IRS bulletin 200202063: Criminal tax case summaries

Plain-English summary

This IRS Criminal Tax Bulletin summarizes court decisions from its August and October 2001 issue. The case notes address tax crimes and related questions about searches, forfeiture, and sentencing. Among them, the bulletin reports a decision upholding a false-return conviction involving unreported embezzlement income and a decision rejecting suppression of evidence as a remedy for an alleged disclosure of tax return information. Other notes discuss search warrant standards, innocent owner claims in forfeiture, and sentencing adjustments. The bulletin presents case reports for information and says it is not a directive.

Ruling snapshot

• Question: What recent court decisions concerned criminal tax and related enforcement issues?
• Outcome: Informational bulletin of case summaries, with no taxpayer-specific ruling.
• Key authorities: IRC §§ 6103, 7206(1), 7206(2), 7212(a); cases listed in the bulletin.

Full text (IRS public release)

Number: 200202063
October 15, 2001
Release Date: 1/11/2002
CT-134014-01/CC:CT
UIL: 9999.98-00

Criminal Tax Bulletin
Department of Treasury
Office of Chief Counsel
Internal Revenue Service
Criminal Tax Division

August/October This bulletin is for informational purposes. It is not a directive. 2001

SUPREME COURT CASES
Id. Further, the Court noted its decision is consistent with
the holding in Dow Chemical Co. v. United States, 106 S. Ct. 1819 (1986), where use of enhanced aerial
Use Of Thermal Imaging Device Is
photography of an industrial complex was upheld. In Dow
Warrantless Search
Chemical, “we found it ‘important that this is not an area
immediately adjacent to a private home where privacy
In United States v. Kyllo, 121 S. Ct. 2038 (2001), the expectations are most heightened.’” Kyllo, 121 S. Ct. at agents used an Agema Thermovision 210 imaging device to 2043. Ultimately, the Court remanded the case, holding determine the amount of heat emanating from Kyllo’s “where the Government uses a device that is not in general house. The scan showed the heat emanating from Kyllo’s public use, to explore details of the home that would garage roof and side wall was consistent with heat that previously have been unknowable without physical emanates from high intensity lamps typically used for intrusion, the surveillance is a ‘search’ and is presumptively indoor marijuana growth. The magistrate issued a warrant unreasonable without a warrant.” Id. at 2046. to search Kyllo’s home based, in part, on the thermal imaging scan. Kyllo unsuccessfully moved to suppress the evidence seized from his home. The Ninth Circuit affirmed
TITLE 26 AND TITLE 26
the district court’s denial of Kyllo’s motion to suppress, RELATED CASES holding there was neither a subjective nor objective expectation of privacy because the technology exposed no 26 U.S.C. § 7206(1) Requires Knowledge intimate details of Kyllo’s life, only hot spots on the home’s
That Illegal Income Is Taxable exterior. The Supreme Court reversed, holding such a use of technology without a warrant is presumptively In United States v. Ytem, 255 F.3d 394 (7th Cir. 2001), unreasonable.
Ytem was an accountant who embezzled $135,000.00 from his employer and failed to report the income on his federal In its Fourth Amendment analysis, the Court compared the income tax return. Ytem was convicted of willfully filing case to its decision in Katz v. United States, 88 S. Ct. 507, a false return in violation of 26 U.S.C. § 7206(1) and (1967), where the privacy of a conversation in a public sentenced to twenty-seven months in prison. Ytem phone booth was upheld. Reversing the approach appealed, arguing the evidence was insufficient to convict established in Katz “would leave the homeowner at the him as it was not proven he knew the illegal income was mercy of advancing technology - - including imaging taxable. technology that could discern all human activity in the home.” Kyllo, 121 S. Ct. at 2044. Although the dissent The Seventh Circuit affirmed the conviction, holding there argued the readings were on the exterior of the house, the was sufficient circumstantial evidence of Ytem’s intent to majority stated “just as a thermal imager captures only heat avoid paying the tax. The court noted a conviction under emanating from a house, so also a powerful directional § 7206(1) requires proof the defendant knew illegal income microphone picks up only sound emanating from a house.”
is taxable, and acknowledged there was no direct evidence by undercover agents or utilizing cooperating witness as a Ytem knew the embezzled funds should have been reported. result of Oregon’s interpretation of its lawyer ethics rules. The circumstantial evidence, however, was more than enough to convict. Ytem was an experienced accountant, he Shortly after the Gatti decision, the Oregon bar appointed prepared the fraudulent tax return, the amount of money a study group which compiled two alternative proposals to taken was substantial, and he used the money for ordinary amend DR 1-102. The Supreme Court of Oregon, however,
