Criminal Tax Manual
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12.00 FRAUD AND FALSE STATEMENT
Updated May 2001
12.01 STATUTORY LANGUAGE: 26 U.S.C. § 7206(1)
12.02 GENERALLY
12.03 ELEMENTS
12.04 RETURN, STATEMENT, OR DOCUMENT
12.05 "MAKES" ANY RETURN, STATEMENT, OR DOCUMENT
12.05[1] Requirement of Filing
12.05[2] Persons and Entities Liable
12.06 "SUBSCRIBES" ANY RETURN, STATEMENT, OR DOCUMENT
12.06[1] Generally
12.07 MADE UNDER PENALTIES OF PERJURY
12.07[1] Requirement Of A Jurat
12.07[2] Law Of Perjury Does Not Apply To Section 7206(1) Prosecutions
12.08 FALSE MATERIAL MATTER
12.08[1] Generally
12.08[2] Reynolds "literal truth" Defense
12.08[3] Proof of One Material Item Enough
12.08[4] Proving Materiality after Neder and Gaudin
12.08[5] Tax Deficiency Not Required, But No Longer "Irrelevant"
12.08[6] Reliance by Government on False Statements Not Required
12.08[7] Pre-Gaudin Examples Of Material Matters
12.08[8] Pre-Gaudin Examples: No Tax Deficiency
12.08[8][a] Failure to Report a Business
12.08[8][b] Failure to Report Gross Receipts
12.08[8][c] Reporting Net Business Income, But Not Gross Income
12.08[8][d] Reporting A False Source But Correct Figures
12.08[8][e] Gambling Losses Deducted as Business Expenses
12.08[8][f] Failure to Report Income from Illegal Business
12.08[8][g] Foreign Bank Account Questions on Tax Forms
12.09 WILLFULNESS -- DOES NOT BELIEVE TO BE TRUE AND CORRECT
12.09[1] Generally
12.09[2] Signature on Return as Evidence of Knowledge of Return Contents
12.09[3] Collective Intent of Corporations
12.09[4] Amended Returns
12.09[5] Reliance On Professional Advice
12.09[6] Ostrich Instruction
12.10 LESSER INCLUDED OFFENSE CONSIDERATIONS
12.11 VENUE
12.12 STATUTE OF LIMITATIONS
12.01 STATUTORY LANGUAGE: 26 U.S.C. § 7206(1)
§7206. Fraud and false statements
Any person who --
(1) Declaration under penalties of perjury. --
Willfully makes and subscribes any return, statement, or other document,
which contains or is verified by a written declaration that it is made
under the penalties of perjury, and which he does not believe to be true
and correct as to every material matter; . . .
shall be guilty of a felony and, upon conviction thereof, shall be
fined* not more than $100,000 ($500,000 in the case of a corporation),
or imprisoned not more than 3 years, or both, together with the costs of
prosecution.
* For offenses committed after December 31, 1984, the Criminal
Fine Enforcement Act of 1984 (P.L. 98-596) enacted 18 U.S.C.
§ 3623 [FN1] which increased the maximum permissible fines for both
misdemeanors and felonies. For the felony offenses set forth in section
7206, the maximum permissible fine for offenses committed after December
31, 1984, is at least $250,000 for individuals and $500,000 for
corporations. Alternatively, if the offense has resulted in pecuniary
gain to the defendant or pecuniary loss to another person, the defendant
may be fined not more than the greater of twice the gross gain or twice
the gross loss.
12.02 GENERALLY
Section 7206(1) makes it a felony to willfully make and subscribe a
false document, if the document was signed under penalties of perjury.
Section 7206(1) is one of the more flexible prosecutorial weapons in the
government's arsenal against criminal tax offenses. Section 7206(1) is
referred to as the tax perjury statute, because it makes the falsehood itself
a crime. Historically, because Section 7206(1) does not require proof of a
tax deficiency, it permits prosecution in cases in which there is no tax
deficiency, a minimal tax deficiency, or a tax deficiency which would be
difficult to prove. However, changes in the law regarding materiality may now
make it more difficult to obtain convictions in cases with no demonstrable tax
deficiency. See § 12.08[3].
12.03 ELEMENTS
The elements of a section 7206(1) prosecution are as follows:
1. The defendant made and subscribed a return, statement, or other
document which was false as to a material matter;
2. The return, statement, or other document contained a written
declaration that it was made under the penalties of perjury;
3. The defendant did not believe the return, statement, or other
document to be true and correct as to every material matter; and
4. The defendant falsely subscribed to the return, statement, or
other document willfully, with the specific intent to violate the
law.
United States v. Bishop, 412 U.S. 346, 350 (1973); United
States v. Pirro, 212 F.3d 86, 89 (2d Cir. 2000); United States
v. Hayes, 190 F.3d 939, 946 (9th Cir. 1999), aff'd en
banc, 231 F.3d 663, 667 n.1 (9th Cir. 2000), cert. denied,
121 S.Ct. 1388 (2001); United States v. Scholl, 166 F.3d 964,
979 (9th Cir.), cert. denied, 528 U.S. 873 (1999); United States
v. Peters, 153 F.3d 445, 461 (7th Cir. 1998)); United States v.
Tucker, 133 F.3d 1208, 1218 (9th Cir. 1998); United States v.
Gollapudi, 130 F.3d 66, 71-72 (3d Cir. 1997); United States v.
Aramony, 88 F.3d 1369, 1382 (4th Cir. 1996); United States v.
Owen, 15 F.3d 1528, 1532 (10th Cir. 1994); United States v.
Borman, 992 F.2d 124, 126 (7th Cir. 1993); United States v.
Robinson, 974 F.2d 575, 579 (5th Cir. 1992); United States v.
Kaiser, 893 F.2d 1300, 1305 (11th Cir. 1990); United States v.
Drape, 668 F.2d 22, 25 (1st Cir. 1982).
12.04 RETURN, STATEMENT, OR DOCUMENT
Section 7206(1) expressly applies to "any return, statement, or other
document" signed under penalties of perjury. While most section 7206(1)
prosecutions involve income tax returns, there are some reported cases
involving false documents other than tax returns. See, e.g.,
United States v. Droms, 566 F.2d 361 (2d Cir. 1977) (per curiam)
(financial information statement submitted to the IRS for settlement
purposes); United States v. Cohen, 544 F.2d 781 (5th Cir. 1977)
(false statement made in an offer in compromise, Form 656); Jaben v.
United States, 349 F.2d 913, 915-16 (8th Cir. 1965) (application for
extension of time for filing). Note that these above-cited cases are merely
examples of the use of the statute: in none of them was the application of
Section 7206(1) to the particular type of false document actually challenged
by the defense.
The Fifth Circuit limited the application of 7206(1) to documents
required by statutes or regulations in United States v. Levy,
533 F.2d 969 (5th Cir. 1976). There, the court of appeals held that section
7206(1) was restricted to statements or documents required either by the
Internal Revenue Code or applicable regulations to be filed or submitted.
Levy involved the submission of a Form 433AB. Levy's
interpretation of section 7206(1), however, has been limited by the
Fifth Circuit itself. See United States v. Damon,
676 F.2d 1060, 1063-64 (5th Cir. 1982) (allowing § 7206(1) prosecution
for false Schedule C); United States v. Taylor, 574 F.2d 232,
237 (5th Cir. 1978) (upholding § 7206(1) prosecution for false Schedules
E and F); cf. United States v. Edwards, 777 F.2d 644, 652
(11th Cir. 1985) (permitting § 7206(1) prosecution for false Schedule C,
following Taylor and distinguishing Levy). See
also United States v. Hunerlach, 197 F.3d 1059, 1068 (5th
Cir. 1999) (affirming conviction based on Form 433A where argument that a
section 7206(1) conviction cannot rest on Form 433A not made below).
Other circuits flatly reject Levy. In United States
v. Holroyd, 732 F.2d 1122 (2d Cir. 1984), the Second Circuit held that
a statement made on an IRS form, the use of which is not expressly authorized
by statute or regulation, may provide the basis for a section 7206(1)
prosecution. In connection with an ongoing assessment of his ability to pay a
tax liability, the defendant had signed under penalties of perjury and filed
with the IRS two false IRS collection information statements -- Form 433-AB
and Form 433-A. The trial court dismissed the indictment on the authority of
Levy because Form 433-AB was not a required form. The Second
Circuit, however, rejected the Levy court's restrictive
interpretation of section 7206(1), concluding:
26 U.S.C. Section 7206(1) means what it says on its face. It applies to
any verified return, statement or other document submitted to the IRS.
