Monday, February 4, 2008
Tax Profs comment below the fold on Friday's acquittal of Wesley Snipes on the most serious tax fraud and conspiracy charges:
- Linda M. Beale (Wayne State)
- Neil H. Buchanan (George Washington)
- Bryan T. Camp (Texas Tech)
- Calvin H. Johnson (Texas)
- John Lee (William & Mary)
- Elliott Manning (Miami)
- Susan Murnane (College of Wooster)
- Ann Murphy (Gonzaga)
- Dave Rifkin (Georgetown)
- Walter D. Schwidetzky (Baltimore)
- Alan D. Westheimer (Houston)
Linda M. Beale (Wayne State):
Wesley Snipes somehow got embroiled in one of the wacky tax protestor dodges pushed by an anti-tax group called the American Rights Litigators. [See It Doesn't Pay Not to File Your Taxes: Wesley Snipes.]
Neil H. Buchanan (George Washington):
Notwithstanding the focus on the acquittal for the felony counts, the jury did convict on 3 misdemeanors. Although it is unlikely that Snipes will receive the 3-year maximum jail time, he might well serve some time in jail; so this is hardly a case where a tax denier got off scot-free. He does still owe the tax plus interest plus penalties; so for his efforts, Snipes will pay much more to the government than he otherwise would have, he'll pay huge legal fees, and he's been convicted of criminal offenses. Everyone can do their own cost-benefit analyses, but it's difficult to see this as a smart move.
Bryan T. Camp (Texas Tech):
It is sad to see a man as rich as Mr. Snipes striving to cheat his fellow citizens out of his fair contribution to our common government. It is also ironic that he sought to undermine the very system which enabled him to earn his great wealth.
More than the sadness and irony with respect to Mr. Snipes, however, I see this case as being a sad and ironic commentary on the dysfunctional procedures used in federal tax law enforcement.
It is ironic because the headlines say "Snipes Acquitted." Only buried in the back page, under the fold, at the end of the story, is the part where he was convicted of three misdemeanor counts. So although the government gets a criminal conviction, the acquittal obliterates the deterrent effect the convictions might otherwise have generated. How much different it could have been if, instead of going for the "gold" standard of a felony conviction, those responsible for this prosecution had simply contented themselves with the misdemeanor prosecution. Then the headlines would simply say "Snipes Convicted of Tax Crimes." The sad part is that did not happen.
We are stuck with this sad result by the stubborn refusal of the Department of Justice to prosecute "mere" misdemeanors.
I do not know whether a felony prosecution here was reasonable ex ante. It most likely was and the trial just did not break well for the prosecution. Those matters are beyond my ken. However, I certainly DO know that the Department of Justice employees responsible for prosecuting tax crimes have long refused to prosecute stand-alone misdemeanors. You have to give them a felony to prosecute, even when the misdemeanor is a strict liability misdemeanor such as 26 USC section 7215. So the IRS attorneys responsible for sending prosecution recommendations to DOJ likewise have consistently demanded that only "righteous" cases get referred. When at the IRS I was told time and again that misdemeanor prosecutions were just not worthy of federal prosecution resources. Time and again taxpayers who were flagrantly flouting the tax laws (particularly employment tax liabilities) never faced a jury of their peers. Since I left the IRS I have heard similar stories from other agency counsel: if it ain't a felony, you cannot get the Department of Justice to prosecute. In one sense this is understandable. Resources are finite...yadda, yadda, yadda. And tax felonies are notoriously hard to prosecute because a defendant has only to create a reasonable doubt in the jury's mind about his subjective good faith---he can have the most outrageous beliefs and act on those beliefs so long as he can convince a jury of his sincerity. Cheek v. United States, 498 U.S. 192 (1991).
I think the Snipes case supports the proposition that requiring a felony prosecution is a short-sighted strategy. Congress has made it a crime for the "willful failure to file return, supply information, or pay tax." § 7203. Again, while I don't know the strengths of the case ex ante, I strongly suspect that prosecutors were locked into the mindset that they HAD to go for a felony conviction. Nothing "less" would do. A myopic focus on jail time misses the point of a criminal conviction: improved compliance by both the convicted taxpayer and others similarly situated. For example, we want people to file their returns. A criminal conviction for failure to file returns could be a wake-up call to many folks. It is true that federal tax misdemeanors such as § 7203 carry small criminal fines and may in fact result in "mere" probation rather than the authorized jail time. On their face, that might appear to offer little deterrence. But the courts have discretion to restrict a convict's ability to engage in a particular occupation, profession, or business as a condition of probation. U.S.S.G. § 5B1.3(e)(4). Thus, even probation may be useful to achieve compliance. Congress has also spoken to this issue, by enacting the Criminal Fine Enforcement Act of 1984, P.L. 98-596, currently codified at 18 U.S.C. § 3571. This statute provides for fines of $100,000 or twice the actual pecuniary damage, whichever is greater, for conviction of a Class A misdemeanor. Most of the tax misdemeanors such as section 7203 fit the definition of a Class A misdemeanor. See 18 U.S.C. § 3559 (Class A misdemeanor is any offense in the U.S. Code which is punishable by imprisonment of more than six months but less than one year). In short, it may be helpful to stop thinking of it as a federal tax misdemeanor and to start thinking of it as a federal tax misdemeanor.
