United States v. Dorothy R. Garber , 607 F.2d 92 ( 1979 )

CHARLES CLARK, Circuit Judge:

Dorothy Clark Garber was indicted for willfully and knowingly attempting to evade a portion of her income tax liability for the years 1970, 1971, and 1972 by filing a false and fraudulent income tax return on behalf of herself and her husband. A jury found her innocent of the charges for 1970 and 1971 but convicted her under 26 U.S.C.A. § 7201 for knowingly misstating her income on her 1972 tax return. She was sentenced to 18 months imprisonment — all but 60 days of which was suspended— placed on probation for 21 months, and fined $5,000 exclusive of any civil tax liability. The taxability of the money received by Garber presents a unique legal question. Because of trial errors which deprived defendant of her defense on the element of willfulness, we reverse the conviction.

Some time in the late 1960’s after the birth of her third child, Dorothy Garber was told that her blood contained a rare antibody useful in the production of blood group typing serum. Dade Reagents, Inc. (Dade Reagents), a manufacturer of diagnostic reagents used in clinical laboratories and blood banks, had made the discovery and in 1967 induced her to enter into a contract for the sale of her blood plasma. By a technique called plasmapheresis, a pint of whole blood was extracted from her arm, plasma was centrifugally separated, and the red cells were returned to her body. The process was then repeated. The two bleeds produced one pint of plasma from two pints of blood, and took a total of from one and a half to two and a half hours.

Plasmapheresis is often preceded by a stimulation of the donor whereby the titre or concentration of the desired antibody in the blood is artifically increased by an injection of an incompatible blood type. Both stimulation and plasmapheresis are accompanied by pain and discomfort and carry the risks of hepatitis and blood clotting.

In exchange for Garber’s blood plasma, Dade Reagents agreed to pay her for each bleed on a sliding scale dependent on the titre or strength of the plasma obtained. Dade Reagents then marketed the substance for the production of blood group typing serum.

Because Garber’s blood is so rare — she is one of only two or three known persons in the world with this antibody — she was approached by other laboratories which lured her away from Dade Reagents by offering an increasingly attractive price for her plasma. By 1970, 1971, and 1972, the three years covered in the indictment, she was receiving substantial sums of money in exchange for her plasma.¹ For two of those years she was selling her blood under separate contract to Associated Biologicals, Inc. (Associated) and to Biomedical Industries, Inc. (Biomedical), in both cases receiving in exchange a sum of money dependent on the strength of the antibody in each unit sold. In addition, Biomedical offered a weekly salary of $200, provided a leased automobile, and in 1972 added a $25,000 bonus. In that last year Garber sold her plasma to Biomedical exclusively, producing the coveted body fluid as often as six times a month.

For all three years involved, Biomedical had treated the regular $200 weekly payments as a salary subject to withholding taxes and provided Garber with a yearly W-2 form noting the taxes withheld. Every year, Garber attached those W-2 forms to her income tax return (which was filed jointly with her husband whom she has since divorced), declared the $200 per week as income, and paid the taxes due. All other payments, both from Biomedical and from Associated, had been paid directly to defendant by check. No income taxes were withheld by the companies; she received no W-2 forms, and paid no taxes on the money received. Biomedical did, however, file a Form 1099 Information Return with the IRS which showed a portion of Garber’s donor fees not subject to withholding. Garber was provided a copy of each 1099, which plainly states that it is for information only and is not to be attached to the income tax return. She had never before received Information Returns, and, while she was receiving checks from both Biomedical and Associated, only Biomedical provided this information.

In this prosecution for the felony of willful evasion of income taxes the government had the burden of proving every element of the crime beyond a reasonable doubt. Holland v. United States, 348 U.S. 121, 75 S.Ct. 127, 99 L.Ed. 150 (1954); United States v. England, 347 F.2d 425 (7th Cir. 1965). This required proof of a tax deficiency, an affirmative act constituting evasion or attempted evasion of the tax due, and willfulness. Sansone v. United States, 380 U.S. 343, 85 S.Ct. 1004, 13 L.Ed.2d 882 (1965); United States v. Callahan, 588 F.2d 1078 (5th Cir. 1979); United States v. Buckley, 586 F.2d 498 (5th Cir. 1978). The element we find lacking here was willfulness.

