Petition for Writ of Certiorari — Kennedy v. United States

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96154:0 MAR 26 1997

No.

* 77 a

In The

Supreme Court of the Anited States

o—

October Term, 1996

DENNIS F. KENNEDY,

Petitioner,

VS.

UNITED STATES OF AMERICA,

Respondent.

Petition for a Writ of Certiorari to the United States

Court of Appeals for the Third Circuit

PETITION FOR A WRIT OF CERTIORARI

ALAN L. ZEGAS

Counsel of Record

Attorney for Petitioner

20 Northfield Avenue

West Orange, New Jersey 07052

(201) 736-1011

On the Petition:

SHARON J. BITTNER, ESQ.

ALAN L. ZEGAS, ESQ.

70752 juz

(800) 3 APPEAL « (800) 5 APPEAL « (800) BRIEF 21

QUESTIONS PRESENTED

Whether Petitioner’s constitutional rights to due process

and to a fair trial were violated because the Third Circuit’s

interpretation of this Court’s decision in Cheek v. United States,

498 U.S. 192 (1991), is at variance with the decisions of other

circuits which find that Cheek imposes an affirmative duty on

trial courts to instruct jurors in criminal tax evasion cases that

they must acquit a defendant if they find that the defendant acted

in subjective good faith, notwithstanding their finding that the

defendant’s actions were objectively unreasonable?

Whether Petitioner’s constitutional rights were violated by

the Third Circuit’s affirmance of the district court’s decision to

deny Petitioner’s motion for acquittal?

Whether Petitioner’s constitutional right to an untainted

grand jury process was violated by the presentation of false and

misleading testimony by Internal Revenue Special Agent

Jacqueline Zisterer?

TABLE OF CONTENTS

Page

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Statement Of FucieGictian ..« . és vviawsneivsdas vas see I

Constitutional Provision and Statute Involved ........ 2

Stabeanent of Tie Ge sas ine civtsnacdkes eee 2

A. CE bis bis de ele ee ee eee 2

B. Tax Treatment of the Brigantine House ....... 3

C. Tax Treatment of the Yacht Sales ............ 5

D. Treatment of the Gas Station Income ........ 8

Reasons for Granting the Writ ............e2eee00e- 9

I. Petitioner’s Constitutional Rights Were Violated

By The District Court’s Failure To Advise The Jury

That Even If It Believed That Petitioner’s Actions

Were Objectively Unreasonable, It Still Was

Required To Acquit Him If It Found That Petitioner

Had Acted In Subjective Good Faith. ........ 9

iii

Contents

Pige

II. Petitioner’s Constitutional Rights To Due Process

Were Violated By The Third Circuit’s Affirmance

Of The District Court’s Denial Of Petitioner’s

NR. eon van tieiedseiscc.. 15

III. Petitioner’s Constitutional Right To Due Process

And To An Untainted Grand Jury Process Were

Irreparably Prejudiced By The Presentation Before

The Grand Jury Of False And Misleading

Testimony By Internal Revenue Special Agent

PEIN I a. 17

A. Overview Of The Effect Of Agent Zisterer’s

Conduct On The Integrity Of The Grand J ury

ROI sa a i ree & 17

B. The Historic And Constitutional Purposes Of

Pp a 17

C. Agent Zisterer’s False Testimony ....... 22

D. More False Testimony Of Agent Zisterer . 25

E. Still Further False Testimony From Agent

MY eh eee 26

F. Zisterer’s Improper Comments On

Petitioner’s Alleged Assertion Of His Fifth

Amendment Rights. .................. 28

nn NESSES SESE SDR eran esas SaaS ae 30

Page

TABLE OF CITATIONS

Cases Cited:

ARICOVIR % THREE, DIS Be SO CAT) v6 s cba eceva dees 22

Boyde v. California, 494 U.S. 370 (1990) ........... 14

Branzburg v. Hayes, 408 U.S. 665 (1972) ........... 18

Cheek v. United States, 498 U.S. 192 (1991) ..........

pe ceVe ehG5445 Ki 6000 RARER i, 9, 11, 12, 13, 14, 16

Costello v. United States, 350 U.S. 359 (1956) ....... 18

Giglio v. United States, 405 U.S. 150 (1972) ........ 21

Government of the Virgin Islands y. Williams, 739 F.2d

re Ce GE TOE dace pcan ecccunenesadens 15

in re Winship, 397 U.S. 335 GIFTS) on ccc ccccccvcnes 15

Napue v. Illinois, 360 U.S. 264 (1959) ...........4.; 21

Sanders v. United States, 541 F.2d 190 (8th Cir. 1976) ... 22

Sansone v. United States, 380 U.S. 343 (1965) ....... 15

Snyder v. United States, 897 F. Supp. 241 (D. Md. 1995)

oeeoeev eevee eeveeseeeeweseeeeeveeeeeeeeeeveee eevee ee eee

Page

The Bank of Nova Scotia v. United States, 487 U.S. 250

CR beck a edee bh baab eden eee ikeneeuwiaes 20

Tigg Corporation v. Dow Corning Corporation, 962 F.2d

REED Ce Gs Ce bh nese hhc ba Games ceaeh eee 14

United Brotherhood of Carpenters and Joiners v. United

peabes, SIO US. BFS CIF) |. vciecasssessssiacas 14

United States ex rel. Annunziato v. Manson, 425 F. Supp.

272 (D. Conn.), aff'd, 566 F.2d 410 (2d Cir. 1977)

RV REGL TSW e LARS AO eA SRK Oa ER CASE RS> 22

United States v. Aitken, 755 F.2d 188 (1st Cir. 1985) .. 11

United States v. Bagley, 473 U.S. 667 (1985) ........ 21

United States v. Barham, 595 F.2d 231 (Sth Cir. 1979)

LiL NY ERAEAS REN GAL ORUERD EER DED LEER ERR Bly aa

United States v. Becker, 965 F.2d 383 (7th Cir. 1992) .... 12

United States v. Benson, 67 F.3d 641 (7th Cir. 1995), rehr’g

GRUMBE, TE PDE 556 AFRO 6 ha ao nie bn be cea 13

United States v. Bigeleisen, 625 F.2d 203 (8th Cir. 1980)

EE ey rT ee Ue Pt eee PEE ey er 22

United States v. Bishop, 412 U.S. 346 (1973) ........ 16

United States v. Breslin, 916 F. Supp. 438 (E.D. Pa. 1996)

PP eT ETE Te EPL Tee Ce yy pene 29, 30

Page

United States v. Calandra, 414 U.S. 338 (1974) ...... 18 |

United States v. Carcaise, 442 F. Supp. 1209 (M.D. Fla.

he, | ee ee re ey se orey ke dp Per Ry owe te gy aN ey 19

United States v. Chesson, 933 F.2d 298 (Sth Cir.), cert.

Gentod, 335 ]. GR SES AI ho we leew ict aan 15, 16

United States v. DeMarco, 550 F.2d 1224 (9th Cir. 1977)

OK b SOs be ORs CRON ede U ERO eee te Re acon 19

United States v. DiGrazia, 213 F. Supp. 232 (N.D. III.

SUED ich acchcdadeccccxeksnreseksanreeaeas 18

United States v. Droge, 961 F.2d 1030 (2d Cir. 1992)

vv waesedduieahca@ne s Ukeleb arnt hes den i2, 13

United States v. Estepa, 471 F.2d 1132 (2d Cir. 1972) ... 18

United States v. Gold, 470 F. Supp. 1336 (N.D. Ill. 1979)

(caput insadsdksbiaetibnbe beeen 18, 19

United States v. Havert, 40 F.3d 197 (7th Cir. 1994),

cert.denied, 115 S. Ct. 1822 (1995) .............. 12, 13

United States v. Hogan, 712 F.2d 757 (2d Cir. 1983) .. 18

United States v. Mason, 902 F.2d 1434 (9th Cir. 1990)

ceases ciwenbedse Cede bani unwakh nea eee 15

United States v. McGill, 964 F.2d 222 (3d Cir. 1992) .... 13

vii

Page

United States v. Meyer, 808 F.2d 1304 (8th Cir. 1987) ... 16

United States v. Morrison, 518 F. Supp. 917 (S.D.N.Y.

SUED Ueno hese 04s ce aehbasead caewe tieeneeke 19

United States v. Murdock, 290 U.S. 389 (1933) ...... 10

United States v. Pabisz, 936 F.2d 80 (2d Cir. 1991) .. 9, 11, 12

United States v. Park, 421 U.S. 658 (1975) .......... 14

United States v. Pecora, 798 F.2d 614 (3d Cir. 1986) .. 15

United States v. Roberts, 481 F. Supp. 1385 (C.D. Calif.

SL 300s Rhee 6 on ed bees Orekeiees cas wes 18

United States v. Samango, 607 F.2d 877 (9th Cir. 1979)

at REE MNS Cee Oe heehee ash tees 18

United States v. SanFilippo, 564 F.2d 176 (Sth Cir. 1977)

6 oNe Ob sere wane aeee ees aeteesewea rare s 22

United States v. Serubo, 604 F.2d 807 (3rd Cir. 1979) . 18

United States v. Soberon, 929 F.2d 935 (3d Cir. 1991) . 20

United States v. Treadway, 445 F. Supp. 959 (N.D. Tex.

REA eee are ener be raat, Seer e 19

viii

Page

Statutes Cited:

OD Uitte G BORE a cckaccn ete civebiaeanvedebass te 21

SU Sins PAGE ohn b5a¥ 6509 eos EROS RRO E RA EAA 21

gS Shes. D+ | Ae Pater ey Ser en ee |

SUMMA IMOE ce vavcxeetcdateeterureuuuerus 2, 10, 15

gt OM Ry.) 8 t errr re yre rer eet yee 2

BO RD RAEE ob doh eeruscasebassneiedaeceue |

United States Constitution Cited:

a SEVP Ee ETE ETT RIV ELT SEETEE Z, 17, 18, 28, 29

Other Authority Cited:

Treasury Regulation Section 183(b)(9) ............. 23

APPENDIX

Appendix A — Memorandum Opinion of the United States

Court of Appeals for the Third Circuit Filed December

Eg OEE eee REL SL Per ore ee ere la

Appendix B — Judgment of the United States Court of

Appeals for the Third Circuit Dated December 4, 1996

cn at 9 aS a NE

Appendix C — Order of the United States Court of Appeals

for the Third Circuit Denying Petition for

Rehearing Dated December 30, 1996 ..........-.

Appendix D — Opinion of the United States District Court

for the District of New Jersey Filed September

Ue ee ey hare ey ery eet ee ey

Appendix E — Order of the United States District Court

for the District of New Jersey Filed September 8, 1994

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Appendix F — Relevant Statute and Constitutional

Provision Involved ........cccevceveccecsseees

Page

23a

]

Petitioner Dennis Kennedy, prays that a writ of certiorari issue

to review the judgment of the United States Court of Appeals for

the Third Circuit denying Petitioner’s application for en banc

consideration and for reconsideration and affirming the judgment

of conviction entered by the trial court.

