Other 200412009: Criminal Tax Bulletin surveys court decisions

Plain-English summary

The IRS Criminal Tax Division's bulletin summarizes court decisions for informational purposes. Its case notes cover criminal tax charges, searches of packages and computer disks, speedy trial claims, forfeiture, sentencing, and wiretaps. The opening note states that the bulletin is not a directive. It reports the courts' decisions rather than granting tax relief or resolving a taxpayer's ruling request. The released PDF also includes a table of cases from an October 2003 bulletin.

Ruling snapshot

• Question: What recent court rulings did the Criminal Tax Division report?
• Outcome: Informational bulletin; no taxpayer ruling.
• Key authorities: IRC §§ 7202, 7203; cited federal court decisions.

Full text (IRS public release)

Number: 200412009
Release Date: 3/31/04
UIL: 9999.98-00

Criminal Tax Bulletin
Department of Treasury
Office of Chief Counsel
Internal Revenue Service
Criminal Tax Division
January/February This bulletin is for informational purposes. It is not a directive. 2004

TAX CRIMES
deficient.

With regard to Ramirez’s alternative argument that the
Willful Failure To
statute was unconstitutionally vague, the court noted in the
Collect Or Pay Over Taxes
Fifth Circuit the standard for finding a statute void for
vagueness is whether the statute: (1) fails to define the
In United States v. Ramirez, 2003 WL 22995118 (W.D. Tx. offense with sufficient definitiveness that ordinary people Dec. 16, 2003), the United States District Court for the can understand what conduct is prohibited; and (2) fails to Western District of Texas denied Ramirez’s motion to establish minimum guidelines to govern law enforcement dismiss the indictment which charged her with failing to so as to invite arbitrary and discriminatory law account for and pay over $69,984 in income and enforcement. In denying Ramirez’s argument, the court employment taxes in violation of I.R.C. § 7202. The found an ordinary person is able to understand the conduct indictment alleged that as president, treasurer and 50 percent prohibited by the statute and accordingly, §7202 is not void shareholder, Ramirez deducted federal income, FICA and for vagueness. Section 7202 clearly imposes a penalty on Medicare taxes from her employees’ wages but willfully any person who fails to willfully collect or truthfully failed to account for and pay over such taxes to the IRS. account and pay over taxes and the term “person” includes Ramirez argued the indictment was deficient because it a corporate officer who “is under a duty to perform the act failed to allege that she was a person required to collect, in respect of which the violation occurs.” account for, and pay over any tax. In the alternative, Ramirez argued that even if she was such a person, the statute was unconstitutionally vague in that neither §7202, SEARCH WARRANTS nor any other statute, imposes upon a corporate officer or shareholder an unequivocal duty to collect, account for, and Warrant Required To Inspect Package pay over any tax, with the specificity required for a criminal statute.
Held By Third Party Bailee
In United States v. James, 353 F.3d 606 (8th Cir. 2003), With respect to the first argument the court, citing Fifth the Eighth Circuit held a search warrant was required to Circuit precedent, held an indictment is sufficient if it view computer disks James had given to a third party in a contains the elements of the charged offense, fairly informs sealed envelope to destroy. While James was incarcerated the defendant of the charges against her, and ensures that on charges of sexual misconduct with a child, he attempted there is no risk of future prosecutions. Here, the indictment to smuggle out a letter to a long-time friend asking him to charged that Ramirez was: (1) the president and treasurer; destroy computer disks he had given him in a sealed (2) that she deducted and collected various taxes from her envelope. James did not tell his friend what was on the employees’ wages; and (3) that she willfully failed to disks nor did he give his friend permission to open the account for and pay over such taxes to the IRS in violation envelope or view the disks. James told his friend the disks of I.R.C. § 7202. The court found that the indictment fairly were old and one even contained a virus. This letter was informed Ramirez as to the charges against her and the mere forwarded to the police and the friend later consented to fact the indictment failed to included a statement that she allowing the police to inspect the disks. The evidence was a person “required . . . to collect, account for, and pay found on the disks was used to convict James of possession over and tax imposed” did not render the indictment of child pornography. would be using the fuel for off-road purposes. In reality,
