Guilty Plea Page2

---

[ Back ] [ Next ]

 

⁸ From the record, it appears that via the Government's Santiago Proffer, filed February 29, 1996 , the Schillings first became aware that the Government planned to introduce this evidence at the sentencing hearing.

⁹ At the same hearing, while under oath, the Schillings repeated their admission to the charges contained in Count One of the Indictment. Because Count One alleged that the conspiracy extended to well over 1,000,000 gallons, the Schillings therefore admitted the veracity of the Government's claim that their criminal conduct included much greater than 300,000 gallons.

COURT: What is it that you're about to do here this morning concerning Count 1 of the indictment which charges you with conspiracy to defraud the United States Treasury Department?

[Robert Schilling]: Plead guilty.

COURT: And why are you going to plead guilty to that crime?

[Robert Schilling]: Because that's the crime that my brother and I did.

. . . .

COURT: [A]re you telling me that you did all those things that the Government has said that you did that are set forth in Count 1 of the indictment?

[John Schilling]: Yes, your honor.

¹⁰ The Schillings do not submit that the district court acted improperly in considering the Government's evidence; the Schillings concede that "The District Court also had the right, as it noted in its sentencing Memorandum, to consider gallons over and above the 300,000 for purposes of sentencing." The Schillings' argument rests, rather, on their claim that "the Government would not introduce evidence of increased substantially higher gallons."

¹¹ An example of an unfulfillable promise would have been if the Government in this case had promised to withhold from the trial court evidence showing that the Schillings' unreported sales totaled much greater than 300,000 gallons. After all, the Government does not have a right to withhold from the sentencing judge all the salient facts of the defendant's conduct: "No limitation shall be placed on the information concerning the background, character, and conduct of a person convicted of an offense which a court of the United States may receive and consider for the purpose of imposing an appropriate sentence." 18 U.S.C. sec. 3661, quoted in United States v. Taylor, 72 F.3d 533, 543 (7th Cir. 1995). See also United States v. Cook, 668 F.2d 317, 320 n.4 (7th Cir. 1982) (the very nature of the sentencing process precludes an attorney for the Government promising to withhold relevant information from the sentencing court); United States v. Block, 660 F.2d 1086, 1091-92 (5th Cir. 1981) (a government agreement to withhold relevant facts from the court would "not only violate[] a prosecutor's duty to the court but would result in sentences based upon incomplete facts or factual inaccuracies, a notion that is simply abhorrent in our legal system"), cert. denied, 456 U.S. 905 (1982), cited with approval by United States v. Billington, 844 F.2d 445, 448 n.4 (7th Cir. 1988).

 

 

 

[2000-1 USTC ¶50,173] United States of America , Appellee v. Gregory Charles Ervasti, Appellant United States of America , Appellee v. Deniene "Dee" Ervasti, Appellant

(CA-8), U.S. Court of Appeals, 8th Circuit, 99-1631, 99-1636, 1/13/2000, 201 F3d 1029. Affirming an unreported District Court decision

[Code Secs. 7206 and 7212 ]

Conspiracy to impede IRS: Jury instructions: Aiding and abetting filing of false returns: Good faith misunderstanding of tax law.--A co-owner of a payroll-processing corporation failed to show that the district court erred in refusing to instruct the jury as to a good faith defense to the charge of aiding and abetting the filing of false Forms 941. There was no evidence that the taxpayer, in good faith, misunderstood a complex tax statute that she did not believe criminalized her conduct. The court properly instructed the jury that conviction for the offense required a willful violation of the law; thus, even if the district court erred in refusing to provide a good faith instruction, the error was harmless.

[Code Sec. 7206 ]

Penalties, criminal: Conspiracy to impede IRS: Employment taxes: False returns: Indictment, sufficiency of.--Married owners of a payroll-processing corporation were properly convicted of conspiracy to impede the IRS's collection of withheld employment taxes. Their contention that their indictment was insufficient because it failed to adequately charge that they had the purpose or object of impeding the IRS was rejected as frivolous. Moreover, there was sufficient evidence for the jury to conclude that they intended to impede and impair the IRS, which included falsified Forms 941, Employer's Quarterly Federal Tax Returns, and the taxpayers' misrepresentations to the IRS and to their clients that the taxes at issue had been timely paid.

[Code Sec. 7206 ]

Penalties, criminal: Conspiracy to impede IRS: Filing false returns: Sentencing Guidelines: Enhancements: Managerial role in conspiracy: Calculation of tax loss.--The district court properly enhanced the sentence of a co-owner of a payroll-processing corporation by two levels for organizing, leading, managing, or supervising a conspiracy to impede the IRS in its collection of withheld employment taxes. The trial court also correctly calculated the tax loss for purposes of the sentence of his spouse for aiding in the filing of false Forms 941. The court determined that the tax loss was the same as the fraud loss and that it was entitled to view the entire scope of the illegal scheme in increasing the sentencing offense level by one.
[Code Sec. 7206 ]

Penalties, criminal: Conspiracy to impede IRS: Sentencing Guidelines: Reductions: Acceptance of responsibility: Guilty plea: Judicial economy.--Although a married co-owner of a payroll-processing corporation received a two-level reduction for acceptance of responsibility in connection with her conviction for conspiracy to impede the IRS, she was properly denied an additional one-level reduction since she did not timely express her intent to plead guilty. Since she entered the pleas nearly a year and a half after her indictment, but only shortly before trial, the government was not prevented from preparing for trial. Thus, her guilty pleas did not serve the goal of judicial economy. Her husband was not entitled to a three-level sentence reduction for acceptance of responsibility. The trial court's observation that he showed little remorse was sufficient to support the denial of a reduction. Moreover, his two rejected attempts to plead guilty prior to trial did not guarantee him a reduction.

[Code Sec. 7212 ]

Penalties, criminal: Conspiracy: Fraud offenses: Double jeopardy.--There was no double jeopardy violation in connection with the convictions of married owners of a payroll-processing corporation for conspiracy to commit mail fraud and conspiracy to defraud the government. Since proof of conspiracy to defraud the government does not require the use of the mails, it was not in law and fact the same offense as mail fraud.

Before: BOWMAN, LAY and BEAM, Circuit Judges.

BOWMAN, Circuit Judge:

Gregory and Deniene "Dee" Ervasti appeal their convictions and sentences arising out of the misappropriation of over $5.7 million of impounded tax monies from over 100 clients of their payroll processing corporation. For the reasons stated below, we affirm in part and reverse and remand in part.

I.

We begin with a summary of the facts underlying the Ervastis' convictions. From 1991 to 1995, Gregory and Deniene "Dee" Ervasti, husband and wife, owned and operated Corporate Financial Services, Inc. ("CFS"). CFS offered a variety of payroll processing services to employers, including a tax filing service. Through this service, CFS received the tax monies its clients (the employers) were required by law to withhold from their employees' pay. ¹ Having received these tax monies, it was then the Ervastis' responsibility to timely prepare and file their clients' Employer's Quarterly Federal Tax Returns, also known as Forms 941, with the Internal Revenue Service ("IRS") and to make timely deposits with the IRS in the amount each Form 941 indicated was due.

Initially, the Ervastis maintained a single bank account and commingled the impounded tax monies with their general operations monies. At some point, the Ervastis opened a "tax account" into which the impounded tax funds were deposited. Their practice of utilizing impounded tax monies to cover operating expenses, however, did not end with the opening of the tax account. Unbeknownst to CFS's clients, the Ervastis from time to time would take funds from the tax account and use them for operating expenses, such as meeting CFS's own payroll. At trial, the Ervastis characterized this practice as "borrowing from the float," that is, using the impounded tax monies during the period between its collection and its deposit with the IRS. ²

Before long the "float" began to sink. CFS lacked adequate capital to meet its expenses and had chronic cash flow problems. Consequently, in many cases, the Ervastis' "borrowing" from the impounded tax monies began to stretch beyond the date the taxes were due to the IRS, the Ervastis already having spent the impounded tax monies by the time they were due to the IRS. Although the Ervastis continued to submit the Forms 941 on time, those filings often were not accompanied by a corresponding tax deposit. On many occasions, the Ervastis misrepresented that the money due had been timely deposited when it had not. Indeed, Mrs. Ervasti signed and submitted many Forms 941 falsely indicating that the amount due had been timely paid. Likewise, when the Forms 941 were filed, the Ervastis notified their clients that the taxes had been timely paid, when they often had not.

This course of conduct had several consequences. The late deposits triggered the IRS's internal federal tax deposit alerts and the IRS began to investigate why CFS's clients had not deposited the tax funds their Forms 941 claimed they had. In addition, IRS computers began to churn out "large stacks" of late payment notices to CFS and its clients indicating the payment discrepancies. Not surprisingly, clients who received copies of these notices--or who were investigated by the IRS--became concerned. After all, according to the testimony of numerous former CFS clients, they had turned over tax monies to the Ervastis with the understanding that the IRS would be paid properly and timely; that was the very purpose of hiring the Ervastis to process their tax deposits. Moreover, as employers, CFS's clients ultimately were liable for the taxes due.

In response to client and IRS inquiries, the Ervastis lied and made up "lame excuses," Brief of Appellant Deniene Ervasti at 12, ³ often blaming the IRS notices on trumped-up computer problems or nonexistent IRS mistakes. Moreover, the Ervastis denied using impounded tax monies to fund CFS's operating expenses. Asked why they would lie to their clients, Mrs. Ervasti testified, "I wanted to pacify them and . . . retain their business." Tr. at 998. Indeed, up to the end, the Ervastis continued to seek and accept clients' impounded tax monies and use them for purposes other than paying the taxes.

Besides the legal implications, the Ervastis' conduct had disastrous financial consequences for CFS. The late deposits to the IRS triggered a cascade of penalties and interest. The situation spiraled downward as the Ervastis used incoming impounded tax monies to pay the interest and penalties on the late deposits. As a result, CFS made still more late payments to the IRS, thus triggering even more penalties and interest liability. Though CFS's clients became unwitting "investors" in CFS, Mr. Ervasti was never able to secure any legitimate outside financing to fund CFS's operations. By September 1995, CFS's finances were collapsing. The Ervastis had fallen nearly two quarters behind in the tax payments for many clients and sought bankruptcy protection for CFS.

While the Ervastis did pay the taxes, penalties, and interest owed with respect to some of their clients (especially those who complained earliest and most vociferously), most clients did not fare so well. By the end, more than 100 clients still owed money to the IRS. Many former CFS clients ended up, in essence, paying their taxes twice: first to the Ervastis and again to the IRS (with penalties and interest). ⁴ A September 1995 accounting, compiled under Mr. Ervasti's direction to assess CFS's debt for the bankruptcy proceedings, revealed that the difference between the amount of impounded tax monies CFS received from its clients and the amount the Ervastis actually deposited with the IRS was $5,747,478.88.

The IRS investigated the Ervastis' conduct and a grand jury ultimately issued a ten-count superseding indictment. Both Mr. and Mrs. Ervasti were charged in Counts 1 through 5. Count 1 charged conspiracy to commit mail fraud in violation of 18 U.S.C. §371 (1994) for defrauding CFS's clients of money, property, and the intangible right of honest services. Counts 2 through 4 were substantive counts of mail fraud under 18 U.S.C. §1341 (1994) in furtherance of the conspiracy. Count 5 charged a conspiracy to impede or impair the due administration of the IRS in the ascertainment, computation, assessment, and collection of taxes in violation of 18 U.S.C. §371. In addition, Mrs. Ervasti alone was charged, under Counts 6 through 10, with five counts of aiding a false tax return in violation of 26 U.S.C. §7206(2) (1994).

After hearing the evidence at trial--including testimony from many of CFS's former clients and employees, as well as from the defendants themselves--a jury convicted the Ervastis on all counts. The District Court sentenced Mr. Ervasti to sixty-three months imprisonment for Counts 1 through 5. Mrs. Ervasti was sentenced to forty-eight months imprisonment for Counts 1 through 5 and thirty-six months for Counts 6 through 10, to be served concurrently. ⁵ In addition, the Ervastis were ordered to pay $5,747,478.88 in restitution and to comply with certain terms of supervised release. The Ervastis appeal their convictions and sentences.

II.

We turn first to the Ervastis' challenge to their convictions under Counts 1 through 4, for conspiracy to commit mail fraud and for three substantive counts of mail fraud. The defendants dispute two jury instructions and challenge the sufficiency of the evidence supporting their convictions. We review each of these matters in turn.

A.

The defendants contend that the District Court erred in refusing to instruct the jury in the precise language that appeared in United States v. Jain, 93 F.3d 436, 442 (8th Cir. 1996), cert. denied, 520 U.S. 1273 (1997): "The essence of a scheme to defraud is an intent to harm the victim." Although the defendants requested this instruction, the District Court declined to give it, observing that this language does not appear as an element in the mail fraud statute and reasoning that, in Jain, we were "making a distillation . . . not setting out one of the elements." Tr. at 1070.

