Former Congressman's Conviction for Filing False Tax Return Affirmed

(Parker Tax Publishing February 2020)

The Fifth Circuit upheld the conviction of a former U.S. Congressman for filing a false tax return and other charges. The Fifth Circuit found that the trial court did not improperly instruct the jury on the definition of Code Sec. 501(c)(3) and Code Sec. 501(c)(4) exempt organizations and was not required to include an instruction regarding good faith when instructing the jury on the willfulness element of the charge for filing a false tax return. U.S. v. Stockman, 2020 PTC 12 (5th Cir. 2020).

Background

Stephen Stockman served two nonconsecutive terms in the U.S. House of Representatives, first from 1995 to 1997 and then from 2013 to 2015. During his first term, Stockman employed Jason Posey and Thomas Dodd as campaign staffers, congressional aides, and business consultants. Posey and Dodd worked with Stockman between 2010 and 2014, when Stockman was alleged to have orchestrated a criminal scheme to obtain charitable donations under false pretenses and to then enrich himself with the proceeds.

Stockman's scheme began in May 2010, when he and Dodd started soliciting Stanford Z. Rothschild, Jr., an elderly donor who was acting through his foundation. Stockman and Dodd persuaded Rothschild to donate $285,000 to the Ross Center, a Code Sec. 501(c)(3) nonprofit organization under Stockman's control. Rothschild was told that his money would fund voter education material for Jewish voters in Florida. Stockman assured Rothschild that he would spend Rothschild's money primarily (if not exclusively) in furtherance of the educational goals laid out in the pitch. However, instead of voter education materials, Stockman spent the funds on trips to Disneyland, at spas, and riding in hot air balloons. Stockman failed to mail any voter education material as promised.

In 2011, Stockman decided to run for a second term in Congress. This time, Stockman and Dodd asked Rothschild for a loan for Stockman's campaign. Rothschild refused, but instead agreed to make additional donations for voter education. Rothschild donated $165,000 to the Ross Center and Life Without Limits (another Stockman-controlled nonprofit). As before, Stockman repurposed the funds. He spent thousands on personal goods and diverted funds to his congressional campaign account. It was later reported to the Federal Election Commission (FEC) that these funds were a personal loan from Stockman to his own campaign.

In January 2013, Stockman, now a member of Congress, shifted his attention to Richard Uihlein, a Wisconsin businessman whose foundation has donated millions of dollars to nonprofit organizations that share his conservative values. Stockman and Dodd pitched Uihlein on Freedom House, a prospective residential facility in Washington, D.C. that would house interns and provide a home base for a nonexistent nonprofit called the Congressional Freedom Foundation. Uihlein agreed to endow the project with $350,000 in seed money. The project died, but the seed money survived to promote a new development in Stockman's political career: he had decided to run for the U.S. Senate in 2014.

As with the Rothschild donations, Stockman used the 2013 Uihlein funds to meet his personal and political needs. Stockman spent over $40,000 on a plan to surveil a conservative Texas politician whom Stockman believed to be a likely opponent in a future primary. Stockman also gave thousands of dollars to Dodd and Posey so that they, in turn, could "donate" the money to Stockman's Senate campaign; the donations were falsely attributed to Dodd's mother and Posey's father in FEC filings. The 2013 Uihlein donation was also used to pay the rent on Stockman's campaign office and to pay off Dodd's credit card debt. Although no money was actually spent on the project pitched to Uihlein, Stockman's team reported to Uihlein that his generosity had allowed Life Without Limits to support Freedom House.

By early 2014, Stockman was in the midst of his primary challenge to incumbent Senator John Cornyn. Stockman met with Kurt Wagner, the president of a direct mail company, to discuss Stockman's plan to mail Texas voters a faux newspaper called The Conservative News. The paper accused Senator Cornyn of falsifying ethics reports to hide income, lying to voters, and filing false donor reports, while highlighting Stockman's policy positions and legislative actions. To finance this campaign, Stockman instructed Wagner to seek a new donation from Uihlein. The letter, which purported to seek financing for an independent expenditure by the Center for the American Future, induced Uihlein to give $450,571. Uihlein testified that he would not have donated the money if he had known of Stockman's involvement. The 2014 Uihlein funds were used to print and distribute hundreds of thousands of copies of The Conservative News and to pay bills related to Stockman's Senate campaign.

In March 2017, Stockman was indicted on four counts of mail fraud, four counts of wire fraud, two counts of making false statements in FEC filings, eleven counts of money laundering, one count of conspiracy to make conduit campaign contributions and false statements, one count of causing an excessive campaign contribution, and one count of willfully filing a false tax return. After a three-week jury trial, Stockman was convicted on all counts except wire fraud. The district court sentenced Stockman to 10 years in prison and three years of supervised release. Stockman was also ordered to pay restitution of more than $1 million. Stockman appealed to the Fifth Circuit. He argued, in part, that the district court erred by improperly defining Code Sec. 501(c)(3) and Code Sec. 501(c)(4) organizations in the jury instructions and that the instructions were irrelevant and misleading.

Fifth Circuit's Decision

The Fifth Circuit upheld the district court's judgments on all counts. The Fifth Circuit was unconvinced that the district court erred in its instructions regarding exempt organizations and found that the definitions of Code Sec. 501(c)(3) and Code Sec. 501(c)(4) organizations, which were undisputedly drawn from the Internal Revenue Code, were not misleading. According to the court, the government provided ample evidence that Stockman fraudulently devised, and implemented, a scheme to deprive two donors of their money and property, thus allowing the jury to rationally find Stockman guilty of mail fraud, wire fraud, and money laundering.

For a discussion of the criminal penalties for false and fraudulent tax returns, see Parker Tax ¶277,110.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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