Opinion ID: 856738
Heading Depth: 2
Heading Rank: 2

Heading: Liability Phase Jury Instruction

Text: Next, Nagy argues on appeal that the following jury instruction at the liability phase of his trial was erroneous: “In December 2009, this court determined that the 90% Loan transaction was a sale, and not a loan. Thus, statements indicating that the 90% Loan transactions were loans are false.” (J.A. 210.) Yet Nagy made no objection to this jury instruction at trial. We conclude that, as Nagy failed to “make timely and sufficient objections” to these jury instructions at trial, he failed to preserve the issue for appeal. See Belk, Inc. v. Meyer Corp., U.S., 679 F.3d 146, 153 n.6 (4th Cir. 2012). Moreover, it is worth noting that the district court twice instructed the jury that it could find Nagy liable under § 6700 regarding the false sale/loan statement only if they found “Nagy knew or had repayment; (c) the customer was never required to repay the “loan proceeds” he received; (d) the only collateral Derivium ever retained, if any, was 10% of the value of the sale of the securities; (e) the customer retained a contractual return-of-stock right; and (f) because a customer would only repay his “loan” and get his securities back (securities Derivium would have to purchase on the open market) if their value had increased, Derivium would only lose if the customer repaid the “loan,” which stands in stark contrast to the ordinary risk assumed by a lender,
Nagy, 2009 WL 5194996, at . 8 reason to know that these statements were false at the time they were made.” (J.A. 210 (emphasis added).) C. Exclusion of Certain Evidence Submitted by Nagy Nagy also argues that the district court abused its discretion in sustaining the government’s objections to certain evidence he sought to present to the jury. At trial, Nagy attempted to introduce the expert testimony of Mark Altemose, a former IRS tax auditor; a letter written by B. John Williams, a tax attorney; and various internal IRS communications. Nagy argues these items of evidence should have been admitted to disprove that he knew or had reason to know that his tax advice was false. We do not believe the district court abused its discretion in excluding this contested evidence. Neither the Williams letter nor the internal IRS communications were in existence at the time Nagy gave his tax advice to Derivium so he could not have relied upon it in forming his advice. Therefore neither the Williams letter nor the IRS communications were relevant to show what Nagy knew at the time he gave his tax advice. While Nagy could have offered testimony from Mr. Altemose for a relevant purpose, he chose to offer that expert testimony only regarding the legal import of an IRS no-change letter as well as IRS audit procedures, neither of which have any relevance to show what Nagy knew or should 9 have known at the time he gave his tax advice and would have likely confused the jury. We conclude the district court did not abuse its discretion in excluding the foregoing from consideration as evidence in this case. D. Pfleiderer Testimony Nagy also contends that the district court abused its discretion in admitting into evidence the testimony of Paul Pfleiderer, an expert on behalf of the government, regarding the economic effect of the 90% Loans. To the extent Nagy has presented a challenge to Pfleiderer’s testimony, we find it to be meritless, and the district court did not abuse its discretion in admitting Pfleiderer’s testimony. E. Nagy’s Personal Tax Information At trial, the government sought to put before the jury, as part of its case-in-chief, evidence that Nagy failed to timely file his personal income tax returns in certain years while he was giving the 90% Loan tax advice to Derivium and timely pay the tax due for some of those years. Nagy timely objected to the introduction of that evidence as general bad acts evidence that was not relevant to the § 6700 penalty determination and should be excluded under Rule 404(b) and/or Rule 403 of the Federal Rules of Evidence. The district court overruled Nagy’s 10 objections and permitted the information regarding Nagy’s failure to timely file and pay his taxes in certain tax years to come before the jury. Under the circumstances of this case, we conclude that the district court abused its discretion in permitting this evidence before the jury and that its effect was highly prejudicial. We also conclude that the error was not harmless. Nagy first contends that I.R.C. § 6103(h)(4) did not authorize the disclosure of Nagy’s personal income tax return information as evidence in the § 6700 penalty case. While § 6103(h)(4)(A) was clearly satisfied (Nagy was a party to the § 6700 proceeding), the applicability of subsections (B) and (C) is much more problematic. But we will assume, without deciding, that the § 6103(h)(4) restrictions can be applied disjunctively. See Mallas v. United States, 993 F.2d 1111, 1118, 1121–22 (4th Cir. 1993) (applying § 6103(h)(4) disjunctively); see also Rice v. United States, 166 F.3d 1088, 1092 (10th Cir. 1999) (holding that § 6103(h)(4) allows the disclosure of a person’s tax return information when that taxpayer “is a party to the proceedings”); Tavery v. United States, 32 F.3d 1423, 1430 (10th Cir. 1994) (“The exceptions in § 6103 are stated in the disjunctive.”). Even if § 6103 does not bar the evidence at issue, however, that conclusion does not resolve the underlying evidentiary issue. The § 6103(h)(4) exceptions operate only as a gatekeeper 11 device that allows the disclosure of taxpayer information in certain situations. If a § 6103(h)(4) exception applies, that determination removes only the statutory disclosure barrier; it does not resolve the independent evidentiary determinations of relevance or prejudice. Rule 404(b) prohibits the admission of evidence of “a crime, wrong, or other act . . . to