expenses. Id. at 396-97.
did not like the proposal, finding it gave attorneys too much
latitude. Consequently, the Oregon bar has since
Furthermore, the court noted, it is widely known illegal reconvened another study group to revamp the original income is taxable. “Everyone knows that Al Capone, for proposals. example, was nailed for income-tax evasion, not for the bootlegging, loan-sharking, extortion and prostitution that Hyde Amendment Award Of Fees generated the income. Accountants know better than anyone except tax lawyers that illegal income is taxable.” In United States v. Knott, 256 F.3d 20 (1st Cir. 2001), the Id. at 397. Therefore, absent evidence to show Ytem's lack First Circuit held, in order for a defendant to obtain an of knowledge, such as "some psychiatric disorder that had award of attorneys’ fees pursuant to the Hyde Amendment, deranged his knowledge of elementary tax law,” Id., the 18 U.S.C. § 3006A, the defendant must show not only that possibility Ytem did not know the illegal income was the prosecution was unfounded but also that the taxable was too remote to compel an acquittal. The court circumstances objectively demonstrate the government found it unlikely Ytem “thought embezzled income tax- harbored malice or an intent to harass or annoy. Further, free–a token of the government’s affection for embezzlers the court held the Hyde Amendment’s incorporation of the and other thieves,” and affirmed the judgment. Id. Equal Access to Justice Act’s (EAJA) “procedures and
limitations” includes EAJA’s limits on the net worth of
DOJ Sues Oregon Bar Asserting The Need
defendants eligible for an award of fees. Here the
For ‘Prosecutorial Exception’
corporation and its owner were indicted for violations of the
Clean Water Act. The government voluntarily dismissed
In United States v. Oregon State Bar, No. 6-01-06168-HO the criminal action following the court’s suppression of (D. Or. May 23, 2001), the Department of Justice (“DOJ”) certain water sampling results. The district court awarded responded to last year’s decision of the Oregon Supreme the corporation fees, but denied the owner fees based on the Court, by filing suit seeking to enjoin the Oregon bar from limitation in EAJA § 2412(d). On appeal, the First Circuit trying to discipline government lawyers who engage in affirmed the district court’s denial of attorneys’ fees to the subterfuge as part of undercover and “sting” operations. owner and reversed the award of fees to the corporation. DOJ filed suit because of concern over broad dicta in a The court determined the procedures and limitations of lawyer disciplinary decision issued last year by the Oregon EAJA § 2412(d) applied to applications for fees under the Supreme Court, In re Gatti, 8 P.3d 966 (Or. 2000)(reported Hyde Amendment. Section 2412(d) includes a limitation in the December 2000 Criminal Tax Bulletin). The Oregon for recovery based on the net worth of individuals ($2 Supreme Court stated no “prosecutorial exception” exempts million) which was applied to the owner and precluded his government lawyers who authorize or engage in covert ability to recover fees under the Hyde Amendment. operations from having to comply with two disciplinary rules in particular: DR 1-102, which prohibits lawyers from The court also found the district court had applied an engaging in deceit or dishonesty, and DR 7-102, which incorrect legal standard for determining vexatiousness. The forbids lawyers to knowingly make a false statement. court held “. . . a determination that a prosecution was
‘vexatious’ for the purposes of the Hyde Amendment
The government contended the United States Constitution’s requires both a showing that the criminal case was Supremacy Clause prevents the state’s application of DRs objectively deficient, in that it lacked either legal merit or 1-102 and 7-102 to federal attorneys when those lawyers are factual foundation, and a showing that the government’s engaged in otherwise lawful activities related to their conduct, when viewed objectively, manifests maliciousness official duties. Federal attorneys, the government asserted, or an intent to harass or annoy.” Id. at 29. Here, the court must be allowed to participate in undercover investigations determined the government’s conduct, when viewed in a variety of situations, to ensure the operations are objectively, did not manifest maliciousness or an intent to effective and they remain within legal bounds. Further, the harass or annoy. In addition, the court found the government argued, “attorney oversight is a vital component government’s case was not objectively deficient as the of covert operations.” The complaint also alleged the FBI government had a reasonably sufficient evidentiary basis has been forced to suspend several investigations developed upon which to pursue charges against the owner and

