FI L ED

U.S. COURT OF APPEAL S

EL EVENTH CI RCUI T

AUGUST 19, 2010

J OHN L EY

CL ERK [ P U B L I S H ]

I N T H E U N I T E D S T A T E S C O U R T O F A P P E A L S

F O R T H E E L E V E N T H C I R C U I T

_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

N o

. 0 8

- 1 3 7 4 0

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D

. C

. D o c k e t N o

. 0 7

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- C R

- T C B

- 3

- 1

U N I T E D S T A T E S O F A M E R I C A

,

P l a i n t i f f

- A p p e l l e e

,

v e r s u s

T H E R E S A L

. K O T T W I T Z

, G E R A R D M A R C H E L L E T T A

, J R

. , G E R A R D M A R C H E L L E T T A

, S R

. ,

D e f e n d a n t s

- A p p e l l a n t s

.

_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

A p p e a l s f

r o m t h e U n i t e d S t a t e s D i s t r i c t C o u r t

f o r t h e N o r t h e r n D i s t r i c t o f G e o r g i a

_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

( A u g u s t 1 9

, 2 0 1 0 )

B e f o r e E D M O N D S O N a n d B I R C H

, C i r c u i t J u d g e s

, a n d H O D G E S

, D i s t r i c t *

J u d g e

.

Wm. Terrell Hodg es, United States District Judge f or the Middle District of F lorida, *

sitti ng by desig nation.P E R C U R I A M :

D e f e n d a n t s T h e r e s a L

. K o t t w i t z [ “ K o t t w i t z ” ]

, G e r a r d M a r c h e l l e t t a

, S r

.

[ “ S e n i o r ” ]

, a n d G e r a r d M a r c h e l l e t t a

, J r

. [ “ J u n i o r ” ] a p p e a l t h e i r c o n v i c t i o n s a n d

s e n t e n c e s f

o r t a x f r a u d

- r e l a t e d c h a r g e s

. W e f i n d t h e e v i d e n c e s u f

f i c i e n t t o s u p p o r t

t h e j u r y ’ s v e r d i c t r e g a r d i n g t h e i r c o n s p i r a c y c o n v i c t i o n s a n d t h a t t h e g e n e r a l g o o d

f a i t h j u r y i n s t r u c t i o n t h a t w a s p r o v i d e d b y t h e d i s t r i c t c o u r t f u l l y e n c o m p a s s e d

K o t t w i t z a n d t h e M a r c h e l l e t t a s ’ t h e o r y o f d e f e n s e o n t h i s c h a r g e

. W e f i n d

,

h o w e v e r

, t h a t t h e d i s t r i c t c o u r t e r r e d i n r e f u s i n g t o g i v e K o t t w i t z ’ s a n d t h e

M a r c h e l l e t t a s ’ r e q u e s t e d s p e c i a l i n s t r u c t i o n t o t h e j u r y o n t h e i r g o o d f a i t h r e l i a n c e

o n t h e i r a c c o u n t a n t ’ s a d v i c e

. B e c a u s e t h e e v i d e n c e w a s s u f f i c i e n t f o r a p r o p e r l y

i n s t r u c t e d j u r y t o c o n v i c t o n t h e c h a r g e s o f f i l i n g m a t e r i a l l y f

a l s e p e r s o n a l i n c o m e

t a x r e t u r n s f

o r 2 0 0 0 a s t o J u n i o r a n d S e n i o r a n d f o r e v a d i n g t a x e s a s t o S e n i o r

, w e

v a c a t e a n d r e m a n d f

o r r e t r i a l i n l i g h t o f t h e j u r y i n s t r u c t i o n e r r o r

. B e c a u s e t h e

e v i d e n c e w a s i n s u f

f i c i e n t f o r a p r o p e r l y i n s t r u c t e d j u r y t o c o n v i c t o n t h e c h a r g e o f

a i d i n g a n d a s s i s t i n g i n t h e f i l i n g o f a m a t e r i a l l y f

a l s e c o r p o r a t e t a x r e t u r n f o r 2 0 0 1

,

w e r e v e r s e t h e c o n v i c t i o n s o f K o t t w i t z

, J u n i o r

, a n d S e n i o r a n d r e m a n d w i t h

d i r e c t i o n s t o e n t e r a j u d g m e n t o f a c q u i t t a l o n t h i s c o u n t

.

2I

. B A C K G R O U N D

N a s t a s i & A s s o c i a t e s [ “ N a s t a s i ” ] i s a c a r p e n t r y u n i o n s u b c o n t r a c t o r i n

G a r d e n C i t y

, N e w Y o r k w h i c h i n s t a l l s a n d f i n i s h e s d r y w a l l

. R 2 0 a t 4 3 8

. I t w a s

f o r m e d b y F r a n k N a s t a s i [ “ F r a n k ” ] a n d S e n i o r i n 1 9 9 3

, a n d w a s o w n e d b y F r a n k

a n d T o m N a s t a s i

, H u g h e y W h i t e

, a n d S e n i o r

. I n 2 0 0 2

, N a s t a s i ’ s p r e s i d e n t w a s

F r a n k ’ s s o n

, A n t h o n y N a s t a s i [ “ A n t h o n y ” ]

. I d

. a t 4 3 7

, 4 3 9

- 4 2

, 4 7 3

. A t N a s t a s i

, 1

S e n i o r s e r v e d a s t h e E x e c u t i v e V i c e P r e s i d e n t a n d w a s i n c h a r g e o f e s t i m a t i n g

. I d

.

a t 4 4 2

. N a s t a s i o w n e d a m a j o r i t y i n t e r e s t i n C i r c l e I n d u s t r i e s [ “ C i r c l e ” ]

, a

c o m m e r c i a l d r y w a l l c o n t r a c t i n g b u s i n e s s i n A t l a n t a

, G e o r g i a f o r m e d b y J u n i o r i n

t h e e a r l y 1 9 9 0 s

. R 1 7 a t 9 5 ; R 1 8 a t 2 2 4 ; R 2 0 a t 3 7 0

- 7 1

, 4 7 4

. D u r i n g t h e f i r s t f e w 2

y e a r s a f t e r C i r c l e b e g a n w o r k i n g i n A t l a n t a

, C i r c l e w a s o f t e n s h o r t o f c a s h

,

i n c l u d i n g w h a t w a s n e c e s s a r y f o r p a y r o l l

, a n d r e g u l a r l y o b t a i n e d l o a n s f r o m

N a s t a s i

. I d

. a t 3 9 2

, 4 3 0

, 4 3 5

, 5 2 1

.

Fr ank and his brothe r, Tom Nasta si, established Nastasi B rothers in the 1950s. R20 at 1

468-69. Senior starte d working for the N astasi B rothers w hile he wa s in high school, a nd was

eventua lly

promoted to a job estimator in the fr ont office . I d. at 469. I n the late 1950s or e arly

1960s, Nastasi B rothers me rg ed with another subcontrac tor to form Na stasi Whi te. I d. at 438,

468, 470. Nastasi & Whit e wa s owned, in par t by Fr ank, Tom, and Senior, a nd installed dry

wall

work in the World Trade Center. I d. at 471-72.

J unior had wor

ked as a n employ ee of

Nastasi pre dece ssor, Nastasi White. R20 at 474; 2

R17 at 95. I n 1984, Nastasi White purcha sed Ne w York’ s “big g est” dry wall business, Circle

I ndustries. R20 at 471-72.

3I n 1 9 9 8

, C i r c l e w a s a w a r d e d a c o n s t r u c t i o n p r o j e c t w o r k i n g o n t h e A t l a n t i s

h o t e l a n d c a s i n o i n N a s s a u

, B a h a m a s

. R 1 8 a t 2 2 4

- 2 5

, 2 2 8

. B e c a u s e B a h a m i a n

e m p l o y m e n t l a w r e q u i r e d t h a t e m p l o y e e s w o r k i n g i n t h e B a h a m a s w o r k f o r

B a h a m i a n c o m p a n i e s

, C i r c l e o r g a n i z e d C i r c l e I n d u s t r i e s

, L t d

. a s a B a h a m i a n

c o m p a n y t o p a y i t s e m p l o y e e s

. I d

. a t 2 3 9 ; R 2 0 a t 4 1 5

.

A b o u t t h e s a m e t i m e

, S e n i o r d e c i d e d t h a t h e w a n t e d t o r e t i r e f r o m N a s t a s i

a n d m o v e t o A t l a n t a t o h e l p J u n i o r r u n C i r c l e

. O n 3 1 D e c e m b e r 1 9 9 8

, S e n i o r a n d

F r a n k e n t e r e d i n t o a s t o c k s w a p a g r e e m e n t w i t h t h e a s s i s t a n c e o f N a s t a s i ’ s t a x

a t t o r n e y

, W i l l i a m B e r n a r d

, i n w h i c h S e n i o r e x c h a n g e d h i s i n t e r e s t i n N a s t a s i f o r

t h e s t o c k h e l d b y N a s t a s i i n C i r c l e

, a n d N a s t a s i a g r e e d t o r e p a y a $ 7 0 0

, 0 0 0 l o a n

f r o m S e n i o r

. R 2 0 a t 4 4 4

- 4 5

, 4 4 8

- 4 9

, 4 7 8

, 4 9 9

- 5 2 1 ; R 2 7 a t 1 1 0 2

- 0 3 ; G o v t

. E x h s

.

3

4 5 8

- 6 0

. T h e s t o c k s t r a n s f e r w a s t o h a v e b e e n c o m p l e t e d p r i o r t o 1 J a n u a r y 2 0 0 0

.

R 2 6 a t 2 8 9

. A t t h e t i m e o f t h e s t o c k s w a p a g r e e m e n t

, t h e N a s t a s i s t o c k w a s o w n e d

7 0 p e r c e n t b y F r a n k a n d 3 0 p e r c e n t b y S e n i o r ; t h e C i r c l e s t o c k w a s o w n e d 8 0

p e r c e n t b y N a s t a s i

. R 2 0 a t 4 4 8

. S e n i o r ’ s 3 0 p e r c e n t s h a r e o f N a s t a s i s t o c k w a s

v a l u e d a t $ 1

, 3 0 0

, 0 0 0 ; N a s t a s i ’ s 8 0 p e r c e n t s h a r e o f C i r c l e s t o c k w a s v a l u e d a t

$ 1

, 0 5 0

, 0 0 0

. I d

. a t 5 0 2

- 0 3 ; E x h

. 4 7 3

. A s p a r t o f t h e c o n s i d e r a t i o n

, N a s t a s i a g r e e d

t o m a k e a n a d d i t i o n a l $ 2 5 0

, 0 0 0 p a y m e n t t o C i r c l e

. I d

. a t 5 0 3 ; E x h s

. 4 5 6

. 4 7 3

,

The stock e x chang e ag ree ment was a lso reviewe d by Stanley Schleg er [“Schleg er” ], an 3

independe nt acc ountant who per formed N astasi’s audits. R20 at 499, 524-25.

44 7 3

. 1

. T h e s t o c k e x c h a n g e w a s r e c o r d e d i n N a s t a s i ’ s g e n e r a l l e d g e r

. R 2 0 a t 5 0 1

.

T h e $ 2 5 0

, 0 0 0 w a s w i r e d f r o m N a s t a s i t o C i r c l e o n 1 1 F e b r u a r y 1 9 9 9

, a n d w a s

r e c e i v e d a n d r e c o r d e d i n C i r c l e ’ s o p e r a t i n g a c c o u n t w h e r e i t w a s c o

- m i n g l e d w i t h

o t h e r m o n i e s i n t h a t a c c o u n t

. I d

. a t 5 0 1

- 0 4 ; R 2 4 a t 1 9 8

- 2 0 7 ; R 2 6 a t 2 8 0

- 8 2

.

S c h l e g e r

, w h o w a s p e r f o r m i n g a c c o u n t i n g a n d a u d i t i n g s e r v i c e s f o r b o t h N a s t a s i

a n d C i r c l e i n 1 9 9 9

, c o n s i d e r e d t h e $ 2 5 0

, 0 0 0 t r a n s f e r a l o a n a n d e n t e r e d i t o n

N a s t a s i ’ s r e c o r d s a s a n “ a d v a n c e a g a i n s t c o s t t o a f f i l i a t e ” [ C i r c l e ] a n d o n C i r c l e ’ s

b o o k s a s a n a d v a n c e f

r o m a s h a r e h o l d e r [ N a s t a s i ]

. R 2 0 a t 5 0 3

- 0 4

, 5 0 5

- 0 7

, 5 2 2

- 2 4 ;

R 2 4 a t 1 9 9

- 2 0 0

, 2 0 2

- 0 3 ; R 2 6 a t 2 8 0

- 8 2 ; G o v t

. E x h

. 4 7 3

. 1

. T h e $ 2 5 0

, 0 0 0 w a s

s p e n t f r o m t h a t a c c o u n t b y t h e e n d o f F e b r u a r y 1 9 9 9

. R 2 6 a t 2 8 2

- 8 4

. A f t e r t h e

s t o c k s w a p

, S e n i o r h a d n o o w n e r s h i p i n t e r e s t i n N a s t a s i a n d o w n e d a b o u t a 7 5

p e r c e n t i n t e r e s t i n C i r c l e ; J u n i o r s e r v e d a s P r e s i d e n t o f C i r c l e a n d o w n e d a b o u t 2 5

p e r c e n t

. R 1 8 a t 1 5 3 ; R 2 0 a t 5 0 0 ; R 2 6 a t 2 8 8 ; G o v t

. E x h s

. 5 a t 2

, 4 5 8

- 6 0

. S e n i o r

d e v o t e d 7 5 p e r c e n t o f h i s t i m e t o C i r c l e

, w h i l e J u n i o r d e v o t e d 1 0 0 p e r c e n t o f h i s

t i m e t o C i r c l e

. G o v t

. E x h

. 5 a t 2

. F o r t a x y e a r 2 0 0 0

, C i r c l e h a d a p p r o x i m a t e l y $ 2 6

m i l l i o n i n g r o s s r e v e n u e

, p r i n c i p a l l y f r o m l a r g e c o m m e r c i a l p r o j e c t s s u c h a s

d o r m i t o r i e s

, h o s p i t a l s

, h o t e l s

, n u r s i n g h o m e s

, a n d r e s o r t s

. R 1 8 a t 2 2 4

- 2 5 ; R 2 0 a t

3 7 3 ; G o v t

. E x h

. 5 a t 1

.

5S e n i o r ’ s e s t i m a t i n g e x p e r t i s e a n d t h e e s t i m a t i n g s o f t w a r e t h a t h e d e v e l o p e d

w e r e “ c r i t i c a l ” t o N a s t a s i ’ s b u s i n e s s

, a n d h e c o n t i n u e d t o w o r k f o r N a s t a s i u n t i l h e

r e t i r e d i n 2 0 0 0

. R 2 0 a t 4 5 0

. W h i l e w o r k i n g f o r N a s t a s i

, S e n i o r ’ s W

- 2 s t a t e m e n t s

w e r e p r e p a r e d b y t h e N a s t a s i b o o k k e e p i n g d e p a r t m e n t a n d r e v i e w e d b y t h e i r

a c c o u n t a n t s

. I d

. a t 5 1 8

. U p o n S e n i o r ’ s r e t i r e m e n t

, h e e n t e r e d i n t o a n a g r e e m e n t

n o t t o c o m p e t e w i t h N a s t a s i f o r c o n s t r u c t i o n w o r k

. T h e a g r e e m e n t a l s o p r o v i d e d

t h a t S e n i o r a n d C i r c l e w e r e e m p l o y e d a s a d v i s o r s a n d c o n s u l t a n t s t o N a s t a s i

, w i t h

p a y m e n t t o C i r c l e

, S e n i o r o r a n y c o m p a n y e i t h e r o r b o t h o f t h e m o w n e d

. B y

s e p a r a t e a g r e e m e n t

, S e n i o r o r h i s d e s i g n e e w a s g u a r a n t e e d $ 1

, 3 0 0

, 0 0 0

, t o b e p a i d

i n 2 1 3 w e e k l y i n s t a l l m e n t s o f $ 6

, 0 0 0 a n d o n e $ 4

, 0 0 0 i n s t a l l m e n t a s c o n s u l t i n g

p a y m e n t s

, e f

f e c t i v e 1 J a n u a r y 2 0 0 0

. I d

. a t 4 5 0

- 5 1

, 4 5 3

- 5 7

, 5 0 8 ; R 2 6 a t 2 9 4 ; R 2 7

a t 1 1 0 2

- 0 3 ; G o v t

. E x h s

. 4 5 9

, 4 6 0

. M u c h o f t h e c o n s u l t a t i o n e s t i m a t i o n w o r k t o o k

p l a c e b e t w e e n t h e i n f

o r m a t i o n t e c h n o l o g y d e p a r t m e n t s o f N a s t a s i a n d C i r c l e

w o r k i n g w i t h S e n i o r ’ s e s t i m a t i n g s o f t w a r e

, w h i c h b o t h N a s t a s i a n d C i r c l e u s e d

.

R 2 0 a t 4 5 1

, 4 5 8

- 5 9

. O n a w e e k l y b a s i s

, C i r c l e s e n t a n i n v o i c e t o N a s t a s i f o r

S e n i o r ’ s c o n s u l t i n g w o r k

, N a s t a s i p a i d C i r c l e $ 6

, 0 0 0

, a n d C i r c l e d e p o s i t e d t h e

$ 6

, 0 0 0 i n t o i t s b a n k a c c o u n t

. I d

. a t 4 5 9

- 6 2

, R 2 4 a t 2 1 8 ; E x h s

. 4 6 1

- 6 3

, 4 6 5

. 1

-

. 4 4

,

4 6 6

. 1

-

. 4 2

, 4 6 7

. 1

-

. 1 3

. N a s t a s i r e c o r d e d t h e p a y m e n t s a s “ c o n s u l t i n g f e e s ” a n d

C i r c l e r e c o r d e d t h e m a s “ o t h e r i n c o m e

. ” R 2 0 a t 4 5 8

- 6 1

, 5 0 9

, 5 4 5

, 5 5 5

- 6 0 ; R 2 2 a t

61 6 3 ; R 2 4 a t 2 1 5

. N o o t h e r c h e c k s o r m o n i e s w e r e p o s t e d t o t h e “ o t h e r i n c o m e ”

a c c o u n t

. R 2 0 a t 5 5 7

. T h e p a y m e n t s w e r e i n c l u d e d o n N a s t a s i & A s s o c i a t e s ’

c o r p o r a t e i n c o m e t a x r e t u r n

, w h i c h w e r e a u d i t e d b y t h e I R S

, a s c o n s u l t i n g f e e s

. I d

.

a t 5 1 0

, 5 3 0

- 3 1

.

K o t t w i t z w a s e m p l o y e d a s a b o o k k e e p e r / c o n t r o l l e r f o r N a s t a s i

. I d

. a t 5 0 4

.

W h i l e a t N a s t a s i

, K o t t w i t z w o r k e d w i t h N a s t a s i ’ s o u t s i d e a c c o u n t a n t

, G a r y

S c h w a r t z [ “ S c h w a r t z ” ]

, w h i l e h e w a s w o r k i n g w i t h t h e S t a n l e y S c h l e g e r

i n d e p e n d e n t a c c o u n t i n g f i r m a n d a f

t e r h e h a d o p e n e d h i s o w n p r a c t i c e

. I d

. a t 4 2 4

- 4

2 5

, 4 9 7

, 5 1 3

, 5 2 1 ; R 2 2 a t 3 0

- 3 3

, 3 6

- 3 8

, 1 5 6

. S c h w a r t z p e r f o r m e d w o r k o n t h e

N a s t a s i t a x r e t u r n s a t b o t h t h e N a s t a s i a n d S c h l e g e r a c c o u n t i n g o f f i c e s

. I d

. a t 3 5

.

K a s s a n d r a L o g a n [ “ L o g a n ” ] b e g a n w o r k i n g f o r C i r c l e i n 1 9 9 4 a n d

,

b e g i n n i n g i n 1 9 9 5

, p e r f o r m e d d a t a e n t r y f

o r a c c o u n t s p a y a b l e a n d e s t i m a t i n g

. R 2 0

a t 3 7 0

- 7 2

. S h e l e a r n e d C i r c l e ’ s E m q u e a c c o u n t i n g p r o g r a m f r o m K o t t w i t z d u r i n g

a t r i p t o N e w Y o r k a n d s p o k e t o h e r o n t h e t e l e p h o n e i f s h e h a d a n y q u e s t i o n s

. I d

.

a t 3 7 0

, 3 7 4

. L o g a n e x p l a i n e d t h a t

, w h e n a n i n v o i c e f o r g o o d s o r s e r v i c e s w a s

r e c e i v e d a t C i r c l e

, i t w a s o p e n e d b y t h e r e c e p t i o n i s t a n d s e n t t o a n a c c o u n t s

p a y a b l e c l e r k

, w h o t h e n m a t c h e d i t t o a s h i p p i n g o r d e l i v e r y t i c k e t t o i n s u r e t h a t t h e

m a t e r i a l s h a d b e e n r e c e i v e d

, a n d e n t e r e d t h e j o b n a m e a n d n u m b e r a n d g e n e r a l

Schleg er w orked w ith the Nastasis, in their var ious businesses, for ove r 40 y ear s until 4

2004. R20 at 498.

7l e d g e r i n f

o r m a t i o n o n t o t h e i n v o i c e

. I d

. a t 3 7 5

, 3 8 3

, 4 2 2

- 2 3

. C i r c l e r e c e i v e d

b e t w e e n 5 0 a n d 1 0 0 i n v o i c e s e a c h d a y

. I d

. a t 4 2 3 ; R 2 6 a t 3 1 2

. T h e j o b n a m e

r e f l e c t e d t h e p r o

j e c t a n d t h e j o b n u m b e r w a s a s s i g n e d b y y e a r a n d t h e h i s t o r i c a l

o r d e r o f t h e a w a r d e d j o b

. I d

. a t 3 7 6

- 3 7 7

. T h e s t a n d a r d j o b n u m b e r c o n s i s t e d o f

f i v e d i g i t s : t h e f

i r s t t w o r e p r e s e n t e d t h e y e a r t h a t t h e p r o j e c t b e g a n

, a n d t h e l a s t

t h r e e w e r e a s s i g n e d c o n s e c u t i v e l y i n c h r o n o l o g i c a l j o b o r d e r

. I d

. T h e a c c o u n t s

p a y a b l e c l e r k d e t e r m i n e d w h a t j o b a n d g e n e r a l l e d g e r n u m b e r t o a s s i g n t o e a c h

i n v o i c e

, e n t e r e d t h e i n v o i c e d a t a i n t o t h e E m q u e p r o g r a m

, a n d f i l e d t h e i n v o i c e

i n t o a n u n p a i d i n v o i c e f i l e

. R 2 0 a t 3 8 8

- 8 9

, 4 2 3 ; R 2 6 a t 3 1 2

- 1 3

. C i r c l e a c c o u n t s

e m p l o y e e s m a d e a b o u t 2 0 0 0 e n t r i e s t o t h e E m q u e p r o g r a m p e r m o n t h

. I d

. a t 3 1 5

.

I f j o u r n a l e n t r i e s o r r e c l a s s i f i c a t i o n s w e r e m a d e o n t h e C i r c l e b o o k s

, t h e y w e r e

d o n e u n d e r t h e i n s t r u c t i o n o f K o t t w i t z o r S c h w a r t z

. R 2 0 a t 4 0 8

- 0 9

. A b o u t o n c e a

m o n t h

, a n a c c o u n t s p a y a b l e r e p o r t o f u n p a i d i n v o i c e s w a s p r i n t e d a n d g i v e n t o

J u n i o r f o r t h e s e l e c t i o n o f i n v o i c e s t o b e p a i d

. I d

. a t 3 8 9

- 9 0

, 4 2 3

- 2 4

. J u n i o r h a d

s i g n a t u r e a u t h o r i t y f

o r C i r c l e ; L o g a n a n d o t h e r a c c o u n t s p a y a b l e e m p l o y e e s h a d a

s i g n a t u r e s t a m p t h a t t h e y f r e q u e n t l y u s e d

. I d

. a t 3 9 5

- 9 6

. L o g a n p r o v i d e d c o p i e s o f

t h e j o b m a n a g e m e n t ( “ J M ” ) r e p o r t s

, a c c o u n t s p a y a b l e s r e p o r t s

, a n d g e n e r a l l e d g e r s

t o S c h l e g e r a n d S c h w a r t z

, a n d d i s c u s s e d t h e g e n e r a l l e d g e r r e v i s i o n s w i t h t h e m

.

I d

. a t 3 7 7

, 4 2 4

- 2 5

, 4 3 1

. T h e J M r e p o r t s p r o v i d e d i n f o r m a t i o n o n a j o b ’ s o v e r a l l

8c o s t

, t h e c o m p a n y ’ s p r o f i t s a n d l o s s e s

, t h e p r o g r e s s o f t h e j o b

, a n d t h e p e r c e n t a g e

o f t h e j o b t h a t h a d b e e n c o m p l e t e d

. I d

. a t 3 7 7

. T h e J M r e p o r t s c o u l d s h o w b o t h

t h e a c t i v e a n d i n a c t i v e a c c o u n t s

, a n d b o t h r e p o r t s w e r e r o u t i n e l y g i v e n t o J u n i o r

.

I d

. a t 3 7 8

, 3 8 0

.

B e g i n n i n g i n 1 9 9 9

, S c h w a r t z w a s “ e n g a g e d b y C i r c l e t o p r e p a r e t h e i r

a u d i t e d f i n a n c i a l s t a t e m e n t s a n d t h e r e l a t e d t a x r e t u r n s

. ” R 2 2 a t 3 9

, 4 5

, 1 2 5

, 1 8 5

.

H i s e n g a g e m e n t l e t t e r p r o v i d e d t h a t h e w o u l d “ r e a s o n a b l y o b t a i n i n f o r m a t i o n ”

f r o m t h e a c c o u n t s

, a n d a s s e s s w h e t h e r t h e a c c o u n t s w e r e f r e e f r o m m a t e r i a l

m i s s t a t e m e n t s t o i n s u r e t h a t e a c h w a s r e c o n c i l e d a n d v a l i d

. I d

. a t 3 9

, 4 1

, 4 8

.

A l t h o u g h S c h w a r t z r e c e i v e d m u c h o f t h e i n f o r m a t i o n f

o r t a x r e t u r n p r e p a r a t i o n b y

m a i l

, h e a l s o t r a v e l e d f

r o m N e w Y o r k t o A t l a n t a f o r t h e a u d i t s a n d s p e n t t w o a n d

o n e

- h a l f d a y s r e v i e w i n g C i r c l e ’ s b o o k s a n d r e c o r d s e a c h J u n e f r o m 1 9 9 9 t h r o u g h

2 0 0 3

. I d

. a t 4 1

- 4 3

, 4 5

, 8 4

, 8 9

. W h e n h e n o t i c e d a n y m i s l a b e l e d e n t r i e s

, S c h w a r t z 5

m a d e j o u r n a l e n t r i e s a n d a d v i s e d L o g a n

, K o t t w i t z

, o r K e n y a D i g g s

, a n a c c o u n t s

r e c e i v a b l e c l e r k

, s o t h a t t h e e n t r i e s c o u l d b e c o r r e c t l y l a b e l e d

. R 2 0 a t 4 3 1

, 5 6 3

- 6

Circle’s f

iscal y ear ended on 31 Ma

rch e ach y ear , and Schwa rtz waited about two and 5

one-ha lf months for the books to close be fore perf orming the audit. R22 at 43.

Dig g s was in cha

rg e of Circ le’s ac counts rec eivable de partment fr om October 2001 6

until Decembe r 2004. R20 at 545.

96 4

, 5 8 1

- 8 2

, 5 8 4 ; R 2 2 a t 3 2

, 1 0 7

, 1 6 2

. S c h w a r t z c o m p l e t e d t h e a u d i t s a t h i s N e w

Y o r k h o m e o f

f i c e

. I d

. a t 3 6

, 4 1

, 4 3

.

