Fourth Circuit Affirms Federal Tax Conviction

Jul 09, 2012   

In United States v. Jinwright, available here, the Richmond, Virginia based 4th Circuit Court of Appeals affirmed two tax convictions. The facts of the case are as follows:

Mr. and Mrs. Jinwright were former co-pastors of the Greater Salem Church in North Carolina. When Mr. Jinwright first became pastor he earned about $10,000 per year. Mr. Jinwright’s salary had increased to  about $148,000 in 2001, and about $300,000 in 2007. Between 2001 and 2007, Mr. Jinwright’s employer provided him with substantial taxable benefits that he failed to report and/or underreported on his personal income tax returns. When taking into account Mr. Jinwright’s reported and unreported compensation between 2001 and 2007, he earned almost $3.9 million. During that same time period Mrs. Jinwright received similar compensation from the church amounting to nearly $1 million.

Mr. and Mrs. Jinwright also earned income separate and apart from the church, such as compensation for speaking engagements, which,  of course, they failed to report on their tax returns. The church, like many others, applied for tax exempt status under Section 501(c)(3) of the Internal Revenue Code, available here.

In 2002, the church understated Mr. Jinwright’s total compensation. The IRS denied the tax exempt status because Mr. Jinwright’s compensation was too high.  A second application by the church was filed in 2003, listing Mr. Jinwright’s compensation as $600,000. However, in contrast to the 501(c)(3) application, Mr. Jinwright reported on his personal income tax return compensation of $280,000.

Not surprisingly, the IRS began an audit and concluded that Mr. and Mrs. Jinwright had failed to properly report taxable income of approximately $2 million between 2002-2007, and federal criminal indictments soon followed.  

Mr. and Mrs. Jinwright were charged withparticipating in a Kleinconspiracy, 18 U.S.C. § 371, available here, of three counts of tax evasion for the years 2005-2007, 26 U.S.C. § 7201, available here, and aiding and abetting tax evasion under the federal aiding and abetting statute, 18 U.S.C. § 2, available here.

Mr. Jinwright was convicted, but not Mrs. Jinwright, of three counts of tax evasion for the years 2002-2004, as well as six counts of filing a false tax return, 26 U.S.C. § 7206(1), available here.

At sentencing, the district court concluded that certain sentencing factors were present, specifically that:  (i) a tax loss of $1.3 million for the period from 1998-2008 (based on relevant conduct), resulting in a base offense level of 22 under 2T1.1 of the U.S. Sentencing Guidelines, available here; (ii) sophisticated means enhancement, a 2 level increase; (iii) an abuse of trust enhancement, a 2 level increase, and (iv) an obstruction enhancement, a 2 level increase.  For a total base level of 28, see
here, Mr. Jinwright was sentenced to 105 months, and Mrs. Jinwright to 80 months.

On appeal, the Fourth Circuit addressed the defendants contentions of error and affirmed in all respects.  The relevant analysis is as follows:

First, the Court affirmed the trail court’s use of the willful blindness instruction and the contents of the instruction.  The Court agreed with the Jinwrights that the request for willful blindness instructions should be handled with care, but declined to provide a categorical exclusion of a willful blindness instruction as no court had previously adopted such a rule.  The Fourth Circuit relied on Global-Tech Appliances, Inc. v. SEB S.A., 131 S. Ct. 2060, 2069 (2011), available here, for the proposition that "[t]he traditional rationale for [the willful blindness] doctrine is that defendants who behave in this manner are just as culpable as those who have actual knowledge."

The Fourth Circuit also held that "the district court properly set a high bar in its instruction for the government to prove willful blindness, while simultaneously recognizing the powerful evidence of such blindness in this case." The Court found that the conditions for use of the jury instruction were present: “Willfulness with respect to tax crimes has been defined in essence as a knowledge requirement, or the "intentional violation of a known legal duty." United States v. Pomponio, 429 U.S. 10, 12 (1976) (per curiam), available here. When applied, the doctrine of willful blindness permits the government to prove knowledge by establishing that the defendant "deliberately shield[ed] [himself] from clear evidence of critical facts that are strongly suggested by the circumstances." Global-Tech, 131 S. Ct. at 2068-69. Willful blindness may satisfy knowledge in a criminal tax prosecution, where "the evidence supports an inference that a defendant was subjectively aware of a high probability of the existence of a tax liability, and purposefully avoided learning the facts pointing to such liability." United States v. Poole, 640 F.3d 114, 122 (4th Cir. 2011). 

According to the Fourth Circuit, these conditions were satisfied in the Governments prosecution of the Jinwrights. Mr. Jinwright denied knowledge of his legal obligations and testified that he and Mrs. Jinwright did not know that their tax returns contained a deficiency. But the Government presented evidence to suggest that defendants were aware of a "high probability" that they were understating their income to the IRS. The Fourth Circuit further discussed and affirmed the content of the willful blindness instruction, stating as follows:

The trial court’s instruction here was thus faithful to the willful blindness standard set forth in Global-Tech.  Global-Tech synthesized the case law on willful blindness to identify "two basic requirements": "(1) the defendant must subjectively believe that there is a high probability that a fact exists and (2) the defendant must take deliberate actions to avoid learning of that fact." Global-Tech, 131 S. Ct. at 2070. The district court included this relevant language here, instructing the jury: "If you find that the defendants were aware of a high probability" that they were violating the law "and that the defendants acted with deliberate disregard to these facts, you may find the defendants acted knowingly" (emphasis added). The Jinwrights were convicted before the Global-Tech decision, but the language of the willful blindness instruction still tracks the factors enumerated there by the Supreme Court.

The Fourth Circuit also addressed the "gift issue" as to whether a gift is taxable and the jury instruction appropriate for the issue. The defendants claimed that at least some of the income was not taxable under which Section 102(a), available here. However, payments to employees from employers cannot be treated as gifts, 26 U.S.C. § 102(c).  The Court held that the instruction was not erroneous or an abuse of discretion, insofar as the jury was left to determine the factual issue as to whether the defendant received payments from their employer (the church) instead of the parishioners, which the 4th Circuit concluded the defendants conceded.

Next, the defendants argued that some income was not taxable, and hence not reportable on a tax return, if they were reimbursements for employer-related expenses.  More specifically, the defendants argued that the Government had to prove that the payments they received were not reimbursements, but in contrast, the Government contended that it must merely prove the payments and then the burden was shifted to the defendants to prove that the payments were reimbursements.  The Court held that once the prosecution introduced credible evidence that there was income, the taxpayer was required to rebut this showing by introducing credible evidence showing that there were deductions reducing or eliminating the tax due.

The Court next turned to the claims of sentencing error, but dispensed with all of these issues quickly and we will not discuss them here.

In sum, this case shows that the Department of Justice and the IRS have been and continue to be aggressive in the areas of unreported income.  Further, inconsistent positions taken on filings with the IRS, in this case the defendants personal income tax returns and the 501(c)(3) application by the church, continue to provide the IRS with initial evidence of income tax evasion, which often, as in this case, lead to an IRS audit and/or criminal investigation.

The attorneys at Fuerst Ittleman, PL have extensive experience litigating against the IRS and the U.S. Department of Justice, in addition to addressing taxpayers’ needs during IRS audits.  You can reach an attorney by emailing us at: contact@fidjlaw.com or by calling us at 305.350.5690.