United States v. Clayton ( 2007 )

REVISED November 19, 2007
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
October 29, 2007
No. 07-50002
Charles R. Fulbruge III
Clerk
UNITED STATES OF AMERICA
Plaintiff - Appellee
v.
CHARLES THOMAS CLAYTON
Defendant - Appellant
Appeal from the United States District Court for the
Western District of Texas, Austin
Before KING, GARZA, and BENAVIDES, Circuit Judges.
PER CURIAM:
Defendant-appellant Charles Thomas Clayton appeals from a jury verdict
finding him guilty of two counts of making and subscribing a false amended tax
return in violation of 26 U.S.C. § 7206(1) and six counts of willful failure to file
a tax return in violation of 26 U.S.C. § 7203. Clayton appeals his conviction on
the six counts of willful failure to file a tax return, arguing that the Internal
Revenue Code and tax regulations do not contain a valid exemption amount, and
as such there is no legal requirement to file a tax return. He also appeals his
conviction on the two counts of making and subscribing a false amended tax
return, arguing that: (1) the district court erred in denying requested jury
No. 07-50002
instructions pertaining to his defense and, (2) there is insufficient evidence to
support his conviction. For the following reasons, we AFFIRM.
I. FACTUAL AND PROCEDURAL BACKGROUND
Defendant-appellant Charles Thomas Clayton is a radiologist who resides
and practices in Texas. Clayton regularly filed federal income tax returns until
he associated with a tax protest organization in 1992. He did not file a 1992 tax
return or pay tax on his 1992 income. In October 1996, he pleaded guilty to
willful failure to file a federal income tax return for 1992 and was sentenced to
one year probation. He subsequently filed his 1997 and 1998 tax returns.
The events giving rise to the present conviction center on Clayton’s tax
returns for 1997 through 2004. In 2000, Clayton began associating with Larken
Rose, a tax protestor. Together they launched a website and produced a video
promoting the “§ 861 argument,” which asserted that the domestic income of
American citizens is not taxed via the Internal Revenue Code (“IRC”). Around
this time, Clayton also began writing letters to the Internal Revenue Service
(“IRS”) and government officials, demanding that they refute the § 861
argument, and meeting with accountants to ask questions about the federal
income tax code. Clayton received numerous replies explaining the fallacy of the
§ 861 argument, which Clayton patently refused to accept.
Clayton did not file returns for calendar years 1999 through 2004,
although he earned over $1.5 million during that period. He also filed amended
tax returns for 1997 and 1998, via two “Form 1040X, Amended U.S. Individual
Income Tax Return” forms, in which he reported his income as zero and
requested a refund of $167,596 in previously-paid tax. Specifically, in April
2001, he filed a Form 1040X for 1997 reporting that his adjusted gross income
was not $246,979, as he had original reported, but $0. He claimed a refund of
$82,296. In April 2002, he filed a Form 1040X for 1998 reporting that his
adjusted gross income was not $243,919, as he had original reported, but $0. He
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No. 07-50002
claimed a refund of $85,300. Clayton attached lengthy memoranda to each
amended return based on the § 861 argument.
On April 4, 2006, Clayton was charged with two counts of making and
subscribing a false Form 1040X Amended U.S. Individual Income Tax Return for
calendar years 1997 and 1998 in violation of 26 U.S.C. § 7206(1). The indictment
also charged him with six counts of willful failure to file a tax return for calendar
years 1999 through 2004, in violation of 26 U.S.C. § 7203. With respect to the
six counts of willful failure to file a tax return, Clayton filed a motion to dismiss
the indictment, arguing that the government could not satisfy the first element
of the offense, namely that he was required by law to file income tax returns for
these years, because the IRC does not establish a valid exemption amount that
triggers the duty to pay taxes. The district court denied this motion. Clayton
also submitted two jury instructions concerning his theory of defense to the two
counts of filing a false tax return. The district court rejected his instructions.
The jury found Clayton guilty of all eight counts on August 29, 2006. On
September 5, 2006, Clayton filed a Rule 29 motion for a judgment of acquittal on
the two counts of filing a false tax return, which the district court denied.
