Good
Faith Page4
[91-1
USTC ¶50,232]
United States of America
, Plaintiff-Appellee v. John L. Cheek, Defendant-Appellant
(CA-7),
U.S.
Court of Appeals, 7th Circuit, 88-1582, 5/7/91, Reversing and on remand
from Sup. Ct, 91-1
USTC ¶50,012 , 111 SCt 604
[Code Secs.
7201 and 7203 ]
Crimes: Willfulness: Reasonableness: Jury instruction: Tax evasion:
Failure to file returns.--A taxpayer's convictions for tax evasion
and willful failure to file returns were reversed and remanded to the
district court for a new trial, consistent with the U.S. Supreme Court's
opinion in J.L. Cheek, SCt, 91-1
USTC ¶50,012 . During the original trial, the jury was
improperly instructed on the mistake of law defense. The jury should
have been instructed to consider whether the taxpayer had a good faith
misunderstanding of the tax law or a good faith belief that there was no
violation, instead of whether the claim was objectionably reasonable.
Because the improper instruction precluded the jury from considering
whether the taxpayer was aware of his legal duties, the IRS was required
to prove this issue at a new trial.
Anton
R. Valukas, United States Attorney, Kristina M.L. Anderson, David J.
Stetler, Assistant United States Attorneys, Chicago, Ill. 60604, James
R. Ferguson, for plaintiff-appellee. Myron M. Cherry, William R.
Coulson, Susan M. Keegan, Cherry & Flynn, 30 N. LaSalle St.,
Chicago, Ill. 60602, Cynthia Giacchetti, 343 S. Dearborn St., Chicago,
Ill. for defendant-appellant.
Before
COFFEY, MANION, and KANNE, Circuit Judges.
KANNE,
Circuit Judge:
John
L. Cheek was charged with three counts of willfully attempting to evade
payment of income taxes in violation of 26 U.S.C. §7201
, and six counts of willfully failing to file federal income
tax returns in violation of 26 U.S.C. §7203
. At trial, the district court followed longstanding Seventh
Circuit precedent, see e.g., United States v.
Moore
[80-2 USTC ¶9627 ],
627 F.2d 830, 833 (7th Cir. 1980), cert. denied, 450
U.S.
916, 101
S. Ct.
1360, 67 L. Ed. 2d 342 (1981), and instructed the jury that only an
objectively reasonable misunderstanding of the law negates the statutory
requirement of willfulness. The jury subsequently convicted Cheek on all
counts. On appeal, we adhered to our "objectively reasonable"
standard and affirmed Cheek's convictions. [89-2
USTC ¶9509 ], 882 F.2d 1263 (7th Cir. 1989).
The
Supreme Court reversed our decision in United States v. Cheek [91-1
USTC ¶50,012 ], 111 S. Ct. 604, 112 L. Ed. 2d 617 (1991).
Reaffirming that "the standard for the statutory willfulness
requirement is the 'voluntary, intentional violation of a known legal
duty,'" id. at 610 (citing United States v. Pomponio
[76-2 USTC ¶9695 ],
429 U.S. 10, 12 (1976) (per curiam); United States v. Bishop [73-1 USTC ¶9459 ],
412 U.S. 346 (1973)), the Court held that a good faith misunderstanding
of the law or a good faith belief that one is not violating the law
negates willfulness, even if the claimed misunderstanding or belief is
not objectively reasonable.
Id.
at 610-12. But, the majority noted the difference between challenges to
the constitutionality of the tax code and misunderstandings resulting
from the complexity of the statutory scheme, and held that "a
defendant's views about the validity of the tax statutes are irrelevant
to the issue of willfulness."
Id.
at 612-13. The Court then returned the case to us for proceedings
consistent with its opinion.
Id.
at 613. We now remand Cheek's case to the district court for a new
trial.
I.
At
his original trial, Cheek's primary argument to the jury was that he
sincerely believed the tax code to be unconstitutional. Because he
thought his actions were lawful, he argued that his failure to comply
with the law's requirements was not willful and that he therefore lacked
the mental state necessary for conviction. Although the district court's
initial instructions did not clearly remove this issue from the jury's
consideration, its later instructions plainly stated that a defendant's
erroneous belief that the tax laws were unconstitutional did not
constitute a defense to charges of tax evasion. 1 Cheek
conclusively prohibits the use of this argument as a legal defense to
charges of tax evasion.
Id.
at 612-13. "[A] defendant's views about the validity of the tax
statutes are irrelevant to the issue of willfulness, need not be heard
by the jury, and if they are, an instruction to disregard them would be
proper."
Id.
at 613; see also United States v. Dunkel [91-1
USTC ¶50,216 ], No. 89-1841, slip op. at 2 (7th Cir. Mar. 8,
1991) ("district judges may rebuff defenses based on erroneous
constitutional beliefs (such as that the 16th Amendment was not properly
ratified)"). The district court's instructions on this issue were
therefore not erroneous.
So,
even after Cheek, most of our list of objectively unreasonable
defenses, see Cheek [89-2 USTC ¶9509 ],
882 F.2d at 1268-69 n.2 (refusing to let jury consider arguments that
the sixteenth amendment to the constitution was improperly ratified and
therefore never came into being, that the sixteenth amendment is
unconstitutional generally, that the income tax violates the takings
clause of the fifth amendment, and that the tax laws are
unconstitutional), continues to provide no protection for tax protestors
seeking to avoid the payment of their income taxes--although not because
these defenses are objectively unreasonable. Rather, arguments
concerning the unconstitutionality of the tax laws are prohibited
because they represent a defendant's full knowledge of the provisions of
the law (unlike claims of mistaken belief or misunderstanding which can
be caused by the complexity of the Internal Revenue Code) and are
therefore irrelevant to the issue of willfulness. See Cheek [91-1
USTC ¶50,012 ], 111
S. Ct.
at 612-13. Moreover, the Supreme Court made clear that a criminal
prosecution for tax evasion is not the proper forum for a defendant to
challenge the validity of the tax laws since Congress has provided other
methods to present those claims.
Id.
at 613. (Cheek "was free to pay the tax that the law purported to
require, file for a refund and, if denied, present his claims of
invalidity, constitutional or otherwise, to the courts" or
"without paying the tax, he could have challenged the claims of tax
deficiencies in the Tax Court."). Accordingly, at Cheek's new
trial, the jury need not consider Cheek's challenges to the validity of
the tax laws.
Cheek,
however, also maintained that he neither knew nor understood the law
concerning his obligations to file income tax returns and to pay taxes.
Over Cheek's objections, the district court instructed the jury that
Cheek's mistaken beliefs as to the law constituted a valid defense only
if they were objectively reasonable. 2 Here, the
district court's instructions "removed from the jury's purview one
of the elements of the offense,"
United States
v. Dunkel, supra at 3, and therefore constituted error. Cheek
[91-1
USTC ¶50,012 ], 111 S. Ct. at 611-12 ("[I]t was error
for the court to instruct the jury that petitioner's [Cheek's] asserted
beliefs that wages are not income and that he was not a taxpayer within
the meaning of the Internal Revenue Code should not be considered by the
jury in determining whether Cheek had acted willfully.").
Thus,
Cheek dictates that a defendant is free to "argue that [his]
mistaken interpretations of the tax laws (such as that wages are not
income) defeat the mental state necessary to the offense." Dunkel,
supra. "[I]f the jury credits a good-faith misunderstanding and
belief submission, whether or not the claimed belief or misunderstanding
is objectively reasonable," the government has not met its burden
of proof. Cheek [91-1
USTC ¶50,012 ], 111
S. Ct.
at 611. Accordingly, at Cheek's retrial the government must prove
"that the defendant was aware of the duty at issue [his duty to
file tax returns and to pay income taxes]."
Id.
In reaching its verdict at Cheek's new trial, the jury must be permitted
to consider evidence concerning "Cheek's understanding that, within
the meaning of the tax laws, he was not a person required to file a
return or to pay income taxes and that wages are not taxable
income"--no matter how incredible or unreasonable those beliefs
might be.
Id.
Tax
evaders who persist in their frivolous beliefs (such as that wages are
not income or that Federal Reserve Notes do not constitute cash or
income) should not be encouraged by the Court's decision in Cheek
or our decision today. While a defendant is now permitted to argue that
his failure to file tax returns and to pay his income taxes was the
result of his incredible misunderstanding of the tax law's
applicability, the government remains free to present evidence
demonstrating that he knew what the law required but simply chose to
disregard those duties. See id. (noting possible evidence
government can utilize to demonstrate Cheek's awareness of his legal
duties). And, as the Court noted, "the more unreasonable the
asserted beliefs or misunderstandings are, the more likely the jury will
consider them to be nothing more than simple disagreement with known
legal duties imposed by the tax laws and will find that the Government
has carried its burden of proving knowledge."
Id.
at 611-12.
II.
For
the foregoing reasons, the judgment is reversed, and the case is
remanded for retrial.
1
In its first supplemental instruction the court stated: "[A]
person's opinion that the tax laws violate his constitutional rights
does not constitute a good faith misunderstanding of the law." A
later reinstruction provided that "advice or research resulting in
a conclusion that ... the tax laws are unconstitutional ... cannot serve
as the basis for a good faith misunderstanding of the law defense."
2
Jury Instruction No. 23 read: "An objectively reasonable good faith
misunderstanding of the law negates willfulness. An objectively
reasonable good faith misreading of the law may be based upon the
defendant's own legal research or an attorney's advice. Good faith
reliance .... requires that the defendant honestly and reasonably
believe his research or the advice, and believe that it is correct and
relies upon it."
The
court's supplemental instructions to the jury stated that "an
honest but unreasonable belief is not a defense and does not negate
willfulness" and that "advice or research resulting in a
conclusion that wages of a privately employed person are not income ...
is not objectively reasonable and cannot serve as the basis for a good
faith misunderstanding of the law defense."
[96-2
USTC ¶50,606]
United States of America
, Plaintiff-Appellee v. Roger V. Chastain, Defendant-Appellant
(CA-9),
U.S. Court of Appeals, 9th Circuit, 95-10267, 5/17/96, 84 F3d 321,
Affirming an unreported District Court decision
[Code Sec.
7203 ]
Conviction: Failure to timely pay income tax: United States
Sentencing Guidelines: Sentence reduction: Downward departure.--A
trial court erred in granting an attorney who was convicted of willfully
failing to timely pay income taxes a two-level sentence reduction based
on United States Sentencing Guidelines (USSG) section 3E1.1. Although
the attorney never denied that he had tax liability, he never accepted
responsibility for the offense of willful failure to pay, as evidenced
by his decision to take his case to trial and his vigorous defense of
his actions as not willful. The trial court should not have granted a
reduction for circumstances unrelated to acknowledgment of guilt, such
as whether deterrence interests were served. Further, the attorney did
not make a voluntary payment of restitution prior to adjudication of
guilt. Also, the trial court should not have departed downward an extra
two months in order to facilitate the attorney's payment of restitution.
Since restitution was adequately taken into consideration by the USSG,
it was not a legitimate basis for departure. Further, the trial court
could not reduce the sentence to preserve the attorney's job and
facilitate restitution.
[Code Sec.
7203 ]
Jury instructions: Good-faith defense: Abuse of discretion.--During
the trial of an attorney who was convicted of willfully failing to
timely pay income tax, the trial court did not abuse its discretion by
declining to further instruct the jury regarding the relationship
between willfulness and good faith. The instructions adequately covered
the attorney's good-faith defense, gave the IRS the burden of proving
that the attorney did not have a good-faith belief that his actions were
not violating the law, and explicitly included the IRS's burden on the
good-faith issue among the other elements of the offense.
[Code Sec.
7203 ]
Improper comments: Closing arguments: Abuse of discretion.--During
the trial of an attorney who was convicted of willfully failing to
timely pay income tax, the trial court did not abuse its discretion by
allowing the jury to consider comments made by the IRS during closing
arguments regarding the attorney's use of his disposable income. The
assertions were reasonable inferences drawn from trial testimony,
including the testimony of the attorney himself.
Benjamin
B. Wagner, Assistant United States Attorney,
Sacramento
,
Calif.
, for plaintiff-appellee. Ann C. McClintock, Marnie L. Sayles, Assistant
Federal Public Defenders, Sacramento, Calif., for defendant-appellant.
Before:
CHOY, BEEZER and HAWKINS, Circuit Judges.
OPINION
HAWKINS,
Circuit Judge:
Appellant
Roger V. Chastain ("Chastain") was convicted pursuant to 26
U.S.C. §7203 of five misdemeanor
counts of willfully failing to timely pay income taxes. Chastain
contends (1) the magistrate judge who presided over Chastain's trial
abused his discretion by failing to instruct the jury regarding the
relationship between §7203 's
"willfulness" requirement and Chastain's "good
faith" defense; (2) the magistrate judge abused his discretion by
refusing to strike the government's allegedly inaccurate summary of the
evidence during closing argument; and (3) the district court erred in
vacating the magistrate judge's downward sentencing departures. We
affirm.
I.
FACTUAL AND PROCEDURAL HISTORY
Chastain
is an attorney in
Northern California
. Evidence at trial established that although he filed accurate tax
returns for years 1984-1989, he failed to pay taxes totalling over
$100,000. Despite making over $50,000 a year and taking at least five
trips to
Europe
between 1985 and 1989, Chastain told the IRS he did not have enough
money to pay his taxes.
In
September 1993, Chastain was charged with five misdemeanor counts of
willfully failing to timely pay income tax. Chastain consented to
proceed before a magistrate judge and pleaded not guilty. The focus of
the trial was the "willful" element of the offense. Perhaps
elevating hope over common sense, Chastain contended that the
"willful" element of §7203 was negated by his
good faith belief that he could treat the IRS "like any other
general creditor."
The
jury convicted Chastain on all counts. At sentencing, 1 the
magistrate granted a two-level reduction in the base offense level for
acceptance of responsibility pursuant to U.S.S.G. §3E1.1. The
magistrate then departed downward two months from the low end of the
4-10 month guideline range in order to facilitate the payment of
approximately $118,000 restitution to the IRS. Chastain appealed his
conviction to the district court, and the government cross-appealed the
sentence.
The
district court affirmed Chastain's conviction after rejecting his claim
of instructional error on the willfulness element of §7203
. The district court granted the government's cross-appeal
and vacated the magistrate's two-level reduction for acceptance of
responsibility and the magistrate's two-month downward departure. 2
Chastain
timely appealed. We have jurisdiction pursuant to 28 U.S.C. §1291 , and we affirm the
district court.
II.
DISCUSSION
A. Jury Instructions
Chastain
contends that the magistrate judge should have instructed the jurors
that a good-faith belief that Chastain was not violating the law would
"directly negate" the willfulness element of §7203 . We review whether
a trial court's instructions adequately covered a defendant's proffered
defense de novo, United States v. Warren, 25 F.3d 890, 895 (9th
Cir. 1994), and review a district court's formulation of jury
instructions for an abuse of discretion, United States v. Vaandering,
50 F.3d 696, 702 (9th Cir. 1995).
The
magistrate judge instructed the jury that accepting Chastain's
good-faith defense would require acquittal. The instruction gave the
government the burden of proving Chastain did not have a good-faith
belief and explicitly included the government's burden on the good faith
issue among the other elements of the offense. The instruction
adequately covered Chastain's good-faith defense, and the magistrate did
not abuse his discretion in declining to further instruct the jury
regarding the relationship between willfulness and good faith.
B.
Closing Argument
Chastain
contends that during closing argument the government mischaracterized
evidence regarding Chastain's use of his disposable income. Chastain
specifically challenges the prosecutor's assertion that "defendant
got a windfall of $80,000, threw a bone to the IRS, went out and spent
over $60,000 buying a new car, a bunch of furniture." The trial
court's decision to allow a jury to consider comments made by one party
in closing argument to which the other party objects is reviewed for an
abuse of discretion.
United States
v. Diaz, 961 F.2d 1417, 1418 (9th Cir. 1992).
Chastain's
argument is without merit. The prosecutor's assertions were reasonable
inferences drawn from trial testimony, including the testimony of
Chastain himself. See
United States
v. Birges, 723 F.2d 666, 671-72 (9th Cir.) (noting that attorneys
may draw reasonable inferences from the evidence during closing
argument), cert. denied, 466
U.S.
