The Tenth Circuit rejected a taxpayer's argument that his conviction for tax obstruction under Sec. 7212(a) should be overturned because he actually was guilty of tax evasion under Sec. 7201.
Jerold Sorensen, an oral surgeon in California, from 2002 to 2007 began to use a pure trust organization (PTO) system that was marketed by Financial Fortress Associates (FFA). He learned about the PTO system on the internet and through seminars run by FFA.
Under the PTO system, FFA established six trusts for Sorensen. Sorensen then had an FFA affiliate open a bank account in the trusts' names; he named the bank account "Northside Management." Though the Northside Management account was in the trusts' names, Sorensen had authorization to withdraw funds from the account for whatever he wished. Under the system, he also retitled his personal residence, dental practice, and dental equipment in the trusts' names and then had his dental practice pay the trusts to rent those assets. In addition, he began depositing his income from his dental practice directly into the trusts' bank account.
On his personal tax returns, Sorensen took business expense deductions for the rent paid to the trust. He did not file tax returns for any of the trusts for the years in question. He obtained an employee identification number to use with the Northside Management account, but he did not file a partnership return for Northside Management.
Soon after establishing the trusts, Sorensen asked his longtime accountant to review the PTO system. The accountant determined that the system was a scheme and told Sorensen so. She prepared his return for that year but included a disclosure statement regarding the trusts. Sorensen thereafter had his business returns prepared by an accountant referred to him by FFA and his personal returns by H&R Block. In 2007, he asked another CPA (his son's father-in-law) to review his situation. The CPA told Sorensen that he believed that the trusts set up under the PTO system were "a complete sham," and he prepared amended returns for Sorensen. However, Sorensen did not file these amended returns for another two years.
In 2008, the IRS sent Sorensen a letter by certified mail notifying him that he was the target of a criminal investigation. Sorensen refused to sign for the letter. He did so because an FFA-seminar speaker had advised against accepting certified mail from the IRS if a client did not know what the mail contained. Later, when an IRS agent came to his office, he locked the doors and refused to allow her to enter. When he realized that the IRS agent was investigating him, he followed FFA's advice and sent her a public-servant's questionnaire, requesting personal information including her home address, birthday, and Social Security number.
The IRS's investigation of Sorensen eventually led to a federal grand jury's indicting him on the charge of violating the omnibus clause of Sec. 7212(a) by "corrupt[ly] endeavor[ing] to obstruct or impede due administration of the Internal Revenue laws. . . ." At trial, the primary issue was whether the statute required knowledge of illegality and whether Sorensen had acted with such knowledge. Sorensen testified that during the time charged in the indictment, he believed the PTOs were legal. The defense argued that Sorensen was a gullible, naïve man, who was unaware that his conduct violated the law.
The jury did not buy this story and convicted him of corruptly endeavoring to obstruct or impede the due administration of the internal-revenue laws, in violation of Sec. 7212(a)'s omnibus clause. The district court sentenced him to 18 months in prison, half of the statutory maximum.
Sorensen appealed his conviction to the Tenth Circuit. In an interesting turn, among other things, he argued that his conduct amounted to evading taxes and thus was punishable under Sec. 7203, which, he claimed, precluded the government from prosecuting him for obstructing or impeding the tax laws under Sec. 7212(a).
The Tenth Circuit's Decision
The Tenth Circuit affirmed Sorensen's conviction, finding that the government could prosecute him for tax obstruction under Sec. 7212(a) regardless of whether he could have been charged and convicted for tax evasion under Sec. 7203. In reaching its conclusion, the court discussed why tax evasion and tax obstruction are different offenses and whether U.S. Department of Justice (DOJ) guidelines or the government's prior prosecutions under Sec. 7212(a) limited what the government could prosecute Sorensen for under the statute.
The Tenth Circuit explained that to establish a violation of Sec. 7212(a)'s omnibus clause, the government must prove that the defendant "corruptly . . . endeavors to obstruct or impede, the due administration of [the Internal Revenue Code]." In this context, to act "corruptly" is to act with intent to gain an unlawful advantage or benefit either for oneself or for another, and the court said that even actions that are otherwise legal violate Sec. 7212(a) if a person commits them to secure an unlawful benefit for himself or others.
Sorensen argued that the government improperly charged him with tax obstruction under Sec. 7212(a) when its evidence instead showed tax evasion under Sec. 7201. He contended that when a taxpayer's conduct results in evaded taxes, the government must charge tax evasion and not obstructing or impeding the due administration of the Internal Revenue Code. According to Sorensen, obstruction requires something more than simply tax evasion, false tax filings, and nonfilings, which Secs. 7201 and 7203 prohibit. The government countered that because Congress had enacted separate tax-crime statutes, if an act is an offense against two statutes, the government is free to prosecute under either statute.
The Tenth Circuit agreed with the government. It determined that tax evasion and tax obstruction are not the same crime because each crime has a different mens rea requirement ("corruptly" for tax obstruction and "willfully" for tax evasion) and the punishment for each crime is also different (up to three years in prison for tax obstruction and up to five years for tax evasion).
Sorensen also argued that the government did not have discretion to charge him under Sec. 7212(a) based on guidelines found in the DOJ Tax Division's Criminal Tax Manual, Section 3.00, Tax Division Directive No. 129 (2004), which instructed that the charge "should not be used as a substitute for a charge directly related to tax liability—such as tax evasion or filing a false tax return—if such a charge is readily provable." The court first found that it would not second-guess the government's view of whether tax evasion was readily provable in Sorensen's case. Second, citing Supreme Court precedent, it observed that criminal law is properly construed by the courts, not by the government, so the government's views on what should or could be charged were not entitled to deference and, moreover, the government's failure to comply with an internal departmental guideline was immaterial.
Sorensen next argued that Sec. 7212(a) should not apply because in previous cases involving the application of Sec. 7212(a) to tax-evasion conduct, the defendant typically was a tax professional engaging in the conduct on someone else's behalf. He cited Popkin, 943 F.2d 1535 (11th Cir. 1991), in which an attorney was being prosecuted for creating an offshore corporation for his drug-dealer client to help the client repatriate criminal proceeds and avoid tax, as support for his point. The court, however, found that the focus of Sec. 7212(a) should be on the conduct committed, not who committed it, and that it would make little sense to conclude that the people who helped Sorensen with the PTO scheme could violate Sec. 7212(a), but Sorensen could not.
Finally, in a similar vein, Sorensen argued that the court should limit the scope of Sec. 7212(a) because all the prosecutions in the Tenth Circuit under that Code section have involved "prototypical acts of obstruction," such as filing a false claim of lien against an IRS agent's property, giving an agent a false, backdated loan document, and sending threatening and harassing notices and bills to IRS agents. The court asserted that the plain language of Sec. 7212(a) allowed the government to charge Sorensen under the statute, and that the government's earlier choices of whom to prosecute under the statute meant nothing.
As is discussed in this case, Sec. 7212(a) can be, and has been, used to punish a practitioner's misconduct on behalf of a client. Since the definition of "corruptly" is so broad and the universe of actions that the government potentially can prosecute under the statute is so large, practitioners should not take the possibility of a government prosecution for tax obstruction lightly.
Sorensen, No. 14-1366 (10th Cir. 9/14/15)