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April 1999 White-Collar Crime By Kathryn Keneally
Ill-Advised Government Theories In recent years, the government has made increasing use of Section 7212(a) of the criminal enforcement provisions of Title 26, the Internal Revenue Code. Despite well-grounded defense challenges and considerable public criticism of these efforts, few courts have imposed limits on the government’s efforts.1 Recently, however, in a prominent prosecution under Section 7212(a), the government’s theory has been rebuffed by a jury. Perhaps now the government will consider the repeated suggestions that it review its policies in bringing these prosecutions. In contrast, it is not likely that the government will give even a second thought to the practices that it defended in obtaining the en banc reversal of the panel decision in United States v. Singleton.2 Nonetheless, it is perhaps fascinating to note that prosecutors at one time had a far different view of the law and of fundamental policy in this regard. Key Defense Victory At Trial in a Section 7212(a) Case The so-called “omnibus” clause of Section 7212(a) imposes criminal liability on any person who “corruptly . . . endeavors to intimidate or impede” an Internal Revenue Service (IRS) officer or employee or who “in any other way corruptly . . . obstructs or impedes, or endeavors to obstruct or impede, the due administration” of the Internal Revenue Code. As previously reported in this column, this issue took on greater concern with the investigation and prosecution of several National Basketball Association (NBA) referees.3 Legal challenges to the indictments against the referees have been rejected in several federal district courts. Now, however, comes news of the rejection of the government’s theory of prosecution — not by the court but by the jury — with the acquittal in United States v. Javie.4 The NBA referees were entitled, under their collective bargaining agreement, to travel first class on all flights exceeding two hours, in connection with their duties. The referees were also entitled to downgrade from the first-class or full-fare tickets, and to keep the difference. The indictment in Javie charged that the referees were required to submit receipts to the NBA reflecting the actual cost of their airline tickets, and that “[i]f a referee chose to downgrade, that is, fly on a less expensive ticket than that to which he was entitled under the labor agreements, the difference in cost represented taxable income to the referee.”5 The indictment further charged that the NBA was required to report this income as a fringe benefit on the referee’s Form W-2, and that the NBA allegedly “took steps to ensure that the referees knew and understood the various travel reimbursement policies and their obligations to accurately report their actual travel expenses.”6 The indictment in Javie specifically charged that the defendant obtained two sets of airline tickets for each flight, one at the full or first class fare permitted under the collective bargaining agreement, and a lower fare ticket. The more expensive ticket was then voided but, according to the indictment, was nonetheless used for submission for reimbursement by the NBA. The indictment charged that the NBA “relied on [the defendant’s] false submissions to compute his fringe benefit income that was reported to the IRS on his Forms W-2.”7 The indictment further charged that the defendant “failed to disclose to his tax preparer that he had received fringe benefit income from the NBA” and that he “falsely advised his tax preparer” that he used tickets provided by the NBA to travel to games.8 The indictment charged three violations of Section 7206(1), willfully filing a materially false tax return, and one violation of Section 7212(a), corruptly endeavoring to impede the due administration of the Internal Revenue Code. District Courts Have Rejected Challenges to Several Referee Indictments The charges in Javie were typical of the charges that had been brought in other cases against NBA referees. In the first of these cases to be addressed by the courts, United States v. Mathis,9 the court initially determined that, under the applicable regulations, because the referees were entitled to keep the difference between the cost of first-class tickets and their actual expenses, the NBA was required to report the full amount of the first-class airfare on the referees’ W-2 forms regardless of what documentation the referees submitted.10 The court’s initial decision concluded that it was irrelevant that the defendant failed to comply with the NBA’s requirements. The court then noted that, once the allegations concerning the submission of documents to the NBA were removed from the Mathis indictment, the only conduct on which the government could purport to be basing a Section 7212(a) prosecution was “defendant’s allegedly causing the preparation and filing of false tax returns,” which was the identical conduct on which the indictment based the Section 7206(1) charge of willfully filing a materially false tax return.11 The court found that “Congress did not intend for a defendant to be held culpable under both Sections 7206(1) and 7212(a) based exclusively on the same alleged conduct.”12 The initial decision in Mathis thus reasoned that “[w]hile it is possible to view a defendant’s filing false returns as being corrupt behavior intended to impede or obstruct administration of the Tax Code, the Court finds this reading of Section 7212(a) to be too broad.”13 The court relied on both statutory interpretation and the doctrine of multiplicity to dismiss the Section 7212(a) charge. Following the district court’s initial decision in Mathis, however, two district courts rejected similar arguments made by NBA referee defendants in United States v. Armstrong,14 and United States v. Toliver.15 Although the Armstrong and Toliver decisions were