Unpublished Disposition, 937 F.2d 614 (9th Cir. 1991)Annotate this Case
UNITED STATES of America, Plaintiff-Appellee,v.Ted H. KIMBALL, Defendant-Appellant.
United States Court of Appeals, Ninth Circuit.
Argued and Submitted July 13, 1988.Opinion Filed Feb. 26, 1990.Opinion Vacated by En Banc Court Feb. 19, 1991.Reargued and Submitted June 6, 1991.Decided July 16, 1991.
Before D.W. NELSON, REINHARDT and O'SCANNLAIN, Circuit Judges.
We again consider the propriety of Kimball's conviction for willful failure to file income tax returns.
* In 1976, Karl L. Dahlstrom began to promote and sell a tax shelter program he had devised. Through an organization called the American Law Association ("ALA"), Dahlstrom and his disciples, Bruce Ripley and Hiram Conley, instructed subscribers on how to create foreign trust organizations in order to reduce their tax liabilities. Under this system, a subscriber would funnel his or her income through several foreign trusts, then back to him- or herself as a nontaxable gift. Dahlstrom did not advocate the proposition that this system eliminated the need to file income tax returns. However, apparently Conley and Ripley did countenance such conduct. In 1979, the IRS issued a position paper in which it made clear that the ALA's scheme violated tax laws.
One of Dahlstrom's converts was the defendant-appellant here, Ted H. Kimball. Kimball, a successful self-employed dentist, filed income tax returns for 1976, 1977, and 1978, on which he reported his income from his practice. He did not file an income tax return for 1979 as due on April 15, 1980. After the IRS sent him four delinquent notices, Kimball filed a 1979 return on April 10, 1981. This return, however, contained only asterisks which referred to a sentence stating:
This means that specific objection is made under the 5th Amendment, U.S. Constitution. Similar objection is made to the question under the 1st, 4th, 7th, 8th, 9th, 10th, 13th, 14th, and 16th Amendments for civil issues.
Upon receipt of this return, the IRS sent Kimball a registered letter warning him that this return was inadequate and might subject him to prosecution for failure to file a return. Kimball acknowledged receipt of the letter.
Kimball submitted similar returns for 1980, 1981, and 1982 as they fell due. Each time, the IRS sent Kimball registered letters warning him of possible prosecution. Kimball filed no valid income tax returns for the years 1979-1985.
During these years, Kimball applied for a series of bank loans. On the applications, he listed his community property share of his net dentistry income ranging from $110,000 to $130,000. He bought a house in the name of Gross International Trust, one of the trusts Kimball had established as part of his participation in the ALA program. He made his monthly mortgage payments of approximately $1,600 in cash. He paid many expenses by endorsing patients' checks over to third parties; the checks would thus never appear in his bank accounts. In 1981, he began closing all of his bank accounts and bought seven cashiers' checks totaling approximately $15,000. In early 1983, Kimball asked his tax return preparer to destroy his records.
In 1986, Kimball was charged with three counts of willful failure to file income tax returns for the years 1979, 1980, and 1981, violations of 26 U.S.C. § 7203. Kimball was tried before a magistrate and jury. The jury found Kimball guilty on all three counts. He was sentenced to three consecutive one-year terms and ordered to pay $30,000 in fines and costs of his prosecution.
Kimball appealed to the district court which affirmed the convictions by order and opinion. He then appealed to this court, which initially reversed his convictions on the ground that the asterisk-filled returns were "returns" for purposes of section 7203. See United States v. Kimball, 896 F.2d 1218 (9th Cir.), reh'g en banc granted, 914 F.2d 1386 (1990). An en banc panel of this court held otherwise, concluding that the asterisk-filled returns were not returns for section 7203 purposes. United States v. Kimball, 925 F.2d 356 (9th Cir. 1991) (en banc). Accordingly we now consider Kimball's remaining contentions on appeal.
The offense of failure to file an income tax return under section 7203 consists of three elements: the government must show that (1) the taxpayer was required to file a return, (2) he or she failed to file a tax return, and (3) his or her failure to file was willful. United States v. Brodie, 858 F.2d 492, 497 (9th Cir. 1988). Kimball contends that his conduct was not "willful."
* Initially, Kimball contends that his conduct was not clearly prohibited, and thus, he must be acquitted as a matter of law. We note that Kimball does not contend that the reason the conduct was not clearly prohibited is that it was unclear whether the asterisk returns constituted "returns" for purposes of section 7203. Rather, Kimball's contention is based upon United States v. Dahlstrom, 713 F.2d 1423 (9th Cir. 1983), cert. denied, 466 U.S. 980 (1984), in which we held that where the legality of a tax shelter program advocated by a defendant was "completely unsettled by any clearly relevant precedent," the defendant lacks the requisite intent to violate the law. Id. at 1428 (citing United States v. Critzer, 498 F.2d 1160, 1162 (4th Cir. 1974)). Applying this rule, we reversed the Dahlstrom convictions for aiding or assisting the preparation of false or fraudulent tax returns.
