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U.S. v. FELDMAN

March 2, 1990

UNITED STATES OF AMERICA
v.
JEFFREY L. FELDMAN AND PAUL J. FOONT, DEFENDANTS.



The opinion of the court was delivered by: Haight, District Judge:

MEMORANDUM OPINION AND ORDER

Trial in this tax evasion case is scheduled to begin on April 23, 1990. Defendants now move for various pre-trial relief.

Background

The indictment in the captioned case charges the defendants with various offenses arising out of certain financial transactions entered into by the Cralin partnerships.*fn1

Specifically, the defendants are charged with having entered into a secret oral agreement with New York Hanseatic Division ("New York Hanseatic")*fn2 on behalf of the Cralin partnerships pursuant to which New York Hanseatic was paid a set fee for creating records substantiating certain false transactions by the Cralin partnerships in government securities. These transactions led to fraudulent interest deductions by the limited partners in the amount of $140,000,000 for the tax year 1981. The second stage of the transaction was the reporting of false income in the amount of $132,000,000 for the tax year 1982. That false income was also passed on to the limited partners.

The charges in the indictment, all of which arise out of the basic scenario set forth above, are divided into three groups. Count 1 charges the defendants with conspiracy in violation of 18 U.S.C. § 371. The conspiracy is defined as one extending from "in or about 1981 through in or about the end of 1985", one object of which was the evasion of taxes due and owing in the 1981 tax year. Indictment at ¶ 1.

Counts 2 through 6 charge the defendants with tax evasion arising out of the 1981 tax returns of various limited partners. The return of each of those partners forms the basis for a separate count in the indictment. Although the offenses arise out of the 1981 tax returns, the indictment charges the defendants with tax evasion for the period 1981 through 1985.

Counts 7 through 15 charge the defendants with aiding and assisting in the filing of certain false tax returns for the Cralin partnerships. Each of the false filings referred to in this set of charges relates to the 1983 tax year.

Defendants move for various pre-trial relief. Specifically, defendants move to dismiss counts 1 through 6 as barred by the statute of limitations. Defendants further move for various discovery and a bill of particulars. Defendant Foont moves for a severance. I address these issues in turn.

Discussion

I. Statute of Limitations

It is common ground that the applicable statute of limitations in respect of both the conspiracy charged in count 1 and the tax evasion charges contained in counts 2 through 6 is six years. 26 U.S.C. § 6531*fn3.

The indictment in the captioned case was filed on October 10, 1989. Thus, in order to be timely filed, the indictment must charge the defendants with crimes committed within six years of October 10, 1989, namely on or after October 10, 1983. Defendants contend that the indictment fails in that regard, while the government argues that both the conspiracy and the counts of evasion were not complete until the end of 1985, well after the October 1983 limitations cutoff date.

A. Tax Evasion

Defendants are charged with five counts of tax evasion in violation of 26 U.S.C. § 7201*fn4. The elements of tax evasion are familiar:

  (1) an attempt to evade or defeat a tax or the payment
      thereof;

(2) an additional tax due and owing; and

(3) willfulness.

Sansone v. United States, 380 U.S. 343, 351, 85 S.Ct. 1004, 1010, 13 L.Ed.2d 882 (1965).

That first element of tax evasion, commonly referred to as the "affirmative act" requirement or the affirmative act of evasion, is described by the Supreme Court as "some willful commission in addition to the willful omissions that make up the list of misdemeanors," Spies v. United States, 317 U.S. 492, 499, 63 S.Ct. 364, 368, 87 L.Ed. 418 (1943), such as failure to pay a tax or failure to file a tax return in any given year.

  Willful but passive neglect of the statutory duty may
  constitute the lesser offense, but to combine with it a willful
  and positive attempt to evade tax in any manner or to defeat it
  by any means lifts the offense to the degree of felony.

Id. The question presented by the instant motion is when the statute of limitations began to run.

Defendants contend that the crime was complete, if committed at all, with the filing of the 1981 tax returns that contained the allegedly fraudulent deductions. In the alternative, defendants argue that the counts of evasion were complete with the filing of the 1982 tax returns that constituted the second prong of the attempt to evade taxes for the 1981 tax year. In essence, the government alleges that the defendants engaged in a course of conduct aimed at evading taxes for 1981, which continued through 1985 at which time the statute of limitations began to run. In consequence, the government argues, the instant indictment was filed only four years after the limitations period began to run, well within the limitations period.

The indictment alleges the following as affirmative acts of evasion occurring after October 10, 1983.

  (d) From in or about 1981 through in or about 1985, FELDMAN
      and FOONT concealed the bogus, fraudulent and pre-arranged
      nature of the New York Hanseatic transactions from the
      outside accountants of the Cralin partnerships and
      attempted to mislead those accountants as to the true
      nature of the transactions.
  (f) On or about December 1, 1983, FOONT made false
      statements and representations to an employee of the IRS,
      in the presence of FELDMAN and one of the outside
      accountants for the Cralin partnerships, for the purpose of
      concealing the fraudulent and pre-arranged nature of the
      tax losses passed on to the limited partner-investors of
      the Cralin partnerships, . . . , to wit, FOONT told an IRS
      agent that there were no oral or written agreements
      affecting the 1981 transactions between the Cralin
      partnerships and New York Hanseatic.
  (g) In or about 1984, FELDMAN made false statements and
      representations to an employee of the IRS, in the presence
      of FOONT and one of the outside accountants for the Cralin
      partnerships, for the purpose of concealing the fraudulent
      and pre-arranged nature of the tax losses passed on to the
      limited partner-investors of the Cralin partnerships, . . .,
      to wit, FELDMAN told an IRS agent that there were no oral
      or written agreements affecting the 1981 transactions
      between the Cralin partnerships and New York Hanseatic.
  (h) Between in or about mid-1984 and in or about April
      1985, FOONT refused to answer questions posed by an
      employee of the IRS, in the presence of one of the outside
      accountants for the Cralin partnerships, for the purpose of
      concealing the fraudulent and pre-arranged nature of the
      tax losses passed on to the limited partner-investors of
      the Cralin partnerships, . . . ,

