Superseding Indictment for Dr. Ahuja Adding Conspiracy Count (9/28/11)

Jeff Neiman posted a blog this morning in the superseding indictment for Dr. Ahuja. See Jeff Neiman, Superseding Indictment: HSBC India Customer Charged (9/28/11), here. Jeff's Blog entry has a good discussion and link to the superseding indictment, so I recommend it and will not repeat it here, other than to note that the allegations which flesh out any conspiracy charge are quite interesting. I have previously blogged the original indictment which did not include the conspiracy charge, here.
I do note the nature of conspiracy charges in this context by this cut and paste from my book (footnotes omitted):

Not surprisingly, therefore, the Government trots out the conspiracy charge whenever it can imagine more than one bad guy behind the tree – it is so easy to do. The conspiracy count allegations are framed as a cascade of allegations telling a damning story (if true and, although literally true, not misleading), but sometimes producing more heat than light. This contrasts with counts for the tax offenses which are dry, sparse, boring, and usually not even flowered up for dramatic effect. The benefits for the Government are great, and the downsides are few; after all, the prosecutors’ life and liberty are not at stake. This means, of course, that the Government’s power to tack on conspiracy charges can be abused, particularly with a weapon as potent and elastic as conspiracy. The Supreme Court has noted that:

We agree that indictments under the broad language of the general conspiracy statute must be scrutinized carefully as to each of the charged defendants because of the possibility, inherent in a criminal conspiracy charge, that its wide net may ensnare the innocent as well as the culpable.

Addendum on 9/29/11:
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Diverting Corporate Earnings - Constructive Dividends or Wages / Salary (9/17/11)

One of the common ways of cheating on taxes is to divert corporate earnings from a C corporation to an entity that is off the IRS's radar screen. The diversions may be of the income which never hits the corporation's books and thus is not reported as income on its tax returns; they may also occur after the income is recorded with the diversion achieved by making payments from the corporation for goods or services which are deducted.  When the transactions thereafter get on the IRS's radar screen, the issue is whether the diversion was an underpayment of tax at the corporate level. 

In a wholly owned corporation, particularly a personal service corporation providing professional services, the corporate income arises from the personal services of the sole shareholder. In such a case, the corporation could easily pay the shareholder wages or salary of the entire net income before payment of compensation. (I refer to this as wages, as did the Court in the case I discuss below.) There would certainly be no unreasonable compensation issue. But, by paying the amount as wages, although fixing the tax issue at the corporate level, the income still is taxed at the shareholder level and the corporation has to withhold, payover and provide a W-2 for an easy IRS match at the shareholder level. By diverting that amount via  either diverting the income or through falsely deductible payments to a shareholder designated entity which does not pay tax, the tax cost at both the corporate and the shareholder levels are avoided (at least until caught). When caught, of course, in order to minimum the tax avoided, the corporation and the shareholder may try to claim that the diversion payments were really wages to the sole shareholder rather than dividends thereby eliminating the corporate level tax. Sometimes, when caught, the shareholder will cause the corporation to amend its returns making that claim.
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Even More on Principals, Accomplices, Causers and Pinkerton Conspirators - the Daugerdas Case (5/10/11)

I have previously written on derivative criminal liability for the enablers in the tax shelter game (lawyers, CPAs, financial wizards). See here. I have just today read the transcript for the instruction conference on 5/5/11 in the Daugerdas criminal case.  Daugerdas involved the same basic pattern as the Larson and Coplan cases (previously discussed here and here). That pattern is the prosecution of the enablers but not the taxpayers (or taxpayer advisors), with even a concession that for purposes of the submission to the jury the taxpayers are not guilty of the crime of evasion. In these cases, the prosecutors trot out several redundant or just not applicable theories of liability as if they were different than criminal liability for the underlying criminal offense of tax evasion.  They are not.