OPINIONS BELOW

The court of appeals affirmed the judgment of conviction by

memorandum opinion and order entered December 4, 1996 (1a,

Sa)! and it denied Petitioner’s application for en banc consideration

and for reconsideration by judgment order. (7a). Prior to trial

Petitioner moved for dismissal of the indictment because of

government misconduct occurring inside the grand jury room.

United States District Court Judge Dickinson R. Debevoise reserved

on the motion until after the trial. On September 8, 1994, the district

court filed an opinion denying Petitioner’s motion. (9a).

STATEMENT OF JURISDICTION

Petitioner was originally a defendant in a criminal action

brought in the United States District Court for the District of New

Jersey. The district court had subject matter jurisdiction pursuant

to 18 U.S.C. § 3231. The judgment of conviction was entered against

Petitioner on December 15, 1994, and was docketed on December

20, 1994, following a trial. A timely appeal was filed with the United

States Court of Appeals for the Third Circuit, which had appellate

jurisdiction to review the judgment of the district court pursuant to

28 U.S.C. § 1291. A memorandum opinion and judgment order

affirming the judgment of conviction was entered by the Third

Circuit on December 4, 1996. (la, 5a). Applications for

reconsideration and for en banc review were subsequently filed

with the Third Circuit, which entered a judgment order denying the

1. The notation “a” refers to the appendix annexed to this petition.

The notation “DA-” refers to the appendix filed by petitioner with the United

States Court of Appeals for the Third Circuit.

applications on December 30, 1996. (7a). Petitioner seeks a writ of

certiorari to review the judgment of the United States Court of

Appeals for the Third Circuit. This Court has jurisdiction to review

the judgment below pursuant to 28 U.S.C. § 1254(1).

CONSTITUTIONAL PROVISION

AND STATUTE INVOLVED

The Fifth Amendment to the United States Constitution and

Petitioner’s constitutional right to due process are pertinent to this

case. Also applicable is the statute proscribing tax evasion, 26 U.S.C.

§ 7201. The applicable provisions of law are set forth in the annexed

appendix. (24a).

STATEMENT OF THE CASE

On October 13, 1993, a two-count indictment was returned by

a United States grand jury of the district of New Jersey, against

Petitioner Dennis Kennedy alleging tax evasion for the years 1986

(Count 1) and 1987 (Count 2). (Da-14). Prior to trial, Petitioner

moved for dismissal of the indictment because of government

misconduct occurring inside the grand jury room. United States

District Court Judge Dickinson R. Debevoise reserved on the motion

until after trial. On September 8, 1994, the district court filed an

opinion denying Petitioner’s motion. (9a). The trial began on April

18, 1994, and ended on April 21, 1994, with the jury finding

Petitioner guilty on both counts of the indictment. Petitioner was

sentenced on December 12, 1994, to a term of imprisonment of 4

months on each of Counts 1 and 2, with the terms to be served

concurrently. (DA-5).

A. Overview

At trial, the government sought to prove that Petitioner’s 1986

tax return was false and fraudulent, as alleged in Count 1 of the

indictment, because he had: (1) under-reported gross receipts

received by Winslow Exxon, a gas station solely-owned by

Petitioner; (2) reported a $51,760 long-term capital gain on the

sale of a 55-foot ocean yacht, when the gain should have been

reported as ordinary income; (3) reported a $40,862 capital loss on

the sale of a 46-foot ocean yacht, which the government contended

had been used primarily for personal and recreational purposes and,

therefore, ineligible for deduction as a capital loss; and (4) failed to

report a long-term capital gain from the sale of real estate located

in Brigantine, New Jersey. (DA-689a). With respect to Count 2 of

the indictment, the government alleged that Petitioner’s 1987 tax

return was false and fraudulent because Petitioner had: (1) again

under-reported the Winslow Exxon gas station receipts; and (2)

reported a $69,422 capital loss on the sale of a 48-foot Uniflite

yacht, when the asset was not entitled to capital loss treatment.

(DA-689a).

Petitioner disputed all of the government’s contentions. He

denied that he under-reported income from his gas station and he

denied any intent to erroneously report or to fail to report any of the

items that were the subject of the indictment. Petitioner, who had

an eighth grade education, maintained that he had given to his

accountants all the information necessary to prepare his tax returns

and that the accountants either failed to properly analyze the

information, or to ask the questions necessary to make highly

technical professional accounting judgments that were required in

order to determine the tax treatment of Petitioner’s assets. The

accountants admitted their deficiencies at trial and the trial judge,

in rendering his opinion on Petitioner’s motion to dismiss the

indictment, specifically noted the carelessness of Petitioner’s

accountants (DA-691a).

B. Tax Treatment of the Brigantine House

The government claimed that Petitioner had failed to report

income from the sale of a house that he had owned in Brigantine,

New Jersey. The house had been purchased for $38,000 in 1974,

and had been sold on April 9, 1986 for $75,000. (DA-141). Although

the government claimed that Petitioner was the sole owner of the

house, Petitioner produced evidence that he owned the house jointly

with his mother, Margaret Kennedy. (DA-388). In 1982, after

Petitioner’s mother lived in the house for about 8 years, she became

ill. She moved out of the house, which was then rented, with the

rental proceeds going to her. (DA-389). The rent checks were written

to Petitioner and were deposited by him in his mother’s account. It

was his mother who had made the mortgage payments. (DA-389).

Over the eight year period during which Petitioner’s mother lived

in the home, a screened-in porch was added at a cost of $5,000. In

addition, a two-car driveway was built, and sprinklers, central air

conditioning, and a new heater, among other things, were purchased.

Payments for all these things were made by Petitioner. (DA-388 to

DA-389).

A deed had been prepared on February 5, 1986, by attorney

Michael Diamond, transferring ownership of the property from

Petitioner and his mother jointly to Petitioner alone. Diamond

testified that because the transfer of the property was from a mother

to a son it was tax exempt. (DA-238). Petitioner’s gain on the house

would have been $19,500, if no improvements had been made.

Petitioner demonstrated, however, that the government failed to take

into account the improvements made to the house over the twelve

years that it was in Petitioner’s family. If these items had been

considered by the government, it would have recognized that no

gain was realized from the sale. Petitioner’s mother had died two

days before the deed prepared by Diamond had been recorded. (DA-

234).

Robert Kelly, a junior accountant employed by Moore and

Fitzpatrick, the accounting firm used by Petitioner, testified that he

had not asked Petitioner whether he had sold any real estate in

1986. (DA-93). He noted that he should have asked the question

because taxpayers are often misinformed about whether the sale of

real estate is a taxable event. (DA-93). Kelly specifically stated

that taxpayers are not knowledgeable about whether gifts from

parents are taxable events or whether gifts from a dead parent are

taxable. (DA-94). Kelly’s boss, Kenneth Moore, also acknowledged

that he had not asked Petitioner about whether he had sold the

Brigantine house in 1986. (DA-122).

C. Tax Treatment of the Yacht Sales

The evidence at trial established that Petitioner was trying to

get into the business of selling yachts, had purchased a marina for

that purpose and formed a company called Magic Marine. Petitioner

had previous experience in the yacht business. He had entered into

two partnerships with Stephen Gordon in 1986 and 1987, called

the Marina Project and South Florida Yacht Sales respectively. (DA-

52 to DA-55). Petitioner belonged to a yacht club, entered

tournaments, and brought his boat to the tournaments. It was

advantageous for people engaged in the business of selling yachts

to engage themselves in activities at marinas in order to generate

potential business. (DA-57). Three yachts, which were the subject

of the indictment, had been sold by Petitioner.

The first yacht sold by Petitioner, which was the subject of

Zisterer’s investigation was a 46-foot boat, called the Ocean. The

boat, which Petitioner had purchased for $42,500, was sold at a

loss. (DA-152). The government contended that this boat was owned

by Petitioner for his personal use and therefore Petitioner was not

entitled to the loss taken. As alleged evidence that the boat was

used for pleasure was a notation on an insurance form, where the

word “pleasure” had been checked. (DA-151). Anthony Faraco,

who sold Petitioner the insurance, noted that “pleasure” is the correct

characterization so long as the boat owner is not charging people to

walk on the boat or to take it out sailing. (DA-154 to DA-155). The

word “commercial” would be checked, Faraco noted, if the boat is

a commercial fishing vessel, a tugboat, or a charter boat used by a

business to collect a fee. (DA-154). Petitioner maintained that the

boat was purchased for investment purposes, and that he, at times,

would take people out on the yacht, in the hope of inducing sales

for his business. This sales strategy in fact worked. Petitioner took

one man in the club, named Lawrence Littman, out on his 46-foot

yacht. (DA-211). Littman subsequently bought from Petitioner a

$450,000 55-foot Ocean yacht, which is the second yacht sold by

Petitioner that is the subject of the indictment. (DA-213). In addition

to purchasing the 55-foot yacht from Petitioner, Littman also sold

Petitioner a 48-foot Uniflite yacht for $150,000. The Uniflite yacht

is the third yacht that is the subject of the indictment.

At trial, the government claimed that Petitioner had possession

of the 55-foot boat for only two months and therefore was not

entitled to the long term capital gain he had taken. The government

also contended that Petitioner received a commission on the boat

and, therefore, any gain was to be treated as ordinary income. (DA-

181 to DA-185). The government’s characterization was disputed,

however, by Leonard Garr, the owner of Comstock Boat Works in

Brick Town, New Jersey, who stated that he had sold the yacht to

Petitioner and earned a commission himself of $50,000. The terms

of the transaction were set forth on forms, which specifically

indicated that the yacht was being purchased by Petitioner for the

purpose of reselling it. (DA-185). No commission had been paid to

Petitioner. (DA-185). Petitioner maintained that irrespective of

whether profit on the transaction was treated as a long term or short

term gain, the end result was the same: no additional taxes were

owed for the year 1986. This claim was supported by the expert

testimony of accountant Robert Brennan. (See Exhibit DX-41, DA-

1817).

The third boat sold by Petitioner was the 48-foot Uniflite that

had been purchased from Lawrence Littman. This boat, the

government contended, was a capital asset. Petitioner bought the

boat for $150,000 and sold it for $210,000, but he had made

improvements to it and had paid a commission for its sale, which

resulted in a loss to Petitioner. Defense counsel, in summing up to

the jury, noted that the government never analyzed any of the

maintenance or repair charges and therefore could not argue beyond

a reasonable doubt what, if anything, Petitioner owed as a result of

the transaction.