943, and cert. denied, 469 U.S. 863 (1984). The prosecutor's
reference to an $80,000 "windfall" related to Chastain's share
of a client's award in a personal injury case. The prosecutor's
characterization of Chastain's effort to "throw the IRS a
bone" referred to Chastain's attempt, after he had received the
$80,000, to settle his debt with the IRS for $20,000. Finally, the
reference to a new car and new furniture came from the testimony of IRS
Agent Sandra Mohan, who testified that Chastain told her after he had
received the $80,000 that "he had purchased a brand-new 1993
automobile that he paid cash for. He had gotten furniture. He sent money
to his kids, paid other creditors, and he had some money left over he
wanted to ask the IRS to consider compromising his liability with."
Because each of the alleged mischaracterizations finds support in the
record, the trial court did not abuse its discretion in allowing them.
C.
Sentencing Guidelines
1. Two-Level Reduction for Acceptance of Responsibility
At
sentencing, the magistrate granted Chastain's request for a two-level
sentence reduction based on the §3E1.1 Acceptance of Responsibility
guideline. The magistrate judge based his §3E1.1 two-level reduction on
three factors: (1) Chastain demonstrated an acceptance of responsibility
by never contesting that he owed taxes, (2) deterrence interests had
already been served by the negative publicity and legal fees associated
with Chastain's case, and (3) a longer sentence would damage his law
practice and thus constitute a "financial death penalty." The
sentencing court's interpretation and application of the Sentencing
Guidelines are reviewed de novo.
United States
v. Basinger, 60 F.3d 1400, 1409 (9th Cir. 1995).
The
reasons cited by the magistrate in support of his decision to grant an
acceptance of responsibility reduction are not legitimate grounds for a
§3E1.1 reduction. Although it is true that Chastain never denied that
he had tax liability, Chastain never accepted responsibility for the
offense of willful failure to pay. See U.S.S.G. §3E1.1(a)
(providing that defendant is eligible for reduction only if defendant
accepts responsibility for his criminal conduct). Chastain's failure to
accept responsibility for his crime was manifest in his decision to take
the case to trial, where he vigorously denied the "willful"
element of the offense. See U.S.S.G. §3E1.1 n.2 (specifying that
only in "rare situations" will a defendant qualify for a
reduction after "put[ting] the government to its burden of proof at
trial by denying the essential factual elements of guilt"). 3
The
other grounds upon which the magistrate based his reduction are even
more suspect. Whether deterrence interests have been served by other
means (public approbation, financial loss, etc.) may be relevant to a §5K2.0
departure, but the §3E1.1 acceptance of responsibility guideline does
not permit a sentence reduction for circumstances unrelated to whether
Chastain acknowledged his guilt. The final ground cited by the
magistrate, Chastain's payment of restitution, is mentioned in §3E1,
but only in a very narrow sense. Application Note 1(b) permits the judge
to consider a defendant's "voluntary payment of restitution prior
to adjudication of guilt" in determining whether a defendant has
clearly accepted responsibility for his criminal acts. In this case,
Chastain made no voluntary restitution. Because the acceptance of
responsibility guideline does not permit a reduction to facilitate
post-conviction payment of restitution, the magistrate erred in using §3E1.1
in an attempt to avoid a "financial death penalty."
In
sum, Chastain's conduct fell well short of manifesting the "clear
acceptance of responsibility" required by §3E1.1.
2.
Departure to Facilitate Payment of Restitution
After
granting a two-level departure for acceptance of responsibility, the
magistrate departed downward an additional two months in order to
facilitate payment of restitution. In lieu of a Guideline provision that
explicitly permits departure based on the amount of restitution
required, Chastain relies on Guideline §5K2.0 in combination with 18
U.S.C. §3553(a)(7) to justify the magistrate's decision to depart.
Guideline §5K2.0 permits departure based on " 'mitigating
circumstance[s] of a kind, or to a degree, not adequately taken into
consideration by the Sentencing Commission.' " U.S.S.G. §5K2.0
(quoting 18 U.S.C. §3553(b)).
The
sentencing judge may not depart unless he or she has legal authority
under the Guidelines to do so. United States v. Lira-Barraza, 941
F.2d 745, 746 (9th Cir. 1991) (en banc) (noting that "legal
authority" is first of three-part test for departure under the
Guidelines). Although in United States v. Miller, 991 F.2d 552
(9th Cir. 1993), and United States v. Berlier, 948 F.2d 1093 (9th
Cir. 1991), we analyzed the related question of the scope of §3E1.1
departures based on pre-trial restitution efforts, we have not decided
under what, if any, circumstances a §5K2.0 departure is appropriate to
permit a defendant to make restitution payments after conviction.
We
join the Second, Fourth, Sixth, and Seventh circuits in holding that a
sentencing judge may not depart to facilitate payment of restitution. See
United States v. Broderson, 67 F.3d 452, 458 (2d Cir. 1995)
("Ordinarily, payment of restitution is not an appropriate basis
for downward departure under Section 5K2.0."); United States v.
Bolden, 889 F.2d 1336, 1340 (4th Cir. 1989) ("[W]e do not think
that the economic desirability of attempting to preserve [defendant's]
job so as to enable him to make restitution warrants a downward
adjustment from the guidelines."); United States v. Seacott,
15 F.3d 1380, 1388-89 (7th Cir. 1994) (holding that restitution is not a
proper ground for departing downward from the Guidelines range); United
States v. Harpst, 949 F.2d 860, 863 (6th Cir. 1991) (holding that
district court may not depart downward to preserve defendant's ability
to make restitution). Guideline §5K2.0 requires that the mitigating
circumstance that forms the basis for departure must be "of a kind,
or to a degree, not adequately taken into consideration by the
Sentencing Commission." We have held, however, that restitution was
taken into consideration by the Commission under Guideline §3E1.1,
which permits a downward departure when voluntary restitution paid
before trial demonstrates an acceptance of responsibility. See Miller,
991 F.2d at 553 ("The Sentencing Commission considered the
possibility that a defendant's payment of restitution might be a
mitigating factor[in §3E1.1].... A court's discretion in departing
because of restitution is therefore constrained [by the requirements of
§3E1.1]."); see also
United States
v. Crook, 9 F.3d 1422, 1426 (9th Cir. 1993) ("We recently held
in [Miller] that extraordinary restitution is a basis for
downward departure only 'to the extent it shows acceptance of
responsibility.' " (quoting Miller)), cert. denied,
114
S. Ct.
1841 (1994). Our determination that the Commission took restitution into
consideration in §3E1.1 is in accord with the decisions of other
circuits that have considered the relationship between §3E1.1 and a
court's §5K2.0 authority to depart on the basis of restitution. See,
e.g., Broderson, 67 F.3d at 458 ("Ordinarily, payment of
restitution is not an appropriate basis for downward departure under
Section 5K2.0 because it is adequately taken into account by Guidelines
Section 3E1.1, dealing with acceptance of responsibility."); Seacott,
15 F.3d at 1388 (citing §3E1.1 in support of the proposition that
Commission considered and rejected restitution as a mitigating
circumstance). Because restitution was adequately taken into
consideration by the Sentencing Commission as a ground for departure, a
§5K2.0 departure based on restitution is not legitimate.
In
addition to the explicit incorporation of restitution considerations
into §3E1.1, the Commission also implicitly considered departures based
on ability to pay restitution in formulating Guideline §5H1.10. Section
5H1.10, a Guideline policy statement, provides that socio-economic
status is "not relevant in the determination of a sentence."
Allowing a sentencing judge to reduce a defendant's sentence to preserve
a defendant's job and facilitate restitution would introduce precisely
the type of socio-economic disparity into sentencing that the Guidelines
were designed to eliminate. Cf. United States v. DeMonte, 25 F.3d
343, 347 (6th Cir. 1994) ("In accordance with U.S.S.G. §5H1.10, we
may not sentence a poor convict more harshly than a rich convict simply
because the rich convict is better able to make restitution."); Harpst,
949 F.2d at 863 ("Furthermore, it seems that the Sentencing
Commission considered including the ability to make restitution as a
possible mitigating circumstance, yet rejected it as a basis for
departure from the guidelines." (citing U.S.S.G. §5H1.10)).
Finally,
the Commission's decision to separate the calculation of restitution
from the sentencing determination evinces an intent to prevent
restitution considerations from influencing the guideline sentence.
Although ability to pay and the "financial needs of the defendant
and his dependents" must be considered by a sentencing judge in
fashioning a restitution order, see Commentary to U.S.S.G. §5E
1.1, the restitution guideline found in §5E
is entirely independent of the §3E1.1 reduction and §5K2.0
departure provisions. Cf. Crook, 9 F.3d at 1426 (examining
structure of Guidelines to determine whether extraordinary forfeiture is
a valid ground for downward departure).
18
U.S.C. §3553(a)(7) is not in conflict with the proposition that
restitution is not a legitimate ground for departure from the guideline
sentencing range. Section 3553(a)(7) instructs that "[t]he court, in
determining the particular sentence to be imposed, shall consider--
... (7) the need to provide restitution to any victims of the
offense." (emphasis added). Section 3553(a)(7) applies to the
sentencing determination once the sentencing range has been
established. See Bolden, 889 F.2d at 1341 (holding that although
restitution is not valid ground for a §5K2.0 departure, 18 U.S.C. §3553(a)(7)
permits the sentencing court to consider restitution "in deciding
what sentence within the guidelines to impose"). Departure from the
applicable sentencing range is controlled not by §3553(a)(7), but
rather by §3553(b), which contains the familiar refrain that departure
from the guideline range is appropriate only in the presence of
aggravating or mitigating circumstances of a kind or degree not
considered by the Commission. In short, §3553(a)(7) applies to setting
a sentence within a guideline range, but may not be used as a
basis for departure from a guideline range.
On
the foregoing bases--§3E1.1's inclusion of restitution as a sentencing
factor, §5H1.10's exclusion of socioeconomic status as a guideline
variable, and the Commission's decision to separate the calculation of
restitution from the guideline range determination--we hold that the
magistrate judge had no authority to depart to facilitate the payment of
restitution. Accordingly, the district court's decision to vacate the
magistrate's two-month departure is affirmed.
AFFIRMED.
1
Chastain was sentenced under the 1992 version of the Guidelines. Any
reference in this disposition to the Guidelines is to the 1992 edition.
2
On remand, Chastain was resentenced to four months in prison and a
one-year term of supervised release. The magistrate stayed his
incarceration pending appeal.
3
Because Chastain attacked the government's proof on willfulness, which
is a specific, factual element of a §7203
offense, he was not in one of the "rare situations"
that would qualify him for a reduction under Guideline §3E1.1. See
U.S.S.G. §3E1.1 n.2.
[Dec.
48,411] Paul E. Niedringhaus
and Gladys F. Niedringhaus v. Commissioner
Docket No. 27032-89., 99 TC 202, Filed August 11, 1992
[Appealable, barring stipulation to the contrary, to CA-7.--CCH.]
[Code
Secs. 6651 , 6653 (Prior to
amendment by P.L. 101-239), 6654 and 7203 ]
[Additions to tax: Penalties: Negligence: Late filing: Failure to pay
estimated tax: Fraud: Failure to file returns: Collateral estoppel:
Returns: Failure to file: Good faith: Willfulness.]R determined that P's
failure to file returns, pay estimated tax, and other related activities
were fraudulent within the meaning of sec. 6653(b)(1) and (2), I.R.C. P,
relying on the recent Supreme Court opinion in Cheek v. United States
[91-1
USTC ¶50,012 ], 498 U.S. --, 111 S.Ct. 604 (1991), contends
that there is no fraud "because of his good faith, although
erroneous, understanding of the tax laws due to his having accepted a
false premise into his thinking process about the question of tax
liability." P had filed returns for many years before becoming
involved with tax protesters.Held, P did not have a good-faith
belief that he was not required to file a return, report his taxes, or
pay his tax. The holding of Cheek v.
United States
, supra (involving the interpretation of willfulness in a criminal
case), analyzed in connection with the use of the term
"willful" in civil fraud additions to tax.
Paul
E. Niedringhaus, pro se. Donna C. Hansberry, for the respondent.
GERBER,
Judge:
By
statutory notice of deficiency, respondent determined deficiencies in
petitioners' Federal income taxes and additions to tax as follows:
Additions to Tax
----------------
Year Deficiency Sec. 6651 Sec. 6653(a) Sec. 6653(a)(1) Sec. 6654
1979 .............. -0- $2,030.00 $406.00 -- $ 336
1980 .............. $4,017 2,797.25 559.45 -- 712
1981 .............. -0- 2,840.75 -- $568.15 1 870
1 50 percent of the interest due on any deficiency determined.
Additions to Tax
----------------
Sec.
Year Deficiency Sec. 6653(b)(1) Sec. 6653(b)(2) Sec. 6654 6651 5
1982 .............. -0- $3,131 1 $609 $ 1,566
1983 .............. $3,809 7,021 2 860 3,511
1984 .............. 5,717 8,113 3 1,020 4,057
1985 .............. 4,164 8,292 4 950 4,146
1 50 percent of the interest on any deficiency determined.
2 50 percent of the interest due on $3,809.
3 50 percent of the interest due on $5,717.
4 50 percent of the interest due on $4,164.
5 Respondent no longer contends for an addition to tax under sec. 6661 for the 1982
through 1985 taxable years.
All
section references are to the Internal Revenue Code in effect for the
years in issue, and Rule references are to the Tax Court Rules of
Practice and Procedure, unless otherwise indicated.
The
parties now agree that there are deficiencies in Federal income taxes
due from petitioners for 1979 through 1985, as follows:
Tax Assessed Deficiency
to be
Year Tax Liability Paid Unpaid Assessed
1979 ....................... $ 8,120 $4,038 $4,082 -0-
1980 ....................... 11,189 7,172 $4,017
1981 ....................... 11,363 12,064 (701)
1982 ....................... 6,262 6,262 -0-
1983 ....................... 14,042 10,233 3,809
1984 ....................... 16,227 700 9,810 5,717
1985 ....................... 16,584 1,700 10,720 4,164
The
issues remaining for our consideration are:
1.
Whether petitioners are liable for the additions to tax under section
6651(a)(1) for 1979, 1980, and 1981;
2.
whether petitioners are liable for the additions to tax under section
6653(a) for 1979 and 1980 and the section 6653(a)(1) addition to tax for
1981;
3.
whether petitioners are liable for the additions to tax under section
6653(b)(1) for 1982 through 1985 and the additions to tax under section
6653(b)(2) for 1983 through 1985;
4.
whether petitioners are liable for the additions to tax under section 6654 for 1979
through 1985; and
5.
if petitioners are not liable for the additions to tax under section
6653(b)(1) and (2) for 1982 through 1985, whether in the alternative
petitioners are liable for the additions to tax under sections
6651(a)(1) and 6653(a)(1) or (2) for 1982 through 1985.
Findings
of Fact
The
stipulations of facts and attached exhibits are incorporated herein by
this reference.
On
the date of the filing of the petition in this case, petitioners resided
in
Northbrook
,
Illinois
.
Petitioner
Paul Niedringhaus (petitioner or Mr. Niedringhaus) graduated from the
U.S. Military Academy at
West Point
,
New York
(
West Point
), sometime before 1960. After his graduation from West Point,
petitioner served in the Army for a few years, including a tour of duty
in
Korea
. Following his resignation from the Army, petitioner worked in the
Philadelphia
,
Pennsylvania
, area variously as a supervisor in a machine shop, a stock broker, and
a manufacturer's representative. Since 1960, petitioner has been a
self-employed manufacturer's representative in the
Chicago
,
Illinois
, area doing business as Penco Precision (Penco). Petitioner sells
inspection equipment to industry. Petitioner operated out of his
residence in
Northbrook
,
Illinois
, during 1979 through 1985 (the years in issue). Over the years
petitioner has represented 5 to 10 different companies and has 200 to
300 customers.
Petitioner
Gladys Niedringhaus (Mrs. Niedringhaus) attended college for 1 year,
after which she worked as a secretary until her marriage to petitioner
in 1960. Following her marriage to petitioner, Mrs. Niedringhaus worked
for 2 years as an assistant to the personnel director of a large
company. Mrs. Niedringhaus ceased working outside the home at about the
time of the birth of her first child.