Judge Pauley, the trial judge in Daugerdas, gets it. My bullet point summary of the charging conference is: (i) the prosecutors may have abandoned 2(a) accomplice liability, (ii) Judge Pauley wants to conflate 2(b) causer liability directly into the substantive offense, and (iii) Judge Pauley is not enamored with Pinkerton liability. Judge Pauley defaults to the real issue -- either these defendants are guilty as direct principals of tax evasion or they are not guilty of tax evasion at all (regardless of what theory is used).
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A Third Theory for Conviction in the Larson, Pfaff and Ruble Cases -- Aiding and Abetting / Accomplice Liability

As I noted in an earlier blog titled More on 18 USC § 2(b) Liability from the Larson / Pfaff / Ruble Case, the Government asserted criminal liability for tax evasion directly under 7201 and also asserted liability under 18 USC § 2(b).  Judge Kaplan described these as the first and second theories of criminal liability for evasion. There was a third theory -- aiding and abetting liability -- often called accomplice liability -- under 18 USC § 2(a). Accomplice liability requires that a principal commit the crime; if a defendant aids and abets the actual principal, the accomplice is deemed a principal.

I thought I would offer readers the Judge Kaplan's instructions on accomplice liability (from pp. 5243-5246 of the transcript).
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The "Slight Evidence" and Similar Formulations for Connection to a Conspiracy

In our Tax Fraud and Money Laundering Class last Monday, Larry Campagna and I addressed conspiracy under Title 18 USC § 371. We covered the key concepts for conspiracy, including the differences between the offense and the defraud / Klein conspiracy. In addressing conspiracy concepts common to both types of conspiracies, we cautioned the class about this comment in the text we use (our own, so this is mea culpa):

Although the Government must prove that a defendant was a member of a conspiracy, this requirement may be satisfied by a showing of only a “slight connection” to the conspiracy so long as the connection is proven beyond a reasonable doubt.

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Another Tax Shelter Lawyer Bites the Dust

Erwin Mayer, a Paul Daugerdas partner and co-defendant in the tax shelter indictment in SD NY, has pled guilty. I have previously blogged on various aspects of the indictment in four parts: Part 1, Part 2, Part 3, and Part 4. Mayer pled to two counts -- conspiracy and tax evasion, both 5 year felonies exposing him to a maximum 10 year sentence.  He also agreed to forfeit money and property worth in excess of $10,000,000,.

The press release by USAO SDNY here summarizes the key admissions for guilts as follows:

During the guilty plea proceeding, MAYER acknowledged that he knew that the tax shelter transactions would be allowed by the IRS only if there was a reasonable possibility of a profit and if the clients were entering into the tax shelter transactions for genuine, non-tax business reasons. MAYER also acknowledged that the losses from the transactions would be allowed only if the clients were utilizing the entities involved in the tax shelters -- such as the partnerships and corporations-- for legitimate, non-tax business reasons and not simply to produce tax losses. MAYER admitted that the tax shelters had no reasonable possibility of resulting in a profit because among other reasons, the costs and fees for most of the transactions exceeded the potential profit, if any.

For some more nuance, see the WSJ Law Blog here.

Daugerdas and a fellow lawyer Donna Guerin remain standing defendants in the case, at least for now.  It is unlikely that the prosecutors will offer Daugerdas a deal -- at least one that would not put him away for a very long time.  But we'll see what happens on Guerin.

Kottwitz -- a Long Rambling Tax Opinion Covering Most of the Major Tax Crimes

I write about the Eleventh Circuit's recent decision in United States v. Kottwitz, 614 F.3d  1241 (11th Cir. 2010). The decision is per curiam so we don't know which judge or which judge's clerks took the laboring oar for the opinion. Judge Birch does dissent, so the other two who formed the majority are Circuit Judge Edmondson and assigned District Judge Terrell Hodges, although I suppose Judge Birch could have written the majority opinion and dissented the part inserted at the insistence of the other two. The per curiam opens with a summary:

Defendants Theresa L. Kottwitz ["Kottwitz"], Gerard Marchelletta, Sr. ["Senior"], and Gerard Marchelletta, Jr. ["Junior"] appeal their convictions and sentences for tax fraud-related charges. We find the evidence sufficient to support the jury's verdict regarding their conspiracy convictions and that the general good faith jury instruction that was provided by the district court fully encompassed Kottwitz and the Marchellettas' theory of defense on this charge. We find, however, that the district court erred in refusing to give Kottwitz's and the Marchellettas' requested special instruction to the jury on their good faith reliance on their accountant's advice. Because the evidence was sufficient for a properly instructed jury to convict on the charges of filing materially false personal income tax returns for 2000 as to Junior and Senior and for evading taxes as to Senior, we vacate and remand for retrial in light of the jury instruction error. Because the evidence was insufficient for a properly instructed jury to convict on the charge of aiding and assisting in the filing of a materially false corporate tax return for 2001, we reverse the convictions of Kottwitz, Junior, and Senior and remand with directions to enter a judgment of acquittal on this count.

