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I

Francis F. Paul was a self-employed neurosurgeon in the Muskegon , Michigan area. During the late 1980's and into the early 1990's. Dr. Paul's practice steadily declined and he began to accumulate large debts. Beginning in 1988, Dr. Paul failed to file his federal income tax returns on time. When he was directly contacted by the Internal Revenue Service (IRS) several years later, Dr. Paul filed the delinquent returns, but did not pay the taxes that were due with the returns filed. In addition, Dr. Paul collected, but did not pay over to the IRS, his employees' income withholdings.

Dr. Paul owned a house in North Muskegon . As a result of his falling behind on the monthly mortgage payments, the bank started foreclosure on the property. During a six-month mortgage redemption period, Dr. Paul suggested to a friend, Edward Snider, that he buy the home and rent it back to Dr. Paul. Snider's testimony revealed that he understood Dr. Paul needed to put the property into someone else's name in order to protect it from creditors. Snider testified that he decided to go forward with the purchase of the house in order to help Dr. Paul.

In September 1991, Dr. Paul's attorney prepared a Purchase and Sale Agreement, in which Snider was to purchase the property from Dr. Paul for $300,000, with $60,000 to be paid by Snider to Dr. Paul as a down payment. Subsequently, on October 5, 1991, Dr. Paul and Snider executed an agreement (the Rental Agreement) in which Dr. Paul agreed to rent the house from Snider after closing on the sale of the property for the amount of Snider's mortgage payment. The Rental Agreement was for a term of seven years, included an option for Dr. Paul to buy the property at any time during the term of the agreement for a sum equal to the outstanding mortgage balance or a sum greater than that at Paul's discretion, required Dr. Paul to pay the real estate taxes and unspecified insurance premiums on the property, and provided for the establishment of an interest-bearing account in Snider's name, which would hold a sum equal to three monthly mortgage payments to be deposited by Dr. Paul, with the interest on the money to be divided equally between Dr. Paul and Snider.

After being denied a mortgage at Old Kent Bank, Snider approached a non-federally-insured Michigan mortgage broker, the Mortgage House, and submitted a loan application in October 1991. The mortgage broker obtained a mortgage from St. Paul Federal Bank, a federally insured bank, on the basis of a loan application submitted to the Mortgage House by Snider in which he misrepresented his income, assets, and profession, and also incorrectly stated that he had given Dr. Paul $60,000 as a down payment on the property. Additionally, Snider submitted a phony bill of sale for a diamond to be used as collateral, a phony gift letter to explain where the $60,000 down payment had come from, and false tax returns. Snider alleges that he did all of this with Dr. Paul's knowledge and help.

St. Paul Federal Bank (the Federal Bank) sent a loan commitment letter to the Mortgage House and subsequently the closing on the property took place. Nevertheless, neither Dr. Paul nor Snider disclosed the existence of the Rental Agreement to either the Mortgage House or the Federal Bank. Over the course of the next few years, Dr. Paul sent Snider checks to cover the mortgage payments and Snider used those funds to pay the mortgage. These checks are the basis of the mailings charged in Counts 5-47, mail fraud. Because of late payments, Snider twice filed suit against Dr. Paul for back rent in Michigan state court.

In February 1992, Dr. Paul's practice in Muskegon had declined to such an extent that he was forced to shut it down and Dr. Paul began a new practice in Idaho Falls , Idaho , affiliated with the Eastern Idaho Regional Medical Center (EIRMC). EIRMC provided Dr. Paul with several loans in order to help start his practice and defray moving costs, so that by the end of 1993, Dr. Paul owed the company $235,000 plus interest, which increased to more than $363,000 by early 1994. Dr. Paul paid his employees in this new office in cash and did not apply for a new Employer Identification Number for the practice. In addition, Dr. Paul did not open up a checking account in the practice's name and utilized five different bank accounts to deposit checks from patients for services.

By 1994, Dr. Paul was assessed approximately $311,000 in unpaid taxes, penalties, and interest, approximately $138,000 of which was actual tax. In May 1994, the IRS decided to accept an Offer-in-Compromise filed by Dr. Paul, which would forgive his tax debt of $311,431.55 for the reduced amount of $50,000. This compromise was reached on the basis of financial statements provided to the IRS by Dr. Paul with regard to his current assets and income, which caused the IRS to make a determination that the residual money owed would very likely remain uncollectible. However, Dr. Paul did not disclose to the IRS that he had a new practice in Idaho, an ongoing interest in a the North Muskegan residence, five bank accounts in Idaho, Nevada, and Wyoming, ownership of an antique Packard automobile, and a new home in Idaho Falls, purchased for $250,000 on an unrecorded land contract. In fact, when dealing with the IRS, Dr. Paul used a false Nevada address, a Nevada driver's license, and Nevada automobile license plates.

In July 1993, Dr. Paul and William Sewell, the husband of Dr. Paul's Idaho Falls office manager, formed an entity known as the Idaho Brain Tumor Center (IBTC), which was to develop and utilize a new medical technology called "boron neutron capture therapy." In July 1994, EIRMC made another loan to Dr. Paul, this time in the amount of $297,000. Dr. Paul gave the proceeds of that loan to the IBTC. In total, Dr. Paul invested approximately $500,000 into IBTC, which sustained huge losses over the course of its existence. EIRMC filed a claim against Dr. Paul in federal court for a sum in excess of $868,152, which included the various loans made to him. In 1999, Dr. Paul managed to refinance the Michigan home through another bank mortgage, paid off the St. Paul Federal Bank mortgage and thereby removed Snider as the owner of record. Shortly thereafter, Dr. Paul sold the house at a substantial profit. In 1997, the IRS began a criminal investigation of Dr. Paul, which eventually led to his arrest and indictment for the charges in this case.

II

1. Claims of Plain Error During the Trial

Dr. Paul now appeals three events during the course of his trial to which his lawyer did not make a timely objection. We restrict our review of these claims, therefore, to correcting "plain errors or defects affecting substantial rights" under Fed. R. Crim. P. 52(b). See United States v. Dedhia, 134 F.3d 802, 808-09 (6th Cir. 1998). Before this court can correct an error not raised at trial, there must be 1) error, 2) that is plain, and 3) that affects substantial rights. United States v. Olano, 507 U.S. 725, 732 (1993); Fed. R. Crim. P. 52(b). If those three factors are met, then this court may exercise its discretion to notice a forfeited error if the error "seriously affect[s] the fairness, integrity, or public reputation of judicial proceedings." Olano, 507 U.S. at 732.

Introductory Comments Made by the Trial Judge

Dr. Paul contends that the trial judge committed plain error by suggesting to the jurors that they were to apply their own local values and local sense of justice when evaluating issues at trial, that the comments tainted the jurors' perception of their role in the proceeding, and that this court should, therefore, reverse Dr. Paul's conviction and order a new trial. In part, the judge stated:

This is your community. And I can't speak more strongly for the fact that the values that are cherished and are a part, indigenous to West Michigan , you bring to this courtroom, and that's okay. And you will use those as you evaluate a matter such as this.

...

You represent [a] statistical cross section [of your district]. That's very important because a jury that sits and deliberates on justice and a just result has historically come from the district where the event is alleged to have occurred and is one in which it is said in the earliest English roots that it's a peer group of the community sitting in judgment on itself. That is, you bring to this courthouse, whether consciously or unconsciously, a sense of justice which you as a member of your community have. Now, this may come from coffee klatches, from newspapers, through television, through schools, through any number of things. You bring that to your sense of justice.

JA at 1046, 1065.

The trial judge's introductory remarks, if objectionable at all, do not amount to plain error requiring reversal. They were made in explanation of the common-law principle that one has a right to be tried by a jury of one's peers. This basic tenet of our judicial system is reflected in the Jury Selection and Service Act of 1968, as amended, which states that "[i]t is the policy of the United States that all litigants in Federal courts entitled to trial by jury shall have the right to grand and petit juries selected at random from a fair cross section of the community in the district or division wherein the court convenes." 28 U.S.C. §1861.

Moreover, the approved circuit instructions on the proper role and duties of a juror were given at the beginning of the trial and after closing arguments the judge reiterated that the jury was bound by oath to follow the court's instructions with regard to the law, applying it to the facts as found by the jury. These additional instructions minimize the likelihood that anything said by the trial judge in his introductory comments could have been misinterpreted by the jury and would have clarified any doubt in a juror's mind that he or she was to apply the law as identified by the court. The district court, therefore, did not commit plain error.

Dismissal of Jurors by the District Court

Dr. Paul contends that the trial judge committed plain error by dismissing venire members during voir dire for expressing opinions about the IRS, without probing further to ascertain if the jurors in question would be capable of putting such opinions aside. Dr. Paul argues that as a result of the judge's actions, the jury impaneled was "pro" IRS and thus Dr. Paul was denied an opportunity to be heard by an impartial jury, in violation of the Sixth Amendment.

The district court has the duty and authority to dismiss jurors for cause. See 28 U.S.C. §1870. In addition, "[t]he scope of questions permitted to be asked on voir dire examination is generally a matter addressed to the sound discretion of the court." Eisenhauer v. Burger, 431 F.2d 833, 836 (6th Cir. 1970). See also United States v. Anderson , 562 F.2d 394, 397 (6th Cir. 1977). The district judge asked a number of routine questions of jurors in order to ascertain if anyone's past experiences with the IRS would affect their ability to evaluate the evidence presented at trial in a fair or impartial manner. Considering that much of this case deals with tax fraud, the trial judge did not abuse his discretion when he dismissed jurors for having strong opinions about the IRS when the jurors admitted to the court that they either did not think they would be fair or impartial in their evaluation of the evidence presented in relation to the IRS or were not sure. Furthermore, it is not enough for Dr. Paul to show that the trial court's decision to exclude the jurors in question was improper. He must also show that the jury selected was biased. See Hill v. Brigano, 199 F.3d 833, 844 (6th Cir. 1999) (citing Ross v. Oklahoma, 487 U.S. 81, 83-85 (1988)). Dr. Paul, however, does not provide any evidence that the jury selected was biased. The trial court did not commit plain error in dismissing the jurors in question and there was no evidence of bias in the jury that was impaneled in this case.

Ex parte Communications

Dr. Paul contends that the trial judge erred by engaging in ex parte communications with jurors during the trial and that according to our decision in Standard Alliance Industries, Inc. v. Black Clawson Co., 587 F.2d 813, 828 (6th Cir. 1978), such conduct raises a presumption of reversible error that cannot be rebutted. However, the situation in this case differs markedly from the situation in Standard Alliance, in which there was absolutely no record of the court's ex parte contact, which was conducted through the court's law clerk, and to which the defendant had no opportunity to object during his trial. Moreover. since Standard Alliance, the Supreme Court has refined the law in this area, providing us with guidance for considering claims of judicial ex parte communications.