-2- corporation both prior to and after the suppression ruling. conspiracy to assist and advise others in the preparation and presentation of materially false income tax returns, in violation of 18 U.S.C. § 371. From 1990 to 1993, Searan and his mother owned and operated a tax service which primarily prepared and electronically filed individual
Suppression Of Evidence Improper
income tax returns. Unbeknownst to the clients, the returns
Remedy For Violation of 26 U.S.C. § 6103
omitted income, inflated deductions, and included false
forms, in order to generate false refunds. After a former
In Nowicki v. Comm’r, No. 01-11679, 2001 U.S. App. Searan client contacted the Service, a successful undercover LEXIS 18748 (11th Cir. Aug. 20, 2001), the Eleventh operation was initiated, leading to the execution of a search Circuit held the suppression of evidence was not an warrant. Records relating to 93 falsely prepared returns for appropriate remedy even if the evidence was obtained as a 65 clients were seized as evidence. result of violation of the confidentiality of tax return information as provided by 26 U.S.C. § 6103. Nowicki, a On appeal, Searan challenged, inter alia, the sufficiency of veterinarian, operated several incorporated animal clinics the evidence supporting his conspiracy conviction. He with her long time companion handling the clinic’s contended most of the taxpayers went to his mother for administrative and financial matters. Following the end of assistance in preparing their returns; therefore, since he did the relationship, the companion told the IRS that Nowicki’s not personally file the returns, the government failed to professional corporation had paid some of her personal prove not only his intent to enter into an agreement to break living expenses which Nowicki had not reported as income. tax laws, but also his knowledge of the returns’ falsity. As part of the IRS investigation, Nowicki produced, among other records, canceled corporate checks and bank In rejecting Searan’s arguments, the Sixth Circuit stated statements which were reviewed by the companion at the “[t]o support a conspiracy conviction, the defendant need Service’s request. The companion assisted in differentiating not be an active participant in every phase of the conspiracy,
between business and personal expenses.
so long as he is party to the general conspiratorial
agreement.” Id. at 15. Moreover, “[p]roof of a formal
As a result of the investigation, the IRS determined Nowicki agreement is not required; it must only be proven that the had realized additional taxable income in the form of members of the conspiracy had at least a tacit or material constructive dividends for the tax years 1992 through 1994 understanding to try to accomplish an unlawful goal.” Id. which resulted in additional tax due and owing. Nowicki Noting Searan’s depiction of the evidence presented at trial petitioned the tax court for a redetermination of the tax was not complete, the court provided a laundry list of facts, deficiency and filed a motion to suppress the evidence she witness testimony, and documentary evidence which claimed was obtained in violation of § 6103. She argued unequivocally showed Searan entered into an agreement the Service violated § 6103 when it asked the companion to with his mother to aid or assist others in the presentation of review her corporate canceled checks because it improperly materially false tax returns. The evidence clearly disclosed her tax return information. The Tax Court denied demonstrated from the time he entered into the agreement, her motion. After settling her civil tax case with the Searan knew any returns ultimately filed in furtherance of Service, Norwicki appealed the tax court’s denial of her the agreement would, in fact, be false. Accordingly, his motion to suppress arguing the disclosure of her return conviction was affirmed. information violated § 6103 and any evidence obtained as a result of that violation must be suppressed.
SEARCH AND SEIZURE
The court affirmed the Tax Court’s denial of her motion to
suppress. It found even assuming the disclosure to the Qualified Immunity companion violated § 6103, suppression of the evidence was not an appropriate remedy. Congress specifically In Leveto v. Lapina, 258 F.3d 156 (3rd Cir. 2001), Leveto provided civil (26 U.S.C. § 7431) and criminal (26 U.S.C. and his wife filed an action against several agents of the IRS
§ 7213) remedies for violations of the confidentiality asserting constitutional claims under Bivens v. Six Unknown
provisions of § 6103.
Named Agents of Federal Bureau of Narcotics, 403 U.S.
388 (1971). The Levetos alleged, on May 2, 1996, 15 IRS
Conspiracy - Sufficiency Of The Evidence
special agents executed search warrants at Leveto’s
veterinary office/hospital and their residence. When Leveto arrived at work that morning, he was rushed by several In United States v. Searan, 259 F.3d 434 (6th Cir. 2001), armed agents in the parking lot, informed of the search Searan and his mother were convicted of, inter alia,

