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The Fifth Amendment guarantees that "No person shall be held to answer for a capital, or otherwise infamous crime, unless on a presentment or indictment of a Grand Jury. . . ." If the indictment does not state the essential elements of the crime, the defendant cannot be assured that he is being tried on the evidence presented to the grand jury, see Russell, 369 U.S. at 770; United States v. Walsh, 194 F.3d 37, 44 (2d Cir. 1999), or that the grand jury acted properly in indicting him. See Russell, 369 U.S. at 768-69 (An important corollary purpose of requirement that indictment state elements of offense is to allow court to evaluate whether facts alleged could support conviction.) See generally United States v. Wydermyer, 51 F.3d 319, 324 (2d Cir. 1995) (pleading requirement at common law was "security against the arbitrary multiplication of offenses"); 2 Wayne R. LaFave and Jerold H. Israel, Criminal Procedure §19.2 at 436, 448-49 (1984) ("The requirement that the offense be stated . . . specifying in detail each element of the crime, was seen as providing assurance both that the grand jury understood what was necessary to establish an offense and that the courts did not engage in unanticipated extensions of the substance of the offense."). "The Indictment Clause of the Fifth Amendment requires that an indictment contain some amount of factual particularity to ensure that the prosecution will not fill in elements of its case with facts other than those considered by the grand jury." Walsh, 194 F.2d at 44 (internal quotations omitted). As the Supreme Court stated in Russell:

To allow the prosecutor, or the court, to make a subsequent guess as to what was in the minds of the grand jury at the time they returned the indictment would deprive the defendant of a basic protection which the guaranty of the intervention of a grand jury was designed to secure. For a defendant could then be convicted on the basis of facts not found by, and perhaps not even presented to, the grand jury which indicted him.

369 U.S. at 770.

The Sixth Amendment guaranty of the defendant's right "to be informed of the nature and cause of the accusation" against him is also offended by an indictment that does not state the essential elements of the crime. Russell, 369 U.S. at 761; see also Walsh, 194 F.3d at 44.

Because the requirement of a sufficient indictment serves these important purposes, the indictment must be considered as it was actually drawn, not as it might have been drawn. See Sanabria v. United States, 437 U.S. 54, 65-66, 57 L.Ed.2d 43, 98 S.Ct. 2170 (1978) ("The precise manner in which an indictment is drawn cannot be ignored. . . ."). The sufficiency of the indictment is a matter of law that is reviewed de novo. See United States v. Velastegui, 199 F.3d 590, 593 (2d Cir. 1999). The timing of the defendant's objection is important to the level of scrutiny employed; a defendant who objects to the indictment before trial, as Pirro has done, is entitled to a more exacting review of the indictment than one who waits until after trial to object. See United States v. Goodwin, 141 F.3d 394, 401 (2d Cir. 1997); Wydermyer, 51 F.3d at 324-25.

Under modern pleading rules, "we have consistently upheld indictments that 'do little more than to track the language of the statute charged and state the time and place (in approximate terms) of the alleged crime.' " Walsh, 194 F.3d at 44 (quoting United States v. Tramunti, 513 F.2d 1087, 1113 (2d Cir. 1975)). The Supreme Court, however, has recognized a limitation on this practice, so that

"where the definition of an offence, whether it be at common law or by statute, includes generic terms, it is not sufficient that the indictment shall charge the offence in the same generic terms as in the definition; but it must state the species, ____ it must descend to particulars." United States v. Cruikshank, 92 U.S. 542, 588, 23 L.Ed. 588 [1875]. . . . "Undoubtedly, the language of the statute may be used in the general description of an offense, but it must be accompanied with such a statement of the facts and circumstances as will inform the accused of the specific offense, coming under the general description, with which he is charged." United States v. Hess, 124 U.S. 483, 487, 31 L.Ed. 516, 8 S.Ct. 571 [1888].

Russell, 369 U.S. at 765. For instance, in Russell the defendants were charged with refusing to answer a question pertinent to the subject under inquiry before a congressional subcommittee, but the indictments did not say what the subject under inquiry was. The indictments neither notified the defendants of the gist of the charges against them, nor allowed the court to ascertain that the charges were legally valid. Id. at 767-69. The Supreme Court therefore reversed the convictions based on the defective indictment. Id. at 755. Under the same principle, where an indictment charges a crime that depends in turn on violation of another statute, the indictment must identify the underlying offense. See LaFave, supra, at 452; 1 Charles Alan Wright, Federal Practice and Procedure: Criminal 3d §124 at 549 (1999). Similarly, when "one element of the offense is implicit in the statute, rather than explicit, and the indictment tracks the language of the statute and fails to allege the implicit element explicitly, the indictment fails to allege an offense." United States v. Foley, 73 F.3d 484, 488 (2d Cir. 1996), abrogated on other grounds, United States v. Santopietro, 166 F.3d 88, 92-93 (2d Cir. 1999). In sum, for an indictment to fulfill the functions of notifying the defendant of the charges against him and of assuring that he is tried on the matters considered by the grand jury, the indictment must state some fact specific enough to describe a particular criminal act, rather than a type of crime.

The indictment failed to sufficiently allege the second element of a section 7206(1) violation, namely a material falsehood or an omission that amounted to a material falsehood. In this case, the allegation is that Pirro omitted something from a tax return. An omission cannot amount to a false statement, which is an essential element of a section 7206(1) violation, without the crucial background fact that gives rise to the duty to disclose the fact that was omitted. Only the omission of facts required to be reported constitutes a material falsehood. The indictment must therefore allege what made the omission in this case criminal.

And indeed the government purports to identify the respect in which the return as filed was incorrect; the problem is that the government's allegation might or might not make the return incorrect, and in violation of section 7206(1). It alleged that the Chairman had an "ownership interest" in Properties when in fact, "ownership interest" is a broader category than "share ownership." The government seemingly admits that "ownership interest" is not specific by persisting in using, in its briefs and at argument, the terms beneficial or de facto ownership of shares as opposed to the indictment's term "ownership interest." ⁷ The most that omitting a Schedule K-1 could be said to imply is that there were no other shareholders in Properties besides Pirro and Monsell. This would be a misstatement if in fact there were other shareholders. However, the indictment itself does not allege that the Chairman was a shareholder, in those words or any other words legally equivalent. Instead, it refers to the Chairman as having an "ownership interest" in Properties.

Here, the allegation is that the "ownership interest" of the Chairman was not reported. "Ownership interest" is a generic term that does not descend to particulars. Cf. Russell, 369 U.S. at 765. The government strongly argues that the Chairman was a de facto shareholder, held a beneficial interest or that Pirro was a nominee, but the indictment did not use those particular terms.

The government's use of the term "ownership interest" rather than "stock ownership" was not inadvertent, since the government chose not to respond meaningfully to Pirro's request for a more specific description. Following up to his request for a bill of particulars, Pirro specifically requested that the government:

Identify the nature of the "ownership interest" allegedly acquired by the hospital Chairman in [Properties], including (a) the date such an interest was acquired, (b) any consideration paid by the hospital Chairman to acquire this interest, (c) any documents evidencing the hospital Chairman's ownership of such an interest, and (d) and statute, regulation or other authority supporting the allegation that the hospital Chairman acquired an "ownership interest" in [Properties].

In light of the government's statement that the Chairman's interest should have been disclosed on a Schedule K-1, Pirro also requested it to "identify (a) the page and line reference of a Schedule K-1 where such interest should have been so reflected; and (b) the statute, regulation, or other tax authority requiring the disclosure of such alleged interest on a Schedule K-1." The government chose not to specify the nature of the Chairman's alleged interest, but instead answered the first request by saying that if the information could not be gleaned from the indictment, discovery materials, and the particulars already provided, it was "not properly the subject of a bill of particulars." In response to Pirro's request regarding the K-1, the government stated that "a Schedule K-1 should have been filled out in its entirety for the hospital Chairman" and that the authority requiring the disclosure was not a proper subject of a bill of particulars.

Thereafter, Pirro filed a motion to strike the allegations because they did not state a violation of section 7206(1). In defending against the motion to strike, the government argued that "beneficial" or "de facto" ownership controls for tax purposes rather than defending the actual words it used in the indictment. In briefing the case before this court, the government referred to Pirro as a "nominee" for the first time. ⁸ It is also evident that the government has made use of "shareholder" and "share ownership" not only in the statement of issues, but substantially throughout its brief. Cf. Russell, 369 U.S. at 768 ("At every stage in the ensuing criminal proceeding [the defendant] was met with a different theory, or by no theory at all, as to what the topic [under inquiry] had been.").

The government argues that the court should infer "shareholder interest" from the more general term "ownership interest." This argument is rejected. This court faced an indictment with the same kind of defect in United States v. Berlin, 472 F.2d 1002, 1008 (2d Cir. 1973). There, the defendant was charged with aiding and abetting another in submitting false documents to a savings and loan. An essential element of the crime was knowledge of the falsity of the documents, but there was no allegation of knowledge, only that the defendant "counseled and caused" the other person to submit the documents. The government argued that the indictment was good enough because "counseled and caused" meant about the same thing as knowledge. Id. at 1007. This court rejected the government's argument:

With this argument we cannot agree. One can counsel and cause another to utter a statement that one only later learns to be untrue. Therefore, Berlin 's knowledge of the falsity at the time he caused the statements to be made is not necessarily implied from the allegation that he "counseled and caused" the statements to be made.

Id. at 1007-08. We reversed the conviction based on the inadequate indictment. Id. at 1010. Accord United States v. Morrison, 536 F.2d 286, 289 (9th Cir. 1976) (allegation that defendant "converted" property not sufficient to allege theft, since conversion may or may not involve intent).

The indictment alleges the omission of a fact that Pirro might not have been required to report. When alerted to this, the government failed to take advantage of the request for a bill of particulars to make the general term "ownership interest" more specific and legally sufficient. ⁹ Count 67, subpart (2) of paragraph 56 failed to state the essential element of a material misrepresentation. Accordingly, Pirro was not adequately informed of the nature of the accusation against him, as is his right under the Sixth Amendment. For the same reasons, the grand jury may not have understood the elements of the crime and the evidence necessary to support the indictment, as required by the Fifth Amendment.

We affirm the judgment of the district court dismissing subpart (2) of paragraph 56 in Count 67 of the indictment.

DISSENT

MCLAUGHLIN, Circuit Judge

I respectfully dissent. In my view, the indictment in this case is not only constitutionally sufficient, it alleges a violation of a known legal duty. No more is required by 26 U.S.C. §7206 (1).

THE FACTS

I begin by recounting in full the factual theory offered by the government in support of the stricken allegations (which the parties refer to as "the Boyle Allegations"). It bears emphasis that for purposes of this appeal, "the facts alleged by the government must be taken as true." United States v. Velastegui, 199 F.3d 590, 592 n.2 (2d Cir. 1999) (citing United States v. Rosengarten, 857 F.2d 76, 78 (2d Cir. 1988)).

The government alleges that from 1991 to 1993, Robert Boyle was the chairman of Hudson Valley Hospital Center ("HVHC"), a small community hospital in Peekskill , New York . He was also a director of HVHC's parent corporation, Westchester-Putnam Health Management Services, Inc. ("WPHMS"). In early 1991, Boyle called an abandoned commercial office building (suitable for doctors' offices) in Croton, New York to the attention of defendant attorney Albert Pirro. According to the government, Pirro and Boyle then hatched a scheme to use the abandoned Croton building as a vehicle through which they could exploit Boyle's status as a director and chairman to misappropriate money from WPHMS and its subsidiaries. Pirro would buy the office building, and then with Boyle's help would lease it to a subsidiary of WPHMS. WPHMS would then pay for the building's renovation, and the pair would ultimately sell it for a substantial profit. Under the government's theory, Pirro and Boyle agreed to share their profits from this scheme on a 50-50 basis.

As the first step in the plan, Pirro set up Distinctive Properties of Croton, Inc. ("DPC") as an S Corporation. DPC's original Shareholders' Agreement lists Pirro as its 90% owner, with the other 10% being owned by his law partner, Paul Monsell. In February 1991, about two-and-a half months before DPC even bought the Croton building, DPC leased the building to Hudson Valley Ventures, Inc. ("HVV"), a subsidiary set up by Boyle's employer WPHMS.

