concern, however, is baked into the criminal laws and tax crimes specifically.  Conduct is often described in more than one criminal law with different punishments (maximum sentences).  Specifically, in the tax context, the prosecutor often has the discretion to charge particular conduct as either tax evasion, a five year felony under § 7201, or tax perjury, a three-year felony under § 7206(1).  Yet, that does not compel the prosecutor to charge the greater crime rather than the lesser crime or the lesser crime rather than the greater.  (By lesser crime, I do not mean the same as the concept of the lesser included offense, for tax perjury is not a lesser included offense to tax evasion.)

2.  In a related vein, there was discussion (Tr. 46-47; 55-56) of the general DOJ policy to charge the more serious offense. The question was whether this guidance would require or tilt in favor of charging the more serious crime, tax obstruction, rather than a misdemeanor crime that more precisely describes the conduct.  JAT Comment: The provision referenced, I presume, is USAM 9-27.300 - Selecting Charges—Charging Most Serious Offenses, here. (Note that the table of contents says this section is titled Selecting Charges—Conducting an Individualized Assessment, but the section itself is titled as indicated).  That provision directs the prosecuting attorney to make an individualized assessment which "will generally conclude that he or she should charge, or should recommend that the grand jury charge, the most serious offense that is consistent with the nature of the defendant's conduct, and that will probably be sufficient to sustain a conviction."  The most serious offense is one that "yields the highest range under the Sentencing Guidelines."  However, SG Appendix A - Statutory Index directs that the Sentencing ranges are calculated under either § 2J1.2 (obstruction  of justice) or § 2T1.1 (the tax guidelines).  In most cases, the sentencing is under § 2T1.1, so that the range is calculated the same as tax crimes, including the misdemeanor failure to file.  Since failure to file is rarely prosecuted for a single year, in all failure to file cases that get prosecuted, the indicated guidelines sentence would be the same and would not be limited by the counts of conviction cap.  (In other words, if the Guidelines range exceeded a single year, the prosecutor would not accept a plea for a single year which would otherwise limit the sentence to one year.)  Finally, I am fairly confident that where failure to file, even for multiple years, was the only conduct, the failure to file crime would be charged even if theoretically the obstruction crime could be charged.  Marinello's concern, echoed by some Justices, was that the obstruction crime if described broadly enough could make the same conduct either a misdemeanor or felony when Congress described the specific conduct as a misdemeanor.

3.  Also, in a related vein, the Government attorney said (Tr. 61) that

[Mr. Parker] The government would have brought a tax evasion charge in this case but for the fact that Mr. Marinello so destroyed his records that it was unable to prove beyond a reasonable doubt that there was an actual tax deficiency.

And so what I think Petitioner's proposed construction would do is it would effectively allow individuals to evade their taxes and then obstruct their way down to a misdemeanor charge, or if they are particularly good at it, maybe obstruct their way out of criminal penalties at all. 

And the government could do nothing about it, unless the individual actually happened to be obstructing a pending audit or investigation.

Voluntary Disclosure Requires Good Amended Returns

One of the cardinal rules of filing an amended return to fix a criminal problem in the original return is to file a nonfraudulent amended return -- better still, an amended return foregoing even really aggressive, even if arguably, nonfraudulent positions. This rule applies to quiet and noisy voluntary disclosures. The reasons should be apparent: (1) if the amended return is fraudulent, the taxpayer has done nothing more than compounded the problem, has refreshed the statute of limitations and potentially has done a separate obstructive act (i.e., the amended return is intended to give the false appearance that he has cleaned up the problem); or (2) even if the amended return is nonfraudulent, but very aggressive positions that arguably do not cross the line could still poison the atmosphere should the IRS choose to focus on the amended returns to test whether the taxpayer has met the condition for voluntary disclosure that he or she fully cooperate.

In United States v. Salisbury (6th Cir. 2/16/10), an unpublished opinion, the taxpayer flunked this cardinal rule. The taxpayer there was helping in the collection of antique arms and helping himself to some of the cash that supposedly was going for purchases. This potentially violated a number of nontax criminal state and federal statutes.  As is typical, the taxpayer did not report all of the ill-gottent gain. The court described the situation thusly (omissions for readability):

Salisbury made large profits from these transactions but failed to pay all of the taxes on them. In the years for which he was convicted, 2000 and 2002, he reported no relevant income in the first year, and $ 247,888 in the second. After the controversy [about his allegedly illegal activities], Salisbury filed amended tax returns to account for some, though not all, of the additional income. In those amended returns he included an additional $ 16,500 in income in 2000 and $ 71,036 in 2002, both accompanied by the explanation that "Taxpayer thought items were not to be reported as income until sold."

