And there's a special guest appearance by von Nuthaus. (See footnote 13.)
There have been many threads about Kahre over the years, and I prefer to attach appeal decisions to threads about the trial or conviction, but in this case they seem old or largely off-topic, and so I'm starting a new one. I won't object if someone decides it would be better to merge this thread with an older one.
The following is the only section of the opinion likely to be of interest to this forum:
9th Circuit wrote:B. The District Court's Determination of Tax Valuation Based on the Fair Market Value of the Gold and Silver Coins
Appellants contend that the district court erred in denying their motions to dismiss the indictments because they did not know that their use of gold and silver coins for payroll payments was illegal under the tax laws. Appellants specifically maintain that the district court's tax valuation predicated on the fair market value of the gold and silver coins unfairly imputed criminal intent to their unknowing actions.
"The element of wilfulness cannot obtain in a criminal tax evasion case unless the law clearly prohibited the conduct alleged in the indictment." George, 420 F.3d at 995 (citations and internal quotation marks omitted). "Without sufficient clarity in the law, taxpayers lack the fair notice demanded by due process so that they may conform their conduct to the law." Id. (citation and internal quotation marks omitted). "However, a lack of prior appellate rulings on the topic does not render the law vague, nor does a lack of previously litigated fact patterns deprive taxpayers of fair notice." Id. at 995-96 (citation and internal quotation marks omitted). "Thus, criminal prosecution is permissible when it is clear beyond any doubt that the conduct is illegal under established principles of tax law." Id. at 996 (citation, alterations, and internal quotation marks omitted).
Appellants' argument is unpersuasive, as we have expressly held that coins are taxable as property when their fair market value exceeds their face value. In Cordner v. United States, 671 F.2d 367 (9th Cir. 1982), the appellants received $20 Double Eagle gold coins as corporate dividends. See id. at 368. After the appellants reported the dividends at the coins' face value, the IRS charged the appellants with a taxable dividend equivalent to the coins' fair market value. See id. We held that the IRS correctly assessed the coins as property based on their fair market value:Id. (citations and internal quotation marks omitted).We have no difficulty in holding that the gold coins here, though legal tender and hence money for some purposes, are also property to be taxed at fair market value because they have been withdrawn from circulation and have numismatic worth. When legal tender, by reason of its value to collectors or the intrinsic worth of its contents, has a fair market value in excess of its face value or tender, then it should be deemed property other than money . . .
In Cal. Fed. Life Ins. Co. v. Comm'r, 680 F.2d 85 (9th Cir. 1982), the appellant exchanged Swiss francs for $20 gold coins, and claimed a capital loss premised on the coins' face value. See id. at 86. We affirmed the tax court's determination that the gold coins were taxable as property based on their fair market value. See id. We held that usage of the term "money" in I.R.C. § 1001(b) required a realistic assessment of the coins as property:Id. (footnote reference and internal quotation marks omitted).Section 1001(b) is clearly intended to permit a realistic assessment of the economic gain or loss attending a sale or exchange. That purpose would be frustrated by an interpretation that compelled gold coins to be treated at a fraction of their true value. We therefore conclude that money in § 1001(b) refers to the currently circulating medium of exchange, while property includes coins that have, by reason of their value to collectors or the intrinsic worth of their contents, a fair market value in excess of their face value. Because the key element is the excess of market over face value, it is immaterial that such coins may be legal tender at their face value.
Appellants attempt to distinguish Cordner and Cal. Fed. Life Ins. Co. because those cases involved coins that had been withdrawn from circulation. However, in Cal. Fed. Life Ins. Co., we declined to recognize this very distinction because we "agree[ed] with the Tax Court's conclusion that the technical status of the coins as legal tender is immaterial . . ." Cal. Fed. Life Ins. Co., 680 F.2d at 86 n.3 (citation and internal quotation marks omitted). Rather, we emphasized that "ecause the key element is the excess of market over face value, it is immaterial that such coins may be legal tender at their face value. . . ." Id. at 86 (footnote reference omitted).