The pair had to figure out a way to pay Boyle without calling attention to the fleecing he was giving his employers. Two documents in the record add some mystery to the arrangements.

The first is an agreement dated April 3, 1991 , in which DPC granted to one of Boyle's wholly owned companies--Westchester Concrete, Inc.--an option to acquire 45% of DPC's shares for $10. The Westchester Concrete company was no more than a cat's-paw for Boyle: the $10 option would exist only as long as Boyle owned 100% of Westchester Concrete. In addition, the agreement proclaimed that DPC granted the option because "ROBERT BOYLE, on behalf of Westchester Concrete, Inc. did find and otherwise organize the overall transaction including the lease with Peekskill Community Hospital and its various entities." The agreement provided that Boyle had to exercise the option within 30 days of DPC's purchase of the Croton office building, otherwise the option would expire.

The second document is a revised DPC "Shareholders' Agreement" dated March 1991. This new Shareholders' Agreement lists Messrs. Pirro, Boyle and Monsell as DPC's shareholders, and declares that Monsell would own 10% of DPC's shares, and that Pirro and Boyle would each own 45%. The Agreement includes, however, a "condition precedent" requiring Boyle to obtain a written resolution of the Board of Directors of WPHMS consenting to his acquisition of the DPC shares. The Agreement is signed and executed by Boyle as well as by Pirro and Monsell.

On this undeveloped record, the purpose of these two documents remains obscure. Perhaps Pirro and Boyle actually thought at one point that WPHMS would consent to Boyle's acquiring an ownership interest in DPC. Or perhaps the pair never intended to seek the requisite consent from WPHMS at all, but instead, as the government contends, created these documents as a mere sham to cloak their arrangement in some semblance of legitimacy. Whatever the case, it is undisputed that when DPC purchased the Croton building for $950,000 on April 19, 1991 , Boyle did not exercise his putative $10 option to formally purchase a 45% ownership interest in DPC.

It is also clear that Boyle never publicly signed on as a shareholder of record in DPC. The government alleges, however, that, despite the lack of a paper trail, Boyle in fact became the beneficial owner of 45% of DPC's shares, and that Pirro, acting as his straw man nominee, distributed the corporation's profits accordingly. For example, from 1991 to 1993, DPC received rental payments from HVV for the lease of the Croton building. During the entire period of the leasehold, as these payments came in from HVV, DPC made a series of payments to another of Pirro's companies, PM Messenger, Inc. ("PMM"). PMM then made payments in precisely the same amounts to Rogene Industries, Inc., a company wholly owned by Boyle. The total amount funneled to Boyle in this fashion was $135,726.70. Then in 1993, two days after DPC sold the building outright to its tenant, HVV, for $1.5 million, yet another of Pirro's companies, AJP Management Group, Inc., paid Rogene $156,572.57. The government alleges that the total payments funneled by DPC to Boyle amounted to almost exactly 45% of the monies derived from the purchase, renovation, leasing and sale of the Croton building.

In early 1993, Pirro had to file DPC's tax return for the 1992 year. The statute requiring Pirro to file a tax return for DPC as a Subchapter S Corporation was (and still is) 26 U.S.C. §6037(a). That statute provides in pertinent part:

Every S Corporation shall make a return for each taxable year, stating specifically . . . the names and addresses of all persons owning stock in the corporation at any time during the taxable year, the number of shares of stock owned by each shareholder at all times during the taxable year, [and] the amount of money and other property distributed by the corporation during the taxable year to each shareholder. . . .

26 U.S.C. §6037(a).

To comply with §6037(a), an S Corporation must file its income tax return on Form 1120-S entitled "U.S. Income Tax Return for an S Corporation." Among the obligatory attachments to Form 1120-S are various schedules calling for such information as the S Corporation's net income, expenses and losses. In addition, the S Corporation must attach to its Form 1120-S a Schedule K-1 for each shareholder setting forth the "Shareholders' Shares of Income, Credits, Deductions, Etc." On the first page of Form 1120-S is the IRS's standard warning: "Under penalties of perjury, I declare that I have examined this return, including accompanying schedules and statements, and to the best of my knowledge and belief, it is true, correct, and complete." An officer of the Corporation must sign the form.

As company president, Pirro signed DPC's Form 1120-S for the 1992 year. Notwithstanding Boyle's 45% ownership interest, Pirro filled out the return as if he, Pirro, owned 90% of DPC. No Schedule K-1 was attached for Boyle. And on line 20 of Pirro's Schedule K-1 which calls for "Shareholder's percentage of stock ownership for tax year," Pirro entered "90%". The return also set forth DPC's financial results for 1992. In addition to such things as depreciation and assets, DPC's net income from real estate activities is listed. Correspondingly, Pirro's Schedule K-1 also set forth his 90% share of DPC's net income from real estate activities, as well as the gross income and net expense figures used to calculate that share.

The indictment charges Pirro with violating 26 U.S.C. §7206(1), which makes it a felony for "any person . . . [to] willfully make[] and subscribe[] any return . . . which he does not believe to be true and correct as to every material matter." The Boyle Allegations actually charge three discrete bases for criminal liability under §7206(1):

--First, they allege that Pirro "failed to report [on DPC's 1992 return, Boyle's] ownership interest in DPC."

--Second, that Pirro "misstated thereon [his own] ownership interest in DPC."

--Third, that Pirro "failed to reflect thereon all of the payments DPC had made, through PMM, to [Boyle's] wholly owned company." ¹

DISCUSSION

I. Perceived Constitutional Flaws

Judge Gibson homes in on the indictment's use of the term "ownership interest" to describe beneficial share ownership. He concludes that the indictment is constitutionally flawed because, by employing the term "ownership interest" it failed to: (1) put Pirro on notice of the charged crime as required by the Sixth Amendment; and (2) give the grand jury an understanding of what was necessary to establish the elements of that crime as required by the Fifth Amendment. See ante at [16]. I disagree with both conclusions.

A. Sixth Amendment: Clarity of the Indictment

A defendant unquestionably enjoys the right to "be informed of the nature and cause of the accusation" against him. U.S. Const. amend. VI. All that is necessary to satisfy this constitutional mandate is that the indictment "inform[] the defendant of the offense charged with sufficient clarity so that he will not be misled while preparing his defense." United States v. Brozyna, 571 F.2d 742, 746 (2d Cir. 1978) (internal quotation marks omitted); see United States v. Alfonso, 143 F.3d 772, 776 (2d Cir. 1998) (same). The Sixth Amendment's notice protection is implemented by the requirement of Rule 7(c)(1) that an indictment contain "a plain, concise and definite written statement of the essential facts constituting the offense charged." Fed.R.Crim. Pro. 7(c); see United States v. Walsh, 194 F.3d 37, 44 (2d Cir. 1999).

Here, the indictment satisfies these requirements. To be sure, the indictment does not use the label "beneficial shareholder" to describe Boyle, nor, for that matter, use the term "nominee" to describe Pirro. Nevertheless, the indictment: (1) describes in detail the evolution of Pirro's and Boyle's scheme, including the specific facts that led to Boyle's acquisition of "a 45% ownership interest" in DPC; and (2) notifies Pirro that this conduct allegedly violated §7206(1).

Under any man-in-the-street reading, the language "45% ownership interest" is sufficiently specific to apprise Pirro that he is being charged with a violation of §7206(1) based on the concealment of Boyle's 45% ownership of DPC. Indeed, the defendant implicitly concedes that he had sufficient notice of the crime charged to allow him to prepare a defense. His brief on this appeal advances no real complaint that he was deprived of constitutional notice. And his successful Rule 12 motion in the district court did not argue for dismissal based on failure of notice, but rather on the weightier objection that there is no legal duty to fill out a Schedule K-1 for a person who enjoys only "quasi-shareholder status." Finally, the district court did not even base its dismissal on failure of notice. Instead, as Judge Gibson concedes, the district court dismissed the Boyle Allegations because it concluded that a legal obligation to include an individual with an ownership interest on an S Corporation's tax return is "debatable." Ante at [4].

In these circumstances, Russell v. United States, 369 U.S. 749, 8 L.Ed.2d 240, 82 S.Ct. 1038 (1962), is totally unhelpful to Pirro. The Russell court did indeed hold that an indictment which "failed to sufficiently apprise the defendant [of the crime charged]" was inadequate. See 369 U.S. at 764. But the Court did so in unique circumstances which have been distinguished numerous times by this and other courts, see, e.g., Walsh, 194 F.3d at 45; United States v. McClean, 528 F.2d 1250, 1257 (2d Cir. 1976); United States v. Paulino, 935 F.2d 739, 750 n.4 (6th Cir. 1991) (collecting cases), and which bear little relationship to the issues confronting us today.

In Russell, the Court condemned indictments that alleged refusal to answer questions posed by the House Committee on Un-American Activities. This refusal, the indictment charged, violated 2 U.S.C. §192 which made it a misdemeanor to "refuse[] to answer any question pertinent to the question under inquiry." The Court held that the defendants could not be guilty under §192 "unless the questions [they] refused to answer were in fact pertinent to a specific topic under [congressional] inquiry." 369 U.S. at 768. Crucially, however, the indictment failed to specify even the subject matter under congressional inquiry. Thus, the Russell defendants faced trial with the "chief issue undefined." Id. at 766.

Here, there are no such problems. We all know what the issues are. As has already been made apparent, the Pirro indictment includes "such a statement of facts and circumstances" as to "descend to particulars." Id. at 765. Unlike the "cryptic" indictments in Russell, the indictment here charges that Pirro "failed to report [on the 1992 return] the hospital Chairman's ownership interest in DPC," and "misstated thereon" his own "ownership interest in DPC, and failed to reflect thereon all of the payments DPC had made, through PMM, to the hospital Chairman's wholly owned company." In my view, this Circuit's case law simply does not require the government to "descend" into any greater particularity. ²

In sum, by relying on the notice requirements of the Sixth Amendment, Judge Gibson rests on a theory that: (a) has never been argued by the defendant; (b) was not relied on by the district court; and (c) demands a level of specificity beyond what the Constitution requires.

B. The Fifth Amendment: The Grand Jury Issue

The grand jury clause of the Fifth Amendment is similarly irrelevant to this appeal. That clause prohibits prosecution for charges not presented to the grand jury. See Walsh, 194 F.3d at 44. All that is required to satisfy the clause is that the indictment contain "some amount of factual particularity to ensure that the prosecution will not fill in elements of its case with facts other than those considered by the grand jury." Id. (citations omitted).

Judge Gibson notes that it was only after the indictment was returned, that the government specified that Boyle, as the holder of a "45% ownership interest," was a "45% beneficial shareholder" of DPC. The suggestion is that the government's post-indictment refusal to adhere slavishly to the "45% ownership interest" language already appearing in the indictment somehow constitutes an impermissible modification of the essential elements of the §7206(1) charge presented to the grand jury. I cannot agree.

In my view, this is hardly a case where "at every stage . . . the defendant [is] met with a different theory." Russell, 369 U.S. at 768. To the contrary, it strikes me that the government's theory here has remained absolutely constant. Simply put, the Boyle Allegations charge that Pirro violated §7206(1) by lying on his tax returns about Boyle's ownership of 45% of DPC. To the extent that the government's change in nomenclature from "45% ownership interest" to "45% beneficial shareholder" has any significance, "it simply adds detail," and indeed "narrows rather than broadens" the original charges. United States v. Zvi, 168 F.3d 49, 54 (2d Cir. 1999). As such, it was entirely permissible. See e.g., United States v. Miller, 471 U.S. 130, 145, 85 L.Ed.2d 99, 105 S.Ct. 1811 (1985); see also United States v. Castro, 776 F.2d 1118, 1123 (3d Cir. 1985) (no violation of Fifth Amendment where "variation did not broaden the bases for conviction, but instead narrowed the scope of the evidence to prove an offense included in the indictment.").

Although this Circuit long ago abandoned "technical rigidity in reviewing indictments," United States v. Wydermyer, 51 F.3d 319, 324 (2d Cir. 1995), Judge Gibson also seeks to support his Fifth Amendment theory by engrafting an additional layer of complexity onto our indictment jurisprudence. He concludes that the indictment was defective because it fails to explicitly specify the legal duty which made Pirro's lies about Boyle a crime under §7206(1). See ante at [12-13]. Such specificity was required, Judge Gibson maintains, because of the "principle" that "where an indictment charges a crime that depends in turn on violation of another statute, the indictment must identify the underlying offense." Id.

