Other 200412004: Criminal Tax Bulletin reviews federal cases

Plain-English summary

The IRS Criminal Tax Division's April 2002 bulletin collects case notes for informational purposes. It discusses tax evasion, attorney fees after a criminal prosecution, grand jury subpoenas, forfeiture, wiretaps, and sentencing. The bulletin reports federal court decisions and includes a table of cases. It does not decide a taxpayer's request for a ruling, and its heading says it is not a directive.

Ruling snapshot

• Question: What court decisions did the Criminal Tax Division report in this bulletin?
• Outcome: Informational bulletin; no taxpayer ruling.
• Key authorities: Cited federal court decisions and criminal statutes.

Full text (IRS public release)

Number: 200412004
Release Date: 3/19/04
UIL: 9999.98-00

Criminal Tax Bulletin
Department of Treasury
Office of Chief Counsel
Internal Revenue Service
Criminal Tax Division
April This bulletin is for informational purposes. It is not a directive. 2002

TITLE 26 AND TITLE 26
160 F.3d 473, 479 (8th Cir. 1998). Additionally, the Eighth
Circuit concluded evidence showing other people had
RELATED CASES
followed the De-Taxing America program would not have
created a reasonable probability of a different result at
Publicly Available Material Not
Willis’ trial. Accordingly, The Eighth Circuit concluded
there was no Brady violation and affirmed the judgment of
Subject To Brady Request
the district court.
In United States v. Willis, 277 F.3d 1026 (8th Cir. 2001),
Willis appealed his conviction on two counts of income tax Hyde Amendment - Attorney’s Fees evasion under 26 U.S.C. § 7201 to the Eighth Circuit, alleging, inter alia, the government failed to disclose Brady In United States v. Braunstein, 281 F.3d 982 (9th Cir. material. Before trial, Willis made a Brady motion February 25, 2002), the Ninth Circuit held Braunstein’s requesting any exculpatory evidence, specifically any Hyde Amendment appeal for attorney’s fee was timely filed documents in the government’s possession relating to a pursuant to Fed. R. App. P. 4(a) and was meritorious based program known as “De-Taxing America.” Willis testified on the government’s “frivolous” prosecution. The Hyde at trial he had relied on materials from De-Taxing America Amendment, enacted by Congress in 1998, provides courts in forming his belief he was not legally obligated to pay may award attorney’s fees to prevailing criminal defendants federal income taxes. Willis received no documents from “where the court finds that the position of the United States the government regarding De-Taxing America although its was vexatious, frivolous, or in bad faith.” Before founders had been investigated by the IRS and permanently addressing the merits of Braunstein’s appeal, the court
enjoined from marketing the program.
considered the government’s claim that the appeal was
untimely. The issue concerning which statute of limitations
To establish a Brady violation, a defendant must show the (civil or criminal) applies was one of first impression in the government withheld material evidence favorable to the Ninth Circuit. The Fourth, Fifth, and D.C. Circuits have defendant. Evidence is considered material only if there is held Hyde Amendment appeals are civil matters governed a reasonable probability the result of the trial would have by Fed. R. App. P. 4(a), which requires a notice of appeal been different had the material been disclosed to the to be filed within 30 days after the judgement or order defendant. United States v. Keltner, 147 F.3d 662, 673 (8th appealed from is entered. The Tenth Circuit has held Hyde Cir. 1998). The Eighth Circuit opined the De-Taxing Amendment appeals are criminal matters governed by Fed. America materials did not meet the materiality standard. R. Cr. P. 4(b), which requires a notice of appeal to be filed Moreover, the court observed the injunction against the De- within 10 days. Taxing America program was a matter of public record at the time of trial and all the information Willis sought could The Ninth Circuit ultimately adopted the reasoning of the have been obtained by him independently through basic Fifth Circuit in United States v. Truesdale, 211 F.3d 898 research. Publicly available information which a defendant (5th Cir. 2000), which rejected the argument Hyde could have discovered through reasonable diligence cannot Amendment appeals are criminal matters for three reasons. be the basis for a Brady violation. United States v. Jones, First, a motion under the Hyde Amendment does not implicate the movant’s liberty interests requiring the short amounts of allegedly stolen merchandise to retail stores. As 10 day statute. Second, the Hyde Amendment adopted a result of her scheme, McGauley received 220 refund substantially all of the “procedures and limitations” of the checks totalling $55,296 and deposited the checks into Equal Access to Justice Act, which provides for recovery of various bank accounts, some of which were held jointly attorney’s fees in unjustified civil actions brought by the with her parents. McGauley conducted financial government. Third, the court noted the government cannot, transactions using the accounts that held the refund money. without statutory authority, appeal from a decision in a The transactions included transfers between banks and criminal case, a practical problem which might arise from withdrawals of over $300,000. McGauley was convicted, characterizing a Hyde Amendment appeal as a criminal inter alia, mail fraud and money laundering and was
matter.
o r d e r e d t o f o r f e i t $ 2 4 3 , 087 pursuant t o
18 U.S.C. § 982(a)(1). McGauley appealed the forfeiture order, arguing 18 U.S.C. § 982(a)(1) does not authorize
GRAND JURY
forfeiture of legitimate funds commingled with proceeds of
unlawful activity. The First Circuit disagreed.
Lawyer Cannot Be Forced To Tell Grand
Jury What Client Said To IRS
In her appeal, McGauley argued the forfeiture of $243,087
Special Agents In Interview
was excessive, since the total amount of refund checks she
received was $55,296; therefore, the legitimate funds
In In re Grand Jury Subpoena Date Oct. 22, 2001 (John commingled with the fraudulent funds were not subject to Doe A. v. United States), 282 F.3d 156 (2nd Cir. 2001), the forfeiture under 18 U.S.C. § 982. The First Circuit affirmed Second Circuit held the work product doctrine shields a McGauley’s conviction as well as the forfeiture of the lawyer from having to tell a grand jury what her client said commingled funds, and noted the district court gave proper to government agents during an interview in the lawyer’s jury instructions regarding the forfeiture. In its instructions, presence if the testimony may be used to indict the client for the district court cited language from both the money previous criminal conduct. The attorney moved to quash a laundering and forfeiture statutes, stating the commingling subpoena compelling her testimony before the grand jury of legitimate and tainted funds may expose legitimate funds regarding statements her client, a corporate general counsel, to forfeiture if the commingling was involved in concealing made in a meeting with two IRS special agents, arguing her the nature or source of the tainted funds. In this case, the testimony would violate the work product privilege. First Circuit held a reasonable jury could find the extensive Initially, the subpoena sought a factual report of what her series of financial transactions McGauley initiated within client said in the meeting with the special agents. However, two weeks of the search of her home was designed to during oral argument, the government stated it also intended conceal the nature of the proceeds of her unlawful refund to use the attorney’s testimony to support charges the scheme. The court also noted the district court cited similar general counsel committed fraud prior to the meeting in findings in the Fifth, Seventh and Tenth Circuits to support
which the attorney was representing him.
its decision