Other courts have held that coins in circulation may be assessed at their fair market value. In Joslin v. United States, 666 F.2d 1306 (10th Cir. 1981), the Tenth Circuit considered whether the taxpayer should have reported payments in silver dollars at their numismatic value. See id. In that case, an attorney received 200 silver dollars for legal services, and reported the income as $200, instead of the fair market value of $1,000. See id. at 1306-07. The Tenth Circuit observed that "f a taxpayer receives property other than cash as compensation, the taxpayer's income is measured by the property's fair market value." Id. at 1307 (citation omitted). Based on general tax principles, the Tenth Circuit held:Id. (citations and footnote reference omitted).Unquestionably, a silver dollar has both a face value and a separate value reflecting the coin's numismatic worth. To this extent a silver dollar combines the characteristics of cash and property. When a taxpayer bargains for and benefits from the higher market value of silver coins, he or she must include this amount in income. That silver dollars are designated legal tender with a nominal value of one dollar acceptable at the United States Treasury to discharge one dollar of debt, or exchangeable for a one dollar Federal Reserve note, does not require a different result. . . .
In Stoecklin v. Comm'r, 865 F.2d 1221 (11th Cir. 1989), the Eleventh Circuit reached a similar conclusion. In that case, the appellant, who was the trustee of an equity trust, formed a corporation for his accounting practice, of which he was the only shareholder and employee. See id. at 1222-23. The corporation paid the appellant's trust 250 silver dollars per month for the appellant's services. See id. at 1223. Although the corporation deducted the coins' fair market value as expenses, the appellant only reported the face value of the coins as income. See id. The IRS subsequently sought a deficiency premised on the fair market value of the coins. See id. Applying the precepts developed in Cordner and Joslin, the Eleventh Circuit rejected the appellant's argument that coins still in circulation were assessed at face value, and held that the IRS properly sought a deficiency premised on the fair market value of the coins. See id. at 1225; see also Lary v. Comm'r, 842 F.2d 296, 299 (11th Cir. 1988) ("Where coins have a fair market value in excess of their face value, their potential use as legal tender is irrelevant. . . .") (citation omitted).[9],[10]
Based on these longstanding and consistent precedent, we conclude that Appellants had ample notice that their payroll scheme, premised on the exchange of gold and silver coins for envelopes of cash, triggered the requirement to remit payroll taxes to the IRS and to report the payments as income based on the fair market value of the coins. See George, 420 F.3d at 995-96.[11]
We are not persuaded by Appellants' argument that the Gold Bullion Coin Act of 1985, Pub. L. No. 99-185, 99 Stat. 1177, overruled prior legal precedent that coins are assessed at fair market value. Although the Gold Bullion Coin Act provides the Secretary of the Treasury with the authority to mint gold and silver coins for circulation, see 31 U.S.C. § 5112(a)(7)-(11) (2010),[12] there is no statutory language reflecting Congressional intent to overrule prior legal precedent or to establish the taxable value of the coins as their face value. See id.; see also Sklar v. Comm'r, 549 F.3d 1252, 1262 (9th Cir. 2008) (observing that if Congress intended to overrule judicial precedent concerning tax laws, "it would have expressed its intention more clearly") (citation omitted). Further, the legislative history of the Act reflects, if anything, Congressional intent that gold coins retain their fair market value. See 131 Cong. Rec. H10528-05, 1985 WL 721189 (Cong. Rec. Dec. 2, 1985) (statement of Rep. Annunzio) ("The gold coins will be sold at the market price of gold plus a small charge for minting, marketing and distribution, beginning October 1, 1986. . . ."); see also id. (statement of Rep. Lewis) ("The actual denomination of these new coins will be obvious to everyone-1 troy ounce, half-ounce, quarter-ounce, and tenth-ounce. Their value will be determined by the free market, just as the values of all other goods and services are determined."). The legislative record contains no linguistic or historical support for Appellants' contention that the Gold Bullion Coin Act of 1985 overruled prior legal precedent formulating tax assessments for gold and silver coins.
