Part of Just Security’s work on accountability and election law.
Just last month, a former President Donald Trump was arraigned on an indictment for thirty-four felony false books and records charges in New York. Because those charges are felonies, Manhattan District Attorney Alvin Bragg is required to prove that the falsifications were made with the intent “to commit…aid or conceal” another crime. As expected, Bragg pointed to federal and state campaign finance violations as those possible other crimes.
But a surprise came when Bragg also suggested that tax violations may serve as a basis for this felony “bump-up.” His statement of facts declared that “The participants also took steps that mischaracterized, for tax purposes, the true nature of the payments made in furtherance of the scheme.”
Now that suggestion has been confirmed in his response on May 16 to Trump’s request for a bill of particulars: tax crimes are among the possible crimes Bragg will pursue as a predicate to bump up the charges against the former president.
Commentators have noted the potential power of the tax allegations to help Bragg bolster his case. But, the exact contours of the possible tax crimes were not clear—even with Bragg’s response to Trump’s request for a bill of particulars in hand. In this essay, we assess what potential tax-related crimes may be implicated by Trump’s alleged mischaracterization of the payments. While the campaign finance bases for the charges may well be sufficient, adding tax bases is important and offers advantages for the prosecutors. Tax-related charges could sidestep potential legal challenges related to campaign finance violations including, for example, issues of federal preemption and state statutory interpretation.
As we explain below, Bragg was wise to strengthen the case by also predicating the felony charges against Trump based on his intent to commit (or aid or conceal) crimes involving false statements to tax authorities. Perhaps the strongest case would involve statements to tax authorities falsely characterizing the payments to Michael Cohen as “legal fees,” rather than the payments’ true nature: a series of simple reimbursements for a hush money payment. Doing so caused the payments to be treated as income to Cohen, which in turn precipitated a tax gross-up so that Cohen would be relieved of any tax burden associated with the mischaracterization.Note that the DA would not have to prove that the tax crimes were actually committed, just that the parties intended them and falsified the business records with that initial intention. We explain these theories of the case below. We describe the law governing offenses involving false statements to tax authorities regardless of whether a defendant’s conduct includes an underpayment or other form of evasion of taxes.
We offer this preliminary assessment based on both Bragg’s response to Trump’s request for a bill of particulars and previously available public information. Additional information is likely to develop as the case progresses. We note below where further information would be helpful before reaching any firm conclusion on a matter.
In prosecuting a criminal case, simplicity is usually better; the focus is on the false statement itself, not its technical tax consequences.
Factual and Procedural Background
The main facts of the case have been known for some time (and are detailed and periodically updated in a Just Security chronology).
On April 4, 2023, former president Donald Trump was arraigned and pleaded not guilty in New York State Supreme Court to state felony charges that he “repeatedly and fraudulently falsified New York business records to conceal crimes that hid damaging information from the voting public during the 2016 presidential election.”
The indictment and its accompanying “statement of facts” accuse Trump of orchestrating a “catch and kill” scheme with his fixer Michael Cohen, American Media, Inc. (AMI)’s former CEO David Pecker, and others to influence the election by “identifying and purchasing negative information” about Trump “to suppress its publication and benefit” his “electoral prospects.”
DA Bragg alleges that, in October 2016, Trump had attorney Michael Cohen pay adult film actress Stormy Daniels (whose real name is Stephanie Clifford) a $130,000 payment to prevent her from publicizing an alleged sexual encounter she had with Trump. To conceal the hush money payment, it was agreed that Cohen would make the payment to Daniels via a shell company (Essential Consultants), on the agreement that Trump would later reimburse Cohen.
In 2017 Cohen was reimbursed, in eleven almost-monthly installments. The invoices Cohen submitted each stated that it was “pursuant to [a] retainer agreement” and each sought “payment for services rendered” for the relevant month of the invoice.
Some reimbursement payments were made from the Donald J. Trump Revocable Trust and others from Trump’s personal bank account. While the Trump Organization likely did not label the payments as “income” in its records, the inevitable corollary of characterizing them as legal fees was to cause the payments to be treated as “income” on Cohen’s tax returns. According to Bragg, the $130,000 payment was added “to a $50,000 payment for another expense for which” Cohen “also claimed reimbursement, for a total of $180,000.” That amount was to $360,000 so that Cohen “could characterize the payment as income on his tax returns, instead of a reimbursement,” and so that Cohen “would be left with $180,000 after paying approximately 50% in income taxes.” “An additional $60,000” was added “as a supplemental year-end bonus.” Together, these amounts totaled $420,000. These allegations are consistent with the Department of Justice’s court filings in Cohen’s federal criminal case.
The Manhattan DA’s indictment alleges that the Trump Organization’s business and organizational records included a series of invoices and ledger entries recording the arrangement, characterizing the 11 payments as legal fees for Cohen’s services. These entries form the basis of the 34 books and records counts.
DA Office Statements About the Tax Scheme
The district attorney’s office has made the following statements in relation to tax violations.
- “The participants also took steps that mischaracterized, for tax purposes, the true nature of the payments made in furtherance of the scheme.” Statement of facts, § 2 (emphasis added)
- Bragg: “Participants in the scheme took steps that mischaracterized, for tax purposes, the true nature of the reimbursements.” Press Release.