In reversing the district court, the court found a key factor INVESTIGATIVE TECHNIQUES in its decision was the government now intended to use the lawyer’s testimony, in part, to prove the client committed the very crime for which the lawyer was representing the Recordings Obtained From A Wiretap Order client at the time of the meeting. The court found the two Admissible Despite Flaws In Application uses of the attorney’s testimony had an important bearing on the resolution of the work product privilege claim. The In United States v. Smart, 278 F.3d 1168 (10th Cir. 2002), court concluded the use of the testimony for the purpose of Smart appealed his conviction of bribing a government proving the client committed a crime fell within the work official, alleging taped telephone conversations obtained product privilege’s zone of privacy of a lawyer’s by F.B.I. agents through a wiretap should be suppressed preparation to represent a client in anticipation of litigation. because the government’s authorization was materially
flawed, rendering the recordings inadmissible. Federal agents may obtain authorization to use a wiretap to intercept
FORFEITURE
telephone calls only if they are investigating certain serious
offenses enumerated in the wiretap statute, 18 U.S.C.
Commingled Funds
§ 2516. In Smart’s case, of the seven offenses listed in the
government’s application for a wiretap order, five of the
In United States v. McGauley, 279 F.3d 62 (1st Cir. 2002), offenses were clearly enumerated in the statute; however, McGauley obtained fraudulent refunds by returning large the remaining two offenses were not enumerated offenses.

