Saturday, March 2, 2019

Tenth Circuit Affirms Tax Crimes Convictions and Sentencing (3/2/19)

In United States v. Stubbs (10th Cir. 2019), here, a nonprecedential decision, the Court affirmed Stubbs' convictions and sentencing for two counts of tax evasion and six counts of failure to file.

The activity giving rise to the tax obligations involved was a rebate program, run by his company National Energy Rebate Fund, Inc.  Basically, the scheme was to sell home-improvement companies the opportunity to market a potential 50% rebate to their customers, but the rebate was well into the future and very difficult to qualify for.  Here is the description:
NRF's profit allegedly came from the "slippage" between the total number of customers eligible for rebates and the much smaller number who successfully completed the requirements. The rebate opportunity carried extremely stringent rules: customers had to register the rebate within 17 days of receiving the form; they had to send forms by registered mail only; they had to claim the rebate within the 30 days after the 47th month from the purchase; and the rebate offer would be invalid if anyone other than NRF, such as the company from which they got the rebate forms, reminded them about the deadlines. NRF set aside only a small portion of the revenues it received to pay rebates. And although the rebate program ostensibly was administered by an independent third party, that administration company actually was connected to Stubbs. Apparently, some customers received rebates, but numerous customers who failed to strictly satisfy each and every condition were denied rebates. NRF and its activities were the subject of civil lawsuits brought by Wisconsin and Colorado on behalf of their citizens, which resulted in multi-million-dollar default judgments against Stubbs.
Stubbs failed to file returns at the S-corporation level and at the individual level.  He also failed to pay the tax that would have been due.

Indictments were obtained for tax evasion and failure to file.  Convictions were obtained.  Stubbs fled to Costa Rica, was arrested and returned to U.S.  He was sentenced to 88 months.  He appealed.  He lost..

The issues resolved against Stubbs on appeal were:

1.  The evidence was sufficient to convict for tax evasion.

2.  The district court did not plainly err in admitting evidence of prior acts.

3.  In its sentencing calculation, the district court did not err in applying the criminal activity and sophisticated means enhancements.

This is a nonprecedential case so there is nothing of major significance in the opinion.  The following, however, did catch my eye.

1.  Stubbs represented himself at trial.

2.  Stubbs claimed lack of willfulness. The jury rejected the claim.

3.  Stubbs chose to testify in his defense.  But, then chose, wrongly, to assert the Fifth Amendment on cross-examination in response to testing his claim of lack of willfulness.  Here is what the Court said about that:
He did not contest that he failed to file tax returns and pay income tax for 2005, 2006, and 2007. Instead, he raised a good-faith defense. He testified that in 1993, it was brought to his attention that the Fourteenth Amendment was not properly ratified, that he was not actually a United States citizen, that the IRS is not an agency of the United States government, and that the Federal Reserve is not part of the United States government but is a privately held bank. He researched on the Internet and began reading books such as Irwin Schiff's How Anyone Can Stop Paying Income Taxes. "And the culmination of that has been that to this very moment, until the day I die, I understand that I am not a person [as defined by the Internal Revenue Code], but that I am a man, and I am not subject to this jurisdiction that they are claiming over me[.]" R., Vol. 8 at 300. He described his avenues of research and his communications with the IRS, and concluded, "it's just my heartfelt belief that I have not done anything wrong; that I am not a person required to file. . . . And that is just where I am coming from, and that has been my belief." Id. at 306. 
On cross-examination, the prosecutor brought up tax returns for 2002 and 2003 that Stubbs had prepared and submitted to Bank of America in support of an application for a mortgage loan—tax returns that Stubbs had never filed, but that reflected income and inaccurately stated that Stubbs had paid taxes on that income. She asked Stubbs why he submitted those returns to the bank if he did not believe he had a duty to file. Stubbs asserted his Fifth Amendment privilege against compelled self-incrimination. The district court initially upheld the privilege. After a sidebar conference and a short recess, however, the district court held that by testifying on direct examination about his good-faith beliefs, Stubbs had waived his Fifth Amendment privilege as to any questions that related to impeaching those beliefs. Stubbs then answered the prosecution's questions, reiterating that he believed he was not required to pay income tax. He further conceded that he did not avail himself of many readily available resources that would have undermined or contradicted his beliefs. For example, he did not consult the IRS website, did not learn that Schiff had been convicted of income tax evasion three times, did not search for information that would discredit his interpretations, and did not speak to any licensed attorney or accountant about his beliefs.
4.  The Court reminded in fn. 2 that willfulness is "closely connected to the affirmative act element" of tax evasion, citing United States v. Boisseau, 841 F.3d 1122, 1127 (10th Cir. 2016).  That may be obvious, but sometimes it just needs to be said.

5.  Although failing to file corporate and personal returns, Stubbs submitted unfiled returns to the bank for a loan application.  This is a not unusual pattern.  It is a dumb one, because the submission of those unfiled returns is evidence of willfulness-that Stubbs knew of the duty to file and intend to avoid it.

6.  The Court identified the following issue as to the elements of tax evasion but declined to address the issue:
Hoskins states that "the statute also requires a positive act of commission designed to mislead or conceal." 654 F.3d at 1091 (internal quotation marks omitted). Since Hoskins [United States v. Hoskins, 654 F.3d 1086 (10th Cir. 2011)], the Supreme Court has stated "the elements of tax evasion pursuant to § 7201 do not necessarily involve fraud or deceit." Kawashima v. Holder, 565 U.S. 478, 488 (2012). We have not yet decided how Kawashima affects our precedent. See Boisseau, 841 F.3d at 1128. The parties do not argue this aspect of the affirmative-act element, however, and we need not discuss it further. 
7.  The Court rejected Stubbs claim that sophisticated means sentencing enhancement was improper.  The Court said (cleaned up):
On appeal, Stubbs depicts his operations as "unsophisticated." "Nothing was concealed or hidden, all of his financial activities were documented by bank records, wire transfers, or his own business records in QuickBooks."  He further attempts to distinguish his circumstances from other cases in which this court upheld the application of § 2T1.1(b)(2). 
Stubbs has failed to show that the district court's finding was clearly erroneous. Section 2T1.1(b)(2) does not require a brilliant scheme, just one that displays a greater level of planning or concealment than the usual tax evasion case. Indeed, the essence of the definition is merely deliberate steps taken to make the offense difficult to detect. The list contained in the application note is not exhaustive.  The enhancement properly applies to conduct less sophisticated than the list articulated in the application note. The fact that the concealment might not have been total does not mean that there was no effort at concealment or that the method employed was not sophisticated. 
In O'Doherty, the Seventh Circuit held that it was proper to apply § 2T1.1(b)(2) where the defendant used corporations to avoid the direct reporting of income in his name" and "used the funds in those corporations as personal funds. This conduct is similar to Stubbs' actions in using NRF's funds to pay personal expenses and to conceal his income. And in Jennings, the Ninth Circuit upheld the enhancement where the defendants only partially obscured their activities, using one defendant's real name and Social Security number to open a bank account to siphon money from their employer.  The court noted that opening the account under the defendant's real name and Social Security number might have made it somewhat less likely that the diversion of funds would go undetected, but went on to point out that an outside party would have to know other facts to figure out the scheme. Similarly, Stubbs' activities might be imperfectly concealed and even obvious from his own records, but an outside party without access to those records would have to know other facts to figure out the scheme.

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