United States v. Donald Wanland, Jr.

Citations: 830 F.3d 947; 118 A.F.T.R.2d (RIA) 5299; 2016 U.S. App. LEXIS 13661; 2016 WL 4011175Docket: 14-10170

Court: Court of Appeals for the Ninth Circuit; July 27, 2016; Federal Appellate Court

Original Court Document: View Document

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The Ninth Circuit Court of Appeals affirmed the district court's ruling in the case against Donald M. Wanland, Jr., who was convicted of tax-related offenses, including tax evasion. The court upheld the finding that Wanland's income from his law practice constituted "salary or wages" under 26 U.S.C. § 6331(e), which supported the government's claim of property concealment necessary for a conviction under 26 U.S.C. § 7206(4). The court rejected Wanland's argument regarding the statute of limitations, affirming that the six-year limit for tax offenses involving fraud, per 26 U.S.C. § 6531(1), applied, rather than the three-year limit he cited. Additionally, the court dismissed Wanland's assertion that res judicata barred the government from pursuing criminal charges related to debts previously discharged in bankruptcy, clarifying that the IRS and the U.S. government are not in privity in this context. The decision also referenced a memorandum disposition addressing several of Wanland's other arguments. Wanland, a prominent civil attorney, had substantial income from his law practice but failed to pay taxes owed for the years 2000–2003 and ceased filing tax returns altogether after reporting significant income.

After multiple unsuccessful attempts to resolve his tax deficiencies, an IRS officer was assigned to Wanland's case. The officer sent a Collection Information Statement (IRS Form 433A) to Wanland's accountant, which required disclosure of income, expenses, assets, and liabilities. In November 2003, Wanland submitted the form, reporting only a single bank account with a balance of $9, while omitting the 705 Account, into which he had deposited $35,000 and withdrawn over $18,000 the previous month. He also failed to disclose his American Express card, despite using approximately $15,000 from the 705 Account to reduce its balance.

In April 2004, after reassessing Wanland's case, a new IRS officer determined he could pay his tax liabilities. During a meeting in May 2004, Wanland committed to pay $10,000 monthly towards his tax debt and to secure a loan, which he ultimately did not pursue, ceasing payments after four months. An updated Form 433A submitted in April 2005 again failed to disclose the 705 Account, even after he deposited $20,000 into it shortly before.

Suspicious of Wanland's omissions, the IRS issued a summons to his bank, revealing the 705 Account, which led to levies on both his law partnership and another business entity. The levies mandated the turnover of future wages and income. Following the issuance of the levies, Wanland's partner, Bernstein, ceased writing checks to Wanland and subsequently left the partnership. Donald Spaulding then took over Bernstein's role, unaware of the levies, and continued to write checks to Wanland.

Throughout 2000 to 2006, despite reporting minimal funds, Wanland deposited $1.95 million into the 705 Account, primarily from his law practice, and spent $1.92 million from it on personal expenses, including luxury vacations and non-business-related purchases. The total unpaid tax liabilities, penalties, and interest exceeded $900,000.

In 2009, Wanland was indicted for tax evasion under 26 U.S.C. § 7201. A superseding indictment in January 2012 added charges of tax evasion, multiple counts of concealment of property subject to a levy under 26 U.S.C. § 7206(4), and several counts of willful failure to file a tax return under 26 U.S.C. § 7203. The superseding indictment detailed allegations of tax evasion, including concealing assets, making false income statements, placing funds in a nominee's name, defying tax levies, and preferentially paying creditors other than the IRS. Each levy count was linked to specific transactions such as checks and cash withdrawals.

Wanland sought to dismiss the levy counts, arguing that continuous levies under 26 U.S.C. § 6331(e) only apply to "salary or wages," which did not include his partnership draws. The district court found this to be a factual dispute, leaving it for trial. Wanland also renewed his argument for acquittal on these counts, which was denied. His motion to dismiss based on statute of limitations was also rejected; the court determined that the six-year statute of limitations under 26 U.S.C. § 6531(1) was applicable due to the fraudulent nature of the charges.

Additionally, Wanland attempted to dismiss the charges on res judicata grounds, asserting that the government's failure to address these claims during his 2007 bankruptcy, where the IRS was his largest creditor, barred the criminal action. The district court dismissed this argument, clarifying that res judicata does not apply when a claim could not be raised in the prior proceeding due to jurisdictional limitations.

Wanland contested the levy counts at trial, arguing their invalidity based on the classification of his partnership draws as neither salary nor wages. He claimed that his intent was lacking due to reliance on an attorney's opinion that the levies did not apply to him. The trial court's jury instructions defined “salary” as remuneration paid on a regular, predetermined basis, and “wages” as remuneration for services performed by an employee. The jury found Wanland guilty on the tax evasion count, willful failure to file counts, and 24 out of 26 levy counts, leading to a sentence of 46 months in prison and 36 months of supervised release.

