2002 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

7-22-2002

USA v. DePaoli

Precedential or Non-Precedential: Non-Precedential

Docket No. 00-2212

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Recommended Citation

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 NOT PRECEDENTIAL 

 UNITED STATES COURT OF APPEALS 

 FOR THE THIRD CIRCUIT 

 

 Nos. 00-2212, 00-2238, 

 00-2422, and 00-2427 

 

 UNITED STATES OF AMERICA 

 v. 

 ROSEMARY DEPAOLI, 

 Appellant in No. 00-2212 

 

 UNITED STATES OF AMERICA 

 v. 

 FRANK KRESOCK, 

 Appellant in No. 00-2238 

 

 UNITED STATES OF AMERICA 

 Appellant in No. 00-2422 

 v. 

 FRANK KRESOCK 

 

 

 UNITED STATES OF AMERICA, 

 Appellant in No. 00-2427 

 v. 

 ROSEMARY DEPAOLI 

 

 On Appeal from the United States District Court 

 for the Middle District of Pennsylvania 

 D.C. Crim. Nos. 99-cr-00026-1 and 99-cr-00026-2 

 Honorable James F. McClure, Jr., District Judge 

 

 

 Argued July 11, 2002 

 BEFORE: SCIRICA and GREENBERG, Circuit Judges, 

 and FULLAM, District Judge* 

 (Filed: July 22, 2002) 

 

 Martin C. Carlson 

 United States Attorney 
 William S. Houser (argued) 

 Assistant U.S. Attorney 

 U.S. Attorney’s Office 

 Suite 309, Federal Building 

 Scranton, PA 18501 

 Attorneys for Appellee-Cross-Appellant 

 United States of America 

 Peter Goldberger (argued) 

 Pamela A. Wilk 

 50 Rittenhouse Place 

 Ardmore, PA 19003-2276 

 Attorneys for Appellant-Cross-Appellee 

 Rosemary DePaoli 

 

*Honorable John P. Fullam, Senior Judge of the United States District Court for the 

Eastern District of Pennsylvania, sitting by designation. 

 Peter T. Campana 

 Campana & Lovecchio, LLP 

 602 Pine Street 

 Williamsport, PA 17701 

 Attorneys for Appellant-Cross-Appellee 

 Frank Kresock 

 

 OPINION OF THE COURT 

 

GREENBERG, Circuit Judge. 

 I. BACKGROUND & PROCEDURAL HISTORY 

 This criminal case is before the court on appeal and cross-appeal from judgments 

of conviction and sentence. A grand jury returned a nine-count indictment charging 

husband and wife defendants Frank Kresock and Rosemary DePaoli with income tax 

evasion and related charges. In particular, the indictment charged each defendant with 

three counts of income tax evasion, in violation of 26 U.S.C. 7201, relating to their joint 

personal income tax returns for years 1992, 1993 and 1994, DePaoli with filing false 

corporate income tax returns for the same three years, in violation of 26 U.S.C. 7206(1), 

and Kresock with aiding and abetting the filing of the false corporate returns, in violation 

of 26 U.S.C. 7206(2). 

 Appellants are medical doctors: Kresock is a cardiologist and DePaoli is a 

dermatologist. In 1988, they formed Columbia Medical Group, Inc. "CMG," a medical 

corporation. Each appellant owned one-half of the shares in CMG and both acted as the 

corporation’s employees, lessors and creditors. William J. Roll, CPA, acted as their 

accountant and designed CMG’s accounting procedures. The system provided for 

appellants to use checks and check stubs, adding expense codes, to record CMG’s income 

and expenses. Appellants’ practice was to send their accountant copies of the corporate 

check stubs, bank statements, and payroll information monthly. 

 In 1995, a routine IRS audit of CMG’s 1993 corporate tax return led to a 

criminal investigation and ultimately the indictments and convictions involved here. The 

evidence at trial showed, inter alia, that appellants used CMG funds to purchase 

thousands of dollars worth of guns and jewelry, which were coded as "office supplies." 