From time to time DOJ allows agency counsel to be appointed as "Special Assistant U.S. Attorneys" for specific purposes. Currently, many IRS attorneys are "SAUSAs" for bankruptcy cases. At one time, there were a small number of IRS attorneys who were designated as SAUSAs to prosecute tax misdemeanors. If you go back to the 1970's you will find convictions for tax misdemeanors. E.g. United States v. Randolph, 588 F.2d 931 (5th Cir. 1979); United States v. Erne, 576 F.2d 212 (9th Cir. 1978); United States v. Gay, 576 F.2d 1134 (5th Cir. 1978). (I don't know for sure whether these were prosecuted initially SAUSAs, but I'd lay odds). For reasons I never learned, that program died and most of those SAUSAs have since left the IRS. It might be time to revive that program.
Calvin H. Johnson (Texas):
Failure to pay $38 million in taxes is a level 28 offense, for which the recommended federal sentence is 78-97 months. Provided he has no priors. Federal Guidelines, tax table and sentencing table.
John Lee (William & Mary):
United States v. Karlin, 77 A.F.T.R.2d (RIA) 2403. Defendant filed a motion for partial summary judgment arguing that imposition of the civil penalties following his acquittal on criminal tax fraud charges violated the Double Jeopardy Clause of the Fifth Amendment. On appeal, defendant conceded that the litigation was still proceeding below and that the district court's denial of his Rule 54(b) motion rendered all issues other than the double jeopardy appeal premature. However, he maintained that the denial of his double jeopardy motion was a final decision within the meaning of 28 U.S.C. § 1291. The court determined that the decisions, which defendant relied on, established that a defendant could immediately appeal a pretrial order in this context to avoid exposure to double jeopardy and that to preserve such right, the challenge had to be reviewable before that subsequent exposure occurred. Defendant, however, did not immediately appeal the double jeopardy decision but rather defended and lost on the merits of the assessment claim before appealing. He therefore had already suffered the exposure. Accordingly, the court lacked jurisdiction and dismissed the appeal.
Christensen v. Commissioner, T.C. Memo 1982-235. Melvin G. Christensen further argues this proceeding, which involves civil fraud (§ 6653(b)) as well as the deficiencies in income tax, subjects him to double jeopardy since he was previously tried and acquitted in a criminal tax case involving violations under § 7206(1) for the years 1966, 1967 and 1968. Petitioner's contention is groundless. A civil tax fraud case is not a criminal case. Consequently, petitioner Melvin G. Christensen is not permitted to claim Fifth Amendment protection.
Elliott Manning (Miami):
The IRS chose a high pro-life taxpayer for the press. They probably thought they had a slam dunk. Or maybe somebody misjudged. 30 years ago, the IRS forced me into Claims Court on a weak case because they had lost the case against the taxpayer on the other side that they had won. Their explanation was that they were being whipsawed and wanted a precedent against being whipsawed. They lost and now have a precedent that whipsawing is OK. Tactical, if not strategic, error.
Susan Murnane (College of Wooster):
Rest assured that Wesley Snipe will spend considerable time in jail, perhaps even the whole 3 years to which he is potentially liable. The sentencing guidelines determine his jail time based on the amount of the tax avoided even though the convictions are misdemeanors. I don't know how much tax Snipes allegedly avoided so I can't compute a guideline range for his probable incarceration, but I bet it is a whole lot of money and a whole lot of time.
As for Snipes' liability for the fraud penalty, that is up to the IRS to prove. Evasion collaterally estops on the issue of fraud but the misdemeanor failure to file doesn't have the same effect. The IRS will have to prove failure to file with intent to defraud the government of the tax in the civil fraud case. On the other hand, there is no statute of limitations on tax and interest and failure to file penalties in a failure to file situation so those financial penalties are givens so long as the funds are someplace that the government can collect from or levy on.
In the past, IRS attorneys too frequently relied on a presumption of fraud from criminal conviction and lost civil fraud cases as a result. If the bureaucratic lottery assigns this fraud case to a lazy, stupid, or inexperienced lawyer, Chief Counsel could lose this one too. Given the high profile of this case, however, I don't think they'll do that. There are plenty of smart lawyers at IRS Chief Counsel, and I expect that management will assign one of the best to this case. From what the press has reported of the criminal trial, a competent Chief Counsel attorney should have no difficulty proving fraud and assessing the fraud penalty. Collecting it will be a problem of a different order.
Alan D. Westheimer (Houston):
I agree with Susan that Snipes is going to prison although not for a very long time and it will probably add to his mystique a la Johnny Cash, Chuck Berry, and Robert Downey, Jr. He will also pay a lot of tax, interest, and failure to file penalty. The civil fraud penalty is another thing again. See the Wickersham cases cited by me in an earlier email. This guy was convicted of tax evasion and went to prison, but the IRS/DOJ was not able to convince the Tax Court to assess the civil fraud penalty against him.
