United States v. Newell, Donald ( 2001 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 00-3180
United States of America,
Plaintiff-Appellee,
v.
Donald Newell,
Defendant-Appellant.
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 99 CR 849-1--Elaine E. Bucklo, Judge.
Argued January 12, 2001--Decided February 9, 2001
Before Posner, Ripple, and Evans, Circuit Judges.
Posner, Circuit Judge. The defendant was
convicted of willfully filing false federal
income tax returns for 1994 for both himself and
a Subchapter S corporation, LPM, Inc. (which
we’ll call "Inc." for a reason that will become
evident in a moment), in violation of 26 U.S.C.
sec. 7606(1). He was sentenced to 30 months in
prison and fined $60,000. His principal ground
for appeal is that the government was allowed to
proceed on an "assignment of income" theory
without having disclosed it in the indictment,
without a jury instruction on it, and without
proving it beyond a reasonable doubt.
Newell was president and 50 percent shareholder
of Inc., a large commodity trader. In 1993, irate
that the Clinton Administration was planning to
increase federal income tax rates for high
earners like himself, Newell established a
Bermuda corporation, LPM, Ltd. ("Ltd."), to which
he planned to funnel income that would otherwise
be received by Inc. Ltd. was to be "a nameplate
on the door," "a dummy corporation"; "it wasn’t
going to do anything" except receive income
intended for Inc.
The Abu Dhabi Investment Authority (ADIA) had
become a client of Inc.’s in 1990 and had made a
contract pursuant to which it owed Inc. more than
$1.3 million for services that Inc. had rendered
to it in 1993. Newell directed ADIA to send the
money to one of Ltd.’s bank accounts in Bermuda,
and ADIA did so early in 1994. Inc. did not
report this money as income; nor did Newell,
though he was obligated to report his share of
Inc.’s income because Inc. was a Subchapter S
corporation. When Inc.’s controller, who knew
that ADIA had been billed by Inc. for the
services rendered in 1993, asked Newell where the
money was, Newell was evasive; and when
nevertheless the controller recorded the money as
a receipt to Inc. he told her to remove the entry
from Inc.’s books. He denied to an outside
accountant that Ltd. had been involved in any
significant transactions, or had any other
activity, in 1994, and also falsely denied, on
his income tax return for that year, that he had
signatory auhority over any foreign bank
accounts. To another accountant, who stumbled
across a record of Ltd.’s receipt of the ADIA
money, Newell lied by saying that the money had
not been recorded as income to Inc. because it
was being claimed by a Swiss company.
Newell argues that the government, in contending
that he should have reported the ADIA fee as
income to Inc. and derivatively to himself, is
necessarily relying on the "assignment of income"
concept announced in Lucas v. Earl, 281 U.S. 111(1930). Lucas held that a taxpayer cannot escape
his tax obligations by assigning income that he
has earned to another person. Suppose ADIA owed
money to Inc. that would be income to Inc. if and
when Inc. received the money, and suppose Inc.
told ADIA to send the money to a favorite charity
of Newell’s; the money would still be income to
Inc., even though Inc. had never received it and
indeed had formally assigned the right to receive
it to the charity. Newell does not deny any of
this. Rather, he argues that if Inc. assigned its
contract with ADIA to another entity, namely
Ltd., the income generated by that contract would
be taxable income to the assignee, not to Inc.,
just as, if an author assigned the copyright in
one of his books, the assignee would be the
person liable for income tax on the royalties
generated by the copyright unless (as is common)
the author had reserved the right to receive the
royalties. Meisner v. United States, 133 F.3d
654, 656-57 (8th Cir. 1998); compare Harper &
Row, Publishers, Inc. v. Nation Enterprises,
Inc., 471 U.S. 539, 547 (1985).
But Newell is painting with much too broad a
brush. To shift the tax liability, the assignor
must relinquish his control over the activity
that generates the income; the income must be the
fruit of the contract or the property itself, and
not of his ongoing income-producing activity. See
Blair v. Commissioner, 300 U.S. 5 (1937); Greene
v. United States, 13 F.3d 577, 582-83 (2d Cir.