Instead, the District Court instructed the jury, inter alia, that "[t]o act with intent to defraud means to act knowingly and with the intent to deceive someone for the purpose of causing some financial loss or loss of property or property rights, loss of an intangible right to honest services to another, or bringing about some financial gain to one's self or another to the detriment of a third party." Tr. at 1218. This instruction is nearly identical to the corresponding part of the mail fraud instruction in the Manual of Model Criminal Jury Instructions for the District Courts of the Eighth Circuit (1997).

It is axiomatic that federal district courts have wide discretion in crafting appropriate jury instructions. See, e.g., United States v. Clapp, 46 F.3d 795, 803 (8th Cir. 1995). In particular, "the district court is afforded considerable discretion in choosing the form and language of jury instructions." United States v. Jerde [88-1 USTC ¶9238], 841 F.2d 818, 820 (8th Cir. 1988). "A defendant is not entitled to a particularly worded instruction where the instructions given adequately and correctly cover the substance of the requested instruction." United States v. Kouba [87-2 USTC ¶9396], 822 F.2d 768, 771 (8th Cir. 1987), quoted in Jerde [88-1 USTC ¶9238], 841 F.2d at 823. We are satisfied that, at least in these circumstances, instructing the jury that it must find that the defendants intended to cause "loss" or "detriment" in order to convict them of mail fraud adequately and correctly covers the substance of the requested instruction, i.e., that intent to harm is the essence of a scheme to defraud.

In any event, our focus on "harm" being an "essential" feature of a scheme to defraud in Jain arose in a context that is inapposite here. In Jain, a psychologist was charged with engaging in a fraudulent referral fees scheme. Unlike in the instant case, however, there was no allegation in Jain that the defendant had given his patients inadequate services and "there was no evidence that any patient suffered tangible harm." Jain, 93 F.3d at 441. Accordingly, we concluded that to prevail under 18 U.S.C. §1341 as expanded by 18 U.S.C. §1346 (1994), ⁶ "[w]hen there has been no actual harm, 'the government must produce evidence independent of the alleged scheme to show the defendant's fraudulent intent.' " Id. at 442 (quoting United States v. D'Amato, 39 F.3d 1249, 1257 (2d Cir. 1994)). Thus, Jain was an exception to the ordinary rule that the scheme itself may provide evidence of the defendant's intent to defraud. See United States v. Whitehead, 176 F.3d 1030, 1038 (8th Cir. 1999). The concerns present in Jain are not present here, where CFS's clients collectively suffered actual loss and detriment (that is, harm) in excess of $5.7 million. We find no error in the instruction.

B.

We turn next to the Ervastis' claim that the government failed to prove they violated a fiduciary duty (or, as Mrs. Ervasti's counsel asserted at oral argument, "some similar duty"), a showing that they assert is necessary for a mail fraud conviction under §1341 as enlarged by §1346. In particular, the Ervastis claim that the District Court erred in giving the following jury instruction: "[O]ne whose business allows him or her to handle the money or property of another must act with responsibility and loyalty. Such a person must subordinate his or her individual property interests to their duty, to the principle [sic] whenever the two conflict." Tr. at 1219. The defendants claim that giving this instruction was an abuse of the District Court's discretion because it "instruct[ed] the jury that it could find a fiduciary duty in this case where none existed as a matter of law and which the Government had not attempted to prove." Brief of Appellant Deniene Ervasti at 17. We think this issue is meritless.

The mail fraud statute prohibits use of the mails to effectuate "any scheme or artifice to defraud." 18 U.S.C. §1341. Before the enactment of §1346, this concept was limited to monetary or tangible loss--such as the $5.7 million in losses suffered by CFS's former clients. See Jain, 93 F.3d at 441 (discussing effect of enactment of §1346 on interpretation of §1341). By enacting §1346, Congress enlarged the definition of "scheme or artifice to defraud" under §1341 to include "a scheme or artifice to deprive another of the intangible right of honest services." 18 U.S.C. §1346.

We reject the Ervastis' contention that §1346 requires the breach of a fiduciary duty. While the defendants are correct that our decision in United States v. Pennington, 168 F.3d 1060 (8th Cir. 1999), involved §1346 and the breach of a fiduciary duty (and while we do not doubt that a defendant's breach of a fiduciary duty in proper circumstances may be a powerful indication that he also has deprived another of the right of honest services), the breach of a fiduciary duty is not a necessary element of §1346. Certainly nothing in Pennington or in the language of either §1341 or §1346 suggests the contrary. Accord United States v. Sancho, 157 F.3d 918, 920-21 & n.1 (2d Cir. 1998) (holding that §1346 does not require proof of fiduciary relationship and finding no mail fraud or wire fraud case where conviction was vacated because no fiduciary relationship existed), cert. denied, ____ U.S. ____, 119 S. Ct. 1076 (1999). Accordingly, the Government was not required to prove the existence or breach of a fiduciary duty to show a violation of §1341 as expanded by §1346, and the instruction was not defective for failing to put the prosecution to such proof.

C.

We turn to the Ervastis' final challenge to their convictions on Counts 1 through 4: that there was insufficient evidence to support those convictions. The Ervastis assert that they just "ended up piloting a sinking ship" and that "no reasonable jury could come to the conclusion that [they] intended the harm that [their] clients sustained." Brief of Appellant Deniene Ervasti at 17. We disagree. We must uphold a jury's verdict if, drawing all reasonable inferences in favor of the verdict, "there is an interpretation of the evidence that would allow a reasonable-minded jury to find the defendants guilty beyond a reasonable doubt." United States v. Vig, 167 F.3d 443, 447 (8th Cir.), cert. denied, ____ U.S. ____, 120 S. Ct. 146, 314 (1999).

The jury was not obligated either to believe the Ervastis' claims that they never intended to defraud anyone or to accept the Ervastis' interpretation of the evidence. See United States v. Baker, 98 F.3d 330, 338 (8th Cir. 1996) (" 'The evidence need not exclude every reasonable hypothesis except guilt.' " (quoting United States v. Erdman, 953 F.2d 387, 389 (8th Cir.), cert. denied, 505 U.S. 1211 (1992))), cert. denied, 520 U.S. 1179 (1997); United States v. Ireland, 62 F.3d 227, 230 (8th Cir. 1995) ("It is the jury's job to judge the credibility of witnesses, and to resolve contradictions in the evidence."). For example, intent to defraud is not necessarily disproved by Mr. Ervasti's bare claim that "[t]here was never any conscious decision to use the float. The money was just there and it got used." Tr. at 907. The jury was free to believe--or reject--this explanation. Certainly a jury reasonably could conclude that impounded tax funds do not "get used" for other purposes without someone's intending that they be so used.

Absent an outright admission of intent to defraud, the requisite intent can be shown by circumstantial evidence. See United States v. Blumeyer, 114 F.3d 758, 767 (8th Cir.) ("[T]he government need not prove intent directly; the jury may infer intent to defraud from circumstantial evidence."), cert. denied, 522 U.S. 938, 1008 (1997). Provided the victims suffered some tangible loss--as they did here--"[t]he scheme itself often serves as evidence of a defendant's intent to defraud." Whitehead, 176 F.3d at 1038; accord United States v. Yoon, 128 F.3d 515, 524 (7th Cir. 1997) ("While it is true that there is no evidence that [the defendant] said, 'I intend to defraud these banks,' the sheer numbers of checks and amounts of money involved in this scheme during the ten-month period provide a surrogate for [defendant's] knowledge."); D'Amato, 39 F.3d at 1257 ("When the 'necessary result' of the actor's scheme is to injure others, fraudulent intent may be inferred from the scheme itself."). The Ervastis' conduct and the nature of the scheme as described above provide circumstantial evidence of fraudulent intent, and we are thoroughly convinced there is sufficient evidence from which a jury could reasonably have concluded that the Ervastis had the requisite intent to defraud.

III.

We turn next to the Ervastis' assertion that Count 5 did not sufficiently charge, and the evidence at trial did not sufficiently show, that they intended to conspire to impede and impair the IRS in violation of 18 U.S.C. §371. Akin to their claims regarding Counts 1 through 4, the Ervastis contend that the evidence shows that they were only trying to maintain their business and that they never meant to impede the IRS's collection of taxes.

A.

The conspiracy to defraud clause of §371 prohibits conspiracies to defraud the United States by, among other things, "impairing, obstructing, or defeating the lawful function of any department of the Government." United States v. Derezinski, 945 F.2d 1006, 1011 (8th Cir. 1991) (quoting Dennis v. United States, 384 U.S. 855, 861 (1966) (quoting Haas v. Henkel, 216 U.S. 462, 479 (1910))) (internal quotation marks omitted). At issue here is a conspiracy to defraud the IRS in the function of assessing and collecting taxes, also known as a Klein conspiracy. See United States v. Klein [57-2 USTC ¶9912], 247 F.2d 908 (2d Cir. 1957), cert. denied, 355 U.S. 924 (1958); see also Derezinski, 945 F.2d at 1010 & n.4. According to the defendants, the indictment is insufficient because it failed to adequately charge that the Ervastis had the purpose or object of impeding the IRS.

This argument is frivolous. Count 5 alleges that the defendants "did unlawfully, willfully and knowingly combine, conspire, confederate and agree . . . to impede and impair the due administration of the Internal Revenue Code [sic] of the United States in the ascertainment, computation, assessment and collection of taxes, all in violation of Title 18, United States Code, Section 371." Superseding Indictment ¶26. Count 5 further specifies that:

The object of the conspiracy was to enable [the Ervastis] to use CFS's clients' tax money for the defendants' own purposes, by either delaying payment or not making any payment to the [IRS] for the clients' employment tax liability and by providing false information to the [IRS] and CFS's clients, thus impeding and impairing the [IRS's] collection of CFS's clients' employment tax liability.

Id. ¶27. The indictment explicitly charges that the Ervastis agreed to impede or impair the IRS, and thus it fairly informed them of the charged offense.

B.

The Ervastis also assert that there is insufficient evidence to uphold their conviction for the Klein conspiracy because the true purpose and object of their actions was not to impede or impair the IRS but "to keep CFS running on a day-to-day basis and to keep all the clients happy so that CFS could either attract new investors or otherwise get out of the hole in[to] which it was inexorably sinking." Brief of Appellant Deniene Ervasti at 21. The Ervastis claim any impact on the IRS was an "inadvertent consequence" of their wholesome desire to keep their business afloat. Id. We disagree.

The requisite agreement "need not be express, but rather can be an informal tacit understanding between the coconspirators . . . . [and] can be proved entirely by circumstantial evidence." United States v. Murphy, 957 F.2d 550, 552 (8th Cir. 1992). We have described above the high burden a defendant bears in challenging the sufficiency of the evidence supporting his conviction. We agree with the First Circuit that while "[v]olumes could be written . . . for cases like ours . . . a more compact solution is at hand: where the conspirators have effectively agreed to falsify IRS documents . . . the factfinder may infer a purpose to defraud the government by interfering with IRS functions." United States v. Goldberg, 105 F.3d 770, 774 (1st Cir. 1997). Here, the numerous purposefully falsified Forms 941, as well as the Ervastis' misrepresentations to the IRS and to their clients that taxes had been paid when they had not, provide sufficient evidence from which a factfinder reasonably could conclude that the Ervastis had a purpose and object to impede and impair the IRS in the performance of its duties. The evidence in support of the Klein conspiracy is sufficient to support the jury's verdict.

IV.

The Ervastis challenge the District Court's denial of their motion to suppress all evidence obtained when special agents of the IRS criminal division executed a search warrant at CFS's offices on October 16, 1995 . Defendants claim the warrant was facially overbroad because it failed to sufficiently particularize the things to be seized and that the good-faith exception of United States v. Leon, 468 U.S. 897 (1984), cannot remedy the warrant's facial defects and save the seized evidence from suppression. Without reaching the overbreadth issue, the District Court found the seized evidence to be admissible under Leon because the officers were acting in good faith reliance on a facially valid warrant. "We review facts supporting the denial of a motion to suppress evidence for clear error and review the legal conclusions based on those facts de novo." United States v. Pitts, 173 F.3d 677, 680 (8th Cir. 1999).

Here, the IRS was investigating potential mail fraud and tax fraud. Based on their interviews with multiple CFS clients and employees, the IRS believed the fraud involved misappropriating client funds, making transfers between bank accounts, and concealing activities through false paperwork. Because the Ervastis delegated relatively little of their fraudulent conduct to subordinates and offered little cooperation with the investigation, it was not possible for the IRS to discern the precise parameters of the potential crimes. Accordingly, the search warrant was extensive and inclusive. ⁷ Nevertheless, we conclude that this warrant was not facially invalid. It was sufficiently particular in these circumstances, where authorities were trying to uncover the precise details of a scheme characterized by concealment, to meet the constitutional standards of specificity. Having concluded that the warrant was not facially invalid, and discerning no basis for disturbing the District Court's finding that the officers here were acting in good-faith reliance on it, we conclude there was no reason to suppress the evidence seized pursuant to the warrant.

V.

