Opinion
Criminal Action No. 04-223.
February 11, 2005
ORDER AND REASONS
Before the Court are a Motion to Dismiss Indictment as Time Barred (Doc. 14) and a Motion to Dismiss Indictment — Ownership Interest by Operation of Law (Doc. 18). These motions came for hearing on November 16, 2004. Having heard the argument of counsel and having reviewed the pleadings, memoranda and the relevant law, the Court finds the motions to be without merit.
Background
Harold E. Molaison ("Molaison") and David C. Loeb ("Loeb") have been indicted for conspiracy to defraud the United States in contravention of 18 U.S.C. § 371 and tax evasion in contravention of 26 U.S.C. § 7201. The facts of the case as alleged in the indictment are that in or about 1985, the Environmental Protection Agency ("EPA") declared approximately 3000 acres in six contiguous tracts of land in Jefferson Parish, Louisiana to be wetlands. (Indictment, ¶ 4). The tracts came to be known as the Bayou Aux Carpes Property.
In 1991 the Bayou Aux Carpes landowners filed several lawsuits against the federal government in the Unites States Court of Federal Claims. The suits claimed that the EPA's regulations deprived the landowners of the commercial and economic use of their property and as such had been taken by the federal government without just compensation in violation of the Fifth Amendment to the United States Constitution. The landowners sought to be paid for the taking. The suits were eventually consolidated into one action. (Indictment ¶ 5).
In or about 1991 and 1992, defendants Molaison and Loeb entered into contracts for legal services with the Bayou Aux Carpes landowners to pursue the landowners' claim against the United States of America and any Departments or Agencies thereof, for the regulation of the Bayou Aux Carpes Property. (Indictment ¶ 6). Defendants agreed to represent the landowners on a contingency or percentage basis as authorized and permitted by La.Rev.Stat. 37:218. Written contracts were executed, all allegedly containing the following provision:
In consideration of the services rendered or to be rendered, I hereby assign, transfer and deliver to attorneys as fee an undivided 25% in and to any recovery I/we may have in this matter, whether such recovery is obtained by settlement, compromise or judgment over and beyond in any residual wet land value in said property, all according to the provisions of La.R.S. 37:218.
(Motion to Dismiss Indictment-Ownership Interest at 5) (emphasis added). In entering these contracts, Molaison and Loeb also agreed to advance all costs and expenses necessary to prosecute the claims with reimbursement to the attorneys out of any funds received in the litigation. (Indictment ¶ 6).
Around March 1996, Molaison and Loeb negotiated a settlement between the federal government and the landowners. Under the terms of the settlement, the landowners allegedly agreed to transfer their respective ownership interests in the Bayou Aux Carpes Property to the federal government in exchange for $8,250,000.00. In April 1996, Agreements to Settle Claims were executed between Molaison and Loeb and the landowners. The Government alleges that the landowners agreed to pay Molaison and Loeb $2,000,000.00 in attorneys' fees. (Indictment ¶ 7).
As stated in the Indictment, when a piece of property is sold, federal income tax must be paid on the gain of the sale — the gain being the difference between the landowners' original purchase price and the sales price. Under 26 U.S.C. § 1033, however, a property owner who receives money from the sale of property that is involuntarily converted, may defer paying capital gains tax by purchasing similar property to the extent that the purchase price of the replacement property exceeds the gain. 26 U.S.C. § 1033(a)(2)(A). The property owner must purchase the replacement property within two years of the close of the taxable year in which the involuntary conversion took place. 26 U.S.C. § 1033(a)(2)(B). If the property is not replaced in a timely manner, tax liability for the year of the sale must be recomputed by amended return and the taxpayer is liable for interest from the due date of payment for the tax year in which the conversion occurred. Likewise, upon replacement, the proper returns must be filed with the Internal Revenue Service ("IRS"). Thus, the horizon on the completion of "replacement property election" is at most two years from the time of the election. Either the replacement property is purchased, which purchase must be reported, or there is a failure to purchase timely, and the capital gains must be assessed for tax purposes as well as interest thereon.
Suffness v. United States, 788 F. Supp. 304 (N.D. Tex. 1992), aff'd 974 F. 2d 608 (5th Cir. 1992).
