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7206- Fraud and False Statements: Constitutionality

 

[57-1 USTC ¶9446]Alvin Kaplan, Appellant v. United States of America , Appellee

(CA-5), U. S. Court of Appeals, 5th Circuit, No. 16129, 241 F2d 521, 3/1/57, Affirming an unreported decision of the District Court

[1954 Code Sec. 7206(2)--similar to 1939 Code Sec. 3793(b)]

Crimes: Aiding and assisting in preparation of false income tax returns: Constitutionality of statute: Competence of defendant to conduct own trial.--The defendant was convicted by a jury of the charge of aiding and assisting in the preparation and presentation of false and fraudulent income tax returns. At the trial he waived assistance of counsel and conducted his own case. On appeal, counsel for defendant alleged that defendant was incompetent to waive the assistance of counsel and that the trial court failed to hear defendant's motion on the unconstitutionality of Sec. 7206(2), the statute under which he was convicted. The record showed that competent professional evidence was offered by defendant that he was competent to conduct his own case. Also, the record did not show any motion urging the unconstitutionality of the statute. Nor did counsel for defendant on brief cite any cases in opposition to those cited by the government on brief in support of the validity, scope, application and effect of the statute. Having failed to show prejudicial error, the judgment was affirmed.

Jacob L. Amato, Gretna , La. , for appellant. M. Hepburn Many, New Orleans, La., Charles K. Rice, Assistant Attorney General, Fred G. Folsom, Jr., Department of Justice, Washington, D. C., for appellee.

Before HUTCHESON, Chief Judge, and CAMERON and JONES, Circuit Judges.

PER CURIAM:

Convicted by a jury on the three counts of an indictment charging him with aiding and assisting in the preparation and presentation of false and fraudulent income tax returns, in violation of Sec. 7206(2) Title 26, and sentenced to imprisonment for one year on each count, the sentences to run concurrently, defendant has appealed, presenting five questions. ¹

The first, second, and fourth together make up the question most urged and argued, that the defendant, though insisting upon conducting his own trial, ² and conducting it through some 600 pages of testimony, did not have the capacity to understand the nature and seriousness of the charges against him and to properly conduct the trial, and that he should, therefore, have had counsel to assist him.

[Constitutionality of Sec. 7206(2)]

The other two claims, (1) of the denial of his request for a continuance of twenty days to prepare a defense, and (2) of the failure of the court to hear defendant's motions, urging the unconstitutionality of the statute under which he was convicted, may be disposed of by saying that the record does not support them. The continuance sought was not for the purpose of preparing a defense. It was, as shown in the record, to consider a motion to be filed for hearing exceptions to criminal jurisdiction and to the indictment, and the record does not show any motion urging the unconstitutionality of the statute under which he was charged or that the court failed or refused to consider and determine all of the matters presented to him. Besides, neither the record nor appellant's brief, points out any prejudicial error in any action of the court, including his refusal to grant any of the defendant's motions. As the government's brief points out, the validity, scope, application, and effect of the statute have been determined adversely to appellant's contentions in cases cited by it, State v. Borgis, 182 Fed. (2d) 274 [50-1 USTC ¶9330] and U. S. v. Kelley, 105 Fed. (2d) 912 [39-2 USTC ¶9621], and no cases holding to the contrary are cited by appellant.

[Competence to Conduct Own Case]

We come then to his counsel's primary contention, that appellant was incompetent to waive the assistance of counsel and conduct his own case, to find that the question of mental competency of the defendant was decided in favor of his contention that he was competent, by the district judge on competent professional evidence offered by the defendant; ³ that the record is replete with evidence that plaintiff had had considerable acquaintance with and experience in regard to legal matters; that throughout the long record he exhibited an understanding of the proceedings, a thoroughness in examination, and a pertinacity which belies the claim his counsel is now making that he was ignorant, inexperienced, and gullible, a lamb among wolves; and that the court therefore erred in permiting him, at his request, to conduct his own case. ⁴

Throughout the trial, in the sentence imposed, and in the proceedings subsequent thereto, including his advising the defendant to appeal his case and authorizing his appeal in forma pauperis, the district judge evidenced patience and forbearance and a recognition of the defendant's age and frailties, together with solicitude of a rare order, to assure to the defendant every rightful protection. On this record, it is impossible for us to view the case, as defendant's counsel asks us to do, as one in which defendant had been denied due process or subjected in any way to a deprivation of his rights or suppose other than that the court will, under Rule 35, Federal Rules of Criminal Procedure, "Correction or Reduction of Sentence", give careful consideration to a reduction of the sentence, including placing the defendant on probation.

No prejudicial error having been made to appear, ⁵ the judgment is affirmed.

¹ (1) The question of the mental capacity of the appellant to fully comprehend and understand the nature of the proceedings against him.

(2) The lack of knowledge on the part of the appellant as to the seriousness of the charge against him and the possible consequences or sentence that could be imposed if found guilty.

(3) The denial of the appellant's request for a continuance prior to trial in order to prepare a defense.

(4) The admission into evidence of certain inadmissible or objectionable evidence without any objection being made on the part of the appellant.

(5) The failure of the court to hear the motions filed by the appellant urging the unconstitutionality of the statute under which he was charged.

² The Court: "Is the defendant ready?"

Mr. Kaplan: "The defendant is ready, your Honor."

The Court: "And the court is advised that counsel appointed by the court is not representing the defendant, is that correct?"

Mr. Kaplan: "I would like to have a trial by jury, and I represent myself. I would like to represent myself, and I have represented myself the last four years in this open court." (TR p. 17)

³ Prior to trial, on motion of the United States Attorney, a hearing was conducted before his Honor, the trial judge, to determine the mental competency of the appellant. Dr. Edmund Connely, a psychiatrist testified that he had examined the appellant in 1955 and that at that time he considered the appellant to be suffering from manic depression insanity, and that he further believed that the appellant was still in that state and could not stand trial.

Upon motion of the appellant, through his attorney, Carl Shumacker, the hearing was continued in order that the appellant could be examined by a psychiatrist of his choosing. Thereafter, the hearing was resumed, this psychiatrist testified categorically to defendant's mental competency and, the hearing ended, the trial judge ruled that the appellant was mentally able to stand trial.

⁴ Adams v. U. S. , 317 U. S. 269; Johnson v. Zerbst, 304 U. S. 458.

⁵ U. S. v. Herskovitz, 209 Fed. (2d) 881 [54-1 USTC ¶9182]; U. S. v. Brewster, 231 Fed. (2d) 213 [56-1 USTC ¶9399].

 

 

[69-2 USTC ¶9584] United States of America , Plaintiff-Appellee v. Jose Escobar, Defendant-Appellant

(CA-5), U. S. Court of Appeals, 5th Circuit, No. 26764, 410 F2d 748, 4/11/69, Aff'g unreported District Court case

[Code Secs. 7206(1) and 7207]

Criminal penalties: Felony v. misdemeanor under overlapping penal laws: Maximum sentence: Lesser-offense rule: Unconstitutionally broad discretion.--The statutes do not overlap; either the taxpayer is guilty of willful attempt to evade taxes or he is innocent of the charge.

Harry Lee Hudspeth, United States Attorney, Romualdo C. Caballero, Assistant United States Attorney, El Paso , Tex. , for plaintiff-appellee. J. Edwin Smith, 1401 South Coast Bldg., Houston , Tex. , for defendant-appellant.

Before AINSWORTH and SIMPSON, Circuit Judges, and MITCHELL, District Judge.

PER CURIAM:

After the mandate from the direct appeal ¹ herein went down, Escobar filed his motion below under Title 28, U. S. C., Section 2255, to set aside his sentence as illegal. The district court denied this motion by memorandum order, reproduced in the margin. ² We find no error, and affirm.

We add the following observation. The thrust of appellant's argument before us largely is that the two statutes overlap and that the U. S. Attorney is vested with unconstitutionally broad discretion to determine whether to proceed under the Misdemeanor Statute, Title 26, §7207, or the felony statute, Title 26, §7206(1), so that only a sentence as a misdemeanant could lawfully have been imposed. The district court's quotation from our opinion on the former appeal [Footnote 1] demonstrates that this is fallacious. Even if it were not, we consider binding the opinion of this Court in Grady Welton Black v. U. S., 5 Cir. 1968, -- F. 2d -- [No. 25661, December 19, 19 68]. In Black, we rejected the argument advanced here, which is based upon the dissents in Berra v. United States [56-1 USTC ¶9480], 351 U. S. 131, at 138-140 (1955) and Hutcherson v. U. S., D. C. Cir. 1965, 345 F. 2d 964, at 972-977.

AFFIRMED.

¹ Escobar v. United States , 5 Cir. 1968, [68-1 USTC ¶9125] 388 F. 2d 661, cert. denied 390 U. S. 1024, 88 S. Ct. 1411, 20 L. Ed. 2d 282 (1968).

² "The defendant in the above styled and numbered cause has moved this Court to correct the sentence imposed by this Court in said case, alleging that the sentence imposed is illegal. The defendant contends that 'the Misdemeanor Statute, 26 U. S. C. §7207, overlaps with §7206(1),' of Title 26, and that hence the defendant should have been sentenced under the Misdemeanor Statute, §7207, rather than under §7206(1).

'[Defendant] . . . was charged in a four count indictment with willfully making and subscribing false income tax returns for the years 1957, 1958, 1959, and 1960. He was acquitted on Count 1 and found guilty on the other three counts.' (Footnotes omitted)

Escobar v. United States [68-1 USTC ¶9125], 388 F. 2d 661, 663 (5th Cir. 1968).

He was sentenced to two (2) years imprisonment, six (6) months to serve, the remainder suspended for two years, plus $1,000.00 fine on each count, the sentences to run concurrently. His conviction was affirmed in Escobar v. United States , supra. On his appeal, defendant contended, inter alia, and the Court found as follows:

'Appellant contends that the court erred in refusing to charge that the jury could find him guilty under 26 U. S. C. A. §7207 (misdemeanor) even though he was indicted for violating 26 U. S. C. A. §7206(1) (felony). There is an element in §7206(1) which is not in §7207, i. e., the document must contain a statement that it is "made under the penalties of perjury".

'. . . [T]he question narrows to whether there is "a disputed factual element" in §7206(1) which is not present in §7207. As pointed out the only difference between the two statutes is in the "made under the penalties of perjury" requirement in §7206(1). If there was any question for the jury concerning whether some or all of the returns involved here were or were not "made under the penalties of perjury" appellant would have been entitled under Sansone [Sansone v. United States [65-1 USTC ¶9307], 380 U. S. 343 (1965)], to the requested charge. However, appellee contends, and appellant does not dispute, that all returns involved here contain the "perjury declaration". Therefore, there was no factual dispute concerning the charged greater offense to be submitted to the jury, ergo appellant was not entitled to his requested charge. See Sansone v. United States at 354-355, 85 S. Ct. 1004.' 388 F. 2d at 666 (Footnote omitted)

In other words, defendant was either guilty of a violation of §7206(1) or he was innocent of violating either §7206(1) or §7207. The jury found that he was guilty as charged, i. e., that he was guilty of acts and/or omissions which constituted a violation of §7206(1). Congress has declared that anyone guilty of such acts of omissions should be punished as a felon. This court could not and can not sentence him otherwise. Especially, the Court could not sentence the defendant under a statute which he could not have lawfully been found guilty of violating.

While this precludes the relief sought; the Court would point out that even if the defendant were correct in his contention that a prosecutor cannot constitutionally be empowered to choose the more onerous of overlapping statutes under which to prosecute, it would not help him here. In the particular facts of this case, the statutes do not overlap. As pointed out above, the defendant was either guilty of a violation of §7206(1) or he was not guilty of any violation, felony or misdemeanor.

Furthermore, the practical effect of the sentence given this defendant, assuming the period of probation is successfully served, as this Court did not must assume, would be the same had he been sentenced under the statutory provision for misdemeanors. In other words, the actual sentence, again assuming no probation revocation, could have, and probably would have been the same under either sentence, his having six (6) months to serve, a $1,000.00 fine to pay, and a two (2) year period of probation.

Treating the motion both as a request to correct an illegal sentence and/or to reduce a valid sentence, the Court having reviewed the motion, files and records of the case, finds, for the foregoing reasons, that it should be, and the same is hereby, in all things, DENIED, and IT IS SO ORDERED.

Entered this 2nd day of September, 1968."

 

 

[71-2 USTC ¶9739] United States of America , Plaintiff-Appellee v. Archie J. Jackson, Defendant-Appellant

(CA-7), U. S. Court of Appeals, 7th Circuit, No. 18798, 452 F2d 144, 10/20/71 , Affirming unreported District Court decision

[Code Sec. 7206-Result unchanged by '69 Tax Reform Act]

Crimes: Fraud and false statements: Aiding and assisting in preparation of false returns: Constitutionality: Jencks Act.--The taxpayer's conviction for willfully aiding and assisting other taxpayers in the preparation of false and fraudulent income tax returns was affirmed. The provision of the Jencks Act, Title 18, U. S. C. A. §3500(a) and (b), was not unconstitutional as alleged by the taxpayer since it afforded recess provisions during trial for post-direct examination of witness' statements, and its validity has been upheld by the Supreme Court and lower courts in a wide variety of cases. Further, there was no violation of due process under the Fifth Amendment by allowing production of witness' statements before direct examination since such action afforded treatment more favorable than the Act itself. Lastly, there was no denial of due process in that taxpayer's prosecution depended upon testimony of witnesses who may escape criminal liability since under the Code the crime is committed by one who knowingly assists another in the preparation of a false return despite the guilt or innocence of a taxpayer.

William J. Bauer, United States Attorney, Donald C. Shine, Assistant United States Attorney, Chicago, Ill., for plaintiff-appellee. Louis V. Kiefor, 684 State Line Ave. , Calumet City , Ill. , for defendant-appellant.

Before HASTINGS, Senior Circuit Judge, KERNER and SPRECHER, Circuit Judges.

PER CURIAM:

Following a trial by jury, defendant Archie J. Jackson was found guilty on each of ten counts of an indictment charging him with willfully and knowingly aiding and assisting taxpayers in the preparation and presentation of fraudulent federal income tax returns in violation of Title 26, U. S. C. A. §§ 7206(a), Internal Revenue Code of 1954. ¹ Upon a judgment of conviction, defendant was sentenced to serve eighteen months on each count, the sentences to run concurrently with each other. He has been represented on appeal by court-appointed counsel. Defendant appeals. We affirm.

Each count of the indictment charged that the tax return involved falsely represented that the taxpayer named therein was entitled to itemized deductions and exemptions in amounts in excess of his proper entitlements. At trial, twelve taxpayer witnesses testified they went to defendant and paid him a fee to prepare their tax returns for the year 1965 as he had done for some in prior years. Each further testified that he had signed his tax return, acknowledging he had read it, when in fact he had not read it. Typical of such testimony was that of taxpayer Killgrove who told defendant he had nothing to claim except "myself and my union dues." However, his tax return contained medical deductions of $470, charitable deductions of $175, special work clothes costing $150, interest expense of $410, and gasoline taxes of $120 when he did not own or drive an automobile. All such deductions were fictitiously supplied by defendant who told taxpayer he would receive a refund.

Prior to trial, defendant moved for the production of statements of Government witnesses which was denied by the trial court. Pretrial discovery of such statements is expressly precluded by the provisions of the so-called Jencks Act, Title 18, U. S. C. A. §3500(a) ², with provision for post-direct examination production in subsection (b) ³. Defendant's counsel was furnished with the requested statements prior to the direct examination of each such witness.

On appeal, defendant makes no claim that the judgment of conviction is not sustained by sufficient evidence. Defendant seeks to overturn his conviction on strained constitutional grounds which do not withstand close scrutiny.

Defendant first asserts that Section 3500, supra, is unconstitutional in that the denial of pretrail production of statements of Government witnesses deprived him of the right of confrontation secured by Sixth Amendment of the Federal Constitution. This claim is without merit.

The record shows that the subject income tax returns were made available to defendant's trial counsel more than two months prior to trial and that the false entries were pointed out to him. Further, the recess provisions for post-direct examination of producible statements under Section 3500(c) ⁴ of the Jencks Act alleviates any prejudice that defendant might suffer from denial of earlier production.

Defendant next asserts deprival of due process guaranteed him by the Fifth Amendment of the Federal Constitution. This strange contention that the trial court abused its discretion under the Jencks Act by allowing production of the statements in question immediately before direct examination, but not before trial, is frivolous. As above stated, such production under the Act is required only after direct examination. Defendant may not be heard to complain that he was given more favorable treatment than the Act itself required.

Finally, the constitutional validity of the Jencks Act has been upheld by the Supreme Court and lower courts in a wide variety of cases among which we need only cite Palermo v. United States [59-2 USTC ¶9532], 360 U. S. 343 (1959); Scales v. United States, 367 U. S. 203 (1961); United States v. De Lucia, 7 Cir., [59-1 USTC ¶9161] 262 F. 2d 610 (1959), cert. denied, 359 U. S. 1000; United States v. Simmons, 2 Cir., 281 F. 2d 354 (1960); Peek v. United States, 9 Cir., 321 F. 2d 934 (1963), cert. denied, 376 U. S. 954 (1964).

