12.00 FRAUD AND FALSE STATEMENT
12.00 FRAUD AND FALSE
STATEMENT
§7206.
Fraud and false
statements
Any
person who --
(1)
Declaration under penalties of
perjury. --
Willfully 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;
. .
.
shall
be guilty of a felony and, upon conviction thereof, shall be fined . . . or
imprisoned not more than 3 years, or both, together with the costs of
prosecution.1
1. Under
18 U.S.C. § 3571, the maximum fine under Section 7206(1) is at least $250,000
for individuals and $500,000 for corporations. Alternatively, if any person
derives pecuniary gain from the offense, or if the offense results in a
pecuniary loss to a person other than the defendant, the defendant may be fined
not more than the greater of twice the gross gain or twice the gross
loss.
The Tax
Division prefers for tax cases to be brought under Title 26, and § 7206(1) is
often a viable charge for defendants who commit tax fraud and file tax returns
in their own names. Prosecutors should consider bringing charges under other
statutes, such as 26 U.S.C. § 7201 (tax evasion), 18 U.S.C. § 371 (conspiracy),
18 U.S.C. § 1001 (false statements), and 26 U.S.C. § 7212(a) (obstruction of
IRS), however, if technical defenses are likely to be raised to § 7206(1).
Section
7206(1) makes it a felony to willfully make and subscribe a false document, if
the document was signed under penalties of perjury. “[T]he primary purpose of
section 7206(1) ‘is to impose the penalties of perjury upon those who willfully
falsify their returns regardless of the tax consequences of the falsehood.’”
United States v. Romanow, 509 F.2d
26, 28 (1st Cir. 1975) (quoting Gaunt v.
United States, 184 F.2d 284, 288 (1st Cir. 1950)). Section 7206(1) is
referred to as the “tax perjury statute,” because it makes the falsehood itself
a crime. Historically, because Section 7206(1) does not require proof of a tax
deficiency, it permits prosecution in cases in which there is no tax deficiency,
a minimal tax deficiency, or a tax deficiency that would be difficult to prove.
However, the government’s burden of proving materiality to the jury may now make
it more difficult to obtain convictions in cases with no demonstrable tax loss.
See § 12.10[5],
infra.
An important preliminary
charging decision is whether or not to specify the amount of the unreported
income or false items in the indictment.2 The considerations are the same as those set forth in
Section 8.07 of
this Manual.
2. See infra, for sample indictment forms charging
Section 7206(1) violations, including a sample “open ended” indictment.
The elements of a Section
7206(1) offense are as follows:
1.The
defendant made and subscribed a return, statement, or other document which was
false as to a material matter;
2.The
return, statement, or other document contained a written declaration that it was
made under the penalties of perjury;
3.The
defendant did not believe the return, statement, or other document to be true
and correct as to every material matter; and
4.The
defendant falsely subscribed to the return, statement, or other document
willfully, with the specific intent to violate the law.
United States v. Bishop, 412 U.S. 346,
350 (1973); United States v.
Griffin, 524 F.3d 71, 75-76 (1st Cir. 2008); United States v. Marston, 517 F.3d 996,
999 n.3 (8th Cir. 2008); United States v.
Clayton, 506 F.3d 405, 410, 413 (5th Cir. 2007) (per curiam),
cert. denied, 128 S. Ct. 1874 (2008); United States v. Pirro, 212 F.3d 86, 89 (2d
Cir. 2000); United States v.
Scholl, 166 F.3d 964, 979-80 (9th Cir. 1999); United States v. Peters, 153 F.3d 445,
461 (7th Cir. 1998); United States v.
Gollapudi, 130 F.3d 66, 71-72 (3d Cir. 1997); United States v. Monus, 128 F.3d 376,
386-87 (6th Cir. 1997); United States v.
Aramony, 88 F.3d 1369, 1382 (4th Cir. 1996); United States v. Owen, 15 F.3d 1528, 1532
(10th Cir. 1994); United States v.
Kaiser, 893 F.2d 1300, 1305 (11th Cir. 1990).
Section 7206(1) expressly
applies to “any return, statement, or other document” signed under penalties of
perjury. It is not limited to tax returns. United States v. Marston, 517 F.3d 996,
1002 (8th Cir. 2008).
In some cases, a defendant files
what is referred to as a “zero” or “0" return, in which zeros are inserted on
all the lines, or files blank Forms 1040 with no information from which a tax
can be computed. In criminal cases involving such returns, there is precedent
that Forms 1040 that report zeros and/or constitutional objections and returns
with lines through all the boxes are not valid returns. See United States v. Mosel, 738 F.2d 157, 158
(6th Cir. 1984) (per curiam); United
States v. Smith, 618 F.2d 280, 281 (5th Cir. 1980) (per
curiam); United States v.
Edelson, 604 F.2d 232, 234 (3d Cir. 1979) (per curiam);
United States v. Brown, 600 F.2d
248, 251 (10th Cir. 1979); United States v.
Grabinski, 558 F. Supp. 1324, 1329-31 (D. Minn. 1983) (collecting
cases), aff’d 727 F.2d 681 (8th Cir. 1984).
Similarly, a blank return with no information from which a tax can be computed
has been held not to constitute a valid return. United States v. Crowhurst, 629 F.2d 1297,
1300 (9th Cir. 1980) (citing United
States v. Porth, 426 F.2d 519, 523 (10th Cir.
1970)).
This has
also been true in the civil tax realm. In Beard v. Comm’r, the Tax Court held that
for a document to be considered a return, the document must
(1)
purport to be a return;
(2)
be executed under penalties of perjury;
(3)
contain sufficient data to allow calculation of tax; and
(4)
represent an honest and reasonable attempt to satisfy the requirements of the
tax law.
82
T.C. 766, 777-79 (T.C. 1984), aff’d, 793 F.2d 139 (6th Cir. 1986);
accord Turner v. Comm’r, TC
Memo. 2004-251 (T.C. 2004) (the taxpayer’s return “contained zero entries for
every line regarding his 1999 income” and “attached to his Form 1040 documents
containing tax-protester rhetoric”). In circuits in which the document filed by
a taxpayer does not constitute a return, care should be taken to charge the
false filing as a “document” rather than a “return.”
The
United States Court of Appeals for the Ninth Circuit held in United States v. Long, 618 F.2d 74, 75 (9th
Cir. 1980) (per curiam), that unlike blanks, zeros on tax
returns constitute information as to income from which a tax loss could be
computed just as if the return had contained other numbers. In Long, the Ninth Circuit held that
“[n]othing can be calculated from a blank, but a zero, like other figures, has
significance. A return containing false or misleading figures is still a
return.” Id. at 76. Similarly,
where a defendant filed a blank Form 1040 containing only his signature but
attached his Forms W-2, the Ninth Circuit affirmed his conviction for violating
§ 7206(1). United States v.
Crowhurst, 629 F.2d at 1300. The court held that the test for
determining whether a filing constitutes a return is “whether or not sufficient
information is supplied from which a tax may be computed,” and the fact that the
defendant “did not himself enter numerals on the appropriate lines of the 1040
form should not prevent his conviction for making a false return.” Id.; see also United States v. Grabinski, 558 F. Supp. at
1330 n. 11 (“A taxpayer could attach a copy of anything he wished to his 1040
form and it would be a return if he provided all of the information called for
on that form.”).
While
most Section 7206(1) prosecutions involve income tax returns, there are some
reported cases involving false documents other than tax returns. See,
e.g., United States v.
Droms, 566 F.2d 361, 362-63 (2d Cir. 1977) (per curiam)
(financial information statement submitted to the IRS for settlement purposes);
United States v. Cohen, 544 F.2d
781, 782-83 (5th Cir. 1977) (false statement made in an offer in compromise,
Form 656); Jaben v. United States,
349 F.2d 913, 915-16 (8th Cir. 1965) (application for extension of time for
filing). Note that these three cases are merely examples of the use of the
statute: in none of them was the application of Section 7206(1) to the
particular type of false document actually challenged by the defense. In
United States v. Carrabbia, 381
F.2d 133, 134-35 (6th Cir. 1967), however, the defendant specifically argued
that his conviction on a charge under § 7206(1) was invalid because the statute
did not apply to a Form 11-C, a renewal application to allow him to continue in
the business of accepting wagers for the ensuing governmental fiscal year, that
was alleged to be false. The court of appeals rejected the defendant’s argument,
concluding that the defendant’s conduct fell within the ambit of § 7206(1). 381
F.2d at 136.
The Fifth
Circuit limited the application of § 7206(1) to documents required either by the
Internal Revenue Code or applicable regulations thereunder, in United States v. Levy, 533 F.2d 969, 975
(5th Cir. 1976). But subsequent decisions of the Fifth Circuit have limited
Levy’s interpretation of Section
7206(1). See United States v.
Damon, 676 F.2d 1060, 1063-64 (5th Cir. 1982) (permitting § 7206(2)
prosecution for filing false Schedules C);
United States v. Taylor, 574 F.2d 232, 237 (5th Cir. 1978) (“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) required the same duty of honest reporting on schedules as it requires
for entries on the Form proper.”); see also United States v. Edwards, 777 F.2d 644, 652
(11th Cir. 1985) (permitting § 7206(1) prosecution for false Schedule C,
following Taylor and
distinguishing Levy); cf.