At trial, outside the presence of the jury, the government proffered the testimony of Jacquin Bierman, a professor of law and practicing attorney in the City of New York, who stated his opinion that Garber had made available her bodily functions or products for a consideration which constituted taxable gross income. His conclusion was based on section 61(a) of the Internal Revenue Code (Code) which defines gross income as all income from whatever source derived, including (but not limited to) the following items:

(1) Compensation for services, including fees, commissions, and similar items;

(3) Gains derived from dealings in property;

26 U.S.C.A. § 61(a). While admitting that this case is the first of its kind, Bierman opined that if the exchanges were considered the sale of a product, there would be no tax basis or original cost for the product sold, and the entire sales price would constitute gain subject to tax under section 61(a)(3). Alternatively, he considered categorizing the transactions as the rendition of a service, in which case he was of the opinion that the entire sales price similarly would be fully taxable under section 61(a)(1).

The defense proffered to the court the testimony of Daniel Nall, a Certified Public Accountant and former revenue agent, who concluded that the money received by Garber was not within the legal definition of income in section 61(a) and that she had therefore participated in tax-free exchanges. He patterned his reasoning on early case law resting on Doyle v. Mitchell Brothers, 247 U.S. 179, 38 S.Ct. 467, 62 L.Ed. 1054 (1918), which held that funds obtained by the conversion of capital assets and which represented only the actual value of such assets was not taxable income. According to Nall, the Attorney General in a 1918 opinion considered the human body a kind of capital asset. Following the reasoning in Doyle, the opinion held that the proceeds of an accident insurance policy were not subject to tax because the proceeds of the insurance policy represented a conversion of the capital loss which the injured taxpayer had suffered. Nall mentioned similar opinions finding settlements received for personal injury not taxable income. Eventually the Code was amended to include a specific provision covering the tax consequences of compensation for injuries or sickness.² Nevertheless, Nall explained, the theory has reappeared in situations involving the exchange of something so personal that its value is not susceptible to measurement. In these transactions— such as property settlements in divorce actions or damage awards for alienation of affection or for defamation of character— the value received is deemed equal to the value given, resulting in no taxable gain. Nall compared blood plasma, a part of the body which no one can value, and concluded that it too must be worth its market value. He therefore reasoned that its exchange produces no gain.

The district court heard the testimony of these two experts but refused to admit either opinion in the evidence which went to the jury because it considered the question of taxability to be one of law for the court and not the jury to decide. However, the court did permit the government to introduce testimony by an Internal Revenue Service agent who qualified as an expert in the field of accounting and taxation. This agent offered his opinion that additional taxable income was due but not reported in the years in question. His testimony was received over defense objection that it was based on his conclusion that the compensation received was income and taxable. During cross examination, the witness conceded that the taxability of money received for giving up a part of one’s body is a unique and undecided question in tax law. He also agreed that money received as a return on a capital product is not subject to tax. Yet, he based his calculations on his opinion that the blood plasma donations here were taxable personal services. His view was, in turn, based solely on a Revenue Ruling which declared donations of whole blood to be a service for purposes of determining the deductibility of a charitable contribution. The court sustained objections to the relevancy of further inquiry regarding the nature or value of blood plasma.

The defense argued to the court that the expert testimony of Daniel Nall should be presented to the jury to rebut the government’s expert IRS agent, to show that doubt existed as to whether a tax was due because it was incapable of being computed, and to demonstrate the vagueness of the law, which would preclude a willful intent to violate it. The court recognized that Nall’s theory could be relevant to its judicial resolution of the legal conflict. It ruled however that since Nall had never discussed his opinion of the law with the defendant, it had no relevancy to the fact issue of Garber’s intent. The jury never heard the testimony. It did, however, hear considerable factual evidence relating to Garber’s actual intent.³

After hearing all the evidence, the court ruled as a matter of law that the moneys Garber received for her blood plasma, whether considered a personal service or a product, were income subject to federal income taxation. Consistent with that ruling the jury was instructed that the funds Garber received from the sale of her blood plasma were taxable income. The court also instructed the jury extensively on good faith and willfulness but refused the instructions requested by defense to the effect that a misunderstanding as to defendant’s liability for the tax is a valid defense to the charge of income tax evasion, saying:

I have said over and over again [to the jury] that she must act willfully, knowingly and willfully, in an effort to evade and defeat a tax by filing a false return, and that tells it all as far as I am concerned. This business about doubt and all these debatable things I have listened to around here for several days, and I’m not going to charge the jury that way, so as to confuse them. I think that would do more harm than good, and I think it would be error.

