Case o' Week: Good as Gold - Kahre and Defense Evidence in Tax Cases

   If your salary is paid with a fifty dollar U.S. coin, you federal owe tax on how many dollars?

   (Hint: the answer ain’t “fifty . . . .)

United States v. Kahre, 2013 WL 6284419 (9th Cir. Dec. 5, 2013), decision available here.

Players: Per curiam decision by Judges Hug, Rawlinson and Ikuta. Hard-fought appeal by D. Nev. AFPDs Michael Powell and Michael Kennedy.  

Facts: Robert Kahre and his co-defendants were charged with federal tax crimes. Id. at *1. Kahre ran a business where employees were paid in gold or silver coins. Employees then exchanged these coins for cash from Kahre’s company – with no W2’s and no payroll taxes paid. Id. at *4-*5. Co-defendant Lori testified at trial that she thought the gold and silver coins were legal tender based on the “Gold Bullion Coin Act of 1985,” that she calculated her wages based on the face value of the coins (instead of their worth as precious metals), and that she thus thought she made too little to trigger tax obligations. Id. at *6. Robert Kahre testified at trial that he believed that gold was legal tender, and that the IRS was an illegal agent of the World Bank and IMF. Id. at *5. The district court allowed the defendants to testify about these views that bore on their theory that they believed their “coin” payroll scheme legal (and therefore this wasn’t willful evasion). The court, however, excluded other evidence concerning the legality of “gold clause contracts.” Id. at *17. The defendants were convicted on tax counts; Robert Kahre was sentenced to 190 months. Id. at *6.

Issue(s): “Appellants challenge the district court’s exclusion of evidence concerning the legality of gold clause contracts.” Id.

Held: “Legal materials upon which the defendant does not claim to have relied . . . can be excluded as irrelevant and unnecessarily confusing because only the defendant’s subjective belief is at issue: the court remains the jury’s sole source of law . . . . The district court, therefore, properly excluded evidence, including proffered expert testimony, that conflicted with its correct legal ruling that coins were assessed at fair market value for tax purposes irrespective of their use as legal tender.” Id. (internal quotations and citation omitted).

Of Note: This per curiam opinion is as dry as old toast, but read between the lines and its clear there was a brutal battle in the district court. Kahre got obstruction after testifying, challenged the judge’s partiality on appeal, id. at *19, and brought a Bivens action against the AUSA. (The AUSA complained to defense counsel that the Bivens action threatened his job and his pension, and the case was now, “personal.” Id. at *3, *16). On appeal, Kahre argued that the AUSA should have been removed because he was a defendant in the Bivens civil rights action. The Ninth was unpersuaded, and in a decision of first impression in the Circuit explains: “We . . . hold that proof of a conflict must be clear and convincing to justify removal of a prosecutor from a case.” Id. at *15 (emphasis added). 

  As the adage goes, if planning to shoot an elephant, it is prudent to bring an elephant gun -- here, the Ninth found neither the challenge to the judge or to the AUSA, of sufficient firepower on appeal. Id. at *16, *19.

How to Use: Kahre is depressingly familiar to anyone who defends clients convinced of the righteousness of their -- creative -- gold theories, or their “Corporation Sole” status, or other ideas of the “fringe on the flag” ilk. It is thus a good teaching tool: everything we worry about when advising these clients about trial (severe limitations on the “proof” of their theories, significant obstruction of justice penalties, and a Circuit that doesn’t share the defendant’s strong views of the prosecutor and judge) happened, and was affirmed. A thin silver lining was the Ninth’s acknowledgement that there is a willfulness element in these tax cases -- it’s the government’s burden to negate a good faith belief. Id. at *18. That’s small solace to Kahre; he’s serving fifteen.

                                               

For Further Reading: News flash: AUSAs unfairly impede trial rights by threatening mandatory minimums for clients who don’t plead. For a thoughtful report on one of the worst systemic bars to justice in the federal system, visit the Human Rights Watch site available here.

Image of gold coin from http://ad-orientem.blogspot.com/2010/06/77-years-ago-today.html Image of Roosevelt with elephant from http://upload.wikimedia.org/wikipedia/commons/6/66/Roosevelt_safari_elephant2.jpg

Steven Kalar, Federal Public Defender N.D. Cal. Website at www.ndcalfpd.org

.