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warrant, and immediately patted down. He was then was based solely on a reliable confidential informant’s escorted into his office building where he was held in a personal observations of a defendant’s illegal activity. In small room for one hour and prohibited from speaking to another previous case, however, the court had agreed no anyone. The agents then ordered Leveto to accompany probable cause existed when a warrant was issued based on them to his residence. At the Leveto’s home, the agents an anonymous tip sparse in detail and wholly displayed another search warrant and proceeded to pat down uncorroborated by the police. In Allen, the Sixth Circuit Leveto’s wife, who was wearing only a nightgown. The found such corroboration was unnecessary because the agents then detained her for six hours, interrogated her informant was known to the detective and, for over five without providing a Miranda warning, and conducted a years, the informant had provided reliable information in search of the premises. Meanwhile, Leveto was ordered criminal investigations in which the detective was involved. back to his office, where he was detained and interrogated Furthermore, the information was gained through personal by armed agents for approximately six hours. During this observation of Allen’s criminal activity, and therefore, no time period, agents sent Leveto’s employees home and corroboration was necessary. turned away clients in the parking lot. The district court dismissed the Levetos’ complaint for failure to state a claim. Ultimately, the Sixth Circuit held where a known informant,
named to the magistrate and whose reliability is known and
On appeal, Leveto and his wife successfully argued the attested to by the officer, gives information regarding a agents, in executing the search warrants, improperly patted particular crime involving particular evidence, a neutral and them down, detained them for up to eight hours without detached magistrate may believe probable cause exists to probable cause or reasonable suspicion, and unlawfully issue a search warrant. The court warned police, however, closed Leveto’s office, all in violation of the Fourth that failing to confirm easily corroborated information could Amendment. However, due to uncertainties in the law at result in a magistrate not issuing a warrant, or worse, at the time regarding all three issues, and the court’s opinion trial, the government losing the evidence gained in the field. as to what a reasonable agent could have believed, the court held the agents were entitled to qualified immunity with Emergency Exception respect to the Levetos’ claims. Under the qualified immunity doctrine, government officials performing In United States v. Cervantes, 219 F.3d 882 (9th Cir. 2000), discretionary functions generally are shielded from liability the Ninth Circuit recognized “the Fourth Amendment does for civil damages insofar as their conduct does not violate not bar police officers from making warrantless entries and clearly established statutory or constitutional rights of which searches when they reasonably believe that a person within
a reasonable person would have known.
is in need of immediate aid.” Id. at 888. Responding to a
call from a firefighter, a police officer investigated a
Uncorroborated Tip From Confidential
complaint of a strong chemical odor. Upon identifying the
Informant
source of the odor, two police officers entered the apartment
Cervantes occupied and, in plain sight, saw a large pot
In United States v. Allen, 211 F.3d 970 (6th Cir. 2001), the containing a substance believed to be methamphetamine. investigating detective received a tip from a reliable Subsequently, a police investigator searched the premises informant. The confidential informant indicated Allen was and then obtained a search warrant. Cervantes was in possession of cocaine and gave specifics as to the date convicted for manufacturing and possessing with intent to and location of Allen’s drug possession. The detective distribute methamphetamine. On appeal, Cervantes argued based the search warrant affidavit solely on the confidential the district court erred by admitting evidence of items seized informant’s tip. Allen pled guilty to possession of crack pursuant to an invalid search warrant. cocaine and possession of an illegal firearm after his motion to suppress was denied. Allen appealed the denial of the The court focused on the emergency doctrine which motion, arguing the affidavit was based on uncorroborated provides if a police officer, while investigating within the information from a confidential informant and the seized scope necessary to respond to an emergency, discovers evidence was, therefore, insufficient to provide probable evidence of illegal activity, that evidence is admissible even cause for the warrant. A panel of the Sixth Circuit agreed, if there was not probable cause to believe such evidence reversing Allen’s conviction, however on a rehearing en would be found. The court applied the three part test banc, the Sixth Circuit affirmed the district court’s denial of outlined in People v. Mitchell, 39 N.Y.2d 173 (N.Y. 1976), Allen’s motion to suppress and his conviction. which provides: (1) a reasonable belief that an emergency
is at hand and that aid is immediately necessary; 2) the
The Sixth Circuit noted in previous decisions it had upheld search is not primarily motivated by the desire to collect the validity of search warrants in cases where the affidavit evidence; and 3) a reasonable basis for associating the place