-2-
In considering whether a reference to non-enumerated offense resulted in a concurrent sentence on the fraud count offenses in a wiretap application invalidates the applicable exceeding the statutory maximum of 12 months for the tax order, the Tenth Circuit first determined the wiretap statute offense. Rejecting Feola’s first claim, the court found does not indicate “where investigators suspect both Feola’s assertion he was unaware the funds the couple enumerated and non-enumerated offenses, wiretaps are received were the result of embezzlement completely lacked impermissible.” The Supreme Court made clear in United credibility. Regarding the second claim, the court noted States v. Giordano, 416 U.S. 505 (1974), suppression is not “[t]he propriety of permitting relevant conduct for one required under the wiretap statute unless “there is failure to offense to enhance an aggregate sentence on multiple counts satisfy any of those statutory requirements that directly and has already been upheld in this Circuit . . . .” In Feola’s substantially implement the congressional intention to limit case, the Second Circuit opined “conduct relevant to the tax the use of intercept procedures.” Id. at 527. The Tenth offense will result in an aggregate sentence greater than the Circuit opined this standard is not met by a reference to statutory maximum for that offense. However, the non-enumerated offenses, or even incorrectly describing aggregate sentence is imposed because appellant has non-enumerated offenses as enumerated ones. committed two offenses, not because a statutory maximum
for any one offense has been exceeded.” Accordingly, the
In Smart’s case, the court noted the scope of the wiretap Second Circuit ruled Feola’s sentence did not violate the investigation was limited to only three enumerated offenses. rule articulated in Apprendi and affirmed the sentence While the court was troubled by the wiretap application’s imposed by the district court. incorrect characterizations, the Tenth Circuit nevertheless ruled the incorrect description of suspected non-enumerated Organizer/Leader Of A Criminal Activity offenses as enumerated offenses, does not invalidate a wiretap order as long as the authorization to wiretap was In United States v. Anthony, 280 F.3d 694 (6th Cir. 2002), limited to only enumerated offenses. Accordingly, the Anthony engaged in a scheme to remove federally required Tenth Circuit affirmed the district court’s order denying child-proof safety mechanisms from disposable cigarette Smart’s motion to suppress the recordings. lighters. He also orchestrated an effort to conceal his
conduct from investigators. Anthony pleaded guilty to
SENTENCING
making a materially false statement to a federal investigator
in violation of 18 U.S.C. § 1001. The sole issue on appeal was whether the district court erred by increasing
Tax Offense Relevant Conduct Allowed In
Anthony’s offense four levels pursuant to U.S.S.G.
Concurrent Sentence For Fraud Offense
§ 3B1.1(a), which states “if the defendant was an organizer
or leader of a criminal activity that involved five or more
In United States v. Feola, 275 F.3d 216 (2nd Cir. 2001), participants or was otherwise extensive, increase by four- Feola was sentenced to concurrent terms of 24 months’ levels.” imprisonment for bank fraud in violation of 18 U.S.C.
§ 1344, and 12 months’ imprisonment for willfully failing The Sixth Circuit noted two reasons why the number of to file a federal income tax return in violation of 26 U.S.C. participants did not warrant a four level increase. The first
§ 7203. Between 1995 and 2000, Feola’s wife embezzled required the identity of the offense in question since nearly four million dollars. Joint tax returns filed by the established case precedent in the circuit stated only conduct Feolas for 1996 and 1997, failed to report the embezzled which could lead to a criminal conviction could be factored money and the couple did not file returns for 1998 and into its sentencing analysis. Since the removal of safety 1999. Additionally, the Feolas submitted a copy of a false devices was not a criminal offense, the participants involved 1998 tax return to a bank in support of a loan application. in this activity were irrelevant to the sentencing analysis.
The second was based on the distinction between
Feola contended the district court erred by using conduct “participants” and “non-participants.” Cases applying this relevant to the tax offense to impose a sentence for the bank guideline uniformly count as participants persons who were fraud charge in excess of the statutory maximum for the tax (1) aware of the criminal objective, and (2) knowingly offense. Feola claimed (1) the court should not have offered their assistance. There was nothing in the record to considered the embezzlement income generated by his wife suggest the fifth participant, Anthony’s attorney, was a in calculating the tax loss attributable to him, and (2) his knowing and willing participant in the cover up scheme. sentence was contrary to the Court’s holding in Apprendi v. New Jersey, 530 U.S. 466 (2000) (holding a fact must be Since the five participant test failed, the pivotal question in alleged in an indictment and determined by a jury if it the case concerned whether the criminal activity was results in a sentence for an offense above the statutorily “otherwise extensive.” The Sixth Circuit adopted the specified maximum), because conduct relevant to the tax

