IRS 200142020: Criminal Tax Bulletin summarizes six appellate decisions

Plain-English summary

This Criminal Tax Bulletin is an informational collection of case summaries, not a ruling on one taxpayer's request. It reports a decision rejecting a Fifth Amendment defense to failing to file tax returns and two decisions about claims for defense costs under the Hyde Amendment. It also summarizes three criminal sentencing decisions involving money laundering or racketeering. The bulletin says it is not a directive and provides a table of the cases discussed.

Ruling snapshot

• Question: What recent criminal tax and sentencing decisions did Chief Counsel summarize?
• Outcome: Other: informational case bulletin, with no taxpayer ruling.
• Key authorities: IRC §§ 6012, 7203; Hyde Amendment; federal sentencing guidelines.

Full text (IRS public release)

Number: 200142020
CT-124307-01
Release Date: 10/19/2001
UILN: 9999.98-00
CC:CT
August 1, 2001

Criminal Tax Bulletin
Department of Treasury
Office of Chief Counsel
Internal Revenue Service
Criminal Tax Division

JUNE This bulletin is for informational purposes. It is not a directive. 2001

TITLE 26 AND TITLE 26
unreasonably restrain interstate trade and commerce in
violation of Section 1 of the Sherman Act. After his
RELATED CASES
acquittal, True filed an application under the Hyde