We hold that the combined effect of the trial court’s evidentiary rulings excluding defendant’s proffered expert testimony and its requested jury charge prejudicially deprived the defendant of a valid theory of her defense. No court has yet determined whether payments received by a donor of blood or blood components are taxable as income. If, as the government contends, by subjecting herself to the plasmapheresis process Garber has performed a service, her compensation would be taxable under section 61(a)(1) of the Code. In some ways, Garber’s activity does resemble work: artificial stimulation, which is not a necessary prerequisite to plasma extraction, causes nausea and dizziness; the ordeal of plasmapheresis can be extremely painful if a nerve is struck, can cause nausea, blackouts, dizziness and scarring, and increases the risks of blood clotting and hepatitis. These efforts of production may logically compare to the performance of a service.

On the other hand, blood plasma, like a chicken’s eggs, a sheep’s wool, or like any salable part of the human body, is tangible property which in this case commanded a selling price dependent on its value. The amount of Garber’s compensation for any given pint of plasma was directly related to the strength of the desired antibodies. The greater their concentration, the more she was paid; her earnings were in no way related to the amount of work done, pain incurred, or time spent producing one pint of plasma.

Of course, the product/service distinction is relevant only if the sale of the product results in no taxable gain. The experts testifying for both parties here concede that section 61(a)(3) includes in income only the profit gained through the sale or conversion of capital assets. They do not, however, agree on the computation of gain, because they differ in their theories as to how the value of the product before its sale is to be established. The cost of Garber’s blood plasma, containing its rare antibody, cannot be mathematically computed by aggregating the market cost of its components such as salt and water. That would be equivalent to calculating the basis in a master artist’s portrait by costing the canvas and paints. No evidence of any original cost exists in the case of Garber’s unusual natural body fluid.

In such a situation it may well be that its value should be deemed equal to the price a willing buyer would pay a willing seller on the open market. See United States v. Davis, 370 U.S. 65, 82 S.Ct. 1190, 8 L.Ed.2d 335 (1962); Bar L Ranch, Inc. v. Phinney, 426 F.2d 995 (5th Cir. 1970); Raytheon Production Corp. v. CIR, 144 F.2d 110 (1st Cir.), cert. denied, 323 U.S. 779, 65 S.Ct. 192, 89 L.Ed. 622 (1944); Farmers’ & Merchants’ Bank v. CIR, 59 F.2d 912 (6th Cir. 1932). If this were the proper basis, the exchange would be a wash resulting in no tax consequences. However, we need not and do not undertake the complex task of resolving what the law should be, nor is it necessary to decide whether, as the trial court concluded, the question is purely one of law for the court and not the jury to resolve. Rather, because the district court refused to permit Bierman, the expert for the government, and Nall, the expert for the defense, to testify and because it reserved to itself the job of unriddling the tax law, thus completely obscuring from the jury the most important theory of Garber’s defense — that she could not have willfully evaded a tax if there existed a reasonable doubt in the law that a tax was due — her trial was rendered fundamentally unfair.

A tax return is not criminally fraudulent simply because it is erroneous. Willfulness is an essential element of the crime charged. As such, the government must prove beyond a reasonable doubt that the defendant willfully and intentionally attempted to evade and defeat income taxes for each year in question by filing with the IRS tax returns which she knew were false. United States v. Pomponio, 429 U.S. 10, 97 S.Ct. 22, 50 L.Ed.2d 12 (1976); United States v. Bishop, 412 U.S. 346, 93 S.Ct. 2008, 36 L.Ed.2d 941 (1973). It is not enough to show merely that a lesser tax was paid than was due. Nor is a negligent, careless, or unintentional understatement of income sufficient. Holland v. United States, 348 U.S. 121, 75 S.Ct. 127, 99 L.Ed. 50 (1954); United States v. Murdock, 290 U.S. 389, 54 S.Ct. 223, 78 L.Ed. 381 (1933); United States v. Pechenik, 236 F.2d 844 (3d Cir. 1956). The government must demonstrate that the defendant willfully concealed and omitted from her return income which she knew was taxable.