The Eighth Circuit held the evidence obtained from the disks Young and his co-defendants engaged in a scheme to sell should have been suppressed because the police had not tax-free fuel for on-road purposes. Much of their business obtained a search warrant prior to viewing the disks. The was conducted in cash and about two to three times per court distinguished this case from a case involving the joint month, the cash proceeds were shipped via Federal Express occupancy of a space in which each cotenant has a between the parties to the crime. diminished expectation of privacy, a function of communal living. The shared-access theory does not apply when the As part of their investigation into the scheme, IRS agents person giving consent is only a bailee, the court found. requested that Federal Express allow them to inspect the Although the bailee may have physical possession and suspect packages. Federal Express consented and the access to the contents, that kind of possession or access does agents x-rayed several of the packages which were found to not imply actual authority to examine the contents or to contain large amounts of currency. During trial, the co- allow another to do so. The court stated that “one does not defendant’s moved to suppress the evidence obtained cede dominion over an item to another just by putting him in through the x-ray of the packages. The district court possession.” Thus, the “mere act of storage” in this case denied the motion, finding the warnings on the package was insufficient to support a finding the bailee, i.e., the rendered unreasonable any expectation of privacy in the custodian, had actual authority to consent. contents. On appeal, Young raised several issues, but the
appellate court found only the suppression issue merited
Moreover, the court concluded there was ample evidence discussion. that James did not give his friend, as bailee, permission to exercise control over the disks or consent to their search. In deciding the case, the Eleventh Circuit looked to the James had sealed the disks with tape, marked them Supreme Court’s decision in United States v. Jacobson, confidential and private, placed them in a sealed envelope, 466 U.S. 109 (1984). In Jacobson, employees of a private and conveyed them to his friend for the sole purpose of freight carrier observed a white powdery substance during
storing them.
their examination of a damaged package. The employees
then notified authorities who later determined the substance
The court also concluded the district court erred when it was cocaine. The Court acknowledged that letters and found the police reasonably relied on the bailee’s apparent other sealed packages are in a class of effects in which the authority. Citing Illinois v. Rodriguez, 497 U.S. 177 (1990), public has a legitimate expectation of privacy, but the issue is whether the facts available to the officers at the ultimately concluded Jacobson lacked such an expectation time the consent was given warranted a reasonable person to of privacy in the subject package when a third party opened believe the consenting party had authority to consent to the the package on its own accord, and the government agents search. The court said “[t]he standard or reasonableness is merely repeated a search that was already conducted by a governed by what the law-enforcement officers know, not private party. This case is distinguishable from Jacobson, what the consenting party knows.” Here, the police not only however, because the IRS agents initiated contact with knew all of the facts that militated against a finding of actual Federal Express, obtained the packages, x-rayed them, all authority to consent to a search, but also knew one more fact without first obtaining a warrant. that the bailee himself did not know: that James wanted him to destroy the disks. The court found the police knew too Ultimately, the Eleventh Circuit found that no reasonable much about James’ manifested desire to keep others, person would expect to retain a privacy interest in a including his long-time friend, from seeing the content of the package after signing an airbill containing an explicit disc to rely on the friend’s authority to consent. warning that the carrier was authorized to act in direct
contravention to that interest. The carrier told its
FOURT AMENDMENT
customers not to ship cash and that it could open and
inspect the packages at the carrier’s option. The court believed the presence of these two warnings removed the
Expectation Of Privacy In Fed-Ex Package
case from post-Jacobson jurisprudence. In fact, the court
speculated that the warnings were probably added in the
In United States v. Young, 2003 U.S. App. LEXIS (11th wake of Jacobson . The court held, as a matter of law, the Cir. November 18, 2003), the Eleventh Circuit held Young warnings simply eliminated any expectation of privacy. and his co-defendant’s had no legitimate expectation of Under an alternative theory, the court found there was also privacy in the contents of a Fed-Ex package where the a consent to the search because the defendant authorized envelop explicitly warned that sending cash was illegal and the carrier, as bailee of the packages, to consent to the Federal Express retained the right to inspect any package for search. any reason. Young was convicted of various tax crimes in SIXTH AMENDMENT connection with the computation and collection of motor fuel excise tax. Specifically, Young misrepresented to the IRS when he applied for a 637 exemption certificate that he
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Speedy Trial
factors, the district court denied Knop’s motion.