S c h w a r t z c o n d u c t e d C i r c l e ’ s a u d i t s f o r t h e i r b o n d i n g i n s u r a n c e

, a n d u s e d t h e

a u d i t s t o p r e p a r e C i r c l e ’ s c o r p o r a t e t a x r e t u r n a n d t h e M a r c h e l l e t t a s ’ p e r s o n a l t a x

r e t u r n s

. I d

. a t 4 7

, 8 3

- 8 4

, 9 0

. S c h w a r t z e x p l a i n e d t h a t i t w a s “ q u i t e d i f f i c u l t ” t o

p e r f o r m t h e a u d i t s o f “ t h e c o m p a n y ’ s i n t e r n a l c o n t r o l

, ” b u t t h a t t h e a u d i t s w e r e

d o n e “ o n l y t o t h e e x t e n t t o a s s e s s t h e c o n t r o l r i s k ” a n d n o t t o “ u n c o v e r c e r t a i n

t y p e s o f i r r e g u l a r i t i e s

. ” I d

. a t 4 6

, 4 9

, 1 7 1

. S c h w a r t z t e s t i f i e d t h a t n o o n e a t C i r c l e

l i m i t e d h i s t i m e i n A t l a n t a o r h i s a u d i t a n a l y s i s i n a n y w a y

, a n d t h a t t h e y p r o v i d e d

h i m w i t h a s m u c h t i m e a n d i n f o r m a t i o n a s h e n e e d e d t o p r e p a r e t h e a u d i t s

. R 2 2 a t

4 7

, 6 0

, 1 5 4

, 1 6 1

- 6 2

. S c h w a r t z r e v i e w e d C i r c l e ’ s g e n e r a l l e d g e r s

, p a y r o l l a n d

s a l a r y s c h e d u l e s

, a n d t h e J M r e p o r t

. I d

. a t 5 7

- 5 8

, 6 0

- 6 1

, 6 3

- 6 4 ; G o v t

. E x h

. 4 3 1

. 1

.

H e a l s o h a d a c c e s s t o C i r c l e ’ s c o m p u t e r a n d c o u l d r u n a n y n e e d e d a d d i t i o n a l

r e p o r t s

. R 2 0 a t 4 2 4

- 2 5 ; R 2 2 a t 1 4 6

. H e p r e p a r e d a “ w o r k

- i n

- p r o g r e s s ” s c h e d u l e

t h a t l i s t e d a l l p e n d i n g j o b s w i t h t h e i r a c t u a l b i l l i n g s a n d e x p e n s e s a n d c o m p a r e d i t

t o C i r c l e ’ s e s t i m a t e o f t h e e x p e c t e d p r o f i t f r o m t h a t j o b t o d e t e r m i n e w h e t h e r t h e

e x p e n s e s a n d t h e r e v e n u e s m a t c h e d

. I d

. a t 7 9

.

I n p r e p a r i n g t h e a u d i t s

, S c h w a r t z r e q u i r e d t h a t C i r c l e p r o v i d e “ r e a s o n a b l e

,

r a t h e r t h a n a b s o l u t e

, a s s u r a n c e t h a t t h e f i n a n c i a l s t a t e m e n t s [ w e ] r e f r e e o f m a t e r i a l

10m i s s t a t e m e n t

, w h e t h e r c a u s e d b y e r r o r o r f r a u d ” a n d e x p l a i n e d t h a t “ a m a t e r i a l

m i s s t a t e m e n t m [ i g h t ] r e m a i n u n d e t e c t e d

. ” G o v t

. E x h

. 4 2 5 a t 1

. H e f u r t h e r

e x p l a i n e d t h a t “ a n a u d i t i s n o t d e s i g n e d t o d e t e c t e r r o r o r f r a u d t h a t i s i m m a t e r i a l t o

t h e f i n a n c i a l s t a t e m e n t s ” a n d t h a t “ a m a t e r i a l f r a u d m a y o c c u r a n d n o t b e

d e t e c t e d

. ” I d

. E a c h t a x y e a r

, J u n i o r s i g n e d a d o c u m e n t

, p r e p a r e d b y S c h w a r t z

,

c o n f i r m i n g t h a t

, t o t h e b e s t o f h i s k n o w l e d g e a n d b e l i e f

, h e h a d g i v e n S c h w a r t z a l l

o f t h e r e l e v a n t d o c u m e n t a t i o n a n d i n f o r m a t i o n

, i n c l u d i n g C i r c l e ’ s f i n a n c i a l

r e c o r d s

, r e l a t e d d a t a

, a n d m i n u t e s o f a n y s t o c k h o l d e r o r d i r e c t o r s ’ m e e t i n g s

, t h a t

w a s n e c e s s a r y f

o r S c h w a r t z t o a u d i t C i r c l e ’ s b o o k s a n d t o p r e p a r e C i r c l e ’ s a n d t h e

M a r c h e l l e t t a s ’ p e r s o n a l i n c o m e t a x r e t u r n s

. I d

. a t 5 0

- 5 4 ; 1 4 0 ; G o v t

. E x h

. 4 2 7

. 1 0

.

O n e o f t h e i t e m s t h a t J u n i o r a g r e e d t o d i s c l o s e w a s a n y “ [ r ] e l a t e d p a r t y

t r a n s a c t i o n s

. ” G o v t

. E x h

. 4 2 7

. 1 0 a t 2

. T h e p e r s o n a l t a x r e t u r n s w e r e d u e o n 1 5

A p r i l e a c h y e a r ; t h e c o r p o r a t e t a x r e t u r n w a s d u e o n 1 5 S e p t e m b e r b e c a u s e C i r c l e

o p e r a t e d o n a f

i s c a l y e a r t h a t b e g a n o n 1 A p r i l a n d e n d e d o n 3 1 M a r c h

. R 2 2 a t 9 0

-

9 1 ; R 2 4 a t 1 0 6

- 0 7

.

S c h w a r t z e v e n t u a l l y p r e p a r e d C i r c l e ’ s 3 1 M a r c h 2 0 0 0 f i n a n c i a l s t a t e m e n t

,

i t s t a x r e t u r n s f

o r 1 A p r i l 1 9 9 9

– 3 1 M a r c h 2 0 0 0 a n d 1 A p r i l 2 0 0 0

– 3 1 M a r c h 2 0 0 1

,

a n d t h e M a r c h e l l e t t a s ’ p e r s o n a l t a x r e t u r n s f o r 1 9 9 9

- 2 0 0 0

. R 2 2 a t 7

, 8 3

- 8 7

, 1 0 2

-

0 3 ; G o v t

. E x h s

. 1

- 2

, 5

, 7

. 3

, 4 7 5

, 4 8 5

. I n p r e p a r i n g t h e M a r c h e l l e t t a s ’ p e r s o n a l

11r e t u r n s

, S c h w a r t z r e q u e s t e d e x t e n s i o n s f o r e a c h o f t h e m

. R 2 2 a t 9 1

, 1 2 5

, 1 7 4

.

J u n i o r ’ s 2 0 0 0 t a x r e t u r n r e p o r t e d $ 1 4 5

, 0 0 0 i n s a l a r y f r o m C i r c l e

. I d

. a t 8 5

- 8 7 ;

G o v t

. E x h

. 3

. S e n i o r ’ s 1 9 9 9 a n d 2 0 0 0 t a x r e t u r n s r e f l e c t e d i n c o m e f

r o m h i s W

- 2 s

,

s m a l l c a p i t a l g a i n s

, i n t e r e s t

, a n d a p e n s i o n

. R 2 2 a t 1 0 0

- 0 3

. S e n i o r ’ s 2 0 0 0 t a x 7

r e t u r n r e p o r t e d $ 1 7 6

, 0 0 0 i n s a l a r y f r o m C i r c l e b u t d i d n o t i n c l u d e a n y i n c o m e f r o m

N a s t a s i o r f

r o m t h e p a y m e n t o f p e r s o n a l e x p e n s e s b y C i r c l e

. I d

. a t 1 0 2

- 0 3 ; R 2 4 a t

2 3 2

- 3 4 ; G o v t

. E x h

. 4

. W h e n S c h w a r t z “ g e n e r a t e d ” a t a x r e t u r n

, h e s i g n e d t h e

o r i g i n a l t h a t w a s s e n t t o t h e I R S

, s e n t h i s c l i e n t s a n u n s i g n e d c o p y o f t h e r e t u r n

,

a n d k e p t a n u n s i g n e d c o p y i n h i s f i l e s

. R 2 2 a t 9 2

- 9 3

, 1 1 9

.

I n l a t e 1 9 9 9 o r e a r l y 2 0 0 0

, K o t t w i t z m o v e d t o A t l a n t a t o r e p l a c e L o g a n a s

C i r c l e ’ s a c c o u n t i n g m a n a g e r a n d c o n t r o l l e r

. R 2 0 a t 3 9 1

, 4 2 0

, 5 0 4

, 5 6 3

. S c h w a r t z

t e s t i f i e d t h a t

, a f

t e r h e w a s r e t a i n e d t o w o r k w i t h C i r c l e

, h e s p o k e t o K o t t w i t z a f e w

t i m e s b y t e l e p h o n e a n d t h e n

, a f t e r 1 9 9 9

, w h e n h e a r r i v e d i n A t l a n t a f o r t h e a u d i t s

,

h e s a t d o w n w i t h K o t t w i t z t o r e v i e w t h e d o c u m e n t s t h a t h a d b e e n a s s e m b l e d f o r

t h e a u d i t s a n d t o a d v i s e h e r r e g a r d i n g w h a t o t h e r n e c e s s a r y i n f o r m a t i o n n e e d e d t o

b e p u l l e d

. R 2 2 a t 3 7

, 4 3

, 5 4

- 5 5

, 5 7

, 1 5 8

, 1 6 0

. A l t h o u g h K o t t w i t z w a s “ v e r y

8

Senior was a

salarie d employ ee of

Nastasi in 1999, and a

salarie d employ ee of

Circle in 7

2000. R20 at 518; R26 at 295, 306.

I n a sepa

rate matter, Kottwitz testified that she did not perfor m audits for Circle a

nd 8

that Circle’s a

udits were ha

ndled by “an outside CPA firm.” R18 a t 309.

12b u s y ” i n h e r p o s i t i o n a s C i r c l e ’ s b o o k k e e p e r

, c o m p t r o l l e r

, a n d o f f i c e m a n a g e r

, s h e

p r o v i d e d h i m w i t h “ a s m u c h i n f o r m a t i o n a s p o s s i b l e

, ” a s s i s t e d h i m i n l o c a t i n g

o t h e r n e e d e d i n f

o r m a t i o n b o t h w h i l e h e w a s i n A t l a n t a a n d a f t e r h e h a d r e t u r n e d t o

N e w Y o r k

, a n d w a s “ t h e r e t o h e l p

. ” R 2 0 a t 5 8 3

- 8 4 ; R 2 2 a t 3 2

, 4 3

, 5 6

, 7 3

, 1 5 6

, 9

1 5 9

, 1 6 1

- 6 2

, 1 8 7

. S c h w a r t z d i d n o t g e n e r a l l y a s k J u n i o r o r S e n i o r f o r i n f o r m a t i o n

,

b u t r e l i e d o n K o t t w i t z

. I d

. a t 3 2

. K o t t w i t z p r o v i d e d S c h w a r t z w i t h t h e J M

R e p o r t s

, w h i c h l i s t e d a l l o f C i r c l e ’ s p r o j e c t s i n c l u d i n g C r a b a p p l e a n d N e w p o r t

B a y

. I d

. a t 6 0

- 6 1

, 6 3

- 6 4

. S c h w a r t z d i d n o t r e v i e w e v e r y r e c o r d o n e a c h

c o n s t r u c t i o n j o b

, b u t h a d a c c e s s t o t h e j o b l e d g e r s f o r e v e r y j o b a n d s e l e c t e d

c e r t a i n j o b s a t r a n d o m t o r e v i e w

. I d

. a t 5 9

- 6 0

, 1 4 6

. S c h w a r t z c o m m e n t e d t h a t

K o t t w i t z w a s “ a l w a y s ” “ r e c l a s s i f y i n g e n t r i e s ” t o g e t t h e m r i g h t o n t h e b o o k s

, a n d

w o u l d a s k h i s a d v i c e o n w h e r e t o c l a s s i f y a n e n t r y

. I d

. a t 9 8

, 1 6 2

. S e n i o r w a s

a w a r e t h a t S c h w a r t z a n d K o t t w i t z w o r k e d o n t h e a u d i t s t o g e t h e r

, a n d t h a t S c h w a r t z

r e l i e d u p o n K o t t w i t z f

o r i n f o r m a t i o n a n d d o c u m e n t a t i o n

. I d

. a t 1 8 5

- 8 6

.

S c h w a r t z

, w h o e x p l a i n e d t h a t h e w a s u n a w a r e o f S e n i o r ’ s s e p a r a t i o n

a g r e e m e n t w i t h N a s t a s i

, n o t i c e d t h a t C i r c l e ’ s “ o t h e r i n c o m e ” a c c o u n t h a d a l a r g e

Dig g s also obtained docume nts for Schwa rtz, whom she understood to be Circle’ s 9

independe nt CP A and not an e mploy ee of Circle. R20 at 563, 583.

13b a l a n c e o f a r o u n d $ 3 0 0

, 0 0 0

, a n d a s k e d K o t t w i t z a b o u t i t

. R 2 0 a t 1 0 1

, 1 0 3 ; R 2 2 1 0

a t 1 6 4

- 6 5

. K o t t w i t z e x p l a i n e d t h a t “ i t w a s i n c o m e f r o m N a s t a s i & A s s o c i a t e s t h a t

w h e n t h e t w o f

o r m e r o w n e r s s p l i t u p t h e c o m p a n y [ N a s t a s i & A s s o c i a t e s ]

, m o n e y

w a s o w e d t o

– a s c o m m i s s i o n i n c o m e t o t h e c o r p o r a t i o n [ C i r c l e ]

. ” I d

. a t 1 0 3 ; a l s o

s e e i d

. a t 1 2 0

- 2 1 ( S c h w a r t z e x p l a i n e d t h a t “ w h a t h a p p e n e d w a s [ t h e N a s t a s i

p a y m e n t s ] w [ e r e ] f

i r s t p u t i n t o i n c o m e a n d t h e n [ K o t t w i t z ] t o l d m e t h a t i t w a s a

r e t u r n o f c a p i t a l )

, i d

. a t 1 6 4 ( S c h w a r t z a n s w e r e d “ [ c ] o r r e c t ” w h e n a s k e d w h e t h e r

K o t t w i t z h a d “ s a i d t h a t i t w a s h e r u n d e r s t a n d i n g t h a t t h i s m o n e y w a s a r e s u l t o f

n e g o t i a t i o n s b e t w e e n S e n i o r a n d

. . . N a s t a s i c o n c e r n i n g t h e s p l i t

- u p ” ) ; i d

. a t 1 6 5

( S c h w a r z a n s w e r e d “ [ c ] o r r e c t ” w h e n a s k e d w h e t h e r K o t t w i t z “ w a s j u s t t e l l i n g

[ S c h w a r t z ] w h a t s h e w a s t o l d

. ” ) ; i d

. a t 1 8 0

- 8 1 ( S c h w a r t z t e s t i f i e d t h a t K o t t w i t z

e x p l a i n e d t h a t t h e “ m o n e y o w e d ” t o S e n i o r a f t e r t h e c o m p a n y b r e a k u p w a s

d e p o s i t e d i n t o C i r c l e ’ s a c c o u n t s a n d “ s h o u l d ” h a v e b e e n c r e d i t e d t o S e n i o r )

.

S c h w a r t z a s k e d K o t t w i t z f o r “ d o c u m e n t a t i o n ” r e g a r d i n g t h e i n c o m e b u t K o t t w i t z

d i d n o t h a v e t h e d o c u m e n t s

. I d

. a t 1 0 4

, 1 6 5

, 1 8 4

- 8 5

. S c h w a r t z d i d n o t a s k S e n i o r

Other w itnesses also testified that Circle’ s books refle cted these pay ments as “other 1 0

income.” Circ le’s CPA Randy Br own testified that the $6,000 pa y ments were “orig inally

. . . booked as othe r income.” R24 at 215. Circle ac counts rec eivable c lerk Ke ny a Dig g s said that

Kottwitz told her to post the pay ments as other inc ome. R20 at 556-57, 559-60. I RS Age nt

L esso testified that the $6,000 pa y ments were rec orded a s “other inc ome.” R24 at 216-17.

14f

o r t h e d o c u m e n t s a n d n e v e r r e c e i v e d a n y d o c u m e n t a t i o n f o r t h i s i n c o m e

. I d

. a t 1 1

1 0 4

, 1 6 5

, 1 8 4

. A t t h e c l o s e o f C i r c l e ’ s f i s c a l y e a r 2 0 0 0

, t h e “ o t h e r i n c o m e ”

a c c o u n t w a s r e c l a s s i f

i e d u n d e r t h e “ n o t e p a y a b l e o f f i c e r

, l o a n t o o f

f i c e r ” a c c o u n t

. 1 2

I d

. a t 1 0 7

- 0 8

, 1 2 0

, 1 7 7

- 8 2

. S c h w a r t z e x p l a i n e d t h a t h e s u g g e s t e d t h e 1 3

r e c l a s s i f i c a t i o n b e c a u s e h e u n d e r s t o o d t h a t “ i t w a s a r e t u r n o f c a p i t a l

, b e c a u s e o f

t h e b r e a k u p o f t h e t w o c o m p a n i e s

, . . . S e n i o r w a s o w e d a l o t o f m o n e y

. S o

, t h a t ’ s

w h a t

. . . b r o u g h t m e t o s a y t h a t i t s h o u l d h a v e b e e n i n n o t e p a y a b l e r a t h e r t h a n

i n c o m e

. ” I d

. a t 1 2 0

- 2 1

. S c h w a r t z m a d e a j o u r n a l e n t r y r e g a r d i n g t h e d i s c r e p a n c y

a n d w h e r e t h e m o n i e s s h o u l d b e p r o p e r l y l o g g e d

. I d

. a t 1 2 2

- 2 3

, 1 7 7

- 7 8

. A f t e r t h e

r e c l a s s i f i c a t i o n o f t h e m o n i e s a s l o a n s p a y a b l e t o S e n i o r

, C i r c l e p a i d t h r e e i t e m s o n

S e n i o r ’ s b e h a l f w h i c h w e r e “ c h a r g e d a s o f f s e t ” t o w h a t C i r c l e o w e d S e n i o r : h i s

Schwar tz understood that the documents wer e at Na stasi’s attorney ’s offic e. R22 at 1 1

184.

Despite the r ecla ssification in Circle’s a ccounting , Schwar tz di d not corre ct Senior’s 1 2

persona l income tax return which did not re flec t the missing $300,000 in income. R22 at 182-

83; R24 at 232-34. Schwar tz admit ted that he kne w that the tax return nee ded to be r evised, but

did not have the ne cessa

ry leg al documents to appr opriately acc ount for the unr eporte d income.

R22 at 183. Schwartz knew that Senior “ never revie wed . . . a

ny of the tax returns” a

nd relied on

Schwar tz t o corr ectly

calc ulate his taxes. I d. at 174, 185.

L esso conf

irmed that the $6000 pa

y ments were rec lassified as “ notes pay able of fice r” 1 3

acc ount and that Schwar

tz’s ex planation for the rec lassification wa s consistent with his analy sis.

R24 at 217.

152 0 0 0 N e w Y o r k p e r s o n a l t a x e s

, h i s 2 0 0 0 f e d e r a l p e r s o n a l t a x e s

, a n d c o n s t r u c t i o n

c o s t s o w e d t o S e a y C o n s t r u c t i o n S e r v i c e s

. R 2 4 a t 1 1 9

- 2 3 ; G o v t

. E x h

. 6 0 0

. 1 4

S c h w a r t z a n d K o t t w i t z c o n f e r r e d o n o t h e r i s s u e s w h e n n e c e s s a r y

, a n d

S c h w a r t z p r o v i d e d K o t t w i t z w i t h a d v i c e r e g a r d i n g t h e r e p o r t i n g o f p e r s o n a l

e x p e n s e s p a i d b y C i r c l e

. R 2 2 a t 9 8

, 1 8 5

. S c h w a r t z b a s i c a l l y r e l i e d o n K o t t w i t z 1 5

f o r a l l i n f o r m a t i o n a n d d o c u m e n t a t i o n

, a n d d i d n o t g e n e r a l l y c o n f e r w i t h t h e

M a r c h e l l e t t a s b e c a u s e t h e y “ d i d n ’ t w a n t t o g e t i n v o l v e d ” a n d w e r e u n a b l e t o

p r o v i d e h i m w i t h a n s w e r s w h e n h e d i d a s k t h e m q u e s t i o n s

. I d

. a t 1 8 5

- 8 7

.

S c h w a r t z r e c o g n i z e d t h a t S e n i o r w a s n o t i n t e r e s t e d i n t h e t e c h n i c a l i t i e s o f b o o k s o r

r e c o r d s

, a n d d i d n o t r e v i e w f i n a n c i a l i n f

o r m a t i o n o r e v e n h i s p e r s o n a l t a x r e t u r n s

w i t h h i m

. I d

. a t 1 7 4

- 7 5

, 1 8 6

. I f S c h w a r z h a d q u e s t i o n s w h i l e h e w a s p r e p a r i n g

S e n i o r ’ s p e r s o n a l t a x r e t u r n

, h e c o m m u n i c a t e d w i t h S e n i o r ’ s w i f e

. I d

. a t 1 7 4

.

I n M a r c h 1 9 9 9

, J u n i o r p u r c h a s e d a r e s i d e n t i a l l o t o n w h i c h h e p l a n n e d t o

b u i l d a h o m e

. R 1 8 a t 1 8 6

. I n A p r i l 1 9 9 9

, J u n i o r o b t a i n e d a $ 2 5 0

, 0 0 0 l o a n f r o m 1 6

Seay Construction was ac tually the builder of Junior’s, and not Senior’s, re sidence

. 1 4

R18 at 270, 272, 300.

When Kottwitz asked howto document monies borrow ed by an individual from the 1 5

company in 2003, Schwartz expl ained that she should set up a note re ceiva ble from the c ompany

showing a loan r ece ivable. R22 at 185.

Kottwitz was not working for Circle at this tim e. R20 at 391, 420. 1 6

16C & G E n t e r p r i s e s

, L t d

. , a n d u s e d i t t o p u r c h a s e t h e l o t l o c a t e d o n T u l l a m o r e W a y 1 7

i n A l p h a r e t t a

, G e o r g i a [ “ C r a b a p p l e ” ]

. I d

. a t 2 6 2 ; R 2 0 a t 5 5 3

- 5 4 ; R 2 1 a t 8 5 1

- 5 3 ;

R 2 6 a t 2 4 8

- 4 9

, 2 5 2

. T h i s p u r c h a s e w a s n o t e n t e r e d o n C i r c l e ’ s r e c o r d s

. I d

. a t 1 8

2 4 8

- 4 9

. S o o n t h e r e a f

t e r

, J u n i o r f

o u n d a s u i t a b l e l o t f

o r a h o m e f

o r S e n i o r

, a n d

, i n

S e p t e m b e r 1 9 9 9

, S e n i o r s i g n e d a n a g r e e m e n t f o r t h e p u r c h a s e o f t h e p r o p e r t y

l o c a t e d i n N e w p o r t B a y C o v e

, A l p h a r e t t a

, G e o r g i a [ “ N e w p o r t B a y ” ] f o r $ 2 7 0

, 0 0 0

.

R 1 8 a t 3 2 1

- 2 4 ; G o v t

. E x h

. 7 5

. 1

. I n O c t o b e r 1 9 9 9

, S e n i o r a s s i g n e d t h e c o n t r a c t t o 1 9

C i r c l e a n d C i r c l e p u r c h a s e d t h e N e w p o r t B a y p r o p e r t y f o r $ 2 7 0

, 0 0 6 ; t h e d e e d w a s

r e c o r d e d w i t h C i r c l e ’ s n a m e a s o w n e r

. R 1 8 a t 3 2 1

- 2 2

, 3 5 8

- 6 0 ; R 2 2 a t 7 5

- 7 6 ; 2 0

R 2 4 a t 2 0 0

- 0 1 ; R 2 6 a t 2 8 4 ; G o v t

. E x h s

. 2 4

, 7 5

. 2

, 7 5

. 4

. T h e l a n d p u r c h a s e

, w h i c h

t o t a l e d $ 2 8 0

, 9 6 3 w i t h “ o t h e r a m o u n t s

, ” w a s r e c o r d e d i n C i r c l e ’ s b o o k s a s a “ n o t e

p a y a b l e t o o f

f i c e r ” m e a n i n g t h a t t h e i r o f f i c e r o w e d C i r c l e $ 2 8 0

, 9 6 3 ; i t w a s n e v e r

s h o w n o n C i r c l e ’ s b o o k s a s a n a s s e t

. R 2 2 a t 7 5

- 7 6 ; R 2 4 a t 2 0 1

- 0 2 ; R 2 6 a t 2 8 5

,

3 5 5

. T h e p r o p e r t y w a s t r a n s f e r r e d t o S e n i o r i n M a r c h 2 0 0 2 f o r $ 1 0

. G o v t

. E x h

.

C&G Ente rprises, L td., was a B ahamian c ompany owned by

Geor g e Gor

man, one of 1 7

J unior’s close busine ss associates. R18 at 227.

Acc ording to I nterna l Revenue Ser vice [“I RS”] Ag ent J ohn W. L esso, this transac tion 1 8

did not go “ throug h the books” of Circ le. R26 at 248.

Ag ain, this transac tion occurr ed bef ore K ottwitz beg an wor

king f or Circle. 1 9

L esso testified that the Circle chec k was made pay able to B ank of A merica . R24 at 2 0

201. L esso and building contra ctor Mar c Dor man ac knowledg ed that Ne wport B ay was a ctually

owned by Circle during the construc tion. R18 at 358-60; R26 at 316-17.

172 5

. A c e r t i f i c a t e o f o c c u p a n c y w a s i s s u e d t o S e n i o r f o r t h e N e w p o r t B a y r e s i d e n c e

o n 1 0 M a y 2 0 0 2

, t h u s p e r m i t t i n g S e n i o r t o o c c u p y t h e h o m e

. G o v t

. E x h

. 3 3

.

J u n i o r ’ s h o m e c o n s t r u c t i o n b e g a n i n J a n u a r y 2 0 0 0

, a f t e r b u i l d e r B o b S e a y

h a d r e c e i v e d a d e p o s i t f o r a h o u s e o n t h e C r a b a p p l e p r o p e r t y

. R 1 8 a t 2 7 2

, 2 7 7

- 7 8 ;

G o v t

. E x h

. 1 1 4

. S e a y r e f e r r e d J u n i o r t o R o b e r t F r e d e r i c k

, m o r t g a g e l o a n

o r i g i n a t o r a t F i r s t C o l o n y B a n k w h e r e J u n i o r s u b s e q u e n t l y s o u g h t a $ 6 5 0

, 0 0 0

c o n s t r u c t i o n l o a n

. R 1 8 a t 1 3 6

- 3 7

, 1 4 1

, 2 7 8

. I n J a n u a r y 2 0 0 0

, S e n i o r c o n t r a c t e d

w i t h b u i l d e r A l l e n D o r m a n

, I n c

. f o r t h e c o n s t r u c t i o n o f a h o u s e o n t h e N e w p o r t

B a y p r o p e r t y

. I d

. a t 3 3 8

- 4 3 ; G o v t

. E x h

. 1 2 5

. M a r c D o r m a n

, o n e o f t h e o w n e r s o f

A l l e n D o r m a n

, I n c

. , u n d e r s t o o d t h a t S e n i o r w a s t h e o w n e r o f t h e p r o p e r t y a n d

, i n

t h e N e w p o r t B a y c o n s t r u c t i o n c o n t r a c t

, S e n i o r w a s i d e n t i f i e d a s “ O w n e r ” ; t h e r e

w a s n o r e f

e r e n c e t o C i r c l e

. R 1 8 a t 3 3 9

- 4 3 ; G o v t

. E x h

. 1 2 5

.