Appellants also purchased numerous vehicles, including a Ferrari Testarossa and Harley 

Davidson motorcycles, with corporate funds. Additionally they used CMG funds to 
renovate their vacation home, purchase jewelry, gold coins and many other personal items 

and services, including child care, home furnishings, groceries, diapers, children’s toys, 

tampons and mustache wax. Many of Kresock’s receipts were altered. Appellants did 

not declare the personal expenses they paid for with CMG funds as income on their 

personal tax returns. Instead the expenses frequently were treated as business-related 

items on CMG’s corporate returns. 

 Evidence showed that appellants took steps to conceal the personal nature of the 

corporation’s expenditures by falsely coding the check stubs to make the expenses appear 

business related. As an example, the purchase of a Harley Davidson motorcycle was 

coded as "equipment rental" for a cardiac echo machine. Defendants also omitted income 

on their personal tax returns from other sources, including fees from speaking 

engagements and for work performed at Bloomsburg Hospital. Overall the evidence of 

the appellants’ guilt was overwhelming and, indeed, they understandably do not contend 

that the verdicts were against the weight of the evidence. 

 At the trial in the district court, the jury returned a verdict of guilty as to both 

appellants on all charges. The court sentenced Kresock to serve 20-month concurrent 

custodial terms to be followed by three-year concurrent terms of supervised release and 

DePaoli to serve 16-month current custodial terms to be followed by three-year 

concurrent terms of supervised release. DePaoli was to commence her custodial term 

when Kresock was released from imprisonment. The appellants have appealed and the 

United States has cross-appealed from the judgments insofar as they imposed sentences. 

 II. DISCUSSION 

 Appellants first contend that the district court erred in denying their pretrial 

motions for bills of particulars. We consider this point on an abuse of discretion basis. 

See United States v. Eufrasio, 935 F.2d 553, 575 (3d Cir. 1991). 

 The purpose of a bill of particulars is to inform the defendant of the nature of the 

charges against him. See United States v. Addonizio, 451 F.2d 49, 63 (3d Cir. 1971). It 

is not intended to be a discovery device. See United States v. Smith, 776 F.2d 1104, 1111 

(3d Cir. 1985). Thus, its purpose is to give the defendant only the information necessary 

to permit him to conduct his own investigation. See id. A trial judge has broad discretion 

in considering a motion for a bill of particulars, but the court should grant a motion 

seeking a bill of particulars when an indictment’s failure to provide factual or legal 

information "significantly impairs the defendant’s ability to prepare his defense or is 

likely to lead to prejudicial surprise at trial." United States v. Rosa, 891 F.2d 1063, 1066 

(3d Cir. 1989). 

 In this case, the indictment sufficiently informed the appellants of the nature of 

the charges against them, and provided them with sufficient information to prepare an 

adequate defense and avoid prejudicial surprise at trial. For example, broken down by the 

years 1992, 1993, and 1994, the indictment charged appellants with income tax evasion, 

subscribing to a false tax return, and aiding and assisting the preparation of a false tax 

return. Furthermore, the government provided appellants with considerable pretrial 

discovery and explained its theories of the case in writing in advance. In the 

circumstances, we are satisfied that appellants understood the nature of and, indeed, had 

considerable details of the charges against them. Accordingly, we cannot say that the 

court erred in denying the motions for a bill of particulars. 

 Appellants argue that the jury instruction on the elements of income tax evasion 

was unclear and permitted personal income tax evasion convictions for acts not charged 

in the indictment. Inasmuch as appellants did not object to the instructions during the 

charging conference or when the instruction was given, we consider this contention on a 

plain error basis. See Fed. R. Crim. P. 52(b); United States v. Dalfonso, 707 F.2d 757, 

760 (3d Cir. 1983). 