- Bragg: “In order to get Michael Cohen his money back, they planned one last false statement. In order to complete the scheme, they planned to mischaracterize the payments to Mr. Cohen as income to the New York State tax authorities.” Press Conference (emphasis added).
- Bragg: “We have charged falsifying business records for those who were seeking to cover up sex crimes and we have brought this charge for those who committed tax violations.” Press Conference.
- Assistant District Attorney Christopher Conroy: “After the election, defendant reimbursed the lawyer through a series of disguised monthly payments that hid the true nature of the payoff by causing a series of false business records in the records of the Trump Organization here in Manhattan, and even mischaracterized for tax purposes the true nature of the payment. Defendant falsified these New York business records with the intent to defraud, including the intent tocommit[sic] another crime, and to aid and conceal the commission of another crime.” Arraignment hearing (emphasis added).
- DA Office: “[T]he People further refer defendant to certain facts, among others, set forth in the Statement of Facts relating to … disguising reimbursement payments by doubling them and falsely characterizing them as income for tax reasons Court filing in response to defendant’s request for bill of particulars.
The SDNY’s Criminal Information and Sentencing Memorandum in Cohen’s case also discussed the reimbursement being “‘grossed up’ for tax purposes.”
It is worth noting that in his press conference Bragg also cited false statements to tax authorities as one of the “unlawful means” needed to prove a violation of New York Election Law, § 17-152: conspiracy to promote or prevent election. “I further indicated a number of unlawful means, including more additional false statements, including statements that were planned to be made to tax authorities.”
Bragg’s Response to Trump’s Request for Bill of Particulars
On April 27, Trump filed a Request for a Bill of Particulars seeking information concerning the other crime(s) Trump is “alleged to have committed or intended to commit or to aid or conceal the commission thereof by means of the allegedly false business record.”
Now, Bragg has responded, stating that “the crimes defendant intended to commit or to aid or conceal may include violations of … New York Tax Law §§ 1801(a)(3) and 1802,” in addition to various state and federal election crimes as well as other violations of the falsifying books and records statute. Notably, Bragg declined to state that the list of crimes included in his response as exclusive—suggesting that other crimes, including other state and federal tax crimes as described below, could also later be added to bolster the prosecution’s case.
Applicable Law
Because Bragg’s response to the request for a bill of particulars leaves open the door that other offenses than those listed might also serve as the “bump-up” predicates to the falsifying business records charges, in addition to New York state tax statutes, we also consider the possibility that prosecutors will attempt to leverage federal tax offenses for this purpose. Two statutes appear most relevant: Declaration under Penalties of Perjury (26 U.S.C. 7206(1)), and Willful Assistance in Preparation of False or Fraudulent Tax Documents (26 U.S.C. 7206(2)).
While New York State tax law is distinct from federal tax law, the two bodies of law, especially in respect of false filing statutes, share similar principles and concepts. As a result, New York State courts often look to federal law for guidance in interpreting and applying state provisions. See, e.g., People v. Essner, 124 Misc. 2d 830, 835-36 (N.Y. Sup. Ct. 1984) (court looked to federal securities laws for the applicable definition of materiality under § 175.45, issuing a false financial statement); State v. Rachmani, 71 N.Y.2d 718, 725-26 (1988) (for New York’s Martin Act, the court adopted the standard for materiality used by federal courts). Accordingly, we analyze the elements of potential charges under New York Tax Law §§ 1801(a)(3) and 1802 with reference mainly to federal law as well as state law (where available).
The two federal statutes are in many ways similar. Section 7206(1) focuses on those who cause false statements in their own tax documents—thus inclusion by Bragg of this statute would focus on Cohen’s criminal conduct of including false statements in his tax returns, which Trump sought to aid or conceal. Conversely, § 7206(2) criminalizes those who cause, assist or aid false statements in others’ tax documents—thus Bragg’s focus here would be on Trump’s intent to assist Cohen in making false statements in his tax returns.
Given their similarities, we discuss all four statutes together (the two state and the two federal tax offenses). First, we set out the elements of each offense, which are very similar. We then address the elements as follows: falsity, materiality, and intent.
Additionally, a variety of other statutes may be applicable depending on how the facts develop, and, by way of example, we also include a brief treatment of Conspiracy to Defraud the United States (18 U.S.C. 371) on the federal side, and on the state side, Offering a False instrument for Filing in the First Degree (N.Y. Penal Law, § 175.35) or Second Degree (N.Y. Penal Law, § 175.30).
Elements of the Offenses
1. New York Criminal Tax Fraud (New York Tax Law, Chapter 60, Article 37, Part 2)
New York Tax Law § 1801(a) defines a “tax fraud act” and is the basis of all New York criminal tax fraud offenses. For Bragg’s case, under § 1801, if a person willfully acts (or causes another to act) in any of the following ways, that person has perpetrated a tax fraud act:
1. knowing that a return, report, statement or other document under this chapter contains any materially false or fraudulent information, or omits any material information, files or submits that return, report, statement or document with the state or any political subdivision of the state, or with any public office or public officer of the state or any political subdivision of the state (§ 1801(a)(2))
2. knowingly supplies or submits materially false or fraudulent information in connection with any return, audit, investigation, or proceeding or fails to supply information within the time required by or under the provisions of this chapter or any regulation promulgated under this chapter (§ 1801(a)(3))
3. engages in any scheme to defraud the state or a political subdivision of the state or a government instrumentality within the state by false or fraudulent pretenses, representations or promises as to any material matter, in connection with any tax imposed under this chapter or any matter under this chapter (§ 1801(a)(4))(emphasis added)
All three of the above tax fraud acts include three elements: (1) falsity; (2) materiality; and (3) intent (willfulness). The first two provisions also require the tax document to be filed, submitted or supplied. The last provision, by its clear wording, also requires an intent to defraud the state.