Kimball reasons that if the law was unsettled as to Dahlstrom, it is equally unsettled as to him, a follower of Dahlstrom. However, in so reasoning, Kimball misses the crucial inquiry. Kimball's conviction was not for filing a false or fraudulent tax return, for which the settled nature of tax law regarding the foreign trusts might be a legitimate defense. Rather, Kimball was convicted of failing to file a tax return. On this point, the law is clearly established; Kimball was required to file a tax return.
Kimball notes, however, that two of Dahlstrom's disciples, Ripley and Conley, claimed that tax returns were not required under the ALA program. However, the beliefs of two of Dahlstrom's disciples as to what the law is does not transmogrify clearly established law into unsettled law.
Kimball contends that there was insufficient evidence of his willfulness to support a conviction in this case. The adequacy of the evidence is reviewed in the light most favorable to the government, and is sufficient if any rational trier of fact could have found the essential elements of the crime beyond a reasonable doubt. See United States v. Crooks, 804 F.2d 1441, 1447-48 (9th Cir. 1986), modified on other grounds, 826 F.2d 4 (1987). Willfulness, as construed in criminal tax cases, "requires the Government to prove that the law imposed a duty on the defendant, that the defendant knew of this duty, and that he voluntarily and intentionally violated that duty." Cheek v. United States, 111 S. Ct. 604, 610 (1991). Here, there was a plethora of evidence indicating that Kimball's conduct was willful:
(1) Kimball filed valid income tax returns for the years 1976, 1977, and 1978; he also filed withholding reports for the years 1979-81. From this a jury could reasonably infer that he was aware of his filing obligations. See United States v. Birkenstock, 823 F.2d 1026, 1028 (7th Cir. 1987).
(2) In August 1979, before any of the returns at issue were filed, the IRS issued a position paper disallowing the use of the ALA tax shelter.
(3) Kimball filed "fifth amendment" returns for the years 1979-81, showing that he was aware that the ALA tax scheme did not entirely relieve him of the obligation to file a tax return.
(4) Kimball received at least seven IRS warning letters informing him that the fifth amendment returns were inadequate and that he could be subject to penalties and prosecution. He acknowledged receipt of one of those letters.
(5) During divorce proceedings, Kimball admitted to his wife's attorney that he owed taxes for the years in question.
(6) Kimball closed his bank accounts and began to conduct most of his normal business transactions using either cash or cashiers' checks.
(7) Kimball took title to a house and opened bank accounts using other names, which a reasonable jury could conclude was an attempt to hide resources from the IRS.
(8) Kimball asked his tax return preparer to destroy his tax records for previous years.
This evidence provides ample support for a rational trier of fact to conclude that Kimball's failure to file tax returns was willful.
Kimball also complains that the district court jury instructions on willfulness incorrectly stated the law. Specifically, Kimball contends that the district court's instructions on "objective reasonableness" misstate the law.
Kimball did not object to this portion of the district court's instructions. Thus, we review for plain error. See United States v. Kessi, 868 F.2d 1097, 1102 (9th Cir. 1989) (court reviewed for plain error where defendant "objected generally" to instruction, but did not raise a "specific objection" to the purported offensive portion of instruction). "A plain error is a highly prejudicial error affecting substantial rights. The reversal of a criminal conviction on the basis of plain error is an exceptional remedy, which the court should invoke only when it appears necessary to prevent a miscarriage of justice or to preserve the integrity and reputation of the judicial process." United States v. Ward, 914 F.2d 1340, 1344 (9th Cir. 1990) (quotations omitted).
Here, the district court instructed the jury on good faith as follows:
The defendant's conduct is not "willful" if the defendant acted through negligence, inadvertence, justifiable excuse, mistake, reckless disregard for the requirements of the law, or due to a good faith misunderstanding of the requirements of the law.... If a person in good faith believes that he has done all that the law requires, he cannot be guilty of the criminal intent to willfully fail to file a tax return.
However, the district court tempered the foregoing instructions with the following instructions on objective reasonableness:
You may consider the reasonableness of the defendant's beliefs in determining whether or not his beliefs were held in good faith.... [I]f a person acts without reasonable ground for belief that his conduct is lawful, it is for the jury to decide whether he acted in good faith or whether he willfully intended to fail to file a tax return.
It is these latter instructions to which Kimball now assigns error.