This has never been the law in this Circuit. To the contrary, "we have consistently upheld indictments that 'do little more than to track the language of the statute charged and state the time and place (in approximate terms) of the alleged crime.' " Walsh, 194 F.3d at 44 (quoting United States v. Tramunti, 513 F.2d 1087, 1113 (2d Cir. 1975)); see United States v. Alfonso, 143 F.3d 772, 776 (2d Cir. 1998); United States v. Stavroulakis, 952 F.2d 686, 693 (2d Cir. 1992).

These requirements were more than satisfied by Pirro's indictment. Indeed, this is not a case like United States v. Berlin, 472 F.2d 1002, 1006 (2d Cir. 1973) in which the government actually omitted a requisite element of the charged offense from the indictment presented to the grand jury. No such omission occurred here. To the contrary, the indictment alleges each essential element of a §7206(1) violation--charging that Pirro "willfully and knowingly" filed a "false" tax return that "he did not believe to be true and correct as to every material matter." See United States v. Peters [98-2 USTC ¶50,650], 153 F.3d 445, 461 (7th Cir. 1998) (listing elements of a §7206(1) violation). More than that, the indictment specifies that Pirro violated §7206(1) by concealing Boyle's "45% ownership interest" in DPC. Under our case law, this was all that was necessary. See Walsh, 194 F.3d at 44; Alfonso, 143 F.3d at 776; Stavroulakis, 952 F.2d at 693.

In sum, both my colleagues may legitimately question whether Pirro's failure to mention in DPC's tax return Boyle's real ownership of DPC constitutes a crime. This is a fair question that turns on whether Pirro had a known legal duty to disclose Boyle's beneficial shareholding in DPC. The question of whether there is a known legal duty, however, is one of law for the court, not the grand jury, to resolve. See United States v. Ingredient Technology Corp. [83-1 USTC ¶9140], 698 F.2d 88, 97 (2d Cir. 1983). Whatever the answer to that question, there can be no doubt that the §7206(1) charge itself was fairly presented to the grand jury.

II. Is It a Crime?

I turn, at last, to what I regard as the only colorable issue in this case. The Boyle Allegations purport to charge a violation of §7206(1). That statute requires the government to prove that the defendant acted "willfully" in filing materially false tax returns. Relying on the due process clause, "the Supreme Court has made clear that in order to avoid snaring people in the tangled net of the tax code solely due to their incompetence, willfulness under the tax laws requires 'a voluntary, intentional violation of a known legal duty.' " United States v. Bok [98-2 USTC ¶50,765], 156 F.3d 157, 165 (2d Cir. 1998) (quoting Cheek v. United States [91-1 USTC ¶50,012], 498 U.S. 192, 200-01, 112 L.Ed.2d 617, 111 S.Ct. 604 (1991)).

Applying these heightened standards, the question presented by this case is a close one--namely, whether there was a known legal duty in 1992 to reflect Boyle as a beneficial owner of DPC's shares on the tax returns required by Subchapter S. My colleagues' answer is no. In my view, the answer to that question should be yes.

A. S Corporations

Subchapter S of the Internal Revenue Code was enacted in 1958 to encourage small businesses to adopt the corporate form. See Bufferd v. Commissioner [93-1 USTC ¶50,038], 506 U.S. 523, 525, 122 L.Ed.2d 306, 113 S.Ct. 927 (1993). The statute accomplishes this goal by means of a pass-through system under which corporate income, losses, deductions, and credits are attributed to the individual shareholders in a manner akin to the tax treatment of partnerships. The tax advantage of an S Corporation is that it avoids the double taxation of corporate earnings to which shareholders of ordinary corporations are subject. See 26 U.S.C. §§1366-1368. Under the law applicable in 1992, to qualify as an S Corporation, a company must: (1) have no more than 35 shareholders; (2) have only one class of stock with "identical rights to distribution and liquidation proceeds;" and (3) distribute its profits and losses to its shareholders on a pro rata basis. See 26 U.S.C. §§1361(b)(1)(A); 1366(a)(1)(A).

A small business indicates its decision to become an S Corporation by filing a completed IRS Form 2553. See 26 C.F.R. §1.1362-6(a)(2). An initial election to become an S Corporation is valid "only if all persons who are shareholders . . . on the day on which such election is made consent to such an election." 26 U.S.C. §1362(a)(2). "However, once a valid election is made, new shareholders need not consent to that election." 26 C.F.R. §1.1362-6(a)(2). ³

Every year, an S Corporation must file an informational return, reporting, inter alia, its gross income and deductions etc. See 26 U.S.C. §6037(a). Those who are the beneficiaries of income from the corporation must then pay taxes on that income on a personal basis, see 26 U.S.C. §1366(c), regardless of whether the income is actually distributed. See id.; Hume v. Commissioner [CCH Dec. 45,084(M)], 1988 Tax Ct. Memo LEXIS 502, 56 T.C.M. (CCH) 290, 293, 1988 T.C. Memo. 458 (T.C. 1988), aff'd. 899 F.2d 1225 (9th Cir. 1990); see also Knott v. Commissioner [CCH Dec. 47,507(M)], 1991 Tax Ct. Memo. LEXIS 401, 62 T.C.M. (CCH) 287, 1991 T.C. Memo. 352 (1991). The fact that undistributed income may be taxed explains the rule requiring unanimous initial consent to an S Corporation election. That rule ensures that no person who is the beneficial recipient of an S Corporation's undistributed income will be forced to report that income involuntarily. See Kean v. Commissioner [72-2 USTC ¶9764], 469 F.2d 1183, 1186 (9th Cir. 1972).

B. The Legal Status of Beneficial Shareholders

It is a fundamental axiom, applicable even in the criminal context, that tax consequences flow from the substance rather than the form of a transaction, and that "control over property, rather than documentary title" marks the real owner for federal tax purposes. United States v. Schmidt [93-1 USTC ¶50,074], 935 F.2d 1440 (4th Cir. 1991) (collecting cases); see United States v. Atkins [89-1 USTC ¶9195], 869 F.2d 135, 140 (2d Cir. 1989); United States v. Ingredient Technology Corp. [83-1 USTC ¶9140], 698 F.2d 88, 95 (2d Cir. 1983). My colleagues suggest that this axiom is inapplicable here. It seems to be their perception that there is no statute which obliged Pirro to report Boyle as a beneficial owner on DPC's returns. I cannot agree.

The majority overlooks 26 U.S.C. §6037(a), the very statute which required Pirro to file DPC's return in the first place. As already noted, §6037(a) imposes its reporting obligations with respect to "all persons owning stock in the corporation," a category it equates with "shareholders." Neither §6037(a) itself, nor the accompanying regulations and IRS instructions, even suggest that the terms "persons owning stock in the corporation," and "shareholders" are somehow confined to ownership interests that are officially recorded on the corporation's books. And while it is also true that these statutes and regulation did not explicitly state in 1992 that those terms include the beneficial owners of stock, I fail to see why the absence of such an explicit definition should confer a license for the willful concealment alleged here.

The prohibition against vagueness in criminal tax proceedings has never been read to prohibit prosecutions under statutes "which a reviewing court believes could have been drafted with greater precision." United States v. Herrera, 584 F.2d 1137, 1149 (2d Cir. 1978). "All the Due Process Clause requires is that the law give sufficient warnings that men may conduct themselves so as to avoid that which is forbidden, and thus not lull the potential defendant into a false sense of security, giving him no reason even to suspect that his conduct might be within its scope." Ingredient Technology Corp. [83-1 USTC ¶9140], 698 F.2d at 97 (quoting Herrera, 584 F.2d at 1149). Here, Pirro had the requisite fair warning, not only from the text of §6037(a), but from the case law, a governing revenue ruling, and applicable regulations.

"The issue of shareholder status in Subchapter S corporations is not a new one." Speca v. Commissioner [80-2 USTC ¶9692], 630 F.2d 554, 556 (7th Cir. 1980). As already noted, an initial election to become an S Corporation is valid, "only if all persons who are shareholders . . . on the day on which such election is made consent to such an election." 26 U.S.C. §1362(a)(2). Although the issue of who is a "shareholder" for purposes of determining whether there has been a valid initial election has been litigated many times, it has been resolved by the courts consistently. Every court that has addressed the issue has concluded that a beneficial shareholder of an S Corporation's stock is indeed that Corporation's shareholder.

The seminal opinion is Hoffman v. Commissioner [CCH Dec. 28,193], 47 T.C. 218 (1966), aff'd on basis of tax court opinion [68-1 USTC ¶9284], 391 F.2d 930 (5th Cir. 1968). In that case, a shareholder in an S Corporation sold her stock to the taxpayer but continued to hold it in escrow (i.e., she remained the shareholder of record) to ensure payment of the purchase price. The purchaser-taxpayer consented to a Subchapter S election, but the former owner and still shareholder of record did not. The Tax Court held that her consent was unnecessary. According to the court, "beneficial ownership of the stock, as opposed to technical legal title thereto," is the "critical" factor in determining who is a "shareholder." Applying this principle, the court then concluded that "regardless of who had naked title, the shares were really owned by [the purchaser-taxpayer] and were merely pledged as collateral." This was so, because it was the purchaser-taxpayer of the Corporation who was to enjoy "all the fruits of the enterprise," whereas the shareholder of record "plainly could not have been taxed" on the Corporation's undistributed earnings. Id. at 234.

The cases following Hoffman are legion. See e.g., Cabintaxi v. Commissioner [95-2 USTC ¶50,445], 63 F.3d 614, 616 (7th Cir. 1995) (individuals who are not shareholders of record, are nevertheless "shareholders" for purposes of Subchapter S if they are "beneficial owners" under applicable state law); Pahl v. Commissioner [98-2 USTC ¶50,602], 150 F.3d 1124, 1228-1129 (9th Cir. 1998) (lawyer who joined law firm organized as S Corporation but withdrew without paying for shares was properly treated as shareholder for S Corporation tax purposes and thus required to report pro rata share of profits because he "held a beneficial shareholder's interest in the corporation"); Wilson v. Commissioner [77-2 USTC ¶9684], 560 F.2d 687, 689 (5th Cir. 1977) ("The term 'shareholders' must mean those who bear the tax consequences of the election. . . . Because beneficial ownership of stock, not mere record ownership or other formal indicia, determines who bears those tax consequences, beneficial ownership also provides the standard for determining who must consent to the Subchapter S election."); Kean v. Commissioner [72-2 USTC ¶9764], 469 F.2d 1183, 1189 (9th Cir. 1972) (" 'shareholders' who must file a consent are not necessarily 'shareholders of record' but rather beneficial owners of shares who would have to include in gross income dividends distributed with respect to the stock of the corporation"); Lafayette Dist., Inc. v. United States [75-2 USTC ¶9609], 397 F.Supp. 719, 724 (W.D. La. 1975) ("Traditionally, courts have looked to the beneficial owner in order to ascertain who has the tax liability"); Danenberg v. Commissioner [CCH Dec. 36,459], 73 T.C. 370, 390 (1979) ("It is well established that for purposes of determining who is a shareholder under the provisions of subchapter S, beneficial ownership of the stock rather than technical legal title is controlling."); Ragghianti v. Commissioner [CCH Dec. 35,565], 71 T.C. 346, 349 (1978) ("By now it is well settled that record ownership of stock, standing alone, is not determinative in answering the question as to who is required to include in gross income any dividends attributable to such stock. Rather, beneficial ownership is the controlling factor."); CHM Co. v. Commissioner [CCH Dec. 34,350], 68 T.C. 31, 37 (1977) ("in deciding who is a shareholder for subch. S purposes, we look to the beneficial ownership of the stock."); Hook v. Commissioner [CCH Dec. 31,380], 58 T.C. 267, 273 (1972) ("Beneficial ownership, as opposed to technical legal title, is determinative. . . .").

