United States v. James Sutton Regan, Jack Z. Rabinowitz, Steven Barry Smotrich, Charles M. Zarzecki, Paul A. Berkman, and Bruce Lee Newberg

(8th Cir.1986)). addition, a defendant by joint the trial after caused government separately. particularize the need not all sought to be tried Vas has follows, then, It of its evidence. Davidoff, 918 F.2d 337. quez, (2d Cir.1988). seeks severance from that if a defendant 845 F.2d co-defendant, scrutiny heightened only one Here, sufficiently Harris was advised as pretrial delay of a as to the reasonableness charges against to the him as well the respect delays to required only with Although elements of the offenses. by particular co-defendant. caused government specific not list did activi- ties which showed how he furthered the the Indictment/Bill Specificity C. of of enterprise conspiracy, criminal or the such Particulars specific alleged acts need not be with re- Harris’ claim Finally, we address defendant, spect every to named if the in- process right his due to that he was denied dictment is otherwise sufficient and names him, charges against because notice of the persons the other involved in the criminal allege any overt indictment failed to activity. him, and acts attributable to because undercutting Further Harris’s claim wrongly denied his motion for district court unfairness at trial is his failure to ask for particulars describing specific a bill of any hearing govern- continuance after charges particu or acts. nature of the witness, Hewitt, Sterling testify ment’s lar, this lack claims that because of Harris guns violent activities New unfairly by surprised of notice he was truly If surprised by York. Harris were relating testimony Sterling Hewitt testimony, sought he could have time to shootings City in New York and oth three prepare his cross examination and/or an- er violent activities. swering case. That counsel assumed such charged Harris was with and convicted request good would be denied is not a engaging continuing in a criminal enter- enough failing excuse for to ask for it. prise, conspiracy possess with intent to and to distribute four identified distribute CONCLUSION substances, controlled and numerous fire- judgments of conviction of the dis- arms violations. He was not defendant-appellants trict court for all the offenses, drug par- substantive and no respects. are in all affirmed ticular overt act committed Harris was specifically stated in the indictment or bill particulars.

Although troubling it is somewhat government provide not did Harris specific advance of trial with more informa America, Appellee, UNITED STATES particular tion as to acts which Harris him committed, specificity self had the lack of v. justify reversing here does not his convic REGAN, Z. James Sutton Jack Rabinow heavy tion. Harris bears burden of itz, Smotrich, Barry M. Steven Charles demonstrating trial court abused Zarzecki, Berkman, Paul A. and Bruce by denying request its discretion his for a Newberg, Defendants-Appellants. Lee particulars.

bill of United States 89-1592, 89-1591, Nos. 25 to Dockets Torres, (2d Cir.1990), 89-1600 to 89-1602 and 89-1614. cert. denied sub nom. Cruz United — Appeals, States, -, United States Court of “ Second Circuit. long L.Ed.2d ‘So as the de adequately fendant was informed of the Argued Jan. 1991. charges against unfairly him and not Decided June surprised consequence at trial aas particulars, denial of the bill of the trial ” court has not abused its discretion.’ Id. Maull,

(quoting United States v. D.C., Kurtz, Washington, Theo- Jerome (Robert Wells, Jr., Roseland, N.J. V.

dore Sandler, Kohl, Krakower, Lowenstein, L. counsel), defen- Boylan, of for Fisher & Regan. dant-appellant Lefcourt, City New York B. Gerald Dratel, Hafetz, P. Su- (Joshua L. Frederick Gutman, Necheles, Jeremy Goldman R. san counsel), Hafetz, defendant-appel- for & Newberg. lant (Paul Bader, City New York Lawrence S. Grand, Morvillo, Grand, & Abramowitz R. counsel), defendant-appellant P.C., of for Zarzecki. (Richard A. Green- Hill Schwartz Robert Schwartz, New York &

berg, Newman counsel), defendant-appellant City, of for Rabinowitz. Silber, (Alan Pau- Hayden,

Joseph A. Jr. Silber, Pitt, Hayden, Perle & lette L. Hoboken, N.J., defendant-ap- counsel), for pellant Smotrich. Roseland, N.J., Arseneault, for de-

Jack fendant-appellant Berkman. D.C., Kurtz, Washington, Abe F. Jerome School, Haven,

