Opinion ID: 3013496
Heading Depth: 3
Heading Rank: 2

Heading: Aiding and Assisting Convictions

Text: We first address the Gambones’ convictions for aiding and assisting their employees in the preparation of false individual income tax returns in violation of I.R.C. S 7206(2). Section 7206(2) provides: Any person who . . . (1) [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 . . . shall be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 3 years, or both, together with the costs of prosecution. The Gambones advance a two-part argument challenging their convictions under section 7206(2). The first step in their reasoning raises a purely legal question. Casting their conduct as, at most, a scheme to provide false W-2s, they argue that the Internal Revenue Code allowed the government to prosecute them only under I.R.C. S 7204. Section 7204 sets forth a misdemeanor offense for willful furnishing of a false W-2 to an employee as follows: In lieu of any other penalty provided by law (except the penalty provided by section 6674) any person required under the provisions of section 6051 [governing an employer’s obligation to issue, inter alia, W-2 forms to employees] to furnish a statement who willfully furnishes a false or fraudulent statement or who willfully fails to furnish a statement in the manner, at 7 the time, and showing the information required under section 6051, or regulations prescribed thereunder, shall, for each such offense, upon conviction thereof, be fined not more than $1,000, or imprisoned not more than 1 year, or both. The Gambones argue that this provision’s in lieu of language indicates that section 7204 provides the exclusive penalty for willfully furnishing a false W-2 to an employee. They further note that the three-year statute of limitations for prosecutions under section 7204 had expired by the time the government initiated its case under section 7206(2). The Gambones then argue that inasmuch as the government may prosecute a defendant for the willful furnishing of a false W-2 to an employee only under section 7204, the evidence was insufficient to sustain a conviction under section 7206(2) as that section requires proof of conduct beyond the mere furnishing of false W-2s. They contend that they did not take affirmative action with respect to their employees’ false tax returns beyond furnishing the false W-2s, and that the jury could not appropriately consider the furnishing of those W-2s or other conduct facilitating it, such as paying money off payroll and underreporting on employee time cards, in connection with the section 7206(2) charges. The Gambones argue that if we remove this evidence from the equation there will not be an evidentiary basis for their section 7206(2) convictions.
As the district court noted, this case presents an issue of first impression in this court as we have not interpreted explicitly the in lieu of language of section 7204, and we have not had the occasion to discuss the relationship between sections 7204 and 7206(2). See Gambone , 167 F. Supp. 2d at 820. The district court, relying primarily on United States v. Hughes, Crim. A. No. CR 86-98, 1987 WL 33806 (N.D. Ohio Nov. 13, 1987), held that conduct which involves, but is not exclusively limited to, the provision of false W-2s can be sufficient for a S 7206(2) violation. Thus, 8 the mere fact that the provision of false W-2s was a part of the case does not mean that a S 7206(2) violation is not possible. Gambone 167 F. Supp. 2d at 820. The court thus rejected the Gambones’ contention that it should disregard entirely the furnishing of the W-2s in assessing the sufficiency of the evidence supporting the section 7206(2) convictions. Nonetheless, when moving on to examine the sufficiency of the evidence, the court found that the evidence was sufficient to sustain the section 7206(2) verdicts even excluding consideration of the W-2s themselves. Id. at 821. In Hughes, the district court concluded thatthe simple fact of providing, or helping to provide, an individual with a fraudulent W-2 is not punishable under S 7206(2) because of S 7204’s ‘in lieu of’ provisions. Hughes, 1987 WL 33806, at . The court found, however, that[a]s long as there are other actions violative of S 7206, the fact that the defendant may also have provided an individual with a false W-2 does not prevent a S 7206 conviction. Id. (citing United States v. MacKenzie, 777 F.2d 811 (2d Cir. 1985); United States v. Isaksson, 744 F.2d 574 (7th Cir. 1984); United States v. Barnes, 313 F.2d 325 (6th Cir. 1963)). Having so concluded, the court denied the defendant’s motion for judgment of acquittal or for a new trial, finding that, [b]ased on the evidence presented, the jury could have found beyond a reasonable doubt that [the defendant] additionally counseled [an employee] to understate her income on her income tax return, by reporting as income only that amount shown on the W-2 and not the additional income which she received as ‘expenses.’  Id. In other words, the defendant violated section 7206(2) by going beyond merely providing false W-2s and, in fact, counseling an employee to understate income. The defendant appealed and the Court of Appeals for the Sixth Circuit reversed even though it did not find that the district court erred in its legal analysis. Rather, the court of appeals held that there was insufficient evidence that the defendant counseled the employee to understate her income, noting that the employee had denied receiving such advice. Hughes v. United States, 899 F.2d 1495, 1500-01 (6th Cir. 1990). The court of appeals did not clarify whether 9 section 7206(2) requires proof of actual counseling or whether something more than furnishing false W-2s but less than actual counseling would support a conviction.6 Our cases have not been more helpful with respect to the issue here than that of the court of appeals in Hughes. In a case not involving furnishing of false W-2s, we held that [t]o establish aiding and abetting the filing of a false tax return ‘there must exist some affirmative participation which at least encourages the perpetrator.’  