Lynne Meredith Disciple Loses Appeal

[The Observer]

UNITED STATES OF AMERICA,
Appellee,
v.
JAMES ELLETT,
Defendant-Appellant.

Release Date: MAY 23, 2008


UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT

August Term 2007

(Argued: May 16, 2008
Decided: May 23, 2008)

Before: JACOBS, Chief Judge; MINER, Circuit Judge; MCAVOY, District Judge./1/

Defendant-Appellant James Ellett appeals from the judgment of the United States District Court for the Northern District of New York (Hurd, J.), convicting him, after a jury trial, of four counts of income tax evasion and one count of failure to file an income tax return. We hold that due process did not require that Ellett be given the opportunity to litigate his tax position civilly or administratively before being prosecuted for tax evasion. Affirmed.

RONALD JAY COHEN, Cohen, Estis & Associates, LLP, Goshen, NY,
for Defendant-Appellant.

PAUL D. SILVER, Assistant United States Attorney (Glenn T.
Suddaby, United States Attorney, Northern District of New York,
on the brief; Sara Lord, Brenda K. Sannes, Assistant
United States Attorneys, of counsel), United States Attorney's
Office for the Northern District of New York, Albany, NY, for
Appellee.

PER CURIAM:

Defendant-Appellant James Ellett appeals from the judgment of the United States District Court for the Northern District of New York (Hurd, J.), convicting him, after a jury trial, on five tax counts. On appeal, Ellett contends that due process required that he be given the opportunity to litigate his tax position civilly or administratively before being prosecuted for tax evasion. We reject that argument in this opinion. In a separate summary order filed today, we reject Ellett's other challenges to his conviction./2/ We therefore affirm the judgment below.

BACKGROUND

Ellett was indicted in the Northern District of New York on September 14, 2006 for three counts of income tax evasion for tax years 2000-2002, in violation of 26 U.S.C. section 7201. A superseding indictment filed on February 2, 2007 added two counts: tax evasion for tax year 2003, in violation of 26 U.S.C. section 7201, and misdemeanor failure to file for tax year 2004, in violation of 26 U.S.C. section 7203. The district court rejected Ellett's requests to dismiss the superseding indictment.

The evidence at trial showed that beginning in 1989 Ellett worked as a skilled mechanic at a public gas and utility company. He received wages and overtime compensation and regularly filed federal and state income tax returns until 1994. That year, at a co-worker's urging, Ellett read Vultures in Eagle's Clothing: Lawfully Breaking Free From Ignorance Related Slavery (1997), a publication by Lynne Meredith that instructs readers how to "LAWFULLY STOP!!! PAYING INCOME TAXES" based on fanciful analyses of the tax laws.

From May 1996 through tax year 2004, Ellett filed an "In Lieu of Form W-4" form (modeled after a sample form included in Vultures), which directed his employer to withhold zero dollars from his income. Thus, although Ellett earned between $ 64,000 and $ 102,000 per year in the period 2000-03, his federal withholding was zero. In the latter half of 2004, at the IRS's instruction, Ellett's employer began withholding taxes from his wages, with the result that $ 8,251 was withheld for 2004 on income of $ 73,376. Ellett did not file federal income tax returns for the 2003 and 2004 tax years. In all, Ellett failed to pay over $ 64,000 in federal income taxes from 2000 through 2004.

Ellett sought to persuade the jury that the prosecution did not prove the willfulness element of tax evasion, because he sincerely believed that, as a native of one of the 50 states who worked for a private employer, he was exercising a "nontaxable right" to engage in labor. Ellett testified that he formulated this belief by reading portions of Vultures in Eagle's Clothing at least one hundred times and by spending hours researching the topic in a law library. On cross-examination Ellett conceded that he knew any tax professional would have disagreed with him (so he never consulted one) and that he was aware that the Supreme Court has upheld the constitutionality of the federal income tax.

The government undertook to prove willfulness by showing that the IRS had notified Ellett that his legal position had been "rejected repeatedly as frivolous and without merit by the federal courts." Other evidence showed that the New York State Department of Taxation informed Ellett that his legal position was "obviously incorrect" and that it "has been rejected and deemed frivolous by the Tax Appeals Tribunal and federal courts."

The jury found Ellett guilty on all five counts of the superseding indictment. The district court denied Ellett's motions for judgment of acquittal and for a new trial, and on August 10, 2007, sentenced Ellett principally to 18 months' imprisonment.

DISCUSSION

Ellett argues that due process required that he be given the opportunity to litigate his tax position civilly or administratively before being prosecuted for tax evasion.

