Thursday, January 21, 2016

Should Proof of No Tax Evaded Be Admissible as Defense …

Originally published by Jack Townsend.

Tax evasion, § 7201, here, requires proof of a tax evaded as an element of the crime.  Other prominent tax crimes do not require proof of tax evaded as an element of the crime. E.g., tax perjury, § 7206(1), here, and tax obstruction, § 7212(a), here.  But, a tax evaded is at the heart of most tax crimes, even when not an element of the crime, because of the Sentencing Guidelines which key the principal punishments — incarceration and fines — to the tax evaded.  See e.g., John A. Townsend, Tax Evaded in the Federal Tax Crimes Sentencing Process and Beyond, 59 Vill. L. Rev. 599 (2014), here.

The question sometimes presented is whether the presence or absence of tax evaded is an issue that can be presented to the jury in a trial for a crime not requiring a tax evaded as an element of the crime.  Obviously, from the Government’s perspective informing the jury that taxes were evaded is important to supply the motive for the conduct that requires willfulness as an element or, as with tax obstruction, corrupt action as an element.  I suspect that most courts would routinely admit the Government’s evidence of tax evaded.  But the defendant might try to admit evidence that no taxes were evaded in the case in chief in order to make conviction less palatable to the jury and as mitigating or disproving other elements of the crime — e.g., the ubiquitous willfulness requirement for tax crimes and corruptly element of § 7212(a)?

In United States v. Giambalvo, ___ F.3d ___, 2016 U.S. App. LEXIS 478 (8th Cir. 2016), here, the defendant was convicted of one count of tax obstruction, § 7212(a), and eight counts of tax perjury, § 7206(1).  As previously noted, tax evaded is not an element of either crime.  In the case in chief, the defendant called as an expert an H&R Block accountant to testify that, based on her review, the defendant owed no tax.  (That evidence would clearly be appropriate at the sentencing phase where tax loss is the primary driver for the Sentencing Guidelines calculations.)  The district court excluded the proffered testimony.  On appeal, defendant raised the issue.  The Court of Appeals resolved the issue as follows:

Prior to trial, Giambalvo notified the government of his intent to call H&R Block accountant Claudia Bradshaw as an expert witness. Bradshaw would testify that, based on her preparation of Giambalvo’s tax returns dated May 31, 2014, for the tax years at issue in the case, Giambalvo did not owe any taxes on January 26, 2011. According to Bradshaw’s proposed testimony, Giambalvo would have been due a substantial tax refund had he filed proper and timely federal income tax returns. The government moved in limine to exclude evidence of Giambalvo’s tax returns and tax-loss data prepared and filed post indictment.

The district court granted the government’s motion in limine during a pretrial motion hearing, concluding that “the suddenly filed tax returns under the established law clearly doesn’t come in” because these tax returns were filed “[m]ore than ten years later, more than three and a half years after the indictment [was] issued.” As a result, the court found the probative value of such returns “minimal,” but the prejudice to be “great.” According to the court, under § 7206(1), “the amount of tax loss isn’t probative” to whether Giambalvo’s misstatements could have hindered the IRS in carrying out its “functions as to verification or the accuracy of the return or unrelated tax return.” The court concluded that the parties would not “get into tax loss” because “[a]ll we are looking at is whether [Giambalvo] made misstatements on his tax returns at the time he made the returns, because it is a perjury related statute. It is irrelevant whether or not there was a tax deficiency.” 

The court later reiterated that “[w]e are not getting into tax loss, or subsequently filed tax returns,” even though the court did suggest that it “would keep the door slightly ajar for conversation.” Giambalvo’s counsel then asked whether the court’s ruling was that the evidence was “also not relevant for corruptly” under 26 U.S.C. § 7212(a). The court responded, “As to the entry of the zero, yes, I’m keeping it out. I’m overruling all of the arguments that you made.”