The indictment against Holroyd . . . did state a crime cognizable under
that section.
Holroyd, 732 F.2d at 1128.
Similarly, the defendants in United States v. Franks,
723 F.2d 1482 (10th Cir. 1983), argued that because the question concerning
the existence of foreign bank accounts on their 1974 income tax returns, as
well as the Forms 4683 attached to their amended 1974 and 1975 returns, were
not authorized by the Internal Revenue Code or by any regulation, the
responses to those questions could not support a section 7206(1) prosecution.
The Tenth Circuit refused to apply the Levy rationale and
rejected this argument:
Like the Fifth Circuit, in cases decided subsequent to United
States v. Levy, supra, we do not believe the rationale of
Levy should be extended, and, in our view, such does not
apply to the schedules here appended to a Form 1040, or to an answer
made in response to a question contained in the Form 1040. In the
instant case, it is clearly established that the defendants in their
1974 tax return gave a false answer to a direct question concerning
their interest in foreign bank accounts, and that they attached to their
amended tax return for 1974 and their tax return for 1975 a completed
Form 4683 which did not identify all of the foreign bank accounts
over which they had signatory authority. Such, in our view, comes
within the purview of 26 U.S.C. Section 7206(1).
Franks, 723 F.2d at 1486 (citations omitted).
12.05 "MAKES" ANY RETURN, STATEMENT, OR DOCUMENT
12.05[1] Requirement of Filing
The plain language of the statute does not require that the return,
statement or other document be filed. Nevertheless, some courts have held
that although "make and subscribe," as used in section 7206(1), are words that
connote "preparing and signing," a completed Form 1040 does not become a
'return,' and a taxpayer does not 'make a return,' until the form is filed
with the Internal Revenue Service. United States v. Gilkey,
362 F. Supp. 1069, 1071 (E.D. Pa. 1973); accord United States v.
Dahlstrom, 713 F.2d 1423, 1429 (9th Cir. 1983) (reversing §
7206(2) conviction because return not filed). According to
Gilkey, 362 F. Supp. at 1071, the rationale for this holding is
that taxpayers ought to have the right of "self-correction." However, there
is no requirement that the defendant file the return, if it was in fact
filed and the defendant "made or subscribed" the return. United States
v. Kellogg, 955 F.2d 1244, 1248-49 (9th Cir. 1992).
There appears to be room for the argument, however, that an unfiled
return may form the basis of a section 7206(1) or (2) prosecution, if the
return was transmitted to a third person obligated to file it. See
United States v. Cutler, 948 F.2d 691, 694-95 (10th Cir. 1991)
(upholding § 7206(2) conviction for false and unfiled 1099B given to
intermediary required to file); United States v. Monteiro, 871
F.2d 204, 210-11 (1st Cir. 1989) (same).
12.05[2] Persons and Entities Liable
Under traditional perjury law, corporations cannot commit perjury
because a corporation cannot take an oath to tell the truth. A corporation,
however, can be prosecuted for a section 7206(1) violation because section
7206(1) expressly refers to "any person," and 26 U.S.C. § 7701(a)(1)
specifically defines "person" to include a corporation. United States
v. Ingredient Technology Corp., 698 F.2d 88, 99 (2d Cir. 1983);
accord United States v. Shortt Accountancy Corp., 785 F.2d 1448,
1454 (9th Cir. 1986) ("A corporation will be held liable under section 7206(1)
where its agent deliberately causes it to make and subscribe to a false tax
return.").
Further, the maker of the return does not have to physically complete or
prepare the return. In United States v. Badwan, 624 F.2d 1228
(4th Cir. 1980), the defendants argued that they did not "make" the return, as
required by section 7206(1), since their returns were prepared by an
accountant. The Fourth Circuit rejected the argument that the defendant had
to actually prepare the return:
The evidence did clearly show, however, that the accountant who prepared
the returns did so solely on the basis of information provided to him by
the Badwans, and that the Badwans then signed and filed the returns.
This satisfies the statute.
Badwan, 624 F.2d at 1232; cf. United States v.
Wilson, 887 F.2d 69, 73 (5th Cir. 1989) (discussing reliance on
preparer as defense to willfulness); United States v. Duncan,
850 F.2d 1104, 1117 (6th Cir. 1988) (same).
Additionally, a return preparer can be charged under section 7206(1) for
willfully making and subscribing a false tax return for a taxpayer.
United States v. Shortt Accountancy Corp., 785 F.2d 1448, 1454
(9th Cir. 1986). In Shortt Accountancy, one of the defendant
accounting firm's accountants had prepared and signed a client's Form 1040,
which contained deductions arising from an illegal tax shelter sold to the
client by the firm's chief operating officer. On appeal from the conviction
under section 7206(1), the defendant firm argued that a tax preparer cannot
"make" a return within the meaning of the statute since it is the taxpayer,
not the preparer, who has the statutory duty to file the return. The court
rejected this argument, however, holding that the prohibitions of section
7206(1) are not based on the taxpayer's duty to file; rather, section 7206(1)
simply prohibits perjury in connection with the preparation of a federal tax
return. Shortt Accountancy, 785 F.2d at 1454. In the court's
opinion, "sections 7206(1) and 7206(2) are `closely related companion
provisions' that differ in emphasis more than in substance," and perjury in
connection with the preparation of a tax return is chargeable under either
section. Shortt Accountancy, 785 F. 2d at 1454 (quoting
United States v. Haynes, 573 F.2d 236, 240 (5th Cir. 1978)).
Generally, however, it is the better practice to charge a violation of section
7206(2) against the person who prepares a false return for the individual
required to file.
12.06 "SUBSCRIBES" ANY RETURN, STATEMENT, OR DOCUMENT
12.06[1] Generally
The submission of a false, unsigned return cannot, without more, serve
as the basis for a 7206(1) prosecution because the act of subscribing
(signing) a return, statement, or other document, is an element of the
offense. An unsigned return, however, may provide the basis for a tax evasion
charge (but not a section 7206(1) violation) if the evidence shows that the
unsigned return was filed by the defendant as his return and was intended to
be such. See United States v. Robinson, 974 F.2d 575,
577-78 (5th Cir. 1992) (noting that submission of unsigned documents
purporting to be returns can constitute affirmative acts of evasion).
Section 7206(1) does not require that the defendant personally sign the
return, so long as he authorized the filing of the return with his name
subscribed . United States v. Ponder, 444 F.2d 816, 822
(5th Cir. 1971).
12.06[2] Proof of Signature
Assuming that the document is signed, the government must still
authenticate the signature -- establish that the signature is what the
government alleges it to be, i.e., that the named person actually
signed the document. The signature can be authenticated by the use of any one
of the three methods provided by the Federal Rules of Evidence:
1. Lay testimony on handwriting -- any witness who is
familiar with the defendant's handwriting may testify that the
questioned signature is that of the defendant. The limitation on
this approach is that the familiarity of the witness with the
handwriting of the defendant must not have been acquired for
purposes of the litigation. Fed. R. Evid. 901(b)(2).
2. Expert testimony -- a qualified expert may compare
the questioned signature with authenticated specimens of the
defendant. Fed. R. Evid. 901(b)(3).
3. Jury comparison -- the finder of fact may compare
authenticated specimens with the questioned signature without
expert help. Fed. R. Evid. 901(b)(3).
For purposes of comparison, 28 U.S.C. § 1731, provides:
The admitted or proved handwriting of any person shall be
admissible, for purposes of comparison, to determine genuineness of
other handwriting attributed to such person.
Furthermore, the authentication of a signature is aided by the statutory
presumption provided by the Internal Revenue Code, 26 U.S.C. § 6064
(1986):
The fact that an individual's name is signed to a return,
statement, or other document shall be prima facie evidence for all
purposes that the return, statement, or other document was actually
signed by him.
For similar presumptions concerning corporate and/or partnership returns, see
26 U.S.C.
§§ 6062 - 6063.
