TABLE OF CONTENTS

12.00 FRAUD AND FALSE STATEMENT

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

12.06 "SUBSCRIBES" ANY RETURN, STATEMENT, OR DOCUMENT

12.06[1] Generally

12.06[2] Proof of Signature

12.07 MADE UNDER PENALTIES OF PERJURY

12.08 FALSE MATERIAL MATTER

12.08[1] Generally

12.08[2] Proof of One Material Item Enough

12.08[3] Tests of Materiality

12.08[4] Examples: Material Matter

12.08[5] Tax Deficiency Not Required

12.08[6] Examples: No Tax Deficiency

12.08[6][a] Failure to Report a Business

12.08[6][b] Failure to Report Gross Receipts

12.08[6][c] Include Net Business Income, Not Gross Income

12.08[6][d] Report False Source But Correct Figures

12.08[6][e] Gambling Losses Deducted as Business Expenses

12.08[6][f] Failure to Report Income from Illegal Business

12.08[6][g] Foreign Bank Account Questions on Tax Forms

12.09 WILLFULNESS -- DOES NOT BELIEVE TO BE TRUE AND CORRECT

12.10 LESSER INCLUDED OFFENSE CONSIDERATIONS

12.11 VENUE

12.12 STATUTE OF LIMITATIONS


12.00 FRAUD AND FALSE STATEMENT

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 (1) 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 knowingly submit 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. Because Section 7206(1) does not require proof of a tax deficiency, it permits prosecution in cases in which there is either no tax deficiency, a minimal tax deficiency, or a tax deficiency which would be difficult to prove.

Because section 7206(1) makes the falsehood itself criminal, it is referred to as the tax perjury statute. 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.), cert. denied, 462 U.S. 1131 (1983). See also United States v. Shortt Accountancy Corp., 785 F.2d 1448, 1454 (9th Cir.), cert. denied, 478 U.S. 1007 (1986).

The "exculpatory no" doctrine (deemed applicable to 18 U.S.C. § 1001 prosecutions in certain instances) does not apply to section 7206(1) prosecutions. United States v. Hajecate, 683 F.2d 894 (5th Cir. 1982), cert. denied, 461 U.S. 927 (1983). See Section 24.08[1], infra.

A false tax return is the usual charge, and the discussion which follows is generally in terms of a false return, but the principles are applicable to any false statement or document signed under penalties of perjury.

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. Drape, 668 F.2d 22, 25 (1st Cir. 1982); United States v. Robinson, 974 F.2d 575, 579 (5th Cir. 1992); United States v. Wilson,887 F.2d 69, 72 (5th Cir. 1989); Hoover v. United States, 358 F.2d 87, 88 (5th Cir.), cert. denied, 385 U.S. 822 (1966); United States v. Borman, 992 F.2d 124 (7th Cir. 1993); United States v. Whyte, 699 F.2d 375, 381 (7th Cir. 1980), cert. denied, 450 U.S. 965 (1981); United States v. Marabelles, 724 F.2d 1374, 1380 (9th Cir. 1984); United States v. Brooksby, 668 F.2d 1102, 1103 (9th Cir. 1982); United States v. Howard, 855 F.2d 832, 835 (11th Cir. 1988).

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 cases which do not involve income tax returns. See e.g., United States v. Droms, 566 F.2d 361 (2d Cir. 1977) (affirmed section 7206(1) conviction for the falsification of a financial information statement submitted to the IRS for settlement purposes); see also United States v. Cohen, 544 F.2d 781 (5th Cir.), cert. denied, 431 U.S. 914 (1977) (false statement made in an offer in compromise, Form 656); Jaben v. United States, 349 F.2d 913 (8th Cir. 1965) (false statement in application for extension of time for filing).

In one case, the application of 7206(1) was limited to documents required by statutes or regulations. Thus, in United States v. Levy, 533 F.2d 969 (5th Cir. 1976) the court of appeals held that section 7206(1) was restricted to any statement or document required either by the Internal Revenue Code or applicable regulations to be filed or submitted. Levy's interpretation of section 7206(1), however, has been rejected by other circuits and subsequently limited by the Fifth Circuit itself. See United States v. Damon, 676 F.2d 1060 (5th Cir. 1982); United States v. Taylor, 574 F.2d 232 (5th Cir.), cert. denied, 439 U.S. 893 (1978).

In United States v. Holroyd, 732 F.2d 1122 (2d Cir. 1984), the Second Circuit refused to follow Levy and 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 court below 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, 1485 (10th Cir. 1983), cert. denied 469 U.S. 817 (1984), 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.