As best we can divine defendant's final constitutional objection, he contends he has been denied due process because his prosecution under Section 7206(a), supra, is unfair. He argues this is so because his prosecution depends upon the testimony of a taxpayer who may escape criminal liability by maintaining lack of knowledge of the false claims in the tax returns. The obvious purpose of the Act is to make it a crime for one to knowingly assist another in preparation and presentation of a false and fradulent income tax return. The innocence or guilty knowledge of a taxpayer is irrelevant to such a prosecution. See, e.g., United States v. Hainowitz, 2 Cir., 404 F. 2d 38 (1968); United States v. Gisehaltz, D. S. C. D. N. Y., [67-2 USTC ¶9616] 278 F. Supp. 434, 438 (1967). Cf. Driscoll v. United States , 1 Cir., [67-1 USTC ¶9430] 376 F. 2d 254 (1967); Strangeway v. United States, 9 Cir., [63-1 USTC ¶9183] 312 F. 2d 283, 286 (1963).

For the foregoing reasons, the judgment of conviction appealed from is affirmed.

Affirmed.

¹ "§7206. Fraud and false statements

Any person who--

* * *

(2) Aid or assistance.--Willfully aids or assists in, or procures, counsels, or advises the preparation or presentation under, or in connection with any matter arising under, the internal revenue laws, of a return, affidavit, claim, or other document which is fraudulent or is false as to any material matter, whether or not such falsity or fraud is with the knowledge or consent of the person authorized or required to present such return, affidavit, claim, or document; or

* * *

shall be guilty of a felony and, upon conviction thereof, shall be fined not more than $5,000, or imprisoned not more than 3 years, or both, together with the costs or prosecution. Aug. 16, 19 54, c. 736, 68A Stat. 852."

² §3500. Demands for production of statements and reports of witnesses

(a) In any criminal prosecution brought by the United States, no statement or report in the possession of the United States which was made by a Government witness or prospective Government witness (other than the defendant) to an agent of the Government shall be the subject of subpoena, discovery, or inspection until said witness has testified on direct examination in the trial of the case."

³ "(b) After a witness called by the United States has testified on direct examination, the court shall, on motion of the defendant, order the United States to produce any statement (as hereinafter defined) of the witness in the possession of the United States which relates to the subject matter as to which the witness has testified. If the entire contends of such statement relate to the subject matter of the testimony of the witness, the court shall order it to be delivered directly to the defendant for his examination and use."

⁴ §3500

"(c) * * * Whenever any statement is delivered to a defendant pursuant to this section, the court in its discretion, upon application of said defendant, may recess proceedings in the trial for such time as it may determine to be reasonably required for the examination of such statement by said defendant and his preparation for its use in the trial."

 

[74-1 USTC ¶9421] United States of America , Plaintiff v. Robert M. Sullivan, Defendant

U. S. District Court, Dist. Mont. , Helena Div., Criminal No. 4518, 4/3/74

[Code Sec. 7206]

Crimes: Fraud and false statements: Aid or assistance: Selective enforcement: Constitutionality: Arbitrary.--A program which singled out attorneys, CPA's and Enrolled practitioners as targets for fraud prosecutions was not unconstitutional. The Court held that the classification was not unreasonable since it was made to insure the integrity of those who filed tax returns for others.

Roy E. Murray, Jr., Assistant United States Attorney, Butte , Mont. , for plaintiff. I. James Heckathorn, One Main Bldg., Kalispell , Mont. , for defendant.

Opinion and Order

SMITH, District Judge:

I assume, although I think it highly unlikely in view of the timing, that the fact that the defendant was a certified public accountant was a factor in selecting him as a target for prosecution. There is an ACE Project (IRS Manual Supplement, 91G-26, 49G-19, Feb. 29, 1973) which singles out attorneys, CPA's and Enrolled Practitioners for special treatment.

It is contended that such a policy constitutes a violation of constitutional rights. The ACE program does create a policy of selective enforcement. Selective enforcement is not violative of constitutional rights unless the standard is arbitrary. Oyler v. Boles, 368 U. S. 448 (1962). The classification here is not arbitrary.

The attorney and the CPA deal not only with their own returns but with the returns of the lay persons by whom they are employed. Certainly the selection for prosecution of persons who are in a position to influence the tax conduct of other persons is not arbitrary. If the tax advisor is corrupt or delinquent it is not completely unreasonable to think that his example or perhaps even his advice will cause others to be corrupt ¹ or delinquent.

Whether attorneys and certified public accountants practice because of a right, entitlement, or privilege, they are permitted to hold themselves out to the public as persons who have been determined to be of good character and proficient in their arts and are permitted to do things which lay citizens may not do. I think that in the areas in which they work attorneys and accountants have a higher moral obligation to the law than does the man on the street.

A prosecutor may view the potentiality of success as a vital factor in the selection of cases for prosecution. In income tax cases where intent is a factor, the proof of intent should not be nearly as difficult with those who not only have knowledge of the law but who should have an awareness of the relationship of facts to the law as with those who might plausibly say "I didn't know I had to do that." Since an individual lawyer could be selected for prosecution because the prosecutor deemed his chances against the lawyer to be good, so I think that lawyers and accountants as a class may be singled out for special treatment.

It is my view that the classification is not unreasonable and that no constitutional rights are violated.

The motions for new trial and for judgment of acquittal are denied and the objections to the entry of judgment are overruled.

On April 22, 1974 , at the hour of 9:00 o'clock A.M. at Missoula , Montana , the court will pronounce judgment. Defendant is ordered to appear at that time.

¹ The use of the word "corrupt" here is without reference to the defendant in this case. As indicated in the findings, there was not the slightest indication of any corrupt purpose.

 

 

[82-1 USTC ¶9397] United States of America , Plaintiff-Appellee v. James M. Damon and Johanna E. Damon, Defendants-Appellants

(CA-5), U. S. Court of Appeals, 5th Circuit, No. 81-1251, 676 F2d 1060, 5/24/82 , Affirming an unreported decision of the District Court

[Code Sec. 7206]

Fraud and false statements: Tax return preparers: Constitutional arguments.--The convictions of tax return preparers for willfully aiding and advising in the preparation of false and fraudulent income tax returns was affirmed. Code Sec. 7206(2) is not unconstitutionally vague or overbroad. The tax return preparers' preparation of false and fraudulent Schedule C's constituted an offense proscribed by Code Sec. 7206(2) because the schedules were integral parts of returns and were incorporated by reference. Finally, the preparers' motions to suppress evidence and to dismiss on the basis of alleged selective prosecution were properly denied.

James M. Simon, Simons & Coleman, 617 Blanco Street, Austin, Tex. 78703, Warren Burnett, P. O. Box 3707, Odessa, Tex. 79760, for defendants-appellants. Edward Charles Prado, United States Attorney, Sidney Powell, Assistant United States Attorney, San Antonio, Tex. 78206, Glenn L. Archer, Jr., Assistant Attorney General, John F. Murray, Acting Assistant Attorney General, Michael L. Paup, Robert E. Lindsay, Deborah W. Dawson, Department of Justice, Washington, D. C. 20530, for plaintiff-appellee.

Before RUBIN and REAVLEY, Circuit Judges, and HUNTER, ^* District Judge.

HUNTER, JR., District Judge:

Appellants, James M. Damon and Johanna E. Damon, challenge their conviction on various counts of knowingly and willfully assisting in the preparation of false or fraudulent income tax returns in violation of 26 U. S. C. §7206(2). ¹ The validity of the convictions is challenged on statutory and constitutional grounds, and further on the basis of certain alleged trial and procedural errors. We reject these contentions as being totally without merit and affirm the convictions.

The government adduced the testimony of 25 taxpayers who had used the defendants' tax return preparer service. The evidence proved beyond any doubt that defendants willfully and systematically prepared false and fraudulent tax returns by simply manufacturing various deductions to which they knew taxpayers were not entitled.

Constitutional Attack

Defendants' primary contention is that the statute is unconstitutional because it is both overbroad and vague. The first premise of this contention is that it proscribes and punishes "pure speech." We are unimpressed with this arguments. These defendants cannot be exonerated on such an extremely tenuous possibility. The conduct proscribed can not be considered "pure speech." The Supreme Court has distinguished between speech which merely advocates law violation and speech which incities imminent lawless activity. Brandenburg v. Ohio , 395 U. S. 444, 89 S. Ct. 1827, 23 L. Ed. 2d 430. The former is protected; the latter is not. The statute here involved proscribes only purposefully incited imminent lawless activity. This is clearly discerned from the commonly understood meanings of "procure," "counsel" and "advise," and from judicial interpretations of the statute itself. United States v. Newton, 68 F. Supp. 952, 954 (W. D. Va. 1946), aff'd [47-2 USTC ¶9353] 162 F. 2d 795 (4th Cir. 1947), cert. denied 333 U. S. 848, 68 S. Ct. 650, 92 L. Ed. 1130 (1948); United States v. Habig [68-1 USTC ¶9243], 390 U. S. 222, 223, 88 S. Ct. 926, 927, 19 L. Ed. 2d 1055 (1968). The type of incitive speech with which we are here concerned is surely not constitutionally protected speech. Brandenburg v. Ohio, supra; Scales v. United States, 367 U. S. 203, 81 S. Ct. 1469, 6 L. Ed. 2d 782 (1961); Yates v. United States, 354 U. S. 298, 77 S. Ct. 1064, 1 L. Ed. 2d 1356 (1957); Dennis v. United States, 341 U. S. 494, 71 S. Ct. 857, 95 L. Ed. 1137 (1951); Fox v. Washington, 236 U. S. 273, 35 S. Ct. 383, 59 L. Ed. 573 (1915); United States v. Moss [79-2 USTC ¶9580], 604 F. 2d 569 (8th Cir. 1979), cert. denied 444 U. S. 1071, 100 S. Ct. 1014, 62 L. Ed. 2d 752 (1980); United States v. Buttorf [78-1 USTC ¶9265], 572 F. 2d 619 (8th Cir.), cert. denied 437 U. S. 906, 98 S. Ct. 3095, 57 L. Ed. 2d 1136 (1978).

Defendants' second constitutional attack is premised upon the argument that it "does not spell out what specific conduct is proscribed." We find this impossible to accept. The defendants lack standing to challenge Section 7206(2) on the ground that it is unconstitutionally vague on its face. In United States v. Raines, 362 U. S. 17, 21, 80 S. Ct. 519, 522, 4 L. Ed. 2d 524 (1960), the Supreme Court stated the applicable rule:

One to whom application of a statute is constitutional will not be heard to attack the statute on the ground that impliedly it might also be taken as applying to other persons or other situations in which its application might be unconstitutional. ²

Thus, this Court's inquiry is properly limited to the question of whether the statute is impermissibly vague as applied to these defendants. ³

The constitutional requirement of definitiveness is violated by a criminal statute that fails to give a person of ordinary intelligence fair notice that his contemplated conduct is forbidden by the statute. U. S. v. Harriss, 347 U. S. 612, 617; 74 S. Ct. 808, 811, 98 L. Ed. 989. Here, the indictment charged and the evidence established that the defendants willfully and systematically prepared false or fraudulent tax returns claiming deductions to which they knew the taxpayers were not entitled. Defendants' conduct falls squarely within the precise language of the statute's proscriptions. We reiterate the solution of Justice Holmes in United States v. Wurzbach, 280 U. S. 396, 399, 50 S. Ct. 167, 169, 74 L. Ed. 508 (1930): "If there is any difficulty, which we are far from intimating, it will be time enough to consider it when raised by some one whom it concerns." ⁴

Sufficiency of the Indictment Under the Statute

Defendants insist that the indictment does not state on offense under Section 7206(2). This is true, they contend, because since Schedule C's were not specifically and explicitly required by statute or regulation, the inclusion of false or fradulent Schedule C's on the returns they prepared could not constitute an offense under the statute. Defendants rely on an erroneous and unduly broad reading of our decision in United States v. Levy [76-2 USTC ¶9500], 533 F. 2d 969 (5th Cir. 1976). There, this Court held that an IRS Form 433-AB, which was not required by statute or regulation, was not a "statement, or other document" within the meaning of 26 U. S. C. 7206(1) and, therefore, could not be the basis of an offense under that section. An attempt to stretch the rationale of Levy to cover schedules appended to a Form 1040 return was considered and rejected by this Court in United States v. Taylor [78-1 USTC ¶9474], 574 F. 2d 232, 237 (5th Cir., cert. denied, 439 U. S. 893, 99 S. Ct. 251, 58 L. Ed. 2d 239 (1978)), affirming a conviction under 26 U. S. C. 7206(1) for making and subscribing individual income tax returns containing false and fraudulent Schedules E and F. The Taylor decision distinguishes Levy ⁵ and holds that:

While there is no explicit requirement in the regulations for the completion and filing of Schedules E and F, it is implicit in required Form 1040 that such schedules, when appropriate, become integral parts of such form and are incorporated therein by reference . . . Therefore, we conclude that section 7206(1) requires the same duty of honest reporting on schedules as it requires for entries on the Form proper.

As in Taylor , the schedules appended to returns prepared by the defendants in this case were integral parts of such returns and were incorporated therein by reference. The appended Schedule C's, claiming business loss deductions to which the taxpayers were admittedly not entitled, rendered the returns "fraudulent" or "false as to [a] material matter," within the meaning of Section 7206(2). ⁶ The defendants' preparation of such returns, as charged in the indictment and proven at trial, constituted offenses proscribed by that section, and the District Court quite properly denied the defendants' motion to dismiss.

Defendants' Motion to Suppress Evidence and to Dismiss on the Basis of Alleged Selective Prosecution

Defendants assert that the District Court's order quashing defense subpoenas to IRS agents and employees ⁷ effectively precluded them from presenting evidence relevant to their motions to dismiss and to suppress; that the District Court erred in denying those motions; and that denial of the motions "without an evidentiary hearing" mandates reversal of their convictions.

First, we note that the defendants were not "denied an evidentiary hearing" on either of their motions. The Court gave counsel an opportunity to explain what he intended to prove through IRS witnesses but remained unpersuaded that their testimony would be relevant or probative. The Court asked for evidence relevant to defense counsel's allegation of a punitive audit, but counsel presented no evidence. Finally, the Court was prepared to hear evidence on the motion to suppress, but again defense counsel chose to call no witnesses.

The gravamen of the defendants' attack on this facet of the indictment was their claim of selective prosecution. To establish the materiality of the testimony they sought from IRS witnesses, it was incumbent upon the defendants to meet the test set forth in United States v. Berrios, 501 F. 2d 1207, 1211 (2nd Cir. 1974), and adopted by this Court in United States v. Johnson [78-2 USTC ¶9642], 577 F. 2d 1304, 1308 (5th Cir. 1978):

To support a defense of selective or discriminatory prosecution, a defendant bears the heavy burden of establishing, at least prima facie (1) that, while others similarly situated have not generally been proceeded against because of conduct of the type forming the basis of the charge against him, and (2) that the government's discriminatory selections of him for prosecution has been invidious or in bad faith, i. e., based upon such impermissible considerations as race, religion, or the desire to prevent his exercise of constitutional rights.

The defendants here utterly failed to make the showing required by Johnson. Aside from a bare allegation of selective prosecution, the defendants made no showing whatsoever that other return preparers who routinely prepared false or fraudulent returns were ignored by the IRS. ⁸ Having failed to establish, prima facie, that they satisfy the first requirement of the Berrios test, defendants cannot prevail on their claim of selective prosecution; (see United States v. Johnson, supra, at 1309) consequently, they failed to establish the materiality of the testimony they sought and any "colorable entitlement" to an evidentiary hearing.

Similarly, the defendants were not entitled to an evidentiary hearing on their motion to suppress. There is, of course, a presumption of validity with respect to the affidavit supporting the search warrants. To mandate an evidentiary hearing, there must be more than a bare conclusory allegation. The Supreme Court has quite clearly defined the circumstances under which a defendant is entitled to a hearing on a motion to suppress:

To mandate an evidentiary hearing, the challenger's attack must be more than conclusory and must be supported by more than a mere desire to cross-examine. There must be allegations of deliberate falsehood or of reckless disregard for the truth, and those allegations must be accompanied by an offer of proof. They should point out specifically the portion of the warrant affidavit that is claimed to be false; and they should be accompanied by a statement of supporting reasons . . . Finally, if these requirements are met, and if, when material that is the subject of the alleged falsity or reckless disregard is set to one side, there remains sufficient content in the warrant affidavit to support a finding of probable cause, no hearing is required. On the other hand, if the remaining content is insufficient, the defendant is entitled, under the Fourth and Fourteenth Amendments, to his hearing. Franks v. Delaware , 438 U. S. 154, 171-172, 98 S. Ct. 2674, 2684-2685, 57 L. Ed. 2d 667 (1978).

