Opinion ID: 3013496
Heading Depth: 4
Heading Rank: 1

Heading: Exclusivity of section 7204

Text: As the district court noted, this case presents an issue of first impression in this court as we have not interpreted explicitly the in lieu of language of section 7204, and we have not had the occasion to discuss the relationship between sections 7204 and 7206(2). See Gambone , 167 F. Supp. 2d at 820. The district court, relying primarily on United States v. Hughes, Crim. A. No. CR 86-98, 1987 WL 33806 (N.D. Ohio Nov. 13, 1987), held that conduct which involves, but is not exclusively limited to, the provision of false W-2s can be sufficient for a S 7206(2) violation. Thus, 8 the mere fact that the provision of false W-2s was a part of the case does not mean that a S 7206(2) violation is not possible. Gambone 167 F. Supp. 2d at 820. The court thus rejected the Gambones’ contention that it should disregard entirely the furnishing of the W-2s in assessing the sufficiency of the evidence supporting the section 7206(2) convictions. Nonetheless, when moving on to examine the sufficiency of the evidence, the court found that the evidence was sufficient to sustain the section 7206(2) verdicts even excluding consideration of the W-2s themselves. Id. at 821. In Hughes, the district court concluded thatthe simple fact of providing, or helping to provide, an individual with a fraudulent W-2 is not punishable under S 7206(2) because of S 7204’s ‘in lieu of’ provisions. Hughes, 1987 WL 33806, at . The court found, however, that[a]s long as there are other actions violative of S 7206, the fact that the defendant may also have provided an individual with a false W-2 does not prevent a S 7206 conviction. Id. (citing United States v. MacKenzie, 777 F.2d 811 (2d Cir. 1985); United States v. Isaksson, 744 F.2d 574 (7th Cir. 1984); United States v. Barnes, 313 F.2d 325 (6th Cir. 1963)). Having so concluded, the court denied the defendant’s motion for judgment of acquittal or for a new trial, finding that, [b]ased on the evidence presented, the jury could have found beyond a reasonable doubt that [the defendant] additionally counseled [an employee] to understate her income on her income tax return, by reporting as income only that amount shown on the W-2 and not the additional income which she received as ‘expenses.’  Id. In other words, the defendant violated section 7206(2) by going beyond merely providing false W-2s and, in fact, counseling an employee to understate income. The defendant appealed and the Court of Appeals for the Sixth Circuit reversed even though it did not find that the district court erred in its legal analysis. Rather, the court of appeals held that there was insufficient evidence that the defendant counseled the employee to understate her income, noting that the employee had denied receiving such advice. Hughes v. United States, 899 F.2d 1495, 1500-01 (6th Cir. 1990). The court of appeals did not clarify whether 9 section 7206(2) requires proof of actual counseling or whether something more than furnishing false W-2s but less than actual counseling would support a conviction.6 Our cases have not been more helpful with respect to the issue here than that of the court of appeals in Hughes. In a case not involving furnishing of false W-2s, we held that [t]o establish aiding and abetting the filing of a false tax return ‘there must exist some affirmative participation which at least encourages the perpetrator.’  United States v. Graham, 758 F.2d 879, 885 (3d Cir. 1985) (quoting United States v. Buttorff, 572 F.2d 619, 623 (8th Cir. 1978) (internal quotation omitted)). In Graham, we held that there was sufficient evidence to affirm a defendant’s conviction where the defendant, who was a member of a group that opposed taxation, set up a Swiss bank account for another member and advised him not to pay taxes on the interest earned on that account because the U.S. had no jurisdiction over it. Id. Likewise, where a defendant had provided false invoices to certain taxpayers as documentation of business expenses and advised those taxpayers to use those expenses as tax deductions improperly, we found sufficient evidence to sustain his conviction under section 7206(2). United States v. McCrane, 527 F.2d 906, 913 (3d Cir. 1975), vacated on other grounds, 427 U.S. 909, 96 S.Ct. 3197 (1976). Finally, other courts of appeals, in cases involving similar factual scenarios where defendant employers disguised certain wages by issuing paychecks from nonpayroll accounts, have affirmed convictions under section 7206(2) where the defendants’ conduct included, but apparently was not limited to, furnishing false W-2s. See, e.g., MacKenzie, 777 F.2d at 820; Isaksson, 744 F.2d at 577-78. These courts, however, did not address specifically the relationship between sections 7204 and 7206(2). The legislative history of section 7204, cited by both sides, clearly establishes that Congress intended the in lieu of language to ensure that the section 7204 penalties displaced the more severe penalties in other provisions of _________________________________________________________________ 6. The court of appeals affirmed in part and reversed in part on other aspects of the appeal that we need not describe. 