Since
1960, Mrs. Niedringhaus has performed office work for Penco. She
prepares the invoices and packing slips and deposits checks paid by
Penco's customers. Mrs. Niedringhaus received no formal training in
bookkeeping and devised her own bookkeeping system for Penco which is
sufficient for her purposes.
For
the years 1960 through 1985, petitioners maintained contemporaneous
records of Penco's income and expenses. Petitioners maintained a joint
bank account at Northfield Bank for approximately 25 years which they
used for personal and business purposes (the
Northfield
account). At some point in time, petitioners sent a letter to the
Northfield Bank, advising it that petitioner was the sole owner of Penco
Precision and he wanted Northfield Bank to process checks also under
Penco's name.
In
December 1983, petitioner opened a separate business bank account in
Penco's name at Glenview State Bank (the
Glenview
account). Petitioner opened the
Glenview
account because he decided the business was getting bigger and, for
bookkeeping purposes, it would be easier to keep the business account
separate from the personal account. Petitioners deposited Penco's gross
receipts into the
Glenview
account between December 1983 and June 1984. Petitioners made no
deposits into the
Glenview
account from July 1984 through October 1985. From July 1984 through
October 1985, petitioners deposited Penco's gross receipts into the
Northfield
account. In November 1985, petitioner changed the name of the
Glenview
account from "Penco Precision" to "Penco Precision
Supplier Escrow Account". Petitioner changed the name of the
Glenview
account because he believed that maintaining the funds in an escrow
account would protect the funds (which were due his suppliers) from
seizure by the Internal Revenue Service (IRS). Petitioners deposited
Penco's gross receipts into the
Glenview
account from November 1985 through October 1986. The
Northfield
account and the
Glenview
account were the only bank accounts petitioners maintained during 1982
through 1985.
For
the years 1960 through 1978, Mr. Niedringhaus prepared petitioners'
Federal income tax returns by looking at invoices and the checkbook to
determine Penco's yearly income and calculate costs of goods sold, and
by looking at the checkbook and the out-of-pocket expenditures file to
determine Penco's yearly expenses.
Sometime
in 1978, petitioner began to attend meetings conducted by certain tax
protester groups. In 1979, petitioner decided that he would not file
returns. Petitioner advised Mrs. Niedringhaus he was not going to file
tax returns and she told him that she did not agree with his decision to
cease filing returns. She also advised Mr. Niedringhaus to work it out
through legal methods. Petitioner did not consult any attorney or tax
return preparer outside the tax protester movement regarding his
obligation to file tax returns.
Around
1980, petitioner became a member of the Constitutional Patriots
Association, a group which objected to some of the income tax laws.
Sometime in 1982, petitioner joined the Belanco Religious Organization
(Belanco), 1 a tax
protester group founded by Paul Bell (Bell).
Bell
claimed that members of his religious organization were exempt from
taxation. Petitioner did not embrace
Bell
's tax-exemption theory.
Bell
also claimed that the 16th Amendment was unconstitutional and
individuals were not required to file tax returns. Petitioner concluded
that
Bell
had some workable ideas because
Bell
had not been prosecuted, even though allegedly over a number of years
Bell
publicly announced that he was not going to pay his taxes. Petitioner
was a dues-paying member of Belanco from 1982 through 1985.
In
addition, petitioner attended meetings held by the Mid-America
Commodities and Barter Association (MACBA). 2 Some of
MACBA's members apparently engaged in bartering to avoid taxes.
Petitioner did not get involved in bartering. MACBA principally
conducted discussions on the tax laws. It also allegedly converted money
into silver.
Jenco
Metal Products (Jenco Metal) was one of petitioner's customers. Jenco
Metal issued a check in the amount of $14,527 to Penco on November 19,
1982, for some equipment. Petitioner addressed the invoice (dated
November 18, 1982) for this equipment to "Jenco South" at an
address in
Florida
. Petitioner endorsed Jenco Metal's check "Penco Precision, Paul
Niedringhaus, Sole Owner" and sent it to Bill Ryche (Ryche), a
principal in MACBA. Ryche deposited this check in an account maintained
by MACBA allegedly to convert it to silver. 3 A few months
later, MACBA sent petitioner $14,527 in cash. The $14,527 invoice was
one of Penco's bigger invoices. Petitioner did not need the $14,527 in
his business at the time he endorsed Jenco Metal's check over to MACBA.
Mrs. Niedringhaus wrote two checks to MACBA in February 1983 in the
amount of $220 and $2,277.34. Other Jenco Metal checks issued to Penco
were deposited into the
Northfield
account or the
Glenview
account.
Petitioners
made estimated tax payments regarding their income tax liabilities for
the years 1960 through 1978. They made no estimated tax payments
regarding their income tax liabilities for the years 1979 through 1985.
Petitioners
timely filed Federal income tax returns from at least 1960 through 1978.
Petitioners filed delinquent, original Federal income tax returns for
1979 through 1984 on August 18, 1986. They filed a delinquent, original
Federal income tax return for 1985 on March 5, 1987. Petitioners did not
request extensions of time in which to file their returns for 1979
through 1985. Mrs. Niedringhaus received no income for 1979 through 1985
and filed no separate tax returns for those years.
The
original income tax returns for 1979 through 1984 filed on August 18,
1986, report only gross receipts or sales on Schedule C, which sums are
then also shown as business income on the face of the applicable return,
in the following amounts:
Gross Receipts
Year Business Income
1979 ............................................... $45,789
1980 ............................................... 30,259
1981 ............................................... 43,135
1982 ............................................... 28,014
1983 ............................................... 40,976
1984 ............................................... 40,071
These
returns indicate that petitioners claimed personal exemptions for
themselves and three dependent children. They provide no other
information regarding income, deductions, expenses, or credits.
Petitioners
later filed amended returns for 1979, 1980, 1981, 1983, and 1984, and an
original, delinquent return for 1985, on the following dates reporting
the following items:
Schedule C Income
Date Gross Net Itemized Interest
Filed Year Receipts Profit Deductions Income
11/5/86 ............... 1979 $245,316 $38,907 $ 7,249 -0-
11/17/86 .............. 1980 240,019 46,498 7,538 -0-
12/15/86 .............. 1981 279,933 44,987 7,104 $175
2/2/87 ................ 1983 235,139 59,294 11,174 185
2/17/87 ............... 1984 271,209 61,228 8,301 220
3/5/87 ................ 1985 267,702 61,155 7,535 288
Petitioner prepared the delinquent returns for the years in issue from
the records of income and expenses he had retained for those years.
The
deficiencies determined by respondent for 1980, 1983, and 1984 and the
overassessment for 1981 reflect the changes from the returns filed in
August 1986 and the amended returns that were filed later.
Respondent
began an investigation of possible criminal violations of the internal
revenue laws by petitioner in February 1986. On July 10, 1986,
Rob
ert Mravca (Mr. Mravca), the Criminal Investigation Division special
agent investigating petitioner, served a summons on First Chicago
Bankcard, seeking records relating to petitioner for 1981 through the
present. Petitioner received a copy of this summons on July 11, 1986.
Mr.
Mravca interviewed petitioner on September 17, 1986, and petitioner was
not willing to disclose any information to Mr. Mravca. Petitioner only
acknowledged information of which Mr. Mravca was already aware.
Petitioner told Mr. Mravca at this meeting that petitioners had filed
their tax returns around September 1, 1986.
On
March 28, 1989, petitioner was charged in a four-count bill of
information in the U.S. District Court, Northern District of Illinois,
with failure to file Federal income tax returns for 1982 through 1985,
in violation of section 7203 (the criminal
charges). He entered a plea of guilty on July 13, 1989, with regard to
the criminal charges for 1982, 1983, and 1984. Petitioner was sentenced
pursuant to his guilty plea on October 11, 1989. 4
Opinion
The
parties agree as to the amount of petitioners' income tax liability for
each year in issue. At issue is whether petitioners are liable for
various additions to tax.
Section
6653(b) Addition to Tax
Respondent
determined that all of the underpayments of tax are due to fraud under
section 6653(b)(1) and (2) 5 for 1982,
1983, 1984, and 1985.
Section
6653(b)(1) provides that if any part of the underpayment is due to
fraud, there will be an addition to tax equal to 50 percent of the
entire underpayment. The addition to tax under section 6653(b)(2),
however, applies only to that portion of the underpayment attributable
to fraud. Fraud is defined as an intentional wrongdoing designed to
evade tax believed to be owing. Powell v. Granquist [58-1
USTC ¶9223 ], 252 F.2d 56 (9th Cir. 1958); Miller v.
Commissioner [Dec. 46,435 ], 94 T.C. 316,
332 (1990).
Respondent
has the burden of proving by clear and convincing evidence that an
underpayment exists for the years in issue and that some portion of the
underpayment is due to fraud. Sec.
7454(a) ; Rule 142(b). To meet this burden, respondent must
show that petitioners intended to evade taxes known to be owing by
conduct intended to conceal, mislead, or otherwise prevent the
collection of taxes. Stoltzfus v. United States [68-2
USTC ¶9499 ], 398 F.2d 1002 (3d Cir. 1968); Webb v.
Commissioner [68-1 USTC ¶9341 ],
394 F.2d 366 (5th Cir. 1968), affg. [Dec. 27,918(M) ] T.C. Memo.
1966-81; Rowlee v. Commissioner [Dec. 40,228 ], 80 T.C.
1111, 1123 (1983). Respondent need not prove the precise amount of the
underpayment resulting from fraud, but only that some part of the
underpayment of tax for each year in issue is attributable to fraud. Lee
v. United States [72-2
USTC ¶9652 ], 466 F.2d 11, 16-17 (5th Cir. 1972); Plunkett
v. Commissioner [72-2
USTC ¶9541 ], 465 F.2d 299, 303 (7th Cir. 1972), affg. [Dec. 30,349(M) ] T.C. Memo.
1970-274. Petitioners concede that there is an underpayment for each of
the years in issue; respondent, therefore, has met her burden of proof
as to the underpayment of tax for each year.
The
existence of fraud is a question of fact to be resolved upon
consideration of the entire record. Gajewski v. Commissioner [Dec. 34,088 ], 67 T.C. 181,
199 (1976), affd. without published opinion 578 F.2d 1383 (8th Cir.
1978); Estate of Pittard v. Commissioner [Dec. 34,775 ], 69 T.C. 391
(1977). Fraud is not to be imputed or presumed, but rather must be
established by some independent evidence of fraudulent intent. Beaver
v. Commissioner [Dec. 30,380 ], 55 T.C. 85,
92 (1970); Otsuki v. Commissioner [Dec. 29,807 ], 53 T.C. 96
(1969). Fraud may not be found under "circumstances which at the
most create only suspicion." Davis v. Commissioner [50-2 USTC ¶9427 ],
184 F.2d 86, 87 (10th Cir. 1950); Petzoldt v. Commissioner [Dec. 45,566 ], 92 T.C. 661,
700 (1989). However, fraud may be proved by circumstantial evidence and
reasonable inferences drawn from the facts because direct proof of the
taxpayer's intent is rarely available. Spies v. United States [43-1 USTC ¶9243 ],
317 U.S. 492 (1943); Rowlee v. Commissioner, supra; Stephenson v.
Commissioner [Dec.
39,562 ], 79 T.C. 995 (1982), affd. [84-2 USTC ¶9964 ]
748 F.2d 331 (6th Cir. 1984). The taxpayer's entire course of conduct
may establish the requisite fraudulent intent. Stone v. Commissioner
[Dec. 30,767 ], 56 T.C. 213,
223-224 (1971); Otsuki v. Commissioner, supra at 105-106. The
intent to conceal or mislead may be inferred from a pattern of conduct.
See Spies v.
United States
, supra at 499.
Courts
have relied on several indicia of fraud in considering the section
6653(b) addition to tax cases. Although no single factor may necessarily
be sufficient to establish fraud, the existence of several indicia may
be persuasive circumstantial evidence of fraud. Solomon v.
Commissioner [84-1 USTC ¶9450 ],
732 F.2d 1459, 1461 (6th Cir. 1984), affg. [Dec. 39,427(M) ] per curiam
T.C. Memo. 1982-603; Beaver v. Commissioner, supra at 93.
Circumstantial
evidence which may give rise to a finding of fraudulent intent includes:
(1) Understatement of income; (2) inadequate records; (3) failure to
file tax returns; (4) implausible or inconsistent explanations of
behavior; (5) concealment of assets; (6) failure to cooperate with tax
authorities; (7) filing false W-4's; (8) failure to make stimated tax
payments; (9) dealing in cash; (10) engaging in illegal activity; and
(11) attempting to conceal illegal activity. Bradford v. Commissioner
[86-2 USTC ¶9602 ],
796 F.2d 303, 307 (9th Cir. 1986), affg. [Dec. 41,615(M) ] T.C. Memo.
1984-601. See Douge v. Commissioner [90-1
USTC ¶50,186 ], 899 F.2d 164, 168 (2d Cir. 1990), affg. in
part and revg. in part and remanding an oral opinion of this Court
entered July 1, 1988. These "badges of fraud" are
nonexclusive. Miller v. Commissioner, supra at 334. The
taxpayer's background and the context of the events in question may be
considered as circumstantial evidence of fraud. United States v.
Murdock [3
USTC ¶1194 ], 290 U.S. 389, 395 (1933); Spies v.
United States
, supra at 497; Plunkett v. Commissioner, supra at 303.
The
record before us provides a basis for finding the underpayment of tax
for 1982, 1983, 1984, and 1985 is due to fraud on the part of
petitioner. Petitioner is well-educated and an experienced businessman.
He filed tax returns from at least 1960 through 1978. He was aware of
his obligation to file Federal income tax returns. Even though he
believed his business generally was expanding, petitioner did not
prepare or file returns for 1979 through 1985 until respondent commenced
a criminal investigation. Petitioner consistently and substantially
understated his income for 1979, 1980, 1981, 1982, 1983, 1984, and 1985.
Petitioner
claims that he filed delinquent tax returns before he learned of
respondent's investigation. Petitioners, however, received a copy of the
summons notifying them of the criminal investigation on July 11, 1986,
approximately 1 month before the delinquent returns were filed.
Petitioners stipulated this fact, but contend that the stipulation may
have been made in error and ask to be relieved from their stipulation.
Parties
are bound by their stipulations without a showing that evidence contrary
to the stipulation is substantial or the stipulation is clearly contrary
to facts disclosed by the record and justice requires that the
stipulation be qualified, changed, or contradicted in whole or in part.
Rule 91(e); Loftin & Woodard, Inc. v. United States [78-2 USTC ¶9645 ],
577 F.2d 1206, 1232 (5th Cir. 1978); Jasionowski v. Commissioner
[Dec. 33,828 ], 66 T.C. 312,
317-318 (1976). No such showing has been made here. The Court is not
required to accept petitioner's self-serving testimony. 6 Geiger v.
Commissioner [71-1
USTC ¶9333 ], 440 F.2d 688, 689-690 (9th Cir. 1971), affg. [Dec. 29,686(M) ] per curiam
T.C. Memo. 1969-159; Sharwell v. Commissioner [70-1 USTC ¶9142 ],
419 F.2d 1057, 1060 (6th Cir. 1969), vacating and remanding on other
issues [Dec. 28,961(M) ] T.C. Memo.
1968-89; Tokarski v. Commissioner [Dec. 43,168 ], 87 T.C. 74,
77 (1986); Surloff v. Commissioner [Dec. 40,419 ], 81 T.C. 210,
239 (1983). Respondent has introduced credible evidence establishing
that petitioners filed the delinquent returns approximately 1 month
after they were notified of respondent's investigation. Additionally,
petitioner testified that he received notification of the criminal
investigation on July 11, 1986. Consequently petitioners will not be
relieved from their stipulation that they received notification of the
criminal investigation on July 11, 1986, a date prior to their filing
delinquent returns for the years in issue.
Petitioner,
though "knowledgeable about * * * [his] taxpaying responsibilities,
consciously decided to unilaterally opt out of our system of
taxation." Miller v. Commissioner [Dec.
46,435 ], 94 T.C. 316, 335 (1990). While the mere failure to
file tax returns may not be fraudulent, Kotmair v. Commissioner [Dec. 43,122 ], 86 T.C. 1253
(1986), it can be evidence of the intent to evade tax. Bradford v.
