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).
Read more »

An Outlier Foreign Bank Account Sentencing (5/10/11)

I recount below the key objective facts in the most recent sentencing, but caution that this sentencing is outside the mainstream for the current initiative -- i.e., more or less ordinary high net worth U.S. tax cheats who have legal source income stashed in overseas banks. The defendant in this case, one Arthur Allen Ferdig, operated a Ponzi Scheme through Tradex. The plea agreement is for the tax offense only but appears animated chiefly by his nontax skullduggery.  The plea agreement describes the nature of his tax offense as:

NATURE OF THE OFFENSE

4. Defendant understands that for defendant to be guilty of attempting to evade and defeat income tax, in violation of Title United States Code, Section 7201, defendant must have willfully attempted to evade or defeat the assessment and payment of a tax due and owing with respect to income received by defendant during the year 2002 by, among other things, committing an affirmative act of evasion. Defendant admits that during the year 2002, defendant knowingly received income from Tradex, a business that defendant operated and failed to report that income. Defendant admits that his failure to report income resulted in a tax due and owing to the Internal Revenue Service. Defendant acted with the specific intent to violate the law. Defendant admits that defendant is, in fact, guilty of this offense as described in the first superseding information.

Read more »

Court Rejects the Temporary Evasion Defense

In United States v. Jewell, ___ F.3d ___ (8th Cir. 2010) which I discussed in the addendum to last blog here, the Eighth Circuit rejected a notion in an earlier Ninth Circuit case that, a taxpayer intending only a temporary diversion of tax revenue but not a permanent one might not be guilty of tax evasion. Jewell was convicted of assisting his clients evade their taxes.  The Court said:

Jewell also claims he cannot be guilty of tax evasion because the Evanses eventually paid their taxes. Jewell relies upon a case from the Ninth Circuit for the proposition a defendant must intend a permanent escape from paying a tax and not merely a postponement. See Edwards v. United States, 375 F.2d 862, 867 (9th Cir. 1967) ("[E]vasion and defeat . . . contemplate an escape from tax and not merely a postponement of disclosure or payment."). The Eighth Circuit has not adopted such a position, however, and the Ninth Circuit itself has limited Edwards to the unique facts involved in that case, where there was no evidence at all of an intent to avoid payment of taxes, but merely to delay. See United States v. Huebner, 48 F.3d 376, 380 (9th Cir. 1994) (indicating the escape not postponement "statement in Edwards must be read in the light of the facts of that case."). The fact that the Evanses eventually reconciled their tax deficiency with the IRS does not exonerate Jewell where a reasonable jury could determine he had the intent to assist the Evanses with evading taxes in the tax year 2000.

Save-A-Patriot Did Not Save a Doctor

Yesterday, the Fifth Circuit decided a case, United States v. Miller, ___ F.3d ___ (5th Cir. 2009) sustaining a medical doctor's conviction for tax evasion, § 7201. The issues decided are not novel, but should reinforce what the practitioner or student probably already knows. The key points are:

1. A misdemeanor failure to file case became a felony evasion case because, in addition to failure to file, there were significant affirmative attempts to evade. The Court of Appeals said in addressing the lower court’s denial of the motion for acquittal:

The evidence at trial sufficiently demonstrates Miller's evasion. It is undisputed that he failed to file tax returns for tax years 2000 and 2001, as charged in the indictment. Further, Miller acted affirmatively when he converted payments made to the clinic to cash, money orders, and cashier's checks. Witnesses testified that Miller's practice of converting payments made to the clinic made it difficult for the IRS to determine his income. These affirmative acts had the "likely effect of mislead[ing]" the IRS, and precluded the agency from effectively assessing his tax liability. Spies, 317 U.S. at 399; Robinson, 974 F.2d at 577. Moreover, Wolff testified that the Medical Manager software on Miller's clinic's computers included double sets of billing records. Viewing the evidence in the light most favorable to the verdict, the affirmative acts of keeping double records and conversion, coupled with the failure to file, support a finding of evasion.

2. The doctor joined a tax protestor / defier movement, called "Save-A-Patriot" to give his evasion some semblance of legitimacy, at least in giving his evasion the opportunity to assert the Cheek defense. He was the sole defense witness, testifying

that in 1995, after being audited by the IRS, he joined Save-A-Patriot. He also studied materials provided by Save-A-Patriot. Based on his study of the materials and of the Internal Revenue Code, he believed that the income tax system was voluntary and that he was not required to pay taxes, though he had filed tax returns in the past.