B e g i n n i n g i n A p r i l 2 0 0 0

, t h e f i r s t m o n t h o f C i r c l e ’ s 2 0 0 1 f i s c a l y e a r

, C i r c l e

b e g a n p a y i n g m a n y o f t h e c o n t r a c t o r b i l l s f o r t h e C r a b a p p l e a n d N e w p o r t B a y

h o m e s

. R 1 8 a t 2 0 7

- 0 8

, 2 1 4

- 2 1 ; R 2 4 a t 2 3 3

. S o m e o f t h e c o n t r a c t o r s w e r e p a i d

2 1

See R18 at 217 (Came ron Padg ett arc hitect Charles Came ron re ceive d a Circle c heck 2 1

as down pa

y ment on the New

port Ba y house which he understood wa s to be Senior’s re sidence ;

“most of the che cks [came] from Circle” ); id. at 285-86 (Sea y ’s subcontra ctors on the Cra bapple

house we re pa id by

Circle); id. at 319 (Sea

y subcontrac tor L ummus S upply ’s owner Br andon

Under wood was pa id by

Circle); id. at 338, 349-350, 360 ( builder Mar c Dor man was instruc ted

by Senior to pick up his draw c hecks a t Circle and wa s paid by Circle for

work on the N ewpor

t

Ba y house); R20 at 600-01, 603, 610- 16 (althoug h Diversifie d Cabinet Distributors’ employ ee

J ay Moore ha d contra cted with Juni or and Senior, she was pa id by Circle for

work a t the

Crabapple and Ne wport B ay houses); R21 at 631-33, 636 (G ilmore Dry wall co- owner

Dennis

18b y K o t t w i t z o r d e a l t w i t h h e r r e g a r d i n g t h e i r p a y m e n t s

. I n a n a f f i d a v i t s u b m i t t e d 2 2

i n a n a r b i t r a t i o n p r o c e e d i n g b e t w e e n J u n i o r a n d S e a y

, K o t t w i t z i n d i c a t e d t h a t s h e

h a d m a d e p a y m e n t s o n t h e M a r c h e l l e t t a s ’ h o m e s a s “ c o m p e n s a t i o n ” t o t h e

M a r c h e l l e t t a s

. R 1 8 a t 3 1 2

- 1 3

. A t o t h e r t i m e s

, c o n t r a c t o r s ’ p a y m e n t s w e r e

a p p r o v e d b y S e n i o r o r w i t h a C i r c l e c h e c k h a n d l e d b y S e n i o r

. C i r c l e a l s o p a i d 2 3

s o m e o f t h e v e n d o r s w h o w o r k e d o n t h e M a r c h e l l e t t a s ’ h o m e s a f t e r t h e 2 0 0 1

c o r p o r a t e f

i s c a l y e a r e n d e d

. 2 4

Gilmore wa s paid by

Circle for

work on the Cra

bapple r esidenc e); id. at 645-47, 649- 50 (Mar vin

Young , the owner

of Shamrock D oors, was pa id by Circle for

work on the Cra

bapple r esidenc e);

id. at 666-67, 669 (Christian Craw ford, the ow ner of Crawf ord L andsca

ping w as paid by

Circle

for wor k on the Craba

pple re sidence ); id. at 703, 705-06, 710, 712, 714, 716-17 ( J ennife r Testa

, an employ ee of

Testa Ma rble Cre ations, was paid by Circle for

work on the Cra

bapple

residenc e); id. at 819, 822-23 ( Dennis Rose, an e mploy ee w ith Spacemake r Closet I nteriors, wa s

paid by Circle for

work on a

Marc helletta re sidence ); id. at 828, 833 (Ang elo Viale, the owner of

I ron Works I nterna tional, was paid by Circle for

work on a

Marc helletta re sidence ); id. at 835,

839-40 (Da

vid Whi tcomb, the Chief F inancial Of fice r for Capitol Materials, was pa id by Circle

for mate rials used a t the Marc hellettas’ r esidenc es); and R23 a t 912, 916-18 (Thier ry Fr ancois,

the owner of Stone Ag e De signs, wa s paid by Circle for

work on the Cra

bapple r esidenc e).

See R18 at 349-350 ( Dorman r ece ived a c heck f rom Kottwitz “eve ry

once in a while” 2 2

and may have se en her

write one chec k); R20 at 615 (Moore rec eived a Circle che ck air -billed

by Kottwitz and spoke w ith her re g arding a che ck); a nd R21 at 840 (Whitcomb knew that

Kottwitz was Circle ’s comptroller, a nd he dea lt with her for pa y ments).

See R18 at 281, 283-84 ( Seay discussed the L

ummus and Wi lliams Brother s’ invoices 2 3

with J unior and he ard Senior a pprove pa y ments); id. at 349-50 (Dor man re ceive d a che ck fr om

Senior “[e]very

once in a while” a nd may have se en him write one chec k).

See R21 at 652-56 ( Osca r Ha dizadeh, the owner

of Allg ree n L andsca

pe, wor ked with 2 4

Dorman on the Crabapple residenc e and w as paid by Circle); id. at 659, 661, 663 (D avid White,

a co- owner

of Specia lty

Fountains, wa s paid by

Circle for

work a t the Crabapple residenc e); id.

at 674-76, 679 (D an B artlett with Ba rtlett Hea ting & Cooling wa s paid by Circle for

work on the

Marc hellettas’ r esidenc es); id. at 686, 690-91 ( J im Rast, owner of Jim Rast Dry wall Company

,

was pa id by

Circle for

work on the N ewpor

t Ba y residenc e); id. at 720, 726, 728-29 ( Edmond

Capozz i, the owner

of Moder n I ndustries, was pa id by

Circle for

work on the Cra

bapple

19J u n i o r u n d e r s t o o d t h a t t h e p a y m e n t s t o t h e c o n t r a c t o r s f r o m C i r c l e w e r e

s h o w n o n C i r c l e ’ s b o o k s a s e m p l o y e e l o a n s b u t h e d i d n o t i n v e s t i g a t e h o w t h e y

w e r e b o o k e d

. R 1 8 a t 3 0 6

. S e n i o r ’ s h o m e c o n s t r u c t i o n p r o j e c t w a s a s s i g n e d t h e

n a m e “ N e w p o r t B a y ” f

o r i t s s u b d i v i s i o n a n d t h e n u m b e r 0 0 9 9 8 ; J u n i o r ’ s h o m e

c o n s t r u c t i o n p r o

j e c t w a s a s s i g n e d t h e n a m e “ C r a b a p p l e ” f o r i t s s u b d i v i s i o n a n d t h e

n u m b e r 0 0 9 9 9

. R 2 0 a t 3 8 0

- 8 1

, 5 5 3

- 5 4 ; R 2 6 a t 2 4 3

- 4 4

. T h e M a r c h e l l e t t a h o m e

c o n s t r u c t i o n c o s t s a p p e a r e d i n C i r c l e ’ s b o o k s a n d r e c o r d s a s “ e x p e n s e s ” a n d

c a t e g o r i z e d a s “ c o s t o f g o o d s s o l d

, ” a n d w e r e p r o v i d e d t o S c h w a r t z d u r i n g h i s 2 5

a u d i t s

. R 2 2 a t 6 0

, 6 4

- 6 5

, 1 4 1

- 1 4 5 ; R 2 4 a t 1 4 4

, 1 5 9 ; R 2 6 a t 2 6 8

, 2 7 6

, 3 1 5

- 1 6 ;

G o v t

. E x h

. 3 2 8

. F o r C i r c l e ’ s f i s c a l y e a r e n d i n g o n 3 1 M a r c h 2 0 0 1

, t h e h o m e

c o n s t r u c t i o n j o b s l i s t e d n o i n c o m e b u t s u b s t a n t i a l c o s t s

. R 2 0 a t 4 3 1

- 3 2 ; R 2 2 a t 6 4

-

residenc e); id. at 762, 766, 768 (Cha rlene L ott, a co-ow ner of

Americ an L andmar

k Fe nce, w as

paid by Circle for

work on the Cra

bapple r esidenc e); R25 at 1008-09 ( L ouis Buckma n, who

installed floor tile and g ranite c ountertops, was pa id by Circle for

work on the Cra

bapple

residenc e).

The Mar chellettas’ homes’ construc tion costs were trac ked on a “ J M” Report, whic h 2 5

ref lected jobs in prog ress a s project number s 00998 (“Ne wport B ay ”) a nd 00999 (“Cra

bapple” ).

R20 at 381, 552-54; R26 at 277. Schwartz testified that, during his audits, Kottwitz provided

him with box es of mate rials re lating to e ach of Circle’s jobs. R22 at 60. Schwar tz

acknow ledg ed that he ha d made ha ndwritten notations on pag es of a J M Report that listed

expenses for both the Ne wport B ay and Craba

pple jobs, but made no notations as to either job

and wa s unsure whe ther he had spoken to Kottwitz about them. I d. at 65, 141-45. He explained

that he “ma

y not have notice d” the a

bsence of income. I d. at 65.

206 5 ; 1 4 4

- 4 6

. T h e p a y m e n t s f o r t h e N e w p o r t B a y r e s i d e n c e w e r e m a d e d i r e c t l y t o

t h e c o n t r a c t o r s ; n o p a y m e n t s w e r e m a d e t o S e n i o r

. R 2 6 a t 3 1 6

- 1 8

. 2 6

A l t h o u g h b o t h t h e N e w p o r t B a y a n d C r a b a p p l e e x p e n s e s w e r e r e c o r d e d i n

t h e J M r e p o r t s

, S c h w a r t z d i d n o t i n c l u d e t h e m o n h i s 2 0 0 1 w o r k

- i n

- p r o g r e s s

s c h e d u l e

, a n d d i d n o t d i s c u s s t h e m w i t h K o t t w i t z

. R 2 2 a t 7 9

- 8 0 ; R 2 6 a t 1 4 4

- 4 5

.

T h e J M r e p o r t s s h o w e d t h a t b o t h t h e N e w p o r t B a y a n d C r a b a p p l e j o b s c o n t a i n e d

l a r g e e x p e n s e s a n d n o i n c o m e

. R 2 2 a t 6 5

- 6 6

. S c h w a r z n o t e d s o m e o f t h e

c o n s u l t i n g f

e e s f o r t h e h o m e c o n s t r u c t i o n j o b s i n h i s a u d i t b u t d i d n o t f o l l o w

- u p

w i t h a l e t t e r t o v e r i f

y t h e i r w o r k

. R 2 2 a t 1 7 5

- 7 7

. T h e M a r c h e l l e t t a s ’ c o n s t r u c t i o n

2 7

c o s t s w e r e n o t t r e a t e d f

o r a c c o u n t i n g p u r p o s e s u n t i l a f t e r t h e e n d o f C i r c l e ’ s

a c c o u n t i n g y e a r o n 3 1 M a r c h

. R 2 4 a t 1 5 6

- 5 7 ; R 2 6 a t 2 7 8

. A t t h a t t i m e

, t h e c o s t s

c o u l d b e t r e a t e d a s s h a r e h o l d e r d i s t r i b u t i o n

, s t r a i g h t i n c o m e o r c o m p e n s a t i o n

, o r a s

a l o a n t o a s h a r e h o l d e r

. R 2 2 a t 7 0 ; R 2 4 a t 1 5 7

- 5 8 ; R 2 6 a t 2 7 8

- 7 9

. S c h w a r t z

,

h o w e v e r

, d i d n o t a d

j u s t C i r c l e ’ s b o o k s r e g a r d i n g t h e h o m e

- r e l a t e d p r o j e c t s a n d t h e

d i s t r i b u t i o n s w e r e r e p o r t e d a s c o s t

- o f

- g o o d s

- s o l d o n t h e 2 0 0 1 t a x r e t u r n

, a n d d i d

n o t i n c l u d e t h e r e p o r t e d d i s t r i b u t i o n s a s i n c o m e o n t h e M a r c h e l l e t t a s ’ p e r s o n a l

Circle’s r ecor ds ref

lected ove r 99% of

the expenses paid on the Ne wport B ay house. 2 6

R26 at 316.

Specifica lly , Schwar

tz not ed the f

ees pa id to the arc hitectura l firm Cameron Padg ett 2 7

and to Crawf

ord L andsca

ping. R22 a t 175-77.

21i n c o m e t a x r e t u r n s

. I d

. a t 6 2

- 6 5

, 7 6

, 7 8

. S c h w a r t z a l s o t e s t i f i e d t h a t h e w a s

u n a w a r e o f t h e c o n s t r u c t i o n o f t h e M a r c h e l l e t t a s ’ r e s i d e n c e s ; h e e x p l a i n e d t h a t

C i r c l e ’ s c o n s t r u c t i o n o f p e r s o n a l r e s i d e n c e s f o r t h e M a r c h e l l e t t a s w o u l d h a v e b e e n

“ r e l a t e d p a r t y t r a n s a c t i o n s ” b u t t h a t h e w a s n e v e r t o l d t h a t C i r c l e w a s p a y i n g f o r

t h e M a r c h e l l e t t a s ’ c o n s t r u c t i o n e x p e n s e s

. I d

. a t 6 3

, 6 5

- 6 6

. H e f u r t h e r t e s t i f

i e d t h a t

h e “ m a y n o t h a v e n o t i c e d ” t h e p r o j e c t c o s t s o n t h e J M r e p o r t s a n d t h u s t h e c o s t s

,

w i t h n o r e l a t e d b i l l i n g s

, d i d n o t c o n s t i t u t e a “ r e d f l a g ” f o r h i m

. R 2 2 a t 5 3

- 5 4

, 6 3

,

6 5

- 6 6

, 6 9

, 7 1

. H e c l a i m e d t h a t

, i f h e h a d n o t i c e d t h e c o s t s a n d r e a l i z e d t h a t C i r c l e

h a d p a i d f

o r t h e p e r s o n a l r e s i d e n c e c o n s t r u c t i o n c o s t s

, h e w o u l d h a v e b o o k e d t h e

c o s t s a s c o m p e n s a t i o n o r a s a l o a n t o t h e M a r c h e l l e t t a s w h e n h e a d j u s t e d t h e

e n t r i e s i n J u n e 2 0 0 2

. R 2 2 a t 6 9

- 7 1

. C i r c l e a l s o p a i d f o r S e n i o r ’ s A l p h a r e t t a

,

G e o r g i a a p a r t m e n t i n 2 0 0 0 a n d f o r l a w n c a r e a t S e n i o r ’ s L o n g I s l a n d

, N e w Y o r k

h o m e d u r i n g 2 0 0 0 a n d 2 0 0 1

. R 2 1 a t 6 9 4

, 6 9 8

, 7 3 3

- 3 5 ; R 2 4 a t 2 2 8

- 3 2 ; G o v t

. E x

.

5 2 2

, 5 3 1

. T h e s e e x p e n s e s w e r e b o o k e d o n C i r c l e ’ s r e c o r d s

, r e s p e c t i v e l y

, a s “ o f f i c e

r e n t ” a n d “ c o n s u l t i n g f

e e s

. ” R 2 4 a t 2 2 9

- 3 1 ; R 2 6 a t 2 4 1

- 4 2

.

C i r c l e a l s o p a i d f

o r J u n i o r ’ s v i s i t s w i t h b u s i n e s s a s s o c i a t e s t o t h e G o l d C l u b

,

a n A t l a n t a a d u l t e n t e r t a i n m e n t v e n u e

, a n d c l o t h i n g p u r c h a s e s

. T h e G o l d C l u b

c h a r g e s a p p e a r e d o n t h e c r e d i t c a r d s t a t e m e n t s a s “ M i k e ’ s S p o r t s B a r ” o r “ M S B

,

I n c

. , ” a n d w e r e r e c o r d e d o n t h e C i r c l e a c c o u n t i n g s y s t e m a s m i s c e l l a n e o u s o f f i c e

22o r v e h i c l e e x p e n s e s

. R 2 1 a t 7 8 5

- 8 8

, 7 9 1

- 9 2 ; R 2 6 a t 2 5 3

- 5 4

, 2 5 7 ; G o v t

. E x

. 5 1 8

.

H i s c l o t h i n g p u r c h a s e s

, f r o m H o n g K o n g T a i l o r s

, E l e g a n t F a s h i o n s o f H o n g K o n g

,

i n A t l a n t a

, a p p e a r e d o n C i r c l e ’ s c r e d i t c a r d

. R 2 0 a t 5 8 8

, 5 9 0

- 9 1

, 5 9 7

- 9 8 ; R 2 6 a t

2 5 7 ; G o v t

. E x h s

. 5 1 8

, 5 2 0

, 5 2 9

. T h e s e e x p e n s e s w e r e r e c o r d e d o n C i r c l e ’ s b o o k s

a s “ v e h i c l e ” a n d “ m i s c e l l a n e o u s o f f i c e ” e x p e n s e s

. R 2 6 a t 2 5 9

- 6 2

.

D u r i n g t h e s u m m e r o f 2 0 0 2

, S c h w a r t z v i s i t e d C i r c l e t o c o n d u c t h i s a u d i t a n d

p r e p a r e d t a x r e t u r n s f

o r C i r c l e a n d t h e M a r c h e l l e t t a s

. R 2 2 a t 4 5

, 8 9

- 9 3

. I n t h e t a x

r e t u r n t h a t S c h w a r t z p r e p a r e d f o r J u n i o r

, $ 1 8 3

, 2 3 1 w a s r e p o r t e d a s s a l a r y f r o m

C i r c l e

. R 2 2 a t 9 3 ; R 2 4 a t 1 0 0 ; G o v t

. E x h

. 4 8 7

. I n t h e t a x r e t u r n t h a t S c h w a r t z

p r e p a r e d f

o r S e n i o r

, $ 1 7 6

, 0 0 0 w a s r e p o r t e d a s s a l a r y f r o m C i r c l e

. R 2 4 a t 1 2 9

- 3 0 ;

G o v t

. E x h

. 4 9 7

. N e i t h e r d r a f t t a x r e t u r n r e f

l e c t e d a n y p e r s o n a l e x p e n s e s p a i d b y

C i r c l e f o r e i t h e r J u n i o r o r S e n i o r n o r d i d S e n i o r ’ s t a x r e t u r n i n c l u d e a n y i n c o m e

f r o m N a s t a s i

. R 2 4 a t 1 0 4

- 0 5

, 1 0 9

- 1 0

, 1 1 3

, 1 3 2

. I n S e p t e m b e r 2 0 0 2

, f o l l o w i n g a

U n i t e d S t a t e s C u s t o m a g e n t ’ s i n v e s t i g a t i o n o f C i r c l e ’ s B a h a m i a n c o n s t r u c t i o n

p r o j e c t a n d a s u b s e q u e n t i n v e s t i g a t i o n b y t h e I n t e r n a l R e v e n u e S e r v i c e

, t h e 2 8

M a r c h e l l e t t a s w e r e a d v i s e d n o t t o f i l e a n y a d d i t i o n a l t a x r e t u r n s u n t i l t h e i r p r e v i o u s

r e t u r n s w e r e r e v i e w e d

. R 2 5 a t 9 2 5

, 9 2 7

- 3 0

, 9 5 9

- 6 1

. T h u s

, t h e 2 0 0 1 r e t u r n s

The I mmigra tion and Customs Enforc ement ag ent who investig ated the B ahamian 2 8

projec t notified the I RS of Ci rcle ’s attorne y ’s “unusua l” and “ out of left fie ld” conc erns a s to

whether the I RS would be contacte d. R25 at 925, 931-33, 955-57.

23p r e p a r e d b y S c h w a r t z w e r e n e v e r s i g n e d n o r f i l e d

. R 2 2 a t 9 2 ; R 2 4 a t 9 6

- 9 8

, 1 0 0

-

0 2 ; G o v t

. E x h s

. 4 8 7

, 4 9 7

. T h e i n v e s t i g a t i o n s

, h o w e v e r

, c o n t i n u e d

. R 2 5 a t 9 6 5

- 7 1

,

9 7 8

.

I n 2 0 0 4

, t h e M a r c h e l l e t t a s h i r e d C P A R a n d y B r o w n

, w h o t h e n m e t w i t h

t h e i r a t t o r n e y a n d T e d R o b e r t s o n

, a f o r e n s i c a c c o u n t a n t a n d f o r m e r I R S a g e n t

.

R 2 4 a t 9 3

, 9 5

. B r o w n r e v i e w e d C i r c l e a n d t h e M a r c h e l l e t t a s ’ r e c o r d s

, i n c l u d i n g

d r a f t s o f u n f i l e d 2 0 0 1 r e t u r n s p r e p a r e d b y S c h w a r t z

. R 2 4 a t 9 8

- 9 9

, 1 0 2

. B r o w n

t h e n p r e p a r e d a n d f

i l e d 2 0 0 1 r e t u r n s f

o r t h e M a r c h e l l e t t a s

. B r o w n i n c l u d e d t h e

i n c o m e f r o m N a s t a s i i n S e n i o r ’ s r e t u r n

, a n d t r e a t e d a s i n c o m e t h e e x p e n s e s f o r t h e

h o u s e s

, c r e d i t c a r d s

, w e e k l y e x p e n s e p a y m e n t s

, a n d a u t o m o b i l e u s e f o r S e n i o r a n d

J u n i o r

. I d

. a t 1 0 3

, 1 6 3 ; G o v t

. E x h s

. 4 9 1

, 5 0 4

. H e e x p l a i n e d t h a t h e r e p o r t e d t h e

p a y m e n t s t h a t S e n i o r r e c e i v e d f r o m t h e “ N a s t a s i s t o c k i n s t a l l m e n t s a l e ” i n b o t h

2 0 0 0 a n d 2 0 0 1 a n d t r e a t e d t h e p a y m e n t s a s “ [ l ] o n g t e r m c a p i t a l g a i n ” b e c a u s e t h e y

w e r e “ d i r e c t l y r e l a t e d t o t h e s a l e o f t h e s t o c k

, t h e e x c h a n g e o f t h e s t o c k

, a n d n o t t o

a n y c o n s u l t i n g s e r v i c e s t h a t w e r e p r o v i d e d

. ” R 2 4 a t 1 3 6

, 1 3 8

- 4 4

. H e o b s e r v e d

t h a t b o t h t h e N e w p o r t B a y a n d C r a b a p p l e h o m e c o n s t r u c t i o n c o s t s w e r e s h o w n o n

t h e J M r e p o r t s

, w h i c h r e p o r t e d l e s s t h a n “ a h u n d r e d ” j o b s

, b u t t h a t

, s i n c e t h e r e w a s

“ n o c o n t r a c t a m o u n t f

o r t h e s e j o b s

, ” i t w a s “ o b v i o u s ” t h a t “ s o m e t h i n g ’ s s c r e w y ”

b e c a u s e “ i t d o e s n ’ t l o o k r i g h t

. ” R 2 4 a t 1 6 8

- 6 9

. B e f o r e t h e r e t u r n s w e r e f

i l e d

, t h e

24M a r c h e l l e t t a s s u b m i t t e d t h e i r e s t i m a t e d t a x p a y m e n t s t o t h e I R S

. I d

. a t 1 4 9

, 1 6 2

-

6 3

.

A n i n d i c t m e n t i s s u e d a g a i n s t J u n i o r

, S e n i o r

, a n d K o t t w i t z i n A p r i l 2 0 0 7

, a n d

w a s f o l l o w e d b y a s u p e r s e d i n g i n d i c t m e n t a g a i n s t e a c h o f t h e m i n J u l y 2 0 0 7

. R 1

-

1

, 4 2

. N i n e f

e l o n y c h a r g e s w e r e s e t f o r t h i n t h e s u p e r s e d i n g i n d i c t m e n t : ( 1 )

J u n i o r

, S e n i o r a n d K o t t w i t z w e r e c h a r g e d w i t h c o n s p i r a c y t o d e f r a u d t h e U n i t e d

S t a t e s b y i m p e d i n g t h e I n t e r n a l R e v e n u e S e r v i c e i n t h e c o l l e c t i o n o f r e v e n u e

, i n

v i o l a t i o n o f 1 8 U

. S

. C

. § 3 7 1 ( C o u n t O n e ) ; J u n i o r w a s c h a r g e d w i t h f i l i n g 2 9

m a t e r i a l l y f

a l s e p e r s o n a l i n c o m e t a x r e t u r n s f o r 1 9 9 9 ( C o u n t T w o ) a n d f o r 2 0 0 0

( C o u n t T h r e e ) i n v i o l a t i o n o f 2 6 U

. S

. C

. § 7 2 0 6 ( 1 ) ; S e n i o r w a s c h a r g e d w i t h f i l i n g 3 0

a m a t e r i a l l y f

a l s e p e r s o n a l i n c o m e t a x r e t u r n f o r 2 0 0 0 i n v i o l a t i o n o f 2 6 U

. S

. C

. §

7 2 0 6 ( 1 ) ( C o u n t F o u r ) a n d i n e v a d i n g t a x e s i n v i o l a t i o n o f 2 6 U

. S

. C

. § 7 2 0 1 ( C o u n t

F i v e ) ; J u n i o r

, S e n i o r

, a n d K o t t w i t z w e r e c h a r g e d w i t h a i d i n g a n d a s s i s t i n g i n t h e 3 1

Under

18 U.S.C. § 371, an individual must have be en par t of a c onspiracy

with at least 2 9

one other person “ to commit any

offe nse ag ainst the United States, or to def raud the United

States, or any

ag ency there of in any

manner or for any purpose . . . .”

“Any person who–[w]ill fully

makes a nd subscribes a

ny return, sta

tement, or other 3 0

document, which c ontains or is verifie d by a wr itten declar ation that is made under the pena lties

of per jury , and which he does not believe to be true a nd corr ect a s to every

materia l matter . . .

shall be g uilty

of a f elony . . . .” 26 U.S.C. § 7206(1).

“Any person who w illfully

attempts in any

manner to evade or def

eat a ny tax i mposed 3 1

. . . or the pa

y ment there of shall, in addition to other pena lties provided by law, be g uilty

of a

felony . . . .” 26 U.S.C. § 7201.

25f

i l i n g o f a m a t e r i a l l y f

a l s e c o r p o r a t e t a x r e t u r n f o r 2 0 0 1 ( C o u n t S i x )

, a n d K o t t w i t z

w a s c h a r g e d w i t h a i d i n g a n d a s s i s t i n g i n t h e f i l i n g o f a m a t e r i a l l y f

a l s e t a x r e t u r n

f o r J u n i o r f

o r 1 9 9 9 ( C o u n t S e v e n ) a n d f o r 2 0 0 0 ( C o u n t E i g h t )

, a n d f o r S e n i o r f

o r

2 0 0 0 ( C o u n t N i n e )

, i n v i o l a t i o n o f 2 6 U

. S

. C

. 7 2 0 6 ( 2 )

. 3 2

A f t e r t h e j u r y w a s s e l e c t e d

, t h e d i s t r i c t c o u r t p r o v i d e d t h e j u r y w i t h i n i t i a l

i n s t r u c t i o n s

. T h e d i s t r i c t c o u r t a d v i s e d t h e j u r y t h a t t h e y s h o u l d n o t c o n s i d e r t h e

l a w y e r s ’ s t a t e m e n t s

, a r g u m e n t s

, q u e s t i o n s

, a n d o b j e c t i o n s a s e v i d e n c e

. R 1 7 a t 4

.

L a t e r

, d u r i n g t h e s a m e i n s t r u c t i o n s

, t h e d i s t r i c t c o u r t a g a i n r e m i n d e d t h e j u r y t h a t

t h e “ [ o ] p e n i n g s t a t e m e n t s a r e n e i t h e r e v i d e n c e n o r a r g u m e n t s ” a n d e x p l a i n e d t h a t

t h e g o v e r n m e n t ’ s “ o p e n i n g s t a t e m e n t

. . . i s s i m p l y a n o u t l i n e t o h e l p y o u

u n d e r s t a n d t h e e v i d e n c e a s i t c o m e s i n

. ” I d

. a t 7

.

A t t r i a l

, t h e g o v e r n m e n t c l a i m e d t h a t K o t t w i t z a n d t h e M a r c h e l l e t t a s

c o n s p i r e d t o f

i l e f a l s e t a x r e t u r n s i n 2 0 0 0 a n d 2 0 0 1

. D u r i n g i t s o p e n i n g s t a t e m e n t

,

t h e g o v e r n m e n t a r g u e d t h a t t h e M a r c h e l l e t t a s “ k n e w t h e t a x r u l e s ” b u t c h o s e n o t t o

f o l l o w t h e m i n o r d e r t o l i v e a l i f e s t y l e u n a t t a i n a b l e b y t h e j u r o r s

. R 1 7 a t 1 0

, 2 7

. I t

a r g u e d t h a t t h e M a r c h e l l e t t a s “ c o n s p i r e d w i t h e a c h o t h e r a n d t h e i r l o n g [ ] t i m e l o y a l

“Any person who–[w]ill fully

aids or assists in, or procur es, counse ls, or advises the 3 2

prepa ration or pr esenta tion under, or in conne ction with any matter a rising unde r, the interna l

reve nue laws, of

a re turn, aff

idavit, claim, or other doc ument, which is fra udulent or is false a s to

any materia l matter, whe ther or not suc h falsity or fr aud is with the knowledg e or c onsent of the

person a uthorized or require d to present suc h return, a ffidavit, cla im, or document shall be g uilty

of a f elony . . . .” 26 U.S.C. § 7206(2).

26e m p l o y e e

, . . . K o t t w i t z

, t h e b o o k k e e p e r ” t o h i d e m o n e y f r o m t a x e s b y “ c o o k i n g

t h e b o o k s ” a n d “ t h r o u g h a c c o u n t i n g t r i c k s

, ” a n d b y f i l i n g f a l s e t a x r e t u r n s

. R 1 7 3 3

a t 1 0

- 1 1

, 2 3

. I t c l a i m e d t h a t t h e i r c r i m e s w e r e “ a g a i n s t t h e U n i t e d S t a t e s a n d i t s

t a x p a y e r s ” a n d p r o v i d e d t h e M a r c h e l l e t t a s w i t h l i f e s t y l e s r e p l e t e w i t h “ m a n s i o n s

, ”

“ c u s t o m c l o t h e s

, ” a n d n i g h t c l u b t r i p s

. I d

. a t 1 0

- 1 1

, 2 8

.