United States v. Hunerlach, 197
F.3d 1059, 1068-69 (5th Cir. 1999) (affirming conviction based on defendant’s
submission of a false Form 433A in the fulfillment of his obligations under a
plea agreement, where argument that a Section 7206(1) conviction cannot rest on
Form 433A was not made below).
Other
circuits flatly reject Levy. In
United States v. Holroyd, 732 F.2d
1122 (2d Cir. 1984), the Second Circuit held that a statement made on an IRS
form, the use of which is not expressly authorized by statute or regulation, may
provide the basis for a Section 7206(1) prosecution. In connection with an
ongoing assessment of his ability to pay a tax liability, the defendant had
signed under penalties of perjury and filed with the IRS two false IRS
collection information statements -- Form 433-AB and Form 433-A. Id. at 1124. The trial court dismissed the
indictment on the authority of Levy because Form 433-AB was not a
required form. Id. at 1123. The
Second Circuit, however, rejected the Levy court’s restrictive interpretation
of Section 7206(1), concluding:
26 U.S.C. Section 7206(1) means
what it says on its face. It applies to any verified return, statement or other
document submitted to the IRS. The indictment against [the defendant], in our
view, did state a crime cognizable under that section.
Holroyd, 732 F.2d at
1128.
Similarly,
the defendants in United States v.
Franks, 723 F.2d 1482, 1485 (10th Cir. 1983), argued that because the
question concerning the existence of foreign bank accounts on their 1974 income
tax returns, as well as the Forms 4683 attached to their amended 1974 and 1975
returns, were not authorized by the Internal Revenue Code or by any regulation,
the responses to those questions could not support a Section 7206(1)
prosecution. The Tenth Circuit refused to apply the Levy rationale and rejected this
argument:
Like
the Fifth Circuit, in cases decided subsequent to United States v. Levy, we do not believe
the rationale of Levy should be
extended, and, in our view, such does not apply to the schedules here appended
to a Form 1040, or to an answer made in response to a question contained in the
Form 1040. In the instant case, it is clearly established that the defendants in
their 1974 tax return gave a false answer to a direct question concerning their
interest in foreign bank accounts, and that they attached to their amended tax
return for 1974 and their tax return for 1975 a completed Form 4683 which did
not identify all of the foreign bank accounts over which they had
signatory authority. Such, in our view, comes within the purview of 26 U.S.C.
Section 7206(1).
Franks, 723 F.2d at 1486 (citations
omitted); see also United States v.
Harvey, 869 F.2d 1439, 1441 & n.3 (11th Cir. 1989) (failing to
report interest income from Cayman Islands accounts on Schedule B and falsely
answering “no” on Schedule B, Part III (Foreign Accounts and Foreign Trusts),
Form 1040, supported a charge defendant violated § 7206(1)).
The plain
language of the statute does not require that the return, statement or other
document be filed. Nevertheless, some courts have held that although “make and
subscribe,” as used in Section 7206(1), are words that connote “preparing and
signing,” a completed Form 1040 does not become a ‘return,’ and a taxpayer does
not ‘make a return,’ until the form is filed with the Internal Revenue Service.
United States v. Harvey, 869 F.2d
1439, 1448 (11th Cir. 1989) (en banc) (“the crime of willfully filing a
false tax return for income earned in 1980 . . . could not have occurred until
April of 1981 when [the defendant] filed the allegedly fraudulent return”);
United States v. Gilkey,
362 F. Supp. 1069, 1071 (E.D. Pa. 1973); United States v. Horwitz, 247 F. Supp. 412,
413-14 (N.D. Ill. 1965); see also United States v. Dahlstrom, 713 F.2d 1423,
1429 (9th Cir. 1983) (reversing § 7206(2) conviction because return not
filed). According to
Gilkey, 362 F. Supp. at 1071, the
rationale for this holding is that taxpayers ought to have the “right of
self-correction.”
Under traditional
perjury law, corporations cannot commit perjury because a corporation cannot
take an oath to tell the truth. A corporation, however, can be prosecuted for a
Section 7206(1) violation because Section 7206(1) expressly refers to “any
person,” and 26 U.S.C. §7701(a)(1) specifically defines “person” to include a
corporation. See United States v.
Ingredient Technology Corp., 698 F.2d 88, 99-100 (2d Cir. 1983);
accord United States v. Shortt Accountancy
Corp., 785 F.2d 1448, 1454 (9th Cir. 1986) (“A corporation will be
held liable under section 7206(1) when its agent deliberately causes it to make
and subscribe to a false tax return.”). “While a corporation has no independent
state of mind, the acts of individuals on its behalf may be properly chargeable
to it.” United States v. Ingredient
Technology Corp., 698 F.2d at 99 (citations
omitted).
Further,
the maker of the return does not have to physically complete or prepare the
return. In United States v.
Badwan, 624 F.2d 1228, 1232 (4th Cir. 1980), the defendants argued
that they did not “make” the return, as required by section 7206(1), since their
returns were prepared by an accountant. The Fourth Circuit rejected the argument
that the defendant had to actually prepare the return:
The
evidence did clearly show, however, that the accountant who prepared the returns
did so solely on the basis of information provided to him by the Badwans, and
that the Badwans then signed and filed the returns. This satisfies the
statute.
Badwan, 624 F.2d at
1232.
Reliance
on a qualified tax return preparer has been referred to as an affirmative
defense to a charge under § 7206(1). United
States v. Loe, 248 F.3d 449, 469 n.91 (5th Cir. 2001) (citing
United States v. Wilson, 887 F.2d
69, 73 (5th Cir. 1989)); United States v.
Duncan, 850 F.2d 1104, 1117 (6th Cir. 1988), overruled on other
grounds by Schad v. Arizona, 501 U.S.
624 (1991). In order to avail himself or herself of this defense, however, a
defendant must demonstrate that he or she provided full information to the
preparer and then filed the return without having reason to believe it was
incorrect. United States v.
Wilson, 887 F.2d at 73 (citations omitted). For other cases
discussing a good faith reliance defense, see United States v. Lindo, 18 F.3d 353, 356
(6th Cir. 1994); United States v.
Kenney, 911 F.2d 315, 322 (9th Cir. 1990).
Additionally,
a return preparer can be charged under Section 7206(1) for willfully making and
subscribing a false tax return for a taxpayer. See United States v. Shortt Accountancy
Corp., 785 F.2d 1448, 1454 (9th Cir. 1986). In Shortt Accountancy, one of the defendant
accounting firm’s accountants had prepared and signed a client’s Form 1040,
which contained deductions arising from an illegal tax shelter sold to the
client by the firm’s chief operating officer. 785 F.2d at 1450-51. On appeal,
the defendant firm argued that a tax preparer cannot “make” a return within the
meaning of Section 7206(1) since it is the taxpayer, not the
preparer, who has the statutory duty to file the return. Id. at 1451. The court rejected this
argument, holding that the prohibitions of Section 7206(1) are not based on the
taxpayer’s duty to file, but instead, Section 7206(1) simply prohibits perjury
in connection with the preparation of a federal tax return. Id. at 1454. According to the court,
“sections 7206(1) and 7206(2) are ‘closely related companion provisions’ that
differ in emphasis more than in substance,” and “[p]erjury in connection with
the preparation of a federal tax return is chargeable under either section.”
Shortt Accountancy, 785 F. 2d at
1454 (quoting United States v.
Haynes, 573 F.2d 236, 240 (5th Cir. 1978)). Generally, however, it is
the better practice to charge a violation of Section 7206(2) against a person
who prepares a false return for an individual required to
file.
The
submission of a false unsigned return cannot, without more, serve as the basis
for a 7206(1) prosecution because the act of subscribing (signing) a return,
statement, or other document, is an element of the offense. An unsigned return,
however, may provide the basis for a tax evasion charge under 26 U.S.C. § 7201
if the evidence shows that the unsigned return was filed by the defendant as his
return and was intended to be such. See United States v. Robinson, 974 F.2d 575,
577-78 (5th Cir. 1992) (noting that submission of unsigned documents purporting
to be returns can constitute affirmative acts of evasion).
Section
7206(1) does not require that the defendant personally sign the return, so long
as he authorized the filing of the return with his name subscribed . United States v. Ponder, 444 F.2d 816,
822 (5th Cir. 1971). Similarly, a return signed by only one spouse nevertheless
qualifies as a joint return where there is evidence that the parties intended to
file their return jointly. United States v.
Robinson, 974 F.2d at 579 n.5 (citations omitted). See also United States v. McKee, 506 F.3d 225, 233
(3d Cir. 2007) (“‘The law does not require the defendant’s own signature to
sustain a conviction under §7201: it merely requires sufficient circumstances .
. . from which a reasonable jury could find that the defendant did authorize the
filing of the return with his name subscribed to it.’”) (quoting United States v. Fawaz, 881 F.2d 259, 265
(6th Cir. 1989)).
Assuming
that the document is signed, the government must still authenticate the
signature -- establish that the signature is what the government alleges it to
be, i.e., that the named person actually signed the document. The
signature can be authenticated by the use of any one of three methods provided
by the Federal Rules of Evidence:
1.
Lay testimony on
handwriting -- any witness who is familiar with the defendant’s
handwriting may testify that the questioned signature is that of the defendant.
The limitation on this approach is that the familiarity of the witness with the
handwriting of the defendant must not have been acquired for purposes of the
litigation. Fed. R. Evid. 901(b)(2).
2. Expert testimony -- a qualified expert
may compare the questioned signature with authenticated specimens of the
defendant. Fed. R. Evid. 901(b)(3).
