In addition to the burden of multi-jurisdiction tax compliance, expatriates living abroad therefore face potentially more expansive criminal tax investigations and greater sentences upon conviction than their counterparts living and working in the United States. . . .
On September 23, 2021, a federal jury in Lexington, Kentucky acquitted Randolph Morris, a former University of Kentucky and NBA basketball player, on all counts of an indictment that alleged federal crimes of wire fraud and filing false tax returns. The indictment and ensuing trial focused on the more than $13 million of foreign-sourced income that Morris earned from 2010 to 2017 as a member of the Beijing Ducks professional basketball team.
The Morris case highlights many of the peculiar features of U.S. criminal tax enforcement as well as the heightened risks faced by expatriates living abroad for criminal tax liability. As discussed further below, Morris compounded those risks by failing to use competent tax counsel when preparing and filing his tax returns and by failing to retain defense counsel during the criminal investigation.
Tolling of Statute of Limitations
The grand jury returned the Indictment on February 24, 2021. The first three counts of the Indictment alleged violations of the federal wire-fraud statute, 18 U.S.C. § 1343, based on Morris’s electronic filing of three Kentucky state income tax returns that failed to report his foreign-sourced income for tax years 2015 to 2017. Section 1343 imposes a maximum sentence of twenty years for each violation.
The Indictment summarized Counts 1-3 with the following table:
Section 1343 is subject to a five-year statute of limitations for offenses that do not involve a financial institution. See 18 U.S.C. § 3282. Although the Indictment does not provide the electronic transmission dates for each state tax return, it appears that the 2015 state tax return is the earliest eligible return within the five-year limitations period.
In addition to the three wire-fraud counts, the Indictment included eight counts accusing Morris of willfully submitting false income tax returns which failed to report his foreign-sourced income for tax years 2010 to 2017.
Each count alleged violations of 26 U.S.C. § 7206(1), which imposes a maximum three-year sentence for signing and filing “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 Indictment summarized the eight criminal tax charges with the following table:
Ordinarily, Section 7206(1) has a six-year statute of limitations. However, 26 U.S.C. § 6531 tolls the limitations period for each day that the defendant is located outside of the United States. The Indictment alleged that after “filing his 2010 federal tax return on September 20, 2011, MORRIS spent a total of at least 1,265 days outside the United States” thus extending the limitations period by approximately 3.5 years.
If the ordinary six-year statute of limitations had applied, then Morris only could have been charged in connection with the filing of his 2014 to 2017 federal tax returns. However, his time working and living in China tolled the limitations period thereby permitting the expansion of the criminal investigation into his 2010 to 2013 tax returns.
In addition to the burden of multi-jurisdiction tax compliance, expatriates living abroad therefore face potentially more expansive criminal tax investigations and greater sentences upon conviction than their counterparts living and working in the United States. The tolling of the limitations period also potentially creates evidentiary hurdles for expatriates as the passage of time results in the unavailability of witnesses and records needed to build a defense.
Interrogation by Videoconference
On September 12, 2018, the IRS special agents conducting the investigation went to Morris’s home in Lexington, Kentucky to request an interview. No one answered the door, and the agents left a business card. They also left a message on Morris’s mobile phone. Twenty minutes later and unaided by counsel, Morris contacted the special agents, informing them that he was in China but that if they would return to his home, his wife could set up a “FaceTime” videoconference for their conversation.
Before trial, Morris moved to suppress the statements he made during the conversation, asserting that the agents failed to provide the warnings against self-incrimination required by United States v. Miranda, 384 U.S. 436, 444 (1966). In ruling on the motion, the court explained that Morris’s motion “is not a close question” because the interrogation was non-custodial, and the special agents were not therefore required to give Miranda warnings. See United States v. Morris, Crim. No. 5: 21-014-DCR, 1-2 (E.D. Ky. August 27, 2021).
The court rejected Morris’s assertion that the interview was custodial, explaining that Morris was in a hotel room in China “thousands of miles away from the agents with whom he was speaking.” Id. at 2. The fact that Morris invited the special agents to his home, the lack of evidence that his wife in any way felt threatened or unable to leave, and the “cordial” tone of the interview all combined to show that the interview was voluntary and that Morris was free to end the discussion at any time. Id. Moreover, at some point in the interview, the special agents did advise Morris that it was not necessary to answer their questions but that “he was required to be truthful if he did answer.” Id.