During trial, Giambalvo counsel’s asked the court to reconsider this ruling after Officer Laramie testified that his job description included collecting taxes, arguing that the government had opened the door to Bradshaw’s testimony by “cross-examining [Officer Laramie] on the fact that Mr. Giambalvo, objectively speaking, did not actually owe the taxes the revenue officer was seeking to collect is proper both impeachment and substantive evidence that was injected into this trial by the prosecution.” He also argued that the government opened the door to introduction of the lack of a tax deficiency through Officer Laramie’s testimony “that Mr. Giambalvo called and asked about paying taxes,” which “suggest[ed] that Mr. Giambalvo actually owed taxes.” The court rejected this argument, explaining that “this case is about—in its most simple, stay-focused terms—whether or not the number [that Giambalvo] wrote on that tax return at zero was correct or if [his] defense that he honestly believed it to be correct, and that’s it.” The court noted that Officer Laramie never discussed collections even though that is included in his job description. According to the court, Officer Laramie “simply went through what was on the documents that [Giambalvo] submitted” without “express[ing] his thoughts about those numbers or his interpretation of those numbers.” The court characterized Officer Laramie’s testimony as “lay[ing] the foundation for the records coming into evidence” without expressing any “efforts to collect anything.” The court advised Giambalvo’s counsel that he could “cross-examine [Officer Laramie] on what he received but not . . . to his efforts to collect taxes” because “[h]e never talked about that.”

On appeal, Giambalvo argues that the district court’s exclusion of evidence that he did not actually owe any income taxes for the tax years at issue violated his right to due process by prohibiting him from establishing a complete defense. Giambalvo intended to prove his lack of tax liability through tax returns prepared and filed after he was indicted for impeding administration of the tax laws and filing false returns.

The Constitution affords “criminal defendants a meaningful opportunity to present a complete defense.” United States v. Petters, 663 F.3d 375, 381 (8th Cir. 2011) (quotations and citations omitted). But a criminal defendant’s “right to present relevant testimony is not without limitation. The right may, in appropriate cases, bow to accommodate other legitimate interests in the criminal trial process.” Id. (quotation and citations omitted). “For instance, ‘[t]he accused does not have an unfettered right to offer testimony that is incompetent, privileged, or otherwise inadmissible under standard rules of evidence.'” Id. (alteration in original) (quoting Taylor v. Illinois, 484 U.S. 400, 410 (1988)). As a result, “the ‘Constitution leaves to the judges who must make these decisions wide latitude to exclude evidence that is repetitive . . . , only marginally relevant or poses an undue risk of harassment, prejudice, [or] confusion of the issues.'” Id. (alterations in original) (quoting Crane v. Kentucky, 476 U.S. 683, 689-90 (1986)).

As discussed supra, Count 1 charged Giambalvo with obstructing or impeding the administration of the internal revenue laws, in violation of 26 U.S.C. § 7212(a). Counts 2-9 charged Giambalvo with making and subscribing a false income tax return, in violation of 26 U.S.C. § 7206(1), which provides that an individual will be guilty of a felony if he or she “[w]illfully makes and subscribes any return, statement, or other document, which contains or is verified by a written declaration that it is made under the penalties of perjury, and which he does not believe to be true and correct as to every material matter.”

Neither §§ 7212(a) nor 7206(1) require proof of a tax deficiency. See, e.g., United States v. Floyd, 740 F.3d 22, 32 (1st Cir. 2014) (“A conviction for violation of section 7212(a) does not require proof of . . . a tax deficiency . . . .” (citation omitted)); United States v. Young, 804 F.2d 116, 119 (8th Cir. 1996) (“In a section 7206(1) prosecution, however, the government need not establish an actual tax deficiency.” (citation omitted)).

Because the government need not establish an actual tax deficiency to prove a violation of §§ 7212(a) or 7206(1), the question arises whether a defendant may put on evidence that he did not owe any taxes as a defense to such charges. Like our sister circuits, we conclude that the answer is no. This is because “the amount of taxes owed is irrelevant to a prosecution for tax fraud.” United States v. Minneman, 143 F.3d 274, 279 (7th Cir. 1998) (emphasis added) (citing United States v. Marashi, 913 F.2d 724, 736 (9th Cir. 1990) (“Section 7206(1) is a perjury statute; it is irrelevant whether there was an actual tax deficiency.” (citation omitted)).

