U.S. v. Kelley

• Decision Date: 10 January 1989
• Docket Number: No. 88-1231,88-1231
• Citation: 864 F.2d 569
• Parties: -616, 89-1 USTC P 9132, 27 Fed. R. Evid. Serv. 485 UNITED STATES of America, Plaintiff-Appellee, v. William J. KELLEY, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 569

864 F.2d 569

63 A.F.T.R.2d 89-616, 89-1 USTC P 9132,

27 Fed. R. Evid. Serv. 485

UNITED STATES of America, Plaintiff-Appellee, v. William J. KELLEY, Defendant-Appellant.

No. 88-1231.

United States Court of Appeals Seventh Circuit.

Argued Sept. 13, 1988.

Decided Jan. 10, 1989.

Douglas G. Wagner, Pollen, Brazill & Bennett, Indianapolis, Ind., for defendant-appellant.

Susan E. Heckard, Asst. U.S. Atty., Indianapolis, Ind., for plaintiff-appellee.

Before POSNER, FLAUM and MANION, Circuit Judges.

FLAUM, Circuit Judge.

Defendant-Appellant William Kelley was convicted by a jury in the Southern District of Indiana on one count of willfully filing a false individual income tax return, in violation of 26 U.S.C. Sec. 7206(1), and eight counts of willfully assisting others in filing false income tax returns, in violation of 26 U.S.C. Sec. 7206(2). Kelley appeals from the judgment of conviction asserting that: (1) the district court erred in refusing to give a tendered instruction on good faith reliance on advice of counsel; (2) the district court erred in admitting into evidence certain statements pursuant to Federal Rule of Evidence 801(d)(2)(E); (3) the district court erred in failing to dismiss the eight counts under Sec. 7206(2) as barred by the statute of limitations; (4) there was insufficient evidence to support the convictions; (5) the district court erred in admitting an exhibit into evidence; and (6) the district court erred in refusing to give a tendered instruction on first amendment protection of advocacy. For the reasons stated in this opinion, we affirm the judgment of conviction.

I.

This case concerns a tax shelter investment known as Stephen Mandarano Fine Arts, Ltd. ("SMFA"). Stephen Mandarano owned both SMFA, a New Jersey corporation, and a New Jersey art publishing company called Graphic House. The tax shelter worked as follows. Investors bought original lithographic plates from SMFA, along with the rights to the lithograph prints made from the plates and the photo reproductions of the prints (collectively, "artwork"). Investors paid between $12,500 and $18,500 in cash and signed a promissory note for the balance of between $155,000 and $238,000. According to the SMFA offering memorandum, the promissory notes were part recourse and part non-recourse-- i.e., the investor was personally liable for the recourse portion of the note (approximately one-third of the total note amount), while the non-recourse portion was secured only by the sale of the artwork. The investors assigned distribution rights to the artwork to Graphic House. As Graphic House sold the artwork, 50% of the receipts were applied to the recourse portion of the notes; the other 50% was retained by Graphic House. According to the offering memorandum, investors could claim depreciation deductions against the cash payment and the recourse portions of the notes each year for seven years following the initial investment.

The problem with the tax shelter involved the recourse portion of the notes. Prior to 1979, the Internal Revenue Code allowed an investor to base her depreciation deductions on financing which was non-recourse. Beginning in 1979, the Code included an "at risk" limitation, which provided that an investor was only entitled to depreciation deductions for the recourse portion of her financing--i.e., for the portion which she was personally liable to repay. See 26 U.S.C. Sec. 465. The tax shelter, as described above, would have met the at risk requirement and would have allowed investors to claim deductions against the recourse portions of the notes. However, as an inducement to investors who might be reluctant to enter into a contract that exposed them to personal liability, SMFA provided each investor with a "side letter agreement" that, in effect, negated personal liability on the recourse portion of the notes. The letter assured the investor that SMFA would provide a credit for unsold artwork to be applied against the recourse portion of the note. The letter stated that SMFA would never seek any further monies from investors. The letter destroyed the at risk requirement of Sec. 465 and thereby made the planned deductions illegal.

Defendant William Kelley, owner of Financial Consultants of Indiana, Inc., was one of several promoters of the SMFA tax shelter in Indiana. Other promoters included: Raymond Dudek, an associate in Kelley's firm; and Alfred Brown, Steven Goldstein, and Alvin Katzman, partners in an Indiana law firm ("Brown's law firm"). All of these promoters maintained their offices in the same building and worked together in selling the tax shelters.