Any person who commits any tax fraud act listed above is guilty, at minimum, of criminal tax fraud in the fifth degree, a Class A misdemeanor crime under § 1802. No additional mens rea is required. A misdemeanor is sufficient to serve as the predicate to make falsifying business records a felony. For felony criminal tax fraud in the first to fourth degrees under §§1803-1806, there are additional elements:
1. an intent to evade tax or defraud New York state (such intent to defraud is, as noted above, also required for 1801(a)(4) in the fifth degree); in
2. a payment to the state (whether by means of underpayment or receipt of refund or both) in a tax year; and
3. of a stated amount (the amount determining the degree of the offense).
2. Declaration under Penalties of Perjury (26 U.S.C. 7206(1))
It is a felony under § 7206(1) for any person who “[w]illfully makes and subscribes any return, statement, or other document, which contains or is verified by a written declaration that it is made under the penalties of perjury, and which he does not believe to be true and correct as to every material matter.”
The elements of a Section 7206(1) conviction have been addressed at length by the case law. See e.g., United States v. Bishop, 412 U.S. 346, 350 (1973); United States v. Pirro, 212 F.3d 86, 89 (2d Cir. 2000); United States v. Clayton, 506 F.3d 405, 410, 413 (5th Cir. 2007) (per curiam). Those elements are:
1. The defendant made and subscribed a return, statement, or other document which was false as to a material matter;
2. The return, statement, or other document contained a written declaration that it was made under the penalties of perjury;
3. The defendant did not believe the return, statement, or other document to be true and correct as to every material matter; and
4. The defendant falsely subscribed to the return, statement, or other document willfully, with the specific intent to violate the law.
3. Willful Assistance in Preparation of False or Fraudulent Tax Documents (26 U.S.C. 7206(2))
Under § 7206(2), it is a felony for any person who “[w]illfully aids or assists in, or procures, counsels, or advises the preparation or presentation under, or in connection with any matter arising under, the internal revenue laws, of a return, affidavit, claim, or other document, which is fraudulent or is false as to any material matter, whether or not such falsity or fraud is with the knowledge or consent of the person authorized or required to present such return, affidavit, claim, or document.”
Although § 7206(2) appears calculated to apply primarily to official tax preparers, the statute has been used to prosecute criminal behavior far beyond that group of professionals (see e.g., 43 A.L.R. Fed. 128 (Originally published in 1979), §§ 10-13). It has been used to prosecute participants in any scheme which causes false statements to be made in others’ tax documents, whether or not the accused actually prepared the return. See e.g., United States v. Clark, 577 F.3d 273, 285 (5th Cir. 2009) (The statute “reaches all knowing participants in the fraud.”); United States v. Crum, 529 F.2d 1380, 1382 (9th Cir. 1976) (“The nub of the matter is that they aided and abetted if they consciously were parties to the concealment of [a taxable business] interest.”); United States v. Siegel, 472 F.Supp. 440, 444 (N.D.Ill.1979) (citing Crum, 529 F.2d 1380) (“[T]he scope of the statute extends to all participants of a scheme which results in the filing of a false return, whether or not those parties actually prepare it.”); United States v. Graham, 758 F.2d 879, 885 (3d Cir.1985) (1985) (quoting United States v. Buttorff, 572 F.2d 619, 623 (8th Cir.) (“[T]here must exist some affirmative participation which at least encourages the perpetrator.”); United States v. HooksUnited States v. Hook, 848 F.2d 785, 791, n.3 (7th Cir. 1988) (citing cases that found liability because of the defendant’s concealing actions); United States v. Hastings, 949 F.2d 400 (9th Cir. 1991) (preparing false corporate financial statements that served as the basis for preparing the corporation’s tax return); United States v. Aracri, 968 F.2d 1512 (2d Cir. 1992) (creating false invoices and shell companies used to prepare false excise tax returns); United States v. Foley, 73 F.3d 484, 493 (2d Cir. 1996) (a state legislator, accepted financial bribes from political contributors in exchange for agreeing to influence legislation and provided those contributors with fraudulent receipts to help disguise their payments as genuine business expenses). See also, IRS Tax Crimes Handbook (2009), pp.72-3; Justice Department, Criminal Tax Manual, Chapter 13, pp.5-8; Federal Tax Coordinator (2nd Ed.), ¶ V-3115.
The elements of a prosecution under Section 7206(2) are also clear and settled. See e.g., United States v. Perez, 565 F.2d 1227, 1233–34 (2d Cir. 1977); United States v. Klausner, 80 F.3d 55, 59 (2d Cir. 1996); United States v. Salerno, 902 F.2d 1429, 1432 (9th Cir. 1990); IRS Tax Crimes Handbook (2009), pp.71-2. Those elements are:
1. The defendant aided or assisted in, or procured, counseled, or advised the preparation or presentation of a return, affidavit, claim, or other document which involved a matter arising under the Internal Revenue laws;
2. The return, affidavit, claim, or other document was fraudulent or false as to a material matter; and
3. The defendant acted willfully.
Unlike with § 7206(1), under § 7206(2) there is no requirement that the document be signed under penalty of perjury. Id.