Here, the district court excluded Bradshaw’s expert testimony that Giambalvo did not owe any taxes and was due a substantial refund on the date that he mailed 11 “zero” income tax returns to the IRS. The court held that evidence of subsequently prepared and filed tax returns is inadmissible in a criminal tax prosecution unrelated to tax deficiency collection. The district court found that the probative value of such evidence is much less than the associated unfair prejudice.

The district court’s ruling is in accord with our precedent. “We have previously said that ‘there is no doubt that self-serving exculpatory acts performed substantially after a defendant’s wrongdoing is discovered are of minimal probative value as to his state of mind at the time of the alleged crime.'” United States v. Ellesfen, 655 F.3d 769, 778 (8th Cir. 2011) (quoting United States v. Radtke, 415 F.3d 826, 840-41 (8th Cir. 2005) (holding that the district court did not abuse its discretion in excluding evidence that the defendant filed an amended tax return after he had been indicted for willfully subscribing to a known false tax return)).

Giambalvo additionally argues that evidence of the non-existence of tax loss should have been admitted to enable him to contest the element of materiality in the § 7206(1) counts. (Citing United States v. Clifton, 127 F.3d 969, 971 (10th Cir. 1997) (“For instance, if a taxpayer’s allowable deductions exceed taxable income in a taxable year, no income tax will be due for that year. Therefore, taxpayer’s failure to report all taxable income will not affect the computation of tax, which in turn might very well affect the jury’s deliberations on the element of materiality. For these reasons, we hold that materiality in a § 7206(1) prosecution is an element of the crime which the district court must submit to the jury, unless of course defendant waives the right.”); United States v. Uchimura, 125 F.3d 1282, 1285 n.5 (9th Cir. 1997) (“That no additional tax is owed of course has a bearing on materiality, but the question is ultimately one for the jury to decide.”).) According to Giambalvo, Clifton and Uchimura are “the only legal authority on point.”

We disagree. Subsequent to Clifton and Uchimura, the Supreme Court explained that

[t]o obtain a conviction on the [§ 7206(1)] tax offense at issue, the Government must prove that the defendant filed a tax return “which he does not believe to be true and correct as to every material matter.” 26 U.S.C. § 7206(1). In general, a false statement is material if it has “a natural tendency to influence, or [is] capable of influencing, the decision of the decisionmaking body to which it was addressed.” United States v. Gaudin, 515 U.S., at 509, 115 S. Ct. 2310 (quoting Kungys v. United States, 485 U.S. 759, 770, 108 S. Ct. 1537, 99 L. Ed. 2d 839 (1988) (internal quotation marks omitted)).
Neder v. United States, 527 U.S. 1, 16 (1999) (third alteration in original) (emphasis added).

We have recognized that “the government need not establish an actual tax deficiency to demonstrate that [a defendant’s] false statements in [his tax] returns were material.” United States v. Peiker, 2 F. App’x 685, 687 (8th Cir. 2001) (per curiam) (citing Young, 804 F.2d at 119). Similarly, the Seventh Circuit has held “that proof of a tax deficiency was not essential to prove materiality.” United States v. Bouzanis, 2003 WL 920717, at *2 (N.D. Ill. Mar. 7, 2003) (citing United States v. Peters, 153 F.3d 445, at 461-62 (7th Cir. 1998)).

Giambalvo also argues that evidence of the lack of a tax deficiency was relevant to showing that he did not act “corruptly” under § 7212(a). 26 U.S.C. § 7212(a) (“Whoever corruptly . . . endeavors to intimate or impede any officer or employee of the United States acting in an official capacity under this title, or in any other way corruptly . . . obstructs or impedes, or endeavors to obstruct or impede, the due administration of this title . . . .”). We have previously indicated our inclination to reject the argument “that the term corruptly is limited to situations in which the defendant wrongfully sought or gained a financial advantage.” United States v. Yagow, 953 F.2d 423, 427 (8th Cir. 1992) (citing United States v. Reeves, 782 F.2d 1323, 1325 (5th Cir. 1986)).

