“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.

Adding "Without Prejudice" to Jurat on Form 1040 Did Not Make Tax Return Invalid

United States v. Davis, No. 08-20844 (5th Cir. Apr. 13, 2010) (DeMoss, Elrod, Haynes)

What's that? You want to read about a tax-related opinion on tax day? You're in luck! Plus, it addresses a novel issue. So break out your adding machines, green eyeshades, and sharpened No. 2 pencils and dig in.

Davis, a Houston-area car-dealer/tax-prep/skydiving magnate, prepared tax returns for Oden, one of his employees. Several of those Form 1040s were fraudulent. Oden was charged with filing false federal tax returns (26 U.S.C. § 7206(1)), and Davis was charged with aiding & abetting Oden (26 U.S.C. § 7206(2)). At trial and on appeal, Davis argued that "because Oden added the phrase 'without prejudice' near his signature on the jurats, the Forms 1040 were invalid and therefore could not qualify as tax returns. According to Davis, the government thus failed to prove an essential element of a violation of § 7206(2), namely the filing of a federal tax return."

By the way, just to make sure we're all on the same page, what's a "jurat?"

A federal income tax return, Form 1040, “shall contain or be verified by a written declaration that it is made under penalties of perjury.” 26 U.S.C. § 6065. Form 1040 contains a jurat that states, in part, “[U]nder the penalties of perjury, I declare that I [the taxpayer] have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and complete.” A taxpayer’s signature on a return with a jurat indicates that the taxpayer attests to the accuracy of the reported data.

And here's where the court breaks new ground.

In cases involving the filing of frivolous tax returns, courts have held that tax returns are not valid where a taxpayer has deleted portions of the jurat. Courts have also held tax returns to be invalid where a taxpayer fails to sign the jurat.

This case presents us with a somewhat different question: whether Oden’s addition of language on the tax return altered the jurat in such a way so as to invalidate the return. Other courts that have addressed this question have examined whether the additional language amends the meaning of the jurat or merely reflects the taxpayer’s exercise of free speech. . . .

We now turn to the language at issue in this case. Oden testified at trial that he did not know what the phrase “without prejudice” meant. He testified further that Davis told him that it was “good practice” to include the phrase, but he had no explanation as to why this was so. As the government notes in its brief, the phrase is ambiguous and does not, on its face, disclaim Oden’s status as a taxpayer, call the accuracy of the data into question, or make “a mockery” of the return. Such a statement is more akin to a general statement of protest.

In cases such as this, where there is some ambiguity as to language’s effect on the jurat, we agree with the Seventh Circuit that the IRS “should be entitled to construe alterations of the jurat against the taxpayer, at least when there is any doubt.” “We refuse to require [the IRS] to engage in guessing games to determine what disclaimers like this one mean. To require such would drastically hinder the [IRS’s] ability to process returns effectively and efficiently.” Here, the IRS did not reject Oden’s Forms 1040 based on the additional language. We therefore hold that the Forms 1040 were valid, though fraudulent, tax returns.

(internal cites omitted).