We look next at the Ervastis' claim that the District Court erred in failing to dismiss Counts 1 and 5 because they both involve the violation of 18 U.S.C. §371 and the same conspiracy and thus violate the Constitution's ban on placing defendants in double jeopardy. We review de novo the denial of a motion to dismiss an indictment on double jeopardy grounds. See United States v. Bennett, 44 F.3d 1364, 1368 (8th Cir.), cert. denied, 515 U.S. 1123, 1145 (1995); 516 U.S. 828 (1995). The question is of limited practical importance in this case, because the Ervastis' sentences on these two counts run concurrently, and concurrently with their sentences on the other counts. The only additional punishment they have received with respect to Counts 1 and 5 is a $50 special assessment on each of these counts.

The Double Jeopardy Clause ⁸ "protects against multiple punishments for the same offense." North Carolina v. Pearce, 395 U.S. 711, 717 (1969). "In order to support a claim of double jeopardy, a defendant must show that the two offenses charged are in law and fact the same offense." Bennett, 44 F.3d at 1368. Our starting point in determining whether Counts 1 and 5 are the "same offense" for double jeopardy purposes is the same elements analysis of Blockburger v. United States, 284 U.S. 299 (1932), which provides: "[W]here the same act or transaction constitutes a violation of two distinct statutory provisions, the test to be applied to determine whether there are two offenses or only one, is whether each provision requires proof of a fact which the other does not." 284 U.S. at 304.

We are satisfied that Counts 1 and 5 charge separate and distinct violations of separate and distinct provisions of §371. Though it is not divided formally into subsections, §371 plainly establishes two offenses:

If two or more persons conspire either to commit any offense against the United States or to defraud the United States . . . each shall be fined under this title or imprisoned for not more than five years or both.

18 U.S.C. §371 (emphasis added); cf. Derezinski, 945 F.2d at 1009-10 (rejecting defendants' claims that they should have been charged under the "offense" provision of §371 rather than its "defraud" provision); Murphy, 957 F.2d at 553 (noting §371 "proscribes two distinct types of conspiracies"). ⁹ Here, Count 1 charges a violation of the "offense" provision of §371: conspiring to commit the substantive offense of mail fraud by a scheme or artifice to deprive CFS's clients of money, property, and the intangible right of honest services through use of the mails. Count 5 charges a violation of the "defraud" provision of §371: conspiring to defraud the United States by impeding and impairing the due administration of the IRS in the ascertainment, computation, assessment, and collection of taxes, that is, the Klein conspiracy. It thus is apparent that the Blockburger test must govern the double-jeopardy issue the Ervastis have raised. ¹⁰

Applying the Blockburger analysis to determine whether these counts require proof of an element the other does not, we conclude they do: "Conspiracy to commit mail fraud requires the Government to show an act constituting use of the mails in furtherance of the conspiracy. Proof of conspiracy to defraud the United States has no requirement regarding the use of the mails, but requires proof of an agreement to specifically defraud the United States ." United States v. Thompson, 814 F.2d 1472, 1477 (10th Cir.), cert. denied, 484 U.S. 830 (1987). Accordingly, Counts 1 and 5 meet the Blockburger standard. We therefore hold that Counts 1 and 5 are not in law and fact the same offense and do not place the defendants in double jeopardy.

VI.

 

We turn next to Mrs. Ervasti's contention that the District Court erred in refusing to instruct the jury that there is a "good faith" defense to Counts 6 through 10--those counts involving her aiding and abetting the filing of false Forms 941. Counts 6 through 10 allege violations of §7206(2) of the Internal Revenue Code which provides criminal liability for any person who "[w]illfully aids or assists in . . . the preparation . . . under . . . the internal revenue laws, of a return, affidavit, claim, or other document, which is fraudulent or is false as to any material matter." 26 U.S.C. §7206(2). A good faith belief that one's conduct does not violate the tax laws negates the willfulness element of this offense. See Cheek v. United States [91-1 USTC ¶50,012], 498 U.S. 192, 201-203 (1991); United States v. Brooks, 174 F.3d 950, 955 (8th Cir. 1999).

"[A] party is entitled to an instruction on his theory of the case, provided the instruction is . . . supported by the evidence. . . ." Jerde [88-1 USTC ¶9238], 841 F.2d at 820. Having closely reviewed the record, we agree with the District Court that "[t]here is no evidence that there was a good faith misunderstanding of the Internal Revenue laws" and that Mrs. Ervasti "said she knew she was making a false statement and she was lying on the form." Tr. at 1085, 1086. While Mrs. Ervasti contends that she thought it was "fine" to deposit funds after the Forms 941 were filed, she candidly conceded that she knew it was wrong to prepare Forms 941 "which [were] fraudulent or [were] false as to any material matter." 26 U.S.C. §7206(2).

We have explained that the concern underlying the good-faith defense in tax cases is that defendants not be convicted for a misapprehension of a complex tax statute they did not believe criminalized their conduct. See United States v. Hildebrandt, 961 F.2d 116, 119 (8th Cir.) (finding no reversible error in not giving Cheek "good faith" instruction where defendant was convicted under general criminal statute's "straightforward prohibition against making false, fictitious, or fraudulent statements to the government" in filing numerous false federal tax forms), cert. denied, 506 U.S. 878 (1992). The District Court did not abuse its discretion in refusing to instruct the jury on "good faith" as requested by Mrs. Ervasti.

We note that the District Court instructed the jury, among other things, that Counts 6 though 10 "call for willful violation of the law" and that "[a]n act is done willfully if it is done voluntarily and intentionally with the purpose of violating a known legal duty." Tr. at 1224, 1225. Under that instruction, the jury could not have found Mrs. Ervasti guilty unless it believed she willfully violated the tax laws and, thus, did not act in a good-faith misapprehension of the law. Hence, even assuming, arguendo, error by the District Court in refusing to give a "good faith" instruction, the error was harmless.

VII.

Mr. Ervasti challenges a two-level sentencing enhancement for being "an organizer, leader, manager, or supervisor" of the scheme for which he and his wife were convicted. U.S.S.G. §3B1.1(c). The District Court found that Mr. Ervasti "was not just [CFS's] CEO in title, he was its leader in all respects." Sentencing Tr. at 36. In explaining its reasoning to Mr. Ervasti, the District Court observed: "[Y]ou were fully in charge, and you were running this operation, and it operated according to your will and to your whim." Sentencing Tr. at 54. Recognizing that a district court is in a far better position than are we to observe and evaluate all of the evidence, we reverse a district court's determination of a defendant's role in the offense under §3B1.1 only if it is clearly erroneous. See United States v. Rodamaker, 56 F.3d 898, 902 (8th Cir. 1995). "We have construed the definition of leadership or organizational role broadly. . . . While control of other participants is an important factor, section 3B1.1 focuses on the 'relative responsibility within a criminal organization.' " United States v. Mayer, 130 F.3d 338, 340 (8th Cir. 1997) (quoting United States v. Bush, 79 F.3d 64, 67 (7th Cir. 1996)); see U.S.S.G. §3B1.1 commentary (background) ("This adjustment is included primarily because of concerns about relative responsibility."). Having reviewed the record carefully, we cannot say that the District Court clearly erred in enhancing Mr. Ervasti's offense level for playing a supervisory role in the offense.

VIII.

Mrs. Ervasti challenges the District Court's calculation for sentencing purposes of the tax loss amount applicable to Counts 6 through 10 for aiding in the filing of false Forms 941 on behalf of CFS's clients and intentionally failing to deposit the funds those forms indicated had been paid to the IRS, all in violation of 18 U.S.C. §7206(2). Under the Sentencing Guidelines, the base offense level with respect to Counts 6 through 10 depends upon the amount of tax loss. See U.S.S.G. §§2T1.1, 2T1.4(a), 2T4.1. The Sentencing Guidelines instruct that, "[i]f the offense involved tax evasion or a fraudulent or false return, statement, or other document, the tax loss is the total amount of loss that was the object of the offense (i.e., the loss that would have resulted had the offense been successfully completed)." Id. §2T1.1(c)(1). Relevant conduct for sentencing is viewed broadly: "In determining the total tax loss attributable to the offense . . ., all conduct violating the tax laws should be considered as part of the same course of conduct or common scheme or plan unless the evidence demonstrates that the conduct is clearly unrelated." Id. §2T1.1 commentary (n.2). Whether an act or omission is relevant conduct is a factual determination subject to review for clear error. See United States v. Georges, 146 F.3d 561, 562 (8th Cir. 1998).

After trial and an evidentiary hearing, the District Court determined that the amount of tax loss was the same as the fraud loss, $5,747,478.88. This amount corresponds to a base offense level of 22. See U.S.S.G. §2T4.1(Q) (offense level 22 corresponds to tax loss of more than $5 million but less than or equal to $10 million). Mrs. Ervasti asks us to reject this finding and to distinguish between the "fraud loss," which she concedes to be $5,747,478.88, and the "tax loss" to which she does not ascribe a precise value. ¹¹ Mrs. Ervasti argues that the "great majority" of the $5.7 million relates to third quarter 1995 liabilities that were not due and for which Forms 941 had not been filed--falsely or otherwise--at the time CFS went out of business in September 1995. Mrs. Ervasti contends that "[t]he proper tax loss calculation for this [tax loss] group. . . . is the readily ascertainable sum based on the difference between the amounts shown on the returns [Mrs. Ervasti] filed and the sum of tax deposits she previously made for those taxpayers." Brief of Appellant Deniene Ervasti at 26. Although she does not quantify this "readily ascertainable sum," Mrs. Ervasti nonetheless claims that the District Court erred and "clearly prejudiced [her] because [this loss value] increased her sentencing offense level by one." Id. at 27. ¹²

Even if we were convinced that Mrs. Ervasti had rebutted the government's showing that the tax loss was less than the $5.7 million and that she had given the court some basis to accept a different value, "all conduct violating the tax laws should be considered as part of the same course of conduct or common scheme or plan unless the evidence demonstrates that the conduct is clearly unrelated." U.S.S.G. §2T1.1 commentary (n.2). Even though CFS collapsed before the third quarter Forms 941 were actually filed and before any additional documents were actually falsified, we believe the District Court was well within its discretion to consider for sentencing purposes the overall scope of the unlawful scheme in assessing the amount of the tax loss for which Mrs. Ervasti is responsible.

IX.

The Ervastis also challenge the District Court's rulings on the extent to which they merit acceptance-of-responsibility sentencing reductions. Section 3E1.1(a) of the Sentencing Guidelines provides for a two-level decrease in a defendant's offense level if "the defendant clearly demonstrates acceptance of responsibility for his offense." Id. §3E1.1(a). If a defendant receives a two-level reduction under §3E1.1(a), he also receives an additional one-level reduction if he "has assisted authorities in the investigation or prosecution of his own misconduct" by either "(1) timely providing complete information to the government concerning his own involvement in the offense" or "(2) timely notifying authorities of his intention to enter a plea of guilty, thereby permitting the government to avoid preparing for trial and permitting the court to allocate its resources efficiently." Id. §3E1.1(b). We review a sentencing court's decision to award or deny an acceptance-of-responsibility reduction for clear error. See United States v. Colbert, 172 F.3d 594, 597 (8th Cir. 1999); cf. U.S.S.G. §3E1.1 commentary (n.5) ("The sentencing judge is in a unique position to evaluate a defendant's acceptance of responsibility.").

A.

The District Court did not grant Mr. Ervasti any acceptance-of-responsibility sentencing reduction. Mr. Ervasti contends that he should have received a full three-level reduction due to the purportedly "unique" circumstances of his case, including the fact that he twice attempted to plead guilty before trial. While we agree that attempting to plead guilty may provide "some evidence" of acceptance of responsibility, an attempt to plead guilty is not a guarantee of receiving the adjustment. See U.S.S.G. §3E1.1 commentary (n.3) ("A defendant who enters a guilty plea is not entitled to an adjustment under this section as a matter of right.").

The fundamental inquiry under §3E1.1(a) is whether the defendant "clearly demonstrates" acceptance of responsibility for "his offense." When a defendant denies having the requisite mental state for the crime for which he was convicted, a district court is well within its discretion to determine that the defendant has failed to "clearly demonstrate[] acceptance of responsibility for his offense." Id. §3E1.1(a) (emphasis added); see United States v. Makes Room, 49 F.3d 410, 416 (8th Cir. 1995) (upholding district court's denial of §3E1.1(a) reduction where defendant admitted to facts underlying conviction but denied having requisite mens rea of the offense of conviction). At trial, Mr. Ervasti repeatedly denied having any intent to defraud CFS's clients and claimed entitlement to use the impounded tax monies as he pleased. At sentencing, while Mr. Ervasti did state the words "I apologize," he expressly limited his regret to not having found an investor to bail out the scheme. In any event, the District Court was not required to accept Mr. Ervasti's bare claims of remorse. Having the benefit of observing Mr. Ervasti's demeanor, the District Court concluded, "I have no doubt you feel bad you've been caught. . . . But there isn't a bit, not a[n] ounce of contrition in you." Sentencing Tr. at 63 (emphasis added). We have reviewed the record closely and see no basis for disturbing this conclusion.