Accordingly, if an individual's name is signed to a return, statement,
or other document, there is a rebuttable presumption by virtue of § 6064
that the document was actually signed by that individual. See
United States v. Kim, 884 F.2d 189, 195 (5th Cir. 1989) (noting
presumption and rejecting constitutional challenge to § 6064). This
presumption applies to both civil and criminal cases. United States v.
Cashio, 420 F.2d 1132, 1135 (5th Cir. 1969).
The statutory presumption has practical consequences at trial, because
it is not necessary to present direct evidence showing that the defendant
actually signed the returns; it is sufficient that the defendant's name is on
the returns and the returns are true and correct copies of returns on file
with the Internal Revenue Service. United States v. Wilson,
887 F.2d 69, 72 (5th Cir. 1989); United States v. Carrodeguas,
747 F.2d 1390, 1396 (11th Cir. 1984).
12.07 MADE UNDER PENALTIES OF PERJURY
12.07[1] Requirement Of A Jurat
Section 7206(1) requires that the return, statement, or other document
be made "under the penalties of perjury." This element should be self-evident
as the document either does or does not contain a declaration that it is
signed under the penalties of perjury. A signature plus the declaration is
sufficient; the document need not be witnessed or notarized. As required by
26 U.S.C. § 6065 (1986), all income tax returns contain such a
declaration.
If a taxpayer presents a return or other document in which the jurat is
stricken, then prosecution should not be brought under section 7206(1) as the
document is not signed under the penalty of perjury. However, 26 U.S.C.
§ 7201 (tax evasion) or 18 U.S.C. § 1001 (false statement) charges
may be considered in this instance.
12.07[2] Law Of Perjury Does Not Apply To Section 7206(1)
Prosecutions
Although referred to as the tax perjury statute, section 7206(1)
prosecutions are not perjury prosecutions. Accordingly, the heightened
requirement of proof traditionally applicable in perjury prosecutions does not
apply to section 7206(1) prosecutions. Escobar v. United
States, 388 F.2d 661, 665 (5th Cir. 1967); United States v.
Carabbia, 381 F.2d 133, 137 (6th Cir. 1967) (holding that the
two-witness rule applicable to perjury prosecutions was not required in
§ 7206(1) prosecutions, even though it would have been met in the instant
case). Similarly, when the "exculpatory no" doctrine was still good law, the
Fifth Circuit suggested, in dicta, that it was inapplicable to section 7206(1)
prosecutions. See United States v. Hajecate, 683 F.2d
894, 901 (5th Cir. 1982) (dicta) (holding "exculpatory no" doctrine applied to
"no" answer on tax return charged as § 1001, but opining that conduct
could still be prosecuted under § 7206(1)).
12.08 FALSE MATERIAL MATTER
12.08[1] Generally
Section 7206(1) requires that a return, statement, or other document
must be "true and correct as to every material matter." Accordingly, the
government must prove that the matter charged as false is material.
Historically, the "prevailing rule" was that materiality was an issue to
be decided by the court in 7206 prosecutions. United States v.
Fawaz, 881 F.2d 259, 261 (6th Cir. 1989). However, in 1994, in an
"unexpected" ruling, [FN2] the Supreme Court in United States v.
Gaudin, 515 U.S. 506 (1994), held that materiality is a question for
the jury, and not the court, in prosecutions under 18 U.S.C. § 1001.
In Neder v. United States, 527 U.S. 1, 7, 9, 17 (1999),
the Supreme Court resolved a circuit split regarding whether
Gaudin mandates that questions of materiality in Title 26 cases
be submitted to the jury. See also United States v. Jackson,
196 F.3d 383, 384 (2d Cir. 1999), cert. denied, 120 S.Ct. 993 (2000).
In Neder, the Court held erroneous the trial court's refusal to
submit the issue of materiality in a section 7206(1) fraud case to the jury,
but found the error harmless.
The Court's decision accords with prior decisions of a clear majority of
the circuits, which treated materiality as a jury question in section 7206(1)
and (2) prosecutions. See United States v. Clifton, 127
F.3d 969, 970 (10th Cir. 1997) (holding that materiality in § 7206(1)
prosecution must be submitted to the jury); United States v.
Uchimura, 125 F.3d 1282, 1284-85 (9th Cir. 1997) (concluding that
§ 7206(1) materiality is a mixed question of law for the jury);
United States v. Knapp, 120 F.3d 928, 932 (9th Cir. 1997)
(noting that question of materiality in § 7206(1) and (2) prosecution
should have been submitted to jury); United States v. McGuire,
99 F.3d 671, 671 (5th Cir. 1996) (per curiam) (holding that § 7206(1)
count on which defendant was acquitted "incorrectly removed the issue of
materiality from the jury."); United States v. Randazzo, 80 F.3d
623, 631 (1st Cir. 1996) (finding error, in case involving false statement and
§ 7206(1), in trial court decision not to submit issue of materiality to
the jury); United States v. DiRico, 78 F.3d 732, 736 (1st Cir.
1996) (holding in § 7206(1) case that materiality, "being an element of
the offense and a mixed question of law and fact, is a matter for the jury to
decide."); United States v. DiDomenico, 78 F.3d 294, 302-03 (7th
Cir. 1996) (noting that defendants convicted of § 7206(1) and (2) would
have been entitled to a new trial had they objected to failure of court to
submit materiality issue to the jury); cf. Knapp v. United
States, 516 U.S. 1024 (1995) (vacating and remanding § 7206(1)
and (2) case for reconsideration in light of Gaudin);
United States v. Tandon, 111 F.3d 482, 488-89 & n.5 (6th Cir. 1997)
(noting, pointedly, that law pre-Gaudin was that materiality was
a question of law, but arguably not resolving issue); United States v.
Aramony, 88 F.3d 1369, 1383 (4th Cir. 1996) (explicitly reserving
issue of whether materiality is a jury question in a § 7206(1)
prosecution); Pattern Jury Instructions-- Criminal Cases Instruction 83 (11th
Cir. 1997) (noting in comment to instruction for § 7206(2) prosecution
that "[t]he issue of 'materiality' is for the jury, not the Court," citing
Gaudin). But see United States v. Zvi, 168
F.3d 49, 59-60 (2d Cir. 1999) (stating that the better practice in false tax
return cases is for the district court to make a determination of materiality,
and then inform the jury that the alleged misrepresentation, if found, is
material, under the statute, as a matter of law), cert. denied, 528
U.S. 872 (1999); United States v. Klausner, 80 F.3d 55, 58-61
(2d Cir. 1996) (finding in § 7206(2) case that materiality is question of
law for the court, where false deductions necessarily created inaccurate tax
computation).
See generally, Elizabeth Grace Livingston, Comment, Judicial
Treatment of the Element of Materiality in Federal Criminal False Statement
Statutes, 72 Tul. L. Rev. 1343 (1998).
For a defense-oriented view of the reach of Gaudin into
criminal tax cases, see Kathryn Keneally, A New Look at Criminal Tax
Enforcement, Champion, Nov. 1996, at 31, 32.
In view of Neder and Gaudin, the "better
practice" in section 7206 cases is to submit "all questions of
materiality to the jury." S ee 2 Edward J. Devitt et al, Federal
Jury Practice And Instructions --Civil and Criminal, § 56.15 (4th ed.
Supp. 1999).
12.08[2] Reynolds "literal truth" Defense
In United States v. Reynolds, 919 F.2d 435 (7th Cir.
1990), the defendant filed a Form 1040EZ reporting all the categories of
income requested on the form, but omitting a category of income not reportable
on that form. Although the defendant's responses on the form were literally
true, the prosecution characterized these responses as misleading because the
defendant had a category of income (the unreported income) which disqualified
him from use of that form. The Seventh Circuit held that, although the form
was misleading, the literal truth of the statements on the form precluded a
7206(1) conviction. The court explicitly stated, however, that Reynolds could
be tried for violations of section 7201 (evasion) or section 7203 (failure to
supply information). Reynolds, 919 F.2d at 437. United
States v. Borman, 992 F.2d 124 (7th Cir. 1993), echoes the views of
the Reynolds court with respect to Form 1040A (both Form 1040A
and Form 1040EZ are simplified tax forms).
The Reynolds defense was recently addressed, and
distinguished, by the Third Circuit in United States v.