12.05 "MAKES" ANY RETURN, STATEMENT, OR DOCUMENT

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). See also United States v. Dahlstrom, 713 F.2d 1423, 1429 (9th Cir. 1983), cert. denied, 466 U.S. 980 (1984) (section 7206(2) conviction reversed because the return in question was never filed).

The maker of the return does not have to be the actual preparer of the return. In United States v. Badwan, 624 F.2d 1228 (4th Cir. 1980), cert. denied, 449 U.S. 1124 (1981), the defendants argued that they did not "make" the return, as required by section 7206(1), since their returns were prepared by their 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. See also United States v. Wilson, 887 F.2d 69, 73 (5th Cir. 1989); United States v. Duncan, 850 F.2d 1104 (6th Cir. 1988), cert. denied, 493 U.S. 1025 (1990). Additionally, the individual who does prepare the return 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.), cert. denied, 478 U.S. 1007 (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. Shortt Accountancy, 785 F. 2d at 1454. 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, can 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. Montgomery v. United States, 203 F.2d 887, 889 (5th Cir. 1953) (decided under the 1939 Code).

Section 7206(1) does not require that the defendant personally sign the return if ". . . there are sufficient circumstances present from which a reasonable jury could find that the defendant did authorize the filing of the return with his name subscribed to it." United States v. Ponder, 444 F.2d 816, 822 (5th Cir. 1971), cert. denied, 405 U.S. 918 (1972); United States v. Fawaz, 881 F.2d 259, 265 (6th Cir. 1989).

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 as to whether a 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.

See also 26 U.S.C. §§ 6062 and 6063 (1986) for similar presumptions concerning corporate and/or partnership returns.

Accordingly, if an individual's name is signed to a return, statement, or other document, there is a rebuttable presumption that the document was actually signed by such individual. United States v. Kim, 884 F.2d 189, 195 (5th Cir. 1989). This presumption applies to both civil and criminal cases. United States v. Cashio, 420 F.2d 1132, 1135 (5th Cir. 1969), cert. denied, 397 U.S. 1007 (1970). As with presumptions in all criminal cases, the presumption of authentication is rebuttable, and the jury must decide that the signature is authentic. See United States v. Wainwright, 413 F.2d 796, 802 (10th Cir. 1969), cert. denied, 396 U.S. 1009 (1970).

This presumption can have 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. Carrodeguas, 747 F.2d 1390, 1396 (11th Cir. 1984), cert. denied, 474 U.S. 816 (1985). See also United States v. Wilson, 887 F.2d 69, 72 (5th Cir. 1989). For a jury instruction, see United States v. Wainwright, 413 F.2d at 801-02.

12.07 MADE UNDER PENALTIES OF PERJURY

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.

12.08 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. Materiality is a question of law for the court and not a question of fact for the jury to decide. United States v. Romanow, 509 F.2d 26, 28 (1st Cir. 1975); United States v. Greenberg, 735 F.2d 29, 31 (2d Cir. 1984); United States v. Rogers, 853 F.2d 249, 251 (4th Cir.), cert. denied, 488 U.S. 946 (1988); United States v. Taylor, 574 F.2d 232, 235 (5th Cir.), cert. denied, 439 U.S. 893 (1978); United States v. Fawaz, 881 F.2d 259, 261 (6th Cir. 1989); United States v. Whyte, 699 F.2d 375, 379 (7th Cir. 1983); United States v. Holecek, 739 F.2d 331, 337 (8th Cir. 1984); United States v. Flake, 746 F.2d 535, 537 (9th Cir. 1984), cert. denied, 469 U.S. 1225 (1985); United States v. Strand, 617 F.2d 571, 574 (10th Cir.), cert. denied, 449 U.S. 841 (1980); United States v. Gaines, 690 F.2d 849, 858 (11th Cir. 1982). But see United States v. Gaudin, No. 90-30334, slip op. at 6655 (dictum), 1994 WL 271930 (9th Cir. June 21, 1994) (en banc).

The "substantiality of the misstatements" is not relevant to a prosecution under section 7206. The issue is whether the misstatements were material, not whether they were substantial. Gaines, 690 F.2d at 858. In Gaines, the court held that although the substantiality of the misstatement would be relevant to a tax evasion prosecution, it was not relevant to a section 7206(1) prosecution. Gaines, 690 F.2d at 858. See also United States v. Hedman, 630 F.2d 1184, 1196 (7th Cir. 1980), cert. denied, 450 U.S. 965 (1981) (false statements relating to gross income are material regardless of the amount of the discrepancy). United States v. Citron, 783 F.2d 307, 313 (2d Cir. 1986); United States v. Marashi, 913 F.2d 724 (9th Cir. 1990). Accord, United States v. Holland, 880 F.2d 1091 (9th Cir. 1989).