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searched with the emergency). The court found all three property. Further, to obtain forfeiture, the court noted, the requirements were met and the search by the police officers government must show probable cause to believe there is a responding to the chemical odor was legal. The court did substantial connection between the property and the not, however, find the subsequent search by the police criminal activity. This link was not uncovered until April investigator, prior to the warrant, satisfied the emergency 1996, when the government’s investigation revealed Allen’s doctrine’s requirements. Analyzing the issuing magistrate’s father purchased the parcels despite any legitimate source of decision, the court excised the portion of the affidavit income and titled them in the names of family members to supporting the warrant containing information obtained conceal its true ownership. Discovery of the link was during the illegal search. After excising the investigator’s effectively postponed by Allen’s father’s active observations, the court found the magistrate still had a concealment of his purchase of the two parcels. “substantial basis” for concluding there was probable cause to believe contraband or evidence of a crime would be Pre-CAFRA Innocent Owner Defense found in the apartment. Thus, the district court did not err in admitting evidence of items seized pursuant to the In United States v. 221 Dana Ave., 2001 U.S. App. LEXIS
warrant.
18744 (1st Cir. Aug. 17, 2001), the claimant sought
dismissal of the government’s forfeiture action against her home located at 221 Dana Avenue, Hyde Park,
FORFEITURE
Massachusetts. The claimant’s late husband, unbeknownst
to the claimant, had used part of the residence to facilitate his drug dealing. He was arrested for selling cocaine from Statute Of Limitations Starts When their residence and eleven days later committed suicide.
Connection To Crime Is Discovered
Before committing suicide, the husband made a will leaving
his wife the marital home. The claimant first learned of her
In United States v. Carrell, 252 F.3d 1193 (11th Cir. 2001), husband’s illegal drug activities the day of his arrest. The the Eleventh Circuit reversed the district court’s dismissal district court granted the government’s motion to seize the of the forfeiture proceeding. The court determined the five marital home, concluding the claimant was not entitled to year statute of limitations applicable to civil in rem assert the innocent owner defense pursuant to the pre- forfeiture actions against properties purchased with the CAFRA forfeiture statute, 21 U.S.C. § 881(a)(7) because illegal drug proceeds begins to run when the government she knew the property was tainted before obtaining the discovers the connection between the properties and the ownership interest in it, even though she was not aware of drug crimes and is tolled by concealment of that connection. the drug activities at the time they occurred. The court’s holding addressed 19 U.S.C. § 1621 prior to its amendment by CAFRA and noted it is contrary to decisions In a panel decision, the First Circuit vacated the district
by the Eighth and Ninth Circuits.
court’s decision and dismissed the government’s motion,
holding the pre-CAFRA forfeiture statute did not apply to
In 1998, the government sought forfeiture of two parcels of the claimant because she was an innocent owner. The issue real property allegedly purchased, with the proceeds of his turned on how to treat the innocent owner defense in the drug trafficking crimes, by Allen’s father. Allen’s father context of a post-illegal act transfer, which the pre-CAFRA had been under investigation for drug trafficking since the forfeiture statute did not address. The court elected not to 1980s. The parcels were titled in Allen’s name, rather than adopt the position of other circuits which defined innocent his father’s name. The district court determined the five ownership at the time of the transfer of property, because year statute of limitations had expired as the two parcels had that theory improperly distinguishes between transferees been properly recorded in the land records since 1990 and who learn of the crime immediately after the transfer and the government could have easily found their existence with transferees who learn of the crime immediately before the due diligence. On that ground, the district court held the transfer. “The more rational approach is to assess
limitations period had run.
innocence in light of whether there was an opportunity,
untaken, to prevent the use of such property for a crime.” Id.
On appeal, the court found under § 1621, a forfeiture action at 21. The court chose to look to the time of the illegal act must be commenced within five years after the time when instead of the transfer, and found the claimant had no the alleged offense was discovered, excluding the time of knowledge of nor consented to her husband’s drug any concealment of the property. The court found “...the activities. Finally, the court noted CAFRA resolves the time when the alleged offense was discovered...” meant the issue since the new innocent owner defense applies to bona time when the government discovered the drug proceeds’ fide purchasers or sellers for value and for spouses and connection to the property or their use to purchase the legal dependents who use the property as a primary