3. Jury comparison -- the finder of fact
may compare authenticated specimens with the questioned signature without expert
help. Fed. R. Evid. 901(b)(3).
For
purposes of comparison, 28 U.S.C. § 1731, provides:
The
admitted or proved handwriting of any person shall be admissible, for purposes
of comparison, to determine genuineness of other handwriting attributed to such
person.
Furthermore,
the authentication of a signature is aided by a statutory presumption provided
by the Internal Revenue Code, 26 U.S.C. §6064 (1986):
The
fact that an individual’s name is signed to a return, statement, or other
document shall be prima facie evidence for all purposes that the return,
statement, or other document was actually signed by him.
For
similar presumptions with respect to corporate and partnership returns, see
26 U.S.C. §§6062-6063.
Accordingly,
if an individual’s name is signed to a return, statement, or other document,
there is a rebuttable presumption by virtue of § 6064 that the document was
actually signed by that individual. See United States v. Kim, 884 F.2d 189, 195
(5th Cir. 1989) (noting presumption and rejecting constitutional challenge to §
6064). This presumption applies to both civil and criminal cases. United States v. Cashio, 420 F.2d 1132,
1135 (5th Cir. 1969).
The
statutory presumption has practical consequences at trial, because it is not
necessary to present direct evidence showing that the defendant actually signed
the returns; it is sufficient that the defendant’s name is on the returns and
the returns are true and correct copies of returns on file with the Internal
Revenue Service. United States v.
Wilson, 887 F.2d 69, 72 (5th Cir. 1989); United States v. Carrodeguas, 747 F.2d
1390, 1396 (11th Cir. 1984).
Even when
a defendant’s signature is never authenticated the jury may correctly conclude
that the defendant knew that the return was false when it was filed. In United States v. McKee, 506 F.3d 225, 228,
233 (3d Cir. 2007), the defendants were charged with employment tax evasion, in
violation of § 7201, and one of the affirmative acts of evasion charged was the
filing of false employment tax returns, Forms 941. The defendants challenged the
sufficiency of the evidence of affirmative acts of evasion on the grounds that
their signatures on the Forms 941 were never authenticated at trial. Id. at 233. The defendants argued that the
jury could not rely on 26 U.S.C. § 6064, which, as noted above, provides that
the fact of a signature on a tax return is prima facie evidence that the
return was signed by the named individual. 506 F.3d at 233. The Third Circuit
held that the fact that a return may have been signed by someone other than the
defendants does not necessarily undermine the jury’s conclusion that the
defendants knew the returns were false and approved the filings to evade the
applicable employment taxes. Id.
“‘The law does not require the defendant’s own signature to sustain a conviction
under §7201: it merely requires sufficient circumstances . . . from which a
reasonable jury could find that the defendant did authorize the filing of the
return with his name subscribed to it.’” Id. (quoting United States v. Fawaz, 881 F.2d 259, 265
(6th Cir. 1989)). Although McKee
involved evasion charges under § 7201, the court’s holding regarding the filing
of false income tax returns may be helpful in cases under § 7206(1) where the
defendant challenges the authenticity of his or her signature and the
applicability of § 6064.
Increasingly,
taxpayers are filing tax returns electronically. Any electronically filed tax
return must contain the perjury jurat. The Internal Revenue Service has
developed methods by which tax returns may be electronically filed. These
include the use of PINs and the IRS Form 8879, IRS e-file Signature
Authorization. “[A]ny return, declaration, statement, or other document filed
and verified, signed, or subscribed under any method adopted under [26 U.S.C. §
6061(b)(1)(B)] shall be treated for all purposes (both civil and criminal,
including penalties for perjury) in the same manner as though signed or
subscribed.” 26 U.S.C. § 6061(b)(2). It is important to ensure that there is
admissible evidence that the taxpayer was responsible for the electronic filing
of the tax return.
Section
7206(1) requires that the return, statement, or other document be made “under
the penalties of perjury.” This element should be self-evident as the document
either does or does not contain a declaration that it is signed under the
penalties of perjury. A signature plus the declaration is sufficient; the
document need not be witnessed or notarized. As required by 26 U.S.C. § 6065,
all income tax returns contain such a declaration. Note that at least one court
has determined that when a taxpayer adds the phrase "without prejudice" near the
taxpayer's signature on the jurat, it does not affect the jurat.
United States v. Davis, 603 F.3d 303, 307 (5th Cir.
2010) ([W]here there is some ambiguity as to language’s effect on the jurat . .
.the IRS should be entitled to construe alterations of the jurat against the
taxpayer, at least when there is any doubt.”)
If a
taxpayer presents a return or other document in which the jurat is stricken,
then prosecution should not be brought under Section 7206(1), as the document is
not signed under the penalties of perjury. However, 26 U.S.C. § 7201 (tax
evasion) or 18 U.S.C. § 1001 (false statement) charges may be considered in such
an instance.
Although
referred to as the “tax perjury statute,” Section 7206(1) prosecutions are not
perjury prosecutions. “The language ‘made under the penalties of perjury’ is of
purely historical significance.” Escobar v.
United States, 388 F.2d 661, 664 (5th Cir. 1967) (citations omitted).
Accordingly, the heightened requirement of proof traditionally applicable in
perjury prosecutions does not apply to Section 7206(1) prosecutions. Id. at 665; see also United States v. Carabbia, 381 F.2d 133,
137 (6th Cir. 1967) (holding that the two-witness rule applicable to perjury
prosecutions does not apply).
Section
7206(1) requires that a return, statement, or other document must be “true and
correct as to every material matter.” Accordingly, the government must prove
that the matter charged as false is material.
“[A]
‘material’ matter is one that affects or influences the IRS in carrying out the
functions committed to it by law or ‘one that is likely to affect the
calculation of tax due and payable.’” United
States v. Griffin, 524 F.3d 71, 76 (1st Cir. 2008) (citations
omitted). “A false statement may be material even if it was only likely to
influence the calculation of tax due and payable.” Id. at 76-77 (emphasis in
original).
In 1994,
the Supreme Court held in United States v.
Gaudin, 515 U.S. 506, 522-23 (1994), that materiality is a question
for the jury, and not the court, in prosecutions under 18 U.S.C. § 1001. In
Neder v. United States, 527 U.S.
1, 8 (1999), the “Government d[id] not dispute that the District Court erred
under Gaudin in deciding the
materiality element of a § 7206(1) offense itself, rather than submitting the
issue to the jury.” The Neder
Court opined that Gaudin mandates
that questions of materiality in Title 26 cases be submitted to the jury. 527
U.S. at 19-20. Accord Washington v.
Recuenco, 548 U.S. 212, 219-20 (2006) (reaffirming Neder); see also United States v. Jackson, 196 F.3d 383,
384-85 (2d Cir. 1999).
In view
of Neder and Gaudin, the “better practice” in Section
7206 cases is to submit all questions of materiality to the jury. See 2B
Kevin F. O’Malley, William C. Lee & Jay E. Grenig, Federal Jury Practice and
Instructions, § 67.15 (5th ed. 2000) (collecting, by circuit, instructions in
which the jury is asked to decide materiality in § 7206(1) cases).
In United States v. Reynolds, 919 F.2d 435,
436-37 (7th Cir. 1990), the defendant filed a Form 1040EZ reporting all the
categories of income requested on the form, but omitting a category of income
not reportable on that form. Although the defendant’s responses on the form were
literally true, the prosecution characterized these responses as misleading
because the defendant had a category of income (the unreported income) which
disqualified him from use of that form. Id. at 437. The Seventh Circuit held
that, although the form was misleading, the literal truth of the statements on
the form precluded a Section 7206(1) conviction. The court stated, however, that
Reynolds could be tried for violations of Section 7201 or Section 7203. Id. The Seventh Circuit adopted a
similar position with respect to Form 1040A, which, like Form 1040EZ is a
simplified tax form, in United States v.
Borman, 992 F.2d 124, 126 (7th Cir. 1993).
The Third
Circuit addressed and distinguished the “Reynolds defense” in United States v. Gollapudi, 130 F.3d 66
(3d Cir. 1997). There, the taxpayer was charged with a violation of section
7206(1) for listing a false amount of withholding on a Form 1040. 130 F.3d at
68. The taxpayer argued that he had in fact withheld taxes, but had simply not
paid over the withheld funds to the IRS, and that his returns thus were
“literally true” under Reynolds.
Id. at 72. The Third Circuit
rejected the taxpayer’s claims as a factual matter, crediting the testimony of
an IRS agent that no taxes had ever been withheld. Id. But the court of appeals went on to
note that Reynolds and Borman offer a defense to Section 7206 only
when there is no specific line item which can be proven false. Gollapudi, 130 F.3d at 72. According to
the Third Circuit, Reynolds stands
for the simple proposition that using the wrong tax form -- one that does not
contain an identifiable line item that can be charged as false -- cannot
constitute a violation of Section 7206(1). Id.