Goldstein, New Yale Law N.J., Mills, Roseland, Ct., and David counsel, defendants-appellants. for Cartusciello, Atty., Asst. U.S. Neil S. Obermaier, Atty. (Otto U.S. City New York Acting S.D.N.Y., Hayes, U.S. Roger S. Estrada, Kerri Martin Atty., Miguel A. At- Bartlett, Brodsky, E. Asst. U.S. David Safirstein, Sp. Asst. and Peter G.A. tys., counsel), ferred; (2) requires payments be made City of Atty., New York equal to the transferor amounts appellee. interest, dividends, and other distributions GRAAFEILAND, VAN Before securities; (3) paid on the transferred does MAHONEY, MINER, Judges. Circuit and not reduce the transferor’s risk of loss or opportunity gain for on the transferred se- GRAAFEILAND, Judge: Circuit VAN curities; (4) require- and meets such other Rabinowitz, may prescribed by Treasury ments Z. Ste be Regan, Jack James S. Zarzecki, regulations. Smotrich, M. Paul Charles ven B. Berkman, Newberg appeal L. and Bruce

A. 1983, Secretary Treasury of the Dis judgments of the United States from 1.1058-1, which, proposed regulation al- District of for the Southern trict Court though promulgated, light upon never shed J.) (Carter, convicting them of York New meaning of section 1058. Subdivision fraud, fraud, mail and wire securities tax (e) proposed regulation provides in fraud, records and re partnership false substance if a transfer of securities is commit all of the fore ports, conspiracy to comply intended to section 1058 but with appellants, and All of the going, RICO. agree- to fails do so because transfer associated with Newberg, were save satisfy ment does not the above-described (PN), Partners, Newport L.P. Princeton section, requirements gain of that or loss with partnership investment firm limited recognized in will be on transfer ac- Ap Jersey in New and California. offices with 26 1001. cordance U.S.C. § managing partner and pellant Regan was a period in From time to time between authority”.1 For the firm’s resident “tax 1987, quan- and PN owned substantial discussion, we have divided convenience of depreciated tities of stock had value charges against appellants into two provide would PN with and whose sale groupings, dealing one with al general Regan opportunities to take tax losses. dealing tax fraud and the other leged that, prompted by correspondence testified alleged fraud. securities accountants, report of the Tax from his Association of the Bar of the Section of the