Clayton was sentenced to a total of sixty months incarceration. Subsequently,
we denied Clayton’s motion for release on bail pending appeal, concluding that
Clayton had not shown that his appeal raises a substantial question of law or
fact.
II. DISCUSSION
A. Whether Inclusion of the Consumer Price Index Negates the Duty
to File a Tax Return
Clayton argues that the district court erred in denying his motion to
dismiss the six counts of willful failure to file a federal tax return because the
court erroneously determined that the government satisfied the first element of
a 26 U.S.C. § 7203 violation—that Clayton was required to file a federal tax
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No. 07-50002
return. See United States v. Buckley, 586 F.2d 498, 503-04 (5th Cir. 1978)
(providing that in order to establish a violation of 26 U.S.C. § 7203, the
government must prove (1) that the defendant was required to file a return; (2)
that the defendant failed to file a return; and (3) that the failure to file a return
was willful); see also United States v. Matosky, 421 F.2d 410, 413 (7th Cir. 1970)
(same); Sansone v. United States, 380 U.S. 343, 351 (1965).
Clayton contends that no “law” requires the filing of a federal income tax
return because, in establishing the exemption amount in 26 U.S.C. § 6012,1 the
government failed to comply with the procedural requirements of the
Administrative Procedure Act (“APA”). 5 U.S.C. §§ 551-558. Clayton contends
that the statute’s reliance on the Consumer Price Index (“CPI”) to calculate the
exemption amount2 strips the exemption amount of legal force because the CPI
1
Title 26 U.S.C. § 6012 provides: “Returns with respect to income taxes under subtitle
A shall be made by . . . [e]very individual having for the taxable year gross income which
equals or exceeds the exemption amount.” 26 U.S.C. § 6012(a) (emphasis added).
2
The term “exemption amount” as used in § 6012 is defined by 26 U.S.C. § 151(d)(1):
“Except as otherwise provided in this subsection, the term ‘exemption amount’ means $2,000.”
26 U.S.C. § 151(d)(1). Section 151(d)(4) in turn provides for inflation adjustments to the $2,000
figure listed in § 151(d):
after 1989, the dollar amount contained in paragraph (1) shall be
increased by an amount equal to—
(i) such dollar amount, multiplied by
(ii) the cost-of-living adjustment determined under
[26 U.S.C.] section 1(f)(3) for the calendar year in
which the taxable year begins, by substituting
“calendar year 1998” for “calendar year 1992” in
subparagraph (B) thereof.
26 U.S.C. § 151(d)(4). Title 26 U.S.C. § 1(f)(3) provides that “the cost-of-living adjustment for
any calendar year is the percentage (if any) by which—(A) the CPI for the preceding calendar
year, exceeds (B) the CPI for the calendar year 1992.” 26 U.S.C. § 1(f)(3). Finally, 26 U.S.C.
§ 1(f)5 provides that “the term ‘Consumer Price Index’ means the last Consumer Price Index
for all-urban consumers published by the Department of Labor.” 26 U.S.C. § 1(f)(5).
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No. 07-50002
is compiled by the Department of Labor (“DOL”) and has not been promulgated
pursuant to the APA.3
We review questions of statutory interpretation de novo. United States v.
Adam, 296 F.3d 327, 330 (5th Cir. 2002).
Clayton’s argument that an exemption amount based on the CPI cannot
trigger tax liability is unpersuasive. Clayton’s obligation to file a federal income
tax return is derived from 26 U.S.C. § 6012. Section 6012, being a
congressionally enacted federal statute, is not the rule of an “agency” as the term
agency is defined by the APA. See Franklin v. Massachusetts, 505 U.S. 788, 800
(1992) (explaining that “[t]he APA defines ‘agency’ as ‘each authority of the
Government of the United States, whether or not it is within or subject to review
by another agency,’” but explicitly does not include the Congress) (citing 5 U.S.C.