At trial, the government presented Petitioner’s accountant,

Robert Kelly, with a sheet of paper captioned “1986 Magic Marine”

that contained notations allegedly written by Petitioner. (DA-72,

DA-85, DA-851). The document had three entries. One entry, next

to the words “46 Ocean”, stated a loss of $40,862.19. (DA-72, DA-

851). Another entry, following the words “55 Ocean”, stated a profit

of $51,760. (DA-73, DA-851). The third entry, next to the words

“48 Uniflite”, stated a loss of $40,682. (DA-73, DA-851). On the

tax returns prepared for Petitioner, the loss for the 46-foot Ocean

yacht and the 55-foot Ocean yacht correlated with the notations on

the handwritten summary document. (DA-73). The loss for the 48-

foot Uniflite, however, was reported on Petitioner's taxes as being

higher than indicated on the summary documents. The loss reported

on the tax returns, of $69,422, was attributable to additional costs

picked up by the accountant, which increased the tax basis of the

boat. (DA-74). These costs included amounts spent by Petitioner

for storage, maintenance and cleaning. (DA-79).

Kelly acknowledged that he had been supplied with folders by

Petitioner for each of the yachts, which contained detailed

information about their sale, but Kelly used summary information

written on the outside of the folders to characterize the gains or

losses as short or long term. (DA-75). Kelly had not looked inside

the folders, which contained information relevant to the tax treatment

of Petitioner’s assets. (DA-91 to DA-92). Kelly also acknowledged

that he made an error in calculating the tax basis for the 55-foot

boat. (DA-92).

Kelly had been instructed by his boss, Mr. Moore, that Petitioner

had held the yachts as an investment. (DA-75). It was Moore who

had 90 percent of the contact with Petitioner, and, when Kelly needed

information about the Kennedys’ taxes, he would first go to Moore,

not the clients. (DA-86). Petitioner had not told Kelly whether to

treat the profits on the boats as short term or long term Capital gains,

he also did not tell him whether to treat property as personal or as

investment. (DA-89 to DA-90). These decisions were made by

Moore. (DA-90). Kelly noted that in all his personal dealings with

Petitioner, he found him to be forthcoming and had willingly

provided any information requested. (DA-95).

Moore confirmed the testimony of Kelly. He acknowledged

that he was the one who told Kelly to treat the yachts as investment

properties and it was he who told Kelly whether to characterize the

yachts as long or short-term assets. (DA-108). Moore stated

specifically that Petitioner had never told him that he never used

his yachts for personal use. (DA-131). Moore also stated that the

folders he had been given by Petitioner for the preparation of his

taxes, which had not been examined, contained information relevant

to Petitioner’s taxes, including sales invoices, repair bills and

purchase invoices. (DA-136).

D. Treatment of the Gas Station Income

In calculating the taxes owed by Petitioner as a result of the

income earned from Winslow Exxon, Petitioner’s accountants added

the deposits in his three business accounts to determine the gross

receipts of the business. The government performed the same

analysis as Petitioner’s accountants, but, in calculating the gross

receipts, added to the business account deposits, monies deposited

into Petitioner’s personal account, which allegedly belonged in the

business bank accounts. Petitioner offered expert testimony that

showed the flaws in the methodologies of both the government and

Petitioner’s accountants: neither had deducted inter-account transfers

and these transfers, if not considered, would have resulted in an

over-reporting of income, not an under-reporting as the government

contended. Petitioner’s accountant, Michael Kelly, recalculated the

receipts and taxes owed, after being informed of the mistake he

made in not deducting inter-account transfers, and he found that

Petitioner had overpaid his taxes for the gas station. (DA-376).

ee Pe ee ee ee ee ee ee ho

REASONS FOR GRANTING THE WRIT

I. PETITIONER’S CONSTITUTIONAL RIGHTS WERE

VIOLATED BY THE DISTRICT COURT’S FAILURE TO

ADVISE THE JURY THAT EVEN IF IT BELIEVED THAT

PETITIONER’S ACTIONS WERE OBJECTIVELY

UNREASONABLE, IT STILL WAS REQUIRED TO ACQUIT

HIM IF IT FOUND THAT PETITIONER HAD ACTED IN

SUBJECTIVE GOOD FAITH.

In instructing the jury on the requirement of willfulness, the

trial judge told the jury that if the Petitioner “had a good faith

misunderstanding of the law or believed in good faith that he had

done all that the law required, you may not find that he acted willfully

and you must acquit him.” (DA-508). The court went on to state:

It is obviously impossible to ascertain or

prove directly the operations of the defendant’s

mind; but a careful and intelligent consideration

of the facts and the circumstances shown by

the evidence in any case enables one to infer

what another’s intentions were in doing or not

doing things. With the knowledge of definite

acts, you may draw definite logical conclusions.

(DA-510).

The trial judge in issuing this instruction, failed to inform the

jury that Petitioner’s beliefs need not be objectively reasonable for

them to be in good faith: the jury could well have concluded that

Petitioner, even though he had subjective good faith in dealing with

his tax liability, was nevertheless acting in an objectively

unreasonable way, and therefore was guilty of the offenses charged.

The failure to provide the jury with instructions differentiating

objective from subjective good faith, especially given the facts of

this case, is reversible error. See, e.g., Cheek v. United States, 498

U.S. 192 (1991). See also United States v. Pabisz, 936 F.2d 80 (2d

Cir. 1991).

Indeed, the jury was confused over the issue of reasonableness,

and after a brief period of deliberations returned with the following

question: “Reasonableness — is proof on a prima facie basis

sufficient, or do we need specific intent on each segment of the

charge to substantiate reasonableness?” (Da-515). After reading

the jurors’ question to counsel, the following colloquy took place:

Defense Counsel: Do you understand they are

using reasonable to refer to reasonable doubt?

The Court: J understand it to refer to the good

faith defense.

Defense Counsel: So you're just going to refer

them to the charge —

The Court: You might be right. It may go to

the burden of proof. Maybe the best thing to do

is ask them just to review the charges on burden

of proof and see if that doesn’t answer their

questions, and if they still have difficulty, to

come back. In fact, we might say that, I find

the question a little bit difficult to understand.

Perhaps they could refer to the charges, yes.

(DA-515-16) (emphasis supplied).

Where, as in this case, the government’s evidence against

Petitioner was far from substantial, and the jury expressed difficulty

in assessing the reasonableness of Petitioner’s actions, Petitioner

was entitled to a clear jury instruction on subjective good faith.

To be guilty of tax evasion in violation of 26 U.S.C. § 7201 the

government must prove that Petitioner “willfully” attempted to evade

or defeat a tax. In United States v. Murdock, 290 U.S. 389 (1933),

this Court held that a defendant is entitled to an instruction with

respect to whether he acted in good faith based on his actual belief

CT nT

(emphasis added). That is, if a defendant believes in good faith that

he was not violating any of the provisions of the tax laws, he cannot

be found to have acted willfully, and must therefore be acquitted of

the charges. In United States v. Cheek, this Court held that a

defendant’s good faith belief need not be objectively reasonable.

Cheek v. United States, 498 U.S. 192 (1991) (“We thus disagree

with the Court of Appeals’ requirement that a claimed good-faith

belief must be objectively reasonable if it is to be considered as

possibly negating the government's evidence purporting to show a

defendant’s awareness of the legal duty at issue”). Consequently, it

is clear that a jury instruction advising the jury that the defendant’s

belief must be objectively reasonable is plain error. See United States

v. Aitken, 755 F.2d 188, 193-94 (1st Cir. 1985) (concluding that

objective reasonableness instruction in willful tax evasion case was

plain error despite strong evidence against defendant). The circuit

and district courts have differed, however, over whether, as Petitioner

maintains, this Court’s decision in Cheek places an affirmative duty

on trial courts to instruct juries on the issue of Petitioner’s subjective

beliefs.

For instance, the Second Circuit in United States v. Pabisz,

936 F.2d 80, 83 (2d Cir. 1991), held that the “fundamental fairness”

of the trial was undermined where the jury was misled into believing

that defendant’s good faith beliefs could negate the element of

willfulness only if those beliefs were objectively reasonable. “The

basic problem with the instruction given is that, on the issue of

good faith, the jury was not instructed that it must consider whether

defendant subjectively believed that he did not need to file income

tax returns or pay taxes”. Jd. Citing Cheek, the Pabisz court

concluded that the district court’s failure to affirmatively instruct

the jury that defendant’s beliefs need not be objectively reasonable

if they were actually held in good faith, was reversible error. Jd.

See also Snyder v. United States, 897 F. Supp. 241, 244 (D. Md.

1995) (“Thus, Cheek simply states that a good faith belief of legality,

no matter how unreasonable, negates the statutory element of

willfulness for tax evasion and failure to file a return, and that a

jury must be allowed to consider evidence of such a belief.”)

(emphasis added).

The Seventh Circuit in United States v. Havert, 40 F.3d 197

(7th Cir. 1994), cert denied, 115 S. Ct. 1822 (1995), however,

declined to adopt the reasoning of United States v. Pabisz, 936 F.2d

80, 83 (2d Cir. 1991), that the district court, in dealing with the

good faith defense, must either instruct the jury to consider “whether

[defendant] subjectively believed that he did not need to file income

tax returns or pay taxes,” or “that defendant’s beliefs need not be

objectively reasonable.” In so holding, the Havert court stated,

“Cheek does not mandate that the use of the word ‘subjective’ or

words ‘subjective standard’ be stated in the charge to the jury. It

does require the elimination of the words ‘objectively reasonable’

as applied to a willful violation of a known legal duty”. Havert, 40

F.3d at 202. See also United States v. Droge, 961 F.2d 1030, 1038

(2d Cir. 1992) (jury instructions on “good faith” need not refer

explicitly to the words “objective” and “subjective” intent); United

States v. Becker, 965 F.2d 383, 388 (7th Cir. 1992) (jury instruction

that “if the defendant actually believed that what he was doing was

in accord with the tax statutes, he cannot be said to have had the

criminal intent to willfully evade or defeat taxes or to willfully fail

to file returns. This is so even if defendant’s belief was not

objectively reasonable as long as he held the belief in good faith” is

an accurate summary of Cheek that appropriately focused the jury’s

attention on whether the defendant had a good faith belief he was

acting lawful).

Unlike the instructions given in the present case, however, in

both Havert and Droge the trial court instructions made it clear that

defendant’s good faith belief need not be objectively reasonable.

See Havert, 40 F.3d at 202 (jury instructed that if the defendant in

good faith believed that under the law he did not have any income

tax obligation for a particular year, then any failure to pay income

taxes for that year cannot be found to be willful, even if such belief

was incorrect); United States v. Droge, 961 F.2d at 1038 (jury

instructed that: “if you find that [defendant] sincerely and in good

faith believed that the law was that he did not have to file a return

because he was not required to by the Internal Revenue Code, then

you cannot find that he acted willfully. Did he sincerely, honestly

believe what he said the law required, or did he in fact know that

(sic) the law required and simply disagreed with it? It’s for you to

decide”.) Indeed, in Droge the court pointed out:

While the ckarge did not explicitly eschew an

“objective” standard or expressly state that the

jury had to employ a “subjective” standard in

measuring the veracity of Droge’s asserted

beliefs, its emphasis on Droge’s personal

sincerity and good faith in those beliefs, and

whether they were honestly held by Droge,

adequately communicated the subjective

approach that the jury was required to take.

