Court Opinion

ID: 9481769
Source: CourtListenerOpinion
Date Created: 2023-08-05 08:31:30.090851+00
Date Added: 2024-06-11T17:48:34.203815
License: Public Domain

MAHONEY, Circuit Judge,
concurring in part and dissenting in part:
I agree with my colleagues that the securities fraud and conspiracy counts should be affirmed. I do not agree, however, that reversal of the tax and related counts is warranted by the district court’s refusal specifically to instruct the jury regarding the defendants’ asserted reliance on 26 U.S.C. § 1058. Nor do I perceive any error in the court’s charge concerning “economic substance.” I therefore respectfully dissent from the majority’s rulings regarding the instructions of the district court.
A. The “Good Faith” Instructions.
My colleagues conclude: “The district court should have instructed the jury that, if it found that the reliance [on section 1058 as appellants interpreted it] was held in good faith, the defendants could not be held criminally liable for proceeding in accordance with that reliance.” The district court in fact gave the following instructions with regard to good faith:
If you find that the defendant acted in good faith in the honest belief that the representations he made were true, that he did not intend to defraud anyone, this constitutes a complete defense to the crime of mail or wire fraud.
The defendants contend the government has failed to prove that they did not act in good faith.
Mr. Regan submits that it was his belief, based on his general knowledge of the tax laws and buttressed by the willingness of Akroyd and Merrill Lynch to engage in these trades, that both the day trades done in 1984 and the 31 day trades done in 1985 were entirely proper for tax purposes.
The other Princeton/Newport defendants contend that they relied on Mr. Regan’s opinion as to the propriety of the trades....
In connection with the false return counts, the court additionally instructed as follows:
If the defendant signed the tax return in good faith and believed it to be true in all material matters, he has not committed a crime and must be acquitted on these counts, even if the return was incorrect.
If you find that the tax return was not true as to a material matter, the central question is whether or not the defendant honestly believed that the return was true. The government has the burden of proving that the defendant did not have an honest belief in the truthfulness of the return.
Characterizing these rather extensive instructions as a “generalized charge on good faith,” my colleagues find them “insufficient to instruct the jury concerning the appellants’ specific good faith defense based on section 1058.” In other words, the defendants were prejudiced by an instruction that their good faith defense was premised on Regan’s “general knowledge of the tax laws,” because defendants more specifically contended that Regan relied on section 1058. I am unpersuaded that a district court is required to present a defen*831dant’s contentions with this level of particularity. The fact is that the theory of defense — to wit, bona fide reliance on the tax code — was squarely presented to the jury. It is unlikely that the jurors were misled because the district court failed to remind them of Regan's contention that section 1058 was at the center of his tax analysis.
Even assuming, however, that the district court arguably should have given an instruction more closely patterned after the defendants’ section 1058 contention, the record does not disclose the specific objection to the court’s instruction on the intent issue required by Fed.R.Crim.P. 30 to preserve a claim of instructional error. Defendants’ proposed jury instructions included a paragraph that essentially summarized Regan’s trial testimony regarding reliance on section 1058. When Judge Carter indicated at the charging conference that his instructions would not refer to section 1058, however, counsel did not contest the ruling, let alone argue that the defense theory would be gutted. After delivery of the charge, the only objections relating to defense contentions were that the court (1) failed to instruct that defendant Zarzecki contended that he never participated in any illegal activity, and (2) failed to instruct the jury on all the defense contentions concerning the manipulation of C.O.M.B. Co. securities. In response, the district court gave a supplemental instruction that both the government and the defendants had set forth more contentions than those presented in the jury charge.
In these circumstances, reversal may be premised only upon “plain error” in the jury instruction, see Fed.R.Crim.P. 52(b); i.e., where “failure to reverse would result in ‘a miscarriage of justice which denied the defendant a fair trial.’ ” United States v. Scarpa, 913 F.2d 993, 1021 (2d Cir.1990) (quoting United States v. Civelli, 883 F.2d 191, 194 (2d Cir.), cert. denied, — U.S. -, 110 S.Ct. 409, 107 L.Ed.2d 374 (1989)). This doctrine is to be invoked sparingly, see Scarpa, 913 F.2d at 1021 (collecting eases), and I see no occasion for its application here.
B. The “Economic Substance” Instruction.
My colleagues find “added support” for their reversal of the tax related convictions from two criticisms of the district court’s instructional definition of economic substance. Briefly, the government’s theory of the case was as follows. PN invested in the so-called “convertible hedge,” establishing a long position in convertible bonds while selling short the underlying stocks. With this hedged position, price fluctuations on the “long” side would more or less exactly be compensated by fluctuations on the “short” side. At the relevant times, short term capital losses were accorded beneficial treatment under the Internal Revenue Code.