We have remanded for reconsideration of a sentence where it appeared that the district court failed to fully consider a defendant's attempt to plead guilty. See United States v. Guerrero-Cortez, 110 F.3d 647, 655-56 (8th Cir.), cert. denied, 522 U.S. 1017 (1997). ¹³ It is not logically inconsistent, however, for a district judge both to deny a defendant's attempt to plead guilty and to determine later, at sentencing, that the defendant failed to sufficiently accept responsibility to merit a reduction in his offense level. A defendant's willingness to plead guilty may be motivated by myriad factors, and may not necessarily be attended by the defendant's clear acceptance of guilt. Cf. United States v. Cojab, 978 F.2d 341, 344 (7th Cir. 1992) (upholding district court's finding that defendant lacked sufficient acceptance of responsibility to warrant §3E1.1 reduction where defendant pled guilty to obtain dismissal of charges against his wife, not because of affirmative recognition of his own guilt) (applying pre-1992 Guidelines). We see no basis for saying that the District Court clearly erred when it made its core determination that Mr. Ervasti's remorse did not meet the standards of §3E1.1(a). See Colbert, 172 F.3d at 597 (stating this determination " 'is entitled to great deference and should be reversed only if it is so clearly erroneous as to be without foundation.' " (quoting United States v. Morris, 139 F.3d 582, 584 (8th Cir. 1998) and omitting internal quotation marks and citation)).

Given that the additional one-level adjustment under §3E1.1(b) is contingent on a defendant's receiving the two-level adjustment under §3E1.1(a), and having found that the District Court properly denied the §3E1.1(a) reduction, we conclude that it properly denied the §3E1.1(b) reduction as well. See Makes Room, 49 F.3d at 417.

B.

Mrs. Ervasti received a two-level offense reduction for acceptance of responsibility under §3E1.1(a), but the District Court declined to grant the additional one-level reduction available under §3E1.1(b) for reasons that are not expressed in the record. Mrs. Ervasti claims entitlement to a full three-level reduction because she twice attempted to enter a plea of guilty before trial, both of which the District Court rejected. If all of the conditions of §3E1.1(b)(2) are met, a defendant is entitled to the additional one-level reduction. See United States v. Rice, 184 F.3d 740, 742 (8th Cir. 1999) ("If the sentencing court finds that the defendant accepted responsibility for his or her offense and entered a timely guilty plea, then the defendant is automatically entitled to the full three-level reduction available under §3E1.1"). ¹⁴ All of the conditions of §3E1.1(b)(2) were not met here.

Receiving the additional one-level reduction depends upon a defendant's "timely notifying authorities of his intention to enter a plea of guilty, thereby permitting the government to avoid preparing for trial and permitting the court to allocate its resources efficiently." U.S.S.G. §3E1.1(b)(2). In the first place, it seems likely that Mrs. Ervasti's plea attempts--one occurring a month and the other two weeks before trial, nearly a year and a half after the indictment, and following a flurry of pre-trial motions--would be considered untimely in the sense that they "did not serve the interests of judicial economy, and contained no hint that the government could ignore preparing for trial." United States v. Sandles, 80 F.3d 1145, 1151 (7th Cir. 1996). In any event, no guilty plea was ever entered here because the District Court found both plea attempts unacceptable. ¹⁵ It is appropriate for a district court to refuse the additional one-level reduction to a defendant who fails to offer an acceptable plea. Having not presented the District Court with an adequate plea, Mrs. Ervasti did not permit either the government or the court to avoid trial and thus did not meet the requirements of §3E1.1(b)(2). Accordingly, we sustain the denial of the additional one-level reduction for Mrs. Ervasti.

X.

We turn next to Mr. Ervasti's claim that the District Court erred in imposing partially-consecutive sentences on Counts 1 through 5 and thereby sentencing him to longer than the sixty-month statutory maximum for each individual count. Section 5G1.2 of the Sentencing Guidelines deals with sentencing on multiple counts of conviction and in relevant part provides: "If the sentence imposed on the count carrying the highest statutory maximum is adequate to achieve the total punishment, then the sentences on all counts shall run concurrently, except to the extent otherwise required by law." §5G1.2(c) (emphasis added). On the other hand, "[i]f the sentence imposed on the count carrying the highest statutory maximum is less than the total punishment, then the sentence imposed on one or more of the other counts shall run consecutively, but only to the extent necessary to produce a combined sentence equal to the total punishment." §5G1.2(d) (emphasis added).

Here, each of the five counts for which Mr. Ervasti was convicted carries a sixty-month statutory maximum term of imprisonment. See 18 U.S.C. §§371; 1341. After considering all of the Sentencing Guidelines factors, the District Court ascertained Mr. Ervasti's adjusted combined offense level to be 24, placing him in a total punishment range of fifty-one to sixty-three months. The District Court determined that sixty-three months was the appropriate sentence within this range.

Mr. Ervasti posits that the "total punishment" referenced in §5G1.2(c) and (d) is the guidelines range (here, fifty-one to sixty-three months). Accordingly, he argues, sixty months is "adequate," because it falls within this range (fifty-one to sixty-three). And if sixty months is "adequate . . . then the sentences on all counts shall run concurrently," U.S.S.G. §5G1.2(c). The effect of such an interpretation is that the District Court could not sentence Mr. Ervasti to more than sixty months. If the "total punishment," however, is the District Court's actual determination of where a defendant falls within the guidelines range (here, sixty-three months), then sixty months is not "adequate" to achieve the "total punishment" and "the sentence imposed on one or more of the other counts shall run consecutively, but only to the extent necessary to produce a combined sentence equal to the total punishment." Id. §5G1.2(d).

We apparently have not had occasion before now to confront this issue directly. While §5G1.2 does not expressly define "total punishment," its commentary instructs that "[t]he combined length of the sentences ('total punishment') is determined by the adjusted combined offense level," thereby suggesting that "total punishment" is the precise sentence determined by the sentencing judge from within the appropriate guidelines range. Indeed, both the Second and Fifth Circuits have so held. See United States v. Loeb, 45 F.3d 719, 723 (2d Cir.) (affirming sentence of seventy-one months under §5G1.2(d) where guidelines range was fifty-seven to seventy-one months and statutory maximum on each of two counts was sixty months), cert. denied, 514 U.S. 1135 (1995); United States v. Kings, 981 F.2d 790, 797-98 (5th Cir.) (affirming sentence of 150 months under §5G1.2(d) where guidelines range was 120-150 months, and where Count 1 carried a 120-month statutory maximum and Count 2 carried a thirty-six-month statutory maximum), cert. denied, 508 U.S. 953 (1993). We agree. Accordingly, the "total punishment" here, as determined by the District Court, is sixty-three months.

Having fixed the total punishment at sixty-three months, the District Court properly determined that the sentence imposed on Mr. Ervasti for Counts 1 and 2 would be sixty months (the highest statutory maximum of the five counts), to run concurrently. Given that the sentence imposed on the count carrying the highest statutory maximum is less than the total punishment (i.e., sixty is less than sixty-three), "then the sentence imposed on one or more of the other counts shall run consecutively, but only to the extent necessary to produce a combined sentence equal to the total punishment." U.S.S.G. §5G1.2(d). The District Court did just that by determining that the sentence imposed on one other count (Count 3) would be three months and would run consecutively to the sixty months (with respect to Counts 1 and 2) to equal the total punishment of sixty-three months. The District Court then correctly ordered that the sentences of the remaining counts (Counts 4 and 5) should run concurrently with the sentence on Count 3 so as not to exceed the total punishment. The District Court's application of §5G1.2 is proper.

XI.

Mr. Ervasti points out an apparent typographical error in the Second Amended Judgment which incorrectly states the amount of restitution as being $7,747,478.88. We believe the record conclusively establishes that the correct figure is $5,747,478.88. ¹⁶ This error now having been called to its attention, we trust that the District Court on remand will correct the judgment to reflect the true amount. See Fed. R. Crim. P. 36 ("Clerical mistakes in judgments, orders or other parts of the record and errors in the record arising from oversight or omission may be corrected by the court at any time. . . .").

XII.

Mr. Ervasti challenges the following condition of his supervised release: "Defendant is prohibited from incurring new credit charges or opening additional lines of credit without written approval from the [District Court], by applying through the probation officer." Second Amended Judgment at 3. Mr. Ervasti contends that this condition is not reasonably related to the concerns at issue in his case and is a greater deprivation of his liberty than is reasonably necessary. We disagree. See U.S.S.G. §5D1.3(d)(2) (recommending for supervised release--"[i]f an installment schedule of payment of restitution or a fine is imposed--a condition prohibiting the defendant from incurring new credit charges or opening new additional lines of credit without approval of the probation officer unless the defendant is in compliance with the payment schedule."). Certainly a district court is not obligated to adopt this formulation verbatim and is entitled to tailor a condition to the needs of a particular case, consistent with §5D1.3(b) ("court may impose other conditions of supervised release"). Here, the District Court has ordered Mr. Ervasti to pay in excess of $5.7 million in restitution to more than 100 former clients of CFS. Given Mr. Ervasti's restitution obligation, it is not unreasonable for the District Court to insist that Mr. Ervasti refrain from taking on additional debt without permission. We hold that the District Court did not abuse its discretion in imposing this condition.

XIII.

Having reviewed the record carefully, and having considered all the issues the Ervastis have raised, we find no basis for reversal. We affirm the defendants' convictions and sentences. We remand for correction of the clerical error with respect to the amount of restitution owed by Mr. Ervasti, so that the judgment shall show that amount to be $5,747,478.88.

¹ Frequently, the Ervastis would receive a power of attorney to directly withdraw these funds from their clients' bank accounts.

² We note that "borrowing from the float" appears to be a broader concept than "investing the float," a practice also raised at trial. "Investing the float" refers to benefitting from the "use" of the impounded tax monies in the narrow sense of receiving the interest that accrues on them before they are deposited with the IRS--but not actually spending the underlying impounded tax monies themselves. The record does not indicate whether the Ervastis ever invested the impounded tax monies. Even if they did, this prosecution did not target such conduct. We express no opinion as to the legality or prudence of either "borrowing from" or "investing" the float.

³ Although Mr. and Mrs. Ervasti were represented by separate counsel, they elected to share the briefing of certain common issues on this appeal. See Fed. R. App. P. Rule 28(i) ("In a case involving more than one appellant . . . any party may adopt by reference a part of another's brief.").

⁴ Some of CFS's former clients were forced to close their businesses as a result of the Ervastis' conduct.

⁵ The Ervastis' sentencing, which occurred on February 10, 1999 , is governed by the United States Sentencing Commission Guidelines Manual, effective November 3, 1998 . See U.S. Sentencing Guidelines Manual (hereinafter "U.S.S.G.") §1B1.11(a) (1998) (stating that "[t]he court shall use the Guidelines Manual in effect on the date that the defendant is sentenced," unless it would violate the Ex Post Facto Clause of the United States Constitution).

⁶ See Part II.B., infra.

⁷ The warrant authorized the seizure of:

Books, records, ledgers, documents, financial instruments, deposit slips, canceled checks, bank statements, passbooks, invoices, bills, telephone toll records and billing statements, utility bills and insurance policies, loan payment records, correspondence, money order receipts, cashiers checks, federal and state tax returns on other tax forms, other financial records, books and data, paper, tickets, notes schedules and receipts, address books, telephone books, Rolodex indices and papers, client lists and, [sic] IRS documents related to CFS clients, computer and computer devices including but not limited to any electronic, magnetic, optical, electrochemical, or other high speed data processing devices; communication facilities directly relating to or operating in conjunction with such devices; computer software programs, together with instruction manuals and information contained on paper, in handwritten, typed, photocopied or printed form, or stored on computer printouts, magnetic tapes, cassettes, discs, diskettes, or other medium; and other evidence and instrumentalities, all of which are evidence of violations of Title 18, [U.S.C.], Sections 1341 and 1343, and Title 26, [U.S.C.], Section 7212(a), for the period of 1991 to present.

⁸ This clause provides: "[N]or shall any person be subject for the same offense to be twice put in jeopardy of life or limb. . . ." U.S. Const. amend. V.

⁹ We acknowledge an apparent disagreement in the circuits on this issue. Compare United States v. Thompson, 814 F.2d 1472, 1475-77 (10th Cir.) (discerning no colorable double jeopardy claim notwithstanding that, like here, same agreement gave rise to first charge of conspiracy to commit mail fraud under "offense" provision of §371 and second charge of conspiracy to impede lawful function of United States under "defraud" provision of §371), cert. denied, 484 U.S. 830 (1987), with United States v. Smith, 891 F.2d 703, 712 (9th Cir. 1989) (concluding, in holding that single indictment count charged under both provisions of §371 was not duplicitous, that "[a]lthough there is no helpful legislative history, the two clauses of [§371] should be interpreted to establish alternate means of commission, not separate offenses" and that "[i]t would be strange to infer that Congress intended to punish twice a conspiracy that violates both clauses. Where a single criminal statute prohibits alternative acts, courts should not infer the legislature's intent to impose multiple punishment."), amended as to form of opinion only, 906 F.2d 385 (9th Cir. 1990), and cert. denied, 498 U.S. 811 (1990).