Fifth Amendment Privilege Not Violated By Amendment seeking to recover his litigation costs.
Codified in the statutory notes to 18 U.S.C. § 3006A, the Filing Requirement
Hyde Amendment authorizes reasonable attorneys’ fees and litigation expenses to a prevailing party in a criminal case if
In United States v. Roberts, No. 00-3405, 2001 U.S. App. a court determines the government’s position was LEXIS 9299 (8th Cir. May 16, 2001), the Eighth Circuit “vexatious, frivolous, or in bad faith.” In his application, affirmed Roberts’ conviction of two counts of failing to file True claimed the government’s prosecution was vexatious income tax returns for 1993 and 1994, in violation of 26 and/or in bad faith because, inter alia, the government knew U.S.C. § 7203. Roberts was sentenced to sixteen months’ there was insufficient evidence to prove beyond a imprisonment and one year supervised release. On appeal, reasonable doubt he was a member of the price fixing Roberts argued, inter alia, the requirement to file a tax conspiracy. True failed, however, to include itemized return under penalty of perjury violated his Fifth statements from his attorneys stating the time they spent on Amendment right against self incrimination because had he his case and their rates. The government moved to dismiss filed returns in 1993 and 1994, he would be admitting he the application arguing it was jurisdictionally defective and was required to but failed to file returns for tax years 1990 True had failed to meet his burden of showing the through 1992. The court rejected Roberts’ argument government’s position was vexatious, frivolous, or in bad because case law has held a taxpayer cannot rely on the faith. The district court denied True’s application on the Fifth Amendment privilege against self incrimination to fail merits, but then denied the government’s lack of jurisdiction to file a tax return or fail to disclose any information. motion. Roberts also argued the indictment was deficient because it On appeal, the Sixth Circuit first examined the failed to cite 26 U.S.C. § 6012, the statute requiring him to government’s argument claiming True’s application was pay taxes. The court rejected this argument holding an jurisdictionally defective because it did not conform to the indictment is ordinarily sufficient if it states each material pleading requirements set forth in the Equal Access to element of the crime charged. In this case, Roberts was Justice Act, 28 U.S.C. § 2412 et seq., as incorporated by the charged with violating § 7203, which provides punishment Hyde Amendment. The court looked to the decisions of for willfully failing to file a tax return and the court found several circuits where the content requirements were held to each element of the charge was recited in the indictment. simply be pleading requirements and not jurisdictional. The
court agreed that interpreting the content requirements as
Content Requirements Of Hyde Amendment
jurisdictional would narrowly construe the EAJA’s waiver
Pleadings Not Jurisdictional
of sovereign immunity and cause attorneys to make their
fee demands and statements of time as large as possible.
In United States v. True, 250 F.3d 410 (6th Cir. 2001), True Accordingly, the court found True’s application was timely was tried and acquitted of one count of conspiring to and not defective for failing to include statements of his attorneys’ time and fees. The court then determined the In United States v. Diaz, 245 F.3d 294 (3rd Cir. 2001), Diaz government’s prosecution was not vexatious or in bad faith pled guilty to fraud and money laundering counts and was for there was probable cause to bring the indictment and sentenced to thirty-three months’ imprisonment. Diaz prosecute True. Accordingly, the court affirmed the district owned a for-profit vocational school, which participated in court’s denial of True’s Hyde Amendment motion. federal student financial assistance programs. She
manipulated the school’s default rates in order to continue to receive federal funds the school was no longer entitled to,
Hyde Amendment Award Of Attorney Fees
thus defrauding the government of $846,000. Diaz
appealed the sentence, arguing her conduct was outside the Requires Harassment And Legal heartland of the money laundering guideline and, therefore,
Insufficiency
her sentence should have been computed under the fraud
guideline. The Third Circuit agreed, despite a new
In United States v. Sherburne, 249 F.3d 1121(9th Cir. amendment to the sentencing guidelines enacted after Diaz 2001), the government appealed the district court’s award was sentenced. Amendment 591, effective November 1, of attorneys’ fees to Sherburne, pursuant to the Hyde 2000, abrogated the courts’ ability to consider whether the Amendment, who was tried for HUD fraud but not conduct punished is atypical of the conduct usually convicted. The Hyde Amendment permits a criminal punished under the money laundering statute and should be defendant to recover fees when the government’s position sentenced under another guideline. was vexatious, frivolous, or in bad faith as provided by 18 U.S.C. § 3006A. At trial, thirteen defendants were Although the court recognized “under the guidelines as prosecuted for alleged abuses in the funding and amended, sentencing courts may not conduct an inquiry into construction of a housing development in Montana using the heartland of [the money laundering guideline] and Department of Housing and Urban Development funds. courts have no discretion to decide that the money The jury acquitted the defendants on some charges but other laundering guideline is inappropriate,” it held the charges resulted in a hung jury. The latter charges were amendment could not be applied retroactively in this case. later dismissed. Some of the defendants (including Id., at 24. “The Constitution does not. . .permit retroactive Sherburne) moved for attorneys’ fees. The district court application of an amended sentencing guideline where, as awarded fees to Sherburne and to one other defendant. here, a harsher penalty might result.” Id., at 26. The court
then applied the pre-amendment guideline and case law
On appeal, the Ninth Circuit recognized the Hyde analysis from its prior decisions to “determine whether the Amendment "establishes three separate grounds upon which defendant’s conduct is atypical of cases ordinarily attorney's fees may be awarded: for conduct that is sentenced under that guideline, and, if so, determine what vexatious, frivolous, or in bad faith." Id., at 11. The guideline would be more appropriate given the offense district court awarded attorneys' fees based on the conduct.” Id., at 28-29. Although the evidence supported vexatiousness of the prosecution, relying on the her money laundering plea, “Diaz never used the proceeds interpretation of vexatious in United States v. Holland, 34 of her fraudulent activities to promote additional criminal F.Supp.2d 346 (E.D. Va. 1999). The Ninth Circuit conduct by reinvesting in further criminal conduct,” and she indicated the Holland standard was incorrect. "A standard did not attempt to conceal the funds or transfer them that focuses solely on the 'reasonable prosecutor' and 'proof anywhere except her business. The court remanded the beyond a reasonable doubt' requires too much of the United case for resentencing, concluding Diaz' conduct was States." Sherburne, at 15. Instead, the court stated atypical and should have been sentenced under the fraud vexatious "includes an element of maliciousness" and guideline. "contemplates a suit that is objectively deficient." Id., at
12. Both are required for the court to grant attorneys’ fees
under the Hyde Amendment. Accordingly, the Ninth Promotion Money Laundering Should Circuit vacated the award of fees and remanded the case for Not Be Grouped With Fraud the district court to apply the proper vexatious, frivolous, or
bad faith standard.
In United States v. Kalust (Percan), 249 F.3d 106 (2nd Cir.
2001), Percan orchestrated a conspiracy to steal and resell
SENTENCING
airbags in his auto parts store. He was convicted of
transportation of stolen goods, money laundering and conspiracy to commit these offenses. At sentencing, his
Amendment Abrogating
transportation of stolen goods and money laundering
“Heartland”Analysis Cannot Be Applied
convictions were not grouped together, resulting in an
offense level two levels higher than if they had been Retroactively