prove a person’s character in order to show that on a particular occasion the person acted in accordance with the character.” Fed. R. Evid. 404(b)(1). Such evidence may be admissible, however, to show, among other things, “knowledge” and “absence of mistake.” Id. 404(b)(2). Evidence is admissible under Rule 404(b) only when that evidence is “(1) relevant to an issue other than character; (2) necessary; and (3) reliable.” United States v. DeLeon, 678 F.3d 317, 330 (4th Cir. 2012) (internal quotation marks omitted). Nagy argued to the district court that the evidence of his failure to meet personal tax obligations was not relevant to the determination of liability under § 6700 and served no purpose other than to cast Nagy’s character in a negative light. The government argues that the evidence of Nagy’s failure to timely file and pay his taxes in certain years during which he was advising Derivium was relevant to show an absence of mistake in his tax advice. Yet the government does not explain, or even 12 attempt to explain, how this evidence was relevant to Nagy’s state of mind in the rendering of opinions on the 90% Loans. The government presented no evidence linking Nagy’s failure to file or pay certain personal taxes to his work for Derivium. Nothing in the record connects Nagy’s failure to timely file or pay his personal taxes to any knowing act of fraud or fraudulent intent in giving tax advice to Derivium. There simply is no record evidence linking the two. Indeed, Nagy argues that his failure to file or pay his personal taxes was related to severe family medical situations and his lack of assets: acts which would subject Nagy to, at most, negligent failure to file or pay penalties under § 6651. The government contends that the evidence of Nagy’s failure to timely file or pay his personal taxes was relevant to Nagy’s state of mind at the time he was rendering tax advice to Derivium. But the government completely fails, as noted above, to make any remote connection between Nagy’s failure to timely file and pay his own taxes and his provision of tax advice to Derivium. Nagy was not a Derivium principal or customer, and the record contains no evidence that his personal tax returns depended in any way upon the Derivium scheme. In short, we are at a loss to see any relevance for Rule 404(b) purposes for the admission of Nagy’s personal tax information other than “to prove [Nagy]’s character in order to 13 show that on a particular occasion [Nagy] acted in accordance with the character.” See Fed. R. Evid. 404(b). While Rule 404(b) is a rule of evidentiary inclusion, United States v. Smith, 441 F.3d 254, 262 (4th Cir. 2006) (“This court has recognized that Rule 404(b) is primarily a rule of inclusion, not exclusion.”), any evidence must satisfy the threshold of relevance to an issue other than character that we find lacking here. Moreover, for Rule 403 purposes, the admission of Nagy’s personal tax information was highly prejudicial and quite likely to influence the jury against him. Had the personal tax information had some semblance of relevance (which proper evidence in some other case may well show), a different balancing for prejudice purposes would be required. But in the absence of relevance, we conclude that the district court abused its discretion to admit Nagy’s personal tax information into evidence, particularly as it bears all the indicia of gardenvariety “bad acts” evidence with no other purpose than to emotionally inflame the jury against the defendant. Further, we conclude that the admission of Nagy’s personal tax information was not a harmless error. Under harmless error analysis, we will not reverse if we can “say, with fair assurance, after pondering all that happened without stripping the erroneous action from the whole, that the judgment was not substantially swayed by the error.” Kotteakos v. United States, 14 328 U.S. 750, 765 (1946). Nagy presented a cognizable defense as to his state of mind for the knowledge purposes of § 6700 that would have permitted a reasonable jury to have rendered a verdict in his favor. The prejudicial effect on the jury of the personal tax information about Nagy, however, and the possibility that it swayed their judgment in their consideration of this case, cannot be ignored. As the error was not harmless, the liability verdict must be vacated. F. Penalty Amount Phase Jury Instruction Reversal of the liability verdict also invalidates the penalty determination in so much as there is no longer a liability finding upon which it could be based. However, in view of the likelihood, that a penalty calculation issue will arise again upon remand, we exercise our discretion to address an assignment of error that Nagy raises. See United States ex. rel. Drakeford v. Tuomey Healthcare Sys., Inc., 675 F.3d 394, 406 (4th Cir. 2012) (noting that “our precedent is clear that we may address issues that are likely to recur on remand”). Nagy contends that the district court erred in its jury instruction for the calculation of the § 6700 penalty amount for any § 6700 liability prior to October 23, 2004, the date of an amendment to the statute, by instructing the jury to “multiply the total number of transactions for which [Nagy] is liable for 15 each year by $1000” for all transactions occurring before October 23, 2004. (J.A. 217–18.) The statute plainly states that, with respect to transactions occurring before October 23, 2004, any person who violates § 6700 “shall pay, with respect to each activity described in paragraph (1), a penalty equal to the $1000 or, if the person establishes that it is lesser, 100 percent of the gross income derived (or to be derived) by such person from such activity.” I.R.C. § 6700(a). Any jury instruction given in a penalty amount determination trial upon remand should follow the plain language of the applicable portion of the statute.