Saturday, August 9, 2008

Evidence of Good-Faith Belief Negates Willful, and thus Criminal, Conduct

State v. Souza (ICA August 7, 2008)

Background. In 1999 and 2000 Souza demanded from his employer that nothing from his wages be withheld for federal and state taxes. In his state tax returns for those years, Souza claimed a refund, entered a zero on the line declaring his adjusted gross income, and reported negative taxable income. When Souza was told by an investigator from the Department of Taxation, Souza told him that he would file an amended tax return. He never did.

Souza was indicted for two counts of willfully filing a false tax return (HRS § 231-36(a)) and two counts of second-degree theft by deception (HRS §§ 708-830(2) and 708-831(1)(b)). Souza represented himself at trial. The circuit court refused to admit into evidence a number of Souza's exhibits, including a memorandum he prepared in 1996 setting forth legal research and analysis on which Souza formed the belief that he was exempt from paying his taxes based on his wages. The circuit court did, however, allow Souza to testify about his legal theory and Souza mentioned the memorandum. Souza explained that he sent various agencies copies of the memorandum and demanded that they respond within 30 days. They never did and Souza took this as a "default" on the part of the agencies. The State investigator testified to rebut Souza's claim that he had a good-faith belief that the State was exempted from taxing his wages. The jury found Souza guilty as charged.

The Good-Faith Defense Negates Willful Conduct (in Criminal Prosecutions).
When construing three particular criminal offenses in the Hawai'i tax code, including HRS § 231-36, courts must be "in accordance with judicial interpretation [of] similar provisions of [the federal Internal Revenue Code]; . . . the term 'wilfully' shall mean a voluntary, intentional violation of a known legal duty." HRS § 231-40. In light of the statute, the ICA adopted the good-faith defense in United States v. Cheek, 498 U.S. 192 (1991).

In that case, the Supreme Court of the United States held that a defendant's good-faith belief that he or she had no duty to pay taxes is a defense in a criminal prosecution when it can negate willful action--even when the defense applies even when the good-faith belief or misunderstanding is "plainly wrong" and "objectively unreasonable." Id. at 202. According to the U.S. Supreme Court, a defendant's good-faith belief or misunderstanding negates willful conduct because it would be impossible to intentionally breach a legal duty if noncompliance is based on ignorance or an honest misunderstanding of the law. Id. at 202. However, it is not a good-faith misunderstanding or ignorance when the defendant failed to pay taxes because he or she claimed that they were unconstitutional. Id. at 204-05. The reason for the distinction, according to the Cheek court, is that a constitutional challenge demonstrates an understanding of the legal duty imposed by the law and that noncompliance was based not on ignorance or a misunderstanding, but disagreement with its legitimacy. Id. at 203 n. 8.

So it Should've Come in. In light of Cheek, the ICA held that the circuit court erred in denying Souza's memorandum. First, contrary to the circuit court's conclusion, the memo was relevant because it had a tendency to make a fact of consequence--Souza's good-faith belief that the State could not tax his wages--more probable. See HRE Rule 401. Secondly, the circuit court abused its discretion in denying the memorandum on HRE 403 grounds as it would confuse the jury. See State v. Sale, 110 Hawai'i 386, 392, 133 P.3d 815, 821 (App. 2006) (decisions based on HRE Rule 403 reviewed for abuse of discretion). The ICA explained that the memorandum "went to the heart of Souza's good-faith defense, and the jury should have been permitted to consider the exhibit in deciding the crucial question of willfulness." Nor was the error harmless beyond a reasonable doubt. Even though Souza testified about the document and his good-faith understanding of Hawai'i tax laws as they applied (or rather did not apply) to his wages, the memorandum could have "corroborat[ed] and lend[ed] credibility to [his] testimony." Given that the good-faith belief was "central to his defense," the ICA did not find the error harmless beyond a reasonable doubt.

Getting Cheeky? The ICA applied the same analysis to the theft-by-deception charges. The indictment averred that Souza engaged in conduct with the specific intent to deceive. The ICA appeared to have extended the Cheek defense to these charges too and, thus, the circuit court should have admitted Souza's memo for the jury to consider the other charges too. These charges were not criminal violations of the tax code, but came from the Hawai'i Penal Code. Does this mean that the good-faith misunderstanding or belief that the laws do not apply to a defendant can negate any criminal prosecution alleging willful conduct? How far Cheek goes is anyone's guess.

Forget About Good-Faith for Civil Proceedings? It may not go far outside of criminal prosecutions. The ICA, in dictum and relying exclusively on federal case law, noted that in civil proceedings where the government attempts to collect outstanding taxes, the individual cannot rely on a good-faith belief that he or she had no duty under the law to pay that tax. This strongly suggests that the good-faith defense would not apply when the Department of Taxation initiates civil proceedings. Because it is dictum, however, no crystal clear determination emerges. The ICA relied exclusively on federal case law, and this time, without the mandate from HRS § 231-40, which directs courts to interpret three specific criminal offenses in the tax code in accordance with federal precedent. That particular statute does not speak to civil proceedings. Thus, the reliance by the ICA on federal case law is independent of a statutory mandate.

Other Exhibits and the Nuances of a Sufficiency-of-the-Evidence Claim. The ICA declined ruling on whether the circuit court erred in denying the rest of Souza's exhibits in light of the remand for a new trial. It also disagreed with Souza and held that there was sufficient evidence adduced at trial to support the jury verdict even though the case is going to be retried for the evidentiary errors. And that makes sense. When the appellant challenges the sufficiency of the evidence presented at trial, appellate courts view the evidence in the light most favorable to the prosecution. State v. Smith, 106 Hawai'i 365, 372, 105 P.3d 242, 249 (App. 2004). The question is whether there was sufficient evidence supporting the conclusion of the trier of fact. Id. It is irrelevant whether that conclusion will be different in light of the corrected evidentiary ruling on remand.

1 comment:

line of flight said...

This should be interesting. I wonder if a Souza documentary is on its way to Akaku.