Gollapudi, 130 F.3d 66 (3d Cir. 1997). There, the taxpayer was
charged with a violation of section 7206(1) for listing a false amount of
withholding on a Form 1040. The taxpayer argued that he had in fact withheld
taxes, but had simply not paid over the withheld funds to the IRS, and thus
that his returns were "literally true" under Reynolds. The
Third Circuit rejected the taxpayer's claims as a factual matter, crediting
the testimony of an IRS agent that no taxes had ever been withheld. But the
court of appeals went on to note that Reynolds and
Borman offer a defense to section 7206 only where there is no
specific line item which can be proven false. Gollapudi, 130
F.3d at 72. For the Third Circuit, Reynolds stands for the
simple proposition that using the wrong tax form--that does not contain an
identifiable line item that can be charged as false--does not violate section
7206(1). Id.
12.08[3] Proof of One Material Item Enough
A section 7206(1) indictment may charge in a single count that several
items in one document are false. If one count in an indictment charges three
items on a single return as false (e.g., dividends, interest, and
capital gains), then it is sufficient if only one of those items is proven to
be false. The government does not have to prove that every item charged is
false. The same is true of a charge that the defendant omitted several items
from his return. See Griffin v. United States, 502 U.S.
46 (1991) (when a jury returns a guilty verdict on an indictment charging
several acts in the conjunctive, the verdict stands if the evidence is
sufficient as to any one of the acts charged); United States v.
Helmsley, 941 F.2d 71, 91 (2d Cir. 1991) (finding that where
deductions taken by taxpayer were either overstated or mischaracterized, in
either case entry was "false and fraudulent"); United States v.
Duncan, 850 F.2d 1104, 1108-13 (6th Cir. 1988) (noting that this
principle applies only insofar as the acts on which unanimity is required fall
into "distinct conceptual groupings."). It is also permissible to present to
a jury alternative theories of falsity. See United States v.
Foley, 73 F. 3d 484, 493 (2d Cir. 1996) (noting that "properly
instructed jury" could convict under § 7206(2) for deduction of bribe
that was either illegal under federal law, illegal under state law, or legal
but not an ordinary business expense, but reversing conviction where one of
the alternate bases was invalid as a matter of law).
While a jury must reach a unanimous verdict as to the factual basis for
a conviction, a general instruction on unanimity is sufficient to insure that
such a unanimous verdict is reached, except in cases where the complexity of
the evidence or other factors create a genuine danger of confusion.
United States v. Schiff, 801 F.2d 108, 114-15 (2d Cir. 1986).
At least one court, however, has held that when a single false return count
contains two or more factually distinct false statements, the jury must reach
unanimity on the willful falsity of at least one statement.
Duncan, 850 F.2d at 1113. In Duncan, one count in
the indictment against two defendants alleged two false statements, one
involving an interest deduction and one involving an income characterization.
The court vacated the section 7206(1) convictions of the defendants because
the trial judge failed to instruct the jury, after a specific request by the
jury during its deliberations, that conviction required unanimity on at least
one of the alleged willful false statements. The court found that in the
context of the case and given the juror's request for clarification, there was
a "tangible risk of jury confusion and of nonunanimity on a necessary element
of the offense charged." Duncan, 850 F.2d at 1113-14. But
cf. Schad v. Arizona, 501 U.S. 624 (1991) (plurality
opinion) (finding that jury was not required in first-degree murder
prosecution to agree on one of alternative theories of premeditated or
felony-murder); United States v. Moore, 129 F.3d 873, 877 (6th
Cir. 1997) (explaining Duncan and distinguishing its holding in
bank fraud case); United States v. Sanderson, 966 F.2d 184,
187-89 (6th Cir. 1992) (holding that trial court's failure to give specific
unanimity instruction was not plain error in prosecution charging in a single
count theft of government property and theft of employee time).
12.08[4] Proving Materiality after Neder and Gaudin
Prior to Gaudin, some commentators noted conflicting
authority as to what constituted proof of materiality in section 7206
prosecutions. See Twelfth Survey on White Collar Crime,
34 Am. Crim. L. Rev. 1035, 1065 (1997) (noting conflict within § 7206(2)
case law).[FN3] Courts defined a material item either as:
1) one required on an income tax return that is necessary for a
correct computation of the tax (the "Warden test");
see United States v. Strand, 617 F.2d 571,
574 (10th Cir. 1980); United States v. Taylor,
574 F.2d 232, 235 & n.6 (5th Cir.1978) (recognizing both
Warden and DiVarco); United
States v. Warden, 545 F.2d 32 (7th Cir. 1976);
United States v. Null, 415 F.2d 1178, 1181 (4th Cir.
1969); Siravo v. United States, 377 F.2d 469, 472
(1st Cir. 1967); or
2) one having a natural tendency to influence or impede the Internal
Revenue Service in ascertaining the correctness of the tax
declared or in verifying or auditing the returns of the taxpayer
(the "DiVarco test"). See United States v.
Greenberg, 735 F.2d, 29, 31 (2d Cir. 1984) (holding that
section 7206(1) is intended to prevent misstatements that could
hinder the IRS in verifying the accuracy of a return;
accordingly, such false statements are material); United
States v. DiVarco, 484 F.2d 670, 673 (7th Cir. 1973); see
also United States v. Fawaz, 881 F.2d 259, 264 (6th Cir.
1989); United States v. Taylor, 574 F.2d 232, 235 & n.6
(5th Cir. 1978) (recognizing both Warden and
DiVarco).
Early indications are that the conflict of authority regarding the test
of materiality survived the issuance of Gaudin. Some courts
favor the Warden test. See United States v.
Hayes, 190 F.3d 939, 946 (9th Cir. 1999), aff'd en banc,
231 F.3d 663, 667 n.1 (9th Cir. 2000) (not reporting money received from
academic grade selling scheme "obviously material to the IRS's ability
correctly to calculate Hayes's tax liabilities), cert. denied,
121 S.Ct. 1388 (2001); United States v. Scholl, 166 F.3d 964,
979 (9th Cir.), cert. denied, 528 U.S. 873 (1999) ("[I]nformation is
material if it is necessary to a determination of whether income tax is
owed.") (citing United States v. Uchimura, 125
F.3d. 1282, 1285 (9th Cir. 1997)); United States v. Clifton, 127
F.3d 969, 970 (10th Cir. 1997) (material statement is one that is "necessary
in order that the taxpayer compute his taxes correctly."); United
States v. Aramony, 88 F.3d 1369, 1384 (4th Cir. 1996) (material item
is one which "must be reported in order that the taxpayer estimate and compute
his tax correctly.") (internal citations omitted); United States v.
Klausner, 80 F.3d 55, 60 & n.4 (2d Cir. 1996) (material matters are
those "essential to the accurate computation of . . . taxes."). Others favor
DiVarco. See United States v. DiRico, 78
F.3d 732, 736 n.1 (1st Cir. 1994) (noting that proof of DiVarco
test satisfies materiality element); cf. United States v.
Gaudin, 515 U.S. at 509 (noting that material statement for §
1001 purposes is one "having a natural tendency to influence, or capable of
influencing, the decision of the decision making body to which it was
addressed.").
Given that the forum for litigating materiality has shifted from the
bench to the jury under Neder and Gaudin, how
materiality is defined in jury instructions is a key issue. See Neder
v. United States, 527 U.S. 1, 7, 9, 17 (1999) (finding erroneous jury
instructions omitting materiality as element of offense in section 7206(1)
prosecution, but holding error harmless).
Pattern Jury instructions defining materiality in section 7206 cases
exist in only a few circuits. The Seventh Circuit tracks the language of
Gaudin and follows alternative tests:
A line on a tax return is a material matter if the information required
to be reported on that line is capable of influencing the correct
computation of the amount of the tax liability of the individual . . .
or the verification of the accuracy of the return. . . . .
OR
A false matter is material if the matter was capable of influencing the
Internal Revenue Service.
Fed. Crim. Jury Instr. of the Seventh Circuit, Ch. 10, § 7206
(Materiality) (1999).