¹⁰ The Ervastis correctly point out that the Supreme Court has found a double jeopardy violation where the defendants were charged with seven separate conspiracy counts, all involving the same conspiracy, under the (nearly identical) statutory predecessor to §371. See Braverman v. United States [42-2 USTC ¶9731], 317 U.S. 49, 52-53 (1942). Braverman is distinguishable, however, because all seven conspiracy counts were charged for a single agreement under the "offense" provision; none was charged under the "defraud" provision. Braverman acknowledged the continuing vitality of Blockburger where the same conspiracy violates two separate statutory provisions. 317 U.S. at 54. Our question of whether the "offense" and "defraud" provisions of §371 constitute two separate offenses for double jeopardy purposes was not before the Braverman Court .

¹¹ We note that the District Court implored Mrs. Ervasti's counsel repeatedly to "[t]ell me . . . how much money is lost, in your, view, and then justify it." Sentencing Tr. 13. Mrs. Ervasti's counsel responded "[w]e do not know," id. at 14, but then contended that the bankruptcy court's calculation of $5.2 million should more accurately be $3.5 million, see id. at 14-16.

¹² Apparently, then, Mrs. Ervasti is claiming the proper tax loss figure would be in the $2.5-5 million range. See U.S.S.G. §2T4.1(P) (offense level 21 corresponds to tax loss of more than $2.5 million but less than or equal to $5 million). We note that in her reply, Mrs. Ervasti (apparently for the first time) asserts an even lower tax loss figure--$2.1 million, see Reply Brief of Appellant Deniene Ervasti at 9 n.3, corresponding to a lower offense level, see §2T4.1(O) (offense level 20 corresponds to tax loss of more than $1.5 million but less than or equal to $2.5 million).

¹³ In Guerrero-Cortez, the defendant had attempted to plead guilty to the charge for which he was ultimately convicted on two occasions immediately following his indictment; he "consistently and repeatedly admitted" his guilt thereafter. 110 F.3d at 655. Noting that the district court clearly erred in incorrectly believing that the defendant had not indicated any acceptance of responsibility until after trial, we remanded to give the district court an opportunity to review the strength of the defendant's earlier admissions. Id. at 655-56. It remained the district court's duty to evaluate the quality of the defendant's remorse.

¹⁴ The government claims Mrs. Ervasti is not entitled to the additional one-level reduction under §3E1.1(b) because she never accepted full responsibility. We disagree. Once a district court finds acceptance of responsibility under §3E1.1(a)--as the District Court did here--the additional §3E1.1(b) reduction may not be denied on the theory that the defendant only partially accepted responsibility. Cf. United States v. Atlas, 94 F.3d 447, 452 (8th Cir. 1996) ("Nothing in the text of the guideline or its commentary suggests that the district court may deviate from the guidelines for 'partial acceptance' of responsibility."), cert. denied, 520 U.S. 1130 (1997).

¹⁵ The District Court rejected the first plea because the court was unwilling to be bound to imposing a six-month sentence on Mrs. Ervasti before learning more about the case. See Sentencing Tr. at 32. The District Court rejected the second plea attempt because it was "deeply troubled" at the time of the plea that Mrs. Ervasti was not sufficiently contrite. Id. at 45.

 

 

 

[Dec. 49,008(M)] William Franklin v. Commissioner

Docket No. 15188-89., TC Memo. 1993-184, 65 TCM 2497, Filed April 26, 1993

[Appealable, barring stipulation to the contrary, to CA-6.--CCH.]

[Code Secs. 6653 (Prior to amendment by P.L. 99-514), 6661 (Prior to repeal by P.L. 102-239) and 7206 ]

[Additions to tax: Penalties: Failure to report income: Unlawful activity: Fraud: Substantial understatement of tax: Deficiency: Assessment: Sufficient evidence.]Petitioner pled guilty to conducting a continuing criminal enterprise involving heroin sales for the period June 1982 through mid-July 1987 and to willfully making a false return by failing to include income and expenses from heroin distribution in his 1983 Federal income tax return. Respondent determined deficiencies and additions to tax for petitioner's taxable years 1982 and 1983 relating to unreported narcotics income. Petitioner challenged the deficiency notice on the grounds that it was arbitrary.1. Held: The notice of deficiency is nonarbitrary as to both 1982 and 1983.2. Held, further, petitioner is liable for deficiencies and additions to tax under sec. 6661 , I.R.C., for both 1982 and 1983.3. Held, further, respondent carries her burden of proving, by clear and convincing evidence, some underpayment for both 1982 and 1983. Respondent also carries her burden of proving, by clear and convincing evidence, petitioner's fraudulent intent for each year. Accordingly, we sustain the additions to tax under sec. 6653(b)(1), I.R.C., for 1982 and 1983.4. Held, further, respondent proves, by clear and convincing evidence, an underpayment attributable to unreported income of $500, for both 1982 and 1983. See Cohan v. Commissioner [2 USTC ¶489 ], 39 F.2d 540, 544 (2d Cir. 1930). Accordingly, we sustain the additions to tax under sec. 6653(b)(2), I.R.C., for both 1982 and 1983, with respect to the underpayment attributable to unreported income of $500.

Robert M. Simels, for the petitioner. Robert A. Walker, Jr., and Mary Corrigan Gorman, for the respondent.

Memorandum Findings of Fact and Opinion

HALPERN, Judge:

Respondent determined deficiencies in petitioner's Federal income tax and additions to tax as follows:

                               Additions to Tax

                               ----------------

Year  Deficiency  Sec. 6653(b)(1)  Sec. 6653(b)(2)  Sec. 6661

1982   $155,214      $  77,607     50% of the        $38,804

                                   interest due

                                   on $155,214

1983    213,767        106,884     50% of the         53,442

                                   interest due

                                   on $213,767

The deficiency notice explained the determinations as being based on receipt of $305,245 and $423,611 in unreported income from heroin sales in 1982 and 1983, respectively. Petitioner has challenged the determinations and additions to tax.

Unless otherwise noted, all section references are to the Internal Revenue Code of 1954 in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.

Findings of Fact

Some of the facts are stipulated and are so found. The stipulations of fact filed by the parties and attached exhibits are incorporated by this reference.

Petitioner was incarcerated in the Federal Correctional Institution in Memphis , Tennessee , when he filed the petition in this case.

Criminal Convictions

In 1977, petitioner was convicted in the United States District Court for the District of Maryland of conspiracy to distribute heroin. Petitioner pled guilty to conspiracy and subsequently was sentenced to a 12-year prison term. Petitioner served a portion of his sentence in a Federal penitentiary and was released to the Volunteers of America Halfway House in Baltimore , Maryland , in June 1982. On July 17, 1987 , pursuant to a superseding indictment, petitioner was indicted by a Federal grand jury on 28 counts of narcotics and Internal Revenue Code violations. Petitioner pled guilty to counts 9, 12, and 23 of the superseding indictment and is currently serving a nonparolable sentence of 10 years.

With regard to the superseding indictment, count 23 charged petitioner with possession of a firearm by a convicted felon and is not relevant to the present case. Count 12 charged petitioner with violating section 7206(1) by willfully making a false return by failing to include in his 1983 Federal income tax return gross income and expenses from the business of distributing heroin. Count 9 charged petitioner as follows:

A. From in or about June, 1982, and continuing thereafter up to and including the date of this Indictment, in the State and District of Maryland, defendant

WILLIAM E. FRANKLIN

did unlawfully, knowingly and intentionally engage in a Continuing Criminal Enterprise in that he did on numerous occasions violate Title 21, United States Code, Section 841(a)(1), which violations, including, but not limited to, those set forth in Counts One, Two, Three, Four, Five, and Eight of this Indictment, were part of a continuing series of violations of said statute undertaken by the said Defendant in concert with at least five other persons, with respect to whom WILLIAM E. FRANKLIN occupied a position of organizer, supervisor or other position of management, and from which continuing series of violations WILLIAM E. FRANKLIN obtained substantial income and resources.

B. From his engagement in the aforesaid Continuing Criminal Enterprise, the Defendant WILLIAM E. FRANKLIN obtained property, profits and interests which are subject to forfeiture to the United States, including, but not limited to approximately $44,080 United States currency seized from WILLIAM E. FRANKLIN'S home at 6713 Yataruba Drive, Baltimore, Maryland, on November 15, 1983 by agents of the United States. 21 U.S.C. section 848 .

The counts referred to in count 9 charged petitioner as follows: Count 1 charged petitioner with conspiring to distribute heroin from at least January 1980 to the date of the indictment. Counts 2 through 5 charged petitioner with distributing approximately 50-dosage unit bags of heroin on each of four occasions in Maryland during a period beginning in or after June 1982 and ending in or before November 1982. Count 8 charged distribution of 1500-dosage unit bags of heroin in Maryland on or before October 7, 1983 . Section 848 of title 21, U.S.C. (1988), whose violation forms the gravamen of count 9, is commonly known as the "Drug Kingpin Statute." See United States v. Johnson, 575 F.2d 1347, 1358 (5th Cir. 1978).

Prior to the District Court's accepting petitioner's plea agreement with regard to the superseding indictment, petitioner was rearraigned in the United States District Court for the District of Maryland on February 22, 1988. In anticipation of the court's accepting petitioner's plea agreement, counsel for the United States represented to the court that, if the case were to go to trial, the United States would show that petitioner, either alone or in conjunction with another, did on numerous occasions in 1982 and on at least one occasion in 1983 distribute heroin. Also, counsel for the United States represented that the United States at trial would be able to show that petitioner's 1983 Federal income tax return falsely failed to disclose income from an ongoing business of heroin distribution. Petitioner's counsel conceded that the United States would be able to obtain a conviction on the three counts to which petitioner was prepared to plead. Petitioner's counsel objected to the court, however, that the United States could not establish through the testimony of the witnesses who had been made known to petitioner that petitioner had been engaged in any criminal activities with them or with anyone else. Petitioner's counsel stated that such witnesses had recanted their prior allegations. Nevertheless, petitioner's counsel agreed with the court that guilt could have been proven by the "accumulation of the totality of the evidence", wholly apart from whether it could be proven by the witnesses in question. The court asked petitioner why he was pleading guilty. Petitioner first answered ambiguously: "Well, Your Honor, one of the main reasons is because I'm dealing with my inner self. Sometimes, you know, a person reaches a stage in their life where they have to set themselves free, and by doing so it calls for a sacrifice. So yes, I just wanted to make that statement." Then, in response to the court's further question as to whether petitioner believed that the United States could prove its case and that is why petitioner was pleading guilty, petitioner answered: "Yes, Your Honor." The court accepted the plea agreement. The court convicted petitioner of the counts to which he had pled guilty and sentenced him to prison for 10 years. The judgment of the court was filed on May 13, 1988.

Petitioner's Tax Returns

Petitioner filed his Federal income tax return for 1982 on April 4, 1983. He filed his Federal income tax return for 1983 on April 16, 1984. Petitioner reported no income related to heroin sales on either return. On March 31, 1989, respondent issued the notice of deficiency here at issue, determining that petitioner had unreported income from heroin sales for 1982 and 1983 in the amounts of $305,245 and $423,611, respectively. That notice provides no further information about such items of income and, in particular, no basis for determining how such amounts were calculated. A petition to this Court timely was made and a trial was held on January 16 and 18, 1991. At that trial, petitioner's only witness was Gregory Welsh, Esq., Assistant United States Attorney, Office of the United States Attorney, Baltimore , Maryland . Mr. Welsh's testimony related primarily to records of petitioner's that had been seized and Mr. Welsh's activities preparatory to petitioner's 1988 conviction. Petitioner did not testify. In response to a question by the Court, petitioner's counsel stated that it was petitioner's view that petitioner's returns spoke for themselves and that Mr. Welsh's testimony was offered only to corroborate that the documents that supported those returns had been seized by the Government and had at some point, in some way, been used by the Government. Counsel further stated that the only remaining issue was whether the Government could demonstrate that petitioner had income beyond that shown on the returns. Counsel insisted that the Government could not, and that the plea that resulted in petitioner's 1988 conviction was not evidence that petitioner had additional income but was part of a resolution of the case that needed to be made to satisfy the various agencies involved. ¹

Respondent also called Mr. Welsh, whose testimony was elicited in support of respondent's fraud case. Respondent presented no other witnesses. No witness testified as to how respondent calculated the unreported income items here at issue or as to how respondent determined that petitioner underreported his income or underpaid his tax for the years here in question.

Opinion

Petitioner asserts that respondent's notice of deficiency is without foundation and is inherently arbitrary. Accordingly, petitioner argues that the notice of deficiency constitutes a "naked assessment," which is "invalid" within the rule of Helvering v. Taylor [35-1 USTC ¶9044 ], 293 U.S. 507 (1935). ² See United States v. Janis [76-2 USTC ¶16,229 ], 428 U.S. 433, 441 (1976). Petitioner continues that, respondent having failed otherwise to offer any basis for her calculations or contentions that was not rebutted by petitioner, this Court should redetermine deficiencies in tax to be zero and sustain no section 6661 additions to tax. Petitioner further argues that respondent has failed to carry her burden of proving fraud by clear and convincing evidence. See sec. 7454(a) ; Rule 142(b).