On appeal, Wanland maintained his argument that his partnership draws did not constitute salary or wages. The district court allowed the jury to decide this issue, and evidence supported the verdicts. The court emphasized that tax evasion cannot hinge solely on the defendant's terminology; otherwise, individuals could mislabel income to evade taxation. The district court's instructions effectively conveyed this principle. Wanland's partnership agreement entailed routine monthly draws as remuneration for services, akin to wages or salary, countering his claim that variability in withdrawals affected their classification. The court referenced precedent supporting its position, noting that similar income types have been deemed “salary or wages” in other cases.

The defendant's commissions, although not labeled as “salary” or “wages,” were regular, consistent payments, qualifying under the continuous levy provision aimed at levying remuneration for personal services. The Second Circuit's ruling in United States v. Moskowitz applied similar reasoning to law firm partnership draws, classifying them as compensation for services akin to fees or bonuses. The defendant, Wanland, argued for dismissal of his levy convictions based on the ambiguity of the “salary or wages” definition, invoking the rule of lenity. However, this rule is narrowly applied and not warranted here, as the statute's language is not grievously ambiguous. The presence of a scienter requirement, which necessitates intent to evade tax collection, further clarifies the law. Wanland was informed that his income could be considered “salary or wages” in the continuous levy notice, indicating he should have recognized the potential inaccuracy of his narrow definition. The jury received instructions on the relevance of counsel advice and good faith, which could have led to an acquittal if believed. The court affirmed that Wanland's income from his law practice fell within the “salary or wages” definition in section 6331(e). Wanland contended that partnership draws should not be classified as “salary or wages” based on distinctions in the Internal Revenue Code, but the court disagreed, asserting that Congress did not intend for these terms to have coordinated meanings across different provisions. The definition of “salary” from Black’s Law Dictionary was applied, and the jury found sufficient evidence to conclude that Wanland's partnership draws were remuneration for legal services, paid regularly and based on annual profits, thus qualifying as “salary.”

Wanland challenged the district court's decision not to dismiss levy counts based on the argument that they were barred by a three-year statute of limitations, given that they pertained to 2006 transactions and the indictment was issued in January 2012. The court correctly applied a six-year statute of limitations, as criminal tax proceedings typically follow a three-year limit under 26 U.S.C. § 6531, with exceptions for offenses involving fraud, which extend the limit to six years. Specifically, section 6531(1) covers tax offenses that involve defrauding the government, without requiring an explicit indictment for tax fraud. The court emphasized that Congress intended the six-year limit to encompass activities reflecting fraudulent intent, as seen in section 7206(4), which requires actions intended to evade tax assessment or collection. 

Wanland's arguments for a three-year limit, including concerns about the broad interpretation of section 6531(1) reducing the prevalence of the three-year rule, were dismissed as unpersuasive. The court referenced the Workinger case to support the broad application of the six-year limit to various actions aimed at avoiding tax payments. Wanland also contended that the specific six-year exception for section 7206(1) implied a three-year limit for section 7206(4). The court countered that these enumerated exceptions were meant to ensure clarity and prevent technical distinctions from affecting the statute of limitations, thus affirming the applicability of the six-year limit to section 7206(4). Lastly, Wanland cited the Internal Revenue Manual (IRM) as stating a three-year limit for section 7206(4), but the court clarified that the IRM is not legally binding and does not influence its ruling. Thus, the six-year statute of limitations applies to violations of section 7206(4).

Wanland contends that his discharged debts from bankruptcy preclude the government from pursuing criminal charges related to unpaid taxes. The district court rejected this argument, emphasizing that res judicata requires three elements: privity between parties, identity of claims, and final judgment on the merits. Wanland failed to establish privity, as courts do not automatically assume that all federal agencies represent a single entity for res judicata purposes. Specifically, the IRS acts as a creditor in bankruptcy proceedings, with different interests than the United States government in criminal prosecutions. The dual roles underscore the distinct objectives of bankruptcy (to assist financially struggling individuals) versus criminal actions (to address societal harms). Although Wanland raises additional points about the identity of claims, he primarily challenges the court's view that the bankruptcy court lacked authority over criminal matters. He references United States v. Liquidators of European Federal Credit Bank to argue that even if a claim could not be made in a prior proceeding, it could still be barred in a subsequent one. However, the court acknowledges that such a situation does not align with existing case law, which typically requires that a claim could have been asserted in the earlier action for res judicata to apply.

The decision is influenced by the distinct nature of forfeiture actions, where both civil and criminal forfeiture aim for the same outcome, stemming from identical facts and involving the same potential plaintiff. However, the IRS in bankruptcy proceedings and the U.S. government in criminal cases are not considered the same plaintiff, nor do their actions seek the same objectives. Thus, applying the precedent set in Liquidators to this case would be inappropriate due to these differences. Regarding Wanland's tax debts, it is unclear if a final judgment on the merits exists, as he received a general discharge under 11 U.S.C. § 727, which typically discharges most debts but excludes certain tax debts, particularly those involving fraud or willful evasion. Wanland was specifically warned that not all debts are dischargeable, including most taxes. Although the intent criteria for willful tax evasion are aligned for both non-dischargeability and criminal charges, it is likely that this issue was not adjudicated before the jury's verdict in the trial.