THE TAX FRAUDS York, study City of and his own New regulation proposed section and A who sells stock that he stockbroker 1.1058-1, PN could take buy he concluded that does not own must either or borrow repur- by means of sales and in order to make deliv- those losses from someone else brokerage arrangements with other ery the settlement date. Because the chase on long houses so as the ar- procurement methods of have different or investment two rangements and the other legal consequences, including the resultant between PN treatment, requirements of satisfy did not important tax it is to know what houses very this Regan 1058. felt method the broker used. section PN to take compliance lack of would enable 1978, for Congress created means the transactions. Based on tax losses on part at making this determination least belief, fifty-nine this PN entered into some Code, by enacting 1058 of the in- brokerage other transactions with 762, S.Rep. 1058. No. 95th U.S.C. See houses, consisting of sales of vestment Cong., reprinted in 1978 2d Sess. agree- by stock PN to those houses Cong. & Admin.News 1292-93. Code prices to PN fixed at ments to resell provides substance that no Section later dates. pro- gain recognized or loss shall be if the lead, Regan’s Appellants, following be- pursuant curement transaction is made (1) did not satis- agreement provides the re- lieved that these transactions an for requirements in that their fy trans- section 1058 turn of securities identical those prior opinion complete background, F.Supp. this court’s re- a more factual see For Judge opinions reported F.Supp. Carter’s at 699 ported F.2d 115. at 858 F.Supp. F.Supp. and 726 distinguishing writing, did not stated in substance that the not reduced terms were sale of securi- notice, feature between a loan and a upon short provide for termination oppor- risk of loss or ties was whether the legally enforceable contain and did not tunity gain person was retained Moreover, the bro- repurchase. rights of course, This, making the transfer. stock was sold whom the kerage houses to rule generally accepted in accord with the the stock their complete had control purposes, income tax that “for Federal none, depriv- thus possession PN had while property possess meaning- must owner of to avoid loss or opportunity ing PN of ownership.” and benefits of ful burdens Also, during period. capitalize gain Sess., H.R.Rep. Cong., 2d No. 98th See price might repurchase agreed-upon 2, 1132, pt. reprinted at in 1984 U.S.Code then-existing substantially vary from 697, Cong. Appellants & Admin.News 806. price. market testimony also offered the of two acknowl- edged experts tax to the effect that Re- this as a court described The district gan’s interpretation of section 1058was not 1058,726 “sophistical” treatment of section unreasonable, but the district court refused 451, out hand. F.Supp. rejected and it at permit testify. experts these to give Stating he didn’t think he had “to Whether, contend, appellants as the dis contrary to what a contention that was [he] rulings evidentiary trict court erred in its (Tr. 4046), regard[ed] being the law” at as concerning this evidence is a matter we appellants’ contention concern he held that appellants’ need not decide. The issue ing had no substance and the section 1058 good ap faith reliance on 1058 as section applicability had to defendants’ section “no pellants interpreted squarely it was raised case,” preju F.Supp. 726 at 451. This was argued. and The district court should have was not dicial error. The issue case that, jury instructed the if it found the appellants’ construction of section whether faith, good defen reliance was held objectively 1058 was correct or even rea criminally dants could not held for be liable good it sonable but whether was made proceeding in accordance with that re — States, faith. Cheek v. United Durham, liance. See v. 825 United States -, 604, 611, 111 112 S.Ct. L.Ed.2d 617 716, (2d Cir.1987); F.2d 719 United States (1991); Murdock, United States v. 290 U.S. Cir.1984), Pedroza, 187, (2d v. 750 F.2d 204-05 389, 395-98, 223, 225-26, 54 L.Ed. 78 842, denied, rt. 479 U.S. 107 S.Ct. ce (1933); Pabisz, 381 936 151, (1986); 93 L.Ed.2d 92 States v. United 80, (2d Cir.1991); F.2d 83 see also United 1362, (2d Alfonso-Perez, 535 F.2d 1365 Cir. Aitken, (1st States v. 755 F.2d 1976). Cir.1985). appellants The record is clear that re- Although appellants charged were not quested charge specifically directed to violating with that section good their claim of faith reliance on section pivotal in appel- became the case because Indeed, Durham, they 1058. even cited lants believed that it authorized them to do supra, authority to the district court as did, i.e., just they what take tax losses. If charge. Quot- their entitlement to such faith, good they this belief was held in Pedroza, ing supra, we said in Durham criminally pro- could not be held liable for general that “the court’s instructions on ceeding Appellants on that basis. offered specific ‘adequate intent were not to inform substantial good evidence of their faith re- if it believed the defendants’ interpretation liance on their of section theory they it was entitled to conclude that 1058, some of which the court received and requisite did not have the intent to be con- ” rejected. some of which it example, For victed of the charged.’ offenses the Tax Section of the Association case, of the appel- 719. the instant where City appears Bar of the of New York sixty-four lants were with counts interpreted have fraud, section 1058 in somewhat covering the waterfront of tax secu- Regan. report fraud, fraud, same manner as did rities conspir- mail and wire upon RICO, Regan acy, Committee which relied generalized charge on

