“Willfulness” Instruction that Did Not Include that Good-Faith Belief Could Be Unreasonable or Irrational Was (Harmless) Error

United States v. Montgomery, No. 12-20741 (5th Cir. Mar. 28, 2014) (Jones, Elrod, Haynes)

The Montgomerys were convicted of conspiracy to avoid federal income tax and of filing false tax returns.  On appeal, they argued that the district court incorrectly instructed the jury on the willfulness element of the charged tax offenses.  The panel finds that the court erred but that the error was harmless.

Both parties requested jury instructions on “willfulness” pursuant to Cheek v. United States, 498 U.S. 192 (1991), asking that the jury be instructed in part:

A defendant does not act willfully if he believes in good faith that his actions comply with the law. . . . If you find that the defendant honestly believed that he was not violating the tax laws, even if that belief was unreasonable or irrational, then you should find the defendant not guilty.

Over the Montgomerys’ objection, the district court instructed the jury that it must acquit if the Montgomerys acted in good faith, but it did not say—as both parties had requested—that their beliefs could be “unreasonable or irrational.”  The panel finds that the jury instruction given did not correctly reflect the issues and the law since the jury could acquit the Montgomerys if it found that the Montgomerys “truly believed that they were not obligated to report their income, . . . however objectively unreasonable [that] belief was.”  As given, the instructions suggest that the good faith belief must be objectively reasonable.  While a court need not always instruct the good-faith defense, when it does, it must explain that the good-faith belief need not be objectively reasonable.  The error was harmless, though, given the overwhelming evidence that the Montgomerys intentionally underreported their income.

The Montgomerys also argued that, in sentencing, the district court could have calculated a more accurate tax loss resulting from the offenses because the IRS agent’s figures did not take into account the business expenses associated with underreported gross receipts.  Instead, the IRS agent multiplied the underreported gross receipts for each year by a tax rate of 28% pursuant to U.S.S.G. §2T1.1(c) cmt. n.(A).  The panel affirmed the calculation holding that, under Fifth Circuit precedent (circuit split), unclaimed deductions that could have been legitimately claimed do not get counted against the tax loss on a fraudulent return and that, even if they did, the Montgomerys’ evidence was unreliable to do so since it was based on estimates.