The Morris interview illustrates a practical challenge faced by expatriates who may seek to cooperate with investigators during a criminal investigation. Obviously, Morris should have retained counsel, but even if he had counsel in attendance at the interview, it is unlikely that his lawyer would have been present in the same room with Morris, severely complicating private consultations between lawyer and client. Under such circumstances, any cooperation with investigators would be best provided solely through defense counsel without the remote involvement of the client.
Electronic Tax Return Filing as Wire Fraud
Morris moved to dismiss the wire fraud counts under the “abstention” doctrine on the theory that the underlying fraud involved a question of Kentucky state law. He argued that adjudication of the state law issues “‘would be disruptive of state efforts to establish a coherent policy with respect to a matter of substantial public concern.’” Id. at 3 (quoting Cleveland Hous. Renewal Project v. Deustche Bank Trust Co., 621 F.3d 554, 562 (6th Cir. 2010)).
The court declined to “abstain” from proceeding on the wire fraud charges, explaining that “the United States does not seek a declaration that Morris violated Kentucky income tax laws.” Id. The court determined that the government sought only to show that Morris fraudulently withheld information about foreign earnings in tax returns that were electronically transmitted to the state of Kentucky in violation of the federal wire fraud statute. Id.
Morris also contended that internal Department of Justice Tax Division policy prohibited the wire fraud charges. According to a long-standing Tax Division directive, “Absent unusual circumstances . . . , the Tax Division will not approve mail or wire fraud charges in cases involving only one person’s tax liability.” The court denied the requested relief, noting that internal DOJ policy does not confer substantive rights. Id. (citations omitted).
The Morris case nonetheless illustrates a more aggressive interpretation of the Tax Division directive. The policy against approving mail or wire fraud charges “in cases involving only one person’s tax liability” was intended to prevent the substitution of non-tax charges and penalties for congressionally defined tax crimes. Since the “filing” of a return either by mail or electronic submission is, for example, an element of a Section 7206(1) violation for subscribing to a false tax return, a mail fraud or wire fraud charge could always be included either in addition to or in substitution of the criminal tax charge.
As a result of the Tax Division directive, mail fraud and wire fraud charges have ordinarily appeared in criminal tax prosecutions only where the underlying source of the unreported income was derived from fraudulent conduct, such as an illicit mail order business. In such cases, the mail fraud and wire fraud charges stand alone and are factually distinct from the criminal tax charges. The Morris case is an apparent departure from this policy since the underlying fraud was the mere filing of a false tax return, albeit a state tax return.
This policy variance likely was not the result of a line prosecutor’s one-off interpretation of the Tax Division directive. DOJ fosters the uniform enforcement of criminal tax law by requiring review and pre-approval of all criminal tax prosecutions by the Tax Division in Washington, DC. Moreover, given Morris’s notoriety and the amount of unreported income, the charging decisions in this case likely required elevated approval within the Tax Division. Although distinctions between state and federal tax returns may have provided the rationale for charging wire fraud in this instance, the motivation for the wire fraud charge was undoubtedly strategic and intended to ensure that evidence of the false state tax returns would be admissible in evidence.
In fact, the government successfully moved in limine to admit Morris’s uncharged 2010 through 2014 state tax returns. The government argued, and the court agreed, that those uncharged state returns demonstrated a common scheme or plan to withhold the reporting of foreign income from both the State of Kentucky and the United States from 2010 through 2017. The court ultimately ruled that evidence of the uncharged conduct was admissible under Fed. R. Evid. 404(b). See United States v. Morris, Crim. No. 5: 21-014-DCR, 8-10 (E.D. Ky. Sep. 16, 2021).
In addition to proving a “common scheme” of underreporting income, the government may have included the state tax return evidence in the prosecution to demonstrate actual harm, i.e., an unpaid tax liability. Although the Indictment reported Morris’s unpaid state income tax, it does not provide any information about Morris’s unpaid federal income tax. The reporting on the case is unclear, but it is possible that the applicable foreign tax credit would have eliminated much of the federal income tax due and owing on Morris’s unreported foreign-sourced income.