Id.

The Third Circuit has held, however, that no additional

instruction need be ziven to the jury in light of this Court’s decision

in Cheek, See United States v. McGill, 964 F.2d 222 (3d Cir. 1992).

In McGill, the court concluded that Cheek only forbids an instruction

that defendant’s beliefs must be objectively reasonable, and does

not piace an affirmative duty on courts to instruct juries that

defendant’s belief need not be objectively reasonable. Jd. at 238.

Indeed, the court held that recitation of the customary definition of

willfulness: the voluntary intentional violation of a known legal

duty, without more, is permissible. Jd. (rejecting defendant’s

argument that Cheek requires that a tax defendant is entitled to a

particularized instruction concerning his actual knowledge of the

tax laws). See also United States v. Benson, 67 F.3d 641, 650 (7th

Cir. 1995), reh’g denied, 74 F.3d 152 (1996) (a precise definition

of good faith highlighting subjectivity is not necessary to a

willfulness instruction. District court did not plainly err that a good

faith belief concerning the requirements of the tax laws may be

subjective and need not be objectively reasonable. Although this is

generally a correct statement of the law.) (citing Cheek and United

States v. Havert, 40 F.3d 197 (7th Cir. 1994).

In rejecting Petitioner’s argument that the district court erred

in failing to advise the jury that Petitioner’s belief, that he was doing

all that was necessary to comply with the tax laws, need not be

objectively reasonable, the Third Circuit Court of Appeals stated

that Petitioner’s argument introduces a distinction, “i.e., subjective

belief as opposed to objectively reasonable belief that is not really

at issue here.” (3a). The panel found that the instructions in this

case were different from Cheek in that they were based on

Petitioner’s state of mind and did not introduce the concept of

Petitioner’s reasonable beliefs. (4a). Petitioner respectfully submits,

however, that this is a distinction without a difference. Indeed, what

is reasonable to Petitioner by definition requires an inquiry into

Petitioner’s state of mind. Petitioner maintains that he believed in

good faith that he was complying with his obligations under the tax

code. If the jury agreed with him, yet believed that he was acting in

an objectively unreasonable way, it was required to find him not

guilty of the charges in the indictment. Further, as in Cheek, the

jury in this case was clearly concerned about “whether the defendant

honestly and reasonably believed that he was not required to pay

the tax.” (3a) (citing Cheek ). That this is so is clear from the jurors’

question regarding reasonableness.

At the core of a defendant’s guarantee to a fair trial is the trial

court’s obligation to assure that the jury’s impartial deliberations

upon the guilt of a criminal defendant are based solely upon the

evidence in accordance with proper and adequate instructions. See

United Brotherhood of Carpenters and Joiners v. United States,

330 U.S. 395, 408-409 (1946). Where jury instructions are

ambiguous, an appeals court should inquire whether “there is a

reasonable likelihood that the jury has applied the challenged

instruction” in an improper manner. Boyde v. California, 494 U.S.

370, 380 (1990). Jury instructions must not be misleading and must

contain an adequate statement of the law to guide the jury’s

determination. United States v. Park, 421 U.S. 658, 675 (1975).

See also Tigg Corporation v. Dow Corning Corporation, 962 F.2d

1119 (3d Cir. 1992) (instructions taken as a whole must fairly apprise

the jury of the issues and the applicable law). In addition, a defendant

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is entitled to jury instructions presenting his theory of defense as

long as the instructions are supported by the law and have a basis in

the evidence presented to the jury. United States y. Mason, 902

F.2d 1434, 1438 (9th Cir. 1990).

Particularly under the facts of this case, where the

reasonableness of Petitioner’s conduct was severely drawn into

question by the government, it was imperative for the trial court to

clearly and unambiguously instruct the jury on the distinction

between objective and subjective good faith. Its failure to provide

that instruction constitutes reversible error and requires reversal of

the judgment of conviction.

II. PETITIONER’S CONSTITUTIONAL RIGHTS TO DUE

PROCESS WERE VIOLATED BY THE THIRD CIRCUIT’S

AFFIRMANCE OF THE DISTRICT COURT’S DENIAL OF

PETITIONER’S ACQUITTAL MOTION.

The due process clause of the constitution requires that the

government prove beyond a reasonable doubt every element of the

crime with which a defendant is charged. In re Winship, 397 U.S.

358, 364 (1970). In determining a niotion for judgment of acquittal

or for a new trial, the district court must decide whether there was

“substantial evidence, viewed in the light most favorable to the

government, to support the jury’s finding of guilt beyond a

reasonable doubt as to the elements of (each) crime charged.” United

States v. Pecora, 798 F.2d 614, 618 (3d Cir. 1986). See also

Government of the Virgin Islands v. Williams, 739 F.2d 936, 940

(3d Cir. 1984).

Petitioner was charged with two counts of attempting to evade

taxes, in violation of 26 U.S.C. § 7201. In order to obtain a conviction

under 26 U.S.C. § 7201, the government must prove a willful

violation, the existence of a tax deficiency, and an affirmative act

of evasion or attempted evasion of the tax. Sansone v. United States,

380 U.S. 343, 351 (1965). It must be shown that the defendant had

unreported income and that the income was taxable. United States

v. Chesson, 933 F.2d 298, 303-04 (Sth Cir.), cert. denied, 112 S. Ct.

583 (1991). “Willfulness” is defined as the “voluntary, intentional

vioiation of a known legal duty.” Cheek v. United States, 498 U.S.

192 (1991). A “good faith misunderstanding of the law or a good

faith belief that one is not violating the law negates willfulness,

even if the claimed misunderstanding or belief is not objectively

reasonable.” United States v. Bishop, 412 U.S. 346 (1973). A

defendant’s good faith reliance on an expert tax preparer may be a

defense to a tax evasion charge. United States v. Meyer, 808 F.2d

1304 (8th Cir. 1987).

Petitioner, who has an eighth grade education, should have

been acquitted because the government failed to prove beyond a

reasonable doubt, with substantial evidence, that he willfully evaded

his tax obligations. As is set forth in detail in the statement of the

case, Petitioner relied upon his accountants, who acknowledged

that they were always given any information they requested of

Petitioner, who further vouched for Petitioner’s integrity, who

admitted to not reviewing Petitioner’s records on the yachts though

they had been presented to them, who further admitted to over

reporting Petitioner’s income from the gas station by not deducting

inter-account transfers, and who failed to ask Petitioner questions

necessary to assess whether taxes were owed on the sale of the

Brigantine property, though improvements to the property were of

sufficient value to negate any tax obligation. The accountants’

negligence was confirmed by Petitioner’s expert, Robert Brennan,

who testified that it did not matter whether the yachts were deemed

to be short or long-term assets, because either way Petitioner would

not have owed any additional taxes.

Because the government had not met its burden of proving all

the elements of the crimes alleged beyond a reasonable doubt, the

judgment of conviction must be reversed.

Ill. PETITIONER’S CONSTITUTIONAL RIGHT TO DUE

PROCESS AND TO AN UNTAINTED GRAND JURY

PROCESS WERE IRREPARABLY PREJUDICED BY THE

PRESENTATION BEFORE THE GRAND JURY OF FALSE

AND MISLEADING TESTIMONY BY INTERNAL

REVENUE SPECIAL AGENT JACQUELINE ZISTERER.

A. Overview Of The Effect Of Agent Zisterer’s Conduct On

The Integrity Of The Grand Jury Proceedings.

Shortly before trial, Petitioner moved for the dismissal of the

indictment on the grounds of grand jury misconduct. The misconduct

came to light after Petitioner was supplied with the grand jury

testimony of Internal Revenue Special Agent, Jacqueline Zisterer.

Through testimony that was false and misleading, which wrongly

informed the jury of not only the facts, but the law, and which

contained improper comments upon Petitioner’s alleged assertion

of his Fifth Amendment rights, Zisterer tainted the functioning of

the grand jury, infringing upon its mission to reach an independent

conclusion on whether there was probable cause to return an

indictment. These governmental encroachments were not only

incompatible with the prosecutor’s statutory obligations to prevent,

among other things, perjurious testimony from coming before the

grand jury, but such conduct subverted the institutional role of the

grand jury. It is respectfully submitted that the trial judge erred in

failing to dismiss the indictment and that Petitioner’s constitutional

rights, including his right to an unfettered grand jury determination,

have been violated in the process.

B. The Historic And Constitutional Purposes Of The Grand

Jury.

The Fifth Amendment to the United States Constitution

guarantees to an accused the right to be indicted by a grand jury

before being required to stand trial. U.S. Const. Amend. V. When

the framers of the constitution included the Fifth Amendment in

the Bill of Rights “they were not engaging in a mere verbal exercise.”

United States v. Estepa, 471 F.2d 1132, 1136 (2d Cir. 1972). Rather,

they recognized that the grand jury was essential to implementing

“basic liberties”. United States v. Hogan, 712 F.2d 757, 759 (2d

Cir. 1983). The grand jury was devised to “provide a fair method

for instituting criminal proceedings,” Costello v. United States, 350

U.S. 359, 362 (1956), to serve “as a protector of citizens against

arbitrary and oppressive governmental action,” United States v.

Calandra, 414 U.S. 338, 343 (1974), and to assure the “protect[ion]

of citizens against unfounded criminal prosecutions.” Branzburg v.

Hayes, 408 U.S. 665, 686 (1972).

Despite the requirement that the grand jury act independently

and that it serve as a buffer against oppressive governmental action,

it has so often become prey to prosecutorial manipulation that the

historic independence of the institution has been compromised.

United States v. Hogan, 712 F.2d 757, 759 (2d Cir. 1983). This

erosion of the independence of the grand jury stems from the active

role that the prosecution plays in the proceedings. Jd. It is the

prosecutor who prepares the indictment, calls and examines

witnesses, advises the grand jury as to the law, and is in attendance

throughout the investigation. Jd.

Though the prosecutor is actively involved in the proceedings

of the grand jury, however, he or she does not have an absolute

license to advocate a particular position. Rather, the prosecutor must

act as “an administrator of justice”. United States v. Gold, 470 F.

Supp. 1336, 1346 (N.D. Ill. 1979). When prosecutors have infringed

upon the independent functioning of the grand jury, courts have

ordered indictments dismissed. United States v. Hogan, 712 F.2d

757, 761-62 (2d Cir. 1983); United States v. Estepa, 471 F.2d 1132

(2d Cir. 1972); United States v. Roberts, 481 F. Supp. 1385 (C.D.

Calif. 1980); United States v. Samango, 607 F.2d 877, 883 (9th Cir.

1979); United States v. DiGrazia, 213 F. Supp. 232, 235 (N.D. Iil.