Commissioner, supra at 307. Petitioner also ceased filing estimated
tax payments for the years in issue even though he knew that his
business was expanding. Petitioner continued his deceptive behavior
until he learned of respondent's criminal investigation. "This
malfeasance weighs heavily against petitioners, particularly when we
consider that petitioners knew of their filing requirements and had a
prior history of filing timely tax returns. Miller v. Commissioner,
supra at 336.
The
facts show that petitioner did not intend to voluntarily pay his tax.
Most telling is petitioner's failure to make estimated tax payments or
to file returns until respondent began the investigation. It is well
settled that later repentant behavior does not absolve a taxpayer of his
antecedent fraud. Badaracco v. Commissioner [84-1
USTC ¶9150 ], 464 U.S. 386, 394 (1984); Plunkett v.
Commissioner [72-2 USTC ¶9541 ],
465 F.2d 299, 303 (7th Cir. 1972), affg. [Dec. 30,349(M) ] T.C. Memo.
1970-274; Miller v. Commissioner, supra.
We
find that petitioner's failure to file returns, combined with his
failure to make estimated tax payments, was a deliberate attempt to
conceal his correct tax liability and to frustrate its collection. Miller
v. Commissioner, supra at 337.
Respondent
has also relied upon collateral estoppel and several actions of
petitioner in support of her determination of an addition to tax under
section 6653(b).
Collateral
Estoppel
Respondent
contends that petitioner is collaterally estopped by his criminal
conviction under section
7203 for 1982 through 1984 from denying his failure to file
returns for those years was willful. The doctrine of collateral
estoppel, or estoppel by judgment, is intended to avoid repetitious
litigation by precluding a second litigation of any issue of fact or law
that was actually litigated and that culminated in a valid and final
judgment. Kotmair v. Commissioner, supra at 1262. Under the
doctrine of collateral estoppel, a judgment in a prior action precludes
litigation, in a second cause of action, of issues actually litigated
and necessary to the outcome of the first action. Parklane Hosiery
Co. v. Shore, 439
U.S.
322, 326 n.5 (1979). Collateral estoppel applies to issues of fact or
law previously litigated. Meier v. Commissioner [Dec. 44,995 ], 91 T.C. 273,
283-286 (1988). Collateral estoppel has been employed concerning failure
to file situations. See Castillo v. Commissioner [Dec. 41,940 ], 84 T.C. 405,
409-410 (1985).
Collateral
estoppel, however, is an affirmative defense which must be raised in a
party's pleading. Rule 39. An affirmative defense not pleaded is deemed
waived. Gustafson v. Commissioner [Dec.
47,492 ], 97 T.C. 85, 90 (1991);
Jefferson
v. Commissioner [Dec.
29,153 ], 50 T.C. 963, 966-967 (1968). In the answer,
respondent pled collateral estoppel in support of the alternative
determination that petitioners are liable for additions to tax under sections
6651(a) and 6653(a). However, collateral estoppel is not
available in support of her determination of additions to tax under
section 6653(b) for 1982, 1983, 1984, and 1985 because respondent did
not raise it with respect to these additions. Accordingly, respondent
has waived the affirmative defense of collateral estoppel with respect
to the section 6653(b) addition to tax.
Other
Actions in Support of Fraud
Respondent
contends that petitioners' actions surrounding the deposit of a $14,527
check into a MACBA bank account are evidence of fraud. Respondent
posits, on the basis of the description of MACBA in United States v.
Jungles [90-1
USTC ¶50,289 ], 903 F.2d 468, 472 (7th Cir. 1990), as
"a clearinghouse for tax protestors and persons who wished to avoid
detection by the IRS", that the check was deposited into a MACBA
bank account in order to avoid detection by the IRS.
Petitioners,
however, claim in effect that the MACBA transaction was not undertaken
to avoid tax. According to petitioner, he forwarded the check to Ryche
of MACBA, at a time when petitioner did not need the funds for his
business, to be converted into silver as a hedge against inflation.
Additionally, petitioner states that within a few months he had MACBA
return the money when it was needed in his business and because
fluctuations in the silver market caused him to worry about the wisdom
of investing in silver. 7
Petitioner
has provided an explanation for the MACBA transaction which respondent
has failed to rebut. Although the circumstances relating to this $14,527
check raise a suspicion as to the purpose for the actions petitioner
undertook, respondent cannot rest on suspicion alone to carry the burden
of proof as to fraud. Davis v. Commissioner [50-2
USTC ¶9427 ], 184 F.2d 86, 87 (10th Cir. 1950); Petzoldt
v. Commissioner [Dec.
45,566 ], 92 T.C. 661, 700 (1989).
Respondent
also contends that petitioners' use of their personal bank account to
deposit business income after opening a separate business account, and
petitioners' use of their business bank account to deposit business
income after changing the name of that account, were deliberate attempts
to prevent the collection of tax and are evidence of fraud.
Petitioners
used the
Northfield
account for personal and business purposes until December 1983 when they
opened the Glenview account for the business, retaining the
Northfield
account generally for personal transactions. They used the
Glenview
account for business purposes until July 1984. Between July 1984 and
October 1985, petitioners did not use the Glenview account but again
used the
Northfield
account for personal and business purposes. In November 1985, petitioner
changed the name of the
Glenview
account to "Penco Precision Supplier Escrow Account" and
resumed using it for business purposes. According to petitioner, he
changed the name of the Glenview account at the time "the tax
situation was coming to the forefront", because he was advised that
"if there should be some adverse ruling against my interpretation
of the tax, maybe they would seize my funds and that if I put it in a
supplier escrow account, that would show that * * * [those] funds had to
be used to pay my suppliers." Respondent would have us infer that
petitioner was attempting to secrete his assets to avoid paying his tax
liabilities. Penco, however, is an unincorporated business and
petitioner's personal assets were available to satisfy business-related
tax liabilities. Other than the MACBA transaction, there is nothing in
the record to suggest that petitioner attempted to specifically secrete
his personal assets from respondent.
Although
none of petitioner's "additional actions", individually would
suffice to carry respondent's burden of clearly and convincingly proving
fraud, taken together they present additional support for respondent's
determination.
Petitioners,
relying on Cheek v. United States [91-1
USTC ¶50,012 ], 498 U.S. --, 111 S. Ct. 604 (1991), contend
that there was no fraud intended "because of * * * [petitioner's]
good faith, although erroneous, understanding of the tax laws due to his
having accepted a false premise into his thinking process about the
question of tax liability." According to petitioner, he was under
an "induced dementia" and as a result "did not believe
that the tax applied to him".
The
Supreme Court has defined willfulness, as used in the criminal tax
statutes, as the voluntary, intentional violation of a known legal duty.
Cheek v. United States [91-1
USTC ¶50,012 ], 498
U.S.
at --, 111
S. Ct.
at 610. In Cheek, the Supreme Court reversed a tax evasion
conviction where the District Court had instructed the jury that a
defendant's good-faith misunderstanding must be "objectively
reasonable." The Court held that the Government cannot carry its
burden of demonstrating that the defendant willfully failed to file a
tax return unless the Government has negated "a defendant's claim
of ignorance of the law or a claim that because of a misunderstanding of
the law, * * * [defendant] had a good-faith belief that * * *
[defendant] was not violating any of the provisions of the tax
laws." Cheek v. United States [91-1
USTC ¶50,012 ], 498
U.S.
at --, 111
S. Ct.
at 610-611. The inquiry properly should focus on whether the defendant
actually believed that he or she did not have to file the return. The
reasonableness or unreasonableness of a defendant's belief is relevant
only for purposes of assessing the credibility of the defendant's claim.
Cheek v. United States [91-1 USTC ¶50,012], 498
U.S.
at --, 111
S. Ct.
at 611; United States v. Lussier [91-1
USTC ¶50,164 ], 929 F.2d 25, 31 (1st Cir. 1991).
The
premise of Cheek is that a person cannot be convicted of willful
failure to file a tax return if he subjectively believes in good faith
that the tax laws do not apply to him. 8 As the
Supreme Court explained: "In the end, the issue is whether, based
on all the evidence, the Government has proved that the defendant was
aware of the duty at issue, which cannot be true if the jury credits a
good-faith misunderstanding and belief submission, whether or not the
claimed belief or misunderstanding is objectively reasonable." Cheek
v. United States [91-1
USTC ¶50,012 ], 498
U.S.
at --, 111
S. Ct.
at 611.
The
term "willfully", as used in sections 7201 , 7202 , 7203 , 7204 , 7205 , 7206 , and 7207 , has been interpreted
to require a specific intent to violate the law. United States v.
Pomponio [76-2
USTC ¶9695 ], 429 U.S. 10, 12 (1976); United States v.
Bishop [73-1 USTC ¶9459 ],
412 U.S. 346, 361 (1973); Kotmair v. Commissioner [Dec. 43,122 ], 86 T.C.
1253, 1273 (1986). We have held that the term "willfully" as
used in section 7201 encompasses
all the elements of fraud which are envisioned in section 6653(b). Amos
v. Commissioner [Dec.
27,012 ], 43 T.C. 50, 55 (1964), affd. [66-1 USTC ¶9130 ]
360 F.2d 358 (4th Cir. 1965). We have interpreted the "due to
fraud" language of section 6653(b) to require proof of specific
intent to evade a tax believed to be owing. Wright v. Commissioner
[Dec. 42,013 ], 84 T.C. 636,
639 (1985). It follows that a good-faith misunderstanding of the tax
laws could negate fraud under section 6653(b). See Granado v.
Commissioner [86-1 USTC ¶9453 ],
792 F.2d 91, 93 (7th Cir. 1986), affg. [Dec. 42,094(M) ] per curiam
T.C. Memo. 1985-237 (fraud under section 6653 `is
intentional wrongdoing on the part of the taxpayer * * * to avoid a tax
known to be owing' ") (quoting Akland v. Commissioner [85-2 USTC ¶9593 ],
767 F.2d 618, 621 (9th Cir. 1985), affg. [Dec. 40,092(M) ] T.C. Memo.
1983-249); see also Klaphake v. Commissioner [Dec. 46,740(M) ], T.C.
Memo. 1990-375;
Clark
v. Commissioner [Dec.
43,543(M) ], T.C. Memo. 1986-586.
There
is a difference, however, between a good-faith misunderstanding of the
law and a good-faith belief that the law is invalid or a good-faith
disagreement with the law. United States v. Burton [84-2 USTC ¶9689 ],
737 F.2d 439, 442-443 (5th Cir. 1984); United States v. Ware [79-2 USTC ¶9608 ],
608 F.2d 400, 405 (10th Cir. 1979). As the Supreme Court has stated:
Claims
that some of the provisions of the tax code are unconstitutional are
submissions of a different order. They do not arise from innocent
mistakes caused by the complexity of the Internal Revenue Code. Rather,
they reveal full knowledge of the provisions at issue and a studied
conclusion, however wrong, that those provisions are invalid and
unenforceable. Thus in this case, Cheek paid his taxes for years, but
after attending various seminars and based on his own study, he
concluded that the income tax laws could not constitutionally require
him to pay a tax.
We
do not believe that Congress contemplated that such a taxpayer, without
risking criminal prosecution, could ignore the duties imposed upon him
by the Internal Revenue Code and refuse to utilize the mechanisms
provided by Congress to present his claims of invalidity to the courts
and to abide by their decisions. * * * As we see it, he is in no
position to claim that his good-faith belief about the validity of the
Internal Revenue Code negates willfulness or provides a defense to
criminal prosecution under §§7201 and 7203 . Of course, Cheek was
free in this very case to present his claims of invalidity and have them
adjudicated, but like defendants in criminal cases in other contexts,
who "willfully" refuse to comply with the duties placed upon
them by the law, he must take the risk of being wrong. [Cheek v.
United States [91-1
USTC ¶50,012 ], 498
U.S.
at --, 111 S.
Ct.
at 612-613; fn. ref. omitted.]
As
was explained recently by the Court of Appeals for the Tenth Circuit:
"Willfulness"
is defined as the "voluntary, intentional violation of a known
legal duty." Cheek v. United States [91-1
USTC ¶50,012 ], 111
S. Ct.
at 610 (emphasis added). To be a relevant defense to willfulness, then,
Willie, because of his belief or misunderstanding, must not have known
he had a legal duty.
Id.
at 611 (defendant must be "ignorant of his duty"). Thus, his
belief must be descriptive--he must believe that the law does not
apply to him. A normative belief that the law should not apply to
him leaves Willie fully aware of his legal obligations and simply
amounts to a disagreement with his known legal duty and a "studied
conclusion . . . that [the law is] invalid and unenforceable."
Id.
at 612-13. * * * [United States v. Willie [91-2
USTC ¶50,409 ], 941 F.2d 1384, 1392 (10th Cir. 1991).]
We
find that petitioner did not have a good-faith belief that he was not
required to file tax returns, report his income, or pay tax for 1982
through 1985. The record shows that petitioner merely thought he could
elude prosecution. Moreover, reviewing the record in the best light for
petitioner, it shows that he considered the tax laws to be
unconstitutional. Petitioner's testimony demonstrates that his
misunderstanding, if any, went to the constitutionality of the tax laws.
For example, in response to an inquiry as to why petitioner filed the
delinquent returns when he did, he stated:
Well,
I was in communication with my legal advisor, Mr. Stift, and he had been
trying to convince me that my interpretation of the tax law was wrong.
And
I also saw that some of these people who I had put my trust in were
having their own legal problems. And, therefore, I changed my mind
and decided that I would have to comply with the law. [Emphasis
added.]
Petitioner's
reliance on advisers would not preclude a finding of fraud in this case.
The testimony establishes that petitioner's reliance did not go to
whether he was required by law to file; rather, petitioner's reliance
related to the question of whether he could continue failing to file the
tax returns without detection.
Mrs.
Niedringhaus' testimony regarding their failure to file returns for 1979
through 1985 also shows that petitioner did not honestly misunderstand
his obligation to file the tax returns but merely disagreed with the tax
laws:
[Respondent]
And then for 1979 through 1985, you didn't file returns; is that
correct?
[Mrs.
Niedringhaus] Paul got very interested, as he has testified in this, I
think you call it a tax protestor thing.
And
as Paul has testified--or as you have brought out--that an individual
out in
California
, over many years, had convincing information regarding taxes and the
passage of the --
[Respondent]
Okay.
[Mrs.
Niedringhaus]--16th Amendment. The fact that one outspoken individual in
California
was never investigated--
[Respondent]
Okay.
[Mrs.
Niedringhaus]--despite the fact that he had gone on record for five
years, invited the press, and had it in the press--
[Respondent]
Yes.
[Mrs.
Niedringhaus]--the government have tacit approval to that individual's
actions. And I think--
[Respondent]
Mrs. Niedringhaus, could--
[Mrs.
Niedringhaus]--that that was convincing to Paul.
[Respondent]
Okay. I just asked the question, you didn't file returns between 1979
and 1985; is that correct?
[Mrs.
Niedringhaus] Paul has testified so.
[Respondent]
Okay.
[Mrs.
Niedringhaus] I, at the time, that Paul said that he was not going
to--that he was believing what all of these individuals were saying, I
said to him--and we were down in the office at the time--I don't agree
with this. I don't agree that you should not file.
You
should work it some other way. You should, you know, write to your
Senator and say, you know, I've heard that the 16th Amendment was never
ratified. And work at it through the legal processes, even though they
are very slow. And I did say to Paul, I don't think you should do it.
At
best this testimony shows that petitioner believed that he should not
have to file returns since the provisions of the tax code requiring same
were unconstitutional. A belief that the tax laws are unconstitutional
and should not apply, however, is not a sufficient defense to fraud. Cheek
v.
United States
, supra;
United States
v. Willie, supra at 1392. We cannot accept petitioner's self-serving
testimony, especially where it contradicts credible testimony. Geiger
v. Commissioner [71-1 USTC ¶9333 ],
440 F.2d 688, 689-690 (9th Cir. 1971), affg. [Dec. 29,686(M) ] per curiam
T.C. Memo. 1969-159; Sharwell v. Commissioner [70-1 USTC ¶9142 ],
419 F.2d 1057, 1060 (6th Cir. 1969), vacating and remanding on other
issues [Dec. 28,961(M) ] T.C. Memo.
1968-89; Tokarski v. Commissioner [Dec. 43,168 ], 87 T.C. 74,
77 (1986); Surloff v. Commissioner [Dec. 40,419 ], 81 T.C. 210,
239 (1983). Petitioner's testimony that he did not file returns because
he did not believe the tax laws applied to him is not credible.
