850 F.2d 1104 (6th Cir. 1988), 87-5896, United States v. Duncan

Docket Nº:87-5896, 87-5897.
Citation:850 F.2d 1104
Party Name:UNITED STATES of America, Plaintiff-Appellee, v. Joe S. DUNCAN and Michael M. Downing, Defendants-Appellants.
Case Date:June 23, 1988
Court:United States Courts of Appeals, Court of Appeals for the Sixth Circuit

Page 1104

850 F.2d 1104 (6th Cir. 1988)

UNITED STATES of America, Plaintiff-Appellee,


Joe S. DUNCAN and Michael M. Downing, Defendants-Appellants.

Nos. 87-5896, 87-5897.

United States Court of Appeals, Sixth Circuit

June 23, 1988

Argued Feb. 23, 1988.

Rehearing Denied in No. 87-5897 Sept. 1, 1988.

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Steven Oberman (argued), W. Zane Daniel, Charles W.B. Fels (argued), Ritchie, Fels and Dillard, Knoxville, Tenn., for defendants-appellants.

Martha P. Rogers, Dept. of Justice, Tax Div., Criminal Div., Michael L. Paup, Chief, Appellate Section, Tax Div., Dept. of Justice, Washington, D.C., Michael D. Durney, William S. Rose, Jr., Gary R. Allen, Robert Lindsay, Alan Hechtkopf (argued), for plaintiff-appellee.

Before ENGEL, Chief Judge [*], MERRITT and KENNEDY, Circuit Judges.

MERRITT, Circuit Judge.

In this false statement tax case, defendant Duncan and defendant Downing, who was Duncan's tax preparer, were acquitted for the tax year 1981 and convicted for the year 1982 of violating 26 U.S.C. Secs. 7206(1) and 7206(2), which prohibit the making and the preparation of a tax return containing a false statement as to a material matter. The 1982 tax return in question contained two separate and distinct statements which the indictment alleged were false. The structure of the indictment and ambiguous instructions given by the judge in response to a question from the jury combined to create a substantial likelihood of jury confusion, with the result that it is unclear which of the statements the jurors found to be false and whether their verdict on either was unanimous.

The appeal raises the question whether a trial judge should go beyond the usual general unanimity charge to give an augmented instruction that the jurors must agree unanimously on a particular false statement as an underlying predicate for conviction. We hold that due to a number of factors--including pretrial motions specifically pointing out the problem and a mid-deliberation question from the jury raising a genuine possibility that conviction could occur as the result of different jurors using a different false statement as the underlying factual predicate for guilt--the District Court was sufficiently apprised of the specific unanimity problem that it should have given an augmented instruction that the jurors must all agree on the willful falsity of at least one, and the same one, false statement.

In addition, we hold that there was sufficient evidence presented that the District Court should have instructed the jury on taxpayer Duncan's theory that he lacked criminal intent because he relied in good faith upon the professional opinion of a certified public accountant, codefendant Downing.

I. The Indictment and Proof

The indictments of Duncan and Downing grew out of an extensive investigation into the collapse of the so-called Butcher banking empire in East Tennessee in the early 1980's. C.H. Butcher, Jr., a principal figure in the Butcher banks, was the third

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person named in the indictment with appellants. The indictment charged Butcher, Duncan, and Downing with conspiring to defraud the United States by impeding the ascertainment and collection of income taxes in violation of 18 U.S.C. Sec. 371 (Count One); charged Duncan with violating 26 U.S.C. Sec. 7206(1) by making false returns for the years 1981 (Count Two) and 1982 (Count Three); and charged Downing with violating 26 U.S.C. Sec. 7206(2) by aiding in the preparation of false returns for the years 1981 (Count Four) and 1982 (Count Five). The jury acquitted Duncan and Downing on all counts except for counts for the year 1982. The 1982 tax return contained two allegedly false statements--that $115,000 of income received was a capital gain rather than ordinary income, and that Duncan had paid $8,800 in interest when he had not.

Butcher, who had earlier pleaded guilty to Count One, testified for the Government. His testimony, and the Government's theory, described a scheme whereby Butcher sought to gain control of the Knox Federal Savings & Loan, a mutual S & L over which Duncan's family exercised partial control. In return for the assistance of the Duncans and of the other controlling family, named Curtis, Butcher agreed to undertake separate financial transactions favorable to each family. David Crabtree, a close associate of Butcher, testified that, acting as a nominee for Butcher, he bought the building that housed Knox Federal from the Curtises for a "significantly inflated" price of $525,000 as an "aspect of buying the [S & L] Board seats." Defendant Duncan, meanwhile, had about $310,000 in indebtedness to the United American Bank (UAB) of Knoxville, which Butcher's family controlled. Some $90,000 of this debt was guaranteed by Duncan's brother Jim. Butcher testified that to enlist the Duncans' support, 1 he and Crabtree, with Downing as a middleman, devised an arrangement to write off defendant Duncan's debt.

