Wednesday, August 19, 2009

Materiality and filing of false claims with IRS

In United States v. Saybolt, Nos. 07-4392 & 4429 (Aug.18, 2009), the 3rd Circuit held (1) that filing false claims with the IRS, in violation of 18 USC sect 287, does not require proof that the false claims or statements were "material." But the Court also held (2) that conspiracy to defraud the US by filing false claims with the IRS, in violation of 18 USC sect 286, does require proof of materiality in that the government must prove that the conspirators "agreed that those false statements or representations would have a material effect on the Government's decision to pay a false, fictitious, or fraudulent claim." The Court went on to hold (3) that that indictment was nonetheless sufficient, in spite of its failure to use the term "material," because the factual allegations implied materiality, and (4) that the district court's failure to instruct on materiality was harmless in light of the evidence which showed beyond a reasonable doubt that the conspirators agreed to make materially false statements as part of the conspiracy.

Defendants were convicted of conspiring to defraud the US by obtaining payment of false tax refunds, in violation of Sect 286, and of multiple counts of making and presenting false and fraudulent tax returns to the IRS, in violation of Sect 287. On appeal they challenged the government's failure to allege materiality under either section.

(1) The Court held that Sect 287 does not require proof of materiality because the statute applies to the filing of a claim, "knowing such claim to be false, fictitious or fraudulent." While the word "fraudulent" implies the materiality must be proved, the use of the disjunctive "or" means that separate meaning should be given to the other terms in the list. Thus, the Court reads Sect 287 "to demand a showing that the claim was known to be either 'fraudulent,' which would require proof of materiality, or 'false' or 'fictitious,' which would not require proof of materiality. This means that materiality is not always required to establish a Sect 287 violation."

(2) The Court also held, however, that Sect 286 does require proof of materiality because it requires proof of a "conspiracy to defraud." Although this section does not require proof that the defendants actually made or presented any falsehoods, let alone material ones, the requirement that there be proof of conspiracy to "defraud" incorporates a materiality requirement. Sect 286 thus requires the government to prove an agreement to make false statements that would have a material effect on the government's decision to pay false claims.

(3) Turning to the sufficiency of the indictment, the Court held that although it did not specifically mention "materiality," the facts alleged in support of the allegation of fraud warrant an inference that the false statements the conspirators agreed to make as part of the conspiracy were material.

(4) Last, the Court held that the district court's failure to mention "materiality" in the jury instruction regarding Sect 286 was harmless error since the misrepresentations of names, addresses, and gross income on the fraudulent tax forms were unquestionably material.

The Court accordingly upheld the convictions and sentences.

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