1994). This means, in the case of a contract,
that in order to shift the tax liability to the
assignee the assignor either must assign the duty
to perform along with the right to be paid or
must have completed performance before he
assigned the contract; otherwise it is he, not
the contract, or the assignee, that is producing
the contractual income--it is his income, and he
is just shifting it to someone else in order to
avoid paying income tax on it. To state the same
point differently, an anticipatory assignment of
income, that is, an assignment of income not yet
generated, as distinct from the assignment of an
income-generating contract or property right,
does not shift the tax liability from the
assignor’s shoulders, Helvering v. Horst, 311
U.S. 112, 118 (1940); Boris I. Bittker et al.,
Federal Income Taxation of Corporations and
Shareholders para. 7.07 (4th ed. 1979), unless,
as we said, the duty to produce the income is
assigned also, so that the assignor is out of the
income-producing picture. In Lucas v. Earl, where
the taxpayer had assigned an interest in his
future income to his wife, the Court held that
when the income came in, it was his income,
because it was generated by his efforts,
including his decisions about what to charge for
his services and what expenses to incur. See also
Commissioner v. Sunnen, 333 U.S. 591, 608-10
(1948); Greene v. United States, supra, 13 F.3d
at 582. Similarly, the income on the contract
with ADIA was generated by the exertions of Inc.,
not of Ltd.
This case is actually much weaker for the
taxpayer than Lucas v. Earl. At least there the
assignment was to a separate person, the
taxpayer’s wife. Here the assignment was to an
alter ego of the taxpayer, as in Kluener v.
Commissioner, 154 F.3d 630, 636 (6th Cir. 1998).
It dignifies the taxpayer’s defense unduly to say
that he was prosecuted under the "assignment of
income" doctrine, a doctrine that presupposes two
parties, an assignor and an assignee, where here
there was only one, a self-assignor. The
assignment was a sham. For that matter, it is
unclear whether there ever was an assignment.
Newell argues that the government was obliged to
prove that Inc. had not assigned its contract
with ADIA to Ltd. We have just seen that even if
there was an assignment, it would not let him off
the hook. And his argument flouts the principle
that a plaintiff’s burden, even in a criminal
case, is not to disprove every possibility that
might exonerate the defendant, Patterson v. New
York, 432 U.S. 197, 208 (1977); United States v.
Petty, 132 F.3d 373, 378 (7th Cir. 1997);
Stanford v. Kuwait Airways Corp., 89 F.3d 117,
124 (2d Cir. 1996); United States v. Restrepo,
884 F.2d 1294, 1296 (9th Cir. 1989), but merely
to present enough evidence to allow a rational
jury to infer guilt beyond a reasonable doubt. A
criminal defendant can always require the
government to prove his guilt to the jury’s
satisfaction, no matter how compelling the
government’s evidence. But failure to produce
evidence to rebut a strong case by the
prosecution will defeat any argument that the
evidence of guilt was insufficient. See, e.g.,
United States v. Kelly, 991 F.2d 1308, 1315 (7th
Cir. 1993). Confronted with the government’s
proof, Newell’s only chance was to persuade the
jury that he really had assigned Inc.’s contract
with ADIA to Ltd., that the contract itself,
rather than Inc.’s services, was the source of
the contract income, and that Ltd. was not just a
dummy corporation. At the irreducible minimum, as
even he concedes, there would have to be an
assignment; and if there had been an assignment,
Newell would have had it in his possession and
would have produced it. His failure to do so was
eloquent.
To require the government in every case of
evading income tax by diverting income to another
person to prove that the income wasn’t the fruit
of a contract or property that had been assigned
to that person would have only one effect, and
that would be to facilitate tax evasion. There is
no precedent for imposing such a requirement.
Holland v. United States, 348 U.S. 121, 135-36
(1954); United States v. Chu, 779 F.2d 356, 364-
66 (7th Cir. 1985); United States v. Stayback,
212 F.2d 313, 317 (3d Cir. 1954).
We move to a second issue. The prosecution used
some Bermudan records at trial, and 18 U.S.C.
sec. 3505(b) provides that a party to a federal
criminal case who wants to offer a foreign record
into evidence must give the other party written
notice of that intention "at the arraignment or
as soon after the arraignment as practicable";
and this was not done. The consequence of such a
failure is not, however, as Newell argues,
automatic exclusion from evidence. Exclusionary
rules are disfavored as remedies for
nonconstitutional violations of law. United
States v. Kontny, No. 00-3004, 2001 WL 8793, at
*3 (7th Cir. Jan. 4, 2001). The remedy for a
violation of section 3505(b) is to object at
trial on the ground of prejudice resulting from
the violation. The objection was made but
properly denied because the failure to notify
Newell of the government’s intention did not harm
his defense in the slightest. The foreign records
in question were Newell’s own records of his
Bermudan activities and he knew the government
was going to use them at trial to illuminate the
nature and purpose of Ltd., the Bermudan dummy in
which Newell had parked the ADIA fee.
