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United States v. Fitzgerald

June 11, 2007


The opinion of the court was delivered by: M. James Lorenz United States District Court Judge


Following oral argument on Defendant's Motion for New Trial, the Court took under submission several issues raised in Defendant's motion.*fn1 The Court has now fully considered the submissions and argument of the parties, and applicable authorities, and concludes that a new trial is warranted.

The Court harbors serious concerns regarding the fairness of Defendant's trial due to the introduction of marginally relevant and prejudicial evidence concerning the indictment of Jesse Cota and Defendant's association with the Tax People and the Government's failure to disclose, prior to trial, the transcripts of the recorded conversations between Ernest Ryder and Dr. Kawesch. Given that the verdict in this case rested upon a credibility determination between Defendant Fizgerald and Dr. Kawesch, and these factors bore directly on the credibility of these witnesses, the Court cannot express any confidence that these errors did not affect the jury's verdict.

I. Extrinsic Evidence Regarding Jesse Cota and the Tax People

During the cross-examination of Defendant Fitzgerald, the Government elicited testimony that during the 1998 to 2000 timeframe, Defendant worked as a tax preparer for an organization called the Tax Loophole. (RT 335.) As a registered tax preparer with the Tax Loophole, Defendant would receive clients through a Kansas company known as the Tax People. (Id. at 335-36.) Defendant ceased to be associated with the Tax People after the company was shut down by the State of Kansas for what Defendant believed was a state of Kansas statutory marketing violation. (Id. at 337-38.) Although the Government attempted to characterize the Tax People as a "criminal enterprise," Defendant maintained that the company was shut down due to an illegality arising from the company's marketing structure under Kansas state statutes.

Defendant was shown a brochure advertising the Tax People which contains a photograph of Defendant standing with several other people, one of whom Defendant identified as Jesse Cota, a Vista C.P.A. who was a director of the Tax People. (Id. at 340.) Defendant testified that Mr. Cota had a prepaid audit program through which Mr. Cota would provide clients with audit assistance for a monthly subscription fee. Id. Defendant testified that he referred some of his clients with high audit risks to Mr. Cota's program after preparing their tax returns.

The Government then asked Defendant whether he was aware that Mr. Cota was indicted for tax fraud in October of 2004. (Id. at 341.) Over defense objection, the Government was permitted to ask whether Defendant was aware that the charges against Mr. Cota were regarding his work with the Tax People. (Id.) Defendant responded that he knew Mr. Cota was indicted, but he didn't know the specifics of the charges. (Id.)

Defendant contends that information regarding the criminal tax fraud charges against Mr. Cota was impermissible guilt by association evidence. The Government responds that this evidence was properly admitted as evidence of Defendant's willfulness and intent to prepare a false income tax return. The Government maintains that the fact that Defendant was preparing tax returns for clients of an organization which was alleged to have committed tax fraud is relevant to Defendant's state of mind and intent, especially since Defendant's involvement with the Tax People was during the same time period that the tax returns at issue in this case were prepared.

In the Court's view, use of such extrinsic evidence to prove Defendant's willfulness and intent is governed by Federal Rule of Evidence 404(b). However, the Court was never put on notice that 404(b) evidence was intended to be used in this manner, therefore the Court did not engage in the required 404(b) analysis before the evidence was admitted, nor did the Court consider the balance required under Fed. R. Evid. 403. Moreover, the jury was not provided with any instruction limiting the purpose for which the jury could consider evidence of Defendant's association with the Tax People and Jesse Cota.

The government "must carry the burden of showing how proffered evidence is relevant to one or more issues in the case; specifically, it must articulate precisely the evidential hypothesis by which a fact of consequence may be inferred from other acts evidence." United States v. Mehrmanesh, 689 F.2d 822, 830 (9th Cir. 1982). Here, the Government did not set forth the basis for its inquiry into Defendant's business relationship with the Tax People and Jesse Cota prior to eliciting testimony regarding these issues. Had the Court had the opportunity to consider the admissibility of the evidence under Rule 404(b), it is unlikely the evidence would have been allowed.