Also relying on Hoffman, the IRS itself advised as far back as 1970 that:

For purposes of determining who is a shareholder under the provisions of Subchapter S of the Code, beneficial ownership of the stock rather than technical legal title is controlling. Accordingly, it is held that the taxpayer who is the stockholder of record but does not own the beneficial interest in a share of stock of a small business corporation is not a shareholder for the purposes of the provisions of Subchapter S of the Code. . . .

IRS Revenue Ruling 70-615, 1970-2 C.B. 169, 1970 WL 20547 (relying on Hoffman [CCH Dec. 28,193], 47 T.C. 218). In this Circuit, this Revenue Ruling is "entitled to great deference." Texasgulf, Inc. & Subs. v. Commissioner [99-1 USTC ¶50,403], 172 F.3d 209, 217 (2d Cir. 1999) (citations omitted). Indeed, it is presumed to " 'have the force of legal precedent unless unreasonable or inconsistent with the provisions of the Internal Revenue Code.' " Gillespie v. United States [94-1 USTC ¶60,166], 23 F.3d 36, 39 (2d Cir. 1994) (quoting Salomon, Inc. v. United States [92-2 USTC ¶50,551], 976 F.2d 837, 841 (2d Cir. 1992) (citing Amato v. Western Union International, Inc., 773 F.2d 1402, 1411 (2d Cir. 1985)).

The rule that beneficial owners of an S Corporation's stock are its shareholders is obviously neither "unreasonable" nor "inconsistent" with the purposes and provisions of the Tax Code. Indeed, while I am the first to concede that the federal tax laws are often "esoteric," I cannot imagine that reasonable people would really have any difficulty understanding the rule that the beneficial owners of an S Corporation's stock are in fact "persons owning stock in the corporation." 26 U.S.C. §6037(a).

The rationales for that rule are self-evident. At a threshold level, it prevents an obvious end run around the rule that an S Corporation can have no more than 35 (now 75) shareholders. More fundamentally, it serves the purpose of requiring S Corporations to list for the IRS the actual recipients of beneficial income from the Corporation's shares. In this latter respect, the beneficial ownership rule is entirely consistent "with the basic congressional purpose [in enacting Subchapter S] to tax" only those who actually receive "dividends paid by the corporation." Kean [72-2 USTC ¶9764], 469 F.2d at 1186 (quoting Hoffman [CCH Dec. 28,193], 47 T.C. at 233).

Finally, for much of the history of Subchapter S, the IRS's regulations have explicitly explained that:

Ordinarily, the person who would have to include in gross income dividends distributed with respect to the stock of the corporation . . . is considered to be the shareholder of the corporation. . . . For example, . . . the person for whom stock of a corporation is held by a nominee, guardian, custodian, or an agent is considered to be the shareholder of the corporation.

26 C.F.R. §1.1361-1(e) (1995). It is true that this regulation was proposed in 1986, but did not actually get formally adopted until 1995. It is equally true that its predecessor statute--§1.1371-1(d) containing almost exactly the same language--was withdrawn pursuant to the 1982 Subchapter S Revision Act, see Pub. L. 97-364, 96 Stat. 1669 (1982). Nevertheless, I fail to see how the suspension of a regulation, which is obviously merely reflective of (rather than the source for) applicable law, somehow grants taxpayers license to hugger-mugger about the real shareholders of their companies.

* * *

In light of the wealth of statutory, decisional and regulatory authority establishing that the beneficial owners of an S Corporation's stock are its shareholders, I am puzzled by my colleagues' reliance on United States v. Harris [91-2 USTC ¶50,433], 942 F.2d 1125 (7th Cir. 1991). Harris arose from the government's failed efforts to prosecute a mistress for not declaring as income personal gifts from her paramour. Unlike that situation, ours is not a case where neither "regulations," nor "appellate or district court cases . . . cover the subject." Harris [91-2 USTC ¶50,433], 942 F.2d at 1132. I am also unsympathetic to the majority's apparent concern that no known criminal prosecution has been premised on the identical theory underlying the Boyle Allegations. While I agree that heightened standards are applicable in determining whether a duty has been breached in the criminal context, to me "it is immaterial that there is no litigated fact pattern precisely in point." United States v. Kinzler, 55 F.3d 70, 74 (2d Cir. 1995) (internal quotation marks omitted) (citing cases).

Indeed, this Circuit has allowed tax convictions on the basis of legal duties far less clearly defined than the duty applicable here. In United States v. Ingredient Technology Corp. [83-1 USTC ¶9140], 698 F.2d 88 (2d Cir. 1983), defendants--the SuCrest Corporation and its former president--filed tax returns for the 1976 year claiming deductions for a large amount of sugar inventory. It turned out that while SuCrest retained legal title to the sugar inventories at all pertinent times, it had resold all beneficial interest in those inventories without reporting the resale on its 1976 return. The defendants were convicted of filing a false return in violation of §7206(1).

On appeal, they argued that their accounting treatment of the sugar was proper under Treasury Regulation Section 1.471-1, which provided that: (1) "goods sold" the "title to which has passed to the purchaser" should be excluded from inventory; and (2) "merchandise should be included in the inventory only if title thereto is vested in the taxpayer." Relying on these provisions, defendants claimed that they had properly included the sugar in inventory, because title to it had not yet passed to the purchaser, but had remained with SuCrest. At the very least, defendants argued, "the applicable tax law was . . . in such dispute that it [did not] provide a clear and definite statement of the conduct proscribed . . . thereby negating the element of willfulness." Id. at 96.

This Court affirmed the convictions. The Court noted that another portion of Section 1.471-1 stated that inventories must be an "income-producing factor." And, according to the Court, the facts showed that the sugar "was never intended" to be "an income-producing factor." To the contrary, the facts revealed that SuCrest had "absolutely no beneficial interest [in the sugar]," and used it solely "to inflate inventory for a few days solely for tax purposes." Id. at 95. Relying on the long established principle that "taxation is not so much concerned with the refinements of title as it is with actual command over the property taxed," id., this Court concluded that the defendants "surely . . . knew they were committing a wrongful act." Id. at 96.

Ingredient Technology is directly analogous to the instant case. Just as the SuCrest defendants had no beneficial interest in their claimed inventory, Pirro had no beneficial interest in half of the 90% of the DPC shares he claimed on his 1992 return. Irrespective of any sham "legal title," Pirro gave Boyle "actual command" over 45% of the DPC shares. If the plain allegations of the indictment can be proven, Pirro surely knew he was committing a wrong when he concealed that fact on his 1992 return.

To sum up, in my view: (1) beneficial owners of an S Corporation's stock are indeed "persons owning shares in the corporation" or "shareholders" for purposes of the reporting requirements of 26 U.S.C. 6037(a); and (2) if Boyle was a beneficial owner of DPC stock, then Pirro violated a known legal duty by failing to report him on the 1992 return.

Again, I recognize that under the heightened standards applicable to tax prosecutions, the question presented by this case is an exceedingly close one. The difficulty of that question, moreover, is greatly exacerbated by the undeveloped state of this record. Perhaps my colleagues would be persuaded if the government offered proof that Boyle stashed secret stock certificates evidencing his 45% beneficial ownership of DPC under his mattress. While the government has understandably not offered such evidence, it does stand willing to prove that Boyle had all the rights and obligations of a beneficial shareholder (as well as any other necessary indicia). Of course if the government were to fail in its endeavor, the district court could then dismiss the Boyle Allegations at the close of the government's case. See Fed.R.Civ.P. 29. In my view, it was simply premature for the district court to do so before trial.

¹ The indictment refers to the Chairman without naming him, although the briefs do so. We think it appropriate to use the title Chairman as used in the indictment.

² Ventures and the Hospital were both owned by the same parent corporation, Westchester-Putnam Health Management Services, Inc.

³ Subpart (1) alleged that Pirro disguised personal expenses as business expenses and deducted rental real estate expenses that he knew were not legitimate on the 1992 tax return for Properties.

⁴ A number of decisions from other circuits agree that a dismissal of a portion of a count is appealable. See, e.g., United States v. Serafini, 167 F.3d 812, 814-16 (3d Cir. 1999); United States v. Bloom, 149 F.3d 649, 652-54 (7th Cir. 1998); United States v. Oakar, 324 U.S. App. D.C. 104, 111 F.3d 146, 149-150 (D.C. Cir. 1997).

⁵ Count 67, subpart (2) actually contains three allegations: that Pirro "failed to report [on the Properties Form 1120-S] the hospital Chairman's ownership interest in [Properties], misstated thereon ALBERT J. PIRRO, JR.'s ownership interest in [Properties], and failed to reflect thereon all of the payments [Properties] had made, through [Messenger] to the hospital Chairman's wholly owned company." The district court did not consider these latter two allegations separately from the allegation about failing to disclose the Chairman's interest. On appeal, the government argues in a footnote that failure to disclose the payments to the Chairman is "an entirely discrete basis for criminal liability." This one-sentence footnote is insufficient to preserve the issue for appeal. See Concourse Rehab. & Nursing Ctr., Inc. v. DeBuono, 179 F.3d 38, 47 (2d Cir. 1999); United States v. Restrepo, 986 F.2d 1462, 1463 (2d Cir. 1993) ("We do not consider an argument mentioned only in a footnote to be adequately raised or preserved for appellate review.").

⁶ Judge Katzmann concurs in the judgment based on Section II.A of this opinion, that Subchapter S corporations had no known legal duty to report "ownership interests" because there were no statutes, regulations, or dispositive case law stating that S corporations were required to report such interests.

⁷ The indictment in paragraphs 52 and 53 alleges the payments from Properties to Messenger and from Messenger to the Chairman's wholly-owned company. There is no allegation, however, as to how these payments create an ownership interest.

⁸ In contrast to Subchapter S's focus on shareholders, the tax law regarding partnerships refers to "nominees" of partnership interests. A partnership that is required to file a tax return must furnish "each person who is a partner or who holds an interest in such partnership as a nominee for another person" with a copy of the information required on the return. 26 U.S.C. §6031(b) (Supp. V 1987). Further, the nominee must give the partnership the name and address of the person for whom he or she holds the interest and give that person the information regarding the partnership's return. See 26 U.S.C. §6031(c) (Supp. V 1987).

⁹ This is not to suggest that a bill of particulars could have saved an otherwise defective indictment. See Russell, 369 U.S. at 770 ("It is a settled rule that a bill of particulars cannot save an invalid indictment."). The government had notice of Pirro's objection to the challenged portion of the indictment, and could have, but did not, file a superseding indictment.

¹ This third Boyle Allegation appears to have nothing to do with whether Pirro's concealment of Boyle's ownership interest in DPC constitutes a crime. Instead, the third charge can be read to allege that various of the financial numbers set forth on DPC's 1992 return (such as net income from real estate activities) are misstated, simply because they omit the payments DPC made to Boyle through PMM. As such, the third charge pleads an independent basis for criminal liability. See, e.g., United States v. Bok [98-2 USTC ¶50,765], [1]56 F.3d 157, 166 (2d Cir. 1998) (affirming §7206(1) conviction for understating gross receipts). I agree with Judge Gibson, however, that the government has failed to preserve this issue for appeal. See ante at [6 n.5]. Accordingly, I join footnote 5 of Judge Gibson's opinion.

² But even if Judge Gibson's heightened standards are applied, the government complied with them by responding to Pirro's request for a bill of particulars. In that response, the government specified that "a Schedule K-1 should have been filled out in its entirety" for Boyle. The significance of this disclosure must have been self-evident: Schedule K-1s are filled out by the "shareholders" of an S Corporation. Nevertheless, Judge Gibson faults the government for "choosing not to specify the nature of [Boyle's] alleged [ownership] interest" in DPC in its response to Pirro's request for a bill of particulars. Ante at [14].

³ For this reason, the cavil that there is no allegation that Boyle "ever elected to become a shareholder" of DPC is beside the point. See ante at [8]. Everyone agrees that Boyle became a shareholder after DPC's initial election.

