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United States v. Flomenhoft

July 26, 1983

UNITED STATES OF AMERICA, PLAINTIFF-APPELLEE,
v.
HOWARD C. FLOMENHOFT, DEFENDANT-APPELLANT.



Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 81 CR 615 -- George N. Leighton, Judge.

Author: Grant

Before COFFEY, Circuit Judge, FAIRCHILD, Senior Circuit Judge, and GRANT, Senior District Judge.*fn*

GRANT, Senior District Judge. Defendant-Appellant Howard C. Flomenhoft appeals his conviction of 61 counts of mail fraud (18 U.S.C. ยง 1341) and two counts of making false statements on income tax returns (26 U.S.C. ยง 7206(2)), and raises three issues for our consideration:

I. Whether Flomenhoft's indictment is invalid as constituting an abuse of grand jury process;

II.Whether the district court erred in denying Flomenhoft's motion for a judgment of acquittal, or, alternatively, for a new trial;

III. Whether the district court erred in failing to tender a "missing witness" instruction?

For the reasons stated below, we affirm Flomenhoft's conviction.

Facts

This case stems from an Internal Revenue Service (IRS) news release issued on October 29, 1976. Prior to this date, a skillful investor could structure his investments in such a manner as to generate tax deductible losses which far exceeded the investor's actual monetary investment. One common way that this was accomplished was through investments in coal mining operations. The investors would establish a limited partnership consisting of a single general partner and a number of limited partners who were the actual investors. The investment generated tax-deductible losses through an advance royalty payment to the lessor of the coal mining operation. This advance royalty payment generally consisted of two components: the cash investment of the investors and the nonrecourse promissory note pledged by the partnership to the lessor. Revenue Rulings 70-20 and 74-214 permitted the advance royalty payment to be deducted in full in one year, thus allowing investors tax deductions far exceeding their actual cash investment.

On October 29, 1976, the IRS issued news release IR-1687 which suspended Revenue Rulings 70-20 and 74-214 and announced the IRS" intention to revise the tax treatment of advanced royalty payments effective as of October 29, 1976.*fn1 The release did provide, however, that binding mineral lease agreements entered into prior to October 29, 1976 would still qualify for the favorable tax treatment which had been accorded advance royalty payments under Revenue Rulings 70-20 and 74-214.

Defendant-Appellant Flomenhoft, formerly an IRS attorney specialized in tax planning for corporations and individuals. A large portion of his private practice consisted of counseling investors in tax shelters.Flomenhoft was aware of the favorable tax treatment accorded advance royalty payments prior to News Release IR-1687 and was actively investigating coal mining operations as possible investments and tax shelters for his clients. He had been unable to find a coal mining operation to serve as a tax shelter prior to the October 29 deadline, but in early November, Flomenhoft discovered Aminex Resources Corporation, a New York Corporation which allegedly had established binding contracts for mineral lease rights to several Kentucky coal mines prior to the October 29 deadline.

Flomenhoft had met on several occasions with Aminex officials to discuss transfer of the mineral lease rights. In mid-November 1977, he established two Illinois limited partnerships (Polls Creek Associates and Morgan Associates) and antedated the partnership documents to make it appear that the partnerships had been established prior to the October 29 deadline. These falsely dated documents were then distributed through the mail to potential investors. Flomenhoft represented to investors that the partnerships and the binding mineral leases were in place prior to the October 29 deadline, thus qualifying for the old favorable tax treatment. Based upon these representations, numerous investors made substantial monetary investments in both Polls Creek Associates and Morgan Associates.

THE GRAND JURY PROCEEDING

In October 1981, the Special November 1978 Grand Jury (hereinafter "the first grand jury") indicted Flomenhoft on 61 counts of mail fraud. Flomenhoft moved to dismiss the first grand jury's indictment, alleging that the government had exculpatory evidence in its possession which it failed to present to the first grand jury. Although the district court denied Flomenhoft's motion to dismiss the indictment, the government informed the district court that it would seek a superseding indictment againt Flomenhoft to add two tax charges and clear up any possible defects in the first grand jury proceeding. The government stated ...


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