The right of the accused to be present during all critical stages of a trial against him is fundamental. See Rushen v. Spain , 464 U.S. 114, 117 (1983); Fed. R. Crim. P. 43. Ex parte communications are absolutely discouraged and a question from the jury should be answered in open court, after providing the defendant with an opportunity to be heard. See Rogers v. United States , 422 U.S. 35, 39 (1975): United States v. Reynolds, 489 F.2d 4, 7-8 (6th Cir. 1973). Nevertheless, even if a judge improperly participates in ex parte communications, such communications will not necessarily constitute reversible error. See Rushen, 464 U.S. at 118-19; Miller v. Am. President Lines, Ltd., 989 F.2d 1450, 1468 (6th Cir. 1993). There must be a reasonable possibility that the ex parte communications affected the verdict.

In this case the judge properly disclosed in open court and on the record that he had communicated ex parte with the jury. See Rushen v. Spain, 464 U.S. 114, 119-20 (1983) (stating that "[w]hen an ex parte communication relates to some aspect of the trial, the trial judge generally should disclose the communication to counsel for all parties."). If Dr. Paul's counsel had been concerned about the communications relayed by the judge, he could have voiced his concern to the district court and an appropriate record could have been made. Counsel having failed to object at trial, our review is limited to a plain error analysis in which we must determine if the judge's responses to the inquiries of the jurors affected the defendant's substantial rights. Olano, 507 U.S. at 736. However, Dr. Paul offers no evidence that the communications in question affected his substantial rights, making it unnecessary to determine whether or not the fairness, integrity or public reputation of the trial was affected.

The ex parte communications in question do not appear to raise a reasonable possibility of prejudice. The communications were related to the general well-being of the jurors, the way in which the lawyers were handling the exhibits, and the fact that the lawyer for the United States Attorney's office was speaking too softly, making it difficult for the jurors to hear him. As pointed out by the Supreme Court in Rushen, 464 U.S. at 118, there "is scarcely a lengthy trial in which one or more jurors do not have occasion to speak to the trial judge about something, whether it relates to a matter of personal comfort or to some aspect of the trial." There appears to be nothing in the content of what was communicated that would adversely affect Dr. Paul's substantial rights. Dr. Paul suggests that these communications should be viewed in the light of other comments made by the judge that suggested he viewed Dr. Paul with "disdain." However, each detrimental comment made by the judge and referred to by Dr. Paul occurred only after the jury had announced its verdict. Although the comments made by the judge are disparaging towards Dr. Paul, such comments are noticeably absent from the rest of the record, suggesting that the judge was careful not to make such comments before the jury rendered a verdict. In sum, there is no evidence to support Dr. Paul's contention that the ex parte communications between the judge and the jury during the course of this trial had any affect on Dr. Paul's substantial rights.



2. Motion for Acquittal

Following the close of the government's evidence, Dr. Paul moved unsuccessfully for a judgment of acquittal pursuant to Fed. R. Crim. P. 29 with regard to the bank fraud charge, arguing that the government had not presented sufficient evidence to support its claim. In determining whether the evidence presented at Dr. Paul's trial was sufficient to support a conviction, "[t]he relevant question is whether, after viewing the evidence in the light most favorable to the prosecution, any rational trier of fact could have found the essential elements of the crime beyond a reasonable doubt." United States v. Kelly, 204 F.3d 652, 656 (6th Cir. 2000) (quoting Jackson v. Virginia, 443 U.S. 307, 319 (1979) (emphasis in original) (internal quotation marks and citation omitted)). All reasonable inferences are to be drawn in the government's favor. Ibid. Moreover, since Dr. Paul failed to renew his motion at the end of his trial, we review the district court's denial "for plain error and can reverse only if there is a `manifest miscarriage of justice."' United States v. Beaver, No. 97-2224/48/70, 97-2343 4, 98-1012/5/76/1155, 2000 WL 491538, at **4 (6th Cir. Apr. 20, 2000) (quoting United States v. Price, 134 F.3d 340, 350 (6th Cir. 1998)).

In order to convict Dr. Paul for bank fraud under 18 U.S.C. §1344, the government must prove that Dr. Paul 1) knowingly executed or attempted to execute a scheme to defraud a financial institution: 2) did so with the intent to defraud; and 3) that the financial institution was insured by the FDIC. See United States v. Everett , 270 F.3d 986, 989 (6th Cir. 2001); United States v. Hoglund, 178 F.3d 410, 412-13 (6th Cir. 1999). Dr. Paul contends that the government failed to demonstrate that he had any knowledge of the fraudulent statements and misrepresentations made by Snider in order to obtain the mortgage for his Michigan home, and thus failed to prove the specific intent requirement contained in the second element of the crime. Alternatively, Dr. Paul argues that because the Mortgage House, the institution from which Snider, and allegedly Dr. Paul, fraudulently obtained a mortgage, was not federally insured, the government did not prove the third element of bank fraud, despite the fact that the Mortgage House sold the mortgage to a federally insured institution at closing on the property.

First, there is ample evidence to support the conclusion that Dr. Paul knowingly acted in collusion with Snider as part of a scheme to obtain a mortgage on the basis of fraudulent information and that this was done with the intent to defraud. Snider's testimony supports this conclusion, as he states that Dr. Paul originally formulated the plan, helped Snider to fraudulently fill out the loan application taken by the Mortgage House, assisted Snider in falsifying his tax returns for the loan application, offered proof to the bank that he had received a down payment of $60,000 from Snider, even though Dr. Paul had not, and finally helped Snider obtain a fraudulent gift letter to be used as evidence of the source of the down payment to the mortgage broker.

Second, it is not necessary for the Mortgage House to have been a federally insured entity in order to prove bank fraud. It is sufficient to demonstrate that the "defendant in the course of committing, fraud on someone causes a federally insured bank to transfer funds under its possession and control." United States v. Everett , 270 F.3d 986, 989 (6th Cir. 2001). In this case, at closing on Dr. Paul's Michigan home, Snider signed a mortgage with The Mortgage House and immediately thereafter at closing that mortgage was assigned to St. Paul Federal Bank on the basis of a commitment letter in which the Federal Bank agreed to purchase the mortgage on the Michigan property. The representative from the Mortgage House testified to the fact that the false information provided to her by Snider in his loan application was forwarded to St. Paul Federal Bank and the Federal Bank representative at trial testified that the bank approved the loan on the basis of that falsified mortgage application. Under the Everett standard, the entire question of whether or not Dr. Paul knew that St. Paul Federal Bank or any bank was to hold the mortgage is moot. If Dr. Paul was deemed to have participated in creating the fraudulent application that was subsequently relied upon by the Federal Bank to transfer funds in its possession and control to Dr. Paul, there is sufficient evidence of bank fraud.

Moreover, there is evidence to suggest that Dr. Paul knew that St. Paul Federal Bank was to hold the mortgage on the property. The representative from the Mortgage House testified that upon receipt of the commitment letter from the Federal Bank, she informed Snider of its acceptance of the mortgage. In addition, Snider testified to the fact that he told Dr. Paul of this fact. Furthermore, the representative from St. Paul Federal Bank testified that both parties knew at closing that the bank was lending the money for the sale of the property.

The evidence relied upon by the government in its case against Dr. Paul on the count of bank fraud is witness testimony, which in this case the jury found to be credible. It is not our position to second-guess the jury's assessment upon review. We generally avoid making such a determination, noting that the opportunity of the trial court to assess witness testimony is superior to that of the appellate court. See United States v. Garcia, 866 F.2d 147, 151-52 (6th Cir. 1989). See also United States v. Hernandez, 227 F.3d 686, 694 (6th Cir. 2000) (noting that "[s]ufficiency-of-evidence appeals are `no place ... for arguments regarding a government witness's lack of credibility."') (citations omitted). Accordingly, we hold there to be sufficient evidence for Dr. Paul's conviction of bank fraud and affirm the district court's denial of Dr. Paul's motion to acquit on that basis.



3. Mail Fraud Counts

Dr. Paul contends that since there is insufficient evidence to find him guilty of bank fraud, the mail fraud charges, which are predicated on the scheme to defraud St. Paul Federal Bank, must fail as well. In light of our holding that the government presented sufficient evidence at trial to find Dr. Paul guilty of bank fraud, his objection to the mail fraud counts must fail.



4. Evidence Admitted of Financial Transactions by Dr. Paul

Dr. Paul contends that the trial court abused its discretion in admitting evidence of Dr. Paul's handling of the proceeds he obtained from the sale of his Michigan home in 1999, after having paid off the St. Paul mortgage, removing Snider as the owner of record and selling the house to a bona fide purchaser at a substantial profit.

Dr. Paul contends that the evidence proffered was irrelevant and thus violated Rule 402 of the Federal Rules of Evidence, that its probative value was substantially outweighed by the danger of unfair prejudice, and that specific notice of the government's intention to introduce this evidence was not provided, in violation of Rule 404(b) of the Federal Rules of Evidence. Dr. Paul further argues that the admission of this evidence affected his substantial rights and that the judgment should, therefore, be vacated and a new trial ordered by this court.

Dr. Paul filed a pre-trial motion in limine, seeking to bar the government from introducing the evidence in question; however, the trial court denied that motion. At trial, Dr. Paul renewed his objection, but it was overruled. We review the trial court's decision to admit the evidence for abuse of discretion. See United States v. Bonds, 12 F.3d 540, 554 (6th Cir. 1993).

The evidence admitted described how Dr. Paul took the proceeds of his house sale ($120,767.47) and broke it down into a number of cashier's checks, periodically cashing each one, taking a small amount of cash and putting the remainder into a new cashier's check. The government argues that this evidence was relevant to the government's case. The government contends that Dr. Paul handled the proceeds of the sale of his house in this unique way in order to avoid creating a trail to a bank account, in an effort to continue to deceive the IRS.

"Broad discretion is given to district courts in determinations of admissibility based on considerations of relevance and prejudice, and those decisions will not be lightly overruled." United States v. Jackson-Randolph, 282 F.3d 369, 376 (6th Cir. 2002). The evidence proffered by the government is reasonably relevant to the crime as subsequent acts that demonstrate an intent to defraud and Dr. Paul does not offer an argument as to why the evidence is unfairly prejudicial to the defense. Furthermore, the record indicates that the government gave notice of its intention to include this information in a brief filed one week before trial, describing the inclusion of this evidence in some detail, in response to Dr. Paul's motion in limine. In so doing, the government provided sufficient notice. See United States v. French, 974 F.2d 687, 694-95 (6th Cir. 1992) (finding no violation of the Fed. R. Evid. 404(b) notice requirement where the government informed the defense of its intent to offer evidence of prior bad acts one week before trial and no motion for a continuance was made). Dr. Paul's three objections to the admission of this evidence fail.



5. Jury Instructions

During deliberations, the jury sent a written question to the judge, which asked "[i]f payments are being made on a fraudulent loan and these payments are mailed --are those payments mail fraud just because the initial loan agreement is fraudulent?" JA at 19. The court notified the parties that the question was asked, and answered the jurors with a note that read: "See instruction `Use of Mails --Defined' (page 33) and specifically the third and fourth paragraphs." The third and fourth paragraphs referred to by the court state the following:

The Government must prove beyond reasonable doubt, however, that the mails were, in fact, used in some manner to further, or to advance, or to carry out the scheme to defraud or scheme to obtain money or property by false or fraudulent pretenses, representations or promises. The Government must also prove that the use of the mails would follow in the ordinary course of business or events or that the use of the mails by someone was reasonably foreseeable.