A Section
7206(1) indictment may charge in a single count that several items in one
document are false. If one count in an indictment charges three items on a
single return as false (e.g., dividends, interest, and capital gains),
then it is sufficient if only one of those items is proven to be false. The
government does not have to prove that every item charged is false. The same is
true of a charge that the defendant omitted several items from his or her
return. See Griffin v. United
States, 502 U.S. 46, 49 (1991) (when a jury returns a guilty verdict
on an indictment charging several acts in the conjunctive, the verdict stands if
the evidence is sufficient as to any one of the acts charged); United States v. Duncan, 850 F.2d 1104,
1108-13 (6th Cir. 1988) (noting that this principle applies only insofar as the
acts on which unanimity is required fall into “distinct conceptual groupings.”),
criticized by Schad v. Arizona,
501 U.S. 624, 635 (1991) (plurality opinion) (“the notion of ‘distinct
conceptual groupings’ is simply too conclusory to serve as a real test”). It is
also permissible to present to a jury alternative theories of falsity. See
United States v. Foley, 73 F.3d 484,
493 (2d Cir. 1996) (noting that “properly instructed jury” could convict under §
7206(2) for deduction of bribe that was either illegal under federal law,
illegal under state law, or legal but not an ordinary business expense, but
reversing conviction where one of the alternate bases was invalid as a matter of
law), overruled in part on other grounds by Salinas v. United States, 522 U.S. 52
(1997).
While a
jury must reach a unanimous verdict as to the factual basis for a conviction, a
general instruction on unanimity is sufficient to insure that such a unanimous
verdict is reached, except in cases where the complexity of the evidence or
other factors create a genuine danger of confusion. United States v. Schiff, 801 F.2d 108,
114-15 (2d Cir. 1986). At least one court, however, has held that when a single
false return count contains two or more factually distinct false statements, the
jury must reach unanimity on the willful falsity of at least one statement.
United States v. Duncan, 850 F.2d
at 1113. In Duncan, one count in
the indictment against two defendants alleged two false statements, one
involving an interest deduction and one involving an income characterization.
850 F.2d at 1106. The court of appeals vacated the Section 7206(1) convictions
of the defendants because the trial judge failed to instruct the jury, after a
specific request by the jury during its deliberations, that conviction required
unanimity on at least one of the alleged willful false statements. Id. at 1110. The Sixth Circuit concluded
that in the context of the case and given the juror’s request for clarification,
there was a “tangible risk of jury confusion and of nonunanimity on a necessary
element of the offense charged.” Duncan, 850 F.2d at 1113-14. But
cf. Schad v. Arizona, 501 U.S.
at 630-32 (plurality opinion) (finding that jury was not required in
first-degree murder prosecution to agree on one of alternative theories of
premeditated or felony-murder); United States
v. Moore, 129 F.3d 873, 877 (6th Cir. 1997) (explaining Duncan and distinguishing its holding in
bank fraud case); United States v.
Sanderson, 966 F.2d 184, 187-89 (6th Cir. 1992) (holding that trial
court’s failure to give specific unanimity instruction was not plain error in
prosecution charging in a single count theft of government property and theft of
employee time).
Prior to
Gaudin, some commentators noted
conflicting authority as to what constituted proof of materiality in Section
7206 prosecutions. See Twelfth
Survey on White Collar Crime, 34 Am.
Crim. L. Rev. 1035, 1065 (1997) (noting conflict within § 7206(2) case
law).3 Courts defined a material item
either as
1)
one required on an income tax return that is necessary for a
correct computation of the tax (the “Warden test”); see United States v. Strand, 617 F.2d 571,
574 (10th Cir. 1980); United States v.
Taylor, 574 F.2d 232, 235 & n.6 (5th Cir.1978) (recognizing and
describing both tests); United States v.
Warden, 545 F.2d 32, 37 (7th Cir. 1976); United States v. Null, 415 F.2d 1178, 1181
(4th Cir. 1969); Siravo v. United
States, 377 F.2d 469, 472 (1st Cir. 1967); or
2)
one having a natural tendency to influence or impede the Internal
Revenue Service in ascertaining the correctness of the tax declared or in
verifying or auditing the returns of the taxpayer (the “DiVarco test”). See United States v. Greenberg, 735 F.2d 29,
31 (2d Cir. 1984) (holding that Section 7206(1) is intended to prevent
misstatements that could hinder the IRS in verifying the accuracy of a return;
accordingly, such false statements are material); United States v. DiVarco, 484 F.2d 670,
673 (7th Cir. 1973); see also United States
v. Fawaz, 881 F.2d 259, 264 (6th Cir. 1989); United States v. Taylor, 574 F.2d 232, 235
& n.6 (5th Cir. 1978) (recognizing both Warden and DiVarco).
3.
Perhaps it is more accurate to say that what occurred was not a conflict, in the
sense of a circuit split, but rather the unresolved emergence of two
complimentary but separate tests for materiality, with one test embracing the
other. See United States v.
Taylor, 574 F.2d 232, 235 n.6 (5th Cir. 1978) (“Application of
DiVarco to this case renders
consideration of the Warden test
unnecessary.”). No circuit has explicitly rejected either the Warden or DiVarco formulation. Further, both tests
have been utilized within the same circuits, without comment. Indeed, both
Warden and DiVarco were decided in the Seventh
Circuit.
Early
indications are that the conflict of authority regarding the test of materiality
survived the issuance of Gaudin.
Some courts favor the Warden test,
see, e.g., United States v.
Hayes, 190 F.3d 939, 946 (9th Cir. 1999) (not reporting money
received from academic grade-selling scheme “obviously material to the IRS’s
ability correctly to calculate [defendant’s] tax liabilities), aff’d, 231 F.3d 663, 667
n.1 (9th Cir. 2000) (en banc); United
States v. Scholl, 166 F.3d 964, 979 (9th Cir.1999) (“‘information is
material if it is necessary to a determination of whether income tax is
owed’”) (quoting United States v. Uchimura, 125 F.3d 1282,
1285 (9th Cir. 1997)); United States v.
Clifton, 127 F.3d 969, 970 (10th Cir. 1997) (material statement is
one that is “necessary ‘in order that the taxpayer . . . compute his taxes
correctly’”) (quoting United States v.
Strand, 617 F.2d 571, 574 (10th Cir. 1980)); United States v. Aramony, 88 F.3d 1369,
1384 (4th Cir. 1996) (material item is one which “must be reported ‘in order
that the taxpayer estimate and compute his tax correctly.’”) (quoting
United States v. Null, 415 F.2d
1178, 1181 (4th Cir.1969) (internal quotation omitted)); United States v. Klausner, 80 F.3d 55,
60 & n.4 (2d Cir. 1996) (material matters are those “essential to the
accurate computation of . . . taxes.”), while the First Circuit seems to favor
DiVarco. See United States v. DiRico, 78 F.3d 732, 736
n.1 (1st Cir. 1994) (quoting from Greenberg, 735 F.2d at 31-32 and citing
DiVarco, 484 F.2d at 673); see
also United States v. Gaudin,
515 U.S. at 509 (noting that material statement for § 1001 purposes is one
having a natural tendency to influence, or capable of influencing, the decision
of the decision making body to which it was addressed.) (quotation omitted).
Given
that the forum for litigating materiality has shifted from the bench to the jury
under Neder and Gaudin, how materiality is defined in jury
instructions is a key issue.
Pattern
Jury instructions defining materiality in Section 7206 cases exist in most
circuits. The Seventh Circuit tracks the language of Gaudin and follows alternative
tests:
A
line on a tax return is a material matter if the information required to be
reported on that line is capable of influencing the correct computation of the
amount of tax liability of the individual . . . or the verification of the
accuracy of the return. . . .
OR
A
false matter is material if the matter was capable of influencing the Internal
Revenue Service.
Fed. Crim. Jury Instr. of the Seventh
Circuit, Ch. 10, 26 U.S.C. § 7206 (Materiality) (1999). The First
Circuit’s model instruction is similar. See Pattern Criminal Jury
Instructions for the District Courts of the First Circuit, False Statements on
Income Tax Return, 4.26.7206 (2008 rev. ed.) (“A ‘material’ matter is one that
is likely to affect the calculation of tax due and payable, or to affect or
influence the IRS in carrying out the functions committed to it by law, such as
monitoring and verifying tax liability.”).
The Fifth
and Ninth Circuit pattern instructions track the language of the DiVarco test. See Fifth Circuit
Pattern Jury Instructions - Criminal, False Statements on Tax Return, 2.97
(2001) (“A statement is ‘material’ if it has a natural tendency to influence, or
is capable of influencing, the Internal Revenue Service in investigating or
auditing a tax return or in verifying or monitoring the reporting of income by a
taxpayer.”); Ninth Circuit Manual of Model Jury Instructions - Criminal, Filing
False Tax Return, 9.37 (2003) (noting in comment that material item is one which
“had a natural tendency to influence or was capable of influencing or affecting
the ability of the IRS to audit or verify the accuracy of the tax return or a
related return.”).
The Third
Circuit follows Warden. See
Third Circuit Model Criminal Jury Instructions, False Income Tax Return - Return
Was Materially False, 6.26.7206-3 (2006) (“The false statement in the return
must be material. This means that it must be essential to an accurate
determination of (name)’s tax liability.”) The Tenth Circuit employs a
hybrid instruction that incorporates both Warden and DiVarco. See Criminal Pattern
Jury Instructions, False Statements on Income Tax Return, 2.93 (10th Cir. 2005)
(“A statement is material . . . if it concerned a matter necessary to the
correct computation of taxes owed and was capable of influencing the decision of
the Internal Revenue Service.”).
The
Eleventh Circuit, by comparison, has set out into uncharted territory.