In United States v. Knop, No. 88-20015-BC, 2003 U.S. FORFEITURE Dist. LEXIS 18024 (E.D.MI Oct. 6, 2003), the district court denied Knop’s motion to dismiss the information for violations of the right to a speedy trial as guaranteed by the Comingling Of Drug-Tainted Funds With
Sixth Amendment. Knop was charged by information in Legitimate Funds Makes Legitimate Funds 1988 for failing to file income tax returns in violation of IRC Forfeitable
§ 7203 for tax years 1981 through 1983. An arrest warrant
was issued as a result of these charges. During the next 14 In United States v. Puche, 2003 U.S. App. LEXIS 23099 years, the IRS tried unsuccessfully to locate Knop. Finally, (11th Cir. Nov. 12, 2003), the Eleventh Circuit held the in 2002, the IRS found and arrested Knop. Knop filed a intermingling of drug-tainted funds with legitimate funds motion to dismiss the information on the ground the 14 year renders the legitimate funds forfeitable. The Puches, a lapse violated his right to a speedy trial as guaranteed by the father and two sons, and their money transmitting business,
Sixth Amendment.
appeal from their convictions and sentences on one count
of conspiracy to commit money laundering, in violation of
During the investigation, IRS agents visited Knop’s home 18 U.S.C. § 1956(a)(3) and (h). The court also entered a and sent letters advising him of the pending criminal forfeiture order pursuant to 18 U.S.C. § 982(a)(1) and 21 investigation. Further, agents searched public records and U.S.C. § 853, finding them jointly and severally liable in notified police of the IRS’s search for Knop. Following the the amount of $1,628,693.60 for money used in the offense issuance of the arrest warrant, agents routinely drove by and money involved in each financial transaction that the Knop’s residence and followed up on multiple leads, Puches conspired to conduct. including that Knop was living at the Hunt Club he belonged to. Agents also recorded the arrest warrant on several The Puches, through their money transmitting business, databases, including the National Crime Information Center conducted several significant offshore wire transactions for and the Treasury Enforcement Communication System. undercover agents as part of a sting operation. The court These entries alert other law enforcement agencies and found the Puches’ suspicions should have been and were conduct periodic searches of other records for any financial aroused by the size of the undercover agents’ cash activity related to identifying data associated with a person, deliveries, their frequency, and the fact the cash was always such as a social security number. These leads proved delivered in small denominations and brought in duffel
fruitless until 2002.
bags or boxes. Further, the manner in which the Puches
structured their business’s bank deposits showed the
At the same time, Knop changed his lifestyle by using an business frequently made deposits of less that $10,000, alias, abandoning his dental practice, abstaining from having thereby circumventing the submission of currency a driver’s license, holding property in his own name or transaction reports. registering vehicles, quit-claiming his house to his girlfriend, living in an unheated cabin during the Michigan fall season, On appeal, the Puches argued the district court’s forfeiture and refusing to pursue activities that would generate IRS order was erroneous because it included $1,606,318.60 in Forms W-2 or 1099. Finally in 2002, a database search legitimate funds that shared bank accounts with the revealed Knop had received a Form 1099 for Social Security undercover DEA money and that only $22,375 in benefits issued with his first and middle names reversed. commissions paid to them in the laundering scheme should
be subject to forfeiture. Further, they argued that the order
In determining whether a speedy trial violation had was excessive in violation of the Eighth Amendment. The occurred, the district court looked to the four factors Eleventh Circuit disagreed and affirmed the order of established by the Supreme Court in Barker v. Wingo, 407 forfeiture. U.S. 514 (1972), which were: 1) the length of delay, 2) the reason for the delay, 3) Knop’s assertion of his speedy trial The court found that “property” under the statute includes right, and 4) the resulting prejudice to Knop. The court any property used to facilitate the offense. Further, the found the 14-year delay between the filing of the charges court, citing with approval United States v. Bornfield, 145 and Knop’s arrest, although extraordinarily long, was not a F.3d 1123 (10th Cir. 1998), held that the forfeiture of Sixth Amendment violation where there was no specific commingled funds was proper when, as in this case, “the prejudice to Knop’s defense resulting from the delay. government demonstrates that the defendant pooled the Further, the court found that although the government had funds to facilitate or ‘disguise’ his illegal scheme.” The failed to do all that it could to locate and to arrest Knop, court found the evidence in this case showed that funds, Knop was a greater cause for the delay as his lifestyle both tainted and untainted, were rapidly moved into bank change was plainly designed to avoid detection. Finally, accounts to conceal the nature and source of the drug Knop did not raise the Sixth Amendment claim until after he proceeds. Moreover, the jury could have inferred that the was arrested. Based on an application of the facts to these legitimate proceeds facilitated the illegal proceeds by
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acting as a “cover,” the court added.
and to set aside the punitive damages award. Bailey argued
the court improperly applied the relation back doctrine to
Finally, the court found the forfeiture of over $1.6 million in satisfy the elements of the claims because it was clear this untainted funds was not grossly disproportionate to the retroactive vesting was based upon a legal fiction. gravity of the Puches’ offenses in violation of the Eighth Amendment’s Excessive Fines Clause as the Puches were Reversing itself, the court held that the relation back liable for a civil penalty in the amount of the funds involved doctrine did not satisfy the “possession“ element of in the transactions. In this case, the court held the $1.6 conversion and civil theft claims under Florida law. million in untainted funds was used to “cover” the transfer Further, at the time of the alleged conversion and theft, the of the tainted funds, and thus was properly forfeitable. government had neither a present nor immediate right to
possess the funds, the court found. Moreover, the
Forfeitable Funds Accepted As Legal Fees
government’s possessory interest was contingent upon the
Not Basis For Conversion Or Civil Theft
conviction of Bailey’s clients, the entry of a special
forfeiture verdict, and the rejection of Bailey’s claim to the
Charge
funds. The court said that such speculative interest was too
attenuated to maintain an action for conversion or civil
In United States v. Bailey, No. 6:01-cv-875-Orl-2KRS, theft under Florida law, and the relation back doctrine 2003 U.S. Dist. LEXIS 19948 (M.D. Fl Oct. 22, 2003), the could not remedy that deficiency. Finally, the court found district court granted Bailey’s request for reconsideration of Bailey had “rightful possession” of the funds when he the grant of summary judgment on the conversion claim and received and disbursed it and that the relation back doctrine part of the civil theft claim, and move to set aside the was a legal fiction. Accordingly, the court held that since punitive damages verdict. Upon reconsideration, the court the government had no possessory interest until the decree reversed the grant of summary judgment in favor of the of forfeiture, the relation back doctrine could not support government, and threw out the civil judgment of at least $9 the money award entered against Bailey. The court added,
million against Bailey.
“the concept of retroactive vesting cannot transform
Bailey’s rightful possession of the [funds] into a tortuous
Following a Special Verdict of Forfeiture, including a $2 act of interference with Government property under Florida million fee that Bailey’s clients transferred to him for their law.” legal defense, Bailey filed a third-party petition claiming superior title to the funds, which was treated as a claim. The With respect to the conversion, the court found Bailey’s court denied Bailey’s claim and found the government held refusal to return the funds upon demand amounted to clear title to the funds, which related back to the date the conversion since at the time Bailey obtained and disbursed funds were laundered in violation of 18 U.S.C. §§ 1956 and the funds, those acts were authorized. The court found the 1957. The court ruled that because Bailey knew from the government had obtained a possessory interest in the funds outset that the money was subject to forfeiture, he did not only after it was dissipated, and Bailey never had the funds qualify as an innocent third-party transferee whose claim at the point when the government had a possessory interest would supersede the government’s title to the funds under in them. Finally, in rejecting the conversion and civil theft federal forfeiture law. As Bailey no longer had the funds, claims against Bailey, the court voided the punitive the court gave the government several options, including damages award against him. pursuit of substitute assets or a civil action against Bailey for the full amount of the funds transferred to him. Further, the Civil Forfeiture Statute Of Limitations court reprimanded him for not turning over the funds and referred him to state disciplinary authorities.
Tolled By Pension Law

