United States v. Chen

99 F.3d 1495 (1996)

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Nature of the Case

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Facts

D's companies manufacture health food and skin care products and import from Taiwan, Hong Kong, Japan, and other countries. Importation tariffs paid depend on the price D declares they paid for the goods. Undervaluation may result in administrative, civil, and criminal penalties. A statutory procedure allows an importer to mitigate or avoid penalties by filing a disclosure statement before the Customs Service learns of the undervaluation independently. The higher the cost of goods sold, then, other things being equal, the lower the level of income taxes. Thus, an importer saves money on tariffs to the extent the goods are cheap but pays more in income tax. Conversely, the company saves money on taxes, but pays higher tariffs, to the extent its cost of goods is higher. The Customs duties on the higher values are less than the additional taxes. Ds were indicted for conspiracy, tax evasion, and other crimes. It is alleged that Ds would pay duties on the true prices paid for the goods. D's sister would then prepare entirely fictional invoices on blank forms from Sunrider's Hong Kong affiliate, owned largely by Ds and operated by D's brother. The fake invoices charged much higher prices for the goods. Tariffs would be paid on the true lower price of the goods, but taxes were paid on much higher costs. Monies were paid to Hong Kong and D would recover those monies from her brother. P charged Ds with skimming $90 million. D became concerned that the IRS and Customs might put the scheme together so they made disclosures to Customs that the true cost of the goods were on their tax returns. The correction to the original duties was in fact a fraud. D’s attorney filed the customs disclosure statements. D also paid $381,000 for the underpayments. An ex-employee involved sent information to P. Attorneys who worked on the matters for D were subpoenaed before the Grand Jury. D moved to quash on their attorney-client privilege. The district judge expressly found a prima facie case establishing reasonable cause to believe that Ds had used their lawyers to make false statements, albeit not known to the lawyers to be false, to the Customs Service and under the crime-fraud exception, there is no valid attorney-client privilege attached. Ds appealed.