Other 200412005: Criminal Tax Bulletin reviews federal cases

Plain-English summary

The IRS Criminal Tax Division's June 2002 bulletin collects case notes for informational purposes. It discusses tax evasion, the right to counsel, grand jury subpoenas, accountant communications, money laundering, 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: 200412005
Release Date: 3/19/05
UIL: 9999.98-00

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. 2002

SUPREME COURT CASES
to a conflict of interest and not the additional requirement
that the conflict adversely affected counsel’s performance.
In Wood, multiple defendants were represented by the
Effective Assistance Of Counsel
same attorney, who had been hired by their employer, and
the possibility of conflict was sufficiently apparent to
In Mickens v. Taylor, 122 S. Ct. 1237 (2002), the Supreme impose upon the trial court a duty to inquire further. The Court held in order to demonstrate a Sixth Amendment Supreme Court explained “an actual conflict of interest,” violation where a trial court fails to inquire into a potential as used in Wood, meant a conflict that affected counsel’s conflict of interest about which it knew or reasonably performance and Wood had not changed the rule should have known, a defendant must establish the conflict established in Cuyler v. Sullivan, 446 U.S. 335 (1980), of interest adversely affected his/her counsel’s which held a defendant must demonstrate a conflict of performance. This case originated from a state murder interest actually affected the adequacy of his/her trial where a Virginia jury convicted Mickens of representation. Ultimately, the Supreme Court affirmed premeditated murder for which he was later sentenced to the denial of habeas relief based on the finding of the death. Mickens filed a petition for writ of habeas corpus Court of Appeals which failed to establish the conflict of alleging he was denied effective assistance of counsel interest adversely affected Micken’s counsel’s because one of his court appointed attorneys had a conflict performance. of interest at trial. Federal habeas counsel had discovered Micken’s lead trial attorney was representing the victim on Consent to Search assault and concealed weapons charges at the time of the murder. The trial attorney did not disclose to the court, his In United States v. Drayton, No. 01-631, 2002 U.S. LEXIS co-counsel, or Mickens that he had previously represented 4420, (June 17, 2002), the Supreme Court held the Fourth the victim. The district court denied the petition. A panel Amendment does not require police officers to advise bus of the Fourth Circuit reversed, but the en banc court passengers of their right not to cooperate and to refuse affirmed. The Supreme Court granted the petition for writ consent to a search. The two defendants, Drayton and
of certiorari.
Brown, were traveling on a bus en route from Florida to
Michigan. At a scheduled stop, the driver allowed three
Before the Supreme Court, Mickens relied upon the police officers to board the bus as part of a routine drug remand instruction in Wood v. Georgia, 450 U.S. 261 and weapons interdiction effort. The officers were dressed (1981), which directed the trial court to grant a new in plain clothes and carried concealed weapons and visible probation revocation hearing if it determined “an actual badges. Once onboard, one officer knelt on the drivers conflict of interest existed.” Mickens contended the seat and faced the rear of the bus and the other two went to holding in Wood established an unambiguous rule where the rear of the bus where one remained stationed facing the trial judge neglects a duty to inquire into a potential forward. The third officer worked his way toward the conflict of interest, the defendant, to obtain reversal of the front of the bus, speaking with individual passengers as he judgement, must only demonstrate his lawyer was subject went. The main aisle remained unobstructed during the questioning. According to one of the police officers, making and filing false income tax returns for 1992 and for passengers who declined to cooperate or who chose to exit failing to file income tax returns for 1993. On appeal, the the bus at any time would have been allowed to do so Rutherfords argued an IRS special agent interrogated them without argument. The police officer conducting the without identifying herself or informing them of their questioning noticed Drayton and Brown were wearing constitutional rights, and all evidence obtained as a result heavy jackets and baggy pants despite the warm weather. of the interrogation violated their Fifth Amendment rights After checking their luggage, the officer asked Brown if he and was inadmissable. The Ninth Circuit noted the could check “his person.” After detecting hard objects Supreme Court’s decision in Beckwith v. United States, similar to drug packages, Brown was escorted off the bus. 425 U.S. 341 (1975) (quoting Rogers v. Richmond, 365 A similar search of Drayton, produced similar objects U.S. 534 (1961)), which held an IRS agent need not which turned out to be bundles of cocaine. Brown and provide Miranda warnings to an individual under IRS Drayton were arrested and later charged with federal drug investigation before questioning unless the individual was
violations.
in custody or “special circumstances” were present “such
as to overbear [the individual’s] will to resist and bring
Brown and Drayton moved to suppress the cocaine, about confessions not freely self-determined.” There was arguing the consent to the pat-down search was illegal. In no evidence the meeting between the special agent and the denying Brown and Drayton’s motions, the district court Rutherfords was custodial in nature, nor were “special determined the police conduct was not coercive and Brown circumstances” involved, therefore the special agent was and Drayton’s consent to search was voluntary. The not required to give the Rutherfords Miranda warnings. Eleventh Circuit reversed and remanded based on its prior holdings that bus passengers do not feel free to disregard officers’ requests to search absent some positive indication
OTHER CONSTITUTIONAL
that consent may be refused. The Supreme Court accepted ISSUES certiorari to decide whether police officers must advise bus passengers during these encounters of their right not to Right To Counsel Can Be Voluntarily cooperate. In Florida v. Bostick, 501 U.S. 429 (1991), the Supreme Court made clear the proper inquiry “is whether
Waived a reasonable person would feel free to decline the officer’s In United States v. Turner, 287 F.3d 980 (10th Cir. 2002), requests or otherwise terminate the encounter.” Applying Turner, who represented himself at trial, was convicted of the Bostick framework to the facts of this case, the three counts of tax evasion in violation of 26 U.S.C.
Supreme Court concluded the police did not seize Brown § 7201 and two counts of failure to file a tax return in and Drayton when they boarded the bus and began violation of 26 U.S.C. § 7203. On appeal, Turner argued questioning the passengers. The officers gave the his conviction should be overturned because his waiver of passengers no reason to believe they were required to his right to counsel was not knowingly and intelligently answer their questions. The officers made no intimidating given. Both at his arraignment and at trial, Turner stated he movements and did not brandish their weapons. The aisle wished to represent himself, despite repeatedly being of the bus also remained free so anyone could exit. advised of the hazards of not retaining counsel.
Nothing the officers said would suggest to a reasonable
person that he or she was barred from leaving the bus or The Tenth Circuit affirmed Turner’s conviction because it otherwise terminating the encounter. The Court rejected found the “district court had provided . . . Turner with the suggestion police officers must always inform citizens enough information to make an informed, knowing, and of their right to refuse, when seeking permission to thus legally intelligent decision whether to waive his right conduct a warrantless consent search. to counsel.” The court noted, based on case law, Turner had a constitutional and statutory right to waive his right to
TITLE 26 AND TITLE 26
counsel and represent himself at trial. Once Turner
RELATED CASES
exercised his constitutional right, then a court must satisfy
three requirements: the assertion must be voluntary, the relinquishment of the benefits of representation must be
Miranda Rights
done knowingly and voluntarily and the assertion must be
made in a timely manner. In this case, the court noted the
In United States v. Rutherford, 01-10164, 2002 U.S. App. only issue was whether Turner’s waiver was knowingly LEXIS 7874 (9th Cir., April 29, 2002) (Unpublished), the and intelligently made, and in this context, knowing and Ninth Circuit affirmed the district court’s order entering intelligent meant only that Turner was reasonably informed judgements of conviction against the Rutherfords for by the court of the hazards of self-representation and had