Case o' The Week: A Taxing Decision - Jennings and Sophisticated Means

With the Judiciary battered by reduced federal funding, on the eve of the April 15 filing deadline, in a case submitted without oral argument, will the government prevail when tax evaders appeal a guideline enhancement?

  As sure as death and taxes. United States v. Jennings, 2013 WL 1317017 (9th Cir. Apr. 3, 2013), decision available here.

Players: Decision by Judge Clifton, joined by Judges O’Scannlain and Trott.

Facts: Defendants Jennings and Feuerborn sought investors for a process that would separate oil from dirt without producing hazardous waste. Id. at *1. They used a vendor, “Eco-Logic Environmental Engineering” to develop the technology. Id. Using Jennings’ real name and social security number, they opened a bank account called, “Ecologic.” Id. Without telling investors, board members, or accountants, they deposited about $2.5 million in investments into the Ecologic account and spent on private expenses. Id. That money wasn’t reported to the IRS as expenses. Id. The men were convicted at trial of conspiracy to defraud the US and tax counts. Id. At sentencing, Probation urged a two-level enhancement under USSG § 2T1.1 for the defendants’ “sophisticated means.” Id. Over defense objection, the district court imposed that enhancement, concluding the Ecologic account disguised income as company expenses. Id.

Issue(s): “Under the Guidelines, a two-level sentencing enhancement should be imposed when a defendant's offense ‘involved sophisticated means .’ [U.S.S.G.] § 2T1.1(b)(2) (2010). Application Note 4 explains that the term ‘sophisticated means,’ for purposes of subsection (b)(2), “means especially complex or especially intricate offense conduct pertaining to the execution or concealment of an offense. Conduct such as hiding assets or transactions, or both, through the use of fictitious entities, corporate shells, or offshore financial accounts ordinarily indicates sophisticated means.” Id. at cmt. n.4. Defendants argue that they did not employ means as sophisticated as those listed in the application note. They argue, for instance, that the enhancement should not apply because they did not create corporate shells or offshore accounts.” Id. at *2.

Held: “[T]he list contained in the application note is not exhaustive. We agree with other circuits that the enhancement properly applies to conduct less sophisticated than the list articulated in the application note.” Id. at *2. “[T]he fact that the concealment might not have been total [because it was using Jennings’ real name and social security number] does not mean that there was no effort at concealment or that the method employed was not sophisticated. Application of the enhancement does not necessarily turn on the scheme's likelihood of success in remaining undetected.” Id. at *3. “Defendants’ effort to disguise funds taken for their own personal use as money paid to a third party vendor for business expenses through use of a bank account with a deceptive name constituted a sufficiently complex method of concealment to warrant application of the sophisticated means enhancement.” Id.

Of Note: The Ninth joins the Second, Seventh, and Eleventh Circuits in holding that the “sophisticated means” enhancement can apply to conduct less sophisticated than the examples in the application note. Id. at *2. While that holding isn’t particularly surprising, applying the enhancement to conduct so – well, unsophisticated – is. If you can suffer that bump for opening an account using your real name and social security number, what conduct is not “sophisticated?”

How to Use: Jennings deals with “sophisticated means” in the tax guideline. What about that enhancement in the fraud guideline, USSG § 2B1.1(b)(10)? The two definitions are uncomfortably close. Mull Jennings when running the guideline calculations for tax or “vanilla” fraud cases.  

                                               

For Further Reading: Defenders are officially singing the sequestration blues. Many offices have laid-off staff, others have started furloughs, all will have furloughs underway by May. For a recent article describing the devastation, see Federal Defenders Face Deep Cuts, Delays In Cases, available here. 

 Image of Uncle Sam from http://www.mhpbooks.com/amazon-tax-holiday/

Steven Kalar, Federal Public Defender N.D. Cal. FPD. Website at www.ndcalfpd.org

.