1. Conspiracy.

The Per Curiam opinion affirms the sufficiency of the evidence on the conspiracy issue. The analysis is rambling, replete with unfocused glittering generalities and string points and quotations, followed by a a summary conclusion that, well, the evidence was sufficient to present to the jury. For flavor, consider the following:

The knowledge requirement must be established by evidence that each alleged conspirator knew that the scheme would culminate in the filing of false tax returns. Adkinson, 158 F.3d at 1155. Evidence of a conspiracy or that a defendant acted in a way that would have furthered "a conspiracy if there had been one" is insufficient; there must also be independent evidence that the defendants knew of the conspiracy in progress and knowingly and voluntarily joined it. Id. (citation omitted). Due to the complexity of the tax laws, specific intent or "willful" conduct is a necessary element of tax offenses. Cheek v. United States, 498 U.S. 192, 200, 111 S. Ct. 604, 609 (1991). "This tax purpose [to interfere with the IRS's lawful functions in collecting taxes] must be the object of a Klein conspiracy, and not merely a foreseeable consequence of some other conspiratorial scheme." Adkinson, 158 F.3d at 1155. The Klein conspiracy to impede the IRS must be the object, or at least an object in a conspiracy with multiple objectives; it is not adequate if the act of impeding the IRS is "only a collateral effect of an agreement." Id. (quotation and citation omitted). Evidence that owners directed their accountant to refer any questions to them and failed to disclose to their accountant payments to some employees or unreported revenue was sufficient to support a conspiracy conviction for IRS fraud. United States v. Useni, 516 F.3d 634, 650 (7th Cir. 2008).

Innocuous even if unfocused.  I do, however, raise a limited issue. Notice how the Per Curiam Opinion weaves into the conspiracy analysis the Cheek willfulness standard. As I have discussed ad nauseum in my article, that is not how the Government in its expansive imagination of the Klein conspiracy offense imagines it. See John A. Townsend, Is Making the IRS's Job Harder Enough?, 9 Hous. & Bus. Tax L.J. 260 (2009) .

Addendum on 12/24/10:  On rehearing, the Eleventh Circuit panel reversed the conspiracy conviction for the same reason it reversed other convictions (discussed at paragraph 4, below).  The order on rehearing is here.  Specifically, the good faith reliance on accountant requested instruction.  The panel had already reversed some of the counts on this basis for retrial; since the burden to receive a requested instruction is light, the panel was convinced on rehearing that the requested instruction was proper for the Count One Conspiracy charge.

2. Tax Perjury.

The Per Curiam then says that there was sufficient evidence for the tax perjury charge. This too is based upon a rambling set of the same type stuff that, at least to me, does not convince that the Per Curiam Judges came to grips with the argument. I cannot say the result is wrong. Just that it seems less than focused.

3. Aiding and Assisting.

The Per Curiam then, quite summarily, reverses the aiding and assisting conviction by simply saying that there is no evidence. I guess that, if indeed there were no evidence, there is nothing to talk about. And so the Per Curiam doesn't talk about it [or the not it] other than to note its absence.

4. Failure to Give the Requested Good Faith Instruction.

Now we come to something a bit more meaty. The defense asserted a good faith reliance defense and the record had sufficient evidence to establish that it was a defense to be submitted to the jury. The defense thus properly requested a good faith jury instruction drawn from the Eleventh Circuit's pattern jury instructions. The Per Curiam held that the defense was entitled to that instruction and failure to give it upon proper request was reversible error.

In the course of its glittering generalities and string quotes, the Per Curiam says some curious things. It says, for example, "The requested good faith reliance jury instruction was based on our pattern jury instructions and was, therefore, a correct statement of the law." The Per Curiam cannot be serious in that statement read on its face. Congress never passed the pattern jury instructions nor has the Supreme Court put its imprimature on it, so if the pattern jury instructions misinterpret the law, the pattern jury instructions do not become the law. Cf. United States v. Svete, 521 F.3d 1302, 1310(11th Cir. 2008), reversed en banc 556 F.3d 1157 (11th Cir. 2009) (although reversed because the pattern was found correct, the key point is that pattern jury instructions are not the law).

