Opinion ID: 200974
Heading Depth: 2
Heading Rank: 1

Heading: Instruction on Ordinary and Necessary Business Expenses

Text: 13 Mikutowicz first argues that the district court erred by instructing the jury on the definition of ordinary and necessary business expenses under the Internal Revenue Code. See 26 U.S.C. § 162. He contends that the court's instruction was unnecessary because the government was required to prove only that the deductions he claimed were false — not that they failed to qualify as ordinary and necessary business expenses. This unnecessary instruction was also prejudicial, he asserts, because it introduced an extraneous issue that might well have confused the jury and diverted its attention from his primary defense: that he claimed the deductions in good faith. 14 The purpose of jury instructions is to inform the jury of its function, which is the independent determination of the facts, and the application of the law, as given by the court, to the facts found by the jury. 2A Charles A. Wright, Federal Practice and Procedure: Criminal, § 485 (3d ed.2000). The instructions should fairly and impartially state the issues and applicable law in logical sequence ... [so that] the jury [can] understand the issues and intelligently apply the law. Id. (quoting Elbel v. United States, 364 F.2d 127, 134 (10th Cir.1966)). It is common in tax crime prosecutions for the court to instruct the jury on the meaning of tax law terms implicated by the particular facts of a case. See, e.g., United States v. Wapnick, 60 F.3d 948, 955 (2d Cir.1995) (in tax evasion case, jury instruction on definition of sham corporation was proper); United States v. Curtis, 782 F.2d 593, 596-98 (6th Cir.1986) (in tax evasion case, jury instruction on definition of income was proper); United States v. Sorrentino, 726 F.2d 876, 881 (1st Cir.1984) (in tax evasion case, jury instruction on definition of taxable income was proper). 15 Here, knowing the definition of ordinary and necessary business expenses was helpful to the jury in applying the law to the evidence. The parties agree that conviction on each count required the government to prove that the deductions claimed by Mikutowicz on behalf of AGM and Felix were false. See 26 U.S.C. § 7206(1) (filing false corporate tax return requires government to prove that return was false as to material matter); 26 U.S.C. § 7201 (tax evasion requires government to prove that defendant owed substantially more federal income tax than declared); 18 U.S.C. § 371 (conspiracy charge required government to prove that defendant agreed with another to file false return and to evade taxes). Based on the evidence presented, whether the deductions claimed by AGM and Felix were false depended on whether they were properly claimed as ordinary and necessary business expenses. Thus, the jury's ultimate conclusion that the deductions were false was inexorably linked to whether they were ordinary and necessary business expenses. Therefore, a definition of ordinary and necessary business expenses was useful information for the jury to evaluate the evidence. 16 Mikutowicz's suggestion that the ordinary and necessary business expense instruction shifted the jury's focus away from his good faith defense is not persuasive. The district court's instructions explained to the jury the separate requirement that the government prove that Mikutowicz did not act in good faith. Indeed, the court was quite explicit in this regard. It instructed: 17 [I]t isn't enough for the government to show that [the deductions] were improper. The government also has to prove that the defendant knew that they were improper, or, rather that the defendant did not believe that the statements he made about the deductions in these returns were true and correct. 18 Rather than confuse the jury, the instructions highlighted for the jury that the government had to prove, inter alia, that the claimed deductions were false and that Mikutowicz did not claim the deductions in good faith. 19 As a fallback, Mikutowicz contends that, even if the district court permissibly instructed the jury on the definition of ordinary and necessary business expenses, the court should have included a supplemental instruction (which we shall describe momentarily). The trial court's refusal to give a particular instruction constitutes reversible error only if the requested instruction was (1) correct as a matter of substantive law, (2) not substantially incorporated into the charge as rendered, and (3) integral to an important point in the case. Sheek v. Asia Badger, Inc., 235 F.3d 687, 697 (1st Cir.2000) (quoting Elliott v. S.D. Warren Co., 134 F.3d 1, 6 (1st Cir.1998)). The district court instructed the jury: 20 [O]rdinary and necessary business expenses are such expenses as are directly connected to the operation of the business. And the government claims here that these deductions were not ordinary and necessary because they did not reflect any economic reality, were not related to the operations and business of either AGM or Felix, but were designed merely to funnel funds into the defendant's personal bank account offshore. 21 Mikutowicz sought to augment this instruction with language focusing the jury's attention on whether Ellis was a legitimate corporation. The district court told the jury that there is no question that Ellis was a legitimately and validly constituted corporation. The question here has only to do with the payments made to it by AGM, and the purpose and treatment of those payments by AGM ... and ultimately Ellis as well. 22 Had the court provided the requested language, which comprised a detailed (and confusing) list of factors used to determine whether Ellis was a legitimate corporation, the jury could have been erroneously induced to conclude that its task was to determine Ellis's legitimacy instead of whether AGM made the payments to Ellis for legitimate business purposes. The district court's instruction kept the jury's attention focused on whether the deductions were properly claimed by Mikutowicz's companies. There was no error. 23