Proper Venue in Criminal Tax
This is the fifth post in our review of the Department of Justice (DOJ) Tax Manual. In the first four parts we reviewed sections of the manual analyzing the structure of DOJ’s tax division, grand jury and administrative criminal tax investigation procedures, the role of immunity, and plea agreements. In this post, we will begin our review of the substantive provisions of the manual. This post will review the rules underlying proper venue in a criminal tax prosecution.
Establishing Venue in Criminal Tax Prosecutions
Venue refers to the federal district where a defendant is charged. The venue rules are dictated by statute with interpretations by the Courts of Appeals. In white collar criminal defense, there are normally a host of options for venue that are proper under the statutory rules. An example will likely help highlight this point. Let’s assume the following:
1. A target operates an investment business, Allied Financial.
2. Allied Financial is organized in Massachusetts.
3. The target lives in Dallas within the Northern District of Texas.
4. Allied Financial’s principal office is in Houston within the Southern District of Texas.
5. Allied Financial’s clients are located all around the United States.
6. Allied Financial’s main bank operates out of San Franciso, California.
If Allied Financial operates a Ponzi scheme involving a national client base, the federal government can tie jurisdiction to multiple venues. The target could be charged in Massachusetts, Texas, California or any district where the clients reside. Essentially, the entire nation is an appropriate venue when a criminal fraud scheme is this expansive.
Generally, the federal government wants to avoid the appearance of venue shopping. Not every jury pool is the same across the United States, and the government should not decide the district of prosecution based on the likelihood of conviction. To combat this problem, the government sets out standards to be followed in every federal criminal prosecution.
For criminal tax prosecutions, the tax manual provides guidance to prosecutors on where charges should be filed when multiple venue options are present. The guidance starts with a general rule before outlining the statutory and case driven confines of venue in particular criminal tax cases.
Under the general rule, the government should pursue prosecution in the home district of the taxpayer or the taxpayer’s principal place of business. In the above example, and assuming Allied Financial has committed tax fraud, venue would be established in the Southern or Northern District of Texas.
It is important to remember DOJ policy is not the law. There is nothing in the law that requires DOJ to prosecute a tax case in the home district of the taxpayer. For this reason, the manual expounds on the general rule by outlining the statutory parameters for venue in criminal tax.
Venue in a Prosecution for Tax Evasion
Tax evasion requires the government to prove the taxpayer committed at least one affirmative act to hide or conceal assets/income. Normally, an indictment for tax evasion will contain multiple affirmative acts of evasion. These affirmative acts can take place across the United States. The case law would allow the government to indict the taxpayer in any jurisdiction where an affirmative act element is alleged.
For example, let’s assume a taxpayer is charged with tax evasion of payment. The government is alleging the taxpayer purchased assets in the name of their LLC to avoid collection efforts by the IRS. If these assets were purchased in Virginia, Texas, and Illinois, the law would allow the government to choose from any of these local districts when filing their indictment.
Venue in Failure to File Cases
Failure to file is a crime of omission. This means the government is alleging the taxpayer violated the criminal tax rules by failing to perform an act that is required by law. If a taxpayer fails to timely file a tax return, they have committed a criminal violation of 26 U.S.C. § 7203. Under the case law, venue is appropriate in the district where the taxpayer was required to file their return. This includes the district where the taxpayer resides or the district where the IRS service center is located.
Venue in False Return Cases
False return cases involve filing of a tax return with material false statements. This statute criminalizes what most citizens equate to tax fraud – lying on one’s tax returns to lower the tax burden. The Courts of Appeals view these cases as a continuing offense and thus, authorizes prosecution in the district where the return was prepared and signed, where the return was received and filed, or where the preparer received information that underlies the false filing.
Removal to Home District as Matter of Right
Under 18 U.S.C. § 3237(b), Congress outlines when a taxpayer has the right to remove a case to the district where they reside. Removal to the home district is allowed if: 1) the offense is failure to file, filing a false return, or tax evasion, 2) the offense is based solely on an IRS mailing, and 3) prosecution is originally filed in a district other than where the taxpayer resides. If all three elements are met, the taxpayer has an absolute right to remove the case to their home district under Congressional mandate.
If any offense in the indictment meets the elements above, the district court must grant the taxpayer’s request for removal. An interesting issue will arise if some of the charges meet the 3237 standard and others do not. While the district court is required to transfer the removable charges, they are not required to transfer the entire case. It is possible the taxpayer will create two separate criminal causes by filing the request. Criminal tax attorneys should attempt to remove the entire case to the home district under Rule 21(b). This rule will be reviewed more pointedly below.
While the right is absolute, the decision on whether to exercise that right is more complex. A criminal tax attorney should weigh the pros and cons of each district prior to pushing for removal. The factors that need to be weighed include: 1) the characteristics of the local prosecutors, 2) the presence of DOJ Trial Attorneys in each district, 3) the jury pool in the filed vs. the home district, 4) whether the taxpayer is cooperating with the government, 5) the additional cost associated with defending in a foreign jurisdiction, 6) the judge presiding over the case in the filed district and 7) the potential for a case split in two districts.
After weighing these factors, a competent decision can be made regarding removal. The evaluation must be done on a case-by-case basis with an eye on any strategic legal advantages.
Rule 21 and Removal in the Interest of Justice
Rule 21(b) of the Federal Code of Criminal Procedure provides an alternative basis for changing venue. In relevant part, the Rule allows for a change for the “convenience of the parties” or “in the interest of justice.” This subjective rule gives the district court wide discretion in transferring venue back to the taxpayer’s home district in specific cases. The district court must review specific factors before ruling on a Rule 21 motion.
Under Supreme Court case law (Platt v. Minnesota Mining & Mfg. Co., 376 U.S. 240 (1964)), a district court should review the following factors before ruling on a Rule 21 motion: 1) location of the defendant, 2) location of witnesses, 3) location of events at issue, 4) location of records and other evidence to be used at trial, 5) collateral disruption to the defendant’s business and life, 6) unnecessary expenses to the parties, 7) location of defense counsel, 8) the size of the dockets in each district, and 9) unique considerations not outlined in the prior factors (novel arguments).
Rule 21 can be used as a stand alone argument or in conjunction with a removal as a matter of right under § 3237. If a criminal tax attorney exercises the right to removal under § 3237, that motion should be accompanied by a Rule 21 motion to remove ineligible counts. Fighting a criminal tax case in two districts simultaneously should be avoided at all costs.
The manual advises prosecutors on Rule 21 to ensure the rules are considered prior to making an initial venue determination. DOJ is not in the business of inviting unnecessary litigation over collateral topics like venue. It is rare that DOJ will file a case in a foreign jurisdiction that unnecessarily obstructs the taxpayer. In my opinion, Rule 21 considerations are the foundation for the general rule requesting cases be filed in the taxpayer’s home district.
Venue in Criminal Tax Cases
The vast majority of criminal tax prosecutions are filed in the home district of the taxpayer. This practice allows DOJ to avoid litigation over removal requests and provides cover for any allegations of venue shopping. However, criminal tax attorneys should remain aware of the venue rules when representing taxpayers under criminal investigation. Based on resource availability, and the scope of certain prosecutions, DOJ can file a criminal tax case in a foreign jurisdiction in unique cases. When that occurs, taxpayers must remain aware of their rights to removal and the considerations surrounding the use of that right.