Once you work past the fluff, the bottom line is that there was sufficient evidence to support the requested jury instruction.

The opinion, including the short dissent, is 70 pages long. Reminds me of the quote attributed to Blaise Pascal (and others), "I would have written a shorter letter, but I did not have the time."

Notable Decision in SDNY Criminal Tax Shelter Case

I have previously blogged that John B. Ohle was an unindictead alleged co-conspirator in the Daugerdas et al. indictment.  See here.  Ohle was indicted apart from that indictment.  He was indicted along with a guy named Bradley.  That indictment generated a significant decision from Judge Leonard Sand in United States v. Ohle, 2010 U.S. Dist. LEXIS 2150 (SDNY No. S2 08 Cr. 1109 (LBS)).  The following are the points that attracted my particular attention:

1. The Court rejected a challenge to the wire fraud count (Count One). Ohle argued that "Count One of the indictment impermissibly uses the wire fraud statute to reach an alleged criminal tax conspiracy, citing United States v. Henderson, 386 F. Supp. 1048 (S.D.N.Y. 1974)." The Court essentially took the life out of Henderson. Prosecutors have their choice of how to charge tax conspiracies. Why does it matter if a conspiracy is a conspiracy and there is a single punishment scheme in 18 U.S.C. § 371? Ah, but there are other potential consequences of wire and mail fraud -- forfeiture and even ramping up to money laundering or RICO -- which are not available for tax crimes and tax conspiracy (either offense or Klein defraud conspiracy). See fn. __ on page __. For the DOJ Tax Division policy for prosecutors to make the choice, see Directive No. 128 here (noting that virtually all tax crimes can be charged as mail or wire fraud, and attempting to provide guidance and preclearance directives so the mine-run tax cases are not willy-nilly charged as mail or wire fraud). Thus, these charging decisions are not tweedle dum / tweedle dee from the defendant's perspective.

2. The Court rejected a challenge to another conspiracy (Count Five) as duplicitous. The indictment contained a "boilerplate" allegation that appeared to allege a single conspiracy. The overt acts, however, seemed to suggest multiple conspiracies. Yet, because the apparent multiple conspiracies were related and involved players not acting in a vacuum, with compensation flowing around, the Court concluded that the allegation is of a single conspiracy and not multiple conspiracies so as to implicate duplicity concerns. In the process of getting to that holding, the Court had a nice discussion of the concerns that are implicated by duplicity in counts (case names and quotation marks omitted to easier see the logical flow):

An indictment is duplicitous if it joins two or more distinct crimes in a single count. Duplicitous pleading is not presumptively invalid; rather, it is impermissible only if it prejudices the defendant. Duplicity is only properly invoked when a challenged indictment affects one of the doctrine's underlying policy concerns: (1) avoiding the uncertainty of a general guilty verdict, which may conceal a finding of guilty as to one crime and not guilty as to other, (2) avoiding the risk that jurors may not have been unanimous as to any one of the crimes charged, (3) assuring the defendant has adequate notice of charged crimes, (4) providing the basis for appropriate sentencing, and (5) providing the adequate protection against double jeopardy in subsequent prosecution.

The Court of Appeals for the Second Circuit has recognized that application of the duplicity doctrine to conspiracy indictments presents "unique issues." In this Circuit, it is well established that [t]he allegation in a single count of a conspiracy to commit several crimes is not duplicitous, for the conspiracy is the crime and that is one, however diverse its objects. A single conspiracy may be found where there is mutual dependence among the participants, a common aim or purpose or a permissible inference from the nature and scope of the operation, that each actor was aware of his part in a larger organization where others performed similar roles equally important to the success of the venture. Each member of the conspiracy is not required to have conspired directly with every other member of the conspiracy; a member need only have participated in the alleged enterprise with a consciousness of its general nature and extent. If the Indictment on its face sufficiently alleges a single conspiracy, the question of whether a single conspiracy or multiple conspiracies exists is a question of fact for the jury. Accordingly, courts in this Circuit have repeatedly denied motions to dismiss a count as duplicitous.