§§ 701(b)(1), 551 (1)). The fact that § 6012 incorporates by reference the CPI,
which is compiled and published by an agency of the DOL, does not cause the
APA to be invoked. In this context, the CPI is simply an ascertainable numerical
standard, and there is no requirement that such a standard incorporated into a
statute be itself an enforceable rule of law. Cf. Ashcroft v. ACLU, 535 U.S. 564,
3
Clayton also argues that to the extent that the exemption amount is listed in the Form
1040 instruction booklet, under the APA, 5 U.S.C. §§ 551-558, this instruction booklet cannot
impose a legal duty on individuals because those exemption amounts are not published in the
Federal Register. See United States v. Harvey, 659 F.2d 62, 64 (5th Cir. 1981) (holding that
the Veterans Administration’s loan servicing manual had no force and effect of law because it
was not “promulgated in accordance with the procedural requirements of the [APA]”). Clayton
asserts that at best, the Form 1040 instruction booklet can be considered as an interpretive
regulation not subject to the procedures of the APA, but that an interpretive regulation cannot
form the basis for a civil or criminal action against Clayton. See Drake v. Honeywell, Inc., 797
F.2d 603, 607 (8th Cir. 1986) (“An action based on a violation of an interpretive rule does not
state a legal claim. Being in nature hortatory, rather than mandatory, interpretive rules can
never be violated.”).
Clayton’s Form 1040 instruction booklet argument is a red herring. Although the IRS
indeed publishes the annual exemption amounts in the Form 1040 instruction booklet and
other government publications, the government makes no claim that the exemption amount
listed in the Form 1040 instruction booklet has the force of law. Instead, the exemption
amount is calculated under a formula that is set forth in § 6012 of the IRC.
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No. 07-50002
585 (2002) (holding that the incorporation of “community standards,” by itself,
did not make the Child Online Protection Act unconstitutionally overbroad).
Furthermore, a statute providing the basis for criminal prosecution may
incorporate other provisions by reference. See United States v. Iverson, 162 F.3d
1015, 1021 (9th Cir. 1998). In United States v. Iverson, the Ninth Circuit held
that a state statute and municipal code that incorporated by reference federal
standards for the term “pollutants” did not fail for unconstitutional vagueness.
Id. The court reasoned that “a statute is not unconstitutionally vague merely
because it incorporates other provisions by reference; a reasonable person of
ordinary intelligence would consult the incorporated provisions.” Id.The Ninth Circuit’s rationale is persuasive here. The CPI is an objective
standard that has been approved by Congress, via the IRC, to adjust the bare
minimum exemption amount of $2,000 for inflation. A reasonable person of
ordinary intelligence, if he did not want to avail himself of the IRS documents
and notices publishing the applicable exemption amounts, would consult the CPI
and make the necessary calculations to determine his gross income for tax
purposes. See Pond v. Comm’r, 211 Fed. Appx. 749, 752 (10th Cir. 2007)
(unpublished) (explaining that the IRC’s provision of a specific number, $2000,
and a statutory formula for adjusting that number, adequately defines the
exemption amount and permits a taxpayer to be penalized for noncompliance);
see also United States v. Priest, Nos. 06-10438, 06-10447, 06-10448, 2007 WL
1961885, at *2 (9th Cir. July 5, 2007) (unpublished mem.) (holding that “the
alleged imprecision [caused by incorporating the CPI] in determining a
statutorily provided exemption does not void, as a matter of law, the obligation
to file a tax return”).
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No. 07-50002
B. Whether the Denial of the Defense’s Jury Instructions Was an
Abuse of Discretion
Clayton argues that the district court abused its discretion in denying the
jury instructions he requested on his theory of defense to the two counts of filing
a false income tax return.
We review a properly preserved challenge to jury instructions for an abuse
of discretion. United States v. Finley, 477 F.3d 250, 261 (5th Cir. 2007). “A
district court has broad discretion in framing the instructions to the jury and
this [c]ourt will not reverse unless the instructions taken as a whole do not
correctly reflect the issues and law.” United States v. McKinney, 53 F.3d 664,
676 (5th Cir. 1995). “While a defendant is entitled to an instruction on his
theory of defense, he has no right to particular wording.” United States v.
Simmons, 374 F.3d 313, 319 (5th Cir. 2004). “When considering an appeal for
failure to give defendant’s requested defense theory instruction, we review
‘whether the court’s charge, as a whole, is a correct statement of the law and
whether it clearly instructs jurors as to the principles of law applicable to the
factual issues confronting them.’” Id. (quoting McKinney, 53 F.3d at 676)
(emphasis added).
