Opinion ID: 563204
Heading Depth: 2
Heading Rank: 1

Heading: The Prosecutor's Remarks Before the Grand Jury

Text: 17 Appellants have begun by contending that the district court erred in refusing to dismiss the indictment on the ground of prosecutorial misconduct. Specifically, appellants have argued that the question of whether a UBO constitutes a sham transaction is a question of fact, citing Frank Lyon Co. v. United States, 435 U.S. 561, 98 S.Ct. 1291, 55 L.Ed.2d 550 (1978) and Rice's Toyota World, Inc. v. Commissioner, 752 F.2d 89 (4th Cir.1985), and that the prosecutor took such finding of fact away from the grand jury through conclusory statements before several witnesses to the effect that the alleged transactions in the instant case were shams as a matter of law. 18 Appellants considered the following exchange between the government and witness Joyce Williams as most vividly illustrating the prosecution's encroachment on the fact-finding role entrusted to the grand jury: 19 A. I've just got to the point where I don't know--I don't know whether it's legal or not, to tell you the truth. 20 Q. I'll tell you it's not. As a matter of law it is not legal. 21 A. That's what I asked Mr. Horowitz [an attorney], and he said right off the top of his head he didn't think it was, but he could not say for sure. 22 Q. I'll tell you that not just off the top of my head but according to criminal cases and general cases for many years on the nature of trusts, Number One, the trust instrument itself is invalid on its face, and any competent lawyer will tell you that, because it does not specify a beneficiary. 23 Number Two, these types of trusts where you supposedly transfer your corpus into the trust and keep total dominion and control have been recognized as sham trusts for over 50 years. That means that were you to be audited yourself, according to the cases, you could be assessed not just back taxes for any taxes you hadn't paid, because that's all your income, it's not trust income, it's your income and your husband's income, you'd be assessed a negligent penalty, and that's been upheld in a number of cases. 24 Also, investors have been prosecuted successfully for joining this trust. That's prosecution, that's criminal. There's several recent cases about it, so the answer to your question is as a matter of law it is not legal. 25 And for the benefit of the grand jury, I'll say I'm explaining about criminal prosecution to make it clear what the law is. That does not say that these particular defendants necessarily, or proposed defendants, have committed any wrongdoing. You have to look at the independent evidence, which we'll present to you and have been presenting to you in this grand jury. Does this answer your question about the legality, Ma'am? A. (Nodded head up and down.) 26 The prosecutor made similar, although not as extensive, statements regarding the illegality of certain aspects of trusts set up by grand jury witnesses Seton Fairless and Myra Poplin. 27 Appellants further have attacked the prosecution's statement of the law before witness Fairless as post-dating the actual commission of the offenses, concluding that the appellants themselves could not possibly have been on notice as to the illegality of the UBO transactions. 1 Finally, appellants have emphasized the fact that the prosecutor failed to mention the Frank Lyon case during his final request for instructions as further indication of his intent to take the factual question of a sham transaction vel non from the jury, leaving the jurors to decide only whether appellants had acted in concert. 28 The appellants have pointed to the existence of numerous non-tax considerations offered by various witnesses before the grand jury to demonstrate how the jury could have concluded that the UBO's were not shams because they were not shaped solely by tax avoidance considerations. Rice's Toyota World, Inc., 752 F.2d at 92; Frank Lyon, 435 U.S. at 583-84, 98 S.Ct. at 1303. At least nine witnesses testified that their primary motivations for purchasing the UBO's included protection of assets from creditors, privacy, and estate planning considerations. In view of such evidence, appellants contended that it would be impossible to perceive the prosecutor's usurpation of the grand jury's role as harmless error, and that such usurpation adversely affected their right to a fair trial, citing Bank of Nova Scotia v. United States, 487 U.S. 250, 108 S.Ct. 2369, 101 L.Ed.2d 228 (1988) and United States v. Mechanik, 475 U.S. 66, 106 S.Ct. 938, 89 L.Ed.2d 50 (1986). 29 The fundamental flaw in the appellant's line of reasoning has been their misapprehension of the nature of the sham at issue by relying inordinately on Frank Lyon. 30 In Frank Lyon, the question presented focused on the taxpayer's ability to claim deductions in connection with a multiple party sale-and-leaseback transaction. The ability of the taxpayer to take the deductions depended in turn upon the Court's determination of the transaction itself as a sham. In the instant case, however, the appellants were charged with conspiring to defraud the United States by using sham trust entities known as UBO's to conceal taxable assets from the [IRS]. And in order to indict and try the appellants on such a charge, it was not necessary for the grand jury to determine whether the UBOs constituted sham transactions under Frank Lyon. Whether a UBO itself would be held to be a sham is of no moment; here it was the fact that the UBOs, whether in other respects sham entities or not, were used to conceal income and assets in a fraudulent manner which made the scheme illegal. 31 The important distinction between civil and criminal tax cases concerning the key element to be focused upon is compellingly set out in United States v. Miller, 545 F.2d 1204, 1214 (9th Cir.1976), cert. denied, 430 U.S. 930, 97 S.Ct. 1549, 51 L.Ed.2d 774 (1977). There the Ninth Circuit noted, 32 In civil tax cases the purpose is tax collection and the key issue is the establishment of the amount of tax owed by the taxpayer. In a criminal tax proceeding the concern is not over the type or the specific amount of the tax which the defendant has evaded, but whether he has wilfully attempted to evade the payment or assessment of a tax.... The difficulty in automatically applying the constructive distribution rules to this case is that it completely ignores one essential element of the crime charged: the willful intent to evade taxes, and concentrates solely on the issue of the nature of the funds diverted. That latter aspect is not the important element. Where the taxpayer has sought to conceal income by filing a false return, he has violated the tax evasion statutes. It does not matter that that amount could have somehow been made non-taxable if the taxpayer had proceeded on a different course. 33 Id. at 1214 (emphasis in original) (footnote omitted). Thus, the technical considerations present in Frank Lyon and Rice's Toyota World, both civil cases, focusing on the allowability of deductions in sale-and-leaseback transactions based upon the non-existence of any legitimate business purpose, are inapposite. Appellants would have us read those cases as standing for the unsound proposition that a criminal defendant cannot be convicted of tax fraud and evasion so long as he can demonstrate the existence of any legitimate business purpose for, or viable economic consequence of, the transaction regardless of other, not-so-commendable purposes as may have been present. 34 Moreover, the statements made by the prosecutor before the three grand jury witnesses did not amount to taking the sham question out of the jury's hands. In his colloquy with Joyce Williams, the prosecutor was careful to remind the grand jury that he was only stating the law in response to various facts and circumstances offered by the witnesses, and that the task of applying the law so stated to the evidence presented as to the appellants remained with the grand jury. 2 35