In United States v. Reynolds, 919 F.2d 435, 437 (7th Cir. 1990), cert. denied, 111 S. Ct. 1402 (1991), the defendant filed a Form 1040EZ reporting all the categories of income requested on the form, but omitting a category of income not called for on that form. The defendant's responses on the form were literally true, but the prosecution characterized these responses as misleading. 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.).

12.08[2] 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. Silverstein v. United States, 377 F.2d 269, 270 (1st Cir. 1967). See Griffin v. United States, 112 S. Ct. 466, 473 (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), cert. denied, 112 S. Ct. 1162 (1992); United States v. Duncan, 850 F.2d 1104, 1108-13 (6th Cir. 1988), cert. denied, 493 U.S. 1025 (1990).

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) cert. denied, 480 U.S. 945 (1987). 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 a 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, 111 S. Ct. 2491 (1991) (plurality opinion) (jury was not required in first-degree murder prosecution to agree on one of alternative theories of premeditated or felony-murder); United States v. Sanderson, 966 F.2d 184, 187-89 (6th Cir. 1992) (court held 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[3] Tests of Materiality

Courts have applied two tests in determining whether a false statement in a section 7206(1) prosecution is material. Under one test, any item required on an income tax return that is necessary for a correct computation of the tax is a material matter. Siravo v. United States, 377 F.2d 469, 472 (1st Cir. 1967); United States v. Null, 415 F.2d 1178, 1181 (4th Cir. 1969); United States v. Taylor, 574 F.2d 232, 236 (5th Cir.), cert. denied, 493 U.S. 893 (1978); United States v. Strand, 617 F.2d 571, 574 (10th Cir.) cert. denied, 449 U.S. 841 (1980). A second test of materiality, the so-called DiVarco test, is whether the false item has 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. 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); see also United States v. Fawaz, 881 F.2d 259, 264 (6th Cir. 1989); United States v. DiVarco, 343 F. Supp. 101, 103 (N.D. Ill. 1972), aff'd, 484 F.2d 670 (7th Cir. 1973), cert. denied, 415 U.S. 916 (1974).

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." Gentsil v. United States, 326 F.2d 243, 245 (1st Cir.), cert. denied, 377 U.S. 916 (1964).

12.08[4] Examples: Material Matter

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.), cert. denied, 409 U.S. 875 (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), cert. denied, 450 U.S. 965 (1981); See also United States v. Marashi, 913 F.2d 724, 736 (9th Cir. 1990); United States v. Wilson, 887 F.2d 69, 75 (5th Cir. 1989); United States v. Young, 804 F.2d 116, 119 (8th Cir. 1986), cert. denied, 482 U.S. 913 (1987).

3. Omitted gross receipts on Schedule F, farm income, are material. United States v. Taylor, 574 F.2d 232, 235 (5th Cir.), cert. denied, 439 U.S. 893 (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.), cert. denied, 431 U.S. 914 (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. "Auditability" 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), cert. denied, 415 U.S. 916 (1974).

12.08[5] Tax Deficiency Not Required

Because a tax deficiency is not an element of the crime, proof thereof is unnecessary to a section 7206(1) prosecution. Silverstein v. United States, 377 F.2d 269 (1st Cir. 1967); United States v. Olgin, 745 F.2d 263 (3d Cir. 1984), cert. denied, 471 U.S. 1099 (1985); United States v. Garcia, 553 F.2d 432 (5th Cir. 1977); United States v. Jernigan, 411 F.2d 471, 473 (5th Cir.), cert. denied, 396 U.S. 927 (1969); Schepps v. United States, 395 F.2d 749 (5th Cir.), cert. denied, 393 U.S. 925 (1968); United States v. Young, 804 F.2d 116, 119 (8th Cir. 1986), cert. denied, 482 U.S. 913 (1987); United States v. Ballard, 535 F.2d 400, 404 (8th Cir.), cert. denied, 429 U.S. 918 (1976); United States v. Marashi, 913 F.2d 724 (9th Cir. 1990); United States v. Carter, 721 F.2d 1514, 1539 (11th Cir.), cert. denied, 469 U.S. 819 (1984).

The falsehood is the crime. Gaunt v. United States, 184 F.2d 284 (1st Cir. 1950), cert. denied, 340 U.S. 917 (1951). The Gaunt court described the statutory predecessor of section 7206(1): (2)

[T]he subsection's purpose is to impose the penalties for perjury upon those who wilfully falsify their returns regardless of the tax consequences of the falsehood.