When the taxability of unreported income is problematical as a matter of law, the unresolved nature of the law is relevant to show that defendant may not have been aware of a tax liability or may have simply made an error in judgment. Nordstrom v. United States, 360 F.2d 734 (8th Cir.), cert. denied, 385 U.S. 826, 87 S.Ct. 59, 17 L.Ed.2d 63 (1966); United States v. Bridell, 180 F.Supp. 268 (N.D.Ill.1960). Furthermore, the relevance of a dispute in the law does not depend on whether the defendant actually knew of the conflict. In United States v. Critzer, 498 F.2d 1160 (4th Cir. 1974), the Fourth Circuit reversed a criminal tax fraud conviction against an Eastern Cherokee Indian who failed to report a portion of her income derived from land held by the United States in trust for the Eastern Cherokee Band. The evidence clearly established that the underreporting was intentional. Whether the income was taxable, however, was a disputed question dependent on the interpretation of certain land allotment statutes, which the court did not resolve. Instead, it reversed the conviction because of the absence of authority definitively governing the situation. The court’s language is particularly apt here:

As a matter of law, defendant cannot be guilty of willfully evading and defeating income taxes on income, the taxability of which is so uncertain that even co-ordinate branches of the United States Government plausibly reach directly opposing conclusions. As a matter of law, the requisite intent to evade and defeat income taxes is missing. The obligation to pay is so problematical that defendant’s actual intent is irrelevant. Even if she had consulted the law and sought to guide herself accordingly, she could have had no certainty as to what the law required.

498 F.2d at 1162 (emphasis added).

Critzer differs from this case in that the defendant there had been advised by the Bureau of Indian Affairs that the income received from the transactions on the Reservation was exempt from taxation. The fact that Garber did not have the benefit of such official advice does not persuade us that the result here should be different. The Critzer court did not so limit its holding:

It is settled that when the law is vague or highly debatable, a defendant — actually or imputedly — lacks the requisite intent to violate it.

498 F.2d at 1162. To hold otherwise would advocate convicting an unsophisticated taxpayer who failed to seek expert advice as to whether certain income was taxable while setting free a wise taxpayer who could find advice that taxes were not due on the identical type of debatably taxable income.

That Critzer was not decided on the basis of the defendant’s actual intent is further evidenced by the reasoning of the court and its reliance on James v. United States, 366 U.S. 213, 81 S.Ct. 1052, 6 L.Ed.2d 246 (1961). In James, the Supreme Court put to rest a dispute over the taxability of embezzled funds. Fifteen years before James, the Court had held such funds non-taxable. CIR v. Wilcox, 327 U.S. 404, 66 S.Ct. 546, 90 L.Ed. 752 (1946). Subsequently a realigned Court undermined the viability of Wilcox by deciding that extortion money was taxable, distinguishing Wilcox on tenuous grounds. Rutkin v. United States, 343 U.S. 130, 72 S.Ct. 571, 96 L.Ed. 833 (1952). When the taxability of embezzled funds again reached the Court in James, it decided that Rutkin had in effect overruled Wilcox and that embezzled monies were taxable. Nevertheless, the court reversed James’ conviction for willfully failing to report embezzled funds in violation of section 7201 because of the uncertainty of the law created by Wilcox. Significantly, neither James nor the cases following James required actual reliance on Wilcox to negate willful intent.⁴ Kahr v. CIR, 414 F.2d 621 (2d Cir. 1969); United States v. Dawson, 400 F.2d 194 (2d Cir. 1968); cert. denied, 393 U.S. 1023, 89 S.Ct. 632, 21 L.Ed.2d 567 (1969); Nordstrom v. United States, 360 F.2d 734 (8th Cir. 1966), cert. denied, 385 U.S. 826, 87 S.Ct. 59, 17 L.Ed.2d 63 (1966). As noted in Critzer:

the uncertainty created by Wilcox as a matter of law precluded a demonstration of “willfulness,” without regard to the defendant’s actual state of mind with respect to his knowledge or reliance on Wilcox.