1963); United States v. Serubo, 604 F.2d 807, 818 (3rd Cir. 1979);

United States v. Gold, 470 F. Supp. 1336, 1346 (N.D. Ill. 1979);

| 19

United States v. Treadway, 445 F. Supp. 959 (N.D. Tex. 1978);

United States v. DeMarco, 550 F.2d 1224 (9th Cir. 1977); United

States v. Carcaise, 442 F. Supp. 1209 (M.D. Fla. 1978); and United

States v. Morrison, 518 F. Supp. 917 (S.D.N.Y. 1981).

5 After reviewing Petitioner’s motion to dismiss the indictment,

the district court concluded that, “Special Agent Zisterer made a

number of erroneous or incomplete statements of a factual or legal

nature to the grand jury.” (DA-690a). The district court ultimately

denied Petitioner’s motion, however, notwithstanding its findings

that:

(1) Special Agent Zisterer’s mistaken statement

that former station manager Craig Matthews left

that position in 1986 instead of 1984 was

‘ erroneous. [DA-691].

(2) Zisterer’s response to a question posed by

a grand juror regarding the tax treatment of the

gas station income was “elliptical” and

“confusing, to say the least”. [DA 691a].

(3) “[RJeference to a $150,000 total diversion

before the grand jury, while confusing and

imprecise, did not constitute prosecutorial

misconduct nor impermissibly influence the

grand jury.” [DA-69 1a].

(4) Agent Zisterer’s explanations of when

personal use transforms an investment property

into a personal asset, “are incorrect statements

of the law.” [DA-692].

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(S) “It was a mistake for Special Agent Zisterer

to have referred to defendant's Fifth Amendment

rights .. .” [DA-693].

(6) “Taken in isolation, the quoted statements

of Special Agent Zisterer are incomplete and

thus, inaccurate.” [DA-694a].

(7) Although, “[t]here was a degree of

carelessness in the presentation to the grand jury

in this case . . . instances of incomplete

information or loose language. . . . It cannot be

said that the errors . . . were so great as to impair

the judgment of the grand jury.” [DA-694-95].

Even the government conceded in its responding brief before

Third Circuit Court of Appeals that “To be sure, the District Court

found Zisterer’s testimony to contain hearsay, to be contrary to the

evidence adduced at trial, and to be inaccurate in some respects”.

(Gov't Br. at 17). The government wrongly maintained, however,

that since there was no specific finding that Zisterer’s testimony

constituted perjury, there was no error. Petitioner strongly disagrees.

In The Bank of Nova Scotia v. United States, 487 U.S. 250

(1988), this Court set forth the standard to be applied in determining

whether an indictment should be dismissed. The Court stated that

dismissal was warranted only in those cases “in which the structural

protections of the grand jury have been so compromised as to render

the proceedings fundamentally unfair, allowing the presumption of

prejudice.” Jd. at 257. Subsequently in United States v. Soberon,

929 F.2d 935 (3d Cir. 1991), the Third Circuit held that the

presentation of perjurious testimony did not compromise the

structural protections of the grand jury referred to in the Nova Scotia

opinion. The court’s holding in Soberon, however, has since been

drawn into question by this Court’s decision in United States v.

Williams, 504 U.S. 36 (1992). There, although this Court held that

the District Court did not have the power to dismiss an indictment

for the prosecutor’s failure to present exculpatory testimony, it

premised its decision on the rationale that Nova Scotia permits

exercise of the supervisory power of the Court to dismiss indictments

to be used to remedy the violation of those “few, clear rules which

Pree

were carefully drafted and approved by this Court and by Congress

to ensure the integrity of the grand jury’s functions.” Jd. at 46. Among

the rules and statutes specifically cited by the Court as being relevant

to the grand jury’s functioning were those relating to perjury. Jd. at

n. 6. citing 18 U.S.C. § 1623 (criminalizing false declarations before

the grand jury) and § 1622 (criminalizing subornation of perjury).

This Court has thus recognized that specific standards of

behavior for prosecutors, and specific statutes relating to perjury,

are among the types of rules or laws that are intended to protect the

integrity of the grand jury, and that do fall within the supervisory

authority of the courts to dismiss indictments. Indeed, it is difficult

to imagine how perjury could, under any circumstances, be tolerable,

or not compromising of the grand jury’s integrity. One of the central

values of the justice system is truth. All witnesses, before they testify,

must swear to tell the truth. Once the truth is disrespected, the

integrity of the system is destroyed. It is for this reason, that

convictions have been overturned where witnesses have been found

to be lying.

In Napue v. Illinois, 360 U.S. 264 (1959), this Court held that

due process is violated when the prosecutor obtains a conviction

with the aid of false evidence which it knows to be false and allows

to go uncorrected. See also United States v. Barham, 595 F.2d 231,

241 (Sth Cir. 1979). It is immaterial whether or not the prosecution

consciously solicited the false information. Jd. at 241. And, similarly,

it is immaterial whether the false testimony directly concerns an

essential element of the government’s proof or whether it bears

only upon the credibility of the witness. Jd. at 241-42.

This rule, that a conviction standing upon false testimony

violates due process, was affirmed in Giglic v. United States, 405

U.S. 150 (1972), and again in United States v. Bagley, 473 U.S. 667

(1985), where the Court held that “a conviction obtained by the

knowing use of perjured testimony must be set aside if there is any

reasonable likelihood that the false testimony could have affected

the jury’s verdict. . . .” Id. at 679 n. 9. Due process is violated not

only when the prosecutor actively solicits false testimony, but also

when he fails to correct false testimony. Alcorta v. Texas, 355 U.S.

28 (1957).

Courts have not hesitated to order new trials where false

testimony has been used by the prosecution to obtain a conviction.

See, e.g., United States v. Bigeleisen, 625 F.2d 203 (8th Cir. 1980)

(false denial by witness of agreement to testify for prosecution);

United States v. Barham, 595 F.2d 231 (Sth Cir. 1979) (false denial

by witness of promise of leniency); United States v. SanFilippo,

564 F.2d 176 (Sth Cir. 1977) (false testimony regarding promise of

immunity); U,.. -d States ex rel. Annunziato v. Manson, 425 F. Supp.

1272 (D. Conn.), aff’d, 566 F.2d 410 (2d Cir. 1977) (false denial by

witness of promises made in exchange for testimony); Sanders v.

United States, 541 F.2d 190 (8th Cir. 1976) (false denial by witness

of receipt of compensation). Application of the foregoing principals

to these facts should have resulted in the dismissal of the indictment.

Agent Zisterer had so contaminated and so manipulated the grand

jury process through false statements and misleading omissions

that the integrity of the proceedings was irreversibly compromised.

C. Agent Zisterer’s False Testimony

One of the crucial issues the grand jury was asked to determine

was whether Petitioner had properly characterized yachts he had

sold as business assets. The grand jurors had specific concern about

this issue. One juror was so concerned that he asked Zisterer a

question. In response to the juror’s question, the agent falsely told

the entire grand jury that the moment a business asset is used for a

personal purpose it becomes a personal asset. The following

colloquy occurred in the grand jury room:

AJUROR: You said he was hoping to make

a gain on the sale of the yacht. Other than

showing it to a number of potential buyers, how

else would he have made a gain on that yacht?

THE WITNESS: He wouldn’t. When we

Pee ee ae ree vate tas keds a teh a o

purchase an asset, we would hope to sell it at a

gain. Just by showing it to people does not turn

that asset into a business asset. It has to be used

strictly for business use. It just cannot be used

for personal use. The moment it is used for

personai use, you can’t take a deduction for

loss.

(DA-685) (emphasis supplied).

Zisterer’s response to the grand juror’s question was false.

Treasury Regulation Section 183(b)(9) specifically declares that:

It is not, however, necessary that an activity

be engaged in with the exclusive intention of

deriving a profit or with the intention of

maximizing profits. . .. An activity will not be

treated as not engaged in for profit merely

because the taxpayer has purposes or

motivations other than solely to make a profit.

Also, the fact that the taxpayer devised personal

pleasure from engaging in the activity is not

sufficient to cause the activity to be classified

as not engaged in for profit if the activity is in

fact engaged in for profit as evidenced by other

factors whether or not listed in this paragraph.

Id. (emphasis supplied).

Judge Debevoise recognized that Zisterer’s testimony before

the grand jury was inaccurate. (DA-692). He found, however, that

the evidence presented by the government to the grand jury clearly

established that it was the government’s position that Petitioner had

falsely informed his accountants that he had acquired his 46-foot

yacht exclusively for investment purposes and had never used it for

personal purposes. The judge also found that the agent, in responding

to the question of another juror, had clarified her inaccurate

testimony, but that was not so. The colloquy relied upon by the

judge was the following:

AJUROR: You mentioned that you would have

to — when he purchased the yachts, he

indicated to the accountants that the use of the

yachts were for business purposes.

THE WITNESS: He said it was simply bought

for business investments and not used for

personal. It wasn’t a personal use but for an

investment.

A JUROR: InLR.S. laws, if you use the yacht

at any time to talk about business, can you

classify that as a business use?

THE WITNESS: No. That doesn’t make the

yacht a business asset at that point, but it would

allow you to take some deductions off your

returns in connection with that business

meeting. That wouldn’t make the yacht itself a

business asset, and the Internal Revenue Code

States that anytime you use an asset for

personal use, you cannot take a deduction for

a loss on that. You can compare it real easy. If

you sell your automobile at a loss, you can’t

take a deduction on your tax return for that

because you used it for personal use.

(DA-693) (emphasis supplied).

If anything, the foregoing testimony compounds the prejudice

suffered by Petitioner. Not only does the colloquy reflect continued

concern on the part of the grand jury with the issue of when an

asset is classified as business and when personal, but Zisterer, by

stating again that an asset used for personal use cannot be deducted

ET ee eee er

en oe a a ye ee ee re

as a loss and by further giving her automobile analogy, misled the

grand jury for a second time. Her testimony caused the jury to believe

that Petitioner, by using the yacht socially, had committed a crime

when he treated the yacht as a capital asset for tax purposes.

Agent Zisterer’s false testimony clearly had the capacity to

cause Petitioner to be indicted by a grand jury that was concerned

about the asset classification issue, yet was misinformed by one

who professed under oath to know the law. The issue was particularly

crucial because, during the year in question, Petitioner was

developing his boat brokerage business and had been active in

boating circles, including participation in social, but business-

producing activities, during the start of his boating operation.

Petitioner was clearly in the boating business, his assets were

properly classified, and he had a right to engage in certain social

activities to promote his business. Zisterer’s testimony caused the

grand jury to believe that once Petitioner used one of his assets for

pleasure, any treatment of the asset as a business one for tax purposes

was criminal.