827 insufficient to instruct 358 U.S. 79 S.Ct. 3 good faith was specific good jury concerning appellants’ wrongful L.Ed.2d 308 Such intent Ap- faith defense based on section is the “essence of the crime.” Pelz v. entitled to have the trial pellants were States, United Cir. clearly jury, instruct relative to court 1932). Where, here, there is little dis tax appellants’ theory of defense to the pute making concerning filing theory justi- if charges, believed allegedly returns, fraudulent the exist acquittal charges. those fied Alfonso- culpable ence vel non of intent or lack of Perez, supra, 535 F.2d at 1365. good crucially important faith is a issue of the most esoteric areas of the law One Ballard, the case. See United States v. replete that of federal taxation. It is 78, 82, 882, 884, 322 U.S. 64 S.Ct. 88 L.Ed. intricacies”, “full-grown is rare Brandt, (1944); United States “simple, that a direct statement of law (2d Cir.1952); United States F.2d made without caveat.” Mertens can be Foshee, (5th Cir.1978). Income Tax Law Federal 1.01. Jus- Despite requests by appellants numerous White, writing majority tice for the Court otherwise, per the district court Cheek, supra, stated because viewing objectively, sisted section 1058 proliferation regula- tax and the of statutes insisting that the judge court was the sole tions, presumption the that ev- common-law That, course, of the law. was true. ery person apply knows the law does not However, jury issue was not where violations of federal criminal tax Instead, alleged. proof guilt are interpreted laws how the district court upon predicated such cases must be a 1058; it how the in good was defendants “ ‘voluntary, of a intentional violation interpreted jury faith it. “A is the ultimate ” legal duty.’ 111 known S.Ct. 610 discipline United silly argument.” to a Bishop, 412 United States v. (quoting U.S. Burton, v. 737 F.2d 439, (5th States 443 346, 360, 2008, 2017, 93 36 L.Ed.2d Cir.1984). The district court’s failure to (1973)). 941 squarely present jury this issue to the was applies alleged This rule to violations of prejudicial error that tainted all of the “hierarchy of tax offenses set forth in hierarchy charges. tax 7201-7207, inclusive.” United States v. §§ reversing remanding Because we are and 346, 359, 2008, Bishop, 412 93 S.Ct. predicate upon tax offenses which 2016, (1973). applies 36 L.Ed.2d 941 It also based, charge bulk of the and RICO conspiracies to 18 U.S.C. 371 to violate § itself, perforce charge need RICO we hierarchy one or more of the of tax of disputed in the not become involved issue States, Ingram v. United fenses. 360 U.S. give whether federal tax violations can rise 672, 677-78, 1314, 1318-19, 79 S.Ct. 3 RICO cause of action. See United v. (1959); United States Gu L.Ed.2d 1503 Henderson, 1048, v. F.Supp. States 386 rary, 860 F.2d 521, (2d Cir.1988), cert. 525 But see United (S.D.N.Y.1974). 1052-54 denied, 1035, 1931, 490 U.S. 109 S.Ct. 104 Computer Corp., v. States Sciences 689 (1989). L.Ed.2d 403 (4th 1181, Cir.1982), n. 13 F.2d prov burden in Government’s denied, 1105, 729, cert. 459 U.S. 103 S.Ct. offense, ing a mail or wire fraud 18 U.S.C. lengthy 74 L.Ed.2d 953 Before this 1343, 1341 and is even more onerous. §§ retried, may case is the Government decide intent crimes. United specific are These to withdraw RICO count view Gelb, (2d Cir.), v. States 700 F.2d 879 Department July guide of Justice’s 1989 denied, cert. 464 U.S. 78 104 S.Ct. lines, substantially curtail the use of which (1983); United States v. Mar L.Ed.2d 152 predicate tax frauds as direct or indirect (7th tin-Trigona, 684 F.2d 492 Cir. offenses, judi and the district court’s RICO 1982). required The Government cious to eliminate the forfeiture of decision beyond prove a reasonable doubt that by Regan, assets the defendants Rabinow- guilty defendant was of a “conscious know Berkman, itz, See to defraud.” ing intent Smotrich. Kyle, (2d Cir.1958), cert. F.Supp. at 459. completed transac denced a closed further that the dis-

