In tax prosecution for conspiracy to defraud the United States and for failure to account and pay over employment taxes, admitting evidence of defendants' “personal spending habits” for “luxury vacations, nice homes” as relevant to defendants' claim that they did not act willfully, noting that the FRE 403 balance of probative value and unfair prejudice was not intended to be "a shield for defendants who engage in outrageous acts, permitting only the crimes of Caspar Milquetoasts to be described fully to a jury," as recognized by other circuits, in United States v. DeMuro, __ F.3d __ (3d Cir. April 23, 2012) (Nos. 11-1887, 11-1941)
In Old Chief v. United States, 519 U.S. 172 (1997) the Supreme Court addressed the balancing that a court is called upon to make under FRE 403. Old Chief dealt with the situation where two different pieces of evidence were available for proving the prior conviction element of being a felon in possession of a firearm. The Court directed that where "the functions of the competing evidence are distinguishable only by the risk inherent in the one [e.g., details of the conviction record] and wholly absent from the other" [e.g., a stipulation to the element of the offense by the defendant], "the only reasonable conclusion was that [if] the risk of unfair prejudice did substantially outweigh the discounted probative value of the record of conviction, it was an error "to admit the [detailed conviction] record when an admission [to the element of the charged crime by the defendant] was available." Old Chief, 519 U.S. at 191 (emphasis added). The Court held that the trial court abused its discretion in rejecting the defendant's offer to stipulate to his felon status and admitting the full record of a prior judgment (including the name or nature of the prior offense) when it enhanced the risk of a verdict based on prejudicial considerations and the purpose of the prior judgment was solely to prove the element of prior conviction.
The situation in Old Chief does not arise in many contexts. However, how does a trial court strike the FRE 403 balance when the difference between the competing evidence for establishing an element of the offense is not distinguishable only by the risk inherent in the one and wholly absent from the other"? The Third Circuit recently considered this problem and tried to demonstrate the difference between use of FRE 403 to alleviate unfair prejudice from using FRE 403 to disrupt a party's presentation of their case.
In the case, the the DeMuros, a married couple who owned and managed an engineering company (TAD Associates), were prosecuted for "fail[ing] to pay over to the IRS more than half a million dollars in taxes that it had withheld from its employees' paychecks." As part of their defense strategy at trial, the defendants "conceded that they did not pay over the $546,242 that TAD owed to the IRS in trust fund taxes, but argued that their failure to pay TAD's taxes was not willful. In support of this position, they emphasized that they negotiated with the IRS in an attempt to pay off the delinquent taxes over time, and pointed to evidence that they even attempted to refinance properties to obtain funds to pay the delinquent taxes." DeMuro, __ F.3d at __. In response to this theory, the prosecution "present[ed] evidence that the DeMuros spent lavishly on personal and discretionary business items while professing an inability to pay the delinquent taxes," so that in the 21 quarters their company failed to pay trust fund taxes totaling over half a million dollars, "the DeMuros spent $5,043,867 from TAD and personal accounts." The jury convicted the defendants. They appealed, raising as one issue whether the evidence the government presented of their lavish expenses during the period they were not paying taxes "was prejudicial because it fomented class prejudice by depicting a life of luxury that came at the expense of the DeMuros' employees and the American people." DeMuro, __ F.3d at __.
The Third Circuit rejected this argument, citing the provisions of FRE 403. The circuit seemed to acknowledge that the evidence used could be brutal to the defendants' case. But in applying FRE 403, the circuit noted that the rule should not be used as "a shield for defendants who engage in outrageous acts, permitting only the crimes of Caspar Milquetoasts to be described fully to a jury. It does not generally require the government to sanitize its case, to deflate its witnesses' testimony, or to tell its story in a monotone.’“ DeMuro, __ F.3d at __ (citing United States v. Cross, 308 F.3d 308, 325 (3d Cir. 2002) (quoting United States v. Gartmon, 146 F.3d 1015, 1021 (D.C. Cir. 1998) ("There is no question but that the conduct portrayed by the testimony was outrageous, and that it may dramatically have injured Gartmon's cause. But that is not sufficient reason to exclude the testimony. )).
Having established that FRE 403 is not a barrier to effective use of evidence, but rather allows the court to balance the virtue of the evidence against other possible factors "unfair prejudice, confusing the issues, misleading the jury, undue delay, wasting of time, or needlessly presenting cumulative evidence” that could distort the trial. Applying this balance the circuit dismissed the defendant's contentions with regard to the admission of the life-style evidence used by the prosecution:
the evidence of the DeMuros' personal spending was relevant to their responsibility for paying TAD's taxes, their willfulness, and the conspiracy charge. Thus, its probative value was significant. Further, despite the DeMuros' contention that this evidence was overwhelming and voluminous at trial, the evidence of personal spending was largely limited to one witness, IRS Agent Carlos Natasi, with other witnesses only briefly mentioning the DeMuros' spending habits. While we are sensitive to the effect that evidence of a defendant's liberal spending habits can have on a jury, particularly in these lean economic times, the evidence admitted in this case, i.e., evidence of vacations, jewelry, cars, and parties, was not so inflammatory as to carry a great risk of prejudice. It certainly was not so prejudicial as to substantially outweigh its very significant probative value. Accordingly, we conclude that the District Court did not abuse its discretion in allowing Agent Natasi and others to testify about how the DeMuros spent money.DeMuro, __ F.3d at __ (citing United States v. Blanchard, 618 F.3d 562, 569-70 (6th Cir. 2010) ("[E]vidence regarding a defendant's ability to pay taxes is pertinent to whether an offense has been committed under § 7202, since it bears on the willfulness of the defendant's failure to pay over withheld tax to the government. If a defendant has made discretionary purchases in lieu of meeting his tax obligations, this is probative of his guilt."; allowing evidence of gambling expenses to prove willfulness, despite the risk that some jurors may have negative views towards gambling)).
The DeMuro case serves as a vivid reminder of the evidence brought before a jury must be faithful to the facts of the case. As noted by the First Circuit, to do otherwise risks "‘trials ... conducted on scenarios, on unreal facts tailored and sanitized for the occasion." The First Circuit noted that this risk counseled that a court's application of FRE 403 "be cautious and sparing.” United States v. Rivera, 83 F.3d 542, 547 (1st Cir. 1996) (in prosecution for carjacking, also admitting evidence that the carjacking victim was also raped) (quoting United States v. McRae, 593 F.2d 700, 707 (5th Cir. 1979)).
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