According to the government, even after Salisbury amended his returns he still had understated his income by $ 298,749 in 2000 and by $ 622,372 in 2002, meaning that he should have paid an additional $ 119,896 and $ 241,581, respectively. Salisbury's expert, William Jessee, used a different accounting method in concluding that Salisbury understated his income by just $ 12,574 in 2000 and by $ 813,109 in 2002, corresponding to tax liabilities of $ 3,787 and $ 399,129.

I have no comment that the reader has not already figured out by just reading the quoted information.

The Government charged wire fraud, conspiracy to commit wire fraud, money laundering, and four counts of tax evasion related to the taxpayer's profits from these activites. The jury acquitted the taxpayer of all counts except "found him guilty of two lesser-included counts of willful failure to pay taxes for 2000 and 2002." The taxpayer received a 24 month sentence (the maximum permitted by the two misdemeanor convictions), although the tax loss produced a guidelines calculation indicating a much higher sentence. (This is a case where, in a sense, the lesser included offense really did save the defendant's bacon; maybe I'll state more about lesser included offese in a later blog.)

The key point for purposes of this blog is to reinforce the verity that amended returns to qualify for the voluntary disclosure practice must be good returns -- i.e., must themselves be nonfraudulent and the better part of wisdom is to forego the really aggressive positions.

Principal Comments on Unclaimed Deductions and Losses in Sentencing Tax Loss Determinations (3/16/13)

The Sentencing Commission has received comments and testimony from principal constituents as to the issue of whether unclaimed deductions and credits should be permitted to reduce the tax loss in the critical tax loss calculation for sentencing purposes.  The sentencing tax loss, like the loss in other financial crimes, is the most influential determinant in the sentencing guidelines calculations in most cases.  I have previously discussed this and cited to an article by Messrs. Toscher and Perez.  See The Role of Unclaimed Deductions in Computing Tax Loss For Sentencing (3/1/13), here.

I offer the following comments principally to DOJ Tax's comments urging that unclaimed deductions and credits not be considered for the tax loss determination.  Here are some key excerpts from the DOJ Tax letter that should set the stage for persons generally familiar with the issue:

"Tax loss" under the Guidelines is distinct from a tax deficiency in a civil tax case or an order of restitution. Tax loss, by definition, should address the entirety of the harm intended by the defendant, including for example the harm caused by concealment through omitting certain deductions. It is only through civil enforcement that the government should be charged with determining the correct tax liability, and restitution serves merely as an aid in the collection of that liability. 

The Tax Division, along with the sentencing courts, has extensive experience in considering claims concerning uncharged expenses in Guidelines calculations. As demonstrated by several examples included below, any attempt to determine whether and when to allow a  deduction that the defendant did not report on an original tax return will require inappropriate speculation, and may implicate complex tax issues and result in unjust anomalies. At a minimum, it will turn routine sentencing hearings into tax mini-trials. Further, in civil tax enforcement, the taxpayer bears the burden of claiming and substantiating deductions, and the IRS's determinations are accorded a presumption of correctness - fundamental principles that are not incorporated into Options 1 or 3. Either of these proposed amendments runs the risk of giving convicted tax evaders advantages over taxpayers with honest disputes with the IRS.

Guidelines Calculations Games -- More on the Chernick Plea (8/3/09)

In my recent blog on the Jeff Chernick Guilty plea here, I said, in effect, that Chernick and the Government were playing games with Chernick’s Sentencing Guidelines Calculations. I would like to explore further that issue further by stepping through the relevant Guidelines calculations. Under Booker, of course, the Guidelines are advisory rather than controlling; they must be considered, however, and, in most sentencings since Booker, the Guidelines have been the principal determinant in setting sentences. (Tomko may be seen as an aberration – an important one – in the pattern of still hewing to the Guidelines’ advisory range). So, with that said, let’s calculate the Guidelines range for Chernick. 

1. I start first with the plea agreement to a single 3 year count of conviction for § 7206(1). Plea to a single 3 year count caps the possible Guidelines sentence at 3 years. It simply makes no difference whether the Guidelines calculations produces a greater sentence than 3 years; it is capped at three years. I discussed this phenomenon in an earlier article involving the plea by the infamous Andy Fastow of Enron fame back when the Guidelines were mandatory and would have generated a sentence well exceeding 20 years; Fastow capped his possible sentence at 10 years by pleading to only 2 five year counts. John A. Townsend, Analysis of the Fastow Plea Agreements, 2004 TNT 44-46 (3/5/2004). 