The defendants' single unsupported allegation does not meet the requirements set forth in Franks.

We have carefully considered the other assertions of error and find them equally without merit. The Court acted well within its discretion in denying the motion for severance. The prosecutor's one-sentence comment utilized in his rebuttal argument referred to a single hearsay objection made during the course of a lengthy and hotly contested trial. Examining the remark in context, we find no impropriety. In any event, given the magnitude of the proof of guilt, such a response--if error at all--was well within the realm of harmless error. Berger v. United States, 295 U. S. 78, 55 S. Ct. 629, 79 L. Ed. 1314 (1935); see also United States v. Dorr, 636 F. 2d 117, 120 (5th Cir., 1981); United States v. Bright, 630 F. 2d 804, 825 (5th Cir. 1981).

The convictions are AFFIRMED.

^* District Judge of the Western District of Louisiana, sitting by designation.

¹ This section provides:

§7206. Fraud and false statements. Any person who--

* * *

(2) . . . [w]illfully aids or assists in, or procures, counsels, or advises the preparation or presentation under, or in connection with any matter arising under, the internal revenue laws, of a return, affidavit, claim, or other document, which is fraudulent or is false as to any material matter, whether or not such falsity or fraud is with the knowledge or consent of the person authorized or required to present such return, affidavit, claim, or document . . .

* * *

shall be guilty of a felony . . .

² Concededly, this rule does not apply where a statute may be interpreted to reach constitutionally protected speech. See, e.g., Smith v. Goguen, 415 U. S. 566, 94 S. Ct. 1242, 39 L. Ed. 2d 605 (1974); Papachristou v. City of Jacksonville, 405 U. S. 156, 92 S. Ct. 839, 31 L. Ed. 2d 110 (1972); Lanzetta v. New Jersey , 306 U. S. 451, 59 S. Ct. 618, 83 L. Ed. 888 (1939). However, Section 7206(2) does not reach constitutionally protected speech. Thus, the standing rule set forth in United States v. Raines, supra, precludes the defendants' attack on the face of the statute.

³ Given the commonly understood meanings of the words "procure," "counsel," and "advise" (see Grayned v. City of Rockford, 408 U. S. 104, 112, 92 S. Ct. 2294, 2301, 33 L. Ed. 2d 222 (1972)), the judicial interpretations of the statute (see Dennis v. United States, supra, 341 U. S. at 515, 71 S. Ct. at 870), the context of the statute (see Connally v. General Construction Co., 269 U. S. 385, 391-392, 46 S. Ct. 126, 127-128, 70 L. Ed. 322 (1926)), and the requirement that the proscribed conduct be willful (see United States v. National Dairy Products Corp., 372 U. S. 29, 35, 83 S. Ct. 594, 599, 9 L. Ed. 2d 561 (1963)), Section 7206(2) is not impermissibly vague on its face.

⁴ Quoted in Broadrick v. Oklahoma, 413 U. S. 601, 609, 93 S. Ct. 2098, 2914, 37 L. Ed. 2d 830 and by this court in United States v. Dozier, 672 F. 2d 531 (5th Cir. 1982).

⁵ See United States v. Taylor , id.:

"Defendant's reliance upon United States v. Levy . . . is misplaced. The instant case does not involve interpretation of 'statement.' For each tax year in question defendant filed a Form 1040, which clearly is a 'return.' See Treas. Reg. §1.6012-1."

⁶ Cf. Siravo v. United States [67-1 USTC ¶9446], 377 F. 2d 469, 472 (1st Cir. 1967), affirming a conviction under 26 U. S. C. 7206(1) for making and subscribing a return which omitted a Schedule C which should have been included: "a return that omits material items necessary to the computation of income is not "true and correct" within the meaning of Section 7206."

⁷ The subpoenaes were quashed only "insofar as [they] require testimony relating to the allegations of selective prosecution."

⁸ Cases involving the trials and tribulations, frauds and attempted frauds of tax preparers are not novel to this Court. See United States v. Haynes [78-1 USTC ¶9455], 573 F. 2d 236 (1978); United States v. Brown [77-1 USTC ¶9278], 548 F. 2d 1194 (1977), and cases cited in footnote 5 therein.

 

 

[83-2 USTC ¶9557] United States of America , Plaintiff-Appellee v. Karl L. Dahlstrom, R. Bruce Ripley, Hiram E. Conley, David J. Morris, and Gaze Durst, Defendants-Appellants

(CA-9), U. S. Court of Appeals, 9th Circuit, Nos. 82-1137, 82-1138, 82-1141, 82-1142, 82-1143, 713 F2d 1423, 8/24/83 , Reversing District Court

[Code Sec. 7206]

Criminal penalties: Fraudulent returns: Specific intent: First amendment.--The defendants' convictions for willfully advising the presentation or preparation of fraudulent returns were reversed due to the prosecution's failure to show that the defendants had the specific intent to defraud the government. At the time the defendants advocated a tax shelter program, there was no federal law, regulation or court decision warning that advocacy of the tax shelter would lead to criminal prosecution. Prosecution against the defendants for instructing an audience on how to create a tax shelter was barred by the first and fifth amendments in the absence of any showing that the defendants had a specific intent to incite violation of the law and that violation was imminent.

[Code Sec. 7206]

Criminal penalties: Fraudulent returns: Preparation: Filing.--A person cannot be convicted of fraudulent preparation of a tax return, if the return has not been filed.

Robert E. Lindsay, Alan Hechtkopf, Department of Justice, Washington, D. C. 20530, for plaintiff-appellee. David L. Botsford, Austin, Tex., Joe Alfred Izen, Jr., 8191 S. W. Fwy., Houston, Tex., Merwin E. Grant, 3300 North Central Ave., Phoenix, Ariz. 85102, Kenneth Kanev, 460 Maynard Bldg., Seattle, Washington, Irwin H. Schwartz, Seattle, Wash., for defendants-appellants.

Before GOODWIN, ALARCON, and FERGUSON , Circuit Judges.

Opinion

ALARCON, Circuit Judge:

Appellants Dahlstrom, Ripley, Conley, Morris and Durst were convicted by a jury of conspiracy to defraud the United States , 18 U. S. C. §371, and of aiding and abetting the preparation and presentation of fraudulent income tax returns. 26 U. S. C. §7206(2). Each appellant contends the evidence was insufficient to sustain a conviction as to the crimes charged against him. We agree.

I. STANDARD OF REVIEW. In determining whether a jury verdict rests on sufficient evidence, a reviewing court must view the evidence in the light most favorable to the prosecution and determine "whether any rational trier of fact could have found the essential elements of the crime beyond a reasonable doubt." Jackson v. Virginia , 443 U. S. 307, 319 (1979); United States v. Universal Trade and Industries, 695 F. 2d 1151, 1153 (9th Cir. 1983).

II. PROCEDURAL BACKGROUND. Appellants were charged in a seven-count criminal indictment brought by the United States . Count I charged all five appellants with conspiracy to defraud the government in violation of 18 U. S. C. §371. Counts II through VII charged one or more of the appellants with violations of section 7206(2) of the Internal Revenue Code.

Dahlstrom and Ripley were indicted under all of the counts. Dahlstrom was convicted under every count save count IV, and Ripley was convicted under Counts I, III and V. Conley was charged and convicted under counts I, II, VI, and VII. Morris was charged and convicted under counts I and V, while Durst was both charged and convicted under counts I and VII.

The district court sentenced each appellant to imprisonment on count I: Dahlstrom for five years, Ripley for four years, Conley for three years, Morris for 18 months and Durst for one year. The court also sentenced each appellant to five years probation on each of the remaining counts on which he was convicted.

III. FACTS. In 1976, Dahlstrom began to promote and sell a tax shelter program he had devised. At various times thereafter, Ripley, Conley, Morris and Durst joined in the promotion and sale of the program.

Sales of the program took the form of sales of membership in an organization that Dahlstrom had formed called, the American Law Association (ALA). Purchasers of the program bought membership in the ALA. As members, they were entitled to receive instruction and materials relating to the tax shelter program at ALA two-day seminars. Members attending these ALA seminars were charged fees ranging from $6,000 to $12,000.

At these seminars, Dahlstrom and Ripley instructed members on how to create foreign trust organizations (FTO's) in order to reduce their tax liabilities. The members were also provided with forms for setting up such trust organizations and documenting trust transactions. In addition, members received instruction on a "taxpayer defense program" which consisted of lawful actions a member could utilize in the event of an IRS audit. While the program did not include advice or assistance in preparing a member's income tax return, some of the appellants occasionally assisted a member in establishing his FTO by traveling to the designated country and executing the requisite trust documents on behalf of that member.

Members who implemented the ALA tax shelter program caused three trust organizations to be created in a foreign country by a citizen of that country. Typically, trust number one would be named trustee of trusts two and three, although the person implementing the FTO's retained complete control over all three trusts.

This tax shelter program contemplated that trust number two would be treated as a non-resident alien (purely for tax purposes) and would be subject to tax on payments from the user of the program. In order to reduce trust two's tax liability, purchasers of the program had trust two make payments to trust three. Payments made to trust three would not represent taxable income since trust three would be a foreign entity receiving income from a foreign source.

The final stage of this tax shelter program involved the return to the purchaser of some or all the money he paid to trust number two. In order to achieve this goal, a purchaser would have trust two borrow money from trust three and execute a demand note payable to trust three. Trust three would then transfer the demand note to the purchaser as a gift and the purchaser would demand and receive payment from trust two. This method was premised on 26 U. S. C. §202 (IRC), which excludes gifts from aross income for income tax purposes, and IRC section 2501 which provides a gift tax exemption for gifts of intangible property by a non-resident alien to a citizen of the United States.

The thrust of the government's case depended in large part on evidence of the trusts and subsequent tax return of Dr. John Ricketts. In November of 1977, Dr. Ricketts expressed interest in the ALA program and attended introductory meetings. Dr. Ricketts' accountant ultimately advised against use of the ALA tax shelter program.

After discussions with his accountant, however, Dr. Ricketts asked O'Leary, a former IRS investigator, to review a tape he had made of a December meeting of the ALA. Shortly after submitting the tape to O'Leary, Dr. Ricketts was contacted by Randy Draughon, an agent for the IRS Criminal Fraud Investigation Division. Agent Draughon returned Dr. Ricketts' tape and asked him to assist in an investigation of the ALA.

In November of 1978, Dr. Ricketts attended an ALA two-day seminar. He was accompanied by IRS agent Walter Perry, who posed as Vince Paoli, a financial advisor to Dr. Ricketts. In order to assist the IRS investigation, Dr. Ricketts authorized appellant Conley to implement the ALA tax shelter program in Belize .

After Dr. Ricketts' trusts were set up, Dahlstrom and Conley advised Agent Perry and Ricketts on creating a deduction by repurchasing his tax package from one of his trusts. Conley also recommended that Ricketts obtain accounting services from Durst. Though it was not his general practice to prepare tax returns for ALA members, Durst agreed to do so for Dr. Ricketts.

Durst advised Agent Perry that Dr. Ricketts could deduct $50,000 for 1978, for the repurchase of his tax package from his trust number two if the check had been written before the end of December, 1978. On March 30, 1979 , Agent Perry received the tax return that Durst had prepared for Dr. Ricketts. On the return, Durst had taken a deduction for Dr. Ricketts' repurchase of the tax shelter package. Agent Perry forwarded the return to IRS Special Agent Don Jensen. Dr. Ricketts was not concerned with the validity of this return since he had been advised by Agent Jensen that the Durst return would not represent his true return with the IRS.

This investigation resulted in the return of a seven-count criminal indictment based upon Dr. Ricketts' transaction and a number of similar transactions involving other appellants.

IV. SUFFICIENCY OF THE EVIDENCE. A. Counts II-VI. Counts II through VI charged the defendants with various violations of section 7206(2) of the Internal Revenue Code. This section imposes criminal sanctions against anyone who "willfully aids or assists in, procures, counsels, or advises the preparation or presentation under, the internal revenue laws, or a return, affidavit, claim, or other document, which is fraudulent or is false as to any material matter. . . ." 26 U. S. C. §7206(2). Appellants contend that the government's proof was insufficient to establish that they willingly and knowingly aided in the presentation and preparation of false income tax returns.

In order to convict a person under section 7206(2), the government must prove the following elements of the offense beyond a reasonable doubt:

1. That defendants aided, assisted, procured, counseled, advised or caused the preparation and presentation of a return;

2. That the return was fraudulent or false as to a material matter; and

3. That the act of the defendant was willful. United States v. Perez [78-1 USTC ¶9297], 565 F. 2d 1227, 1233-34 (5th Cir. 1977); United States v. Crum [76-1 USTC ¶9214], 529 F. 2d 1380 (9th Cir. 1976).

The Supreme Court has defined the term "willfully" under section 7206 to mean a "voluntary intentional violation of a known legal duty." United States v. Pomponio [76-2 USTC ¶9695], 429 U. S. 10, 12 (1976); United States v. Drape [82-1 USTC ¶9145], 668 F. 2d 22, 26 (1st Cir. 1982). We have determined that the term "willful" under the statute "requires proof of a specific intent to do something which the law forbids; more than a showing of careless disregard for the truth is required." United States v. Brooksby [82-1 USTC ¶9210], 668 F. 2d 1102, 1104 (9th Cir. 1982).

The dispositive issue in this case is whether the evidence shows that appellants acted with the specific intent to violate section 7206(2). We have concluded, when viewed in the light most favorable to the government, that the evidence was insufficient to support a finding that appellants possessed a specific intent to violate section 7206(2).

In order to meet its burden of proof as to the appellants' willfulness, the government relies upon three major contentions. First, the government asserts that the FTO's advocated by the ALA had no economic substance and were therefore blatant shams. Second, the government argues that the "taxpayer defense program" could reasonably be found to be inconsistent with a belief in the legality of the tax shelter program. Finally, the government points to some statements made by appellant Durst to show that the appellants had guilty knowledge.

In support of its first contention, the government argues that the law is clear that economic realities of a transaction rather than form are controlling for tax purposes. Consequently, the government asserts that the appellants were well aware of the inherent illegality of the tax deductions which flowed from use of the ALA tax shelter program. The government, however, has not pointed to any cases which invalidated the FTO's presented in this particular case. Moreover, the government's own expert witness, Karl K. Krogue, testified that the trusts created through implementation of the ALA tax shelter program were valid legal entities.

The government's reliance on Zmuda v. Commissioner, 79 T. C. No. 46 (1982), is misplaced. Zmuda did not address the issues of good faith, intent, or belief in the legality of the deductions. The sole issue before the tax court was whether Zmuda's FTO's had a business purpose, and if the claimed deductions were valid. We further note that Zmuda was a civil proceeding. It was not decided until some ten months after these appellants had been convicted. Due process requires that a person be given fair notice as to what constitutes illegal conduct so that he may conform his conduct to the requirements of the law. United States v. Batchelder, 442 U. S. 114, 123 (1979). Reliance on Zmuda as establishing an ex post facto determination that the ALA tax shelters were illegal would not afford the appellants that fair notice.

The government's assertion that the law was clear as to the application of substance over form in criminal prosecutions under section 7206(2) is further contradicted by the evidence at the time of trial. The use of foreign trusts to save taxes was still a highly debatable issue. Darrell D. Hallett, Regional Counsel for the IRS in Seattle , called as a witness for the prosecution, testified that his office had been approached by a number of practitioners who were confused as to the laws dealing with foreign trusts. This confusion prompted the Deputy Director of the IRS to issue a position paper regarding the use of foreign trusts. We note that this position paper was not issued until August 8, 1979 . The indictment in this matter was premised upon actions which occurred before the issuance of the paper.

Even if we were to assume that appellants were negligent in continuing to promote the ALA tax shelter program in light of the IRS's adverse position paper, the law is clear that "degrees of negligence only give rise in the tax system to civil penalties." United States v. Bishop [73-1 USTC ¶9459], 412 U. S. 346, 360 (1972). The criminal law concerns itself with willful violations of tax law, United States v. Brooksby, 668 F. 2d at 1102; and "its purpose is not to penalize frank differences of opinion." United States v. Bishop, 412 U. S. at 361.

We are convinced that the legality of the tax shelter program advocated by the appellants in this case was completely unsettled by any clearly relevant precedent on the dates alleged in the indictment. "It is settled that when the law . . . is highly debatable, defendant-actually or imputedlylacks the requisite intent to violate it." United States v. Critzer [74-2 USTC ¶9505], 498 F. 2d 1160, 1162 (4th Cir. 1974). A criminal proceeding pursuant to section 7206 "is an inappropriate vehicle for pioneering interpretations of tax law." United States v. Garber [79-2 USTC ¶9709], 607 F. 2d 92, 100 (5th Cir. 1979).

As noted above, the government asks us to find that the ALA 's use of a taxpayer defense program is sufficient proof of a specific intent to violate section 7206(2). Even the government concedes, however, that the actions recommended in the taxpayer defense program were not unlawful (Gr. Br. p. 27). We are unpersuaded that the appellant's advocacy of various lawful actions translates into proof that the appellants were aware of the illegality of their tax shelter program.