The Government contends that on September 4, 1996, the defendants allegedly represented to their accountants and tax attorney that (1) it was the original intent of the landowners to give the defendants a property interest in the Bayou Aux Carpes Property when they entered into the contracts for legal services in or about 1991 and 1992 (Indictment ¶ 15); that (2) the Government had required them to be property owners in order to represent the landowner in the litigation (Indictment ¶ 16); and that (3) that it was necessary to take an ownership interest in the property in order to enforce their contingency fee agreements in the Court of Federal Claims. (Indictment ¶ 17). The Government further contends that the defendants in addition prepared, executed and caused to be executed "false and fraudulent Acts of Correction" stating that the landowners intended to give defendants a 25% ownership interest in the Bayou Aux Carpes Property when the landowners signed the contracts for legal services. (Indictment ¶ 18).
The Government further contends that Loeb filed a fraudulent tax return on October 17, 1997, reporting the receipt of $995,839 as proceeds from an involuntary conversion of land under 26 U.S.C. § 1033 rather than reporting that sum as income derived as attorneys' fees. (Indictment ¶ 19), and that Molaison filed a fraudulent tax return on October 20, 1997, reporting the receipt of $791,503 as proceeds from an involuntary conversion of land under 26 U.S.C. § 1033 rather than reporting that sum as income derived as attorneys' fees. (Indictment ¶ 20)
On August 19, 1998, the Government contends that Loeb filed another false and faudulent 1997 tax return when he reported that purchase of replacement property with the proceeds received from an involuntary conversion. (Indictment ¶ 21) Likewise, the Government contends that on August 31, 1998, Molaison filed a false and fraudulent income tax return when he reported the purchase of replacement property. (Indictment ¶ 22)
The Government also alleges that on January 14, 2000, David Loeb caused his accountant and tax attorney to make false statements concerning this conspiracy during an IRS audit of Loeb's and his wife's 1996 Individual Income Tax Return. (Indictment ¶ 23) Furthermore, the Government contends that Molaison did the same on May 25, 2000. (Indictment ¶ 24)
All of the foregoing are in the Government's allegations of overt acts in furtherance of the conspiracy to defraud the United States by Molaison and Loeb, in 1996, by impeding the IRS in collecting revenue, that is revenue derived from Molaison's and Loeb's income and self employment taxes for 1996. (Indictment ¶ 9). The Government maintains that the defendants did this by making false statements to their accountants and tax attorney (Indictment ¶ 10), by causing the Acts of Correction to be signed (Indictment ¶ 11), by causing to be filed the 1996 U.S. Individual Income Tax Returns with the IRS reporting the Bayou Aux Carpes legal fees as proceed from an involuntary conversion of property, (Indictment ¶ 12), by filing the 1997 reports of the purchase of the replacement property (Indictment ¶ 13) and causing false statements to be made during the audits of the defendants' 1996 U.S. Individual Income Tax Returns, Forms 1040. These actions constitute the allegations contained in Count One of the Indictment.
In Count Two, the Government states its tax evasion count against Molaison. It alleges that Molaison, having received $791,503 in legal fees, attempted to evade and defeat income and self employment taxes due for 1996 because he stated he had $9,507 taxable income and owed $1,429 in income tax and no self-employment tax whereas the Government contends that his taxable income was $757,058 rendering due income tax and self employment tax of approximately $296,727, and that he further filed on August 31, 1998, a false and fraudulent 1997 Income Tax Return when he reported that purchase of the replacement property and on May 25, 2000 caused false statements to be made during his audit.
In Count Three, the Government states its tax evasion count against Loeb. It alleges that Loeb, having received $1,056,000 in legal fees, attempted to evade and defeat income and self employment taxes due for 1996 because he stated he had $2,021 taxable income and owed $302 in income tax and $9,124 in self-employment tax whereas the Government contends that his taxable income was $1,022,195 rendering due income tax and self employment tax of $415,963, and that he further filed on August 18, 1998, a false and fraudulent 1997 Income Tax Return when he reported that purchase of the replacement property and on January 14, 2000 caused false statements to be made during his audit. The subject indictment was handed down on July 29, 2004.
