Seventh Circuit Sounds the Death Knell for Inextricable Intertwinement as End-Run Around Rule 404 and 403

Courts have developed the notion that evidence inextricably intertwined with the criminal offense charged may be introduced free of the constraints of FRCrP Rule 404(b) and perhaps even of CRCrP Rule 403 (excluding certain types of evidence including evidence otherwise admissible under Rule 404(b) if unfairly prejudicial). In United States v. Gorman, ___ F.3d ___ (7th Cir. 2010), the Seventh Circuit sounded the death knell of the inextricable intertwinement doctrine. Although Gorman is not a tax case, Rule 404(b) does loom large in many criminal tax cases (both at trial and in consideration of whether a plea is advisable). Accordingly, I excerpt there the guts of the Seventh Circuit's holding and reasoning (some case citations omitted):

This circuit has also traditionally allowed the admission of evidence under the "inextricable intertwinement" or "intricately related" doctrine. See United States v. Conner, 583 F.3d 1011, 1018 (7th Cir. 2009). The inextricable intertwinement doctrine is based on the notion that evidence inextricably intertwined with charged conduct is, by its very terms, not other bad acts and therefore, does not implicate Rule 404(b) at all. "In other words, evidence admitted under this doctrine lie[s] outside the purview of the Rule 404(b) character/propensity prohibition, and is not subject to its constraints regarding the manner in which the evidence may be used." Conner, 583 F.3d at 1019 (internal quotation marks and citations omitted) (alteration in original).

Even if evidence is initially deemed admissible under any of these three doctrines, however, that evidence must still pass muster under Rule 403's balancing test to actually be admitted against a defendant. To make this determination, a court must weigh whether the evidence's probative value is substantially outweighed by the danger of unfair prejudice to the defendant. Only if the court determines that Rule 403's balancing test weighs in favor of admission is the disputed evidence then placed before the jury.

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We have recently cast doubt on the continuing viability of the inextricable intertwinement doctrine, finding that "[b]ecause almost all evidence admitted under this doctrine is also admissible under Rule 404(b), there is often 'no need to spread the fog of "inextricably intertwined" over [it].'" Conner, 583 F.3d at 1019. We again reiterate our doubts about the usefulness of the inextricable intertwinement doctrine, and again emphasize that direct evidence need not be admitted under this doctrine. If evidence is not direct evidence of the crime itself, it is usually propensity evidence simply disguised as inextricable intertwinement evidence, and is therefore improper, at least if not admitted under the constraints of Rule 404(b).

We recognize, however, that we do not write on a clean slate. There traditionally have been subtle distinctions between direct evidence of a charged crime, inextricable intertwinement evidence, and Rule 404(b) evidence, but our case law has not often focused on these fine distinctions. We have often lumped together these types of evidence, and this has only served to further cloud the already murky waters of the inextricable intertwinement doctrine.

There is now so much overlap between the theories of admissibility that the inextricable intertwinement doctrine often serves as the basis for admission even when it is unnecessary. Thus, although this fine distinction has traditionally existed, the inextricable intertwinement doctrine has since become overused, vague, and quite unhelpful. To ensure that there are no more doubts about the court's position on this issue -- the inextricable intertwinement doctrine has outlived its usefulness. Henceforth, resort to inextricable intertwinement is unavailable when determining a theory of admissibility.

Addendum 8/3/2010:
After posting the foregoing, I read United States v. Jewell, __ F.3d ___ (8th Cir. 2010), decided July 30, 2010, which has a good, short discussion of Rule 404(b) evidence in a tax case.  The defendant there was a tax lawyer who had assisted a client evade tax through a one-off tax evasion scheme. The Court's discussion relevant to the Rule 404(b) issue is as follows:

The district court allowed the government to introduce evidence of a separate tax evasion scheme in which Jewell participated to establish his intent to engage in the Evans tax evasion scheme. Moser created a nonprofit corporation called the Christian Missionary Fund (CMF), to which both he and Jewell made contributions, claiming the contributions were charitable for tax purposes. In reality, the payments made to CMF were tuition payments for the two men's children, who attended private schools. After the so-called charitable contributions were made to CMF, CMF would in turn award "scholarships" for donors' children at the schools they attended. The government argued this tax evasion scheme, which occurred during the same time Jewell engaged in the Evans tax evasion scheme, was admissible as evidence of Jewell's criminal intent to evade taxes.

Other acts evidence is admissible under Rule 404(b) if it is 1) relevant to a material issue raised at trial, 2) similar in kind and close in time to the crime charged, 3) supported by sufficient evidence to support a jury finding the defendant committed the other act, and 4) its probative value is not substantially outweighed by its prejudicial value.

United States v. Johnson, 439 F.3d 884, 887 (8th Cir. 2006).