Appellants contend tion, i.e., ending identifiable event concerning “economic “some charge trict court’s taxpayer proper tax the interest of substance”, necessary element of a Commissioner, ty.” loss, prejudicially erro- Williams also was deductible Cir.1978) curiam); (5th (per see that a neous. The court 1.165-1(b). respect, every In this substance C.F.R. economic transaction is without § taxpayer claims a deduction based pur- business who (1) had no if the transaction depreciated in of an asset that has of tax deduc- sale from the creation pose apart may to have “created a tax subject to value be said (2) transaction was tions Appellants point out that the deduction.” The court stated market risk. no herein were made at or near purpose sales at issue have no business transactions price the stock that was sold. if the market creation of tax deductions apart from the They correctly prop as a basic either to make or assert they intended are not osition, fide sale that has no sham any limit a loss in a bona preserve any profit or to may tax implications receive favorable for the tax benefits and way except though treatment even it is made for the subject to no market risk transactions are realizing existing an price express purpose have changes “if in market cannot book loss. See Mertens Law Federal any effect on the transaction.” 28.08, Taxation at 47. Income appellants objected to this When problem respect exists that it was A similar charge, the district court stated ap that we the district court’s definition of “no market substantially the same risk”, i.e., Atkins, there is no market risk “if 869 — proved in States United Cir.), changes in market cannot have cert. 72, -, 39 effect the transaction.” We assume 110 S.Ct. 107 L.Ed.2d on U.S. (1989), that court meant this Ingredient what the district and United States 88, (2d phrase Corp., 698 F.2d 97 n. 9 is that there would be no market Technology 1131, Cir.), denied, risk if the transaction would be carried 462 U.S. 103 S.Ct. cert. (1983), 3111, through completion planned regard- dis as 77 L.Ed.2d 1366 and the change it. less of movement in the market. This trict court saw no reason to However, charge adequate saying that and is not the same as that there would a risk if market movements proper may play in one case not the same be no market involving in a different had no “effect” on the transaction. role another case case, in the market facts. The district court must tailor instant movements set of would have an effect on the transaction. its instructions to the facts of the case out, brokerage Wright, already pointed 2 As before it. C. Federal Practice 485, PN sold its had at 710-13. “Each houses to whom stock and Procedure § possession. peculiar facts and formal control of the stock their case has its own They repurchase response ized instructions must be tailored to could sell and Devitt, market, PN and issues.” Ten Practical to movements in the but could facts returned, not. At time the stock was Suggestions Jury About Federal Instruc 75, tions, (1965). might F.R.D. 77 its actual market value be substan- 38 tially previously agreed upon below Appellants contend while the price. gainsaid It cannot be that the trans- phrase use of the “creation of tax deduc brought changes in actions at issue about proper Ingredi tions” was Atkins parties. the economic interests of the See Technology ent where it referred to the Commissioner, Rosenfeld upon artificial creation of losses which Cir.1983). 1277, 1282-83 made, for tax deductions could be claims where, here, whether, deciding proper standing was not it referred Without alone, problems to the creation of tax deductions based the above-discussed associ- upon legitimate already that ated with the district court’s are of book losses importance require existed. To be allowable as an income tax sufficient deduction, jury, evi- matter to another we a business loss must be be submitted

829 10(b), support enacting “Congress they provide added conclude prohibit range ingen meant to the full of disposition. for that might manipu be used to ious devices prices.” late securities Fe Santa Indus. v. FRAUD THE SECURITIES Green, 462, 477, 1292, 430 97 S.Ct. U.S. 1303, 480 For an in 51 L.Ed.2d 1985, the firm of Drexel In March of diverse formative discussion devices Lambert, was retained to Inc. Burnham conceived, ingenious minds have 3 see million convertible bond underwrite $25 Lowenfels, Bromberg & Fraud Securities Co., Minneapolis offering for C.O.M.B. 7.3(220)-(227). Fraud Commodities fixed rate of pay bonds concern. Such plan by Newberg conceived and Zar- are convertible into common interest and comfortably zecki fits within this “full According price. predetermined stock at a See, range” wrongful e.g., acts. Crane the stock ly, higher the market value of Co., Westinghouse Co. v. Air Brake are offered for when the convertible bonds (2d Cir.1969), denied, cert. advantageous from the con sale the more 27 L.Ed.2d U.S. S.Ct. standpoint purchase vertible (1970). “Failure to disclose that market this, appear to be. Because bonds will prices being artificially depressed oper are interest can sold at a lesser the bonds be place ates as a deceit on the market and is corporations contem Accordingly, rate. an omission of a material fact.” United offerings usually plating convertible bond (9th Charnay, States v. high price market for their stock hope for a Cir.), cert. U.S. S.Ct. cases, and, attempt to “levitate” some (1976). Appellants’ 50 L.Ed.2d 610 This, range. higher into a argument fiduciary relationship that a course, adversely affect sales to could liability must exist before can be found is purchasers pri interested those who are without merit. The case of Chiarella v. marily in It also could interest income. 222, 100 States, 445 United adversely prudent investors affect sales (1980), appel which upon 63 L.Ed.2d 348 manipu who are concerned about stock trading rely lants involved basis lation. information; here, nonpublic appellants are manipulation. market with The in sub- Government’s contention sum, Newberg’s and Zarzecki’s convictions period just prior to the stance is charging manipu market on the counts underwriting agreement, finalization of the of lation in connection with the C.O.M.B. Drexel, believing that C.O.M.B. was “levi- fering affirmed. Because all of must be stock, tating” by the of its undertook appellants on the con the were convicted depress price. Appel- devious means to the incorporates spiracy count which Drexel, Newberg, lant a bond trader for stock, charges manipulating of C.O.M.B.’s accomplish arranging sought by this conspiracy on the count their convictions Zarzecki, PN, appellant for with a trader also must be affirmed. See United States 40,000 for PN to sell shares of C.O.M.B. Dixon, Cir. disclosing short to a broker-dealer without 1976). to the dealer that PN was the seller or that moving party Drexel was the behind the requested that The Government has not entire deal. The Government contends salvage by using only count we RICO 10(b) that this was a violation of section of the predi- securities fraud as C.O.M.B. Act, Exchange the Securities 15 U.S.C. remanding cate act. Because we are 10b-5, 78j(b), and Rule 17 C.F.R. racketeering new trial on nine of the ten § 240.10b-5, any which bar the use of de- alleged and it is not acts in the RICO count vice, scheme, defraud, or or artifice to have found a clear that would manipulative deceptive percent or device or contri- the 10 of RICO violation based on pertinent remain, in vance contravention of SEC the acts that that it is we believe regulations. jury, portion rules and under of the RICO best remand proper charge, count that on the securities fraud so found. is based in the defendant acted you If find that is based on portion that