Appellants' reliance on 31 U.S.C. § 5118(a) and (d) in support of their argument that the district court's ruling violated their right to contract is similarly misplaced. According to Appellants, § 5118 legalizes contracts like theirs, that contain "gold clauses."
Section 5118 provides in relevant part:Id. (internal quotation marks omitted).(a) In this section -- (1) gold clause means a provision in or related to an obligation alleging to give the obligee a right to require payment in -- (A) gold; (B) a particular United States coin or currency; or (C) United States money measured in gold or a particular United States coin or currency.
. . .
(d)(1) In this subsection, obligation means any obligation (except United States currency) payable in United States money. (2) An obligation issued containing a gold clause or governed by a gold clause is discharged on payment (dollar for dollar) in United States coin or currency that is legal tender at the time of payment. This paragraph does not apply to an obligation issued after October 27, 1977.
Assuming arguendo that § 5118 does "legalize" contracts containing gold clauses, it would be of no help to Appellants, because Appellants' schemes did not implicate gold clause contracts as defined in § 5118. See § 5118(a)(1) (defining "gold clause" as an obligation purporting to give the obligee the right to demand payment in, among other things, gold); see also 60 Am.Jur.2d Payments § 26 (2012) ("A gold clause is a provision in or related to an obligation alleging to give the obligee a right to require payment in gold, a particular United States coin or currency, or United States money measured in gold or a particular United States coin or currency. An obligation issued containing a gold clause or governed by a gold clause is discharged on payment (dollar for dollar) in United States coin or currency that is legal tender at the time of payment. . . .") (footnote references and internal quotation marks omitted). Rather than utilizing a gold clause, i.e., a clause designed to give employees a right to demand payment in gold, Appellants evaded income and payroll tax obligations by requiring employees to exchange gold and silver coins for cash in order to receive their weekly wages. This practice turned the gold clause standard on its head. Rather than the obligee (the employee) demanding payment in gold from the obligor (Kahre), the obligor (Kahre) required the obligee (the employee) to accept payment in gold that would then be repaid with cash. Nothing in 31 U.S.C. § 5118 or cases interpreting that statute validates Kahre's practice.
Notably, if an employee retained a gold or silver coin in lieu of cash, the fair market value of the coin, as opposed to its face value, was deducted from the employee's wages. The evidence at trial also established that the Kahres did not participate in the gold and silver coin exchange required of Kahre's employees, a clear indication of the illegitimacy of the practice. Given the inapplicability of § 5118 to Kahre's scheme, Appellants' argument regarding their right to contract pursuant to that section is unpersuasive.
In the alternative, Appellants maintain that the Department of Justice and the IRS lack authority to value coinage. In essence, Appellants erroneously assume that the IRS thwarted Congress' monetary powers, including the valuation of money. The flaw in Appellants' assumption is that the IRS did not establish valuation of coinage as a matter of monetary policy. Rather, the IRS interpreted and applied the tax code defining the taxable value of gold and silver coins as property when used as compensation for services rendered. The IRS's actions in no way violated the separation of powers, as the IRS is "the authority on the interpretation and application of the Internal Revenue Code . . ." Tualatin Valley Builders Supply, Inc. v. United States, 522 F.3d 937, 942 (9th Cir. 2008); see also 26 U.S.C. § 7805(a) (delegating authority concerning the Internal Revenue Code).
Appellants again urge application of the rule of lenity to reverse their convictions, pointing to the "uncertainty" of their tax obligations. "The rule of lenity only applies, however, where there is a grievous ambiguity or uncertainty in the language and structure of the statute, such that even after a court has seized every thing from which aid can be derived, it is still left with an ambiguous statute. . . ." United States v. Carona, 660 F.3d 360, 369 (9th Cir. 2011), as amended (citation, alterations, and internal quotation marks omitted). "Because the meaning of language is inherently contextual, we have declined to deem a statute ambiguous for purposes of lenity merely because it was possible to articulate a construction more narrow than that urged by the government. . . ." Id. (citation and alteration omitted) (emphasis in the original).