The
evidence clearly and convincingly establishes that petitioner is liable
for the additions to tax under section 6653(b)(1) and (2) for 1982
through 1985. Because the additions to tax under section 6653(b) apply,
we need not consider respondent's alternative argument under sections
6651(a)(1) and 6653(a) for 1982 through 1985.
Fraud--Mrs.
Niedringhaus
There
is no basis in the record to find that any part of the underpayment in
any of the years in issue is due to fraud on Mrs. Niedringhaus' part.
She had no separate income for the years in issue and urged petitioner
to file returns for those years. There is no evidence showing that the
delinquent returns (to which she was a party) are fraudulent. Therefore,
we hold that the fraud additions determined by respondent do not apply
to her. See Cirillo v. Commissioner [63-1 USTC ¶9311 ],
314 F.2d 478, 484 (3d Cir. 1963), affg. in part and revg. in part [Dec. 24,920(M) ] T.C. Memo.
1961-192. Because of our holding that Mr. Niedringhaus' acts were
fraudulent for these taxable years, respondent's alternative
determination concerning sections
6651(a)(1) and 6653(a) are moot.
Section
6651(a)(1) Addition To Tax
Respondent
determined additions to tax under section
6651(a)(1) for the late filing of petitioners' 1979, 1980,
and 1981 returns. Petitioners filed these returns on August 13, 1986,
after they discovered that petitioner was under investigation by
respondent.
Section
6651(a)(1) imposes an addition to tax of 5 percent of the
amount of the tax due for each month a return is delinquent, up to a
maximum of 25 percent. The addition to tax is not applicable if the
lateness is due to reasonable cause and not to willful neglect. Sec. 6651(a)(1) ; United
States v. Boyle [85-1
USTC ¶13,602 ], 469 U.S. 241, 245 (1985). Petitioners have
the burden of proving that the failure to file is due to reasonable
cause and not willful neglect. Davis v. Commissioner [Dec. 40,564 ], 81 T.C. 806,
820 (1983), affd. without published opinion 767 F.2d 931 (9th Cir.
1985). Whether the late filing of an income tax return is due to
reasonable cause or willful neglect is a question of fact. Commissioner
v. Walker [64-1 USTC ¶9208 ],
326 F.2d 261, 264 (9th Cir. 1964), affg. on this issue [Dec. 25,361 ] 37 T.C. 962
(1962).
Reasonable
cause for the failure to timely file a return exists if the taxpayer
exercised ordinary business care and prudence but, nevertheless, was
unable to file the return within the time prescribed by law. Sec.
301.6651-1(c)(1) , Proced. & Admin. Regs.; Estate of
La Meres v. Commissioner, 98 T.C. 294 [Dec. 48,085 ], -- (1992)
(slip op. at 24). In order to disprove "willful neglect", a
taxpayer must prove that the late filing did not result from a
"conscious, intentional failure or reckless indifference." United
States v. Boyle, supra at 245-246. A taxpayer's belief that no
return is required in itself is not sufficient to show that the failure
to file was due to reasonable cause. Lawrence Block Co. v.
Commissioner [Dec. 16,864], 12 T.C. 366 (1949); P. Dougherty Co.
v. Commissioner [Dec. 14,763 ], 5 T.C. 791,
800 (1945), affd. [47-1
USTC ¶9117 ] 159 F.2d 269 (4th Cir. 1946).
Petitioners
have failed to show that their failure to file returns for 1979, 1980,
and 1981 was due to reasonable cause and not willful neglect.
Petitioners were fully aware of their duty to timely file tax returns
but they elected not to file the returns until notified of the IRS
criminal investigation. Therefore, we hold that petitioners are liable
for the additions to tax under section
6651(a)(1) for 1979, 1980, and 1981.
Section
6653(a) Additions
Respondent
determined that all of the underpayment of tax for 1979, 1980, and 1981,
is due to negligence or the intentional disregard of rules and
regulations.
Section
6653(a) 9 provides an
addition to tax if any part of an underpayment is due to negligence or
intentional disregard of rules. Negligence is the lack of due care or
failure to do what a reasonable and ordinarily prudent person would do
in a similar situation. Neely v. Commissioner [Dec.
42,540 ], 85 T.C. 934, 947 (1985). Petitioners have the
burden of proving that the additions to tax under section 6653(a) do not
apply for 1979, 1980, and 1981. Rule 142(a); Luman v. Commissioner
[Dec. 39,500 ], 79 T.C. 846,
860-861 (1982). As a general rule, taxpayers are charged with knowledge
of the law. Harrington v. Commissioner [Dec. 45,989 ], 93 T.C. 297,
314 (1989). While a showing of good faith by the taxpayer may preclude
the existence of fraud, good faith does not always negate negligence. Wesley
Heat Treating Co. v. Commissioner [Dec. 22,926 ], 30 T. C. 10,
26 (1958), affd. [59-2
USTC ¶9524 ] 267 F.2d 853 (7th Cir. 1959); Richlands
Medical Association v. Commissioner [Dec. 47,064], T.C. Memo.
1990-660, affd. without published opinion 953 F.2d 639 (4th Cir. 1992).
Although taxpayers are not subject to the addition to tax for negligence
where they make honest mistakes in complex matters, they are required to
take reasonable steps to determine the law and to comply with it. See
Adams
v. Commissioner [Dec.
38,971(M) ], T.C. Memo. 1982-223, affd. without published
opinion 732 F.2d 159 (7th Cir. 1984). Additionally, petitioners' failure
to file has some bearing on negligence. See Emmons v. Commissioner
[Dec. 45,490 ], 92 T.C. 342
(1989), affd. [90-1
USTC ¶50,217 ] 898 F.2d 50 (5th Cir. 1990).
Petitioners
have not shown that their actions were reasonable, or prudent, or that
they exercised due care. Petitioner made no effort to consult an
attorney or tax return preparer outside the tax protester movement
regarding his obligation to file tax returns. Petitioners were advised
of and knew of their obligation to file tax returns for 1979, 1980, and
1981, but they intentionally failed to file the returns. Therefore,
petitioners are liable for the section 6653(a) additions to tax for 1979
and 1980 and the section 6653(a)(1) and (2) additions to tax for 1981.
Section
6654 Addition to Tax
Respondent
also determined that petitioners are liable for additions to tax under section 6654(a) for failure
to pay estimated income tax. Imposition of the addition to tax under section 6654(a) applies
where prepayments of tax, either through withholding or by making
estimated quarterly tax payments during the course of the year, do not
equal the percentage of total liability required under the statute,
unless petitioners show that one of the several statutory exemptions
applies. Sec. 6654(a) ; Grosshandler
v. Commissioner [Dec.
37,317 ], 75 T.C. 1, 20-21 (1980). Petitioners have made no
such showing. For the years in issue petitioners filed no timely returns
and made no estimated tax payments. They had substantial taxable income
for the years in issue; therefore, we hold that they are liable for the
additions to tax under section 6654(a) for those
years.
To
reflect the foregoing,
Decision
will be entered under Rule 155.
1
It appears that this organization is the same Belanco Religious Order,
founded by Paul Bell, which is mentioned in the following cases: United
States v. Witvoet [85-2
USTC ¶9530 ], 767 F.2d 338 (7th Cir. 1985); United States
v. Streich, 759 F.2d 579 (7th Cir. 1985); In re Grand Jury
Witness, 695 F.2d 359 (9th Cir. 1982); United States v. House,
617 F.Supp. 240 (W.D. Mich. 1985); Gromnicki v. Commissioner [Dec. 44,960(M) ], T.C.
Memo. 1988-358.
2
The record regarding MACBA's activities is very sparse. The Court of
Appeals for the Seventh Circuit has described MACBA as "a
clearinghouse for tax protestors and persons who wished to avoid
detection by the IRS." United States v. Jungles [90-1
USTC ¶50,289 ], 903 F.2d 468, 472 (7th Cir. 1990).
3
Neither party introduced evidence to show what MACBA actually did with
the funds between the time of deposit and their return to petitioner.
4
The record does not contain a copy of the bill of information for the
criminal charges nor does it contain any information regarding the
sentence imposed pursuant to petitioner's plea of guilty for the 1982,
1983, and 1984 years.
5
The addition to tax for fraud is now contained in sec. 6663 of the Internal
Revenue Code of 1986.
6
Petitioners rely on the unsworn declaration of
Rob
ert G. Stift (Stift) to corroborate petitioner's testimony. The
declaration was an exhibit to their reply to respondent's answer.
Outside of the obvious hearsay problems with the declaration, it was
never offered at the trial or admitted into the record; hence, it cannot
be considered as evidence. Petitioners did not call Stift as a witness
at the trial. We are left with the conclusion that had Stift been called
to testify, his testimony would have been unfavorable to petitioners. McKay
v. Commissioner [Dec. 44,346 ], 89 T.C.
1063, 1069 (1987), affd. [89-2 USTC ¶9574 ]
886 F.2d 1237 (9th Cir. 1989); Pollack v. Commissioner [Dec. 28,165 ], 47 T.C. 92,
108 (1966), affd. [68-1
USTC ¶9318 ] 392 F.2d 409 (5th Cir. 1968); Wichita
Terminal Elevator Co. v. Commissioner [Dec.
15,171 ], 6 T.C. 1158, 1165 (1946), affd. [47-1 USTC ¶9253 ]
162 F.2d 513 (10th Cir. 1947).
7
In his posttrial filings, which we have treated as his briefs,
petitioner attempts to add additional or clarifying information to the
testimony adduced at the trial on the MACBA transaction or other
matters. Statements in briefs, however, do not constitute evidence and
cannot be used as such to supplement the record. Rule 143(b).
8
In a recently issued Memorandum Opinion, this Court cited Cheek v.
United States [91-1
USTC ¶50,012 ], 498
U.S.
--, 111 S. Ct. 604 (1991), but did not address its application to civil
cases. See Coulter v. Commissioner [Dec. 48,156(M) ], T.C.
Memo. 1992-224. In Coulter, the taxpayer argued that he was not
subject to additions to tax for fraud because he was "taken
in" by a tax-protest promoter and did not believe that he was
subject to tax. We rejected taxpayer's argument because the Internal
Revenue Service had notified him that returns must be filed.
9
Sec. 6653(a)(1) and (2) for 1981.
[99-2
USTC ¶50,648]
United States of America
, Plaintiff-Appellee v. Michael L. Lindsay, Defendant-Appellant
(CA-10),
U.S.
Court of Appeals, 10th Circuit, 98-3218, 7/1/99, 184 F3d 1138, 184 F3d
1138. Affirming and reversing an unreported District Court decision
[Code
Sec. 7203 ]
Crimes: Tax evasion: Failure to file: Jury instructions: Tax
protestor: Constitutional arguments: Good-faith defense.--A tax
protestor's conviction on charges of tax evasion and failure to file
returns was upheld. The trial court did not commit reversible error when
it instructed the jury that neither the taxpayer's opinion that tax laws
were unconstitutional nor his disagreement with the government's tax
collection system and policies constituted a good-faith misunderstanding
of the law. Cheek (SCt), 91-1
USTC ¶50,012 , followed.
[Code
Secs. 7201 and 7203
]
Crimes: Tax evasion: Failure to file: Sentencing guidelines: Downward
adjustment denied.--A tax protestor was properly convicted of tax
evasion and failure to file returns. The trial court's application of a
multi-count sentencing analysis did not constitute plain error; thus,
his sentence enhancement was valid. Based on the court's determination
that the taxpayer's tax convictions and mail fraud convictions involved
unrelated conduct, it grouped them separately for purposes of the
sentencing guidelines. In light of the fact that the victims and
mischief at issue in the tax and fraud convictions differed, those
convictions did not have to be grouped as part of a criminal plan that
was ongoing or continuous in nature.
[Code
Secs. 7201 and 7203
]
Crimes: Tax evasion: Failure to file: Sentencing guidelines: Downward
adjustment denied.--A tax protestor was properly convicted of tax
evasion and failure to file returns. The trial court did not err in
refusing to reduce the taxpayer's sentence for acceptance of
responsibility. Even though the taxpayer lessened the prosecution's
trial burden by admitting his failure to file or pay taxes, by failing
to object to the government's exhibits, and by refraining from
cross-examining witnesses, his behavior did not warrant a downward
adjustment in his sentence. His numerous efforts to obstruct justice
were inconsistent with acceptance of responsibility and provided an
ample foundation for the trial court's determination.
Jackie
N. Williams, United States Attorney, Alan G. Metzger, Assistant United
States Attorney, Wichita, Kan., for the plaintiff-appellee. Timothy J.
Henry, Assistant Federal Public Defender (David J. Phillips, Federal
Public Defender, with him on the briefs), Wichita, Kan., for the
defendant-appellant.
Before:
BALDOCK, EBEL and LUCERO, Circuit Judges.
LUCERO,
Circuit Judge:
We
must determine whether a district court commits reversible error when it
instructs a jury that a defendant's opinion that the tax laws are
unconstitutional cannot constitute a "good faith" defense to
tax charges. Exercising jurisdiction pursuant to 28 U.S.C. §1291, we
conclude it does not, but nevertheless reverse Lindsay's bank fraud
convictions because of insufficient evidence. We affirm the sentence
imposed below.
I
Michael
L. Lindsay is a tax protester from
Kansas
. Beginning in 1991, Lindsay ceased to file income tax returns and pay
income taxes. In 1992, Lindsay began affirmatively to conceal his income
by taking actions such as closing his personal checking account,
depositing his earnings in various trust accounts, and destroying his
business records. When the Kansas Department of Revenue confronted him
with a demand for payment of $138,221.38 in overdue taxes, Lindsay
responded by mailing the agency a fraudulent "certified bankers
check" in the amount of $276,000. The check was an apparent effort
not only to discharge his state tax debt, but also fraudulently to
obtain nearly $138,000 from the State. Lindsay also presented worthless
certified money orders to Mid-Continent Federal Savings Bank and Central
National Bank Marion County.
Lindsay's
conduct resulted in indictments charging three counts of tax evasion, 26
U.S.C. §7201; one count of failure to file a tax return, 26 U.S.C. §7203;
two counts of bank fraud, 18 U.S.C. §1344(1); and one count of mail
fraud, 18 U.S.C. §1341. Lindsay represented himself at trial and was
convicted on all counts charged. The district court then sentenced him
to twenty-four months in prison.
Lindsay
asserts four errors. First, he argues that the district court erred when
it instructed the jury that an opinion that the tax laws are
unconstitutional cannot constitute a "good faith" defense to a
tax charge. Second, he claims that his convictions for bank fraud must
be vacated because the government presented insufficient evidence to
sustain those convictions. Third, he asserts that the district court
erred when it applied a multi-count analysis in determining his
sentence. Finally, he argues that the district court erroneously failed
to grant him a sentence reduction for acceptance of responsibility.
II
We
first consider Lindsay's argument based on the district court's good
faith jury instruction. Because Lindsay failed to raise a timely
objection to the jury instruction, we review the instruction only for
plain error. 1 See
United States
v. Sides, 944 F.2d 1554, 1562 (10th Cir. 1991). We apply this
standard of review with somewhat less rigidity given that Lindsay's
claim alleges constitutional error. See
United States
v.
Jefferson
, 925 F.2d 1242, 1254 (10th Cir. 1991).
A
defendant charged with a specific-intent, federal criminal tax offense
can negate the element of wilfulness necessary to prove the violation,
thereby providing a defense to the conduct charged, if the defendant
establishes that he or she sought in good faith to comply with the
relevant law. See Cheek v. United States [91-1 USTC ¶50,012],
498 U.S. 192, 201 (1991). In the current action the district court
instructed the jury that "good faith," which "means,
among other things, an honest belief, a lack of malice, and the intent
to perform all lawful obligations," is a defense to conduct
otherwise punishable under the tax laws, I R. Doc. 40, Instruction No.
30, and that "a person's opinion that the tax laws violate his
constitutional rights does not constitute a good faith misunderstanding
of the law. Furthermore, a person's disagreement with the government's
tax collection system and policies does not constitute a good faith
misunderstanding of the law."
Id.
Lindsay
argues that the referenced instruction conflicts with our decision in United
States v. Ratchford, 942 F.2d 702 (10th Cir. 1991). In Ratchford,
a bank fraud case, the defendant-appellant challenged the district
court's failure to include, in its jury instruction on good faith,
language indicating that a "[d]efendant's belief that he was acting
in good faith need not be rational nor reasonable if [d]efendant's
belief [was] truly held."