along with good faith in the honest belief that Ruggie United States tax frauds. See true, representations he made were that (2d Cir.), ro, cert. anyone, this he did not intend to defraud 83 L.Ed.2d 105 S.Ct. 469 U.S. complete defense to the constitutes a fraud. crime of mail or wire

CONCLUSION govern- contend the The defendants appellants on of all of the Conviction they prove failed to did not ment has count, is affirmed. count no. conspiracy good act in faith. Newberg on the appellant Conviction Regan Mr. submits that it was his be- counts, is nos. 48 to fraud securities lief, knowledge general based on his on all other His conviction affirmed. by tax laws and the will- buttressed vacated, conspiracy that of counts save ingness Akroyd Lynch Merrill are remand- on those counts and the issues trades, engage day in these both proceed- court for further ed to the district day trades done in 1984and the 31 trades of Zarzecki on the securi- ings. Conviction entirely proper in for tax done 1985 were count, His no. is affirmed.

ties fraud purposes. all counts save that conviction on other Princeton/Newport The other defen- vacated, conspiracy is and the issues they relied on Mr. dants contend to the those counts are remanded district propriety of Regan’s opinion as to the proceedings. court for further Conviction the trades.... Rabinowitz, Berkman, Regan, appellants on all counts save that of and Smotrich In connection with the false return vacated, the issues on conspiracy are counts, additionally instructed as the court remanded to the district those counts are follows: proceedings. for further

court signed If the defendant the tax return good faith and believed to be true MAHONEY, concurring Judge, Circuit matters, all material he has not commit- dissenting part: part acquitted on ted a crime and must be counts, if the return in- these even agree my colleagues I that the secu- correct. conspiracy counts rities fraud and should however, agree, you I do not If find that the tax return was not

be affirmed. matter, the central reversal of the tax and related counts is true as to a material question refusal is whether or not the defendant warranted the district court’s honestly believed that the return was specifically jury regarding to instruct government has the burden of true. The the defendants’ asserted reliance on 26 proving did not have that the defendant perceive any I error U.S.C. 1058. Nor do an honest belief in the truthfulness of charge concerning “economic court’s the return. respectfully substance.” I therefore dis- rulings regarding majority’s sent from the in- Characterizing these rather extensive