D. More False Testimony Of Agent Zisterer

In addition to testifying falsely about the applicable law (and,

as noted above, Judge Debevoise acknowledged that her testimony

on this issue was inaccurate), Zisterer also misled the jury about

the facts. She suggested to the grand jury that Petitioner gave his

accountants one sheet of paper, on which he had written down the

losses and profit he earned on the sale of the three yachts, and that

he did this with the intention of misleading the accountants. Zisterer

Stated:

Well, in respect to all the yachts reflected on

the 1986 and 1987 returns, they (meaning the

accountants) were provided with one sheet of

paper. They were provided this piece of paper

by Mr. Kennedy. It reflects the profit and the

losses of all three yachts. Those match the tax

returns, so they simply took the losses and the

one gain from this sheet of paper given to them

by Mr. Kennedy.

(DA-680, DA-694).

In fact, Zisterer’s testimony was false, because she knew that

the accountants, Moore and Kelly, had stated that Petitioner gave

them three folders before his tax returns were prepared and those

folders contained information that would have permitted the

accountants to accurately prepare Petitioner’s return. Not only did

Zisterer attempt to mislead the jury by stating that Petitioner gave

his accountants minimal and misleading information, but the tax

returns prepared for Petitioner did not match, as Zisterer had

claimed, what Petitioner put down on paper.

E. Still Further False Testimony from Agent Zisterer

Zisterer also falsely testified that Petitioner was “pocketing”

money that did not go into either his business or personal accounts.

The following exchange occurred between a grand juror and

Zisterer:

JUROR: In the pocketing of money that he

put in his pocket (reference to Petitioner) do

you have any papers or anything to prove that

he pocketed — did you pick up any evidence

to that?

ZISTERER: The only evidence that I have

in relation to what he put in his pocket is the

testimony of the managers that delivered the

cash to him at his personal residence that

watched him do that. I do have the invoices

which clearly substantiated the evidence that it

wasn’t reported on the tax returns. It didn’t all

appear to be going all into his personal bank

Wi aise ie ac ea it a iii emcee Se ee eral aac

ee ae SN

accounts. When I added all these invoices up,

they exceeded to about $150,000.00 to what was

reported for automobile repairs on the tax

returns. I was not able to trace all that going

into the personal bank accounts. I don’t know

where the difference went, but it’s an indication

that it was put in his pocketed and used and

spent.

(DA-690a to DA-691a).

Judge Debevoise referred to Zisterer’s testimony on this issue

as “elliptical” and “confusing, to say the least”. (DA-691).

Nevertheless he found that it was not prejudicial because there was

evidence presented at trial of a diversion in excess of what the agent

had stated. (DA-691a). In fact, Zisterer’s testimony was false in

several material respects. First, the government had paperwork in

its possession that reflected inter-account transfers. When the

government calculated Petitioner’s gross receipts it failed to

eliminate these transfers, which ended up in a double-counting of

the receipts and in an overestimation of Petitioner’s income. Further,

merely because monies may have been deposited in a personal

account does not mean that the monies were not first recorded in

the business accounts. In fact, contrary to Zisterer’s testimony, the

government did have in its possession evidence that would have

established that, if anything, Petitioner overstated his business

receipts because his own accountants failed to eliminate inter-

account transfers.

False testimony was also given by Zisterer on the issue of

whether Petitioner had earned a commission on the sale of the 55-

foot Uniflite yacht. Judge Debevoise referred to Zisterer’s testimony

on this issue as “conclusory”, but he found that there was evidence

to support her conclusion because the grand jury might have believed

that Petitioner’s profit on the sale was in fact a commission. (DA-

693a). Although there was evidence that Petitioner had paid a

commission in order to obtain a boat for Petitioner’s buyer, Larry

Littman, there was no evidence that Petitioner was paid a

commission. On the contrary, Larry Garr explicitly testified that

Petitioner had not been paid a commission. This was an important

issue because treatment of Petitioner’s profit as a commission had

different tax implications than if the profit derived from the sale of

a Capital asset.

Misleading testimony had also been offered about the

Brigantine property. The government knew that the property, which

Petitioner had sold, had been jointly owned by Petitioner and his

mother and that his mother died two days before the deed was

recorded, but after the deed had been prepared and signed. The

jury was left with the inaccurate impression, however, that Petitioner

was the sole owner of the property, had an obligation to pay taxes

on it, and failed to do so.

F. Zisterer’s Improper Comments On Petitioner’s Alleged

Assertion Of His Fifth Amendment Rights.

In addition to providing false and misleading testimony to the

grand jury, Zisterer also improperly commented upon Petitioner’s

alleged assertion of his Fifth Amendment right to remain silent:

THE WITNESS: Yes, I contacted Mr. Kennedy

through correspondence. He immediately

obtained an attorney and took his Fifth

Amendment right. He didn’t have to speak with

me or provide me with anything. I contacted

his attorney and asked him to provide me with

substantiation of any nontaxable income he had.

(DA-684 to DA-685).

Petitioner maintained that it was not only improper for Zisterer

to have made any mention of Petitioner having asserted his Fifth

Amendment rights, but he maintained that the testimony itself was

false. Through his counsel, Petitioner proffered to the Court that he

never asserted his Fifth Amendment privilege, either with respect

to talking to the agent or to producing documents. Petitioner

maintained that the agent’s use of the word “immediate” was

particularly prejudicial because it emphasized for the grand jurors

Zisterer’s suggestion that Petitioner had something to hide. The

comment was not merely an infringement of Petitioner’s Fifth

Amendment rights, but was also an infringement of his right to

counsel, inasmuch as Zisterer also commented on Petitioner having

“immediately” obtained an attorney upon being contacted by the

agent.

In this area, as in the others, Judge Debevoise found that

Zisterer’s comments were wrong, but not unduly prejudicial. The

Judge acknowledged that Zisterer’s testimony had the capacity to

feed into a public perception that “a person who relies on the Fifth

Amendment is likely to be guilty of some crime.” (DA-693).

Although the Judge found that Zisterer’s comment was a “minimal

reference” to Petitioner’s Fifth Amendment rights, he found that

the damage was ameliorated by Zisterer’s further comment that

Petitioner did not have an obligation to speak with her. That further

comment, however, did not suffice to undo the damage already done.

Zisterer had focused the grand jury’s attention on Petitioner’s

immediate silence and retention of counsel, said nothing about his

having a constitutional right to counsel, and left the jury with the

clear and unmistakable impression that Petitioner had something

to hide.

Recently, in United States v. Breslin, 916 F. Supp. 438 (E.D.

Pa. 1996), the court considered a case strongly analogous to this

one. There, the court dismissed an indictment because of

prosecutorial misconduct. The court found that the prosecutor had

mischaracterized the evidence, offered improper opinions about

witnesses, and erroneously instructed the jury on the law, a fact

that the court found was the “most disturbing” of all. The court was

concerned with the cumulative effect of the prosecutor’s conduct

upon the grand jury.

The same concerns that motivated the court in Breslin to dismiss

the indictment, should also have motivated Judge Debevoise to do

so here. In this case, the government’s principal witness testified

falsely about fundamental principles of tax law, lied about crucial

facts, and inappropriately commented upon Petitioner’s assertion

of his constitutional rights. Inasmuch as false legal principles and

false facts, pivotal to the government’s case, were communicated

by the government to the grand jurors, the prejudice to Petitioner’s

fundamental rights is plain. The integrity of the grand jury was

irreversibly compromised by the government’s explicit violations

of rules and laws intended to ensure the truth of information coming

before the grand jury.

For all the foregoing reasons, the judgment of conviction against

Petitioner must be reversed and the indictment must be dismissed.

CONCLUSION

For all the foregoing reasons, it is respectfully submitted that

this Court should grant Petitioner’s petition for issuance of a writ

of certiorari.

Respectfully submitted:

ALAN L. ZEGAS

Counsel of Record

Attorney for Petitioner

20 Northfield Avenue

West Orange, New Jersey 07052

(201) 736-1011

PE NER OOO

Pee Te ee ee ee -

APPENDIX A — MEMORANDUM OPINION OF THE

UNITED STATES COURT OF APPEALS FOR THE THIRD

CIRCUIT FILED DECEMBER 4, 1996

NOT FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

No. 94-5779

UNITED STATES OF AMERICA

DENNIS F. KENNEDY

Dennis Kennedy,

Appellant

On Appeal from the United States District Court

for the District of New Jersey

(D.C. Crim. No, 93-00502)

District Judge: Honorable Dickinson R. Debevoise

Submitted under Third Circuit LAR 34.1(a)

November 25, 1996

BEFORE: GREENBERG, ALITO, and ROTH, Circuit Judges

(Filed: Dec. 4, 1996)

Appendix A

MEMORANDUM OPINION OF THE COURT

GREENBERG, Circuit Judge.

Appellant Dennis Kennedy appeals from a judgment of

conviction and sentence entered on December 20, 1994, in this

criminal tax case convicting him on two counts of tax evasion.

The district court sentenced Kennedy to two concurrent four-

month custodial terms followed by two concurrent three-year

terms of supervised release. Kennedy raises the following three

issues on the appeal: (1) the indictment against him should have

been dismissed because Internal Revenue Special Agent

Jacqueline Zisterer gave false and misleading testimony to the

grand jury, which irreparably prejudiced Kennedy’s rights; (2)

the district court erred in denying Kennedy’s motion to acquit

him; and (3), on a plain error basis, the district court’s

“instructions failed to advise the jury that even if it believed

that [Kennedy’s] actions were objectively unreasonable, it still

was required to acquit him if it found that he had acted in

subjective good faith.” We conclude that the first two issues

which Kennedy raises lack merit and do not require discussion,

and consequently, we address only the third issue.

Kennedy predicates his argument on Cheek v. United States,

498 U.S. 192, 111 S.Ct. 604 (1991). In Cheek, the Supreme

Court made it clear that a defendant’s good faith

misunderstanding of the law or a good faith belief that he is not

violating the law negates the willfulness element necessary to

sustain a criminal tax conviction. Furthermore, the Court made

it clear that a defendant’s good faith belief does not have to be

objectively reasonable. Of course, if the defendant’s purported

beliefs are not objectively reasonable, a jury might conclude

that the defendant does not hold the beliefs in good faith. Jd. at

203-04, 111 S.Ct. at 611-12.

Appendix A

Kennedy points out that the district court instructed the jury

that if Kennedy “had a good faith misunderstanding of the law

or believed in good faith that he had done all that the law

required, you may not find that he acted willfully and you must

acquit him.” Kennedy then notes that the court instructed the

jury that “[i]t is obviously impossible to ascertain or prove

directly the operations of the defendant’s mind; but a careful

and intelligent consideration of the facts and the circumstances

shown by the evidence in any case enables one to infer what

another’s intentions were in doing or not doing things. With the

knowledge of definite acts, you may draw definite logical

conclusions.”

Kennedy does not quarrel with the foregoing instructions

insofar as they go, but he contends that the instructions were

not complete because the instructions permitted the jury to

conclude that even though Kennedy had subjective good faith

in dealing with his tax liability, he had acted objectively

unreasonably and thus was guilty. In this regard, he points out

that the court did not specifically instruct the jury that Kennedy’s

beliefs “need not be objectively reasonable for them to be in

good faith.” Br. at 31.