I. Arbitrariness of Respondent's Determinations

Petitioner seeks to show that respondent's determinations are arbitrary and, hence, come within the rule of Helvering v. Taylor , supra. The rule of Helvering v. Taylor , supra, may be simply put: a court is given sufficient cause to set aside respondent's determination of a deficiency if it is shown to the court that such determination was arbitrarily made. Id.

A. Unreported Income from an Unlawful Activity

In a case involving unreported income from an unlawful activity, where the Commissioner rests on the presumption of correctness that is said to attach to her determination, the presumption generally will fail if the taxpayer can show that the Commissioner has failed to link him with some illegal tax-generating act (such as the purchase or sale of a controlled substance). See Shriver v. Commissioner [Dec. 42,190 ], 85 T.C. 1, 3 (1985). However, the Commissioner need not link the taxpayer to an unlawful income-generating activity to the extent that she can connect the taxpayer to unexplained cash or deposits. Tokarski v. Commissioner [Dec. 43,168 ], 87 T.C. 74, 76 (1986). Here, at least, such connection would explain only part of respondent's claim, so we will continue our inquiry as to petitioner's linkage to the unlawful activity in question.

A taxpayer has made a sufficient showing that the Commissioner has failed to link him with some tax-generating unlawful activity if he establishes that the Commissioner has shown merely a peripheral contact with illegal conduct. Llorente v. Commissioner [81-1 USTC ¶9446 ], 649 F.2d 152 (2d Cir. 1981), affg. in part and revg. in part [Dec. 36,955 ] 74 T.C. 260 (1980). The taxpayer has made an insufficient showing if it is established that his involvement with an unlawful activity is direct enough to support the inference that he received or used funds in the course of his engagement in that activity. Id. ; see DeCavalcante v. Commissioner [80-1 USTC ¶9363 ], 620 F.2d 23 (3d Cir. 1980), affg. Barrasso v. Commissioner [Dec. 35,492(M) ], T.C. Memo. 1978-432 (supervision and control of gambling operations); Avery v. Commissioner [78-1 USTC ¶9454 ], 574 F.2d 467 (9th Cir. 1978), affg. [Dec. 33,789(M) ] T.C. Memo. 1976-129 (selling drugs to a Government agent); Carson v. United States [78-1 USTC ¶16,280 ], 560 F.2d 693 (5th Cir. 1977) (running a wagering business); Gerardo v. Commissioner [77-1 USTC ¶9322 ], 552 F.2d 549 (3d Cir. 1977), affg. in part and revg. in part [Dec. 33,515(M) ] T.C. Memo. 1975-341 (collecting gross wagering receipts); Pizzarello v. United States [69-1 USTC ¶15,886 ], 408 F.2d 579 (2d Cir. 1969) (running a wagering business).

Here, petitioner argues that respondent failed to link him to any income-generating activity. Accordingly, petitioner would conclude, respondent's determinations of deficiencies are arbitrary and any presumptions of correctness that would attach to such determinations fail. Respondent's only witness was Assistant United States Attorney Welsh, whose testimony went to respondent's fraud case, and who testified to petitioner's criminal activities. Stipulated into the record by both parties, however, are the superseding indictment of petitioner and petitioner's guilty pleas to counts 9, 12, and 23 of that indictment. Thus, we must consider whether that evidence is sufficient to link petitioner to the alleged income-generating activities during the periods covered by the deficiency notice.

Petitioner pled guilty to count 9 of the superseding indictment, charging him with conducting a continuing criminal enterprise over a 5-year period, in violation of 21 U.S.C. section 848 . Elements of engaging in a continuing criminal enterprise include, among others, a supervisory or management role in a criminal enterprise (including heroin distribution) and the obtaining of substantial income or resources from such enterprise. 21 U.S.C. sec. 848(c) (1988). Specifically, count 9 charged a continuing series of violations of 21 U.S.C. section 841(a)(1) (distribution or possession with intent to distribute a controlled substance) occurring throughout the period June 1982 to July 17, 1987 , from which petitioner obtained substantial income. Count 9 referred to but did not limit such violations to those charged in counts 1, 2, 3, 4, 5, and 8 of the superseding indictment. Counts 1, 2, 3, 4, 5, and 8 charged petitioner with specific acts of distributing large amounts of heroin in 1982 and 1983. Specified in count 9 as property, profits, and interests from that continuing criminal enterprise subject to forfeiture is $44,080 seized from petitioner in 1983. In addition, petitioner pled guilty to count 12, charging him with willfully making a false return by failing to report substantial gross income and expenditures relating to heroin sales on his Federal income tax return for 1983. On the surface, therefore, counts 9 and 12 of the superseding indictment and petitioner's guilty pleas thereto clearly link him to illegal income-generating activities during 1982 and 1983.

Petitioner points out that Gregory Welsh, the Assistant United States Attorney prosecuting his criminal case, testified that, had petitioner not pled guilty, the Government need only have proved at trial three income-generating felony drug violations occurring sometime in the period covered in count 9 (mid-1982 to mid-1987) in order to obtain a conviction. Petitioner argues that the Government could have proved three violations occurring during years not here in issue. Therefore, continues petitioner, neither count 9 nor his guilty plea thereto relate directly enough to illegal unreported income in 1982 and 1983, the periods covered by the deficiency notice, for the deficiency notice to be considered nonarbitrary.

Such an argument pertains more to the applicability of collateral estoppel than to whether the notice of deficiency can be said to be arbitrary. Petitioner was not charged with, and did not plead guilty to, a crime that merely placed him in peripheral contact with illegal activity for the period covered by the deficiency notice. See Llorente v. Commissioner, supra. On the contrary, count 9 charged that petitioner participated in an illegal, income-generating activity during the last half of 1982 and all of 1983. Pursuant to count 9, petitioner was charged with occupying "a position of organizer, supervisor or other position of management" in connection with a continuing criminal enterprise, and it was charged that he "obtained substantial income and resources" therefrom. Specific acts of heroin distribution during 1982 and 1983 were charged. Petitioner pled guilty to, and was convicted of, counts 9 and 12. Together, the superseding indictment, guilty plea, and conviction are sufficient to support an inference linking petitioner to illegal income-generating activities during 1982 and 1983, the tax years covered by the deficiency notice. Unless rebutted, that inference is sufficient to support the presumption of correctness said to attach to respondent's determination of a deficiency, so long as such determination is not rendered arbitrary by petitioner's showing that respondent has plucked the income figures in question out of the blue. See Llorente v. Commissioner, supra.

B. The Arbitrariness of the Amounts in Question

In evidence here is respondent's notice of deficiency, determining that petitioner had unreported income from heroin sales for 1982 and 1983 of $305,245 and $423,611, respectively, but offering no explanation of how those amounts were determined. Respondent's only witness at trial, Assistant United States Attorney Welsh, shed no light on that question, nor does any document or fact stipulated into evidence. Accordingly, petitioner contends that those deficiencies are arbitrary. See Helvering v. Taylor [35-1 USTC ¶9044 ], 293 U.S. 507 (1935); Gasper v. Commissioner [55-2 USTC ¶9541 ], 225 F.2d 284 (6th Cir. 1955), revg. and remanding Memorandum Opinions of this Court dated June 30 and Nov. 25, 19 53. In other words, petitioner asks us to infer the lack of a rational basis for respondent's deficiencies from her failure to demonstrate the same. That we cannot do, because the burden of proof is on petitioner to demonstrate the arbitrariness of respondent's deficiencies, Shriver v. Commissioner [Dec. 42,190 ], 85 T.C. 1, 3 (1985): to draw such inference from respondent's inaction would be tantamount to placing the burden of proof, as to that issue, on respondent--which we are not at liberty to do. Beyond emphasizing respondent's failure to come forward with an explanation of her deficiencies, petitioner has produced no evidence of arbitrariness. We are therefore constrained to conclude that petitioner has failed to meet his burden of proving respondent's deficiencies to be arbitrary. See id.

We would point out that the circumstances of this case are unusual, inasmuch as we have been favored with but a paucity of evidence on which to base a determination as to the possible arbitrariness of respondent's deficiencies. If respondent's deficiencies indeed are arbitrary, as petitioner contends, petitioner might, for instance, have adduced evidence of that fact through the service of interrogatories on respondent requesting an explanation of how the deficiencies were computed. Had petitioner (as suggested or otherwise) required respondent to advance an explanation for her deficiencies, this Court would have been in a position to scrutinize that explanation; and if that explanation proved unsatisfactory, there would have been evidence from which we would have concluded that respondent's deficiency figures were arbitrarily derived and therefore placed the burden of going forward with the evidence on respondent. Helvering v. Taylor, supra; Gasper v. Commissioner, supra; Shriver v. Commissioner, supra. Whether the evidence petitioner might have adduced would have been sufficient to make his case, as to arbitrariness, we do not know. What we know for certain, however, is that, in the absence of such evidence, petitioner cannot prevail.

C. Petitioner's Guilty Pleas

Finally, petitioner contends that his guilty pleas were motivated by a desire to protect his family and their home and for personal reasons concerning his "inner self", which alleged motivation diminishes the reliability of the pleas to link him with unreported illegal income. We find that argument unpersuasive. In response to the District Court's question as to whether petitioner believed that the United States could prove its case and that was why petitioner was pleading guilty, petitioner answered "Yes, Your Honor." We will not speculate as to what else may have motivated petitioner. Moreover, we put little stock in recantations by confederates of petitioner and by others concerning criminal activities of petitioner. Those individuals were not before this Court to be cross-examined or otherwise questioned about their statements. In brief, petitioner has tried to convince us that petitioner's convictions do not necessarily lead to the conclusion that petitioner engaged in income-generating activities from drug sales during the years here in issue so as to support respondent's determinations of deficiencies. However, an inference can be drawn of such activities from the superseding indictment, petitioner's guilty plea, and his conviction. For all those reasons, the notice of deficiency supported by the superseding indictment and petitioner's guilty plea cannot be said to be arbitrary and without rational foundation.

II. Petitioner's Failure to Carry the Burden of Proof

It is well settled that, except where otherwise provided in the Internal Revenue Code or the Tax Court Rules of Practice and Procedure, the burden of proof rests with petitioner. See Rule 142(a); Welch v. Helvering [3 USTC ¶1164 ], 290 U.S. 111 (1933). Where the burden so rests, failure to carry the burden results in our sustaining the determination made by respondent. By petitioner's failure to call witnesses other than Assistant United States Attorney Welsh, from the statement by his counsel at trial that his returns spoke for themselves, and from the position he has taken on brief, it is clear that petitioner is making no attempt to carry the burden of proof. We interpret petitioner's position with regard to the deficiencies as a general denial. A general denial is insufficient to carry the burden of proof. See Anastasato v. Commissioner [86-2 USTC ¶9529 ], 794 F.2d 884, 888 (3d Cir. 1986), vacating [Dec. 41,925(M) ] T.C. Memo. 1985-101; Avco Delta Corp. v. United States [76-2 USTC ¶9570 ], 540 F.2d 258 (7th Cir. 1976). Accordingly, since we have determined respondent's determinations to be nonarbitrary, we will sustain the deficiencies as determined.

III. Deficiencies and Section 6661 Additions to Tax

We have concluded that, with respect to deficiencies and the section 6661 additions to tax for substantial understatements, petitioner bears the burden of proving respondent's determinations incorrect. We have also concluded that petitioner has failed to carry that burden. Petitioner is thus liable for the deficiencies and section 6661 addition to tax as determined by respondent.

IV. Additions to Tax for Fraud

Respondent also determined that petitioner was liable for additions to tax for fraud for 1982 and 1983 under section 6653(b)(1) and (2).

A. Section 6653(b)(1)

Section 6653(b)(1) imposes an addition to tax equal to 50 percent of any underpayment in tax if any part of such underpayment is due to fraud. To prevail under section 6653(b)(1), it is well established that respondent must show both: (1) That the taxpayer has underpaid his taxes for each year, and (2) that some part of the underpayment is due to fraud. DiLeo v. Commissioner [Dec. 47,423 ], 96 T.C. 858, 873 (1991), affd. [92-1 USTC ¶50,197 ] 959 F.2d 16 (2d Cir. 1992); Parks v. Commissioner [Dec. 46,545 ], 94 T.C. 654, 660-661 (1990); Truesdell v. Commissioner [Dec. 44,500 ], 89 T.C. 1280, 1301 (1987); Hebrank v. Commissioner [Dec. 40,488 ], 81 T.C. 640, 642 (1983). A conviction for willful falsification under section 7206(1) does not estop a taxpayer from denying fraud, Wright v. Commissioner [Dec. 42,013 ], 84 T.C. 636, 643 (1985), nor is it necessary to a conviction under that section that the falsification result in the underpayment of tax, Goodwin v. Commissioner [Dec. 36,413 ], 73 T.C. 215, 229 (1979), overruled as to another issue Wright v. Commissioner, supra; Considine v. Commissioner [Dec. 34,365 ], 68 T.C. 52, 60 (1977), overruled as to another issue Wright v. Commissioner, supra.