498 F.2d at 1163.

Both Critzer and James involved disagreements among recognized authorities which were more clearly documented than the theories presented here. James involved conflicting Supreme Court decisions, and in Critzer the Bureau of Indian Affairs and the Internal Revenue Service strongly disagreed on the taxability of the income. In the case presently before us, as conceded by all the experts who testified, there is a dearth of authority directly supporting either argument. However, the fact that the question has never before evoked anything more than theories on either side adds to rather than detracts from the critical conflict upon which defendant’s criminal liability hinges. Neither position is frivolous, and the fact that both are urged without clear precedential support in law demonstrates that the court should not have restricted the evidence or instructed as it did.

The tax treatment of earnings from the sale of blood plasma or other parts of the human body is an uncharted area in tax law. The parties in this case presented divergent opinions as to the ultimate taxability by analogy to two legitimate theories in tax law. The trial court should not have withheld this fact, and its powerful impact on the issue of Garber’s willfulness, from the jury. Morissette v. United States, 342 U.S. 246, 72 S.Ct. 240, 96 L.Ed. 288 (1952); United States v. Pomponio, 563 F.2d 659 (4th Cir. 1977). In a case such as this where the element of willfulness is critical to the defense, the defendant is entitled to wide latitude in the introduction of evidence tending to show lack of intent. United States v. Brown, 411 F.2d 1134 (10th Cir. 1969); Petersen v. United States, 268 F.2d 87 (10th Cir. 1959); Miller v. United States, 120 F.2d 968 (10th Cir. 1941). The defendant testified that she subjectively thought that proceeds from the sale of part of her body were not taxable. By disallowing Nall’s testimony that a recognized theory of tax law supports Garber’s feelings, the court deprived the defendant of evidence showing her state of mind to be reasonable.

This error was compounded by the court’s instructions to the jury which took from them the question of the validity of the tax. In effect, the court adopted the government’s position that a tax was owing as a matter of law. Garber admitted receiving unreported money and disclosed its source; the defense in this case rested entirely on a denial of the necessary criminal intent to evade taxes. The court erred by refusing to instruct the jury that a reasonable misconception of the tax law on her part would negate the necessary intent. See Morissette v. United States, 342 U.S. 246, 72 S.Ct. 240, 96 L.Ed. 288 (1952); Mann v. United States, 319 F.2d 404 (5th Cir. 1963); United States v. Tadio, 223 F.2d 759 (2d Cir. 1955); Wardlaw v. United States, 203 F.2d 884 (5th Cir. 1953). By withholding this theory, the court left the jury with the impression that a tax was clearly due and that Garber simply refused to pay it.⁵ A panel of this court in United States v. McClain, 593 F.2d 658 (5th Cir. 1979), recently reached a similar conclusion when' criminal liability for importing stolen Mexican artifacts depended on an interpretation of complicated, uncertain, and changing Mexican law declaring national ownership of artifacts. At the first trial, the district court heard in camera expert testimony interpreting the Mexican Constitution and relevant statutes, and instructed the jury on its determination of the foreign law. On appeal this was held to be error and the case remanded:

The court’s instruction that the Mexican government had owned the artifacts for over seventy-five years was highly prejudicial to the defendants. It could have been the decisive factor in the jury’s inferring that the defendants must have known that the artifacts in question were stolen.

United States v. McClain, 545 F.2d 988, 1000 (5th Cir. 1977). The second trial was replete with historians, professors, and others expressing their views on the changing Mexican laws, based for the most part on independent review of the Mexican Constitution and relevant statutes. After hearing all the experts, the jury was given the task of first deciding whether and when Mexico actually enacted national ownership of the artifacts, and then determining the defendants’ guilt based on that law. The defendants were convicted. Despite the “near overwhelming” evidence of guilt and intent to violate the law, the panel reversed the substantive convictions

because the most likely jury construction of Mexican law upon the evidence at trial is that Mexico declared itself owner of all artifacts at least as early as 1897. And under this view of Mexican law, we believe the defendants may have suffered the prejudice of being convicted pursuant to laws that were too vague to be a predicate for criminal liability under our jurisprudential standards.