The government sued Bailey alleging conversion and civil In United States v. All Funds, No. 01-6232, 2003 U.S. theft of the $2 million fee because Bailey obtained the funds App. LEXIS 19279 (2nd Cir. Sept. 17, 2003), the Second from his clients and disbursed funds to himself and other Circuit held the statute of limitations applicable to an in lawyers, that he knew was subject to forfeiture in the clients’ rem action to forfeit the proceeds of Medicare fraud is criminal case. The count alleging conversion included a equitably tolled during the time the fraudulently obtained claim for punitive damages, and the count alleging civil theft funds were in a pension plan protected by the anti- sought treble damages pursuant to Florida law. The court alienation provision of the Employee Retirement Income granted the government’s motion for summary judgment and Security Act, ERISA. Edward Weiss, owner of an Bailey went to trial on the remaining issues. At trial, the ambulance service which had fraudulently billed Medicare, jury awarded the government $3 million in punitive damages pleaded guilty to one count of filing false claims in and found Bailey had the felonious intent to commit a theft violation of 18 U.S.C. § 287. Weiss commingled the fraud when he obtained the fee, justifying a trebling of the proceeds with legitimate revenues and established a government’s $2 million in damages. Bailey appealed the pension plan. In 1998, the pension plan was dissolved and holding asking the court to reconsider its summary judgment the funds were transferred into an IRA. As the funds were
no longer covered by ERISA, the government sought -4-
forfeiture of the funds. Weiss moved to dismiss the for the property and the wife’s income was too small to government’s forfeiture action as barred by the one-year have been a primary source of the mortgage payments and statute of limitations in 18 U.S.C. § 984(c). The district improvements. Accordingly, the wife was found to be a court agreed and dismissed the government’s suit. “straw owner” with no independent legal right to the
property. On appeal, the wife challenged this finding,
On appeal, the government alleged that contributions to the asserting her legal right to a portion of the estate. company’s pension plan were derived form the income from the false Medicare claims. Once in the plan, however, the In its initial analysis, the Eighth Circuit noted a RICO funds were protected by ERISA’s anti-alienation provision, forfeiture is an in personam sanction against an individual, which states that pension funds may not be “assigned or not an in rem action, therefore, the forfeiture only reached alienated” while the money is held by the plan administrator. the defendant’s interest in the property. Under Thus, the government argued, ERISA’s anti-alienation §1963(l)(2)-(6), claimants may challenge the forfeiture by provision prevented it from initiating the forfeiture action showing by a preponderance of the evidence they had until the pension plan was dissolved and began disbursement either (1) a vested legal interest in the property or (2) a of the funds. Reversing the district court, the Second Circuit superior interest at the time the criminal act took place. found that based on Supreme Court case law, the government could not touch the pension plan assets until the With respect to the first test, the Eighth Circuit determined plan was terminated and the assets distributed. Further, the it was undisputed the wife held title to the property before court found “it would be inequitable to bar the government the RICO violations began. The court noted this case did from proceeding against the funds in this suit simply because not lend itself to a finding of straw or nominal ownership, the [Weisses] invested their ill-gotten gains in a pension since the wife lived in the house and exercised at least plan.” Thus, the court held that equitable tolling was partial dominion and control over it. The court, however, appropriate in this case as “equitable tolling . . . permits found the wife’s interest insufficient to prevent forfeiture courts to extend a statute of limitations on a case-by-case under the first test since, but for the RICO proceeds and the basis to prevent inequity, even when the limitations period subsequent payment of the mortgage, the wife would not
would otherwise have expired.”
hold any title to the estate. It would do a severe disservice
to the purpose of the RICO forfeiture statute if a criminal
Division of Commingled Funds
were able to protect and enjoy RICO proceeds by investing
them in property titled in a spouse.
In United States v. Totaro, 345 F.3d 989 (8th Cir. 2003), As for the second test, the Eighth Circuit held it must look the Eighth Circuit held state family law governing the to state law to sort out the respective ownership interests, division of marital property should be applied to determine and save from forfeiture the portion of the estate the wife the property interests of a defendant from those of a spouse can prove was hers. Here, the wife established she for purposes of a RICO forfeiture. This appeal arises from received half of the estate as a gift from her husband prior the district court’s denial of a spouse’s claim to a legal to his receipt of RICO proceeds and she legally purchased interest in a country estate she shared with her husband for her husband’s remaining interest from one of his creditors. almost thirty years. The country estate was forfeited Accordingly, the Eighth Circuit concluded her ownership pursuant to the RICO forfeiture statute, 18 U.S.C. interest was untainted by RICO funds until 1984, by which
§1963(l)(1), after the husband was convicted and sentenced time it appears she had accumulated some economic value in connection with his involvement in an investment fraud in the estate by her own efforts. As such, the district court scheme committed between the years 1984 and 1999. erred in finding the entire estate forfeited. It was now up to
the trial court to engage in a factual analysis to determine