Defendants maintain their innocence and contend that the subject contracts for legal services that were executed in 1991 and 1992 indeed gave to them a sufficient possessory interest in the property that they were entitled to make a § 1033 election in their respective tax returns. As support for this contention, they note that in August of 1996 when the actual settlement papers were confected the theory that the defendants had an ownership interest was acknowledged by both the Department of Justice and the Court of Federal Claims in Washington, D.C. because they were listed as landowners in the final settlement agreement drafted by the federal government attorneys. (Motion to Dismiss Indictment as Time Barred at 3). Thus, as sellers in October 6, 1996, sale of the involuntarily converted property to the government, they had the option to defer gains taxes thereon. In the alternative, they maintain that the issue as to whether they had a sufficient interest in the property from the inception of the contract with the landowners was so unsettled that they could not have had the requisite intent to violate the tax law. In addition, they maintain that the Acts of Correction were not illegal but were done to memorialize what had indeed occurred.
Motion to Dismiss Indictment as Time Barred
Defendants have filed the subject Motion to Dismiss Indictment as Time Barred. Defendants reason that because the indictment was filed in July of 2004, this criminal prosecution would be time barred unless there is alleged an overt act in furtherance of the conspiracy that occurred six years prior to the indictment issuing — that is after July of 1998. Grunewald v. United States, 353 U.S. 391, 396-97 (1957); Fiswick v. United States, 329 U.S. 211 (1946). Defendants maintain that based on Sansone v. United States, 380 U.S. 343 (1965), the alleged crime was completed upon the filing of the 1997 tax return. As such, they contend that the "conspiracy" was ended, and subsidiary acts of concealment do not extend the offense where the main criminal purpose of the conspiracy has been completed. United States v. Davis, 533 F.2d 921, 928 (5th Cir. 1976) citing Grunwald, 353 U.S. at 399, 401-02. Indeed, the scope of the conspiratorial agreement alleged in the indictment determines both the duration of the conspiracy and whether an act relied on as an overt act may properly be regarded as in furtherance of the conspiracy. Id.
Defendants maintain the Government's allegations that in August of 1998 defendants each filed their respective tax returns for 1997 in which the purchase of the replacement property was reported and that the defendants caused their tax attorneys and accountants to make false statements while conducting an audit in 2000, do not constitute "overt acts in furtherance of the conspiracy;" rather theses actions would be efforts to conceal and as such, would not breath life into a prescribed crime. The Government rejects this contention and maintains that the scope of the conspiracy was such that these acts indeed were in furtherance of the conspiracy and that the indictment is not time-barred.
Section 6531 of Title 26 of the United States Code provides that "[n]o persons shall be prosecuted . . . for any offenses arising under the internal revenue laws . . . unless the indictment is found . . . within [6] years next after the commission of the offense . . . for offenses involving defrauding or attempting to defraud the United States or any agency thereof, whether by conspiracy or not, and in any manner." 26 U.S.C. § 6531(1). Thus, the issue becomes whether the filing of the tax returns reporting the purchase of the replacement property and/or alleged inducement of having attorneys and accountants conceal information in the audits would constitute an overt act in furtherance of the conspiracy. Grunewald requires that the Government adduce direct evidence that the particular acts of concealment relied on to extend the statute of limitations were fully embraced within the original aims of the conspiracy. United States v. Gabriel, 920 F. Supp. 498 (S.D.N.Y. 1996).
Here, unlike the conspiracy in Davis, the conspiracy alleged is:
to defraud the United States for the purpose of impeding, impairing, obstructing, and defeating the lawful government functions of the Internal Revenue Service of the Treasury Department in the ascertainment, computation, assessment, and collection of the revenue: to wit, defendants HAROLD E. MOLAISON'S and DAVID C. LOEB'S 1996 income and self employment taxes.
(Indictment ¶ 9). This conspiracy is broader than the conspiracy to make false statements to a government agency which was alleged in Davis. As noted in United States v. Girard, 744 F. 2d 1170 (5th Cir. 1984), a conspiracy continues until the conspirators realize the full anticipated economic benefits of that conspiracy. Id. at 1172. As such, considering the procedures necessary for the § 1033 election, the filing in 1998 was a necessary and anticipated act in furtherance of the alleged conspiracy. Had there been no purchase of replacement property and no reporting thereof, then defendants would have not been able to take advantage of the replacement property claim. They would have been liable for another tax, that being capital gains and interest thereon. Without the filing of that 1998 return, the defendants would not have realized the full economic gain they sought. It was integral to the scheme. Thus, pretermitting whether the actions taken in 2000 with respect to the audit might be more in line with "concealment" rather than acts in furtherance of the conspiracy, the filing in 1998 of the 1997 tax returns wherein each reported the purchase of replacement property with the proceeds received from an involuntary conversion the 1997 were acts in furtherance of the conspiracy. This count is not time barred.