Case o' The Week: Ninth Gets "Cheek"-y with Tax Evasion Defendant, Cohen

One of the last decisions of '07 is a very good Tallman opinion emphasizing the right to a defense expert, and explaining the mens rea requirements in tax evasion cases. United States v. Lawrence Cohen, __ F.3d __, 2007 WL 4485629 (9th Cir. Dec. 26, 2007), decision available here.

Players: Good defense-expert decision by Judge Richard Tallman.

Facts: Cohen was an “acolyte” of recidivist tax protestor Irwin Schiff. Id. at *1. (Schiff's book is shown above left).

With Schiff, Cohen faced charges for assisting the filing of false tax returns. Id. The defense wanted to introduce the testimony of a shrink, who would have opined that Cohen suffered from a “narcissistic personality disorder” and that his “will was in the service of irrational beliefs.” Id. According to this expert, Cohen “did not intend to violate the law.” Id. The district court excluded the witness, holding that the expert “failed to explain ‘how the alleged mental disorders negate mens rea. Rather, his opinion merely explains or justifies Cohen’s conduct.” Id. at *7. Cohen was convicted. Id. at *1.

Issue(s): “Cohen argues that his conviction must be overturned because the district court wrongfully excluded the expert testimony of his psychiatrist who would have offered evidence of Cohen’s mental state.” Id. at *1. “The threshold issue is whether . . . [the expert’s] testimony would have assisted the tried of fact within the meaning of Rule 702. According to Cohen, [the expert’s] testimony would have bolstered the contention that Cohen had a good faith belief that he was acting in accordance of the law, thereby negating the mens rea element of 26 U.S.C. § 7206(2), which requires that a defendant ‘[w]illfully assist in the filing of a false return.’ See Cheek v. United States, 498 U.S. 192, 201 (1991) (holding that a defendant cannot be convicted of violating a federal tax law if he harbors a good faith belief that he was not violating any of the provisions of the tax laws).”

Held: “We agree, and we reverse Cohen’s conviction, vacate his sentence, and remand for a new trial.” Id.

Of Note: Judges Tallman and Ikuta – two-thirds of the Cohen panel – aren’t known as great defense allies. What gives with this good decision? The opinion hews closely to two great precedents: Cheek, 498 U.S. at 201, and United States v. Finley, 301 F.3d 1000, 1007 (9th Cir. 2002). As noted above, the Supremes in Cheek held that the government has to negate “a defendant’s . . . claim that because of a misunderstanding of the law, he has a good-faith belief that he was not violating any of the provisions of the tax laws.” Cheek, 498 U.S. at 202. In Finley, the Ninth reversed a tax conviction when – like here – the defendant fell under the sway of a tax protestor, and wasn’t allowed to call a shrink to explain why he clung “doggedly to [his] beliefs even in the face of overwhelming contradictions.” Cohen, 2007 WL 4485629, *9. Cheek, Finley, Tallman and Ikuta make Cohen an unlikely en banc candidate.

How to Use: As noted above, the expert would have opined that Cohen “did not intend to violate the law.” Id. at *9. That’s verboten - a shrink can’t opine that a defendant didn’t have the requisite mental state. Id.; FRE 704(b). Cohen acknowledges this problem, but helpfully explains that this should not have barred the expert’s testimony. Id. at *10. “[T]he best way for the district court to have insured the exclusion of the potentially inadmissible aspects of [the expert’s] testimony was not to bar him from testifying altogether, but to sustain the government’s objections to particular questions likely to elicit inadmissible evidence under the rule. The district court also could have discussed with the parties before he testified the limits that would be imposed on the scope of [the expert’s] testimony.” Id. Cohen’s useful for the proposition that a defense expert cannot be excluded simply because parts of his testimony are inadmissible or irrelevant; the solution is instead to address specific problematic questions.

(A related lesson is to be very careful with a shrink’s testimony before making a proffer– it would have been better in this case for the expert to have avoided opinions that clearly violated FRE 704(b) in his report).

For Further Reading: Cohen has sparked much interest among bloggers. For a taste of a law prof's sour grapes (he was on the government's early briefing), see Brian Galle's comments here. More mens rea analysis (and some interesting gossip on other details of the case) can be found here.

Steven Kalar, Senior Litigator N.D. Cal. FPD. Website at www.ndcalfpd.org

.