Unpublished Disposition, 889 F.2d 1097 (9th Cir. 1986)

MEMORANDUM^** 

Gerald Schulman appeals from a conviction of conspiracy and tax fraud in violation of 18 U.S.C. § 371 and 26 U.S.C. § 7206(1) and (2). The conduct underlying the convictions is not disputed; the only issue being appealed from is whether there is sufficient evidence to support a finding that the appellant willfully violated the tax code. We affirm.

FACTS AND PROCEEDINGS BELOW

Between 1978 and 1979 the appellant organized and promoted eighty-seven limited partnership tax shelters in which he was the general partner. Each partnership used short-term circular financing to generate interest expenses in order to secure long-term low rate financing. The long-term financing was used to acquire postal and public utility properties for lease to the government.

While the ostensible purpose of the partnerships was to acquire postal and other public buildings for lease to the government, investors were offered the prospect of a one-hundred percent first year write-off of their contributions to the partnerships. Schulman orchestrated a series of paper transactions involving two foreign corporations and a foreign bank to realize this objective. A Schulman partnership would "borrow" approximately $3 million on a 10 percent promissory note from Hexagram, N.V., a Netherlands Antilles financing company. Hexagram obtained the money from a Panamanian bank, Iberoamerica, giving its own promissory note at 9.75 percent interest. The Schulman partnership would deposit the $3 million, interest free, with a Panamanian company, Parallax Corp., in return for Parallax's guarantee to provide the partnership with favorable, i.e. nothing down, 4-5% fixed rate, 35-40 year financing with which to acquire postal properties. Parallax would then deposit the money in its account with Iberoamerica and instruct it to purchase the note from Hexagram. Thus, the circle wsa completed without any money actually changing hands.

By so completing the circle a Schulman partnership would show on its balance sheet a debit of $3 million representing the Parallax deposit and a credit of $3 million representing liability on its note payable at 10 percent to Hexagram. On the balance sheet of Hexagram the partnership note would be a debit and there would be a credit of $3 million representing its note to Iberoamerica. Parallax on its balance sheet would have a $3 million credit representing the deposit by a Schulman partnership and a $3 million debit representing its deposit in Iberoamerica. The Iberoamerica balance sheet would show the $3 million deposit by Parallax as a credit and a debit of $3 million would represent the Hexagram note. No entity experienced a change in its net worth and no money actually changed hands. While the transaction generated promissory notes that called for payments, the question is whether these were "interest" payments.

This transaction was executed thirty-three times on October 31, 1978, and fifty-six times on December 5, 1978, each time with a different Schulman partnership, generating a debt of $252 million to the partnerships on the notes payable to Hexagram. Approximately one year later through a series of similar but not identical transactions the debt of all the partnerships was removed from their books and the partnerships claimed interest deductions of $25.2 million, which, after business expenses, coincided with the capital contributions of the Schulman investors. It is not disputed that Parallax actually provided the partnerships with low rate financing for the acquisition of public properties.

Presumably each participant in the scheme was to profit from the transactions, a profit that could come from the capital contributions of the Schulman partners who received very favorable long-term financing and sought to obtain a full deduction for their $28 million investment.

The government did not agree with the interest deduction by the partnerships. On March 20, 1986 Schulman was charged in a twenty-five count indictment with conspiracy to defraud the United States in violation of 18 U.S.C. § 371, assisting in the preparation of fraudulent tax returns in violation of 26 U.S.C. § 7206(2), filing a fraudulent tax return in violation of 26 U.S.C. § 7206(1), and making false declarations in violation of 18 U.S.C. § 1623.

Schulman moved to dismiss the conspiracy and tax fraud violations on the ground that the government would be unable to establish that the tax shelters were clearly unlawful in 1978 and 1979, thus negating the willful element of the charges. The district court agreed and dismissed these charges along with the false declaration counts, finding that the appellant "could not have had fair notice that his conduct was illegal." This court reversed the dismissal of the conspiracy and tax fraud counts, characterizing the transactions as "a sham that lacked substance because there was no economic risk associated with the purported loans." United States v. Schulman ("Schulman I "), 817 F.2d 1355, 1361 (9th Cir. 1987). After characterizing the transaction as a sham, the court stated that " [t]he only question is whether there were real interest payments on genuine indebtedness. The indictment sufficiently alleges a lack of substance behind the check cycle to sustain a motion to dismiss." Id. at 1359. The court further stated that, "assuming the truth of the allegations in the indictment, the defendant was engaged in promoting a tax scheme, the illegality of which he had fair notice." Id. at 1361.