Although a plain reading of both § 7206(1) and § 7206(2) does not include a filing requirement, some courts have held that the return or statement must be filed. See e.g., United States v. Dahlstrom, 713 F.2d 1423, 1429 (9th Cir. 1983) (filing of a return is a necessary element of § 7206(2)); United States v. Boitano, 796 F.3d 1160 (9th Cir. 2015) (confirming a filing requirement under § 7206(1)); (United States v. Harvey, 869 F.2d 1439, 1448 (11th Cir. 1989) (en banc) (same). Cf. United States v. Feaster, 843 F.2d 1392 (6th Cir. 1988) (per curiam) (holding Dahlstrom as contrary to the plain reading of § 7206(2)). See also, Justice Department, Criminal Tax Manual, Chapter 13, p.2.
First Key Issue: Falsity. Bragg may argue that the representations made in Cohen’s tax returns were false statements and were false in at least two ways:(1) the mischaracterization of the funds as payment for legal services, and (2) the resulting treatment of the payments “income.”
a. False statement as to the mischaracterization of the funds as payment for legal services
According to Bragg, each of the eleven checks made out to Cohen was “issued for a phony purpose.” The checks, which were in fact simple repayments, were “illegally disguised” as payment for legal services rendered in 2017 pursuant to a “non-existent retainer agreement.” Cohen’s plea agreement said the same: “there was no such retainer agreement, and the monthly invoices COHEN submitted were not in connection with any legal services he had provided in 2017.” See also Department of Justice Sentencing Memorandum for Michael Cohen (“In fact, no such retainer agreement existed and these payments were not ‘legal expenses’ – Cohen in fact provided negligible legal services to Individual-1 or the Company in 2017 – but were reimbursement payments.”).
Trump “could not simply say that the payments were a reimbursement for Mr. Cohen’s payments to Stormy Daniels,” Bragg said during the press conference. “To do so, to make that true statement, would have been to admit a crime. So instead, Mr. Trump said that he was paying Mr. Cohen for fictitious legal services in 2017 to cover up an actual crime committed the prior year.”
b. False statement of “income”
By characterizing the reimbursement payments to Cohen as legal fees, the Trump Organization necessarily caused Cohen to report the amount as income, subject to tax on Cohen’s return. But, the repayment to Cohen of the funds paid to Daniels would simply not be regarded for tax purposes as “income.” The payment was a straight dollar-for-dollar reimbursement of a purely personal expense (whether related to Trump’s marriage or to his campaign).
It was therefore false for Cohen to then tell tax authorities that he received the $130,000 in “income.” Similarly, the Trump Organization was therefore not required to report the full $420,000 worth of payments to Cohen on Cohen’s Form W-2, as reimbursements are not “income” to be included on such a form.
However, an argument could be made that both the $130,000 reimbursement amount and the equal $130,000 “bump up” paid to cover Cohen’s taxes were income to Trump, as they represented payments by the Trump Organization for personal expenses of Trump. Such a payment is frequently referred to as a “constructive dividend,” where a business owner causes the business to pay for personal expenses. Here, it is unclear how the Donald J. Trump Revocable Trust and Trump’s personal account, the issuers of the checks, are integrated into the Trump Organization’s accounting system and tax reporting. Whether or not a payment is a dividend depends on whether the Trump Organization had earnings and profits, a matter we’re fairly certain is entirely too complicated to delve into for the purposes of Bragg’s criminal case. See e.g., Boulware v. United States, 552 U.S. 421 (2008). Moreover, it would likely also require analysis of Trump’s personal income tax returns – another quagmire.
But it’s even more likely that none of this really matters from a criminal prosecution perspective, since all of these issues arise from the same false statement: that the payments to Cohen were for legal services. In prosecuting a criminal case, simplicity is usually better; the focus is on the false statement itself, not its technical tax consequences.
Second Key Issue: Materiality. If Cohen erroneously claimed the repayments as part of his income in submitting tax returns, he would have effectively overstated his income, thus triggering an overpayment of tax. How, then, could Cohen’s tax returns form the basis of a tax violation? Indeed, some may argue that the statement was not material if it did not cause any financial loss. But the law does not require such a loss. It is a crime to submit intentionally false statements to tax authorities, even if the statement does not involve evasion of tax.
a. Materiality under federal tax law
We have not identified any New York tax case interpreting the meaning of materiality under state law. Accordingly, as noted above, we first look to federal law for guidance. In contrast to the crime of tax evasion, federal false statement tax statutes generally do not require proof of a tax deficiency, i.e. a difference between what was reported and the taxpayer’s correct tax liability. See e.g., United States v. Tsanas, 572 F.2d 340, 343 (2d Cir. 1978) (regarding § 7206(1)); Edwards v. United States, 375 F.2d 862 (9th Cir. 1967) (§ 7206(2) is directed not to evasion or defeat of tax but rather to falsification and counseling and procuring of deception as to any material matter); IRS Tax Crimes Handbook (2009), p.72 (regarding § 7206(2)); Justice Department, Criminal Tax Manual, Chapter 13, pp.12-14 (regarding § 7206(2)). Thus, a defendant may be convicted even where a tax refund is due. See e.g., United States vs. Witasick, W.D. Va., No. 4:07-CR-00030-001, 15-16 (Apr. 7, 2014).