10 the Internal Revenue Code setting out both felonies and misdemeanors. H.R. Rep. No. 2333, 77th Cong., 2d Sess. at 132 (1942); S. Rep. No. 1631, 77th Cong., 2d Sess. at 172 (1942) (These penalties are prescribed in lieu of the penalty imposed by S 145 of the Code, and are much less severe than those displaced.). Beyond this point, which, in any event, the in lieu of phrasing of section 7204 itself adequately captures, the parties’ citations to section 7204’s legislative history are largely inconclusive, inasmuch as that history fails to address its relationship to section 7206(2). On the other hand, the timeline of amendments to the Code does lend some support to the government’s position that evidence of the Gambones’ furnishing of false W-2s can be used to support the section 7206(2) convictions. Congress enacted section 7204 as I.R.C. S 470(a) in 1942. Revenue Act of 1942, Pub. L. No. 77-753, 56 Stat. 798, 892.7 At that time section 7206(2) already was in place in the form of I.R.C. S 3793(b) in the Internal Revenue Code of 1939, Congress having enacted it in 1924. See Revenue Act of 1924, 26 U.S.C. S 1267 (1926). Conduct designed to assist an employee in filing a false return therefore already was punishable under section 3793(b), while failing to furnish a statement required under the Code (although not specifically applicable to the W-2 context, inasmuch as employers were not yet required to withhold) was punishable under I.R.C. S 145(a). Taking the legislative history at its word, section 470(a), enacted as part of the new withholding regime, was intended to displace the penalties under section 145, which set out misdemeanors in subsection (a), including for failing to furnish a statement, and felonies in subsection (b). There is no _________________________________________________________________ 7. Congress first required employers to withhold employees’ income taxes in 1942; the 5% World War II Victory Tax on most employees’ gross wages was the first vehicle for doing so. Carolyn C. Jones, Class Tax to Mass Tax: The Role of Propaganda in the Expansion of the Income Tax During World War II, 37 Buff. L. Rev. 685, 694-99 (1989); Peter W. Colby, Comment, Federal Withholding on Employee Fringe Benefits for Income and Social Security Taxes, 70 Cal. L. Rev. 178, 180-81 & n.19 (1982). The following year, Congress amended the Code to make withholding applicable to all income tax. Id. 11 indication, however, that Congress intended section 470(a), now section 7204, to displace the penalty under section 3793(b). The legislative history therefore lends some support to the government’s argument that Congress did not intend section 7204 to preclude felony prosecutions of conduct involving, but not limited to, furnishing false statements. Moreover, nothing in the language of either section 7204 or section 7206(2) or in the relevant legislative history, suggests that a jury may not consider the furnishing of false W-2s in deciding whether a defendant committed an offense under section 7206(2). Read together, these provisions stand for the less than remarkable proposition that a person who merely furnishes false W-2s is only culpable enough to deserve a misdemeanor conviction, while a person who goes further and willfully causes a false return to be filed is more culpable and is guilty of a felony. Thus, although the in lieu of language suggests that proof of the mere furnishing of false W-2s is insufficient as a matter of law to support a section 7206(2) conviction,8 such evidence plus any other evidence suggesting a defendant’s intent to cause a false return to be filed form a proper evidentiary basis for such a conviction. Indeed, MacKenzie and Isaksson implicitly applied this principle. Thus, the government may prosecute conduct involving, but not limited to, furnishing false W-2s to employees under section 7206(2). Under Graham, the relevant inquiry is whether the defendant engages in some affirmative participation which at least encourages the employee to prepare or present a false return. Graham, 758 F.2d at 885. Evidence of such affirmative participation that includes, but is not limited to, furnishing false W-2s is sufficient to sustain a conviction under that provision.9 Finally, such _________________________________________________________________ 8. Allowing the jury to infer intent to aid and assist from the mere furnishing of false W-2s would subject a defendant who had engaged in precisely the conduct prohibited by section 7204--no more and no less-- to a punishment other than that prescribed by that section, thus ignoring the in lieu of language. 9. The Gambones also argue that other conduct ancillary to furnishing false W-2s--details such as the preparation of employee time cards, the 12 affirmative participation need not rise to the level of actual counseling, as the Gambones sometimes seem to suggest, as long as it at least encourages the preparation or presentation of a false return.