The Fifth and Ninth Circuit instructions track the language of the
DiVarco test. See Pattern Jury Instructions-- Criminal Cases
Instruction 2.97 (5th Cir. 1997) ("A statement is `material' if it has a
natural tendency to influence, or is capable of influencing, the Internal
Revenue Service in investigating or auditing a tax return or in verifying or
monitoring the reporting of income by a taxpayer."); Pattern Jury
Instructions-- Criminal Cases Instruction 9.6.5 (9th Cir. 1997) (noting in
comment that material item is one which "had a natural tendency to influence
or was capable of influencing or affecting the ability of the IRS to audit or
verify the accuracy of the tax return or a related return."). The Eleventh
Circuit, by comparison, has set out into uncharted territory. See
Pattern Jury Instructions -- Criminal Cases Instruction 83 (11th Cir. 1997)
(noting, in instruction to § 7206(2), that "[a] declaration is material
if it relates to a matter of significance or importance as distinguished from
a minor or insignificant or trivial detail. It is not necessary, however,
that the Government be deprived of any tax by reason of the filing of the
false return, or that it be shown that additional tax is due . . . .").
12.08[5] Tax Deficiency Not Required, But No Longer
"Irrelevant"
On occasion, defendants in false returns cases argue that the lack of a
tax deficiency renders the alleged false item immaterial. For instance, in
cases involving unreported income, a taxpayer might argue that he had expenses
which exceeded his true gross income, thus rendering his failure to report
income immaterial, since it had no bottom line tax effect. Prior to
Gaudin, such arguments fell on deaf ears. Courts held not only
that proof of a tax deficiency was not required in a false return case, but
also that evidence of the lack of a tax deficiency was irrelevant. See
United States v. Marashi, 913 F.2d 724, 736 (9th Cir. 1990) (rejecting
as "irrelevant" sufficiency of evidence challenge based on asserted lack of
tax deficiency in § 7206(1) case); United States v. Olgin,
745 F.2d 263, 272 (3d Cir. 1984) (affirming trial court's exclusion of
evidence of tax effect of unreported expenses and noting that "evidence of tax
liability is generally inadmissible in prosecutions under I.R.C. 7206 . . . .");
United States v. Garcia, 553 F.2d 432, 432 (5th Cir. 1977) (upholding
trial court's refusal to allow defense evidence of tax liability or lack
thereof in § 7206(1) case); Schepps v. United States, 395 F.2d
749, 749 (5th Cir. 1968) (same); see also United States v.
Citron, 783 F.2d 307, 313 (2d Cir. 1986) (rejecting argument that
material falsity is one which results in substantial tax due); United
States v. Johnson, 558 F.2d 744, 745-47 (5th Cir. 1977) (noting that
such evidence might be relevant to willfulness, subject to Rule 403, but
disallowing introduction based on facts of case); United States v.
Fritz, 481 F.2d 644, 645 (9th Cir. 1973) (evidence of potential
adjustments to tax liability not relevant to willfulness since no evidence
presented that defendant considered making the proposed adjustments).
While courts still maintain that proof of tax deficiency is not
required in a section 7206(1) prosecution (United States v.
Peters, 153 F.3d 445, 461 (7th Cir. 1998); United States v.
Minneman, 143 F.3d 274, 279 (7th Cir. 1998)), some post-
Gaudin circuit opinions indicate that the presence or
lack of a tax deficiency may be relevant to a jury's determination of
materiality. See United States v. Scholl, 166 F.3d 964, 979
(9th Cir.), cert. denied, 528 U.S. 873 (1999).
For example, the Ninth Circuit in United States v.
Uchimura, 125 F.3d. 1282, 1285 (9th Cir. 1997), held that in a section
7206(1) case, "information is material if it is necessary to a determination
of whether income tax is owed." 125 F.3d at 1285. In deciding whether the
question of materiality should be submitted to the jury as a matter of course
in false returns cases, the court addressed whether the false item at issue--
unreported income-- was inherently material. The court considered a
hypothetical situation where a taxpayer's legitimate deductions exceed his
gross income, and the taxpayer thus has no taxable income. In such a
circumstance, "unreported income . . . may not be necessary to a
determination of whether income tax was owed." Id. While the court
insisted that "we do not mean by this example that to satisfy the materiality
requirement of § 7206(1) the government must show that additional tax is
owed," it also left no doubt that the lack of a tax deficiency is relevant to
a jury's determination of materiality and ought to be admitted: "[t]hat no
additional tax is owed of course has a bearing on materiality, but the
question is ultimately one for the jury to decide." Id., 125 F.3d at
1285, n. 5
The Tenth Circuit followed suit in United States v.
Clifton, 127 F.3d 969, 970 (10th Cir. 1997). Clifton
addressed the same hypothetical case as did Uchimura, in which
the taxpayer fails to report income, but has no tax due because his deductions
exceed taxable income for the year. In this situation, the "taxpayer's
failure to report all taxable income might very well affect the jury's
deliberations on the element of materiality." 127 F.3d at 970. It is hard to
read this language as anything other than a mandate that evidence supporting
the lack of tax deficiency must be submitted to the jury. See also
United States v. Aramony, 88 F.3d 1369, 1384 (4th Cir. 1996).
If trial courts follow these holdings, a tax deficiency or the lack
thereof may be an issue in every section 7206(1) case. Prosecutors will be
placed in the unenviable position of having to argue to the jury that the
false statements at issue are material, even though there was no bottom line
tax harm. Such an argument promises to have little jury appeal, regardless of
whether the jury is instructed pursuant to DiVarco or
Warden. For this reason, one prosecutors has flatly concluded
that "[t]he practical consequence of treating materiality as a question of
fact is that it is incumbent on the Government to prove a tax loss." Barger,
Trial of a Tax Fraud Case, a Prosecutor's Perspective, (ABA Center for
Continuing Legal Education) (1997), available in WESTLAW, TP-ALL
database, Document No. N97WCCB ABA-LGLED G-1. This is not to say that
Uchimara and Clifton were correctly decided, or
that the trend noted will be the one accepted by most courts. Clearly, this
is a question that will be the subject of future litigation, and prosecutors
should be aware of the above authority.
In such litigation, prosecutors should consider arguing that if the
holdings in Uchimara and Clifton have the
"practical effect" noted above, then it would appear that the crime of false
returns has been written off the books. If proof of tax loss is now required,
it would no longer be true that the falsehood itself defines the crime of
filing a false return. See Gaunt v. United States,
184 F.2d 284, 288 (1st Cir. 1950) (observing that the purpose of the false
returns statute is "to impose the penalties for perjury upon those who
wilfully falsify their returns regardless of the tax consequences of the
falsehood."). [FN4] Proof of false returns would constitute proof of evasion.
Another doctrine that is likely to come into question, or at least be
subject to reassessment, is that of the irrelevance of the "substantiality of
the understatements." Pre-Gaudin, some defendants appealed
their false returns convictions on the basis that the material falsehoods on
their returns were insubstantial. Courts rejected these arguments, holding
that the issue was whether the misstatements were material, not whether they
were substantial. See United States v. Helmsley,
941 F.2d 71, 92 (2d Cir. 1991); United States v. Citron,
783 F.2d 307, 313 (2d Cir. 1986); United States v. Gaines,
690 F.2d 849, 858 (11th Cir. 1982). The validity of
these holdings is called into question by Uchimura and
Clifton. If it is now relevant whether a tax deficiency exists
in a section 7206(1) prosecution, it would seem that the amount of any tax
deficiency, and thus the degree of any misstatement, would be relevant to a
jury's determination of materiality by the rational of these two holdings.
12.08[6] Reliance by Government on False Statements Not
Required
Section 7206(1) does not require a showing that the government relied on
the false statements. "[I]t is sufficient that they were made with the
intention of inducing such reliance." Genstil v. United States,
326 F.2d 243, 245 (1st Cir. 1964); accord United States v.
Romanow, 509 F.2d 26, 28-29 (1st Cir. 1975) ("[m]ateriality . . . is
to be measured objectively by a statement's potential rather than by its
actual impact."). Neither is it a defense that the false statements were so
outrageous and flagrant that they should not be taken seriously. See
United States v. Winchell, 129 F.3d 1093, 1098 (10th Cir. 1997)
(rejecting claim of tax protester who declared $7.5 billion in income and
sought nearly $5.5 billion refund that statements in section 7206(1) case were
not material because they were preposterous). Winchell is a
particularly favorable case for the government. There, the defendant
challenged his conviction explicitly on the basis of materiality, arguing that
his alleged false statements were so facially ridiculous that they would not
have been acted upon by the government. Winchell thus reaffirms
the proposition that it is the potential and not actual impact of the alleged
false statement that the jury must weigh in determining materiality.