 3. The Court rejected a challenge to joinder on Count 5 based on the "reasonable person" test - "We take a common sense approach when considering the propriety of joinder under Rule 8(b), and ask whether "a reasonable person would easily recognize the common factual elements that permit joinder." (Internal quotations and citations omitted.) The Court undertook a fact specific inquiry to show that the test was met so that the two conspiracies could be joined.

4. The Court granted severance as to the two conspiracy allegations (Counts One and Five) because they were not sufficiently related. Because of that severance, the Court also severed Counts Six through Eight involving individual tax counts for tax crimes arising from failure to report and pay tax on income from the conspiracy alleged in Count Five.

5. The Court held that, since a financial institution was involved in -- affected by -- the scheme, the 10 year statute of limitations in 18 USC § 3293(2) applies. Further, the tax crimes charged 6 years and one month after the return filings, although in untimely by a strict application of the 6 year limitations period could still be timely if the defendant were, during that period, out of the country for one month or more. The reason is that, while a person is outside the country (even for business or personal trips), the statute of limitations is tolled. § 6531. This is a good reminder that we, as practitioners, should not just assume a 6 year statute of limitations. Actually, it is a 6 year statute of limitations that just gets tolled for some period. All of us need to remember that nuance.

6. The Court easily moved past the venue objections. Although the defendants were not residents of SDNY, such broadly alleged conduct easily met the nexus requirement.

7. The Court then held that the tax obstruction count (Count Eight) was not unconstitutionally vague because it racked the statute and incorporated the specific allegations in prior paragraphs of the indictment. Further, the Court rejected the Kassouf argument (United States v. Kassouf, 144 F.3d 952 (6th Cir. 1998)) that tax obstruction did not reach actions taken before an IRS investigation was commenced.

8. The Court rejected any consequence of the IRS and DOJ to offer pre-indictment conferences. The reasoning is short and bitter (case citations omitted):

However, IRS guidelines do not provide for a pre-indictment conference "if the taxpayer is the subject of a grand jury investigation," as was the case here. IRM 9.5.12.3.1 (July 25, 2007). The United States Attorneys' Manual ("USAM") provides that, "If time and circumstances permit, the Tax Division generally grants a taxpayer's written request for a conference with the Division in Washington, D.C." USAM 6-4.214 (Sept. 2007). However, the Second Circuit has held that the provisions of the USAM "reflect executive branch policy judgments" and "do not confer substantive rights on any party." United States v. Piervinanzi, 23 F.3d 670, 682-83 (2d Cir. 1994); see also United States v. Kelly, 147 F.3d 172, 176 (2d Cir. 1998) (stating that "[internal department] guidelines provide no substantive rights to criminal defendants" in discussing DOJ Criminal Tax Manual). The Government claims it decided not to offer Ohle a pre-indictment conference in order to prevent Ohle from dissipating assets subject to forfeiture before he was indicted and arrested. This decision does not provide a basis for dismissal of the indictment. See United States v. Goldstein, 342 F. Supp. 661, 666 (E.D.N.Y. 1972) (failure to offer pre-indictment conference in criminal tax case not grounds for dismissal of indictment because "such a conference is clearly not a matter of right").

This is a specific application of the Caceres doctrine (United States v. Caceres, 440 U.S. 741 (1979) (holding that IRM does not confer rights on taxpayers; hence, evidence obtained arguably in violation of IRM cannot be excluded).

9. The Court rejected Ohle's claims that two grand jury subpoenas after the original indictment and IRS investigations after the indictment were improper use of process in violation of the limited discovery allowed in criminal cases. As to the grand jury subpoena, the Court noted curtly that none were issued after the superseding indictment, and that was the end of the matter. As to the IRS investigations, the Court rejected Ohle's request for an evidentiary hearing to inquire into whether they were intended to circumvent the limited criminal discovery rules. The Court reasoned:

Although Ohle cites a number of legal propositions, he alleges no acts of bad faith on the part of the Government to support the contention that the Government conducted the civil tax proceedings in order to obtain evidence for the pending criminal trial. He argues only that the timing of the two civil audits conducted in the midst of the criminal tax investigation is "suspicious" without alleging relevant dates or information obtained. Notably, Ohle does not contest the Government's statement that he had counsel during both of the audits, and that one of the audits was commenced prior to the criminal investigation. (Gov't Opp. 77 n.45.) Ohle has not raised any issues or pointed to any potential infringement of his rights that would warrant an evidentiary hearing. Ohle's motion for an evidentiary hearing is denied.