 

 

 

[2000-2 USTC ¶50,702] United States of America , Plaintiff-Appellee v. Todd C. Gaskill, Defendant-Appellant United States of America , Plaintiff-Appellee v. Martin L. Goodrich, Defendant-Appellant

(CA-9), U.S. Court of Appeals, 9th Circuit, 99-10154, 99-10155, 7/27/2000, 2000 U.S. App. LEXIS 18375. Affirming in part, reversing in part and remanding an unreported District Court decision

[Code Sec. 7206 ]

Penalties, criminal: Preparation of false returns: Conspiracy to defraud.--Sufficient evidence existed to support an individual's convictions for conspiracy to defraud the government and assisting in the preparation of false income tax returns. The taxpayer cycled his clients' income through offshore trusts and subsequently filed false income tax returns. The transactions were conducted to evade the clients' tax liability and the participants in the scheme retained control over the cycled funds. Moreover, the taxpayer advocated the use of the offshore trusts and assisted in their creation and operation.
[Code Sec. 7206 ]

Penalties, criminal: Preparation of false returns: Conspiracy to defraud: District Court: Abuse of discretion: Sentencing: Downward departure.--Insufficient evidence existed to support a conviction against a co-conspirator for assisting in the preparation of false returns for a business in connection with a tax evasion scheme. He did not prepare the returns and his mere association with the business was inadequate to establish a violation of Code Sec. 7206 . However, jurisdiction was lacking to review the district court's refusal to grant a downward departure of his sentence since it acted within its discretion.

[Code Sec. 7206 ]

Penalties, criminal: Preparation of false returns: Conspiracy to defraud: Severance motion: Exculpatory evidence: District Court: Abuse of discretion.--The district court's denial of an individual's motion to sever the government's case against him for conspiracy to defraud and assisting in the preparation of false income tax returns from that of his co-conspirator for the purpose of introducing exculpatory evidence was not an abuse of discretion. That his co-conspirator might invoke his Fifth Amendment right against self-incrimination and, thereby, exclude certain evidence, was not sufficient to sustain the severance motion.

Benjamin B. Wagner, Michael Malachek, Sacramento , Calif. 95814 , for plaintiff-appellee. Donald S. Frick, Sacramento, Calif., for Todd C. Gaskill, Joe Alfred Izen, Jr., Izen & Assocs., P.C., Bellaire, Tex., for Martin L. Goodrich.

Before: NOONAN, THOMAS and BERZON, Circuit Judges.

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

MEMORANDUM ¹

Todd C. Gaskill and Martin Goodrich appeal from their jury convictions and sentences for conspiracy to defraud the United States, in violation of 18 U.S.C. §371, and aiding and assisting in the preparation of a false income tax return, in violation of 26 U.S.C. §7206(2). We have jurisdiction pursuant to 28 U.S.C. §1291, and we affirm. Because the parties are familiar with the facts and procedural history, we do not recount them here.

I.

The government presented sufficient evidence to establish that Goodrich participated in a fraudulent tax scheme with the requisite intent in violation of §371. Section 371 is intended to cover a broad range of activity involving the "defrauding" of the federal government. See United States v. Caldwell , 989 F.2d 1056, 1058 (9th Cir. 1993). To convict someone under §371, the government must show that he (1) entered into an agreement (2) to impede, impair, obstruct or defeat a lawful function of the government (3) by deceitful or dishonest means and (4) perpetrated at least one overt act in furtherance of the conspiracy. See id.; see also United States v. Tuohey, 867 F.2d 534, 537 (9th Cir. 1989); United States v. Everett, 692 F.2d 596, 599 (9th Cir. 1982).

In his briefs and oral argument, Goodrich argued that reversal was compelled by Zmuda v. C.I.R. [84-1 USTC ¶9442], 731 F.2d 1417 (9th Cir. 1984), because the government failed to present any evidence establishing that either the trustees or taxpayers maintained "complete control" over the monies transferred to the foreign trusts. This argument misapprehends Zmuda, which held that: "although the taxpayer may structure a transaction so that it satisfies the formal requirements of the Internal Revenue Code, the Commissioner may deny legal effect to a transaction if its sole purpose is to evade taxation." Zmuda [84-1 USTC ¶9442], 731 F.2d at 1421 Lack of the indicia of formal "control" was merely one element in the Zmuda's trust scheme that supported the government's contention that the scheme was a sham transaction. Here, sufficient evidence was presented to demonstrate that tax evasion was the sole purpose of the transactions, and that the participants in the scheme retained ultimate control over the funds as they cycled through the various trusts.

Contrary to Goodrich's assertion, sufficient evidence also existed to prove that he intended or acted in a manner to defraud the United States . Goodrich clearly participated in not only advocating the use of the offshore trusts, but also in assisting in the creation and operation of the trusts. See United States v. Moran, 759 F.2d 777, 785 (9th Cir. 1985). Based on Gawley's testimony and the recorded conversations between Gawley and Goodrich alone, a rational trier of fact could have concluded beyond a reasonable doubt that Goodrich's participation in the conspiracy to defraud included the requisite element of deceit or dishonesty.

II.

Because Goodrich did not assert his variance argument before the district court, we review only for plain error. United States v. Jackson , 84 F.3d 1154, 1158 (9th Cir. 1996). No variance occurred. Count three of the indictment charges Gaskill, Goodrich and Winburn with the conspiracy, along with their clients, "to impair, impede, and obstruct the lawful function of the Internal Revenue Service in the computation, assessment, and collection of federal income tax liabilities of certain clients of GGA." The object of the conspiracy, as alleged, was to conceal taxable income from the IRS by cycling clients' income through a series of offshore trusts and then having the clients file false income tax returns.

Contrary to Goodrich's assertions, the evidence adduced at trial did not prove a conspiracy different from the one alleged in the indictment. See United States v. Olano, 62 F.3d 1180, 1194 (9th Cir. 1995). The government presented sufficient evidence to show that the sham transactions formed the basis of the conspiracy charged and is not required to show that any of the defendants formally controlled the transferred funds.

Goodrich's acquittal on the charges in count six does not establish that a variance existed. The conspiracy charge in count three and aiding and abetting charge in count six form separate and independent charges, and acquittal on the §7206(2) charge does not necessitate acquittal on a §371 conspiracy charge.

III.

The district court did not abuse its discretion in denying Goodrich's severance motion based on the possibility that Gaskill might have invoked his Fifth Amendment rights, as Goodrich urged before trial. See United States v. Mariscal, 939 F.2d 884, 886 (9th Cir. 1991) (defendant seeking severance to obtain exculpatory testimony of co-defendant "must show that the co-defendant's testimony is 'substantially exculpatory' in order to succeed").

In his brief, Goodrich contended for the first time that the severance motion should have been granted because of the disparity in amount of evidence introduced against joined defendants. Although this may furnish a basis for severance, see United States v. Donaway, 447 F.2d 940, 943 (9th Cir. 1971),the prejudicial effect of evidence relating to the guilt of co-defendants is "generally held to be neutralized by careful instruction by the trial judge," as is true in Goodrich's case. United States v. Escalante, 637 F.2d 1197, 1201 (9th Cir. 1980).

Finally, Goodrich's reliance on United States v. Sababu, 891 F.2d 1308 (7th Cir. 1989), is misplaced. The weight of the evidence against Goodrich was substantial, and much of the background testimony on the structure and operation of the trust schemes would be admissible against Goodrich as well as his co-conspirators; and, the limiting instructions given by the district court make it clear that the district court was aware of the danger of prejudice. ²

IV.

The district court did not err in denying the pro hac vice application of Goodrich's appellate counsel, Joe A. Izen, an attorney admitted to practice law in Texas . The record demonstrated that several actual and potential conflicts of interest existed, constituting proper bases for denying a pro hac vice application in order to "ensure the ethical . . . administration of justice." See Wheat v. United States, 486 U.S. 153, 160-64, 100 L.Ed.2d 140, 108 S. Ct. 1692 (1988); see also United States v. Stites, 56 F.3d 1020, 1026 (9th Cir. 1995). A review of the record shows that the district court clearly did not impose upon Izen any burden of proving that he was free from conflict of interest. The district court also afforded Izen a sufficient hearing in which it attempted to elicit a clear response from Izen regarding the alleged conflicts asserted by the government. No adequate explanation was tendered.

V.

The government did not present sufficient evidence for any rational trier of fact to find beyond a reasonable doubt that Gaskill violated 26 U.S.C. §7206(2) as charged in count four of the indictment. See United States v. Hernandez, 105 F.3d 1330, 1332 (9th Cir. 1997).

To establish a §7206(2) violation, the government must show that: (1) the defendant aided, assisted, or otherwise caused the preparation and presentation of a return; (2) that the return was fraudulent or false; and (3) the act of the defendant was willful. See United States v. Salerno [90-1 USTC ¶50,261], 902 F.2d 1429, 1432 (9th Cir. 1990). The undisputed evidence was that Gaskill did not directly prepare, aid or cause preparation of the return. Indeed, there was not even circumstantial evidence linking him to preparation of any tax return at issue. Rather, the government's theory was that he was liable because he was associated with the business and was trustee of one of the trusts. Thus, there was a failure of proof that Gaskill had any actual knowledge that "the false information would be used in the preparation of the tax returns." See United States v. Crum [76-1 USTC ¶9214], 529 F.2d 1380, 1381-82 (9th Cir. 1976). Unlike the situation in Crum, there was no evidence that Gaskill personally met with the Picks prior to the preparation of the return and participated in providing them advice. In fact, Gaskill did not meet the Picks until after he had left G & D Associates and after the tax return had been prepared. Nor was there any testimony that the Picks relied upon any material generated by Gaskill. He did not produce any such material until long after the preparation of return at issue. The charge was temporally specific and limited to conduct between January 18, 1994 and April 15, 1994 . Thus, there was not sufficient evidence to sustain Gaskill's conviction on this specific count.

VI.

We review de novo a district court's conclusion that it lacked authority to depart downwards, see United States v. Mena, 925 F.2d 354, 355 (9th Cir. 1991). However, we lack jurisdiction to review a discretionary refusal to depart downward. See United States v. Morales, 972 F.2d 1007, 1011 (9th Cir. 1992). The district judge's articulation of reasoning in this case creates doubt whether he considered fully whether the defendant's head injury created a deficit in judgment; rather, the district court appeared to limit its consideration to an assessment of Gaskill's intellectual prowess. The question to be decided was not whether Gaskill knew the difference between right and wrong or whether he could reason and articulate rational judgments, but whether his injuries and the operations on his frontal and parietal lobes had significantly affected the processing of emotions that affect judgment. Substantial evidence was presented that such had occurred: the reports of his attending physicians at periods well before he was on trial and the decline in his law practice and the difficulties described by his spouse in the 1980's. In light of this evidence and substantial scientific opinion that a person may retain rationality while his damaged emotional brain impairs his judgment, the basis of the district court's decision is unclear. ³

Nonetheless, in the end, the district court stated on the record that it recognized its authority to depart, but chose not to exercise its discretion to do so. Thus, because the district court acted within its discretion to refuse to grant a downward departure on the grounds of diminished capacity, we lack jurisdiction to consider Gaskill's claims on appeal. See United States v. Govan, 152 F.3d 1088, 1095 (9th Cir. 1998).

VII.

In summary, we affirm the judgment against Goodrich in its entirety. We reverse the conviction against Gaskill on count four of the indictment and remand his case for resentencing and further proceedings consistent with this opinion.

AFFIRMED in part; REVERSED in part; REMANDED.

¹ This disposition is not appropriate for publication and may not be cited to or by the courts of this circuit except as may be provided by Ninth Circuit Rule 36-3.

² At oral argument, Goodrich contended for the first time that severance should have been granted because of Gaskill's presentation of a diminished capacity defense. Because this argument was not presented to the trial court, nor in appellate briefing, we decline to consider it.

³ Because we are reversing Gaskill's conviction in part and remanding for new sentencing, the district court will have the opportunity to consider as part of that re-sentencing procedure whether to exercise his discretion to grant a downward departure based on impaired judgment as distinct from impaired intellectual ability. Cf. United States v. Cantu, 12 F.3d 1506, 1511, 1513 (9th Cir. 1993) ("mental capacity" downward departure factor includes not only "a lack of full intellectual functioning" but also "distorted . . . reasoning" and "interference with . . . ability to make considered decisions.")