 The appellants’ particular objection is that the instructions failed to specify that 

the jury to convict was required to find that they knowingly filed personal tax returns each 

year which understated their joint taxable income. They argue that the jury instructions 

broadened the possible bases of conviction beyond that charged in the indictment. In 

support of their argument, appellants quote a small portion of the charge in which the 

court stated that the appellants’ tax evasion was attempted: 

 by filing and causing to be filed . . . a false and fraudulent joint U.S. 

 individual income tax return . . . wherein it was stated that their joint 
 taxable income for [1992] was the sum of $519,357 . . . whereas . . . 

 [they knew the correct figure] was substantially in excess of that . . . and 

 that upon said additional joint taxable income a substantial additional 

 tax was due. 

App. at 290-91. Appellants complain that this instruction was ambiguous and that the 

jury may not have known that it was to "focus exclusively on the omission of income 

from the personal returns as the ’act of evasion.’" Appellants’ Jt. Reply Br. at 4. 

Appellants point out that the record was "replete" with testimony about their conduct that 

the jury could have viewed as affirmative acts undertaken with the intent of tax evasion. 

They complain that nothing in the jury charge told the jury that it could convict on the 

personal evasion counts only if it found that they had attempted to evade income taxes by 

filing what they knew to be a false personal return which omitted income. This omitted 

income includes the imputed income appellants derived from the value of CMG’s funds 

that were incurred for their personal benefit. See Appellants’ Br. at 40. 

 We reject this contention as we are satisfied that the ambiguity of which 

appellants complain is not real and we see no reason to believe that the jury failed to 

understand that to convict it had to find beyond a reasonable doubt that appellants 

knowingly filed personal tax returns that understated their joint taxable income. We 

cannot believe that the jury, when it considered the charge, did not understand the 

elements of the offenses involved here. 

 Appellants claim that the court’s charge to the jury on "willfulness" and "good 

faith" confused the jury into applying the "objective reasonableness" approach prohibited 

by Cheek v. United States, 498 U.S. 192, 111 S.Ct. 604 (1991). We review the 

instructions on this point on a plenary basis for legal correctness but on an abuse of 

discretion basis on matters of phrasing. See United States v. Zehrbach, 47 F.3d 1252, 

1260 (3d Cir. 1995). Here we are satisfied that viewed in its entirety the court’s charge 

on "willfulness" and "good faith" left no doubt that the defense of "good faith" need not 

be objectively reasonable. Moreover, the instructions clearly set forth that the burden of 

proving willfulness rested with the government. 

 With regard to willfulness, the district court stated in part: 

 [T]he government must prove beyond a reasonable doubt that each 

 defendant acted willfully. To act willfully means to act voluntarily and 

 deliberately and intending to violate a known legal duty. . . . The word 

 willfully as used in these instructions means a voluntary intentional 

 violation of a known legal duty, in other words, the defendant must have 

 acted voluntarily and intentionally with the specific intent to do 

 something he or she knew the law prohibited, that is to say with intent 

 either to disobey or to disregard the law. 

App. at 298-300. 

 With regard to the "good faith" defense, appellants argue that the district court 

led the jury to believe that it was their burden to show good faith and that their belief 

must have been objectively reasonable. Appellants contend that the court’s statement that 

"[i]f a person acts without reasonable grounds for belief that his or her conduct is lawful, 

it is for the jury to decide whether that person has acted in good faith . . ." violated Unite

States v. Powell, 955 F.2d 1206 (9th Cir. 1991). 

 The district court stated: 

 Now, the good faith of a defendant is a complete defense to 

 the tax charges in the indictment because good faith is simply 

 inconsistent with willfully attempting to evade or defeat any tax, 

 subscribing to a false return or aiding and assisting the preparation of a 

 false tax return. 