United States v. Graham, 758 F.2d 879, 885 (3d Cir. 1985) (quoting United States v. Buttorff, 572 F.2d 619, 623 (8th Cir. 1978) (internal quotation omitted)). In Graham, we held that there was sufficient evidence to affirm a defendant’s conviction where the defendant, who was a member of a group that opposed taxation, set up a Swiss bank account for another member and advised him not to pay taxes on the interest earned on that account because the U.S. had no jurisdiction over it. Id. Likewise, where a defendant had provided false invoices to certain taxpayers as documentation of business expenses and advised those taxpayers to use those expenses as tax deductions improperly, we found sufficient evidence to sustain his conviction under section 7206(2). United States v. McCrane, 527 F.2d 906, 913 (3d Cir. 1975), vacated on other grounds, 427 U.S. 909, 96 S.Ct. 3197 (1976). Finally, other courts of appeals, in cases involving similar factual scenarios where defendant employers disguised certain wages by issuing paychecks from nonpayroll accounts, have affirmed convictions under section 7206(2) where the defendants’ conduct included, but apparently was not limited to, furnishing false W-2s. See, e.g., MacKenzie, 777 F.2d at 820; Isaksson, 744 F.2d at 577-78. These courts, however, did not address specifically the relationship between sections 7204 and 7206(2). The legislative history of section 7204, cited by both sides, clearly establishes that Congress intended the in lieu of language to ensure that the section 7204 penalties displaced the more severe penalties in other provisions of _________________________________________________________________ 6. The court of appeals affirmed in part and reversed in part on other aspects of the appeal that we need not describe. 10 the Internal Revenue Code setting out both felonies and misdemeanors. H.R. Rep. No. 2333, 77th Cong., 2d Sess. at 132 (1942); S. Rep. No. 1631, 77th Cong., 2d Sess. at 172 (1942) (These penalties are prescribed in lieu of the penalty imposed by S 145 of the Code, and are much less severe than those displaced.). Beyond this point, which, in any event, the in lieu of phrasing of section 7204 itself adequately captures, the parties’ citations to section 7204’s legislative history are largely inconclusive, inasmuch as that history fails to address its relationship to section 7206(2). On the other hand, the timeline of amendments to the Code does lend some support to the government’s position that evidence of the Gambones’ furnishing of false W-2s can be used to support the section 7206(2) convictions. Congress enacted section 7204 as I.R.C. S 470(a) in 1942. Revenue Act of 1942, Pub. L. No. 77-753, 56 Stat. 798, 892.7 At that time section 7206(2) already was in place in the form of I.R.C. S 3793(b) in the Internal Revenue Code of 1939, Congress having enacted it in 1924. See Revenue Act of 1924, 26 U.S.C. S 1267 (1926). Conduct designed to assist an employee in filing a false return therefore already was punishable under section 3793(b), while failing to furnish a statement required under the Code (although not specifically applicable to the W-2 context, inasmuch as employers were not yet required to withhold) was punishable under I.R.C. S 145(a). Taking the legislative history at its word, section 470(a), enacted as part of the new withholding regime, was intended to displace the penalties under section 145, which set out misdemeanors in subsection (a), including for failing to furnish a statement, and felonies in subsection (b). There is no _________________________________________________________________ 7. Congress first required employers to withhold employees’ income taxes in 1942; the 5% World War II Victory Tax on most employees’ gross wages was the first vehicle for doing so. Carolyn C. Jones, Class Tax to Mass Tax: The Role of Propaganda in the Expansion of the Income Tax During World War II, 37 Buff. L. Rev. 685, 694-99 (1989); Peter W. Colby, Comment, Federal Withholding on Employee Fringe Benefits for Income and Social Security Taxes, 70 Cal. L. Rev. 178, 180-81 & n.19 (1982). The following year, Congress amended the Code to make withholding applicable to all income tax. Id. 11 indication, however, that Congress intended section 470(a), now section 7204, to displace the penalty under section 3793(b). The legislative history therefore lends some support to the government’s argument that Congress did not intend section 7204 to preclude felony prosecutions of conduct involving, but not limited to, furnishing false statements. Moreover, nothing in the language of either section 7204 or section 7206(2) or in the relevant legislative history, suggests that a jury may not consider the furnishing of false W-2s in deciding whether a defendant committed an offense under section 7206(2). Read together, these provisions stand for the less than remarkable proposition that a person who merely furnishes false W-2s is only culpable enough to deserve a misdemeanor conviction, while a person who goes further and willfully causes a false return to be filed is more culpable and is guilty of a felony. Thus, although the