A four-part test guides whether evidence should be admitted under Rule 404(b): "evidence of prior criminal conduct may be admitted if (1) the evidence tends to prove a material point; (2) the prior act is not too remote in time; (3) the evidence is sufficient to support a finding that defendant committed the other act; and (4) (in cases where knowledge and intent are at issue) the act is similar to the offense charged." United States v. Mayans, 17 F.3d 1174, 1181 (9th Cir. 1994). In this case, the admission of the evidence would likely have failed on the strength of the first prong alone as the evidence bore little discernable relationship to any material point at issue in this case.

As a preliminary matter, it should be noted that Defendant's business relationship with the Tax People and Jesse Cota had no direct connection to the events charged in the indictment and was not directly probative of any element of the charged crime. Nor did the extrinsic evidence of Defendant's relationship with the Tax People and Mr. Cota inferentially shed much light on Defendant's intent at the time he prepared Dr. Kawesch's tax returns. Although the Government suggests that the fact that Defendant prepared tax returns for an organization alleged to have committed tax fraud is probative of Defendant's specific intent to violate the law, Defendant's testimony established he had no knowledge of the nature of the charges against Mr. Cota. Furthermore, Mr. Cota was not indicted until 2004, four years after the relevant time period in this case. Plus, at the time of Defendant's testimony in January, 2007, Mr. Cota had not yet been convicted of any crime, he had only been indicted. There is no evidence suggesting Defendant had any knowledge of alleged fraudulent activities concerning the Tax People or Mr. Cota prior to 2004. Thus, the Court fails to perceive any logical connection between Defendant's intent in the preparation of Dr. Kawesch's tax returns in 1998 through 2000 and Defendant's preparation of tax returns for clients of an organization that was subsequently alleged to have committed tax fraud. To the contrary, the Government's suggestion that Defendant's conduct was willful in this case because he also worked for the Tax People, an allegedly fraudulent organization as evidenced by the Cota indictment, appears to be propensity evidence prohibited under Rule 404(b). See e.g. United States v. Bradley, 5 F.3d 1317, 1320 (9th Cir. 1993) (noting that guilt or innocence must be "established by evidence relevant to the particular offense being tried, not by showing that the defendant has engaged in other acts of wrongdoing.").

Furthermore, even if the evidence had been marginally probative of intent, the Court failed to weigh the probative value of the evidence against the danger of undue prejudice to the defendant as required under Rule 403. Even when the Government establishes relevancy of other act evidence, it is only admissible after the Government demonstrates that, on balance, its probative value is not substantially outweighed by the danger of unfair prejudice to the defendant. Id. Although the Court was not required to provide a detailed or even a mechanical recitation of the Rule 403 factors, it was required to apply Rule 403 at this stage. Mayans, 17 F.3d at 1183. The Court erred in failing to undertake any Rule 403 balancing with respect to the Cota evidence and views this failure as significant given the tenuous probative force of the evidence and the real possibility of undue prejudice arising by virtue of Defendant's association with an organization characterized by the Government as a "criminal enterprise" and his business relationship with an indicted tax cheat - a tax cheat indicted for charges involving the same company Defendant was associated with at the time he prepared Dr. Kawesch's tax returns.

Finally, even if the evidence had been properly admitted under Rules 404(b) and 403, the Court failed to instruct the jury that the evidence could be considered only as it related to Defendant's intent, and for no other purpose. When evidence is admitted under Rule 404(b), the trial court "should ordinarily instruct the jury carefully as to the limited purpose for which the evidence is admitted." United States v. Sangrey, 586 F.3d 1312, 1314 (9th Cir. 1978). By failing to instruct the jury as to the limited purpose of admission of the evidence regarding the allegations of fraud against ...

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