See Eleventh Circuit Pattern Jury Instructions (Criminal Cases), Aiding and
Abetting Filing False Return, No. 95 (2003) (noting, in instruction for §
7206(2), that “[a] declaration is ‘material’ if it relates to a matter of
significance or importance as distinguished from a minor or insignificant or
trivial detail. It is not necessary, however, that the Government be deprived of
any tax by reason of the filing of the false return, or that it be shown that
additional tax is due . . . .”).
On
occasion, defendants in false return cases argue that the lack of a tax
deficiency renders the alleged false item immaterial. For instance, in cases
involving unreported income, a taxpayer might argue that she had expenses which
exceeded her true gross income, thus rendering his failure to report income
immaterial, because it had no bottom-line tax effect. Prior to Gaudin, such arguments fell on deaf ears.
Courts held not only that proof of a tax deficiency was not required in a false
return case, but also that evidence of the lack of a tax deficiency was
irrelevant. See United States v.
Marashi, 913 F.2d 724, 736 (9th Cir. 1990) (rejecting as “irrelevant”
sufficiency of evidence challenge based on asserted lack of tax deficiency in
§ 7206(1) case); United States v.
Olgin, 745 F.2d 263, 272 (3d Cir. 1984) (affirming trial court’s
exclusion of evidence of tax effect of unreported expenses and noting that
“evidence of tax liability is generally inadmissible in prosecutions under
I.R.C. 7206") (citations omitted); United
States v. Garcia, 553 F.2d 432, 432 (5th Cir. 1977) (per
curiam) (upholding trial court’s refusal to allow defense evidence of tax
liability or lack thereof in § 7206(1) case); Schepps v. United States, 395 F.2d 749, 749
(5th Cir. 1968) (per curiam) (same); see also United States v. Citron, 783 F.2d 307, 313
(2d Cir. 1986) (rejecting argument that material falsity is one which results in
substantial tax due); United States v.
Fritz, 481 F.2d 644, 645 (9th Cir. 1973) (per curiam)
(evidence of potential adjustments to tax liability not relevant to willfulness
since no evidence presented that defendant considered making the proposed
adjustments); cf. United States v.
Johnson, 558 F.2d 744, 745-47 (5th Cir. 1977) (where defendant claims
a good-faith-reliance defense, evidence of lack of tax deficiency might be
relevant to willfulness, subject to Rule 403, but disallowing introduction based
on facts of case).
While
courts still maintain that proof of a tax deficiency is not required in a
section 7206(1) prosecution, see United
States v. Scholl, 166 F.3d 964, 979 (9th Cir.1999); United States v. Peters, 153 F.3d 445,
461 (7th Cir. 1998); United States v.
Minneman, 143 F.3d 274, 279 (7th Cir. 1998), some post-Gaudin opinions indicate that the presence
or lack of a tax deficiency may be relevant to a jury’s determination of
materiality.
In
United States v. Uchimura, 125
F.3d 1282 (9th Cir. 1997), the Ninth Circuit held that in a Section 7206(1)
case, “information is material if it is necessary to a determination of whether
income tax is owed.” 125 F.3d at 1285. In deciding whether the question of
materiality should be submitted to the jury as a matter of course in false
return cases, the court addressed whether the false item at issue-- unreported
income-- was inherently material. Id. at 1284-85 The court considered a
hypothetical situation in which a taxpayer’s legitimate deductions exceed his
gross income and the taxpayer thus has no taxable income. In such a
circumstance, “unreported income . . . may not be necessary to a determination
of whether income tax is owed.” Id. at 1285. While the court insisted
that “[w]e do not mean by this example that to satisfy the materiality element
of § 7206 the government must show that additional tax is owed,” it also left no
doubt that the lack of a tax deficiency is relevant to a jury’s determination of
materiality and ought to be admitted: “That no additional tax is owed of course
has a bearing on materiality, but the question is ultimately one for the jury to
decide.” 125 F.3d at 1285, n.5
The Tenth
Circuit followed suit in United States v.
Clifton, 127 F.3d 969 (10th Cir. 1997). Clifton addressed the same hypothetical
as Uchimura, in which the taxpayer
fails to report income, but has no tax due because her deductions exceed taxable
income for the year. In this situation, the “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.” 127 F.3d at
971. It is hard to read this language as anything other than a mandate that
evidence supporting the lack of tax deficiency must be submitted to the jury.
See also United States v. Aramony,
88 F.3d 1369, 1384-85 (4th Cir. 1996).
Prosecutors
should consider arguing that if the language in Uchimara and Clifton has the effect of requiring proof
of tax loss, it would no longer be true that the falsehood itself defines the
crime of filing a false return. See Gaunt v. United States, 184 F.2d 284,
288 (1st Cir. 1950) (observing that the purpose of the false returns statute is
“to impose the penalties for perjury upon those who wilfully falsify their
returns regardless of the tax consequences of the falsehood.”).4 Otherwise, proof
of false returns would constitute proof of evasion.
4. Gaunt referred to 26
U.S.C. § 7206's statutory predecessor, 26 U.S.C. § 145(c) (1939).
Clearly,
this was not Congress’s intent in drafting § 7206(1), which “charges an offense
separate and distinct in itself[.]” United
States v. White, 417 F.2d 89, 93 (2d Cir. 1969). As the Second
Circuit explained in White,
Section 7206(1) . . . is only one
part in a comprehensive statutory scheme to prohibit and punish fraud occurring
in the assessment and collection of taxes by the government. Section 7201 is the
inclusive section, prohibiting all attempts to evade or defeat any tax in any
manner, and such an attempt is punishable as a felony. There follows a series of
sections prohibiting specific methods of fraud in the collection and payment of
taxes, all of which are separately punishable standing alone. Among these are
7203, 7206 and 7207, all directed against the taxpayer. Other sections are
directed at persons involved in the process of tax collection. . . . Section
7206(1) provides penalties for signing, under oath, false returns or statements
made in the process of tax collection. The offense charged is perjury, the
operative element is the signature under oath, and the felony penalties reflect
the seriousness of this method of committing fraud. Thus the perjury offenses
charged under 7206 may separately form the basis for an
indictment[.]
United States v. White, 417 F.2d at 93-94
(citations omitted). Nevertheless, in light of the recent appellate decisions,
it would be prudent for the prosecutor to consider the tax loss -- or lack
thereof -- as part of the overall assessment of the government’s ability to
prevail in a Section 7206(1) case.
Another
doctrine that may come into question, or at least be subject to reassessment, is
that of the irrelevance of the “substantiality of the understatements.”
Pre-Gaudin, some defendants
appealed their false returns convictions on the basis that the material
falsehoods on their returns were insubstantial. Courts rejected these arguments,
holding that the issue was whether the misstatements were material, not whether
they were substantial. See United
States v. Helmsley, 941 F.2d 71, 92 (2d Cir. 1991); United States v. Citron, 783 F.2d 307, 313
(2d Cir. 1986); United States v. Gaines,
690 F.2d 849, 858 (11th Cir. 1982). The validity of these holdings is
called into question by Uchimura
and Clifton. If it is now relevant
whether a tax deficiency exists in a Section 7206(1) prosecution, it would seem
that the amount of any tax deficiency, and thus the degree of any misstatement,
would be relevant to a jury’s determination of materiality by the rationale of
these two holdings.
Section
7206(1) does not require a showing that the government relied on the false
statements. “[I]t is sufficient that they were made with the intention of
inducing such reliance.” Genstil v. United
States, 326 F.2d 243, 245 (1st Cir. 1964); accord United States v. Romanow, 509 F.2d 26, 28
(1st Cir. 1975) (“[m]ateriality . . . is to be measured objectively by a
statement’s potential rather than by its actual impact.”). The government is not
required to prove that the defendant intended to induce the government to rely
on his or her false statement or that the government was actually deceived.
“[T]he intent to induce government reliance on a false statement or to deceive
the government is not an element of 26 U.S.C. § 7206(1).” United States v. Griffin, 524 F.3d 71, 81
(1st Cir. 2008) (emphasis original) (citing United States v. Boulerice, 325 F.3d 75,
79-80 (1st Cir. 2003)).
Neither
is it a defense that the false statements were so outrageous and flagrant that
they should not be taken seriously. See United States v. Winchell, 129 F.3d 1093,
1098 (10th Cir. 1997) (rejecting claim of tax defier who declared $7.5 billion
in income and sought nearly $5.5 billion refund that statements in Section
7206(1) case were not material because they were preposterous). Winchell is a particularly favorable case
for the government. There, the defendant challenged his conviction explicitly on
the basis of materiality, arguing that his alleged false statements were so
facially ridiculous that they would not have been acted upon by the government.
129 F.3d at 1098. Winchell thus
reaffirms the proposition that it is the potential and not actual impact of the
alleged false statement that the jury must weigh in determining materiality.
The
following are examples of false items found to be material by courts,
pre-Gaudin. They should continue
to remain valid law for issues such as sufficiency of the evidence on
appeal.
1. Amounts
listed on returns as receipts from a business, improperly claimed deductions,
and the like, have a direct bearing on a tax computation and are material. United States v. Morse, 491 F.2d 149,
157 (1st Cir. 1974); United States v.
Engle, 458 F.2d 1017, 1019-20 (8th Cir. 1972).
2. Gross
income falsely reported is clearly material. “This Court has . . . held that
false statements relating to gross income, irrespective of the amount,
constitute a material misstatement in violation of Section 7206(1).” United States v. Hedman, 630 F.2d 1184,
1196 (7th Cir. 1980).