Even if the defendants knew that a taxpayer who actually performed the actions they advocated would be acting illegally, the first amendment would require a further inquiry before a criminal penalty could be enforced. With the exception of Durst, no defendant actually assisted in the preparation of any individual tax return. Rather, they merely instructed an audience on how to set up a particular tax shelter. Nothing should be clearer at this stage in the development of first amendment jurisprudence than "the principle that the constitutional guarantees of free speech and free press do not permit a State to forbid or proscribe advocacy . . . of law violation except where such advocacy is directed to inciting or producing imminent lawless action and is likely to incite or produce such action." Bradenberg v. Ohio, 395 U. S. 444, 447 (1969) (per curiam).

Nothing in the record indicates that the advocacy practiced by these defendants contemplated imminent lawless action. Not even national security can justify criminalizing speech unless it fits within this narrow category; certainly concern with protecting the public fisc, however laudable, can justify no more.

Finally, the government cites several statements made by Durst as sufficient to show the appellants' requisite intent. Although these statements may have been admissible against Durst as admissions upon proof of a corpus delecti of some crime, they were clearly inadmissible as proof of the crimes charged against the other appellants.

In order for the statement of a coconspirator to be admissible against his fellow conspirators under Rule 801(d)(2)(E), Fed. R. Evid., the government must establish substantial independent proof of the existence of the conspiracy. United States v. Perez, 658 F. 2d 654, 658 (9th Cir. 1981); United States v. Eubanks, 591 F. 2d 513, 519 (9th Cir. 1979). As we explain below, there is no independent proof of a conspiracy. Therefore, these statements could not be used against Durst's codefendants for any purpose.

We conclude that proof of the requisite intent to violate section 7206(2) is not shown in this record.

B. Count VII. Count VII related to the tax return prepared by Durst for Dr. John Ricketts. This return was never filed with the IRS. It was never intended to represent Dr. Ricketts' true return with the IRS. (RT: 2395-96). The government contends that an offense under section 7206(2) may be committed without the filing of a document. We disagree.

In United States v. Hobig [68-1 USTC ¶9243], 390 U. S. 222 (1968), the Supreme Court specifically stated that the crime of fraudulent preparation of a tax return is "committed at the time the return is filed." Id. at 223. Other courts have arrived at similar conclusions.

In Butzman v. United States [53-2 USTC ¶9450], 205 F. 2d 343 (6th Cir. 1953), the defendant argued that the statute of limitations started to run on the day the fraudulent return was prepared, not the later date upon which it was filed. In rejecting the argument, the court stated "[n]o crime was committed by Butzman until the application was filed. No crime would have been committed if the application had not been filed." Id. at 351. See also United States v. McGee, 572 F. 2d 1097 (5th Cir. 1978) (offense of filing a fraudulent return is complete at the time of filing).

We find that the filing of a return is in fact an element of a section 7206(2) violation. Since the return prepared by Durst was never filed each appellant's conviction under count VII must be set aside.

C. Conspiracy. Appellants were convicted of conspiracy to defraud the United States by impeding, impairing and obstructing the IRS in the ascertainment, computation, assessment and collection of income taxes. 18 U. S. C. §371. The appellants contend that they lacked the necessary intent to commit the substantive offense. We agree.

We have determined that the government must prove the following elements in order to sustain a conviction for conspiracy:

1. Agreement to accomplish an illegal objective;

2. Coupled with one or more overt acts in furtherance of the illegal purpose; and

3. The requisite intent to commit the substantive offense.

United States v. Melchor-Lopez, 627 F. 2d 886 (9th Cir. 1980).

"It is hornbook law that when knowledge of a fact is required to convict for a substantive offense, knowledge is also required to convict for conspiracy to commit the substantive offense. Ingram v. United States [59-2 USTC ¶15,245], 360 U. S. 672, 678 (1969); United States v. Eaglin, 571 F. 2d 1069, 1974 (9th Cir. 1977); United States v. Berkowies, 432 F. 2d 8, 14 (9th Cir. 1970). "Conspiracy to commit a particular substantive offense cannot exist without at least the degree of criminal intent necessary for the substantive offense itself." Ingram v. United States , 360 U. S. at 678.

What we have said concerning the insufficiency of the evidence as to counts II through VI is also dispositive of the conspiracy count. The government's failure to present evidence as to the appellants specific intent to violate the underlying substantive count requires us to set aside the convictions premised upon 18 U. S. C. §371.

V. CONCLUSION. The government has failed to establish that the appellants advocated a tax shelter program with the specific intent to violate section 7206(2).

These appellants were prosecuted in spite of the fact that no statute, regulation or court decision gave fair warning that advocacy of the creation of lawful foreign trust corporations as a tax shelter would result in a criminal prosecution if the challenged transaction might later be held to lack economic substance for purposes of a civil tax proceeding.

Prosecution for advocacy of a tax shelter program in the absence of any evidence of a specific intent to violate the law is offensive to the first and fifth amendments of the United States Constitution.

The judgments are REVERSED.

Dissenting Opinion

GOODWIN, Circuit Judge, dissenting:

The majority's opinion finds that what defendants assisted, counselled, and advised their clients to do was not clearly illegal at the time they gave the advice and assistance. The majority therefore finds a failure of "proof of a specific intent to do something which the law forbids," U. S. v. Brooksby [82-1 USTC ¶9210], 668 F. 2d 1102, 1104 (9th Cir. 1982). The opinion notes that Zmuda v. Commissioner, 79 T. C. No. 46 (1982) was not decided until ten months after these convictions.

The government specifically did not rely on Zmuda. It had no need to so rely. It relied on settled principles of tax law regarding sham "gifts" and transactions. Defendants advised their clients to use sham transactions to evade taxes. Such schemes have been illegal since Gregory v. Helvering [35-1 USTC ¶9043], 293 U. S. 465, 469-70 (1935) and Knetsch v. United States [60-2 USTC ¶9785], 364 U. S. 361 (1960). See also Barnett v. C. I. R. [66-2 USTC ¶9563], 364 F. 2d 742 (2nd Cir. 1966); Lynch v. C. I. R. [60-1 USTC ¶9161], 273 F. 2d 867 (2nd Cir. 1959). There were no "gifts" here within the clear intent of the statute because the taxpayers controlled the transactions of their trusts. See Hilda M. Royce [Dec. 19,111], 18 T. C. 761 (1952); see also Jackson [Dec. 8939], 32 BTA 470 (1935); Stine [Dec. 8940], 32 BTA 482 (1935).

Defendants' knowledge that they were advising and assisting illegal tax evasion is obvious from the record. Defendant Morris provided client Howlett false employer identification numbers to be used in connection with the sham trust bank accounts. Defendant Durst recommended that client Ricketts set up additional sham trusts to make future transactions more difficult for the I. R. S. to trace. Defendants Ripley and Durst recommended that clients use blue "copy-not" pens to sign checks so that I. R. S. agents could not read them on bank microfilm records. Defendant Morris instructed client Dr. Howard Bean to use specified fictitious names as the authorized signatures on bank accounts opened for the trusts and Morris accompanied Bean when Bean opened accounts using the fictitious names supplied by Morris. Bean also followed Morris's advice and used a false name on a non-resident alien tax return he filed for one of his sham trusts. Defendant Durst counselled clients to alter their Social Security numbers on trust bank accounts to prevent the I. R. S. from tracing them.

Defendants' clear knowledge of the illegality of their scheme was evident in the affidavit they required all participants to sign stating that they would not aid any governmental unit or agency in any civil, criminal, or administrative action against the defendants, and that the member would not divulge to any governmental agency any information concerning his relationship with the defendants. Defendant Durst explained to "client" Paoli (I. R. S. Special Agent Perry) why all the strategies for concealment were necessary. "If they (the I. R. S. get ahold of your books or records, they could probably shoot holes in this thing . . .. Yeah if they do you're in trouble . . .. Then you're talking about tax avoidance, tax fraud, and the whole thing." There could hardly be any chearer evidence that the defendants in this case knew that what they were advising and assisting clients to do was patently illegal.

Defendants did more than advise taxpayers. They committed acts in furtherance of the conspiracy. Defendants Conley and Morris traveled to Belize and the Turks and Caicos Islands to set up sham trust organizations for the taxpayers. Defendants Conley, Ripley and Morris also actively assisted taxpayers in opening bank accounts for the sham trusts. And defendant Durst prepared a fraudulent tax return.

Attendance at ALA meeting and distribution of ALA membership fees established membership in the conspiracy for all defendants except Durst. Defendant Durst attened ALA meeting but did not receive distributions of membership fees. But he did counsel his clients to participate in the scheme and agreed with his co-conspirators that he would prepare tax returns claiming deductions based on the ALA program. Durst thus participated in the conspiracy and by counselling his clients to file fraudulent tax returns he committed a substantive offense in furtherance of the conspiracy.

Durst did more. He actually prepared a fraudulent tax return that he believed his client, Dr. Ricketts, would fine and he thus violated 26 U. S. C. §7206(2). Ricketts did "file" the return, but both Ricketts and the I. R. S. knew that it would not be his true return, because Ricketts was cooperating with the I. R. S. investigation of the scheme.

26 U. S. C. §7206(2) states:

"Any person who--. . . (2) . . . Willfully aids or assists in, or procures, counsels, or advises the preparation or presentation under, or in connection with any matter arising under, the internal revenue laws, of a return, affidavit, claim, or other document, which is fraudulent or is false as to any material matter, whether or not such falsity or fraud is with the knowledge or consent of the person authorized or required to present such return, affidavit, claim, or document . . . shall be guilty of a felony and, upon conviction thereof, shall be fined not more than $5,000, or imprisoned not more than 3 years, or both, together with the costs of prosecution."

I cannot agree with the legal conclusion in the majority's opinion that Durst could not have violated 26 U. S. C. §7206(2) because the return was never "presented" as a true return to the I. R. S.

Title 26 U. S. C. §7206(2) makes aiding or advising "the preparation or presentation" of a fraudulent income tax return a crime. There are no cases in this circuit holding that presentation is a necessary element to the separate crime of fraudulent preparation. To create such a requirement would render the words "preparation or" mere surplusage. For returns that are actually presented, the term "presentation" would be enough to permit punishment of the advisor. The statute was clearly intended to reach tax return preparers whether or not the returns they prepare are ultimately presented. A statute should be construed so that no word, sentence, or clause shall be superfluous. Ex Parte Public Bank, 278 U. S. 101, 104 (1928); Consolidated Flower Ship. v. Civil Aeronautics Bd., 205 F. 2d 449, 450 (9th Cir. 1953).

The cases cited in the majority's opinion are not in point because all were cases in which the fraudulent return was both prepared and presented and the question was from what date the statute of limitations should run. United States v. Habig [68-1 USTC ¶9243], 390 U. S. 222 (1968) held that the government could press charges within six years from the actual filing of the returns, not from the statutory due date. Presentation is a separate act from preparation and the government could prosecute up to six years from that act. There was no holding in Habig that the government could not prosecute for fraudulent preparation alone.

Similarly in Butzman v. United States [53-2 USTC ¶9450], 205 F. 2d 343 (6th Cir. 1953), cert. denied 74 S. Ct. 50 (1953), the Sixth Circuit ruled that the statute of limitations ran from the date of filing, not from the date of preparation. The dicta in Butzman that no crime was committed until the application was filed and that no crime would have been committed if the application had not been filed have never been adopted by the Ninth Circuit. The dicta would render the words "preparation or" in §7206(2) nugatory, and we should not adopt them.

The crime of fraudulent preparation should be deemed complete when the preparer delivers the returns to a client with the belief that the client will file them.

Durst advised Ricketts to back date a check so that he could claim a deduction. And the tax return he prepared for Ricketts included a deduction for "repurchase" of ALA tax shelter documents that Durst knew was a sham. He knew the return he prepared contained false deductions and he therefore violated §7206(2).

There was no violation of first amendment protected speech or association here. The first amendment does not protect communications that are part of conspiracies to commit unlawful acts. U. S. v. Buttorff [78-1 USTC ¶9265], 572 F. 2d 619 (8th Cir. 1978), cert. denied 437 U. S. 906 (1978).

Viewing the evidence in the light most favorable to the jury's verdict and drawing all reasonable inference, there was substantial evidence from which the jury reasonably could have found the defendants guilty beyond a reasonable doubt. U. S. v. Friedman, 593 F. 2d 109, 115 (9th Cir. 1979); U. S. v. Jacobo-Gil, 474 F. 2d 1213, 1214 (9th Cir. 1973).

 

 

[87-1 USTC ¶9334] United States of America , Plaintiff-Appellant v. Gerald L. Schulman, Defendant-Appellee

(CA-9), U.S. Court of Appeals, 9th Circuit, No. 86-5251, 5/20/87 , Affirming, reversing and remanding an unreported decision of the District Court

[Code Sec. 7206(1) and (2) --Result unchanged bythe Tax Reform Act of 1986]

Crimes: Fraud and false statements: Aiding and advising preparation of false returns: Preparation of false or fraudulent returns: Constitutionality.--In reversing the district court, the court of appeals ruled that the dismissal of an indictment alleging that an accountant aided and assisted in preparation of false and fraudulent returns filed by limited partnerships, individual partners, and by himself was improper because the accountant's intent to violate the law could not be ruled out as a matter of law. The court found that, assuming the truth of the allegations in the indictment, the accountant was engaged in promoting a tax scheme, the illegality of which he had fair notice. The accountant created and promoted the sale of 91 real estate tax shelters based upon the representation that all monies invested would be deductible on 1979 tax returns as an interest expense. Such deductions were generated by circular financing. The court of appeals found that the financing transactions were a sham because there was no economic risk associated with the purported loans and that such sham transactions were clearly prohibited by law in 1978 and 1979.

Donald Searles, Washington , D.C. 20530 , for plaintiff-appellant. Bruce Hochman, Hochman, Salkin & DeRoy, 9100 Wilshire Blvd., Beverly Hills, Calif. 90212, for defendant-appellee.

Before J. WALLACE, TANG and ALARCON, Circuit Judges.

OPINION

TANG, Circuit Judge:

The government appeals the district court's dismissal of 23 counts of a 25-count indictment charging Schulman with conspiracy, tax fraud and perjury. The charges arose from the promotion, sale and administration of a tax shelter scheme Schulman developed, in which 91 limited partnerships purchased buildings leased to the United States Postal Service, public utilities and state governmental units, and claimed interest deductions equal to each limited partner's total capital contribution. The district court dismissed the conspiracy and tax fraud charges on the ground that the government could not prove the element of willfulness essential to convictions under 26 U.S.C. §7206(1) (making or subscribing a false tax return) and 26 U.S.C. §7206(2) (aiding in preparation and presentation of a false tax return) because the government could not show that the type of tax shelter promoted by Schulman was clearly illegal in 1978 and 1979. We reverse.

BACKGROUND

Schulman is an accountant who has done tax planning for clients since the early 1970's. He was a client of tax attorney Harry Margolis for several years beginning in 1974 and received advice about real estate tax shelters based on deductions generated by circular financing. See, e.g., Goldberg v. United States [86-1 USTC ¶9413 ], 789 F.2d 1341 (9th Cir. 1986). In 1978 and 1979 Schulman created 91 real estate limited partnerships for the purpose of acquiring various public buildings to be purchased through long-term purchase money mortgages, requiring no down payment and bearing interest at below market rates. Schulman promoted the sale of the partnership interests by representing that all money invested would be deductible on 1979 tax returns as an interest expense. Schulman was the general partner in each limited partnership.

The promised tax objective was realized through a series of financing and loan transactions between the partnerships and two foreign corporations: Hexagram, a Netherlands Antilles corporation, and Parallax, a Panamanian corporation. The corporations and the limited partnerships all had bank acounts at Banco de Iberoamerica, in Panama , and at Barclays Bank in Holland . The partnerships each secured a short-term loan from Hexagram and executed promissory notes to Hexagram bearing interest at 10%. Each partnership delivered the funds borrowed from Hexagram to Parallax under a financing agreement in which the partnership agreed not to charge any interest as consideration for Parallax's agreement to obtain favorable long-term financing for the purchase of the real estate. Parallax deposited the money in the Panamanian Bank with instructions to loan it to Hexagram. These loans and transfers thus were effected through the use of circular financing, with the same transaction being repeated 91 times in two days on October 31 and December 5, 1978 ; the result was that $252 million was "loaned" to the Schulman partnerships. Some twelve to fourteen months later, on December 27, 1979 , the principal amount ($220 million) was repaid to Hexagram by reversing the circle using the accounts at Barclays Bank. When Parallax returned the money to each partnership, it in turn repaid Hexagram the loan plus interest. The interest payment equaled the initial capital contribution of the partners (approximately $28 million).