 

It is not necessary for the Government to prove that the item itself mailed was false or fraudulent or contained any false or fraudulent statement, representation, or promise, or contained any request for money or thing of value.

Dr. Paul maintains that the district court erred in not providing him with an opportunity to respond to the jury's note and that therefore we should remand this case for a new trial. Under Rule 43 of the Federal Rules of Criminal Procedure, a defendant shall be present "at every stage of the trial." The rule requiring a defendant's presence at every stage of the trial must be reviewed by this court for harmless error under Fed. R. Crim. P. Rule 52(a). See United States v. Harris, 9 F.3d 493, 499 (6th Cir. 1993). This court has held that an ex parte communication of this type, between the judge and the jury during its deliberations, will not result in reversal if there is no reasonable possibility of prejudice. Ibid. See also United States v. Giacalone, 588 F.2d 1158, 1165 (6th Cir. 1978) (quoting United States v. Reynolds, 489 F.2d 4, 8 (6th Cir. 1973)). This court has alternatively said that such an error "is reversible only if the court's response to the question is confusing, misleading or potentially harmful to the defendant, or results in `a miscarriage of justice."' United States v. Combs, 33 F.3d 667, 670 (6th Cir. 1994). In this case, Dr. Paul has not successfully demonstrated how the court's instructions could have created a reasonable possibility of prejudice. The court did not make a substantive response to the jury's note, but instead mechanically referred back to the jury instructions that had been previously given. Cf. Combs, 33 F.3d at 670 (holding that although the district court erred in failing to assemble the parties and the jury in the courtroom in order to render supplemental instructions, the instructions were legally correct and therefore the error did not result in a "grave miscarriage of justice."); Giacalone, 588 F.2d at 1164 (harmless error to tell jury to continue deliberations after receiving a note informing court that jury was deadlocked); United States v. Florea, 541 F.2d 568, 570-71 (6th Cir. 1976) (harmless error to allow agent to replay tapes admitted into evidence at the request of the jury, without the presence of the parties).

The district court erred in failing to assemble the parties and the jury in the courtroom in order to render the supplemental instructions; however, there was no reasonable possibility of prejudice towards Dr. Paul as a result, because the judge's note simply referred back to the original jury instructions. This error was, therefore, harmless and on this basis we affirm the district court's denial of Dr. Paul's motion for a new trial.



6. Calculation of Tax Loss

The district court determined the tax loss to the government under the Sentencing Guidelines to be $327,302.93. This figure was based on a total of three amounts. First, the court calculated the assessed tax without penalties and interest for the period covered by the Offer-in-Compromise, which came to $134,105.63. This figure is undisputed. Second, the court calculated the amount of tax Dr. Paul avoided on his 1993 income tax return when he failed to disclose the gross proceeds from his Idaho medical practice to be $180,952.30. This second figure is disputed by Dr. Paul. The government produced at trial two different methods by which Dr. Paul's income from the Idaho practice during 1993 and 1994 could be calculated. On the one hand, the government introduced the patient checks that Dr. Paul had deposited into his various bank accounts and had a revenue agent calculate for the court, based on those deposits, the amount of tax that Dr. Paul would have owed. The expert calculated that Dr. Paul would have owed $54,571.40. In the alternative, the government introduced Dr. Paul's own business records, as kept by his office manager, Kaye Sewell, which reflected a considerably larger revenue from the Idaho practice. The final amount of tax owed, based on Ms. Sewell's records, came to $180,952.30. The court chose to use the tax debt calculated on the basis of Ms. Sewell's records and at sentencing Dr. Paul objected, stating that Ms. Sewell's testimony and records were unreliable. Third and finally, the court calculated the tax Dr. Paul avoided on his 1994 income tax return to be $12,245. This figure is undisputed. Dr. Paul also objects to the fact that the district court did not reduce the calculated tax loss by the $50,000 he paid in connection with the Offer-in-Compromise.

In examining factual determinations made by the district court for the purpose of applying the Sentencing Guidelines, we review for clear error. 18 U.S.C. §3742(e); United States v. Pierce, 17 F.3d 146, 151 (6th Cir. 1994). We review de novo the application of the Sentencing Guidelines to a particular set of facts. See United States v. Morrison, 983 F.2d 730, 732 (6th Cir. 1993). Thus, the first issue, centering on whether or not Ms. Sewell's testimony and records are reliable, is reviewed for clear error. The district judge's response to Dr. Paul's objection on this point demonstrates that he carefully weighed the evidence before him and decided that Ms. Sewell's records were likely to be more accurate. The judge noted that the government might not have found all of the bank accounts that Dr. Paul had opened while practicing in Idaho and that there was evidence demonstrating that Dr. Paul had paid for things by signing over checks he received from patients. In either case, the government's first figure would not have taken these variables into account, while Ms. Sewell's calculations would not have had the same problem. Although Dr. Paul claims that Ms. Sewell's records were unreliable and that she was biased, the judge noted that the jury found Ms. Sewell's testimony to be credible. In sum, the district court did not clearly err in its decision to use Ms. Sewell's records in order to calculate the tax loss at stake.

We review de novo the issue of whether the amount paid by Dr. Paul in connection with the Offer-in-Compromise should have been subtracted from the overall tax loss, since it requires an application of the Sentencing Guidelines to a particular set of facts. The government argues that the district court did not err since the Sentencing Guidelines specifically state that "[t]he tax loss is not reduced by any payment of the tax subsequent to the commission of the offense." USSG §2T1.1(c)(5). Dr. Paul contends that the commission of the offense actually occurred when the IRS accepted Dr. Paul's final Offer-in-Compromise and that the money paid in association with that acceptance does not fall under the auspices of §2T1.1(c)(5), since it is not a payment made subsequent to the relevant offense.

The district court established two categories of offenses for the purposes of sentencing under the guidelines, pursuant to USSG §3D1.2. The first group, known as the "Count Group 1" contained Counts One, Two, and Three, all of which involved Dr. Paul in a common scheme of tax evasion. The base offense level assigned to Dr. Paul for Count Group 1 was 17, based on the calculation done by the court that his calculated tax loss came to $327,302.93. Therefore, the "offense" to which the tax payment must be subsequent includes any of the offenses contained in this common scheme of tax evasion. Count One of the indictment, on which the jury returned a guilty verdict, charges Dr. Paul with willfully attempting to evade and defeat the payment of a substantial portion of the assessed taxes owed by him "from on or about December 14, 1993 to on or about May 27, 1994." December 14, 1993 was chosen because it was when Dr. Paul submitted the first Offer-in-Compromise, which was later rejected by the IRS. Therefore, the money paid in association with the Offer-in-Compromise in April 1994 was made subsequent to the relevant offense and is subject to USSG §2T1.1(c)(5). We affirm the district court's ruling on this matter.



7. Sentence Enhancements

Dr. Paul now appeals the district court's decision to apply three sentence enhancements, ultimately increasing his sentence by six levels on the basis of sophisticated concealment, his aggravating role, and for obstruction of justice. We review the district court's findings of fact with respect to the application of the enhancement for clear error, but review legal conclusions as to whether the facts justify an enhancement de novo. See United States v. Morris, No. 99-3905, 2001 WL 92126, at **3 (6th Cir. Jan. 23, 2001) (reviewing the application of a sentence enhancement under USSG §2T1.1 for sophisticated concealment by the defendant, making the offense difficult to detect); United States v. Caseslorente, 220 F.3d 727, 734 (6th Cir. 2000) (reviewing the application of a sentence enhancement under USSG §3B1.1 for the defendant's role in the offenses he committed); United States v. Sabino, 307 F.3d 446, 448 (6th Cir. 2002) (reviewing the application of a sentence enhancement under USSG §3C1.1 for the defendant's obstruction of justice).

Sophisticated Concealment Enhancement

The Sentencing Guidelines provide for a sentence enhancement of two levels for tax evasion offenses involving "sophisticated concealment." USSG §2T1.1(b)(2). Sophisticated concealment is defined as "especially complex or especially intricate offense conduct in which deliberate steps are taken to make the offense, or its extent, difficult to detect." USSG §2T1.1, comment. (n.4). The Commentary points out that `[c]onduct such as hiding assets or transactions, or both, through the use of fictitious entities, corporate shells, or offshore bank accounts ordinarily indicates sophisticated concealment." Ibid.

In general, complex schemes of tax evasion warrant imposition of the sophisticated concealment enhancement. In United States v. Butler [ 2002-2 USTC ¶50,579], 297 F.3d 505 (6th Cir. 2002), this court affirmed the application of a sophisticated concealment enhancement where the defendant set up shell corporations, used post office drop boxes, aliases, and different bank accounts to conceal his tax evasion. In Sabino [ 2002-1 USTC ¶50,137], 274 F.3d 1053, this court affirmed the application of a sophisticated concealment enhancement where the defendant had used at least seven trusts to avoid payment of taxes, noting that the IRS investigation had been lengthy and complex. In United States v. Middleton, 246 F.3d 825 (6th Cir. 2001), this court affirmed the application of a sophisticated concealment enhancement where the defendant had deposited his receipts into non-interest-bearing business bank accounts, had opened accounts at several different banks, had used several different company names to open these accounts, including one in which he had no ownership interest, had traveled to different branches of the same bank to make structured withdrawals of amounts less than $10,000, and had paid all of his bills using cash, money orders, or endorsed business checks without ever retaining a receipt or other record of the transaction.

The district court, in justifying its enhancement of Dr. Paul's sentence for sophisticated concealment, noted that Dr. Paul opened five different bank accounts in three states, supplied a false social security number to the IRS, paid his employees with cash, personal checks, and checks from a business other than his medical practice, required the buyer of his home in Michigan to enter into a confidentiality agreement that prevented the new owner of the house from disclosing any facts or circumstances of the land purchase, and carefully broke down the check he had received from the sale of the Michigan property into amounts that were below $10,000 in order to avoid alerting the IRS to his activities when depositing this money into various accounts. Moreover, the court took notice of the scheme between Dr. Paul and Snider in conducting the straw sale purchase of his Michigan home. All of these factors point to an elaborate plan to conceal Dr. Paul's tax evasion, relatively similar to the one described in Middleton. The district judge did not commit clear error in assessing Dr. Paul a sentence enhancement for sophisticated means.

Aggravating Role Enhancement

The Sentencing Guidelines provide a sentence enhancement for an individual's aggravating role in the commission of an offense. USSG §3B1.1. In particular, the guidelines direct a sentencing court to increase a defendant's offense level by two levels "if the defendant was an organizer, leader, manager, or supervisor in any criminal activity...." The Commentary gives examples of factors to be considered in determining whether the defendant had a leadership role:

Factors the court should consider include the exercise of decision making authority, the nature of participation in the commission of the offense, the recruitment of accomplices, the claimed right to a larger share of the fruits of the crime, the degree of participation in planning or organizing the offense, the nature and scope of the illegal activity and the degree of control and authority exercised over others.

USSG §3B1.1, comment. (n.4).