The country estate was originally purchased by the couple in the precise boundaries of the legal interest asserted by the 1974. In 1977, the husband filed for bankruptcy, and a year wife. later the wife acquired full legal title to the property after paying off a mechanics lien. The husband’s RICO violations State law respecting the division of marital property does began in 1984 and from that date forward, the husband not normally govern the distribution of property interests of funneled large amounts of proceeds of his illegal scheme a husband and wife unless the marriage is dissolved. In into his wife’s checking account, from which she paid the this case, the wife established some legal interest in the mortgage and made other significant improvements to the forfeited property superior to her husbands; the question country estate. Meanwhile, the wife’s income during the that remains is how much. In the absence of rules period 1974 through 1999 was modest, never exceeding specifically designed for the forfeiture context, the Eighth
$35,000.
Circuit noted the best rules to sort out the property rights of
married people are found in the laws governing divorce.
The district court found the wife held legal title to the Accordingly, the case was remanded with the instruction country estate before her husband began committing RICO that the family property laws of New York, where the violations in 1984. After that time, however, the district property was located, be applied to determine the wife’s court noted the husband’s RICO proceeds were used to pay
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interest in the estate.
supporting departure on the criminal history grounds.
Furthermore, although the district court made comments about Bell’s need for mental treatment and its fear that
SENTENCING GUIDELINES
imprisonment would interrupt such treatment, the Fifth
Circuit found the court’s statements were unclear and thus, the appellate court was unable to determine what Appellate Standard of Review for Departures conclusions the court reached in granting the departure.
Thus, it vacated the sentence and remanded the case to the
In United States v. Bell, 2003 U.S. App. LEXIS 23673 (5th district court to clarify its reasoning. Cir. November 20, 2003), the Fifth Circuit found the district court abused its discretion in granting Bell a downward Tax Crimes and Sentencing departure at sentencing. Bell, in an attempt to have her probation hearing postponed or canceled, phoned in a false bomb threat to the courthouse on the day her hearing was In United States v. Shevi, 345 F.3d 675 (8th Cir. 2003), scheduled, stating Pakistani terrorists had placed a bomb at Shevi pled guilty to mail fraud, structuring cash the courthouse. State and local police as well as the FBI transactions and five counts of filing false tax returns. At initiated an investigation, which resulted in the arrest of a sentencing, the district court found the mail fraud loss to be Pakistani immigrant. Eventually, police identified Bell as $305,133 under USSG §2F1.1; imposed an abuse of trust the caller through cellular telephone records. Bell pleaded enhancement under §3B1.3; grouped the mail fraud and guilty to using a telephone to convey a false threat to structuring counts under §3D1.2(c); but declined to group damage a building by means of an explosive. the mail fraud and tax offenses under §3D1.2. Shevi
appealed the district court’s sentencing determinations.
Bell’s criminal history placed her sentencing range at 12 to
18 months’ imprisonment. At sentencing, the district court Shevi, was named trustee of his niece and nephew’s social granted a downward departure and sentenced Bell to security benefits following his sister’s death. Using trust probation, stating it feared imprisonment would interrupt funds to pay the premiums, Shevi purchased two life Bell’s mental treatment and that the nature of her criminal insurance policies naming himself as the beneficiary. history, which consisted mostly of nonviolent, petty crimes, Shortly before filing for bankruptcy, Shevi transferred the overrepresented her criminal history category. policies to his wife, omitted them from the schedule of
bankruptcy assets, and obtained the cash surrender values.
In vacating the sentence, the Fifth Circuit first determined When Shevi filed for bankruptcy relief he failed to include that the new standard of review analysis under the several assets in the petition and obtained a discharge of PROTECT Act (Prosecutorial Remedies and Other Tools to secured and unsecured debts. Following the bankruptcy, End the Exploitation of Children Today) should be applied Shevi used the insurance proceeds to open a personal retroactively, agreeing with the First and Eighth Circuits that investment account. Additionally, Shevi structured 21 the new standard of review was a procedural, not transactions totaling $196,667 and filed false individual substantive, change and thus was not a violation of the Ex and business returns, evading $134,960 in tax liabilities. Post Facto Clause. Under the PROTECT Act, the standard of review is de novo, unless the district court either fails to Affirming in part and remanding, the court held the provide a written statement of reasons supporting the abuse of trust enhancement was proper, as well as the downward departure or fails to state a factor which advances district court’s refusal to group the mail fraud and tax an objective specified under the amended statute. counts. The court found grouping was not proper under Otherwise, the standard of review is abuse of discretion. 18 §3D1.2(c) because the offense level for the tax fraud U.S.C. § 3742(e). The Fifth Circuit recognized the district counts was not increased based upon conduct that was court’s statement at sentencing that the fact Bell needed punished as mail fraud. Sections 3D1.2(a) and (b) did medical care met the requirement of advancing an objective not apply where the mail fraud and tax fraud had set forth under the statute and, thus, the correct standard of different victims. Finally, §3D1.2(d) did not apply review was abuse of discretion, not de novo. because the offenses, although largely based on the
amount of harm or loss, were not of the same general
