Other 200412006: Criminal Tax Bulletin reviews federal cases

Plain-English summary

The IRS Criminal Tax Division's August 2002 bulletin collects case notes for informational purposes. It discusses the limitation period for failing to pay over taxes, civil audits that reveal fraud, obstruction of tax administration, searches, electronic surveillance, 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: 200412006
Release Date: 3/31/04
UIL: 9999.98-00

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

SUPREME COURT CASES
be disclosed to defendants prior to entering into a plea:
first, impeachment information relates to the fairness of trial, not to whether a plea is voluntary; second, the Court
Waiving Right To Impeachment
found no legal authority embodied in either the Supreme
Evidence In Guilty Plea
Court’s earlier cases nor in cases from other circuits to
support the Ninth Circuit’s decision; and third, due process
In United States v. Ruiz, 122 S. Ct. 2450 (2002), Ruiz considerations mitigate against such disclosure, since the refused to accept a plea bargain requiring her to waive her defendant’s due process rights are satisfied with the right to impeachment evidence. The plea bargain was government’s disclosure of any information establishing offered by federal prosecutors after immigration agents the defendant’s innocence, but the government’s interests found marijuana in Ruiz’ luggage. The plea bargain are adversely impacted by the premature disclosure of included a reduced sentence recommendation but required government witness information. Ultimately, the Court Ruiz to waive indictment, her right to impeachment held the Constitution does not require plea agreement information, and her right to appeal. Despite her refusal of disclosure of impeachment information. the plea bargain, Ruiz pleaded guilty to unlawful drug possession and asked the court to sentence her at the TITLE 26 AND TITLE 26 reduced sentence recommended pursuant to the plea. The district court refused and Ruiz appealed the sentence. The RELATED CASES Ninth Circuit vacated the sentence, finding the waiver provision of the plea bargain unconstitutional. The Ninth Six Year Limitation Period Applicable Circuit reasoned since the Constitution requires
To 26 U.S.C. § 7202 prosecutors to make certain impeachment information available to a defendant before trial, the same requirement
applies to plea bargains. The government sought In United States v. Adam, 296 F.3d 327 (9th Cir. 2002), the certiorari, arguing the Ninth Circuit’s requirement was Fifth Circuit affirmed the district court’s determination that unique among circuits, could force the government to a six year statute of limitations applied to 26 U.S.C. reveal identities of cooperating informants or other § 7202. Adam was charged with three counts of wilfully witnesses, and would deplete government resources on failing to pay over taxes to the IRS in violation of § 7202, trial preparation prior to plea bargaining. for the first, third and fourth quarters of 1994. The day
before his trial was to commence, Adam pled guilty to one
The Supreme Court reversed, reasoning although count of § 7202 for the fourth quarter of 1994. Two exculpatory impeachment material is part of a defendant’s weeks later, Adam filed a notice of intent to withdraw his basic Constitutional right to a fair trial, such a right does guilty plea and almost two months later filed a motion to not extend to guilty pleas since by its nature a guilty plea withdraw the guilty plea. In his motion, Adam argued, requires a defendant to forgo a fair trial. Specifically, the among other things, the statute of limitations barred his Court cited three reasons impeachment material need not indictment. presented the revenue agent with a draft amended return The government pointed out that every circuit which and disclosed additional bank accounts that the gross considered the issue of the appropriate statute of underreporting became readily apparent. At this point in limitations for a violation of § 7202 has held that time, the revenue agent knew there were firm indications