D u r i n g S e n i o r ’ s a t t o r n e y ’ s o p e n i n g s t a t e m e n t

, h e e x p l a i n e d t h a t S e n i o r

o f f e r e d S c h w a r t z t h e o p p o r t u n i t y t o w o r k w i t h C i r c l e i n A t l a n t a b e c a u s e h e h a d

s e e n S c h w a r t z ’ s w o r k w i t h S c h l e g e r f o r N a s t a s i

, a n d S c h w a r t z “ h e l d h i m s e l f o u t a s

a

. . . N e w Y o r k C P A

, . . . e x p e r i e n c e d

. . . i n t h e c o n s t r u c t i o n i n d u s t r y a n d

. . . a n

a u d i t o r

, p r e p a r i n g f

i n a n c i a l s t a t e m e n t s

. ” R 1 7 a t 5 5

- 5 6

. S e n i o r ’ s a t t o r n e y

e m p h a s i z e d t h a t S c h w a r t z w a s g i v e n “ c o m p l e t e a c c e s s t o a l l t h e b o o k s o f C i r c l e

, ”

a n d c o n c e d e d t h a t

, a l t h o u g h S e n i o r ’ s h o m e c o n s t r u c t i o n c o s t s w e r e k e p t o n

C i r c l e ’ s b o o k s

, S e n i o r “ h a d n o t h i n g t o d o w i t h i n s t r u c t i n g a n y b o d y i n t h e b u s i n e s s

o v e r w h e r e t o c l a s s i f

y t h e [ h o m e c o n s t r u c t i o n ] i n v o i c e s

, . . . t o c o n c e a l a n y f a c t s

,

[ o r ] t o b u r y t h e c o s t [ s ]

. ” I d

. a t 5 6

- 5 7

, 5 9

. H e f u r t h e r e x p l a i n e d t h a t S e n i o r w a s

“ n o t a b o o k p e r s o n

, . . . d [ i d n o t ] h a v e t h a t b a c k g r o u n d

, ” b u t w a s a “ b l u e

- c o l l a r

w o r k e r w h o s t a r t e d o u t a s a y o u n g m a n w o r k i n g h a r d

, . . . a n e s t i m a t o r

, ” w h o

Outside the pre sence of the jury , the g overnme nt expl ained that “ Kottwitz form[ed] 3 3

the hub” with Juni or and Senior a s the spokes, and “ [t ]hat the unreporte d income re lated to

Crabapple flow[ed] t hroug h [her].” R27 at 1025.

27“ r e l i e d o n p r o f e s s i o n a l s

, p e o p l e w h o w e a r t h e s u i t s

. . . . ” I d

. a t 5 9

. K o t t w i t z ’ s

a t t o r n e y a l s o a r g u e d t h a t S c h w a r t z w a s h i r e d f o r h i s t a x e x p e r t i s e a n d t o m a k e s u r e

t h e f i n a n c i a l r e c o r d s w e r e c o r r e c t o r t o m a k e c h a n g e s i f n e e d e d

, t h a t K o t t w i t z d i d

n o t p r e p a r e

, r e v i e w

, s i g n

, o r f i l e a n y o f t h e t a x r e t u r n s

, a n d t h a t K o t t w i t z k n e w s o

l i t t l e a b o u t t a x e s t h a t s h e a l s o a s k e d S c h w a r t z t o d o h e r s

. I d

. a t 6 5

- 6 6

, 7 1

- 7 3

.

I R S r e v e n u e a g e n t J o h n L e s s o c a l c u l a t e d t h a t t h e M a r c h e l l e t t a s ’ a n d C i r c l e ’ s

t r a n s a c t i o n s r e s u l t e d i n J u n i o r h a v i n g t a x d e f i c i e n c i e s o f $ 1 0 3

, 6 1 6 f

o r 1 9 9 9

,

$ 5 6

, 4 8 0 f

o r 2 0 0 0

, a n d $ 3 1 9

, 0 4 1 f o r 2 0 0 1 ; S e n i o r h a v i n g p e r s o n a l t a x d e f i c i e n c i e s

o f $ 1 3 2

, 8 5 8 f

o r 2 0 0 0 a n d $ 3 1 9

, 8 3 2 f o r 2 0 0 1 ; a n d C i r c l e h a v i n g c o r p o r a t e t a x

d e f i c i e n c i e s o f $ 1 0 5

, 0 5 0 f

o r t h e f i s c a l y e a r e n d i n g i n M a r c h 2 0 0 1

, a n d $ 5 1 0

, 6 6 7

f o r t h e f i s c a l y e a r e n d i n g i n M a r c h 2 0 0 2

. R 2 4 a t 2 3 6

, 2 4 7

, 2 5 8

, 2 6 0

, 2 6 2

, 2 6 8

,

2 7 1

. H e e x p l a i n e d t h a t t h e N a s t a s i p a y m e n t s c o n s t i t u t e d i n c o m e t o S e n i o r b e c a u s e

( 1 ) A n t h o n y N a s t a s i a n d S c h l e g e r t e s t i f i e d t h a t t h e s e p a y m e n t s w e r e f o r s e r v i c e s

r e n d e r e d t o N a s t a s i

, ( 2 ) C i r c l e i n v o i c e d N a s t a s i e v e r y w e e k

, a n d ( 3 ) N a s t a s i

d e d u c t e d t h e p a y m e n t s a s e x p e n s e s

. I d

. a t 2 1 0

- 1 2

. L e s s o

, h o w e v e r

, n e v e r

e x a m i n e d t h e s e p a r a t i o n

, p a y m e n t g u a r a n t e e

, o r c o n s u l t i n g a g r e e m e n t s

. I d

. a t 2 0 9

.

H e e x p l a i n e d t h a t t h e r e c l a s s i f i c a t i o n o f t h e s e p a y m e n t s t o t h e “ n o t e s p a y a b l e

o f f i c e r ” a c c o u n t w a s n o t i n c o n s i s t e n t w i t h h i s a n a l y s i s

, a n d t h a t

, b a s e d o n t h e

r e c l a s s i f i c a t i o n o f t h e s e p a y m e n t s a s a l o a n t o S e n i o r

, i t p e r m i t t e d S e n i o r t a x

- f r e e

28u s e o f t h e i n c o m e

. I d

. a t 2 1 7

- 1 8

, 2 2 0

. B y t r a c i n g t h e $ 2 5 0

, 0 0 0 r e c e i v e d b y C i r c l e

f r o m N a s t a s i i n F e b r u a r y 1 9 9 9

, h e b e l i e v e d t h a t t h e m o n e y w a s u s e d i n t h e

p u r c h a s e o f t h e p r o p e r t y f o r S e n i o r ’ s h o m e i n O c t o b e r 1 9 9 9

. I d

. a t 1 9 8

- 2 0 7

.

L e s s o c o n f

i r m e d t h a t

, f

r o m 1 J a n u a r y u n t i l 1 M a r c h

, 2 0 0 0

, t h e $ 6

, 0 0 0

p a y m e n t s w e r e e n t e r e d o n C i r c l e ’ s b o o k s a s “ o t h e r i n c o m e ” a n d t h a t C i r c l e p a i d

t a x o n t h i s a s i n c o m e t o C i r c l e

. R 2 4 a t 2 1 6

- 1 7 ; G o v t

. E x h

. 7

. 3

. H e e x p l a i n e d t h a t

J u n i o r h a d a b o u t $ 1 5 0

, 5 0 6

. 9 7 i n u n r e p o r t e d i n c o m e a n d o w e d a t a x d e f i c i e n c y o f

$ 5 6

, 4 8 0 i n 2 0 0 0 a s a r e s u l t o f t h e e x p e n s e s f o r t h e C r a b a p p l e h o m e c o n s t r u c t i o n

a n d s u i t s

, a n d t h a t h e h a d $ 7 9 8

, 2 9 5

. 9 7 i n u n r e p o r t e d i n c o m e a n d o w e d a t a x

d e f i c i e n c y o f $ 3 1 9

, 0 4 1 f

o r 2 0 0 1 a s a r e s u l t o f t h e e x p e n s e s f o r t h e C r a b a p p l e h o m e

c o n s t r u c t i o n a n d o t h e r p e r s o n a l e x p e n s e s

. R 2 6 a t 2 5 8

- 6 2

.

L e s s o b e l i e v e d t h a t t h e m o n i e s t h a t C i r c l e p a i d f o r S e n i o r ’ s a p a r t m e n t a n d

l a n d s c a p i n g w o r k c o n s t i t u t e d u n r e p o r t e d p e r s o n a l i n c o m e t a x a b l e t o S e n i o r

b e c a u s e t h e e x p e n s e s w e r e u n r e l a t e d t o C i r c l e ’ s b u s i n e s s

. R 2 4 a t 2 2 8

- 3 2 ; R 2 6 a t

2 4 2

. H e e x p l a i n e d t h a t

, a l t h o u g h t e m p o r a r y h o u s i n g w a s a p o s s i b l e b u s i n e s s

e x p e n s e

, i t w a s l i m i t e d t o a s h o r t

- t e r m p e r i o d

. R 2 4 a t 2 3 1

. H e a g r e e d

, h o w e v e r

,

t h a t t h e N e w p o r t B a y p r o p e r t y w a s a n a s s e t o f C i r c l e ’ s d u r i n g 2 0 0 1

. R 2 6 a t 3 1 6

-

1 7

. A l t h o u g h h e e x p l a i n e d t h a t C i r c l e ’ s e x p e n d i t u r e s o n b e h a l f o f J u n i o r a n d

S e n i o r w e r e “ t a x a b l e w h e n t h e i n d i v i d u a l r e c e i v e s a n e c o n o m i c b e n e f i t

, ” h e l a t e r

29t e s t i f

i e d t h a t t h e c o n s t r u c t i o n e x p e n s e s o n C i r c l e ’ s b o o k s c o u l d b e c h a r a c t e r i z e d a t

t h e e n d o f t h e c o r p o r a t i o n ’ s f i s c a l y e a r e i t h e r a s l o a n s o r i n c o m e t o t h e

s h a r e h o l d e r s

, a n d t h a t s u c h a d e t e r m i n a t i o n w a s n o t m a d e i n t h i s c a s e u n t i l

S c h w a r t z c l o s e d C i r c l e ’ s b o o k s

, a d j u s t e d e n t r i e s

, a n d p r e p a r e d a n d f i l e d C i r c l e ’ s

t a x r e t u r n s d u r i n g J u n e t h r o u g h S e p t e m b e r 2 0 0 1

. R 2 6 a t 2 7 5

- 8 0

, 3 5 4

.

R o b e r t H i s h o n

, a n a t t o r n e y a n d C P A w h o s p e c i a l i z e s i n t a x m a t t e r s

, t e s t i f i e d

o n b e h a l f o f J u n i o r a n d S e n i o r

. R 2 7 a t 1 1 1 1

- 1 3

. H i s h o n o p i n e d t h a t S e n i o r ’ s

“ r e c e i p t o f $ 6

, 0 0 0 a w e e k w o u l d b e p r o c e e d s f r o m t h e s a l e o r e x c h a n g e

. . . o f h i s

s h a r e s i n N a s t a s i

. . . . t h a t w o u l d b e c l a s s i f i e d u n d e r t h e I n t e r n a l R e v e n u e C o d e a s a

c a p i t a l a s s e t

, [ a n d ] t a x e d a s [ l o n g

- t e r m ] c a p i t a l g a i n

. . . [ a n d ] w o u l d q u a l i f y

. . . a s

a n i n s t a l l m e n t s a l e

. ” R 2 8 a t 1 1 3 2

- 3 3

. H e e x p l a i n e d t h a t

, a s a c a p i t a l g a i n

, t h e

“ t r a n s a c t i o n w o u l d b e t a x e d b y t a k i n g t h e t o t a l v a l u e o f w h a t w a s r e c e i v e d m i n u s

t h e b a s i s ” a n d p a i d a l l a t o n c e

, b u t t h a t u n d e r t h e I n t e r n a l R e v e n u e C o d e

, t h e t a x

c o u l d b e p a i d o v e r a p e r i o d o f t i m e i f t h e p a y m e n t s o n t h e s a l e w e r e o v e r a p e r i o d

o f t i m e

. I d

. a t 1 1 3 3

. H e n o t e d t h a t C i r c l e a p p e a r e d t o m a i n t a i n a n “ o p e n a c c o u n t ”

f o r b o t h s h a r e h o l d e r s

, w h e r e t h i n g s w e r e c h a r g e d a n d c r e d i t e d

, a n d t h a t s u c h a n

a c c o u n t w a s “ n o t u n u s u a l

. ” I d

. a t 1 1 3 4

. H e o b s e r v e d t h a t C i r c l e ’ s p a y m e n t s o f t h e

a p a r t m e n t r e n t a l f

o r S e n i o r w e r e “ o r d i n a r y a n d n e c e s s a r y b u s i n e s s e x p e n s e s

. . . a s

s o r t o f a w o r k i n g c o n d i t i o n f r i n g e ” b e n e f

i t t o h e l p S e n i o r m o v e f r o m N e w Y o r k t o

30A t l a n t a

. I d

. a t 1 1 3 8

. H e b e l i e v e d t h a t t h e l o d g i n g e x p e n s e s w e r e e i t h e r e x c l u d a b l e

f r o m S e n i o r ’ s g r o s s i n c o m e a s “ o r d i n a r y a n d n e c e s s a r y ” e x p e n s e s o r d e d u c t i b l e

b e c a u s e t h e y w e r e t e m p o r a r y

, n e c e s s a r y f o r t h e e m p l o y e e t o p a r t i c i p a t e w i t h t h e

b u s i n e s s

, a n d a n o r d i n a r y a n d n e c e s s a r y e x p e n s e f o r a p e r s o n w h o l i v e d i n N e w

Y o r k a n d w a s e m p l o y e d b y a G e o r g i a c o r p o r a t i o n

. I d

. a t 1 1 4 1

- 4 2

. H e s t a t e d t h a t

t h e 2 0 0 0 h o m e c o n s t r u c t i o n c o s t s f o r S e n i o r w e r e “ t a x n e u t r a l ” b e c a u s e C i r c l e

o w n e d t h e l a n d a n d

, a t t h a t t i m e

, w a s b u i l d i n g t h e h o u s e

. I d

. a t 1 1 4 2

. H e s a i d t h a t

t h e c o n s t r u c t i o n c o s t s w e r e t a x a b l e t o S e n i o r a t t h e e n d o f C i r c l e ’ s 2 0 0 1 t a x y e a r

w h e n h e o b t a i n e d t h e h o u s e t i t l e a s c o m p e n s a t i o n

, a n d o b s e r v e d t h a t S e n i o r t h e n

p a i d t h e t a x

. I d

. a t 1 1 4 3

- 4 4

. H i s h o n b e l i e v e d t h a t t h e l a w n m a i n t e n a n c e e x p e n s e s

w e r e i n c o r r e c t l y c h a r g e d t o C i r c l e a n d s h o u l d h a v e b e e n b o o k e d a s p a r t o f t h e

s h a r e h o l d e r s ’ o p e n a c c o u n t

. I d

. a t 1 1 4 4

- 4 5

.

A t t h e c l o s e o f t h e e v i d e n c e

, t h e g o v e r n m e n t d i s m i s s e d C o u n t S e v e n a g a i n s t

K o t t w i t z

. R 2 a t 9 4 ; R 2 7 a t 1 0 2 0

. K o t t w i t z a n d t h e M a r c h e l l e t t a s j o i n t l y m o v e d f o r

a n a c q u i t t a l o n a l l o f t h e r e m a i n i n g c o u n t s

, a r g u i n g t h a t t h e r e w a s n o e v i d e n c e t h a t

t h e y i n t e n d e d t o v i o l a t e t h e t a x l a w s

, a n d t h a t t h e i r d u e p r o c e s s r i g h t s w e r e v i o l a t e d

b y t h e g o v e r n m e n t ’ s i m p r o p e r r e f e r e n c e s d u r i n g t r i a l t o t h e i r w e a l t h

. I d

. a t 1 0 2 2

-

2 3

, 1 0 2 7

, 1 0 3 5

, 1 0 3 7

, 1 0 3 9

- 4 5

, 1 0 4 7

- 4 8

. T h e s e m o t i o n s w e r e d e n i e d

. R 2 a t 9 4 ;

R 2 7 a t 1 0 4 9

.

31K o t t w i t z a n d t h e M a r c h e l l e t t a s r e q u e s t e d a “ r e l i a n c e o n a c c o u n t a n t ” j u r y

i n s t r u c t i o n

. R 1

- 8 1 a t 2 6 ; R 5 a t 8 1

, E x h

. A a t 1 5 ; R 2 8 a t 1 1 9 9

- 1 2 0 0

. B a s e d o n i t s

3 4

The Mar chellettas’ reque sted instruction rea d: 3 4

Good fa ith is a complete def ense to the c harg es in the indictment since

g ood faith on the pa

rt of the De fenda

nt is inconsist ent with the exist ence of intent

to defraud or willfulness which is an esse ntial part of the c harg e. Specific intent

to defraud or wil lfulness “may be negated by a good-faith misunderstanding of

law or a good-fait h belief that one is not violating t he law . . . ” The burde n of

proof is not on the De fenda nt to prove g ood faith, of c ourse, since the Def endant

has no burde n to prove a

ny thing. The Gover

nment must establish bey ond a

rea sonable doubt that the De fenda nt acted w illfully and with specific intent as

char g ed in the indictment.

“Good faith r eliance on a qualified acc ountant . . . [is] a defenseto

will fullness in cases of tax fraud.” So, a Def endant would not be “ willfully ”

doing w rong if

, befor e taking any

action with re g ard to the a lleg ed off ense, the

Def endant c onsulted in good f aith an . . . accountant

whom the Def

endant

considere d competent, made a full and a ccur ate r eport to that . . . accountant of

all materia l fac ts of which De fenda nt had the mea

ns of knowledg e, and the n acte d

strictly in acc ordanc e with the advic e g iven by that . . . accountant.

Whether the De fenda

nt acted in g ood faith for

the purpose of

seeking

advice conce rning questions about which the De fenda nt was in doubt, and

whether the Def endant a cted strictly

in acc ordanc e with the advic e re ceive d, are

all questions for y ou to determine.

Also a complete de

fense to the c harges in the indictment is where the tax

violation was t he result of a failure of an accountant to exe rcise due c are or diligence, and not the re

sult of t he De

fendants’ actions. Titl e 26, Code of Fede ral

Regulations, Section 16694-1 provide s that an accountant or tax preparer who

prepares taxe

s for a person “may not ignore the implications of inf ormation

furnished to the preparer or actually known to the prepare r. The preparer must

make reasonable inquiries if the informati on as furnished appears to be incorrec t

or incomplete . . . The pre parer must make appropriate inquiri es to determine the

existenc e of facts and circumstanc es required by a[n] [Internal Rev enue] Code

section or regulation as a condition to claiming the deduction.”

Article V, Sec tion 56 of the American Institute of Certified Public

Acc ountants Code of Professional Conduct and Arti cle V of the New Y ork State

Society of CPA’s Princ iples of Professional C onduct provide, in rele vant part,

that “[ d] ue care requires [an acc ountant] to discharge professional

responsibilit ies with competenc e and diligence . It imposes the obligation to

perform professional service s to the best of a membe r’s ability wit h conce rn for

the best interest of those for whom service s are performed and c onsistent wi th the

[accounting] profession’s responsibilit y to the public.” “[Accountants] should be

32i n t e r p r e t a t i o n o f U n i t e d S t a t e s v

. J o h n s o n

, 7 3 0 F

. 2 d 6 8 3 ( 1 1 t h C i r

. 1 9 8 4 )

, t h e

d i s t r i c t c o u r t d e n i e d t h e i n s t r u c t i o n

, f i n d i n g t h a t t h e g o o d f

a i t h r e l i a n c e i n s t r u c t i o n

r e q u i r e d t h a t t h e d e f

e n s e “ s h o w

, o n e

, t h a t [ t h e d e f e n d a n t s ] f

u l l y d i s c l o s e d a l l

r e l e v a n t f

a c t s t o t h e e x p e r t a n d

, t w o

, t h a t [ t h e d e f e n d a n t s ] r e l i e d i n g o o d f a i t h o n

t h e e x p e r t ’ s a d v i c e

. ” R 2 2 a t 1 2 0 0

. I t c o m m e n t e d t h a t “ t h e r e [ w a ] s n o e v i d e n c e

t h a t t h e d e f

e n d a n t [ s ] s u p p l i e d a l l r e l e v a n t i n f o r m a t i o n t o t h e i r a c c o u n t a n t o r

a c c o u n t a n t s a n d r e l i e d i n g o o d f a i t h o n a c c o u n t a n t ’ s o p i n i o n ” a n d t h a t t h e

i n s t r u c t i o n w a s n o t a p p r o p r i a t e a s i t w a s n o t “ a d j u s t e d t o t h e f

a c t s

. ” I d

. a t 1 1 9 9

-

1 2 0 0

. J u n i o r ’ s c o u n s e l r e s p o n d e d t h a t

, a s t o t h e 2 0 0 1 r e t u r n s i n i t i a l l y d r a f t e d b y

S c h w a r t z a n d u l t i m a t e l y p r e p a r e d b y B r o w n

, h e d i d n o t w a n t t o b e f o r e c l o s e d f

r o m

a r g u i n g t h a t t h e y h a d p r e s e n t e d “ t e s t i m o n y t h r o u g h B r o w n a n d t h r o u g h H i s h o n

t h a t t h e d e f

e n d a n t s b e l i e v e d t h a t w h a t t h e y d i d i n f i l i n g t h e 2 0 0 1 r e t u r n s f

i x e d t h e

p r o b l e m

, i f y o u w i l l

. A n d t h a t i s r e l i a n c e o n t h e a d v i c e o f a n e x p e r t

. ” R 2 8 a t

1 2 0 0

- 0 1

. T h e g o v e r n m e n t o b j e c t e d t h a t i t d i d n o t “ t h i n k t h e [ c ] o u r t s h o u l d p u t i t s

diligent in dis charging responsibiliti es to clients . . . Diligence imposes the

responsibilit

y to rende r service

s promptly and carefully, to be thorough, and to

observe applicable technic al and ethical standards.

If you find that an accountant or tax preparer ignored any information,

did not make re asonable inquiries as to w hether any information provided to him

was complete and c orrect, or otherwise was not dili gent, thorough or careful to

the best of his abilit

y, and that the failure to exe rcise due c are cause d the tax

violations charged in the indictment, you m ust acquit the Defendants.

R5-81, Ex h. A at 15 (italics a re the Marc hellettas’ a dditions t o the Eleve nth Circuit Pattern J ury

I nstructions).

33i m p r i m a t u r o n R a n d y B r o w n ’ s a d v i c e ” a n d t h a t t h e d e f e n d a n t s w e r e a s k i n g t h a t t h e

c o u r t “ e s s e n t i a l l y i g n o r e t h e i r c o n t e m p o r a n e o u s i n t e n t t o

. . . l o o k t o w h a t t h e y d i d

a f t e r t h e f a c t

. ” I d

. a t 1 2 0 1

- 0 2

. W h e n t h e d i s t r i c t c o u r t a s k e d w h e t h e r i t w a s n o t

s u f f i c i e n t f o r t h e g o v e r n m e n t “

j u s t t o m a k e t h a t a r g u m e n t t o r e b u t [ J u n i o r ’ s

a t t o r n e y ’ s ] p o i n t

, ” t h e g o v e r n m e n t r e s p o n d e d t h a t w a s “ w h a t [ i t ] w o u l d d o

, ” t o

w h i c h J u n i o r ’ s a t t o r n e y r e p l i e d

, “ [ t ] h a t ’ s a l l I n e e d

. ” I d

. a t 1 2 0 2

.

D u r i n g c l o s i n g a r g u m e n t s

, t h e g o v e r n m e n t c l a i m e d t h a t K o t t w i t z w a s

“ c e n t r a l ” t o t h e t a x s c h e m e

, a n d c h a r a c t e r i z e d K o t t w i t z ’ s s t a t e m e n t

, t o w i t

, t h a t s h e

u n d e r s t o o d C i r c l e ’ s p a y m e n t s f o r t h e M a r c h e l l e t t a s ’ r e s i d e n c e s a s “ i n c o m e ” t o t h e

M a r c h e l l e t t a s

, a s a “ l i e [ ]

. . . u n d e r o a t h

. ” R 2 9 a t 1 2 6 5 ; s e e a l s o R 1 8 a t 3 1 2

- 1 3

. I t

s u g g e s t e d t h a t K o t t w i t z w a s l i a b l e f o r t h e c o n s p i r a c y a n d t h e t a x f r a u d b e c a u s e s h e

f a i l e d t o d i s c l o s e t o S c h w a r t z t h a t C i r c l e w a s p a y i n g f o r t h e M a r c h e l l e t t a s ’

r e s i d e n c e s

. R 2 9 a t 1 2 5 6

. T h e g o v e r n m e n t a l s o m a i n t a i n e d t h a t

, b e c a u s e t h e

M a r c h e l l e t t a s d i d n o t d i r e c t a l l o c a t i o n o f t h e i r h o m e c o n s t r u c t i o n c o s t s t o a n y

s p e c i f i c a c c o u n t

, t h e “ p a y a b l e s c l e r k s

. . . h a d n o i d e a ” h o w t h e M a r c h e l l e t t a s

w o u l d t r e a t t h e i n c o m e s h o w n o n t h e i r h o m e j o b l e d g e r s o r w h e t h e r o r n o t t h e y

w o u l d a c t u a l l y d e c l a r e i t a s i n c o m e

. I d

. a t 1 2 6 8

. I t s u g g e s t e d t h a t t h e d e f e n s e

a r g u m e n t t h a t “ S c h w a r t z w a s s u p p o s e d t o k n o w a b o u t ” t h e i n c l u s i o n o f t h e

M a r c h e l l e t t a s ’ p e r s o n a l e x p e n s e s i n C i r c l e ’ s e x p e n s e l o g s w a s “ n o n s e n s e ” s i n c e h e

34o n l y r e v i e w e d t h e a c c o u n t s o n “ o n e d a y

. ” I d

. a t 1 3 2 9

- 3 0

. S e n i o r ’ s a t t o r n e y ’ s

c l o s i n g a r g u m e n t e m p h a s i z e d t h a t t h e r e w a s n o e v i d e n c e t h a t h e h a d a n y

k n o w l e d g e o f h o w e n t r i e s w e r e b o o k e d o n C i r c l e ’ s a c c o u n t i n g r e c o r d s

, t h a t c e r t a i n

e n t r i e s s h o u l d h a v e a l e r t e d S c h w a r t z t o p o t e n t i a l p r o b l e m s a n d t h e n e e d t o f i l e

a m e n d e d r e t u r n s

, a n d t h a t S e n i o r h a d n o c r i m i n a l i n t e n t t o v i o l a t e t h e t a x l a w s

. I d

.

a t 1 3 0 3

- 0 4

.

T h e d i s t r i c t c o u r t i n s t r u c t e d t h e j u r y t o b a s e i t s v e r d i c t o n l y o n t h e e v i d e n c e

a n d t h e c o u r t ’ s i n s t r u c t i o n s o n t h e l a w

, a n d n o t o n t h e l a w y e r s ’ s t a t e m e n t s

. I d

. a t

1 2 1 4

- 1 6 ; s e e a l s o R 6

- 1 1 3 a t 2

- 3

. T h e c o u r t p r o v i d e d t h e j u r y w i t h a g e n e r a l

i n s t r u c t i o n o n t h e e l e m e n t s o f a g o o d f a i t h d e f e n s e t o t h e c h a r g e o f i n t e n t t o

d e f r a u d a n d o n w i l l f

u l l n e s s

. R 2 9 a t 1 2 2 8

- 3 0 ; R 6

- 1 1 3 a t 1 9

- 2 1

. A f t e r c l o s i n g 3 5

The c ourt’s g ood faith instruction provided: 3 5

Good fa ith is a complete def ense to the c harg es in the indictment since

g ood faith on the pa

rt of the de fenda

nt is inconsist ent with intent to defra ud or

willfulness[,] which is an e ssential part of the char g es. While the term ‘g ood

faith’ ha s no prec ise definition, it means an hone st belief, a la ck of ma lice, and

the intent to perfor

m all lawful oblig ations. The burde n of proof is not on the

defe ndant to prove g ood faith, of c ourse, since the def endant ha s no burden to

prove a ny thing. The Gover

nment must establish bey ond a re asonable doubt that

the def endant a cted with spec ific intent to defr aud as c harg ed in the I ndictment.