What prosecutors must instead prove is whether the statements made were false as to a “material” matter. This is a question for the jury to decide. See e.g., Neder v. United States, 527 U.S. 1, 4 (1999); United States v. Jackson, 196 F.3d 383, 384-85 (2d Cir. 1999) (reaffirming Neder); United States v. Gaudin, 515 U.S. 506, 522-23 (1995) (holding that “materiality” is a question for the jury in prosecutions for false statements under 18 U.S.C. § 1001). It’s worth noting, as the Justice Department has in Chapter 12 of Criminal Tax Manual on § 7206(1), that “[w]hile courts still maintain that proof of a tax deficiency is not required in a section 7206(1) prosecution, … some post-Gaudin opinions indicate that the presence or lack of a tax deficiency may be relevant to a jury’s determination of materiality.”
The three questions Bragg will therefore need to consider are: (1) what “material” means; (2) is the nature of a payment considered material; and (3) does overreporting or overstating income negate materiality. One of the leading authorities on all three questions is United States v. DiVarco, 484 F.2d 670 (7th Cir. 1973), aff’g, 343 F. Supp. 101, (N.D. Ill. 1972).
Under the DiVarco definition—adopted by most circuits, including the U.S. Court of Appeals for the Second Circuit—a false statement is “material” if it has a natural tendency to influence or impede the IRS in ascertaining the correctness of reported tax or in verifying or auditing the returns of taxpayers. See, United States v. Bok, 156 F.3d 157, 164-65 (2d Cir. 1998) (regarding § 7206(1)); Neder, 527 U.S. at 16 (adopting for § 7206(1) the definition of materiality in Gaudin, 515 U.S. at 522-23 regarding 18 U.S.C. § 1001: “a natural tendency to influence, or [is] capable of influencing, the decision of the decisionmaking body to which it was addressed”); United States v. Klausner, 80 F.3d 55, 60, n.4 (2d Cir. 1996) (regarding § 7206(2)); United States v. Potstada, 206 F. Supp. 792, 794 (N.D. Cal. 1962) (Under § 7206(2) “it is sufficient to allege and prove obstruction, delay or impairment of governmental functions.”).
Importantly, the statement needs to have only the “potential” for influencing or impeding the IRS. United States v. Greenberg, 735 F.2d 29, 31 (2d Cir. 1984) (“The question is rather whether the statement had the potential for an obstructive or inhibitive effect. A consideration of this potential requires an analysis of the responsibilities of the public agency — responsibilities that are assigned by law — and analysis of the relevance of the statement to those responsibilities.”); United States v. Pirro, 212 F.3d 86, 89 (2d Cir. 2000); United States v. Moon, 532 F.Supp. 1360, 1366-67 (S.D.N.Y. 1982), aff’d, 718 F.2d 1210 (2d Cir. 1983)
Prosecutors in the DiVarco case proved that income reported by the defendant on his personal tax returns as commissions from a mortgage and investment business did not come from that business. The defendant had mischaracterized the source of his taxable income. (Note, there was no dispute in DiVarco as to whether the claimed income was, in fact, taxable income, just whether the source of the taxable income was mischaracterized). The court confirmed that “source of income” is to be considered a “material matter” for tax purposes, such that willfully and knowingly stating a false source of income on tax documents is prohibited under § 7206(1)—even in the rarer cases involving an overstatement of taxable income.
It is true … that most, if not all, of the cases involving misstatement of source of income also involved an understatement of taxable income. However, “[o]ne of the more basic tenets running through all the cases is that the purpose behind the statute is to prosecute those who intentionally falsify their tax returns regardless of the precise ultimate effect that such falsification may have.” 343 F.Supp. at 103.
… The plain language of the statute does not exclude the matter of the source of income from the definition of “material matter.” In light of the need for accurate information concerning the source of income so that the Internal Revenue Service can police and verify the reporting of individuals and corporations, a misstatement as to the source of income is a material matter.
DiVarco, 484 F.2d 670, 673 (emphasis added)
The purpose of the statute is, therefore, “not simply to ensure that the taxpayer pay the proper amount of taxes — though that is surely one of its goals.” Instead, the statute “is intended to ensure also that the taxpayer not make misstatements that could hinder” the IRS “in carrying out such functions as the verification of the accuracy of that return or a related tax return.” United States v. Greenberg, 735 F.2d 29, 31 (2d Cir. 1984). New York district courts of the Second Circuit have similarly held that merely mischaracterizing the source of an income or other matter on tax documents will be considered material. United States v. Goldman, 439 F. Supp. 337, 344 (S.D.N.Y. 1977); United States v. Kaczowski, 882 F. Supp. 304 (W.D.N.Y. 1994); Moon, 532 F.Supp. 1360 (misstating source of income on personal tax returns); United States v. Cole, 463 F. 2d 163 (2d Cir. 1972) (related to the mischaracterization of personal legal bills as business expenses); see also United States v. Helmsley, 941 F.2d 71, 93 (2d Cir. 1991) (The district court’s instruction that Section 7206(2) would be violated even if the deductions were allowable but mischaracterized was hardly complex. The alleged offense involved a single predicate act: entering a false statement on a tax form.”). See also, United States v. Mirelez, 496 F.2d 915 (5th Cir. 1974) (through fear of self-incrimination, taxpayer failed to report true source of income as illegal heroin sales); United States v. Diamond, 788 F.2d 1025 (4th Cir. 1986) (falsely listing losses from commodities transactions on Schedule C of Form 1040 as being from a trade or business and misstated occupation to conceal the source of losses).