2. Since the plea was for one § 7206(1) (tax perjury count), the beginning point for the Guidelines calculations is determining the base offense level under SG §2T1.1(a)(2). The base offense level is determined by the tax loss table in § 2T4.1. That table requires that the tax loss be determined. The tax loss is determined by the court by a preponderance of the evidence after receiving recommendations by the probation office and objections by the parties (the Government or the defendant). Normally, in tax cases, the initial calculation of the tax loss is made by the Government in the Special Agent’s Report that is available to the probation office. In addition, in the plea discussions, the parties may negotiate over the proper amount of the tax loss. By that time, the defendant’s counsel will negotiate over the amount that is a proper amount under the Guidelines. If they can reach agreement, they will state their agreement as to the tax loss in the plea agreement. That statement of agreement is not binding on the probation office, and defendant’s counsel must be careful to advise his client that the probation office can determine a larger tax loss which could dramatically affect the sentence. 

In the Chernick plea agreement, although the parties did not agree as to the tax loss, the parties did try to close some parameters on the issue by agreeing: 

 a. Tax Loss: The relevant amount of actual, probable, or intended tax loss under Section 2T1.1 of the Sentencing Guidelines resulting from the offense committed in this case and all relevant conduct is the tax loss associated with accounts at UBS that were disclosed to the Government pursuant to the Deferred Prosecution Agreement with UBS, and of which the defendant was the beneficial owner for tax years 2001 through 2007. 

Note that this agreement constricts possible tax loss in two ways: (1) it limits the tax loss to the tax loss associated with the UBS accounts disclosed to the Government and (2) it limits the tax loss to the years 2001 through 2007. As I noted in my earlier discussion of the Chernick plea, both of these limitations are improper. The tax loss is “the total amount of loss that was the object of the offense.” “‘Offense’ means the offense of conviction and all relevant conduct under §1B1.3.” SG § 1B1.1, Application Notes (H). Relevant conduct includes conduct which would require grouping (suffice it now to say that all tax crimes would require grouping) “that were part of the same course of conduct or common scheme or plan as the offense of conviction.” In this case, under the Statement of Facts entered along with the guilty plea, Chernick admitted a course of conduct from 1981 forward involving (a) depositing income into foreign bank accounts which he failed to report and pay U.S. tax and (b) earning income on or with respect to those deposits which he failed to report and pay tax. That is precisely the conduct he admitted guilt for the year of conviction. The time frame for the relevant conduct was thus 1981 through 2007 and includes all banks. Nevertheless, the Government and Chernick attempt to limit the time frame to 2001-2007 and then only include the tax on the deposits into and earnings from the UBS accounts. 

Now, in my experience, this type of limitation will sometimes occur in a plea agreement where the IRS has not investigated earlier years and there are serious limitations on ability to reconstruct the tax loss for the earlier years. All parties – the Government, the defense, the probation office and the Court – know that there is earlier relevant conduct tax loss that could be included, but it is not because it has not been and cannot reasonably be quantified. One may ask whether that is what happened here which might account for the limitations in the agreement noted above? That could hardly explain omitting the amounts deposited in other banks, at least one of which was stipulated to exist in this time frame. 

Moreover, the Guidelines provide expressly for estimates where more precise calculations cannot or have not been made. How can they be made in the Chernick case Chernick admits in his Statement of Facts that, by 2005, the amount in his UBS account was $8 million. Since, under the pattern admitted, tax amounts would not have been deposited into the accounts, we may presume that these are untaxed amounts. Chernick admits further that, not all of his offshore assets connected with this scheme were in UBS. Around 2003, Chernick moved some portion of his UBS assets to another smaller Swiss Bank with no U.S. presence in order to avoid detection in the U.S. How much was moved is not stated, but that should be easily quantifiable given that this conduct was relatively recent. Chernick also admitted that he typically withdrew some $300,000 + per year that was then deposited into his U.S. corporate account. It is unclear whether he reported this amount on the U.S. corporate return, so it is unclear whether these amounts have been taxed. I thus, cannot assume for present purposes that these withdrawn amounts should enter the tax loss calculation. (Timing differences are effectively included by including the earnings on the previously untaxed amounts.) Finally, he did send $700,000 in the U.S. by sham loan in 2004, so this amount would not be on deposit in UBS or any foreign bank, so there is another $700,000 in untaxed income (as well as the relatively minor amount of taxes due on the interest deductions he claimed on the sham loan. So it appears that, on the amounts stipulated, there was at least $8.7 million of untaxed income over all the years. Even if some precise quantification year by year would be impossible for all of the years involved, it is admitted that all of this cumulative amount was untaxed and the Guidelines permits an estimate as follows (SG § 2T1.1 Notes (A):