One who e x presse s an honestly held opinion, or an hone stly formed be lief,

is not charg eable with fraudule nt intent even thoug h the opinion is errone ous or

the belief is mist aken; a

nd, simil arly , evidenc e which e stablishes only that a

person made a mistake in judg ment or an e rror in manag ement, or w as ca rele ss,

does not establish fra

udulent intent.

R29 at 1228-29.

35a r g u m e n t s

, t h e j u r y w a s e x c u s e d f o r l u n c h

, i n s t r u c t e d t o b e g i n d e l i b e r a t i o n s w h e n

t h e y r e t u r n e d t o t h e j u r y r o o m

, a n d a d v i s e d t h a t t h e y w o u l d b e p r o v i d e d w i t h t h e

a d m i t t e d e x h i b i t s a n d a c o p y o f t h e i n d i c t m e n t a n d v e r d i c t f o r m

. I d

. a t 1 3 4 0

. W i t h

t h e j u r y o u t o f t h e c o u r t r o o m

, J u n i o r ’ s a t t o r n e y n o t i f i e d t h e d i s t r i c t c o u r t t h a t h e

h a d p r e p a r e d a w r i t t e n o b j e c t i o n t o c o u r t ’ s d e n i a l o f t h e r e q u e s t e d j u r y i n s t r u c t i o n s ;

t h e d i s t r i c t c o u r t i n s t r u c t e d h i m t o “ [ j ] u s t f i l e i t

. ” I d

. a t 1 3 4 3

- 4 4

. I n t h e w r i t t e n

o b j e c t i o n

, J u n i o r o b s e r v e d t h a t t h e d i s t r i c t c o u r t h a d “ r e f u s e d t o g i v e t h e

D e f e n d a n t s ’ p r o p o s e d J u r y I n s t r u c t i o n N u m b e r 1 5

, c o n c e r n i n g ‘ G o o d F a i t h

R e l i a n c e U p o n

. . . A c c o u n t a n t F a i l u r e o f A c c o u n t a n t t o E x e r c i s e D u e C a r e ’ ” a n d

The district cour

t’s willfullness instruction stated:

The wor d ‘willfully ,’ . . . mea ns that the ac t was committed voluntarily

and purpose ly , with the specific intent to do something the lawforbids; that is

with bad purpose e ither to disobey or disreg ard the law.

. . . So, if y ou find beyond a re asonable doubt that the acts c onstitut ing the

crime c harg ed we re c ommitt ed by a def endant voluntar ily

as an intentional

violation of a known leg al duty ; that is, with specific intent to do something the

law for bids, then the eleme nt of ‘willfulness’ a s defined in these instructions has

been sa tisfied.

On the other

hand, if y ou have a

rea sonable doubt as to whe ther a

defe ndant ac ted in g ood faith, sincer ely believing that the tax returns in question

wer e true and cor

rec t as to ever

y materia l matter and tha t no additional tax was

owed, then the defe ndant did not intentionally violate a known le g al duty ; that is,

the def endant did not ac t ‘willfully ’-- and that esse ntial part of the of fense would

not be established. I t is not t he purpose of the tax laws to penalize innocent er rors

made de spite the exercise of rea sonable c are , and it is not enoug h to show merely

that a lesser

tax was paid than was due . Nor is a ne g lige nt, car eless, or

unintentional understateme nt of income suff icient.

I d. at 1229-30.

36a r g u e d t h a t “ t h e d i s t r i c t c o u r t s h o u l d h a v e g r a n t e d t h e [ g o o d f a i t h r e l i a n c e ]

i n s t r u c t i o n

. ” R 2

- 9 5 a t 4

.

F o l l o w i n g d e l i b e r a t i o n s

, t h e j u r y f o u n d K o t t w i t z n o t g u i l t y o f C o u n t s E i g h t

a n d N i n e ( a i d i n g a n d a b e t t i n g J u n i o r a n d S e n i o r i n t h e f i l i n g o f m a t e r i a l l y f

a l s e

p e r s o n a l r e t u r n s f

o r 2 0 0 0 )

, a n d f

o u n d J u n i o r n o t g u i l t y o f C o u n t T w o ( f i l i n g a

m a t e r i a l l y f

a l s e p e r s o n a l r e t u r n f

o r 1 9 9 9 )

. R 2

- 1 0 9 a t 2

- 4

. K o t t w i t z w a s c o n v i c t e d

o n C o u n t s O n e a n d S i x ; J u n i o r w a s c o n v i c t e d o n C o u n t s O n e

, T h r e e a n d S i x ; a n d

S e n i o r w a s c o n v i c t e d o n C o u n t s O n e

, F o u r

, F i v e

, a n d S i x

. I d

. a t 3

.

K o t t w i t z a n d t h e M a r c h e l l e t t a s j o i n t l y m o v e d f o r a n a c q u i t t a l o n a l l o f t h e

c o u n t s o f c o n v i c t i o n

, a r g u i n g t h a t t h e r e w a s n o e v i d e n c e t o s u p p o r t a f i n d i n g o f

i n t e n t t o v i o l a t e t h e t a x l a w s

, a n d t h a t t h e g o v e r n m e n t ’ s i m p r o p e r r e f e r e n c e s

d u r i n g t h e t r i a l t o t h e i r w e a l t h v i o l a t e d d u e p r o c e s s r i g h t s

. R 2

- 1 0 6 ; R 2

- 1 2 7 a t 4

- 5

,

2 4

- 2 6

. T h e y a r g u e d

, i n t e r a l i a

, t h a t “ m a n y

, i f n o t a l l

, o f t h e g o v e r n m e n t ’ s s p e c i f i c

i t e m s o f a l l e g e d o m i t t e d i n c o m e w e r e n o t r e q u i r e d t o b e r e p o r t e d a s i n c o m e f o r

[ t h e ] y e a r i n q u e s t i o n

. ” R 2

- 1 2 7 a t 9

. T h e d i s t r i c t c o u r t d e n i e d t h e m o t i o n

, f i n d i n g

t h a t t h e r e w a s s u b s t a n t i a l e v i d e n c e f r o m w h i c h a r e a s o n a b l e j u r y c o u l d h a v e f o u n d

c r i m i n a l i n t e n t t o v i o l a t e t h e t a x l a w a n d t h a t t h e g o v e r n m e n t p r o p e r l y i n t r o d u c e d

e v i d e n c e o f t h e d e f

e n d a n t s ’ w e a l t h b e c a u s e t h e e v i d e n c e o f t h e i r f a i l u r e t o r e p o r t a

h i g h v o l u m e o f i n c o m e w a s r e l e v a n t t o t h e i r w i l l f u l n e s s

. R 2

- 1 3 4

.

37A t s e n t e n c i n g

, S e n i o r o b j e c t e d t o t h e p r o b a t i o n o f f i c e r ’ s d e t e r m i n a t i o n a s t o

t h e a m o u n t o f t h e t a x l o s s

. R 3 0 a t 2 1

- 2 4

, 3 2

- 3 7

, 3 9

- 4 2

, 4 5

. T h e d i s t r i c t c o u r t

o v e r r u l e d S e n i o r ’ s o b

j e c t i o n s a n d f

o u n d t h a t t h e l o s s a m o u n t w a s b e t w e e n

$ 1

, 0 0 0

, 0 0 0 a n d $ 2

, 5 0 0

, 0 0 0

. I d

. a t 5 4

- 5 5

. K o t t w i t z w a s s e n t e n c e d t o t w e n t y

- f o u r

m o n t h s o f i m p r i s o n m e n t o n e a c h o f t h e t w o c o u n t s o f c o n v i c t i o n

, t o r u n

c o n c u r r e n t l y

, a n d t h r e e y e a r s o f s u p e r v i s e d r e l e a s e o n e a c h c o u n t

, t o r u n

c o n c u r r e n t l y

. R 3 0 a t 1 4 7

. S h e w a s a l s o f i n e d $ 2 5 0 0 a n d a s s e s s e d $ 2 0 0

. I d

. ; s e e

a l s o R 1 0

- 1 5 6

. J u n i o r w a s s e n t e n c e d t o t h i r t y

- s i x m o n t h s o f i m p r i s o n m e n t o n e a c h

o f t h e t h r e e c o u n t s o f c o n v i c t i o n

, t o r u n c o n c u r r e n t l y

, t h i r t y

- s i x m o n t h s o f

s u p e r v i s e d r e l e a s e o n C o u n t O n e a n d t w e l v e m o n t h s o f s u p e r v i s e d r e l e a s e d o n e a c h

o f C o u n t s T h r e e a n d S i x

, t o r u n c o n c u r r e n t l y

. R 3 0 a t 1 4 6

. H e w a s a l s o f i n e d

$ 5 0

, 0 0 0 a n d w a s a s s e s s e d $ 3 0 0

. I d

. ; s e e a l s o R 3

- 1 5 4

. S e n i o r w a s s e n t e n c e d t o

t h i r t y

- t h r e e m o n t h s o f i m p r i s o n m e n t o n e a c h o f t h e f o u r c o u n t s o f c o n v i c t i o n

, t o

r u n c o n c u r r e n t l y a n d t h i r t y

- s i x m o n t h s o f s u p e r v i s e d r e l e a s e o n e a c h c o u n t o f

c o n v i c t i o n

, t o r u n c o n c u r r e n t l y

. R 3 0 a t 1 4 5

- 4 6

. H e w a s a l s o f i n e d $ 5 0

, 0 0 0 a n d

w a s a s s e s s e d $ 4 0 0

. I d

. a t 1 4 6

. K o t t w i t z a n d t h e M a r c h e l l e t t a s w e r e e a c h r e l e a s e d

o n b o n d p e n d i n g a p p e a l

. R 1 0

- 1 8 6

.

38I I

. D I S C U S S I O N

O n a p p e a l

, K o t t w i t z

, J u n i o r

, a n d S e n i o r a r g u e t h a t t h e e v i d e n c e w a s

i n s u f f i c i e n t t o s u p p o r t t h e i r c o n v i c t i o n s a n d t h a t t h e d i s t r i c t c o u r t e r r e d i n r e f u s i n g

t o g i v e t h e j u r y a g o o d f a i t h r e l i a n c e o n a c c o u n t a n t i n s t r u c t i o n

. 3 6

A

. I n s u f f i c i e n c y o f t h e E v i d e n c e

K o t t w i t z

, J u n i o r

, a n d S e n i o r c o n t e n d t h a t t h e t r i a l e v i d e n c e w a s i n s u f f i c i e n t

t o s h o w t h e e x i s t e n c e o f a t a x c o n s p i r a c y

, t h a t t h e y k n o w i n g l y p a r t i c i p a t e d i n a n y

c o n s p i r a c y t h a t m a y h a v e e x i s t e d

, o r t h a t t h e y a i d e d a n d a b e t t e d i n t h e f i l i n g o f a

f a l s e t a x r e t u r n f

o r C i r c l e i n 2 0 0 1

. S e n i o r m a i n t a i n s t h a t

, b e c a u s e h e w a s o w e d

$ 2 5 0

, 0 0 0 a t t h e e n d o f 1 9 9 9 f r o m t h e a s s i g n m e n t o f t h e l o a n m a d e b y N a s t a s i t o

C i r c l e a n d t h e s t o c k s w a p

, a n y p e r s o n a l e x p e n d i t u r e s m a d e b y C i r c l e f o r h i m

s h o u l d h a v e b e e n c r e d i t e d a g a i n s t t h e n o t e s p a y a b l e

, t h u s r e d u c i n g C i r c l e ’ s d e b t t o

h i m

. A s s u c h

, t h e e x p e n d i t u r e s w e r e p r o p e r l y a c c o u n t e d f o r a n d d i d n o t r e s u l t i n

a n y t a x a b l e i n c o m e t o h i m

. S e n i o r a l s o a r g u e s t h a t t h e e v i d e n c e w a s i n s u f f i c i e n t t o

s h o w t h a t h e k n o w i n g l y e v a d e d t a x e s o r f i l e d a f a l s e t a x r e t u r n f

o r 2 0 0 0

. K o t t w i t z

J unior adopted Senior’ s sufficienc y arg ument; Senior adopted Junior’s arg ument on 3 6

this iss ue re g arding the timing and ta x conseque nces of the home construc tion ex penses, a nd

application of B oulware v. United States, 552 U.S. 421, 128 S. Ct . 1168 (2008).

Kottwitz adopted Junior’s and Senior’s a rg uments reg arding the re liance on a ccounta nt

instruction, and both J unior and Senior a dopted ea ch other ’s ar g uments on this is sue.

J unior and Senior a lso raised the issue of prosec utorial misconduct, and Senior r aised a n

issue reg arding sentenc ing. B eca use we reve rse, we will not address these issues.

39m a i n t a i n s t h a t t h e e v i d e n c e s h o w e d s h e c o n s i s t e n t l y t r i e d t o d o t h e r i g h t t h i n g a n d

n e v e r s a w a n y o f t h e t a x r e t u r n s a t i s s u e o r h a d a n y e x p e c t a t i o n t h a t t h e f i l e d

r e t u r n s w o u l d b e m a t e r i a l l y f a l s e

. S h e c o n t e n d s t h a t t h e r e i s n o t r i a l e v i d e n c e

s h o w i n g t h a t s h e k n e w o f a n y c o n s p i r a c y t h a t w o u l d r e s u l t i n t h e f i l i n g o f f a l s e t a x

r e t u r n s o r t h a t s h e a g r e e d t o j o i n a n y s u c h c o n s p i r a c y

. J u n i o r a n d S e n i o r a l s o

a r g u e t h a t t h e d i s t r i c t c o u r t e r r e d b y d e n y i n g t h e i r m o t i o n f o r j u d g m e n t o f a c q u i t t a l

b e c a u s e

, u n d e r B o u l w a r e v

. U n i t e d S t a t e s

, 5 5 2 U

. S

. 4 2 1

, 1 2 8 S

. C t

. 1 1 6 8 ( 2 0 0 8 )

,

d i s t r i b u t i o n s m a d e t o a s h a r e h o l d e r o f a c l o s e l y

- h e l d c o r p o r a t i o n c a n n o t b e

c l a s s i f i e d f o r t a x p u r p o s e s u n t i l t h e f i n a l d a t e o f t h e c o r p o r a t i o n ’ s f i s c a l y e a r

.

W e r e v i e w b o t h a c h a l l e n g e t o t h e s u f f i c i e n c y o f t h e e v i d e n c e a n d t h e d e n i a l

o f a R u l e 2 9 m o t i o n f

o r j u d g m e n t o f a c q u i t t a l d e n o v o

. U n i t e d S t a t e s v

. M e r c e r

,

5 4 1 F

. 3 d 1 0 7 0

, 1 0 7 4 ( 1 1 t h C i r

. 2 0 0 8 ) ( p e r c u r i a m ) ; U n i t e d S t a t e s v

. D e s c e n t

, 2 9 2

F

. 3 d 7 0 3

, 7 0 6 ( 1 1 t h C i r

. 2 0 0 2 ) ( p e r c u r i a m )

. “ [ W ] e v i e w t h e e v i d e n c e i n t h e l i g h t

m o s t f a v o r a b l e t o t h e g o v e r n m e n t

, ” m a k i n g a l l r e a s o n a b l e i n f e r e n c e s a n d

c r e d i b i l i t y c h o i c e s i n t h e g o v e r n m e n t ’ s f a v o r

, a n d t h e n “ d e t e r m i n e w h e t h e r a

r e a s o n a b l e j u r y c o u l d h a v e f o u n d t h e d e f

e n d a n t g u i l t y b e y o n d a r e a s o n a b l e d o u b t

. ”

M e r c e r

, 5 4 1 F

. 3 d a t 1 0 7 4

. W e w i l l u p h o l d a R u l e 2 9 m o t i o n d e n i a l i f w e

“ d e t e r m i n e t h a t a r e a s o n a b l e f a c t

- f i n d e r c o u l d c o n c l u d e t h a t t h e e v i d e n c e

40e s t a b l i s h e d t h e d e f e n d a n t ’ s g u i l t b e y o n d a r e a s o n a b l e d o u b t

. ” D e s c e n t

, 2 9 2 F

. 3 d a t

7 0 6 ( q u o t a t i o n m a r k s a n d c i t a t i o n o m i t t e d )

.

1

. C o n s p i r a c y

A c o n s p i r a c y t o d e f

e a t t h e I n t e r n a l R e v e n u e S e r v i c e ’ s ( “ I R S ” ) l a w f u l

f u n c t i o n i n g a n d v i c t i m i z e t h e I R S i s k n o w n a s a K l e i n c o n s p i r a c y

. U n i t e d S t a t e s v

.

A d k i n s o n

, 1 5 8 F

. 3 d 1 1 4 7

, 1 1 5 4 ( 1 1 t h C i r

. 1 9 9 8 ) ( c i t i n g U n i t e d S t a t e s v

. K l e i n

, 2 4 7

F

. 2 d 9 0 8 ( 2 d C i r

. 1 9 5 7 ) )

. T h e g o v e r n m e n t m u s t s h o w n o t o n l y ( 1 ) t h e r e q u i s i t e a c t

o f a f a i l u r e t o p r o p e r l y r e p o r t i n c o m e b u t a l s o ( 2 ) a n a g r e e m e n t b e t w e e n a t l e a s t

t w o c o n s p i r a t o r s t o i m p e d e t h e I R S ’ f u n c t i o n i n g a n d ( 3 ) k n o w i n g p a r t i c i p a t i o n i n

s u c h a c o n s p i r a c y

. A d k i n s o n

, 1 5 8 F

. 3 d a t 1 1 5 3

. A l t h o u g h t h e r e q u i s i t e a c t

r e q u i r e m e n t i s e s t a b l i s h e d b y t h e f a i l u r e t o p r o p e r l y r e p o r t i n c o m e

, s u c h

, w i t h o u t

m o r e

, i s i n s u f

f i c i e n t t o e s t a b l i s h a c o n s p i r a c y

. I d

. a t 1 1 5 4

. T h e r e q u i s i t e a c t s m u s t

b e c o n s i d e r e d u n d e r “ t h e o b j e c t i v e e c o n o m i c r e a l i t i e s o f a t r a n s a c t i o n r a t h e r t h a n

. .

. t h e p a r t i c u l a r f

o r m t h e p a r t i e s e m p l o y e d

. ” B o u l w a r e

, 5 5 2 U

. S

. a t 4 2 9

, 1 2 8 S

. C t

.

a t 1 1 7 5 ( q u o t a t i o n m a r k s a n d c i t a t i o n o m i t t e d )

. T h e a g r e e m e n t r e q u i r e m e n t m u s t

b e e s t a b l i s h e d b y e v i d e n c e o f a c t u a l k n o w l e d g e b y e a c h p a r t i c i p a n t t h a t a

c o n s p i r a c y b e t w e e n a t l e a s t t w o p a r t i c i p a n t s i n t e n d i n g t o o b s t r u c t t h e I R S ’ s

c o l l e c t i o n o f o w e d t a x r e v e n u e w a s i n p r o g r e s s a n d b y e v i d e n c e o f e a c h

p a r t i c i p a n t ’ s k n o w i n g a n d v o l u n t a r y i n t e n t i o n a l p a r t i c i p a t i o n i n i t

. A d k i n s o n

, 1 5 8

41F

. 3 d a t 1 1 5 3

- 5 4

. T h e e v i d e n c e m u s t s h o w a “ c o m m o n a g r e e m e n t ” t o v i o l a t e t h e

l a w

. I d

. a t 1 1 5 5 ( q u o t a t i o n m a r k s a n d c i t a t i o n o m i t t e d )

. T h e e v i d e n c e o f s u c h a n

a g r e e m e n t m a y b e c i r c u m s t a n t i a l o r d i r e c t

, a n d m a y b e i n f e r r e d f r o m t h e p a r t i e s ’

c o n c e r t e d a c t i o n s

, o v e r t a c t s

, r e l a t i o n s h i p

, a n d t h e e n t i r e t y o f t h e i r c o n d u c t

. U n i t e d

S t a t e s v

. S c h w a r t z

, 5 4 1 F

. 3 d 1 3 3 1

, 1 3 6 1 ( 1 1 t h C i r

. 2 0 0 8 )

. I f t h e c o n s p i r a c y

e v i d e n c e i s c i r c u m s t a n t i a l

, i t m u s t w a r r a n t a j u r y f i n d i n g t h a t t h e c o n s p i r a t o r s

o p e r a t e d w i t h a “ c o m m o n d e s i g n w i t h u n i t

y o f p u r p o s e t o i m p e d e t h e I R S ” b a s e d

o n “ r e a s o n a b l e i n f

e r e n c e s

, a n d n o t m e r e s p e c u l a t i o n

. ” A d k i n s o n

, 1 5 8 F

. 3 d a t

1 1 5 4

, 1 1 5 9 ( q u o t a t i o n m a r k s a n d c i t a t i o n o m i t t e d ) ; U n i t e d S t a t e s v

. P e r e z

- T o s t a

,

3 6 F

. 3 d 1 5 5 2

, 1 5 5 7 ( 1 1 t h C i r

. 1 9 9 4 )

. S e e a l s o I n g r a m v

. U n i t e d S t a t e s

, 3 6 0 U

. S

.

6 7 2

, 6 7 8

- 7 9

, 7 9 S

. C t

. 1 3 1 4

, 1 3 1 9

- 2 0 ( 1 9 5 9 ) ( k n o w l e d g e o f t a x l i a b i l i t y i s

e s s e n t i a l ) ; U n i t e d S t a t e s v

. G u r a r y

, 8 6 0 F

. 2 d 5 2 1

, 5 2 4 ( 2 d C i r

. 1 9 8 8 ) ( s t a t i n g t h a t

t h e g o v e r n m e n t m u s t p r e s e n t “ e v i d e n c e f r o m w h i c h t h e j u r y c o u l d i n f e r t h a t

d e f e n d a n t s k n e w t h e i r s c h e m e w o u l d r e s u l t i n t h e f i l i n g o f f a l s e

. . . t a x r e t u r n s

, a n d

d e l i b e r a t e l y p r o c e e d e d w i t h t h e i r s c h e m e i n t h e f a c e o f t h a t k n o w l e d g e ” )

. A

c o n s p i r a c y c o n v i c t i o n c a n n o t s t a n d w i t h o u t e v i d e n c e s h o w i n g a m e e t i n g o f t h e

m i n d s t o c o m m i t t h e i l l e g a l a c t

. A d k i n s o n

, 1 5 8 F

. 3 d a t 1 1 5 5

. C i r c u m s t a n t i a l

e v i d e n c e t h a t i n c o m e h a s b e e n d i s g u i s e d a s n o n

- t a x a b l e p r o c e e d s i s n o t s u f f i c i e n t ;

42t h e g o v e r n m e n t m u s t a l s o s h o w s t a t e m e n t s o f c o

- c o n s p i r a t o r s m a n i f e s t i n g a d e s i r e

t o i m p e d e t h e I R S

. U n i t e d S t a t e s v

. P r i t c h e t t

, 9 0 8 F

. 2 d 8 1 6

, 8 2 2 ( 1 1 t h C i r

. 1 9 9 0 )

.

T h e k n o w l e d g e r e q u i r e m e n t m u s t b e e s t a b l i s h e d b y e v i d e n c e t h a t e a c h

a l l e g e d c o n s p i r a t o r k n e w t h a t t h e s c h e m e w o u l d c u l m i n a t e i n t h e f i l i n g o f f a l s e t a x

r e t u r n s

. A d k i n s o n

, 1 5 8 F

. 3 d a t 1 1 5 5

. E v i d e n c e o f a c o n s p i r a c y o r t h a t a d e f e n d a n t

a c t e d i n a w a y t h a t w o u l d h a v e f u r t h e r e d “ a c o n s p i r a c y i f t h e r e h a d b e e n o n e ” i s

i n s u f f i c i e n t ; t h e r e m u s t a l s o b e i n d e p e n d e n t e v i d e n c e t h a t t h e d e f e n d a n t s k n e w o f

t h e c o n s p i r a c y i n p r o g r e s s a n d k n o w i n g l y a n d v o l u n t a r i l y j o i n e d i t

. I d

. ( c i t a t i o n

o m i t t e d )

. D u e t o t h e c o m p l e x i t y o f t h e t a x l a w s

, s p e c i f i c i n t e n t o r “ w i l l f

u l ”

c o n d u c t i s a n e c e s s a r y e l e m e n t o f t a x o f f e n s e s

. C h e e k v

. U n i t e d S t a t e s

, 4 9 8 U

. S

.

1 9 2

, 2 0 0

, 1 1 1 S

. C t

. 6 0 4

, 6 0 9 ( 1 9 9 1 )

. “ T h i s t a x p u r p o s e [ t o i n t e r f e r e w i t h t h e

I R S ’ s l a w f

u l f u n c t i o n s i n c o l l e c t i n g t a x e s ] m u s t b e t h e o b j e c t o f a K l e i n

c o n s p i r a c y

, a n d n o t m e r e l y a f o r e s e e a b l e c o n s e q u e n c e o f s o m e o t h e r c o n s p i r a t o r i a l

s c h e m e

. ” A d k i n s o n

, 1 5 8 F

. 3 d a t 1 1 5 5

. T h e K l e i n c o n s p i r a c y t o i m p e d e t h e I R S

m u s t b e t h e o b

j e c t

, o r a t l e a s t a n o b

j e c t i n a c o n s p i r a c y w i t h m u l t i p l e o b j e c t i v e s ; i t

i s n o t a d e q u a t e i f t h e a c t o f i m p e d i n g t h e I R S i s “ o n l y a c o l l a t e r a l e f f e c t o f a n

a g r e e m e n t

. ” I d

. ( q u o t a t i o n a n d c i t a t i o n o m i t t e d )

. E v i d e n c e t h a t o w n e r s d i r e c t e d

t h e i r a c c o u n t a n t t o r e f

e r a n y q u e s t i o n s t o t h e m a n d f a i l e d t o d i s c l o s e t o t h e i r

a c c o u n t a n t p a y m e n t s t o s o m e e m p l o y e e s o r u n r e p o r t e d r e v e n u e w a s s u f f i c i e n t t o

43s u p p o r t a c o n s p i r a c y c o n v i c t i o n f o r I R S f r a u d

. U n i t e d S t a t e s v

. U s e n i

, 5 1 6 F

. 3 d

6 3 4

, 6 5 0 ( 7 t h C i r

. 2 0 0 8 )

.

D e s p i t e t h e l a c k o f d i r e c t e v i d e n c e t h a t K o t t w i t z a n d t h e M a r c h e l l e t t a s

c o n s p i r e d t o i m p e d e t h e I R S

, t h e c i r c u m s t a n t i a l e v i d e n c e w a s s u f f i c i e n t f o r t h e j u r y

t o h a v e c o n c l u d e d b e y o n d a r e a s o n a b l e d o u b t t h a t t h e y h a d e n t e r e d i n t o t h e

c h a r g e d c o n s p i r a c y ( C o u n t O n e )

. K o t t w i t z o v e r s a w t h e a c c o u n t i n g b o o k s a n d

k n e w w h e r e t h e v a r i o u s h o m e a n d p e r s o n a l e x p e n s e s o f t h e M a r c h e l l e t t a s w e r e

b o o k e d o n t h e C i r c l e a c c o u n t s

. S h e c o m m u n i c a t e d w i t h S c h w a r t z c o n c e r n i n g

t h e s e s e x p e n s e s i n c o n

j u n c t i o n w i t h b o t h t h e C i r c l e a n d M a r c h e l l e t t a t a x r e t u r n s

.

K o t t w i t z

, J u n i o r

, a n d S e n i o r h a d a l o n g

- s t a n d i n g e m p l o y m e n t r e l a t i o n s h i p a n d

w e r e n o t d i s t a n t

.