There is no dispute that the limited partners made capital contributions, or that the partnerships did purchase and do own real buildings in the United States , or that some of the partnership transactions had economic substance apart from their tax consequences. The government does not argue that Schulman, the partners, or the partnerships had any ownershp interest in the two foreign companies or that the companies were not duly organized under the laws of the Netherlands Antilles or Panama .

The government alleges that the loan and financing transactions between the Schulman partnerships and Hexagram and Parallax had no economic substance. There was not $252 million in cash to be loaned. Rather, there was a collected fund available for cash withdrawal of as little as one thousand dollars. The thousand dollars was circulated through the accounts until a total of $252 million was reached. Thus these transactions were mere "check swaps" which cannot be characterized as loans. Since there were no loans, the December 1979 cash payments to Hexagram, the government contends, cannot be characterized as interest payments.

The IRS began a civil audit in 1982 of the 1979 partnerships and in August 1983 reached a Settlement Plan Agreement in which the IRS agreed to permit 70% of the interest deductions to be taken in the first year of investment and the balance to be deducted over the term of the purchase money notes executed by the partnerships to acquire the leased properties. Mr. Schulman agreed to restructure future transactions so that no foreign entities would be involved. The Service, however, abandoned the agreement in 1984 and instituted a summons enforcement proceeding in which it took Schulman's deposition.

Count I of the indictment--the conspiracy count--alleges that Schulman organized and promoted the Schulman partnerships, orchestrated the financing transactions which generated the false loans and falsely reported the payments as interest on federal tax filings. The substantive tax counts arise from the tax plan and charge that Schulman aided and assisted in preparation of false and fraudulent returns filed by the limited partnerships (Counts II--XIII) and individual partners (Counts XIV--XIX) in violation of 26 U.S.C. §7206(2) and by Schulman himself (Count XX) in violation of 26 U.S.C. §7206(1) . Counts XXI--XXV charge that Schulman perjured himself while giving deposition testimony in violation of 18 U.S.C. §1623.

Schulman moved to dismiss the indictment and for a bill of particulars. The district court granted Schulman's motion to dismiss the tax fraud and conspiracy counts on the ground that the due process defense was legally sufficient because in 1978 and 1979 this type of circular financing was not clearly illegal. The district court dismissed two of the perjury counts (Counts XXII and XXIII) because the questioning had been too ambiguous. The government agreed to dismissal of Count XXV as multiplicitous.

ANALYSIS

I. Dismissal of Tax Shelter Counts

A. Standard of Review. We review the sufficiency of an indictment de novo. United States v. Buckley, 689 F.2d 893, 897 n.4 (9th Cir. 1982), cert. denied, 460 U.S. 1086 (1983).

A Rule 12(b)(1) motion to dismiss is appropriately granted when it is based on questions of law rather than fact.United States v. Shortt Accountancy Corp. [86-1 USTC¶9317 ], 785 F.2d 1448, 1452 (9th Cir.) cert. denied, 106 S.Ct. 3301 (1986). Here Schulman argued that he lacked notice of the criminality of his conduct, and that this constitutional deficiency provided a complete due process defense to the charges, and that the legal defense was capable of determination without trial. The district court agreed. The court assumed all facts alleged and found them insufficient to create a triable issue of fact with regard to the due process defense. The district court relied on United States v. Dahlstrom [83-2 USTC ¶9557 ], 713 F.2d 1423, 1428 (9th Cir. 1983), cert. denied, 466 U.S. 980 (1984) in deciding that the law in 1978 and 1979 was not sufficiently clear as to the legality of the tax shelter program Schulman promoted to find Schulman had the requisite intent to violate the law. Because the district court ruled as a matter of law, we review the holding de novo. United States v. Russell [86-2USTC ¶9801], 804 F.2d 571, 574 (9th Cir. 1986).

B. Is Willfulness a Factual Question? The government first argues that the district court erred in dismissing the indictment as a matter of law because the question of Schulman's willfulness is a factual question of his subjective intent, not a legal question of the objective certainty in the law. The government argues that willfulness is a question of subjective intent because when a defendant knows he is committing a wrongful act it does not matter that "there is no litigated fact pattern precisely in point." United States v. Ingredient Technology Corp. [83-1 USTC¶9140 ], 698 F.2d 88, 96 (2d Cir.) (quoting United States v. Brown, 555 F.2d 336, 339-40 (2d Cir. 1977)), cert. denied, 462 U.S. 1131 (1983). The government thus insists that if a defendant has the willful intent to commit a wrongful act, but the act is not illegal as a matter of law, the indictment should be dismissed not for the failure to establish intent but because another essential element of the charged offense is missing. We need not decide the issue because even if the government is correct, we still must review the district court's determination that the tax shelter scheme Schulman promoted was not clearly illegal in 1978 and 1979.

C. Legality of Schulman's Tax Shelter. The district court dismissed the indictment because it believedDahlstrom, 713 F.2d at 1428, stands for the proposition that when the legality of a tax shelter is unsettled by clearly relevant precedent an indictment must be dismissed because the requisite intent is lacking. Dahlstrom is more properly read as a case barring the "[p]rosecution for advocacy of a tax shelter program in the absence of any evidence of a specific intent to violate the law" because such prosecution "is offensive to the first and fifth amendments." Id. at 1429 (emphasis added); see also Russell, 804 F.2d at 576 ( Ferguson , J., concurring) (Dahlstrom "was primarily a First Amendment case involving pure advocacy"). In this case, Schulman did not merely advocate the tax shelter in question, he was involved in "orchestrating the generation of the questionable tax deduction." United States v. Crooks, 804 F.2d 1441, 1449 (9th Cir. 1986) (distinguishingDahlstrom in a factually similar case).

Of course even in a case involving more than mere advocacy, the inquiry must be whether the law clearly prohibited the conduct alleged in the indictment. There is no dispute in this case that the law is well settled that sham transactions are illegal. Commissioner v. Court Holding Co. [45-1 USTC ¶9215 ], 324 U.S. 331 (1945); Knetsch v. United States [60-2 USTC ¶9785 ], 364 U.S. 361 (1960);United States v. Clardy [80-2 USTC ¶9721 ], 612 F.2d 1139, 1151-53 (9th Cir. 1980). In Court Holding the Supreme Court established the fundamental doctrine that the true nature of a transaction may not "be disguised by mere formalisms, which exist solely to alter tax liabilities." 324 U.S. at 334. The Supreme Court has also clearly held that for an interest payment to be deductible, the interest must be paid on genuine indebtedness. Knetsch, 364 U.S. at 365-66. When there is no genuine indebtedness underlying the interest payment, the transaction is a sham. Id. Relying onKnetsch we upheld a conviction for false return information in a case of claimed deductions for interest payments because our analysis revealed "that there was no substance behind the forms employed." Clardy, 612 F.2d at 1152.

In this case the district court found that the transactions were not a sham because "real money" was expended, and that the transactions were not devoid of economic substance because the partnerships each acquired a real building. We believe the financing arrangement has to be evaluated separately on its own merits and cannot be found to have substance merely because the partnerships acquired real property or invested "real" money. The only question is whether there were real interest payments on genuine indebtedness. The indictment sufficiently alleges a lack of substance behind the check cycle to sustain the charges against a motion to dismiss.

The transactions in this case are similar to those we held to be a sham in Crooks, 804 F.2d 1441. In Crooks the defendant devised a tax shelter in which investors purchased interests in limited partnerships which owned coal leases and claimed deductions three times the amount of their investment for payments denominated advance mineral royalty payments. Id. at 1443. Because the partnerships lacked the assets to make the royalty payments they created a "check cyclone" with simultaneous, same bank transfers of checks in a circular transaction which we characterized "as borrowing money, paying oneself a royalty payment, and paying back the lender, leaving each party in the same position it was in before the transaction." Id. at 1443, 1449. In Crooks we upheld a conviction for conspiracy and filing false returns on facts similar to those alleged in the Schulman indictment. We are persuaded the allegations in this case are sufficient to withstand dismissal.

We agree with the government that the Schulman financing transactions were a sham that lacked substance because there was no economic risk associated with the purported loans.See Goldberg v. United States [86-1 USTC ¶9413 ], 789 F.2d 1341, 1343 (9th Cir. 1986) (indebtedness a sham when taxpayers do not incur "any actual economic liabilities of any substance"). Schulman does not dispute that there were no actual loans of real money in the amount of $252 million; further the government contends that the promissory notes in this case are wholly unenforceable. Assuming that contention is true, there is no risk of any sort in the underlying financing transactions and the $28 million was improperly characterized as a deductible interest expense. Such a sham transaction was clearly prohibited by law in 1978 and 1979, and thus dismissal of the indictment was improper since an intent to violate the law cannot be ruled out as a matter of law. ¹

II. Dismissal of Perjury Counts

A. Standard of Review. The legal sufficiency of a perjury indictment is reviewed de novo. United States v. DeCoito, 764 F.2d 690 (9th Cir. 1985).

B. Dismissal of Counts XXII and XXIII. Count XXII charged that Schulman lied when he stated "all . . . the complete sets" of books and records for the partnerships had been turned over to the IRS because in truth he "well knew and believed, the complete sets of books for each partnership had not been turned over." The district court held that the truth paragraph did not specify what records and statements were not provided by the defendant, and thus the count failed to meet the standard of United States v. Cowley, 720 F.2d 1037, 1042 (9th Cir. 1983), cert. denied, 465 U.S. 1029 (1984). Cowley indicates an indictment must set out the "allegedly perjurious statements and the objective truth in stark contrast so that the claim of falsity is clear to all who read the charge." Id. (quoting United States v. Tonelli, 577 F.2d 194, 195 (3d Cir. 1978)). Schulman's statement was volunteered and nonresponsive to any question. In the context of his discourse on the mechanics of the partnership transactions with Parallax and Hexagram, Schulman stated that each partnership had its own set of books and that the complete sets had been turned over to the IRS. What Schulman may have meant is unclear when viewed in context, since he may have been talking only about the records called for in the subpoena or only about the partnerships that dealt with Parallax and Hexagram. It was incumbent on the government attorney "to bring the witness back to the mark, to flush out the whole truth with the tools of adversary examination."Bronston v. United States , 409 U.S. 352, 358-59 (1973). Here the attorney failed "to pin the witness down to the specific object of the questioner's inquiry." Id. at 360. Because the meaning of Schulman's answer is ambiguous we agree with the district court that the truth paragraph did not stand out in stark contrast to the allegedly perjurious statement.

Count XXIII charged that Schulman lied when he denied he knew what Parallax did with the money received from the partnerships and when he said he had no first-hand knowledge concerning Parallax's depositing of the money because Schulman himself deposited the checks into the Parallax account. The government attorney asked Schulman if he knew whether Parallax deposited the money from the partnerships. Schulman said he did not know. The government says that in truth Schulman acted for Parallax by initialing and depositing the deposit tickets and checks into the Parallax account. The government contends this contrast between the answer and the truth is sufficient for a charge of perjury. We agree with the district court that there is not a stark contrast between the statements because the government attorney did not ask questions specific enough to pin down precisely what Schulman's role had been. Bronston, 409 U.S. at 360.

CONCLUSION

 

We conclude that, assuming the truth of the allegations in the indictment, the defendant was engaged in promoting a tax scheme, the illegality of which he had fair notice. The district court erred in granting defendant's motion for dismissal of 20 counts. The court did not err in dismissing the two perjury counts.

AFFIRMED in part, REVERSED in part and REMANDED.

¹ The district court's other reasons for dismissing the indictment are unsound. The court thought that the 1975 prosecution of Harry Margolis for tax fraud involving a theory of sham circle transfers, which resulted in Margolis's acquittal, would have served to make Schulman believe his activities were permissible. The government is correct in saying Schulman's knowledge and understanding of the implications of the Margolis trial is a factual question for the jury. The disposition of the Margolis case offers little guidance on the law at the time since the government of course could not appeal from the acquittal. The district court cited two other attorney designed tax plans approved by this court as a reason for dismissal of the Schulman indictment. The cases are inapposite because they are not sham transaction cases. See Stern v. Commissioner [84-2 USTC ¶9949 ], 747 F.2d 555 (9th Cir. 1984); Roberts v. Commissioner [81-1 USTC ¶9380 ], 643 F.2d 654 (9th Cir. 1981). The district court also thought the government's proposed Settlement Plan entered into with Schulman constituted evidence of the legality of the tax shelters. Aside from the fact that subsequent opinions are irrelevant to an inquiry into the objective state of the law at a prior time, as the government notes, it did not have proof of the sham nature of the transactions when it entered into the agreement. Once the government obtained that evidence it cancelled the agreement.

 

[87-2 USTC ¶9482] United States of America , Plaintiff-Appellee v. Fred F. Solomon, Jr., Defendant-Appellant United States of America , Plaintiff-Appellee v. George G. Nicoladze, Defendant-Appellant

(CA-9), U.S. Court of Appeals, 9th Circuit, 86-1155, 86-1162, 8/18/87 , 825 F2d 1292, Affirming, vacating and remanding unreported District Court decision

[Code Sec. 7206 --Result unchanged by the Tax Reform Act of 1986 ]

Criminal penalties: Fraud: Constitution: Sufficiency of the evidence: Jury instructions: Prosecutor's comments: Sentence: Vacated and remanded.--In convicting defendants for tax fraud, the district court did not abuse its discretion in refusing to give various jury instructions requested by them. The court of appeals distinguished U.S. v. Dahlstrom, 713 F2d 1423 (9th Cir. 1983), cert. denied, 466 U.S. 980 (1984), and stated that the district court did not abuse its discretion in refusing to give the proposed instruction based on this case. In addition, the instructions were sufficiently clear and correct to apprise the jury of the mechanics of the tax shelter scheme. Sufficient evidence was presented for the jury to conclude that one of the defendants did have the requisite criminal intent. The admission of the defendants' personal tax returns filed by the limited partner participants was proper, and if a violation of the Sixth Amendment confrontation clause existed, any error to that effect was harmless beyond a reasonable doubt. Closing remarks made by the prosecutor were not improper, and, even if they were, they did not materially affect the fairness of the trial. One of the defendants' sentence was vacated and remanded for resentencing because no record was available to show why his sentence was increased at a second trial.

Deborah Dawson, Department of Justice, Washington , D.C. 20530 , for plaintiff-appellee. J. Frank McCabe, Goojian & McCabe, Inc., 500 Sansome St., San Francisco, Calif. 94104, Stephen Kaus, Kaus & Kerr, 155 Montgomery St., San Francisco, Calif. 94104, for defendants-appellees.

Before GOODWIN, WALLACE and BOOCHEVER, Circuit Judges.

OPINION

GOODWIN, Circuit Judge:

A jury convicted George G. Nicoladze and Fred F. Solomon, Jr. of (1) conspiracy to defraud the United States, 18 U.S.C. §371 ; (2) tax evasion, 26 U.S.C. §7201 ; (3) making and subscribing false returns, 26 U.S.C. §7206(1) , and aiding and abetting the same, 18 U.S.C. §2 ; and (4) aiding and abetting the preparation and presentation of false returns, 26 U.S.C. §7206(2) . Both defendants allege constitutional, evidentiary, and other errors. None justifies reversal. We affirm as to all matters except for Nicoladze's sentence, which must be vacated and a new sentence imposed.

Solomon and Nicoladze and others not involved in this appeal worked together to establish numerous limited partnerships created for the dual purposes of developing patents and creating valuable tax shelter deductions. Solomon acted as president of the master partnership entity responsible for establishing the limited partnerships. Nicoladze acted as a consultant to Solomon and as the tax advisor to all the limited partnership entities.

The limited partnerships were designed to give rise to large annual tax deductions for investors. In the majority of cases, a patent was purchased from an inventor for $3,000 in cash and a $2,000,000 nonrecourse note against the limited partnership formed for development of the patent. With such a substantial cost basis, the partnerships were able to offer significant paper losses to individuals desiring "tax shelters" to apply against other sources of income. After purchasing limited partner shares, investors were allocated a portion of the annual losses suffered by the limited partnerships and could deduct those losses on their personal tax returns.

It is not disputed that bona fide patent development limited partnerships backed by nonrecourse notes could support legal tax deductions at the time that Nicoladze and Solomon assisted in the creation of the limited partnerships covered by the indictment. However, the government set forth three types of activities undertaken by the defendants which, if proved, could support criminal convictions. First, in connection with the establishment of the limited partnerships, defendants allegedly purchased existing patents at fraudulently inflated values with no genuine patent development purpose. Second, in anticipation of imminent changes in the tax code which took effect on January 1, 1977 , defendants allegedly encouraged their agents (1) to enter into unenforceable oral contracts for the purchase of patents and (2) to backdate to 1976 purchase dates for patents actually purchased in 1977. Third, in order to make the limited partnership shares even more attractive to investors, defendants allegedly backdated documents establishing purchase dates of limited partnership shares in order to extend to share purchasers' unwarranted depreciation deductions.