both issued by courts in the Fourth Circuit, which has historically given Section 7212(a) a broad interpretation,16 the district judge in Mathis, located in the Southern District of Ohio, granted the government’s motion to reconsider in view of the decisions in Armstrong and Toliver. None of these decisions was appealed; rather, the defendants in Armstrong, Toliver and Mathis all entered plea agreements. Subsequent to the guilty pleas in the three referee cases, the Sixth Circuit rendered its decision in United States v. Kassouf.17 The indictment in Kassouf charged the defendant with willfully attempting to evade income tax and willfully filing materially false tax returns, in violation of Title 26, Sections 7201 and 7206(1), and also included a charge that, in the steps taken in preparation for filing his personal tax return, the defendant corruptly endeavored to impede the administration of the tax code in violation of Section 7212(a). The Sixth Circuit read into Section 7212(a) a requirement that the defendant be on notice of a pending IRS proceeding, and held that the indictment in Kassouf failed to plead this necessary element.18 The court concluded that “[b]ecause Title 26 encompasses such routine actions . . . imposing liability for actions committed before a person knew of an investigation or proceeding, would open them up to a host of potential liability of conduct that is not proscribed.”19 The defendant in Javie raised arguments in support of the dismissal of the Section 7212(a) count similar to those arguments that had been raised in Mathis, Armstrong and Toliver, and also raised the Kassouf argument. All were rejected by the district court in a ruling from the bench. Thus, the defendant in Javie proceeded to trial. Defense Arguments Persuaded Javie Jury Gregory Magarity of Philadelphia, trial counsel in Javie, credits his victory to several factors. Two defenses were presented. First, the defense contended that the NBA referees perceived the NBA reporting requirements in connection with airline tickets as an attempt to hinder the referees’ exercise of their rights, under the collective bargaining agreement, either to fly first class or to keep the difference in the ticket prices. Thus the defense in Javie contended that the submission of the full fare, albeit voided, ticket receipts to the NBA was not done with the intent to evade taxes, but rather was done to secure the full payment due to the defendant from the NBA. Second, as a corollary, the defense was able to show that the defendant, while paying for coach or reduced fare tickets, in fact flew first class on virtually all of the flights at issue. He accomplished this through the use of his frequent flyer awards. To redeem the frequent flyer awards, the defendant presented the lower fare ticket to the airline at the boarding gate, and received a boarding pass for the upgraded first-class seat. As a result, the defendant did not have a ticket or a receipt to submit to the NBA, and chose instead to submit his voided first-class ticket receipts. The government argued that the frequent flyer awards had no value, and accordingly contended that the difference between the coach fare paid by the defendant and the full fare reimbursed by the NBA was income to the defendant. In contrast, the defense contended — apparently persuasively — that the receipts that the defendant submitted to the NBA, while themselves voided and therefore not the actual expense receipts, in fact accurately reflected the flights actually flown by the defendant, and the class of service that he used. A fundamental element of the non-Section 7212(a) charge against the defendant in Javie, and indeed in all non-Section 7212(a) felony prosecutions, is willfulness. In criminal tax cases, to prove willfulness, the government must show that the defendant committed a voluntary and intentional violation of a known legal duty.20 The defense in Javie contended that the defendant in good faith believed that the first-class ticket receipts that he submitted to the NBA, while based on voided tickets, were not false because they were of the same value as the combination of the coach ticket and the frequent flyer awards. In addition to the defendant’s testimony, the defense presented two expert witnesses. One defense expert, a former IRS special agent, testified that it was his opinion that the frequent flyer awards had a fair market value, and that the use of frequent flyer awards for business travel constituted a deductible expense for tax purposes. The second defense expert, a former IRS revenue agent, presented a summary report of the defendant’s travel records, including the value of the frequent flyer awards used in the upgrades. Defense counsel Greg Magarity reports that the issue of expert witness testimony was greatly contested at trial. Ultimately, he prevailed in persuading the court to permit the proffered expert testimony by relying on the Eleventh Circuit opinion in United States v. Lankford.21 The court in Lankford reversed a conviction for willfully filing a materially false tax return because the trial court did not allow the defendant’s expert to testify as to the reasonableness of his conclusion that the amount omitted from the return was a gift and not income. The court stated: “Any evidence concerning the reasonableness of [the defendant’s] belief . . . is relevant to the determination of whether [he] willfully violated the tax laws.”22 Notably, Section 7212(a), unlike other tax felonies, does not expressly contain a willfulness element. Defense counsel Magarity reports that the trial court in Javie, while refusing a request to charge willfulness in connection with the Section 7212(a) count, did give a strong specific intent charge on that count, and further instructed the jury that the defendant’s act of filing his personal tax returns could not, of itself, constitute an act in violation of Section 7212(a). All