Obviously, this can be a serious concern.  It implicates some of the same concerns as parallel investigations that have been a hot topic in the tax and SEC area over the last few years.

Guilty Plea in SLOTS Tax Shelter

On December 1, 2009, Michael Parker pled guilty to one count of Klein conspiracy in a tax shelter scheme using the ubiquitous tax shelter trademark -- an acronym, in this case SLOTS for Sale Leaseback of Tenant Improvements Strategy. According to the DOJ press release for the original indictment in October, two parties were indicted -- David Haynor, an accountant/tax partner with KPMG, and Jon Flask, a lawyer. Parker, COO of a "tax-advantaged investments company," was named in a contemporaneous criminal information and entered a plea agreement. The original DOJ Tax press release is here.

According to the DOJ Tax press release on the guilty plea on December 1 here:

According to the plea agreement and statements made during the hearing before United States District Judge Sandra S. Beckwith in Cincinnati, Parker admitted to conspiring with Daryl Haynor, an accountant who was a tax partner at KPMG LLC, in its Tysons Corner, Va., office, and Jon Flask, an attorney for TransCapital, who was a partner at a law firm in Vienna, Va., to defraud the IRS with regard to tax shelter transactions. Parker admitted that he was both a CPA and an attorney, but acted as the Chief Operating Officer of TransCaptial Corporation. In October 2009, Haynor and Flask were indicted for conspiracy to defraud the IRS and for corruptly endeavoring to obstruct and impede the due administration of the internal revenue laws.

According to the plea agreement and statements made during the hearing, from 1998 through 2006, Parker, Haynor and Flask marketed and implemented a tax shelter to KPMG clients called the Sale Leaseback of Tenant Improvements Strategy (SLOTS), which enabled various U.S. corporations to claim tax deductions totaling more than $240 million on corporate income tax returns filed with the IRS. During 2002 through 2004, the IRS audited three U.S. corporations that had claimed losses generated by SLOTS transactions, including The Kroger Company. Parker identified Kroger as the Fortune 500 corporation which did the largest SLOTS tax shelter transaction, and which claimed over $178 million in loss deductions, causing over $64 million in tax loss to the IRS. Parker admitted that he, Haynor and Flask conspired to impede and impair the IRS by making false and misleading statements to IRS agents and attorneys during these audits, including the Kroger audit. Additionally, Parker admitted that he, Haynor and Flask concealed certain aspects of the tax shelter transaction from SLOTS clients, including Kroger, for the purpose of impeding and impairing the IRS. Parker further acknowledged that the SLOTS tax shelter and related transactions were themselves nothing more than devices to disguise and conceal mere financing transactions.

Other than the press releases and the smattering of newspaper articles that I have read, I have no further detail. I do, however, have several comments based on the press release.

1. The plea is to conspiracy which is the sole count in the information as well as in the indictments of the others. It is noteworth, I think, that the Government did not include tax evasion counts. I suppose this can serve as warning to taxpayers and practitioners that the Government stands ready to indict for misbehaving even if the tax shelter is not fraudulent.

2. The plea to conspiracy offers the Government great advantage in the ongoing case against the other two indicted defendants.

3. For students not familiar with the song and dance for DOJ Tax press releases, you will note that the press release is careful to state that the information is from the guilty plea. In press releases such as this DOJ Tax and the IRS have to be careful to provide only information that it has derived from public information such as indictments and guilty pleas in order to not violate Section 6103, the general prohibition on disclosing return information which is defined broadly to include the fruits of IRS investigations. A parallel rule, FRCrP Rule 6(e) prohibits disclosure of grand jury matters, so DOJ Tax and the IRS have to be careful to include in press releases only information that has been made public.