the of the district court. instructions “generalized structions as a on faith,” good my colleagues find them “in- A. The Faith” Instructions. “Good jury concerning sufficient to instruct the My colleagues appellants’ specific good conclude: “The district the faith defense words, jury the In court should have instructed based on section 1058.” other prejudiced by if it found that the reliance section 1058 the defendants were an in- [on interpreted good held in faith appellants struction that their defense was it] faith, good premised Regan’s “general knowledge the defendants could not be on laws,” criminally proceeding held liable for ac- of the tax because defendants more specifically Regan cordance with that reliance.” The district contended that relied on gave following unpersuaded court in fact the instruc- section I am that a regard good required present tions with faith: district court a defen- B. partic- level of The “Economic Substance” Instruc- contentions with this dant’s theory tion. is that ularity. The fact wit, bona fide reliance on defense—to My colleagues support” find “added squarely presented to tax code—was their reversal of the tax related convictions unlikely jurors were

jury. It is that the from two criticisms of the district court’s court failed to misled because the district instructional definition of economic sub- Regan's that remind them of contention Briefly, government’s stance. theory at the center of his tax section 1058 was of the case was as follows. PN invested in analysis. the so-called hedge,” “convertible establish- ing long position in convertible bonds however, assuming, dis- Even selling underlying while short the stocks. arguably given should have an trict court position, hedged price With this fluctua- closely patterned instruction more after the “long” tions on the side would more or less contention, section 1058 defendants’ exactly compensated by be fluctuations on specific objec- record does not disclose the times, the “short” side. At the relevant tion to the court’s instruction on the intent capital term short losses were accorded pre- required by issue Fed.R.Crim.P. 30 to beneficial treatment under the Internal De- a claim of instructional error. serve Revenue Code. includ- proposed jury fendants’ instructions paragraph essentially ed a summa- reap order to this tax without benefit Regan’s testimony regarding trial re- rized disturbing hedged posi- the balance of their Judge liance on 1058. When Carter tion, the defendants concocted false sales charging indicated at the conference that losing Specifically, of their securities. PN his instructions would not refer to section brokerage would “sell” the securities to a 1058, however, counsel did not contest the just house the end of the before maximum ruling, argue let alone the defense holding period, short term with the under- theory gutted. delivery would be After standing repurchase that PN would charge, only objections relating approximately securities at the same (1) that the defense contentions were court shortly government thereafter. failed to instruct that defendant Zarzecki charged purported (whereby that the sales participated contended that he never reported PN term incurred and short (2) illegal activity, and failed to instruct the losses) substance, and lacked economic jury on all the defense contentions concern- unlawfully re- the losses were therefore ing manipulation secu- C.O.M.B. Co. ported partnership returns. PN’s response, gave rities. the district court jury The district court that a supplemental instruction that both the lacked economic if it transaction substance government and the defendants had set (1) purpose apart “had no from business present- forth more contentions than those (2) the creation of tax deductions” jury charge. ed in the subject My “was to no market risk.” col- circumstances, may leagues

In these reversal criticize the first of this be branch premised only upon “plain ground language error” in the definition on the that the instruction, 52(b); might unfairly “creation of tax deductions” see Fed.R.Crim.P. i.e., encompass where “failure to reverse would result fide sale that is intended bona miscarriage justice existing in ‘a which denied to realize an loss. This criticism ” presented the defendant a fair trial.’ was not to the district court ei- United States (2d Cir.1990) in Scarpa, charging v. 913 F.2d 1021 ther at the conference or defen- Civelli, (quoting objections following 883 F.2d dants’ numerous — Cir.), (2d denied, Indeed, charge. following 194 cert. similar lan- U.S. -, (1989)). guage pro- 110 in S.Ct. 107 L.Ed.2d 374 was contained defendants’ has sparingly, posed jury This doctrine is to be invoked see instructions: “A sale eco- eases), Scarpa, (collecting possibly 913 F.2d at 1021 if it have nomic substance could I application see no occasion for its an economic effect other than the creation payment of the here. a tax deduction and the 832 Glass, (1986), taxpayers and costs incident to the 87 1087