In this case, the district judge enhanced Dr. Paul's sentence because of his leadership role in the straw sale purchase of his Michigan home. The judge points out that Dr. Paul came up with the idea, planned the offense, recruited Snider and others, such as Kaye Sewell and the man who fronted Dr. Paul the money for the down payment in the straw sale of his Michigan property, and directed them in the commission of the crime, exercising a considerable degree of control over Snider in particular. Furthermore, the judge points out that Dr. Paul was the only participant to gain financially from the transaction.

Dr. Paul cites to the case of United States v. Vandeberg, 201 F.3d 805, 812 (6th Cir. 2000), in which this court held that the record did not support the imposition of a two-level enhancement to a defendant's sentence for being an organizer, leader, manager, or supervisor of criminal activity pursuant to USSG §3B1.1, even though the defendant had provided his co-conspirator with information that was crucial to helping the co-conspirator burglarize a home. However, in Vandenberg, there was no evidence indicating that the defendant had either recruited his co-conspirator, exercised any authority over him, or had taken a leadership role in planning the crime. Id. at 811. Moreover, the defendant in Vandeberg did not take a larger share in the profits garnered from the burglary. Ibid. Dr. Paul's role is not comparable, since there was evidence to support the conclusions reached by the district court in this case that Dr. Paul had recruited Snyder and others into defrauding the IRS, had exercised control over Snyder, had masterminded the straw sale of his Michigan home, and had reaped a far greater financial gain as a result of his crime than anyone else involved. The district court did not commit clear error in applying the two-level enhancement for Dr. Paul's leadership role in the commission of the offense.

Obstruction of Justice Enhancement

The Sentencing Guidelines provide for a two-level enhancement for obstruction of justice pursuant to USSG §3C1.1. The guidelines provide that:

If (A) the defendant willfully obstructed or impeded, or attempted to obstruct or impede, the administration of justice during the investigation, prosecution, or sentencing of the instant offense of conviction, and (B) the obstructive conduct related to (i) the defendant's offense of conviction and any relevant conduct; or (ii) a closely related offense, increase the offense level by 2 levels.

USSG §3C1.1. The non-exhaustive list of examples of obstructive conduct found in the Commentary includes in relevant part:

...

(b) committing, suborning, or attempting to suborn perjury;

...

(f) providing materially false information to a judge or magistrate;

(g) providing a materially false statement to a law enforcement officer that significantly obstructed or impeded the official investigation or prosecution of the instant offense;

...

USSG §3C1.1, comment. (n.4).

The district court found that Dr. Paul was eligible for a sentence enhancement on the basis of obstruction of justice because Dr. Paul had perjured himself in the submission of his Offer-in-Compromise, which was signed "under penalty of perjury," on December 14, 1993 . Moreover, the court held that Dr. Paul had willfully perjured himself on the witness stand on several material points, when Dr. Paul declared that he had not filled out the documents relating to the Offer-in-Compromise, had never used a false Social Security number and that Snider alone committed the bank fraud.

As in this case, the application of an enhancement on the basis of obstruction of justice is generally dependant upon credibility determinations and thus a district court has considerable discretion in determining whether the obstruction enhancement applies. See United States v. Moss, 9 F.3d 543, 553 (6th Cir. 1993). Here, the district court did not err in its application of the obstruction of justice enhancement. Dr. Paul contends that the judge's determinations with regard to Dr. Paul's credibility were unreasonable, but the evidence and the jury's conviction prove otherwise. We affirm the district court's ruling.



8. Conditions on Supervised Release

The Sentencing Guidelines permit the trial court to add specific conditions to the supervised release of a defendant, stating that:

The court may impose other conditions of supervised release to the extent that such conditions (1) are reasonably related to (A) the nature and circumstances of the offense and the history and characteristics of the defendant; (B) the need for the sentence imposed to afford adequate deterrence to criminal conduct; (C) the need to protect the public from further crimes of the defendant; and (D) the need to provide the defendant with needed educational or vocational training, medical care, or other correctional treatment in the most effective manner; and (2) involve no greater deprivation of liberty than is reasonably necessary for the purposes set forth above and are consistent with any pertinent policy statements issued by the Sentencing Commission.

USSG §5D1.3(b). In addition, the Guidelines recommend that the court impose certain conditions, including that the "defendant shall refrain from excessive use of alcohol...." USSG §5D1.3(c)(7). Moreover, the Guidelines note that certain "special conditions" may be appropriate on a case-by-case basis, including community service. Since Dr. Paul did not object at sentencing to the conditions set by the district court, we review for plain error. See United States v. Vincent, 20 F.3d 229 (6th Cir. 1994).

The district court imposed two conditions on Dr. Paul's supervised release. First, the district court required that Dr. Paul refrain from consuming alcohol. Dr. Paul contends that there is no basis for this condition and that it should be eliminated. The record, however, reflects that Dr. Paul was arrested twice for incidents that related to an abuse of alcohol. Dr. Paul was once charged with operating a vehicle under the influence, and was allowed to plead guilty to the lesser included offense of operating while impaired. A few years later, Dr. Paul was arrested for resisting and obstructing an officer who had pulled him over for speeding, weaving, and other traffic offenses, and attempted to conduct a sobriety test. As a result of the second arrest, Dr. Paul was required to participate in alcohol counseling and his driver's license was suspended for a year.

This court has consistently held that the imposition of a special condition is within the district court's discretion if that condition is "reasonably related to the dual goals of probation, the rehabilitation of the defendant and the protection of the public." United States v. Bortels, 962 F.2d 558, 560 (6th Cir. 1992). In addition, the Sentencing Guidelines specifically provide that if the court has reason to believe that the defendant has an alcohol problem, conditions requiring that the defendant participate in abuse programs that include testing for the substance to ensure abstinence are appropriate. USSG §5D1.3(d)(4). Given Dr. Paul's criminal record, it is not unreasonable to assume that he may have a substance abuse problem and therefore the district court did not commit clear error in requiring that Dr. Paul refrain from consuming alcohol during his supervised release. Cf United States v. Modena, 302 F.3d 626, 636-37 (6th Cir. 2002) (holding that the district court's requirement that the defendant abstain from the use of alcohol during his term of supervised release was an abuse of discretion since there was nothing in the record to indicate that the defendant had a substance abuse problem).

The second condition required by the court is that Dr. Paul perform 300 hours of community service in a non-medical related field. The court explained that it was putting this restriction on Dr. Paul in order to help Dr. Paul to regain a more realistic picture of himself as a normal human being, and not as an important doctor. This special condition is intended to serve the permissible goal of rehabilitation. See Bortels, 962 F.2d at 560. We affirm the district court's imposition of these two conditions.

III

For the reasons given above, we AFFIRM Dr. Paul's conviction and sentence.

^* The Honorable Marianne O. Battani, United States District Judge for the Eastern District of Michigan, sitting by designation.

 

 

 

 

 

 

[2001-1 USTC ¶50,197] United States of America , Plaintiff-Appellee v. Kenneth P. Kontny and Joann L. Kontny, Defendants-Appellants

(CA-7), U.S. Court of Appeals, 7th Circuit, 00-3004, 00-3006, 1/4/2001 , 2001 U.S. App. LEXIS 52. Affirming an unreported District Court decision

[Code Secs. 7201 , 7206 and 7602 ]

Fraud: Evidence, admissibility of: Criminal v. civil investigation.--A motion by married business owners to suppress documents and statements they gave to an IRS Agent in the course of a civil investigation that were subsequently used to convict them in criminal fraud proceedings was properly denied. There was no evidence that the agent improperly failed to refer the matter for criminal investigation or otherwise cease the civil investigation once there were firm indications of fraud. Moreover, the agent was unarmed, un-uniformed and unaccompanied at the time he interviewed the taxpayers; thus, they were not disadvantaged or under pressure to answer his questions.

[Code Sec. 7206 ]

Penalties, civil: Sentencing: Enhanced sentences: Sophisticated means.--The sentence imposed on married business, which included a two-level enhancement based on their sophisticated concealment of their fraudulent scheme to avoid paying overtime wages to their employees and payroll taxes was upheld. They wrote separate checks to the employees for regular and overtime wages and frequently included reimbursement for expense items in the overtime checks to disguise the fact that the checks were for wages. They also altered books and records by classifying the overtime checks as nonwage expenses.

John W. Vaudreuil, Peggy A. Lautenschlager, Madison , Wis. , for plaintiff-appellee. Robert E. Meldman, Colleen D. Ball, Reinhart, Boerner, Van Deuren, Norris & Rieselbach, Milwaukee, Wis., for defendants-appellants.

Before: POSNER, EASTERBROOK and EVANS, Circuit Judges.

POSNER, Circuit Judge:

The Kontnys were convicted of fraudulent nonpayment of federal payroll taxes and sentenced to prison. Their appeal complains about the denial of their motion to suppress documents and statements that they gave to an Internal Revenue Agent and about a sentencing increase that they received by virtue of the "sophisticated" character of their fraud.

The Fair Labor Standards Act requires employers to pay their hourly employees time and a half for overtime (that is, hours worked above 40 hours a week), but, of course, the overtime wage is taxable income to the employee. To defeat both the overtime and tax laws, the Kontnys, who own an equipment-supply business that employs 25 to 30 workers, concocted the following scheme. They would pay the workers normal wages rather than time and a half for overtime work but not report the overtime wages to the government as taxable income, thus making it easy (or easier) for the workers to avoid detection if they did not report this income on their tax returns. The employees benefited from this scheme by obtaining a greater after-tax income and the Kontnys by not paying either overtime wages at the rate of 1.5 times regular wages or payroll taxes on the overtime wages.

The scheme continued for at least a decade until the Kontnys became embroiled in a bitter labor dispute with their workers. One of them decided to tattle to the government. He visited an office of the IRS and was interviewed by Special Agent Babbitt, a criminal investigator. The matter was turned over to Revenue Agent Furnas to investigate. Revenue agents, unlike special agents, conduct civil rather than criminal investigations. Furnas interviewed a number of employees of the Kontnys' company and concluded that despite their disgruntlement over the labor dispute, they might well be telling the truth. In that event the Kontnys had committed a fraud; and tax fraud is criminal, though more often handled on a civil than on a criminal basis.

Furnas requested an interview with the Kontnys. They agreed. At the interview he explained that he was investigating allegations that they had failed to withhold payroll taxes from overtime payments to their employees. Before Mr. Kontny arrived for the interview, Mrs. Kontny asked Furnas whether she needed to have a lawyer present for the interrogation. He replied that this was "a civil exam" and it was up to her to decide whether she needed to have a lawyer present. But he added that if he discovered fraud he would refer the matter for a criminal investigation. He asked her for various business records, which she gave him, and she made some statements that were later used against her at trial, for example that she realized that payroll taxes have to be withheld from overtime wages. In a follow-up phone call from Furnas a few days later she mentioned that she had shredded some checks that Furnas had inquired about. At the mention of the shredded checks his suspicions crystallized and he decided that he now had firm indications that the Kontnys had committed tax fraud and he turned the case over to the criminal investigatory arm of the IRS and had no further contact with the Kontnys.