§ 6531(4) covers § 7202. The court was persuaded by the of fraud, concluded her meeting with the lawyers and reasoning in United States v. Gollapudi, 130 F.3d 66 (3rd initiated a criminal referral. The court ultimately denied Cir. 1997) and United States v. Musacchia, 900 F.2d 493 Foster’s motion to suppress concluding he was not misled (2nd Cir. 1991), that the plain language of IRC § 6531(4) by the revenue agent, who did not have a firm indication of encompasses the conduct engaged in by Adam. As Adam fraud until the point in time she suspended the audit. was unable to show a persuasive reason for creating a split among the circuits on this issue and finding the plain Application Of 26 U.S.C. § 7212(a) language of § 6531(4) includes violations of § 7202, the court held a six year statute of limitations applies to
To TIGTA Agents
§ 7202.
In United States v. Lovern, 293 F.3d 695 (4th Cir. 2002),
Firm Indications of Fraud
the Fourth Circuit affirmed Lovern’s conviction under 26
U.S.C. § 7212(a) for impeding, intimidating, or obstructing an employee of the United States acting in his capacity
In United States v. Foster, 01-80264, 2002 U.S. Dist. under Title 26 of the United States Code. Beginning in LEXIS 12341 (E.D. Mich., July 1, 2002), Foster, who was 1998, Lovern repeatedly called the Richmond, Virginia, charged with filing false individual tax returns, moved to office of the IRS to complain about his taxes. Eventually, suppress certain evidence on the grounds the revenue agent IRS officials instructed Lovern not to call anymore, who audited his returns continued the examination after referring him instead to the Richmond office of the the agent had identified a firm indication of fraud in Treasury Inspector General for Tax Administration violation of the Internal Revenue Manual. (TIGTA). Thereafter, Lovern regularly called TIGTA.
Because of the perceived threatening nature of some of the
IRS regulations explicitly prohibit a revenue agent from calls, a TIGTA agent recorded some of the incoming calls. developing a criminal case against a taxpayer under the Based on these conversations, Lovern was convicted of guise of a civil investigation. Effectively what is involved violating § 7212(a). in such a situation is, as described in United States v. Peters, 153 F.3d 445, 451 (7th Cir. 1998), an unreasonable On appeal, Lovern asserted the TIGTA agent was not consensual search under the Fourth Amendment and a acting in an official capacity under Title 26 when he denial of due process under the Fifth Amendment because threatened him. Lovern pointed out the primary source of the consent was induced by fraud, trickery, or TIGTA’s authority is Title 5, which gives TIGTA agents misrepresentation by the revenue agent. The court noted, the authority to protect IRS employees from threats and to the “firm indications of fraud” standard is a difficult investigate any such threats. Lovern contends the TIGTA standard for federal courts to apply because it is inherently agent was acting in an official capacity during the subject vague and depends, in large part, on the good faith and conversation, but not under Title 26. The Fourth Circuit professional judgement of the revenue agents conducting held Lovern was correct in that much of TIGTA’s the investigation. The case law suggests a revenue agent authority is derived from Title 5. Under 26 U.S.C. has developed a firm indication of fraud when he/she has § 7803(d)(3)(B), however, TIGTA is required to “establish established the taxpayer has engaged in a consistent pattern and maintain a toll free telephone number for taxpayers to of substantial underreporting of income or overstatement use to confidentially register complaints of misconduct by of deductions to the extent an intent to evade taxes can be IRS employees . . . ” It was beyond question the TIGTA
inferred.
agent was receiving complaints registered by Lovern
during the subject conversation. While there was no doubt
Initially during the audit, the revenue agent only had access the TIGTA agent was talking to Lovern during the subject to information gathered from IRS data bases, public conversation to protect employees of the IRS’s Richmond records and documents furnished by an informant. At an office from Lovern’s threatening phone calls, he was also initial meeting with Foster, the revenue agent was given providing Lovern an opportunity to register complaints of very little in the way of information or documents. At this IRS misconduct. Thus, the TIGTA agent was acting point in time, the information in the hands of the revenue within the scope of authority granted TIGTA under Title agent was sufficient to suggest the subject return was not 26. accurate, however, it was not sufficient to firmly indicate the presence of fraud. It was not until Foster’s lawyers
Hyde Amendment Prevailing Party