A person commits the felony of filing a false tax return in violation of
26 U.S.C. § 7206(1) when he “[w]illfully makes and subscribes any return,
statement, or other document, which contains or is verified by a written
declaration that it is made under the penalties of perjury, and which he does not
believe to be true and correct as to every material matter.” § 7206(1).
Clayton requested two jury instructions concerning his theory of defense
to the counts of filing a false income tax return for 1997 and 1998. Clayton’s
theory of defense at trial was that the two Form 1040Xs that he submitted to
amend his tax returns for 1997 and 1998 were not false returns, but rather were
proper and lawful claims for refunds. Clayton asserted that he filed Form 1040X
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No. 07-50002
returns to initiate a process whereby, if his claims for a refund were denied, he
could present in a later district court proceeding his § 861 argument that income
derived from sources within the United States is non-taxable income.
Accordingly, he attached to his two Form 1040X returns lengthy memoranda
explaining his § 861 argument. Clayton contends that whether the returns were
false or were claims for refunds was a central focus of the trial, and, based on the
evidence, the jury could have concluded these issues in favor of Clayton.
The jury instructions Clayton requested detail the Form 1040X filing
procedure and are as follows:
REFUND LAWSUITS
If a taxpayer has filed a return and paid taxes for a
prior year, he may seek a refund of taxes paid for that
year. This is accomplished by filing a Form 1040X
within 3 years thereof. If such a claim is denied, a
taxpayer may sue to recover the refund and may assert
in such refund lawsuit whatever legal arguments he
believes are valid.
REFUND SUITS
A taxpayer is barred from raising in a refund suit
grounds for recovery not clearly and specifically set
forth in his claim for a refund on Form 1040X, including
all attachments. All grounds upon which the taxpayer
relies must be stated in his claim for refund so as to
apprise the IRS of what to look into. Anything not
raised in the claim cannot be raised later in a suit for a
refund. The refund suit must be filed in either federal
District Court or a Claims Court, but cannot in [sic] Tax
Court.
Clayton’s argument lacks merit because his proposed jury instructions are
misleading. Clayton asserts that a Form 1040X cannot give rise to liability for
filing a false tax return because it is simply a form used to claim a refund. See
26 C.F.R. 301.6402-3(a)(2). His instructions would serve to bolster that
argument. Form 1040X is entitled “Amended U.S. Individual Income Tax
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No. 07-50002
Return” and is verified by a written declaration that it was made under penalties
of perjury. Because Form 1040X is used to report all changes or corrections to
a filed return, even when the form is used to claim a refund, it is still a return
that amends an originally filed return. As such, Form 1040X can give rise to
liability for filing a false tax return.
Our decisions, and those of other circuits, support the conclusion that
filing a false claim for the refund of taxes gives rise to legal liability for filing a
false tax return. See, e.g., United States v. Martin, 790 F.2d 1215 (5th Cir. 1986)
(defendant convicted of conspiracy to aid and assist in the preparation of false
tax returns and false tax refund claims in violation of 26 U.S.C. § 7206(2) and
18 U.S.C. §§ 371, 287); United States v. Ambort, 405 F.3d 1109 (10th Cir. 2005)
(defendant convicted of sixty-nine counts of aiding and assisting in the
preparation of false federal tax returns, in violation of 26 U.S.C. § 7206(2), for
advising individuals on how to complete Form 1040X and the nonresident alien
income tax return form). Moreover, use of a legal procedure to challenge tax
liability does not preclude criminal liability. In Ambort, where a defendant
advised clients to file Form 1040X to avoid tax liability, he attempted to avoid
conviction on charges of aiding and assisting in the preparation of false federal
tax returns by arguing that he was simply following established procedures for
obtaining a refund. Id. at 1116. The Tenth Circuit rejected his argument,
stating that the defendant could not “disguise his knowing disregard of
well-established legal principles and duties as a good faith procedural effort to
evade those principles and duties.” Id.We have already rejected, in an unpublished opinion, as “patently
frivolous” and “absurd” the argument that income derived from sources within
the United States is non-taxable income under § 861. Rayner v. Comm’r, 70 F.