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grouped. Percan objected to the sentencing court’s failure Accordingly the court based Farese’s sentence on the 20 to group his fraud and money laundering convictions. offense level applicable to money laundering. The court
found Farese’s other underlying offense, mail fraud, was
Although the circuits are split regarding the grouping of not the object of his racketeering offense. Since finding fraud and money laundering counts, the seminal case in the mail fraud was the object of Farese’s racketeering would Second Circuit is United States v. Napoli, 179 F.3d 1 (2d have resulted in a 19 offense level, the issue on appeal was Cir. 1999), which held grouping to be appropriate if all whether the court correctly determined money laundering counts involve the same victim. On appeal, Percan argued was the object. because he was convicted of promotion money laundering, rather than concealment money laundering, the victims of On appeal, Farese contended the district court had his money laundering were the same as the victims of his incorrectly applied the preponderance of the evidence underlying fraud. The Second Circuit disagreed, finding the standard, rather than the proof beyond a reasonable doubt victims different despite the fact Percan’s money laundering standard, to determine the object of Farese’s racketeering was promotion money laundering. Moreover, the court offense was money laundering. The Eleventh Circuit found Percan’s deposit of the SUA proceeds into his looked to the general application principles found in business bank account lent legitimacy to the SUA proceeds. U.S.S.G. Chapter 1, Part B. The Application Notes to The court found although Percan’s fraud and promotion U.S.S.G. § 1B1.2(d) concern cases such as Farese’s where money laundering convictions were more highly interwoven there are multiple underlying offenses and the plea does not than the fraud and concealment money laundering establish which offense was the object. convictions in Napoli, the victims were still not the same,
The Application Notes provide the court should determine therefore, the footnote in Napoli sanctioning grouping in which offense was the object based on whether “the court, uniquely interwoven circumstances did not apply. Percan’s were it sitting as a trier of fact, would convict the defendant sentence was affirmed. of conspiring to commit that object offense.” The Eleventh Circuit interpreted the words “were it sitting as a trier of
To Determine The Object Of Racketeering
fact” to mean the district court must find beyond a
Offense, Courts Must Use Beyond A
reasonable doubt Farese conspired to commit the object
Reasonable Doubt Standard
offense before it can sentence him on the basis of that
offense. Since the district court had found Farese conspired
In United States v. Farese, 284 F.3d 1056 (11th Cir. 2001), to commit money laundering by a preponderance of the Farese plead guilty to racketeering in violation of evidence, the Eleventh Circuit vacated Farese’s sentence 18 U.S.C. § 1962. The applicable sentencing guideline, and remanded. U.S.S.G. § 2E1.1, provides the base offense level for racketeering shall be the greater of 19 or the offense level applicable to the underlying object of the racketeering offense. At sentencing, the district court found the object of Farese’s racketeering offense was money laundering.

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 CRIMINAL TAX BULLETIN
TABLE OF CASES
JUNE 2001

TITLE 26 AND TITLE 26 RELATED CASES

United States v. Roberts, No. 00-3405, 2001 U.S. App. LEXIS 9299 (8th Cir. May 16, 2001) . . . . . . . . . . . . . . . . . . . . . . . . . 1

United States v. True, 250 F.3d 410 (6th Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

United States v. Sherburne, 249 F.3d 1121(9th Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

SENTENCING

United States v. Diaz, 245 F.3d 294 (3rd Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

United States v. Kalust (Percan), 249 F.3d 106 (2nd Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

United States v. Farese, 284 F.3d 1056 (11th Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Department of the Treasury
Internal Revenue Service
Document 10023 (6-2001)
Catalog Number 24304B

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