With respect to Counts Two and Three, the crime of tax evasion, 26 U.S.C. § 7201, has three essential elements: (1) the existence of a tax deficiency; (2) willfulness; and (3) an affirmative act constituting evasion or attempted evasion of the tax. United States v. Bishop, 264 F.3d 535, 545 (5th Cir. 2001). While the Fifth Circuit has not directly addressed this issue, a number of circuit courts have held that it is the date of the latest act of evasion, not the due date of the taxes that triggers the statute of limitations. This peg is considered proper in a tax evasion offense because § 7201 criminalizes not just the failure to file a return or the filing of a false return, but the willful attempt to evade taxes in any manner. United States v. Anderson, 319 F.3D 1218, 1220 (5th Cir. 2003) (emphasis added) citing United States v. Ferris, 807 F.2d 269, 271 (1st Cir. 1986). See United States v. Dandy, 998 F.2d 1344, 1355 (6th Cir. 1993) (to hold otherwise would only reward a defendant for successfully evading discovery of his tax fraud for a period of six years subsequent to the date the returns were filed). As the filing in 1998 of the 1997 return constituted an affirmative act, likewise, these two counts of the indictment are likewise not time barred. Accordingly,
IT IS ORDERED that the Motion to Dismiss the Indictment as Time-Barred is DENIED.
Motion to Dismiss Indictment — Ownership Interest by Operation of Law
Defendants move the Court pursuant to Fed.R.Crim.Pro. 12(b)(3) to dismiss the indictment based on their contention that it does not state an offense, that a defense can be determined without the trial of the general issue, and that defendants cannot be lawfully convicted of the charges in the indictment. The thrust of this motion is that the defendants as attorneys under a written contingency fee contract obtained a "possessory interest" in the Bayou Aux Carpes tract by operation of Louisiana law and the United States Court of Appeals for the Fifth Circuit sufficient for § 1033 exchange treatment. In the alternative, defendants argue that they had a good-faith belief that the law so provided. Finally, they contend, that at a minimum, the law was so conflicting, unsettled or uncertain that there could be no criminal intent to violate the law. Thus, the gravamen of this motion is that defendants ask the Court to find as a matter of law that because of the condition of the law, there cannot be the requisite willfulness to constitute the commission of the crimes charged.Rule 12(b)(3) of the Federal Rules of Criminal Procedure provides a list of motions that must be raised before trial. Subsection (B) provides "a motion alleging a defect in the indictment or information — but at any time while the case is pending, the court may hear a claim that the indictment or information fails to invoke the court's jurisdiction or to state an offense." While defendants do not specifically provide the Court with the procedural basis for the instant motion, the Court construes it as one based on a failure to state an offense.
As stated in United States v. Kay, 359 F.3d 738 (5th Cir. 2004):
As a motion to dismiss an indictment for failure to state an offense is a challenge to the sufficiency of the indictment, we are required to "take the allegations of the indictment as true and to determine whether an offense has been stated."
"[I]t is well settled that an indictment must set forth the offense with sufficient clarity and certainty to apprise the accused of the crime with which he is charged. The test for sufficiency is "not whether the indictment could have been framed in a more satisfactory manner, but whether it conforms to minimum constitutional standards"; namely, that it "[(1)] contain the elements of the offense charged and fairly inform a defendant of the charge against which he must defend, and [(2)], enable him to plead an acquittal or conviction in bar of future prosecutions for the same offense."Id. at 742.