12.08[7] Pre-Gaudin Examples Of Material Matters
The following are examples of false items found to be material by
courts, pre-Gaudin. They ought still to be valid law for issues such
as sufficiency of the evidence on appeal.
1. Amounts listed on returns as receipts from a business,
improperly claimed deductions, and the like, have a direct
bearing on a tax computation and are material. United
States v. Morse, 491 F.2d 149, 157 (1st Cir. 1974);
United States v. Engle, 458 F.2d 1017, 1019-20
(8th Cir. 1972).
2. Gross income falsely reported is clearly material. "This
Court has . . . held that false statements relating to gross
income, irrespective of the amount, constitute a material
misstatement in violation of Section 7206(1)." United
States v. Hedman, 630 F.2d 1184, 1196 (7th Cir.
1980).
3. Omitted gross receipts on Schedule F, farm income, are
material. United States v. Taylor, 574 F.2d
232, 235 (5th Cir. 1978).
4. False schedule designed to induce allowance of unwarranted
depreciation is material. The Ninth Circuit could "scarcely
imagine anything more material." United States v.
Crum, 529 F.2d 1380, 1383 (9th Cir. 1976) (section
7206(2) violation, but principle applies to section
7206(1)).
5. Schedule C claiming business loss deductions to which the
taxpayers were not entitled rendered the returns false as to
a material matter. United States v. Damon,
676 F.2d 1060, 1064 (5th Cir. 1982).
6. Omission of a material fact makes a statement false, just as
if the statement included a materially false fact.
See United States v. Cohen, 544 F.2d
781, 783 (5th Cir. 1977) (defendant had $30,000 in checks
which he did not include on an Offer in Compromise, Form
656).
7. Understatement of gas purchases by gas station operator was
material because it restricted ability of the Internal
Revenue Service to verify his income tax returns and his
diesel fuel excise tax returns. If purchases are
unreported, a number of related items, such as inventory,
income, or other costs, could also be incorrect.
"Adaptability" of the entire calculation may be more
difficult because of the misstatements. United States
v. Fawaz, 881 F.2d 259, 263-64 (6th Cir. 1989).
8. Failure to report source of income. United States v.
DiVarco, 484 F.2d 670, 673 (7th Cir. 1973).
12.08[8] Pre-Gaudin Examples: No Tax Deficiency
12.08[8][a] Failure to Report a Business
In Siravo v. United States, 377 F.2d 469 (1st Cir. 1967),
the defendant reported wages he had earned but did not report either his
jewelry business or substantial gross receipts he received in connection
therewith. The defendant argued that his omissions did not constitute false
statements. The First Circuit affirmed his conviction, holding that for a
statement to be "true and correct," it must be both accurate and complete.
12.08[8][b] Failure to Report Gross Receipts
In United States v. Holladay, 566 F.2d 1018
(5th Cir.1978), the defendant did not report gross receipts from a gambling
and bootlegging operation conducted at his service station. Although the
government did not prove that the defendant received any profits or income
from the illicit business, the failure to report substantial gross receipts
was sufficient to support a conviction.
12.08[8][c] Reporting Net Business Income, But Not Gross
Income
In United States v. Young, 804 F.2d 116 (8th Cir. 1986),
the court rejected defendant's claim that because the income from his bail
bonding business was included on the corporate return as net income, the
failure to include it as gross income on the return did not make the return
untruthful, but only incomplete. Omissions from a tax return of material
items which are necessary for a computation of income means the return is not
true and correct within the meaning of section 7206(1).
12.08[8][d] Reporting A False Source But Correct Figures
In United States v. DiVarco, 484 F.2d 670 (7th Cir. 1973),
the government proved that income reported by the defendant as commissions
from a mortgage and investment business did not come from that business. The
fact that the source stated on the return was false was sufficient to support
a Section 7206(1) conviction because "a misstatement as to the source of
income is a material matter." DiVarco, 484 F.2d at 673.
12.08[8][e] Gambling Losses Deducted as Business Expenses
In United States v. Rayor, 204 F. Supp. 486, (S.D. Cal.
1962), the defendant claimed deductions for personal gambling losses on the
corporate tax return of his construction business. A subsequent audit
revealed that there would have been an overpayment of corporate taxes even if
the gambling losses had not been falsely deducted. The defendant claimed in a
motion to dismiss that there was no offense charged as there was no deficiency
for the year in question.
The district court denied the motion to dismiss, concluding that "what
is claimed as deductible from gross income must be stated truthfully and is of
utmost materiality." Rayor, 204 F. Supp. at 491. Moreover, the
court continued:
The Government was entitled, as of March 7, 1956, to a statement which
stated the gross income truthfully and correctly and which did
not claim as legitimate business expenses personal gambling losses.
The auditing of the return, in the light of the returns for the other
years, which later developed that the omission of these falsely claimed
deductions would have made no difference in the defendant's tax
liability for the year 1955, cannot be retrojected to the date of the
false statement, so as to confer verity on it.
Rayor, 204 F. Supp. at 492.
12.08[8][f] Failure to Report Income from Illegal
Business
In United States v. Garcilaso de la Vega, 489 F.2d
761(2d Cir. 1974), the defendant was charged with failing to report income
which he earned from selling narcotics. The government's case was premised on
the defendant's failure to report the additional income, not his failure to
report that narcotics sales were the source of this additional income. The
charge to the jury made it clear that it was the failure to report income, not
the failure to report the illegal source of the income, that constituted the
violation of section 7206(1). Garcilaso de la Vega, 489 F.2d at
765. See Garner v. United States, 424 U.S. 648 (1976)
(finding that defendant, who reported his occupation as "professional gambler"
on his tax return instead of claiming Fifth Amendment privilege against
self-incrimination, could not later rely on privilege to preclude use of
return against him in a criminal prosecution).
12.08[8][g] Foreign Bank Account Questions on Tax Forms
In United States v. Franks, 723 F.2d 1482 (10th Cir.
1983), the defendants falsely answered "No" to questions on income tax returns
asking if they had any interest in or signature authority over bank accounts
in a foreign country. They also attached a form to their amended return which
did not list "all of their foreign accounts over which they had control." The
court affirmed the false return convictions, holding that the false responses
to these questions "comes within the purview of 26 U.S.C. § 7206(1)."
Franks, 723 F.2d at 1486.
12.09 WILLFULNESS -- DOES NOT BELIEVE TO BE TRUE AND CORRECT
12.09[1] Generally
Section 7206(1) is a specific intent crime requiring a showing of
willfulness. Proof of this element is essential, and "neither a showing of
careless disregard nor gross negligence in signing a tax return will suffice."
United States v. Claiborne, 765 F.2d 784, 797 (9th Cir. 1985);
accord, United States v. Erickson, 676 F.2d 408, 410 n. 4
(10th Cir. 1982)(listing § 7206 as one example of a "specific intent"
crime).
The Supreme Court has defined "willfulness" as "a voluntary, intentional
violation of a known legal duty." Cheek v. United States,
498 U.S. 192, 200 (1991); accord, United States v. Winchell, 129
F.3d 1093, 1097 (10th Cir. 1997)(noting in § 7206(1) case that
Cheek's definition of willfulness is the "conclusively
established standard," and affirming trial court's refusal of an additional
specific intent instruction); see also, United States v.
Guidry, 199 F.3d 1150, 1156 (10th Cir. 1999) (same). For a more
complete discussion of willfulness and the legal ramifications of the
Cheek case, see Section 8.06, supra, and Section 40.11,
infra.
In United States v. Pomponio, 429 U.S. 10 (1976), a
section 7206(1) prosecution, the Supreme Court approved the following jury
instruction on willfulness:
In explaining intent, the trial judge said that "[t]o establish the
specific intent the Government must prove that these defendants
knowingly did the acts, that is, filing these returns, knowing that they
were false, purposely intending to violate the law." The jury was told
to "bear in mind the sole charge that you have here, and that is the
violation of 7206, the willful making of the false return, and
subscribing to it under perjury, knowing it not to be true and [sic] to
all material respects, and that and that alone."