As an original matter it is extremely difficult to see what possible basis there could be for a motion to suppress in this case. Confessions or other admissions obtained in the course of an interrogation are deemed involuntary and therefore inadmissible only if they are procured by threats or promises. Bram v. United States , 168 U.S. 532, 542-43, 42 L.Ed. 568, 18 S.Ct. 183 (1897); Johnson v. Trigg, 28 F.3d 639, 641-42 (7th Cir. 1994); United States v. Glover, 104 F.3d 1570, 1579 (10th Cir. 1997); United States v. Guerrero, 847 F.2d 1363, 1366 (9th Cir. 1988). The Miranda rule is not in play here since the interrogation of the Kontnys by agent Furnas was not custodial. Beckwith v. United States [76-1 USTC ¶9352], 425 U.S. 341, 48 L.Ed.2d 1, 96 S.Ct. 1612 (1976); compare Mathis v. United States [68-1 USTC ¶9357], 391 U.S. 1, 20 L.Ed.2d 381, 88 S.Ct. 1503 (1968). But the fact that the Kontnys were not in custody has a broader significance. Virtually all cases involving coerced confessions involve the questioning of a suspect who is in police custody, an inherently intimidating situation in which people find it difficult to stand up for their rights or even to think straight. The situation is different when a person who does not even know that he is a criminal suspect (that is a premise of the Kontnys' appeal) is being interviewed in his home, and by a civil rather than a criminal investigator to boot. Furnas was unarmed, un-uniformed, unaccompanied. The Kontnys were at no disadvantage in dealing with him. They were under no pressure to answer his questions. Any answers they gave were voluntary.

Trickery, deceit, even impersonation do not render a confession inadmissible, certainly in noncustodial situations and usually in custodial ones as well, unless government agents make threats or promises. Frazier v. Cupp, 394 U.S. 731, 739, 22 L.Ed.2d 684, 89 S.Ct. 1420 (1969); Holland v. McGinnis, 963 F.2d 1044, 1051 (7th Cir. 1992); United States v. Rutledge, 900 F.2d 1127, 1131 (7th Cir. 1990) ("far from making the police a fiduciary of the suspect, the law permits the police to pressure and cajole, conceal material facts, and actively mislead"); United States v. Byram, 145 F.3d 405, 408 (1st Cir. 1998) ("trickery is not automatically coercion. Indeed, the police commonly engage in such ruses as suggesting to a suspect that a confederate has just confessed or that police have or will secure physical evidence against the suspect. While the line between ruse and coercion is sometimes blurred, confessions procured by deceits have been held voluntary in a number of situations"). And these were custodial cases. Nothing is more common in the noncustodial setting of police investigations than for an undercover police officer to extract a damaging admission from a criminal suspect simply by pretending to be another criminal. The admission is usable in evidence against the suspect even though he would never have spilled the beans to the officer had he known the officer's status. Planting informers is not an unconstitutional method of collecting evidence for use in criminal trials. Illinois v. Perkins, 496 U.S. 292, 298-99, 110 L.Ed.2d 243, 110 S.Ct. 2394 (1990); Hoffa v. United States , 385 U.S. 293, 303-04, 17 L.Ed.2d 374, 87 S.Ct. 408 (1966). There is no right to require secrecy of the people whom one confides in.

So even if Furnas was pretending to be conducting a civil investigation but was really, as the appeal argues, conducting a criminal one, this would not, under the rules that govern the admissibility of incriminating statements (written or oral) made to government officers even by a suspect who is in custody, make the statements inadmissible. The circumstances did not remotely prevent the Kontnys from making a rational decision about whether to play ball with Furnas. United States v. Lawal, 231 F.3d 1045, 1048 (7th Cir. 2000) ("a confession is voluntary if the totality of the circumstances demonstrates that it was the product of rational intellect and not the result of physical abuse, psychological intimidation, or deceptive interrogation tactics calculated to overcome the defendant's free will"); United States v. Westbrook, 125 F.3d 996, 1006 (7th Cir. 1997) ("nothing in this record leads us to believe the agents misled him or exploited Mr. Westbrook's anxiety to the point that he was unable to make a rational decision about whether to confess"); Sprosty v. Buchler, 79 F.3d 635, 647 (7th Cir. 1996) ("the police did not magnify or exploit Sprosty's fears, anxieties and uncertainties to the point where he was unable to make a rational decision about whether to confess"); United States v. Doucette, 979 F.2d 1042, 1045 (5th Cir. 1992) ("a confession is voluntary if, under the 'totality of the circumstances,' the statement is the product of the accused's 'free and rational choice' "); United States v. Velasquez, 885 F.2d 1076, 1089 (3d Cir. 1989) ("although the deception [by the police] may have been a partial cause of Velasquez's statements, we do not think that her will was overcome or her capacity for self-control vitiated"); United States v. Guerrero, supra, 847 F.2d at 1365 ("an inculpatory statement is voluntary only when it is the product of a rational intellect and a free will"). We might have a more difficult case had Furnas gone further and promised the Kontnys they would not be prosecuted if they played ball with him, for that conceivably is the kind of false promise that might induce a rational person to rely. United States v. Baldwin, 60 F.3d 363, 365 (7th Cir. 1995), vacated and remanded on other grounds, 517 U.S. 1231 (1996); United States v. Rutledge, supra, 900 F.2d at 1130. Furnas did not do that. On the contrary, he as much as warned the Kontnys that any evidence they provided of fraud would lead to a criminal investigation. As we have said, he didn't have to go further and give them Miranda warnings.

It is true that the Internal Revenue Service by regulation requires that a civil investigation cease when the investigator develops firm indications of fraud, Internal Revenue Manual §§4565.21(1), 9311.83(1), which the Kontnys argue happened before the fatal interview and the check-shredding phone conversation. But the federal exclusionary rule, which forbids the use of evidence obtained in violation of the Fourth or Fifth Amendments, does not extend to violations of statutes and regulations. The Supreme Court so held in United States v. Caceres [79-1 USTC ¶9294], 440 U.S. 741, 755, 59 L.Ed.2d 733, 99 S.Ct. 1465 (1979), with specific reference to a regulation of the IRS. See also United States v. Peters [98-2 USTC ¶50,650], 153 F.3d 445, 456 (7th Cir. 1998); United States v. Michaud, 860 F.2d 495, 498-99 (1st Cir. 1988); Groder v. United States [87-1 USTC ¶9259], 816 F.2d 139, 142 (4th Cir. 1987), and, for application of the principle outside the tax area, United States v. Chaparro-Alcantara, 226 F.3d 616, 621 (7th Cir. 2000); United States v. Page, 232 F.3d 536, 2000 WL 1682523, at *3 (6th Cir. 2000); United States v. Hinton, 222 F.3d 664, 674-75 (9th Cir. 2000); United States v. Felipe, 148 F.3d 101, 109 (2d Cir. 1998); United States v. Hensel, 699 F.2d 18, 29-30 (1st Cir. 1983). The Kontnys do not claim to have relied, reasonably or unreasonably, on the existence of the regulation that required Furnas to back off as soon as he obtained firm indications of fraud. United States v. Caceres, supra [79-1 USTC ¶9294], 440 U.S. at 752-53; United States v. Ani, 138 F.3d 390, 392 (9th Cir. 1998); United States v. Pipes, 87 F.3d 840, 842 (6th Cir. 1996). But this means, as Pipes makes clear, that there was no causal relation between Furnas's alleged violation of the regulation and the Kontnys' decision to make incriminating statements. "The defendant obviously did not know that the officers were violating [the statute]. Thus, the officers' failure to comply with [it] had no impact on defendant's decision to commit the offense." Id. Nor is there any suggestion that Furnas violated the prohibition against enforcement of a summons for tax records after a matter has been referred to the Justice Department for possible criminal prosecution. 26 U.S.C. §7602(c)(1); United States v. Michaud [90-2 USTC ¶50,425], 907 F.2d 750 (7th Cir. 1990) (en banc).

A number of decisions explore at length the nebulous distinction in the IRS regulation between "first" and "firm" indications of fraud; Furnas only admitted that he had the former sort before he interviewed the Kontnys. But the cases generally and we think rightly do not treat the distinction as an independent basis for determining whether evidence obtained in an IRS investigation is admissible. They treat it merely as a factor to be considered in evaluating the defendant's constitutional claim. The defendant must prove that "the IRS's conduct resulted in prejudice to defendant's constitutional rights." United States v. Peters, supra [98-2 USTC ¶50,650], 153 F.3d at 452 n.10; see also United States v. Grunewald [93-1 USTC ¶50,122], 987 F.2d 531, 534 (8th Cir. 1993); United States v. Knight [90-1 USTC ¶50,246], 898 F.2d 436, 438 (5th Cir. 1990), and the concurring opinion in Peters [98-2 USTC ¶50,650], 153 F.3d at 462-64.

There are some outliers, such as United States v. McKee [99-2 USTC ¶50,867], 192 F.3d 535, 541 (6th Cir. 1999), which states (in dicta, as the concurring judge pointed out, id. at 545), reflecting a common but perhaps excessive hostility to the Internal Revenue Service, that section 4565.21(1) of the IRS manual is "mandated by the Constitution." It is true as we have noted that Caceres left the door slightly ajar by indicating that it might be a denial of due process to induce reasonable reliance on the regulation and then pull the rug out from under the defendant; but nothing of that kind is involved in this case. United States v. Tweel [77-1 USTC ¶9330], 550 F.2d 297, 299 (5th Cir. 1977), contains broad McKee-like language, and has been cited frequently. But besides having been decided before Caceres , it was a case, unlike ours, involving the issue of consent to a search, and the defendant in giving his consent was held to have relied reasonably on the agent's promise that the investigation was purely civil. United States v. Powell [88-1 USTC ¶9140], 835 F.2d 1095, 1098 (5th Cir. 1988). The government had broken its promise, and we know that admissions extracted by false promises are sometimes excluded as being involuntary. There were no promises in the present case.

Peters goes on to state that the defendant must show "affirmative misrepresentations," "affirmative deceit," or "affirmative misleading" [98-2 USTC ¶50,650], (153 F.3d at 456-57) (these terms are synonymous), but it would be a mistake to infer that such a showing without more requires exclusion of incriminating statements. Proof of deceit must be linked up to the constitutional standard of threat or promise. Deceit by itself is neither, though it can be the basis of either--if Furnas had pretended to be a representative of the Mob and told the Kontnys that they would be killed if they didn't turn over their business records to him, or pretended to be an Assistant U.S. Attorney and assured them they would not be prosecuted if they cooperated with him, the Kontnys might have a sound ground for exclusion. Cf. Arizona v. Fulminante, 499 U.S. 279, 287-88, 113 L.Ed.2d 302, 111 S.Ct. 1246 (1991). They showed nothing of the sort, and must therefore lose even if the district court clearly erred (the applicable standard of appellate review, United States v. Peters, supra [98-2 USTC ¶50,650], 153 F.3d at 459; United States v. McKee, supra [99-2 USTC ¶50,867], 192 F.3d at 543; United States v. Wadena [98-2 USTC ¶50,849], 152 F.3d 831, 851 (8th Cir. 1998))--which, incidentally, it did not--in finding that Furnas did not have firm indications of fraud before he interviewed the Kontnys. That issue is not determinative. A failure to terminate a civil investigation when the revenue agent has obtained firm indications of fraud does not without more establish the inadmissibility of evidence obtained by him in continuing to pursue the investigation. There is nothing more here.