-5- residence and rely on it as a basis for shelter.
In United States v. Hunerlach, 258 F.3d 1282 (11th Cir.
SENTENCING
2001), Hunerlach was convicted of willfully attempting to
evade payment of his income taxes for tax years 1981 through 1988 and for willfully filing a false Collection
Obstruction Of Justice Enhancement
Information Statement (“CIS”) in violation of
26 U.S.C. § 7206(1). The case arose from a 1988 guilty
In United States v. Hernandez-Ramirez, 254 F.3d 841 (9th plea for filing a false income tax return for tax year 1983, in Cir. 2001), the Ninth Circuit held the submission of a false which Hunerlach agreed to pay taxes due and owing. financial affidavit to a magistrate judge for the purpose of Hunerlach failed to pay the taxes, lied on a CIS about his obtaining court appointed counsel was sufficiently related ability to pay the taxes, and was subsequently convicted. to the offense of conviction to support application of a two The sentence in the subsequent conviction was vacated and level enhancement for obstruction of justice pursuant to the the case was remanded for resentencing. On remand, the amended version of U.S.S.G. § 3C1.1. Convicted of district court departed upward from a Criminal History various tax offenses, Hernandez-Ramirez, a professional tax Category I to Criminal History Category III. Additionally, preparer, argued on appeal that his failure to disclose an the court fined Hunerlach the statutory maximum of ownership interest in a sports bar was not material to the $250,000.00. determination of his eligibility for court appointed counsel and, even if he had included his interest in the bar, he would On appeal, the Eleventh Circuit noted the district court nevertheless have qualified. In addition, he contended the believed U.S.S.G. § 4A1.2 prevented it from considering enhancement was incorrectly applied for there is no Hunerlach's 1988 prior sentence, because the prior sentence relationship between the underlying criminal tax offenses involved conduct which was already part of the instant and the conduct supporting the obstruction of justice offense. Section 4A1.2 prohibits courts from considering enhancement, i.e., omitting material information on a such prior offenses in computing a defendant’s criminal financial affidavit submitted to a magistrate judge. history category. The district court then applied
U.S.S.G. § 4A1.3 and departed upward to Criminal History
With respect to the materiality argument, the Ninth Circuit Category III. Section 4A1.3 includes "prior sentence" in its stated Hernandez-Ramirez’s position ran counter to a long list of items the court may consider for departing if the line of cases where false representations made “to probation criminal history category does not adequately reflect the officers have been found to be material whether or not they seriousness of a defendant's past criminal conduct or there result in actual obstruction.” Id. at 843-44. Here, “[w]ithout is a likelihood the defendant will commit other crimes. The doubt, . . . providing information that he had significant debt district court departed upward because the exclusion of and essentially no assets would tend to influence or affect Hunerlach’s prior sentence resulted in a category which whether the magistrate found him qualified for appointed failed to represent the seriousness of Hunerlach’s past
counsel.” Id. at 844.
criminal conduct.

In regard to the lack of relationship argument, the Ninth The Eleventh Circuit held the district court’s upward Circuit opined “nothing about the amendment to § 3C1.1 departure under U.S.S.G. § 4A1.3 was improper because it suggests it was intended to add a requirement that the was apparent the district court still considered the prior obstructive conduct relate substantively to the offense of sentence, which it was precluded from considering under which the defendant is convicted.” Id. For example, the § 4A1.2. The Eleventh Circuit reasoned the definition of court stated “[j]ust as [providing false information to “prior sentence” in § 4A1.2 applies not just to § 4A1.1 but probation officers] relates to sentencing of the offense, also to § 4A1.3. The Eleventh Circuit remanded the case providing a false financial affidavit to a magistrate judge to for resentencing, but affirmed the fine due to Hunerlach’s obtain legal representation relates to the prosecution of the untimely objection requirement. offense.” Accordingly, the sentence was affirmed. Id.

Departure For Co-Defendants’ Sentence
Relevant Conduct And Prior Conviction
Disparity
Within The Meaning Of U.S.S.G. § 4A1.2