Cases involving overstatement of income
The bottom line is that Bragg can establish materiality if he can show that Trump intended Cohen to report repayment of expenses or illicit campaign contributions as income, and so to overstate that line on his tax returns. Although unusual, there have been a number of prosecutions involving overstated income.
For instance, in 1975 former New York City Cultural Affairs Commissioner Irving Goldman was indicted by New York federal prosecutors for, among other things, filing false corporation returns on behalf of a shell company he created, Jola Candy Inc., in that the returns falsely stated gross income by including payments received for goods it had charged at unnecessarily “inflated and excessive prices.” In an attempt to have the indictment dismissed, Goldman argued that, as Jola’s returns included an “overstatement of income” which resulted in an “overpayment of taxes,” the materiality element under was not made out. The Court rejected the argument, citing DiVarco.
[T]he cited authorities do suggest that a statement is material if it is capable of influencing actions of the IRS in any matter within its jurisdiction. The question then is whether overstatement of income is a material matter. The accuracy of items of taxable income reported on the return of one individual or entity may affect the ability of the IRS to assess the tax liability of another taxpayer. Furthermore, overstated income may shield from scrutiny falsely inflated deductions. Thus, an overstatement of income impairs the ability of the IRS to determine if the correct amount of tax has been paid. United States v. DiVarco, 343 F.Supp. at 103. The conclusion that an overstatement of income may result in a prosecution is buttressed by the Congressional determination to make Section 7206(1) a crime separate and apart from income tax evasion, 26 U.S.C. § 7201.
United States v. Goldman, 439 F. Supp. 337, 342 (S.D.N.Y. 1977) (emphasis added)
In United States v. Barrow, the defendant underreported income on his personal tax returns and overreported income on an amended corporate return. The Sixth Circuit held that both underreporting and overreporting were material. “Under this section, false statements are material if they make it more difficult for the IRS to verify defendant’s tax returns.” United States v. Barrow, 118 F.3d 482, 493-94 (6th Cir. 1997).
Another example is United States v. Lamberti, in which the defendant, a parolee, was accused of overstating his hours of work and income on tax returns in order to trick his parole officer into believing that he had worked the minimum hours required under his parole conditions. United States v. Lamberti, 847 F.2d 1531 (11th Cir. 1988). The Eleventh Circuit held that the overstatement of income to the Parole Commission was material for the purposes of false statements under § 18 U.S.C. 1001, and, in respect of the federal tax statute, made its position clear: “As to the completely independent § 7206(1) tax charges, his assertion hinges on his untenable theory that an overstatement of income cannot be a material false statement for purposes of 26 U.S.C. § 7206(1), because it can lead only to overestimation and overpayment of tax liability.” Id. at 1536. As the indictment “did not rest solely upon” overstatements, but instead rested “primarily” upon false statements claiming that he had only one source of income, the court held it unnecessary to consider further Lamberti’s contention that an overstatement of income cannot violate § 7206(1). Id.
In United States v. Bouzanis, one of the defendants was accused of “aiding, counseling and causing the preparation and presentation of a false and fraudulent tax return” belonging to a co-defendant, in that the return included false, inflated income, which was submitted in support of a loan application. The Illinois district court, citing Divarco and the Second Circuit decision in Greenberg, rejected the defendant’s argument that overstated income was not “material.” United States v. Bouzanis, 00 CR 1065, 2003 WL 920717, at *2 (N.D. Ill. Mar. 7, 2003).
Another case involving inflated income is United States v. Barshov, where the defendants, who had formed limited partnerships to purchase motion picture films for distribution and exhibition, inflated the purchase prices and the income generated by the films in order to maximize depreciation costs and investment credits, and caused returns to be filed based on the inflated figures. United States v. Barshov, 733 F.2d 842, 845-46 (11th Cir. 1984).
b. Materiality under New York non-tax law
As noted above, our research turned up no New York State criminal cases specifically addressing the concept of “materiality” for the purposes of New York Tax Law. Nevertheless, the general principles of materiality under federal law offer helpful guidance. Given the similarities in wording and purpose between N.Y. Tax Law § 1801(a)(2) and federal § 7206(1) and (2), it is likely that the New York state courts would adopt the federal definition of materiality as set forth in DiVarco.