I. Jury Instructions

A defendant is entitled to a jury instruction on a theory of defense if the theory has a basis in law and in the record. United States v. Hayes, 794 F.2d 1348, 1350-51 (9th Cir. 1986), cert. denied, 107 S. Ct. 1289 (1987); United States v. Escobar de Bright, 742 F.2d 1196, 1198 (9th Cir. 1984). The adequacy of any one jury instruction and the jury instructions as a whole, however, is determined by examining the instructions in their entirety. United States v. Park, 421 U.S. 658, 674-75 (1975); United States v. Wellington, 754 F.2d 1457, 1463 (9th Cir.), cert. denied, 106 S. Ct. 593 (1985).

A defendant is not entitled to any particular form of an instruction so long as the instructions given fairly and adequately cover the defendant's theories of defense. United States v. Echeverry, 759 F.2d 1451, 1455 (9th Cir. 1985); United States v. Little [84-2 USTC ¶9889 ], 753 F.2d 1420, 1432 (9th Cir. 1984); United States v. Kenny, 645 F.2d 1323, 1337 (9th Cir.), cert. denied, 452 U.S. 920 (1981). The district court has broad discretion in formulating the precise language of jury instructions and " '[i]mperfectly formulated jury instructions will serve as a basis for overturning a conviction only upon a showing of abuse of discretion.' " Hayes, 794 F.2d at 1351, quoting Wellington , 754 F.2d at 1463.

Supplemental instructions which are given by a trial court in response to jury inquiries are held to a similar standard. Although the trial court is obliged to "eliminate confusion when a jury asks for clarification of a particular issue," the "necessity, extent and character" of supplemental instructions, lies within the discretion of the trial court. Hayes, 794 F.2d at 1352.

A. Oral Contracts. The district court instructed the jury that patents could be assigned only in writing. This instruction arguably foreclosed appellants' contention that they had entered or thought that they had entered into valid patent purchase agreements prior to January 1, 1977 . Appellants raise two criticisms of the instruction. First, they contend that the court should have instructed the jury that the patent purchase agreements in issue did not have to be in writing to be valid. Second, they contend that the jury should have been instructed that a good faith belief as to (1) the validity of oral agreements, or (2) the validity of certain boilerplate patent purchase agreements Solomon unilaterally signed in December 1976 would negate the "specific intent" or "willfulness" element of 26 U.S.C. §7206(1) and (2) . ¹

The first contention, that the oral agreements for the assignment of patents allegedly entered into in 1976 were valid is unpersuasive. Some evidence was presented at trial to suggest that appellants' agent, Henry Winkler, may have obtained oral assurances of varying degrees of finality from inventors, prior to 1977, for the purchase of patents they owned. This evidence was not uncontradicted, however, and in the end the trial court determined, as a matter of law, that a valid assignment of a patent to become operational as limited partnership property required a writing. The court stated: "in the context of an assignment of a patent, they can agree verbally until the cows come home, and that patent isn't assigned until there's a writing." As a consequence, the jury was instructed that only written agreements to assign patent rights are valid. The district court was correct on the law.

A patent is a creature of federal statute and may be transferred only according to the terms of the patent statutes. The rules governing the transfer and assignment of patent rights clearly envision a scheme of written assignment by providing that patents "shall be assignable in law by an instrument in writing." 35 U.S.C. §261 . Indeed, the necessity of a writing, like the necessity of an automobile certificate or a deed, to effect a valid transfer of a patent right has long been a matter of hornbook law. One authoritative treatise describes the state of the law as follows:

An assignment of a patent must be in writing to fulfill the requirements of the federal statute, and though no particular form of words is required, the instrument of transfer must be unambiguous and show a clear and unmistakable intent to part with the patent; it must express intention to transfer ownership.

5 Lipscomb's Walker on Patents, Title §19:7 (3d ed. 1986).

Moreover, whether it may be possible to enter into an enforceable oral contract to assign a patent--assuming proper delivery and the existence of adequate consideration--is not relevant here because such an agreement would not suffice for determining tax consequences when a patent had been purchased by one of the appellants' limited partnerships. A contract to assign a patent is legally distinguishable from an assignment of a patent, and valid assignments are a prerequisite to the taking of patent tax shelter depreciation deductions. See Treas. Reg. §1.167(a)-6 (1987) ("patentee" entitled to depreciate cost of patent). See also Sarkes Tarzian, Inc. v. United States , 159 F.Supp. 253, 256 (D.Ind. 1958) (patent application, although a form of property, is only an inchoate patent right, maturing into a depreciable patent asset only when patent issues); Fed. Tax Guide Rep. (CCH) ¶1723.20 (1987) (ownership of patent asset necessary predicate to patent depreciation deduction). Even if one of the limited partnerships had an enforceable oral agreement to purchase a patent in 1976 investors could not have taken valid tax deductions until 1977 following the perfection of a valid written assignment of that patent.

With respect to the second contention, after reviewing the instructions given by the district judge, we conclude that the instructions, taken as a whole, adequately charged the jury on the issues of willfulness and specific intent. The district court was not required to give a "good faith belief" instruction with respect to the issue of the validity of oral patent purchase agreements because the jury was instructed to find specific intent as an element of section 7206(2) and the other federal statutes. We have held that the failure to give an instruction on a "good faith" defense is not fatal so long as the court clearly instructed the jury as to the necessity of "specific intent" as an element of a crime. United States v. Green [84-2 USTC ¶9661 ], 745 F.2d 1205, 1209 (9th Cir. 1984) cert. denied, 106 S.Ct. 259 (1985); citing United States v. Cusino, 694 F.2d 185, 188 (9th Cir. 1982), cert. denied, 461 U.S. 932 (1983).

In sum, we hold that the district court correctly refused to instruct on the possibility of a valid oral assignment of a patent. Further, we hold that the court did not abuse its discretion by refusing to give a "good faith" instruction when the jury was adequately instructed on "specific intent."

B. Dahlstrom. Defendants proposed a jury instruction, based on United States v. Dahlstrom [83-2 USTC ¶9557 ], 713 F.2d 1423 (9th Cir. 1983), cert. denied, 466 U.S. 980 (1984), stating that if the jury found the legality of the patent tax shelter in question was unsettled, then they must vote for acquittal. The district court correctly refused to give the instruction.

In Dahlstrom, we reversed convictions for tax fraud and conspiracy to defraud the United States for two reasons. First, we concluded that the "unsettled legality" of the tax shelter scheme denied "fair notice" under the fifth amendment and made it impossible for the defendants to have a specific intent to "willfully" violate the federal statutes. Second, we concluded that because the defendants had only advocated the use of a complex tax shelter scheme involving foreign trusts and had taken no further steps to bring the scheme to fruition, the first amendment protected them from criminal sanction.

Cases we have decided since Dahlstrom, however, have narrowed both its fifth amendment and first amendment prongs.

In United States v. Schulman [87-1 USTC ¶9334 ], 817 F.2d 1355 (9th Cir. 1987), we narrowed Dahlstrom to situations involving the " 'prosecution for advocacy of a tax shelter program' . . . because such prosecution 'is offensive to the first and fifth amendments.' " Id. at 1359, quoting Dahlstrom, 713 F.2d at 1429. Here, appellants did far more than merely advocate the creation of patent tax shelters. Rather, they actively performed all the organizational and managerial tasks necessary to create and operate the tax shelters. They sought out patents available for purchase, enticed limited partner investors, inflated the cost bases of patents purchased, and filed erroneous partnership tax returns and other documents used in the preparation of tax returns. In sum, because defendants were closely involved in the creation and operation of the tax shelters they can draw no support from Dahlstrom or the first amendment. See United States v. Crooks, 804 F.2d 1441, 1449 (9th Cir. 1986). See also Akland v. Commissioner [85-2 USTC ¶9593 ], 767 F.2d 618, 621-22 (9th Cir. 1985) (in a civil action for tax deficiencies and fraud, specific intent to defraud can be inferred from the nature and extent of defendant's involvement in the operation of foreign trust tax shelters).

In a case involving more than mere advocacy, the court must next inquire whether the law clearly prohibited the conduct alleged in the indictment. Schulman, 817 F.2d at 1359. Even if we were to assume that the tax shelter scheme was legal or of "unsettled legality" as it was envisioned, the defendants' administration of the mechanics of the limited partnership transactions was blatantly illegal. The indictment charged and the jury found that the defendants backdated the participation of limited partners in limited partnerships to the beginning of 1977. They were also found to have acted fraudulently as though patents purchased in 1977 had been purchased in December 1976. Finally, for each of the limited partnerships, the jury found that the defendants had caused patents purchased for development to be accorded a fraudulently inflated value. Taken together, these affirmative acts of fraud move this case completely outside the scope of the fifth amendment. See Crooks, 804 F.2d at 1449; United States v. Vreeken [87-1 USTC ¶9187 ], 803 F.2d 1085, 1091 (10th Cir. 1986), cert denied, 107 S.Ct. 955 (1987), United States v. Little [84-2 USTC ¶9889 ], 753 F.2d 1420, 1434 (9th Cir. 1984).

It was not an abuse of discretion for the district court to refuse to give the proposed Dahlstrom instruction.

C. The mechanics of the tax shelter scheme. Neither defendant objected during the trial to the failure of the district court to give more detailed instructions on the mechanics and potential legality of the patent tax shelter scheme. As a consequence, we review the failure to give the suggested instruction for "plain error." Fed. R. Crim. P. 52(b); Cusino, 694 F.2d at 188; United States v. Giese, 597 F.2d 1170, 1199 (9th Cir.), cert. denied, 444 U.S. 979 (1979). In applying this standard, we review the entire record of the trial and will reverse only if failure to do so will result in a "miscarriage of justice." United States v. Young, 470 U.S. 1, 15 (1985), quoting United States v. Frady, 456 U.S. 152, 163 n.14 (1982).

Defendants contend that the jury may have had difficulty understanding the complexities of their patent tax shelter program. They had proposed that the jury be instructed as to the facial legality of their tax scheme in order to forestall a jury conclusion that the scheme was fraudulent from its inception. After reviewing the district court's instructions, however, we do not believe that the failure to give more detailed instructions was "plain error." The district court's instructions were clear and correct. The jury was not instructed that the tax programs were fraudulent as conceived but that they could find that they became fraudulent as carried out by the defendants.

II. Sufficiency of Evidence

Nicoladze asserts that the evidence did not establish his criminal intent as a matter of law and fact. The argument comes in two stages. First, he contends that the tax shelter scheme was legal as envisioned. Second, he claims that any irregularities and illegalities that occurred--such as the inflating of patent cost values and backdating of transactions--were a result of Solomon acting alone without Nicoladze's knowledge or approval.

The first part of Nicoladze's argument, that the tax shelter scheme may have been legal as envisioned, is repetitive. In essence, the argument comes down to a Dahlstrom defense, which, for reasons noted, does not apply here.

As to the second part, that Nicoladze was involved only to the extent of "conceptualization" of the tax shelter scheme while Solomon actually performed any possibly illegal acts, there is substantial evidence in the record that contradicts this assertion of innocence. At trial, the government established Nicoladze's intimate involvement with Solomon and others in the promotion and management of the tax shelter scheme. The jury had sufficient evidence reasonably to conclude that Nicoladze had been a wifull and knowing participant with Solomon in criminal violations. That is all the government had to prove.

III. Admission of Documents

The district court received into evidence approximately 100 personal tax returns filed by limited partner participants in defendants' tax shelter partnerships. Appellants attack the admission of these documents alleging (1) a lack of relevancy under Fed. R. Evid. 402 and (2) a denial of sixth amendment rights to confrontation and cross-examination.

A. Relevancy. Because defendants objected on constitutional grounds to the admission of the tax returns, we review their admission under a "harmless error beyond a reasonable doubt" standard. Chapman v. California , 386 U.S. 18, 24 (1967); United States v. Valle-Valdez, 554 F.2d 911, 915 (9th Cir. 1977).

The personal tax returns of limited partners in the tax shelter partnerships were clearly relevant to the government's case. The admission of the returns allowed the government to establish the "presentation" element of 26 U.S.C. §7206(2) . This section prohibits aiding and abetting the preparation and presentation of false income tax returns. For conviction, the government had to show that limited partners had actually either (1) claimed full-year deductions to which they were not entitled or (2) taken deductions derived from fraudulently dated patent assignments in returns presented to the IRS. Defendants contend that this purpose would have been served by the admission of the limited partnerships' K-1 returns, which by themselves, detailed the amounts of deductions passed through to individual limited partners. This contention fails to comprehend that the K-1's do not establish that the improper deductions were actually "presented" or taken by the individual limited partners within the meaning of section 7206(2) .

In addition, the probative value of the personal tax returns was not outweighed by any danger of undue prejudice. United States v. Beattie, 594 F.2d 1327, 1330 (9th Cir. 1979), is not to the contrary. In Beattie, a prosecution witness, testifying in connection with bank fraud and conspiracy charges, stated that the bank had charged off $315,000 in bad loans approved by the defendant when in fact only $17,000 in loan write-offs were related to the conspiracy charged. The testimony therefore permitted the jury to draw an enhanced inference as to the extent of the defendant's illegal conduct. For this reason, we reversed and remanded, finding that the possibility of undue prejudice made the testimony improper.

By contrast, in this action, the government's last witness, IRS agent Paul Perry, testified as to his estimation of the total amount of deductions attributable to defendants' tax shelter limited partnerships as partly reflected in the personal tax returns admitted into evidence. This testimony was competent because the government was entitled to attempt in this fashion to prove its conspiracy allegation. All of the limited partnership transactions in reference to which Perry testified were covered by the indictment. In addition, each personal tax return specified by name and amount deductions derived from participation in one or more of the limited partnerships.

B. Sixth Amendment. In admitting the tax returns, the district court admitted a few returns filed by limited partners then deceased. The court also denied defendants' motion for a continuance to interview the remaining limited partners whose returns were to be offered into evidence. Appellants assert that they did not have an effective opportunity to cross-examine or confront these limited partners within the meaning of the confrontation clause of the sixth amendment. These arguments lack merit for two reasons. First, as verbal acts and public records, the returns were admitted not for the truth of their contents but to establish the existence of a limited partnership deduction. Cross-examining a limited partner after he or she has filed a return which claimed the deduction would be irrelevant. The deduction either was taken or it was not. ² Second, even if a colorable confrontation clause violation occurred, any error that may have resulted was harmless beyond a reasonable doubt. The state of mind of the taxpayers was never an issue in this case. See United States v. Regner, 677 F.2d 754, 759 (9th Cir.) (even assuming that admission of foreign documents into evidence violated the confrontation clause such admission was harmless because there was sufficient other evidence to support the mail fraud conviction), cert. denied, 459 U.S. 911 (1982).

IV. Prosecutorial Misconduct

This court reviews allegations of prosecutorial misconduct to consider whether the conduct "materially affected the fairness of the trial." United States v. Polizzi, 801 F.2d 1543, 1558 (9th Cir. 1986), quoting United States v. McKoy, 771 F.2d 1207, 1212 (9th Cir. 1985). If timely objection is made at trial, we review under a harmless error beyond a reasonable doubt standard. Polizzi, 801 F.2d at 1558. If timely objection is not made at trial, we review the prosecutor's conduct under the more exacting "plain error" standard. Young, 470 U.S. at 6, 16. Young also instructs that "a criminal conviction is not to be lightly overturned on the basis of a prosecutor's comments standing alone, for the statements or conduct must be viewed in context . . . [to determine] whether the prosecutor's conduct affected the fairness of the trial." Id. at 11.

Appellants contend that the prosecutor's remarks, by hinting at the existence of additional evidence of criminal activity, improperly influenced the jury.

During closing argument to the jury, the prosecutor made two comments which appellants assert were improper. The first comment was a suggestion that the government suspected or knew of substantially more criminal violations by defendants than those charged in the indictment. Defendants' counsel registered his protest, and in response, the district court admonished the prosecutor not to mention or comment on any fraud not charged in the indictment. Later that morning during his rebuttal argument, the prosecutor referred to "30 or 40" blank patent purchase agreements executed by Solomon and dated December 15, 1976 , when the indictment alleged that only 20 were dated December 15, 1976 , and that only eleven of those had been backdated. At the first recess defendants' counsel objected to the reference.

We think the prosecutor's remarks did not exceed propriety because the indictment contained a conspiracy charge and the remarks could be taken as comment on the scope of the conspiracy. In any event, we need not characterize the quality of the remarks because the remarks, even of improper beyond a reasonable doubt, did not materially affect the fairness of the trial. The evidence of criminal activity presented in this case was of repeated and cumulative acts of fraud. The possibility that the jury might have inferred from the remarks that there may have been a greater number of questionable or illegal transactions than those charged in the indictment would not likely have been a determinative factor in their deliberations on whether fraud occurred.

V. Jury Comments

Just before discharging the jury, the district judge suggested to the jury that their deliberations would be best "kept to themselves." This admonition no doubt reflected the district court's hope that a retrial could be avoided.