On remand the district court found Schulman guilty of the conspiracy and tax fraud charges, expressing "serious thoughts" about the case, and stating that its difficulty had been "greatly increased by some of the rather gratuitous statements in the 9th Circuit opinion." At sentencing the judge reiterated these sentiments, noting that "this is a case that should be looked at by the appellate court." At a later hearing when a plan of community service for the appellant was presented, the judge continued:

I think that I ought to say one thing on the record which is a statement [for] the 9th Circuit. I believe that the 9th Circuit opinion, the opinion which governed these proceedings, virtually dictated finding Mr. Schulman guilty, and I am saying that for the benefit of the next panel and for the benefit of argument.

If you remember the 9th Circuit opinion characterizes the transaction [as a sham]. I am sure you remember those words from the opinion. Mr. Schulman is a lawyer, and whether he testified or not, the fact that he had the kind of background that he had and was a lawyer and the 9th Circuit characterized the transaction in the manner that it did, virtually leads to the conclusion that he had to be found guilty.

I want to tell you that if the 9th Circuit had not characterized the transaction that way, I believe that the court would have found him not guilty.

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[I]f the 9th Circuit had left more area for the court to deal with in terms of a fact finding, perhaps this would have gone differently. That is one of the difficulties about saying more than you intended to say in an opinion, or perhaps they intended to say that much.

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If they intended to say that much, they almost dictated the conclusion.

Schulman appeals.

STANDARD OF REVIEW

In reviewing the sufficiency of the evidence we consider whether "after viewing the evidence in the light most favorable to the prosecution, any rational trier of fact could have found the essential elements of the crime beyond a reasonable doubt." United States v. Marchini, 797 F.2d 759, 755 (9th Cir. 1986), cert. denied, 479 U.S. 1085 (1987). While circumstantial evidence and inferences drawn therefrom may be sufficient to sustain a conviction, United States v. Talbert, 710 F.2d 528, 530 (9th Cir. 1983), cert. denied, 464 U.S. 1052 (1984), speculation is not. United States v. Lewis, 787 F.2d 1318, 1323 (9th Cir. 1986).

DISCUSSION

The appellant argues that his good faith reliance on the advice of counsel should defeat a finding that he specifically intended to violate the law, and that his background as a lawyer and accountant was improperly used to infer willfulness.

The trial judge made no express findings of fact. Thus, it can be concluded that she either convicted the appellant solely on the basis of Schulman I 's characterization of the transaction as a sham, in which case reversal would be required, or that she implicitly agreed with the government that the scheme was indeed a sham because there was no economic substance to the transactions, and that Schulman's conduct was willful. The Schulman I court expressly left open the question of whether Schulman's conduct was willful, and the fact that the district judge convicted Schulman leads us to the conclusion that she discredited his good faith reliance on the advice of counsel defense.

The appellant asserts that he could not have willfully violated the law because he relied in good faith on the opinion letters of law firms that indicated that the transactions in question were legal, and that his level of sophistication as a lawyer and accountant was used against him to support an inference that his conduct was willful. We are not persuaded.

The letters relied on by the appellant assume that the entities involved would be independent of one another. That was not the case here. If Schulman were to be believed that each entity in the transactions acted independently and at arm's length from the others, then each would have made substantial unsecured loans to another. This is not credible. The only reason the transactions were executed is that each entity knew of the circularity of the scheme, and each knew that there was no risk involved. Moreover, one of the opinion letters was written in 1982, several years after the transactions were executed. This letter clearly could not have been relied on.

Schulman claims to have relied on the validity of the "Margolis" tax plan, a similar scheme, in formulating the Schulman partnerships. Even assuming the validity of the Margolis plan there is nothing to indicate that the Schulman plan was the same scheme, particularly on the question of whether collected funds were used to fuel the loans. The record indicates that less than $2000 was initially deposited by the partnerships, and this was the only cash that was available to any of the parties during the life of the loans. The $252 million was the result of a wash transaction that was cycled until it reached the desired aggregate amount. Schulman's reliance argument is not relevant because there is insufficient evidence to establish that the Schulman scheme was the same as the one that was allegedly legal.

Regarding Schulman's "sophistication" argument, the fact that Schulman was a lawyer and accountant, coupled with his level of involvement, can be more easily construed against him than in his favor. The government is correct that the appellant's background was properly considered in deciding whether he was capable of forming the requisite intent to violate the law. He was not duped into this scheme because of his ignorance of finance and the law; he used his knowledge of financial arrangements with offshore organizations to orchestrate this scheme in an attempt to circumvent the tax laws. The appellant's background was only one of several factors that were used to consider the issue of willfulness.

CONCLUSION

The evidence is sufficient to support a finding that Schulman willfully engaged in the conduct that led to his conviction. Although the district judge failed to make findings of fact, she nonetheless considered all the evidence and found the appellant's conduct willful in convicting him. The statements made by the trial judge indicate that this was a close case, and that circumstantial evidence could have supported an acquittal. These statements, however, do not establish that the judge failed to make independent findings of fact, or that she did not conclude that the appellant was guilty beyond a reasonable doubt. The appellant's convictions are affirmed.

AFFIRMED.