-3-
Second Circuit’s analysis which authorizes a four level dictate the length of his sentence and punish him for his lies enhancement when the combination of knowing participants and recalcitrance. The court found the government’s refusal and non-participants in the offense is the functional was based on the “destructive effect [of Wolf’s] equivalent of an activity involving five criminally recalcitrance upon its investigation and other prosecutions.” responsible participants. The final test is to identify The court, ruling Wolf had not made the required threshold individuals whose contribution was so essential to the showing the government’s refusal to file a substantial criminal objective, they should be counted as a participant assistance motion was improper, affirmed Wolf’s sentence. irrespective of their true criminal intent. Ultimately, the Sixth Circuit held the district court based their findings on 2001 Amendment To Money Laundering a consideration of impermissible factors, and thus remanded Sentencing Guideline Is Substantive, the case and directed the district court to examine the respective contributions of the participants and non-
Not Clarifying participants to determine whether the combined effort was In United States v. Sabbeth, 277 F.3d 94 (2nd Cir. 2002), equal to five criminally responsible participants.
Sabbeth filed a motion for reconsideration of his sentence, asserting the 2001 amendment to the money laundering
Untruthful Defendant Properly Denied
sentencing guideline was a clarifying amendment and
A Government Motion For
should be applied retroactively to his sentence. The 2001
Substantial Assistance
amended guideline instructs courts to group two separate
counts where one count is a money laundering offense and
In United States v. Wolf, 270 F.3d 1188 (8th Cir. 2001), the other is an underlying offense. Sabbeth was convicted Wolf pled guilty to conspiring to distribute of bankruptcy fraud and money laundering in 2000, and was methamphetamine and was sentenced to a ten year prison sentenced to ninety-seven months imprisonment. At term. Wolf appealed his sentence arguing the government’s sentencing, the court refused to group the offenses and refusal to move for a substantial assistance downward found Sabbeth should be sentenced a Criminal History departure was unconstitutional or motivated by bad faith. Category I with an offense level of 30. In his motion for Wolf argued the district court erred when it denied his reconsideration, Sabbeth argued the 2001 amendment presentence motion to compel the government to file a required grouping his fraud and money laundering offenses, motion for a substantial assistance downward departure resulting in an offense level of 28. pursuant to U.S.S.G. § 5K1.1 or 18 U.S.C. § 3553(e).
The Second Circuit disagreed, although it acknowledged
At Wolf’s sentencing, the government presented evidence defendants generally may benefit from an amendment to the Wolf had been untruthful and his continued illegal conduct Sentencing Guidelines if the revision is a mere clarification, hampered his potential assistance against at least four co- and not a substantive change. In this case, however, the defendants setting the government’s investigation back four court found the 2001 amendment to the money laundering months. Thus, the court found the government’s refusal to guideline to be substantive, rather than clarifying, and move for a substantial assistance downward departure refused to apply the amended Guideline retroactively to pursuant to U.S.S.G. § 5K1.1 or 18 U.S.C. § 3553(e) did Sabbeth’s sentence. The court noted the Sentencing not violate constitutional standards because it was Commission did not characterize the amendment as “rationally related to a legitimate governmental purpose- clarifying and explained Application Note 6 of the money encouraging criminal defendants to be fully cooperative and laundering guideline resolved a circuit conflict on the issue forthright with the government.” Further, the court of grouping money laundering offenses. Sabbeth argued explained, because there was no plea agreement requiring resolving a circuit split was evidence the amendment was a the government to file a substantial assistance motion, the mere clarification. Sabbeth argued this intent was also filing of such a motion was at the government’s discretion. supported by the fact the grouping guideline, U.S.S.G. Accordingly, the court found, absent a motion by the § 3D1.2, was not amended. The Second Circuit examined government, the district court generally lacked the authority the entire amendment instead, which substantively redefined to grant a downward departure based on a defendant’s the way offense levels for money laundering are calculated. substantial assistance unless the refusal was based upon or “The purpose and effect of the revision of § 2S1.1 motivated by some form of invidious discrimination. Wolf demonstrates that Application Note 6 is the result of the
had made no claim of discrimination.
substantive revision of the money laundering guidelines and
not simply a separate, independent clarification of that
The essence of Wolf’s allegation of bad faith was the more provision of the existing law.” Id., 98. The Second Circuit lenient treatment some of his co-conspirators received affirmed Sabbeth’s sentence. demonstrated the government’s refusal was an attempt to

-4-
 CRIMINAL TAX BULLETIN

APRIL 2002

TABLE OF CASES

TITLE 26 AND TITLE 26 RELATED CASES

United States v. Willis, 277 F.3d 1026 (8th Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

United States v. Braunstein, 281 F.3d 982 (9th Cir. February 25, 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

GRAND JURY

In re Grand Jury Subpoena Date Oct. 22, 2001 (John Doe A. v. United States), 282 F.3d 156 (2nd Cir. 2001) . . . . . . . . . . 2

FORFEITURE

United States v. McGauley, 279 F.3d 62 (1st Cir. 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

INVESTIGATIVE TECHNIQUES

United States v. Smart, 278 F.3d 1168 (10th Cir. 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

SENTENCING

United States v. Feola, 275 F.3d 216 (2nd Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

United States v. Anthony, 280 F.3d 694 (6th Cir. 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

United States v. Wolf, 270 F.3d 1188 (8th Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

United States v. Sabbeth, 277 F.3d 94 (2nd Cir. 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

-5-
Department of the Treasury
Internal Revenue Service
Document 10023 (04-2002)
Catalog Number 24304B

-6-