A defendant's good faith belief that he was not in violation of tax law need not be objectively reasonable. See Cheek, 111 S. Ct. at 611 ("We disagree with the Court of Appeals' requirement that a claimed good-faith belief must be objectively reasonable if it is to be considered as possibly negating the Government's evidence purporting to show a defendant's awareness of the legal duty at issue."); see also United States v. Powell, No. 90-10060, slip op. 7341, 7350-51 (9th Cir. June 13, 1991). Indeed, in Powell we held that an instruction identical in part to that given here was improper. See Powell, slip op. at 7351.1 "The vice of the jury instruction given is that it did not make clear that the defendant must demonstrate only that a subjective good faith belief is held and not that the belief must also be found to be objectively reasonable." Id.
However, reasonableness is not irrelevant. " [T]he more unreasonable the asserted beliefs or misunderstandings are, the more likely the jury will consider them to be nothing more than simple disagreement with known legal duties imposed by the tax laws and will find that the Government has carried its burden of proving knowledge." Cheek, 111 S. Ct. at 611-12. Moreover, in evaluating a challenged jury instruction, we must view the instruction in light of the instructions as a whole. See Kessi, 868 F.2d at 1101 ("We examine whether or not the instructions taken as a whole were misleading or represented a statement inadequate to guide the jury's deliberations.") (quotation omitted); United States v. Bordallo, 857 F.2d 519, 527 (9th Cir. 1988) ("A single instruction to a jury may not be judged in artificial isolation, but must be viewed in the context of the overall charge.") (brackets and quotation omitted), amended on other grounds, 872 F.2d 334, cert. denied, 110 S. Ct. 71 (1989). Here, the district court repeatedly emphasized to the jury that a "good faith misunderstanding" negated the willfulness element of a section 7203 violation.2 Viewing the instructions as a whole, we cannot say that the instructions on good faith and objective reasonableness were plainly erroneous.
Kimball argues that the district court erred in excluding evidence and in failing to instruct the jury on his theory of the case. The district court excluded certain testimony by Ripley and Special Agent Frietas regarding the unsettled legal status of foreign trust organizations. The district court also rejected Kimball's "Dahlstrom Defense," "ALA Program," and "Fair Notice" instructions.
To the extent that the testimony of Ripley and Frietas concerned only Kimball's tax liability and not Kimball's need to file a return, the testimony would have been irrelevant. See United States v. Emmert, 829 F.2d 805, 809 (9th Cir. 1987); cf. United States v. Wilcox, 919 F.2d 109, 113 (9th Cir. 1991). In any event, Kimball had abundant opportunity to explain his "unsettled law" theory to the jury. Accordingly, we cannot say that the district court abused its discretion in excluding the testimony.
The district court also did not err in rejecting Kimball's proposed instructions. A person is not per se absolved of liability merely by following the ALA's program. See United States v. Solomon, 825 F.2d 1292, 1297 (9th Cir. 1987) ("Defendants proposed a jury instruction, based on [Dahlstrom ], stating that if the jury found the legality of the patent tax shelter in question was unsettled, then they must vote for acquittal. The district court correctly refused to give the instruction."), cert. denied, 484 U.S. 1046 (1988). Moreover, the jury was adequately instructed regarding lack of notice: "The defendant's conduct is not 'willful' if the defendant acted through negligence, inadvertence, justifiable excuse, mistake, reckless disregard for the requirements of the law, or due to a good faith misunderstanding of the requirements of the law.... If a person in good faith believes that he has done all that the law requires, he cannot be guilty of criminal intent to willfully fail to file a tax return." See Solomon, 825 F.2d at 1295 ("A defendant is not entitled to any particular form of instruction so long as the instructions given fairly and adequately cover the defendant's theories of defense.").
Finally, Kimball contends that the district court erred in admitting evidence that Kimball failed to file tax returns for the years after those charged in the indictment. It is true that such evidence is ordinarily admissible only after a foundational showing that the defendant was required to file a return for those years. See United States v. Moon, 718 F.2d 1210, 1233 (2d Cir. 1983), cert. denied, 466 U.S. 971 (1984). However, in light of the overwhelming evidence of Kimball's guilt, we find this error harmless. See id.
This disposition is not appropriate for publication and may not be cited to or by the courts of this circuit except as provided by Ninth Circuit Rule 36-3
The improper instruction provided that "if a person acts without reasonable grounds for belief that his or her conduct is lawful, it is for you [the jury] to decide whether the defendants acted in good faith, or whether they willfully intended to fail to file an income tax return." Powell, slip op. at 7350 (emphasis added)
In addition to the instructions previously noted, the district court instructed the jury that:
The defendant's position is that he, in good faith, relied upon the ALA program to reduce his taxes to zero and that because of performing his dental practice through his number two foreign trust organization, Prudent Management, he had no filing requirement for 1979, 1980 and 1981.
Similarly, the district court told the jury that " [t]he defendant has introduced evidence showing that he relied on the advice of others, and that he relied on certain documents and publications. If you believe this evidence, or if this evidence raises a reasonable doubt in your mind as to the guilt of the defendant, then you will acquit the defendant...."