-2- sufficient understanding of those hazards. precedence over a grand jury subpoena. The Third Circuit examined the historical function of the grand jury as well
To ensure defendants knowingly and intellegently waive as the importance of civil protective orders in serving their right to counsel, ideally, courts should conduct a public interest. The court noted as a cornerstone of our “thorough and comprehensive formal inquiry including justice system, the grand jury serves the highest of public such topics as the nature of the charges, the range of interests; therefore, its function must not be improperly punishment, possible defenses, and a disclosure of the intruded upon and should override the important, but not risks involved in representing oneself pro se.” A review of as unique and essential, interest served by a civil protective the record in this case revealed both the magistrate judge order. Ultimately, the Third Circuit joined the First Circuit during arraignment and the district court judge at trial, in holding there is a strong but rebuttable presumption in advised Turner of the charges against him, the potential favor of a grand jury subpoena, but stressed the length of his sentence according to the Sentencing presumption may only be rebutted in the rarest and most Guidelines, that his defense theories made little, if any, important of cases. sense and attempted to impress upon him the difficulties of self representation. Thus, the court upheld Turner’s waiver.
EVIDENCE

Proof Of Willfulness
GRAND JURY/RULE 6(e)
In United States v. Bishop, 01-50266, 2002 U.S. App.
Grand Jury Subpoenas And
LEXIS 10190 (9th Cir., May 30, 2002), the Ninth Circuit
Civil Protective Orders
affirmed the defendants’ convictions for conspiring to
defraud the IRS in violation of 18 U.S.C. § 371 and
In In Re: Grand Jury, 286 F.3d 153 (3rd Cir. 2002), the attempting to evade personal income taxes in violation of Third Circuit held a grand jury subpoena supercedes a 26 U.S.C. § 7201. The main issue at trial, and on appeal, protective order unless the party seeking to quash the was whether the defendants’ conduct was willful. subpoena can demonstrate exceptional circumstances Specifically, the defendants argued (1) the district court which clearly favor subordinating the subpoena to the erred in relying on an objective standard for good faith in protective order. The target of the grand jury investigation determining willfulness, and (2) the district court was involved in civil commercial litigation between private improperly excluded, as hearsay, proffered testimony parties. The court in the civil case issued a state protective about willfulness. The defendants caused disbursements order over any and all civil discovery gathered in the civil to themselves from their Subchapter S corporation to be case. As discovery continued in the civil matter, a grand reflected on the business’s books and tax returns as jury began investigating the target for alleged mail fraud, “shareholder loans.” The government argued the wire fraud and tax violations, all of which related to the “sharholder loans” were, in fact, distributions of income civil litigation. The grand jury issued a subpoena to the and noted there were no promissory notes indicating an target’s attorney for the civil discovery. The target filed a obligation to repay, no repayment schedules, no personal motion to intervene and to quash the subpoena. The collateral, and no authorization for the loans in the government filed a cross-motion to compel compliance corporate minutes. with the subpoena. All parties agreed the discovery sought by the grand jury was gathered under the state protective The defendants contended they could not have been willful
order.
in treating the money they received from their corporation
as “shareholder loans” since they relied on the professional
In upholding the subpoena, the district court noted the advice of their accountant, who subsequently died before existing circuit conflict as well as the absence of a Third trial. The Ninth Circuit rejected this claim, holding, even Circuit decision on the issue. The court found the after Cheek v. United States, 498 U.S. 192, 201 (1991), the protective order was improvidently granted and, therefore, reliance-on-accountant defense still requires defendants to the grand jury was entitled to subpoena the documents make full disclosure of all relevant information to the gathered in the civil case. The target appealed. professional. The defendants did not challenge the district
court’s factual findings that they failed to disclose all the
The Third Circuit observed the Fourth, Ninth and Eleventh relevant information to the professionals on whose advice Circuits all applied a per se rule that a grand jury subpoena they relied. The Ninth Circiuit held because the district always trumps a protective order. The Second Circuit, court applied the correct legal standard to defendants’ however, held the opposite, stating absent a compelling reliance defense, and the defendants did not challenge the need for the information, a protective order takes factual findings underlying the decision, the district court