3. Omitted
gross receipts on Schedule F, farm income, are material. United States v. Taylor, 574 F.2d 232,
235-36 (5th Cir. 1978).
4. False
schedule designed to induce allowance of unwarranted depreciation is material.
The Ninth Circuit could “scarcely imagine anything more material.” United States v. Crum, 529 F.2d 1380,
1383 (9th Cir. 1976) (Section 7206(2) violation, but principle applies to
Section 7206(1)).
5. Schedule
C claiming business loss deductions to which the taxpayers were not entitled
rendered the returns false as to a material matter. United States v. Damon, 676 F.2d 1060,
1064 (5th Cir. 1982).
6. Omission
of a material fact makes a statement false, just as if the statement included a
materially false fact. See United
States v. Cohen, 544 F.2d 781, 783 (5th Cir. 1977) (defendant had
$30,000 in checks which he did not include on an Offer in Compromise, Form
656).
7. Understatement
of gas purchases by gas station operator was material because it restricted
ability of the Internal Revenue Service to verify his income tax returns and his
diesel fuel excise tax returns. If purchases are unreported, a number of related
items, such as inventory, income, or other costs, could also be incorrect.
“‘[A]uditability of this entire calculation [may be] made more difficult by the
misstatements.” United States v.
Fawaz, 881 F.2d 259, 263-64 (6th Cir. 1989).
8. The
source of income is a “material matter” and the willful and knowing misstatement
of the source of income is prohibited by § 7206(1). United States v. Vario, 484 F.2d 1052, 1056
(2d Cir. 1973); United States v.
DiVarco, 484 F.2d 670, 673 (7th Cir. 1973); United States v. Sun Myung Moon, 532 F.
Supp. 1360, 1367 (S.D.N.Y. 1982).
In Siravo v. United States, 377 F.2d 469,
471 (1st Cir. 1967), the defendant reported wages he had earned but did not
report either his jewelry business or substantial gross receipts he received in
connection therewith. The defendant argued that his omissions did not constitute
false statements. Id. at 472. The
First Circuit affirmed his conviction, holding that for a statement to be “true
and correct,” it must be both accurate and complete. Id.; see also United States v. Taylor, 574 F.2d 232,
234-36 (5th Cir. 1978) (failure to report substantial amounts of gross livestock
receipts on Schedule F renders a return materially false).
In United States v. Holladay, 566 F.2d
1018, 1020 (5th Cir.1978) (per curiam), the defendant did not report
gross receipts from a gambling and bootlegging operation conducted at his
service station. Although the government did not prove that the defendant
received any profits or income from the illicit business, the failure to report
substantial gross receipts was sufficient to support a conviction. Id.
In
United States v. Vario, 484 F.2d
1052, 1053-54 (2d Cir. 1973), the defendant failed to report gross income from a
gambling or “policy” operation or that he was engaged in such an operation. The
government did not use the net worth, specific items, bank deposits, or
expenditures method to prove the defendant’s receipt of additional unreported
income; instead, through federal agents and “policy” members, the government
established that the defendant was active in the organization and that it
produced gross income he failed to report. 484 F.2d at 1054. The court of
appeals found that evidence that the defendant paid for police protection was
admissible to prove that the defendant had sufficient income from the operation
to pay for the protection, that he had a source of income he was concealing, and
that there was a relationship between the defendant and his coconspirator. 484
F.2d at 1056 (citations omitted).
In United States v. Young, 804 F.2d 116,
117 (8th Cir. 1986), the court rejected the defendant’s claim that because the
income from his bail bonding business was included on the corporate return as
net income, the failure to include it as gross income on the return did not make
the return untruthful, but only incomplete. Omissions from a tax return of
material items which are necessary for a computation of income means the return
is not true and correct within the meaning of section 7206(1). 804 F.2d at
119.
In United States v. DiVarco, 484 F.2d 670,
672-73 (7th Cir. 1973), the government proved that income reported by the
defendant as commissions from a mortgage and investment business did not come
from that business. The fact that the source stated on the return was false was
sufficient to support a Section 7206(1) conviction because “a misstatement as to
the source of income is a material matter.” Id. at 673.
In United States v. Rayor, 204 F. Supp.
486, 488 (S.D. Cal. 1962), the defendant claimed deductions for personal
gambling losses on the corporate tax return of his construction business. A
subsequent audit revealed that there would have been an overpayment of corporate
taxes even if the gambling losses had not been falsely deducted. Id. at 489. The defendant claimed in a
motion to dismiss that there was no offense charged as there was no deficiency
for the year in question. Id.
The
district court denied the motion to dismiss, concluding that “what is claimed as
deductible from gross income must be stated truthfully and is of utmost
materiality.” Rayor, 204 F. Supp.
at 491. Moreover, the court continued:
The
Government was entitled, as of March 7, 1956, to a statement which stated the
gross income truthfully and correctly and which did not claim as
legitimate business expenses personal gambling losses. The auditing of the
return, in the light of the returns for the other years, which later developed
that the omission of these falsely claimed deductions would have made no
difference in the defendant’s tax liability for the year 1955, cannot be
retrojected to the date of the false statement, so as to confer verity on
it.
Rayor, 204 F. Supp. at 492 (emphasis
added).
In United States v. Garcilaso de la Vega,
489 F.2d 761, 762 (2d Cir. 1974), the defendant was charged with failing to
report income he earned from selling narcotics. The government’s case was
premised on the defendant’s failure to report the additional income, not his
failure to report that narcotics sales were the source of this additional
income. Id. at 765. The charge to
the jury made it clear that it was the failure to report income, not the failure
to report the illegal source of the income, that constituted the violation of
section 7206(1). Id.; see
Garner v. United States, 424 U.S.
648, 659-61 (1976) (finding that defendant, who reported his occupation as
“professional gambler” on his tax return instead of claiming Fifth Amendment
privilege against self-incrimination, could not later rely on privilege to
preclude use of return against him in a criminal prosecution).
In some
cases involving illegal source income, an indirect method of proof is needed to
demonstrate the material falsity of the return. In United States v. Marrinson, 832 F.2d 1465
(7th Cir. 1987), the government used the cash expenditures method of proof to
establish that the defendant had omitted substantial additional income in each
of the years charged, and offered evidence that the likely source of the
unreported taxable income was marijuana sales. 832 F.2d at 1469, 1471. The
Seventh Circuit held that “[d]irect proof of a defendant’s likely source of
income is not required . . . . The jury needed only enough circumstantial
evidence from which they reasonably could have found the marijuana business to
have been the source of the increase in the defendant’s wealth.” 832 F.2d at
1472.
In a case
involving a fraudulent pyramid investment, or “Ponzi” scheme, the government
proved the defendants had additional unreported income in each of the years in
question, using the expenditures method of proof. United States v. Weiner, 755 F. Supp. 748,
754-55 (E.D. Mich. 1991). The court also found that the government had
successfully proven that the defendant had constructively, though not actually,
received income in the form of profits from the scheme that he did not report,
but should have reported, on his Forms 1040. Id. at 755 (citations omitted).
In United States v. Franks, 723 F.2d 1482,
1485 (10th Cir. 1983), the defendants falsely answered “No” to questions on
income tax returns asking if they had any interest in or signature authority
over bank accounts in a foreign country. They also attached a form to their
amended return which did not list “all of their foreign accounts over
which they had control.” (Emphasis in original). The court affirmed the false
return convictions, holding that the false responses to these questions “comes
within the purview of 26 U.S.C. § 7206(1).” Franks, 723 F.2d at 1486; accord
United States v. Harvey, 869 F.2d
1439, 1441 & n.2 (11th Cir. 1989) (failing to report interest income from
Cayman Islands accounts on Schedule B and falsely answering “no” on Schedule B,
Part III (Foreign Accounts and Foreign Trusts), Form 1040, supported a charge
defendant violated § 7206(1)).
Section
7206(1) is a specific intent crime requiring a showing of willfulness. Proof of
this element is essential, and “neither a careless disregard whether one’s
actions violate the law nor gross negligence in signing a tax return will
suffice.” United States v.
Claiborne, 765 F.2d 784, 797 (9th Cir. 1985), abrogation on other
grounds recognized by United States v.
Alexander, 48 F.3d 1477, 1484 (9th Cir. 1995); accord United States v. Winchell, 129 F.3d 1093,
1096 (10th Cir. 1997) (listing § 7206 as one example of a “specific intent”
crime); United States v. Erickson,
676 F.2d 408, 410 n.4 (10th Cir. 1982) (same).
The
Supreme Court has defined “willfulness” as “‘a voluntary, intentional violation
of a known legal duty.’” Cheek v. United
States, 498 U.S. 192, 200 (1991) (quoting United States v. Bishop, 412 U.S. 346,
360 (1973)); accord, United States v.
Griffin, 524 F.3d 71, 78 (1st Cir. 2008); United States v. Winchell, 129 F.3d 1093,
1096-97 (10th Cir. 1997) (noting in § 7206(1) case that Cheek’s definition of willfulness is the
“conclusively established standard,” and affirming trial court’s refusal of an
additional specific intent instruction); see also, United States v. Guidry, 199 F.3d 1150,
1156 (10th Cir. 1999) (same). In Guidry, the Tenth Circuit explained that
the same principles that govern proving willfulness in an evasion case apply to
proving willfulness in the context of § 7206(1):
While
it is well established willfulness cannot be inferred solely from an
understatement of income, willfulness can be inferred from
making false entries of
alterations, or false invoices or documents, destruction of books or records,
concealment of assets or covering up sources of income, handling of one’s
affairs to avoid making the records usual in transactions of the kind, and any
conduct, the likely effect of which would be to mislead or to
conceal.