"The elements of tax evasion [under 26 U.S.C. section 7201] are willfulness, the existence of a tax deficiency and an affirmative act of evasion, all of which the government must prove." United States v. Plitman, 194 F.3d 59, 65 (2d Cir. 1999); see United States v. Helmsley, 941 F.2d 71, 97 (2d Cir. 1991) (explaining that the jury must "find a substantial tax deficiency").

The government therefore was required to establish the existence of a substantial tax deficiency beyond a reasonable doubt. To do that, Ellett contends, the government was first required to adjudicate his income tax exemption claim either civilly or administratively. It is undisputed that the Internal Revenue Service never formally audited Ellett and that the United States Tax Court therefore has never ruled on what Ellett believes to be the central legal issue of this case, namely, whether a citizen of one of the 50 states who works for a private employer is subject to the federal income tax.

Ellett misunderstands the tax deficiency element of tax evasion. A tax deficiency arises by operation of law the date a tax return is due but not filed; no formal demand or assessment is required. See 26 U.S.C. section 6151(a) ("[W]hen a return of tax is required under this title or regulations, the person required to make such return shall, without assessment or notice or demand from the Secretary . . . pay such tax at the time and place fixed for filing the return. . . ." (emphasis added)); id. section 6072(a) (requiring annual tax returns to be filed on or before April 15). Tax liability therefore comes into being as of April 15. A tax deficiency notice "merely reminds the taxpayer of his duty to pay a tax debt already due[, it] does not create that liability." United States v. Voorhies, 658 F.2d 710, 714 (9th Cir. 1981) (internal quotation marks and alterations omitted).

Accordingly, the government is not required to obtain a civil or administrative determination of a tax deficiency in order to establish the existence of a substantial tax deficiency beyond a reasonable doubt. We join the First, Sixth, Seventh and Ninth Circuits in holding that due process does not require the government to adjudicate tax disputes civilly or administratively before proceeding to criminal prosecution for tax evasion. See United States v. Daniel, 956 F.2d 540, 542 (6th Cir. 1992); United States v. Hogan, 861 F.2d 312, 315-16 (1st Cir. 1988); United States v. Dack, 747 F.2d 1172, 1174-75 (7th Cir. 1984); Voorhies, 658 F.2d at 715 (per curiam). Ellett's criminal prosecution was not unlawfully premature.

CONCLUSION

For the foregoing reasons, and for the additional reasons discussed in our accompanying summary order, we affirm the judgment of conviction below.

FOOTNOTES

/1/ The Honorable Thomas J. McAvoy of the United States District Court for the Northern District of New York, sitting by designation.

/2/ In the summary order we reject arguments concerning: (1) the exclusion of legal materials that Ellett claims to have relied upon in forming the view that tax laws were invalid; (2) the exclusion of an IRS agent's tax worksheets and the denial of an adjournment to allow the defense to review another agent's calculations; (3) the admission of evidence of Ellett's prior federal and state tax history; (4) the alleged violation of Brady v. Maryland, 373 U.S. 83 (1963); (5) the delayed filing of the superseding indictment; and (6) the tone and volume used in delivering the jury charge.

END OF FOOTNOTES

* * * * *

SUMMARY ORDER

RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO SUMMARY ORDERS FILED AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED BY THIS COURT'S LOCAL RULE 32.1 AND FEDERAL RULE OF APPELLATE PROCEDURE 32.1. IN A BRIEF OR OTHER PAPER IN WHICH A LITIGANT CITES A SUMMARY ORDER, IN EACH PARAGRAPH IN WHICH A CITATION APPEARS, AT LEAST ONE CITATION MUST EITHER BE TO THE FEDERAL APPENDIX OR BE ACCOMPANIED BY THE NOTATION: "(SUMMARY ORDER)." A PARTY CITING A SUMMARY ORDER MUST SERVE A COPY OF THAT SUMMARY ORDER TOGETHER WITH THE PAPER IN WHICH THE SUMMARY ORDER IS CITED ON ANY PARTY NOT REPRESENTED BY COUNSEL UNLESS THE SUMMARY ORDER IS AVAILABLE IN AN ELECTRONIC DATABASE WHICH IS PUBLICLY ACCESSIBLE WITHOUT PAYMENT OF FEE (SUCH AS THE DATABASE AVAILABLE AT HTTP://WWW.CA2.USCOURTS.GOV/). IF NO COPY IS SERVED BY REASON OF THE AVAILABILITY OF THE ORDER ON SUCH A DATABASE, THE CITATION MUST INCLUDE REFERENCE TO THAT DATABASE AND THE DOCKET NUMBER OF THE CASE IN WHICH THE ORDER WAS ENTERED.