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 Stewart’s law office, which was part of a suite she shared In United States v. Campbell, 291 F.3d 1169 (9th Cir. with four other lawyers. The search was conducted by a 2002), the Ninth Circuit affirmed the district court’s denial special team of law enforcement officers who had been of Campbell’s petition for an award of attorneys’ fees segregated from the prosecution team in order to prevent under the Hyde Amendment, 18 U.S.C. § 3006A. the prosecution from viewing privileged materials Campbell, indicted for mail fraud, entered into a diversion uncovered during the search. At arraignment, Stewart agreement with the government which required him to argued a Special Master should be appointed to review the perform community service, pay restitution and report seized items since some of the items involved the regularly to a pretrial services officer. After successfully representation of criminal defendants who were unrelated fulfilling the diversion agreement’s requirements, the to Stewart’s case. government dismissed the indictment. Following the dismissal, Campbell petitioned for attorney’s fees under The court agreed, finding appointment of a Special Master the Hyde Amendment, arguing he was a “prevailing party” to review the seized materials appropriate for several and was entitled to an attorney’s fee award. reasons. First, the United States Attorney’s Manual
acknowledges such appointment may be appropriate in
The Ninth Circuit held Campbell was not a “prevailing some circumstances. Second, Stewart’s case was party” as required under the Hyde Amendment because he exceptional since the documents seized were likely to had received no relief on the merits. The court noted the contain not only privileged materials of unrelated criminal statute did not define the term “prevailing party” and there defendants, but also of clients of attorneys other than was no case law definitively interpreting the term. To Stewart. Third, courts previously employed Special define the term, the court incorporated the definition Masters to review materials seized from the law offices of announced by the Supreme Court in Buckhannon Bd. & criminal defense attorneys, and a few courts which allowed Care Home, Inc. v. West Virginia Dep’t of Health & for review by government privilege teams, later opined the Human Res., 532 U.S. 598 (2001), and adopted by it in use of other methods of review may have been better. Perez-Arellano v. Smith, 279 F.3d 791 (9th Cir. 2002), Finally, the court was unpersuaded by the government’s which defined “prevailing party” under the Equal Access argument the case would be delayed by injecting a third to Justice Act, which by statutory design, the Hyde party to review materials seized. The court noted the Amendment is required to apply. Based on those two materials in this case were not voluminous and the decisions, the court concluded a “prevailing party” was extraordinary facts of the case favored the appointment of one who has “received at least some relief on the merits of a Special Master, thus overriding the government’s his claim.” The court found Campbell did not fit the countervailing concerns. description since Campbell’s experience “was more akin to that of a convicted defendant.” Accordingly, Campbell was not a “prevailing party” for purposes of the Hyde INVESTIGATIVE TECHNIQUES Amendment and, thus, not entitled to attorney’s fees.
Electronic Surveillance - Necessity
SEARCH AND SEIZURE
Requirement

In United States v. Ramirez-Encarnacion, 291 F.3d 1219
Special Master
(10th Cir. 2002), Ramirez-Encarnacion (“Ramirez”)
appealed the district court’s refusal to suppress evidence
In United States v. Stewart, 2002 U.S. Dist. LEXIS 10530 obtained through a wiretap. Ramirez was one of several (S.D.N.Y. June 11, 2002), Stewart was indicted on charges Mexican nationals indicted as a result of a multi-state of, inter alia, conspiring to provide material support to narcotics investigation. Ramirez and her co-conspirators designated foreign terrorist organizations. Stewart, a were suspected of transporting drugs into the United criminal defense attorney, moved for the appointment of a States. The investigation led federal agents to a facility in Special Master to review items seized from her law office Colorado used by the conspirators for drug trafficking. A for privileged material. The government argued its wiretap authorized for that facility was later expanded to privilege team would provide adequate safeguards to include communications from Ramirez’ house. Ramirez protect any privileges and should be allowed to perform an moved to suppress evidence obtained from the expanded initial review of the items for privilege purposes. After wiretap, arguing the government’s evidence failed to meet one of Stewart’s clients was convicted in 1995 of the standard of necessity required to obtain an authorized participating in the 1993 World Trade Center bombing, she wiretap. The district court disagreed, finding the wiretap continued to communicate with him, allegedly as his was necessary for the successful completion of the attorney. The government obtained a search warrant for investigation. Ramirez pleaded guilty to one count of