App’x 739, 740 (5th Cir. 2003) (unpublished). As such, Clayton should not avoid
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No. 07-50002
liability for filing a false tax return simply because he used the procedural device
of Form 1040X to challenge his tax liability under the § 861 argument.
Accordingly, because Clayton’s proposed instructions would not clearly
instruct jurors about the effect of filing a false Form 1040X, the district court did
not abuse its discretion in denying them.4
C. Whether sufficient evidence was presented to find guilt beyond a
reasonable doubt
Clayton argues that the district court erred in denying his post-trial
motion for judgment of acquittal on the two counts of filing a false income tax
return for 1997 and 1998 because the evidence was insufficient to support his
conviction. Clayton first asserts that it is clear from the facts that he was
making a “claim for refund” of taxes previously paid and thus could not be
charged for filing false returns. He relies on our decision in United States v.
Levy, 533 F.2d 975 (5th Cir. 1976), for the proposition that liability cannot arise
from a form that is not authorized by a regulation. He contends that the Form
1040X cannot give rise to liability because it is identified as a claim for refund
in certain tax code provisions. He further contends that Form 1040X allows him
to file an amended tax return based on any legal argument.
Clayton next argues that the evidence that his amended returns were false
falls short of proving his guilt beyond a reasonable doubt. He contends that the
attachments that he filed with his amended returns advancing his § 861
argument make clear that his purpose in filing the amended returns was to
claim a refund, not to file a false return. He further asserts that where the
evidence is evenly balanced, entry of a judgment of acquittal is proper.
We review the district court’s denial of Clayton’s motion for acquittal de
4
Since Clayton’s appellate challenge to the jury instructions does not relate to the
element of wilfulness under § 7206(1), we find it unnecessary to determine whether his
proffered jury instructions, which were intended to explain and support his “theory of defense,”
would have created confusion as to the willfulness element.
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No. 07-50002
novo. United States v. Anderson, 174 F.3d 515, 522 (5th Cir. 1999) (citing United
States v. Payne, 99 F.3d 1273, 1278 (5th Cir. 1996)). In reviewing the sufficiency
of the evidence, we view the evidence and the inferences drawn therefrom in the
light most favorable to the verdict, and we determine whether a rational jury
could have found the defendant guilty beyond a reasonable doubt. Id. (citing
United States v. Burton, 126 F.3d 666, 669 (5th Cir. 1997); Payne, 99 F.3d at
1278). “The evidence need not exclude every reasonable hypothesis of innocence
or be wholly inconsistent with every conclusion except that of guilt, and the jury
is free to choose among reasonable constructions of the evidence.” Id. (quoting
Burton, 126 F.3d at 669–70). “Moreover, our standard of review does not change
if the evidence that sustains the conviction is circumstantial rather than direct.”
Id. (citing Burton, 126 F.3d at 670; United States v. Cardenas, 9 F.3d 1139, 1156
(5th Cir. 1993); United States v. Bell, 678 F.2d 547, 549 n.3 (5th Cir. Unit B
1982)).
A person commits the felony of filing a false tax return in violation of 26
U.S.C. § 7206(1) when he “willfully makes and subscribes any return, statement,
or other document, which contains or is verified by a written declaration that it
is made under the penalties of perjury, and which he does not believe to be true
and correct as to every material matter.” § 7206(1).
Clayton’s initial arguments, which essentially contend that the Form
1040X cannot give rise to legal liability for filing a false tax return, have no
merit. We have rejected similar arguments brought under Levy that certain
schedules appended to tax returns could not give rise to legal liability for filing
a false tax return. United States v. Damon, 676 F.2d 1060, 1063–64 (5th Cir.
1982) (holding that a false Schedule C is an “integral” part of a tax return and
is incorporated therein by reference, thus giving rise to liability under § 7206(1));
United States v. Taylor, 574 F.2d 232, 237 (5th Cir. 1978) (same as to Schedules
E and F). Also, as we previously discussed, filing a false claim for the refund of
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No. 07-50002
taxes may give rise to legal liability for filing a false tax return, and the mere
use of the correct legal procedure will not preclude liability. See Ambort, 405
F.3d at 1116 (stating that the defendant “cannot disguise his knowing disregard
of well-established legal principles and duties as a good faith procedural effort
to evade those principles and duties”).
