U.S. v. Wood, 90-30211

• Decision Date: 26 August 1991
• Docket Number: No. 90-30211,90-30211
• Citation: 943 F.2d 1048
• Parties: -5957, 91-2 USTC P 50,432, 34 Fed. R. Evid. Serv. 86 UNITED STATES of America, Plaintiff-Appellee, v. Steven M. WOOD, Defendant-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1048

943 F.2d 1048

68 A.F.T.R.2d 91-5957, 91-2 USTC P 50,432,

34 Fed. R. Evid. Serv. 86

UNITED STATES of America, Plaintiff-Appellee, v. Steven M. WOOD, Defendant-Appellant.

No. 90-30211.

United States Court of Appeals Ninth Circuit.

Argued and Submitted May 8, 1991.

Decided Aug. 26, 1991.

Norman Sepenuk, P.C., Norman Sepenuk, Douglas Stringer, Portland, Or., for defendant-appellant.

Kris A. McLean, Asst. U.S. Atty., Helena, Mont., for plaintiff-appellee.

Appeal from the United States District Court for the District of Montana.

Before WRIGHT and O'SCANNLAIN, Circuit Judges, and MacBRIDE, ^* District Judge.

O'SCANNLAIN, Circuit Judge:

Wood appeals his conviction for tax evasion.

I

In December 1983, Wood established an entity known as the S-M-W Investment Group out of an office in Kalispell, Montana. At approximately the same time, Wood created entities known as Rover Resources and Norcross. Wood and his employees advertised these companies as Canadian mining exploration penny stocks that, if successfully promoted, would be listed and publicly traded on the Canadian/Vancouver Stock Exchange. The funds solicited during the promotion of Norcross and Rover Resources--totaling approximately $250,000--were deposited into three trust accounts maintained by Wood. These funds, however, never made it to Canada. Rather, Wood converted these investors' funds to his own use and lost them playing the commodities futures market.

In 1986, the State of Montana charged Wood with various securities fraud and related crimes stemming from these transactions. Wood pleaded guilty to three selected counts pursuant to a plea agreement; imposition of sentence was deferred for a period of six years on the condition, among others, that he pay restitution to the Montana residents who purchased stock in Norcross or Rover Resources. Meanwhile, the State of Montana Securities Department contacted an IRS criminal investigator concerning Wood's embezzlement of investors' funds, suggesting possible tax liability. In August 1989, a federal grand jury brought a two-count indictment against Wood, charging him with two counts of tax evasion (violations of I.R.C. § 7201) for tax years 1983 and 1984, respectively.

Trial by jury commenced on April 9, 1990. On April 19, the jury found Wood guilty of the first count (tax year 1983), but acquitted him of the second count (tax year 1984). This appeal followed.

II

A

The elements of tax evasion, as proscribed by section 7201, are: "(1) the existence of a tax deficiency; (2) willfulness; and (3) an affirmative act constituting an evasion or attempted evasion of the tax." United States v. Marashi, 913 F.2d 724, 735 (9th Cir.1990) (quoting United States v. Conforte, 624 F.2d 869, 873 (9th Cir.), cert. denied, 449 U.S. 1012, 101 S.Ct. 568, 66 L.Ed.2d 470 (1980)). It is the first element that is at issue here; Wood contends that he did not owe any additional taxes and that if the jury had been properly instructed, it likely would have acquitted him. ¹

At trial, Wood argued that his commodities-related trading losses were fully deductible as business losses under I.R.C. § 165(a) and (c), ² and thus, his tax liability for the years 1983 and 1984 was insubstantial. The government, on the other hand, contends that the commodities losses were capital losses, and were subject to a limit on deductibility. See I.R.C. §§ 165(f), 1211. ³ Under the government's theory, Wood's tax liability for the years 1983 and 1984 would have been substantial.

The district court instructed the jury that:

The existence of a trade or business is not determinative of whether the property is considered as a capital asset or not.... The primary issue is whether the property was held by the taxpayer primarily for the sale to customers.... [p] Those who sell commodities on an exchange do not have customers within the meaning of Section 1221. [p] If commodities futures are bought and sold by a taxpayer on his own account, primarily with the expectation of realizing profit due to price fluctuation rather than developing or finding a market for the sale to customers those commodity futures are treated as capital assets and not as property held primarily for sale to customers in the ordinary course of a trade or business.