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In United States v. Caperna, 251 F.3d 827 (9th Cir. 2001), In United States v. Hernandez, 251 F.3d 1247 (9th Cir. Caperna was a small part of a large marijuana importing 2001), Hernandez pled guilty to conspiracy to affect organization. His job was two fold: to secure a stash house interstate commerce by extortion, extortion and filing a for a large shipment of marijuana scheduled to arrive in false federal income tax return. The plea stemmed from Washington state and to hire a trusted person to drive the Hernandez’s abuse of his position as a California Deputy shipment from the off load site to the safe house. Caperna Labor Commissioner wherein he required owners of eventually accepted the government’s offer and pled guilty garment businesses to pay him bribes in order to receive to violating Interstate and Foregin Travel or Transportation advance notice of government inspections. At sentencing, in Aid of Racketeering Enterprises (“ITAR”). At the district court stated it was inclined to apply a four level sentencing, the district court calculated Caperna’s sentence upward adjustment based on Hernandez’s role as a range to be fifty-seven to seventy-one months. The court leader/organizer of the offense. Additionally, the court departed downward and sentenced Caperna to thirty-six stated it was considering an upward departure on grounds months in prison because a sentence within the guideline Hernandez’s conduct was part of a “systematic or pervasive range would have created a disparity between Caperna’s corruption of a governmental function.” U.S.S.G. § 2C1.1, sentence and the sentences of two other similarly culpable App. Note 5. Although Hernandez’s counsel requested co-defendants, Ricker, who pled guilty to ITAR, and Cliett, additional time to address the leader/organizer adjustment, who pled guilty to conspiracy to distribute marijuana. The he did not request additional time with respect to the government appealed, arguing it is not appropriate for a upward departure, instead, arguing against it on the merits. sentencing court to depart on the basis of co-defendant The court sentenced Hernandez to, inter alia, 36 months sentence disparity unless the co-defendant was convicted of imprisonment imposing the aforementioned upward the same offense as the defendant. The Ninth Circuit departure. agreed.
On appeal, Hernandez contended the district court erred in
In its decision, the Ninth Circuit stated the district court failing to provide adequate notice of its intention to impose erred in considering two co-defendants’ sentences as the an upward departure at sentencing, in violation of Fed. R. basis for downward departure, because one of the co- Crim. P. 32. In assessing this argument, the Ninth Circuit defendants was convicted of a different offence than turned to Burns v. United States, 501 U.S. 129, 138-39 Caperna. The Ninth Circuit acknowledged it previously (1991), where the Supreme Court unequivocally established held a court has the authority to depart downward on the that Rule 32 requires “reasonable notice” to be given when basis of disparity among co-defendants’ sentences; departing upward. The Court, however, explicitly left open however, it also noted it did not identify what circumstances the question of when notice must be given to qualify as would make such a departure appropriate. See United reasonable, “leav[ing] . . . the lower courts . . . to adopt States v. Daas, 198 F.3d 1167 (9th Cir. 1999). After Daas, appropriate procedures by local rule.” Id. at 139 n.6. the Ninth Circuit held a district court may not depart based Interpreting lower courts to mean district courts, the Ninth on co-defendant sentence disparity if the co-defendant was Circuit found no error in Hernandez’s sentencing because convicted of a different offense than the defendant. See “the court thoroughly explained both the factual and legal United States v. Banuelos-Rodriguez, 215 F.3d 969 (9th grounds that might justify an upward departure and Cir. 2000). The Ninth Circuit in Caperna explained the permitted counsel the opportunity to comment at length Banuelos-Rodriguez case simply began where Daas left off before imposing sentence.” Hernandez 251 F.3d at 1252. and indicated when it is not appropriate for a district court Moreover, Hernandez’s counsel failed to object to the to use co-defendant sentence disparity as a ground to depart. district court’s failure to provide notice before the The Ninth Circuit vacated the sentence and remanded the sentencing hearing of its intention to depart upward. case for clarification as to whether it departed downward Accordingly, Hernandez’s sentence was affirmed. based on other factors, including whether the departure was based solely on the sentence recieved by Ricker.

Threat Of Upward Adjustment For Failure
Notice To Defendant Of Sentencing
Of Third Party To Surrender Right To
Court’s Intention To Depart Upward
Assets Improper