Id.
at 706. We rejected this argument, concluding the district court's good
faith instruction adequately stated the law and was "sufficiently
broad to include beliefs not rationally or reasonably held."
Id.
at 707 (citations omitted). Lindsay apparently incorrectly interprets Ratchford
to hold that a good faith belief that is irrationally or unreasonably
held can always provide a defense to a charge that requires proof of
intent.
The
Supreme Court's decision in Cheek [91-1 USTC ¶50,012], 498
U.S.
at 204-07, forecloses Lindsay's interpretation. Cheek, who had been
charged with tax fraud and tax evasion, appealed his sentence based on
an allegedly erroneous good faith jury instruction. Cheek's
determination that the tax laws are unconstitutional, the Court
concluded, constituted a "studied conclusion" rather than an
innocent mistake of the type encompassed by the good faith defense. 2
Id.
at 205. Accordingly, the Court held that
a
defendant's views about the validity of the tax statutes are irrelevant
to the issue of willfulness and need not be heard by the jury, and if
they are, an instruction to disregard them would be proper. For this
purpose it makes no difference whether the claims of invalidity are
frivolous or have substance. It was therefore not error in this case for
the District Judge to instruct the jury not to consider Cheek's claims
that the tax laws were unconstitutional.
Cheek
[91-1 USTC ¶50,012], 498
U.S.
at 206. Cheek compels our conclusion that the district court's
good faith instruction was not plainly erroneous.
III
Lindsay
argues, and the government concedes, that the evidence of his bank fraud
convictions is insufficient because the government failed to produce
evidence that the financial institutions at issue are insured by the
Federal Deposit Insurance Corporation. Such proof is an essential
element of bank fraud. See
United States
v. Rackley, 986 F.2d 1357, 1361 (10th Cir. 1993). The government's
concession, our independent review of the record, and the mandate of Rackley,
require that Lindsay's bank fraud convictions be reversed. 3
IV
Lindsay's
next claim--that the district court violated U.S.S.G. §3D1.2 when it
applied a multi-count analysis to his sentence--lacks suasion. When, as
is presently the case, a defendant fails to object to the district
court's application of the Sentencing Guidelines at sentencing, we
review a subsequent legal challenge to a sentence for plain error. 4 See
United States
v. Gilkey, 118 F.3d 702, 704 (10th Cir. 1997);
United States
v. Farnsworth, 92 F.3d 1001, 1007-08 (10th Cir. 1996).
The
grouping provisions contained in U.S.S.G. Chapter 3, Part D are intended
to "limit the significance of the formal charging decision and to
prevent multiple punishment for substantially identical offense
conduct." U.S.S.G. Ch. 3, Pt. D, intro. comment. Adopting the
approach of the presentencing report ("PSR"), the district
court in this case concluded that Lindsay's tax and fraud convictions
involve unrelated conduct and should be separately grouped under §3D1.2(d).
Lindsay insists the proper procedure required the grouping of these
counts, thereby reducing his offense level by two points by invalidating
the sentence enhancement he received pursuant to §3D1.4. We disagree.
"[T]he
difference in the nature and measure of harm resulting from [multiple]
offenses" precludes the grouping of Lindsay's surviving
convictions: his tax and mail fraud convictions under §3D1.2(d). 5
United States
v. Kunzman, 54 F.3d 1522, 1531 (10th Cir. 1995) (citing United
States v. Johnson, 971 F.2d 562, 576 (10th Cir. 1992)). The
convictions at issue involve different harms. Lindsay's tax offenses
deprived the federal government of revenue to which it was entitled from
him under the tax code. Lindsay's mail fraud constituted an
attempt to obtain funds fraudulently from
Kansas
. The measure of harm attributable to Lindsay's offenses could also be
seen as distinct. Under U.S.S.G. §2T1.1(c)(2)-(3), which concerns
failure to file a tax return or pay taxes, the harm attributable to an
offense is based on the amount of tax that is actually owed and remains
unpaid. So too, the loss attributable to an act of tax evasion is the
amount that a defendant owes and seeks to avoid. See U.S.S.G. §2T1.1(c)(1).
By contrast, the harm attributable to an act of mail fraud is the amount
of loss a perpetrator creates or seeks to create if that amount is
determinable and is greater than the actual loss caused. 6 See
U.S.S.G. §2F1.1, comment. (n.8). In addition, the determination of loss
in the mail fraud context, as opposed to the tax context, does not
necessarily relate to a pre-existing obligation. Under Johnson
and Kunzman, the district court did not commit plain error when
it declined to group Lindsay's tax and mail fraud convictions for
sentencing purposes.
Furthermore,
because the victims and mischief at issue in Lindsay's tax and mail
fraud convictions differ, the convictions need not be grouped as part of
a criminal plan that is "ongoing or continuous in nature"
under §3D1.2(d). We reject Lindsay's argument that example three in §3D1.2,
comment. (n.6) requires the grouping of these convictions. That
guideline example involves the offenses of wire fraud and mail fraud,
not mail fraud and tax evasion. The analogy that Lindsay seeks to draw
is not apt.
For
these reasons, we conclude that the district court's application of a
multi-count sentencing analysis did not constitute plain error.
Accordingly, Lindsay's sentence enhancement under §3D1.4 remains valid.
V
The
final issue brought to us for consideration is the assertion that the
district court erred when it refused to reduce Lindsay's sentence for
acceptance of responsibility. Determination of acceptance of
responsibility is a question of fact reviewed under a clear error
standard. See
United States
v. Mitchell, 113 F.3d 1528, 1533 (10th Cir. 1997). "The
sentencing judge is in a unique position to evaluate a defendant's
acceptance of responsibility. For this reason, the determination of the
sentencing judge is entitled to great deference on review."
U.S.S.G. §3E1.1, comment. (n.5). A district court's determination
concerning whether a defendant has accepted responsibility should not be
disturbed "unless it is without foundation."
United States
v. Amos, 984 F.2d 1067, 1071-72 (10th Cir. 1993).
Based
on our review of the record, we conclude that Lindsay's numerous efforts
to obstruct justice are inconsistent with acceptance of responsibility
and provide ample foundation for the court's denial of this downward
adjustment. See United States v. Tovar, 27 F.3d 497, 499 (10th
Cir. 1994); see also United States v. Hopper, 27 F.3d 378, 383
(9th Cir. 1994) (noting that appellate courts consider whether the
defendant's obstructive conduct is inconsistent with the defendant's
claim of acceptance of responsibility). The record reveals that Lindsay
behaved in an unruly manner during prior proceedings. For example,
Lindsay persistently resisted the court's request that he either swear
or affirm that he would testify truthfully. He refused to comply with
court security procedures, failed to review court correspondence on
which his name appeared in all capital letters, and was non-responsive
to questions posed by the court. Lindsay also engaged in an apparent
effort to undermine the
admin
istration of justice by filing numerous frivolous documents with the
district court. Even though Lindsay lessened the prosecution's trial
burden by admitting his failure to file or pay taxes, by failing to
object to the government's exhibits, and by refraining from witness
cross-examination, for the reasons discussed above, the record
nonetheless supports the district court's determination that Lindsay's
behavior is inconsistent with acceptance of responsibility. The district
court's refusal to award Lindsay a sentence reduction for acceptance of
responsibility does not constitute clear error.
VI
We
AFFIRM all of Lindsay's convictions except for his bank fraud
convictions, which we REVERSE and REMAND to the district
court with directions to VACATE. 7 Because we
conclude that Lindsay's sentence remains valid, we AFFIRM the
district court's sentence determination.
1
The fact that Lindsay proceeded pro se before the district court does
not immunize him from resulting prejudice to his case. The right of
self-representation is not a license to violate relevant rules of
procedural law. See Faretta v.
California
, 422
U.S.
806, 834-35 (1975).
2
The Court also noted a distinction between a good faith, irrationally or
unreasonably held belief that a provision of the tax code is
inapplicable to oneself, which could constitute a good faith defense by
precluding a finding of willfulness, and a studied conclusion, like
Lindsay's, that the tax code is unconstitutional, which could not
constitute such a defense. Cheek [91-1 USTC ¶50,012], 498
U.S.
at 205-07.
3
We conclude that despite our decision to reverse Lindsay's bank fraud
convictions, the offense level calculated pursuant to U.S.S.G. §2F1.1(b)(1)(I)
for the mail fraud conviction, with which the bank fraud convictions
were previously grouped, remains the same. We agree with the government
that Lindsay's mail fraud offense caused sufficient loss to render him
eligible for the sentence level he received. In sentencing Lindsay, the
district court found a total loss of $342,352.02, and enhanced his
sentence level by eight points in accordance with §2F1.1(b)(1)(I),
which applies to losses of between $200,000 and $350,000 arising from
offenses involving fraud or deceit. Even without the losses attributable
to his bank fraud, Lindsay's mail fraud still implicates approximately
$276,000 of intended loss and therefore still qualifies Lindsay for the
eight-point sentence enhancement. Our decision to reverse the bank fraud
convictions thus does not affect this offense level determination.
Nor
does our reversal affect Lindsay's sentence enhancement under §2F1.1(b)(2)(B)
for perpetrating a scheme to defraud more than one victim. Section
1B1.3(a) of the Sentencing Guidelines recognizes that a defendant can be
held accountable for "relevant conduct" for which he has not
been convicted. See
United States
v. Watts, 519
U.S.
148, 152-54 (1997). A specific offense characteristic, such as that
encompassed by §2F1.1(b)(2)(B), which is used to determine a sentence
enhancement, can be based on relevant conduct. See U.S.S.G. §1B1.3;
see also
United States
v. Fox, 999 F.2d 483, 485-86 (10th Cir. 1993) (upholding use of
relevant conduct in determining specific offense characteristic of
monetary loss for purposes of §2F1.1(b)(1)). In analogous
circumstances, in which a defendant pled guilty to one count of
defrauding one bank but had actually defrauded three banks in similar
schemes, the Second Circuit has held that "the district court erred
when it failed to apply the two-level adjustment [under U.S.S.G. §2F1.1(b)(2)(B)]
for defrauding more than one victim," given the relevant conduct of
defendant's additional fraudulent activities.
United States
v. Shumard, 120 F.3d 339, 340 (2d Cir. 1997).
For
an offense to be included within the scope of §1B1.3(a)(2), the conduct
must satisfy a three-pronged standard.
First,
there must be a finding that the offense in question involved conduct
described in §§1B1.3(a)(1)(A) and (B). Second, the offense must be the
type of offense that, if the defendant had been convicted of both
offenses, would require grouping with the offense of conviction for
sentencing purposes under U.S.S.G. §3D1.2(d). Third, the offense must
have been "part of the same course of conduct or common scheme or
plan." U.S.S.G. §1B1.3(a)(2).
United States
v.
Taylor
, 97 F.3d 1360, 1363 (10th
Cir. 1996). Because Lindsay had originally been convicted of bank fraud,
the district court did not need to find that the instances of bank fraud
constitute relevant conduct. Nonetheless, we may and do conclude that
the record contains sufficient evidence to support such an enhancement
based on relevant conduct. See
Taylor
, 97 F.3d at 1364. First, Lindsay's jury concluded that he sought to
obtain funds fraudulently from the two banks at issue here. Second, §2F1.1(b)(2)(B)
and the conclusion of the presentencing report demonstrate that
Lindsay's bank fraud convictions, were they valid, would be grouped with
his mail fraud convictions. Finally, the district court made sufficient
findings that Lindsay's attempts to obtain money fraudulently from
Mid-Continent Federal Savings Bank, Central National Bank
Marion
County, and the State of
Kansas
, were part of a common scheme or plan. See §1B1.3. comment.
(n.9(a)). Accordingly, Lindsay's bank fraud is relevant conduct for the
purpose of determining Lindsay's eligibility for a sentence enhancement
under §2F1.1, and we affirm the two-point enhancement he received.
4
Although Lindsay could not have been expected to anticipate our decision
to reverse his bank fraud convictions, he should have raised an
objection to application of the multi-count sentencing analysis below.
5
Section 3D1.2(d) requires that courts shall group together counts
[w]hen
the offense level is determined largely on the basis of the total amount
of harm or loss, . . . or some other measure of aggregate harm, or if
the offense behavior is ongoing or continuous in nature and the offense
guideline is written to cover such behavior.
6
Moreover, while the district court did not do so here, a court may
adjust downward the amount of loss attributed to an act of fraud if the
unadjusted loss valuation overstates the seriousness of the offense. See
U.S.S.G. §2F1.1, comment. (n.11). No comparable provision exists with
respect to the valuation of loss attributable to tax offenses under §2T1.1.
Because the amount of loss attributable to a tax offense is the amount
of money actually owed and withheld by a perpetrator, the loss valuation
cannot logically be deemed to overstate the seriousness of an offense.
7
We also reverse and remand with instructions to vacate the accompanying
imposition of the special assessments associated with Lindsay's bank
fraud convictions.
[91-1
USTC ¶50,012] John L. Cheek, Petitioner v.
United States
Supreme
Court of the United States, 89-658, 1/8/91, Vacating and remanding CA-7,
89-2
USTC ¶9509 , 882 F.2d 1263
On Writ of Certiorari to the United States Court of Appeals for the
Seventh Circuit.
[Code Secs.
7201 and 7203 ]
Crimes: Willfullness: Reasonableness: Jury instruction: Tax evasion:
Failure to file returns: Tax protestor.--A pilot's convictions of
the crimes of tax evasion and the failure to file returns were vacated
and remanded where a jury instruction removed a factual inquiry from the
consideration of the jury. The jury instruction improperly stated that
an honest but unreasonable belief fails to negate willfullness, and the
pilot's beliefs that wages were not income and that he was not a
taxpayer within the meaning of the Code were not objectively reasonable.
Willfullness (defined as a voluntary, intentional violation of a known
legal duty) may be negated by a good-faith misunderstanding of the law
or a good-faith belief that there is no violation whether or not the
claim is objectively reasonable. A second jury instruction properly
informed the jury to disregard the pilot's claim that the tax laws are
unconstitutional because such claim does not arise from an innocent
mistake and it is irrelevant to the issue of willfullness.
Syllabus
Petitioner
Cheek was charged with six counts of willfully failing to file a federal
income tax return in violation of §7203
of the Internal Revenue Code (Code) and three counts of
willfully attempting to evade his income taxes in violation of §7201 . Although admitting
that he had not filed his returns, he testified that he had not acted
willfully because he sincerely believed, based on his indoctrination by
a group believing that the federal tax system is unconstitutional and
his own study, that the tax laws were being unconstitutionally enforced
and that his actions were lawful. In instructing the jury, the court
stated that an honest but unreasonable belief is not a defense and does
not negate willfulness, and that Cheek's beliefs that wages are not
income and that he was not a taxpayer within the meaning of the Code
were not objectively reasonable. It also instructed the jury that a
person's opinion that the tax laws violate his constitutional rights
does not constitute a good-faith misunderstanding of the law. Cheek was
convicted, and the Court of Appeals affirmed.
Held:
1. A good-faith misunderstanding of the law or a good-faith belief that
one is not violating the law negates willfulness, whether or not the
claimed belief or misunderstanding is objectively reasonable. Statutory
willfulness, which protects the average citizen from prosecution for
innocent mistakes made due to the complexity of the tax laws, United
States v. Murdock [3
USTC ¶1194 ], 290 U.S. 389, is the voluntary, intentional
violation of a known legal duty. United States v. Pomponio [76-2 USTC ¶9695 ],
429 U.S. 10. Thus, if the jury credited Cheek's assertion that he truly
believed that the Code did not treat wages as income, the Government
would not have carried its burden to prove willfulness, however
unreasonable a court might deem such a belief. Characterizing a belief
as objectively unreasonable transforms what is normally a factual
inquiry into a legal one, thus preventing a jury from considering it.
And forbidding a jury to consider evidence that might negate willfulness
would raise a serious question under the Sixth Amendment's jury trial
provision, which this interpretation of the statute avoids. Of course,
in deciding whether to credit Cheek's claim, the jury is free to
consider any admissible evidence showing that he had knowledge of his
legal duties. Pp. 6-11.
2.