 While the term good faith has no precise definition, it 

 means, among other things, an honest belief, a lack of malice, and the 

 intent to perform all lawful obligations. A person who acts on a belief 

 or on an opinion honestly held is not punishable under this statute 

 merely because that honest belief is unreasonable or turns out to be 

 incorrect or wrong. . . . If a person acts without reasonable grounds for 
 belief that his or her conduct is lawful, it is for the jury to decide 

 whether that person has acted in good faith in order to comply with the 

 law or whether that person has willfully attempted to evade or defeat the 

 tax, subscribed to a false return, or aid and assist the preparation of a 

 false tax return. 

 A person who believes that his or her tax return truthfully 

 reports the taxable income and allowable deductions under the tax law 

 acts in good faith and cannot be found guilty of willfully committing the 

 offenses charged in the indictment. . . . The burden of proving good 

 faith does not rest with the defendants because the defendants have no 

 obligation to prove anything to you. The government has the burden of 

 proving to you beyond a reasonable doubt that each defendant acted 

 willfully. 

App. at 301-04. In context, the court’s instructions on willfulness and good faith did not 

mislead the jury as to the burden of proof and did not lead the jury into believing that the 

"good faith" defense required appellants to have an objectively reasonable belief in the 

propriety of their actions. Thus, the court’s charge captures both the spirit and the letter 

of the law as set forth in Cheek and is not contrary to Powell. 

 Appellants unsuccessfully sought jury instructions to the effect that corporate 

expenditures for the benefit of shareholders are not treated as personal income until they 

exceed in amount all outstanding shareholder loans to the corporation and that a 

corporation cannot generate dividend income in the absence of earnings and profits. See 

United States v. D’Agostino, 145 F.3d 69 (2d Cir. 1989). Appellants assert that their 

receipt of benefits from CMG would not be taxable if those benefits served to reduce the 

principal amount of a loan balance outstanding. See Appellants’ Jt. Reply Br. at 6. They 

add that their intent, no matter how subjectively fraudulent, cannot create liability if they 

did not receive income but instead were repaid for their loans. See id. Appellants 

contend that the D’Agostino instruction was necessary to show that there was no 

deficiency in tax and that the instruction they request would not have been contrary to our 

opinion in United States v. Goldberg, 330 F.2d 30, 38 (3d Cir. 1964). We review a 

refusal to give a requested instruction on an abuse of discretion basis, evaluating 

"whether the proffered instruction was legally correct, whether or not it was substantially 

covered by other instructions, and whether its omission prejudiced the defendant." 

United States v. Pitt, 193 F.3d 751, 755-56 (3d Cir. 1999). 

 In Goldberg, we noted that the government need not fix a precise label on 

diverted funds since "substance controls over form, and taxation is concerned with the 

actual command over the property taxed." Id. at 38. A number of other courts have 

agreed that the government need not prove the character of diverted funds, rejecting the 

D’Agostino rationale. See United States v. Williams, 875 F.2d 846, 849-52 (11th Cir. 

1989); United States v. Miller, 545 F.2d 1204, 1213-14 (9th Cir. 1976); Davis v. United 

States, 226 F.2d 331, 335-36 (6th Cir. 1955). These courts have stressed the distinction 

between a civil collection action and a criminal tax proceeding by noting that: 

 In civil tax cases the purpose is tax collection and the key 

 issue is the establishment of the amount of tax owed by the taxpayer. In 

 a criminal tax proceeding the concern is not over the type or the specific 

 amount of tax which the defendant has evaded, but whether he has 

 wilfully attempted to evade the payment or assessment of tax. 

 The difficulty in automatically applying the constructive 

 distribution rules in this case is that it completely ignores one essential 

 element of the crime charged: the willful attempt to evade taxes, and 

 concentrates solely on the nature of the funds diverted. That latter 

 aspect is not the important element. Where the taxpayer has sought to 

 conceal income by filing a false return, he has violated the tax evasion 

 statutes. 

Miller, 545 F.2d at 1214; see also Williams, 875 F.2d at 850. Indeed, the Court of 

Appeals for the Second Circuit has acknowledged that its view in D’Agostino does not 
state the prevailing rule. See United States v. Bok, 156 F.3d 157, 162 (2d Cir. 1998). 

