Second Circuit Vacates Part of Tax Shelter Case

Guest Blogger - Peter D. Hardy (Post & Schell)

On November 29, a divided panel of the Second Circuit vacated two out of four convictions obtained at trial by the government in the massive Ernst & Young (E&Y) tax shelter case, due to insufficient evidence.  The opinion, United States v. Coplan et al, 10-583-cr(L), is available here.

In Coplan, four defendants were convicted after a 10-week trial on a variety of criminal tax charges arising out of their alleged involvement in the development and defense of five complicated tax shelters that were sold or implemented by E&Y to wealthy clients.  Two defendants, Nissenbaum and Shapiro,　had been tax attorneys at E&Y who were each convicted of conspiracy to defraud the United States and to commit tax evasion (18 U.S.C. §371) and two substantive counts of tax evasion (26 U.S.C. §7201).  Nissenbaum also was convicted of one count of obstructing the IRS, in violation of 26 U.S.C. §7212(a), on the basis of allegedly causing false statements to be submitted to the IRS in response to an Information Document Request (IDR) submitted when the IRS was examining one of the tax shelters at issue.

The opinion is lengthy and complex, and resists easy summarization.  It is well worth reading because it discusses in detail a kaleidoscope of issues relevant to any "white collar" criminal trial, from evidentiary rulings to jury instructions to sentencing.  This commentary is limited to the sufficiency of evidence claims, and some of their implications for lawyers as potential defendants.

The panel in Coplan displayed a remarkable willingness to comb through an extremely complicated trial record and test every nuanced inference that the government urged could be drawn from the evidence in support of the verdicts.  The bottom-line holding of the panel was that, after making all inferences in favor of the government, the convictions had to be vacated because the evidence of guilt was at best in equipose.

Although this general principle can be stated easily, its practical application in Coplan involved the panel conducting a particularized review of the evidence that appellate courts often forego.  For example, one important fact for Shapiro was that a tax opinion letter provided to shelter clients stated that, for the purposes of the "economic substance" test governing tax-related transactions, the clients had a "substantial nontax business purpose" (OK, per the Coplan panel), rather than stating, as it had before Shapiro’s revisions, that the clients had a "principle" investment purpose.  Likewise, although Shapiro had reviewed letters and attended phone conferences deemed incriminating by the government, his involvement in such conduct was not "habitual" or otherwise substantial.  As for Nissenbaum’s Section 7212(a) conviction, his response to the IDR that the government characterized as obstructive – a partial explanation of the clients’ subjective business reasons for participating in the　tax shelters – could not sustain the conviction because the IDR drafted by the IRS had sought all reasons held by the clients, rather than their primary reason.  If this sounds somewhat murky and convoluted, it is.  The point is that multiple convictions for very significant offenses were vacated after much effort at extremely fine line-drawing.

The implicit theme running throughout the discussion of the evidence was that it was not sufficiently clear that these lawyers had crossed the line while attempting to assist their clients, to whom they owed a duty.  The competing tensions that lawyers can face was encapsulated in a jury instruction discussed later in the opinion.  Although the trial court instructed the jury as requested by the defense that "[i]t is not illegal simply to make the IRS’s job harder[,]" it declined to instruct the jury on the larger defense point that "[t]his is particularly true for the defendants, whose professional obligations as attorneys or certified public accountants required them to represent the interests of their clients vigorously in their dealings with adversaries, such as the IRS." 

The Coplan case echoes partially the case of Lauren Stevens, the former in-house counsel for GlaxoSmithKline who was indicted and tried in 2011 by the government for allegedly obstructing a U.S. Food and Drug Administration investigation of alleged off-label practices by the company.  The district court dismissed all charges against Ms. Stevens at the end of the government’s proofs for insufficient evidence.  The ruling was a tremendous defense victory and underscored, like the Coplan case, the difficulties that the government can face when it targets a lawyer on the basis of alleged conduct undertaken on behalf of a client.  Nonetheless, these cases still stand as cautionary tales to practitioners.  Although there are important differences between Coplan and Ms. Stevens' case, both cases remind us of the pitfalls that can await advocates who stumble into the cross-hairs of the government.  Ms. Stevens – like Shapiro and Nissenbaum – was fortunate enough to have an extremely conscientious court willing to parse through the nuances of the evidence, a great defense team, and the resources for extended litigation.  It is no slight to these clients or their lawyers to recognize that, in many ways, sheer luck played a role in their ultimate outcomes.  Although acquittals can provide vindication, such finales may provide limited comfort to the client after the excruciating process of being investigated, charged and tried.  That such a process might turn eventually on the precise phrasing of a document, or how a conference call might be handled, is sobering.

(Peter Hardy)