Court Opinion

ID: 9481923
Source: CourtListenerOpinion
Date Created: 2023-08-05 08:35:39.736261+00
Date Added: 2024-06-11T17:48:39.749423
License: Public Domain

OAKES, Chief Judge,
concurring in part and dissenting in part:
I concur in so much of the panel majority as affirms the convictions on count one, the conspiracy count, counts eight through ten, the false return counts, and counts fourteen through twenty-nine, the aiding and abetting the filing of false corporate and partnership return counts. There was ample proof that Mrs. Helmsley conspired to cheat the Government of taxes, filed false personal tax returns to that end, and assisted or indeed directed the filing of false corporate and partnership returns to consummate the scheme. Judge Winter’s comprehensive opinion more than adequately addresses Mrs. Helmsley’s claims (violation of the Fifth Amendment, amendment of the indictment, and prosecutorial misconduct), and is correct on resentencing, as far as it goes.
*104For reasons that I will spell out below, however, I would reverse her convictions on counts two through four, the evasion counts, and counts thirty through thirty-nine, the mail fraud counts. I also do not believe that the Victim and Witness Protection Act (VWPA) permits the court to order restitution of taxes owed or interest or penalties to the United States as “victim,” see United States v. Joseph, 914 F.2d 780, 784 (6th Cir.1990) (VWPA permits restitution only for Title 18 offenses, not Title 26 offenses), when Congress already has a comprehensive scheme in the Internal Revenue Code for the recovery of taxes, interest and penalties, through civil actions, with liens, forfeitures and jeopardy assessments, among other things. See, e.g., 26 U.S.C. §§ 6651(a) (interest of up to 25 percent in case of failure to file a return), 6653(b), (d) (75 percent penalty for underpayments attributable to fraud), 6851 (jeopardy assessment of income when assessment or collection of deficiency jeopardized by delay).
I
As to the tax evasion counts, as the majority agrees, if there has not been proof beyond a reasonable doubt of a deficiency, there cannot be proof of tax evasion. Sansone v. United States, 380 U.S. 343, 351, 85 S.Ct. 1004, 1010, 13 L.Ed.2d 882 (1965); Lawn v. United States, 355 U.S. 339, 361, 78 S.Ct. 311, 323, 2 L.Ed.2d 321 (1958); United States v. Koskerides, 877 F.2d 1129, 1137 (2d Cir.1989). Thus, accepting the fact that they (or Mrs. Helmsley) clearly had the intent to evade paying some of their taxes, if Mrs. Helmsley paid more taxes than were due on her personal income for the three years in question, she could be prosecuted for false statements made on her returns, 26 U.S.C. § 7206(1), but not for tax evasion under 26 U.S.C. § 7201. I do not believe the Government, which never purported to have audited the returns of the myriad of partnerships, joint ventures and corporations that contributed to the Helmsleys’ vast income, proved that Mrs. Helmsley had in fact understated the total taxes due in any of the three years in question. This deficiency in proof of underpayment was exposed by an extremely technical but, I believe, ultimately persuasive argument presented by the defense at trial: certain accelerated depreciation deductions required by the law to have been taken by some of their limited partnerships had not in fact been taken, with the result that the Helmsleys’ income was overstated by an amount greater than the personal expenses that they falsely claimed as business expenses.
During the years in question, the Helms-leys reported gains or losses from over 100 real estate partnerships. Some of these partnerships owned real estate “placed in service” after December 31, 1980. See Economic Recovery Tax Act of 1981, Pub.L. No. 97-34, § 209(a), 95 Stat. 172, 226 (1981). The law is clear that as to such property the Accelerated Cost Recovery System (ACRS) required accelerated depreciation, i.e., it was mandatory, as the majority opinion concedes. See 5 Mertens Law of Fed. Income Tax § 23.01 (1988 and Supp.1989) (“with limited exceptions, the ACRS provisions are mandatory_”).
Yet the Helmsleys’ accountants had not taken these deductions. Robert Schweihs, an expert appraiser and cost segregation analyst, testified that as to three of the partnerships (the “Formula partnerships”) 7.8 percent of the cost basis was attributable to personal property, required to be deducted by ACRS on a five-year basis as opposed to the 15 or 18 year real property rate on which the Helmsleys actually took all deductions. Gerald Padwe, a recognized tax expert, calculated the additional deductions from the Formula partnerships alone to offset more than the alleged deficiencies in 1983 and 1985 and nearly offset the deficiencies in 1984. But he also testified that the returns had erroneously taken as to real estate only 6.67 percent instead of the required 7 percent deductions, thus making even 1984 an overpayment year. According to this testimony, then the Helmsleys in fact overpaid their taxes by about $93,000 in 1983, $21,000 in 1984, and $477,000 in 1985.