Wood's objection to this instruction is three-fold. First, Wood argues that the instruction is incorrect as a matter of law; the existence of a trade or business is integral to the determination of whether property is or is not a capital asset. Second, Wood reasons that even if the existence of a trade or business is not integral as a matter of law, it was the role of the jury to decide which factor--"trade or business" or "sale to customers"--was dispositive. Finally, Wood contends that the language "those who sell commodities on an exchange do not have customers within the meaning of section 1221" is incorrect, as some sellers of commodities on an exchange might have customers.

B

Section 1221 defines capital assets as "property held by the taxpayer (whether or not connected with his trade or business), but does not include ... property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business." I.R.C. § 1221(1). To determine whether securities fall within the latter exception to capital asset treatment, courts have identified three classifications of purchasers of stocks or commodities futures--dealers, traders, or investors. See generally King v. Commissioner, 89 T.C. 445, 457-58 (1987). The tax liability of a seller of securities depends upon which classification best identifies the seller; dealers may qualify for this exception, while traders and investors do not.

A dealer is a person who purchases the securities or commodities with the expectation of realizing a profit

not because of a rise in value during the interval of time between purchase and resale, but merely because they have or hope to find a market of buyers who will purchase from them at a price in excess of their cost. This excess or mark-up represents remuneration for their labors as a middle man bringing together buyer and seller, and performing the usual services of retailer or wholesaler of goods.

Kemon v. Commissioner, 16 T.C. 1026, 1032-33 (1951). Dealers have customers for purposes of section 1221. See United States v. Diamond, 788 F.2d 1025, 1029 (4th Cir.1986).

Traders, on the other hand, are sellers of securities or commodities who "depend upon such circumstances as a rise in value or an advantageous purchase to enable them to sell at a price in excess of cost." Id. at 1033. A trader performs no merchandising functions nor any other service which warrants compensation by a price mark-up of the securities he or she sells. Id. at 1032-33. "[A] trader will be deemed to be engaged in a trade or business if his or her trading is frequent and substantial." King, 89 T.C. at 458. Generally, both dealers and traders will be engaged in a trade or business; only a dealer, however, has customers.

An investor is very similar to a trader. Like a trader, an investor "makes purchases for capital appreciation and income." King, 89 T.C. at 459. Unlike a trader, however, an investor makes such purchases "usually without regard to short-term developments that would influence prices on the daily market." Id. An investor, on the other hand, will never be considered to be engaged in a trade or business with respect to his or her investment activities, no matter how extensive his or her activities might be. Id. at 459.

These distinctions have important tax consequences. A dealer in securities or commodity futures can take advantage of one of the section 1221 exceptions to capital asset tax treatment, as a dealer deals in property held primarily for sale to customers in the ordinary course of his or her trade or business. Id. at 458. However, since neither a trader nor an investor deals with customers, any security or commodity future-related loss or gain must be evaluated under the capital asset provisions. See id.; see also Diamond, 788 F.2d at 1028 ("courts have clearly and consistently held that a taxpayer who trades securities for his own account, does not sell 'to customers' within the meaning of § 1221(1)"). ⁴

In sum, Wood's losses might be fully deductible as business losses if he were a dealer but are only partially deductible as capital asset losses if he was a trader or investor. Thus, contrary to Wood's contentions, the question of whether Wood had a trade or business is not dispositive; rather, the primary issue is whether Wood sold the securities or commodity futures to customers in the ordinary course of business. See Kemon, 16 T.C. at 1032 ("Whether or not securities are held primarily for sale to customers in the ordinary course of business is a question of fact, in which the crucial phrase is 'to customers.' ") (emphasis added). The district court properly focused the jury's attention on "customers." ⁵

C

There is merit to Wood's contention that the instruction "those who sell commodities contracts on an exchange do not have customers within the meaning of § 1221" is unnecessarily sweeping. While the statement may be true in many instances, a bona fide dealer might trade on an exchange. See King, 89 T.C. at 457 ("One who regularly buys and sells on an exchange may be either a dealer or a trader.") (emphasis added). A dealer, by definition, has customers, even a dealer that buys and sells on an exchange.

Even if the instruction was incorrect, however, any error was harmless. Jury instructions are to be viewed as a whole, in context of the entire trial, to determine whether they were misleading or inadequate to guide the jury's determination. United States v. Arvin, 900 F.2d 1385, 1390 (9th Cir.1990), cert. denied, --- U.S. ----, 111 S.Ct. 672, 112 L.Ed.2d 664 (1991). A conviction should not be reversed because of an allegedly incorrect instruction as long as the instruction, when...