593 F.2d at 670.

Similarly in the case before us, the government presented persuasive evidence showing that the defendant knowingly and willfully evaded her taxes. She received a significant amount of money over a three year period, but reported none of it. The proof also showed that those with whom she dealt advised her that they thought the proceeds were taxable. Nevertheless, the tax question was completely novel and unsettled by any clearly relevant precedent. A criminal proceeding pursuant to section 7201 is an inappropriate vehicle for pioneering interpretations of tax law. The conviction is reversed and the cause is remanded for retrial.

REVERSED and REMANDED.

1 . Sale of her plasma allegedly brought her $80,200 in 1970, $71,400 in 1971, and $87,200 in 1972.

2 . Section 104 of the Code, 26 U.S.C.A. § 104, now expressly excludes from taxable income certain insurance proceeds and

(2) the amount of any damages received (whether by suit or agreement) on account of personal injuries or sickness;

26 U.S.C.A. § 104(a)(2).

The defendant has alternatively argued that the payments here in question fall within this exclusion from taxable income. Section 104(a)(2) has consistently been applied only to payments resulting from the settlement or prosecution of a tort claim. Knuckles v. CIR, 349 F.2d 610 (10th Cir. 1965); Starrels v. CIR, 304 F.2d 574 (9th Cir. 1962); Agar v. CIR, 290 F.2d 283 (2d Cir. 1961). The only evidence in the record which could possibly support a claim that the payments to Garber were in settlement of a tort liability were medical release of liability forms she signed. We express no opinion on the ultimate merits of this contention.

3 . To prove that Garber had to have been actually aware of her tax liability, the government offered testimony from an employee of Dade Reagents, contradicted by defendant’s own statements, that in Garber’s early dealings with that company not only had she been advised of the taxable element of her payments but the company had also opened a savings account in her name and regularly deposited a portion of her earnings allegedly for income tax purposes. The IRS agent who first investigated the Garbers took the stand and testified that, in his initial interview with both Mr. and Mrs. Garber concerning their 1971 joint return, defendant denied having received any income other than the reported $200 per week salary from Biomedical. However, that same afternoon following the interview, defendant called the agent, explained that she and her husband were about to be divorced, and arranged a second interview in which she discussed her plasma donations and disclosed all monies received. The agent admitted that Garber was cooperative in the absence of her husband; she produced all relevant records including the 1099 forms received from Biomedical.

The defense offered affirmative evidence to show that Garber did not willfully misstate her income. An accountant had prepared all three joint returns from information supplied by Mr. Garber, who was not indicted, without consulting with defendant. Furthermore, it was undisputed that all payments to defendant were made by check, payable to her, and deposited in her bank account. Payments were never made in cash; there was no duplicative bookkeeping or other clandestine financial dealings indicative of an attempt to secrete earnings. Her returns for the years in question disclosed Biomedical as a source of income. In addition, Garber produced a copy of her 1969 tax return on which she declared no taxable income but noted “I have no W-2 forms as my income was made up entirely from donating blood plasma from various blood banks.” The defendant herself testified that she thought, after speaking with other blood donors, that because she was selling a part of her body the money received was not taxable.

4 . The plurality opinion in James stated:

We believe that the element of willfulness could not be proven in a criminal prosecution for failing to include embezzled funds in gross income in the year of misappropriation so long as the statute contained the gloss placed upon it by Wilcox at the time the alleged crime was committed. Therefore, we feel that petitioner’s conviction may not stand and that the indictment against him must be dismissed. 366 U.S. at 221-222, 81 S.Ct. at 1057.

Justices Black and Douglas were of the opinion that Wilcox still represented the controlling law, but agreed with the plurality that the new determination finding embezzled funds taxable should not be applied to past conduct:

[A] criminal statute that is so ambiguous in scope that an interpretation of it brings about totally unexpected results, thereby subjecting people to penalties and punishments for conduct which they could not know was criminal under existing law, raises serious questions of unconstitutional vagueness. 366 U.S. at 224, 81 S.Ct. at 1058.

The two dissenting Justices argued that a remand was necessary for a jury to determine the factual question of actual reliance on Wilcox.

5 . During its deliberations, the jury asked the court whether any effort was made by the government to settle the case in any other way previous to filing an indictment. Obviously they were not aware that the taxability of the sums was still a disputed question.