The Government attempts to discredit this testimony with several arguments, two *105of which the court partially adopts and adds to, but none of which I find persuasive.1 In one argument, partially embraced by the court, the jury was entitled to reject Padwe’s tax testimony on the basis of the Government’s cross-examination because he admitted that he: (a) did not look at all the Helmsley partnership returns; (b) did not look at the effect of ACRS on the income side of Harry Helms-ley’s 1983 purchase of Leona Helmsley’s interest in a partnership; (c) made no attempt to see if his analysis would have applied to the sale of 225 Broadway in 1983 (on which the Helmsleys reported a $23 million gain) so as to cause a greater gain on that sale; and (d) did not cheek on whether the recapture provisions of section 1245 applied to the Helmsleys’ 1983-85 capital gains would have increased their tax liability. I believe, however, that: (a) Padwe only needed to look at returns of partnerships likely to have post-December 31, 1980 property, and he in fact did so as to the post-1975 partnerships, finding them “awash” [sic] (A. 6747) (except for the Formula partnerships); (b) Padwe did not agree that the Harry-Leona partnership transfer generated taxable income and, moreover, under 26 U.S.C. § 1041(a)(1) no gain or loss is recognized on an interspousal transfer; (c) 225 Broadway (the Woolworth building) was acquired in 1946 and likely to have little, if any, ACRS property; and (d) Alternative Minimum Tax requirements applied in any event to the Helms-leys. I think the Government’s burden of proving a deficiency was not satisfied by the cross-examination of Padwe, nor do I think that the omission to calculate the effect of recapture resulting from the separation of real and personal property for depreciation purposes on the capital gains from the sales of certain other partnerships — “offsets to the offsets” — is of any note. The Government still had to prove a deficiency, and if indeed there were offsets to the offsets, the Government did not prove them, it merely hypothesized in interrogation.
The court goes on to argue, however, that the Helmsleys had four depreciation options for personal property (5 years in specified percentages as Padwe testified, and 5, 12 and 25 years on a straight-line method). In fact, however, absent a specific election to use one of the three straight-line depreciation methods under 26 U.S.C. § 168(b)(3), ACRS required the specified percentages over 5 years (15, 22, 21, 21 and 21) method to be utilized, as Padwe testified. 26 U.S.C. § 168(b)(1)(A). The Helms-leys clearly made no such election.
The court’s response to this is that the Helmsleys “elected” to depreciate personal property over a fifteen year straight-line basis by the way their returns were filed. But this “election” or option was not available to them. They were required to follow ACRS. The court’s suggestion is that it may have been a “strategically motivated, conscious decision” not to segregate personal property and depreciate it over a permissible period in order to obtain tax benefits, namely, to obtain capital gains treatment for the personal property upon its sale and to avoid recapture as income of depreciated amounts. But there was no evidence as to this; the fact that it could have been so does not make it so. Fowler v. United States, 352 F.2d 100, 106 (8th Cir.1965), cert. denied, 383 U.S. 907, 86 S.Ct. 887, 15 L.Ed.2d 663 (1966), relied on by the majority, stands only for the proposition that one who has elected a legally permissible depreciation method may not defend an evasion charge by showing he could have selected another permissible method. Here, however, the Helmsley claim relates to deductions under a method of depreciation the partnership was legally required to utilize. The court says this makes the case a fortiori to Fowler; I *106disagree, because that assumes that the failure to segregate personal property and to follow the required ACRS method was conscious, something as to which there is, as I have said, no evidence in the record.
The recapture point I think a bit of a red herring; I agree with the trial judge that it is “human instinct to write off as much as you can as soon as you can.”
As a penultimate argument, the court says that the failure to segregate personal property was “equivalent” to selection of an accounting method, which, axiomatically, cannot be changed without the Commissioner’s consent, as provided by the statute, 26 U.S.C. § 446(e), and the regulations, Treas.Reg. § 1.167(e)-l(a). However, the change of method requirements were specifically inapplicable to ACRS under the Economic Recovery Tax Act of 1981, Pub.L. No. 97-34, § 203(c)(2), 95 Stat. 172, 222 (1981): “Sections 446 and 481 of the Internal Revenue Code of 1954 shall not apply to the change in the method of depreciation to comply with the provisions of this subsection.” Moreover, correction of a classification of property is not a change in method of accounting. Treas.Reg. § 1.446-l(e)(2)(ii)(b).