Confusion about the Defraud Conspiracy

Conspiracy is a frequent charge in tax related indictments. Indeed, Judge Easterbrook of the Seventh Circuit has lamented, with some hyperbole, that, in federal crimes generally, a conspiracy charge is “inevitable because prosecutors seem to have conspiracy on their word processors as Count I; rare is the case omitting such a charge.” United States v. Reynolds, 919 F.2d 435, 439 (7th Cir. 1990) (Reynolds is important in the tax crimes area for other reasons, but I won't digress).

The general conspiracy statute (18 U.S.C. § 371) defines two types of conspiracy -- an offense conspiracy and a defraud conspiracy. The offense conspiracy is a conspiracy to commit an act otherwise defined in the law as an offense. A tax example is a conspiracy to commit tax evasion; tax evasion is a substantive offense defined in 26 U.S.C. § 7201. The defraud conspiracy is not a conspiracy to commit a substantive offense, but in a tax setting is a conspiracy to impair or impede the lawful functioning of the IRS in the administration of the tax law. In a tax setting, the defraud conspiracy is often referred to as a Klein conspiracy, named after the leading case of United States v. Klein, 247 F.2d 908, 920 (2d Cir. 1957), cert. denied 355 U.S. 924 (1958).

In a recent article (cited at the end of this blog), I note the importance of distinguishing between the two types of conspiracy in tax crimes because the offense conspiracy requires the same proof of mens rea as the substantive offense that is the object of the conspiracy. Although the conspiracy statute says nothing about willfulness, when tax crimes are the object of the offense conspiracy, a willfulness element is imported as an element of the offense conspiracy because tax crimes require willfulness. Willfulness is a high standard of proof -- that the defendant knew the law and intended to violate the law. (By contrast to other areas of the law, the crime is committed if the defendant knew he was doing the activity that the law defines as criminal whether or not he knew that the law so defined the activity as criminal; ignorance of the law is no excuse; in tax crimes, however, ignorance of the law is an excuse.) The defraud conspiracy, like the offense conspiracy, has no textual requirement of willfulness but, unlike the offense conspiracy, has no referrant from which to import a requirement of willfulness.

For purposes of this blog, I just want the reader to understand that the offense conspiracy requires an offense as the object of the conspiracy whereas the defraud conspiracy does not. So, with that background, consider the following statement in a case I read today:

To establish conspiracy to defraud the United States in violation of 18 U.S.C. § 371, "there must be proof (1) of an agreement among two or more persons (2) to accomplish something that constitutes an offense against the United States, and (3) an overt act by one of them in furtherance of the conspiracy." United States v. Lichenstein, 610 F.2d 1272, 1276 (5th Cir. 1980). Furthermore, "the government must prove the requisite intent to commit the substantive offense." United States v. Charroux, 3 F.3d 827, 831 n.4 (5th Cir. 1993) (internal quotation and citation omitted).

United States v. Blockett, 324 Fed. Appx. 402 (5th Cir. Miss. 2009) (unpublished opinion). Blockett was not a tax case, but the distinction between offense and defraud conspiracies applies to the general conspiracy statute. Basically, the court blew it. The defraud conspiracy does not require proof of an agreement "to accomplish something that constitutes an offense against the United States." The case cited by the court for the proposition (Lichtenstein) was an offense conspiracy case. (Lichtenstein was a very interesting case, but I won't digress here to discuss it.) This error by the court was not outcome determinative in the case, and the error was committed in a nonprecedential decision so that, hopefully, the error will not have a life beyond the case. (One of the dangers that commentators have note about nonprecedential decisions is that, perhaps, judges are less careful about what they say in nonprecedential cases.)

The key point for students of the tax crimes, of course, is not to make this rather elementary mistake about the defraud / Klein conspiracy. For nuance, however, as I develop in my article, the defraud conspiracy, as interpreted, does have some significant requirement of proof that one might not discern from simply reading the statute – a requirement that deceit be involved in the attempt to impair or impede the administration of a government agency. This requirement serves an important limiting role for the defraud conspiracy, much as the willfulness element at least in tax crimes serves an important limiting role for the offense conspiracy.

My article that I cite in this blog is John A. Townsend, Is Making the IRS's Job Harder Enough?, 9 Hous. & Bus. Tax L.J. 260 (2009) and may be viewed on line here.