The single opinion the Circuit issued today is United States v. Daugerdas, No. 14-2437-cr (Circuit Judges: Kearse, Walker, and Cabranes).
The defendant was a Certified Public Accountant and tax attorney. He and others designed tax shelters (for wealthy clients) in which the transactions underlying the shelters focused on the transactions tax consequences, not on their profitability. And the tax shelters “generally did not generate meaningful returns.” The defendant was convicted by a jury of seven counts related to the tax shelters (i.e., 1 count of conspiracy to defraud the IRS [§371] ; 4 counts of client tax evasion [26 U.S.C. § 7201]; 1 count of IRS obstruction [id. 7212(a)]; and 1 count of mail fraud [18 U.S.C. § 1341] ).
Interesting though, the jury acquitted Mr. Daugerdas of the 3 counts that charged him with personal tax evasion based on his use of the tax shelters to reduce his own tax liability. During a (5-year) period when he made $26 million, he used one of his tax shelters to pay only $7,315 in federal personal income tax. And during a (3-year tax) period when he made $79 million in income, he used a shelter to offset his income so he paid no income tax whatever. The jury also acquitted him of 6 more counts — he was acquitted of 6 of the 10 counts that charged him with client tax evasion. Op. at 11. (And the jury acquitted a codefendant of all charges). The jury does not seem to have bought much of the prosecution’s case against Mr. Daugerdas.
The issues the Circuit addressed were the sufficiency of the evidence; constructive amendment of the indictment; duplicitous indictment; hearsay (Rules 609 and 806); summation comments by the prosecution; a supplemental instruction to the jury; procedural and substantive reasonableness of the sentence; and forfeiture. No new ground appears to have been plowed.
I. Sufficiency of the evidence
A. Mens rea for the tax evasion counts
The 4 tax evasion counts (of conviction) turned on alleged misrepresentations in the tax returns of several of the defendant’s clients. The government’s proof, he argued, did not show he knowingly developed and sold tax shelters “that violated the so-called economic substance rule.” Op. at 13 (emphasis added). Under this rule, sham transactions that cannot be said with reason “to have purpose, substance, or utility apart from their anticipated tax consequences” cannot form the basis of legitimate tax losses under the Internal Revenue Code. Op. at 13 (citation omitted).
To find that the defendant had the requisite mens rea (for the 4 tax evasion counts, 1 mail fraud count, and 1 obstruction count) “on the basis of violations of the economic substance rule,” the jury had to find “both that he knew the rule and knew that the transactions lacked economic substance.” Op. at 13. Whether a transaction lacks economic substance requires examination of (1) whether the clients “had an objectively reasonable expectation of profit, apart from tax benefits, from the transaction; and (2) whether clients had a subjective non-tax business purpose in entering the transaction.” Op. at 14.
The Panel concluded there was sufficient evidence the defendant knew of the economic substance rule because he was a CPA and tax lawyer “who explained the economic substance requirement to his clients.” Op. at 14. And it concluded he was aware of the low possibility of the shelters earning a profit and that the low likelihood of the clients profiting from the shelters “provided circumstantial support for inferences that they did not have a subjective non-tax business purpose in entering the transaction, and that Daugerdas knew it.” Op. at 16, 17.
B. Conspiracy to defraud IRS and mail fraud
The evidence was sufficient to show the mail fraud count “affected a financial institution” because the defendant “entered into a pre-trial stipulation that Deutche Bank was a financial institution that was ‘affected’ by the shelters.” Op. at 19 (internal quotation marks and alterations in original omitted). Proof of this element, made the statute of limitations 10 years; without it, the mail fraud count would have been barred by the 5-year statute of limitations. Op. at 19; 18 U.S.C. §3582 (5-year), §3293 (10-year). And because of the Stipulation, it was not plain error that the indictment did not allege an affect on a financial institution. Op. at 20.
II. Constructive Amendment of Indictment.
The Circuit acknowledges that constructive amendment of an indictment “is a per se violation of the Fifth Amendment[.]” Op. at 21. But, it adds, “significant flexibility in proof is constitutionally permissible, as long as the indictment provides notice to the defendant of the core of criminality to be proven at trial.” Op. at 12 (citation and internal quotation marks omitted). “[C]ore of criminality” — it states — is “the essence of the crime, in general terms, and excludes the particulars of how a defendant effected the crime;” hence, “there is no constructive amendment when the proof at trial does no more than supply the particulars.” Id. Here, the Panel concluded that the defendant’s complaints were about matters that went to the particulars of how the crime was effected and did not amount to a constructive amendment of the indictment. Op. at 22.
III. Duplicitous Indictment
When one count alleges “multiple crimes” it is said to be duplicitous, but it is not duplicitous if it alleges “multiple ways of committing a single offense.” Op. at 23. Daugerdas claimed that the count charging obstruction of the IRS was duplicitous because it involved two schemes: one scheme based on the clients’ use of the tax shelters; the second based on his personal use of the tax shelters. The Panel ruled that the count alleged a single crime, obstruction of the IRS, and that the count then alleged that the crime was committed in different ways, “divided into two categories — those that relate to Daugerdas’s work on behalf of his clients and those that relate to Daugerdas’s personal use of the shelters[.]” Op. at 23.
IV. Hearsay: Rules 609 (impeaching with a criminal conviction) and 806 (attacking and supporting the declarant’s credibility).
On cross-examining a witness, Daugerdas elicited from the witness that a tax attorney named Ivsan, who was unaffiliated with Daugerdas, had concluded that the tax shelter the witness had used was legal. The court then allowed the government to introduce — under Fed.R.Crim.P. 609 and 806 — the fact that Ivsan (who was not testifying) had pled guilty to unrelated tax crimes. Op. at 24. The Panel stated that this was appropriate to impeach Ivsan’s opinion that the shelter was legal. “The probative value of the evidence lay in its relevance to the jury’s assessment of Ivsan’s credibility, which was itself relevant to its assessment of whether Daugerdas had a good faith belief in the legality of his actions.” Op. at 25.
The Panel finds it was not impermissible for the prosecutor to comment that (1) “the defense had not introduced any evidence that anyone had convinced the IRS that the shelter transactions were legitimate;” and (2) that “Daugerdas did not record his views about the validity of the shelters, seek other legal opinions on the validity of the shelters he was selling, or litigate them in court.” Op. 26-27. It held that, although “the government cannot comment on a defendant’s failure to testify, it is permissible to draw the jury’s attention to the fact that a defendant did not call witnesses to contradict the government’s case or support his own theory of what happened.” Op. at 27.
VI. Supplemental instruction to jury; reasonableness of sentence; forfeiture
The Panel acknowledged that “[a] flawed supplemental instruction can undermine and even invalidate a [jury] charge that is otherwise correct if the supplemental instruction is sufficiently incomplete and misleading.” Op. at 30 (citation omitted). And the Circuit has “cautioned that a trial judge must be especially careful with supplemental instructions in response to jury questions because they are often provided to the jury at crucial moments of deliberations.” Id. But the Panel concludes that the district court’s supplemental instructions in this case did not deny the defendant a fair trial. Op. at 30-34.
The Panel also found that the sentence was not procedurally or substantively unreasonable. Op. at 34-36. And regarding the criminal forfeiture order, the Panel concluded that the government had established, by a preponderance of the evidence, the “‘requisite nexus between the property and the offense.’” Op. 36-37 (quoting Fed.R.Crm.P.32.2(b)(1)(A)).