United States v. Steven M. Wood
943 F.2d 1048, 91 Cal. Daily Op. Serv. 6822, 34 Fed. R. Serv. 86 (1991)
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Rule of Law:
A tax deficiency for evasion requires determining if a taxpayer's losses are fully deductible as business losses or partially deductible as capital losses, which hinges on whether the property was held primarily 'for sale to customers' in a trade or business; additionally, prior convictions are not inadmissible under Federal Rule of Evidence 609(c) unless the expungement procedure includes an explicit judicial finding of the convicted person's rehabilitation.
Facts:
- In December 1983, Wood established the S-M-W Investment Group, Rover Resources, and Norcross out of an office in Kalispell, Montana.
- Wood and his employees advertised these companies as Canadian mining exploration penny stocks that, if successfully promoted, would be listed and publicly traded on the Canadian/Vancouver Stock Exchange.
- The funds solicited from investors during the promotion of Norcross and Rover Resources, totaling approximately $250,000, were deposited into three trust accounts maintained by Wood.
- Wood converted these investors’ funds to his own use and subsequently lost them playing the commodities futures market.
- In 1986, the State of Montana charged Wood with various securities fraud and related crimes stemming from these transactions, to which he pleaded guilty, agreeing to pay restitution to Montana residents.
- The State of Montana Securities Department contacted an IRS criminal investigator concerning Wood’s embezzlement of investors’ funds, suggesting possible tax liability.
- In August 1989, a federal grand jury brought a two-count indictment against Wood, charging him with tax evasion (violations of I.R.C. § 7201) for tax years 1983 and 1984.
Procedural Posture:
- In 1986, the State of Montana charged Wood with various securities fraud and related crimes.
- Wood pleaded guilty to three selected counts in state court pursuant to a plea agreement; imposition of sentence was deferred.
- In August 1989, a federal grand jury brought a two-count indictment against Wood, charging him with tax evasion for tax years 1983 and 1984.
- Trial by jury commenced on April 9, 1990, in the United States District Court.
- On April 19, 1990, the jury found Wood guilty of the first count (tax year 1983) but acquitted him of the second count (tax year 1984).
- Wood appealed his conviction to the United States Court of Appeals for the Ninth Circuit.
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Issue:
1. Did the district court err by instructing the jury that the existence of a trade or business is not determinative of whether property is a capital asset, and that the primary issue for tax deductibility is whether the property was held for sale to customers, even if a part of the instruction was overly broad regarding selling commodities on an exchange? 2. Did the district court abuse its discretion by admitting the government's summary charts while excluding the defense's summary charts, especially when the defense's chart contained an unsupported legal analysis? 3. Did the district court err in admitting evidence of Wood's prior state convictions for impeachment, given that Wood's guilty pleas were later withdrawn under a Montana statute that encourages rehabilitation?
Opinions:
Majority - O'Scannlain
No, the district court did not err in its jury instructions concerning the tax deficiency element of evasion. The court correctly instructed the jury that the primary issue for determining if losses are fully deductible is whether Wood held the commodity futures 'primarily for sale to customers' in the ordinary course of business, rather than merely whether he had a trade or business. This distinction is crucial because only a 'dealer' (who has customers) can take advantage of the I.R.C. § 1221 exception to capital asset treatment, whereas 'traders' and 'investors' (who do not have customers) must treat losses as capital losses, which are subject to deductibility limits. While the instruction that 'those who sell commodities on an exchange do not have customers within the meaning of section 1221' was overly sweeping, any error was harmless because the overall instructions and arguments properly focused the jury on the critical 'to customers' element, and there was no evidence that Wood sold commodities on an exchange as a bona fide dealer. The district court also did not abuse its discretion in its handling of the summary charts. Summary charts are categorized either as evidence under Federal Rule of Evidence 1006 (for voluminous writings) or as pedagogical devices (summaries of testimony or admitted documents). The defense's chart, offered by its expert Richter, was a pedagogical device. Such devices should generally not be admitted into evidence but used as testimonial aids. Even if the court had discretion to admit it, it properly declined because Richter's calculation of Wood's losses was based on an incomplete legal analysis, failing to account for the 'primarily for sale to customers' requirement. Since Richter presented no evidence that Wood had customers, the chart was not supported by the proof, justifying the court's decision to mask the unsupported portion and exclude it from evidence. Finally, the district court did not err in admitting evidence of Wood's prior state convictions. Federal Rule of Evidence 609(c) makes a prior conviction inadmissible if it 'has been the subject of a pardon, annulment, certificate of rehabilitation, or other equivalent procedure based on a finding of the rehabilitation of the person convicted.' While the Montana statute allowing Wood to withdraw his guilty pleas and dismiss the charges showed a rehabilitory motivation, it did not require an explicit finding of rehabilitation by the trial court. The record did not reveal that the Montana court made such a finding when allowing Wood to withdraw his plea. Without an explicit judicial finding of rehabilitation, the Montana procedure does not trigger the inadmissibility provision of Rule 609(c), making the convictions admissible for impeachment purposes. The district court's decisions are affirmed.
Analysis:
This case provides important guidance on the classification of commodities trading losses for tax purposes, clarifying the critical distinction between 'dealers' and 'traders/investors' under I.R.C. § 1221 by emphasizing the 'to customers' requirement. It also reinforces the Ninth Circuit's stance on summary charts as pedagogical devices, underscoring that their admissibility or use is contingent on being fully supported by underlying evidence and legally sound analysis. Furthermore, the ruling strictly interprets Federal Rule of Evidence 609(c), requiring an explicit judicial finding of rehabilitation for a prior conviction to be deemed inadmissible, thus limiting the reach of state expungement or withdrawal procedures in federal court without clear rehabilitative findings.