 

 

[2001-1 USTC ¶50,311] United States of America , Plaintiff-Appellee v. Kenneth L. Utecht, Defendant-Appellant

(CA-7), U.S. Court of Appeals, 7th Circuit, 00-2285, 1/26/2001

238 F3d 882

2001 U.S. App. LEXIS 1060. Affirming an unreported District Court decision.

[Code Sec. 7602 ]

Examination of books and witnesses: Criminal proceedings: Fraud: Underreporting of income: Summons.--The district court did not err in denying a video game distributor's motion to dismiss a criminal indictment entered against him for his failure to report rental income from illegal video poker machines. The taxpayer failed to establish a prima facie case that the IRS impermissibly used its summons power to establish probable cause to begin a criminal investigation.

[Code Secs. 7206 and 7602 ]

Examination of books and witnesses: Criminal proceedings: Discovery: Indictment, discovery procedure.--In an issue of first impression in the Seventh Circuit, a video game distributor was not entitled to conduct discovery in connection with the indictment based on the IRS's failure to establish his liabilities before proceeding with the criminal investigation. Since the IRS's failure to proceed civilly was consistent with a proper separation of its civil and criminal investigations, the taxpayer failed to meet his burden to show a need for discovery.
[Code Sec. 7206 ]

Criminal proceedings: Fraud: Underreporting of income: Sentencing guidelines: Downward and upward adjustments.--The district court properly denied a two-level downward adjustment to a video game distributor's sentence for concealment of income from illegal video poker machines because he failed to make an adequate showing of contrition for his criminal activity. While he admitted wrongdoing at a hearing, the taxpayer later recanted, stating that his former attorney coerced him into pleading guilty. Likewise, the trial court properly applied a two-level increase to the taxpayer's sentence for sophisticated concealment. The sentence increase was proper even though none of his activities rose to a level beyond that of simple tax fraud; the mere presence of uncomplicated elements did not preclude enhancement.
[Code Sec. 7206 ]

Criminal proceedings: Fraud: Underreporting of income: Sentencing: Tax loss, calculation of.--The district court properly calculated a video game distributor's sentence even if his unreported rental income from illegal video poker machines was decreased by the depreciation he failed to claim on the machines. While the base offense level would have been lower with the deductions, the sentence as imposed against the taxpayer would have been greater than what he ultimately received.

Before: FLAUM, Chief Judge, RIPPLE and EVANS, Circuit Judges.

FLAUM, Chief Judge:

Kenneth L. Utecht claims the district court erred in denying his motion to dismiss the indictment or suppress evidence because the Internal Revenue Service ("IRS") used its civil summons power after it decided to recommend that criminal charges be brought against him. He also contends that he should have been permitted to conduct discovery on this issue. In addition, Utecht challenges the calculation of his sentence, arguing that certain enhancements should not have been applied and the amount of tax loss was improperly calculated. For the reasons stated herein, we affirm.

I. Background

Utecht is the owner of a corporation that supplies entertainment equipment, such as pinball machines and pool tables, to bars in central Wisconsin . In 1990, Utecht added video poker games to his stock and began offering these devices to his customers. Video gambling is illegal in Wisconsin , so Utecht took a number of steps to hide the existence of the video gambling machines and the monies these produced. Most relevant to this case, Utecht did not report the revenues from the poker devices on his corporate or personal federal income tax returns.

The IRS began a civil audit of Utecht and his company in 1994. The audit revealed that Utecht was spending large amounts of cash over his reported income. The IRS investigated and used the "cash method" of proof to determine what the IRS claims are conservative calculations of Utecht's unreported income. The IRS's minimum estimates of Utecht's unreported corporate income are $123,999.21 for the year ending June 30, 1993 , and $75,085.46 for the year ending June 30, 1994 . His individual unreported income is $64,506.59 for 1992, $137,841.05 for 1993, and $54,913.71 for 1994.

At some point, the IRS's civil audit became a criminal investigation for tax fraud. On October 6, 1999 , Utecht was indicted on five counts of violating 26 U.S.C. §7206(1) by making false statements in his personal and business tax returns and two counts of violating 26 U.S.C. §7206(2) by assisting others in filing materially false returns. Utecht filed a not guilty plea on October 26, and then filed a "LaSalle motion" (named after United States v. LaSalle Nat'l Bank [78-2 USTC ¶9501], 437 U.S. 298, 57 L.Ed.2d 221, 98 S.Ct. 2357 (1978)) on December 29, seeking to dismiss the indictment or suppress evidence because the IRS allegedly misused its civil summons power. This motion claims that all of the administrative summonses of the IRS seeking records from Utecht were issued after the IRS had made an institutional commitment to criminal prosecution. Utecht did not provide any specific facts to support this assertion in either the motion itself or a supporting brief, but he also filed a discovery motion seeking to require the government to produce all evidence relevant to this defense. On February 1, 2000 , the district court, without conducting a hearing, denied Utecht's "LaSalle motion" because he had not made a prima facie showing of entitlement to relief. The court also denied the discovery motion because the government acknowledged that it was under a duty to provide the kind of material Utecht was seeking due to its exculpatory nature, but that the government was unaware of any such evidence.

On February 4, 2000 , Utecht entered a plea agreement, under which he plead guilty to the five counts of making false statements in his income tax returns and the government dismissed the remaining two counts. This plea preserved the denial of the "LaSalle motion" for appeal. Utecht claims that he was unable to consult with his counsel before the plea colloquy on that date, which led him to appear confused when the judge first began questioning him. After a recess where Utecht consulted with his attorney, he was able to satisfactorily answer all of the questions posed by the court. In particular, Utecht answered that no one had forced him to plead guilty and that he was pleading of his own free will because he was in fact guilty of the offenses. The district court scheduled sentencing for April 14.

On March 24, Utecht's appointed counsel filed a motion to withdraw. This motion stated that Utecht claimed that his counsel had threatened him into agreeing to file a guilty plea and was not acting in Utecht's best interests. On April 12, the court conducted a hearing regarding this motion, where Utecht agreed that his counsel should withdraw. The court read various portions of the transcript from the February 4 hearing back to Utecht and reminded Utecht that he had been under oath when he stated at the previous hearing that he had not been forced to plead guilty, that he was in fact guilty of the charged offenses, and that he was satisfied with his current attorney. Utecht then claimed that he had lied at the plea colloquy because he was scared and did not know what to do. The court granted the motion to withdraw, and Utecht retained new counsel.

A sentencing hearing was held on April 26, 2000 . The government, using the presumptive rates stated in Note (A) to U.S.S.G. §2T1.1(c)(1), argued that the tax loss from Utecht's failure to report his video gambling income was $120,769.09. Utecht presented the testimony of his accountant in contending that this amount should be decreased by the unclaimed depreciation that would have been taken on the poker machines if the accountant had known about these games. The district court rejected Utecht's argument because of a lack of credible evidence that the depreciations would in fact have been taken. The court also imposed a two level increase for sophisticated concealment, listing a number of ways in which Utecht hid his offenses. Because the court found that Utecht lied at the April 12 hearing, it denied a two level decrease for acceptance of responsibility recommended by the government in the plea agreement. After applying certain other provisions, the court calculated the offense level at 21 and the criminal history category as I, yielding a range of 37 to 46 months. Because the amount of tax loss was near the minimum of the range for the base offense level, the court originally stated that it would sentence Utecht to 37 months, the lowest amount permitted by the Guidelines. The court noted that if it had accepted Utecht's depreciation argument, it would have sentenced him to the top of the range for an offense level of 20, which was 41 months and thus longer than the sentence calculated without taking the deductions into account. Because the statutory maximum for a single count of violating 26 U.S.C. §7206(1) is three years, the court actually sentenced Utecht to thirty-six months, rejecting the government's suggestion that it remain within the Guidelines by using concurrent sentences.

II. Discussion

A. "LaSalle Motion"

Utecht argues that the indictment should have been dismissed or evidence suppressed because the IRS abused its civil summons power. In the alternative, he claims that he should have been permitted to conduct discovery into this issue. Utecht principally relies on two cases, LaSalle [78-2 USTC ¶9501], 437 U.S. at 316-17 & n.18, which held that under the Internal Revenue Code then in effect the IRS lacked the statutory power to issue civil subpoenas for the sole purpose of investigating criminal activity, and United States v. Peters [98-2 USTC ¶50,650], 153 F.3d 445 (7th Cir. 1998), which involves when evidence obtained through a consensual search should be suppressed. However, Utecht's precise claim, while closely related to these two lines of authority, appears not to be covered by either of these two cases. Utecht apparently argues that the IRS circumvented his constitutional rights by using civil summonses, and thus the evidence should be suppressed under the exclusionary rule.

In theory, Utecht might have a valid argument for suppression. Subject to certain exceptions and qualifications, materials involuntarily seized from a defendant without probable cause (and a warrant unless an exception to the warrant requirement applies) will be excluded from the defendant's trial. See, e.g., Soldal v. Cook County, Ill., 506 U.S. 56, 66, 121 L.Ed.2d 450, 113 S.Ct. 538 (1992); United States v. Place, 462 U.S. 696, 701, 77 L.Ed.2d 110, 103 S.Ct. 2637 (1983). However, the IRS need not show probable cause in order to enforce a subpoena demanding that the defendant produce documents for a civil investigation. See United States v. Powell [64-2 USTC ¶9858], 379 U.S. 48, 57, 13 L.Ed.2d 112, 85 S.Ct. 248 (1964); United States v. Kis [81-2 USTC ¶9659], 658 F.2d 526, 536 (7th Cir. 1981). Thus, the government's use of civil subpoenas (or other kinds of administrative measures that do not require probable cause) principally to further a criminal investigation could undermine the Fourth Amendment's probable cause requirement. These constitutional concerns were recognized in Abel v. United States, 362 U.S. 217, 4 L.Ed.2d 668, 80 S.Ct. 683 (1960), the most relevant precedent for Utecht's argument. Abel explicitly contemplates applying the exclusionary rule to evidence obtained through the bad faith use of administrative warrants (which includes the IRS's civil summonses). Id. at 226, 230, 240. Bad faith is present if "the decision to proceed administratively . . . was influenced by, and was carried out for, a purpose of amassing evidence in the prosecution for crime." Id. at 230; see also Michigan v. Tyler, 436 U.S. 499, 508, 56 L.Ed.2d 486, 98 S.Ct. 1942 (1978) (holding that, while administrative search warrants issued without probable cause can be used to investigate the cause of a fire, search warrants based on probable cause must be used where authorities are seeking evidence that will be used in a criminal investigation). Therefore, if the IRS uses civil subpoenas without establishing the probable cause necessary for criminal cases after having made an institutional commitment to recommend prosecution of the defendant, evidence obtained through these subpoenas possibly could be suppressed at a criminal trial. Factors used to determine when the IRS is conducting a criminal investigation rather than a civil audit are described in Peters [98-2 USTC ¶50,560], 153 F.3d at 452-56.

As in all requests for dismissal of the indictment or suppression of the evidence, the defendant must first allege facts demonstrating that a hearing on the suppression issue is warranted and then at the hearing must produce evidence that he or she is entitled to the relief sought. Utecht bears the burden of making a prima facie showing before the district court must hold a hearing to investigate whether the IRS abused its civil summons power. See United States v. Rodriguez, 69 F.3d 136, 141 (7th Cir. 1995); United States v. Randle, 966 F.2d 1209, 1212 (7th Cir. 1992). A defendant must present specific, detailed, and material facts in order to carry this burden. See Rodriguez, 69 F.3d at 141; Randle, 966 F.2d at 1212. Utecht fails to satisfy this standard. The only fact on which he relies is that his civil audit has not yet resulted in a tax bill or arrears notice, which he claims suggests that the IRS abandoned its civil tax collection purpose. However, a tax fraud defendant's failure to receive a tax bill tends to suggest that the IRS maintained a proper separation of its civil and criminal functions, undermining Utecht's claim rather than supporting it. Civil matters should be suspended once a criminal investigation begins, see Peters [98-2 USTC ¶50,650], 153 F.3d at 454, and this would preclude the IRS from sending a tax bill until after the criminal proceeding was completed. Thus, the lack of a civil tax notice is not material to the question of whether the IRS improperly used its civil summons power to gather evidence for a criminal prosecution. Therefore, Utecht has not established a prima facie case and the district court did not err in denying Utecht's motion or refusing to hold a hearing.