At a stated term of the United States Court of Appeals for the Second Circuit, held at the Daniel Patrick Moynihan United States Courthouse, 500 Pearl Street, in the City of New York, on the 23 day of May, two thousand eight. rd

PRESENT:
HON. DENNIS JACOBS, Chief Judge,
HON. ROGER J. MINER, Circuit Judge,
HON. THOMAS J. MCAVOY, District Judge./1/

FOR DEFENDANT-APPELLANT:

RONALD JAY COHEN, Cohen, Estis & Associates, LLP, Goshen, NY.

FOR APPELLEE:

PAUL D. SILVER, Assistant United States Attorney (Glenn T.
Suddaby, United States Attorney, Northern District of New York,
on the brief; Sara Lord, Brenda K. Sannes, Assistant
United States Attorneys, of counsel), United States
Attorney's Office for the Northern District of New York, Albany,
NY.

Appeal from the United States District Court for the Northern District of New York (Hurd, J.).

UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED AND DECREED that the judgment of the district court be AFFIRMED.

Following a jury trial in the United States District Court for the Northern District of New York (Hurd, J.), Defendant-Appellant James Ellett was convicted of four counts of income tax evasion, in violation of 26 U.S.C. section 7201, and one count of failure to file an income tax return, in violation of 26 U.S.C. section 7203. The district court sentenced Ellett principally to 18 months' imprisonment. In a separate per curiam opinion issued today, we hold that due process did not require that Ellett be given the opportunity to litigate his tax position civilly or administratively before being prosecuted for tax evasion. In this summary order, we address Ellett's additional challenges to his conviction. We assume the parties' familiarity with the underlying facts, the procedural history, and the issues presented for review.

[1] Ellett challenges the exclusion of certain legal materials that (he claims) convinced him that he was exempt from paying taxes. We review a district court's exclusion of evidence for abuse of discretion, reversing only where the decision was "manifestly erroneous," United States v. Samet, 466 F.3d 251, 254 (2d Cir. 2006) (internal quotation marks omitted), or "arbitrary and irrational," United States v. Paulino, 445 F.3d 211, 217 (2d Cir. 2006) (internal quotation marks omitted). Ellett was permitted to testify that he relied on these sources in developing his views on the income tax laws and he testified as to his understanding of the facts and holdings of certain Supreme Court cases. To the extent that the excluded material was proffered to show the depth of Ellett's research, it was cumulative because the government never challenged Ellett's research efforts on cross-examination. Given the substantial prospect that these legal sources would have confused or misled the jury, the district court's exclusion of them was not arbitrary or irrational.

[2] Ellett asserts that the government called IRS Agent Bhagwendeen to testify even though Ellett was expecting a different agent, Agent Fattarouso. Ellett fails to demonstrate any prejudice resulting from the substitution of Agent Bhagwendeen for Agent Fattarouso. Ellett claims that the district court erred in not affording defense counsel time to review Agent Bhagwendeen's tax liability calculations and in excluding Agent Fattarouso's tax worksheets for tax year 2004. However, even if Agent Bhagwendeen had miscalculated Ellett's liability for the tax years prior to 2004, such differences would not be material to his tax evasion defense because Ellett would still have owed the government a substantial sum. As to the excluded worksheets, Agent Bhagwendeen could not properly authenticate them because he did not prepare them and could not vouch for their accuracy. (Ellett could have called Fattarouso as a witness, but did not.) Finally, if Ellett had planned to demonstrate that Agent Fattarouso miscalculated Ellett's tax liability for 2004, this would not have affected the outcome of the case because the superseding indictment only charged a failure to file a tax return for 2004 (rather than tax evasion, which requires proof of a substantial tax liability, see United States v. Plitman, 194 F.3d 59, 65 (2d Cir. 1999)).

[3] Ellett argues that the district court abused its discretion in admitting evidence of his federal tax history for years that were not charged in the indictment and [ii] evidence of his New York State tax history. "District courts enjoy broad discretion in admitting evidence of similar acts; to find an abuse of that discretion we must be persuaded that the trial judge ruled in an arbitrary and irrational fashion." United States v. Bok, 156 F.3d 157, 165 (2d Cir. 1998) (internal quotation marks omitted). A defendant's past taxpaying record is admissible under Federal Rules of Evidence 403 and Rule 404(b) as circumstantial evidence of willfulness. Id. at 166 ("[Defendant's] failure to file state or federal returns . . . is indicative of an intent to evade the tax system." (emphasis added)); United States v. Klausner, 80 F.3d 55, 63 (2d Cir. 1996) ("Patterns of understating or failing to report income are also considered evidence of willfulness."). Evidence of Ellett's failure to pay federal income tax in uncharged years was undoubtedly relevant because it tended to show that his failure to pay tax in the charged years was willful -- that is, that he "knew of [his] duty, and that he voluntarily and intentionally violated that duty." Cheek v. United States, 498 U.S. 192, 201 (1991). Moreover, the district court provided a limiting instruction that the evidence was admitted only to show Ellett's state of mind.