On October 30, 1981, the Knox Federal board of directors, which to that point was majority-controlled by the Duncans and Curtises, was expanded to include a number of Butcher associates. On November 6, 1981, at Downing's insistence, Butcher wrote a letter confirming the arrangement that would relieve defendant Duncan's debt and Jim Duncan's guarantee. Addressed to defendant Duncan, it said:

The purpose of this letter is to confirm my commitments to you to provide sources of income during 1981 and/or 1982 in a manner which can hopefully be to your best advantage for income tax purposes in the aggregate of approximately $311,500, which in turn will be utilized by you to discharge existing indebtedness to UAB of Knoxville, which is represented by promissory notes dated August 25th, 1980 and June 30th, 1981.

Tr. 367.

Butcher testified that the $311,500 represented a "fee" to Duncan for being "my conduit to a smooth transition" at the S & L. Crabtree testified that at Butcher's request, he studied Duncan's financial situation and determined that the best way to avoid taxability was to "turn the $300,000 payment into a short term capital gain" that could be offset against Duncan's existing short term capital losses. The creation of a capital gain, however, would involve a "sham transaction" that would involve "some papering of transactions, backdating of documents." Crabtree said that he told Butcher the arrangement would be "technically correct" but in reality a sham. Crabtree said Butcher replied that this "wasn't his problem, that it solved his side of the deal, that was the Duncans' problem." Tr. 478.

The "capital asset" ultimately used was a right of first refusal to buy a 40 percent interest in a Knoxville motel. Downing, who had been engaged in negotiations to buy other motel properties from the same seller, Clyde Blalock, persuaded Blalock to convey this "first refusal" to Duncan for nominal consideration. The first refusal

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was then assigned by Duncan to Downing. 2 Both the agreement granting the first refusal and the assignment were dated September 21, 1981, although Blalock testified that he believed the agreement actually had been drawn in October or November. Blalock also testified that on the day the agreement was signed Downing took him to Duncan's office, which was in the same office building as Downing's separate office, and the three discussed and signed the agreement. Blalock said he did not know of the assignment until he was told by federal agents a couple of years later.

Duncan's indebtedness to UAB was discharged in the following manner, with consequences for both the 1981 tax return for which the defendants were acquitted and the 1982 return for which they were convicted. By check dated November 25, 1981, Downing paid Duncan $200,000. The check was drawn on the account of Downing's firm, but apparently was funded by a $200,000 loan from UAB made November 27, 1981. The loan went to Desh Investment Corporation, a separate Downing enterprise with which Butcher and Crabtree also were involved. Duncan endorsed the $200,000 check to UAB to apply to his indebtedness.

In April or May 1982, UAB advanced a second loan to Desh totaling $115,704.28. As the loan application stated, the funds were used to pay off Duncan's loan. At approximately the same time, Downing wrote a check on a Desh account paying UAB $8,817.59 owed in interest on Duncan's loans. Neither loan to Desh ever was repaid; the loans, totaling about $315,000, eventually were written off by another bank that assumed them after UAB failed.

Indictment Counts Two and Four charged that Duncan 3 and Downing had willfully filed and prepared a false return for 1981 which reflected the $200,000 as a short term capital gain rather than as ordinary income. The 1981 return had identified the transaction as "Inv., Howard Johnson," the cost as zero, the gross sales price as $200,000, and therefore the gain as $200,000. Counts Three and Five charged that the 1982 return was false because it reflected (1) $115,704.28 as a short term capital gain rather than as ordinary income, and (2) an interest expense deduction of $8,817.59 to which Duncan was not entitled. The 1982 return had listed a gain of $115,704.28 without any further identification or detail of cost or sale price.

At trial, the Government's case included the testimony of Butcher, Crabtree, Blalock, some employees of Downing, and several bank officials and government agents. A Downing employee, Mark Lund, testified that he had prepared Duncan's 1982 return and that Downing had told him to get the interest figure on Duncan's loans by calling UAB. Neither Downing nor UAB told Lund that Desh, not Duncan, had paid the interest, and Lund did not ask. An IRS expert testified at the close of the Government's case-in-chief that, based...

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