More recently, the Fifth Circuit has held that, § 7212(a) does not require that the defendant obtain benefits or advantages “under the tax laws.” United States v. Saldana, 427 F.3d 298, 305 (5th Cir. 2005). The Fifth Circuit observed that “the language of the statute itself does not require that an individual intend to procure a benefit for himself under the tax laws to have formed the requisite mens rea.” Id. Similarly, “the Sixth Circuit [has] affirmed a defendant’s conviction for violation of § 7212(a) when the defendant had filed false 1099 and 1096 forms for the sole purpose of intimidating and harassing his creditors.” Id. (citing United States v. Bowman, 173 F.3d 595, 596-97 (6th Cir. 1999)). The Sixth Circuit “held that the defendant’s conduct fell within the [27]  ambit of § 7212(a)’s proscribed conduct even though he sought no financial advantage or benefit for himself under the tax laws.” Id. (citing Bowman, 173 F.3d at 600).

In line with the Fifth Circuit’s and Sixth Circuit’s more recent conclusions, we now hold—as we were inclined to do in Yagow—that “corruptly” is not limited to situations where the defendant wrongfully sought or gained a financial advantage under the tax laws. If the government was not required to prove that the benefit that Giambalvo sought by his “corrupt” actions to obstruct or impede the IRS was financial in nature, then evidence of the non-existence of a tax loss was not relevant to refute the “corruptly” element of § 7212(a).

Additionally, Giambalvo argues that evidence of the lack of a tax deficiency was relevant to showing that he did not act “willfully” under § 7206(1). See 26 U.S.C. § 7206(1) (“Any person who . . . [w]illfully makes and subscribes any return, statement, or other document . . . .”). According to Giambalvo, he is permitted to present circumstantial evidence tending to show his good faith as a defense. Giambalvo asserts that, for approximately eight years, he “subscribed to a belief that was so against his financial interest that it literally cost him more than $30,000—i.e. [28] , had he filed proper tax returns, he would have been entitled to receive more than $30,000 back in tax refunds.” He maintains that such evidence was admissible evidence of his good-faith belief because his actions were against his financial interest.

Giambalvo does not have “‘an unfettered right to offer testimony that is . . . otherwise inadmissible under the standard rules of evidence.'” Petters, 663 F.3d at 381 (quoting Taylor, 484 U.S. at 410). As explained supra, because the issue of tax deficiency is not an element that the government must prove—or attempted to prove—then the existence of such deficiency is irrelevant in such prosecutions. While the district could have admitted Giambalvo’s evidence of no tax deficiency, it was not an abuse of discretion to exclude it.

Finally, Giambalvo argues that the government opened the door to the admission of tax-loss evidence by IRS Revenue Officer Laramie’s testimony that his “[p]rimary duties are to collect taxes and returns.” Officer Laramie testified, “[W]e try to determine if returns are due, if there are balances that may be owed on previously filed returns. We then try to collect on those or determine if the person has the ability to pay, you know.” The trial record reveals that Officer Laramie did not describe his efforts to collect taxes from Giambalvo; instead, he was only giving his general job description. Therefore, we hold that the district court did not err in rejecting Giambalvo’s argument that the government opened the door to admission of tax-loss evidence through Officer Laramie’s testimony.

JAT Comment:  I am unconvinced that the judge properly excluded the evidence.  Still, I suppose, that in the discretion to manage the boundaries of a case, so long as the defendant is given a fair trial, these type of evidentiary rulings, even if technically incorrect, may not require reversal.  But, when they go to the heart of a defense in tax crimes — usually the defense of nonwillfulness or, for tax obstruction, noncorruptness — I think the defendant’s right to a broad defense is appropriate.

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