[4] Ellett maintains that the government violated his rights under Brady v. Maryland, 373 U.S. 83 (1963), by excluding Agent Fattarouso's tax worksheets. A Brady violation requires, inter alia, that favorable evidence "must have been suppressed by the State, either willfully or inadvertently." United States v. Jackson, 345 F.3d 59, 71 (2d Cir. 2003) (internal quotation marks omitted). But here the worksheet was excluded pursuant to an evidentiary ruling by the district court. In addition, Ellett fails to explain how this evidence was favorable to him -- i.e., how it "tends to show that [he] is not guilty" or how it "impeaches a government witness." Id. (internal quotation marks omitted).

Even if the delayed filing of the superseding indictment amounted to bad faith on the part of the government -- an issue that we do not decide -- Ellett fails to demonstrate prejudice. Defense counsel sought and obtained a continuance after the superseding indictment was filed. Moreover, the government surely knew in advance of Ellett's pre-trial brief that Ellett would be raising a good faith defense to the tax evasion charges: willfulness was the only seriously contested issue. This claim therefore provides no basis for vacatur.

[5] Finally, Ellett asserts that the district court gave insufficient prominence to the good faith defense by "burying" it deep in the jury instructions and by delivering that portion of the charge with a "lack of emphasis." We review challenges to jury instructions de novo, "reversing only where a charge either failed to inform the jury adequately of the law or misled the jury about the correct legal rule." United States v. Ford, 435 F.3d 204, 209-10 (2d Cir. 2006). We see no error here because the jury charge correctly recited the elements of the good faith defense and because Ellett cites no support for the idea that we ascertain and review the tone and volume used in delivering the jury charge.

Finding no merit in Ellett's remaining arguments, the judgment of the district court is hereby AFFIRMED.

FOR THE COURT:

Catherine O'hagan Wolfe, Clerk

By: ________________________

FOOTNOTE

/1/ The Honorable Thomas J. McAvoy of the United States District Court for the Northern District of New York, sitting by designation.

[Famspear]

Maybe the defendant can contact Bonita Lynne Meredith and ask her what he should do now. If he wants to contact her, she's here:

http://www.bop.gov/iloc2/InmateFinderSe ... &x=25&y=26

[Lambkin]

Here's a trip down memory lane for you...

I hear that these Contractual Trust Organizations work great when you want to "hide in plain sight".

http://web.archive.org/web/200202080344 ... /038pg.htm

How to Become Uncollectable! Hide in Plain Sight! Protect Your Assets from Capital Assaults from Personal Lawsuits, Personal Liens, Personal Levies, Personal Bankruptcy, Divorce, Incapacity, or Death! Operate a Tax Free Business! Legally Eliminate Income, Estate Taxes and Probate! Extensively Researched!!! Numerous Case Law Cites, Supreme Court Decisions and Professional Legal Opinions Upholding the Legality and Superiority of Contractual Trusts! Includes a Summary of an Investigation by an Attorney Hired by the Tax Commissioner of Massachusetts who Concluded that Common Law Trusts are Well Recognized at Law and Equity and Provide Numerous Advantages to Citizens Over Other Types of Organizations!

[Kimokeo]

"On cross-examination Ellett conceded that he knew any tax professional would have disagreed with him (so he never consulted one) and that he was aware that the Supreme Court has upheld the constitutionality of the federal income tax."

I could see someone now brushing up on how to properly answer the question.
Every tax professional would disagree, but those are professionals who aren't truly educated.

[The Operative]

I could see someone now brushing up on how to properly answer the question.
Every tax professional would disagree, but those are professionals who aren't truly educated.

Amazingly enough, that is exactly how they think. I was recently in an argument on Yahoo!Answers about how wrong a particular conspiracy theory was. The guy I argued with finally finished by proclaiming that people with a college education were brainwashed and that prevented them from thinking clearly.

[Mr. Mephistopheles]

I could see someone now brushing up on how to properly answer the question.
Every tax professional would disagree, but those are professionals who aren't truly educated.

Amazingly enough, that is exactly how they think. I was recently in an argument on Yahoo!Answers about how wrong a particular conspiracy theory was. The guy I argued with finally finished by proclaiming that people with a college education were brainwashed and that prevented them from thinking clearly.

Does that mean we can all get a refund then?