Regarding the downward departure, the Fifth Circuit found type because the loss tables for the mail fraud and tax the district court failed to provide detailed reasoning in its fraud offenses punished the same amount of loss written statement of reasons, but found no limitation in the differently. Further, the court concluded the district PROTECT Act preventing the appellate court from court’s fraud loss calculation was inconsistent with its considering the sentencing colloquy in addition to the recent decision in United States v. Wheeldon, 313 F.3d court’s written reasons in reviewing the sentence. In this 1070 (8th Cir. 2002). Wheeldon required the district regard, the Fifth Circuit considered both the written court to determine the value of concealed assets, a statement of reasons and the hearing record and found the determination not made in this case. Accordingly, the district court still failed to provide adequate reasons court remanded to the district court for a determination
of the mail fraud loss.
-6- disorder. The probation officer agreed and recommended
Sentencing Enhancement – Abuse of Trust
two grounds for departure: diminished capacity and
aberrant behavior. The Government objected to both
In United States v. Caplinger, 339 F.3d 226 (4th Cir. grounds. First, the Government argued a gambling 2003), the Fourth Circuit vacated defendant’s sentence after addiction is not a permitted impairment under the holding the district court erred in applying the abuse of trust Sentencing Guidelines. Second, regarding the aberrant enhancement under U.S.S.G. § 3B1.3. The trust the behavior departure, the Government cited to the United investors placed in the defendant was not based on a special States Attorney’s Office policy instructing prosecutors to relationship he had with them as a physician, but rather on object to all downward departures. The district court the investors’ misplaced belief in his investment abilities. declined to depart downward for diminished capacity, but Caplinger’s convictions for wire fraud and money granted a four-level departure for aberrant behavior and laundering arose out of his successful efforts to attract sentenced Vieke to five years’ probation. The Government investment in a bogus scheme to market a drug that was appealed. supposed to be effective in treating HIV/AIDS and cancer. Caplinger held himself out as a physician who had medical In affirming the sentence, the Ninth Circuit found the degrees from schools in Great Britain and the Dominican Government’s objection to the aberrant behavior departure Republic. In reality, Caplinger’s medical degrees were was merely a pro forma, blanket objection based on policy “mail order” ones bought with no study required. The reasons of the United States Attorney’s Office and gave no district court adopted the PSR’s recommendation for a two- articulated reason to support the objection. The level enhancement for abuse of trust, which Caplinger Government made a more specific argument on appeal,
challenges on appeal.
namely that the district court failed to make the three
requisite findings as articulated in the Guidelines to support
The basic question is whether Caplinger, by posing as an the aberrant behavior departure. The Ninth Circuit found accomplished physician in order to influence potential this argument in effect was raised for the first time on investors, abused a position of trust with respect to the appeal. Since the Government did not object to the legal victims of his fraud scheme. § 3B1.3. The “position of analysis of the guideline at sentencing, the district court trust” inquiry must focus on the relationship between the was not provided an opportunity to consider legal defendant and the victim from the perspective of the victim. arguments, correct possible errors or produce a record to Application of the enhancement requires more than a mere guide appellate review. Moreover, the Ninth Circuit showing that the victim had confidence in the defendant. refused to find the sentence was erroneous, since the long
standing rule in the Ninth and other circuits is to not
The fact Caplinger posed as a physician does not by itself consider claims of error if raised for the first time on mean he occupied a position of trust. Caplinger did not appeal. assume a physician-patient relationship with any of the victims. Rather, the victims were simply investors who put Sentencing Enhancement – Abuse of Trust their money into Caplinger’s scheme based on representations that he was a prominent physician. Any trust In United States v. Hall, 2003 U.S. App. LEXIS 22972 the investors placed in Caplinger was not based on a special (11th Cir. November 10, 2003), the Eleventh Circuit relationship he had with them as a physician, but on the declined to apply a two-level enhancement under U.S.S.G. investor’s misplaced belief in false representations about his § 3B1.3 after concluding Hall’s status as a pastor failed to credentials and the investment’s potential for success. As create a personal trust relationship between himself and the such, the facts did not support the conclusion that Caplinger, victims of his fraud scheme. Hall was convicted of mail by posing as a physician, occupied a position of trust with fraud conspiracy, money laundering conspiracy and mail the victims as that term is used in § 3B1.3. fraud in connection with his promotion of a fraudulent
investment scheme. Hall and his co-defendants held
Downward Departure Objection Must Be
meeting across the country promoting their investment
Specific
program. Despite using religious rhetoric to encourage
participation in the program, the main focus of the
In United States v. Vieke, 2003 U.S. App. LEXIS 22565 (9th meetings was on marketing various investment products. Cir. November 3, 2003), the Ninth Circuit refused to address Notwithstanding the defendant’s promises of large returns, the district court’s downward departure for aberrant most investors ended up losing their investments. behavior because the Government’s general objection to the departure failed to preserve the issue for appeal. Between In appealing his sentence, Hall contended that the district the Fall of 1997 through the Spring of 2001, Vieke used her court erroneously enhanced his sentence under U.S.S.G. § parents’ names and good credit standing to obtain more than 3B1.3 for abuse of a position of trust due to his status as a
