Paul L. Caron

Wednesday, August 15, 2007

Federal Judge Dismisses Tax Evasion Indictment Against Evangelist Because Prosecutor Misled Grand Jury About Duberstein Test for Distinguishing Gifts from Service Income

The federal district court in San Diego issued a fascinating opinion last week in United States v. Cerullo, No. 05cr1190 (S.D. Cal. 8/9/07), dismissing a tax evasion indictment against evangelist Morris Cerullo, president of Morris Cerullo World Evangelism, on the ground of prosecutorial misconduct in misleading the grand jury about the applicable legal test for determining whether a payment constitutes a nontaxable gift under Commissioner v. Duberstein, 363 U.S. 278 (1960):

[I]n this case there is one crucial over-arching legal question, the answer to which came from the Supreme Court almost half a century ago – the legal tax question of how to distinguish between reportable income and a non-reportable gift. Unfortunately, the prosecutor did not attempt to inform the grand jury of the Supreme Court’s decision. Whether a prosecutor would have such a duty absent a question from the grand jury, this Court need not decide. Here, the prosecutor’s duty to instruct correctly is plainly apparent. The tax statute is silent. The grand jury asked repeatedly how to distinguish a gift from earnings. It was incumbent on the prosecutor to correctly inform the grand jury as to the Supreme Court’s approach on this penultimate question. Yet, the prosecutor and the revenue agent witnesses failed to tell the grand jury that the donor’s intent is the most critical factor. Their failure misled the grand jury and amounts to misconduct. ...

[T]his case illustrates the specter of a federal tax prosecution that faces every clergyman, minister, rabbi, and cleric who receives money after delivering a sermon. Such tax cases must be considered by government prosecutors with great care lest the Government trench on rights afforded by the Free Exercise Clause and convert that which is a guaranteed liberty into a federal crime. In this case, the prosecutor did not exercise that necessary care before the grand jury. Consequently, the grand jury was misled on the law, was unable to correctly adjudge the evidence, and no longer operated as an independent body and buffer between the Government and the Defendant. As a direct result, the Defendant has suffered substantial prejudice.

For more details, see the Associated Press and San Diego Union-Tribune.  (Hat Tip:  Richard Winchester.)

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» A really interesting tax indictment dismissal. from Appellate Law
TpB points to United States v. Cerullo, No. 05cr1190 (S.D. Cal. 8/9/07). Apparently the government was not straight with the grand jury regarding the “Duberstein test” as applied to monies received by a preacher. Judge Benitez wrote:[T]his case illustr... [Read More]

Tracked on Aug 15, 2007 3:54:50 AM


Giving the Honorable Judge Benitez and his indefatigable law clerk the benefit of the doubt, I believe that both reserved the "ultimate" question to the guilt or innocence of the indicted evangelical.
Frankly, the best part of Justice Brennan's opinion in Duberstein is his quotation of the words of Justice Cardozo in Welch vs. Helvering. Whether distinguishing between a gift or compensation, or attempting to define the constituent elements of an "ordinary and necessary expense", such a highly factual determination should perhaps be made in the manner stated by Justice Cardozo: "Here, indeed, as so often in other branches of the law, the decisive distinctions are those of degree and not of kind. One struggles in vain for any verbal formula that will supply a ready touchstone. The standard set up the statute is not a rule of law; it is rather a way of life. Life in all its fullness must supply the answer to the riddle."

Posted by: Jonathan S. Ingber | Aug 16, 2007 9:44:31 AM

Apparently, neither Judge Benitez nor his law clerk know the meaning of the word "penultimate."

Posted by: Jeff | Aug 15, 2007 7:08:03 AM