We turn finally to the sentence. The sentencing
guidelines provide for a heavier sentence in a
tax case if "sophisticated means were used to
impede discovery of the existence or extent of
the offense." U.S.S.G. sec. 2T1.1(b)(2); see
United States v. Kontny, supra, at *5. The
commentary to the guideline, which is
authoritative, uses "hiding assets or
transactions, or both, through the use of
fictitious entities, corporate shells, or
offshore banking accounts" as the paradigmatic
example of sophisticated concealment; and it is
an exact description of this case. But at closing
argument the government’s lawyer told the jury
that Newell’s scheme was "not particularly
sophisticated," and Newell argues that, in light
of this comment, the doctrine of judicial
estoppel barred the sentencing enhancement. The
argument is frivolous.
The doctrine of judicial estoppel instructs that
having obtained a judgment in a case on some
ground a litigant cannot turn around and in
another case seek a judgment on an inconsistent
ground. E.g., Saecker v. Thorie, 234 F.3d 1010,
1014 (7th Cir. 2000); Moriarty v. Svec, 233 F.3d
955, 962 (7th Cir. 2000); Lydon v. Boston Sand &
Gravel Co., 175 F.3d 6, 12-13 (1st Cir. 1999).
There is nothing like that here, since the
conviction is not the judgment in a criminal
case; the sentence is; and so the prosecutor
wasn’t trying to obtain a second judgment. The
making of inconsistent arguments within a single
case is more common than otherwise, and closely
resembles pleading in the alternative, which is
allowed. Fed. R. Civ. P. 8(e)(2); Allen v. Zurich
Ins. Co., 667 F.2d 1162, 1167 (4th Cir. 1982).
Occasional formulations of the doctrine of
judicial estoppel that omit mention of the
requirement that there have been a previous
judgment, see, e.g., Ahrens v. Perot Systems
Corp., 205 F.3d 831, 833 (5th Cir. 2000), are
mostly inadvertent, yet there is, as
noncommittally remarked in Hossaini v. Western
Missouri Medical Center, 140 F.3d 1140, 1143 (8th
Cir. 1998), a minority view, undesirably loose
and clearly not the view of this circuit, that
"judicial estoppel applies even where no court
has accepted the prior assertion if the party
taking contrary positions demonstrates an intent
to play ’fast and loose’ with the courts."
One decision states that the prior inconsistent
position must have been "adopted by the court in
some manner, perhaps, for example, by obtaining a
judgment." Maharaj v. BankAmerica Corp., 128 F.3d
94, 98 (2d Cir. 1997) (citation omitted). That
too strikes us as too vague and loose; better to
assimilate judicial estoppel in this respect to
res judicata and collateral estoppel, which
require a judgment.
A distantly related doctrine, "mend the hold,"
sometimes erroneously confused with judicial
estoppel, as in Estate of Ashman v. Commissioner,
213 F.3d 541, 543 (9th Cir. 2000), limits the
right of a contract promisor, especially an
insurer, to switch defenses in the course of a
dispute. See, e.g., Level 3 Communications, Inc.
v. Federal Ins. Co., 168 F.3d 956, 960 (7th Cir.
1999); Patz v. St. Paul Fire & Marine Ins. Co.,
15 F.3d 699, 703 (7th Cir. 1994); Harbor Ins. Co.
v. Continental Bank Corp., 922 F.2d 357, 362-64
(7th Cir. 1991). That has no relevance to this
case.
There is, no doubt, confusion and uncertainty in
the case law (though not of this circuit) over
the scope of the doctrine of judicial estoppel.
But no court would apply it in the way urged by
Newell. The argument that Newell’s tax dodge was
unsophisticated was neither a ground for the
conviction nor inconsistent with the position
taken by the government at sentencing; it was
just a way of asking the jury not to be
bamboozled by the corporate setting into thinking
that what Newell had done was a "sophisticated"
and therefore perhaps lawful method of arranging
his affairs in such a way that he and Ltd. would
not be liable for income tax on the fee from
ADIA. Everyone knows that financial
sophistication enables a taxpayer to reduce his
tax liability, and the prosecutor must have
worried that the jury might equate sophistication
to tax avoidance as distinct from tax evasion.
There was no impropriety in his comment, no
occasion for an invocation of judicial estoppel,
and in fact no error at all in the conviction or
sentence.
Affirmed.