Certainly, taking all the allegations as true, the Government has alleged the necessary elements for conspiracy to defraud the United States in contravention of 18 U.S.C. § 371 and tax evasion in contravention of 26 U.S.C. § 7201. "A § 371 conspiracy requires an agreement between two or more persons to commit a crime and an overt act by at least one in furtherance of the agreement." United States v. Bordelon, 871 F.2d 491, 493 (5th Cir. 1989). The crime must be one against the United States. Here, as noted above, the Government has alleged that the defendants conspired "to defraud the United States by impeding, impairing, obstructing, and defeating the lawful government functions of the Internal Revenue Service of the Treasury Department in the ascertainment, computation, assessment, and collection of the revenue: to wit, defendants Harold E. Molaison's and David C. Loeb's 1996 income and self employment taxes." (Indictment ¶ 9). Furthermore, as previously stated, there is alleged at least one overt act done within the six-year statute of limitations. Thus, the indictment is sufficient with regard to Count One.
Likewise, as set forth above, the elements of the crime of tax evasion are (1) the existence of a tax deficiency; (2) willfulness; and (3) an affirmative act constituting evasion or attempted evasion of the tax. United States v. Bishop, 264 F.3d 535, 545 (5th Cir. 2001). Considering the difference alleged in the indictment between the income declared by the defendants for 1996 and the income alleged by the government and the tax liability based thereon, clearly the Government has alleged a tax deficiency on the part of both defendants. Likewise, the allegations concerning the filing in 1998 of the income tax form reporting the purchase of the replacement property in 1997 as well as the allegations of fraud in 2000, if taken as true, would constitute evasion or attempted evasion of the tax. As to the second element — willfulness — if the allegations are taken as true, which is required in the context of a motion to dismiss for failure to state an offense, it is clear that the indictment alleges this element as well with respect to both defendants.
The gravamen of defendants' motion, however, asks the Court to eschew the requirement to take the allegations as true — defendants contend that objectively the Court should find that they had a possessory interest sufficient to trigger their right to claim a § 1103 election. The Court is unwilling to do so. The language of the contract states clearly that the defendants were "to receive an undivided 25% in and to any recovery I/we may have in this matter, whether such recovery is obtained by settlement, compromise or judgment over and beyond in any residual wet land value in said property, all according to the provisions of La.R.S. 37:218." This provision does not state that defendants were granted 25% of the property; they were to receive 25% of any recovery whether by settlement, compromise or judgment beyond the residual wetland value, which had been assessed as $500 an acre. While defendants' argument that the taking by the Government had resulted in the landowners' deprivation of the usus and fructus of the land, leaving the only value in the abusus is a valid description of the legal effect of the declaration of the property as wetlands by the Government, it does not provide the basis for the argument that there was a transfer in that facet of ownership by virtue of the language of the contract.
Furthermore, pursuant to La.Rev.Stat. 37:218, the Louisiana statute concerning contingency fee contracts, defendants were precluded from obtaining the land itself. As stated by Judge Wisdom in Deshotels v. United States, 450 F.2d 961 (5th Cir. 1971) cert. denied 406 U.S. 920 (1972), a contingent fee coupled with an interest is "language indicative of special agency relationship and not transfer of present possessory interest." Id. at 966. In Deshotel, the Court described the effect of La.Rev.Stat. 37:218:
The effect of the statute was two-fold: first to legitimize the contingency fee contract, allowing the attorney to sue for his fee after successfully litigating his client's claim; second, to allow the parties to agree that the client cannot unilaterally end the litigation. In adjudicating contracts under this statute the Louisiana courts have held that contractual language to the effect that the attorney has a vested right in a portion of the expect recovery does not in fact presently vest anything. See Tennant v. Russell, 1949, 214 La. 1046, 39 So.2d 726. As the Court said in Succession of Vlaho, La.App. 1962, 140 So.2d 226,
. . . the attorney has no vested interest in the client's suit or claim and obtains no vested interest therein even where the contract in express terms grants such an interest to him.Id. at 965-66. Furthermore, the "unequivocal conveyance" that was found in McClung v. Atlas Oil Co., 1921, 148 La. 674, 87 So. 515 is not present in the language of this contract of employment.
Nonetheless, the Court does not by this ruling intend to eviscerate the defendants' defense with respect to "willfulness" in any respect. It has broached this subject only as a result of the defendants' argument seeking the dismissal based on this legal premise. Obviously, the defendants are entitled to argue to a jury as fact finder whether they had the requisite intent to commit the crimes alleged based on this contract. Accordingly
IT IS ORDERED that the Motion to Dismiss Indictment — Ownership Interest by Operation of Law (Doc. 18) is DENIED.