Wednesday, February 6, 2013

Jury Instructions in Tax Obstruction and Klein Conspiracy Case (2/6/13)

In  the Tax Fraud and Money Laundering class that Larry Campagna and I teach at UH Law School, in Monday's class, we covered tax obstruction, Section 7212(a), here.  Next week we will cover the defraud conspiracy in 18 USC Section 371, here, commonly called a Klein conspiracy in a tax setting.  Both of these crimes are described by the statutes and their interpretations as crimes where the conduct does or is intended to impair or impede the lawful function of the IRS.  Hence, the tax obstruction crime has been called a one person Klein conspiracy.  But, as articulated in the text of Section 371, the conspiracy is not an offense conspiracy to commit tax obstruction under Section 7212(a) (meaning that it is not an offense conspiracy), but is rather a conspiracy having as its object tax obstruction rather than a statutory offense.  (I won't dig any further into that now, since it gets into more esoterica than I need to for the scope of this blog.)

I have just become aware of a recent acquittal where defendants were charged with both of these crimes.  I am not sure why both overlapping crimes were charged.  I suppose, perhaps, it was to protect against the possibility that the jury would find tax obstruction generally, but would not find a conspiracy to obstruct.  Setting that aside, I thought it might help students to see the instructions in the case.  So, I provide the entire instructions here.  I include the entire instructions because students should see a complete set to understand the specific instructions I focus on here -- the Klein conspiracy instruction and the tax obstruction instruction.  So, I do encourage students to read the entire instructions just to get a feel what a complete set does.

I quote immediately below  the instructions related to the two counts of the indictment (pp. 19-25 of the instructions; I have added bold face to draw your particular attention to parts of the instruction I discuss below after presenting the instructions; I also insert in brackets the paragraph number of the corresponding comment, e.g., [1], etc.):
Count One - Conspiracy to Defraud the United States 
Count One of the indictment charges that the Defendants conspired to defraud the United States and the Internal Revenue Service, for the purpose of impeding, impairing, obstructing, and defeating the lawful functions of the Internal Revenue Service in the ascertainment, assessment and collection of federal income taxes, in violation of Title 18 of the United States Code, Section 371. 
A conspiracy is a kind of criminal partnership. For you to find either of the Defendants guilty of the conspiracy charge, the government must prove each and every one of the following elements as to each Defendant beyond a reasonable doubt: 
(1) First, that two or more persons conspired, or agreed, to defraud the United States and the Internal Revenue Service by dishonest means. 
(2) Second, the government must prove that the Defendant knowingly and voluntarily joined the conspiracy. 
(3) Third, the government must prove that a member of the conspiracy did one of the overt acts described in the indictment for the purpose of advancing or helping the conspiracy. 
You must be convinced that the government has proved all of these elements beyond a reasonable doubt as to either of the Defendants, in order to find either of them guilty of the conspiracy charge.  
This crime does not require proof that a defendant intended to directly commit the fraud himself. Proof that the defendant intended to use a third party as a go-between may be sufficient. But the government must prove that the United States or one of its agencies or departments was the ultimate target of the conspiracy, and that the defendant intended to defraud the United States.  
Not all agreements to engage in conduct that impedes the lawful functions of the IRS are illegal. To be unlawful, an agreement must entail fraud, deceit, or other dishonest means. It is not illegal simply to make the IRS’s job harder. Only an agreement to engage in conduct that tends to impede the IRS and that also involves fraudulent, deceitful, or dishonest means, constitutes an illegal agreement to defraud the United States. [1] 
With regard to the first element – a criminal agreement – the government must prove that two or more persons conspired, or agreed, to cooperate with each other to defraud the government. The word “defraud” is not limited to its ordinary meaning of cheating the government out of money or property. “Defraud” also means impairing, obstructing, or defeating the lawful function of a government agency by dishonest means. This does not require proof of any formal agreement, written or spoken. Nor does this require proof that everyone involved agreed on all the details. But proof that people simply met together from time to time and talked about common interests, or engaged in similar conduct, is not enough to establish a criminal agreement. These are things that you may consider in deciding whether the government has proved an agreement. But without more they are not enough.  
What the government must prove is that there was a mutual understanding, either spoken or unspoken, between two or more people, to cooperate with each other to defraud the government for the purpose of impeding, impairing, obstructing, and defeating the lawful functions of the Internal Revenue Service. This is essential.  
An agreement can be proved indirectly, by facts and circumstances which lead to a conclusion that an agreement existed. But it is up to the government to convince you that such facts and circumstances existed in this particular case.  
If you are convinced that there was a criminal agreement, then you must decide the second element, whether the government has proved that either of the Defendants knowingly and voluntarily joined that agreement. You must consider each of the Defendants separately in this regard. To convict any defendant, the government must prove that he knew the conspiracy's main purpose, and that he voluntarily joined it with the intent to help advance or achieve its goals. 
This does not require proof that a defendant knew everything about the conspiracy, or everyone else involved, or that he was a member of it from the very beginning. Nor does it require proof that a defendant played a major role in the conspiracy, or that his connection to it was substantial. A slight role or connection may be enough. 
But proof that a defendant simply knew about a conspiracy, or was present at times, or associated with members of the group, is not enough, even if he approved of what was happening or did not object to it. Similarly, just because a defendant may have done something that happened to help a conspiracy does not necessarily make him a conspirator. These are all things that you may consider in deciding whether the government has proved that a defendant joined a conspiracy. But without more they are not enough. 
A defendant's knowledge can be proved indirectly by facts and circumstances which lead to a conclusion that he knew the conspiracy's main purpose. But it is up to the government to convince you that such facts and circumstances existed in this particular case.