sales sale_” T.C. added). (latter invested, straddles, emphasis through options had in delivery specified future of a metal in a Further, Atkins, in v. 869 United States produce ordinary manner that would an Cir.1989), approved F.2d 135 we the use year, capital loss in the initial tax and a in strikingly of the same similar gain in the next. See id. at 1095. The Tax attempt context. The defendants to distin- that the that Court concluded transaction guish theory that defini- Atkins on its year created the loss for the first —the applies only to tion of economic substance closing leg of the loss of the straddle— created, phony in losses are cases which disallowing lacked economic substance. actual losses are recog- not cases where deductions, the court looked to the en- through the of sham nized use transac- tirety of the tax avoidance scheme: tions. This will not do. Atkins involved determining deductibility, we be- in falsely recognize scheme actual losses precludes lieve that substance-over-form legs value on the short of straddles via focusing solely upon us from the losses repurchases. artificial Like this sales case, closing op- incurred of the sold not false Atkins involved losses but year options tions in one of the false London sales. strategy, to the exclusion of all that fol- Finally, my colleagues are dissatisfied hold, lowed. For this reason we as we “that with the court’s instruction transac- before, have done the relevant subject tions are to no market risk if petitioners’ transaction was entire com- changes prices any in cannot market have modity tax straddle scheme.... What They effect on the transaction.” essential- petitioners in invested here with the re- ly that PN took the risk that the contend spective prear- broker/dealers was a parking prearranged transactions —the ranged sequence trading calculated to repurchases nearly sales and at identical objective achieve a tax-avoidance in- not, it, —not prices majority puts as the —would profit objec- vestments held for non-tax through completion be “carried as tive. planned regardless movement words, market.” In after a 87 T.C. at 1163. other broker- age possession parked house took plethora I note that because of the securities, might refuse to honor the case, taxpayers involved the Glass prearranged transfer of the securities back appeal by decision has been affirmed on at to PN. eight least circuits. Lee v. See Commis sioner, (8th Cir.1989); 897 F.2d 915 Dewees brokerage might

The risk that the house Commissioner, (1st 21 v. 870 F.2d Cir. parked party sell securities to third or 1989); Commissioner, them, v. Friedman despite otherwise decline to return (4th Cir.1989); agreement contrary, F.2d 785 Keane v. to the seems indis Commis sioner, (9th Cir.1989); tinguishable from 865 F.2d 1088 the risk United States Rat Commissioner, (6th Ingredient Technology Corp., v. 865 F.2d 97 Cir. liff (2d Cir.), 1989); Commissioner, cert. Killingsworth (1983), (5th Cir.1989); 77 L.Ed.2d 1366 Kirchman v. inventory taxpayer Commissioner, (11th seller of to the would 862 F.2d 1486 Cir. 1989); Commissioner, repurchase inventory refuse to Yosha v. Cir.1988). agreed. (7th We held nonetheless there agreement the lack of an enforceable did Further, Judges Breyer I note that imparted not result in risk that such eco Posner observed that while the straddle nomic substance to the transaction as to trading might theory involve economic preclude tax fraud. Id. 94-95. substance, the Tax Court did not err in

Moreover, concluding particular was entitled to con- that the trades at is- parking sider the whole of the scheme to be sue were executed in a manner that lacked Dewees, the transaction that lacked economic sub- economic substance. See 32; Yosha, example, stance. For in 861 F.2d at 499. sum, majority’s I do not concur regarding error

rulings instructional court, respectfully and therefore

district I do not reach rulings. from those

dissent concerning the tax complex of issues presented that would be

and related counts concerning majority my

if shared views jury charge. INVESTMENTS, INC.,

In re HOOKER Inc., Corporation, et

L.J. Hooker

al., Debtors. BANK, N.A.,

FIRST FIDELITY NEW

JERSEY, Appellant, INVESTMENTS, INC., L.J.

HOOKER Inc., Corporation,

Hooker et

al., Appellees.

No. Docket 91-5016. Appeals,

United States Court of

Second Circuit.

Argued 1991. June

Decided June

Case Details

Case Name: United States v. James Sutton Regan, Jack Z. Rabinowitz, Steven Barry Smotrich, Charles M. Zarzecki, Paul A. Berkman, and Bruce Lee Newberg

Court Name: Court of Appeals for the Second Circuit

Date Published: Jun 28, 1991

Citation: 937 F.2d 823

Docket Number: 25 to 30, Dockets 89-1591, 89-1592, 89-1600 to 89-1602 and 89-1614

Court Abbreviation: 2d Cir.