 We also point out that in D’Agostino, unlike in this case, the government 

conceded that the defendant’s corporation had no earnings or profits. Here, there was 

evidence supporting a conclusion that, when adjustments were made for personal items 

falsely labeled as business expenses, CMG showed a profit for each year charged in the 

indictment. Additionally, even though appellants complain that the diverted funds could 

have been accounted for lawfully as return of capital or repayment of a loan and that there 

would have been no or very little taxable income if corporate income diverted by 

appellants had been accounted for by issuance of 1099 forms, there was no evidence from 

which it could be inferred that the diverted income was accounted for in this way. 

Accordingly, we will not stray from Goldberg, which requires the government to prove 

the taxpayer’s "actual command" over the property taxed rather than fix a precise label or 

prove the character of the diverted funds. 

 Appellant Kresock filed a motion to recuse the district judge, who, during the 

pretrial conference, revealed to counsel that he and William Roll, appellants’ CPA, 

belonged to the same church and were involved in church activities. We consider the 

appeal from the court’s denial of the motion on an abuse of discretion basis. See 

Securacomm Consulting, Inc. v. Securacom, Inc., 224 F.3d 273, 278 (3d Cir. 2000). 

 Under 28 U.S.C. 455: 

 (a) Any justice, judge, or magistrate of the United States shall 

 disqualify himself in any proceeding in which his 

 impartiality might reasonably be questioned. 

 (b) [The judge] shall also disqualify himself in the following 

 circumstances: 

 (1) Where he has a personal bias or prejudice concerning 

 a party, or personal knowledge of disputed 

 evidentiary facts concerning the proceeding. 

 In considering this issue we determine whether an objective observer reasonably 

might question the judge’s impartiality. See Massachusetts Sch. of Law at Andover, Inc. 

v. American Bar Ass’n, 107 F.3d 1026, 1042 (3d Cir. 1997). In its opinion declining to 

recuse the court noted, quoting Hadler v. Union Bank and Trust Co., 765 F. Supp. 976, 

977 (S.D. Ind. 1991) (internal quotation marks omitted) that "it is beyond the bounds of 

reasonable supposition to infer that a judge would abandon his obligation of impartiality 

merely because a friend is a witness in a case in which that judge is presiding. That is 

why practically every federal court faced with arguments for recusal based on friendship 

has found recusal unnecessary." App. at 22. In this case, the judge and the witness did 

not have a close personal relationship. Instead, the judge merely was acquainted with the 

witness through church involvement. Moreover, we see no reason to believe that the 

judge’s acquaintance with the witness affected the outcome of sentencing. Indeed, we 

note that neither appellant has appealed from his or her sentence, which, considering the 

situation in which they were in, were favorable to them. In fact, it is the government 

which is appealing from the sentences. Overall, we are satisfied that the district court 

properly denied the motion to recuse. 

 Appellants argue that the court committed plain error in allowing testimony from 

IRS agent Christopher Roginsky who was a summary witness who observed the trial and 

testified as to the amount of criminal tax due and owing from the defendants based on the 

evidence. See Fed. R. Crim. P. 52(b). Appellants argue that they received inadequate 

pretrial notice of Roginsky’s testimony and that his testimony violated Fed. R. Evid. 

704(b). 

 Before trial, appellants filed an unsuccessful motion under Rule 16(d)(2) to 

exclude Roginsky’s testimony to the extent that he proposed to testify as an expert on tax 

preparation. The government, however, identified Roginsky as a summary witness who 

would offer a summary of tax calculations at the end of the government’s case, based on 

the evidence presented at trial. Appellants complain that Roginsky’s testimony went 

beyond his role as a summary witness when he offered expert opinion on their intent to 

avoid taxes. 