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using a communication facility to further a conspiracy to the providing materially false information to a judge as an distribute narcotics, but appealed the court’s finding of example of conduct to which an obstruction of justice
necessity.
enhancement applies. In this case, the court found the
district court’s determination that Adam lied under oath at The Tenth Circuit first resolved a conflict within the his plea withdrawal hearing was supported by the record. Circuit regarding the applicable standard of review. Although previous decisions endorsed a de novo standard, the appellate court, after consulting the en banc court, held Special Skill And Offense Level
a district court’s determination of necessity in authorizing For Conspiracy a wiretap must be reviewed under an abuse of discretion standard of review. In deciding whether a wiretap is In United States v. Downing, No. 01-1437, 2002 U.S. necessary, a district court must find the government App. LEXIS 13541 (2nd Cir., July 18, 2002), the showed traditional investigative techniques (1) were tried defendants, two accountants, became involved in a stock unsuccessfully, (2) reasonably appeared to be unsuccessful market manipulation scheme known as a “pump and if tried, or (3) were too dangerous to attempt. In this case, dump,” in which bribed stock promoters to artificially the court noted, the government met its burden of proof in inflate a stock‘s price and then sell the stock when the obtaining authorization for the wiretap. See, 18 U.S.C. § price is high enough. The defendants were convicted of 2518(1)(c). The government, prior to requesting the conspiring to commit securities and wire fraud in violation wiretap, utilized pen registers and interviewed confidential of 18 U.S.C. § 371. The Second Circuit held the sources to further the investigation. Surveillance and enhancement under U.S.S.G. § 3B1.3 for use of special undercover filtration were impossible due to the rural skill can apply in a conspiracy case even if the scheme did nature of the area and tight-knit nature of the conspiracy. not progress to the point at which the special skill would Furthermore, a search warrant executed at the residence of have been put to use. Both defendants appealed, one of the conspirators gleaned little additional contesting the district court erred in applying § 3B1.3 and information and only caused the other conspirators to flee refusing to apply § 2X1.1(b)(2). In general, § 3B1.3 to Mexico. The district court, therefore, did not abuse its applies if the defendant “. . . used a special skill, in a discretion in finding the government made an adequate manner that significantly facilitated the commission or
showing of necessity.
concealment of the offense.” Although the commentary
lists accountants as persons who possess a special skill, the defendants pointed out the scheme was aborted before they
SENTENCING
used their accounting skills in a manner contemplated by
the guideline. Despite the absence of binding precedent in the Second Circuit, the court concluded, § 3B1.3, like most Obstruction Of Justice Enhancement specific offense characteristics, applies to inchoate
Appropriate For Perjury During Plea
offences provided the court determines with reasonable
Withdrawal Hearing
certainty the defendant actually intended to use his or her
special skill to facilitate or conceal the corresponding
In United States v. Adam, 296 F.3d 327 (9th Cir. 2002), the substantive offense. Section 2X1.1 instructs, unless Fifth Circuit held the district court did not err in imposing specifically addressed elsewhere in the guidelines, an obstruction of justice enhancement, under U.S.S.G. sentences for inchoate crimes should correspond to those
§ 3C1.1, on the basis of Adam’s testimony at his plea for the substantive offenses. Employing this analysis, the withdrawal hearing. Adam was indicted for three counts Second Circuit concluded the district court correctly of wilfully failing to pay over taxes to the IRS in violation applied § 3B1.3. of 26 U.S.C. § 7202. The day before his trial was to commence, Adam pled guilty to one count of violating The Second Circuit, however, concluded the district court
§ 7202. Two weeks later, Adam filed a notice of intent to erred by declining to adjust the defendants’ sentences withdraw his guilty plea and almost two months later filed downward pursuant to U.S.S.G. § 2X1.1(b)(2), which a motion to withdraw the guilty plea. In his motion, Adam instructs district courts to reduce the base offense level if argued, among other things, the district court improperly the conspirators failed to complete all the acts they enhanced his sentence for obstruction of justice based on believed necessary to carry out the substantive offense. his statements under oath regarding the circumstances Section 2X1.1(b) holds, if the crime is a conspiracy, the
surrounding his guilty plea.
court is to “decrease [the base offense level for the
substantive crime] by 3 levels, unless the defendant or a
In affirming the district court’s decision to enhance co-conspirator completed all the acts the conspirators Adam’s sentence, the court noted the guideline included believed necessary on their part for the successful