in lieu of language suggests that proof of the mere furnishing of false W-2s is insufficient as a matter of law to support a section 7206(2) conviction,8 such evidence plus any other evidence suggesting a defendant’s intent to cause a false return to be filed form a proper evidentiary basis for such a conviction. Indeed, MacKenzie and Isaksson implicitly applied this principle. Thus, the government may prosecute conduct involving, but not limited to, furnishing false W-2s to employees under section 7206(2). Under Graham, the relevant inquiry is whether the defendant engages in some affirmative participation which at least encourages the employee to prepare or present a false return. Graham, 758 F.2d at 885. Evidence of such affirmative participation that includes, but is not limited to, furnishing false W-2s is sufficient to sustain a conviction under that provision.9 Finally, such _________________________________________________________________ 8. Allowing the jury to infer intent to aid and assist from the mere furnishing of false W-2s would subject a defendant who had engaged in precisely the conduct prohibited by section 7204--no more and no less-- to a punishment other than that prescribed by that section, thus ignoring the in lieu of language. 9. The Gambones also argue that other conduct ancillary to furnishing false W-2s--details such as the preparation of employee time cards, the 12 affirmative participation need not rise to the level of actual counseling, as the Gambones sometimes seem to suggest, as long as it at least encourages the preparation or presentation of a false return.
Given the foregoing framework, the government presented sufficient evidence to sustain the 59 section 7206(2) aiding and assisting convictions. To be sure, there was no direct evidence that either of the Gambones explicitly counseled any of the 59 employees to underreport their income. There was, however, ample circumstantial evidence to allow the jury to conclude that the Gambones aided and assisted them in doing so by encouraging exactly that behavior. The essential elements of an offense under section 7206(2) are (1) that defendant aided, assisted, procured, counseled, advised or caused the preparation and presentation of a return; (2) that the return was fraudulent or false as to a material matter; and (3) that the act of the defendant was willful. I.R.C. S 7206(2). See United States v. La Haye, 548 F.2d 474, 475 (3d Cir. 1977); see also United States v. Hooks, 848 F.2d 785, 788-89 (7th Cir. 1988). _________________________________________________________________ use of separate, nonpayroll checks for overtime wages, and the extra accounting necessary to accommodate a false W-2 scheme--should in effect merge with the furnishing of false W-2s, so that evidence of such conduct likewise would be insufficient on its own to sustain a section 7206(2) conviction. Because this position lacks any support in the statutory text, legislative history, and applicable caselaw, we reject it. If a defendant goes beyond merely furnishing false W-2s, and if the jury finds his conduct to constitute affirmative participation that encourages employees to file false returns, it may convict him of a felony under section 7206(2). The Gambones suggest that, becauseevery fraudulently understated W-2 opens the possibility of such ancillary conduct, in every section 7204 case the facts also would support a section 7206(2) conviction. Joint Br. of Appellants at 26. Nevertheless we are satisfied that persons who furnish false W-2s may avoid felony convictions so long as they either eschew such ancillary conduct altogether, or at least engage in such conduct in such a way that a jury does not believe to constitute affirmative participation that willfully encourages employees to file false returns. 13 There appears to be no dispute as to the falsity of the employees’ returns and as to the materiality of the false statements. The Gambones challenge the sufficiency of the evidence only on the issue of whether they aided or assisted the filing of those returns and whether their actions were willful. Through the testimony of two controllers of Gambone Brothers, Frank Ruser, who worked in that position from 1972 to 1981, and Thomas Gaasche, who was controller from 1985 until April 2000, the government established that there was a scheme to pay employees’ overtime wages from nonpayroll accounts, payingstraight time, and failing to withhold tax from the overtime wages and to disclose those wages to the IRS. Thus, when Ruser expressed his concerns about how overtime was paid, Tony Gambone responded, It’s my business, stay out of it. Id. at 662. Similarly, Gaasche testified: I was probably only working there, you know, six to ten weeks when I--you know, looking at payroll, and I realized at that point everything going through payroll was just a flat 40 hours. And, you know, I thought it-- I don’t like this, this seemed improper to me. And I went to Jack Gambone and I went in his office and I said, Jack, I don’t--I don’t think we’re handling payroll right, I don’t know why we’re doing this, why is it only showing 40 hours and then the other is on a separate check? And I don’t recall verbatim what he said, but basically he said, well, this is their mad money, you know, they take one check home and the old lady don’t have to know about the other one. And I said--at that time I said, well, I don’t know why you’d stick your neck out for them and help them hide money from their wives. I said, you know, if it gets audited you’re probably going to wind up paying both your share and their share of the social