      to wit, FOONT refused to answer an IRS agent's question
      about the financing for the 1981 transactions between the
      Cralin partnerships and New York Hanseatic.
  (i) Between in or about March 1985 and in or about April
      1985, FELDMAN made false statements and representations to
      one of the outside accountants for the Cralin partnerships
      for the purpose of concealing the fraudulent and
      pre-arranged nature of the tax losses passed on to the
      limited partner-investors of the Cralin partnerships, . . .,
      to wit, FELDMAN lied to the accountant about the
      financing for the 1981 transactions between the Cralin
      partnerships and New York Hanseatic.

Indictment at ¶ 7(d), (f)-(i).

Defendants concede, as they must, that false statements to an employee of the IRS constitute affirmative acts of evasion. United States v. Beacon Brass, 344 U.S. 43, 45-46, 73 S.CT. 77, 78-79, 97 L.Ed. 61 (1952) ("[t]he language of [26 U.S.C. § 7201] which outlaws willful attempts to evade taxes `in any manner' is clearly broad enough to include false statements made to Treasury representatives for the purpose of concealing unreported income").*fn5 Rather, defendants contend that the alleged false statements, along with the other affirmative acts of evasion set forth in the indictment, occurred after the crime of evasion was complete.

Two separate but related issues are presented by these facts and the arguments of counsel. First, the question arises whether the elements of the alleged crime of evasion were present in 1981 or 1982. The next issue presented for consideration is whether, assuming that the elements of tax evasion were all present in 1981 or 1982, the limitations period began to run at that point, or after the last affirmative act of evasion, that being in 1985. I address these issues in turn.

In respect of that first issue, whether the elements of evasion were present in 1981, it is important to note that the tax returns at issue were not filed by the defendants. Rather, the fraudulent tax returns were filed by various limited partners of the Cralin partnerships to whom the tax benefits of certain false transactions were passed along. In these circumstances, it is difficult to view the allegedly false filings as a "watershed event" for purposes of the statute of limitations.*fn6

It is defendants' course of conduct preceding and subsequent to the false filings that constitutes the evasion with which they are charged. Specifically, the government charges the defendants with a continuing series of acts ranging in time from the creation of the allegedly fraudulent transactions with New York Hanseatic to the defendants' continued and ongoing concealment of the true nature of those transactions. The question is whether the last act in such a course of conduct is that which properly triggers the statute of limitations.

While not cited in the briefs, United States v. Shorter, 608 F. Supp. 871 (D.C.D.C. 1985), aff'd, 809 F.2d 54 (D.C.Cir.), cert. denied, 484 U.S. 817, 108 S.Ct. 71, 98 L.Ed.2d 35 (1987) is instructive. In that case the government had charged the defendant in one felony count of "willful attempt to evade the payment of income taxes due for the years 1972 through 1983, in violation of 26 U.S.C. § 7201." 608 F. Supp. at 873. Shorter had filed allegedly fraudulent tax returns for the years in question. The indictment was returned in 1984. The defendant argued that the indictment was time-barred as to the tax years between and including 1972 and 1977 and consequently that allegations as to those tax years should be stricken from the indictment. The defendant further argued that the single felony count was impermissibly duplicitous and should be dismissed, inasmuch as it alleged twelve separate offenses, namely evasion for each tax year 1972 through 1983.

The district court rejected defendant's first claim, namely that certain of the allegations of evasion were time-barred.

  [T]he statute of limitations does not ipso facto rule out
  prosecution with respect to taxes owing prior to 1978, for the
  offense of tax evasion is not necessarily committed only in the
  year when the tax was due and payable. That is so because the
  existence of a tax deficiency is but one of the two essential
  elements of the crime, the other being an affirmative act of
  willful evasion. Sansone v. United States, 380 U.S. 343, 351,
  85 S.Ct. 1004, 1010, 13 L.Ed.2d 882 (1965); Spies v. United
  States, 317 U.S. 492, 63 S.Ct. 364, 87 L.Ed. 418 (1943). An
  act constituting evasion which occurs during the limitations
  period brings the prosecution within the statute of limitations
  even if the taxes being evaded were due and payable prior
  thereto. United States v. Trownsell, 367 F.2d 815 (7th Cir.
  1966); United States v. Mousley, 194 F. Supp. 119 (E.D.Pa.
  1961), aff'd without opinion, 311 F.2d 795 (3d Cir. 1963);
  United States v. Sclafani, 126 F. Supp. 654 (E.D.N.Y. 1954),
  aff'd on other grounds, 265 F.2d 408 (2d Cir. 1959); see
  also, United States v. Malnik, 348 F. Supp. 1273 (S.D.Fla.
  1972), aff'd on other grounds, 489 F.2d 682 (5th Cir. 1974).
    It follows that the indictment in this case is not subject to
  dismissal even with respect to the evasion of taxes due prior
  to 1978 if it is supported by proof of one or more
  affirmative acts of evasion committed by the defendant within
  the past ...

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