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completion of the substantive offense or the circumstances Firment agreed to plead guilty to the tax conspiracy count demonstrate that the conspirators were about to complete and stipulated to a $46,465.00 tax loss calculation. At all such acts but for apprehension or interruption by some sentencing, the district court applied several adjustments to similar event beyond their control.” The Second Circuit Firment‘s sentence, including a two level upward held the district erred by declining to apply § 2X1.1(b)(2) adjustment for vulnerability of the telemarketing victims, to the defendants’ sentences. Neither a defendant nor a co- pursuant to U.S.S.G. § 3A1.1(b)(1). conspirator completed all the acts the conspirators believed necessary on their part for the successful completion of the The Second Circuit upheld the sentence, disagreeing with substantive offense. The conspiracy to carry out the Firment’s contention the vulnerable victim adjustment “pump and dump” scheme did not ripen into a substantially under § 3A1.1(b)(1) was not applicable because the
completed offense.
vulnerable persons were not related to his offense of
conviction, which was tax conspiracy. The court held the vulnerable victim adjustment may be applied even if the
Vulnerable Victim Adjustment
victims are not the victims of the offense of conviction.
The court noted the guideline commentary defines victim
In United States v. Firment, 296 F.3d 118 (2nd Cir. 2002), as a person who is a victim of the offense of conviction as Firment appealed his sentence, arguing the court erred in well as a victim of any conduct for which the defendant is adjusting the offense level upward for an offense involving accountable under the relevant conduct guideline. Since vulnerable victims. Firment and his co-conspirators Firment conceded at sentencing the conduct concerning the persuaded victims of other telemarketing scams, most of telemarketing scheme was relevant conduct and the victims them elderly and living on fixed incomes, to provide of that scheme were vulnerable, the adjustment was not money for nonexistent lawsuits or investigations for the erroneous. The court also cited some of its previous earlier scams. The conspirators also charged people fees decisions in which the vulnerable victim adjustment was to help them obtain credit lines, although no help was ever upheld even though the entity directly targeted by the provided. In total, the scams netted the conspirators offense of conviction was different from the vulnerable approximately $700,000.00, and they all agreed not to person harmed. report or pay taxes on the income. Firment was charged with conspiracy to commit mail fraud and conspiracy to impede and impair the lawful functions of the IRS.

CRIMINAL TAX BULLETIN

AUGUST 2002

TABLE OF CASES

SUPREME COURT CASES

United States v. Ruiz, 122 S. Ct. 2450 (2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

TITLE 26 AND TITLE 26 RELATED CASES

United States v. Adam, 296 F.3d 327 (9th Cir. 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

United States v. Foster, 01-80264, 2002 U.S. Dist. LEXIS 12341 (E.D. Mich., July 1, 2002) . . . . . . . . . . . . . . . . . . . . . . 2

United States v. Lovern, 293 F.3d 695 (4th Cir. 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

United States v. Campbell, 291 F.3d 1169 (9th Cir. 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

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SEARCH AND SIEZURE

United States v. Stewart, 2002 U.S. Dist. LEXIS 10530 (S.D.N.Y. June 11, 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

INVESTIGATIVE TECHNIQUES

United States v. Ramirez-Encarnacion, 291 F.3d 1219 (10th Cir. 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

SENTENCING

United States v. Adam, 296 F.3d 327 (9th Cir. 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

United States v. Downing, No. 01-1437, 2002 U.S. App. LEXIS 13541 (2nd Cir., July 18, 2002) . . . . . . . . . . . . . . . . . . . . 4

United States v. Firment, 296 F.3d 118 (2nd Cir. 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Department of the Treasury
Internal Revenue Service
Document 10023 (08-2002)
Catalog Number 24304B

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