1. Existence of an Underpayment

The first inquiry under section 6653(b)(1) is whether any underpayment exists. As relevant to this case, section 6653(c)(1) defines an "underpayment" for purposes of section 6653 as a "deficiency" defined under section 6211 . Nevertheless, we must keep in mind that respondent bears the burden of proving fraud, which burden she must carry by clear and convincing evidence. Sec. 7454(a) ; Rule 142(b); DiLeo v. Commissioner, supra ("clear and convincing" standard applies both to fraudulent intent and to existence of underpayment); Parks v. Commissioner, supra, at 663-664 (same); Hebrank v. Commissioner, supra (same). Our failure to redetermine a deficiency does not necessarily mean that there is clear and convincing evidence of an underpayment. As we stated in Parks v. Commissioner, supra at 660-661:

Where, as here, respondent has prevailed on the issue of the existence of a deficiency by virtue of a taxpayer's failure to carry his burden of proof, respondent cannot rely on that failure to sustain his burden of proving fraud. We must be careful in such cases not to bootstrap a finding of fraud upon a taxpayer's failure to prove respondent's deficiency determination erroneous. * * * [Citations omitted.]

Here, respondent has presented little evidence in support of the particular deficiencies she has determined. Petitioner has, in effect, presented no evidence in support of the errors he has assigned to respondent's determination; as a result, we have declined to redetermine those deficiencies because petitioner has failed to carry his burden of proof. See supra sec. II; Rule 142(a). To find an underpayment for purposes of satisfying the first part of the section 6653(b)(1) test, we must examine the evidence that exists and determine whether, for each year, it clearly and convincingly demonstrates an underpayment. If it does, then, for that year, the first part of the section 6653(b)(1) test would be satisfied, and it would be appropriate for us to turn our attention to the second part of that test.

a. Receipts

Although respondent has offered little to substantiate the particular deficiencies she has determined, she has adduced substantial evidence that there were unreported receipts in both 1982 and 1983. Respondent has introduced into evidence count 9 of the superseding indictment, to which petitioner pled guilty, charging that, from approximately June 1982 to July 1987, petitioner engaged in a continuing criminal enterprise. Count 9 (incorporating counts 2 through 5 and count 8 of the superseding indictment) further charges that such enterprise included distributing 50-dosage unit bags of heroin on four occasions between June 1982 and November 1982 and distributing 1500-dosage unit bags of heroin on or before October 7, 1983 . Last, count 9 charges that petitioner "obtained substantial income and resources" and "obtained property, profits and interests" (including $44,080 in cash, forfeited under 21 U.S.C. section 848 and seized on November 15, 1983 ) from such enterprise. Respondent also directs our attention to count 12, to which petitioner pled guilty, charging that petitioner willfully made a false return by failing to include gross income and expenses from heroin distribution activities on his 1983 Federal income tax return.

We think the foregoing adequate to conclude, by clear and convincing evidence, that petitioner had some unreported receipts from heroin distribution activities in both 1982 and 1983.

b. Underpayment

The existence of unreported receipts does not, however, demonstrate that petitioner underpaid tax in either 1982 or 1983. Indeed, in a merchandising business, gross receipts from sales must be reduced by cost of goods sold to determine gross income from sales. Sec. 1.61-3(a) , Income Tax Regs. Moreover, gross income from sales must be reduced by all deductible expenses (including salaries, commissions, etc.) to determine taxable income from sales. See sec. 63(a) . Thus, an underpayment of tax resulting from unreported gross receipts from sales is possible only if such unreported gross receipts are not exceeded by cost of goods sold and deductible expenses. ³

Nevertheless, even in criminal tax evasion cases, where the Government bears the greater burden of proof beyond a reasonable doubt, it is well settled--"that evidence of unexplained receipts shifts to the taxpayer the burden of coming forward with evidence as to the amount of offsetting expenses, if any." Siravo v. United States [67-1 USTC ¶9464 ], 377 F.2d 469, 473 (1st Cir. 1967). Accord, e.g., United States v. Garguilo [77-1 USTC ¶9402 ], 554 F.2d 59, 62 (2d Cir. 1977); Elwert v. United States [56-1 USTC ¶9423 ], 231 F.2d 928, 933 (9th Cir. 1956); United States v. Link [53-1 USTC ¶9230 ], 202 F.2d 592, 593 (3d Cir. 1953); United States v. Bender [55-1 USTC ¶9142 ], 218 F.2d 869, 871 (7th Cir. 1955); Bourgue v. Commissioner [Dec. 37,117(M) ], T.C. Memo. 1980-286 (applying the general rule to cost of goods sold). Where a taxpayer has not entirely omitted receipts from a particular activity from his return, the settled rule is based on the presumption that the taxpayer, having no desire to overpay tax, has reported all deductions and other offsetting amounts. See, e.g., United States v. Bender, supra at 871. Where the taxpayer has failed to file a return, or his return shows no receipts from a particular activity, then the assumption that he, more readily than respondent, has access to evidence of deductions or other offsetting amounts makes the nonexistence of such amounts a fair presumption, at least as an initial matter and absent a satisfactory explanation of such nonexistence or the production of some exculpatory evidence. See Siravo v. United States , supra at 474. ⁴

Here, petitioner has not carried his burden of coming forth with evidence of expenses to offset unexplained receipts. Indeed, petitioner argues that there is no evidence of any narcotics distribution activities by him during 1982 and 1983. Consistent with that position, petitioner has not even attempted to show costs or expenses of narcotics distribution activities during those years or any records seized by the Government and still in their possession that would show such costs or expenses. ⁵ Accordingly, having concluded, by clear and convincing evidence, that petitioner had some unreported receipts from heroin distribution activities in 1982 and 1983, we find some underpayment of taxes for each such year. See Siravo v. United States , supra; United States v. Garguilo, supra; Elwert v. United States , supra; United States v. Link, supra; United States v. Bender, supra. The first part of the section 6653(b)(1) test is satisfied.

2. Fraudulent Intent

The second inquiry under section 6653(b)(1) concerns the taxpayer's state of mind. The existence of a fraudulent state of mind is a question of fact to be determined from the entire record. See Recklitis v. Commissioner [Dec. 45,154 ], 91 T.C. 874, 909 (1988); Meier v. Commissioner [Dec. 44,995 ], 91 T.C. 273, 297 (1988). As with the existence of an underpayment (our first inquiry), respondent has the burden of proof, which she must carry by clear and convincing evidence. Sec. 7454(a) ; Rule 142(b). In sustaining her burden of proof, respondent is not required to prove the precise amount of the underpayment resulting from fraud, but only that "any part" of the underpayment is attributable thereto. Otsuki v. Commissioner [Dec. 29,807 ], 53 T.C. 96, 105 (1969). Respondent must make such showing for each taxable year involved. Id. An underpayment is due to fraud if we find that the taxpayer intended to evade taxes known to be owing by conduct intended to conceal, mislead, or otherwise prevent the collection of such taxes. See Parks v. Commissioner [Dec. 46,545 ], 94 T.C. 654, 661 (1990); Truesdell v. Commissioner [Dec. 44,500 ], 89 T.C. 1280, 1301 (1987); Hebrank v. Commissioner [Dec. 40,488 ], 81 T.C. 640, 642 (1983). Respondent need not establish that tax evasion was a primary motive of petitioner, but may satisfy her burden by showing that a tax-evasion motive played any part in petitioner's conduct, including conduct also serving to conceal another crime. Recklitis v. Commissioner, supra at 909. Fraudulent intent will never be presumed, Beaver v. Commissioner [Dec. 30,380 ], 55 T.C. 85, 92 (1970), but may, however, be proved by circumstantial evidence because direct proof of the taxpayer's intent is rarely available. Recklitis v. Commissioner, supra at 910; Meier v. Commissioner, supra at 297. The taxpayer's entire course of conduct may be examined to establish the requisite fraudulent intent. Recklitis v. Commissioner, supra; Meier v. Commissioner, supra.

Having considered all of the evidence before us, we conclude that respondent, in addition to having satisfied her burden of showing underpayments of tax by petitioner resulting from his heroin distribution activities in 1982 and 1983, has satisfied her burden of clearly and convincingly showing that such underpayments were made with fraudulent intent.

a. 1983

As stated in section IV. A., supra, a conviction for willful falsification under section 7206(1) does not estop a taxpayer from denying fraud. Nevertheless, petitioner did plead guilty to (and was convicted of) violating section 7206(1) by willfully making a false return by failing to include in his 1983 Federal income tax return gross income and expenses from his business of distributing heroin. We have found that such activity gave rise to an underpayment of income tax for 1983. Petitioner is thus estopped from denying the willful falsity of his return with regard to such underpayment. See Considine v. Commissioner [Dec. 34,365 ], 68 T.C. 52, 68 (1977), overruled as to another issue Wright v. Commissioner [Dec. 42,013 ], 84 T.C. 636, 643 (1985). We still must determine, however, whether such willfulness was with intent to evade tax known to be owing. We find that it was. Petitioner filed income tax returns showing substantial tax due for both 1982 and 1983, thus demonstrating his cognizance of the duty to report income and pay tax. Moreover, petitioner has not argued, nor would we believe, that he thought those requirements to be excused in the case of illegal income; and in any event, petitioner's conviction under section 7206(1) would estop him from making that argument. Nor would it matter if one of petitioner's motives for willfully omitting income was to conceal his illegal drug-distribution activity. See Recklitis v. Commissioner, supra at 909 (fraud may be found even where tax evasion not the primary motive). In light of all the facts and circumstances, we think tax avoidance was at least one of the motivations behind petitioner's willful underreporting of income in 1983. Accordingly, we conclude that, for 1983, petitioner knew his income from the activity of heroin distribution to be reportable and failed to report that income with the intent to evade tax. ⁶

b. 1982

Our analysis leads to the same conclusion for 1982, notwithstanding the lack for that year of a conviction for violating section 7206(1) . The facts are otherwise the same. As discussed above, petitioner has demonstrated his cognizance of the duty to report income and pay tax. Further, petitioner has not argued, nor would we believe, that he thought those requirements to be excused in the case of illegal income. Accordingly, notwithstanding the absence of a conviction under section 7206(1) for 1982, we conclude that petitioner willfully failed to include in his 1982 Federal income tax return all income from his drug-distribution activities. Thus, we are in the same position respecting 1982 as we were respecting 1983 and incorporate our above reasoning herein. Having considered petitioner's entire course of conduct, we conclude that, for 1982, petitioner knew his income from the activity of heroin distribution to be reportable and failed to report that income with intent to evade tax.

3. Conclusion

Respondent has carried her burden of proving, by clear and convincing evidence, for both 1982 and 1983(1) some (any) underpayment of tax, and (2) petitioner's fraudulent intent. Accordingly, we sustain respondent's additions to tax under section 6653(b)(1) for both 1982 and 1983.

B. Section 6653(b)(2)

We apply to section 6653(b)(2) a logic similar to that which we have applied to section 6653(b)(1). Under section 6653(b)(2), a separate addition to tax (equal to 50 percent of the interest payable under section 6601 ) is determined with respect to "the portion" of the underpayment attributable to fraud. Again, we must be wary not to bootstrap a finding of fraud, as to any portion of the underpayment, on the taxpayer's failure of proof. Respondent bears the burden of proving the specific portion of the underpayment of tax that is attributable to fraud for purposes of applying the section 6653(b)(2) addition to tax. DiLeo v. Commissioner [Dec. 47,423 ], 96 T.C. 858, 873 (1991), affd. [92-1 USTC ¶50,197 ] 959 F.2d 16 (2d Cir. 1992). Accordingly, to adjudicate an addition to tax under section 6653(b)(2), first we must examine the evidence and satisfy ourselves as to the amount that clearly and convincingly is an underpayment. Then, we must determine whether any or all of such amount clearly and convincingly is due to fraud. Only to that extent can respondent prevail in her determination of an addition to tax under section 6653(b)(2).

1. Amounts of Underpayment

As previously discussed (sec. I. B.), respondent has provided us with little evidence of the amount of petitioner's underpayments for 1982 and 1983. Nevertheless, we will deal separately with each year.

a. 1982

In evidence is respondent's notice of deficiency, determining that petitioner had unreported income from heroin sales for 1982 of $305,245, but offering no explanation of how that amount was determined. In her answer, respondent alleged certain facts concerning petitioner's receipts from heroin sales, costs of goods sold, and expenses, which support the calculations set forth in her notice of deficiency. Respondent moved to have those allegations deemed admitted. Petitioner, however, denied them, and, as a result, we denied respondent's motion. Respondent has adduced scant evidence from which calculations of petitioner's underpayment for 1982 could be found. That evidence appears limited to counts 9, 12, and 23 of the superseding indictment, to which petitioner pled guilty. Notably, however, count 9 of the superseding indictment charges that petitioner "obtained substantial income and resources" from a "continuing series of violations" of 21 U.S.C. section 848 (the "Drug Kingpin Statute"), beginning in approximately June of 1982. Accordingly, we are compelled to find "substantial" unreported receipts for 1982 which, as explained above, would be deemed to be unreported income. E.g., Siravo v. United States [67-1 USTC ¶9446 ], 377 F.2d 469, 473 (1st Cir. 1967) (burden on taxpayer to come forward with evidence of offsetting expenses).