As discussed, several federal courts, as well as the Tax Court, have held that gold and silver coins are assessed at their fair market value when used for compensation for services rendered. The applicable tax laws and corresponding regulations also establish that, when property is used as compensation, it is assessed at fair market value. See 26 U.S.C. § 61(a)(1) (defining gross income as including "[c]ompensation for services, including fees, commissions, fringe benefits, and similar items . . ."); 26 C.F.R. § 1.61-2(d)(1) ("f services are paid for in property, the fair market value of the property taken in payment must be included in income as compensation. . . ."). Additionally, Appellants were charged with violating 26 U.S.C. § 7202, with the operative Indictment alleging that Appellants "willfully fail[ed] to collect or truthfully account for and pay over such tax . . ." (emphasis added). Inclusion of a scienter requirement "mitigates a law's vagueness, especially with respect to the adequacy of notice to the complainant that his conduct is proscribed." United States v. Guo, 634 F.3d 1119, 1123 (9th Cir. 2011) (citations, alteration, and internal quotation marks omitted).[13]
We hold that the district court correctly determined that gold and silver coins used to pay wages were properly assessed at their fair market value, and that Appellants had sufficient notice that their conduct was illegal under the tax laws.
These are the relevant footnotes:
[9] Appellants contend that gold and silver coins are statutorily valued at face value. However, this appeal does not really concern the statutory value of gold and silver coins when utilized as legal tender. See Cordner, 671 F.2d at 368; Stoecklin, 865 F.2d at 1225. Instead, this appeal addresses Appellants' payment of wages in gold and silver coins in a scheme to avoid payroll taxes, as evidenced by the facts that Kahre's employees were required to immediately return the coins for cash and, that if an employee retained the coins, his wages were reduced by the fair market value of the coins.
[10] The Tax Court has also opined that coins are taxed as property at fair market value when used as compensation for services or goods. See Smith v. Comm'r, T.C.Memo. 1998-148, 1998 WL 191835, at *3 (U.S. Tax Ct. 1998) ("When the fair market value of legal tender exceeds its face value, such legal tender is property other than money.") (citations omitted).
[11] In their request for judicial notice, Appellants proffer a memorandum from IRS Senior Counsel Mark Howard as confirmation that the IRS assesses coins at face value, and that Appellants' payments in gold and silver coins were consistent with IRS policy. However, the referenced memorandum primarily analyzed whether a taxpayer could pay a tax bill with gold and silver coins at face value. Citing Joslin, Cordner, and Cal. Fed. Life Ins. Co., the memorandum opined that "the taxpayer may have taken his pay out of the business in gold and silver coins and reported only the face value of the coins as income. We note that others have tried such an approach in the past. In each of these cases, the courts required the taxpayers to recognize income based on the market value and not on the face value of the coins. This case may provide evidence of some sort of ongoing scheme . . ." The memorandum does not support Appellants' argument that their payroll payments were consistent with IRS policy. See Consolidated Appellants' Request to Take Judicial Notice of Government Records and Facts Contained Therein That Can Be Accurately and Readily Determined, March 5, 2012, Exh. 1, at 2, 5, Case No. 09-10471, Docket No. 70.
[12] The Gold Bullion Coin Act of 1985 is currently codified at 31 U.S.C. § 5112 (2010).
[13] Appellants posit that the government's confusion concerning the valuation of gold and silver coins demonstrates that the law is unsettled. In support of the premise that the government is in fact confused, they point to the indictment in United States v. von Nothaus, Case No. 5:09-27 (W.D. N.C.) (von NotHaous Indictment). Appellants assert that governmental confusion is evidenced by the allegation in the von Nothaus Indictment that coins constitute United States currency, rather than property. However, von Nothaus involved the creation and promotion of a private coin as competing currency, and not violations of the tax code through the use of wage payments in gold and silver coins to avoid paying payroll taxes. As in this case, the legal analysis turned on the manner in which the coins were used.
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