Moving on to discovery, what standard a defendant must satisfy to engage in discovery to gather evidence that a potential violation based on Abel may have occurred appears to be a question of first impression. In the areas of vindictive prosecution and selective prosecution, a defendant must show a colorable basis for his or her claim before discovery against the government is permitted, see United States v. Goulding, 26 F.3d 656, 662 (7th Cir. 1994); United States v. Heidecke, 900 F.2d 1155, 1159 (7th Cir. 1990), and we adopt that requirement for cases where a defendant claims that the IRS misused its civil summons power in a criminal investigation. This standard prevents defendants from unnecessarily imposing enormous administrative costs and delays in tax evasion prosecutions by engaging in extended fishing expeditions to support frivolous challenges. Cf. Heidecke, 900 F.2d at 1158-59 (justifying the colorable basis requirement by discussing the need to guard against "allowing claims of vindictive prosecution to mask abusive discovery tactics by defendants" and to "free[] the judicial system of criminal trials with irrelevant massive discovery"). However, this "relatively low burden" on defendants recognizes that, as with vindictive or selective prosecutions, the government holds most of the relevant evidence. Id. at 1158.

Utecht again bases his claim only on his failure to receive a tax bill. As explained above, this lack of action by the IRS is consistent with a proper separation between its civil and criminal functions, and thus is not a colorable basis on which to conclude that the IRS engaged in wrongdoing. Therefore, the district court did not err in refusing to grant discovery against the government.

Moreover, the prosecutor in Utecht's case professed that he was under an obligation to provide the defense with any evidence that might tend to show that the IRS had used its civil summons power improperly. The prosecutor consulted with IRS agents before informing the court and Utecht that he was unaware of any such evidence. Thus, Utecht benefitted from the added protection of a search of the evidence by the government to ensure that Utecht had not been deprived of any of his constitutional rights.

B. Sentencing Issues

1. Acceptance of responsibility.

The district court denied a two level downward adjustment for acceptance of responsibility, even though this was recommended by the prosecution and the pre-sentencing report, because the court believed that Utecht lied at the April 12, 2000 hearing when he disavowed his earlier statements at the plea colloquy. Utecht does not deny that he lied under oath but challenges the court's decision, claiming that a sworn prevarication is an insufficient basis on which to deny an adjustment for acceptance of responsibility. Whether a defendant has accepted responsibility for his actions is a factual question and thus we review for clear error. See United States v. Martinez , 169 F.3d 1049, 1056 (7th Cir. 1999). In addition, great deference is given to the trial court's determination, since that court is best able to judge the sincerity and contrition of the defendant. See United States v. Stewart, 198 F.3d 984, 987 (7th Cir. 1999); United States v. Mancillas, 183 F.3d 682, 711 (7th Cir. 1999).

The law of this circuit is that lying under oath is a sufficient reason for denying a downward adjustment for acceptance of responsibility. See United States v. Taliaferro, 211 F.3d 412, 415 (7th Cir. 2000) (collecting cases). This statement would normally be enough to conclude discussion on this issue, but Utecht raises a couple of challenges based on case law, though these are unsuccessful. Utecht cites this court's decision in United States v. Eschman, 227 F.3d 886, 891 (7th Cir. 2000), which vacated a defendant's sentence where the defendant expressed remorse at his actions but the district court denied an acceptance of responsibility downward adjustment apparently because the defendant challenged the calculation of his sentence. When Utecht lied at the April 12 hearing, he stated that he had previously lied at the plea colloquy about pleading guilty of his own free will because he was in fact guilty of the charged offenses. This prevarication (that is, the one at the April 12 hearing) was a denial of factual guilt for filing false tax returns because Utecht claimed that he lied when he admitted such guilt. By contrast, Eschman did not involve a claim that the defendant had lied under oath in denying that he had violated the law, as the court here found that Utecht had done. Id. (stating that the defendant "never expressed outright denials of relevant conduct"). Therefore, Eschman does not aid Utecht.

In addition, Utecht relies on the Ninth Circuit's opinion in United States v. Gonzalez, 16 F.3d 985, 991 (9th Cir. 1994), which holds that lying about one's motivation for committing a crime should not play a part in sentencing if the defendant was not trying to avoid criminal liability. However, Gonzalez has been explicitly rejected by the Sixth Circuit in United States v. Greene, 71 F.3d 232, 235 (6th Cir. 1995), weakening its persuasive authority, and is distinguishable from Utecht's circumstances. Gonzalez applies only to lies about a defendant's motivation; as described above, at the April 12 hearing Utecht prevaricated about filing false tax returns, the offenses with which he was charged rather than his motivation for those crimes. Utecht does not challenge the district court's factual finding that he lied at the April 12 hearing, and thus the district court did not commit clear error in determining that he had not accepted responsibility.

2. Sophisticated concealment.

The district court imposed a two level increase for sophisticated concealment under U.S.S.G. §2T1.1(b)(2). Utecht argues that the district court incorrectly applied a two level enhancement for sophisticated concealment because none of his activities rises above what is necessary to commit garden variety tax fraud. We review the district court's determination that Utecht's conduct made the offense difficult to detect for clear error. See United States v. Madoch [97-1 USTC ¶50,284], 108 F.3d 761, 765 (7th Cir. 1997); United States v. Hammes, 3 F.3d 1081, 1083 (7th Cir. 1993).

Utecht is correct that the enhancement should not be applied where the concealment is no more intricate or complex than the routine tax evasion case, since all such offenses involve some planning and this is already incorporated into the base offense level. U.S.S.G. §2T1.1, Application Note 4; U.S.S.G. §2T1.1, Background; see Madoch [97-1 USTC ¶50,284], 108 F.3d at 765-66. However, the mere fact that the scheme might have been more sophisticated or may have had some uncomplicated elements does not preclude the enhancement. See Madoch [97-1 USTC ¶50,284], 108 F.3d at 766. At least some of the conduct relied on by the district court in imposing the increase is sufficiently above the standard tax fraud case to warrant the enhancement. These activities include: hiding the existence of the video poker machines and proceeds from his accountants; fabricating receipts to account for the proceeds from the video poker machines and including these in the corporate records; generating false 1099s that did not include the payments to bars owners from the revenues of these machines, causing these owners to file false tax returns; and generating false personal property tax returns. Cf. id. (relying in part on defendant's creation of "false W-2 forms, phony itemized deductions and false employment records" in upholding sophisticated concealment enhancement); United States v. Wu, 81 F.3d 72, 73-74 (7th Cir. 1996) (listing falsification of business records, providing fraudulent documents to others, and providing incomplete and misleading information to accountants as some of the defendant's activities justifying a sophisticated concealment enhancement).

3. Tax loss calculation.

The district court used the presumptive rates in U.S.S.G. §2T1.1(c)(1), Note (A) in calculating the tax loss from Utecht's offenses to be $120,769.09, resulting in a base offense level of 15, U.S.S.G. §2T4.1. If this loss had been just $769.09 less, then Utecht's base offense level would have been 14. Id. At the sentencing hearing, Utecht presented the testimony of his accountant that he would have depreciated the video poker machines had he known of them, resulting in a deduction of more than necessary to drop the tax loss into the amount for the lower base offense level. Utecht argues that the district court should have begun with the presumptive tax rates to calculate tax loss and then decreased this amount by any unclaimed deductions to which he would have been entitled. Utecht relies heavily on dicta in United States v. Martinez-Rios, 143 F.3d 662, 670-71 (2d Cir. 1998), which states that under the 1995 Guidelines legitimate but unclaimed deductions may be used in calculating tax loss.

The government responds by discussing the language of U.S.S.G. §2T1.1(c)(1), Note (A), which provides that the presumptive rates shall be used "unless a more accurate determination of the tax loss can be made." It asserts that this language means that either the presumptive rates can be used without any adjustment, or the government or taxpayer can forego use of the presumptive rates and perform a more complete audit to determine tax loss which could include unclaimed deductions. However, the government asserts that these two approaches cannot be mixed; that is, if the defendant wishes to rely on the presumptive rates, then no adjustments such as deductions can be applied. It also notes that United States v. Spencer, 178 F.3d 1365, 1368 (10th Cir. 1999) questions the dicta in Martinez-Rios.

We need not answer the question posed by the parties of whether deductions can be taken from tax loss calculated using the presumptive rates for two reasons. First, the district court indicated that if it had credited Utecht's argument and decreased his offense level by one to 20, it would have sentenced him to the high end of the range for that level, which is 41 months. Because the maximum sentence for a violation of 26 U.S.C. §7206(1) is three years and the district court refused to construct consecutive sentences, the court would have reduced this sentence to 36 months, which is of course the sentence that Utecht received. Thus, Utecht's sentence would not change even if the depreciation deductions were used in calculating tax loss. Because we conclude that the same sentence would have been imposed irrespective of whether these deductions should have been applied, we decline to resolve this issue. See United States v. Howard, 179 F.3d 539, 545 (7th Cir. 1999); United States v. Dillon, 905 F.2d 1034, 1038 (7th Cir. 1990).

The second, independently sufficient reason for not deciding this legal question is that the district court found as a matter of fact that Utecht had not established that he would have taken the deductions. ¹ While Utecht's accountant said on direct examination that he would have depreciated the video poker machines during the relevant fiscal years if he had known these existed, on cross-examination the accountant could not remember whether the poker equipment had ever actually been depreciated after the accountant learned of the games. The prosecutor asked additional questions indicating that on the accounting worksheets for years subsequent to when Utecht filed false tax returns the video poker machines had never been depreciated, but the accountant again stated that he could not remember and could not determine from the documents presented to him whether the games were ever depreciated. Presumably on this basis, the district court found that the video poker machines would not have been depreciated during the years of Utecht's tax fraud even if the accountant had known of the games, since whether the machines had in fact been depreciated after the accountant learned of these was unclear. On the record presented to the district court, this finding is not clearly erroneous. Therefore, we need not determine the legal effect of a finding contrary to the district court's actual factual determinations.

III. Conclusion

Utecht failed to present sufficient evidence to entitle him to dismissal of the indictment, suppression of the evidence, or discovery to investigate a potential violation of his constitutional rights. The district court did not commit error in any of its sentencing calculations. Therefore, Utecht's conviction and sentence are Affirmed.

¹ Indeed, the transcript of the April 26, 2000 sentencing hearing reveals that the district court apparently accepted Utecht's legal argument that unclaimed deductions could be subtracted from tax loss calculated using the presumptive rates, but that Utecht had failed to present sufficient evidence in this particular case that such deductions would have been claimed. After stating that the offense level was based on a tax loss of $120,769.09, the district court stated:

It may very well be that variations can be addressed by the Court but certainly not in this case. There has been no credible evidence presented to the Court as to the variation which has been suggested by the defendant.

[. . .]

The Court does understand that it should attempt to be more precise perhaps than the guidelines may direct and where the evidence would so demonstrate to the Court by a preponderance of the evidence that the guideline should be changed from that from which it is as suggested to us by the defendant, the Court would do that, but at this point there is nothing to so suggest.

As stated in the body of the text, we express no opinion on the legal issue presented by the parties.

 

 

[2005-2 USTC ¶50,571] United States of America , Plaintiff v. Leonard Molesworth, Defendant.

U.S. District Court, Dist. Ida.; CR-05-045-C-EJL, August 16, 2005 .

[ Code Sec. 7206]

Individual taxpayer: False and fraudulent statements: Interference with administration of IRS laws: Indictment: Subject matter jurisdiction: Procedure.  

An indictment under Code Sec. 7206 properly provided a basis for subject matter jurisdiction because it tracked the language of the charging statutes. It contained the elements of the offense charged, fairly informed the defendant of the charge against which he must defend and enabled him to plead an acquittal or conviction in bar of future prosecutions. Furthermore, both the original indictment and the superseding indictment were valid charging instruments because each contained the signature of the grand jury's foreperson.

[ Code Sec. 7212]

Individual taxpayer: False and fraudulent statements: Interference with administration of IRS laws: Indictment: Subject matter jurisdiction: Procedure.  

An indictment under Code Sec. 7212 properly provided a basis for subject matter jurisdiction because it tracked the language of the charging statutes. It contained the elements of the offense charged, fairly informed the defendant of the charge against which he must defend and enabled him to plead an acquittal or conviction in bar of future prosecutions. Furthermore, both the original indictment and the superseding indictment were valid charging instruments because each contained the signature of the grand jury's foreperson.

