Tax Evasion - Case Study

Judgment of Acquittal in a Federal Criminal Tax Evasion Case in Dallas

On January 15, 2020, after seven days of trial, Judge Karen Gren Scholer of the United States District Court for the Northern District of Texas entered a judgment of acquittal for my client on all charges in a federal criminal tax evasion case. Judge Scholer did this after all of the evidence had been presented to the jury, but before the jury got to decide the case. There were two other defendants whose cases went to the jury. The jury found both of them guilty on all counts. The case is United States v. Thomas Selgas et al., No. 3:18-CR-00356, in the United States District Court for the Northern District of Texas, Dallas Division.

The case involved a fascinating look at the tax protester, or “tax denier” movement, as well as the legal intent that the Government is required to prove in tax evasion cases.

According to the Government, the lead defendant was a participant in the tax protester or “denier” movement. People who are part of this movement believe that the federal government has no legal or constitutional power to impose an income tax on them. As a result, they tend to use every conceivable tactic to fight the IRS, including many that the Government believes are illegitimate. I represented the lead defendant’s wife. The other defendant was a lawyer who advised the lead defendant.

An unusual aspect of this case involved the use of American Eagle gold coins. These are gold coins made by the U.S. Mint. They are made of pure gold. They come in different weights and denominations, but the ones in this case are a quarter ounce of gold and have a face value of $10.00. The coin itself has the words “United States of America,” “E Pluribus Unum,” and “Ten Dollars.” Although the face value of the coin is $10.00, the market value of the coin depends on the price of gold and is normally much higher than the face value. $450.00 is not unusual.

The lead defendant arranged for himself and his wife to receive a total payment with a market value of over $1 million in these gold coins. He ultimately filed a written statement, instead of a tax return, for himself and his wife, in which he argued that each coin should only count as $10.00 of income, even though its market value was much higher. Using the face value of the coins, rather than their market value, resulted in a much lower amount of income and therefore a much lower amount of tax due, according to his tax statement.

There was evidence at trial that he attempted to pay his taxes in gold coins. As an example, suppose he received ten $10.00 gold coins with a total face value of $100.00. According to the evidence, he attempted to pay his tax rate percentage in gold coins. So, if his tax rate was 20 percent, he would have attempted to pay the IRS two gold coins (20 percent of ten coins is two coins, or 20 percent of $100.00 is $20.00, which is two $10.00 coins). There was also evidence that the tellers at the IRS windows where he took the coins refused to accept them.

There was also evidence that the lead defendant had been fighting the IRS for years over his alleged failure to pay taxes for three earlier tax years. Judges and courts had sometimes described his arguments in those cases as “frivolous.”

The lead defendant and the lawyer also had an arrangement in which all, or nearly all, of the lead defendant’s and his wife’s bills were paid by credit card. The bills were sent to the lawyer, who would cause a sale of enough of the lead defendant’s gold coins to pay the bills. The sales proceeds would be held in the lawyer’s client trust account to pay the lead defendant’s bills. The Government argued that this was an attempt to hide the money so that the IRS would have difficulty seizing it to cover the tax debt. The lead defendant argued that it was a way to keep his money in gold for as long as possible and that he believed that gold would hold its value even if there was a financial crash.

The lead defendant and his wife also bought their house using gold coins, and the lead defendant had fought appraisals of the house in court in which he had argued that the appraisal value should be based on a purchase price using the face value, rather than the market value, of the gold coins used to buy the house. That argument was rejected by the courts.

I represented the lead defendant’s wife. She had participated in the arrangement with the gold coins and had signed letters and tax documents. In fact, her husband had made her a limited partner in the partnership that received the funds from which the $1 million was obtained.

Most people have heard of the expression, “Ignorance of the law is no excuse.” That is true most of the time, but it is not true in criminal tax evasion cases. In a case about a tax protester, the United States Supreme Court ruled in Cheek v. United States, that it is a defense to tax evasion that a defendant believes, in good faith, that he or she is not violating the tax laws, even if that belief is unreasonable or irrational. However, the Supreme Court also ruled that a belief that the tax laws are invalid or unconstitutional is not a good faith belief that is a defense.

In this case, the Government therefore had to prove, beyond a reasonable doubt, that each defendant “willfully” violated the tax laws—that is, that they knew they were violating the law and did not have a good faith belief that they were in compliance, except that their belief could not be based on a belief that the tax laws are invalid or unconstitutional.

After the close of all of the evidence, including testimony from my client, the wife, the judge granted a judgment of acquittal. The judge ruled that the evidence was not sufficient, even if considered in the light most favorable to the Government, for a reasonable jury to conclude that my client was guilty beyond a reasonable doubt. Therefore, my client was declared not guilty before the jury was allowed to consider whether she was guilty or not.

This was an extraordinary result. It is extremely rare for a federal judge to make a ruling like this, but it was absolutely correct. The Government had to prove “willfulness.” In the tax context, this requires proof that the defendant believed his or her conduct was illegal, other than based on an invalidity or constitutional argument. As to my client, we showed that such evidence was lacking.

In any federal criminal case—especially criminal tax cases—it is crucial for a criminal defense lawyer to have a thorough understanding of the applicable law. Sometimes, the law about the level of criminal intent the Government must prove, and the evidence about the defendant’s intent, can be complicated. That is one important reason why anyone facing federal criminal charges should hire a skilled and experienced federal criminal defense lawyer.

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