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In United States v. Bennett, 252 F.3d 559 (2d Cir. 2001), In United States v. McLeod, 251 F.3d 78 (2nd Cir. 2001), the Second Circuit held the district court’s threat of an McLeod pled guilty to assisting in the preparation of 46 enhanced sentence was, in effect, an attempt to force fraudulent income tax returns and with obstructing the Bennett’s wife to abandon her legal right to defend her administration of the tax laws with respect to one false tax interest in the ancillary proceeding and was improper. return, in violation of 26 U.S.C. §§ 7206(2) and 7212(a), Bennett was convicted of public integrity crimes, money respectively. The charges stemmed from McLeod’s laundering, bank fraud and securities fraud. The jury also operation of a tax return preparation firm, which offered its returned a forfeiture verdict of $109 million. At sentencing, customers assistance in filing fraudulent income tax returns. the district court forewarned Bennett his sentence would be For sentencing purposes, the total tax loss caused by enhanced if he did not surrender the criminal proceeds, McLeod’s actions was $7,578,925.00. This was determined including those held by his wife. When Bennett’s wife by adding the tax loss from the 46 charged fraudulent refused to surrender her assets, the district court entered an returns to a $7,238,058.00 tax loss determined by an IRS upward departure from the sentencing guidelines, increasing civil audit of 2,866 other returns, which were considered by Bennett’s sentence by ten years. On appeal, Bennett argued the court as relevant conduct. McLeod was sentenced to the district court improperly enhanced his sentence because 121 consecutive months of imprisonment. of his wife’s refusal to surrender her interest in assets in her
name. On appeal, McLeod challenged the sentencing court’s inclusion of the $7.2 million tax loss resulting from the civil
The court noted the district court’s use of threats of audit as relevant conduct. Extracting a claim for a higher increased punishment to compel action by Bennett was itself standard of proof from Apprendi v. New Jersey, 530 U.S. unusual but found it even more unusual to use the threat of 466 (2000), McLeod contended the sentencing judge could an increased sentence to compel action by Bennett’s wife. not include the tax loss determined from the civil audit as In spite of the district court judge’s concern for the victims relevant conduct unless the court found beyond a of Bennett’s crimes, the judge could not achieve his reasonable doubt that the evidence presented at the objectives by threatening to increase Bennett’s sentence sentencing hearing established such a loss. unless his wife waived her right to contest the forfeiture.
In rejecting McLeod’s claim, the Second Circuit explained
The court further noted, while Bennett’s wife had every an understanding of the Sentencing Guidelines’ concept of right to assert an interest in the forfeited property in an “total punishment” was required. Pursuant to U.S.S.G. ancillary proceeding, Bennett had no right to frustrate the § 5G1.2(b), this is the punishment determined after all forfeiture by transferring his criminal proceeds to his wife relevant Guidelines’ calculations have been made. If the in the first place. Accordingly, the district court may “total punishment” exceeds the highest statutory maximum consider on remand, apart from Bennett’s wife’s refusal to on any count, as in McLeod’s case, the Guidelines require surrender the assets, whether Bennett’s own acts of the sentence run consecutively, to the extent necessary to concealment or any other appropriate factors warrant a achieve the “total punishment.” In United States v. White, departure from the sentence the court would have otherwise 240 F.3d 127, 136-37 (2d Cir. 2001), the court ruled the
imposed.
“preponderance of the evidence” standard applies to
determinations of relevant conduct for purposes of ascertaining the “total punishment” which may exceed the statutory maximum on a single count. Moreover, in White, the Second Circuit also ruled that Apprendi is inapplicable to a sentencing judge’s decision to run sentences consecutively when required by the Guidelines.

Civil Audit Tax Loss Included
As Relevant Conduct

CRIMINAL TAX BULLETIN

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 AUGUST/OCTOBER 2001

TABLE OF CASES

SUPREME COURT CASES

United States v. Kyllo, 121 S. Ct. 2038 (2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

TITLE 26 AND TITLE 26 RELATED CASES

United States v. Ytem, 255 F.3d 394 (7th Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

United States v. Oregon State Bar, No. 6-01-06168-HO (D. Or. May 23, 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

United States v. Knott, 256 F.3d 20 (1st Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Nowicki v. Commissioner, No. 01-11679, 2001 U.S. App. LEXIS 18748 (11th Cir., Aug. 20, 2001) . . . . . . . . . . . . . . . . . . . . 3

United States v. Searan, 259 F.3d 434 (6th Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

SEARCH AND SEIZURE

Leveto v. Lapina, 258 F.3d 156 (3rd Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

United States v. Allen, 211 F.3d 970 (6th Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

United States v. Cervantes, 219 F.3d 882 (9th Cir. 2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

FORFEITURE

United States v. Carrell, 252 F.3d 1193 (11th Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

United States v. 221 Dana Ave., 2001 U.S. App. LEXIS 18744 (1st Cir. Aug. 17, 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

SENTENCING
United States v. Hernandez-Ramirez, 254 F.3d 841 (9th Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

United States v. Hunerlach, 258 F.3d 1282 (11th Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

United States v. Caperna, 251 F.3d 827 (9th Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

United States v. Hernandez, 251 F.3d 1247 (9th Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

United States v. Bennett, 252 F.3d 559 (2nd Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

United States v. McLeod, 251 F.3d 78 (2nd Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

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Department of the Treasury
Internal Revenue Serivce
Document 10023 (8/10-2001)
Catalog Number 24304B

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