The problem with Kennedy’s argument is that it introduces

a distinction, i.e., subjective belief as opposed to objectively

reasonable belief, that is not really at issue here. In Cheek, the

jury told the district court it was divided on whether the

defendant honestly and “reasonably” believed that he was not

required to pay the tax. The district court then instructed the

jury that an “honest but unreasonable belief” that the defendant

did not have to pay the tax was not a defense. The jury then

convicted the defendant.

Appendix A

The instructions here were different as they were based on

Kennedy’s state of mind and did not introduce the concept of

Kennedy’s reasonable beliefs into the jury’s deliberations. Thus,

the court told the jury that willfulness meant “the voluntary,

intentional violation of a known legal duty.” The court also

explained that if Kennedy had “a good faith misunderstanding

of the law or believed ip good faith that he had done all that the

law required,” the jury had to find that he had not acted willfully

and thus had to be acquitted. Furthermore, the district court told

the jury that if “the government proves the defendant knew of

his legal duty to file true and correct tax returns, and that he

voluntarily and intentionally violated that duty, then you may

find he acted willfully.” These explanations of the law and the

charge as a whole, which we have studied carefully, simply did

not suggest to the jury that it should consider the reasonableness

of Kennedy’s beliefs. Rather, these explanations focused on

Kennedy’s state of mind without regard for the reasonableness

of his beliefs. Thus, the charge was correct as it could not have

misled the jury. Accordingly, the court in the charge did not

commit error, let alone plain error.

In view of the aforesaid, we will affirm the judgment of

conviction and sentence of December 20, 1994.

TO THE CLERK:

Please file the foregoing memorandum opinion.

s/ Morton I. Greenberg

Circuit Judge

DATED:

APPENDIX B — JUDGMENT OF THE UNITED STATES

COURT OF APPEALS FOR THE THIRD CIRCUIT

DATED DECEMBER 4, 1996

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

No. 94-5779

UNITED STATES OF AMERICA

DENNIS F. KENNEDY

Dennis Kennedy,

Appellant

On Appeal from the United States District Court

for the District of New Jersey

(D.C. Crim. No. 93-00502)

BEFORE: GREENBERG, ALITO, and ROTH, Circuit Judges

JUDGMENT

This cause came on to be considered on the record from

the United States District Court for the District of New Jersey

and was submitted under Third Circuit LAR 34.1(a) on

November 25, 1996.

On consideration whereof, it is now here ADJUDGED and

ORDERED by this court that the judgment of conviction and

Appendix B

sentence of the District Court entered December 20, 1994, be

and is hereby affirmed.

ATTEST:

s/ P. Douglas Sisk

Clerk

DATED: Dec. 4, 1996

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sashes

56 8h UE AA: ©

APPENDIX C — ORDER OF THE UNITED STATES

COURT OF APPEALS FOR THE THIRD CIRCUIT

DENYING PETITION FOR REHEARING

DATED DECEMBER 30, 1996

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

No. 94-5779

UNITED STATES OF AMERICA

DENNIS F. KENNEDY

Dennis Kennedy,

Appellant

On Appeal from the United States District Court

for the District of New Jersey

(D.C. Crim. No. 93-00502)

SUR PETITION FOR REHEARING

BEFORE: SLOVITER, Chief Judge, and BECKER,

STAPLETON, MANSMANN, GREENBERG, SCIRICA,

COWEN, NYGAARD, ALITO, ROTH, LEWIS, and MCKEE,

Circuit Judges

The petition for rehearing filed by the appellant, Dennis F.

Kennedy, in the above captioned matter having been submitted

to the judges who participated in the decision of this court and

to all the other available circuit judges of the court in regular

Appendix C

active service, and no judge who concurred in the decision having

asked for rehearing, and a majority of the circuit judges of the

circuit in regular active service not having voted for rehearing

by the court in banc, the petition for rehearing is denied.

BY THE COURT:

s/ Morton I. Greenberg

Circuit Judge

DATED: Dec. 30, 1996

DORE OR a Pn oct ak ek

SRR Sid Bla Sele aide ogc geo

APPENDIX D — OPINION OF THE UNITED STATES

DISTRICT COURT FOR THE DISTRICT OF NEW

JERSEY FILED SEPTEMBER 8, 1994

NOT FOR PUBLICATION

UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF NEW JERSEY

Hon. Dickinson R. Debevoise

Criminal Action No. 93-502

UNITED STATES OF AMERICA,

Plaintiff,

DENNIS F. KENNEDY,

Defendant.

Appearances:

Beth M. Elfrey, Esq.

John E. Sullivan, Esq.

Tax Division

U. S. Department of Justice

10th & Pennsylvania Avenue, N.W.

Room 4623

Washington, DC 20530

Attorneys for Plaintiff

10a

Appendix D

Robert W. Lynch, Esq.

Sherman, Silverstein, Kohi, Rose & Podolsky

Fairway Corporate Center, Suite 311

4300 Haddonfield Road

Pennsauken, New Jersey 08109

Attorneys for Defendant

OPINION

DEBEVOISE, District Judge

A. Background

On October 14, 1993, a grand jury returned a two-count

indictment against Dennis F. Kennedy charging him with tax

evasion for the years 1986 and 1987.

With respect to the year 1986, the government charged that

defendant’s tax return was false and fraudulent in the following

respects:

(a) On Schedule C of the tax return, defendant under

reported the amount of gross receipts received by his Winslow

Exxon gas station;

(b) On Schedule D of the tax return, defendant reported a

$51,760 long-term capital gain on the sale of a 55-foot Ocean

yacht when, in fact, the gain represented ordinary income;

$40,862 capital loss on the sale of a 46-foot Ocean yacht, when,

in fact, he had used the yacht primarily for personal and

recreational purposes and was not entitled to claim the capital

loss; and

— ee ee

Ais abo thewer tition eatin Cite ALM,

lla

Appendix D

(d) On Schedule D of the tax return, defendant failed to

report a long-term capital gain from the sale of real estate located

in Brigantine, New Jersey.

With respect to the year 1987, the government charged that

defendant’s tax return was false and fraudulent in the following

respects:

(a) On Schedule C of the tax return, defendant under

reported the amount of gross receipts received by Winslow

Exxon gas station; and

(b) On Schedule D of the tax return, defendant reported a

$69,422 capital loss on the sale of a 48-foot Uniflite yacht, when,

in fact, he was not entitled to claim the Capital loss.

The defendant denied these charges. At the trial, he

contended with respect to the charge that he under reported gross

receipts from the gas station (i) that there was, in fact, no under

reporting in either 1986 or 1987 and (ii) that there was no intent

to under report gross receipts in either year. With respect to each

of the other false reporting or failure to report charges, defendant

denied that there was intent on his part to erroneously report or

to fail to report the item in question.

The jury found defendant guilty on both counts.

Immediately prior to trial, defendant moved to dismiss the

indictment on the ground of prosecutorial misconduct before

the grand jury. I reserved decision on the motion and proceeded

with the trial. After the trial, defendant renewed his motion to

dismiss. Briefs and exhibits have been submitted, and the parties

have argued the motion.

12a

Appendix D

B. The Alleged Misconduct

Defendant charges that the grand jury testimony of Special

Agent Jacqueline Zisterer was replete with inaccurate statements

of fact, inaccurate hearsay and misstatements of the law and

that these errors so tainted the government’s presentation to the

grand jury that its ability to exercise independent judgment was

significantly impaired.

The government produced five witnesses before the grand

jury — Lawrence Littman, who acquired the 55-foot Ocean yacht

through defendant; Leonard Garr, who sold the 55-foot Ocean

yacht to defendant; Robert Kelly and Kenneth Moore, who were

the accountants who prepared defendant’s 1986 and 1987 income

tax returns and to whom, according to the government, defendant

made false and misleading statements and failed to disclose

critical information; and Special Agent Jacqueline Zisterer, the

IRS employee charged with the responsibility of investigating

and preparing this case.

Defendant has established that Special Agent Zisterer made

a number of erroneous or incomplete statements of a factual or

legal nature to the grand jury. I conclude, however, that in their

total effect and in the context of the totality of Special Agent

Zisterer’s testimony and the testimony of the other grand jury

witnesses, Special Agent Zisterer’s lapses did not prejudice

defendant or substantially influence the grand jury’s decision

to indict.

I shall discuss each of the deficiencies of which defendant

complains.

13a

Appendix D

1. Defendant faults Special Agent Zisterer’s testimony

concerning diversion of funds from the service station. Initially

_ he challenges her hearsay testimony recounting what two former

. managers of Winslow Exxon, defendant’s former service station,

told her about the diversion of cash receipts. It is not

objectionable, of course, to present hearsay testimony to a grand

jury. United States v. Costello, 350 U.S. 359, 363-64 (1956).

| Defendant contends that the particular hearsay testimony in this

case was false.

" Special Agent Zisterer testified before the grand jury that

i David Sagot told her that defendant instructed him on a regular

basis to make deposits of gas station cash in his personal account.

; At trial, Sagot testified that he made three such deposits in 1986

and possibly an additional one in 1987, each for very small

amounts. However, at the time when Special Agent Zisterer

testified before the grand jury, she had Sagot’s affidavit that 3-4

times a month defendant would ask him to deposit $200 to $300

of the day’s cash receipts into his personal checking account.

Thus, Special Agent Zisterer had a good faith reason to testify

as she did about what Sagot had told her.

Special Agent Zisterer’s mistaken statement that former

station manager Craig Matthews left that position in 1986 instead

of 1984 is a de minimis error.

During Special Agent Zisterer’s testimony, a juror inquired:

Q. In the pocketing of money that he put in

his pocket (reference to Defendant) do you

have any papers or anything to prove that he

pocketed — did you pick up any evidence to

that?

CNR INA UR WIRE SiR RT | ak Soin Tae de 24 fear isk

Sw Ee ESC eS ame MENS nH cb

l4a

Appendix D

Special Agent Zisterer replied:

A. The only evidence that I have in relation

to what he put in his pocket is the testimony

of the managers that delivered the cash to him

at his personal residence that watched him

do that. I do have the invoices which clearly

substantiated the evidence that it wasn’t

reported on the tax returns. It didn’t all appear

to be going all into his personal bank

accounts. When I added all these invoices up,

they exceeded to about $150,000.00 to what

was reported for automobile repairs on the

tax returns. I was not able to trace all that

going into the personal bank accounts. I don’t

know where the difference went, but it’s an

indication that it was put in his pocket and

used and spent.

This elliptical reply was confusing, to say the least. At the

time the testimony was given, the government had evidence that

defendant understated his auto repair receipts by approximately

$87,000 during a thirteen-month period ending in October, 1984,

although this evidence was not admitted at trial. Further, the

government’s evidence at the time of the grand jury hearing

appeared to support substantially larger diversions in 1986 and

1987 than were proved at trial. In these circumstances, reference

to a $150,000 total diversion before the grand jury, while

confusing and imprecise, did not constitute prosecutorial

misconduct nor impermissibly influence the grand jury.