$50,000 in fraudulent credit charges. Vieke pleaded guilty pastor. In order for the district court to have applied this to one count of identity theft and, prior to sentencing, told increase, two elements must have been established: (1) that the probation officer she has a compulsive gambling the defendant occupied a position of public or private trust;
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and, (2) that the defendant abused that position in a The Seventh Circuit agreed and reversed the enhancement, significant way to facilitate the commission or concealment finding Carroll’s statement, even if inaccurate, was not an of the offense. Within the context of fraud, the Eleventh attempt to conceal assets and did not amount to material Circuit has found a position of trust to exist in two instances: misstatements required under U.S.S.G. § 3C1.1. Carroll’s (1) where the defendant steals from his employer, using his guilty plea included an agreement to a $2.5 million position in the company to facilitate the offense, and (2) forfeiture allegation which was higher than the $1.7 million where a fiduciary or personal trust relationship exists with amount the government had sought in the indictment; thus, other entities, and the defendant takes advantage of the Carroll’s statements regarding his brokerage accounts had relationship to perpetuate or conceal the offense. Based on no impact on Carroll’s forfeiture liability since all of his the facts of this case, the only relevant test is whether a property was subject to forfeiture as substitute assets
personal trust relationship existed.
regardless of the source. The court further noted Carroll’s
misstatements were distinguishable from other cases
In determining whether Hall occupied a position of trust, the upholding obstruction enhancements for concealing assets court focused on the victims’ perspective of their since there was nothing in the record to establish Carroll relationship with Hall. In this regard, none of the victims concealed any assets. Nor were any hidden assets that testified indicated that they came to the meetings for discovered subsequent to Carroll’s guilty plea. The spiritual guidance; rather, all of them stated that they came appellate court reversed and remanded for resentencing to invest money, not because Hall was a pastor, but because without the enhancement. they wanted to “double their money.” Although Hall may have used his status as a pastor to Appellate Standard of Review for develop the trust of the investors, this alone did not establish a personal trust relationship. As such, the district court Sentencing Departures erred in applying a two-level enhancement under U.S.S.G. §
3B1.3.
In United States v. Mallon, 345 F.3d 943 (7th Cir. 2003),
the Seventh Circuit vacated Mallon’s sentence and remanded with instructions to increase the sentence
Obstruction of Justice Enhancement
according to the Sentencing Guidelines. Mallon, a 61- year
old citizen of Ireland, father of five and grandfather of ten
In United States v. Carroll, 346 F.3d 744 (7th Cir. 2003), the children, pleaded guilty to using international Seventh Circuit reversed the district court’s application of an communication to entice a female under the age of 18 to enhancement for obstruction of justice and vacated Carroll’s engage in sexual activity. Mallon met “Marny,” who he sentence. Carroll pleaded guilty to selling fraudulent non- believed to be a 14-year old girl but who was actually an immigrant visas while employed as a foreign service officer undercover agent, in an internet chat room and, after at the U.S. Embassy in Guyana, which resulted in an months of communication, persuaded her to meet him at a estimated harm of $5 to $10 million. In the indictment, the hotel room in Chicago. Mallon was already scheduled to U.S. Government sought forfeiture of traceable illegal visa be in the United States for a meeting at the White House proceeds or substitute assets in the amount of $1.7 million. and attempted to achieve both goals in one trip. Mallon During his interview with the probation officer, Carroll was arrested after meeting “Marny” in the hotel room. At explained that his wife’s premarital assets and his legitimate sentencing, the district court calculated Mallon’s total savings in six brokerage accounts totaled $100,000 and offense level to be 22, with a corresponding range of 41 to should be exempt from forfeiture. When questioned by the 51 months’ imprisonment. The district court departed district court whether the six brokerage accounts were downward six levels to an offense level of 16, with a excepted from the list of Carroll’s forfeitable property, corresponding range of 21 to 27 months’ imprisonment. Carroll answered in the affirmative without further The district court based its departures on Mallon’s severely explanation. He later clarified that although the six diminished capacity as well as a combination of factors, brokerage accounts contained tainted proceeds commingled including his age, health and non U.S. citizenship, and with legitimate savings, he believed his wife’s premarital sentenced Mallon to 21 months’ imprisonment. The assets together with the legitimate savings within those government appealed. accounts amounted to as much as $100,000. At sentencing, the district court found Carroll misled the probation officer In reviewing the sentencing decisions of the district court, in an attempt to affect the forfeiture determination and the Seventh Circuit applied the amended standard of review applied a two-level obstruction of justice enhancement for sentencing departures from the PROTECT Act. It pursuant to U.S.S.G. § 3C1.1. As evidence of Carroll’s agreed with the First Circuit the new standard of review did deceptive intent and material misstatements, the court cited not violate the Ex Post Facto law, since the new standard to Carroll’s ordinarily meticulous management and was a procedural, not substantive, change in sentencing knowledge of his finances, which contradicted his vague laws, did not change the statutory maximum punishment statements during the plea colloquy regarding the brokerage annexed to Mallon’s crime, and did not affect the
accounts. Carroll appealed.
calculation of his offense level.