Pomponio, 429 U.S. at 11 n.2.
In a section 7206(1) prosecution, the government is not required to show
an intent to evade income taxes by the defendant. United States v.
Taylor, 574 F.2d 232, 234 (5th Cir. 1978); United States v.
Engle, 458 F.2d 1017, 1019 (8th Cir. 1972). [FN5] There is also "no
requirement that showing the specific intent for a section 7206(1) violation
requires proof of an affirmative act of concealment; it is enough that the
government show the defendant was aware that he was causing his taxable income
to be underreported." United States v. Barrilleaux, 746 F.2d
254, 256 (5th Cir. 1984). Moreover, the government may rely solely on
circumstantial evidence to prove willfulness. See United States v.
Tucker, 133 F.3d 1208, 1218 (9th Cir. 1998) (false returns);
United States v. Klausner, 80 F.3d 55, 63 (2d. Cir. 1996)
(evasion).
12.09[2] Signature on Return as Evidence of Knowledge of Return
Contents
The defendant's signature on a document can help establish
willfulness. See United States v. Tucker, 133 F.3d 1208, 1218 n. 11
(9th Cir. 1998) (noting that signature proved knowledge of contents of
return); United States v. Mohney, 949 F.2d 1397, 1407 (6th Cir. 1991)
(holding that signature is prima facie evidence that the
signer knows the contents of the return); United States v. Drape, 668
F.2d 22, 26 (1st Cir. 1982) (finding that defendant's signature is
sufficient to establish knowledge once it has been shown that the return was
false); United States v. Romanow, 505 F.2d 813, 814-15 (1st Cir.
1974) (noting that the jury could conclude from nothing more than the
presence of his uncontested signature that he had in fact read the Form
941); United States v. Bettenhausen, 499 F.2d 1223, 1234 (10th Cir.
1974) ("From proof of one's signing a return it may be believed that he knew
its contents. . . .").
12.09[2] Collective Intent of Corporations
A showing of "collective intent" on the part of a corporate defendant
can satisfy the willfulness requirement in a section 7206(1) prosecution of a
corporate defendant. United States v. Shortt Accountancy Corp.,
785 F.2d 1448, 1454 (9th Cir. 1986). In Shortt Accountancy, an
accountant employed by the defendant accounting firm prepared and signed a tax
return for a client which contained deductions arising from an illegal tax
shelter sold to the client by the firm's chief operating officer. The
accountant, acting on information provided to him by the chief operating
officer, was unaware of the fraudulent nature of the deductions. The Ninth
Circuit found that the accountant's lack of intent to make and subscribe a
false return did not prevent the conviction of the defendant corporation under
section 7206(1), because the defendant's chief operating officer acted
willfully. The officer's willfulness and the accountant's act of making and
subscribing the false return were sufficient to constitute an intentional
violation of section 7206(1) on the part of the defendant corporation. The
court reasoned that precluding a finding of willfulness in this situation
would allow a tax return preparer to "escape prosecution for perjury by
arranging for an innocent employee to complete the proscribed act of
subscribing a false return." Thus, a corporation is liable under section
7206(1) when its agent intentionally causes it to violate the statute.
Shortt Accountancy, 785 F. 2d at 1454; cf. United States
v. Bank of New England, N.A., 821 F.2d 844, 855-56 (1st Cir.1987)
(prosecution of bank for currency transaction reporting violations);
United States v. Gold, 743 F.2d 800, 822-23 (11th Cir. 1984)
(medicare fraud prosecution of medical corporation).
12.09[3] Amended Returns
Although willfulness may be inferred from circumstantial evidence, the
Second Circuit has held that the filing of an amended return after filing a
false return cannot provide the sole basis for an inference of willfulness.
United States v. Dyer, 922 F.2d 105, 108 (2d Cir. 1990). In
Dyer, the court reversed a section 7206(1) conviction because
the trial judge's instructions allowed the jury to conclude that the
defendant's amended return, by itself, could support a finding that he had
known his original return to be false when he filed it. The filing of an
amended return may indicate that a taxpayer now believes the original return
was inaccurate, but it does not prove he had such knowledge at the time of the
false filing. Thus, without more, an amended return provides only an
inference of mistake, rather than of fraud. Dyer, 922 F.2d at
108; cf. Santopietro v. United States, 948 F. Supp. 145, 154 (D.
Conn. 1996) (explaining Dyer and allowing introduction of
amended return coupled with other evidence).
Similarly, if a defendant underreported income on a false return, the
inclusion of the income on a subsequent return does not establish a lack of
willfulness at the time the original return was filed. The Seventh Circuit
has held that a subsequent return is not probative of the defendant's state of
mind at the time he filed the false return. United States v.
McClain, 934 F.2d 822, 834-35 (7th Cir. 1991) (affirming trial court's
exclusion of amended return offered by defendant).
12.09[4] Reliance On Professional Advice
Reliance by the defendant on a qualified tax preparer is an affirmative
defense to a charge of willful filing of a false tax return, if the defendant
can show that he provided the preparer with complete information and then
filed the return without any reason to believe it was false. See United
States v. Tandon, 111 F.3d 482, 490 (6th Cir. 1997) (noting that jury
instruction for professional reliance defense not warranted where there was no
evidence that full disclosure was made or that advice was given); United
States v. Brimberry, 961 F.2d 1286, 1290-91 (7th Cir. 1992) (denying
good faith reliance defense in absence of full disclosure of all material
facts); United States v. Wilson, 887 F.2d 69, 73 (5th Cir. 1989)
(finding that professional reliance defense was not available where defendant
presented no evidence concerning either element).
12.09[5] Ostrich Instruction
It is a defense to a finding of willfulness that the defendant was
ignorant of the law or of facts which made the conduct illegal, since
willfulness requires a voluntary and intentional violation of a known legal
duty. However, if the defendant deliberately avoided acquiring knowledge of a
fact or the law, then the jury may infer that he actually knew it and that he
was merely trying to avoid giving the appearance (and incurring the
consequences) of knowledge. See United States v.
Dykstra, 991 F.2d 450, 452 (8th Cir. 1993); United States v.
Ramsey, 785 F.2d 184, 189 (7th Cir. 1986). [FN6] In such a case, the
use of an "ostrich instruction" -- also known as a deliberate ignorance,
conscious avoidance, willful blindness, or a Jewell instruction
may be appropriate. See United States v. Bussey, 942 F.2d 1241,
1246 (8th Cir. 1991); United States v. DeFazio, 899 F.2d 626,
635 (7th Cir. 1990); United States v. Jewell, 532 F.2d 697
(9th Cir.1976). See generally, Robin Charlow, Wilful Ignorance and
Criminal Culpability, 70 Tex. L. Rev. 1351 (1992).
A number of courts have approved the use of such instructions under
proper circumstances. See, e.g., United States v.
Bornfield, 145 F.3d 1123, 1128-30 (10th Cir. 1998) (finding no plain
error in trial court's use of deliberate ignorance instruction in money
laundering case); United States v. Neville, 82 F.3d 750, 760
(7th Cir. 1996)(drug conspiracy); United States v. Hauert, 40
F.3d 197, 203 (7th Cir. 1994)(finding, in false returns and evasion case, no
error in court's instruction that "no person can intentionally avoid knowledge
by closing his or her eyes to information or facts which would otherwise have
been obvious"); United States v. Bussey, 942 F.2d 1241, 1246
(8th Cir. 1991) (evasion); United States v. Fingado, 934 F.2d
1163, 1166-67 (10th Cir. 1991)(failure to file); United States v.
Picciandra, 788 F.2d 39, 46 (1st Cir.1986) (evasion); United
States v. MacKenzie; 777 F.2d 811, 818-19 (2d Cir.1985) (conspiracy
and false returns); United States v. Callahan, 588 F.2d 1078,
1081 (5th Cir. 1979) (evasion). However, it has also been said that the use
of such instructions is "rarely appropriate." United States v.
deFrancisco-Lopez, 939 F.2d 1405, 1409 (10th Cir. 1991) (reversing
drug possession conviction where deliberate ignorance instruction given).
But see United States v. Rodriguez, 983 F.2d 455, 457
(2d Cir. 1993) (noting that in the Second Circuit, unlike the Ninth, a
"conscious avoidance" charge is "commonly used.").