Moving to the sentencing issue, we confront the argument that the efforts the Kontnys made to conceal their scheme of tax evasion did not amount to the "sophisticated concealment" that requires a two-level sentencing bonus under U.S.S.G. §2T1.4(b)(2). That they did make such efforts is not in question. They wrote separate checks to the employees, one for regular wages and one for overtime, and sometimes the overtime checks would include reimbursement for expense items to disguise the fact that the checks were for wages. The Kontnys programmed their computer so that the amount of the overtime checks was classified in nonwage expense categories. The stubs for the overtime checks, which they gave their accountant, likewise placed the expense in nonwage categories.

But did these efforts amount to "sophisticated concealment"? They were not very sophisticated in the lay sense of the word, especially in context. By creating a fraud that involved the knowing participation of more than two dozen employees, they not only armed the employees to blackmail them but greatly increased the risk of eventual detection, though it is true that the fraud persisted for at least a decade before the inevitable occurred. The Kontnys' efforts at concealment were sophisticated in relation to a case in which the owner of a shop evades taxes by emptying the drawer of the cash register before counting the day's cash receipts and puts the cash thus skimmed into a shoebox and slides it under his bed, but unsophisticated in relation to a scheme of evasion that does not depend on the continuing goodwill of one's entire workforce and that creates a paper trail that is more difficult to follow to its guilty conclusion than the one the Kontnys created.

The existence of a statutory sentencing range reflects the fact that criminal acts that involve the same statutory elements (in the case of criminal tax fraud they are essentially that the defendant knowingly made a materially false return, 26 U.S.C. §7206(1); United States v. Pirro [2000-1 USTC ¶50,451], 212 F.3d 86, 89 (2d Cir. 2000)) may differ in circumstances that are pertinent to the appropriate penalty. One criminal act may be much more lucrative for the offender because it involves a very large amount of money relative to the cost of committing the offense, and so a heavier punishment will be necessary to deter. Another may be more lucrative than the average not because it involves a larger take but because the probability of detection is lower; an economist would say in such a case that the "expected" profit of the crime was greater. The existence of a sentencing range as opposed to a sentencing point allows these differences to be reflected in sentencing. The federal sentencing guidelines guide and discipline the judge's choice of the sentence within the range. They do this by fixing a sentencing range (narrower than the statutory range) for the average offense within the offense category (here, criminal tax fraud) and by prescribing bonuses and discounts to adjust for relevant differences between the average and the particular offender's offense.

The more sophisticated the efforts that an offender employs to conceal his offense, the less likely he is to be detected, and so he should be given a heavier sentence to maintain the same expected punishment, and hence the same deterrence, that confronts the average offender. Implementation of this rule requires both determining how much the average offense is concealed and relating the guideline concept of "sophistication" to deterrent needs. The complication in the first half of this inquiry is that fraud is by nature self-concealing--its success depends on its being hidden from the victim. The average criminal tax fraud thus involves some concealment; "sophisticated" tax fraud must require more. A parallel distinction has arisen in determining when statutes of limitations in fraud cases are tolled. If concealment were enough to toll such a statute of limitations, the statute would be tolled in almost every case, because fraud is inherently covert. So the courts distinguish between the initial fraud and any distinct efforts at cover up ("fraudulent concealment") and toll the statute only when the defendant has resorted to such efforts. Wolin v. Smith Barney Inc., 83 F.3d 847, 851 (7th Cir. 1996); Martin v. Consultants & Administrators, Inc., 966 F.2d 1078, 1093-95 (7th Cir. 1992). Likewise the concealment that is inherent in criminal tax fraud, as in our shoebox example, must be distinguished from efforts over and above that concealment to prevent detection. Only the latter permit the sentencing enhancement.

In light of its purpose and context, we think "sophistication" must refer not to the elegance, the "class," the "style" of the defrauder--the degree to which he approximates Cary Grant--but to the presence of efforts at concealment that go beyond (not necessarily far beyond, for it is only a two-level enhancement that is at issue, which in this case added roughly six months to the defendants' sentences) the concealment inherent in tax fraud. It is true that the guideline commentary illustrates with examples suggesting a higher level of financial sophistication: "'sophisticated concealment' means especially complex or especially intricate offense conduct in which deliberate steps are taken to make the offense, or its extent, difficult to detect. Conduct such as hiding assets or transactions, or both, through the use of fictitious entities, corporate shells, or offshore bank accounts ordinarily indicates sophisticated concealment." U.S.S.G. §2T1.4, Application Note 3. But these are offered as examples, as emphasized in United States v. Friend [97-1 USTC ¶50,145], 104 F.3d 127, 130 (7th Cir. 1997), and United States v. Clements, 73 F.3d 1330, 1340 (5th Cir. 1996); the essence of the definition is merely "deliberate steps taken to make the offense . . . difficult to detect." When the term "sophisticated" is defined so, it becomes apparent that the district judge did not commit a clear error (the applicable standard of appellate review of this ruling too, e.g., United States v. Madoch [97-1 USTC ¶50,284], 108 F.3d 761, 765 (7th Cir. 1997); United States v. Aragbaye [2001-1 USTC ¶50,126], 2000 U.S. App. LEXIS 31561, No. 99-50603, 2000 WL 1818365 at *6 (9th Cir. Dec. 13, 2000 )) in enhancing the defendants' sentences.

The Kontnys point out that the government rarely prosecutes criminal tax fraud that is not "sophisticated" in the sense indicated by the facts of this case. Armed as it is with fearsome civil remedies involving huge penalties--for example the 75 percent penalty for taxes fraudulently not paid, 26 U.S.C. §6663--the government brings few criminal tax cases (fewer than 700 a year) relative to the amount of tax fraud; and perhaps none against defendants less sophisticated than the Kontnys. We do not know this to be the case, but will assume it is for the sake of argument. No matter. The question is what the Sentencing Commission took to be the average criminal tax fraud when it promulgated the "sophisticated concealment" guideline back in 1987. That would be the benchmark for courts to use to decide whether the Commission would have wanted the sentences of the Kontnys increased by reason of the character or extent of their efforts at concealment. The government's lawyer told us without contradiction from his opponent that before the guidelines era the federal government prosecuted many unsophisticated criminal tax frauds, as illustrated by our shoebox case. The defendant would usually plead guilty and the judge impose a light sentence ("roughly half of all tax evaders were sentenced to probation without imprisonment, while the other half received sentences that required them to serve an average prison term of twelve months," U.S.S.C. §2T1.1, Background Commentary), and sentences in those days were essentially unappealable unless they exceeded the statutory maximum. So these were easy cases for the government. When the guidelines came into force, limiting sentencing discretion, the government shifted its focus to the more serious cases, not wanting to become involved in trials of minor cases when under the guidelines defendants might be reluctant to plead guilty because they would be facing a heavier sentence and might, like so many other federal criminal defendants these days, appeal their sentences. So today the average criminal tax fraud that is prosecuted is more sophisticated than when the concept of sophistication was introduced into the guidelines. That is no reason for thinking the Commission would consider the enhancement imposed in this or like cases excessive even if they are the only type of criminal tax fraud being prosecuted nowadays.

Affirmed.

 

 

[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.

 

 

 

 

 

[2002-1 USTC ¶50,456] United States of America , Plaintiff-Appellee v. Michael Wick, Defendant-Appellant

(CA-9), U.S. Court of Appeals, 9th Circuit, 00-10446, 2/11/2002, 2002 U.S. App. LEXIS 2380. Affirming an unreported District Court decision

[Code Sec. 7203 ]

Evasion of taxes: Willful: Sufficiency of the evidence: Failure to supply information: Defenses.--Sufficient evidence existed to find that an individual taxpayer willfully attempted to evade payment of his individual tax liability. The taxpayer offered no proof that corporate transactions were repayments of loans and, therefore, not taxable income. Additionally, the taxpayer had already committed tax evasion by assuming control over the funds and failing to report such funds on his return. Finally, the purported joint ventures between the taxpayer and his corporation were sham transactions used by the taxpayer to divert funds from the corporation for personal use.

[Code Sec. 7203 ]

Penalties, criminal: Evasion of taxes: Defenses: Carryback offset: Sentencing guidelines: Downward departure.--A taxpayer convicted of attempted tax evasion could not use his corporation's future net operating losses to reduce the total tax loss for purposes of sentencing. Also, the trial court's decision not to downward depart the taxpayer's sentence for tax evasion based on diminished capacity was not subject to review.
[Code Sec. 7206 ]

Evasion of taxes: Willful: Fraud and false statements: Sufficiency of the evidence: Failure to supply information: Assisting in preparation of fraudulent returns.--Sufficient evidence existed to find that an individual taxpayer assisted in the preparation of false returns with respect to his closely held corporation. The court found that the taxpayer closely directed all aspects of the corporation's accounting and bookkeeping. The taxpayer's conduct demonstrated his assistance in the preparation of a false return, rather than the financial officer's transfer of information to the return. The trial court's decisions on carryback offset and downward departure in sentencing were proper.

Karen Quesnel, Robert E. Lindsay, Alan Hechtkopf, Samuel R. Lyons, Department of Justice, Washington, D.C. 20530, for plaintiff-appellee. Stephen M. Dichter, Rodney W. Ott, Bryan Cave LLP, Sally S. Duncan, Phoenix, Ariz., Alan Ellis, Law Offices of Alan Ellis, Sausalito, Calif., for defendant-appellant.

Before: PREGERSON and RAWLINSON, Circuit Judges, and WEINER, District Judge. ¹

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

MEMORANDUM ²

I.

Michael Wick appeals his jury trial conviction and sentence for tax evasion and aiding the filing of a false return. We affirm.

The facts are well known to the parties and will be repeated here only as is necessary to explain our decision. The indictment charging Wick contained five counts Counts 1, 2 and 3 charged violations of 26 U.S.C. §7201, willfully attempting to evade and defeat personal income taxes for tax years 1991, 1992 and 1993 respectively. Counts 4 and 5 of the indictment charged violations of 26 U.S.C. §7206(2), aiding and assisting in the preparation of a false tax return. These counts involved the FY 1991-92 and 1992-93 corporate returns of Wick's closely held corporation, CTI. Following trial, the district court dismissed Count 4 relating to the corporate return for FY 1991-92, because there was no evidence that a person with the requisite authority signed that return.

II.

