December 26, 2012

The Second Circuit Reverses A Conviction For Tax Evasion Based On Insufficient Evidence

Five partners at Ernst & Young - Robert Coplan, Martin Nissenbaum, Richard Shapiro, and Brian Vaughn, and Charles Bolton - were charged with a number of tax crimes in federal court in New York, specifically tax evasion, conspiracy to defraud the United States, and lying to the IRS. The Second Circuit said that the government didn't prove that two of the men were guilty and send the case back.

Ernst & Young had developed a number of tax shelters. Tax shelters - to be clear - are not themselves necessarily legal or illegal. As the jury was instructed, "it depends on the facts."

1102930_piggy_bank_1.jpgThere were five tax shelters at issue. The Second Circuit, in United States v. Coplan, described the tax shelter that was the basis of the tax evasion count this way:

The Add-On shelter was a tax strategy marketed as a means to defer indefinitely income tax liability on capital gains, including the capital gains generated in the second year of [another tax shelter involved in the case, which converted ordinary income to capital gains, which are generally taxed at a lower rate for folks who are using tax shelters .] Add-On involved the purchase of offsetting digital option pairs, followed by a series of transactions designed to generate a tax loss. The offsetting options were structured so that there was a "one-pip" gap between their strike prices, so that, in a theoretical "home run" scenario, a taxpayer could make a multimillion dollar profit. [H]owever, there was no reasonable possibility of earning a profit from Add-On apart from the "home run" scenario, since the Add-On fee structure required payments to [Ernst & Young] and the entity acting as general partner that exceeded the potential payoff.

Four of the men - Mr. Coplan, Mr. Nissenbaum, Mr. Shapiro, and Mr. Vaughn - were charged with, and went to trial on, three charges - conspiracy to defraud the United States, tax evasion, and obstructing the IRS. Mr. Vaughn and Mr. Coplan were also charged with making false statements to the IRS. Mr. Bolton pled guilty.

The government's theory, basically, was this:

At trial, the Government sought to demonstrate that the defendants conspired to conceal the true nature of the five tax shelters by creating a variety of "cover stories" regarding the purported business purpose of the shelters, when in fact the shelters were motivated solely by a desire to avoid taxes. In essence, the Government sought to demonstrate that the defendants hid the truth from the IRS by withholding information and making affirmative misstatements.

After the trial, the jury returned a guilty verdict on all counts.

Bolton, who had entered a plea, was sentenced to 15 months in prison. The folks who went to trial were sentenced to between 20 months to three years.

The Second Circuit reversed the conspiracy charges against Shapiro and Nissenbaum because there was insufficient evidence to support them.

That's a tough standard, to win a sufficiency challenge you've got to show that at least one juror could have reasonably found the person charged guilty. Worse, in a conspiracy case with multiple objects of the conspiracy - as in this case - to win you've got to show that the person wasn't engaged in any object of the conspiracy. Yet that's what the Second Circuit found happened.

The opinion is 95 pages and summarizes a decent bit of the evidence from a multi-week trial. In essence, there wasn't enough evidence that Mr. Shapiro was familiar enough with the details of the tax shelter that the government alleged caused tax evasion.

Here's the important bit from the opinion that will matter to folks not involved in this case (though, by all means, if you have a tax evasion case involving what happened at a company, read the entire opinion). Basically, the government's case was too thin as to Shapiro (internal citations omitted):

Having reviewed the record and the arguments of counsel, we conclude that the evidence against Shapiro is insufficient to support his conviction on Count One. In reaching this conclusion, we are mindful that the absence of direct evidence is not dispositive, since "the government is entitled to prove its case solely through circumstantial evidence." Nevertheless, "[i]f the evidence viewed in the light most favorable to the prosecution gives equal or nearly equal circumstantial support to a theory of guilt and a theory of innocence, then a reasonable jury must necessarily entertain a reasonable doubt." In this case, an essential element of the conspiracy charged in Count One required proof beyond a reasonable doubt that Shapiro joined the alleged conspiracy with the "specific intent" to violate the law. The evidence with respect to Shapiro's intent, viewed in the light most favorable to the Government, remains, at best, in equipoise. Because "[i]t would not satisfy the [Constitution] to have a jury determine that the defendant is probably guilty," we conclude that Shapiro's conviction on Count One must be reversed.

It's nice to see a rejection of the idea that someone is "probably" guilty in a Second Circuit opinion.

The court of appeals reached a similar conclusion for Mr. Nissenbaum.

Because the conspiracy conviction fell, the Second Circuit held that the substantive charges of tax evasion also had to be vacated for Mr. Shapiro and Mr. Nissenbaum. Mr. Nissenbaum's conviction for making a false statement to the IRS was also vacated for insufficient evidence.

The district court also imposed a fine on Mr. Bolton in excess of the statutory maximum. That was reversed so it could be reduced to the statutory maximum.

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