Furthermore, after reviewing the evidence in the light most favorable to
the verdict, we conclude that a jury reasonably could have found Clayton guilty
on Counts 1 and 2 in the indictment. The government’s theory of the case was
that Clayton had been constructing a putative defense centered around his sham
§ 861 argument as early as June 2000, before ever having filed a false Form
1040X. The evidence presented, and reasonable inferences therefrom, revealed
that Clayton knew that his § 861 argument was invalid under the law, and
therefore, that his amended returns based on that argument, were false. The
government’s evidence included Clayton’s 1997 and 1998 original returns,
stating his income as $246,979 and $243,919, respectively, juxtaposed with
Clayton’s Form 1040X returns, purporting that his adjusted gross income for
1997 and 1998 was, in fact, zero.
Additionally, the evidence showed that before Clayton filed his first Form
1040X in April 2001, seeking a refund from 1997, he received at least three
responses to letters he sent demanding answers to his § 861 argument, which all
invalidated the theory. Clayton received a letter from the United States
Department of Treasury on December 21, 2000, stating that a U.S. citizen is
subject to tax on his or her worldwide income, and that the source rules of
§§ 861–865 of the IRC do not limit or exclude items from consideration for
purposes of determining a U.S. citizen’s taxable income. Clayton also received
correspondence from David Cay Johnston, a New York Times reporter, who told
him the § 861 argument was a fantasy, pure and simple. When, Clayton
challenged this conclusion based on the fact that Johnston was not a lawyer,
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No. 07-50002
Clayton received yet another response from Johnston stating that he asked
lawyers, including tax lawyers, and everyone agreed that taxes are owed. Also,
testimony from Clayton’s CPA David Smith revealed that he advised Clayton
that the theory was invalid. However, Clayton dismissed these replies and
advice and submitted Form 1040X based on his § 861 argument anyway.
The evidence also showed that before sending his second Form 1040X in
April of 2002 to request a refund for the original 1998 tax return, Clayton
received at least three more responses to his letters, similarly putting him on
notice that his § 861 argument was flawed. In May of 2001, he received two
emails from Tax Help stating that the obligation to pay taxes is not optional, the
average citizen knows taxes are required, and income includes all income
worldwide. In July 2001, the IRS sent him another letter with an attached
Notice 2001-40 stating that those who continue to follow the § 861 argument in
refusing to file returns may well be subject to criminal penalties. Again, Clayton
testified that he disregarded these letters as not addressing the issue he
presented.
Additionally, by Clayton’s own written words, it was reasonable for a jury
to conclude, beyond a reasonable doubt, that he willfully filed what he
subjectively knew were false amended returns. The evidence revealed that in
June 2000, around the time Clayton initiated his research regarding the § 861
argument, he sent an email to a fellow tax protester, Larken Rose, stating that
“by God (or whatever) I am going to screw [the IRS] for screwing me.” In the
same month, Clayton sent Rose another email discussing how to deceive the
online public into thinking more than just a few people were advocating the
§ 861 argument. He ended that email with the line: “Sometimes (most of the
time) I am so full of shit it amazes me.” In yet another email exchange with
Rose, Clayton seemed to be constructing a defense to future litigation when he
discussed documenting the “solid stuff ” about the § 861 argument, and then
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No. 07-50002
stated, “if they were ever stupid enough to bring it to court, that knowing what
I do about what can be dealt with in criminal court (which is ANYTHING
convinced me of my position) that all this stuff would be brought out formally
and kill them dead.” Then, in March of 2001, Clayton mentioned taking
“proactive steps” to protect himself from indictment in another email to Rose.
On this evidence, a rational jury could have found beyond a reasonable
doubt that Clayton knew his Form 1040X returns were false under the tax laws
and wilfully filed them in violation of 26 U.S.C. § 7206(1) to obtain refunds for
1997 and 1998.
III. CONCLUSION
For the foregoing reasons, we AFFIRM the district court’s judgment.
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