As to the conviction for Count 5, Wick argues the government failed to establish willful intent to defraud the IRS because CTI's return was prepared by its accountant Schneider, whom, Wick argues, simply assumed that Wick's personal expenses improperly paid by CTI during the tax year, had been corrected. He asserts that Schneider failed to ask Wick or CTI's Chief Financial Officer if the information Schneider was given to prepare the returns was correct and thus failed to make reasonable inquiries into information he found incorrect, inconsistent, or incomplete. ³

These arguments ignore the other evidence adduced by the government which was sufficient to prove willfulness. It was undisputed that Wick closely oversaw all aspects of the company's accounting and personally directed how the improper charges would be expensed by the company. This included purposely spreading large expenditures among several different categories to hide their true nature. Viewed from the light most favorable to the government, Wick's direction to the bookkeepers, both orally and in notations on accounting records, to charge CTI with his personal expenses, and how to categorize them for bookkeeping purposes, was sufficient to demonstrate that the act of charging the items to the company was willful. See United States v. Tucker [98-1 USTC ¶50,147], 133 F.3d 1208, 1218 (9th Cir. 1998) (to prove willfulness, the government must show that the defendant intended to violate the law or knew that his actions would do so.) It was this conduct that government asserted constituted aiding and assisting or otherwise causing the preparation or presentation of a false return, not merely the act of transferring this information to the return. But for the improper bookkeeping entries, the return would not have been fraudulent; the return was based directly upon the accounting records kept over the course of the fiscal year, which the evidence showed Wick willfully caused to show that his personal expenses were legitimate expenses of the business. As any conduct, the likely effect of which would be to mislead or conceal, is sufficient to demonstrate willfulness, Spies v. United States [43-1 USTC ¶9243], 317 U.S. 492, 499, 63 S.Ct. 364, 368, 87 L.Ed. 418 (1943), the government clearly met its burden. Wick's arguments regarding the role of Schneider go to the weight the jury assigned that evidence, not the sufficiency of the government's evidence of Wick's intent.

Wick's argument regarding the manner in which the real estate expenses were categorized suffers from the same problem. Wick argues the government improperly relied upon the evidence of CTI's bookkeeper, Preston , who admitted she never discussed CTI's real estate business with Wick, to establish the improper classification of the expenses. This argument also goes to weight not sufficiency. It also ignores other evidence that the real estate, whose purchase and renovation costs were expensed on CTI's books, were never owned by CTI. Rather, it was titled in Wick's name and when sold, Wick retained the profits of the sale. Wick also retained the profits from sales of personalty that were paid by CTI as business expenses, such as an ATV and two snowmobiles. This demonstrated his knowledge that the expenses were indeed personal. Given this and the other evidence in the record, we find the government clearly demonstrated the willfulness element of §7206(2).

Similarly, Wick arguments regarding the sufficiency of the evidence on the evasion counts relating to his personal returns also ignore other evidence that demonstrated willfulness. He contends the evidence of willfulness was insufficient because every alleged inaccuracy in his personal returns grew out of the alleged accounting "incompetence" at CTI. He cites as an example testimony that those at CTI responsible for preparing Form 1099s admitted they "forgot" to prepare them. He also points to the fact that he never affirmatively directed anyone at CTI to not prepare the forms. He asserts that all the amounts the government contends Wick failed to report as income were not income, but rather repayment of the loans he previously made to CTI, which CTI's bookkeepers failed to properly record as loan repayments on CTI's books. Finally, he asserts that the government failed to refute his contention that the expenses related to the real properties were made as part of joint ventures between him and CTI. These arguments suffer several problems.

First, the evidence demonstrated that Wick himself directed how these personal expenses were to be entered on CTI's books, in several instances spreading the payments among several categories in an attempt to hide their true nature. Second, it is irrelevant whether these expenses could have been entered on CTI's book so that they would have had no present tax consequences to Wick.

Where the taxpayer has sought to conceal income by filing a false return, he has violated the tax evasion statutes. It does not matter that that amount could have somehow been made non-taxable if the taxpayer had proceeded on a different course. To apply the constructive distribution rules to this situation would nullify all of the taxpayer's prior unlawful acts.

United States v. Miller [76-2 USTC ¶9809], 545 F.2d 1204, 1214 (9th Cir. 1976). Miller goes on to note

At the time the funds are initially diverted it might well be argued that they could constitute either income or a return of capital. However once the taxpayer has assumed control of the funds and then fails to report such funds as income or to make any adjustments in the corporate books to reflect a return of capital, he has already violated the tax evasion statutes.

Id. at 1214 n. 12 citing Spies [43-1 USTC ¶9243], 317 U.S. at 498-99. The language of this note directly refutes Wick's argument that the improperly paid expenses can be redesignated a return of loan principal after the fact. Accordingly, his argument that CTI's repayment of its loan would not constitute income to Wick is inapposite. ⁴

In addition, Wick's assertion that there was insufficient evidence of willfulness because the witnesses testified that they merely "forgot" to issue Wick 1099 forms, goes to the weight of that evidence and not its sufficiency. It was for the jury to determine whether they believed this evidence, or whether someone who reports taxable income of $ 85,000 would forget he had nearly again that same amount--$ 77,000--in income transfers that his company forgot to document on a 1099 form.

Wick's joint venture argument ignores other evidence which the jury could have used to find that no joint ventures ever existed. There was no documentation to support the existence of a joint venture; Wick never told any employees at CTI that he created any joint ventures; the sale proceeds went entirely to Wick. Viewing the evidence in the light most favorable to the government, the jury was within its bounds to conclude the joint ventures were a sham used by Wick to divert income out of CTI without paying tax.

Finally, Wick argues that his conviction on Count 1, which alleged tax evasion in 1991, must be vacated because the district court determined the CTI tax return for FY 1991-92 was never properly filed. He asserts that because no valid return existed, the government cannot impute disallowed business expenses to him, because CTI can still file a legitimate return properly characterizing those expenses as repayment of loans. This argument again ignores the fact that the government placed sufficient evidence before the jury for it to conclude that Wick evaded taxation at the point where he directed the bookkeepers to record the payments as business expenses, rather than against his loan accounts. Income is received when the taxpayer has an "undeniable accession[] to wealth, clearly realized, and over which the taxpayer has complete dominion." Commissioner v. Glenshaw Glass Co. [55-1 USTC ¶9308], 348 U.S. 426, 431, 99 L.Ed. 483, 75 S.Ct. 473 (1955). Any attempt to argue that CTI could still go back and change its corporate records is refuted by our holding in Miller that once the taxpayer has assumed control of the funds and then fails to report such funds as income or to make any adjustments in the corporate books to reflect a return of capital, he has already violated the tax evasion statutes. Id. [76-2 USTC ¶9809], 545 F.2d at 1214 n. 12.

III.

In Count 4, the government charged that Wick willfully aided and assisted in the preparation and presentation of false and fraudulent corporate tax returns for fiscal year 1991-92. As mentioned above, the district court vacated the conviction on this count because the evidence at trial demonstrated that Jennifer Preston, the CTI bookkeeper, signed the return when she had no authority to do so. Wick argues that he was prejudiced by the introduction of evidence relating to that count. He also argues that Count 1, which charged a willful attempt to evade and defeat income taxes for tax year 1991, should have been dismissed, because it depended upon the jury convicting him on Count 4.

Under Fed. R. Evid. 402, the evidence which supported Count 4 was also relevant to Count 1 to show that Wick used CTI's funds for his personal benefit during 1991. The payment by CTI of Wick's personal expenses during the 1991-92 fiscal year, constituted income which should have been reported on Wick's calendar year 1991 personal return. The evidence of how CTI's bookkeepers recorded these expenses was clearly relevant to Count 1 to show Wick had dominion and control over the money without paying taxes on it.

It is thus irrelevant to the viability of the conviction on Count 1 whether the conviction on Count 4 was proper. Wick makes no cogent argument that there is a requirement of a quid pro quo to support the two convictions, i.e. that one conviction necessarily supported the other. The two counts charged different crimes related to different tax obligations. The legal defect the district used to overturn the conviction on Count 4--the failure of an authorized person to sign the return--had no bearing on the ultimate question of whether Wick realized income during that year which he willfully evaded on his personal return.

IV.

Wick next takes issue with the amount of the tax loss to the government calculated by the probation officer and accepted by the district court at sentencing. The total tax loss was determined to be $ 348,693.56. Wick argues this amount disregarded CTI's net operating loss of $ 419,376 for FY 1993-94, which when carried back to FY 1992-93, would have allegedly reduced the total tax loss to $ 229,390. The application of a carry back is a question of law which we review de novo. We find the district court was correct in not taking the carry back into consideration in determining the total tax loss.

Wick concedes that in tax evasion cases, a net operating loss is generally not a factor at trial or sentencing. He argues that his is a special case because CTI's net operating loss was known at the time the 1992-93 corporate tax return was filed. Wick cites no authority to support this argument. Although the Ninth Circuit has never addressed the issue of whether a net operating loss may be carried back to reduce the total tax loss in a tax evasion case, cases from other circuits have uniformly rejected allowance of such a carry back. See A.C. Willingham v. United States [61-1 USTC ¶9401], 289 F.2d 283 (5th Cir. 1961) (crime of tax evasion is complete when, with willful intent, a false and fraudulent return is filed for a year as to which there would still be a tax but for the fraud; any adjustment that may be permissible resulting from subsequent losses does not prevent the fraud already committed from being an attempt to evade or defeat tax); United States v. Keltner [82-1 USTC ¶9305], 675 F.2d 602 (4th Cir. 1982) (subsequently incurred net operating loss cannot be carried back to eliminate a tax liability that existed at the time the return was required to be filed; otherwise the defendant may escape conviction by reason of the fortuity of a later loss that would reduce or eliminate misstatements of tax liability fraudulent when made). We agree that permitting the use of a carry back to reduce the total tax loss to the government would permit the taxpayer to further manipulate the fortuity of the later loss to eliminate the prior evaded tax by simply delaying the filing of the fraudulent return. In addition, if there was some other reason for the delay, the taxpayer could deliberately falsify the return with impunity knowing that if he was caught he could always claim the carry back. If not caught, the taxpayer would then be free to apply the loss forward to diminish a future year's tax liability. We thus conclude that Wick may not attempt to use CTI's subsequent losses to lower the total tax loss to the government.

V.

Finally, Wick argues the district court erred in failing to depart downward based on diminished capacity. A district court's discretionary refusal to depart from the Guidelines is not reviewable on appeal. United States v. Davoudi, 172 F.3d 1130, 1133 (9th Cir. 1999) However, if the trial court indicated that it did not have discretion under the Guidelines to depart, that determination is reviewed de novo. Id. There is nothing in the record of the sentencing that would indicate the district court thought it had no discretion to award the downward departure for diminished capacity. Indeed, the district court's statements indicated the contrary, that the court knew it had discretion and exercised that discretion because it did not believe Wick's evidence. As such, its decision to deny the downward departure is not subject to review.

AFFIRMED.

¹ Honorable Charles R. Weiner, Senior United States District Judge for the Eastern District of Pennsylvania, sitting by designation.

² 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 9th Cir. R. 36-3.

³ Wick also points to the fact that the FY 1992-93 return was signed by the CFO and not Wick, in arguing the government failed to demonstrate willfulness on Count 5. Unlike the 1991-92 return, there is no suggestion that the CFO was not authorized to sign the 1992-93 return on behalf of the company.

