Source: http://law.justia.com/cases/federal/appellate-courts/ca8/09-3292/093292p-2011-07-21.html
Timestamp: 2013-05-22 16:10:53
Document Index: 50897622

Matched Legal Cases: ['§ 7202', '§ 7202', '§ 2702', '§ 144', '§ 2702', '§ 7202', '§ 7203', '§ 7201', '§ 7202', '§ 6011', '§ 31', '§ 31', '§ 3102', '§ 7206', '§1', '§2', '§ 7206']

United States v. McLain :: Eighth Circuit :: US Courts of Appeals Cases :: US Federal Case Law :: US Case Law :: US Law :: Justia
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Justia.com Opinion Summary: Defendant was convicted of failing to account for and pay employment taxes under 26 U.S.C. 7202, sentenced to 48 months imprisonment and fined $75,000. Defendant appealed his conviction, the calculation of loss to the government, and his fine. The court held that the district court did not err under Federal Rule of Evidence 404(b) in admitting evidence relating to defendant's compliance with Minnesota tax law. The court held however, that the district court made insufficient findings to conclude that defendant had violated section 7206(2). Accordingly, the court vacated the calculation of loss and remanded for resentencing on the existing record. Because the court remanded for resentencing, it did not reach defendant's remaining arguments.Receive FREE Daily Opinion Summaries by Email
Court Description:	Criminal case - criminal law and sentencing. Evidence of defendant's compliance with Minnesota state tax law was relevant in his prosecution for failing to account for and pay employment taxes under 26 U.S.C. Sec. 7202 as it went to willfulness and because defendant's beliefs regarding the status of his employees was a central issue at trial; jury instructions concerning the elements of a Section 7202 offense were not erroneous; evidence was sufficient to support defendant's conviction; with respect to defendant's sentencing, he could have violated Section 7206(2) by counseling others to file false tax returns even if they never filed a return; however, the section cannot be violated if a false return is never prepared, and the district court made no findings as to whether the other persons prepared returns that were false or fraudulent as to a material matter; as a result, the matter must be remanded for recalculation, based on the existing record, of the amount of loss.
No. 09-3292
Freedom Law School; We the People *
Amici on behalf of Appellant.
Francis Leroy McLain was convicted of failing to account for and pay
employment taxes, see 26 U.S.C. § 7202, and sentenced to 48 months imprisonment
and fined $75,000. McLain appeals his conviction, the calculation of loss to the
government, and his fine. We affirm McLain’s conviction, but we vacate the district
court’s calculation of loss to the government and remand for resentencing.
McLain managed Kirpal Nurses, LLC, a temporary staffing agency for nurses.
From 2002 to 2005, Kirpal Nurses neither filed the Employer’s Quarterly Federal Tax
Returns, Form 941, with the Internal Revenue Service (IRS) nor payed federal
employment taxes. McLain was charged with a nine-count indictment for failing to
account for and pay employment taxes in violation of 26 U.S.C. § 7202. Each count
encompassed one calender quarter in which the employment taxes were not accounted
for or paid, from the fourth quarter of 2002 through the fourth quarter of 2005.
At trial, McLain asserted that Kirpal Nurses was not required to account for or
pay employment taxes because the nurses were independent contractors. In the
alternative, he argued that even if he was wrong, he held a good faith belief that the
nurses were independent contractors and thus he did not have the requisite mens rea
to be liable under section 7202. After a nine day trial, the jury found him guilty on
The Presentence Report (PSR) calculated the tax loss to the government based
on the amount of employment taxes Kirpal Nurses failed to account for and pay with
respect to Kirpal’s nursing staff. The government objected to the PSR’s calculation,
arguing that the tax loss should include McLain’s other attempts to defraud the IRS.
In particular, the government asserted that the loss should include the amount of tax
deductions that McLain had purported to “give” to two acquaintances, Daniel Shetka
and Brad Hall.1 After a hearing, the district court included the tax deductions “given”
The government also argued that the tax loss should encompass the
employment taxes that Kirpal Nurses failed to account for and pay with respect to
to Shetka and Hall in its calculation, which resulted in an offense level of 22. With
an offense level of 22 and a Criminal History Category I, McLain’s advisory
Guidelines range was 41 to 51 months imprisonment. The district court sentenced
McLain to 48 months imprisonment and imposed a $75,000 fine.
McLain argues that the district court erred under Federal Rule of Evidence
404(b) in admitting evidence relating to McLain’s compliance with Minnesota tax
law. Because McLain objected to the evidence in limine and at trial, we review the
district court’s evidentiary ruling for abuse of discretion. United States v. Yarrington,
634 F.3d 440, 447 (8th Cir. 2011).
Rule 404(b) limits how evidence of other crimes, wrongs, or acts can be used
at trial. It states:
may, however, be admissible for other purposes, such as proof of
absence of mistake or accident . . . .
Kirpal’s office workers; McLain’s unpaid income taxes from 2000 to 2004; and tax
deductions that McLain had gifted to Larry McCormick. The district court accepted
the government’s argument with respect to the employment taxes that Kirpal Nurses
failed to account for and pay on its office workers and McLain’s unpaid income taxes,
but it found the government had not met its burden with respect to the tax deductions
that McLain allegedly gave to McCormick. These findings are not appealed.
