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Fraud
Statutes *
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Fraud
Statutes
7204- Fraudulent
Statement or No Statement to Employees:
Providing False Forms
W-2
[91-1
USTC ¶50,022] Martin J. Hughes, Plaintiff-Appellant/Cross-Appellee v.
United States of America
, Defendant-Appellee/ /Cross-Appellant.
United States of America
, Respondent v. Martin J. Hughes, Petitioner
(CA-6),
U.S. Court of Appeals, 6th Circuit, 87-4052, 87-4069, 87-4125, 4/4/90,
Affirming, reversing and remanding a District Court decision, 88-1
USTC ¶9277
[Code Secs.
7204 and 7206 ]
Criminal penalties: Fraud and false statements: Aiding and advising
preparation of false returns.--The U.S. Court of Appeals at
Cincinnati (CA-6) affirmed a decision of the district court which
reduced a union vice-president's felony conviction under Code Sec. 7206(2) for aiding and
assisting in the filing of a false W-3 wage transmittal form with the
IRS to a misdemeanor conviction under Code Sec. 7204 . If the
government could charge an employer with a felony for filing a false W-3
form with the IRS, it would render useless Congress's intent to punish
as a misdemeanant a person who provides false information on a statement
required under Code Sec.
6051 . In addition, the appellate court reversed the district
court's denial of a similar reduction with respect to another count of
the indictment against the union official. With respect to this count,
the government conceded that the official could not have violated Code Sec. 7206(2) merely by
furnishing a particular employee with a false W-2 form, since Code Sec. 7204 provided the
exclusive sanction for such an act. In refusing to reduce the union
official's felony conviction on this count, the district court
improperly found that the jury could have reasonably concluded that the
official took other steps in counseling the employee to understate her
income on her tax return. In fact, the employee denied that the official
gave her any advice concerning the filing of her tax return. On remand,
the district court was instructed to vacate the official's felony
conviction, enter a misdemeanor conviction on that count, and resentence
the official accordingly.
Percy
Squire, Catherine M. Ballard, Bricker & Eckler, 100 S. Third St.,
Columbus, Ohio 43215, Martin J. Hughes III, 21410 Morewood Parkway,
Rocky River, Ohio 44116, Merritt C. Dietz, Jr., Dietz, Fridy &
Freeburger, Main St., Sebree, Ky. 42455, for
plaintiff-appellant/cross-appellee. Christian H. Stickan, John Siegel,
Assistant United States Attorneys, Cleveland, Ohio 44114, for U.S.
Michael P. Butler, Assistant Prosecuting Attorney, Cleveland, Ohio, for
amicus curiae.
Before
BOGGS and NORRIS, Circuit Judges, ENGEL, Senior Circuit Judge.
ALAN
E. NORRIS, Circuit Judge:
Defendant,
Martin J. Hughes, appeals from his conviction on twelve counts of a
thirty-seven-count indictment charging him with various federal criminal
offenses. The government also appeals the district court's decisions
acquitting defendant on two of the counts and reducing his conviction to
a lesser included offense on another count. For the reasons stated
below, we affirm the district court's judgment in part and reverse in
part.
I.
On
May 6, 1986
, the grand jury issued a thirty-seven-count indictment against
defendant, a district vice-president for the Communications Workers of
America, AFL-CIO ("CWA"), charging him with mail fraud,
embezzlement, falsification of union records, aiding and assisting in
the filing of false W-2 and W-3 forms with the Internal Revenue Service
("IRS"), and with making false statements to the United States
through the submission of falsified labor reporting documents. The
government alleged that defendant submitted to the CWA International
office expense vouchers that falsely claimed reimbursement for mileage
and meal expenses for union employees. The government alleged that
defendant received nearly $400,000 in reimbursement funds from the CWA
International and used those funds to make political contributions and
to pay salaries at the United Telephone Credit Union ("UTCU").
Specifically,
the government charged defendant in Counts 1 through 6 and Counts 19
through 23 with mail fraud, in violation of 18 U.S.C. §1341 . Counts 7 through
12 and Counts 24 through 28 charged defendant with embezzlement, in
violation of 29 U.S.C. §501(c)
. Counts 13 through 18 and Counts 29 through 32 charged
defendant with falsification of union records, in violation of 29 U.S.C.
§439(c). Counts 33 through 35 charged defendant with aiding and
assisting in the filing of false W-2 and W-3 forms to the IRS, in
violation of 26 U.S.C. §7206(2) . Finally, Counts
36 and 37 charged defendant with making false statements to the United
States through the submission of false labor reporting documents, in
violation of 18 U.S.C. §1001 .
The
case proceeded to trial on
July 1, 1987
. Before the case was sent to the jury, the district court dismissed
Counts 1 through 12 and Counts 19 through 28, the mail fraud and
embezzlement charges. After the case had been submitted to the jury, the
court dismissed Count 35, one of the tax charges, because of a
typographical mistake in the indictment. The jury returned guilty
verdicts on each of the remaining counts.
Defendant
then moved for acquittal on Counts 33, 34, 36, and 37. The court
acquitted defendant of the felony charges in Counts 36 and 37, finding
as a matter of law that false statements made by defendant were not
material. The court also reduced defendant's conviction of a felony
under 26 U.S.C. §7206(2) to the lesser
included misdemeanor under 26 U.S.C. §7204 in Count 33. The
court refused to reduce the felony conviction under section 7206(2) in Count
34.
Defendant
was sentenced to two years' probation and fined $10,000.