MEMORANDUM ORDER

LODGE, District Judge: Pending before the Court in the above entitled matter are Defendant's motions to dismiss count one, produce the complaining party, strike surplusage, venue, dismiss the indictment, exclude certain acts, and restore speedy trial rights. The parties have filed their responsive briefing on the motions and the matter is now ripe for the Court's consideration. Having fully reviewed the record herein, the Court finds that the facts and legal arguments are adequately presented in the briefs and record. Accordingly, in the interest of avoiding further delay, and because the court conclusively finds that the decisional process would not be significantly aided by oral argument, this motion shall be decided on the record before this Court without oral argument. Local Rule 7.1(d)(2).

Discussion

1) Motion to Dismiss Count One:
Defendant seeks to dismiss count one of the indictment arguing that the "omnibus clause" of the statute, 26 U.S.C. §7212(a), is a "catch-all" clause which requires that the taxpayer be given notice of a discrepancy in his filing before he or she can violate the statute. ¹ Defendant cites to United States v. Kassouf [ 98-1 USTC ¶50,437], 144 F.3d 952 (6th Cir. 1998) for the proposition that to be guilty of violating §7212(a) one must, at the time he or she files a false form, be aware of some pending IRS action. The government disputes the implications of Kassouf and maintains that the facts alleged in this case warrant the §7212(a) charge.

Count one charges Defendant with violating §7212(a), which makes it a felony to:

corruptly or by force or threats of force ... endeavor[ ] to intimidate or impede any officer or employee of the United States acting in an official capacity under this title, or in any other way corruptly or by force or threats of force ... obstruct[ ] or impede[ ], or endeavor[ ] to obstruct or impede, the due administration of this title.

"Section 7212(a) is aimed at prohibiting efforts to impede 'the collection of one's taxes, the taxes of another, or the auditing of one's or another's tax records.'" United States v. Kuball [ 92-2 USTC ¶50,501], 976 F.2d 529, 531 (9th Cir. 1992) (citation omitted). In order to prove a violation of §7212(a), attempting to interfere with the administration of the IRS, requires the government to prove "(1) corruption, force, or threat of force, and (2) an attempt to obstruct the administration of the IRS." United States v. Hanson [ 94-1 USTC ¶50,075], 2 F.3d 942, 946 (9th Cir. 1993). In Kassouf, the Sixth Circuit held that the §7212(a) charge was properly dismissed because there was no on-going IRS investigation. This holding, however, was expressly limited to the particular facts in Kassouf by United States v. Bowman [ 99-1 USTC ¶50,510], 173 F.3d 595 (6th Cir. 1999) ("All of the reasoning in Kassouf supports the conclusion that an individual's deliberate filing of false forms with the IRS specifically for the purpose of causing the IRS to initiate action against a taxpayer is encompassed within §7212(a)'s proscribed conduct."). Thus, the allegations in this case, filing of false Form 8300's, properly alleges a violation of §7212(a). See Kuball [ 92-2 USTC ¶50,501], 976 F.2d at 531 (finding the government need not prove that the defendant was aware of an ongoing tax investigation to obtain a conviction under §7212(a); it is sufficient that the defendant hoped "to benefit financially" from threatening letters or other conduct.); Hanson, 2 F.3d at 946 (finding defendant's submissions of false and fictitious 1099 and 1096 forms and fraudulent tax returns violated §7212(a)'s omnibus clause). The motion to dismiss is denied.

2) Motion to Dismiss Indictment for Entrapment:
The forms making up the allegations in this case were filed, the Defendant argues, in reliance on information received from an IRS employee. Specifically, Defendant argues that he telephoned the IRS and inquired about whether he needed to file a Form 8300 and was told he should file the form and the IRS, at his request, sent him the forms, which he then filed. The government argues the Defendant has not satisfy the requirements for entrapment.

An entrapment defense has two elements: (1) government inducement to commit the crime; and (2) the absence of predisposition to commit the crime. United States v. Ross, 372 F.3d 1097, 1108 (9th Cir. 2004) (citation omitted). If the defendant is able to put entrapment in issue, the government bears the burden of negating the defense beyond a reasonable doubt. Id. (citation omitted). "The entrapment defense protects the unwary innocent, not the unwary criminal." Id. (quoting United States v. Russell, 411 U.S. 423, 429 (1973)) (citation and quotation marks omitted).

The Defendant may be asserting the defense of entrapment by estoppel. "Entrapment by estoppel is the unintentional entrapment by an official who mistakenly misleads a person into a violation of the law." United States v. Batterjee, 361 F.3d 1210, 1215 (9th Cir. 2004) (citation omitted). The defense "derives from the Due Process Clause of the Constitution, which prohibits convictions based on misleading actions by government officials." Id. (citing United States v. Tallmadge, 829 F.2d 767, 773 (9th Cir. 1987) (citations omitted)). "In order to establish entrapment by estoppel, a defendant must show that (1) an authorized government official, empowered to render the claimed erroneous advice, (2) who has been made aware of all the relevant historical facts, (3) affirmatively told him the proscribed conduct was permissible, (4) that he relied on the false information, and (5) that his reliance was reasonable." Id. (citations and quotations omitted). Reasonable reliance exists where "[a] defendant's reliance is reasonable if a person sincerely desirous of obeying the law would have accepted the information as true, and would not have been put on notice to make further inquiries." Id. (citations and quotations omitted).

The Defendant in this case has not satisfied the requirements for a defense under either theory, entrapment or entrapment by estoppel. No evidence of government inducement nor the absence of predisposition has been asserted by the Defendant. As to the estoppel theory, the information the Defendant indicated that he provided to the IRS employee was insufficient to provide the IRS employee with the facts necessary to accurately assist the Defendant. As the government states, it is the alleged falsity of the Form 8300s that gives rise to the charges in this case. The IRS employee, however, was not told the complete details, as the government alleges them to be, surrounding the Defendant's inquiry regarding the filing of the forms. The Court finds the entrapment elements have not been shown and, thus, the motion is denied.

3) Motion to Strike Surplusage:

Defendant has filed a motion seeking to strike surplusage from the government's motions. Specifically, the words "harass and intimidate" which is not part of the charging statutes and, he argues, can only be intended to prejudice or inflame. In particular, the motion notes that the language was quoted in a local newspaper. The motion is made pursuant to Rule 7(d). The government contends the motion is without a proper basis to seek such relief.

Federal Rule of Criminal Procedure 7 governs the use, procedure, and contents of an indictment and/or information. Fed. R. Crim. P. 7. Rule 7(d) allows defendants to strike surplusage from a given indictment. It does not, however, provide a basis for striking language from motions and briefing filed by the government. The impact, if any, of the newspaper article is a different question involving prejudice to potential jurors. This concern, however, can be resolved during voir dire of the jury panel. The motion is denied.

4) Motion to Produce Complaining Party:

Defendant also seeks an order compelling the appearance of IRS Special Agent Donald F. Jensen at the trial in this matter and challenges the evidence gathered by Special Agent Jensen. The motion is based on the Confrontation Clause. While noting that Special Agent Jensen will be present at trial and may possibly be called during the government's case in chief, the government opposes the motion and notes that it will object to questioning at trial on irrelevant topics or otherwise inadmissible evidence.

"The Sixth Amendment Confrontation Clause requires that in order to introduce relevant statements at trial, state prosecutors either produce the declarants of those statements as witnesses at trial or demonstrate their unavailability" and that the statements "bear some adequate indicia of reliability." Bains v. Cambra, 204 F.3d 964, 973 (9th Cir. 2000) (citing Ohio v. Roberts, 448 U.S. 56, 65-66 (1980) and White v. Illinois, 502 U.S. 346, 356 (1992)). The right of confrontation exists for the purpose of promoting accuracy and reliability of the evidence presented at trial against a criminal defendant. Bockting v. Bayer, 399 F.3d 1010, 1014 (9th Cir. 2005) (citing several Supreme Court cases). "The principal evil at which the Confrontation Clause was directed was the civil-law mode of criminal procedure, and particularly its use of ex parte examinations as evidence against the accused." Id. (quoting Crawford v. Washington, 541 U.S. 36, 45 (2004)). Thus, Courts should not allow "admission of testimonial statements of a witness who did not appear at trial unless he was unavailable to testify, and the defendant had had a prior opportunity for cross-examination." Id. (quoting Crawford, supra).

In this case, the Defendant seeks to question Special Agent Jensen prior to any presentation of evidence at trial regarding his collection of the evidence in this case. This request to challenge the agent's testimony and evidence prior to trial is not what the Confrontation Clause is intended to protect. "A defendant has no right to confront a 'witness' who provides no evidence at trial. Nor is the government required to call all of the witnesses to a crime." United States v. Heck [ 74-2 USTC ¶9730], 499 F.2d 778, 789 (9th Cir. 1974). Moreover, the right of confrontation is satisfied by the defendant's opportunity to subpoena and call a witness in his or her own case in chief. Pavlik v. United States, 951 P.2d 220, 224 (9th Cir. 1991) (citations omitted). The admissibility of evidence in this case will be ruled upon by the Court at trial. If the Defendant seeks to challenge such evidence prior to trial he may file an appropriate motion in advance of trial providing sufficient time for the opposing party to respond and for the Court to consider the motion. The motion to compel based upon the Confrontation Clause, however, is denied.

ORDER

Based on the foregoing and being fully advised in the premises, the Court hereby orders as follows:

1) Defendant's Motion to Dismiss Count One is DENIED.

2) Defendant's Motion to Dismiss Count One for Entrapment (Dkt. No. 27) is DENIED.

3) Defendant's Motion to Strike Surplusage (Dkt. No. 28) is DENIED.

4) Defendant's Motion to Compel to Produce the Complaining Party (Dkt. No. 21) is DENIED.

MEMORANDUM ORDER

Pending before the Court in the above-entitled matter is Defendant's motion to dismiss the Superseding Indictment. The motion is ripe for the Court's consideration. Having fully reviewed the record herein, the Court finds that the facts and legal arguments are adequately presented in the briefs and record. Accordingly, in the interest of avoiding further delay, and because the court conclusively finds that the decisional process would not be significantly aided by oral argument, this motion shall be decided on the record before this Court without oral argument. Local Rule 7.1.

Discussion

Defendant's motion renews his objection to the initial indictment in this matter arguing it is an invalid charging instrument and lacks subject matter jurisdiction because it is unsigned by the Grand Jury Foreperson. The government has responded to the motion arguing the superseding indictment is valid and properly provides a basis for subject matter jurisdiction.

The Defendant's challenge to the Grand Jury Foreperson's signature on the document was previously rejected by the Court. (Dkt. No. 22). The Court determined "Federal Rule of Criminal Procedure 6(c) requires that all indictments be signed by the grand jury foreperson. The practice in this district is that the foreperson's signature is on the back of the indictment. Thus, the original indictment in this case does contain the signature of the foreperson as required by Rule 6." (Dkt. No. 22). The same holds true for the Superseding Indictment.

The motion also asserts that the indictment lacks subject matter jurisdiction. The Superseding Indictment alleges charges pursuant to 26 U.S.C. §§7206(1), 7212(a). (Dkt. No. 24). Original jurisdiction is vested in district courts of the United States over "all offenses against the laws of the United States ." 18 U.S.C. §3231. "[A]n indictment is sufficient if it, first, contains the elements of the offense charged and fairly informs the defendant of the charge against which he must defend, and, second, enables him to plead an acquittal or conviction in bar of future prosecutions." United States v. Ross, 206 F.3d 896, 899 (9th Cir. 2000) (citing United States v. Bailey, 444 U.S. 394, 414 (1980) (quoting Hamling v. United States, 418 U.S. 87, 117 (1974)). The indictment in this case tracks the language of the charging statutes which allege violations of the laws of the United States . The Court finds the indictment properly invokes this Court's subject matter jurisdiction over this case; therefore, the motion is denied.

ORDER

Based on the foregoing and being fully advised in the premises, the Court DENIES Defendant's motion to dismiss (Dkt. No. 48).

¹ This motion was not docketed with the Court in the normal course. The Court was made aware of the motion when reviewing the government's response to the motion. A copy of the motion was obtained from the government and has been docketed accordingly.