Gaunt, 184 F.2d at 288.

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), cert. denied, 390 U.S. 1024 (1968); United States v. Carabbia, 381 F.2d 133, 137 (6th Cir.), cert. denied, 389 U.S. 1007 (1967) (holding that the two-witness rule applicable to perjury prosecutions was not required in section 7206(1) prosecutions, even though it would have been met in the instant case).

Where no evidence of a tax deficiency is introduced by the government, the defense will sometimes attempt to show an overpayment of taxes. The relevancy of such a showing depends on the facts of the particular case. When such evidence is offered merely to show a lack of tax deficiency, it is irrelevant as a tax deficiency is not an element of a section 7206(1) charge. Schepps, 395 F.2d at 749; Marashi, 913 F.2d at 736. However, such evidence may be relevant as a defense to willfulness, such as accident, mistake, negligence, inadvertence, or good faith reliance on accountant. Even here, however, the underlying facts would have to support such a claim. Moreover, in deciding whether to receive such evidence, the trial court may appropriately consider, in its discretion, the danger of jury confusion and considerations of judicial economy. Fed. R. Evid. 403. See e.g., United States v. Johnson, 558 F.2d 744, 745-47 (5th Cir. 1977), cert. denied, 434 U.S. 1065 (1978) (while evidence of failure to claim permissible deductions, resulting in a tax overpayment, was indirectly relevant on the issue of reliance on one's accountants, such evidence was of no appreciable impact as defendant withheld relevant information from his accountants; moreover, trial court did allow direct evidence of reliance on accountants); United States v. Fritz, 481 F.2d 644, 645 (9th Cir. 1973) (evidence of potential adjustments to tax liability not relevant to willfulness as no evidence presented that defendant considered making the proposed adjustments).

12.08[6] Examples: No Tax Deficiency

12.08[6][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[6][b] Failure to Report Gross Receipts

In United States v. Holladay, 566 F.2d 1018, 1020 (5th Cir.), cert. denied, 439 U.S. 831 (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[6][c] Include Net Business Income, Not Gross Income

In United States v. Young, 804 F.2d 116, 119 (8th Cir. 1986), cert. denied, 482 U.S. 913 (1987), 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[6][d] Report False Source But Correct Figures

In United States v. DiVarco, 484 F.2d 670 (7th Cir. 1973), cert. denied, 415 U.S. 916 (1974), 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[6][e] Gambling Losses Deducted as Business Expenses

In United States v. Rayor, 204 F. Supp. 486, 489-92 (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[6][f] Failure to Report Income from Illegal Business

In United States v. Garcilaso de la Vega, 489 F.2d 761, 765 (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) (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). See also United States v. Barnes, 604 F.2d 121, 147-48 (2d Cir. 1979), cert. denied, 446 U.S. 907 (1980).

12.08[6][g] Foreign Bank Account Questions on Tax Forms

In United States v. Franks, 723 F.2d 1482, 1485-86 (10th Cir. 1983), cert. denied, 469 U.S. 817 (1984), the defendants falsely answered "No" to questions on income tax returns asking if they had any interest in or signature authority over a bank account 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

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), cert. denied, 475 U.S. 1120 (1986).

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). See also United States v. Doyle, 956 F.2d 73 (5th Cir. 1992); United States v. Bussey, 942 F.2d 1241 (8th Cir. 1991), cert. denied, 112 S. Ct. 1936 (1992); United States v. Lankford, 955 F.2d 1545 (11th Cir. 1992). 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, 11 n.2 (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."

The defendant's signature on a document can also help establish willfulness. United States v. Drape, 668 F.2d 22, 26 (1st Cir. 1982) (defendant's signature on his return is sufficient to establish knowledge once it has been shown that the return was false); see also United States v. Romanow, 505 F.2d 813, 814 (1st Cir. 1974) (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. Mohney, 949 F.2d 1397, 1407 (6th Cir. 1991), cert. denied, 112 S. Ct. 1940 (1992) (signature is prima facie evidence that the signer knows the contents of the return); United States v. Bettenhausen, 499 F.2d 1223, 1234 (10th Cir. 1974).

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.), cert. denied, 478 U.S. 1007 (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. See United States v. Bank of New England, N.A., 821 F.2d 844, 855-56 (1st Cir.), cert. denied, 484 U.S. 943 (1987) (prosecution of bank for currency transaction reporting violations); United States v. Gold, 743 F.2d 800, 822-23 (11th Cir. 1984), cert. denied, 469 U.S. 1217 (1985) (medicare fraud prosecution of medical corporation).