If the offense involved filing a tax return in which gross income was underreported, the tax loss shall be treated as equal to 28% of the unreported gross income (34% if the taxpayer is a corporation) plus 100% of any false credits claimed against tax, unless a more accurate determination of the tax loss can be made.

So, based on what we know from the court filings, the tax loss can be calculated as.28 times $8.6 million, for a tax loss of $2.4 million (rounded down). The base offense level under the Tax Table is thus at least 22. I should note that some portion of the $8.7 million might well have been taxable at lesser capital gains rates, but under the foregoing presumption a court would require that the defendant show which portion in order to make that more accurate determination but it looks like the parties are now unwilling to delve into the pre-2001 years (that may change in the sentencing process). Moreover, under the Tax Table, the tax amount would have to drop by over $1,400,000 to lower the base offense level which I don’t think would be likely on the difference between the capital gains and presumed 28% ordinary income rate. So, in sum, we have a base offense level of 22. 

3. An additional 2 levels are added because the parties stipulated that the offense involved sophisticated means. (That stipulation may also not be binding on the probation office or the court, but it is unimaginable that this 2 level increase does not apply.) So, we are now at level 24. 

4. The parties stipulate to the 2 or 3 level acceptance of responsibility reduction under S.G. 3E1.1, so Chernick gets a 3 level reduction. So, we are now at level 21. 

5. Chernick admits that he paid – or at least intended to pay – a bribe to a Swiss official for information about whether his accounts would be turned over pursuant to the U.S. Government’s full court press in 2007. This might be considered obstruction of justice which could justify a 2 level increase, but there are not enough facts known now to add that. Leave the offense level at 21. 6. Moving to the sentencing table (Ch. 5, Part A), the indicated sentencing range for offense level 21 at criminal history I is 37-46 months. Note that this indicated level could go up depending on whether additional amounts (deposits in other banks and cash brought back into the United States) are properly included in the tax loss amount, which would ripple down to a higher offense level for sentencing. 7. The low end of the indicated range thus exceeds the maximum incarceration for the sole 3 year count of conviction. These calculations assume, of course, that the tax loss calculations include all relevant conduct. In the plea agreement, the Government agreed “to recommend that the defendant be sentenced at the low end of the guideline range, as that range is determined by the court.” Either the Government was making the defendant a meaningless promise or, more likely as indicated above, it was willing to ignore tax loss amounts clearly and relatively easily includible and even required by the Guidelines. Maybe the Government is playing that game. However one may view the propriety of the Guidelines, I don’t think that type of game playing speaks well for the Government. At a minimum, the Government should tell the probation office and court when it is playing that game.

Be Careful When Using Pattern Jury Instructions -- a Tax Evasion Example (5/17/11)

In my Federal Tax Crimes book, I advise readers that pattern jury instructions for the Circuit in which a case is tried are a good beginning point for (i) understanding the elements of tax and tax related crimes and (ii) fashioning proposed instructions in a criminal tax case. However, I do caution that pattern jury instructions can be wrong or misfocused. Incident to grading examinations in the class on Tax Fraud class that I co-teach at the University of Houston Law School, I have just discovered an instance of that type of problem in the Fifth Circuit pattern jury instructions for tax evasion (which are quoted in my Federal Tax Crimes book and in the LEXIS-NEXIS Tax Crimes book). This particular error was mine (originating in an earlier version of my Federal Tax Crimes book and being uncritically brought forward), so this is my mea culpa or errata for these books; corrections will appear in the next editions. But here I will present the Fifth Circuit Pattern Instruction and also present a correct instruction from the patterned from Judge Pauley's charges to the jury in the ongoing Daugerdas case.