REINHARDT, Circuit Judge, dissenting:

It is clear from the record that in convicting the defendant of willful violations of the tax laws the district judge did not feel free to exercise her fact-finding function fully. Her reason is understandable. She believed that her authority was drastically limited by United States v. Schulman, 817 F.2d 1355 (9th Cir. 1987), (Schulman I) . While the district court's reading of Schulman I is a plausible one, it appears to be overly broad. As a result, the appellant may have been deprived of his right to have his guilt determined by a fact-finder who heard the evidence and observed the witnesses. I therefore dissent from the affirmance of the conviction and would remand the case with instructions to the district judge to reconsider the evidence and clarify or vacate her ruling.

In Schulman I, we reversed the district court's dismissal of the tax fraud and conspiracy charges lodged against the appellant. Our dismissal was based on the district court's conclusion "that the government could not prove the element of willfulness ... because the government could not show that the type of tax shelter promoted by Schulman was clearly illegal...." 817 F.2d, at 1356-57. We reached the contrary conclusion, holding that the type of transactions alleged by the government were clearly illegal at the time appellant allegedly engaged in them and, thus, that "dismissal of the indictment was improper since an intent to violate the law cannot be ruled out as a matter of law." Id. at 1360.¹ 

The decision in Schulman I went only to the sufficiency of the allegations contained in the indictment. Notwithstanding the breadth of some of our statements, our language must be read in that context. We did not, as the district judge may have believed, hold the government's allegations that the appellant's transactions were illegal to be true. That question was left for the district judge to decide, as was the question whether the appellant had the requisite intent to violate the tax laws. The court merely held that assuming the facts to be as the government alleged, the transactions as described were clearly illegal and that, therefore, the indictment sufficiently alleged a violation of the tax laws.

Despite this limited holding of Schulman I, the district judge appears to have read it somewhat more broadly. At trial, during the sentencing hearing, and again at a later hearing concerning a program of community service for the defendant, the judge repeatedly commented on what she felt to be constraints on her fact-finding functions imposed by our earlier decision. Specifically, she indicated that the characterization of the appellant's transactions as "sham" dictated a guilty verdict. She stated:

I believe that the 9th Circuit opinion, the opinion which governed these proceedings, virtually dictated finding Mr. Schulman guilty....

If you remember the 9th Circuit opinion characterizes the transaction. I am sure you remember those words from the opinion. Mr. Schulman is a lawyer, and whether he testified or not, the fact that he had the kind of background that he had and was a lawyer and the 9th Circuit characterized the transaction in the manner in which it did, virtually leads to the conclusion that he had to be found guilty.

I want to tell you that if the 9th Circuit had not characterized the transaction that way, I believe that the court would have found him not guilty.² 

But Schulman I 's characterization of the transactions as sham was a characterization limited to the facts as alleged in the indictment. The court assumed the facts to be true for purposes of passing on the sufficiency of the indictment. The facts developed at trial may have varied to some extent from those set forth in the indictment or, possibly, additional facts may have been adduced that would justify a different conclusion. In short, the district court was responsible for determining whether in light of all the facts and circumstances introduced into evidence the actual transactions met the definition of "sham." Indeed, the district judge must have sensed that Schulman I left her a certain amount of discretion since she heard evidence on the nature of the appellant's transactions and the economic risks involved; issues that would have been foreclosed by Schulman I had its effect been as restrictive as is suggested in her comments.

That is not to say that the district judge's sense of constraint was in any way unreasonable. For example, were she to conclude that the transactions engaged in by the appellant were of the type identified in Schulman I as "sham" the only remaining question would be that of appellant's intent. And that question, as the district court indicated, may largely be answered by the clear illegality of the transactions combined with the appellant's background and expertise as a lawyer. Nevertheless, while there may not ultimately have been much for the district judge to decide, if such was the case it was because of the clarity of the law once the facts were established, not because Schulman I had determined the facts.

Unfortunately, I do not believe that we can determine from the district judge's opinion the precise basis for her decision. She heard evidence that the appellant's transactions differed from those alleged in the indictment and commented on its persuasiveness. Still, she found the appellant guilty of the crimes alleged. Whether this was because she found the evidence established that the actual transactions met the "sham" test discussed in Schulman I or because she read Schulman I to require that outcome regardless of any possible differences in the facts is unclear.

What is clear, however, is that the district court's decision to find appellant guilty may have been based on an overly broad reading of Schulman I. The appellant is entitled to have his guilt determined by a fact-finder who fully exercises his or her authority. In a case such as this, where comments of the district judge suggest that she did not feel free to consider whether the actual evidence warranted particular legal consequences, i.e., a finding of not guilty, the appropriate remedy is to remand the case to the district court for reconsideration or clarification of its decision. Accordingly, I would remand this case with instructions to the district judge to reconsider the verdict and either to vacate it or reaffirm it with a fuller explanation of the court's reasons.