United States v. Regan - 937 F.2d 823 (2d Cir. 1991)

Rule:

The government's burden in proving a mail or wire fraud offense, 18 U.S.C.S. §§ 1341 and 1343, is onerous. These are specific intent crimes. The government is required to prove beyond a reasonable doubt that the defendant was guilty of a "conscious knowing intent to defraud." Such wrongful intent is the "essence of the crime." Where there is little dispute concerning the making and filing of the allegedly fraudulent returns, the existence vel non of culpable intent or lack of good faith is a crucially important issue in the case.

Facts:

Defendants were associated with Princeton Newport Partners, L.P. (PN), a limited partnership investment firm with offices in New Jersey and California. From time to time in the period between 1984 and 1987, PN owned substantial quantities of stock that had depreciated in value. Prompted by the correspondence from accountants, one of the defendants concluded that PN could take losses by means of sales and repurchase arrangements with other brokerage or investment houses so long as the arrangements between PN and the other houses did not satisfy the requirements of section 1058 of the Code, 26 U.S.C. § 1058. Based on this belief, PN entered into some fifty-nine transactions with other brokerage and investment houses. Defendants were subsequently charged with tax fraud, securities fraud, mail and wire fraud, false partnership records and reports, conspiracy, and violations of the Racketeer Influenced and Corrupt Organizations Act. Defendants requested a charge specifically directed to their claim of good faith reliance on section 1058, which the district court denied, holding that the defendant’s contention concerning section 1058 had no substance and the section had no applicability to defendants' case. Defendants were subsequently convicted of the crimes charged. Defendants challenged their conviction.

Issue:

In analyzing defendants’ case, did the district court err in failing to consider defendants’ interpretation of section 1058?

Answer:

Yes.

Conclusion:

The court held that the district court’s outright rejection of defendants’ interpretation of section 1058 was a prejudicial error. According to the court, the issue was not whether defendants’ construction of section 1058 was correct or even objectively reasonable but whether it was made in good faith. Although defendants were not charged with violating section 1058, that section became pivotal in the case because defendants believed that it authorized them to do just what they did, i.e., take tax losses. If this belief was held in good faith, they could not be held criminally liable for proceeding on that basis. The issue of defendants’' good faith reliance on section 1058 as defendants interpreted it was squarely raised and argued. The court held that the district court should have instructed the jury that, if it found the reliance was held in good faith, the defendants could not be held criminally liable for proceeding in accordance with that reliance. Defendants were entitled to have the trial court clearly instruct the jury, relative to defendants' theory of defense to the tax charges, that the theory if believed justified acquittal on those charges.