Respondent has failed to provide us with any guidance as to what amount of receipts would be considered "substantial", as that term is used in count 9 of the superseding indictment. Thus, it is tempting to estimate petitioner's unreported receipts at zero, or perhaps only a nominal amount, which estimate might be justified by respondent's failure to prove any greater amount. Such an estimate, however, would be inconsistent with the finding that "substantial" sums were received. See Cohan v. Commissioner [2 USTC ¶489 ], 39 F.2d 540, 544 (2d Cir. 1930) ("But to allow nothing at all appears inconsistent with saying that something was spent."). Accordingly, notwithstanding that the result will be speculative, we must approximate petitioner's receipts as best we can, bearing heavily upon respondent who bears the burden of proof on this issue, which burden she must carry by clear and convincing evidence. Secs. 6653(b)(2); 7454(a) ; Rule 142(b); see Cohan v. Commissioner, supra at 544. Based on the evidence at hand, we find that petitioner had unreported receipts, and therefore unreported income, e.g, Siravo v. United States , supra, of $500 in 1982. ⁷ See Cohan v. Commissioner, supra.

b. 1983

Except with regard to the seizure of $44,080 from petitioner during 1983 and the conviction under section 7206(1) for willfully making a false return for 1983, the facts at issue with regard to 1982 are similar to those at issue for 1983 (respondent's notice of deficiency determined that petitioner had unreported income from heroin sales for 1983 of $423,611). Notwithstanding that forfeiture and conviction, we will draw no distinction between 1982 and 1983. Pursuant to count 9 of the superseding indictment, the forfeited amount constituted undifferentiated "property, profits and interests" from petitioner's engagement in a criminal enterprise. The existence of cash is dubious evidence of sales, however, and may in whole or part represent petitioner's investment in his business rather than his receipts therefrom.

Count 9 of the superseding indictment also charges that petitioner "obtained substantial income and resources" from his criminal activity in 1983, which, unlike the cash seized, clearly constitutes receipts. Accordingly, petitioner had "substantial" unreported receipts, and therefore unreported income, e.g., Siravo v. United States , supra, in 1983. Based on the evidence at hand, we find that petitioner had $500 of unreported income in 1983. Cohan v. Commissioner, supra.

2. Fraudulent Intent

Our above discussion of fraudulent intent, with regard to section 6653(b)(1), is applicable here and will not be repeated. It suffices to emphasize that petitioner has neither argued, nor would we believe, that he thought the duty to report income and pay tax excused in the case of illegal income. For the reasons explained more fully above, we conclude that petitioner willfully failed to report all income from his criminal activities in 1982 and 1983.

3. Conclusion

The "portion of the underpayment * * * attributable to fraud" is the portion of the underpayment resulting from unreported income of $500 in both 1982 and 1983. Thus, the addition to tax under section 6653(b)(2), for each year, is equal to 50 percent of the interest payable under section 6601 with respect to the underpayment resulting from unreported income of $500.

Decision will be entered under Rule 155.

¹ Counsel for petitioner expressed this fundamental point in additional ways in response to questions from the Court. E.g., he responded that the Government had failed in its proof and that it had shown no basis for the deficiency other than that it sent out a deficiency notice.

² To hold that a deficiency notice is invalid within the rule of Helvering v. Taylor [35-1 USTC ¶9044 ], 293 U.S. 507 (1935), because it constitutes a "naked assessment," is not to hold that it is invalid in the usual sense or that this Court lacks jurisdiction over such notice. See Suarez v. Commissioner [Dec. 31,494 ], 58 T.C. 792, 814 (1972), overruled as to another issue Guzzetta v. Commissioner [Dec. 38,758 ], 78 T.C. 173 (1982) ("Helvering v. Taylor [35-1 USTC ¶9044 ], 293 U.S. 507 (1935), teaches that when a petitioner makes a showing casting doubt on the validity of a deficiency determination, the statutory notice itself is not rendered void; the result of such showing is that the respondent must then come forward with evidence to establish the existence and amount of any deficiency."). To avoid confusion, we will refer to a notice of deficiency held to constitute a naked assessment as being "arbitrary."

³ In this case, a showing of gross income would suffice to demonstrate an underpayment, at least for 1983, because, for that year, petitioner was entitled to no deductions or credits respecting his illegal drug sales. Sec. 280E . Sec. 280E disallows any otherwise allowable deduction or credit for amounts paid or incurred with respect to the sale of certain controlled substances such as the ones distributed by petitioner. Sec. 280E deals only with deductions and credits, however, and does not disallow exclusions from gross income on account of cost of goods sold. S. Rept. 97-494, at 309 (1982). Sec. 280E is effective for amounts paid or incurred after Sept. 3, 1982 , in tax years ending after such date. Id. Because such exclusions may equal (or exceed) gross receipts, however, a showing of gross receipts is insufficient to demonstrate taxable income, even where, as here, no deductions are available.

⁴ Of course, a taxpayer may carry his burden of coming forth with evidence of expenses to offset unexplained receipts. In such a case, we have held that the presumption underlying the settled rule loses all force. In Perez v. Commissioner [Dec. 32,725(M) ], T.C. Memo. 1974-211, there was substantial evidence demonstrating that the taxpayer, who owned a furniture repair business, made cash payments to various employees who insisted on such method of payment in order to avoid reporting those payments on their income tax returns. We therefore found a solid basis for the assumption that the taxpayer had unclaimed deductions that could have offset unreported gross income and demonstrated the absence of any underpayment. We stated the general rule as follows: "once the Government establishes the existence of unreported income and allows the deductions claimed on the return, it does not have the further burden of proving the negative that the taxpayer did not have any additional deductions." Id. Nevertheless, we declined to apply the general rule on the theory that the underlying assumption of that rule--that the taxpayer would not knowingly have failed to report all exclusions and deductions--had been rebutted and therefore lost all force. See also Rivera v. Commissioner [Dec. 36,275(M) ], T.C. Memo. 1979-343 (acknowledging the propriety of declining to apply the general rule where the underlying presumption is rebutted by evidence that the taxpayer had unclaimed deductions that could have offset unreported gross income but finding insufficient evidence of that kind in that case).

⁵ Count 12 of the indictment to which petitioner pled guilty in 1987 charged petitioner with violating sec. 7206(1) by willfully making a false return by failing to include in his 1983 Federal income tax return gross income and expenses from the business of distributing heroin. As stated, petitioner has made the tactical decision to deny that he engaged in that activity during 1982 or 1983 and (apart from the Government's ambiguous concession in the indictment), therefore, has failed to adduce evidence of such "expenses". We need not resolve any apparent inconsistency, however, since, given the provisions of sec. 280E (see supra note 3), petitioner would not, for 1983, be entitled to any deductions for expenses incurred in connection with his illegal drug sales. Although petitioner would not be precluded by sec. 280E from taking account of any cost of goods sold (see supra note 3), the terms of his indictment (and plea agreement) are sufficiently ambiguous that we will not interpret his conviction for violating sec. 7206(1) as a concession by respondent that, indeed, petitioner did, in 1983, incur any cost of goods sold.

⁶ This plainly is not a case like that suggested by Judge Featherston in his dissent in Goodwin v. Commissioner [Dec. 36,413 ], 73 T.C. 215, 235 (1979)--a taxpayer willfully falsifying his return in order to cover up the source of illegal income but likewise omitting a legitimate deduction so as not to have an underpayment or evade tax. In such a case it would be evident that the taxpayer, who by design refrains from understating his tax, is not driven (even in part) by a tax-evasion motive; in the case at hand, petitioner has not refrained from understating his tax and it is not at all evident that tax evasion was not a motivating factor in the understatements at issue.

⁷ Five hundred dollars is not the maximum amount we consider consistent with "substantial" unreported receipts from the criminal activities engaged in by petitioner. Rather it is the amount that, "bearing heavily *** upon (respondent) whose inexactitude is of [her] own making", we consider supported by the evidence in this case. See Cohan v. Commissioner [2 USTC ¶489 ], 39 F.2d 540, 544 (2d Cir. 1930). That evidence does not support (although it does not disprove) any greater amount. Accordingly, respondent's failure to prove any greater amount does not bring into question our determination of a greater deficiency, which determination is based on petitioner's failure of proof in that regard.

 

 

[2001-2 USTC ¶50,760] United States of America v. George C. Snyder, Appellant

(CA-3), U.S. Court of Appeals, 3rd Circuit, 00-3578, 10/19/2001 , 2001 U.S. App. LEXIS 24674. Affirming an unreported District Court decision

[Code Sec. 7402 ]

False tax returns: Guilty plea, withdrawal of: Abuse of discretion.--The district court did not abuse its discretion in denying an individual's motion to withdraw his guilty plea of willfully filing false income tax returns. Because he failed to submit substantive evidence that his lawyer was unprepared to go to trial, that he had wished to present a different defense than his lawyer presented, or that his plea was coerced, he did not meet his burden of showing fair and just reason for withdrawing his plea.
[Code Secs. 7206 and 7212 ]

Penalties: False tax returns: Sentencing guidelines: Jurisdiction: Court of appeals.--Appellate jurisdiction was lacking over an individual taxpayer's claim that the imposition by the district court of the maximum sentence for willfully filing false income tax returns was an abuse of discretion. The correct standard for hearing the issue was whether the sentence violated statutory sentencing guidelines. In addition, the record was insufficient to entertain his pro se claim of ineffective assistance of counsel on direct appeal.

è Caution: This court has designated this opinion as NOT FOR PUBLICATION. Consult the Rules of the Court before citing this case.ç

MEMORANDUM OPINION

ROSENN, Circuit Judge:

The appellant, George C. Snyder, was indicted on two counts of willfully filing false income tax returns in violation of 26 U.S.C. §7206(1) and one count of corruptly endeavoring to obstruct the due administration of the Internal Revenue Laws, in violation of 26 U.S.C. §7212(a). With an Assistant Public Defender representing him, Snyder pled guilty on May 19, 2000 , to both counts. On September 13, 2000 , Snyder, having obtained the appointment of new counsel, filed a motion to withdraw his guilty plea. Following a hearing on the motion, the District Court denied it and subsequently sentenced the defendant to twenty-one months in prison, with supervised release for one year, and payment of a statutory assessment of $100. Snyder timely appealed.

On appeal, Snyder raises two issues: (1) whether a defendant in a criminal case voluntarily entered a guilty plea when he believed that his trial counsel was unprepared to try the case, and (2) whether the trial court erred when it sentenced him to the maximum under the Sentencing Guidelines because he was unable to pay a fine.

We will not discuss the facts pertaining to the underlying crimes because they are well-known to the parties. When Snyder pled guilty on May 19, 2000 , to both counts of the indictment, he admitted in his colloquy with the court that he wished to waive his right to a jury trial, had sufficient opportunity to discuss the case with counsel, and was satisfied with the work that counsel had done for him. Snyder also denied that anyone had made any threat forcing or coercing him into entering the guilty plea. The District Court found Snyder competent to enter the plea, accepted his plea, and judged him guilty.

Rule 32(e) of the Federal Rules of Civil Procedure states that: "if a motion to withdraw a plea of guilty is made before sentence is imposed, the court may permit the plea to be withdrawn if the defendant shows any fair and just reason." Although such motions are considered liberally, there is no absolute right to withdraw a guilty plea. Moreover, it is the defendant's burden to show grounds for the withdrawal of the plea. Three factors are evaluated in determining whether defendant has met the burden: 1) does the defendant assert his innocence; 2) would the Government be prejudiced by the withdrawal of the plea; and 3) the strength of defendant's reasons to withdraw the plea. See United States v. Jones, 979 F.2d 317, 318 (3d Cir. 1992).

We are satisfied that the trial court did not abuse its discretion in denying Snyder's motion to withdraw his plea. Although he asserts his innocence and the Government would not be prejudiced by a withdrawal of the plea, Snyder offers no substance or valid reason for the withdrawal. Snyder makes much of his attorney's efforts to withdraw from the case at or about the time he pled guilty, claiming that his lawyer was unprepared to go to trial, but Snyder submits nothing of substance to support his claim. His counsel at the time strongly believed that ethically and morally he could not present the defense that Snyder wished to present. Snyder has not specified what that defense was, and we can only presume that his lawyer was correct. The District Court found no evidence to support Snyder's coercion allegation, and we can find none in the record to support a finding that the court abused its discretion.

With respect to the sentence imposed upon Snyder, he again asserts that the court abused its discretion in the imposition of the sentence. However, "abuse of discretion" is not the standard applicable with respect to this issue. He does not argue that the sentence violated the statute and, in the absence of such violation, we are without jurisdiction to hear the sentence appeal.

Finally, in his pro se brief, Snyder argues that he received ineffective assistance of counsel. Ordinarily, such claims are not heard on direct appeal. See United States v. Theodoropoulos, 866 F.2d 587, 598 (3d Cir. 1989). Rather, the proper avenue for such an appeal is though a collateral proceeding with an opportunity to develop a record. The record here is insufficient to entertain Snyder's ineffective assistance of counsel argument in this direct appeal.

Accordingly, the judgment and sentence of the District Court is affirmed.