The jury did not believe him and convicted him. (There was a deliberate ignorance instruction, so that the jury could have convicted him on that basis rather than finding that he had an affirmative expressly formulated intention to violate a known legal duty.) The key part of the deliberate ignorance instruction (from the Fifth Circuit pattern instructions) was:

You may find that a defendant had knowledge of a fact if you find that the defendant deliberately closed his eyes to what would otherwise have been obvious to him. While knowledge on the part of the defendant cannot be established merely by demonstrating that the defendant was negligent, careless, or foolish, knowledge can be inferred if the defendant deliberately blinded himself to the existence of a fact.

Note in this regard that the doctor's ex-wife who gave otherwise damaging testimony did testify that the doctor "decided not to file tax returns after joining Save-a-Patriot because he felt that filing was unnecessary and unconstitutional." Cheek does not permit the unconstitutional argument; indeed, by asserting nonliability based on unconstitutionality of the law, a defendant virtually admits that he knows the law and intentionally violated violate it. (There may perhaps be some logical lapses here, but I think they may be inherent in the Cheek case, Cheek v. United States, 498 U.S. 192 (1991) which is worth re-reading (with concurrence and dissent) from time to time.)

Further as to his knowledge of the duty to pay, the Court of Appeals said:

In addition, the evidence supports the jury's finding of willfulness under the Cheek standard. Miller testified that he withheld taxes after becoming a member of Save-A-Patriot and studying the tax laws in late 1995. Miller, however, permitted taxes to be withheld from his earnings prior to 1996, which demonstrates that he knew of the duty to pay appropriate income tax. Miller also did not consult with any tax professionals regarding his failure to file taxes for 2000 and 2001, though he had done so in the past. Based on this evidence, the jury could have reasonably determined that Miller knew he had a duty to pay taxes and knowingly violated that duty.

3. The doctor complained on appeal that evidence of a settlement negotiation had been improperly excluded. The court of appeals found that the excluded evidence (i) was not relevant, a threshold requirement in all events, and (ii) had minimum probative value that was offset by the potential to confuse the jury, citing FRE 403. Interestingly, the court of appeals noted in a footnote:

n9 The district court also ruled that the negotiations evidence was not admissible under FRE 408, which forbids the admission of offers of compromise or negotiations for compromise in certain civil cases, or its exceptions. FED.R.EVID.408. Though we have held that Rule 408 applies in criminal cases, see United States v. Hays, 872 F.2d 582, 588-89 (5th Cir. 1989), there is a split in authority in our sister circuits on this issue. See United States v. Bailey, 327 F.3d 1131, 1144-47 (10th Cir. 2003) (discussing circuit split). We decline to address the applicability of FRE 408 to this criminal case, however, because the evidence regarding settlement negotiations is excludable on the grounds of relevance.

The Bailey case is a worthy read for those encountering this issue.

4. The Court discusses the two marital privileges. I quote just the portion of the opinion that describes these privileges (citations omitted):

The marital privilege encompasses two distinct privileges. The first permits a married witness to refuse to testify adversely against his or her spouse. The witness may neither be compelled to testify nor foreclosed from testifying. The second bars one spouse from testifying as to the confidential marital communications between the spouses. The confidential communications privilege survives the marriage and may be asserted by either spouse with respect to communications that occurred during the marriage even after the marriage has terminated. The privilege applies only to communications; it does not apply to acts.

Under the facts, the parties were not married at the time, so the first privilege was not applicable. The second was applicable as to qualifying marital communications. However, as with many rules, there is an exception, and the exception in this case was for "conversations between husband and wife about crimes in which they are jointly participating." (Citation omitted.) The key testimony was his ex-wife's admission that her failure to file committed the crime of failure to file. Defendant's concern on appeal was that he was convicted of guilty by association to his ex-wife.

Duplicity in Government Charging of Evasion of Assessment Counts

The Third Circuit issued an important opinion in United States v. Root, 585 F.3d 145 (3d Cir. 2009). The major issue in the opinion is the application of the criminal law concept of "duplicity." Duplicity is defined as "an indictment where the Government charges two or more distinct offenses in one count. In the latter situation, it cannot be determined if the jury's verdict was unanimous as to each distinct offense.)." 1A Charles Alan Wright et al., Federal Practice and Procedure § 142 (3d ed. 1999) (cited in fn. 7 of the concurring opinion in Root). The majority cites a longer list of concerns in duplicity:

The purposes of the prohibition against duplicity include: (1) avoiding the uncertainty of whether a general verdict of guilty conceals a finding of guilty as to one crime and a finding of not guilty as to another; (2) avoiding the risk that the jurors may not have been unanimous as to any one of the crimes charged; (3) assuring the defendant adequate notice; (4) providing the basis for appropriate sentencing; and (5) protecting against double jeopardy in a subsequent prosecution.

(Note that some of these concerns overlap the recent Rigas discussion here.
Read more »