The case of People v. De Leo, a decision by the Appellate Division of the Supreme Court of New York, Third Department, offers a glimpse into how New York state courts would likely define materiality under false tax filing laws. People v. De Leo, 185 A.D.2d 374, 585 N.Y.S.2d 629 (N.Y. App. Div. 1992). The defendant was convicted of second degree perjury (as well as second degree forgery and attempted grand larceny) for two false statements he made in a real property transfer gains tax affidavit. First, he falsely claimed to be acting in the capacity of attorney-in-fact for the seller of the property. Second, he significantly understated the amount of consideration he received on transfer for his role as purported attorney. The defendant argued on appeal that the false statements were not “material to the action, proceeding or matter involved” within the meaning of the perjury statute (§ 210.10). Rejecting the defendant’s contention and affirming the conviction, the Third Department court stated:
The gravamen of his claim in this regard is that the misstatement of one’s authority to act and the amount of consideration received in a transfer gains tax affidavit are not “material to the action, proceeding or matter involved” within the meaning of Penal Law § 210.10. We disagree. The purpose of the affidavit is to assess the amount of tax due, if any, upon the transfer of realty and to identify those responsible therefor (see, Tax Law art. 31–B). Because calculation of taxes owed is dependent upon the consideration recited in the affidavit, any misrepresentation regarding the consideration is indeed material to the proper assessment of tax. The materiality of a misrepresentation of one’s authority to act on behalf of a purported principal, inasmuch as it has the effect of potentially casting the principal in liability for taxes assessed, cannot be doubted. Upon review, we find the prosecution’s evidence that defendant was not an attorney-in-fact for the Colony at the time he executed the affidavit, combined with evidence that defendant effected the transfer as a means of payment for services rendered to the Colony and for which he had not been paid, thus indicating that the transfer was for consideration in excess of the $1 recited in the affidavit, satisfies both the legal sufficiency and weight of the evidence challenges.
Id. at 375. (emphasis added)
Courts have often said that false tax filing statutes are similar to perjury statutes. See e.g., United States v. Scholl, 166 F.3d 964, 980 (9th Cir. 1999) (describing §7206(1) as a perjury statute); Gaunt v. United States, 184 F.2d 284, 288 (1st Cir. 1950) (“purpose is to impose the penalties for perjury upon those who wilfully falsify their returns regardless of the tax consequences of the falsehood”); United States v. Taylor, 574 F.2d 232, 236 (5th Cir. 1978) (noting that to require the government to prove additional tax liability would “seriously jeopardize the effectiveness of section 7206(1) as a perjury statute and would imperil the self-assessment nature of our tax system”); United States v. Fawaz, 881 F.2d 259, 263 (6th Cir. 1989) (The court saw no reason to frame a different rule in the § 7206(1) context than the one applied under § 1623(a) false statement made to federal grand juries.)
The New York Criminal Jury Instruction for perjury also states that, “[d]epending on the facts of the case, it may be appropriate to adapt the language of materiality utilized by the Court of Appeals in the context of a Grand Jury proceeding; namely, that a false statement is material if it has ‘the natural effect or tendency to impede, influence or dissuade’ the public servant in the performance of his or her official functions in an action, proceeding or matter involved. People v. Davis, 53 N.Y.2d 164, 171 (1981).” (hyperlink added). This language reflects the federal position on false statement statutes, including § 7206.
Third Key Issue: Intent (Willfulness). When it comes to intent, potential criminal liability under New York State tax law is broader than federal tax law.
N.Y. Tax Law defines willfulness as “acting with either intent to defraud, intent to evade the payment of taxes or intent to avoid a requirement of [New York Tax Law], a lawful requirement of the [tax] commissioner or a known legal duty.” Section 1801(c).
Under federal law, willfulness refers to a voluntary, intentional violation of a known legal duty, including the duty to report accurate information on a tax return or other tax related documents. This means that an individual or entity must have acted with a specific intent to provide false or misleading information on their tax documents, and knew or should have known that their conduct was generally unlawful. See e.g., Cheek v. United States, 498 U.S. 192 (1991); United States v. Pomponio, 429 U.S. 10 (1976); United States v. Bishop, 412 U.S. at 412 U. S. 360. Knowledge of the specific statute is not required, so long as the individual knows the information submitted was false.
Willfulness is a question of fact. Direct proof of intent is not necessary, and instead can be inferred from a broad range conduct and evidence (including circumstantial) relating to attempts to conceal or misrepresent income, assets and other material tax matters. United States v. Libous, 645 F. App’x 78, 81 (2d Cir. 2016). The government will often seek to prove willful intent with reference to “affirmative acts” and “acts of commission.” See e.g., United States v. Smith, 206 F.2d 905 (3d Cir. 1953) (discussing U.S. Supreme Court authorities); Maxfield v. United States, 152 F.2d 593 (9th Cir. 1945); Battjes v. United States, 172 F.2d 1, 5 (6th Cir. 1949) (“Direct proof of willful intent is not necessary. It may be inferred from the acts of the parties, and such inference may arise from a combination of acts, although each act standing by itself may seem unimportant. It is a question of fact to be determined from all the circumstances.”); Katz v United States, 321 F.2d 7, 10 (1st Cir. 1993).
Potential Other Offenses
1. Additional Applicable Federal Statute: Conspiracy to Defraud the United States (18 U.S.C. 371)
As noted earlier, a wide variety of other tax-related statutes may be applicable depending on how the facts develop. One example is Conspiracy to Defraud the United States (18 U.S.C. 371).
That statute makes it a crime for two or more people to “conspire either to commit any offense against the United States, or to defraud the United States, or any agency thereof in any manner or for any purpose, and one or more of such persons do any act to effect the object of the conspiracy.”
The statute can be violated in two ways: (1) conspiring to commit other federal offenses; and (2) conspiring to “defraud the United States.” The two offenses can overlap in circumstances where the purpose of the conspiracy to defraud the United States involved conduct that violated federal criminal law. See e.g., United States v. Helmsley, 941 F.2d 71, 90 (2d Cir. 1991) (citing United States v. Rosenblatt, 554 F.2d 36, 40 (2d Cir. 1977).