. .
. This conduct can be used to prove willfulness “even though the conduct may
also serve other purposes such as concealment of other crime.”
199
F.3d at 1157 (quoting Spies v. United
States, 317 U.S. 492, 499 (1943); citing United States v. Samara, 643 F.2d 701, 704
(10th Cir. 1981)). Willfulness can also be proven by evidence that the defendant
had been repeatedly advised by IRS agents that he could not deduct personal,
non-business expenditures on his tax returns. See United States v. Garcia, 762 F.2d 1222,
1225 (5th Cir. 1985). Similarly, where the IRS repeatedly disallows the
defendant’s deductions for personal expenses in prior years, resulting in
assessments of additional taxes and civil judgments to collect those
assessments, such evidence can be used to establish that the defendant willfully
falsified his tax return. Id. at
1225-26.
When
charged with violations of § 7206(1), defendants frequently request a separate
instruction on good faith. The Fourth Circuit has held that where the district
court gives adequate instructions on specific intent, declining to give a
separate instruction on good faith is not error. See United States v. Fowler, 932 F.2d 306, 317
(4th Cir. 1991) (citing United States v.
Pomponio,
429 U.S. 10, 13 (1976), and Cheek v. United
States, 498 U.S. 192, 201 (1991), and collecting cases). This is the
majority position among the circuits. United
States v. Leahy, 445 F.3d 634, 652 n.14 (3d Cir. 2006) (citing
United States v. Gross, 961 F.2d
1097, 1102-03 (3d Cir. 1992)).
One
court, however, held pre-Cheek,
that a general instruction on willfulness is not sufficient when the evidence
supports the giving of a good faith instruction. United States v. Harting, 879 F.2d 765, 769
(10th Cir. 1989) (citing Pomponio);
United States v. Hopkins, 744 F.2d 716, 718 (10th Cir. 1984) (en
banc). In Pomponio, a
prosecution under Section 7206(1), the Supreme Court approved the following jury
instruction on willfulness:
In
explaining intent, the trial judge said that “[t]o establish the specific intent
the Government must prove that these defendants knowingly did the acts, that is,
filing these returns, knowing that they were false, purposely intending to
violate the law.” The jury was told to “bear in mind the sole charge that you
have here, and that is the violation of 7206, the willful making of the false
return, and subscribing to it under perjury, knowing it not to be true and [sic]
to all material respects, and that and that alone.”
429
U.S. at 11 n.2.
The
Eighth Circuit initially took the same position as the Tenth Circuit. See
United States v. Leahy, 445 F.3d
at 652 n.14 (citing United States v.
Casperson, 773 F.2d 216, 223-24 (8th Cir. 1985)). Subsequently, the
Eighth Circuit appeared to move more toward the majority of circuits in finding
that a good faith instruction is not required, despite a defense request, where
the jury instructions adequately convey the specific intent requirement.
See United States v. Leahy,
445 F.3d at 652 n.14 (citing Willis v.
United States, 87 F.3d 1004, 1008 (8th Cir. 1996 (discussing issue in
context of denial of a motion under 28 U.S.C. § 2255))). For a further
discussion of willfulness and the legal ramifications of the Cheek case, see Section 8.08,
supra, and Section 40.04,
infra.
In a Section 7206(1)
prosecution, the government is not required to show an intent on the defendant’s
part to evade income taxes. United States v.
Taylor, 574 F.2d 232, 234 (5th Cir. 1978); United States v. Engle, 458 F.2d 1017,
1019 (8th Cir. 1972).5
Also, there is “no requirement that showing the specific intent for a
§ 7206(1) violation requires proof of an affirmative act of concealment; it is
enough that the government show the defendant was aware that he was causing his
taxable income to be underreported.” United
States v. Barrilleaux, 746 F.2d 254, 256 (5th Cir. 1984) (per
curiam). Moreover, the government may rely solely on circumstantial evidence
to prove willfulness. See, e.g., United States v. Tucker, 133 F.3d 1208,
1218-19 (9th Cir. 1998) (false returns); United States v. Klausner, 80 F.3d 55, 63
(2d. Cir. 1996) (evasion); United States v.
Grumka, 728 F.2d 794, 797 (6th Cir. 1984) (violation of §
7203).
5.
Of course, to the extent that the government can show that the defendant was
motivated by a desire to evade taxes, the case is more attractive to a jury.
Consequently, this is one of the factors considered by the Tax Division in
deciding whether to authorize prosecution.
The defendant’s signature on a
document can help establish willfulness. See
United States v. Tucker, 133 F.3d 1208, 1218 n.11 (9th Cir. 1998)
(noting that signature proved knowledge of contents of return). “A taxpayer’s
signature on a return does not in itself prove his knowledge of the contents,
but knowledge may be inferred from the signature along with the surrounding
facts and circumstances, and the signature is prima facie evidence that
the signer knows the contents of the return.” United States v. Mohney, 949 F.2d 1397,
1407 (6th Cir. 1991) (citing United States v.
Harper, 458 F.2d 891, 894 (7th Cir. 1971)); United States
v. Davis, 603 F.3d 303, 306 (5th Cir. 2010) (“A taxpayer’s
signature on a return with a jurat indicates that the taxpayer attests to the
accuracy of the reported data.”); United
States v. Drape, 668 F.2d 22, 26 (1st Cir. 1982) (finding that
defendant’s signature is sufficient to establish knowledge once it has been
shown that the return was false); United
States v. Romanow, 505 F.2d 813, 814-15 (1st Cir. 1974) (noting that
the jury could conclude from nothing more than the presence of his uncontested
signature that he had in fact read the Form 941); United States v. Bettenhausen, 499 F.2d
1223, 1234 (10th Cir. 1974) (“From proof of one’s signing a return it may be
believed that he knew its contents . . . .”).
Prosecutors should, however, be
aware of the Ninth Circuit’s decision in United States v. Trevino, 419 F.3d 896, 902
(9th Cir. 2005). In Trevino, the
court held that it was error to instruct the jury that “[a] return or other tax
document signed with the defendant’s name creates a rebuttable presumption that
the defendant actually signed it and had knowledge of its contents.” The court
noted that while 26 U.S.C. § 6064 provides that an individual’s signature on the
return is prima facie evidence that the return was actually signed by that
individual, it does not create any other presumption. Id.; see also United States v. Rayborn, 491 F.3d 513,
519 (6th Cir. 2007) (discussing Trevino and holding that any error was
harmless where trial court instructed: “If you find beyond a reasonable doubt
that the defendant signed the tax return, that is evidence from which you may
but are not required to find or infer that the defendant had knowledge of the
contents of the return.”).
A showing of “collective intent”
on the part of a corporate defendant can satisfy the willfulness requirement in
a Section 7206(1) prosecution of a corporate defendant. See United States v. Shortt Accountancy
Corp., 785 F.2d 1448, 1454 (9th Cir. 1986). In Shortt Accountancy, an accountant
employed by the defendant accounting firm prepared and signed for a client a tax
return that contained deductions arising
from an illegal tax shelter sold to the client by the firm’s chief operating
officer. 785 F.2d at 1450-51. The accountant, acting on information provided to
him by the chief operating officer, was unaware of the fraudulent nature of the
deductions. Id. at 1451. The Ninth
Circuit held that the accountant’s lack of intent to make and subscribe a false
return did not prevent the conviction of the defendant corporation under Section
7206(1), because the defendant’s chief operating officer acted willfully.
Id. at 1454. The officer’s
willfulness and the accountant’s act of making and subscribing the false return
were sufficient to constitute an intentional violation of Section 7206(1) on the
part of the defendant corporation. Id. The court reasoned that precluding a
finding of willfulness in this situation would allow a tax return preparer to
“escape prosecution for perjury by arranging for an innocent employee to
complete the proscribed act of subscribing a false return.” Id. Thus, a corporation is liable under
section 7206(1) when its agent intentionally causes it to violate the statute.
Shortt Accountancy, 785 F. 2d at
1454; cf. United States v. Bank of New
England, N.A., 821 F.2d 844, 855-56 (1st Cir.1987) (collective
knowledge in prosecution of bank for currency transaction reporting violations);
United States v. Gold, 743 F.2d
800, 822-23 (11th Cir. 1984) (Medicare fraud prosecution of medical
corporation); United States v. Phillip Morris
USA, Inc., 449 F. Supp. 2d 1, 893-894 (D.D.C. 2006) (“Corporations
are liable for the collective knowledge of all employees and agents within (and
acting on behalf of) the corporation.”) (citation omitted).
Although
willfulness may be inferred from circumstantial evidence, the Second Circuit has
held that the filing of an amended return after the filing of a false return
cannot provide the sole basis for an inference of willfulness. United States v. Dyer, 922 F.2d 105, 108
(2d Cir. 1990). In Dyer, the court
reversed a Section 7206(1) conviction because the trial judge’s instructions
allowed the jury to conclude that the defendant’s amended return, by itself,
could support a finding that he had known his original return to be false when
he filed it. 922 F.2d at 107-108. The filing of an amended return may indicate
that a taxpayer now believes the original return was inaccurate, but it does not
prove he had such knowledge at the time of the false filing. Id. at 108. Thus, without more, an amended
return provides only an inference of mistake, rather than of fraud. Id.; cf. Santopietro v. United States, 948 F. Supp.