 On cross-examination appellants tried to create the impression that there would 
have been no corporate tax due and owing if their accountant simply had issued form 

1099s to appellants on behalf of the corporation. Thus, the line of questioning suggested 

that corporate profit, and appellants’ resulting liability, were consequences of the 

accountant’s error. On redirect examination, the government asked the following 

questions to rebut the suggestion that the accountant was responsible for creating 

corporate profit: 

 Q: Now, Mr. Borden asked you a couple of questions about if 

 there had been 1099’s issued and if things had been done a 

 certain way what the effect would have been on the 

 corporate tax; is that correct? 

 A: Yes, I remember those questions. 

 Q: Why is it that you calculated a corporate tax due and owing 

 in this case? 

 A: The items which comprised the corporate adjustments 

 represent expenses that are not business expenses. They 

 were expenses personal expenses related to the 

 shareholder, nonbusiness items. Had the shareholders had 

 the intention of deducting them as business expenses, they 

 would have been wait, let me step back. Had they been 

 legitimate business expenses they would have been allowed. 

 Had the shareholders’ intention been otherwise, that was 

 additional compensation, they would have followed that 

 route when they were coding the checks, placing them in the 

 general ledger, et cetera. 

 Q: Okay, and that wasn’t done here, correct. 

 A: No, it was not. 

Supp. app. at 492-93. 

 Although they did not object at the time, appellants now contend that Roginsky’s 

answer was highly prejudicial and that he improperly expressed an opinion as to their 

intent. See Appellants’ Br. at 74 (citing United States v. Watson, 260 F.3d 301, 308 (3d 

Cir. 2001) for proposition that reversal is required when expert offers opinion about 

defendant’s intention). The government responds that in the disputed testimony, 

Roginsky merely stated that appellants’ treatment of the funds from CMG was 

inconsistent with an intention to consider those payments to be compensation as 

appellants had suggested, and that the opinion was not tantamount to an opinion regarding 

appellants’ willfulness to evade income taxes. In any event, it points out that Roginsky’s 

testimony covers 75 transcript pages and that the challenged testimony was not repeated. 

 In fact, from the start of Roginsky’s testimony, the government made clear that 

he had been asked to assume that expenses paid by CMG to appellants were personal 

rather than business expenses. The fact that he began with this assumption and that his 

testimony was not intended to prove the intent of appellants was repeated throughout his 

testimony. See Br. of Appellant/Cross-Appellee at 71-73 (citing pages of transcript). 

Thus, even if a single, isolated portion of the agent’s testimony was improper, it would 

not require reversal. 

 To reverse a conviction under Rule 52(b), plain error must affect substantial 

rights. See United States v. Olano, 507 U.S. 725, 735, 113 S.Ct. 1770, 1778 (1993). The 

appellant bears the burden of persuasion, and "[i]n most cases," the substantial rights 

requirement "means that the error must have been prejudicial: [i]t must have affected the 

outcome of the district court proceedings." Id. at 734, 113 S.Ct. at 1778. Here, the 

testimony was a brief statement in the midst of lengthy testimony and the agent’s 

statements did not directly address appellants’ intention to evade the payment of income 

taxes. In the circumstances, it is difficult to characterize the error as plain. 

 Moreover, even if the error was plain, there has been no specific showing of 

prejudice. We cannot believe that in the face of the overwhelming evidence supporting 
the convictions that the statement affected the outcome of the trial. Thus, appellants are 

not entitled to a new trial: the alleged error was not of constitutional dimension, and there 

is a "high probability" that the error did not contribute to the conviction. See United 

States v. Molina-Guevara, 96 F.3d 698, 703 (3d Cir. 1996). The error was harmless. 

 III. CONCLUSION 

 We have reviewed all the other points raised by the parties, including those the 

government has advanced on the cross-appeal, and we are satisfied that we have no basis 

to reverse by reason of any of them. Consequently, we will affirm the judgments of 

conviction and sentence entered July 20, 2000. 

 

TO THE CLERK: 

 Please file the foregoing opinion. 

 /s/ Morton I. Greenberg 

 Circuit Judge 

DATED: July 22, 2002