The third element that the government must prove is that a member of the conspiracy did one of the overt acts that are described in the indictment for the purpose of advancing or helping the conspiracy. Again, I remind you that the indictment is not evidence, and the fact that either of these Defendants has had an indictment filed against him is no evidence whatsoever of his guilt.
The government does not have to prove that all of the overt acts alleged were committed, or that any of these acts were themselves illegal. And there may be overt acts alleged about which there has been no testimony. But the government must prove that at least one of these acts was committed by a member of the conspiracy, and that it was committed for the purpose of advancing or helping the conspiracy. This is essential. 
One more thing about overt acts. There is a limit on how much time the government has to obtain an indictment. This is called the statute of limitations. For you to return a guilty verdict on the conspiracy charge, the government must convince you beyond a reasonable doubt that at least one overt act was committed for the purpose of advancing or helping the conspiracy on or after October 23, 2003.  
Some of the people who may have been involved in these events are not on trial. This does not matter. There is no requirement that all members of a conspiracy be charged and prosecuted, or tried together in one proceeding.

Count Two - Corrupt Endeavor to Obstruct and Impede 
The Internal Revenue Laws Count Two of the indictment alleges that from on or about November 4, 2003 and continuing to on or about July 23, 2004, in the Southern District of Ohio and elsewhere, the Defendants corruptly endeavored to obstruct and impede the due administration of the Internal Revenue Laws of the United States, in violation of Title 26, United States Code, Section 7212(a). The indictment specifically alleges that on or about November 6, 2003, on or about March 23, 2004, and on or about July 23, 2004,during IRS audits of three different corporations’ income tax liabilities, the Defendants made and caused to be made, certain false and misleading statements to the IRS about the SLOTS transactions entered into by those corporations. [2]  
In order to establish that either of the Defendants violated 26 U.S.C. Section 7212(a), the government must prove each of the following essential elements of the offense beyond a reasonable doubt as to each Defendant:  
1) The Defendant corruptly 
2) endeavored 
3) to obstruct or impede the due administration of the Internal Revenue laws. 
"Corruptly" refers to the mental state with which actions are performed. To act “corruptly” means to act knowingly and dishonestly, with the specific intent to secure an unlawful benefit either for oneself or for another. Acting “corruptly” requires consciousness of wrongdoing. 
To “endeavor” means to knowingly and intentionally act, or to knowingly and intentionally make any effort, which has a reasonable tendency to bring about the desired result. 
To “obstruct or impede” means to knowingly engage in some act or to take some step, in a conscious attempt to hinder, delay, or prevent the proper administration of the Internal Revenue laws. 
It is not necessary for the government to prove that the corrupt endeavor to obstruct or impede was successful or achieved the desired result.  
If either of the Defendants believed in good faith that he was acting within the law or that his actions complied with the law, he cannot be said to have acted corruptly with the purpose to obtain an unlawful benefit for himself or someone else. This is so even if the Defendant’s belief was not objectively reasonable. However, you may consider the reasonableness of the defendant’s belief together with all the other evidence to determine whether the defendant held the belief in good faith. ]3]
* * * 