2. Defendant asserts that the government deceived the grand

jury by telling it that the diverted amounts were concealed by

15a

Appendix D

defendant from his accountants when, in fact, defendant gave

both his personal and business books and records to the

accountants. I do not find an inconsistency between defendant

providing the accountants with all his books and records and

defendant concealing the diversions from his accountants.

Perhaps careful accountants (which these Clearly were not) would

have detected diversions had they audited the books and records

or examined them thoroughly. However, by failing to disclose

diversions, defendant would have deceived the accountants even

if he had provided books and records.

3. Defendant criticizes the government for failing to detect

his accountants’ error arising from their failure to reconcile all

transfers between various bank accounts. Since the accountants

determined gross income by adding up all the deposits into the

bank accounts, transfers between bank accounts resulted in

duplicated amounts and the overstatement rather than

understatement of income.

While theoretically the government might have done what

defendant’s own accountants failed to do, at the time of the grand

jury presentation, the government had substantial evidence from

Sagot and Matthews which seemed to support a charge of

diversion of cash proceeds from the service station to defendant’s

personal account. More was not required.

4. Defendant refers to inaccurate statements of the law

which Special Agent Zisterer made during the course of her

testimony. She stated concerning the sale of the yachts, “[t]he

moment it is used for personal use, you can’t take a deduction.”

She further stated, “and the Internal Revenue Code states that

any time you use an asset for personal use, you cannot take a

deduction for a loss on that.”

l6a

Appendix D

These statements are incorrect statements of the law.

However, the evidence presented to the grand jury made it

perfectly clear what the government’s legal position was, namely,

‘hat defendant falsely informed his accountants (and, through

them, the government) that he had acquired his 46-foot yacht

exclusively for investment purposes and that he never used it

for personal purposes:

Q. What in the next item that’s listed on that

schedule?

A. A 46-foot yacht. He’s claiming a loss on

the sale of the yacht.

Q. What evidence did you come across

which tells you that that is a false item?

A. Basically, his return preparers told me

they included this item on a Schedule D and

included this on his return because Mr.

Kennedy told them that he never used the

yacht for personal use and it was simply

purchased for investment, fixed up and sold.

Throughout my entire investigation, I

interviewed many people including Mr.

Kennedy’s brother, next door neighbor,

employees, his business associates, his

insurance man. I went to a Yacht Club where

Mr. Kennedy was. Everyone told me that Mr.

Kennedy used this yacht for personal use.

They went on numerous trips with Mr.

Kennedy, and to the best of all their

knowledge, he used this -~lely for personal

purposes.

17a

Appendix D

| Q. Now, Did Mr. Kennedy have any real

: estate that was sold —

A. Can I add one thing? The reason that this

is not a deductible loss is because the Internal

Revenue does no: allow a deduction on our

personal assets.

Tr. at 17-18.

At the end of her testimony, one of the grand jurors brought

up the subject of the yachts again:

A JUROR: You mentioned that you would

have to — when he purchased the yachts, he

indicated to the accountants that the use of

the yachts were for business purposes.

THE WITNESS: He said it was simply

bought for business investments and not used

for personal. It wasn’t a personal use but for

an investment.

A JUROR: In LR.S. laws, if you use the

yacht at any time to talk about business, can

you Classify that as a business use?

THE WITNESS: No. That doesn’t make the

yacht a business asset at that point, but it

would allow you to take some deductions off

your returns in connection with that business

meeting. That wouldn’t make the yacht itself

a business asset, and the Internal Revenue

Code states that anytime you use an asset for

18a

Appendix D

personal use, you cannot take a deduction for

a loss on that. You can compare it real easy.

If you sell your automobile at a loss, you can’t

take a deduction on your tax return for that

because you used it for personal use.

Tr. at 37-38.

With that testimony in mind, it cannot be said that the grand

jury was misled by her later observation that “[t]he moment it is

used for personal use, you can’t take a deduction for the loss”

(Tr. at 39) and that “the Internal Revenue Code states that any

time you use an asset for personal use, you cannot take a

deduction for a loss on that.” Tr. at 38.

5. Defendant notes Special Agent Zisterer’s reference to

his Fifth Amendment. Her testimony was as follows:

A JUROR: Did you try to obtain any of the

invoices from 1986?

THE WITNESS: From Mr. Kennedy?

A JUROR: Yes.

THE WITNESS: Yes, I contacted Mr.

Kennedy through correspondence. He

immediately obtained an attorney and took

his Fifth Amendment right. He didn’t have

to speak with me or provide me with

anything. I contacted his attorney and asked

him to provide me with substantiation of any

nontaxable income he had.

Tr. at 38-39.

19a

Appendix D

It was a mistake for Special Agent Zisterer to have referred

to defendant’s Fifth Amendment rights, because in the minds of

much of the public, a person who relies on the Fifth Amendment

is likely to be guilty of some crime. However, it cannot be said

that the minimal reference here rendered the proceedings

fundamentally unfair, particularly when Special Agent Zisterer

added after her reference to the Fifth Amendment the observation

that “[defendant] didn’t have to speak with me or provide me

with anything. I contacted his attorney and asked him to provide

me with substantiation of any nontaxable income he had.”

6. Before the grand jury, Special Agent Zisterer made a

conclusory statement that defendant earned a commission on

the sale of the 55-foot Uniflite yacht to Larry Littman that would

be reported ordinarily as ordinary income. Defendant contends

that this characterization of the profit that defendant received

on the sale of the yacht to Littman was misleading in light of

statements which witnesses Garr and Littman had given to her

and in light of their trial testimony, in which both men denied

the existence of a commission arrangement. Defendant urges

that the real question was whether the transaction resulted in a

long-term or short-term capital gain, and that there would have

been no tax consequences to defendant because of offsets from

other capital gain transactions which were properly reported.

There was evidence, however, which supported Special

| Agent Zisterer’s statement to the grand jury that the profit on

) the sale of the 55-foot Ocean yacht was a commission, received

| by defendant acting as buyer’s agent for Littman. When Kennedy

communicated with Comstock Boatworks, he was doing so in

order to acquire the vessel for Littman. Two months after he

signed the purchase agreement, defendant invoiced and delivered

the yacht to Littman. Special Agent Zisterer’s grand jury

‘

20a

Appendix D

characterization of the profit was reasonable, and it was the

province of the trial jury to decide ultimately what the nature of

the profit was.

7. Finally, defendant contends that the following statement

of Special Agent Zisterer misled the grand jury:

Well, in respect to all the yachts reflected on

the 1986 and 1987 returns, they (meaning the

accountants) were provided with one sheet

of paper. They were provided this piece of

paper by Mr. Kennedy. It reflects the profit

and the losses of all three yachts. Those

matched the tax returns, so they simply took

the losses and the one gain from this sheet of

paper given to them by Mr. Kennedy.

Defendant correctly notes that after he brought the sheet to his

accountants, they informed him that they would need more

information and that immediately thereafter he brought in the

folders which contained all the information concerning purchase

prices, summary of transactions, repair bills and sales contracts.

Special Agent Zisterer gave the testimony quoted above

when summarizing the evidence of the falsely-reported yacht

transactions for the benefit of a new grand juror who had not

been present when the accountants had testified. Previously, both

accountants (Moore and Kelly) had testified before the grand

jury and told the grand jurors about the three folders of

information and the summary information which defendant had

provided on a sheet of paper. They further testified that they did

not use the information in the folders to calculate gains or losses

reported on the tax returns and instead relied on the summary

information defendant provided them on the one sheet of paper.

2la

Taken in isolation, the quoted statement of Special Agent

Zisterer is incomplete and, thus, inaccurate. However, in view

of the accountants’ testimony about all the documents which

defendant provided io them, the quoted statement cannot have

misled the grand jury in any way.

: Appendix D

C. Discussion

in grand jury proceedings unless such errors prejudiced the

defendants.” Bank of Nova Scotia v. United States, 487 U.S. 250,

254 (1988). An error prejudices the defendant if the violation

substantially influenced the grand jury’s decision to indict or “if

there is grave doubt that the decision to indict was free from the

substantial influence of such violations.” Jd. at 256. Absent a

showing of prosecutorial misconduct, a defendant may not

challenge an indictment on grounds that unreliable or

incompetent evidence was presented to the grand jury. Jd. at

261. “One challenging an indictment carries a difficult burden.

He must demonstrate that the prosecutor engaged in flagrant

misconduct that deceived the grand jury or significantly impaired

its ability to exercise independent judgment.” United States v.

Al Mudarris, 695 F.2d 1182, 1185 (9th Cir. 1983).

“A district court may not dismiss an indictment for errors

There was a degree of carelessness in the presentation to

the grand jury in this case, but there was nothing even

approaching prosecutorial misconduct. The instances of

incomplete information or loose language were rectified by other

portions of the testimony before the grand jury. It cannot be

said that the errors either singly or in the aggregate were so

great as to impair the judgment of the grand jury. The case was

tried before a jury; none of the objectionable grand jury testimony

was presented to the trial jury; through unusually able counsel,

——

22a

Appendix D

defendant availed himself of his right to present his contentions

to the trial jury; the government’s burden of proof at trial is a

heavy one, compared to its burden before the grand jury; and

the jury found defendant guilty of the charges contained in the

indictment. This is confirmatory of my conclusion that the errors

of the government during its grand jury presentation did not

prejudice the defendant.

I shall file an order denying defendant’s motion to dismiss

the indictment.

s/ Dickinson R. Debevoise

DICKINSON R. DEBEVOISE, U.S.D.J.

DATED: September 8, 1994

23a

APPENDIX E — ORDER OF THE UNITED STATES

DISTRICT COURT FOR THE DISTRICT OF NEW

JERSEY FILED SEPTEMBER 8, 1994

UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF NEW JERSEY

Hon. Dickinson R. Debevoise

Criminal Action No. 93-502

UNITED STATES OF AMERICA,

Plaintiff,

DENNIS F. KENNEDY,

Defendant.

ORDER

For the reasons set forth in an opinion of even date,

IT IS THIS 8th day of September, 1994;

ORDERED that defendant’s motion to dismiss the

indictment is denied.

s/ Dickinson R. Debevoise

DICKINSON R. DEBEVOISE, U.S.D.J.

24a

APPENDIX F — RELEVANT STATUTE AND

CONSTITUTIONAL PROVISION INVOLVED

United States Constitution, Amendment V:

No person shall be held to answer for a

capital, or otherwise infamous crime, unless on

a presentment or indictment of a Grand |

Jury. ... |

26 U.S.C. § 7201:

Any person who willfully attempts in any

manner to evade or defeat any tax imposed

by this title or the payment thereof shall, in

addition to other penalties provided by law,

be guilty of a felony and, upon conviction

thereof, shall be fined not more than

$100,000 ($500,000 in the case of a

corporation), or imprisoned not more than 5

years, or both, together with the costs of

prosecution.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.