Nicoladze asserts that these comments "had a chilling effect on their [the jury's] speech thereby interfering with defendant's right to a trial by a fair and impartial jury." This is nonsense. Nicoladze confuses the line of cases establishing a defendant's rights to Brady material in the possession of the prosecution with the right of a court to control the post-verdict interrogation of jurors. There is no clear relationship between counsel's desire to inquire after the verdict and the right to a fair trial. The district court's comments to the jury prior to discharge were in no way improper and had no impact on the fairness of the trial.

VI. Nicoladze's Increased Sentence

After the first conviction in this action, Nicoladze was sentenced to a total of five years in custody and a $15,000 fine. The first conviction was reversed on appeal and a new trial was held. After the second trial, Nicoladze received a sentence of six years in custody and a total fine of $20,000.

Under North Carolina v. Pearce, 395 U.S. 711, 726 (1969), any increase in a defendant's sentence upon retrial after a successful appeal is "presumptively" vindictive unless the trial court identifies "objective information in the record justifying the increased sentence." United States v. Goodwin, 457 U.S. 368, 374 (1982). Nicoladze asserts that the increase of one year in custody and $5,000 in fines was "vindictive" in violation of due process.

At sentencing after the retrial, the district court reviewed and noted the contents of a sentencing memorandum indicating that Nicoladze had continued his involvement in questionable tax sheltering activities after the first trial. Perhaps as a consequence, the district court conditioned Nicoladze's bail and probation on a cessation of such activities. The district court may have been concerned about Nicoladze's lack of remorse and continuing involvement in highly questionable tax sheltering schemes. While such concerns are potentially objective sentencing factors, they were not memorialized in the record as is required under Pearce. As a consequence, we have no choice but to vacate the sentence of Nicoladze. The sentence of Nicoladze is remanded to the district court for resentencing in accordance with the cases cited above. The sentence imposed upon Solomon is not disturbed.

CONCLUSION

 

The judgments of the district court are affirmed as to all issues except the sentencing of Nicoladze. The Nicoladze case is remanded to the district court solely for resentencing pursuant to North Carolina v. Pearce, 395 U.S. 711.

AFFIRMED in part, VACATED in part and REMANDED.

¹ A "willful" act element has been read into 26 U.S.C. §7206(1) by United States v. Brooksby [82-1 USTC ¶9210 ], 668 F.2d 1102, 1104 (9th Cir. 1982). A "willful" act element has been read into 26 U.S.C. §7206(2) by United States v. Dahlstrom [83-2 USTC ¶9557 ], 713 F.2d 1423, 1426-27 (9th Cir. 1983), cert. denied, 466 U.S. 980 (1984).

² Our examination of the personal tax returns admitted into evidence reveals that each incorporates specific references by name, date, and amount to losses stemming from ownership interests in the limited parnerships charged in the indictment. Accordingly, each return helped the government to establish requisite elements of section 7206(1) and (2) .

 

 

[84-2 USTC ¶9563] United States of America , Appellee v. Russell M. Bliss, Appellant

(CA-8), U. S. Court of Appeals, 8th Circuit, No. 83-2194, 5/22/84 , Affirming an unreported District Court decision

[Code Secs. 7206 and 7402]

Crimes: Fraud: False statements in tax returns--Although the taxpayer claimed that: (1) the U. S. District Court for the Eastern District of Missouri erred in refusing to grant a change in venue (because of adverse pretrial publicity regarding his role in spraying dioxin-laced waste oil materials over numerous sites in and around Times Beach, Missouri), (2) there was prejudicial preindictment delay and (3) there was insufficient evidence to support his conviction for filing false income tax returns, such conviction was affirmed. The appellate court found no abuse of discretion in the trial court's refusal to rule on the transfer motion prior to voir dire and the voir dire revealed that the jurors' qualification as to impartiality exceeded the minimum constitutional standards. The two-and-a-half year delay between the completion of the IRS investigation and the indictment did not violate the taxpayer's due process rights because such delay was justified by the numerous investigative measures necessarily undertaken during that period. Finally, because of the overwhelming evidence to the contrary, the taxpayer's claim that the evidence was insufficient to support his conviction bordered on the frivolous.

Thomas E. Dittmeier, United States Attorney, James E. Crowe, Jr., Assistant United States Attorney, St. Louis, Mo. 63101, for appellee. Charles M. Shaw, Shaw, Howlett & Schwartz, 225 South Meramec, Clayton , Mo. 63105 , for appellant.

Before HEANEY, Circuit Judge, FLOYD R. GIBSON, Senior Circuit Judge, and MCMILLIAN, Circuit Judge.

GIBSON, Senior Circuit Judge:

Russell M. Bliss appeals his conviction for filing false income tax returns for the years 1976, 1977, and 1978 (26 U. S. C. §7206(1)). Bliss principally contends, as grounds for reversal, that the district court ^* prejudicially erred in refusing to grant him a change of venue; he urges that intensive and inflammatory pretrial publicity surrounding his spraying of dioxin contaminated substances in eastern Missouri made it impossible to impanel a fair and impartial jury there. He additionally claims there was prejudicial preindictment delay and insufficient evidence to support his conviction. We reject all of these claims and affirm Bliss' conviction.

I. Factual Background. During the relevant taxable years 1976, 1977, and 1978, and for many years prior, Bliss was the sole proprietor and operator of Bliss Waste Oil Service, a St. Louis business engaged in buying used or "waste" motor oil from gas stations, treating it, and then reselling or reusing it for various purposes. Bliss reported income and expenses for his waste oil service business on a Schedule C, which was attached to his personal income tax returns filed in 1976, 1977, and 1978. The criminal charges against Bliss concerned his overstatement of "purchases" expenses on his Schedule C's for 1976, 1977, and 1978. The government's position was that Bliss willfully overstated his expenditures for waste oil by $23,570.00 in 1976, $27,550.00 in 1977, and $18,100.00 in 1978. ¹

The overstated purchases expenditures were generated by bogus transactions between Bliss and three other individuals. First, in 1976 and 1977, twenty-two checks written on the Bliss Waste Oil Service account were made payable to variations of the "G-L Oil Co.," a fictitious business entity. The checks were delivered to Gary Lambarth, an employee of Bliss, who cashed them at a local bank and paid Bliss back 90% of the full amount; the 10% retained represented Lambarth's "service commission." For each check, either Bliss or Lambarth prepared an invoice or receipt indicating that the entire amount represented the payment of oil purchases. Bliss provided the receipts or invoices to the IRS as documentation of the purchases expenditures entry on his returns. Lambarth testified that the G-L Oil Co. was a fictitious entity and that Bliss never purchased any oil from him. Lambarth further testified that Bliss characterized the money generated by the transactions as "tax free money."

When Lambarth left Bliss' employ in 1978, Bliss had another young employee of his, Dave Covert, cash four Bliss company checks made payable to "Dave Covert Oil Co.," a fictitious business. Covert, like Lambarth, paid Bliss back all but 10% of the full amount. Again, the full amounts of the checks were claimed by Bliss as expenditures for oil "purchases," purchases that were never in fact made. Both Covert and Lambarth testified that after the IRS investigation began, they were advised by Bliss to tell the IRS that they had sold Bliss the oil as shown on the checks they had cashed.

Finally, in 1977, Bliss purchased a truck from a business acquaintance for $6,000.00, which was paid with a check written on the Bliss company account. On the face of the check, Bliss noted that the payment represented a purchase of 60,000 gallons of oil at 10 cents per gallon. That check comprised part of the oil "purchases" expense on Bliss' Schedule C for 1977. Callahan testified that after the IRS began investigating Bliss, the latter advised Callahan to tell the IRS that the $6,000.00 payment represented a legitimate oil purchase.

At trial, Bliss admitted the "G-L Oil" and "Dave Covert Oil" checks were cashed as Lambarth and Covert had testified. However, he asserted that the money generated by the checks were used to make cash payments to Larry Gooden, the manager of a barge cleaning business that removed residue liquid cargo--including oil--from barges and stored it in "slop tanks." Bliss testified that in order to purchase the residue, he was required to make "under the table" cash payments to Gooden. Bliss claimed all the money generated by the "G-L Oil" and "Dave Covert Oil" checks went to Gooden; thus, to Bliss' way of thinking, the full amounts of those checks were properly deductible oil purchases expenses. Bliss further explained that the $6,000.00 check to Callahan was for an oil hauling truck, worth only $1,000. Since he "felt" the truck payment should be deductible, he claimed the full amount of the check as an oil purchase.

Larry Gooden testified, under a grant of judicial immunity, that, in 1976, Bliss made four cash payments to him for the slop tank residue, but the total amount of these payments was only $4,000.00, considerably less than the $23,570.00 in checks written by Bliss to "G-L Oil" in that year. Moreover, the cash payments Gooden received in 1977 and 1978 were "brokerage commissions" for Gooden's participation in arranging Bliss' sale of over $180,000.00 in oil to the Kiesel Oil Company. Gooden was "secretly married" to Lorraine Kiesel, the president of Kiesel Oil Co. Gooden testified that the brokerage payments from Bliss amounted to $7,500.00 in 1977, considerably less than the $27,550.00 in checks written that year to "G-L Oil" and Callahan. And, Gooden testified that he received $2,500.00 in cash payments from Bliss in 1978, again far short of $18,100.00 in checks written that year to "G-L Oil" and "Dave Covert Oil." Bliss stopped making brokerage payments to Gooden once he found out about the close relationship between Gooden and Kiesel.

The indictment against Bliss was returned on December 20, 1982 . Bliss sought to dismiss because of preindictment delay and requested a change of venue because of prejudicial pretrial publicity concerning his involvement in spraying dioxin contaminated substances in eastern Missouri . The court continued the initial trial setting of January 1, 1983 , and reset the case of July 18, 1983 . The district court adopted a magistrate's recommended denial of the preindictment delay motion. The court deferred ruling on the motion and supplemental motion for a change of venue until the jury selection process was undertaken. Satisfied that it had impaneled a fair and impartial jury, the court denied the requested change of venue. Bliss was convicted on all three counts after a five-day trial.

II. Change of Venue. Bliss claims the court abused its discretion in failing to grant his motion for a change of venue, either before or during voir dire, because of prejudicial pretrial publicity. He refers to the widespread publicity surrounding his spraying of dioxin contaminated oil substances in eastern Missouri --specifically, Times Beach , Missouri . Allegedly, the extensive and inflammatory nature of this publicity made it impossible to impanel a fair and impartial jury in the Eastern District of Missouri. As proof of the prejudicial effect of the pretrial publicity, Bliss refers to the fact that all but one of the veniremen admitted they had heard about Bliss' dioxin problems.

First, we do not believe the court abused its discretion by refusing to rule on the transfer motion prior to voir dire. United States v. Brown, 540 F. 2d 364, 377-78 (8th Cir. 1976). "This court has repeatedly held that it is preferable to await voir dire before ruling upon motions for change of venue." United States v. Poludniak, 657 F. 2d 948, 955 (8th Cir. 1981), cert. denied, sub. nom., Weigand v. United States , 455 U. S. 940 (1982). Underlying this preference is the recognition that the due process guarantee of trial by a fair and impartial jury can be met even where, as here, virtually all of the veniremen admit to some knowledge of the defendant due to pretrial publicity. See Irvin v. Dowd, 366 U. S. 717, 722-23 (1961); Murphy v. Florida , 421 U. S. 794, 799-800 (1975). As the court stated in Brown, 540 F. 2d at 378:

Mere exposure to publicity or the formation of tentative impression by some jurors is not enough to require a change of venue. The ultimate test is whether a juror has been exposed to pre-trial publicity and, if so, whether he or she can set aside any impression or opinion resulting from that exposure and render a verdict based solely on the evidence presented at trial.

Citing Irvin v. Dowd, 366 U. S. 717, 722-23 (1961); see also Poludniak, 657 F. 2d at 955.

A pretrial venue change is called for only in those situations where the pretrial publicity in a community is so extensive and inflammatory as to raise a presumption that an impartial jury could not be seated there. See Poludniak, 657 F. 2d at 955; United States v. McNally, 485 F. 2d 398, 402 (8th Cir. 1973), cert. denied, 415 U. S. 978 (1974). As the Supreme Court recognized in Beck v. Washington, 369 U. S. 541, 557 (1961), the inquiry is whether the "pretrial publicity was so intensive and extensive or the examination of the entire panel revealed such prejudice that a court could not believe the answers of the jurors [regarding their impartiality] and would be compelled to find bias or preformed opinion as a matter of law." In this case, the pretrial publicity was not so extensive, in scope or duration, as to raise a presumption of juror partiality; nor did the voir dire indicate "such hostility to [Bliss] by the jurors who served in his trial as to suggest a partiality that could not be laid aside." Murphy v. Florida, 421 U. S. 794 at 800; see also Irvin v. Dowd, 366 U. S. at 723, 727-28.

The adverse pretrial publicity began in December, 1982, when Times Beach was ravaged by the flooding Meramec River . At that time, EPA investigators found traces of dioxin in soil samples in Times Beach , Missouri , triggering massive evacuations. In late December, 1982, and early January, 1983, various Missouri newspapers and both local and national television began reporting Bliss' role in spraying dioxin laced waste oil materials over numerous sites (including roads and horse arenas) in eastern Missouri. The reports indicated that Bliss, while conducting his waste oil business in 1971, was hired to haul away dioxin contaminated waste materials from a chemical processing plant in Verona , Missouri (southeastern Missouri ). Bliss, in the course of his business, mixed the dioxin contaminated waste materials with oil and sprayed the mixture on the streets and various horse arenas in eastern Missouri .

Much of the publicity in late January and early February, 1983, concerned the hearings conducted by the Missouri Department of Natural Resources to determine whether to cancel the waste hauling license of Jerry Russell Bliss, Inc., the successor to the defendant Bliss' business. Numerous national and local reports detailed the state's evidence concerning Bliss' spraying of dioxin contaminated materials in 1971. These reports also included Bliss' own forceful testimony before the Department that he was completely unaware that the waste materials he sprayed contained chemicals hazardous to human or animal health. Bliss made a rather emotional appeal that the chemical company in Verona , Missouri , from whom he acquired the dioxin tainted waste, never warned him of the health dangers associated with the application of the waste. Bliss provided similar exculpatory testimony before the Missouri House Energy Committee in early January. This testimony was contained in various Missouri newspaper reports as well as in St. Louis and national television broadcasts. The district court properly noted that Bliss' highly publicized testimony may have evoked a sympathetic response in part of the community.

After the hearings before the Department of Natural Resources concluded in early February, 1983, the media attention--both local and national--turned away from Bliss and towards the EPA's proposals to "buy-out" homeowners in various dioxin plagued sites--specifically the Times Beach area. On February 22, 1983 , the EPA announced its $33 million dollar "superfund" buy-out proposal. Widespread local and national publicity ensued. Through most of March and April, 1983, the media reports on dioxin focused almost entirely on the EPA's additional proposals to buy out other sites contaminated by dioxin. Local media also focused on the Missouri legislature's proposal to establish its own "superfund" for buy-outs. From this point on, only occasional and passing reference was made to Bliss in news reports on the dioxin problem. Bliss' motion for a change of venue contained 350 pages of materials reflecting dioxin publicity only up until April 7, 1983 .

It is fair to say that the bulk of the adverse publicity surrounding Bliss occurred between December, 1982, and February, 1983; after that time frame, Bliss was relegated to a peripheral role in the dioxinrelated publicity. And, the publicity concerning Times Beach had substantially abated by April of 1983. The district court acted judiciously in continuing Bliss' trial date to July, 1983, to allow the adverse publicity to subside. By the time of trial in July, there was no indication that the eastern Missouri community was inflamed or corrupted by the publicity of some five months earlier. The earlier publicity concerning Bliss consisted of straightforward, factual, and objective reports, rather than invidious reports tending to arouse lingering ill-will or vindictiveness in the local community. This case is thus clearly distinguishable from Irvin v. Dowd, 366 U. S. 717 (1961), where the Court concluded that defendant did not receive a fair and impartial jury in a small, rural community that was, immediately preceding the trial, barraged by highly sensationalized and inflammatory publicity, including reports of defendant's confessions to six murders (including the one for which he was charged).

The voir dire in this case also reveals that the jurors' qualification as to impartiality exceeded the minimum Constitutional standards. Of the fifty-one veniremen who were questioned, eleven were stricken for cause related to opinions regarding Bliss. Only three of those eleven stated that their opinions stemmed from exposure to pretrial publicity. None of the venirement had any prior knowledge of the criminal tax case against Bliss. Finally, and most critically, not one of the venire group from which the jury was selected admitted to having any opinion or impression about the defendant.