Fed. R. Evid. 404(b). “Bad acts evidence is admissible if (1) it is relevant to a
material issue; (2) it is similar in kind and not overly remote in time to the crime
charged; (3) it is supported by sufficient evidence; and (4) its potential prejudice does
not substantially outweigh its probative value.” United States v. Gaddy, 532 F.3d
783, 789 (8th Cir. 2008) (quoting United States v. Jackson, 278 F.3d 769, 771 (8th
Section 7202 is violated only when an employer “willfully fails” to account for
and pay employment taxes, 26 U.S.C. § 2702, and at trial, McLain argued that he
believed he could treat the nurses as independent contractors rather than employees.
Minnesota law, however, requires nurse staffing agencies like Kirpal Nurses to certify
that they are treating nurses as employees, not independent contractors. Minn. Stat.
§ 144A.72., Subd. 1(9). The government sought to undermine McLain’s defense and
prove his willfulness by introducing evidence of his compliance with this Minnesota
statute. The district court agreed that such evidence was highly relevant to intent and
allowed the government to introduce evidence about the Minnesota statute, its terms,
the notice McLain received about it, and the forms he filed under the statute to certify
his compliance with it.
McLain argues that the evidence relating to his compliance with Minnesota law
was irrelevant to the federal charges and its potential prejudice substantially
outweighs its probative value. We agree with the district court that such evidence
was highly relevant to McLain’s willfulness, a necessary element of the crime
charged, 26 U.S.C. § 2702. In addition, because McLain’s beliefs were a central
issue at trial, the district court did not abuse its discretion in finding the evidence
highly probative and not outweighed by any unfair prejudice.
McLain challenges the district court’s understanding of the essential elements
of section 7202 by appealing the district court’s jury instructions and the district
court’s denial of his motions for acquittal. When objected to at trial, we review jury
instructions for abuse of discretion, and when not objected to, we review for plain
error. United States v. Gill, 513 F.3d 836, 849 (8th Cir. 2008). We review the denial
of a motion for acquittal de novo, “viewing the evidence in the light most favorable
to the guilty verdict, resolving all evidentiary conflicts in favor of the government,
and accepting all reasonable inferences supported by the evidence.” United States v.
Thompson, 533 F.3d 964, 970 (8th Cir. 2008) (quoting United States v. No Neck, 472
F.3d 1048, 1052 (8th Cir. 2007)).
First, McLain contends that an assessment of a tax deficiency is an essential
element of the crime and that the district court erred in not including it in the jury
instructions and not acquitting him because the government never proved an
assessment was made. The plain language of section 7202, however, does not require
an assessment of a tax deficiency:
provided by law, be guilty of a felony and, upon conviction thereof,
26 U.S.C. § 7202. In rejecting a similar claim with respect to 26 U.S.C. § 7203, we
stated, “The filing of an administrative assessment record is not required before a
criminal prosecution may be instituted under 26 U.S.C. §§ 7201-07. . . .” United
States v. Richards, 723 F.2d 646, 648 (8th Cir. 1983) (quoting United States v.
Voorhies, 658 F.2d 710, 714 (9th Cir. 1981)). The district court was correct to omit
the requirement of an assessment of a tax deficiency from the jury instructions and
to deny McLain’s motion for acquittal on the same basis.
Second, McLain argues that because an affirmative act is an essential element
of a crime under section 7202, the district court erred in not including an affirmative
act jury instruction. Section 7202, however, focuses on the lack of action taken by
employers and imposes liability for the “fail[ure] to collect or truthfully account for
and pay over” employment taxes. 26 U.S.C. § 7202. There is no affirmative act
requirement in the plain language of section 7202, and the district court correctly
excluded it from the jury instructions.
Third, McLain argues that because private employers are not required under
the tax code to file the Form 941 tax return, the failure to file Form 941 cannot be
prosecuted under section 7202. Thus, he submits the district court erred in instructing
the jury that it could convict on that basis and in denying his motion for acquittal on
Kirpal Nurses was required to file Form 941. Section 6011(a) of the Code
states, “When required by regulations . . . any person made liable for any tax imposed
by this title . . . shall make a return . . . .” 26 U.S.C.A. § 6011(a). The accompanying
regulations state that “every employer required to make a return under the Federal
Insurance Contributions Act [FICA] . . . shall make a return for each subsequent
calendar quarter . . . . Form 941 . . . is the form prescribed for making the return
required by this subparagraph.” 26 C.F.R. § 31.6011(a)-1T. We agree with the Sixth
Circuit that “return” is used first to mean “a remittance of taxes withheld from
employees” and then to mean the “specific form or statement documenting
information required by the Secretary.” United States v. Neal, 93 F.3d 219, 223 (6th
Cir. 1996). Thus, section 31.6011(a) states that every employer who has to withhold
FICA and income taxes shall file the Form 941 for each calender quarter. Id. Kirpal
Nurses is an employer required to withhold FICA and income taxes. See 26 C.F.R.