In order to reap this tax benefit without disturbing the balance of their hedged position, the defendants concocted false sales of their losing securities. Specifically, PN would “sell” the securities to a brokerage house just before the end of the maximum short term holding period, with the understanding that PN would repurchase the securities at approximately the same price shortly thereafter. The government charged that the purported sales (whereby PN incurred and reported the short term losses) lacked economic substance, and that the losses were therefore unlawfully reported on PN’s partnership returns.
The district court charged the jury that a transaction lacked economic substance if it (1) “had no business purpose apart from the creation of tax deductions” and (2) “was subject to no market risk.” My colleagues criticize the first branch of this definition on the ground that the language “creation of tax deductions” might unfairly encompass a bona fide sale that is intended to realize an existing loss. This criticism was not presented to the district court either at the charging conference or in defendants’ numerous objections following the charge. Indeed, the following similar language was contained in defendants’ proposed jury instructions: “A sale has economic substance if it could possibly have an economic effect other than the creation of a tax deduction and the payment of the *832sales price and costs incident to the sale_” (latter emphasis added).
Further, in United States v. Atkins, 869 F.2d 135 (2d Cir.1989), we approved the use of the same charge in a strikingly similar context. The defendants attempt to distinguish Atkins on the theory that its definition of economic substance applies only to cases in which phony losses are created, not cases where actual losses are recognized through the use of sham transactions. This will not do. Atkins involved a scheme falsely to recognize actual losses in value on the short legs of straddles via artificial sales and repurchases. Like this case, Atkins involved not false losses but false sales.
Finally, my colleagues are dissatisfied with the court’s instruction “that transactions are subject to no market risk if changes in market prices cannot have any effect on the transaction.” They essentially contend that PN took the risk that the parking transactions — the prearranged sales and repurchases at nearly identical prices — would not, as the majority puts it, be “carried through to completion as planned regardless of any movement in the market.” In other words, after a brokerage house took possession of the parked securities, it might refuse to honor the prearranged transfer of the securities back to PN.
The risk that the brokerage house might sell the parked securities to a third party or otherwise decline to return them, despite the agreement to the contrary, seems indistinguishable from the risk in United States v. Ingredient Technology Corp., 698 F.2d 88 (2d Cir.), cert. denied, 462 U.S. 1131, 103 S.Ct. 3111, 77 L.Ed.2d 1366 (1983), that the seller of inventory to the taxpayer would refuse to repurchase that inventory as agreed. We nonetheless there held that the lack of an enforceable agreement did not result in risk that imparted such economic substance to the transaction as to preclude tax fraud. Id. at 94-95.
Moreover, the jury was entitled to consider the whole of the parking scheme to be the transaction that lacked economic substance. For example, in United States v. Glass, 87 T.C. 1087 (1986), the taxpayers had invested, through straddles, in options for future delivery of a specified metal in a manner that would produce an ordinary loss in the initial tax year, and a capital gain in the next. See id. at 1095. The Tax Court concluded that the transaction that created the loss for the first year — the closing of the loss leg of the straddle— lacked economic substance. In disallowing the deductions, the court looked to the entirety of the tax avoidance scheme:
In determining deductibility, we believe that substance-over-form precludes us from focusing solely upon the losses incurred by the closing of the sold options in year one of the London options strategy, to the exclusion of all that followed. For this reason we hold, as we have done before, that the relevant transaction was petitioners’ entire commodity tax straddle scheme.... What petitioners invested in here with the respective broker/dealers was a prearranged sequence of trading calculated to achieve a tax-avoidance objective — not investments held for non-tax profit objective.
87 T.C. at 1163.
I note that because of the plethora of taxpayers involved in the case, the Glass decision has been affirmed on appeal by at least eight circuits. See Lee v. Commissioner, 897 F.2d 915 (8th Cir.1989); Dewees v. Commissioner, 870 F.2d 21 (1st Cir.1989); Friedman v. Commissioner, 869 F.2d 785 (4th Cir.1989); Keane v. Commissioner, 865 F.2d 1088 (9th Cir.1989); Ratliff v. Commissioner, 865 F.2d 97 (6th Cir.1989); Killingsworth v. Commissioner, 864 F.2d 1214 (5th Cir.1989); Kirchman v. Commissioner, 862 F.2d 1486 (11th Cir.1989); Yosha v. Commissioner, 861 F.2d 494 (7th Cir.1988).
Further, I note that Judges Breyer and Posner observed that while the straddle trading in theory might involve economic substance, the Tax Court did not err in concluding that the particular trades at issue were executed in a manner that lacked economic substance. See Dewees, 870 F.2d at 32; Yosha, 861 F.2d at 499.
*833In sum, I do not concur in the majority’s rulings regarding instructional error by the district court, and therefore respectfully dissent from those rulings. I do not reach the complex of issues concerning the tax and related counts that would be presented if the majority shared my views concerning the jury charge.