congratulations must go to Greg Magarity on a fight well fought. Government’s View of the Issues Raised in Singleton Have Changed Over Time By the time this column is published, much will have been written about the Tenth Circuit’s reversal en banc panel decision in United States v. Singleton.23 I wish to add only one historical perspective. As is true for many — if not most — in the white-collar defense bar, I have represented persons on both sides of the Singleton equation — those whose only chance for leniency is to cooperate and those against whom such bargained-for testimony has been proffered. Had the well-reasoned panel decision been sustained, it certainly would have altered the landscape as we currently know it. In the Singleton en banc opinion, the court noted the government’s argument that to hold that federal law might proscribe an offer of leniency in exchange for testimony “would not only be a radical departure from the ingrained legal culture of our criminal justice system but would also result in criminalizing historic practice and established law.”24 However, this current position is apparently not consistent with the viewpoint once held by the government. I have long been privileged to enjoy the perspective on the legal practice offered by my senior partner, Boris Kostelanetz, who is now 87 years old. When Mr. Kostelanetz read that a court had held that an offer by the prosecution of leniency in exchange for testimony was a bribe in violation of federal law, his comment was succinct: “Of course it is,” he said. Mr. Kostelanetz’s certainty came not from his years as a defense lawyer, but from his earlier training as a federal prosecutor. Moreover, he based his view not merely on common sense or recollection, but on a document that he once considered to be the starting point for good government practice in criminal law: the 1935 Practice Manual for Assistant United States Attorneys for the Southern District of New York. Mr. Kostelanetz’s long-preserved copy of that tome, in startling contrast to today’s practices, states: No assistant is authorized under any circumstances, to make any representation or statement as to what the Government’s recommendation will be: a. As to sentence after a plea or conviction; b. As to the disposition of the remaining counts following a plea of guilty to certain counts only; or c. As to the disposition of the case against the defendant in the event of a plea by a codefendant. Prosecutors have argued that they need the ability to make deals with witnesses to prove complex conspiracies. In full disclosure, while Mr. Kostelanetz may recall the prosecution of Al Capone, he did not participate in that case. He can count among his prosecutorial successes, however, the conviction of Capone’s enforcer, Frank Nitti. And while it may be awhile ago, he can still remember how it was done when a witness’s testimony could not be bought for any price — even, and especially, for a promise of leniency. Notes 1. A notable exception is the Sixth Circuit’s decision in United States v. Kassouf, 144 F.3d 952 (6th Cir. 1998), which is discussed more fully later in this column. 2. 1999 U.S. App. Lexis 222 (January 8, 1999). 3. See Hard Facts and Tax Protesters, The Champion, August 1997. 4. Criminal No. 98-328-1 (E.D. Pa.). 5. Id., Indictment, Count 1, ¶ 4. 6. Id., Indictment, Count 1, ¶¶ 5 & 6. 7. Id., Indictment, Count 1, ¶¶ 10-13. 8. Id., Indictment, Count 1, ¶ 15. 9. Case No. CR-1-97-15 (S.D. Ohio). 10. Id., slip op. at 10-16 (S.D. Ohio, June 2, 1997), rev’d on reconsideration (Dec. 17, 1997); IRC Reg. § 1.62-2. 11. Id., slip op. at 16 (reversed on motion for reconsideration). 12. Id., slip op. at 18 (reversed on motion for reconsideration). 13. Id., slip op. at 19 (footnote omitted) (reversed on motion for reconsideration). The analysis of the initial district court opinion in Mathis was consistent with the language of the long-standing policy directive of the Tax Division of the Department of Justice. See Department of Justice Tax Division Directive No. 77 (dated July 7, 1989), titled “Section 7212(a) Policy Statement” (the directive is reprinted in Department of Justice Criminal Tax Manual at 3-29 to 3-30 (1995-1 Supp. at 6-245)). 14. 974 F. Supp. 528 (E.D. Va. 1997). 15. 972 F. Supp. 1030 (W.D. Va. 1997). 16. See, e.g., United States v. Mitchell, 985 F.2d 1275 (4th Cir. 1993). 17. 144 F.3d 952 (6th Cir. 1998). 18. Id. at 956-58. The court drew an analogy between Section 7212(a) and Section 1503 of title 18, which criminalizes corruptly endeavoring to obstruct or impede “the due administration of justice.” The court noted that the inclusion of the language “the due administration of justice” had long been held to require a showing of the existence of a judicial proceeding as to which the defendant had notice. The court held that the parallel language of Section 7212(a) similarly required a nexus between the defendant’s conduct and the “due administration of this title” which could be met only by the existence of an IRS audit or investigation as to which the defendant had notice. See, e.g., United States v. Aguilar, 515 U.S. 593 (1995) (holding that uttering false statements to an investigative agent is an insufficient showing on which to base a Section 1503 obstruction of justice prosecution). 19. Kassouf, 144 F.3d at 957. 20. See, e.g., Cheek v. United States, 498 U.S. 192, 201 (1991); United States v. Pomponio, 429 U.S. 10, 12 (1972). 21. 955 F.2d 1545 (11th Cir. 1992). 22. Id. at 1550. 23. 1999 U.S. App. Lexis 222 (10th Cir., January 8, 1999) (en banc). 24. Id. at *5. 25. Practice Manual for Assistant United States Attorneys, The Office of the United States Attorney for the Southern District of New York, April 15, 1935, at 22-23. n
White-Collar Crime Kathryn Keneally 230 Park Ave, Ste 1140 New York NY 10169 Phone (212) 808-8100 Fax (212) 808-8108 | |||||||||
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