Ann Murphy (Gonzaga):
From what I read, he received plenty of information from the IRS that his arguments were flawed. If he was a "mark," then once he received this information from the IRS, he's no longer a mark. Typically, the IRS will send a lot of case cites with its letter - letting the person know that the arguments of the promoters are bogus.
I think the real problem here is not with Snipes, but with the press the verdict caused. It's been portrayed as a win. And that's never good for the IRS.
Dave Rifkin (Georgetown):
Stating that Mr. Snipes was acquitted of “tax fraud” may lead to the misconception that Mr. Snipes was acquitted of attempted tax EVASION (§ 7201) or acquitted of violating of § 7206(1) (fraud and false statements). This is not the case.
Mr. Snipes was NOT charged with violating §§ 7201 or 7206(1). Instead he was charged with willfully failing to file income returns in violation of § 7203 (counts 3 through 8 of the indictment) and the jury convicted him on 3 of these counts. Additionally, he was charged with, and acquitted of: a Klein conspiracy (tax conspiracy) in violation of 18 U.S.C. § 371 (count 1 of the indictment), and knowingly making and presenting, and aiding and abetting, a materially false, fictitious, or fraudulent claim for payment in violation of 18 U.S.C. §§ 2 and 287 (count 2 of the indictment). The indictment is available here.
This may be a subtle point, but the media is portraying the acquittal as if Mr. Snipes got away with tax evasion. I know the difference between felony evasion (failure to file combined with an affirmative act of evasion) and misdemeanor willful failure to file may be lost on a broader audience, but I think the readers of your blog are savvy enough to understand the difference.
Walter D. Schwidetzky (Baltimore):
I know next to nothing about criminal law, tax or otherwise, but years ago I represented some tax protestors. The string pullers definitely deserved to go to jail (though none did, as far as I am aware, for tax crimes--one, not a client, was convicted at the trial level, but the 5th circuit reversed; another went to jail for exposing himself to a young boy). But it would be hard to argue that their "clients" aka marks should go to jail. They mostly just got conned. Believe me, the tax con men can be very persuasive (partly because they believe in their own cons). And some of those clients were smart. At one stage a lot of airline pilots fell for this. All of which brings me to my question. Was Snipes a more of a mark? If he was, couldn't the jury reasonably conclude that he did he lacked the necessary mens rea?
Alan D. Westheimer (Houston):
United States v. Wickersham, No. 1:92-CR-98-1 (E.D. TX ); United States v. Wickersham, 29 F.3d 191 (5th Cir. 1994); Wickersham v. Commissioner, T. C. Memo 1999-276. Charles T. Wickersham was convicted of criminal tax fraud for making a false statement on his tax return in violation of § 7206(1) about an alleged involuntary conversion under § 1033. Wickersham appealed his conviction to the United States Court of Appeals for the Fifth Circuit, which affirmed the conviction pursuant to which he was incarcerated for a period of time. Later, the IRS asserted a deficiency of about $98,000 plus the 75% civil fraud penalty pursuant to § 6663(a) of about $73,000 related to the same transaction. Wickersham filed a petition in Tax Court to adjudicate the civil tax controversy. Despite his criminal tax fraud conviction, statutorily based on proof beyond a reasonable doubt, the Tax Court, based on the less stringent proof of “clear and convincing evidence,” found: After reviewing all of the facts and circumstances, we conclude that [the IRS] has failed to prove clearly and convincingly that for 1989 Mr. Wickersham intended to evade taxes known to be owing by conduct intended to conceal, mislead, or otherwise prevent the collection of taxes. Accordingly, we do not sustain the fraud penalty for 1989.
Alan; Wickersham was not a tax evasion case. Wickersham (29 F3d 191 1994) was a 7206(1) case. Wickersham was convicted of filing a false return. Wickersham falsely reported the sale of a failing business threatened with foreclosure as an involuntary conversion. The offense of filing a false return does not require proof of a tax due let alone an intent to evade tax. Taxpayers have been convicted of filing false returns by OVERSTATING gross receipts. But clear and convincing proof of both a tax due and intent to evade it are necessary in order to prevail in a civil fraud case.
The government lost the tax court fraud case in Wickersham because the government erroneously relied on the criminal conviction as evidence of fraudulent intent to evade tax. Either the government didn't have or didn't produce additional evidence showing an intent to evade tax.
A litigator can always lose a case on the evidence, and the government could lose the Wesley Snipes fraud case. You don't need to prove a tax due for failure to file, and even though the government will prove one for the sentencing hearing, unless Snipes stipulates to it in order to look good for the sentencing court it won't establish any tax amount for the civil tax case. And the government will have to present clear and convincing evidence of intent to evade that tax. It seems from the newspapers that the evidence is there: Snipes owed tax, knew his position was legally insupportable and would keep taxes out of the hands of the government, and took steps to prevent the government from finding out the true amount of his tax. That's all the IRS needs to prevail, but they will have to prove it.