The Defense 
The Defendants have denied that they committed the offenses charged by the Indictment, and each of the Defendants claims that he acted in good faith. Good faith is a complete defense to each of the charges in the indictment because good faith on the part of a defendant is inconsistent with a finding that he knowingly and intentionally conspired to defraud the United States or the Internal Revenue Service, or that he corruptly impeded the enforcement of the Internal Revenue Laws. While the term “good faith” has no precise definition, it means, among other things, an honest belief, a lack of malice, and the intent to perform all lawful obligations. A person who acts or speaks based on an opinion or belief which is honestly held is not punishable under these federal statutes merely because the action or statement turns out to be inaccurate, incorrect, or wrong. If the Defendant believed in good faith that he was acting properly, and even if the government was, in fact, impeded by his conduct, there would be no crime. 
In determining whether or not the Government has proven that a Defendant willfully committed the crimes charged, or whether a Defendant acted in good faith, the jury must consider all the evidence received in the case bearing on the Defendant’s state of mind.  
The burden of proving good faith does not rest with either of the Defendants because a defendant has no obligation to prove anything to you. The government has the burden of proving to you beyond a reasonable doubt that the Defendants acted knowingly and intentionally to commit the offenses charged.  [4]
JAT Comments:
  1. This is the instruction consistent with the Caldwell case presented in the text beginning on p. 107.  The language is based on the Supreme Court's Hammerschmidt decision and thus is binding on the courts. Hammerschmidt retreated from an earlier holding that did not include the requirement that the conduct involve "fraudulent, deceitful, or dishonest means."  And, of course, this is the language addressed in Caldwell.
  2. The tax obstruction count states that the defendants gave false and misleading statements in an audit. I want you to think about a point Larry and I have made several times -- the same conduct can be subject to a number of tax crimes which are within the prosecutor's discretion to charge.  You will recall that Beacon Brass held that lying in an audit can be charged as tax evasion with respect to the underlying taxes.  But, these were not the taxpayer's taxes.  Persons other than taxpayers can be charged with evasion of the taxpayer's taxes.  For example, in the three big tax shelter prosecutions in SDNY, the defendants were charged and convicted for evasion of others' taxes.  Moreover, lying or misleading in an audit can be subject to false statement prosecution under 18 USC 1001, here, assuming that the false statements were part of the conduct as they appear to have been.  Further, if false documents were presented, Section 7206(2) could be implicated.  In this case, the Government chose to prosecute for tax obstruction and Klein conspiracy.
  3. I think the key instruction is the good faith instruction.  Students will recall that we discussed the importance of the good faith instruction (sometimes referred to as the Cheek instruction) as it relates to the willful element of most tax crimes.  Students will recall that, technically, the willful instruction requiring the Government to prove beyond a reasonable doubt that the defendant acted willfully (intentional violation of a known legal duty) necessarily subsumes that, if the defendant had a good faith belief that he or she acted legally, the Government will not have met its burden of proof and the jury must acquit.  (Sort of a variation of the Johnny Cochran remark about the glove in the OJ Simpson trial, "if it don't fit, you must acquit.")  But, this good faith instruction has historically developed as a nuance on the statutory element requiring that the defendant act willfully.  Neither tax obstruction under Section 7212(a) nor the Klein conspiracy under 18 USC Section 371 have a statutory textual requirement that the defendant act "willfully."  The Government has sometimes imagined the absence of a textual "willfulness" requirement meant that tax obstruction and the Klein conspiracy may involve some lesser level of mens rea.  I have argued otherwise in an article cited in the Supplement, that the statutory elements of corruptly and defraud parallel whatever is required by willfully.  The Court in the Kelly case suggested  as much ("The district court’s definition of the proof required for the section 7212(a) violation was as comprehensive and accurate as if the word “willfully” was incorporated in the statute.").  So, I think this is an important instruction and, in the context, appears to be helpful for a jury.  For those with an interest in more on this issue, see John A. Townsend, Tax Obstruction Crimes: Is Making the IRS's Job Harder Enough, 9 Hous. Bus. & Tax. L.J. 255, 277-314 (2009), here.
  4. The judge instructed the jury that the defendants did not have to prove good faith and that, because the defense went to an element of the crime (willfulness which cannot exist if good faith is present) , the Government had to disprove good faith beyond a reasonable doubt.  See Smith v. United States, ___ U.S. ___, 2013 U.S. LEXIS 601 (2013), here (involving withdrawal from a conspiracy which is not an element of the crime).
I invite readers to make their own comments below.

Addendum on 2/8/13:

I added an addendum as indicated, but I have elevated that discussion to a separate blog entry, Good Faith as a Defense to Tax Crimes (2/9/13), here.

Addendum on 2/12/13:


Here are some excerpts from a new article:  Shamik Trivedi, Practitioners Parse Promoters' Wins in Sale-Leaseback Tenant Improvements Transaction, 2013 TNT 29-2:
Thomas E. Zehnle of Miller & Chevalier represented Flask at trial. Sale-leasebacks are common in the business world, Zehnle said, citing the airline industry as one that often engages in the transaction for aircraft. The SLOTS transaction was not so different, he said. 
* * * * 
Neither the Klein conspiracy nor the tax obstruction charge under section 7212(a) are "substantive crimes," because a finding of willfulness is technically not necessary, Zehnle said. "If you have a good-faith belief that you're doing something and you're not violating the law, which I think happens a lot in these shelter cases . . . then you cannot be found guilty of a substantive tax offense," he said. 
But, of course, the Judge gave a good faith instruction anyway.

Referring to a post-verdict order dismissing the one Section 7212(a) count that the jury had not spoken, the article says:
The most telling part of [Judge] Beckwith's acquittal order was in essence that "the IRS didn't ask and didn't care" about the residual sale, the [anonymous] practitioner said. "So now you're going to prosecute someone for not volunteering it?" asked the practitioner. On that point, a corollary exists between a New York district court's holding in Coplan and the current case, the practitioner said. 
* * * *  
"If you know the IRS wants to know something, are you supposed to tell them what you think they want to know, even if they don't ask you?" the practitioner said. "I think it's a view the government has. I don't think it's correct, but it's a view it has. I think maybe this will curtail pursuing that view in criminal cases."

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