security and Medicare taxes. Id. at 1731-32. Notwithstanding the controllers’ concerns the practice persisted. In 1995 the IRS audited Gambone Brothers which then for a short time began paying overtime through payroll. After some time, however, Gaasche confronted Tony Gambone about what he suspected was a false expense reimbursement, and Gambone responded, [I]t’s my 14 company. I can pay whoever I want however I want and as much as I want. Id. at 1828. The government also produced the testimony of four employees who worked under the controllers in the accounting department, a receptionist who worked at Gambone Brothers for over 20 years, and 20 field workers and supervisors, all of whom testified that they received overtime wages off payroll. Moreover, the witnesses were aware that Gambone Brothers neither withheld tax from nor reported those wages, and they understood that they should not report those wages to the IRS either. Many witnesses also testified that Gambone Brothers gave employees who were to receive raises the option of having the money paid on or off payroll. The Gambones suggest that the testimony of these 25 employees is insufficient to prove that they willfully aided or assisted the preparation of false returns because none of the employees testified that the Gambones directly counseled them to do so. As we discussed above, however, the government did not have to prove that the Gambones directly counseled employees to file false returns. Rather, it was sufficient for the government to demonstrate that they engaged in some affirmative conduct that at least encouraged them to do so. The Gambones contend that their role was limited to providing false W-2s and that they had no interest in whether or not the employees reported their overtime wages. The overwhelming weight of the evidence, however, establishes that this is not an accurate characterization of the Gambones’ conduct. Given the testimony of all of the witnesses just mentioned, there plainly was sufficient circumstantial evidence to support a finding that the Gambones engaged in a long-running scheme to encourage their employees to file false returns. The Gambones not only furnished false W-2s to scores of employees, but also created false employee time cards, engaged in intricate and deceptive bookkeeping intended to mask underreported income, and issued checks to employees from nonpayroll accounts for unreported overtime wages. The parade of employees testifying that they understood the Gambones’ actions as a sign that they should not report their overtime wages is evidence in itself that the 15 Gambones, through this pervasive, ongoing scheme, took affirmative steps to encourage the employees to file false returns.10 Furthermore, some witnesses testified that agents of the Gambones, including John Zangari, a superintendent involved in hiring new employees, and certain foremen informed them more specifically that Gambone Brothers’ straight-time policy meant that they should not worry about reporting overtime income. When pressed further, Zangari told these employees that Gambone Brothers would take care of any problems that might arise out of employees’ failure to report overtime income. One employee testified Zangari told him that he should quit if he did not want to be paid under the straight-time system, and Zangari testified that when he told Jack and Tony Gambone about another employee’s request that taxes be withheld from all of his pay, the Gambones told him the employee’s only options were to receive a straight-time check, not to work overtime at all, or to quit. Finally, Zangari, who, from 1989 to 1993, was the company’s overall superintendent, overseeing all jobs performed during that time period, testified that he informed all newly hired employees upfront of the straight-time policy, and that he spoke daily with Tony Gambone, mentioning in their discussions every new employee hired. Cumulatively, this evidence supports an inference that the Gambones, either themselves or through their agents, encouraged employees not to report overtime income. Employees were informed that Gambone Brothers would pay straight time for overtime, not report overtime income, and take care of any problems that might arise. As a result, some employees testified that they felt obligated not to report overtime income for fear of blowing the whistle on Gambone Brothers or on their fellow employees. The evidence supports the inference that the Gambones intended exactly that result, inasmuch as inconsistent reporting would have pointed to their own underreporting, _________________________________________________________________ 10. Curiously, the Gambones appear to concede that there was evidence supporting this inference. Joint Br. of Appellants at 26 (There was also evidence enough to conclude that the Gambones intended to make it possible for their employees not to report all of their wage income by issuing false W-2s, and that some employees so understood it.). 16 which they had taken great pains to hide by creating false employee time cards and manipulating the company’s books. In any event, although there was little evidence suggesting that the Gambones explicitly advised employees to file false returns, there is ample circumstantial evidence showing that they took affirmative steps to encourage them to do so. Accordingly, a reasonable jury could have concluded that the Gambones knowingly aided and assisted in the preparation of tax returns of 59 employees that contained materially false statements and, thus, the evidence supported the convictions for violations of section 7206(2).