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.), cert. denied, 439 U.S. 893 (1978); United States v. Engle, 458 F.2d 1017, 1019 (8th Cir.), cert. denied, 409 U.S. 875 (1972). (3) 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. United States v. Schiff, 801 F.2d 108, 111 (2d Cir. 1986), cert. denied, 480 U.S. 945 (1987); United States v. MacKenzie, 777 F.2d 811, 818 (2d Cir. 1985), cert. denied, 476 U.S. 1169 (1986); United States v. Moon, 718 F.2d 1210, 1222 (2d Cir. 1983), cert. denied, 466 U.S. 971 (1984); United States v. Marchini, 797 F.2d 759, 766 (9th Cir. 1986), cert. denied, 479 U.S. 1085 (1987); Claiborne, 765 F.2d at 798. See also United States v. Gurtunca, 836 F.2d 283, 287 (7th Cir. 1987) (defendant's failure to report the funds anywhere on his return demonstrates that he attempted to hide the funds from the IRS, and undercuts any argument that his failure to report the funds was not willful -- defendant had failed to include business income received through fraud on his Schedules C).

Although an inference of willfulness may be based on circumstantial evidence, the Second Circuit has held that the defendant's 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.

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).

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. United States v. Wilson, 887 F.2d 69, 73 (5th Cir. 1989); Bursten v. United States, 395 F.2d 976, 981 (5th Cir. 1968); United States v. Duncan, 850 F.2d 1104, 1117 (6th Cir. 1988), cert denied, 493 U.S. 1025 (1990); United States v. Brimberry, 961 F.2d 1286, 1290 (7th Cir. 1992); Claiborne, 765 F.2d at 798.

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. Ramsey, 785 F.2d 184, 189 (7th Cir.), cert. denied sub nom. McCreary v. United States, 476 U.S. 1186 (1986). (4) In such a case, the use of an "ostrich instruction" -- also known as a deliberate ignorance, conscious avoidance, willful blindness, or a Jewell instruction (see United States v. Jewell, 532 F.2d 697 (9th Cir.), cert. denied, 426 U.S. 951 (1976) -- may be appropriate.

A number of courts have approved the use of such instructions under proper circumstances. See, e.g., United States v. Picciandra, 788 F.2d 39, 46 (1st Cir.), cert. denied, 479 U.S. 847 (1986); United States v. MacKenzie; 777 F.2d 811, 818-19 (2d Cir.), cert. denied, 476 U.S. 1169 (1986); United States v. Callahan, 588 F.2d 1078 (5th Cir. 1979); United States v. Dube, 820 F.2d 886, 892 (7th Cir. 1987); United States v. Bussey, 942 F.2d 1241, 1246 (8th Cir.), cert. denied, 112 S. Ct. 1936 (1991) (post-Cheek decision); United States v. Fingado, 934 F.2d 1163, 1166-67 (10th Cir.), cert. denied, 112 S. Ct. 320 (1991). 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) (relying on several 9th Circuit cases). (5) 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. (6) 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." (7)

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.), cert. denied, 396 U.S. 841 (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 will lie in the district of filing even though the return was prepared and signed in a different district. United States v. Lawhon, 499 F.2d 352, 355 (5th Cir. 1974), cert. denied, 419 U.S. 1121 (1975). Venue also lies in the district where the false return was prepared and signed. United States v. King, 563 F.2d 559, 562 (2d Cir. 1977), cert. denied, 435 U.S. 918 (1978); United States v. Marrinson, 832 F.2d 1465, 1475 (7th Cir. 1987).

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. Samara, 643 F.2d 701, 704 (10th Cir.), cert. denied, 454 U.S. 829 (1981). See also Marrinson, 832 F.2d at 1476 (7th Cir. 1977).

For a further discussion of the statute of limitations, see Section 7.00, supra.




Footnotes:

1. Changed to 18 U.S.C. § 3571, commencing November 1, 1986.

2. 26 U.S.C. § 145(c) (1939).

3. 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.

4. 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.), cert. denied, 112 SS. Ct. 320 (1991). But see United States v. MacKenzie, 777 F.2d 811, 818 n.2 (2d Cir.), cert. denied, 476 U.S. 1169 (1986).

5. But see United States v. Rodriguez, 983 F.2d 455, 457 (2d Cir. 1993) (Second Circuit more willing than Ninth Circuit to authorize use of this type of instruction).

6. 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 811, 818 n.2 (2d Cir. 1985), cert. denied, 476 U.S. 1169 (1986).

7. It is suggested that 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.




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