145, 154 (D. Conn. 1996) (explaining Dyer and allowing introduction of amended
return coupled with other evidence), aff’d in part, vacated in part on other
grounds, 166 F.3d 88 (2d Cir. 1999), abrogated sub nom. Sabri v. United States, 541 U.S. 600
(2004).
In
United States v. Tishberg, 854
F.2d 1070, 1073 (7th Cir. 1988), the court decided that amended returns filed
between an audit and indictment may demonstrate a defendant’s good faith effort
to correct his past mistakes. As the trier of fact, the jury is free to consider
this evidence, but the filing of amended returns does not negate the import of
the defendant’s previous actions. Id. at 1073-74. A defendant’s act of filing
amended returns after he becomes aware that he is under criminal investigation
for tax evasion may be considered by the jury to evaluate the defendant’s true
intent during the earlier period. United
States v. Johnson, 893 F.2d 451, 453-54 (1st Cir. 1990). Where the
facts and circumstances establish that the defendant was aware of his receipt of
additional taxable income and failed to report it, a reasonable jury can
conclude that the defendant’s omission of income from his original returns was
intentional, as opposed to an act of negligence or mistake. United States v. Tishberg, 854 F.2d at
1073.
Similarly,
if a defendant underreported income on a false return, the inclusion of the
income on a subsequent return does not establish a lack of willfulness at the
time the original return was filed. The Seventh Circuit has held that a
subsequent return is not probative of the defendant’s state of mind at the time
he filed the false return. United States v.
McClain, 934 F.2d 822, 834-35 (7th Cir. 1991) (affirming trial
court’s exclusion of amended return offered by
defendant).
The
district court may be within its discretion to grant a motion in limine
to exclude the defendant’s amended return filed post-indictment, where the
return is offered for the purpose of showing that the defendant made a good
faith mistake in omitting income from his original return. United States v. Radtke, 415 F.3d 826, 840
(8th Cir. 2005). “Whether an amended tax return filed post-indictment
technically might be ‘relevant’ to the taxpayer’s intent at the time he filed
the original return, 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.” Id. at 840-41.
Reliance
by the defendant on a qualified tax preparer is an affirmative defense to a
charge of willful filing of a false tax return, if the defendant can show that
he or she provided the preparer with complete information and then filed the
return without any reason to believe it was false. See United States v. Tandon, 111 F.3d 482, 490
(6th Cir. 1997) (noting that jury instruction for professional reliance defense
not warranted where there was no evidence that full disclosure was made or that
advice was given); United States v.
Brimberry, 961 F.2d 1286, 1290-91 (7th Cir. 1992) (denying good faith
reliance defense in absence of full disclosure of all material facts); United States v. Wilson, 887 F.2d 69, 73
(5th Cir. 1989) (finding that professional reliance defense was not available
where defendant presented no evidence concerning either
element).
It is a
defense to a finding of willfulness that the defendant was ignorant of the law
or of facts which made the conduct illegal, since willfulness requires a
voluntary and intentional violation of a known legal duty. However, if the
defendant deliberately avoided acquiring knowledge of a fact or the law, then
the jury may infer that he actually knew it and that he was merely trying to
avoid giving the appearance (and incurring the consequences) of knowledge.
See United States v.
Dykstra, 991 F.2d 450, 452 (8th Cir. 1993); United States v. Ramsey, 785 F.2d 184,
189-91 (7th Cir. 1986) (mail and wire fraud charges).6 In such a case,
the use of an “ostrich instruction” -- also known as a deliberate ignorance,
conscious avoidance, willful blindness, or Jewell instruction, may be appropriate.
See United States v. Bussey, 942
F.2d 1241, 1245-48 (8th Cir. 1991); United
States v. Defazio, 899 F.2d 626, 635-36 (7th Cir. 1990); United States v. Jewell, 532 F.2d 697,
699-704 (9th Cir.1976); see generally Robin Charlow, Wilful Ignorance
and Criminal Culpability, 70 Tex. L.
Rev. 1351 (1992).
6.
Even if the defendant successfully avoided actual knowledge of the fact, “[t]he
required knowledge is established if the accused is aware of a high probability
of the existence of the fact in question unless he actually
believes it does not exist.” United States v.
Fingado, 934 F.2d 1163, 1166 (10th Cir. 1991); cf. United States v. MacKenzie, 777 F.2d
811, 818 n.2 (2d Cir. 1986) (“The element of knowledge may be satisfied by
inferences drawn from proof that a defendant deliberately closed his eyes to
what would otherwise have been obvious to him.”).
A number
of courts have approved the use of such instructions under proper circumstances.
See, e.g., United States v.
Griffin, 524 F.3d 71, 79 (1st Cir. 2008) (government did not forfeit
its right to request a willful blindness instruction where the evidence
supported such an instruction, simply because it contended at trial that
defendant had actual knowledge); United
States v. Alston-Graves, 435 F.3d 331, 338 n.2 (D.C. Cir. 2006)
(collecting cases reflecting that all circuits have approved willful blindness
instructions for specific intent criminal offenses when evidence supports
instruction); United States v.
Marston, 517 F.3d 996, 1003-04 (8th Cir. 2008) (district court did
not err in giving willful blindness/deliberate ignorance instruction in
prosecution for filing false tax documents); United States v. Bornfield, 145 F.3d
1123, 1128-30 (10th Cir. 1998) (finding no plain error in trial court’s use of
deliberate ignorance instruction in money laundering case); United States v. Neville, 82 F.3d 750,
759-60 (7th Cir. 1996) (drug conspiracy); United States v. Hauert, 40 F.3d 197, 203
(7th Cir. 1994) (finding, in false returns and evasion case, no error in court’s
instruction that “[n]o person can intentionally avoid knowledge by closing his
or her eyes to information or facts which would otherwise have been obvious”);
United States v. Bussey, 942 F.2d
1241, 1246-51 (8th Cir. 1991) (false returns, failure to file, and false
statement under 18 U.S.C. §1001); United
States v. Fingado, 934 F.2d 1163, 1166-67 (10th Cir. 1991) (failure
to file); United States v.
Picciandra, 788 F.2d 39, 46-47 (1st Cir. 1986) (evasion); United States v. MacKenzie; 777 F.2d
811, 818-19 (2d Cir. 1985) (conspiracy and false returns); United States v. Callahan, 588 F.2d
1078, 1081-83 (5th Cir. 1979) (evasion). However, it has also been said that the
use of such instructions is “rarely appropriate.” United States v. de Francisco-Lopez,
939 F.2d 1405, 1409 (10th Cir. 1991) (per curiam) (reversing drug
possession conviction where deliberate ignorance instruction given); United States v. Heredia, 483 F.3d 913,
924 n.16 (9th Cir. 2007) (collecting cases); cf. United States v. Rodriguez, 983 F.2d
455, 457-58 (2d Cir. 1993) (noting that in the Second Circuit, unlike the Ninth,
a “conscious avoidance” charge is “commonly used.”).
Thus, it
is advisable not to request such an instruction unless it is clearly warranted
by the evidence in a particular case. Furthermore, the language of any
deliberate ignorance instruction in a criminal tax case must comport with the
government’s obligation to prove the voluntary, intentional violation of a known
legal duty. The deliberate ignorance instruction set forth in United States v. Fingado, 934 F.2d at
1166, appears to be suitable for a criminal tax case. Out of an abundance of
caution, however, a prosecutor may wish to utilize the instruction set out in
United States v. MacKenzie,
777 F.2d at 818 n.2. Further, to avoid potential confusion as to the meaning of
“willfulness” as it relates to the defendant’s intent, it may be wise to avoid
use of the phrase “willful blindness,” using instead such phrases as “deliberate
ignorance” or “conscious avoidance.” Any time a deliberate ignorance or
conscious avoidance instruction is given, the prosecutor should also insure that
the jury is expressly directed not to convict for negligence or
mistake.
“[T]he place of signing a tax
return does not control the determination of venue[]” for a charge under Section
7206(1). United States v.
Marrinson, 832 F.2d 1465, 1475 (7th Cir. 1987). Venue in a Section
7206(1) prosecution lies in any district where the false return was made,
subscribed, or filed. Id.; United States v. Shyres, 898 F.2d 647,
657-58 (8th Cir. 1990). Venue also lies in the district where the false return
was prepared and signed. United States v.
Rooney, 866 F.2d 28, 31 (2d Cir. 1989); Marrinson, 832 F.2d at 1475; United States v. King, 563 F.2d 559, 562
(2d Cir. 1977). Venue may also lie “where the preparer received information from
the defendant even though the defendant signed and filed the returns elsewhere.”
United States v. Marrinson,
832 F.2d at 1475 (collecting cases).
The statute of limitations for
Section 7206(1) offenses is six years. In the case of a return, the limitations
period runs from the date of filing, unless the return is filed early, in which
case the statute of limitations runs from the statutory due date for filing.
26 U.S.C. § 6531(5); United States v.
Habig, 390 U.S. 222, 225 (1968); United States v. Marrinson, 832 F.2d
1465, 1475-76; United States v.
Samara, 643 F.2d 701, 704 (10th Cir. 1981). (For rules
relating to employment taxes, see Section
7.02[5].)
www.irstaxattorney.com 888-712-7690
No comments:
Post a Comment