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did not err on this issue.
common interest rule is an exception to the general rule the
attorney-client privilege is waived when privileged
The Ninth Circuit also rejected the defendants’ claim that information is disclosed to a third party. statements they made to the second accountant, who succeeded the deceased accountant, about advice received Note: After July 22, 1998, there is a limited privilege for from the deceased accountant qualified as “state of mind” accountant-client communications codified at 26 U.S.C. testimony, which is an exception to the rule against hearsay § 7525; however, § 7525(a)(2) provides the privilege is under Federal Rule of Evidence 803(3). Statements of limited to non-criminal tax matters before the Service or in memory used to prove the fact remembered are excluded a federal court. from the “state of mind” exception. In any event, the Ninth Circuit concluded any error in excluding the second accountant’s testimony about what defendants told him they intended to do or why they intended to do it, was MONEY LAUNDERING harmless. Such testimony would be self-serving and duplicative of defendant’s own testimony about their state Money Laundering As A Continuing of mind. Although the testimony might have been helpful Offense in a jury trial, in a bench trial as here, it would have been
cumulative and irrelevant.
In United States v. Moloney, 287 F.3d 236 (2nd Cir. 2002),
Moloney argued his conviction, following a guilty plea to
PRIVILEGES
money laundering in violation of 18 U.S.C.
§ 1956(a)(1)(A), must be vacated because § 1956 does not create a continuing offense and, therefore, each transaction Attorney-Client Privilege Does Not Extend must be charged as a separate crime. Moloney’s argument
To Non Kovel Accountants
was based “ . . . on whether an indictment charging money
laundering as a continuing offense states an offense which
In Cavallaro v. United States, 284 F.3d 236 (1st Cir. is cognizable, in the sense of charging conduct made 2002), petitioners sought to quash a third party illegal by statute.” administrative summons issued to petitioners’ accounting firm seeking documents the firm created or received while Affirming Moloney’s conviction, the Second Circuit held working on estate tax and corporate merger issues with “ . . . criminal charges may aggregate multiple individual petitioners’ attorneys. Petitioners’ argued the accounting actions that otherwise could be charged as discrete firm was assisting their attorneys in tax planning, thus they offenses as long as all of the actions were part of a would be covered under the attorney-client umbrella single scheme.” The holding was based on the court’s espoused in United States v. Kovel, 296 F.2d 918 (2d Cir. general rule which favors “ . . . allowing a common scheme 1961). They also argued the documents were protected to be treated as part of a single offense.” The court because they fell within the common interest rule. Kovel recognized other federal courts have held § 1956 does not holds the presence of an accountant, whether hired by the create a continuing offense. The court pointed out, lawyer or by the client, during a communication between however, “ . . . those cases lack the Second Circuit’s a client and an attorney does not destroy the attorney-client general presumptions in favor of allowing a common privilege when the accountant is necessary, or at least scheme to be treated as part of a single offense.” Further, highly useful, for the effective consultation between the the court noted the legislative history does not undercut
client and the lawyer.
this presumption of allowing multiple acts that are part of
a single scheme to be charged as a single count. Thus, the
Rejecting petitioners’ arguments, the First Circuit held the court concluded because no convincing reason exists to record did not show any party hired the accounting firm to deviate from it’s general rule, a single money laundering assist the law firm in providing legal advise and, therefore, count can encompass multiple acts provided each act is the attorney-client privilege did not extend to the part of a unified scheme. accounting firm. Further, the petitioner’s second argument also failed because the common interest rule presumed a valid underlying privilege, which did not exist in this case. SENTENCING The common interest rule is typically understood to apply when two or more clients consult or retain an attorney on Relevant Conduct particular matters of common interest, such that the communications between each of them and the attorney are In Leonard v. United States, 289 F.3d 984 (7th Cir. 2002), privileged against third parties. The First Circuit noted the Leonard submitted her own fraudulent claim for a tax