The statute is regularly used to prosecute a broad array of criminal conspiracies to defraud the government. The case law is clear—to “defraud” the government does not require any financial or pecuniary loss. Instead, interfering with, impairing, or obstructing one of the government’s functions by deceit or dishonesty is enough. See e.g., Hass v. Henkel, 216 U.S. 462 (1910); Hammerschmidt v. United States, 265 U.S. 182 (1924); Tanner v. United States, 483 U.S. 107 (1987); United States v. Del Toro, 513 F.2d 656 (2d Cir.), cert. denied, 423 U.S. 826 (1975); United States v. Coplan 703 F. 3d 46 (2d Cir. 2012); United States v. Jacobs, 475 F.2d 270 (2d Cir.); United States v. Sprecher, 783 F. Supp. 133, 156 (S.D.N.Y. 1992), modified on other grounds, 988 F.2d 318 (2d Cir. 1993).
The statute has often been used to prosecute those who make false statements to federal tax authorities. See, e.g., United States v. Helmsley, 941 F.2d 71, 93 (2d Cir. 1991) (mischaracterization of deductions was prosecuted under §§ 371, 7206, 7201 (evasion)); United States v. Goldberg, 105 F.3d 770, 772 (1st Cir. 1997) (convicted of §§ 371 and 7206(1) for a scheme to conceal payments to individuals through use of “straw employees” and benefits to third parties); Coplan, 703 F. 3d 46, (conspiracy to deceive IRS about the purpose of transactions engineered to generate tax losses). A conspiracy to defraud the IRS charged under § 371’s defraud clause is commonly referred to as a “Klein conspiracy” after a Second Circuit decision where the defendants were convicted of conspiring to defraud the United States by impeding and obstructing the Treasury Department in collection of income taxes. United States v. Klein, 247 F.2d 908, 915 (2d Cir. 1957).
To succeed in prosecuting conspiracies to defraud the United States, the government must prove: (1) there was an illegal agreement between at least two people; (2) that the defendant voluntarily entered; (3) with specific, willful intent to achieve the objective of the conspiracy; and (4) an overt act occurred in pursuance of the objective. See e.g., United States v. Pinckney, 85 F.3d 4 (2d Cir. 1996); United States v. Nall, 949 F.2d 301, 305 (10th Cir. 1991).
Here, the conspiracy might consist of (1) an agreement between Trump and Cohen or Allen Weisselberg; (2) that Trump voluntarily entered; (3) with the specific, willful intent to defraud the IRS by mischaracterizing the reimbursement of the hush money payment as legal fees, resulting in it being reported as income; and (4) proof of overt acts by Trump such as his personal signature on a number of the checks issued to Cohen.
2. Additional Applicable State Statute: New York Filing a False Instrument (N.Y. Penal Law, § 175.30; N.Y. Penal Law, § 175.35).
Just as on the federal side, a wide variety of other statutes may be applicable depending on how the facts develop. One example is Offering a False instrument for Filing, either in the Second Degree (N.Y. Penal Law, § 175.30) or First Degree (N.Y. Penal Law, § 175.35).
“The elements of offering a false instrument for filing in the second degree are (1) knowledge that the written instrument contains a false statement or false information, and (2) offering or presenting such an instrument to a public office or public servant (3) with the knowledge or belief that it will become a permanent record of the public office to which it was submitted. To make out offering a false instrument for filing in the first degree, the People are also required to prove (4) the defendant’s intent to defraud the state, one of its political subdivisions, a public authority or public benefit corporation.” § 17:10. Offering a false instrument for filing—Elements of offense, 6 N.Y. Prac., Criminal Law § 17:10 (4th ed.).
The statute has been used many times to successfully prosecute those who file false tax returns or related documents. See e.g., People v. Lacay, 115 A.D.2d 450, 496 N.Y.S.2d 337 (N.Y. App. Div., 1st Dept. 1985) (Prosecutors had discretion to prosecute the defendant’s filing of false sales tax returns under broader statute of offering false instrument for filing, rather than N.Y. Tax Law § 1145(b), which provides for criminal penalties for filing false sales and use tax returns.); People v. DeRue, 179 A.D.2d 1027, 579 N.Y.S.2d 799 (N.Y. App. Div., 4th Dept. 1992) (Invoices were capable of being used to defendant’s advantage, to avoid paying sales tax, to show tax exemption or that sales tax has been paid, thus “written instruments” for the purposes of the statute.). See also, 6 N.Y. Prac., Criminal Law § 17:12 (4th ed.), § 17:12. Offering a false instrument for filing—Tax returns as “written instruments” under false filing statute.
Conclusion
We have argued that DA Bragg has strengthened his case against Trump by bumping up the charges to a felony based on Trump’s intent to commit (or aid or conceal) crimes involving false statements to tax authorities. Whatever the effectiveness of such a bump-up based on the alleged primary campaign finance violations, pursuing an approach based upon state tax violations is wise and well grounded. The strongest case involves statements to tax authorities falsely characterizing the payments to Michael Cohen as “legal fees,” rather than their true nature (reimbursements for a hush money payment). A strong case could also involve other variations on state criminal tax violations, as well as possible federal ones. The DA has not precluded asserting additional tax or other bases for the bump up. His response to the defendant’s request for a bill of particulars notably includes (but is not limited to) a set of specified offenses. We hope the additional analysis we have offered here is useful to the press, the public and all other stakeholders in understanding the strength of the DA’s position.