2

. F i l i n g o

f a F a l s e I n c o m e T a x R e t u r n

J u n i o r a n d S e n i o r c o n t e n d t h a t t h e h o m e c o n s t r u c t i o n c o s t s w e r e t h e o n l y

b a s i s f o r t h e j u r y ’ s v e r d i c t r e l a t e d t o J u n i o r ’ s 2 0 0 0 t a x r e t u r n

. T h e j u r y r e j e c t e d t h e

p r o s e c u t i o n ’ s a c c u s a t i o n t h a t J u n i o r h a d u n d e r s t a t e d h i s i n c o m e o n h i s 1 9 9 9 t a x

r e t u r n b y f

a i l i n g t o i n c l u d e t h e $ 2 5 0

, 0 0 0 l o a n f r o m C & G e n t e r p r i s e s o r t h e

c l o t h i n g a n d e n t e r t a i n m e n t e x p e n d i t u r e s ( w h i c h w e r e o m i t t e d f r o m b o t h t h e 1 9 9 9

a n d 2 0 0 0 r e t u r n s ) ( C o u n t T w o )

. T h e y a s s e r t t h e B o u l w a r e o b j e c t i v e

c h a r a c t e r i z a t i o n r u l e r e q u i r e s c o n s i d e r a t i o n o f ( 1 ) t h e t i m i n g o r t a x y e a r o f t h e

44r e c o g n i t i o n o f t h e d i s t r i b u t i o n a n d ( 2 ) t h e c l a s s i f i c a t i o n o f t h e t r a n s a c t i o n a s

c o m p e n s a t i o n

, l o a n s

, d i v i d e n d s

, r e t u r n s o f c a p i t a l

, o r g a i n s f r o m t h e e x c h a n g e o r

s a l e o f p r o p e r t y

. T h e y r e a s o n t h a t J u n i o r ’ s h o m e c o n s t r u c t i o n c o s t d i s t r i b u t i o n s

c o u l d n o t b e a s s i g n e d t o h i m a s i n c o m e i n 2 0 0 0 b e c a u s e i t w a s i m p o s s i b l e f o r

C i r c l e t o c l a s s i f

y t h e d i s t r i b u t i o n s p a i d a f t e r 1 A p r i l 2 0 0 0 u n t i l i t s f i s c a l y e a r c l o s e d

i n M a r c h 2 0 0 1 a n d t h a t t h e d e p o s i t m a d e i n J a n u a r y 2 0 0 0 w a s d e m i n i m i s a n d

,

t h e r e f o r e

, n o t a m a t e r i a l m a t t e r

. T h e y s u g g e s t t h a t B o u l w a r e ’ s h o l d i n g a s t o 2 6

U

. S

. C

. § 7 2 0 6 ( 1 ) e x t e n d s t o § 7 2 0 6 ( 2 ) s i n c e b o t h c o n t a i n s i m i l a r l a n g u a g e

r e g a r d i n g t h e t r u t h f

u l n e s s o f t h e t a x r e t u r n : “ e v e r y m a t e r i a l m a t t e r ” i n § 7 2 0 6 ( 1 )

a n d “ a n y m a t e r i a l m a t t e r ” i n § 7 2 0 6 ( 2 )

. T h e y m a i n t a i n t h a t t h e o n l y e x p e n s e p a i d

b y C i r c l e o n J u n i o r ’ s h o m e b e f o r e 1 A p r i l 2 0 0 0 w a s t h e g e n e r a l c o n t r a c t o r ’ s

d e p o s i t p a i d i n J a n u a r y 2 0 0 0

.

T h e g o v e r n m e n t r e s p o n d s t h a t t h e e v i d e n c e w a s s u f f i c i e n t t o s u s t a i n t h e

c o n v i c t i o n s b e c a u s e i t s h o w e d t h a t t h e M a r c h e l l e t t a s s k i m m e d o v e r $ 1

, 0 0 0

, 0 0 0

f r o m t h e i r c o m p a n y t o f

u n d p e r s o n a l e x p e n s e s

, f a i l e d t o d i s c l o s e t h i s i n f o r m a t i o n

t o t h e i r a c c o u n t a n t

, a n d s i g n e d f a l s e t a x r e t u r n s o m i t t i n g t h i s i n c o m e

. T h e y a l s o

m a i n t a i n t h a t K o t t w i t z f a c i l i t a t e d t h e M a r c h e l l e t t a s ’ a c t i o n s b y w r i t i n g c h e c k s a n d

s u p e r v i s i n g C i r c l e ’ s b o o k s w h i c h s h o w e d t h e e x p e n d i t u r e s a s b u s i n e s s e x p e n s e s

.

45R a n d y B r o w n

, a c e r t i f i e d p u b l i c a c c o u n t a n t w h o p r e p a r e d a m e n d e d 2 0 0 1 t a x

r e t u r n s a n d s u b s e q u e n t r e t u r n s f o r C i r c l e a n d t h e M a r c h e l l e t t a s

, e x p l a i n e d t h a t

C i r c l e ’ s 2 0 0 1 t a x y e a r b e g a n o n 1 A p r i l 2 0 0 0 a n d e n d e d o n 3 1 M a r c h 2 0 0 1

. R 2 4 a t

1 0 6

- 0 7

. C i r c l e s p e n t $ 1 4 4

, 0 0 0 d u r i n g t h e 2 0 0 0 c a l e n d a r y e a r a n d $ 9 0 8

, 0 0 0 d u r i n g

t h e 2 0 0 1 t a x y e a r o n J u n i o r ’ s h o m e c o n s t r u c t i o n c o s t s

. I d

. a t 1 0 6

, 1 0 8

, 1 1 1

.

B r o w n s t a t e d t h a t t h e c o n s t r u c t i o n c o s t s w e r e n o t d u e t o b e r e p o r t e d a s i n c o m e t o

J u n i o r u n t i l t h e c o s t s w e r e “ e x p e n s e d ” b y C i r c l e

, a n d c o u l d “ b e t r e a t e d a s a n

o f f i c e r l o a n u n t i l t h e p o i n t t h a t t h e c o m p a n y t a k e s i t a s a d e d u c t i o n

. ” I d

. a t 1 0 7

.

B r o w n p r e p a r e d J u n i o r ’ s 2 0 0 1 p e r s o n a l t a x r e t u r n i n 2 0 0 4

, a n d e x p l a i n e d t h a t

J u n i o r ’ s i n c o m e o f $ 1

, 3 3 0

, 5 4 6 w a s a r e s u l t o f h i s w a g e s

, d i v i d e n d s

, a n d v a r i o u s

“ o f f i c e r a d v a n c e s ” w h i c h h e r e c e i v e d f r o m C i r c l e i n c l u d i n g t h e h o m e c o n s t r u c t i o n

c o s t s i n 2 0 0 0 a n d 2 0 0 1 a n d p e r s o n a l c r e d i t c a r d a n d a u t o u s e e x p e n s e s

. I d

. a t 1 1 5

-

1 6

. H e s t a t e d t h a t t h e a d v a n c e m e n t o f m o n i e s f r o m a c o m p a n y t o a s h a r e h o l d e r

“ h a p p e n s a l o t ” s u c h a s l o a n s o r p e r s o n a l c r e d i t c a r d e x p e n s e s

. I d

. a t 1 1 7

. H e

e x p l i c a t e d t h a t “ i t d e p e n d s o n t h e i n t e r n a l a c c o u n t i n g o f t h e c o m p a n y ” a s t o w h e n

o r w h e t h e r a n e x p e n s e w a s i n i t i a l l y “ t r e a t e d a s a n o f f i c e r a d v a n c e ” o r w a s “ b u r i e d ”

i n o t h e r e x p e n s e s s u c h t h a t t h e c l a s s i f i c a t i o n o f t h e e x p e n s e w o u l d h a v e t o w a i t

u n t i l t h e c o m p a n y ’ s f

i n a n c i a l s t a t e m e n t a d

j u s t m e n t s “ a t t h e e n d o f t h e y e a r

. ” I d

. a t

1 1 7

- 1 8 ; s e e a l s o I R S A g e n t J o h n W

. L e s s o ’ s t e s t i m o n y t h a t “ n o t h i n g ’ s f i n a l u n t i l

46t h e f

i n a n c i a l s t a t e m e n t s a r e p r e p a r e d

. ” R 2 6 a t 2 7 8

. J u n i o r t e s t i f i e d t h a t h e

u n d e r s t o o d t h e c o n s t r u c t i o n e x p e n s e s t o b e “ a n e m p l o y e e l o a n

. ” R 1 8 a t 3 0 6

.

C i r c l e p a i d a $ 3 6

, 4 5 6 d e p o s i t

, d u e f i v e d a y s w i t h i n t h e c o m m e n c e m e n t o f

c o n s t r u c t i o n

, o n J u n i o r ’ s h o m e i n J a n u a r y 2 0 0 0

. R 1 8 a t 2 7

- 7 8

. N o o t h e r e x p e n s e s

w e r e p a i d o n b e h a l f o f J u n i o r ’ s h o m e c o n s t r u c t i o n u n t i l A p r i l 2 0 0 0

. I d

.

F o r a c o n v i c t i o n u n d e r 2 6 U

. S

. C

. § 7 2 0 6 ( 1 )

, t h e g o v e r n m e n t m u s t p r o v e t h a t

t h e d e f e n d a n t s : ( 1 ) f

i l e d a t a x r e t u r n w i t h a w r i t t e n d e c l a r a t i o n m a d e u n d e r t h e

p e n a l t y o f p e r

j u r y ; ( 2 ) d i d n o t b e l i e v e t h e r e t u r n t o b e t r u e a n d c o r r e c t a s t o e v e r y

m a t e r i a l m a t t e r ; a n d ( 3 ) a c t e d w i l l f u l l y a n d n o t m e r e l y n e g l i g e n t l y

. U n i t e d S t a t e s

v

. E d w a r d s

, 7 7 7 F

. 2 d 6 4 4

, 6 5 1 ( 1 1 t h C i r

. 1 9 8 5 )

. A c o n v i c t i o n u n d e r § 7 2 0 1

r e q u i r e s t h a t t h e g o v e r n m e n t s h o w t h a t t h e d e f e n d a n t s ( 1 ) a c t e d w i l l f

u l l y ; ( 2 )

d e f i c i e n t l y p a i d t h e i r t a x e s ; a n d ( 3 ) a f f i r m a t i v e l y a c t e d t o e v a d e o r a t t e m p t e d t o

e v a d e t h e i r t a x e s

. S a n s o n e v

. U n i t e d S t a t e s

, 3 8 0 U

. S

. 3 4 3

, 3 5 1

, 8 5 S

. C t

. 1 0 0 4

,

1 0 1 0 ( 1 9 6 5 )

. T h e r e f

o r e

, t h e s p e c i f

i c i n t e n t o f w i l l f

u l l n e s s i s a r e q u i r e m e n t i n b o t h

o f f e n s e s

. U n i t e d S t a t e s v

. L a n k f o r d

, 9 5 5 F

. 2 d 1 5 4 5

, 1 5 5 0 ( 1 1 t h C i r

. 1 9 9 2 ) ( §

7 2 0 6 ( 1 ) ; S a n s o n e

, 3 8 0 U

. S

. a t 3 5 1

, 8 5 S

. C t

. a t 1 0 1 0

. T h e w i l l f u l n e s s s t a n d a r d

r e q u i r e s “ ‘ t h e v o l u n t a r y

, i n t e n t i o n a l v i o l a t i o n o f a k n o w n l e g a l d u t y ’ ” a n d c a n b e

“ n e g a t e d b y a g o o d

- f

a i t h m i s u n d e r s t a n d i n g o f t h e l a w [

, ] a g o o d

- f a i t h b e l i e f t h a t

o n e i s n o t v i o l a t i n g t h e l a w

, r e g a r d l e s s o f w h e t h e r o r n o t t h e b e l i e f i s r e a s o n a b l e

, ”

47o r a g o o d

- f a i t h r e l i a n c e o n a p r o f

e s s i o n a l ’ s a d v i c e

. U n i t e d S t a t e s v

. M o r r i s

, 2 0

F

. 3 d 1 1 1 1

, 1 1 1 4

- 1 5 ( 1 1 t h C i r

. 1 9 9 4 ) ( c i t i n g C h e e k

, 4 9 8 U

. S

. a t 2 0 2

, 1 1 1 S

. C t

. a t

6 1 0

- 1 1 )

.

I n B o u l w a r e

, t h e S u p r e m e C o u r t n o t e d t h a t t a x c l a s s i f i c a t i o n s m a n d a t e d

c o n s i d e r a t i o n o f “ t h e o b j e c t i v e e c o n o m i c r e a l i t i e s o f a t r a n s a c t i o n r a t h e r t h a n

. . .

t h e p a r t i c u l a r f

o r m [ o f c l a s s i f

i c a t i o n ] t h a t t h e p a r t i e s e m p l o y e d

. ” B o u l w a r e

, 5 5 2

U

. S

. a t 4 2 9

, 1 2 8 S

. C t

. a t 1 1 7 5

. T h e C o u r t h e l d t h a t i n t e n t i s i r r e l e v a n t t o t h e

t i m i n g o f o b

j e c t i v e t a x c l a s s i f

i c a t i o n s a n d I R S r e p o r t i n g r e q u i r e m e n t s f o r

d i s t r i b u t i o n s t o s h a r e h o l d e r s o f c l o s e l y h e l d c o r p o r a t i o n s ; o b j e c t i v e a p p l i c a t i o n o f

t h e I n t e r n a l R e v e n u e C o d e S e c t i o n s 3 0 1 a n d 3 1 6 a p p l y

. I d

. 4 2 4

- 2 5

, 4 3 4

, 4 3 9

, 1 2 8

S

. C t

. a t 1 1 7 3

, 1 1 7 9

, 1 1 8 2

. S p e c i f i c a l l y

, i t s t a t e d t h a t a c r i m i n a l t a x “ d e f e n d a n t

. . .

d o e s n o t n e e d t o s h o w a c o n t e m p o r a n e o u s i n t e n t t o t r e a t d i v e r s i o n s a s r e t u r n s o f

c a p i t a l b e f

o r e r e l y i n g o n [ S e c t i o n s 3 0 1 a n d 3 1 6 ] t o d e m o n s t r a t e t h a t n o t a x e s a r e

o w e d

. ” I d

. a t 4 3 9

, 1 2 8 S

. C t

. 1 1 8 2

. T h e S u p r e m e C o u r t a p p l i e d B o u l w a r e t o 2 6

U

. S

. C

. § 7 2 0 6 ( 1 ) c a s e s n o t i n g t h a t “ [ a ] l t h o u g h

. . . § 7 2 0 6 ( 1 ) d o e s n o t r e q u i r e t h e

p r o s e c u t i o n t o p r o v e t h e e x i s t e n c e o f a t a x d e f i c i e n c y

, . . . t h e n a t u r e a n d c h a r a c t e r

o f t h e f u n d s r e c e i v e d c a n b e c r i t i c a l i n d e t e r m i n i n g w h e t h e r

. . . § 7 6 0 2 ( 1 ) h a s b e e n

v i o l a t e d

. ” I d

. a t 4 3 3 n

. 9

, 1 2 8 S

. C t

. 1 1 7 8 n

. 9 ( i n t e r n a l q u o t a t i o n m a r k s a n d

c i t a t i o n s o m i t t e d )

. T h e C o u r t n o t e d t h a t c l a s s i f i c a t i o n s o f t r a n s a c t i o n s b e t w e e n

48c l o s e l y

- h e l d c o r p o r a t i o n s a n d s h a r e h o l d e r s m a y b e d i f f i c u l t b e c a u s e “ a c o r p o r a t i o n

a n d i t s s h a r e h o l d e r s h a v e a c o m m o n o b j e c t i v e

- t o e a r n a p r o f

i t f o r t h e c o r p o r a t i o n

t o p a s s o n t o i t s s h a r e h o l d e r s

, ” t h a t a “ c o r p o r a t i o n

. . . w h o l l y o w n e d b y o n e

s h a r e h o l d e r

. . . b e c o m e s t h e a l t e r e g o o f t h e s h a r e h o l d e r i n h i s p r o f i t m a k i n g

c a p a c i t y

, ” a n d t h a t

, b y “ p a s s i n g c o r p o r a t e f u n d s t o h i m s e l f a s s h a r e h o l d e r

, ” t h e

o w n e r

- s h a r e h o l d e r “ i s a c t i n g i n p u r s u i t o f t h e s e c o m m o n o b j e c t i v e s

. ” I d

. a t 4 3 8

3 7

n

. 1 3

, 1 2 8 S

. C t

. 1 1 8 1 n

. 1 3 ( c i t i n g T r u e s d e l l v

. C o m m ’ r

, I R S N o n D o c k e t e d S e r v i c e

A d v i c e R e v i e w

, 1 9 8 9 W L 1 1 7 2 9 5 2 ( M a r

. 1 5 1 9 8 9 ) ) ( i n t e r n a l q u o t a t i o n s o m i t t e d )

.

“ [ E ] c o n o m i c s u b s t a n c e r e m a i n s t h e r i g h t t o u c h s t o n e f o r c h a r a c t e r i z i n g f

u n d s

r e c e i v e d w h e n a s h a r e h o l d e r d i v e r t s t h e m b e f o r e t h e y c a n b e r e c o r d e d o n t h e

c o r p o r a t i o n ’ s b o o k s ” a s t h e d i v e r t e d f u n d s m a y b e t r e a t e d a s “ d i v i d e n d s o r c a p i t a l

d i s t r i b u t i o n s ” b a s e d o n t h e b e n e f i t r e c e i v e d b y t h e s h a r e h o l d e r

. I d

. a t 4 3 0

, 1 2 8 S

.

C t

. 1 1 7 6

. I f i t i s u n c l e a r

, h o w e v e r

, w h e t h e r t h e c o r p o r a t i o n w i l l h a v e s u f f i c i e n t

f u n d s t o c o v e r d i s t r i b u t i o n s t o i t s s h a r e h o l d e r s a t t h e e n d o f i t s t a x y e a r

, i t m u s t

I n United States v. Wil liams, 875 F.2d 845 (11th Cir. 1989), we held that the 3 7

g overnme nt was not requir ed to “c hara cter ize diverted income in c riminal tax case s” by

deter mining whe ther the inc ome was pr operly classified a s a “c onstructive dividend” ba sed on

sufficie nt corpora

te ea rning and prof

its to cover the income as a “ dividend.” I d. at 851-52. I n

Boulwa re’ s discussion of the circ uit spli t “over the applica

tion of §§ 301 and 316(a ) to

informally

transfe rre d or diverte d corpor ate f unds in criminal tax proceeding s,” the Supreme

Court observed tha t, in W illiams, we had take n the position that §§ 301 and 316(a) wer e

“altog ether

inapplicable in c riminal tax case s involving informa l distributi ons.” B oulware , 552

U.S. at 428 n.6, 128 S. Ct . at 1175 n.6.

49r e p o r t t h e d i s t r i b u t i o n s a s d i v i d e n d s e v e n i f t h e d i s t r i b u t i o n w i l l l a t e r b e t r e a t e d a s

a c a p i t a l g a i n o r a r e t u r n o n c a p i t a l

. I d

. a t 4 3 4 n

. 1 1

, 1 2 8 S

. C t

. 1 1 7 9 n

. 1 1

.

“ [ A ] d i s t r i b u t i o n o f p r o p e r t y

. . . m a d e b y a c o r p o r a t i o n t o a s h a r e h o l d e r w i t h

r e s p e c t t o i t s s t o c k s h a l l b e t r e a t e d i n t h e m a n n e r p r o v i d e d i n s u b s e c t i o n ( c )

. ” 2 6 3 8

U

. S

. C

. § 3 0 1 ( a )

. S u b s e c t i o n ( c ) p r o v i d e s t h a t

, i f t h e a m o u n t o f t h e d i s t r i b u t i o n

c o n s t i t u t e s a d i v i d e n d

, i t s h o u l d “ b e i n c l u d e d i n g r o s s i n c o m e ; ” i f t h e a m o u n t

w h i c h i s n o t a d i v i d e n d

, i t s h o u l d “ b e a p p l i e d a g a i n s t a n d r e d u c e t h e a d j u s t e d b a s i s

o f t h e s t o c k ; ” a n d

, i f t h e a m o u n t “ w h i c h i s n o t a d i v i d e n d

. . . e x c e e d s t h e a d j u s t e d

b a s i s f o r t h e s t o c k

, ” i t s h o u l d “ b e t r e a t e d a s g a i n f r o m t h e s a l e o r e x c h a n g e o f

p r o p e r t y

. ” § 3 0 1 ( c ) ( 1 )

- ( 3 ) ( a )

. I n c o m e s h o u l d b e i n c l u d e d i n a n i n d i v i d u a l ’ s g r o s s

i n c o m e d u r i n g t h e y e a r t h a t i t i s r e c e i v e d b y t h e t a x p a y e r

. 2 6 U

. S

. C

. § 4 5 1 ( a ) ; 2 6 3 9

C

. F

. R

. § 1

. 3 0 1

- 1 ( a d i v i d e n d b e c o m e s t a x a b l e w h e n i t i s “ u n q u a l i f i e d l y m a d e

s u b j e c t t o [ t h e s h a r e h o l d e r s ’ ] d e m a n d s

. ” ) ; A v e r y v

. C o m m ’ r o f I n t e r n a l R e v e n u e

,

2 9 2 U

. S

. 2 1 0

, 2 1 5

, 5 4 S

. C t

. 6 7 4

, 6 7 6 ( 1 9 3 4 ) ( a d i v i d e n d b e c o m e s t a x a b l e t o t h e

For tax purposes, “‘prope rty ’ mea ns money , secur ities, and any other prope rty ;” it 3 8

“does not include stock in the corpor ation making the distribution.” 26 U.S.C. § 317(a).

[T] he ter m ‘dividend’ mea

ns any distribution of property

made by a cor poration to its

share holders–(1) out of its [ reta ined] earning s and prof its . . . , or (2) out of its ear nings a nd

profits of the tax y ear

(computed a s of the close of the taxable y ear without dimi nution by

rea son

of any distributions made dur ing the taxable y ear ) without reg ard to the a mount of the ea

rning s

and prof its at the time the distributi on was made . 26 U.S.C. § 316(a).

“[T] he time of a ctual re ceipt of the dividend g overn[s] i ts inclusion in t axable 3 9

income.” D y

namics Corp. of Ame rica v. United States, 392 F.2d 241, 248 ( Ct. Cl . 1968).

50s h a r e h o l d e r u p o n a c t u a l r e c e i p t )

. T h e r e c e i p t o f i n c o m e c a n b e a c t u a l o r

“ c o n s t r u c t i v e

. ” “ C o n s t r u c t i v e r e c e i p t ” o f i n c o m e o c c u r s w h e n i t i s “ i s c r e d i t e d ” t o

t h e t a x p a y e r s a c c o u n t a n d h e c a n d r a w u p o n i t

. 2 6 C

. F

. R

. § 1

. 4 5 1

- 2 ( a )

.

C o n s t r u c t i v e r e c e i p t d o e s n o t o c c u r

, h o w e v e r

, “ i f t h e t a x p a y e r ’ s c o n t r o l o f [ t h e

r e c e i v e d i n c o m e ] i s s u b j e c t t o s u b s t a n t i a l l i m i t a t i o n s o r r e s t r i c t i o n s

. ” I d

. A

c o n s t r u c t i v e d i v i d e n d i s a c o r p o r a t e d i s b u r s e m e n t f o r t h e b e n e f

i t o f a s h a r e h o l d e r

a n d m u s t b e r e p o r t e d b y t h e s h a r e h o l d e r a s i n c o m e

. U n i t e d S t a t e s v

. M e w s

, 9 2 3 4 0

F

. 2 d 6 7

, 6 8 ( 7 t h C i r

. 1 9 9 1 )

.

A l t h o u g h t h e p e r s o n a l e x p e n s e e n t r i e s i n C i r c l e ’ s b o o k s c o u l d n o t h a v e b e e n

c h a r a c t e r i z e d a s d i v i d e n d s o r b a l a n c e d i n r e l a t i o n t o J u n i o r ’ s a n d S e n i o r ’ s

s h a r e h o l d e r i n t e r e s t s u n t i l t h e e n d o f C i r c l e ’ s a c c o u n t i n g y e a r

, t h e j u r y p o s s e s s e d

Fur ther, distributions are “ reg arde d as dividends wher e a c orpora tion makes a loan to a 4 0

share holder a

nd later c ance ls the indebtedness, or se lls property to a share holder for

a purc hase

price for be low its fair marke t value, or pa y s compensation to an of

fice r-sha reholde r in an

amount in excess of the value of his service s.” Dy namics Corp., 392 F .2d at 246. “I t is not t he

intent of the par

ties that g overns the c hara cter ization of the distribut ion, but rather the economic

and conse quent leg al ef

fec t of their ac tions.” I d. at 247. I ntent, howeve r, may be conside red in

the deter mination of whether

or not a distribution was a loan to a share holder. Ha

ber v. Comm’r

of I nterna l Revenue, 52 T.C. 255, 266 (1969) . I n such a de termination, the intent of the pa rties

at the time of the distribution is key : the share holder’s intent to re pay the loan and the

corpor ation’s intent to enforc e such a n obliga tion. I d. Evidence of such intent may be shown by

notes of indebtedne ss, collatera l or other se curity provided for

repa y ment of the loan, a g ree ments

as to the time of the r epay ment and the a

mount of interest to be pa id, or corpor ate r esolutions

reg arding the loan. I d.

I f there is insufficient evidenc e of a share holder loan, a

share holder’s r ece ipt of corpor ate

rec eipts is “trea ted as a

constructive distribution . . . taxable as a dividend to the e x tent of

corpor ate e arning s and prof its for the cor

porate fiscal y ear

in which it occur

red.” Midwest

Stainless, I nc. v. Comm’r of I nterna l Revenue, T.C.M. 2000-314, *4 n.5 ( 2000).

51s u f

f i c i e n t e v i d e n c e t o c o n v i c t o n C o u n t s T h r e e

, F o u r a n d F i v e

. C i r c l e ’ s p a y m e n t

o f $ 5

, 0 0 0 f

o r s u i t s a n d $ 8

, 0 0 0 f

o r n i g h t

- c l u b v i s i t s f

o r J u n i o r

, w h i c h w e r e

e r r o n e o u s l y l a b e l e d o n C i r c l e ’ s b o o k s a n d n o t r e p o r t e d b y J u n i o r a s p e r s o n a l

i n c o m e

, p r o v i d e d s u f

f i c i e n t s u b s t a n t i v e e v i d e n c e o f t h e u n d e r s t a t e m e n t o f i n c o m e

.

C i r c l e ’ s p a y m e n t s o f N e w Y o r k l a n d s c a p i n g f e e s f o r S e n i o r

, w h i c h w e r e n o t

r e p o r t e d b y S e n i o r a s p e r s o n a l i n c o m e

, p r o v i d e d s u f f i c i e n t s u b s t a n t i v e e v i d e n c e o f

t h e u n d e r s t a t e m e n t o f i n c o m e

. F u r t h e r

, i f t h e j u r y d e t e r m i n e d t h a t C i r c l e ’ s

p a y m e n t o f t h e l a n d s c a p i n g f e e s c o n s t i t u t e d p e r s o n a l i n c o m e t o S e n i o r

, t h e

o b j e c t i v e e l e m e n t o f a t a x d e f i c i e n c y w a s m e t t o s a t i s f y t h e c h a r g e t h a t S e n i o r

e v a d e d t a x e s

. V i e w i n g t h e e v i d e n c e i n t h e l i g h t m o s t f a v o r a b l e t o t h e g o v e r n m e n t

,

t h e j u r y c o u l d f

i n d s u f f i c i e n t c i r c u m s t a n t i a l e v i d e n c e t o s u p p o r t a f i n d i n g o f i n t e n t

a n d w i l l f u l n e s s o n t h e s e c o u n t s

.

3

. A i d i n g a n d A b e t t i n g t h e F i l i n g o f a M a t e r i a l l y F a l s e I n c o m e T a x R e t u r n

T o p r o v e a c h a r g e u n d e r 2 6 U

. S

. C

. § 7 2 0 6 ( 2 )

, t h e g o v e r n m e n t m u s t s h o w

t h a t t h e d e f

e n d a n t “ ( 1 ) w i l l f

u l l y a n d k n o w i n g l y a i d e d o r a s s i s t e d ( 2 ) i n t h e

p r e p a r a t i o n o r f

i l i n g o f a f

e d e r a l i n c o m e t a x r e t u r n ( 3 ) t h a t c o n t a i n e d m a t e r i a l

s t a t e m e n t s t h a t t h e d e f

e n d a n t k n e w t o b e f

a l s e

. ” U n i t e d S t a t e s v

. P a r k e r

, 2 7 7 F e d

.