Thus, it is advisable not to request such an instruction unless it is
clearly warranted by the evidence in a particular case. Furthermore, the
language of any deliberate ignorance instruction in a criminal tax case must
comport with the government's obligation to prove the voluntary, intentional
violation of a known legal duty. The deliberate ignorance instruction set
forth in United States v. Fingado, 934 F.2d at 1166, appears to
be suitable for a criminal tax case. Out of an abundance of caution, however,
a prosecutor may wish to utilize the instruction set out in United
States v. MacKenzie, 777 F.2d at 818 n.2. Further, to avoid potential
confusion with the meaning of "willfulness" as it relates to the defendant's
intent, it may be wise to avoid use of the phrase "willful blindness," using
instead such phrases as "deliberate ignorance" or "conscious avoidance." Any
time a deliberate ignorance or conscious avoidance instruction is given, the
prosecutor should also insure that the jury is expressly directed not to
convict for negligence or mistake.
12.10 LESSER INCLUDED OFFENSE CONSIDERATIONS
Tax Division Memorandum, dated February 12, 1993, regarding Lesser
Included Offenses in Tax Cases (hereinafter "Memorandum") explains the Tax
Division's policy. A copy of this memorandum is included in Section 3.00,
supra. The Memorandum states the government's adoption of the strict
"elements" test of Schmuck v. United States, 489 U.S. 705,
709-10 (1989). This test provides that one offense is necessarily included in
another only when the statutory elements of the lesser offense are a subset of
the elements of the greater offense. The sections of the above-noted Tax
Division Memorandum relevant to false returns are as follows:
(Section 7206 and 7201) (Memorandum at 2-3)
2. [I]n evasion cases where the filing of a false return (Section
7206) is charged as one of the affirmative acts of evasion (or the
only affirmative act), it is now the Tax Division's policy that a
lesser included offense instruction is not permissible, since
evasion may be established without proof of the filing of a false
return. See Schmuck v. United States,
489 U.S. 705 (1989) (one offense is necessarily included in
another only where the statutory elements of the lesser offense
are a subset of the elements of the charged greater offense).
Therefore, as with Spies-evasion cases, prosecutors
should consider charging both offenses if there is any chance that
the tax deficiency element may not be proved but it still would be
possible for the jury to find that the defendant had violated
Section 7206(1). But where a failure of proof on the tax
deficiency element would also constitute a failure of proof on the
false return charge, nothing generally would be gained by
charging violations of both Sections 7201 and 7206.
Where the imposition of cumulative sentences is possible, the
prosecutor has the discretion to seek cumulative punishments. But
where the facts supporting the statutory violations are
duplicative (e.g., where the only affirmative act of
evasion is the filing of the false return), separate punishments
for both offenses should not be requested.
(Section 7206 and 7207) (Memorandum at 3)
4. Adhering to a strict "elements" test, the elements of Section 7207
are not a subset of the elements of Section 7206(1).
Consequently, it is now the government's position that in a case
in which the defendant is charged with violating Section 7206(1)
by making and subscribing a false tax return or other document,
neither party is entitled to an instruction that willfully
delivering or disclosing a false return or other document to the
Secretary of the Treasury (Section 7207) is a lesser included
offense of which the defendant may be convicted. Here, again, if
there is a fear that there may be a failure of proof as to one of
the elements unique to Section 7206(1), the prosecutor may wish to
consider including charges under both Section 7206(1) and Section
7207 in the same indictment, where such charges are consistent
with Department of Justice policy regarding the charging of
violations of 26 U.S.C. 7207. Where this is done and the jury
convicts on both charges, however, cumulative punishments should
not be sought. In all other situations, the decision to seek
cumulative punishments is committed to the sound discretion of the
prosecutor.
(Other Offenses) (Memorandum at 4)
6. In tax cases, questions concerning whether one offense is a lesser
included offense of another may not be limited to Title 26
violations, but may also include violations under Title 18
(i.e., assertions that a Title 26 charge is a lesser
included violation of a Title 18 charge or vice-versa). The
policy set out in this memorandum will also govern any such
situations -- that is, the strict elements test of Schmuck
v. United States, 489 U.S. 705, should be applied.
(General Warning) (Memorandum at 3)
5. Prosecutors should be aware that the law in their circuit may be
inconsistent with the policy stated in this memorandum.
See e.g., United States v. Doyle,
956 F.2d 73, 74-75 (5th Cir. 1992); United States v.
Boone, 951 F.2d 1526, 1541 (9th Cir. 1991); United
States v. Kaiser, 893 F.2d 1300, 1306 (11th Cir. 1990);
United States v. Lodwick, 410 F.2d 1202, 1206
(8th Cir. 1969). Nevertheless, since the government has now
embraced the strict "elements" test and taken a position on this
issue in the Supreme Court, it is imperative that the policy set
in this memorandum be followed.
With the advent of the Sentencing Guidelines, the issue of cumulative
punishments generally will arise only in pre-guidelines cases.
Memorandum at 2. Under the Sentencing Guidelines, related tax counts
are grouped, and the sentence is based on the total tax loss, not on the
number of statutory violations. In the extraordinary case in which cumulative
punishments are possible, the Memorandum provides discretion to the prosecutor
to seek cumulative punishment.
Prosecutors dealing with issues of lesser included offenses, cumulative
punishment, and related issues in tax cases are encouraged to contact the Tax
Division's Criminal Appeals and Tax Enforcement Policy Section at (202)
514-3011.
See also the discussions of lesser-included offenses in
Sections 8.00 and 10.00, supra, and 16.00, infra.
12.11 VENUE
Venue in a section 7206(1) prosecution lies in any district where the
false return was made, subscribed, or filed. United States v.
Shyres, 898 F.2d 647, 657 (8th Cir. 1990). Venue also lies in the
district where the false return was prepared and signed. United States
v. Rooney, 866 F.2d 28, 31 (2d Cir. 1989); United States v.
Marrinson, 832 F.2d 1465, 1475 (7th Cir. 1987); United States v.
King, 563 F.2d 559, 562 (2d Cir. 1977).
Reference should be made to the discussion of venue in Section 6.00,
supra.
12.12 STATUTE OF LIMITATIONS
The statute of limitations for section 7206(1) offenses is six years
from the date of filing, unless the return is filed early, in which case the
statute of limitations runs from the statutory due date for filing. 26 U.S.C.
§ 6531(5); United States v. Mittelstaedt, 31 F.3d 1208,
1220 (2d Cir. 1994); United States v. Samara, 643 F.2d 701, 704
(10th Cir. 1981); see also United States v. Marrinson, 832 F.2d
1465, 1475-1476 (7th Cir. 1987).
For a further discussion of the statute of limitations, see
Section 7.00, supra.
FN 1. Changed to 18 U.S.C. § 3571, commencing November 1, 1986.
FN 2. United States v. Randazzo, 80 F.3d 623, 624 (1st Cir.
1996).
FN 3. Perhaps it is more accurate to say that what occurred was not a
conflict, in the sense of a circuit split, but rather the unresolved emergence
of two complimentary but separate tests for materiality, with one test
embracing the other. See Taylor, 574 F.2d at 235 n.6
("Application of DiVarco to this case renders consideration of
the Warden test unnecessary."). No circuit has explicitly
rejected either the Warden or DiVarco formulation.
Further, both tests have been utilized within the same circuits, without
comment. For example, both Warden and DiVarco
were decided in the Seventh Circuit.
FN 4. Gaunt referred to 26 U.S.C. § 7206's statutory
predecessor, 26 U.S.C. § 145(c) (1939).
FN 5. Of course, to the extent that the government can show the defendant was
motivated by a desire to evade taxes, the case is more attractive to a jury.
Consequently, this is one of the factors considered by the Tax Division in
deciding whether to authorize prosecution.
FN 6. Even if the defendant successfully avoided actual knowledge of the fact,
"[t]he required knowledge is established if the accused is aware of a high
probability of the existence of the fact in
question unless he actually believes it does not exist." United States
v. Fingado, 934 F.2d 1163, 1166 (10th Cir. 1991). But see
United States v. MacKenzie, 777 F.2d 811, 818 n.2 (2d Cir.
1986).