Constitutionality
Page1
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
.