In 1979, Kelley purchased an SMFA tax shelter for himself and sold the shelter to at least six of his clients. All of the closings took place in the conference room of Brown's law firm. Present at the closings were the investor, a representative of SMFA named Alan Bernstein, at least one representative of Brown's law firm, and either Kelley or Dudek. Brown testified that at the closings the investors were told that they should keep the side letter agreement "in a safe place" and avoid showing it to the IRS if they were audited, because otherwise "the tax shelter itself might be in question."

As a result of this tax shelter scheme, Alfred Brown, Steven Goldstein, and Alan Bernstein each pled guilty to one count of 26 U.S.C. Sec. 7206(2), aiding and assisting in the filing of a false tax return. Kelley went to trial on nine counts: one count of 26 U.S.C. Sec. 7206(1), based on his 1981 individual tax return, and eight counts of 26 U.S.C. Sec. 7206(2), based on the 1980 and/or 1981 tax returns of the six clients to whom he had sold the tax shelters. He was convicted on all counts.

II.

On appeal, Kelley first argues that the district court erred in refusing to give his tendered instruction on good faith reliance on advice of counsel. Kelley had testified at trial that attorney Alfred Brown introduced the SMFA tax shelter to him, recommended that it was a "superior" investment, and never told Kelley that the side letter agreement violated the at risk requirement of Sec. 465. Kelley's proposed instruction read as follows:

If you find that attorney Alfred Brown was fully informed of all relevant facts and advised William J. Kelley that the Stephen Mandarano Fine Arts tax deductions were lawful and proper, and if you find that William J. Kelley relied on that advice, then you may use that as a factor in assessing William J. Kelley's good faith or lack of intent to violate the tax laws.

Kelley claims that the court's refusal to give the instruction denied him the right to have his defense theory presented to the jury.

Good faith reliance on the advice of counsel is a valid defense to the charge of willfully filing, or willfully assisting others in filing, a false tax return. United States v. Whyte, 699 F.2d 375, 379 (7th Cir.1983). Further, it is well settled that a "defendant in a criminal case is entitled to have the jury consider any theory of the defense which is supported by law and which has some foundation in the evidence, however tenuous." United States v. Grimes, 413 F.2d 1376, 1378 (7th Cir.1969); see also United States v. Boucher, 796 F.2d 972 (7th Cir.1986); United States v. Walsh, 627 F.2d 88, 93 (7th Cir.1980); United States v. Creamer, 555 F.2d 612, 616 (7th Cir.), cert. denied, 434 U.S. 833, 98 S.Ct. 118, 54 L.Ed.2d 93 (1977). This is not to say, however, that the defendant is entitled to a particular instruction. Rather, the defendant is entitled only to have his theory, if supported by the evidence, considered by the jury. See United States v. Douglas, 818 F.2d 1317, 1320 (7th Cir.1987); Boucher, 796 F.2d at 976. The questions on appeal, then, are whether the evidence supported Kelley's theory of good faith reliance on advice of counsel and, if so, whether the court's instructions, viewed as a whole, encompassed that theory.

Whether there was a foundation in the evidence to support the defense theory of good faith reliance is questionable. The testimony of Brown and Kelley at trial showed only that Brown had served as Kelley's attorney on other matters prior to the SMFA investment, that Brown reviewed tax shelter investments as part of his law practice, that Brown introduced Kelley to the SMFA investment, that Brown told Kelley that the SMFA investment was superior, in the sense of more profitable, than another investment they had discussed, and that Brown did not tell Kelley that the side letter agreement violated the at risk requirement of Sec. 465. To place this testimony in perspective, we also note the following. Kelley testified that he did not retain Brown for legal advice on the SMFA investment. Brown and Kelley each travelled separately to New Jersey to view the SMFA artwork and facilities and to discuss with Mandarano and Bernstein the investment. Bernstein testified that he and Mandarano went over all aspects of the program with Kelley, including the offering memorandum and the side letter agreement. Brown testified that at various closings at which Kelley and he were both present, Bernstein would tell the investor that the side letter agreement should be kept secret from the IRS. He testified that he did not tell Kelley about his "concern" about the impact of the side letter agreement on the propriety of the tax deductions because it was apparent at the closings that Kelley was already familiar with it. Brown testified that at some of the closings Kelley himself told the client to keep the side letter agreement "in a safe place" and not show it to the IRS.

Even assuming that the evidence supported the defense theory of good faith reliance, however, we find that the instructions, viewed as a whole, adequately encompassed that theory. Willfulness is an element of both 26 U.S.C. Sec. 7206(1) and (2). The court's instructions required the jury to find that Kelley acted knowingly and willfully. In defining "knowingly," ...