USA V. RODRIGO LOZANO (9th Cir. 2019) 17-50127 This 3-page opinion for a form of tax related fraud charged a violation of 18 U.S. Code §286, rather than the more often seen 18 U.S.C. § 371. The points that the defendant raised on appeal seemed instantly fatally dismissed as based upon grounds that are known to be not well received in similar tax based criminal appeals.
Defendant’s first best ground of appeal was an objection to a jury instruction that included a “deliberate avoidance” instruction when defendant was only charged with conspiracy. However, the defendant in this case was an experienced tax preparer and should have been aware of the impropriety of the criminal actions. In addition a look back into a government press release at the time of trial reveals that the tax preparer “filed false tax refund claims totaling over $53 million, of which the IRS had already paid out more than $23 million of refunds before the preparer’s operations were disrupted. If $53 million is not adequate to establish “deliberate avoidance,” of his responsibility how much more seriousness would be required?
The second ground for appeal, was somewhat “dead before arrival” and challenged well established principles that tax loss is computed based upon intended loss, and not ‘actual’ loss. Sentencing case law is clear that when a $53 million plan is put into motion and stopped only after a $23 million slips into the offender’s pocket, the loss is the $53 million plan put in motion. The U.S. Sentencing guidelines don’t operate upon a “catch me if you can” game that would be based upon a combined criminal incompetence added to prosecution agency ineffectiveness to produce the maximum sentence based upon tax loss. The fraudulent scheme’s potential magnitude after launch is the scalar magnitude upon which a prison sentence is computed.
The third ground for appeal, again an example of a well established principle, is that restitution is normally determined without the benefit of a jury finding, because tax loss and restitution are not separate findings of guilt required to be charged and found beyond a reasonable doubt in accord with Apprendi v. New Jersey, 530 U.S. 466 (2000). The court reminds us that restitution is not a question that is subject to those Apprendi protections, especially as established in. United States v. Green, 722 F.3d 1146, 1149-50 (9th Cir. 2013).
The final teaching point of this case is the fact that the a violation of 18 U.S. Code § 286 was charged rather than the more often seen 18 U.S.C. § 371. What is the difference? Here are the statutes:
“18 U.S. Code §371. Conspiracy to commit offense or to defraud United States.
If two or more persons conspire either to commit any offense against the United States, or to defraud the United States, or any agency thereof in any manner or for any purpose, and one or more of such persons do any act to effect the object of the conspiracy, each shall be fined under this title or imprisoned not more than five years, or both.” (Misdemeanor provision omitted)
“18 U.S. Code §286. Conspiracy to defraud the Government with respect to claims.
Whoever enters into any agreement, combination, or conspiracy to defraud the United States, or any department or agency thereof, by obtaining or aiding to obtain the payment or allowance of any false, fictitious or fraudulent claim, shall be fined under this title or imprisoned not more than ten years, or both.”
A first difference is that 18 U.S. Code §286 has a maximum of 10 years imprisonment while 18 U.S. Code §371 has a maximum of 5 years imprisonment. Given the size of tax loss its not difficult to understand at least one reason why 18 U.S. Code §286 was chosen, but what other factors were present? The Department of Justice Criminal Tax Manual (2001) outlines a specific difference. The Criminal Tax Manual 22.00 — FALSE, FICTITIOUS, OR FRAUDULENT CLAIMS, especially subsection 22.04 outlines a comparison entitled “18 U.S.C. § 286 — ELEMENTS.” The manual includes the following comments:
“18 U.S.C. § 286 that differ from the general conspiracy to defraud statute, 18 U.S.C. § 371. For a further discussion of the differences between section 286 and section 371, see United States v. Lanier, 920 F.2d 887, 891-95 (11th Cir. 1991). In order to establish a violation of 18 U.S.C. § 286, the following elements must be proved beyond a reasonable doubt:
- An agreement, combination, or conspiracy to defraud the United States;
- by obtaining or aiding to obtain the payment of any false, fictitious or fraudulent claim.”
“The crime proscribed by section 286 is the entering into an agreement to defraud the government in the manner specified. In order to convict, the government must prove that the defendants agreed to engage in a scheme to defraud the government and knew that the objective of the scheme was illegal.” (See discussion of United States v. Neder, 527 U.S. 1 (1999))
“The government need not charge or establish an overt act undertaken in furtherance of the conspiracy in order to prove a violation of section 286 because, unlike section 371, an overt act is not an element of a section 286 conspiracy. United States v. Lanier, 920 F.2d at 892.”
“The government must also prove that the conspirators agreed to defraud the government by obtaining the payment of false claims against the government. There is no requirement that the coconspirators actually obtained the payment or that the government prove that any steps were taken to consummate the filing of a false claim, so long as the existence of the agreement can be proved. As a practical matter, the proof in section 286 cases generally does not differ from proof in section 371 tax cases, because in most false claims conspiracy cases the existence of the agreement will be proved by acts that were undertaken in furthering the conspiracy or in consummating the attempt to obtain payment of the claim.”
So, 18 U.S.C. § 286 only requires one agreement and one obtaining or aiding to obtain a payment of “any false, fictitious or fraudulent claim.” The need to show an affirmative act could have resulted in multiple blame assignment and an attempt to explain or argue whether an act was in furtherance of the conspiracy or just an innocent act. It may also be that in lesser cases meriting a lesser sentence the government required the greater showing of an overt act so as not to ensnare the ostensibly less innocent. A jury might weigh a 10 year sentence more critically, along with the need for certainty of the establishment of a physical act as well as the intent for such physical act.
Lastly, note that neither 18 U.S.C. § 286 nor 18 U.S.C. § 371 mandate the time consuming direct IRS administrative safeguards associated with 26 U.S.C. §§ 7201, 7202, 7203, 7206, 7207, & 7212(a). Lozano was a massive fraud not really related to any legitimate tax account. The fraud included more than 12,000 false tax returns in an 18-month period in 2011 and 2012; suspicious looking identity and W-2 documents; and hundreds of IRS warning notices to Lozano that the fabricated tax returns and fabricated W-2s were invalid.
Other details of the scheme involved false Tax Identification Numbers (“ITINs”); fake identification documents such as Matricula cards supposedly issued by the Mexican government and birth certificates; fake W-2s; 3 or 4 fictitious dependents per return; refunds in the $3,000 to $4,000 range, along with claims of Child Tax Credit (“ACTC”). This case is valuable to show that a pair of quicker, and more powerful conspiracy tools can be employed in addition to the traditional 26 U.S.C. criminal tax statutes.
Department of Justice Criminal Tax Manual (2001)
Criminal Tax Manual 22.00 — FALSE, FICTITIOUS, OR FRAUDULENT CLAIMS ; 22.04 18 U.S.C. § 286 — ELEMENTS
https://www.justice.gov/usao-cdca/pr/oxnard-tax-return-preparer-convicted-53-million-tax-fraud-scheme (Friday, July 8, 2016 Conviction)
https://www.justice.gov/usao-cdca/pr/investigations-irs-lead-cases-against-tax-return-preparers (Monday, April 10, 2017 Sentence Announcement)
Link to Tax Evasion Avoidance Learning Blog: https://rebrand.ly/TaxEvasionAvoidance