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refund and assisted five other individuals prepare and conspiracy to defraud and conspiracy to launder money. submit ten false income tax returns claiming excessive At sentencing, a two level enhancement for abuse of a refunds. For each of these returns, including her own, position of trust pursuant to U.S.S.G. § 3B1.3 was Leonard prepared and included an altered or completely recommended because Morris’s co-conspirators told the fictitious Form W-2. After being indicted on eleven victims Morris was an attorney and because Morris had counts, Leonard entered a guilty plea to the count related used an attorney trust account to launder the money. to her own return and the district court granted the government’s motion to dismiss the remaining counts. At The Eleventh Circuit reversed the application of the sentencing, the district court found Leonard’s fraudulent enhancement because the government failed to show filing of tax returns on behalf of others “relevant conduct” Morris not only held a place of public or private trust but
also abused that position in a way that significantly
and Leonard’s sentence was adjusted accordingly. On facilitated the offense. The government argued the appeal, Leonard argued her sentence of 30 months was enhancement should apply because Morris’s co-
improper for two reasons.
conspirators represented Morris as an attorney and trader
to the victims. The Eleventh Circuit found the co-
First, Leonard argued the district court erred when it conspirators statements could not constitute an abuse of considered the tax fraud she committed on behalf of others trust by Morris since Morris did not represent himself as as “relevant conduct.” Pursuant to § 1B1.3(a)(2), “relevant occupying a position of trust to the victims. The guideline conduct” includes any acts or omissions that were “part of requires the enhancement be based on each defendant’s the same course of conduct or common scheme or plan as culpability. There was also no evidence to show Morris the offense of conviction.” Application Note 9(A) defines acted as an attorney on behalf of any of the victims. In “common scheme or plan” as two or more offenses regard to the attorney trust account, the court noted there “substantially connected to each other by at least one was no commingling of the fraudulent funds with non- common factor, such as common victims, common related funds and none of the victims even knew the accomplices, common purpose, or similar modus account existed; therefore, there was no abuse of a position operandi.” In Leonard’s case, all the financial transactions of trust. The Eleventh Circuit interpreted the enhancement in which Leonard was involved established a “common as requiring more than a mere showing the victim had scheme or plan.” Each transaction involved the filing of confidence in the defendant; rather, the government must false tax returns seeking a refund and the IRS was a show more of a fiduciary function or relationship between common victim in each instance. Leonard’s modus the attorney defendant and the victims. operandi was also the same for each transaction in that she attached an altered or falsified Form W-2. Although the court reversed the enhancement, it affirmed
the order of restitution. Morris was told of the fine but not
Secondly, Leonard argued the district court acted contrary the restitution. Although Fed. R. Crim. P. 11(c) requires to the Supreme Court’s holding in Apprendi v. New Jersey, the court to explain a defendant’s liability for both fines 530 U.S. 466 (2000), by enhancing Leonard’s sentence and restitution, the Eleventh Circuit noted the restitution based on prior tax offenses which were not proven to a order was considerably less than the fine Morris was given jury beyond a reasonable doubt. The Seventh Circuit notice of at the plea. rejected this argument, stating it is well settled in the Seventh Circuit that Apprendi does not apply in cases Departure where the actual sentence imposed is less severe than the statutory maximum. Here, the statutory limit was five
In United States v. Reinke, 283 F.3d 918 (8th Cir. 2002), years and the sentence imposed, even after the “relevant Reinke was convicted of conspiracy to defraud the United conduct” adjustment was only 30 months. Accordingly, States in violation of 18 U.S.C. § 371. At sentencing, the the Seventh Circuit rejected Leonard’s arguments and district court departed downward sentencing Reinke to six affirmed the district court’s inclusion of relevant conduct months in a community facility, two years probation and in its sentence. three years supervised release. The district court specifically found Reinke’s case fell within the heartland
Abuse Of Trust And Restitution
of the appropriate guideline prior to departing downward.
The district court based the downward departure on
In United States v. Morris, 286 F.3d 1291 (11th Cir. 2002), Reinke’s lack of pecuniary gain, her lesser role in offense Morris and four co-conspirators fraudulently obtained and expressed remorse. The government appealed arguing investors’ funds and then used bank wire transfers to the downward departure was not appropriate because the conceal the funds and promote the investment fraud. district court found Reinke’s case fell within the heartland Morris, a non-practicing attorney, pleaded guilty to of the applicable guideline, and even without that finding,