In Murphy v. Florida, 421 U. S. 794 (1975), the Supreme Court rejected defendant's change of venue motion under circumstances at least as threatening to a juror's impartiality as existed here. Virtually all the veniremen in Murphy had been exposed to widespread pretrial publicity concerning the defendant's robbery charge at issue and his previous criminal exploits. Id. at 800. However, the voir dire revealed that twenty of seventy-eight veniremen had formed an opinion on defendant's guilt. The Court in Murphy distinguished Irvin v. Dowd, where 90% of the veniremen and eight of twelve of the eventual jurors expressed opinions that they believed defendant was guilty. Justice Marshall stated for Court in Murphy, 421 U. S. at 803:

In a community where most veniremen will admit to a disqualifying prejudice, the reliability of the others' protestations may be drawn into question; for it is then more probable that they are part of a community deeply hostile to the accused, and more likely that they may unwittingly have been influenced by it. In Irvin v. Dowd, for example, the Court noted that 90% of those examined on the point were inclined to believe in the accused's guilt, and the court had excused for this cause 268 of the 430 veniremen. In the present case, by contrast, 20 of the 78 persons questioned were excused because they indicated an opinion as to petitioner's guilt. This may indeed be 20 more than would occur in the trial of a totally obscure person, but it by no means suggests a community with sentiment so poisoned against petitioner as to impeach the indifference of jurors who displayed no animus of their own.

See also Beck v. Washington, 369 U. S. 541, 556 (1962) (that fourteen of 52 potential jurors admitted an opinion on defendant's guilt did not raise a presumption of bias).

We believe the voir dire in this case similarly failed to raise a presumption of juror partiality that could not be laid aside.

Finally, the trial judge's careful and painstaking jury selection procedures assured that a fair and impartial jury was impaneled. The voir dire questioning on the pretrial publicity was especially penetrating and probing, permitting the court and the parties to ferret out any latent prejudicial opinions or impressions. The veniremen were split into two groups, each of which was separately questioned on pretrial publicity. The first group of veniremen, from which eleven of the twelve jurors were chosen, was repeatedly cautioned against reliance on any pretrial publicity. The court also asked a wide array of questions designed to elicit the existence of opinions and sources of those opinions. The court specifically asked whether the prospective jurors: (1) had any opinion with respect to Bliss' involvement in the dioxin matter or had any "feeling," inclination, or attitude about Bliss; (2) had read more than three newspaper articles on the dioxin matter; (3) had read anything about dioxin within ten days prior to trial; (4) had been personally affected by the dioxin issue as a result of spraying in areas where they lived and frequented; (5) had worked in a waste oil business or had dealt with the dioxin issue in work.

All veniremen falling into one of these five categories were then questioned individually in camera by the court and counsel. Those expressing an opinion with regard to Bliss were then stricken for cause. The court then once again met with the remaining veniremen and renewed its request that the veniremen express any impressions or opinions they might have. Following that, the court allowed counsel to question the veniremen on topics other than pretrial publicity. The second group of veniremen, from which the twelfth juror and two alternates were selected, were questioned in the same manner.

This careful questioning of both groups led to the striking of all eleven veniremen who expressed an opinion with respect to Bliss, despite their protestations of impartiality. Of the thirty-two veniremen from whom the jury was ultimately selected, none admitted any opinion or impression about the defendant. The district court thereupon concluded, based upon its own observation of the venire panel and the courtroom atmosphere, that these thirty-two veniremen had no unstated prejudices or opinions that would prevent them from being impartial. Given the extensive and careful voir dire questioning, we are unable to say that the district court's finding of impartiality was erroneous. Irvin v. Dowd, 366 U. S. 717, 723-24; see also Rosales-Lopez v. United States, 451 U. S. 182, 188-89 (1981) (trial court accorded wide latitude of discretion in the selection of jurors because demeanor plays an important part in determining impartiality).

III. Preindictment Delay. Bliss claims the two-and-one-half-year delay between the completion of the IRS investigation, in June, 1980, and the indictment, in December, 1982, violated his due process rights. To establish such a claim, Bliss must demonstrate that the government intentionally delayed seeking an indictment to gain tactical advantage and that the delay substantially prejudiced his defense. United States v. Lovasco, 431 U. S. 783, 788-90 (1977); United States v. Marion , 404 U. S. 307, 322, 324 (1971). Bliss brazenly asserts that the government intentionally delayed to exploit the intervening dioxin publicity, resulting in substantial prejudice to his trial defense.

The record simply does not support Bliss' claim. The government's delay between the completion of the agent's report and indictment was justified by numerous investigative measures, including the reviews by the District Counsel of the IRS, the Tax Division of the Department of Justice, and the United States Attorney's Office. During this time, witnesses Lambarth and Covert had to be brought before the Grand Jury. Also, key witness Gooden, whose identity Bliss had concealed from the government, was first approached in the fall of 1981, when he requested immunity. Gooden's immunity request was then processed and his proffered testimony was studied before he was granted immunity on April 8, 1982 . Gooden appeared in the Grand Jury in October, 1982, and the indictment was brought two months later. Bliss has made no showing that the government timed the indictment to gain a tactical advantage over him or to exploit the pretrial publicity.

Bliss has also failed to show how his trial defense was substantially prejudiced by the timing of the indictment. He has not claimed that evidence or witnesses became unavailable to him because of the delay. Moreover, as discussed above, Bliss was not deprived of a fair trial because of the pretrial publicity.

IV. Sufficiency of the Evidence. Bliss' contention that the evidence was insufficient to support his convictions for filing false tax returns borders on the frivolous. There was overwhelming evidence indicating that Bliss knew the tax returns for the three years in question were false as to material matters--i.e., the purchases expenditures on his Schedule C's. 26 U. S. C. §7206(1); United States v. Warden [76-2 USTC ¶9790], 545 F. 2d 32, 37 (7th Cir. 1976).

In support of his contention, Bliss relies entirely on his own self-serving trial testimony that all of the cash generated by the checks to fictitious entities were paid to Gooden for the purchase of the contents of the slop tanks. But the jury could have properly discredited Bliss' testimony and credited Gooden's testimony that he received amounts far less than the amounts generated by the checks. And, even if part of Bliss' payments to Gooden in 1977 and 1978 were deductible as "brokerage commissions," Bliss falsely misstated those deductions as "purchases" from the fictitious entities "G-L Oil" and "Dave Covert Oil." Bliss also falsely claimed a $6,000 payment for a truck as an oil purchase expense in 1977. It has been recognized that a willful and knowing misstatement as to the source and nature of income on a return is prohibited by §7206(1), even if the correct amount of income is otherwise fully reported. United States v. DeVarco, 484 F. 2d 670, 673 (7th Cir. 1973), aff'g, 343 F. Supp. 101, 103-04 (N. D. Ill. 1973), cert. denied, 415 U. S. 916 (1974). It would appear that the same principle should apply with respect to willful and knowing misstatements as to the source of claimed deductions.

Finally, Bliss' willfulness was established by rather strong evidence showing his efforts to conceal the true nature of the numerous check transactions. See Spies v. United States [43-1 USTC ¶9243], 317 U. S. 492, 499 (1943). The checks and check stubs representing purchases from fictitious entities, and the invoices documenting those purchases, were patently false. In fact, many of the invoices were fabricated after the IRS investigation had started. Bliss' awareness of the illegal nature of his check-cashing scheme was vividly revealed by statements to Lambarth that the checks in question generated "tax free money" and that he wrote the checks "to keep our taxes down." Bliss' willfulness was also shown by his efforts to cajole Covert, Lambarth, and Callahan into admitting, falsely, that they had sold him the oil as reflected on the checks. Bliss also went to great lengths to conceal his association with the local bank where the checks written to "G-L Oil" and "Dave Covert Oil" were cashed. The evidence fully supports the conviction.

^* The Honorable Clyde S. Cahill , United States District Judge, Eastern District of Missouri.

¹ The overstated tax deductions yielded the following underpayments of tax by Bliss: 1976--$12,579.00; 1977--$16,075.00; and 1978--$11,221.00.

 

 

 

[86-1 USTC ¶9110] United States of America , Plaintiff-Appellee v. Norman C. Edwards, Jr., Robert H. Bolden, Jr., Defendants-Appellants

(CA-11), U.S. Court of Appeals, 11th Circuit, 84 5968, 12/6/85 , 777 F2d 644, (777 F2d 644.) Affirming unreported District Court decision

[Code Secs. 7201 and 7206 ]

Crimes: Attempt to evade tax: Fraud and false statements: Sufficiency of indictment.--Convictions against two individuals on drug charges and criminal tax-related charges were affirmed, because the indictment containing the charges was sufficient. The indictment, which superseded a prior indictment by adding the tax-related counts, did not improperly broaden or amend the prior indictment. An allegation of concealing or attempting to conceal income adequately charged an affirmative act of tax evasion and was not a mere legal conclusion, and the counts alleging the fraudulent filing of a return adequately notified the defendant of the charges against him. Also, claimed violations of due process and the Fifth Amendment were without merit and were rejected.

Stanley Marcus, United States Attorney, Caroline Heck, Assistant United States Attorney, Miami, Fla. 33130, Glenn L. Archer, Jr., Assistant Attorney General, Harvey E. Eisenberg, Michael L. Paup, Robert E. Lindsay, Donald W. Searles, Department of Justice, Washington, D.C. 20530, for plaintiff-appellee. D. Robert Silber, Harry Hipler, 510 Southeast 17 Street, Ft. Lauderdale, Fla. 33316, H. Dohn Williams, Jr., 2432 Hollywood Blvd., Hollywood, Fla. 33020 for Norman C. Edwards, Jr. Sky E. Smith, Smith & Gellman, 2400 S. Dixie Hwy., Miami, Fla. 33133 for Robert H. Bolden, Jr.

Before FAY and JOHNSON, Circuit Judges, and HOFFMAN, ^* District Judge.

HOFFMAN, District Judge:

A four-count indictment on March 2, 1984 , charged defendants Norman C. Edwards, Jr. and Robert H. Bolden, Jr. with conspiracy to import and to possess with intent to distribute marijuana, in violation of 18 U.S.C. §2 , and 21 U.S.C. §§841(a)(1), 846 , 952(a) , 960 , and 963 . Upon the governments's motion this indictment was immediately sealed.

On March 22, 1984 , a superseding indictment realleged the four counts of the original indictment and added numerous tax-related counts. Counts VII and VIII charged Bolden with violations of 26 U.S.C. §7201 , attempting to evade and defeat income taxes due the United States . Counts IX, X and XI charged Edwards with violations of 26 U.S.C. §7206(1) , willfully subscribing tax returns which he did not believe to be true and correct. Upon the government's motion, the superseding indictment was also sealed. Bolden and Edwards were arrested on March 22, 1984 .

The district court affirmed and adopted the recommendations of the magistrate that the defendants' various motions to dismiss be denied. On October 4, 1984 , Edwards entered into a plea agreement with the government, pleading guilty to one drug and one tax count in exchange for the government's dismissing the remaining counts at the time of sentencing. Subject to the court's permission and pursuant to Fed.R.Cr.P. 11(a)(2), the parties agreed that Edwards could appeal the courts's denial of his motion to dismiss. On October 9, 1984 , Bolden entered into a similar plea agreement, likewise preserving his right to appeal the denial of his motion to dismiss.

The district court accepted Edwards' and Bolden's conditional guilty pleas. On December 13, 1984, Bolden was sentenced to 48 months of imprisonment followed by a two-year special parole term and a fine of $15,000 on the drug charge. On the tax charge, Bolden is placed on five years probation to be served upon completion of his sentence. Additionally, Bolden must pay a fine of $10,000 and perform 400 hours of community service annually during his probation period. ¹ The court sentenced Edwards to 30 months of imprisonment on the drug charge, followed by a two-year special parole term. Upon completion of the drug sentence, Edwards is placed on probation for three years on the tax count, must pay a $5,000 fine, and must perform 400 hours of community service annually during the probation period. ²

We affirm the judgments of conviction, based upon the conditional pleas of guilty in these cases which have been consolidated for appellate purposes.

DISCUSSION

Sealed Indictment. Defendants assert that Counts I through IV found in the first indictment and realleged in the second indictment should be dismissed as time barred by 18 U.S.C. §3282. ³ When the grand jury returned the first indictment on March 2, 1984 , four days remained before the five-year deadline expired on the drug charges. ⁴ The superseding indictment, returned March 22, 1984 , was brought sixteen days after the expiration of the five-year statute of limitations as to the drug counts; the tax counts have a six-year limitation. The original indictment was clearly timely filed. In general, a statute of limitations is tolled by the timely filing of an indictment. United States v. Grady, 544 F.2d 598, 601 (2d Cir. 1976).

Furthermore, the government may properly request the sealing of an indictment for a period beyond the statute of limitations. An indictment sealed pursuant to Fed.R.Cr.P. 6(e)(4) ⁵ is timely even though the defendant is not arrested and the indictment is not made public until after the end of the statutory limitations period. United States v. Muse, 633 F.2d 1041 (2d Cir. 1980) (en banc), cert. denied, 450 U.S. 984, 101 S.Ct. 1522, 67 L.Ed.2d 820 (1981); United States v. Michael, 180 F.2d 55 (3d Cir. 1949), cert. denied, sub nom., United States v. Knight, 339 U.S. 978, 70 S.Ct. 1023, 94 L.Ed. 1383 (1950). Therefore, the government's actions in requesting the sealing of the original indictment are consistent with those contemplated under the aegis of Fed.R.Cr.P. 6(e)(4).

Defendants also assert that the government's reasons for seeking to seal the original indictment were improper. Both Edwards and Bolden maintain that an indictment may not be sealed for the government's convenience and contend that the government's actions deprived them of due process. See United States v. Watson, 599 F.2d 1149, 1155 (2d Cir. 1979), modified sub nom. United States v. Muse, 633 F.2d 1041 (2d Cir. 1980) (en banc), cert. denied, 450 U.S. 984, 101 S.Ct. 1522, 67 L.Ed.2d 820 (1981) (government may not request the sealing of an indictment for more than a reasonable time after statute of limitations has expired). Edwards argues that the government had no legitimate prosecutorial need to seal the original indictment and asserts that Counts I through IV consequently should be dismissed. In support of this argument, Edwards relies upon a narrow interpretation of Fed.R.Cr.P. 6(e)(4), that the only valid reasons for sealing an indictment are to locate and to gain custody over defendant. See, e.g., Watson, 599 F.2d at 1155; United States v. Cosolito, 488 F.Supp. 531 (D.Mass. 1980); United States v. Sherwood, 38 F.R.D. 14, 20 (D.Conn. 1964). We do not accept this limiting interpretation of the Federal Rules of Criminal Procedure.

Prosecutorial Purpose. A recent decision of the Second Circuit addresses precisely the issue raised in this appeal: what reasons justify the sealing of an indictment. In United States v. Southland [85-1 USTC ¶9368 ], 760 F.2d 1366 (2d Cir. 1985), Judge Friendly provides an analytical and historical perspective to Fed.R.Cr.P. 6(e)(4). Southland cites an opinion by Judge Maris written only three years after the Criminal Rules were adopted:

Criminal Procedure Rule 6(e) authorizes indictments to be kept secret during the time required to take the defendant into custody. If such secrecy may lawfully be imposed in that situation we see nothing unlawful in the court imposing secrecy in other circumstances which in the exercise of a sound discretion it finds call for such action.

United States v. Michael, 180 F.2d 55, 57 (3d Cir.1949), cert. denied sub nom. United States v. Knight, 339 U.S. 978, 70 S.Ct. 1023, 94 L.Ed. 1383 (1950). Judge Friendly concludes that the Michael court would scarcely have made the statement if the taking of custody had been the sole objective of Fed.R.Cr.P. 6(e)(4). Southland, 670 F.2d at 1379.

Southland continues its historical analysis by delving into the practice of the courts at the time the Rule was written and concludes that courts then ordered an indictment to be sealed, "[W]here the public interest requires it, or for other sufficient reason," ⁶ or "for sound reasons of policy." ⁷ Southland, 760 F.2d at 1379, 1380. Judge Friendly also explains that the Federal Rules of Criminal Procedure were not meant to be exhaustive. Therefore, that the Rule omits an enumeration of the reasons for which an indictment may be sealed is not to be read as a restriction on those reasons. In sum, reasons other than taking defendants into custody validly support the sealing of an indictment.

Magistrate's Decision. In the present case, we must decide whether the prosecutorial needs and objectives justified the sealing of the indictment. Again, the words of Judge Friendly are instructive:

This is a point on which great deference should be accorded to the discretion of the magistrate, at least in the absence of any evidence of substantial prejudice to the defendant. The Government should be able, except in the most extraordinary cases, to rely on that decision rather than risk dismissal of an indictment, the sealing of which it might have been willing to forego, because an appellate court sees things differently, after the expenditure of vast resources at a trial and at a time when reindictment is by hypothesis impossible.

Southland, 760 F.2d at 1380. Defendants argue at length that the colloquy which transpired between the magistrate and the government counsel regarding the need to seal the indictment is reflective of an improper purpose, i.e., a purpose other than the need to take the defendant into custody. In fact, the record shows that the magistrate does suggest that an appropriate procedure would have been to have arrested the defendants on the original indictment and later to have superseded that indictment with a second which added the tax counts. The tax counts are subject to a six-year statute of limitations and, unlike the drug counts, were not threatened by a time bar, on March 2, 1984 .