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Regarding the grounds for departure, the Seventh Circuit to whether or not other investigative procedures have been found the departures unwarranted. First, although Mallon’s tried and failed or why they reasonably appear to be doctor stated Mallon’s second heart attack had resulted in unlikely to succeed if tried or to be too dangerous.” mental deterioration, there was no evidence to establish Mallon’s heart problems and resulting mental deterioration Since all the wiretap applications were similar, the Tenth somehow transformed into pedophilia to justify the four- Circuit addressed them collectively finding the applications level departure for severely diminished mental capacity. adequately established that, due to the close-knit The court also noted Mallon’s behavior commenced prior to community, as well as the suspicious nature of those his second heart attack and stated, “departures are designed involved in the drug organization and the difficulty of to accommodate the abnormal case, not the person whose introducing anyone new into it, the traditional investigative problems are common among those who commit the crime technique of using informants had been tried but was
in question.” Id., *14.
unlikely to be successful. The court furthered detailed the
difficulties encountered in conducting surveillance in the
Second, there was no justifiable basis for the two-level rural area. Finally, the applications for wiretaps pointed downward departure for a combination of factors, including out the limited success obtained through search warrants. Mallon’s nationality, age and health. Since Mallon’s While the warrants resulted in the seizure of drugs they ailments were as treatable in prison as outside, and his age failed to uncover the scope of the operations, the sources of alone was not enough to establish him as elderly and infirm precursor chemicals, the methods pf distribution, and other pursuant to U.S.S.G. § 5H1.1, the departure was not members of the conspiracy. As such, the Tenth Circuit warranted. To find a defendant infirm, the court stated, it concluded the government made an adequate showing of must find the physical impairment is extraordinary due to necessity for the issuance of the wiretaps. markedly inferior medical treatment within the prison as opposed to treatment available on the outside. The district court specifically found Mallon’s ailments were as treatable in prison as outside. Thus, the departure on those grounds Cline next argued the government failed to timely seal the was not justified. Further, U.S.S.G. § 5H1.10 provides tapes of the calls intercepted. According to 18 U.S.C. § alien status is not relevant to a sentence; thus, Mallon’s Irish 2518(8)(a), “immediately upon the expiration of the period citizenship should not be used to warrant a departure. The of the order authorizing the wiretap, or extensions thereof, court vacated Mallon’s sentence and remanded with such recordings shall be made available to the judge instructions for the district court to sentence Mallon without issuing such order and sealed under his directions.”
the departures.
Specifically, Cline argued a one week delay was too long
and the government failed to explain the delay, other than to assert that the judge was unavailable.
ELECTRONIC SURVEILLANCE
The government conceded that it did not have the wiretap
Suppression of Evidence Obtained Through
evidence immediately sealed as required. It argued,
Wiretaps
however, that it presented the tapes in a timely fashion, but
the judge’s schedule prevented the government from
In United States v. Cline, 2003 U.S. App. LEXIS 23792 obtaining the necessary seal until a week later. The (10th Cir. November 21, 2003), the Tenth Circuit refused to government asserted that it presented the tapes for sealing suppress evidence obtained through a wiretap. The court in an “immediate” fashion as required, and thus the tapes held the government’s wiretap application established a were “made available” as required. The Tenth Circuit sufficient degree of necessity and the unavailability of a agreed with the government, finding their explanation judge to seal the tapes within the time frame provided by reasonable. This decision is consistent with other circuit statute was a satisfactory explanation that excused the courts which have considered a judge’s scheduling government’s failure to obtain the seal timely. Cline was problems when tapes are untimely sealed. convicted for his involvement in a large drug trafficking organization. On appeal he challenges the district court’s The Tenth circuit also concluded the district court decision denying his motion to suppress evidence seized properly denied Cline’s motion to suppress evidence pursuant to wiretaps, a traffic stop and a search of his house. found in his vehicle during a traffic stop since the initial
stop was valid and his consent to search the vehicle was Cline first argued the wiretaps placed on the phones of his voluntary. business, residence and co-conspirator’s residence were obtained without an adequate showing of necessity. Pursuant to 18 U.S.C. § 2518(1)(c), an application for a wiretap order must contain a “full and complete statement as

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CRIMINAL TAX BULLETIN

October 2003

TABLE OF CASES

SEARCH AND SEIZURE

United States v Bridges, 344 F.3d 1010 (9th Cir. 2003)............................................................................................................. 1

Meredith v. Erath, 342 F.3d 1057 (9th Cir. 2003)...................................................................................................................... 1

FORFEITURE

United States v. All Funds, 345 F.3d 49 (2nd Cir. 2003)............................................................................................................ 2

United States v. Saccoccia, 344 F.3d 31 (1st Cir. 2003) ............................................................................................................ 2

United States v. McHan, 345 F.3d 262 (4th Cir. 2003) .............................................................................................................. 2

Contents of Account Number 03001288 v. United States, 344 F.3d 399 (3rd Cir. 2003)........................................................... 3

SENTENCING

United States v. Thurston, 338 F.3d 50 (1st Cir. 2003).............................................................................................................. 4

United States v. Leon, 341 F.3d 928 (9th Cir. 2003) .................................................................................................................. 4

United States v. Pressley, 345 F.3d 1205 (11th Cir. 2003)......................................................................................................... 4

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