A p p x

. 9 5 2

, 9 5 7 ( 1 1 t h C i r

. 2 0 0 8 ) ( p e r c u r i a m ) ( c i t i n g U n i t e d S t a t e s v

. S e a r a n

, 2 5 9

52F

. 3 d 4 3 4

, 4 4 1 ( 6 t h C i r

. 2 0 0 1 ) )

. A l t h o u g h t h e d e f e n d a n t ’ s p r e p a r a t i o n o f t h e r e t u r n s

i s n o t e s s e n t i a l

, t h e g o v e r n m e n t m u s t p r o v e t h a t t h e d e f e n d a n t k n o w i n g l y p r o v i d e d

f a l s e d o c u m e n t a t i o n w i t h t h e e x p e c t a t i o n t h a t i t w o u l d b e u s e d i n t h e f i l i n g o f a t a x

r e t u r n

. U n i t e d S t a t e s v

. W o l f s o n

, 5 7 3 F

. 2 d 2 1 6

, 2 2 5 ( 5 t h C i r

. 1 9 7 8 ) ; U n i t e d S t a t e s

v

. A r a c r i

, 9 6 8 F

. 2 d 1 5 1 2

, 1 5 2 4 ( 2 n d C i r

. 1 9 9 2 ) ( c o n v i c t i o n s u n d e r § 7 6 0 2 ( 2 )

u p h e l d w h e r e t h e “ d e f

e n d a n t s k n e w t h a t t h e i r s c h e m e w o u l d r e s u l t i n t h e f i l i n g o f

f a l s e t a x r e t u r n s

. ” )

.

I n t h i s c a s e

, n o e v i d e n c e s u g g e s t s t h a t K o t t w i t z o r t h e M a r c h e l l e t t a s k n e w

t h a t C i r c l e w o u l d f

i l e a f a l s e 2 0 0 1 t a x r e t u r n

. K o t t w i t z a n d t h e M a r c h e l l e t t a s

n e v e r s a w t h e t a x r e t u r n b e f o r e i t w a s f

i l e d o r t o o k a n y a c t i o n i n p r e p a r a t i o n o f i t

w i t h a n e x p e c t a t i o n t h a t i t w o u l d b e f i l e d w i t h m a t e r i a l l y f

a l s e s t a t e m e n t s

. T h e i r

c o n v i c t i o n s o n C o u n t S i x a r e r e v e r s e d

.

B

. F a i l u r e t o G i v e t h e R e q u e s t e d G o o d F a i t h R e l i a n c e J u r y I n s t r u c t i o n

K o t t w i t z a n d t h e M a r c h e l l e t t a s a r g u e t h a t t h e d i s t r i c t c o u r t e r r e d b y f a i l i n g t o

g i v e t h e i r p r o p o s e d j u r y i n s t r u c t i o n r e g a r d i n g g o o d f a i t h r e l i a n c e o n S c h w a r t z ’ s

a c c o u n t i n g a d v i c e a n d h i s f a i l u r e t o e x e r c i s e d u e c a r e i n h i s a u d i t o f C i r c l e

. T h e y

m a i n t a i n t h a t t h e d i s t r i c t c o u r t m i s a p p r e h e n d e d t h e l a w r e g a r d i n g w h a t t h e j u r y

n e e d e d t o d e c i d e i n o r d e r f o r a d e f e n d a n t t o s u c c e e d a s o p p o s e d t o w h e n t h e y

s h o u l d b e i n s t r u c t e d f

o r t h e i r u l t i m a t e d e t e r m i n a t i o n s a s t o g u i l t o r i n n o c e n c e

.

53T h e y c o n t e n d t h a t t h e r e w a s o v e r w h e l m i n g e v i d e n c e t h a t S c h w a r t z f a i l e d t o

e x e r c i s e d u e c a r e o f d i l i g e n c e i n d i s c h a r g i n g h i s d u t i e s

.

T h e g o v e r n m e n t r e s p o n d s t h a t K o t t w i t z a n d t h e M a r c h e l l e t t a s w e r e n o t

e n t i t l e d t o a g o o d f

a i t h r e l i a n c e i n s t r u c t i o n b e c a u s e S c h w a r t z n e v e r a d v i s e d t h e m

h o w t o r e c o r d a n d r e p o r t t h e p e r s o n a l e x p e n d i t u r e s o n t h e i r t a x r e t u r n s

, t h e y n e v e r

t o l d S c h w a r t z a b o u t t h e p a y m e n t s

, a n d t h e y g a v e h i m f a l s e b o o k s t h a t d i s g u i s e d t h e

p a y m e n t s

. I t m a i n t a i n s t h a t t h e c h a r g e w o u l d h a v e c o n f u s e d t h e j u r y a n d w a s

u n n e c e s s a r y b e c a u s e t h e c o u r t p r o v i d e d a n i n s t r u c t i o n r e g a r d i n g t h e h i g h s t a n d a r d

o f c r i m i n a l i n t e n t a n d t h a t “ g o o d f a i t h i s a c o m p l e t e d e f

e n s e

. ” F i n a l l y

, i t a s s e r t s

t h a t w e s h o u l d r e v i e w t h i s i s s u e f o r o n l y p l a i n e r r o r b e c a u s e J u n i o r n e v e r

a r t i c u l a t e d a n y s p e c i f

i c e v i d e n t i a r y g r o u n d s i n s u p p o r t o f t h e c h a r g e a n d d i d n o t

o b j e c t t o i t s o m i s s i o n u n t i l a f t e r t h e j u r y h a d r e t i r e d

.

W e r e v i e w d e n o v o t h e i s s u e o f w h e t h e r a r e q u e s t e d j u r y i n s t r u c t i o n i s

s u p p o r t e d b y s u f

f i c i e n t e v i d e n c e

, U n i t e d S t a t e s v

. C a l d e r o n

, 1 2 7 F

. 3 d 1 3 1 4

, 1 3 2 9

( 1 1 t h C i r

. 1 9 9 7 )

, a n d r e v i e w t h e d i s t r i c t c o u r t ’ s r e f u s a l t o g i v e s u c h a n i n s t r u c t i o n

f o r a b u s e o f d i s c r e t i o n

, U n i t e d S t a t e s v

. M o r r i s

, 2 0 F

. 3 d 1 1 1 1

, 1 1 1 4 ( 1 1 t h C i r

.

1 9 9 4 )

. A d i s t r i c t c o u r t a b u s e s i t s d i s c r e t i o n i n d e n y i n g a r e q u e s t e d j u r y i n s t r u c t i o n

i f : ( 1 ) t h e i n s t r u c t i o n i s c o r r e c t ; ( 2 ) t h e i n s t r u c t i o n w a s n o t s u b s t a n t i a l l y c o v e r e d b y

t h e g i v e n c h a r g e ; a n d ( 3 ) t h e d e f e n d a n t ’ s a b i l i t y t o p r e s e n t a n e f f e c t i v e d e f

e n s e w a s

54s e r i o u s l y i m p a i r e d b y t h e f a i l u r e t o g i v e t h e i n s t r u c t i o n

. U n i t e d S t a t e s v

. S i r a n g

,

7 0 F

. 3 d 5 8 8

, 5 9 3 ( 1 1 t h C i r

. 1 9 9 5 )

. “ T h e d i s t r i c t c o u r t h a s b r o a d d i s c r e t i o n i n

f o r m u l a t i n g j u r y i n s t r u c t i o n s a s l o n g a s t h o s e i n s t r u c t i o n s a r e a c o r r e c t s t a t e m e n t o f

t h e l a w

. ” U n i t e d S t a t e s v

. G a r c i a

, 4 0 5 F

. 3 d 1 2 6 0

, 1 2 7 3 ( 1 1 t h C i r

. 2 0 0 5 ) ( p e r

c u r i a m )

. F u r t h e r

, b e c a u s e “ [ a ] c o n f u s e d j u r y c a n g i v e a s i m p r o p e r a v e r d i c t a s o n e

w h i c h h a s f

a i l e d t o r e c e i v e s o m e s i g n i f i c a n t i n s t r u c t i o n

, . . . t h e c h a r g e s h o u l d b e

d i r e c t a n d f

o c u s t h e j u r y ’ s a t t e n t i o n o n t h e e v i d e n c e g i v e n a t t r i a l

. ” U n i t e d S t a t e s

v

. B l a i r

, 4 5 6 F

. 2 d 5 1 4

, 5 2 0 ( 3 d C i r

. 1 9 7 2 )

.

I n o b j e c t i n g t o a d i s t r i c t c o u r t ’ s f a i l u r e t o p r o v i d e a r e q u e s t e d j u r y

i n s t r u c t i o n

, t h e o b

j e c t i n g p a r t y m u s t a d v i s e t h e c o u r t b e f o r e t h e j u r y r e t i r e s t o

d e l i b e r a t e o f i t s s p e c i f

i c o b j e c t i o n a n d t h e e v i d e n t i a r y g r o u n d s u p o n w h i c h t h e

o b j e c t i o n w a s b a s e d

. F e d

. R

. o f C r i m

. P r o c

. 3 0 ( d )

. T h e o b j e c t i o n m u s t b e s p e c i f

i c

a n d t i m e l y

, U n i t e d S t a t e s v

. W r i g h t

, 3 9 2 F

. 3 d 1 2 6 9

, 1 2 7 7 ( 1 1 t h C i r

. 2 0 0 4 )

, a s “ a

g e n e r a l o b

j e c t i o n

. . . w i l l n o t s u f

f i c e

, ” U n i t e d S t a t e s v

. G a l l o

- C h a m o r r o

, 4 8 F

. 3 d

5 0 2

, 5 0 7 ( 1 1 t h C i r

. 1 9 9 5 )

. A n o b j e c t i o n i s t i m e l y e v e n i f m a d e a f t e r t h e j u r y h a s

b e e n e x c u s e d a s l o n g a s t h e j u r y w a s t o l d n o t t o b e g i n d e l i b e r a t i o n s u n t i l f u r t h e r

n o t i c e

. S e e U n i t e d S t a t e s v

. E i l a n d

, 7 4 1 F

. 2 d 7 3 8

, 7 4 2 ( 5 t h C i r

. 1 9 8 4 )

. A l t h o u g h

“ w e d o n o t i n s i s t o n a n e x t r e m e l y t e c h n i c a l r e a d i n g o f R u l e 3 0

, t h e o b j e c t i o n

s h o u l d b e s u f

f i c i e n t t o g i v e t h e d i s t r i c t c o u r t t h e c h a n c e t o c o r r e c t e r r o r s b e f o r e t h e

55c a s e g o e s t o t h e j u r y

. ” S i r a n g

, 7 0 F

. 3 d a t 5 9 4 ( c i t a t i o n s o m i t t e d )

. O b j e c t i o n s t o t h e

d i s t r i c t c o u r t ’ s e r r o n e o u s b e l i e f t h a t t h e r e q u e s t e d i n s t r u c t i o n w a s a n “ i n c o r r e c t

s t a t e m e n t o f t h e l a w

, ” U n i t e d S t a t e s v

. Y e a g e r

, 3 3 1 F

. 3 d 1 2 1 6

, 1 2 2 3 ( 1 1 t h C i r

.

2 0 0 3 )

, o b

j e c t i o n s “ a s a m a t t e r o f f o r m ” t o t h e d e n i a l o f a l l o f t h e r e q u e s t e d

i n s t r u c t i o n s

, U n i t e d S t a t e s v

. F l y n t

, 1 5 F

. 3 d 1 0 0 2

, 1 0 0 6 ( 1 1 t h C i r

. 1 9 9 4 ) ( p e r

c u r i a m ) ( q u o t a t i o n m a r k s o m i t t e d )

, a n d o b j e c t i o n s t h a t d o n o t a d d r e s s t h e d i s t r i c t

c o u r t ’ s e x p l a n a t i o n f

o r i t s d e n i a l o f t h e i n s t r u c t i o n b e c a u s e i t w a s “ n o t t a i l o r e d t o

t h e e v i d e n c e

, ” a r e i n a d e q u a t e t o p r e s e r v e t h e i s s u e o n a p p e a l

, S i r a n g

, 7 0 F

. 3 d a t

5 9 4 ( q u o t a t i o n m a r k s o m i t t e d )

. A n o n

- p r e s e r v e d o b j e c t i o n t o a c o u r t ’ s f

a i l u r e t o

g i v e a r e q u e s t e d j u r y i n s t r u c t i o n i s r e v i e w e d u n d e r t h e m o r e s t r i n g e n t s t a n d a r d o f

p l a i n e r r o r

. F e d

. R

. C r i m

. P

. 5 2 ( b )

. A s w e h a v e e x p l a i n e d

, a p l a i n e r r o r i s o n e t h a t

i s c l e a r

, i s o b v i o u s u n d e r c u r r e n t l a w

, a n d t h a t a f f e c t s s u b s t a n t i a l r i g h t s

. U n i t e d

S t a t e s v

. E c k h a r d t

, 4 6 6 F

. 3 d 9 3 8

, 9 4 8 ( 1 1 t h C i r

. 2 0 0 6 )

.

A t r i a l c o u r t i s n o t f

r e e t o d e t e r m i n e t h e e x i s t e n c e o f t h e d e f e n d a n t ’ s t h e o r y

o f d e f e n s e a s a m a t t e r o f l a w ; i t i s e s t a b l i s h e d b y t h e d e f e n d a n t ’ s p r e s e n t a t i o n o f a n

e v i d e n t i a r y a n d l e g a l f

o u n d a t i o n a n d

, o n c e e s t a b l i s h e d

, t h e d e f e n d a n t i s e n t i t l e d t o

j u r y i n s t r u c t i o n s o n t h a t d e f e n s e t h e o r y

. U n i t e d S t a t e s v

. R u i z

, 5 9 F

. 3 d 1 1 5 1

, 1 1 5 4

( 1 1 t h C i r

. 1 9 9 5 ) ; U n i t e d S t a t e s v

. W i l l i a m s

, 7 2 8 F

. 2 d 1 4 0 2

, 1 4 0 4 ( 1 1 t h C i r

. 1 9 8 4 )

.

T h e r e q u e s t e d j u r y i n s t r u c t i o n s h o u l d “ p r e c i s e l y a n d s p e c i f i c a l l y

, r a t h e r t h a n

56m e r e l y g e n e r a l l y o r a b s t r a c t l y

, p o i n t [ ] t o t h e t h e o r y o f

. . . d e f e n s e

. ” M o r r i s

, 2 0

F

. 3 d a t 1 1 1 7 ( q u o t a t i o n m a r k s a n d c i t a t i o n s o m i t t e d )

. T h e l a w i s c l e a r t h a t t h e

d e f e n d a n t ’ s b u r d e n i s l i g h t a s “ a n y f o u n d a t i o n i n t h e e v i d e n c e ” i s s u f f i c i e n t e v e n i f

t h a t e v i d e n c e i s o f d o u b t f u l c r e d i b i l i t y

, f

r i v o l o u s

, i m p r u d e n t

, i n c o n s i s t e n t

,

i n s u f f i c i e n t

, u n b e l i e v a b l e

, o r w e a k

. U n i t e d S t a t e s v

. O p d a h l

, 9 3 0 F

. 2 d 1 5 3 0

, 1 5 3 5

( 1 1 t h C i r

. 1 9 9 1 ) ( c i t a t i o n o m i t t e d ) ; U n i t e d S t a t e s v

. M i d d l e t o n

, 6 9 0 F

. 2 d 8 2 0

, 8 2 6

( 1 1 t h C i r

. 1 9 8 2 ) ; S t r a u s s v

. U n i t e d S t a t e s

, 3 7 6 F

. 2 d 4 1 6

, 4 1 9 ( 5 t h C i r

. 1 9 6 7 )

. “ [ I ] t

i s r e v e r s i b l e e r r o r t o r e f u s e t o c h a r g e o n a d e f

e n s e t h e o r y f

o r w h i c h t h e r e i s a n

e v i d e n t i a r y f

o u n d a t i o n a n d w h i c h

, i f b e l i e v e d b y t h e j u r y

, w o u l d b e l e g a l l y

s u f f i c i e n t t o r e n d e r t h e a c c u s e d i n n o c e n t

. ” U n i t e d S t a t e s v

. E d w a r d s

, 9 6 8 F

. 2 d

1 1 4 8

, 1 1 5 3 ( 1 1 t h C i r

. 1 9 9 2 ) ( q u o t a t i o n m a r k s a n d c i t a t i o n o m i t t e d )

.

“ T h e d e f e n s e o f g o o d f

a i t h r e l i a n c e o n e x p e r t a d v i c e i s d e s i g n e d t o r e f u t e t h e

g o v e r n m e n t ’ s p r o o f t h a t t h e d e f e n d a n t i n t e n d e d t o c o m m i t t h e o f f e n s e

. ” U n i t e d

S t a t e s v

. J o h n s o n

, 7 3 0 F

. 2 d 6 8 3

, 6 8 6 ( 1 1 t h C i r

. 1 9 8 4 ) ( i n t e r n a l q u o t a t i o n m a r k s

o m i t t e d )

. S u c h a d e f

e n s e i s s u c c e s s f

u l w h e n t h e d e f

e n d a n t s e s t a b l i s h t h a t t h e y ( 1 )

f u l l y d i s c l o s e d a l l r e l e v a n t f a c t s t o t h e e x p e r t a n d ( 2 ) r e l i e d i n g o o d f a i t h o n t h e

e x p e r t ’ s a d v i c e

. I d

. O n c e t h e d e f e n d a n t c h a r g e d w i t h w i l l f u l i n c o m e t a x e v a s i o n 4 1

Where the a ccounta

nt “possesse[s] all of the re levant fa cts conc erning [t he 4 1

transac tions at issue] from the outset,” it is not nece ssary that the def

endant show “ that he

persona lly

disclosed all per

tinent fac ts to the acc ountant.” United States v. L indo, 18 F.3d 353,

356 (6th Cir. 1994).

57p r e s e n t s e v i d e n c e t h a t h e d i s c l o s e d a l l o f t h e r e l e v a n t f a c t s t o a c o m p e t e n t t a x

a d v i s o r a n d r e l i e d o n t h e a d v i s o r ’ s a d v i c e b a s e d o n h i s d i s c l o s u r e s

, h e i s e n t i t l e d t o

a j u r y i n s t r u c t i o n o n t h e d e f e n s e o f g o o d f

a i t h r e l i a n c e o n t h e a d v i c e o f h i s a d v i s o r

.

U n i t e d S t a t e s v

. E i s e n s t e i n

, 7 3 1 F

. 2 d 1 5 4 0

, 1 5 4 3

- 4 4 ( 1 1 t h C i r

. 1 9 8 4 ) ( c i t i n g

B u r s t e n v

. U n i t e d S t a t e s

, 3 9 5 F

. 2 d 9 7 6

, 9 8 1

- 8 2 ( 5 t h C i r

. 1 9 6 8 ) )

. I f t h e e x p e r t

p r o v i d e s n o a d v i c e o r a c t s a s a c o

- c o n s p i r a t o r a n d n o t a s a n e x p e r t

, g o o d f a i t h

r e l i a n c e i s n o t e s t a b l i s h e d

. J o h n s o n

, 7 3 0 F

. 2 d a t 6 8 6 ; U n i t e d S t a t e s v

. M i l e s

, 2 9 0

F

. 3 d 1 3 4 1

, 1 3 5 4 ( 1 1 t h C i r

. 2 0 0 2 ) ( p e r c u r i a m )

. A r e l i a n c e i n s t r u c t i o n i s a l s o n o t

r e q u i r e d i f t h e d e f

e n d a n t f a i l e d t o d i s c l o s e “ m a t e r i a l f a c t s r e l a t e d t o [ t h e

d e f e n d a n t ’ s ] m i s r e p r e s e n t a t i o n s

. ” U n i t e d S t a t e s v

. C o n d o n

, 1 3 2 F

. 3 d 6 5 3

, 6 5 7 4 2

( 1 1 t h C i r

. 1 9 9 8 ) ( p e r c u r i a m )

.

T h e d e f e n d a n t b e a r s a n “ e x t r e m e l y l o w ” t h r e s h o l d t o j u s t i f y t h e g o o d f

a i t h

r e l i a n c e i n s t r u c t i o n a n d d o e s n o t n e e d t o p r o v e g o o d f a i t h

. R u i z

, 5 9 F

. 3 d a t 1 1 5 4 ;

s e e a l s o M o r r i s

, 2 0 F

. 3 d a t 1 1 1 4 n

. 2

. W h e t h e r t h e d e f e n d a n t f u l l y d i s c l o s e d t h e

r e l e v a n t f

a c t s

, f a i l e d t o d i s c l o s e a l l r e l e v a n t f a c t s

, o r c o n c e a l e d i n f

o r m a t i o n f

r o m

h i s a d v i s o r

, a n d r e l i e d i n g o o d f a i t h o n h i s a d v i s o r a r e m a t t e r s f o r t h e j u r y

– a n d n o t

A taxpay er w ho fails to disclose mater ial information from his ac countants or take s 4 2

aff irmative steps to mislead his acc ountants is not entitl ed to ar g ue re liance. U nited States v.

L isowski, 504 F.2d 1268, 1272 (7th Cir. 1974).

58t h e c o u r t

– t o d e t e r m i n e

, u n d e r p r o p e r i n s t r u c t i o n

. S e e U n i t e d S t a t e s v

. B a l d w i n

, 4 3

3 0 7 F

. 2 d 5 7 7

, 5 7 9 ( 7 t h C i r

. 1 9 6 2 ) ; U n i t e d S t a t e s v

. W a l t e r s

, 9 1 3 F

. 2 d 3 8 8

, 3 9 2

( 7 t h C i r

. 1 9 9 0 )

. A j u r y i s e n t i t l e d t o t h e o p p o r t u n i t y t o b e l i e v e o r d i s b e l i e v e e v e n

f r a g i l e e v i d e n c e i n s u p p o r t o f a d e f e n s e

. S t r a u s s

, 3 7 6 F

. 2 d a t 4 1 9 ; E i s e n s t e i n

, 7 3 1

F

. 2 d a t 1 5 4 5

. D e f

e n d a n t s a r e e n t i t l e d t o t h e g o o d f a i t h d e f e n s e i n s t r u c t i o n i f i t

( 1 ) w a s c o r r e c t

, ( 2 ) w a s n o t s u b s t a n t i a l l y c o v e r e d b y t h e c o u r t ’ s

c h a r g e t o t h e j u r y

, a n d ( 3 ) d e a l t w i t h s o m e p o i n t i n t h e t r i a l s o

i m p o r t a n t t h a t f

a i l u r e t o g i v e t h e r e q u e s t e d i n s t r u c t i o n s e r i o u s l y

i m p a i r e d t h e d e f

e n d a n t ’ s a b i l i t y t o c o n d u c t h i s d e f e n s e [

, ]

a n d w h e r e t h e r e i s a n y e v i d e n c e

, r e g a r d l e s s o f h o w d u b i o u s

, i n c o n s i s t e n t o r w e a k i t

m a y h a v e b e e n

, t o s u p p o r t t h e i r g o o d f a i t h c l a i m

. M o r r i s

, 2 0 F

. 3 d a t 1 1 1 6

( p u n c t u a t i o n a n d c i t a t i o n o m i t t e d )

. T h e i n s t r u c t i o n i s a p p r o p r i a t e e v e n w h e r e t h e

e v i d e n c e m i g h t l e a d t h e j u r y t o c o n c l u s i o n s t h a t w o u l d n o t b e n e f i t t h e d e f e n d a n t

b e c a u s e r e f

u s i n g t h e c h a r g e w i t h d r a w s t h e p o i n t f r o m t h e j u r y ’ s c o n s i d e r a t i o n a n d

a j u r y s h o u l d b e g i v e n t h e o p p o r t u n i t y t o r e s o l v e a l l q u e s t i o n s o f f a c t

. U n i t e d

S t a t e s v

. P l a t t

, 4 3 5 F

. 2 d 7 8 9

, 7 9 2

- 9 3 ( 2 n d C i r

. 1 9 7 0 )

. S u c h a n i n s t r u c t i o n w a s

p r o p e r w h e r e t h e d e f

e n d a n t s ’ b o o k s w e r e k e p t i n t e r n a l l y a n d r e v i e w e d b y o u t s i d e

The trial c ourt’s eva luation of the evide nce suppor ting a relianc e def

ense a nd denial of 4 3

such a c harg e “dilutes” the def endants’ tr ial and ac ts as an “imper missibl e” dir ecte d verdic t

ag ainst the defe ndants. Bur sten, 395 F.2d a t 981 (quotation marks and c itation omit ted).

59a c c o u n t a n t s

, a n d t h e i r t a x r e t u r n s w e r e p r e p a r e d b y o u t s i d e a c c o u n t a n t s

, s e e 4 4

M o r r i s

, 1 2 0 F

. 3 d a t 1 1 1 4

, w h e r e t h e o n l y e v i d e n c e i n s u p p o r t o f t h e i n s t r u c t i o n i s

t h e d e f e n d a n t ’ s o w n t e s t i m o n y

, s e e S t r a u s s

, 3 7 6 F

. 2 d a t 4 1 9 ( c i t i n g T a t u m v

.

U n i t e d S t a t e s

, 1 9 0 F

. 2 d 6 1 2

, 6 1 7 ( D

. C

. C i r

. 1 9 5 1 )

, a n d w h e r e t h e d e f e n d a n t f a i l e d

t o t e s t i f y

, s e e L i n d o

, 1 8 F

. 3 d a t 3 5 6

. T h e r e l i a n c e i n s t r u c t i o n i s a l s o p r o p e r e v e n i f

t h e o u t s i d e a c c o u n t a n t w a s a c o

- d e f e n d a n t

. U n i t e d S t a t e s v

. D u n c a n

, 8 5 0 F

. 2 d

1 1 0 4

, 1 1 0 5

, 1 1 1 7 ( 6 t h C i r

. 1 9 8 8 )

, o v e r r u l e d o n o t h e r g r o u n d s

, S c h a d v

. A r i z o n a

,

5 0 1 U

. S

. 6 2 4

, 1 1 1 S

. C t

. 2 4 9 1 ( 1 9 9 1 )

. T h e d e n i a l o f t h e i n s t r u c t i o n m a y p r e j u d i c e

t h e d e f e n d a n t s w h e r e t h e y h a v e c o n t e s t e d t h a t t h e y l a c k e d t h e s p e c i f i c i n t e n t t o

c o m m i t t a x f

r a u d ; s u c h p r e

j u d i c e i s “ a m p l i f

i e d ” w h e n t h e e v i d e n c e a g a i n s t t h e m

w a s c i r c u m s t a n t i a l a n d l i m i t e d

, a n d t h e e v i d e n c e i n t h e i r f a v o r w a s s u b s t a n t i a l

. 4 5

The g ood faith re liance instruc tion was proper when the de fenda

nt: (1) had be en 4 4

advised by

an ac countant that extensions had been r equeste d, Platt, 435 F.2d at 790-92; (2) was

mere ly a “‘ walk-in c ustomer’” who provided only oral infor mation rather

than a r eg ular

customer whose business activity was c ontinuously

overse en by

an ac countant, United States v.

Kim, 884 F.2d 189, 193-94 ( 5th Cir. 1989); (3) had sig ned a ta x return pr epar ed by an

acc ountant from re cords r ecor ded by the def endant’ s bookkeepe r, B erkovitz v. United States,

213 F.2d 468, 470, 472- 73, 476 (5th Cir. 1954); and (4) had sig ned tax returns pre pare d by an

acc ountant from re cords in which e ntries wer e cla ssified by the bookkee per a

nd the def

endant

neither c oncea led any

thing nor ref used the a ccounta

nt any information, United States v.

Pechenik, 236 F .2d 844, 845-47 (3r d Cir. 1956) (a jur y was e ntitled to acce pt or reje ct evidenc e

that the def

endant r elied on his bookkee per to de termine how va rious expenses should be enter ed

into his books and on his accountant to audit the c orpora tion’s books and prepa re its tax returns).

See also United States v. He ad, 641 F .2d 174,180 (4th Cir. 1981) (such a n instruction was prope r

wher e the de fenda

nt “re lied upon acc ountants to prepar e tax returns and did nothing to obstruct

the flow of inf

ormation nec essar

y to prepa re those r eturns”)

.