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the district court did not identify any basis for departure guideline. Further, the court found in order to determine that was not adequately accounted for in the Sentencing whether a case falls outside the heartland, the district court
guidelines.
must articulate the factors that make the case atypical. If
those factors are already taken into account by the
Vacating the sentence, the Eighth Circuit held the Sentencing guidelines, the district court may not base a departure could not be affirmed on the basis provided by departure on them unless the factors are present to an the district court. The court noted “[a]ccording to the exceptional degree or in some unusual form. In this case, Sentencing Commission and Koon, departures are only the district court’s decision was improper because it made appropriate when a case falls outside the heartland.” See no findings as to the extraordinariness of any factor, and Koon v. U.S., 518 U.S. 81 (1996). Thus, the district found that case fell within heartland of guidelines. court’s decision to depart downward was hampered by its finding that Reinke’s case fell within the heartland of the

CRIMINAL TAX BULLETIN

JUNE 2002

TABLE OF CASES

SUPREME COURT CASES
Mickens v. Taylor, 122 S. Ct. 1237 (2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

United States v. Drayton, No. 01-631, 2002 U.S. LEXIS 4420, (June 17, 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

TITLE 26 AND TITLE 26 RELATED CASES

United States v. Rutherford, 01-10164, 2002 U.S. App. LEXIS 7874 (9th Cir., April 29, 2002) . . . . . . . . . . . . . . . . . . . . . 2

OTHER CONSTITUTIONAL ISSUES

United States v. Turner, 287 F.3d 980 (10th Cir. 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

GRAND JURY/RULE 6(E)

In Re: Grand Jury, 286 F.3d 153 (3rd Cir. 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

EVIDENCE

United States v. Bishop, 01-50266, 2002 U.S. App. LEXIS 10190 (9th Cir., May 30, 2002) . . . . . . . . . . . . . . . . . . . . . . . . 3

PRIVILEGES

Cavallaro v. United States, 284 F.3d 236 (1st Cir. 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

MONEY LAUNDERING

United States v. Moloney, 287 F.3d 236 (2nd Cir. 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

SENTENCING

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Leonard v. United States, 289 F.3d 984 (7th Cir. 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

United States v. Morris, 286 F.3d 1291 (11th Cir. 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

United States v. Reinke, 283 F.3d 918 (8th Cir. 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

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Department of the Treasury
Internal Revenue Service
Document 10023 (06-2002)
Catalog Number 24304B

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