It was proper for the trial court to instruct the jury not to consider
Cheek's claim that the tax laws are unconstitutional, since a
defendant's views about the tax statutes' validity are irrelevant to the
issue of willfulness and should not be heard by a jury. Unlike the
claims in the Murdock-Pomponio line of cases, claims that Code
provisions are unconstitutional do not arise from innocent mistakes
caused by the Code's complexity. Rather, they reveal full knowledge of
the provisions at issue and a studied conclusion that those provisions
are invalid and unenforceable. Congress could not have contemplated that
a taxpayer, without risking criminal prosecution, could ignore his
duties under the Code and refuse to utilize the mechanisms Congress
provided to present his invalidity claims to the courts and to abide by
their decisions. Cheek was free to pay the tax, file for a refund, and,
if denied, present his claims to the courts. Also, without paying the
tax, he could have challenged claims of tax deficiencies in the Tax
Court. Pp. 11-14.
[89-2 USTC ¶9509 ],
882 F.2d 1263, vacated and remanded.
WHITE,
J., delivered the opinion of the Court, in which REHNQUIST, C.J., and
STEVENS, O'CONNOR, and KENNEDY, JJ., joined. SCALIA, J., filed an
opinion concurring in the judgment. BLACKMUN, J., filed a dissenting
opinion, in which MARSHALL, J., joined. SOUTER, J., took no part in the
consideration or decision of the case.
JUSTICE
WHITE
delivered
the opinion of the Court: Title 26, §7201
of the United States Code provides that any person "who
willfully attempts in any manner to evade or defeat any tax imposed by
this title or the payment thereof" shall be guilty of a felony.
Under 26 U.S.C. §7203 , "[a]ny person
required under this title . . . or by regulations made under authority
thereof to make a return . . . who willfully fails to . . . make such
return" shall be guilty of a misdemeanor. This case turns on the
meaning of the word "willfully" as used in §§7201
and 7203.
I
Petitioner
John L. Cheek has been a pilot for American Airlines since 1973. He
filed federal income tax returns through 1979 but thereafter ceased to
file returns. 1 He also
claimed an increasing number of withholding allowances--eventually
claiming 60 allowances by mid-1980--and for the years 1981 to 1984
indicated on his W-4 forms that he was exempt from federal income taxes.
In 1983, petitioner unsuccessfully sought a refund of all tax withheld
by his employer in 1982. Petitioner's income during this period at all
times far exceeded the minimum necessary to trigger the statutory filing
requirement.
As
a result of his activities, petitioner was indicted for 10 violations of
federal law. He was charged with six counts of willfully failing to file
a federal income tax return for the years 1980, 1981, and 1983 through
1986, in violation of 26 U.S.C. §7203 . He was further
charged with three counts of willfully attempting to evade his income
taxes for the years 1980, 1981, and 1983 in violation of 26 U.S.C. §7201 . In those years,
American Airlines withheld substantially less than the amount of tax
petitioner owed because of the numerous allowances and exempt status he
claimed on his W-4 forms. 2 The tax
offenses with which petitioner was charged are specific intent crimes
that require the defendant to have acted willfully.
At
trial, the evidence established that between 1982 and 1986, petitioner
was involved in at least four civil cases that challenged various
aspects of the federal income tax system. 3 In all four
of those cases, the plaintiffs were informed by the courts that many of
their arguments, including that they were not taxpayers within the
meaning of the tax laws, that wages are not income, that the Sixteenth
Amendment does not authorize the imposition of an income tax on
individuals, and that the Sixteenth Amendment is unenforceable, were
frivolous or had been repeatedly rejected by the courts. During this
time period, petitioner also attended at least two criminal trials of
persons charged with tax offenses. In addition, there was evidence that
in 1980 or 1981 an attorney had advised Cheek that the courts had
rejected as frivolous the claim that wages are not income. 4
Cheek
represented himself at trial and testified in his defense. He admitted
that he had not filed personal income tax returns during the years in
question. He testified that as early as 1978, he had begun attending
seminars sponsored by, and following the advice of, a group that
believes, among other things, that the federal tax system is
unconstitutional. Some of the speakers at these meetings were lawyers
who purported to give professional opinions about the invalidity of the
federal income tax laws. Cheek produced a letter from an attorney
stating that the Sixteenth Amendment did not authorize a tax on wages
and salaries but only on gain or profit. Petitioner's defense was that,
based on the indoctrination he received from this group and from his own
study, he sincerely believed that the tax laws were being
unconstitutionally enforced and that his actions during the 1980-1986
period were lawful. He therefore argued that he had acted without the
willfulness required for conviction of the various offenses with which
he was charged.
In
the course of its instructions, the trial court advised the jury that to
prove "willfulness" the Government must prove the voluntary
and intentional violation of a known legal duty, a burden that could not
be proved by showing mistake, ignorance, or negligence. The court
further advised the jury that an objectively reasonable good-faith
misunderstanding of the law would negate willfulness but mere
disagreement with the law would not. The court described Cheek's beliefs
about the income tax system 5 and
instructed the jury that if it found that Cheek "honestly and
reasonably believed that he was not required to pay income taxes or to
file tax returns," App. 81, a not guilty verdict should be
returned.
After
several hours of deliberation, the jury sent a note to the judge that
stated in part:
"
'We have a basic disagreement between some of us as to if Mr. Cheek
honestly & reasonably believed that he was not required to pay
income taxes.
.
. .
"
'Page 32 [the relevant jury instruction] discusses good faith
misunderstanding & disagreement. Is there any additional
clarification you can give us on this point?' "
Id.
, at 85.
The
District Judge responded with a supplemental instruction containing the
following statements:
"[A]
person's opinion that the tax laws violate his constitutional rights
does not constitute a good faith misunderstanding of the law.
Furthermore, a person's disagreement with the government's tax
collection systems and policies does not constitute a good faith
misunderstanding of the law"
Id.
, at 86.
At
the end of the first day of deliberation, the jury sent out another note
saying that it still could not reach a verdict because " '[w]e are
divided on the issue as to if Mr. Cheek honestly & reasonably
believed that he was not required to pay income tax.' "
Id.
, at 87. When the jury resumed its deliberations, the District Judge
gave the jury an additional instruction. This instruction stated in part
that "[a]n honest but unreasonable belief is not a defense and does
not negate willfulness," id., at 88, and that "[a]dvice
or research resulting in the conclusion that wages of a privately
employed person are not income or that the tax laws are unconstitutional
is not objectively reasonable and cannot serve as the basis for a good
faith misunderstanding of the law defense." Ibid. The court
also instructed the jury that "[p]ersistent refusal to acknowledge
the law does not constitute a good faith misunderstanding of the
law." Ibid. Approximately two hours later, the jury returned
a verdict finding petitioner guilty on all counts. 6
Petitioner
appealed his convictions, arguing that the District Court erred by
instructing the jury that only an objectively reasonable
misunderstanding of the law negates the statutory willfulness
requirement. The United States Court of Appeals for the Seventh Circuit
rejected that contention and affirmed the convictions. [89-2
USTC ¶9509 ], 882 F.2d 1263 (1989). In prior cases, the
Seventh Circuit had made clear that goodfaith misunderstanding of the
law negates willfulness only if the defendant's beliefs are objectively
reasonable; in the Seventh Circuit, even actual ignorance is not a
defense unless the defendant's ignorance was itself objectively
reasonable. See, e.g.,
United States
v. Buckner [87-2
USTC ¶9591 ], 830 F.2d 102 (1987). In its opinion in this
case, the court noted that several specified beliefs, including the
beliefs that the tax laws are unconstitutional and that wages are not
income, would not be objectively reasonable. 7 Because the
Seventh Circuit's interpretation of "willfully" as used in
these statutes conflicts with the decisions of several other Courts of
Appeals, see, e.g., United States v. Whiteside [87-1 USTC ¶9199 ],
810 F.2d 1306, 1310-1311 (CA-5 1987); United States v. Phillips [85-2 USTC ¶9745 ],
775 F.2d 262, 263-264 (CA-10 1985); United States v. Aitken [85-1 USTC ¶9209 ],
755 F.2d 188, 191-193 (CA-1 1985), we granted certiorari, 493 U.S. --
(1990).
II
The
general rule that ignorance of the law or a mistake of law is no defense
to criminal prosecution is deeply rooted in the American legal system.
See, e.g.,
United States
v. Smith, 5 Wheat. 153, 182 (1820) (Livingston, J., dissenting); Barlow
v. United States, 7 Pet. 404, 411 (1833); Reynolds v. United
States, 98 U.S. 145, 167 (1879); Shevlin-Carpenter Co. v.
Minnesota, 218 U.S. 57, 68 (1910); Lambert v. California, 355
U.S. 225, 228 (1957); Liparota v. United States, 471 U.S. 419,
441 (1985) (WHITE, J., dissenting); O. Holmes, The Common Law 47-48
(1881). Based on the notion that the law is definite and knowable, the
common law presumed that every person knew the law. This common-law rule
has been applied by the Court in numerous cases construing criminal
statutes. See, e.g., United States v. International Minerals &
Chemical Corp., 402 U.S. 558 (1971); Hamling v. United States,
418 U.S. 87, 119-124 (1974); Boyce Motor Lines, Inc. v. United
States, 342 U.S. 337 (1952).
The
proliferation of statutes and regulations has sometimes made it
difficult for the average citizen to know and comprehend the extent of
the duties and obligations imposed by the tax laws. Congress has
accordingly softened the impact of the common-law presumption by making
specific intent to violate the law an element of certain federal
criminal tax offenses. Thus, the Court almost 60 years ago interpreted
the statutory term "willfully" as used in the federal criminal
tax statutes as carving out an exception to the traditional rule. This
special treatment of criminal tax offenses is largely due to the
complexity of the tax laws. In United States v. Murdock [3 USTC ¶1194 ], 290 U.S.
389 (1933), the Court recognized that:
"Congress
did not intend that a person, by reason of a bona fide misunderstanding
as to his liability for the tax, as to his duty to make a return, or as
to the adequacy of the records he maintained, should become a criminal
by his mere failure to measure up to the prescribed standard of
conduct."
Id.
, at 396.
The
Court held that the defendant was entitled to an instruction with
respect to whether he acted in good faith based on his actual belief. In
Murdock, the Court interpreted the term "willfully" as
used in the criminal tax statutes generally to mean "an act done
with a bad purpose," id., at 394, or with "an evil
motive."
Id.
, at 395.
Subsequent
decisions have refined this proposition. In United States v. Bishop
[73-1 USTC ¶9459 ],
412 U.S. 346 (1973), we described the term "willfully" as
connoting "a voluntary, intentional violation of a known legal
duty," id., at 360, and did so with specific reference to
the "bad faith or evil intent" language employed in Murdock.
Still later, United States v. Pomponio [76-2
USTC ¶9695 ], 429 U.S. 10 (1976) (per curiam),
addressed a situation in which several defendants had been charged with
willfully filing false tax returns. The jury was given an instruction on
willfulness similar to the standard set forth in Bishop. In
addition, it was instructed that " '[g]ood motive alone is never a
defense where the act done or omitted is a crime.' "
Id.
, at 11. The defendants were convicted but the Court of Appeals
reversed, concluding that the latter instruction was improper because
the statute required a finding of bad purpose or evil motive. Ibid.
We
reversed the Court of Appeals, stating that "the Court of Appeals
incorrectly assumed that the reference to an 'evil motive' in
United States
v. Bishop, supra, and prior cases," ibid.,
"requires proof of any motive other than an intentional violation
of a known legal duty."
Id.
, at 12. As "the other Courts of Appeals that have
considered the question have recognized, willfulness in this context
simply means a voluntary, intentional violation of a known legal
duty." Ibid. We concluded that after instructing the jury on
willfulness, "[a]n additional instruction on good faith was
unnecessary."
Id.
, at 13. Taken together, Bishop and Pomponio
conclusively establish that the standard for the statutory willfulness
requirement is the "voluntary, intentional violation of a known
legal duty."
III
Cheek
accepts the Pomponio definition of willfulness, Brief for
Petitioner 5, and n. 4, 13, 36; Reply Brief for Petitioner 4, 6-7, 11,
13, but asserts that the District Court's instructions and the Court of
Appeals' opinion departed from that definition. In particular, he
challenges the ruling that a good-faith misunderstanding of the law or a
good-faith belief that one is not violating the law, if it is to negate
willfulness, must be objectively reasonable. We agree that the Court of
Appeals and the District Court erred in this respect.
A
Willfulness,
as construed by our prior decisions in criminal tax cases, requires the
Government to prove that the law imposed a duty on the defendant, that
the defendant knew of this duty, and that he voluntarily and
intentionally violated that duty. We deal first with the case where the
issue is whether the defendant knew of the duty purportedly imposed by
the provision of the statute or regulation he is accused of violating, a
case in which there is no claim that the provision at issue is invalid.
In such a case, if the Government proves actual knowledge of the
pertinent legal duty, the prosecution, without more, has satisfied the
knowledge component of the willfulness requirement. But carrying this
burden requires negating a defendant's claim of ignorance of the law or
a claim that because of a misunderstanding of the law, he had a
good-faith belief that he was not violating any of the provisions of the
tax laws. This is so because one cannot be aware that the law imposes a
duty upon him and yet be ignorant of it, misunderstand the law, or
believe that the duty does not exist. In the end, the issue is whether,
based on all the evidence, the Government has proved that the defendant
was aware of the duty at issue, which cannot be true if the jury credits
a good-faith misunderstanding and belief submission, whether or not the
claimed belief or misunderstanding is objectively reasonable.
In
this case, if Cheek asserted that he truly believed that the Internal
Revenue Code did not purport to treat wages as income, and the jury
believed him, the Government would not have carried its burden to prove
willfulness, however unreasonable a court might deem such a belief. Of
course, in deciding whether to credit Cheek's good-faith belief claim,
the jury would be free to consider any admissible evidence from any
source showing that Cheek was aware of his duty to file a return and to
treat wages as income, including evidence showing his awareness of the
relevant provisions of the Code or regulations, of court decisions
rejecting his interpretation of the tax law, of authoritative rulings of
the Internal Revenue Service, or of any contents of the personal income
tax return forms and accompanying instructions that made it plain that
wages should be returned as income. 8
We
thus disagree with the Court of Appeals' requirement that a claimed
good-faith belief must be objectively reasonable if it is to be
considered as possibly negating the Government's evidence purporting to
show a defendant's awareness of the legal duty at issue. Knowledge and
belief are characteristically questions for the factfinder, in this case
the jury. Characterizing a particular belief as not objectively
reasonable transforms the inquiry into a legal one and would prevent the
jury from considering it. It would of course be proper to exclude
evidence having no relevance or probative value with respect to
willfulness; but it is not contrary to common sense, let alone
impossible, for a defendant to be ignorant of his duty based on an
irrational belief that he has no duty, and forbidding the jury to
consider evidence that might negate willfulness would raise a serious
question under the Sixth Amendment's jury trial provision. Cf.
Francis v. Franklin, 471
U.S.
307 (1985); Sandstrom v.
Montana
, 442
U.S.
510 (1979); Morissette v.
United States
, 342
U.S.
246 (1952). It is common ground that this Court, where possible,
interprets congressional enactments so as to avoid raising serious
constitutional questions. See, e.g., Edward J. DeBartolo Corp. v.
Florida Gulf Coast Building and Construction Trades Council, 485
U.S. 568, 575 (1988); Crowell v. Benson, 285 U.S. 22, 62, and n.
30 (1932); Public Citizen v. United States Dept. of Justice, 491
U.S. --, -- (1989) (slip op., at 24-25).
It
was therefore error to instruct the jury to disregard evidence of
Cheek's understanding that, within the meaning of the tax laws, he was
not a person required to file a return or to pay income taxes and that
wages are not taxable income, as incredible as such misunderstandings of
and beliefs about the law might be. Of course, the more unreasonable the
asserted beliefs or misunderstandings are, the more likely the jury will
consider them to be nothing more than simple disagreement with known
legal duties imposed by the tax laws and will find that the Government
has carried its burden of proving knowledge.