The pre judice fr om a district court’s f ailure to g ive the g ood faith re liance instruc tion 4 5

is not abated by

counsel’s pr esenta tion of the theory of def ense dur ing c losing a

rg ument. Wit h

60M o r r i s

, 2 0 F

. 3 d a t 1 1 1 8

. T h e i n s t r u c t i o n m a y b e p r o p e r l y d e n i e d

, h o w e v e r

, i f : ( 1 )

t h e r e i s e v i d e n c e t h a t t h e d e f e n d a n t p e r s o n a l l y f

a i l e d t o r e c o r d r e c e i p t s

, p r o v i d e h i s

a c c o u n t a n t w i t h t h e u n d e r l y i n g r e c o r d s

, o r i n f o r m h i s a c c o u n t a n t s o f a d d i t i o n a l

i n c o m e

, s e e U n i t e d S t a t e s v

. G a r a v a g l i a

, 5 6 6 F

. 2 d 1 0 5 6

, 1 0 5 9

- 6 0 ( 6 t h C i r

. 1 9 7 7 ) ;

( 2 ) t h e r e i s n o e v i d e n c e t h a t t h e d e f e n d a n t s o u g h t

, r e c e i v e d

, o r f o l l o w e d t h e a d v i c e

o f a n a d v i s o r i n g o o d f

a i t h o r i n f

o r m e d t h e a d v i s o r o f a l l o f t h e f a c t s

, s e e U n i t e d

S t a t e s v

. B r i m b e r r y

, 9 6 1 F

. 2 d 1 2 8 6

, 1 2 9 0 ( 7 t h C i r

. 1 9 9 2 ) ; U n i t e d S t a t e s v

. D u r n i n

,

6 3 2 F

. 2 d 1 2 9 7

, 1 3 0 1 ( 5 t h C i r

. 1 9 8 0 ) ; ( 3 ) s u c h t h e o r y o f d e f e n s e i s b a s e d m e r e l y

u p o n s p e c u l a t i o n

, s e e C o n d o n

, 1 3 2 F

. 3 d a t 6 5 6 ; o r ( 4 ) t h e i s s u e o f t h e d e f e n d a n t ’ s

r e l i a n c e o n a d v i c e f

o r g i v e n c o n d u c t i s n o t b e f o r e t h e j u r y o n t h e c h a r g e s o f

c o n v i c t i o n

, U n i t e d S t a t e s v

. S n i p e s

, F

. 3 d

, , 2 0 1 0 W L 2 7 9 4 1 9 0 a t * 9 ( 1 1 t h

C i r

. J u l y 1 6

, 2 0 1 0 )

. T h e r e l i a n c e i n s t r u c t i o n i s a l s o n o t n e c e s s a r y w h e r e t h e d i s t r i c t

c o u r t ’ s i n s t r u c t i o n s r e g a r d i n g t h e d e f e n d a n t ’ s h o n e s t

, g o o d f

a i t h b e l i e f t h a t h i s

a c t i o n s w e r e l e g i t i m a t e n e g a t e s t h e s p e c i f i c i n t e n t r e q u i r e d f

o r c o n v i c t i o n

, U n i t e d

S t a t e s v

. T a n n e h i l l

, 4 9 F

. 3 d 1 0 4 9

, 1 0 5 8 ( 5 t h C i r

. 1 9 9 5 )

, a d e q u a t e l y c o v e r e d t h e

s u b s t a n c e o f t h e d e f

e n d a n t ’ s t h e o r y o f d e f

e n s e a n d p e r m i t t e d d e f

e n s e c o u n s e l t o

p r e s e n t a d e q u a t e a r g u m e n t o n t h e d e f e n d a n t ’ s g o o d f

a i t h m i s u n d e r s t a n d i n g o f t h e

l a w

, S n i p e s

, F

. 3 d a t

, 2 0 1 0 W L 2 7 9 4 1 9 0 a t * 1 0 ; U n i t e d S t a t e s v

. K o u b a

, 8 2 2

no instruction on the leg al ef fec t of g ood faith re liance, a jury is left with no lawful or leg itimate

alterna tive for the e x planation for the defe ndant’s conduc t. See Ruiz , 59 F.3d a t 1155.

61F

. 2 d 7 6 8

, 7 7 1 ( 8 t h C i r

. 1 9 8 7 )

, o r r e q u i r e d t h a t t h e j u r y r u l e o u t g o o d f a i t h i n o r d e r

t o c o n v i c t t h e d e f

e n d a n t

. U n i t e d S t a t e s v

. M a r t i n e l l i

, 4 5 4 F

. 3 d 1 3 0 0

, 1 3 1 6 ( 1 1 t h

C i r

. 2 0 0 6 )

.

T h e r e q u e s t e d g o o d f

a i t h r e l i a n c e j u r y i n s t r u c t i o n w a s b a s e d o n o u r p a t t e r n

j u r y i n s t r u c t i o n s a n d w a s

, t h e r e f o r e

, a c o r r e c t s t a t e m e n t o f t h e l a w

. 4 6

W e m u s t f

i r s t d e t e r m i n e w h e t h e r K o t t w i t z a n d t h e M a r c h e l l e t t a s p r e s e r v e d

t h e i s s u e o f t h e g o o d f

a i t h r e l i a n c e i n s t r u c t i o n t h r o u g h t h e i r o b j e c t i o n i n t h e d i s t r i c t

c o u r t

. T h e g o o d f

a i t h d e f e n s e t h e o r y w a s p r e s e n t e d t h r o u g h o u t t h e t r i a l

. T h e

t h e o r y w a s s e t o u t i n t h e o p e n i n g s t a t e m e n t s

, d u r i n g S c h w a r t z ’ s c r o s s

- e x a m i n a t i o n

,

a n d i n c l o s i n g a r g u m e n t s t h a t K o t t w i t z

, J u n i o r

, a n d S e n i o r

, n o n e o f w h o m w e r e

t r a i n e d o r e x p e r i e n c e d i n t a x e s

, r e l i e d o n S c h w a r t z f o r h i s a d v i c e i n c l a s s i f

y i n g

e n t r i e s m a d e i n C i r c l e ’ s b o o k s a n d i n p r e p a r i n g c o r r e c t t a x r e t u r n s

. T h e y

s p e c i f i c a l l y r e q u e s t e d t h e i n s t r u c t i o n a n d o b j e c t e d b o t h o r a l l y a n d i n w r i t i n g t o t h e

d i s t r i c t c o u r t ’ s r e f

u s a l t o g r a n t t h e i n s t r u c t i o n b e f o r e j u r y d e l i b e r a t i o n s

c o m m e n c e d

. W e

, t h e r e f o r e

, r e v i e w t h e d i s t r i c t c o u r t ’ s r e f u s a l t o g i v e t h e

i n s t r u c t i o n f

o r a b u s e o f d i s c r e t i o n

.

The a dditions t o the patter n jury instructions included lang uag e consistent with the 4 6

reg ulations under the I nterna l Revenue Code. “ The tax return pre pare r must make re asonable

inquiries if the informa tion as furnished a ppear s to be incorr ect or

incomplete . . . [and] to

deter mine the exist ence of fa cts and c ircumstance s require d by a Code sec tion or reg ulation as a

condition of the cla iming of a deduction or c redit.” 26 C.F .R. § 1.6694-1(e)

.

62W h e t h e r i t w a s n e c e s s a r y t o p r o v i d e t h e g o o d f a i t h r e l i a n c e i n s t r u c t i o n

d e p e n d s o n w h e t h e r ( 1 ) a j u r o r c o u l d f i n d a n y e v i d e n c e t o c o n c l u d e t h a t K o t t w i t z

a n d t h e M a r c h e l l e t t a s p r o v i d e d a l l m a t e r i a l f a c t s t o t h e i r a c c o u n t a n t

, a n d ( 2 ) a j u r o r

c o u l d f i n d a n y e v i d e n c e t h a t K o t t w i t z a n d t h e M a r c h e l l e t t a s r e l i e d i n g o o d f a i t h o n

t h a t a c c o u n t a n t ’ s a d v i c e a n d d e c i s i o n s

. T h e e v i d e n c e d e m o n s t r a t e d t h a t t h e

M a r c h e l l e t t a s h i r e d S c h w a r t z t o p r e p a r e C i r c l e ’ s a u d i t e d f i n a n c i a l s t a t e m e n t s a n d

t a x r e t u r n s

, a n d t h a t K o t t w i t z w o r k e d c l o s e l y w i t h h i m d u r i n g h i s y e a r l y a u d i t s

. I n

a l e t t e r d a t e d 2 1 A u g u s t 2 0 0 1

, J u n i o r c o n f i r m e d t o S c h w a r t z t h a t h e h a d “ t o t h e

b e s t o f m y k n o w l e d g e a n d b e l i e f

. . . m a d e a v a i l a b l e t o y o u a l l

. . . [ f ] i n a n c i a l

r e c o r d s a n d r e l a t e d d a t a [ a n d ] [ m ] i n u t e s o f t h e m e e t i n g s o f s t o c k h o l d e r s

, d i r e c t o r s

.

. . . ” G o v t

. E x

. 4 2 7

. 1 0

. S c h w a r t z e x p l a i n e d t h a t h e c o n d u c t e d t h e a u d i t s b u t r e l i e d

o n K o t t w i t z f

o r “ m o s t l y e v e r y t h i n g ” b e c a u s e n e i t h e r J u n i o r n o r S e n i o r w a n t e d t o

b e i n v o l v e d o r p r o v i d e d h i m w i t h c l e a r a n s w e r s r e g a r d i n g “ t h e t e c h n i c a l i t i e s o f t h e

b o o k s a n d r e c o r d s

. ” R 2 2 a t 1 8 5

- 8 6

. H e s t a t e d t h a t S e n i o r w o u l d w a l k t h r o u g h b u t

d i d n o t p a r t i c i p a t e a n d d i d n o t s e e m t o c a r e a b o u t t h e n u m b e r s

. I d

. a t 1 8 5

- 8 7

.

K o t t w i t z d i d n o t l i m i t S c h w a r t z ’ s a u d i t i n a n y m a n n e r

, p r o v i d e d h i m w i t h

r e q u e s t e d d o c u m e n t a t i o n

, a n d r e l i e d o n h i s a c c o u n t i n g a d v i c e t o i n s u r e t h e

p r o p r i e t y o f C i r c l e ’ s a c c o u n t i n g

. S c h w a r t z t e s t i f i e d t h a t K o t t w i t z m a d e h e r b e s t

e f f o r t s t o a s s u r e t h a t C i r c l e ’ s a c c o u n t i n g w a s c o r r e c t a n d t o m a k e a p p r o p r i a t e

63c h a n g e s

. L o g a n a n d D i g g s b o t h t e s t i f i e d t h a t S c h w a r t z w a s g i v e n a c c e s s t o

C i r c l e ’ s b o o k s a n d r e c o r d s a n d t o a n y o t h e r r e q u e s t e d d o c u m e n t s

, a n d t h a t h e

d i r e c t e d t h e c o r r e c t i o n o f m i s c l a s s i f i e d e n t r i e s

. S c h w a r t z a d m i t t e d t h a t n e i t h e r t h e

t i m e t h a t h e s p e n t o n t h e a u d i t n o r h i s a c c e s s t o t h e d o c u m e n t s w a s l i m i t e d

, a n d

m a d e n o c h a n g e s t o t h e t i m e t h a t h e a l l o c a t e d a f t e r h e f o u n d i t “ d i f

f i c u l t ” t o

p e r f o r m t h e a u d i t i n t w o d a y s

. S c h w a r t z n o t o n l y r e c l a s s i f i e d t h e m o n i e s C i r c l e

r e c e i v e d f

r o m N a s t a s i a s a l o a n

, b u t h e f a i l e d t o i n f

o r m S e n i o r o f t h e

r e c l a s s i f i c a t i o n o r i t s e f

f e c t o n h i s p r e v i o u s l y f

i l e d t a x r e t u r n a n d t o o k n o s t e p s t o

c o r r e c t t h a t t a x r e t u r n

. S c h w a r t z a d m i t t e d r e v i e w i n g t h e J M r e p o r t s

, w h i c h

i n c l u d e d t h e C r a b a p p l e a n d N e w p o r t B a y c o s t s o f

, r e s p e c t i v e l y

, a b o u t $ 1 m i l l i o n

a n d $ 8 0 0

, 0 0 0

, a n d r e f

l e c t e d n o i n c o m e

.

B a s e d o n t h i s e v i d e n c e

, t h e M a r c h e l l e t t a s w e r e e n t i t l e d t o h a v e t h e j u r y

i n s t r u c t e d o n t h e i r g o o d f a i t h r e l i a n c e o n S c h w a r t z ’ s a d v i c e a n d o n S c h w a r t z ’ s

f a i l u r e t o e x e r c i s e d u e c a r e

. T h e r e q u e s t e d i n s t r u c t i o n p r o p e r l y p l a c e d t h e

d e t e r m i n a t i o n w i t h t h e j u r y a s t o w h e t h e r t h e y a c t e d i n g o o d f a i t h i n s e e k i n g

a d v i c e

, f u l l y a n d c o m p l e t e l y r e p o r t i n g t o t h e i r a c c o u n t a n t

, a n d a c t i n g s t r i c t l y i n

a c c o r d a n c e w i t h t h e a d v i c e

. T h e d i s t r i c t c o u r t ’ s r e f u s a l t o d e l i v e r t h e r e q u e s t e d

i n s t r u c t i o n

, w h i c h a d d r e s s e d t h e d e f e n s e ’ s t h e o r y o f t h e c a s e o n C o u n t s T h r e e

,

F o u r

, a n d F i v e w a s n o t s u b s t a n t i a l l y c o v e r e d b y o t h e r i n s t r u c t i o n s s e r i o u s l y

64i m p a i r e d K o t t w i t z a n d t h e M a r c h e l l e t t a s ’ d e f e n s e

. T h e d i s t r i c t c o u r t ’ s r e f u s a l t o

d e l i v e r t h e r e q u e s t e d i n s t r u c t i o n d i d n o t

, h o w e v e r

, i m p a i r K o t t w i t z a n d t h e

M a r c h e l l e t t a s ’ d e f

e n s e a s t o t h e c o n s p i r a c y c h a r g e ( C o u n t O n e )

. T h e d e f e n s e ’ s

t h e o r y o f t h e c a s e a s t o t h e c o n s p i r a c y c h a r g e w a s f u l l y e n c o m p a s s e d b y t h e g o o d

f a i t h i n s t r u c t i o n g i v e n b y t h e d i s t r i c t c o u r t b e c a u s e t h e c o n s p i r a c y w a s

c o n s u m m a t e d b e f

o r e a n y r e l i a n c e u p o n t h e a d v i c e o f a n a c c o u n t a n t

.

B e f o r e w e r e s o l v e t h i s i s s u e

, h o w e v e r

, w e m u s t l o o k a g a i n t o o u r r e v i e w o f

t h e s u f f i c i e n c y o f t h e e v i d e n c e a s t h e c o u n t s i n q u e s t i o n b e c a u s e “ [ o ] n l y i f t h e

e v i d e n c e i s s u f

f i c i e n t f o r a p r o p e r l y i n s t r u c t e d j u r y t o h a v e c o n v i c t e d [ t h e

d e f e n d a n t s o f t h e c h a r g e d o f f e n s e s ] d o w e h a v e t o d e t e r m i n e w h e t h e r t h e d i s t r i c t

c o u r t ’ s e r r o n e o u s j u r y i n s t r u c t i o n c o n s t i t u t e d

. . . e r r o r r e q u i r i n g r e v e r s a l a n d

r e m a n d f o r a n e w t r i a l

. ” U n i t e d S t a t e s v

. M o u n t

, 1 6 1 F

. 3 d 6 7 5

, 6 7 8 ( 1 1 t h C i r

.

1 9 9 8 ) ( c i t a t i o n o m i t t e d )

. “ I f t h e r e c o r d d o e s n o t c o n t a i n s u f f i c i e n t e v i d e n c e u n d e r

w h i c h a p r o p e r l y i n s t r u c t e d j u r y c o u l d h a v e c o n v i c t e d [ t h e d e f e n d a n t s o f t h e

c h a r g e d o f

f e n s e s ]

, t h e n d o u b l e j e o p a r d y p r i n c i p l e s m a n d a t e t h a t w e v a c a t e t h e

c o n v i c t i o n a n d r e m a n d t o t h e d i s t r i c t c o u r t w i t h d i r e c t i o n s t o e n t e r a j u d g m e n t o f

a c q u i t t a l o n t h e c o u n t i n q u e s t i o n

. ” I d

. ( q u o t a t i o n m a r k s a n d c i t a t i o n o m i t t e d )

.

B e c a u s e w e h a v e d e t e r m i n e d t h a t t h e e v i d e n c e w a s s u f f i c i e n t t o s u p p o r t

J u n i o r ’ s a n d S e n i o r ’ s c o n v i c t i o n s f o r f i l i n g m a t e r i a l l y f

a l s e p e r s o n a l i n c o m e t a x

65r e t u r n s f

o r 2 0 0 0 ( C o u n t s T h r e e a n d F o u r )

, a n d S e n i o r ’ s c o n v i c t i o n f o r e v a d i n g

t a x e s ( C o u n t F i v e )

, w e r e v e r s e t h e i r c o n v i c t i o n s o n t h e s e c o u n t s a n d r e m a n d f o r a

n e w t r i a l

. B e c a u s e t h e e v i d e n c e w a s

, h o w e v e r

, i n s u f f i c i e n t t o s u p p o r t K o t t w i t z ’ s

,

J u n i o r ’ s

, a n d S e n i o r ’ s c o n v i c t i o n s f o r a i d i n g a n d a s s i s t i n g i n t h e f i l i n g o f a

m a t e r i a l l y f

a l s e c o r p o r a t e r e t u r n f

o r 2 0 0 1 ( C o u n t S i x )

, w e n e e d n o t a d d r e s s

w h e t h e r t h e d i s t r i c t c o u r t ’ s i n s t r u c t i o n w o u l d h a v e c o n s t i t u t e d p l a i n e r r o r r e q u i r i n g

a n e w t r i a l i f t h e e v i d e n c e h a d b e e n s u f f i c i e n t

. S e e M o u n t

, 1 6 1 F

. 3 d a t 6 8 0 n

. 4

.

W e r e v e r s e t h e i r c o n v i c t i o n s o n t h i s c o u n t a n d r e m a n d w i t h d i r e c t i o n s t o e n t e r a

j u d g m e n t o f a c q u i t t a l o n t h i s c o u n t a n d f o r r e s e n t e n c i n g f

o r K o t t w i t z

. 4 7

I I I

. C O N C L U S I O N

F o r t h e r e a s o n s t a t e d a b o v e

, w e A F F I R M K o t t w i t z ’ s

, J u n i o r ’ s

, a n d S e n i o r ’ s

c o n v i c t i o n s f

o r c o n s p i r a c y t o d e f

r a u d t h e I n t e r n a l R e v e n u e S e r v i c e ( C o u n t O n e )

.

W e V A C A T E J u n i o r ’ s a n d S e n i o r ’ s c o n v i c t i o n s f o r f i l i n g m a t e r i a l l y f

a l s e p e r s o n a l

i n c o m e t a x r e t u r n s f

o r 2 0 0 0 ( C o u n t s T h r e e a n d F o u r )

, a n d S e n i o r ’ s c o n v i c t i o n f o r

e v a d i n g t a x e s ( C o u n t F i v e )

, a n d R E M A N D f o r a n e w t r i a l

. W e R E V E R S E

K o t t w i t z ’ s

, J u n i o r ’ s

, a n d S e n i o r ’ s c o n v i c t i o n s f o r a i d i n g a n d a s s i s t i n g i n t h e f i l i n g

o f a m a t e r i a l l y f

a l s e c o r p o r a t e r e t u r n f

o r 2 0 0 1 ( C o u n t S i x ) a n d R E M A N D w i t h

Kottwitz did not appeal he r sentenc e and the rec ord of he r sentenc ing is not bef ore us. 4 7

We note, howeve r, that bec ause the sentenc ing on multiple counts may ref lect interde pendenc e

of the c ounts of conviction, re sentenc ing is a ppropriate . See United States v. Watkins, 147 F.3d

1294, 1296 n.3, 1297 (11th Cir. 1998).

66d i r e c t i o n s t o e n t e r a j u d g m e n t o f a c q u i t t a l o n t h i s c o u n t a n d f o r r e s e n t e n c i n g o f

K o t t w i t z o n C o u n t O n e

.

67B I R C H

, C i r c u i t J u d g e

, c o n c u r r i n g i n p a r t a n d d i s s e n t i n g i n p a r t :

I f u l l y c o n c u r w i t h t h e m a j o r i t y ’ s a n a l y s i s o f a n d r u l i n g o n t h e d i s t r i c t

c o u r t ’ s f a i l u r e t o p r o p e r l y c h a r g e t h e j u r y

. W i t h r e g a r d t o t h e m a j o r i t y ’ s

c o n c l u s i o n t h a t t h e r e c o r d r e f l e c t s a d e q u a t e e v i d e n c e t o s u s t a i n t h e p r o s e c u t i o n ’ s

b u r d e n o n t h e c o n s p i r a c y c h a r g e s

, I r e s p e c t f u l l y d i s s e n t

.

M i n d f u l o f t h e p r o s e c u t i o n ’ s b u r d e n t o p r o v e g u i l t b e y o n d a r e a s o n a b l e

d o u b t

, a r e v i e w o f t h e r e c o r d m a n i f e s t s t h a t t h e r e w a s n o d i r e c t o r c i r c u m s t a n t i a l

e v i d e n c e p r e s e n t e d t h a t K o t t w i t z a n d t h e M a r c h e l l e t t a s c o n s p i r e d t o i m p e d e t h e

I R S

. T h e r e w a s n o e v i d e n c e t h a t s h o w e d t h a t K o t t w i t z k n e w h o w t h e

M a r c h e l l e t t a s w o u l d t r e a t a n y o f t h e C i r c l e e x p e n s e s w h i c h b e n e f i t t e d t h e m

p e r s o n a l l y o n t h e i r t a x r e t u r n s

, h a d a n y i n p u t i n t h e p r e p a r a t i o n o f t h e i r t a x r e t u r n s

,

o r e v e r s a w t h e i r t a x r e t u r n s

. T h e r e w a s n o e v i d e n c e p r e s e n t e d s h o w i n g t h a t

K o t t w i t z e v e r e v e n s a w t h e C o n s u l t i n g A g r e e m e n t o r t h e P a y m e n t G u a r a n t e e

b e t w e e n S e n i o r a n d N a s t a s i & A s s o c i a t e s

, h a d a n y d i r e c t k n o w l e d g e o f t h e t e r m s

o f t h o s e d o c u m e n t s

, o r h a d a n y i n f o r m a t i o n a s t o t h e i r t a x t r e a t m e n t

. A s S e n i o r

m a i n t a i n s

, t h e d o c u m e n t s

– a n d t h e I R S ’ s a c c e p t a n c e o f C i r c l e ’ s t a x e s o n t h e f i r s t

t h r e e m o n t h s ’ p a y m e n t s o f t h e $ 6

, 0 0 0 c o n s u l t i n g f e e s

– s u p p o r t a c o n c l u s i o n t h a t

t h e p a y m e n t s w e r e i n c o m e t o C i r c l e a n d n o t t o S e n i o r

. T h e w r i t t e n c o n s u l t i n g

68a g r e e m e n t p r o v i d e d t h a t N a s t a s i w a s r e t a i n i n g t h e s e r v i c e s o f S e n i o r a n d C i r c l e

,

a n d N a s t a s i ’ s I T p e o p l e c o n s u l t e d w i t h C i r c l e ’ s I T p e o p l e

. S e n i o r w a s a s a l a r i e d

e m p l o y e e o f C i r c l e a n d p a i d i n c o m e t a x e s b a s e d o n a W

- 2 t h a t h e r e c e i v e d f r o m

C i r c l e

. T h e N a s t a s i m o n i e s w e r e r e c l a s s i f i e d b y S c h w a r t z s o a s n o t t o b e

r e c o g n i z a b l e a s t a x a b l e i n c o m e t o C i r c l e a n d S c h w a r t z f a i l e d t o i n f

o r m S e n i o r o f

t h e a d j u s t m e n t o r t o a d v i s e h i m t h a t h i s 2 0 0 0 t a x r e t u r n s n e e d e d t o b e a m e n d e d t o

r e f l e c t t h e a d

j u s t m e n t

. T h e r e w a s n o e v i d e n c e t h a t ( 1 ) K o t t w i t z d i r e c t e d t h e

r e a d j u s t m e n t o f S e n i o r ’ s p a y m e n t s a s t a x a b l e i n c o m e t o S e n i o r

, ( 2 ) a t t e m p t e d t o

c o v e r u p t h e o r i g i n a l c l a s s i f i c a t i o n o f t h e p a y m e n t s

, o r ( 3 ) S e n i o r k n e w o f t h e

r e a d j u s t m e n t o f t h e s e p a y m e n t s

. T h e r e w a s n o e v i d e n c e p r e s e n t e d t h a t e i t h e r

J u n i o r o r S e n i o r d i r e c t e d a n y a c c o u n t e n t r i e s i n t o C i r c l e ’ s a c c o u n t s

. T h e

c o n s t r u c t i o n c o s t s f

o r C r a b a p p l e a n d N e w p o r t B a y w e r e s e t u p a s s e p a r a t e a c c o u n t s

i n C i r c l e ’ s b o o k s

, a n d a l l e x p e n s e s w e r e t r a c k e d w i t h i n t h o s e a c c o u n t s

. T h e r e w a s

n o e v i d e n c e t h a t K o t t w i t z m a d e a n y d e c i s i o n s r e g a r d i n g t h e N e w p o r t B a y p r o p e r t y

o r h o w i t w a s

, o r w a s n o t

, t r e a t e d o n C i r c l e ’ s b o o k s o r b y S e n i o r

. T h e r e w a s n o

e v i d e n c e t h a t K o t t w i t z e v e r s a w C i r c l e ’ s t a x r e t u r n s o r h a d a n y i n p u t o t h e r t h a n

p r o v i d i n g d o c u m e n t a t i o n f o r S c h w a r t z

. T h e r e w a s n o e v i d e n c e t h a t K o t t w i t z h a d

a n y i n v o l v e m e n t i n t h e p r e p a r a t i o n

, e x e c u t i o n o r s u b m i s s i o n o f J u n i o r ’ s o r

69S e n i o r ’ s t a x r e t u r n s o r k n e w h o w C i r c l e ’ s p a y m e n t s f o r t h e h o m e c o n s t r u c t i o n a n d

o t h e r e x p e n s e s w e r e t r e a t e d i n J u n i o r a n d S e n i o r ’ s p e r s o n a l t a x r e t u r n s

.

T h e r e w a s n o e v i d e n c e t h a t s u g g e s t s t h a t K o t t w i t z o r t h e M a r c h e l l e t t a s k n e w

t h a t C i r c l e w o u l d f

i l e a f a l s e 2 0 0 1 t a x r e t u r n

. K o t t w i t z a n d t h e M a r c h e l l e t t a s

n e v e r s a w t h e t a x r e t u r n b e f o r e i t w a s f

i l e d o r t o o k a n y a c t i o n i n p r e p a r a t i o n o f i t

w i t h a n e x p e c t a t i o n t h a t i t w o u l d b e f i l e d w i t h m a t e r i a l l y f

a l s e s t a t e m e n t s

.

M o r e o v e r

, t h e p e r s o n a l e x p e n s e e n t r i e s i n C i r c l e ’ s b o o k s c o u l d n o t h a v e

b e e n c h a r a c t e r i z e d a s d i v i d e n d s o r b a l a n c e d i n r e l a t i o n t o J u n i o r ’ s a n d S e n i o r ’ s

s h a r e h o l d e r i n t e r e s t s u n t i l t h e e n d o f C i r c l e ’ s a c c o u n t i n g y e a r

. T h e d e t e r m i n a t i o n

o f t h e s e e x p e n s e s f

r o m 1 A p r i l 2 0 0 0 u n t i l 3 1 M a r c h 2 0 0 1 a s t a x a b l e i n c o m e c o u l d

a l s o n o t o c c u r u n t i l t h e e n d o f C i r c l e ’ s f i s c a l y e a r

, a f

t e r 3 1 M a r c h 2 0 0 1

, a n d t h e

a d j u s t e d e n t r i e s w e r e m a d e i n S e p t e m b e r 2 0 0 1

. A t t h a t t i m e

, t h e M a r c h e l l e t t a s

r e c o g n i z e d t h e i r c o n s t r u c t i v e i n c o m e a n d p a i d t h e i r r e s p e c t i v e t a x e s

. T h o s e

d e t e r m i n a t i o n s c o u l d n o t b e m a d e f o r t h e 2 0 0 0 t a x y e a r

. T h e c o n s p i r a c y

c o n v i c t i o n s s h o u l d b e r e v e r s e d

.

B e c a u s e t h e g o v e r n m e n t d i d n o t s h o w t h a t K o t t w i t z o r t h e M a r c h e l l e t t a s

k n e w o f a t a x c o n s p i r a c y o r t h a t K o t t w i t z o r t h e M a r c h e l l e t t a s v o l u n t a r i l y a n d

k n o w i n g l y a g r e e d t o i m p e d e t h e I R S ’ s c o l l e c t i o n o f t a x e s

, i t f a i l e d o n i t s b u r d e n o f

p r o o f w i t h r e s p e c t t o t h e c o n v i c t i o n s o n C o u n t O n e

.

70