⁴ Wick also argues that the district court failed to properly instruct the jury on how to determine whether a transaction constituted a loan for purposes of the income tax code. Specifically, he argues the district court failed to instruct on the seven factors listed in Welch v. Commissioner [2000-1 USTC ¶50,258], 204 F.3d 1228, 1230 (9th Cir. 2000). There is no indication that counsel ever raised or preserved this issue prior to the court's instructing the jury. Our standard of review is thus for plain error. Jones v. United States , 527 U.S. 373, 388, 119 S.Ct. 2090, 144 L.Ed.2d 370 (1999); United States v. Anderson , 201 F.3d 1145, 1148 (9th Cir. 2000).

In Webb, we said that the following factors are, while non-exclusive and no single factor is dispositive, indicia of a bona fide loan: (1) whether the promise to repay is evidenced by a note or other instrument; (2) whether interest was charged; (3) whether a fixed schedule for repayments was established; (4) whether collateral was given to secure payment; (5) whether repayments were made; (6) whether the borrower had a reasonable prospect of repaying the loan and whether the lender had sufficient funds to advance the loan; and (7) whether the parties conducted themselves as if the transaction were a loan. Id. at 1230. The district court, again with no objection or preservation of the issue, charged the jury that "a loan which the parties to the loan agree is to be repaid does not constitute gross income as that term is defined by the Internal Revenue Code. However, merely calling a transaction a loan is not sufficient to make it such. When money is acquired and there is no good faith intent on the part of the borrower to repay the funds advanced, such funds are income under the income tax laws and taxable as such." The district court's failure to include the Webb factors was not plain error since there is no argument that it failed to adequately advise the jury how the law treats the taxability of loan proceeds or highly prejudiced Wick's substantive rights. Under a plain error review this is all that was necessary. United States v. Garcia-Guitar, 160 F.3d 511, 516 (9th Cir. 1998) (plain error is a highly prejudicial error affecting substantial rights).

 

 

 

 

[2003-1 USTC ¶50,478] United States of America , Appellee v. William N. Jackson, Defendant-Appellant.

U.S. Court of Appeals, 2nd Circuit; 02-1089, May 16, 2003 .

Unpublished opinion affirming an unreported DC Conn. decision.

[ Code Secs. 7206 and 7402]

Penalties, criminal: Jurisdiction of courts: Review by Court of Appeals: Fraud and false statements: Sentencing Guidelines: Evidence: Findings. --

The conviction and sentence of an individual for aiding and assisting the filling of false tax returns was upheld because any error was harmless in the face of overwhelming evidence against him and the calculation of loss attributable to his wrongdoing was reasonable. The contentions of the taxpayer, the sole proprietor of a tax preparation business, that prior bad acts evidence was improperly admitted and that a government witness improperly stated legal conclusions were dismissed. If any error occurred, it was harmless in the face of testimony by his clients whose returns he filed with false information they had not given him, his own admissions to government agents and the fact that an incredible 99 percent of the returns filed generated refunds. Moreover, the calculation of the loss of tax revenue attributable to his wrongdoing was reasonable because it was reasonable to conclude that the taxpayer had acted with fraudulent intent with respect to all of the fraudulent returns.

Eric J. Glover, Assistant United States Attorney, for appellee. Michael G. Considine, Day, Berry & Howard, LLP, for defendant-appellant.

Before: Minder, McLaughlin and Pooler, Circuit Judges.

¬ Caution: The court has designated this opinion as NOT FOR PUBLICATION. Consult the Rules of the Court before citing this case.®

SUMMARY ORDER

ON CONSIDERATION WHEREOF, IT IS HEREBY ORDERED, ADJUDGED, AND DECREED that the judgment of said District Court be and it hereby is AFFIRMED.

William N. Jackson appeals from a judgment of the United States District Court for the District of Connecticut. After a jury convicted Jackson of eleven counts of aiding and assisting the filing of false tax returns in violation of 26 U.S.C. §7206(2), the court sentenced him to a term of forty-two months imprisonment. Jackson appeals the conviction, asserting various trial errors, and the sentence. With respect to the sentence, Jackson urges that the court improperly calculated the loss attributable to his conduct.

Jackson was the sole proprietor of a tax preparation business, the Tax Center , which used the Internal Revenue Service's ("IRS") electronic filing system for submitting returns. Filing tax returns electronically creates an advantage for the preparer because its preparation fee can be automatically deducted from the refund, which is directly deposited to a bank that has issued a loan in anticipation of the refund. In order to file electronically, a preparer must have an electronic filing identification number ("EFIN"), which may be revoked if the preparer acts improperly.

By indictment returned February 24, 2000, a grand jury charged Jackson with filing eleven false tax returns for six different clients. The falsities included creating non-existent businesses and non-existent business expenses, claiming fictional deductions and dependent exemptions, and misstating income.

All of the taxpayers named in the indictment testified against Jackson . They claimed that certain items on their returns were false and that they had not given Jackson or the Tax Center the falsely reported information. In addition, IRS Special Agent Richard Schumacher testified that Jackson told him that he never created a fictitious business unless a client instructed him to do so. Schumacher further testified, over Jackson 's objection, that Jackson 's admission was significant because of the "elements of the offense" and then listed the elements of the offense including "knowledge that the returns are false as a material matter, and that the [preparer submits the false returns] willfully and with voluntary intent to do so." Schumacher also testified, again over objection, that if Jackson signed electronic return forms that had actually been prepared by others, he committed a criminal violation.

Michael Kinsley, the IRS electronic tax administrator coordinator who supervised Jackson 's filings, testified that 99% of returns filed by Jackson for 1993 and 1994 generated refunds although the nationwide average for refunds was between 30% and 35%.

The government also introduced evidence of bad conduct not included in the indictment. First, Joanne Burks, a friend of Jackson's, testified that in October or November 1995, apparently around the time his own EFIN was revoked, Jackson told her he was being audited by the IRS and asked to use her EFIN number to file returns. Burks allowed Jackson to use the number. Second, IRS auditor Janice Ferretti testified that she conducted an audit of Jackson 's 1993 personal tax return in August 1995. During the audit, Jackson furnished a letter from his attorney, Sharon Skyers Jenkins, stating that Jackson had legal expenses of approximately $300 in 1993. Ferretti confronted Jackson with her belief that the relevant date had been altered. Jackson admitted that he changed "1994" in the original to "1993." Jenkins, who testified before Feretti, identified the original letter with the "1994" date and testified that she had not made the change in the copy Jackson submitted to the auditor. Jackson objected to the proof of both incidents. Although the court overruled his objections, it gave instructions to the jury limiting its consideration of the "bad acts" evidence to the issue of willfulness.

Jackson testified in his own defense. He claimed that he did not prepare all of the returns that were filed under his EFIN and that some were done by "people that came around that knew how to do taxes." He kept no documentation concerning his employees and none of the documentation furnished to him by taxpayers. Jackson also testified that he included in tax returns only the income, expenses, and deductions that were reported to him by the taxpayers. On cross-examination, the prosecutor repeatedly confronted Jackson with testimony from other witnesses that contradicted Jackson 's testimony and asked if Jackson recalled the testimony.

After Jackson 's conviction, the district court conducted a sentencing hearing to consider objections to the pre-sentence report. During the hearing, testimony was offered concerning the amount lost to the government as a result of false returns Jackson submitted. Special Agent Schumacher testified that, by auditing returns Jackson submitted that were not included in the counts of conviction, the government arrived at an underpayment figure of $433,406.26. The district court found a loss in excess of $325,000 by adding the $17,953.81 in tax loss from the returns included in the indictment to the tax losses from only those 1993 and 1994 Tax Center-generated returns for which the taxpayers had agreed to the government's calculation of the underpayment. The court also found that the totality of the evidence established that Jackson acted with fraudulent intent with respect to the returns included in the calculation. In marshaling this evidence, the court referred to (1) the proof that 99% of Jackson's returns resulted in refunds; (2) Jackson's lack of credibility as demonstrated by "his selective recollection of details;" (3) Jackson's admissions to investigating agents; and (4) his use of Burks' EFIN number and submission of an altered document to the IRS.

On appeal, Jackson makes many arguments, but we need discuss only his claims that (1) the prosecution engaged in improper cross-examination; (2) admission of the prior bad acts evidence was error; (3) a government witness was improperly allowed to testify to legal conclusions; and (4) the loss was improperly calculated.

The prosecution's cross-examination of Jackson was not improper. See United States v. Weiss, 930 F.2d 185, 195 (2d Cir. 1991) (not finding error in similar cross-examination).

Jackson 's two principal evidentiary contentions --that prior bad acts evidence was improperly admitted and that a government witness improperly stated legal conclusions --are more substantive. However, we need not address their merits because, even considered cumulatively, any errors committed were harmless. See United States v. Myerson, 18 F.3d 153, 167 (2d Cir. 1994) (holding that even if prior bad acts evidence should not have been admitted, its admission was harmless in light of "sufficiently strong" additional evidence); see also United States v. Taubman, 297 F.3d 161, 165 (2d Cir. 2002) (same with respect to evidentiary rulings in general); United States v. Duncan, 42 F.3d 97, 103 (2d Cir. 1994) (applying harmless error analysis to claim government witness testified to legal conclusions). The evidence against Jackson was overwhelming. The testimony of the six taxpayers was buttressed by Jackson 's own admissions to government agents and by the incredible refund rate achieved for Jackson 's clients. Because of this overwhelming evidence, we conclude that any error was harmless and does not require a new trial. See United States v. Tubol, 191 F.3d 88, 97 (2d Cir. 1999) (indicating that the weight of the evidence against the defendant is the most important factor in a harmless error analysis).

In calculating loss for sentencing purposes, the district court need only "make a reasonable estimate" where "the amount of tax loss [is] uncertain." U.S.S.G. §2T1.1.cmt. n.1; see also United States v. Bryant, 128 F.3d 74, 76 (2d Cir. 1997) ( per curiam) (upholding estimation of loss from unaudited returns where 20% of over 8,500 returns had been audited). Jackson contends that the district court's calculation was unreasonable because (1) Agent Schumacher had not personally performed the audits; (2) the record did not reveal whether the audits involved in-person interviews of the taxpayer; (3) returns were counted regardless of whether they were prepared by Jackson or by another Tax Center employee; and (4) contrary to statements in the PSR and the position of the government at sentencing, Jackson neither refused to identify his employees in 1993 and 1994 nor testified inconsistently with the statements he made to government agents prior to trial. None of these arguments has merit. First, because the district court's determination concerning Jackson 's credibility was not clearly erroneous, it cannot be disturbed. United States v. Medley, 313 F.3d 745, 748 (2d Cir. 2002). Second, responsibility for the inability to separate returns Jackson prepared from those prepared by other employees rests squarely on the shoulders of Jackson, the only person in a position to know which returns he prepared. Especially in light of (1) the 99% refund rate and (2) a notation in one file from an employee that he or she had to create a fictional business for a taxpayer, it was reasonable for the court to conclude that Jackson acted with fraudulent intent with respect to all the fraudulent returns. Finally, no particular audit method is necessary for the audit results to be admissible at a sentencing hearing, and it was not necessary that each auditor testify at the hearing. See U.S.S.G. §6A1.3.(stating that rules of evidence do not apply to resolving disputes relevant to sentencing).

We have considered all of Jackson 's remaining arguments and found that they lack merit.