§ 31.3121(d)-2 (defining employer); 26 U.S.C. §§ 3102, 3402, and 3403 (requiring
FICA and income tax withholding and making employer liable for payment of the
taxes withheld). The district court was correct to instruct the jury that it could convict
McLain under section 7202 for failing to file Form 941 and to deny McLain’s motion
Fourth, McLain contends he cannot be held responsible for Kirpal Nurses’s
employment tax obligations under section 7202 and the district court erred in not
granting his motion for acquittal on this ground. He asserts that because section 7202
imposes liability solely on the person required to account for and pay employment
taxes, only the employer, Kirpal Nurses, could have violated the statute. The
Supreme Court in dicta, however, has broadly interpreted section 7202 to apply to an
employer’s officers. It has stated, “Sections 6672 and 7202 were designed to assure
compliance by the employer with its obligation to withhold and pay the sums
withheld, by subjecting the employer’s officials responsible for the employer’s
decisions regarding withholding and payment to civil and criminal penalties for the
employer’s delinquency.” Slodov v. United States, 436 U.S. 238, 247 (1978). Other
circuits have cited this language in holding an employer’s officials responsible under
section 7202. United States v. Thayer, 201 F.3d 214, 219-20 (3d Cir. 1999); United
States v. Gilbert, 266 F.3d 1180, 1184 (9th Cir. 2001). We agree and conclude that
the district court was correct to deny McLain’s motion for acquittal on this basis.
Fifth, McLain argues the district court confused the jury and undermined his
“good faith belief” defense by giving a “willful blindness” jury instruction. “Willful
blindness” instructions are appropriate in tax cases where the government must prove
“willfulness” as an element of the crime. United States v. Marston, 517 F.3d 996,
1003 (8th Cir. 2008). The district court did not err in giving the instruction.
Finally, McLain contends the district court miscalculated his Guidelines range
because the court included the amount of tax deductions that he improperly “gave”
to Shetka and Hall in its calculation of tax loss to the government. We review the
application of the Guidelines to the facts de novo and the factual findings underlying
the calculations of the Guidelines for clear error. United States v. Morse, 613 F.3d
787, 796 (8th Cir. 2010).
McLain contends the district court erroneously concluded that his tax
deduction “gifts” to Hall and Shetka violated 26 U.S.C. § 7206(2) and thus qualified
as relevant conduct. United States Sentencing Commission, Guidelines Manual,
§1B1.3. McLain sent Shetka a document counseling Shetka to write off a $10,000
investment that Shetka had never made, and McLain improperly “gave” Hall
$741,113.12 in mortgage interest deductions for mortgage interest payments and
other expenditures that McLain, not Hall, had made. According to McLain, because
the district court did not find that either Hall or Shetka had filed a return claiming the
false deductions, the district court should not have included in its calculation of the
tax loss to the government any tax losses attributable to the tax deduction McLain
“gifted” to Shetka or to Hall. If the tax losses associated with these “gifts” are not
included, the tax loss to the government is less than $1,000,000 and McLain’s base
offense level falls from 22 to 20. See U.S.S.G. §§2T1.6(a), 2T4.1.
We agree with the district court that liability under section 7206(2) can attach
even if a false return is never filed. Section 7206(2) is violated when a person:
[w]illfully aids or assists in, or procures, counsels, or advises the
preparation or presentation under, or in connection with any matter
arising under, the internal revenue laws, of a return, affidavit, claim, or
other document, which is fraudulent or is false as to any material matter,
whether or not such falsity or fraud is with the knowledge or consent of
the person authorized or required to present such return, affidavit, claim,
or document[.]
The plain language of the statute provides that a violation occurs when a person
counsels either the preparation or the presentation of a return. 26 U.S.C. § 7206(2);
see also United States v. Borden, 269 F. App’x 903, 905 (11th Cir. 2008)
(unpublished per curiam); United States v. Feaster, 843 F.2d 1392 (6th Cir. 1988)
(unpublished per curiam). Thus, McLain could have violated section 7206(2) by
counseling the preparation of a false tax return, even if neither Hall nor Shetka
actually filed a false return.
Section 7206(2) cannot be violated, however, if a false return is never prepared.
We have laid out three essential elements to a violation of section 7206(2): “(1) the
defendant aided, assisted, procured, counseled, advised or caused the preparation and
presentation of a return; (2) the return was fraudulent or false as to a material matter;
and (3) the act of the defendant was willful.” United States v. Ali, 616 F.3d 745, 755
(8th Cir. 2010). The second element—the return was fraudulent or false as to a
material matter—cannot be met if no return was actually prepared.
The district court made insufficient findings to conclude that McLain had
violated section 7206(2). The district court found that McLain willfully counseled
both Shetka and Hall to prepare a false return, but it made no finding as to whether
either Shetka or Hall actually prepared a return that was false or fraudulent as to a
material matter. Accordingly, we vacate the calculation of loss and remand for
resentencing on the existing record. Because we remand for resentencing, we do not
reach McLain’s remaining arguments concerning the district court’s calculation of the
amount of tax loss resulting from the section 7202 violation or his argument about the
We affirm McLain’s conviction but vacate his sentence and remand for