First the Fifth Circuit Pattern Instruction:

Court Holds that the Trust Fund Recovery Penalty is a Tax For Purposes of Tax Evasion, § 7201 (11/10/18)

In United States v. Prelogar, 2018 U.S. Dist. LEXIS 188305 (D. Mo. 2018), here), the Court rejected the defendant's argument to dismiss the following count of tax evasion, § 7201 that defendant:  "did willfully attempt to evade and defeat the payment of the Trust Fund Recovery Penalty ("TFRP") due and owing by him to the United States of America . . . and the payment of income tax due and owing by him to the United States of America."  The first thing to note is that two types of evasion are alleged -- one for the TFRP and the other for income tax.  I focus here on the allegation of tax evasion for the TFRP.

Defendant's argument was simple.  Tax evasion requires a tax to be evaded (or, in the language of the statute attempted to be evaded).  The TFRP, as stated in § 6672, is a "penalty" rather than a tax.  Therefore a person evading the TFRP is not evading tax and thus outside the scope of tax evasion.

The Court rejects the defendant's argument as follows:

Count I charges that Defendant "did willfully attempt to evade and defeat the payment of the Trust Fund Recovery Penalty ("TFRP") due and owing by him to the United States of America . . . and the payment of income tax due and owing by him to the United States of America" in violation of 26 U.S.C. § 7201. Defendant argues that § 7201 does not apply to him because the TFRP owed is a penalty and not a tax. In support of this argument, Defendant quotes Section 7201, which prohibits the willful evasion of "any tax imposed by this title or the payment thereof." Id. (emphasis added). Initially, the Court notes that Defendant's argument does not justify dismissal of Count I because Count I alleges that Defendant attempted to evade the payment of both taxes and penalties. At best, Defendant's argument would justify only limiting the scope of Count I. Regardless, the Court does not agree with Defendant that § 7201 applies only to evasion of the tax itself. Section 7201 makes it unlawful to attempt "to evade or defeat any tax", and § 6671(a) states that "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." 26 U.S.C. § 6671(a). As explained in the Report, a "plain reading of Section 6671(a) leads to the inescapable conclusion that a reference to 'tax imposed' in a statute under the Internal Revenue Code [Title 26] must be deemed to include a 'penalty' provided in the subchapter [Subchapter B: Accessible Penalties]." Therefore, Defendant's arguments with respect to Count I are rejected. 

In Defendant's objections to the Report, he argues that the Fifth Circuit supports his claim that a penalty is not a tax for the purposes of § 7201. (Doc. 68, p. 3.)1 In United States v. Wright, 211 F.3d 233 (5th Cir. 2000), the Fifth Circuit addressed whether petitioners could be prosecuted for tax evasion if they owed only interest and penalties. Wright, 211 F.3d at 236-37. The Court based its analysis by relying on Sansone v. United States, 380 U.S. 343 (1965), where the Supreme Court observed that a conviction under § 7201 requires proof of a "tax deficiency." The Fifth Circuit then relied on the tax code's definition of "tax deficiency" - which does not include a tax penalty — to conclude that a conviction under § 7201 cannot be predicated on the willful evasion of a tax penalty. Id. at 236 & n. 3-4 (citing 26 U.S.C. §§ 6211, 6601(e)). The Court declines to follow Wright for several reasons. First, Wright does not discuss § 6671. Second, the phrase "tax deficiency" does not appear in § 7201, so the more limiting definition of "tax deficiency" (as opposed to the definition of "tax" found in § 6671) is inapplicable. Third, the issue in Sansone involved the circumstances under which a person charged with felony tax evasion is entitled to a lesser-included offense instruction for the misdemeanor of willful failure to pay a tax. Thus, it does not appear that when Sansone said the elements of § 7201 included a "tax deficiency," it meant to use the technical definition of the phrase as found elsewhere in the tax code. For these reasons, the Court denies Defendant's arguments with respect to Count I.

U.S. Congressman Indicted for Tax Related Crimes (4/29/14)

The federal indictment of U.S. Representative Michael Grimm -- formerly a Marine and an FBI agent -- has been in the news.  See the press release from USAO EDNY, here, and the indictment here.  According to the press release, the charges are:

A 20-count indictment was unsealed this morning in federal court in Brooklyn charging Michael Grimm with five counts of mail fraud, five counts of wire fraud, three counts of aiding and assisting in the preparation of false federal tax returns, one count of conspiring to defraud the United States, one count of impeding the Internal Revenue Service, one count of health care fraud, one count of engaging in a pattern or practice of hiring and continuing to employ unauthorized aliens, two counts of perjury and one count of obstructing an official proceeding.