As the court’s final point, the argument is that even if the failure to segregate personal property was a good faith mistake, the sufficiency argument must fail as a matter of law, because Padwe’s method of depreciation was only one option among several. Even though the Helmsleys did not elect one of the straight-line methods under ACRS, they could have done so and apparently, the argument runs, could even now do so since good faith taxpayers are often permitted to make a late election under some Tax Court cases and an IRS Tech.Memo. 1986-46010 (July 21, 1986). Moreover, it is said, the adjustment of the depreciation rate made by Padwe from 6.67 percent to 7 percent was “based on a proposed, but never adopted, Treasury Regulation.”
To suggest that these bad faith taxpayers could now be entitled to good faith treatment so as to be enabled to take the optional straight-line methods of depreciation then available to them strikes me as disingenuous. In any event, prior to the Tax Reform Act of 1986, such elections were available only to taxpayers who made the election for the year in which the property was placed in service on the return for the taxable year concerned, 5 Mertens Law of Fed. Income Tax § 23.57 (1988 and Supp.1989). They were not available, as a matter of law, to the Helmsleys.
The argument that the adjustment of rate from 6.67 to 7 percent was not mandatory because it was based on only a proposed regulation (§ 1.168.2) does not hold water, either. Not only did the Government not challenge this at trial but the ACRS tables were either set forth in the statute itself, Pub.L. No. 97-34, § 201(a), amending 26 U.S.C. § 168(b), 95 Stat. 204 (1981) or, in the case of 15 year real property, were to be “prescribed by the Secretary,” Pub.L. No. 97-34, § 201(a), amending 26 U.S.C. § 168(b)(2), 95 Stat. 205 (1981). The 7 percent rate was so “prescribed” in the proposed regulation. I do not see how the Helmsleys could have done other than to follow it. The fact that ACRS was subsequently abolished and the proposed regulation never finalized accordingly seems to me immaterial. Just the other day, our court relied on a proposed but never promulgated regulation in a tax evasion case to substantiate taxpayers’ position that they could take certain losses. United States v. Regan, 937 F.2d 823, 825 (2d Cir.1991).
For these reasons, I would reverse on the evasion counts.
The appropriateness of such a reversal raises a further question as to whether the infirmities in the Government’s case with regard to the evasion counts affected any of the other counts. In my view, though it is arguable, there was probably a spillover to counts thirty through thirty-nine, the mail fraud counts, which related to the filing of false New York State income tax returns reflecting the same deductions as on the federal returns. On balance I would, however, let the conspiracy and false statement counts stand because the *107Helmsleys so clearly conspired to and did charge residential and other personal purchases to their corporations and partnerships. Hence, I would uphold the corporation/partnership aiding and abetting counts (14-29) as well.
With regard to sentencing, even if the convictions were altogether affirmed, I would remand for resentencing and would reverse the order of restitution. The amount of tax owed is still a matter of dispute and the prison sentence and order of restitution were directly related to it. Moreover, as I stated, I do not think the Government is a “victim” under the VWPA so as to be entitled to restitution of taxes, interest and penalties. To be sure, the restitution was ordered for violations of Title 18, namely sections 371 (conspiracy) and 1341 (mail fraud). But, as I said, I would reverse as to the mail fraud counts and that would make the restitution order rest only on the conspiracy count, all the overt acts of which related to Title 26, i.e., tax violations, specifically not covered by the VWPA. Finally, in relevant part, the VWPA provides:
Any amount paid to a victim under an order of restitution shall be set off against any amount later recovered as compensatory damages by such victim in (A) any Federal civil proceeding.
18 U.S.C. § 3663(e)(2) (1988) (emphasis added).
I suggest that the Government in a civil tax proceeding does not recover “compensatory damages” so that, theoretically at least, the possibility remains that, in addition to the order of restitution, the Government can recover taxes, penalties and interest in a civil proceeding.
Thus, while concurring with affirmance of the convictions on counts one, eight through ten and fourteen through twenty-nine, I respectfully dissent as to the convictions on counts two, three, four and thirty through thirty-nine. I do not think the capping provisions of the Criminal Fine Enforcement Act are applicable, however, and would let stand the fines of $250,000 on each count affirmed.

. The Government's other argument, which I do not read the court’s opinion as adopting, was that it would be impossible to prove a tax evasion case with multiple-partnership and corporate returns because by the time the Government audited all the returns the statute would have run on the evasion case. I do not think the applicable six-year statute, 26 U.S.C. § 6531, is that short. One would hope that tax-shelter real estate entrepreneurs with incomes like the Helmsleys would be regularly and carefully audited from top to bottom instead of waiting for an enterprising newspaper reporter to break his story. "Little people” get audited all the time.