If so, the absence of a substantial tax due and owing may also explain the decision to charge Morris for subscribing to a false tax return under Section 7206(1) instead of tax evasion under Section 7201, which requires the government to prove a tax due and owing as well as affirmative acts to evade or defeat payment of the tax. Although Section 7206(1) carries a lesser three-year sentence than the five-year maximum under Section 7201, prosecutors often proceed under Section 7206(1) to streamline the presentation of evidence, especially where the operation of credits and deductions substantially offset the unpaid tax liability.
Proof of “Willfulness” & Morris’s Acquittal
Morris’s main defense at trial was that he had made an honest effort to comply with his tax obligations but was confused by the instructions and advice he received from his accountant, his sports agent, and his Chinese employer, the Beijing Ducks.
In support of that defense, Morris offered in evidence his April 4, 2011 email exchange with his sports agent, Wallace Prather:
Morris: “When the Chinese team said they would pay my taxes it’s the American ones right? That’s what it means by tax free? What has been your experience with this?”
Prather: “Dudes don’t even report that [expletive] in America. Or they report less. But if you have an issue, then the team will be asked for a frm [sic] to show your tax people. America and [C]hina have a treaty together so they [sic] tax break is monstrous.”
Morris: “How should I report my income?”
Prather: “Either don’t or correlate [sic] with the team (I will).”
Morris: “Hope they don’t audit the [expletive] outta my [expletive] . . .”
Michael McCann, Former Knick’s Tax Trial Over China Pay Opens with Agent Email Evidence, AOL News (Sep. 20, 2021).
Also in 2011, when sending information to his accountant by email about potential deductions for his U.S. taxes, Morris asked the account, “Were you able to research the tax agreements between the U.S. and China[?]” Id.
The court received the email exchanges in evidence, having ruled previously in limine that the emails were relevant to Morris’s “mental state” and that they “may be offered to prove the effect on the listener or to show why the listener acted in the manner in which he did.” United States v. Morris, Crim No. 5: 21-014-DCR (E.D. Ky. Sep. 16, 2021). More specifically, the evidence was relevant to whether Morris acted “willfully” in failing to report his foreign-sourced income to the United States.
The element of “willfulness” in criminal tax charges requires the government to prove that the defendant voluntarily and intentionally violated a known legal duty. See United States v. Cheek, 498 U.S. 192, 201-02 (1991). As a defense, the accused may offer evidence of his good-faith belief that he did not know or understand his legal duty, here the obligation to report foreign-sourced income. Id. at 201-04. There is no requirement that the proffered belief be objectively reasonable. Id. If “the jury believes [the defendant], the Government would not have carried its burden to prove willfulness, however unreasonable a court might deem such a belief.” Id. at 202.
As the Supreme Court explained in Cheek, requiring the asserted belief to be “objectively reasonable transforms the inquiry into a legal one and would prevent the jury from considering it.” Id. at 203. The court further explained that it is possible “for a defendant to be ignorant of his duty based on an irrational belief that he has no duty, and forbidding the jury to consider evidence that might negate willfulness would raise a serious question under the Sixth Amendment’s jury trial provision.” Id. Thus, in criminal tax prosecutions, ignorance of the law is both an excuse and a defense.
In view of this permissive good-faith defense, it is not uncommon for defendants in a criminal tax trial to take the stand to explain that their conduct was motivated by a good-faith, albeit mistaken, belief about the accounting and reporting of income to the federal government. Unsurprisingly, therefore, Morris testified at his trial that, as demonstrated by the email evidence, he tried to understand and comply with his tax obligations but received inaccurate advice from others.
Morris’s testimony and other defense evidence apparently raised enough doubt about his knowledge of the U.S. and Kentucky income reporting requirements that the jury acquitted him on all eleven counts. The acquittal is a remarkable outcome for a case in which the defendant arguably had made multiple mistakes and took unnecessary risks while representing himself during the criminal investigation. Fortunately for Morris, he wisely retained counsel for his trial and succeeded in delivering a rare loss to the U.S. Department of Justice.