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United States v. Dalton

United States District Court, W.D. Virginia, Abingdon Division

January 10, 2018


          Sean P. Beaty and Daniel T. McGraw, U.S. Department of Justice, Tax Division, Washington, D.C., for United States;

          Randall C. Eads, Eads & Eads, Abingdon, Virginia, for Defendant Jeffrey S. Dalton, and Nancy C. Dickenson, Assistant Federal Public Defender, Abingdon, Virginia, for Defendant Karen L. Dalton.


          James P. Jones United States District Judge

         In this criminal case, in which the defendants are accused of tax evasion and conspiracy to structure currency transactions, I determine several pretrial motions in limine filed by the parties.[1]


         Because I write primarily for the parties, I do not exhaustively restate the facts here. The Indictment sets forth the following pertinent allegations.

         The defendants, Jeffrey S. Dalton and Karen L. Dalton, husband and wife, resided in Hillsville, Virginia, and owned and operated a subcontracting business, Blue Ridge Stainless, Inc. (“BRS”). BRS was treated as an S-Corporation for tax purposes, which means the defendants, as the corporation's sole shareholders, were responsible for reporting the income or losses of the corporation on their own individual income tax returns.

         From 2009 through 2014, the defendants jointly filed their tax returns and self-assessed their taxes due as a result of income earned from BRS. The defendants failed to pay any taxes, penalties, or interest to the Internal Revenue Service (“IRS”) for these years. From 2012 through 2015, the defendants communicated with the IRS regarding their tax liabilities, but still failed to pay the full amounts owed. It is alleged that the defendants also affirmatively acted to evade the payment of such amounts. The IRS levied the defendants' personal bank accounts, after which the defendants allegedly used the BRS business account to pay various personal expenses.

         Count One of the Indictment charges that beginning in or around October 2010 and continuing to the present, the defendants willfully attempted to evade and defeat the payment of income tax for the calendar years 2009, 2010, 2011, 2012, 2013, and 2014. Count One alleges that the defendants did so by placing and holding real property in the names of their children and other family members as nominees, signing and causing to be filed a false IRS Form 433-A, and withdrawing over $250, 000 in cash from the BRS business account between June 10, 2015, and December 9, 2015, in increments of less than $10, 000.

         Count Two charges that beginning on or about June 10, 2015, and continuing through at least on or about December 9, 2015, the defendants knowingly conspired together for the purpose of evading the currency transaction reporting requirements under 31 U.S.C. § 5313(a), in violation of federal law, by withdrawing amounts close to but less than $10, 000 at a time.

         The government has filed four motions in limine[2] and a renewed motion for disclosure of defendants' financial statements. The defendants have filed joint motions to interview grand jury members and subpoena the IRS case agent. All of the motions have been fully briefed and orally argued by counsel.


         A. Evidence of Post-Indictment Payment to the IRS.

         In its first motion in limine, the government seeks to preclude all evidence regarding the defendants' post-indictment payment of tax liabilities. The government argues that such evidence is not relevant and therefore inadmissible. In the alternative, the government contends that even if the court finds such evidence probative, any probative value is greatly outweighed by the substantial risk of confusing or misleading the jury, as well as jury nullification. The defendants argue that the tax payment was not made post-indictment, but instead, the payment was arranged a week prior. Accordingly, the defendants contend that the payment is evidence of a lack of willfulness and should be admitted.

         “Evidence of payment may be such that it merely shows a change of heart or an attempt to vitiate a crime.” United States v. Harned, 279 F. App'x 262, 264 (4th Cir. 2008) (unpublished) (internal quotation marks and citation omitted). However, evidence of payment may be offered “under such circumstances as to warrant an inference of good faith and lack of evil intent, ” and such evidence “is admissible in an income tax evasion case to support the contention that there was . . . no intent to evade payment of taxes.” Id. Admissibility “depends upon the facts and circumstances of each case.” Id.

         In this case, the defendants are alleged to have evaded their tax responsibilities for over five years. They did not finalize arrangements to pay such tax liabilities until a week before indictment, which was more than two years after their alleged criminal conduct. These circumstances suggest that the payment was an attempt to vitiate the crime.

         The government argues that the defendants' subsequent payment does not detract from the criminality of their tax evasion. That crime would be complete as soon as each fraudulent understatement of taxes was filed, and subsequent intention to pay taxes is no defense to a past intention to evade taxes. See Sansone v. United States, 380 U.S. 343, 354 (1965); see also Unites States v. Pang, 362 F.3d 1187, 1194 (9th Cir. 2004) (holding that evidence of belated tax payments made while awaiting prosecution is irrelevant).

         The government further argues that the defendants' act of paying the IRS after indictment was most likely a self-serving act performed more than two years after their alleged wrongdoing. Such an act would have minimal probative value as to the defendants' state of mind over the five years they allegedly filed understated tax returns. “[T]here is no doubt that self-serving exculpatory acts performed substantially after a defendant's wrongdoing is discovered are of minimal probative value as to his state of mind at the time of the alleged crime.” United States v. Radtke, 415 F.3d 826, 840-41 (8th Cir. 2005).

         The defendants argue that the tax payment prior to indictment is indicative of their state of mind at the time they originally failed to pay their taxes. The fact that the defendants made arrangements to pay the outstanding liability before indictment may suggest a lack of willfulness, but the defendants would have been aware of possible criminal charges since at least January 2016, and full payment to the IRS was not made until August 2017. The defendants intend to offer evidence at trial that they began making payments to the IRS in 2015 and had been attempting to obtain loans since before 2016. Under these circumstances, evidence of payment could be offered to support the contention that the defendants were acting in good faith and had no intent to evade taxes.

         The government also argues that evidence of payment would be confusing or misleading to the jury, and is likely to result in jury nullification. Federal Rule of Evidence 403 provides that evidence, though relevant, may be excluded if its probative value is substantially outweighed by a danger of confusing the issues or misleading the jury. Here, evidence of full payment to the IRS could easily leave the jury wondering why the government is prosecuting the defendants for amounts they have now paid. In other words, the jury may take a “no harm, no foul” position and acquit the defendants based solely on the belated payment. However, I believe this concern could be mitigated by a jury instruction. I find that whether the August 2017 payment bears upon the ...

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