B
Cheek
asserted in the trial court that he should be acquitted because he
believed in good faith that the income tax law is unconstitutional as
applied to him and thus could not legally impose any duty upon him of
which he should have been aware. 9 Such a
submission is unsound, not because Cheek's constitutional arguments are
not objectively reasonable or frivolous, which they surely are, but
because the Murdock-Pomponio line of cases does not support such
a position. Those cases construed the willfulness requirement in the
criminal provisions of the Internal Revenue Code to require proof of
knowledge of the law. This was because in "our complex tax system,
uncertainty often arises even among taxpayers who earnestly wish to
follow the law" and " '[i]t is not the purpose of the law to
penalize frank difference of opinion or innocent errors made despite the
exercise of reasonable care.' " United States v. Bishop
[73-1 USTC ¶9559], 412 U.S. 346, 360-361 (1973), (quoting Spies v.
United States [43-1 USTC ¶9243 ],
317 U.S. 492, 496 (1943)).
Claims
that some of the provisions of the tax code are unconstitutional are
submissions of a different order. 10 They do not
arise from innocent mistakes caused by the complexity of the Internal
Revenue Code. Rather, they reveal full knowledge of the provisions at
issue and a studied conclusion, however wrong, that those provisions are
invalid and unenforceable. Thus in this case, Cheek paid his taxes for
years, but after attending various seminars and based on his own study,
he concluded that the income tax laws could not constitutionally require
him to pay a tax.
We
do not believe that Congress contemplated that such a taxpayer, without
risking criminal prosecution, could ignore the duties imposed upon him
by the Internal Revenue Code and refuse to utilize the mechanisms
provided by Congress to present his claims of invalidity to the courts
and to abide by their decisions. There is no doubt that Cheek, from year
to year, was free to pay the tax that the law purported to require, file
for a refund and, if denied, present his claims of invalidity,
constitutional or otherwise, to the courts. See 26 U.S.C. §7422 . Also, without
paying the tax, he could have challenged claims of tax deficiencies in
the Tax Court, 26 U.S.C. §6213
, with the right to appeal to a higher court if unsuccessful.
§7482(a)(1) . Cheek took
neither course in some years, and when he did was unwilling to accept
the outcome. As we see it, he is in no position to claim that his
good-faith belief about the validity of the Internal Revenue Code
negates willfulness or provides a defense to criminal prosecution under §§7201 and 7203 . Of course, Cheek was
free in this very case to present his claims of invalidity and have them
adjudicated, but like defendants in criminal cases in other contexts,
who "willfully" refuse to comply with the duties placed upon
them by the law, he must take the risk of being wrong.
We
thus hold that in a case like this, a defendant's views about the
validity of the tax statutes are irrelevant to the issue of willfulness,
need not be heard by the jury, and if they are, an instruction to
disregard them would be proper. For this purpose, it makes no difference
whether the claims of invalidity are frivolous or have substance. It was
therefore not error in this case for the District Judge to instruct the
jury not to consider Cheek's claims that the tax laws were
unconstitutional. However, it was error for the court to instruct the
jury that petitioner's asserted beliefs that wages are not income and
that he was not a taxpayer within the meaning of the Internal Revenue
Code should not be considered by the jury in determining whether Cheek
had acted willfully. 11
IV
For
the reasons set forth in the opinion above, the judgment of the Court of
Appeals is vacated, and the case is remanded for further proceedings
consistent with this opinion.
It
is so ordered.
JUSTICE
SOUTER took no part in the consideration or decision of this case.
1
Cheek did file what the Court of Appeals described as a frivolous return
in 1982.
2
Because petitioner filed a refund claim for the entire amount withheld
by his employer in 1982, petitioner was also charged under 18 U.S.C. §287
with one count of presenting a claim to an agency of the
United States
knowing the claim to be false and fraudulent.
3
In March 1982, Cheek and another employee of the company sued American
Airlines to challenge the withholding of federal income taxes. In April
1982, Cheek sued the IRS in the United States Tax Court, asserting that
he was not a taxpayer or a person for purposes of the Internal Revenue
Code, that his wages were not income, and making several other related
claims. Cheek and four others also filed an action against the
United States
and the CIR in
Federal District Court
, claiming that withholding taxes from their wages violated the
Sixteenth Amendment. Finally, in 1985 Cheek filed claims with the IRS
seeking to have refunded the taxes withheld from his wages in 1983 and
1984. When these claims were not allowed, he brought suit in the
District Court claiming that the withholding was an unconstitutional
taking of his property and that his wages were not income. In dismissing
this action as frivolous, the District Court imposed costs and attorneys
fees of $1,500 and a sanction under Rule 11 in the amount of $10,000.
The Court of Appeals agreed that Cheek's claims were frivolous, reduced
the District Court sanction to $5,000 and imposed an additional sanction
of $1,500 for bringing a frivolous appeal.
4
The attorney also advised that despite the Fifth Amendment, the filing
of a tax return was required and that a person could challenge the
constitutionality of the system by suing for a refund after the taxes
had been withheld, or by putting himself "at risk of criminal
prosecution."
5
"The defendant has testified as to what he states are his
interpretations of the United States Constitution, court opinions,
common law and other materials he has reviewed. . . . He has also
introduced materials which contain references to quotations from the
United States Constitution, court opinions, statutes, and other sources.
"He
testified he relied on his interpretations and on these materials in
concluding that he was not a person required to file income tax returns
for the year or years charged, was not required to pay income taxes and
that he could claim exempt status on his W-4 forms, and that he could
claim refunds of all moneys withheld." App. 75-76.
"Among
other things, Mr. Cheek contends that his wages from a private employer,
American Airlines, does not constitute income under the Internal Revenue
Service laws."
Id.
, at 81.
6
A note signed by all 12 jurors also informed the judge that although the
jury found petitioner guilty, several jurors wanted to express their
personal opinions of the case and that notes from these individual
jurors to the court were "a complaint against the narrow & hard
expression under the constraints of the law."
Id.
, at 90. At least two notes from individual jurors expressed the opinion
that petitioner sincerely believed in his cause even though his beliefs
might have been unreasonable.
7
The opinion stated, [89-2
USTC ¶9509 ], 882 F.2d 1263, 1268-1269, n. 2 (CA-7 1989), as
follows:
"For
the record, we note that the following beliefs, which are stock
arguments of the tax protester movement, have not been, nor ever will
be, considered 'objectively reasonable' in this circuit:
"(1)
the belief that the sixteenth amendment to the constitution was
improperly ratified and therefore never came into being;
"(2)
the belief that the sixteenth amendment is unconstitutional generally;
"(3)
the belief that the income tax violates the takings clause of the fifth
amendment;
"(4)
the belief that the tax laws are unconstitutional;
"(5)
the belief that wages are not income and therefore are not subject to
federal income tax laws;
"(6)
the belief that filing a tax return violates the privilege against
self-incrimination; and
"(7)
the belief that Federal Reserve Notes do not constitute cash or income.
"Miller
v. United States [89-1
USTC ¶9184 ], 868 F.2d 236, 239-41 (7th Cir. 1989); Buckner
[87-2 USTC ¶9591 ],
830 F.2d at 102; United States v. Dube [87-1 USTC ¶9351 ],
820 F.2d 886, 891 (7th Cir. 1987); Coleman v. Comm'r [86-1 USTC ¶9401 ],
791 F.2d 68, 70-71 (7th Cir. 1986); Moore [80-2 USTC ¶9627 ],
627 F.2d at 833. We have no doubt that this list will increase with
time."
8
Cheek recognizes that a "defendant who knows what the law is and
who disagrees with it . . . does not have a bona fide misunderstanding
defense" but asserts that "a defendant who has a bona fide
misunderstanding of [the law] does not 'know' his legal duty and lacks
willfulness." Brief for Petitioner 29, and n. 13. The Reply Brief
for Petitioner, at 13, states: "We are in no way suggesting that
Cheek or anyone else is immune from criminal prosecution if he knows
what the law is, but believes it should be otherwise, and therefore
violates it." See also Tr. of Oral Arg. 9, 11, 12, 15, 17.
9
In his opening and reply briefs and at oral argument, Cheek asserts that
this case does not present the issue of whether a claim of
unconstitutionality would serve to negate willfulness and that we need
not address the issue. Brief for Petitioner 13; Reply Brief for
Petitioner 5, 11, 12; Tr. of Oral
Arg.
6, 13. Cheek testified at trial, however, that "[i]t is my belief
that the law is being enforced unconstitutionally." App. 60. He
also produced a letter from counsel advising him that " 'Finally
you make a valid contention . . . that Congress' power to tax comes from
Article I, Section 8 , Clause 1 of the
U.S. Constitution, and not from the Sixteenth Amendment and that the
[latter], construed with Article I, Section 2 , Clause 3, never
authorized a tax on wages and salaries, but only on gain and
profit."
Id.
, at 57. We note also that the jury asked for "the portion [of the
transcript] wherein Mr. Cheek stated he was attempting to test the
constitutionality of the income tax laws," Tr. 1704, and that the
trial judge later instructed the jury that an opinion that the tax laws
violate a person's constitutional rights does not constitute a good
faith misunderstanding of the law. We also note that at oral argument
Cheek's counsel observed that "personal belief that a known statute
is unconstitutional smacks of knowledge with existing law, but
disagreement with it." Tr. of Oral
Arg.
5. He also opined that:
"If
the person believes as a personal belief that known--law known to them [sic]
is unconstitutional, I submit that that would not be a defense, because
what the person is really saying is I know what the law is, for
constitutional reasons I have made my own determination that it is
invalid. I am not suggesting that that is a defense.
"However,
if the person was told by a lawyer or by an accountant erroneously that
the statute is unconstitutional, and it's my professional advice to you
that you don't have to follow it, then you have got a little different
situation. This is not that case."
Id.
, at 6.
Given
this posture of the case, we perceive no reason not to address the
significance of Cheek's constitutional claims to the issue of
willfulness.
10
In United States v. Murdock [3 USTC ¶1194 ], 290 U.S.
389 (1933), discussed supra, at 7-8, the defendant Murdock was
summoned to appear before a revenue agent for examination. Questions
were put to him, which he refused to answer for fear of
self-incrimination under state law. He was indicted for refusing to give
testimony and supply information contrary to the pertinent provisions of
the Internal Revenue Code. This Court affirmed the reversal of Murdock's
conviction, holding that the trial court erred in refusing to give an
instruction directing the jury to consider Murdock's asserted claim of a
good-faith, actual belief that because of the Fifth Amendment he was
privileged not to answer the questions put to him. It is thus the case
that Murdock's asserted belief was grounded in the Constitution, but it
was a claim of privilege not to answer, not a claim that any provision
of the tax laws were unconstitutional, and not a claim for which the tax
laws provided procedures to entertain and resolve. Cheek's position at
trial, in contrast, was that the tax laws were unconstitutional as
applied to him.
11
Cheek argues that applying to him the Court of Appeals' standard of
objective reasonableness violates his rights under the First, Fifth, and
Sixth Amendments of the Constitution. Since we have invalidated the
challenged standard on statutory grounds, we need not address these
submissions.
Concurring
Opinion
JUSTICE
SCALIA
in
the judgment: I concur in the judgment of Court because our cases have
consistently held that the failure to pay a tax in the good-faith belief
that it is not legally owing is not "willful." I do not join
the Court's opinion because I do not agree with the test for willfulness
that it directs the Court of Appeals to apply on remand.
As
the Court acknowledges, our opinions from the 1930s to the 1970s have
interpreted the word "willfully" in the criminal tax statutes
as requiring the "bad purpose" or "evil motive" of
"intentional[ly] violat[ing] a known legal duty." See, e.g.,
United States
v. Pomponio [76-2 USTC ¶9695 ],
429 U.S. 10, 12 (1976); United States v. Murdock, 290
U.S.
389, 394-395 (1933). It seems to me that today's opinion squarely
reverses that long-established statutory construction when it says that
a good-faith erroneous belief in the unconstitutionality of a tax law is
no defense. It is quite impossible to say that a statute which one
believes unconstitutional represents a "known legal duty." See
Marbury v. Madison, 1 Cranch 137, 177-178 (1803).
Although
the facts of the present case involve erroneous reliance upon the
Constitution in ignoring the otherwise "known legal duty"
imposed by the tax statutes, the Court's new interpretation applies also
to erroneous reliance upon a tax statute in ignoring the otherwise
"known legal duty" of a regulation, and to erroneous reliance
upon a regulation in ignoring the otherwise "known legal duty"
of a tax assessment. These situations as well meet the opinion's crucial
test of "reveal[ing] full knowledge of the provisions at issue and
a studied conclusion, however wrong, that those provisions are invalid
and unenforceable," ante, at 13. There is, moreover, no
rational basis for saying that a "willful" violation is
established by full knowledge of a statutory requirement, but is not
established by full knowledge of a requirement explicitly imposed by
regulation or order. Thus, today's opinion works a revolution in past
practice, subjecting to criminal penalties taxpayers who do not comply
with Treasury Regulations that are in their view contrary to the
Internal Revenue Code, Treasury Rulings that are in their view contrary
to the regulations, and even IRS auditor pronouncements that are in
their view contrary to Treasury Rulings. The law already provides
considerable incentive for taxpayers to be careful in ignoring any
official assertion of tax liability, since it contains civil penalties
that apply even in the event of a good-faith mistake, see, e.g.,
26 U.S.C. §§6651 , 6653 . To impose in
addition criminal penalties for misinterpretation of such a
complex body of law is a startling innovation indeed.
I
find it impossible to understand how one can derive from the lonesome
word "willfully" the proposition that belief in the
nonexistence of a textual prohibition excuses liability, but belief in
the invalidity (i.e., the legal nonexistence) of a textual
prohibition does not. One may say, as the law does in many contexts,
that "willfully" refers to consciousness of the act but not to
consciousness that the act is unlawful. See, e.g., American Surety
Co. of New York v. Sullivan, 7 F.2d 605, 606 (CA-2 1925) (L. Hand,
J.); cf. United States v. International Minerals and Chemical Co.,
402 U.S. 558, 563-565 (1971). Or alternatively, one may say, as we have
said until today with respect to the tax statutes, that
"willfully" refers to consciousness of both the act and
its illegality. But it seems to me impossible to say that the word
refers to consciousness that some legal text exists, without
consciousness that that legal text is binding, i.e., with the
good-faith belief that it is not a valid law. Perhaps such a test for
criminal liability would make sense (though in a field as complicated as
federal tax law, I doubt it), but some text other than the mere word
"willfully" would have to be employed to describe it--and that
text is not ours to write.
Because
today's opinion abandons clear and long-standing precedent to impose
criminal liability where taxpayers have had no reason to expect it,
because the new contours of criminal liability have no basis in the
statutory text, and because I strongly suspect that those new contours
make no sense even as a policy matter, I concur only in the judgment of
the Court.
Dissenting
Opinion
JUSTICE
BLACKMUN, with whom JUSTICE MARSHALL joins
It
seems to me that we are concerned in this case not with "the
complexity of the tax laws," ante, at 7, but with the income
tax law in its most elementary and basic aspect: Is a wage earner a
taxpayer and are wages income?
The
Court acknowledges that the conclusively established standard for
willfulness under the applicable statutes is the "voluntary,
intentional violation of a known legal duty." Ante, at 8.
See United States v. Bishop [73-1 USTC ¶9459 ],
412 U.S. 346, 360 (1963), and United States v. Pomponio [76-2 USTC ¶9695 ],
429 U.S. 10, 12 (1976). That being so, it is incomprehensible to me how,
in this day, more than 70 years after the institution of our present
federal income tax system with the passage of the Revenue Act of 1913,
38 Stat. 166, any taxpayer of competent mentality can assert as his
defense to charges of statutory willfulness the proposition that the
wage he receives for his labor is not income, irrespective of a cult
that says otherwise and advises the gullible to resist income tax
collections. One might note in passing that this particular taxpayer,
after all, was a licensed pilot for one of our major commercial
airlines; he presumably was a person of at least minimum intellectual
competence.
The
District Court's instruction that an objectively reasonable and good
faith misunderstanding of the law negates willfulness lends further,
rather than less, protection to this defendant, for it added an
additional hurdle for the prosecution to overcome. Petitioner should be
grateful for this further protection, rather than be opposed to it.
This
Court's opinion today, I fear, will encourage taxpayers to cling to
frivolous views of the law in the hope of convincing a jury of their
sincerity. If that ensues, I suspect we have gone beyond the limits of
common sense.
While
I may not agree with every word the Court of Appeals has enunciated in
its opinion, I would affirm its judgment in this case. I therefore
dissent.