The CMF evidence was relevant to Jewell's intent to engage in a tax evasion scheme, was arguably similar to the Evans tax evasion scheme, and occurred during the same time. Finally, there was sufficient evidence to show Jewell engaged in this separate tax scheme, and the district court was within its discretion to determine the probative value of the evidence was not outweighed by its prejudicial effect under Rule 403. We therefore find no abuse of discretion in the district court's decision to admit evidence of the CMF tax evasion scheme.

The Reliance Defense as Bearing on Willfulness: Expert Testimony

The issue in a tax crimes case having a willfulness element (all of the significant ones except the tax obstruction crimes) is whether the defendant intentionally violated a know legal duty. Defendants will often try to deflect the blame other orthers, particularly the accountants and tax return preparers. In US v. St. Pierre, 599 F.3d 19 (1st Cir. 2010), the defendant sought to introduce expert testimony that the acountant/tax return preparer's failure to meet standards of care at least raised a reasonable doubt as to the defendant's state of mind. The district court denied the attempt, citing tangential relevance of the proffered expert testimony to the issue of the defendant's state of mind, and, in any event, FRCrP 403 that the evidence might not be helpful to the jury. Rule 403 provides: "Although relevant, evidence may be excluded if its probative value is substantially outweighed by the danger of unfair prejudice, confusion of the issues, or misleading the jury, or by considerations of undue delay, waste of time, or needless presentation of cumulative evidence." The Court of Appeals rejected the defendant's appeal on the issue.

The Court of Appeals went through the steps as follows:

1. Defendant was charged with tax evasion for 2000-2002 and tax obstruction under Section § 7212(a).

2. At trial, St. Pierre's underpayment of her personal taxes was undisputed; the central issue was whether St. Pierre had the requisite state of mind for the various offenses.

3. One of the accountants testified "that St. Pierre had been told to deposit company income into Staab's corporate bank account, as such deposits would enable the accountants to track Staab income that had to be reported on Staab's corporate and St. Pierre's personal income tax returns." There was apparently other "evidence that St. Pierre's accountants had explained to her -- in connection with past failures that she had claimed to be inadvertent -- the obligation to report company income on Staab's books."

4. Without telling her accountants, St. Pierre established at least 10 bank accounts unknown to the accoutants and deposited business revenue into the accounts, diverting over 3,000 business checks into those accounts. "Records indicated unreported income of $1,248,327 for the three-year period; the taxes avoided by the failure to report this income amounted to over $500,000, apart from interest."

5. This pattern existed in the years 2000-2002. By 2002 a tax audit had started, and the defendant doctored documents to affect the audit.

6. The jury acquitted the defendant of evasion for 2000 & 2001, but convicted for tax evasion in 2002 and for obstruction. The Court noted (fn. 1): "Although the unpaid taxes for 2000 and 2001 were also substantial, the government suggests that the jury may have given St. Pierre the benefit of the doubt as to her understanding of her obligations prior to 2002. By the time she signed her 2002 return, a tax audit was underway and St. Pierre had told IRS auditors that she understood her obligation to report company income."

7. The defendant claimed on appeal that the trial court's exclusion of the proffered expert testimony violated her Sixth Amendment right to present a defense and that the trial court misapplied the rules of evidence in denying the testimony.

8. The Court of Appeals rejected the defendant's claim as follows (footnote omitted):

At first blush, one might think that whether St. Pierre's accountants exercised due care was flatly irrelevant to any issue properly in the case. Mere failure of the accountants to detect her under-reporting or to give St. Pierre better directions, even if negligent, would not be a defense to a knowing effort by St. Pierre to evade taxes or willfully create false documents. n2 The jury was told what elements were required to prove tax evasion and obstruction, and the evidence amply permitted the jury to find that St. Pierre had the requisite consciousness of wrongdoing.

The trial judge was probably wise to invoke Rule 403, thereby assuming arguendo some possible relevance of the proffered evidence, however minimal or doubtful. Cases can be imagined where an accountant's neglect could bear on the likelihood that a taxpayer's under-reporting was due to honest reliance rather than deliberate dishonesty. And, although not at all a straightforward inference in this case, in some situations the professional standards governing accountants might in turn have some bearing on whether there was such neglect.

However, the scheme as charged and proved in this case was not hospitable to such reasoning. The government's evidence allowed the jury to find that St. Pierre, in diverting company income to personal ends but not reporting it as income to the company or herself, had acted against warnings; that St. Pierre had used multiple personal accounts not disclosed to accountants; that the scale of diversion was huge; that the accountants were unaware of most of what was occurring; and that St. Pierre herself engaged in creating false documents to cover her tracks.

By contrast, St. Pierre's proposed accounting standards evidence, by shifting the focus to whether the accountants were doing a good job, did have a potential to confuse and mislead a jury -- precisely because her accountants' failure to prevent the fraud would not be a defense. To the extent that St. Pierre relied on what she said her accountants or lawyer or bankers told her, she was permitted to offer such evidence. Her own beliefs about what they were responsible for doing might also be pertinent to her state of mind. Evidence of accounting standards, unknown to St. Pierre, had at best little tendency to negate the damning inferences against her, and Rule 403 was properly applied."