As explained in the press release, the charges center around Grimm's alleged conduct that had a purpose of evading federal and state taxes related to employees, but also touched other crimes. Tax crimes enthusiasts will know that run of the mill tax crimes also potentially involve mail fraud and wire fraud, but DOJ Tax typically does not charge mail fraud and wire fraud except in the most egregious of cases.  See Tax Division Directive 128, here.  This appears to be an egregious case, at least as alleged in the indictment and in the press release.

The proliferation of charges from a unified pattern of conduct should remind readers that (1) the prosecutors have a grab bag of charges in the IRC and Title 18 and other Titles that can be marshaled in an indictment and (2) a sentencing truism that proliferating charges from a pattern of conduct is not likely to affect the sentence beyond what could have been achieved with a fewer number of charges.  In the latter regard, the press release further states:

If convicted, Grimm faces a term of imprisonment of up to 20 years for each mail and wire fraud charge and for the obstruction charge, up to 10 years of imprisonment for the health care fraud charge, and up to five years of imprisonment for the charge of conspiring to defraud the United States and for each perjury charge. Grimm further faces a term of imprisonment of up to three years for each charge of aiding and assisting in the preparation of a false and fraudulent tax return and for the charge of obstructing and impeding the due administration of the Internal Revenue Laws. Finally, Grimm faces up to six months of imprisonment for engaging in a pattern or practice of hiring and continuing to employ unauthorized aliens, as well as forfeiture, restitution, and fines.

It is hard to imagine that, even if convicted of all counts, the sentence will exceed 10 years -- certainly won't exceed 15 years.

Obviously, cherishing the opportunity for a press sound bit, it is reported that the US Attorney said that Grimm "never met a tax that he did not lie to evade."

More District Court Thrashing Around on Arbitrary and Capricious Calculation of Willful FBAR Penalties (3/30/21)

I have written before on the saga of Timberly Hughes.  Court Sustains Willful FBAR Penalty for Two of Four Years (Federal Tax Crimes Blog 10/15/21), here.  Hughes is back in the news, so to speak.  In United States v. Hughes (N.D. Cal 18-cv-05931-JCS 3/29/22), here, Magistrate Judge Spero is trying to wrap up the case so that it goes to the District Judge and then, apparently, to the Ninth Circuit.  (The docket entries in CourtListener are here.)

 In high level summary:

1. The court confirms that for the two years it previously found nonwillful, that while losing on the willful penalty for the 2 years, there would be no nonwillful penalty for those years.  The court says (p. 3, n 4):

   n4 “The United States does not seek nonwillful penalties against Ms. Hughes for 2010 and 2011, though the United States reserves its right to appeal the Court’s  willfulness determination as to 2010 and 2011.” Pl.’s Reply (dkt. 168) at 2

I have never thought about whether nonwillful and willful penalties can be assessed and litigated in the alternative (something like a lesser included offense concept).  Since the IRS never assessed the nonwillful penalty, I suppose it is out of time to assert assess.  I don't know whether such alternative assessments and/or litigation could be made under the statutes or procedures.  For example, in the Hughes case, applying the nonwillful penalty to the years the court found were not willful.

2. The Court found that there were errors in the calculations and methodology in several respects and remanded to the IRS to reconsider the penalties.  There is no discussion of potential statute of limitations issues from a recalculation and reassessment.  The issue is whether a new assessment would be permitted or only an adjustment downward to the prior assessment.  I am not sure whether the normal APA remand to the agency holds or forces open the statute of limitations (sort of the way a petition to the Tax Court in a deficiency cases suspends the statute of limitations so that the correct number after litigation gets assessed).

3.  In paragraph 2 my prior blog here, I discussed a potential glitch where the IRS uses its methodology to quantify the willful penalty by spreading the amount quantified at 50% of the single high amount over the willful years.  The example I gave was a high amount of $2 million over four willful years and for simplicity assumed that high amount was static at all times during the year.  The maximum penalty authorized by the statute would be 50% per year, for an aggregate of $4 million.  Under the IRS policy to apply only a 50% to the high amount for all willful years (that's not each year), the willful penalty would be the same $1,000,000, but applied to each of the four years.  Now, with two years dropping out, does $500,000 allocated to the now nonwillful years drop off or can the IRS re-allocate the lost $500,000 to the years in which the willful penalty was sustained.  I don’t know.  And, if you vary the amounts so that only in one year the high amount was $2 million, you can get weird results to this type of issue.  And what if in that varying scenario, the high amount were in a year judicially determined to be nonwillful?