The
government appeals the district court's action in acquitting defendant
on Counts 36 and 37, and reducing the felony conviction on Count 33.
Defendant
appeals the district court's decisions denying his motions for acquittal
on Count 34, for recusal, for mistrial, and to dismiss the entire
indictment in light of the holding in McNally v. United States,
483 U.S. 350 (1987).
II.
A.
The False Statement Counts Under 18 U.S.C. §1001
The
government contends that the district court erred in acquitting
defendant on the felony charges under 18 U.S.C. §1001
in Counts 36 and 37, when it concluded as a matter of law
that false statements made by defendant were not material.
Section 1001 is a general
prohibition against falsifying information given to government agencies,
and provides:
Whoever,
in any matter within the jurisdiction of any department or agency of the
United States knowingly and willfully falsifies, conceals or covers up
by any trick, scheme, or device a material fact, or makes any false,
fictitious, or fraudulent statements or representations, or makes or
uses any false writing or document knowing the same to contain any
false, fictitious or fraudulent statement or entry, shall be fined not
more than $10,000 or imprisoned not more than five years, or both.
Although
the statute explicitly mentions materiality only in the first clause,
courts have read such a requirement into the second clause as well
"in order to exclude trivial falsehoods from the purview of the
statute." United States v. Abadi, 706 F.2d 178, 180 (6th
Cir.), cert. denied, 464 U.S. 821 (1983). Under section
1001 , a false statement to a federal agency is material even
if it does not actually influence a decision of the agency, so long as
it has a natural tendency to influence or is capable of influencing a
decision of the agency.
United States
v.
Chandler
, 752 F.2d 1148, 1151 (6th Cir. 1985).
However,
materiality "is not an element of the offense that must be proved
beyond a reasonable doubt but a 'judicially imposed limitation to ensure
the reasonable application of the statute.' "
Chandler
, 752 F.2d at 1151 (quoting Abadi, 706 F.2d at 180 n.2).
Accordingly, "materiality is a question of law for the court to
decide."
United States
v. Keefer, 799 F.2d 1115, 1126 (6th Cir. 1986). "A
materiality determination is subject to complete review on appeal and is
not controlled by the clearly erroneous standard."
Chandler
, 752 F.2d at 1151.
In
this case, the jury found that the defendant made false statements to
the Department of Labor when he caused the CWA to file false LM-2
reports. These are the annual reports that unions are required to file
disclosing, among other things, the salary and expenses of each employee
who receives more than $10,000 during the year. See 29 U.S.C. §431(b)(3).
Evidence demonstrated that the LM-2 reports filed by the CWA for 1982
and 1983 contained false entries showing Gay Griffith, the manager of
UTCU, as a CWA employee who received $7,995 in 1982 and $10,540 in 1983
as reimbursement for expenses. In fact, these amounts were paid to
Griffith
as salary and were generated by the false expense vouchers filed with
the CWA at the direction of defendant.
The
district court found that the false statements were not material. The
district court took into consideration that the total amount paid to
Griffith was correctly stated, that the misstated amounts were small in
relation to the union's total expenses, and the testimony of a labor
department official that the chief purpose for requiring these figures
was to call attention to persons who were being paid by more than one
union and to "adequately describe" the total amount the union
paid to each employee. The court also relied upon the fact that the
false statements had no effect on any determinations by the Department
of Labor, even though the court also noted that the government need not
prove such an effect to sustain a conviction under section 1001 . Finally, the
court considered the fact that Congress had also included in the Labor
Management Reporting and Disclosure Act a prohibition against making
material false representations in documents required by the Act, but
provided that a violation would be punished as a misdemeanor, rather
than a felony. 29 U.S.C. §439. The court acknowledged that the United
States Supreme Court, in United States v. Batchelder, 442 U.S.
114 (1979), held that if two separate laws cover certain criminal
activity, the government may prosecute under either law. However, the
district court felt that the existence of a misdemeanor statute covering
the making of false statements to the Department of Labor was relevant
in determining the issue of materiality.
The
district court erred in concluding that the false statements were
immaterial. The statements were clearly of the type capable of
influencing the Department of Labor's information-gathering and
regulatory decision-making process. Since Congress specifically required
a union to disclose the amounts it disburses in salary and reimbursement
expenses for each employee who receives over $10,000, and the LM-2 form
provided by the Department of Labor requires the union to separately
list the amounts given to an employee for salary and for reimbursed
expenses, it follows that a false reporting of information specifically
required to be disclosed is material.
The
fact that the misstated amounts are relatively small when compared with
total union expenditures is not particularly relevant to the issue of
materiality. Instead, the relevant inquiry is whether the false
information is of the type that is capable of influencing a decision of
an agency, as opposed to an examination of the magnitude of the
falsehood. See United States v. Norris, 749 F.2d 1116, 1121-22
(4th Cir. 1984) (false inclusion of $650 in expense statement totalling
$35,584 is material), cert. denied, 471
U.S.
1065 (1985). Similarly, the district court's reliance upon the fact that
Congress also provided that essentially identical conduct could also be
punished as a misdemeanor is misplaced, especially in view of the court
having acknowledged that "the false statements do rise to the level
of materiality required" to violate the misdemeanor statute. Since
the government may bring a prosecution for making a false statement to
the Department of Labor under either 18 U.S.C. §1001
or 29 U.S.C. §439, see
United States v. Batchelder, 442 U.S. at 123-24, and no different
standard for determining materiality is set out in the statutes, there
is no basis for concluding that a statement that is material under 29
U.S.C. §439 is not also material under 18 U.S.C. §1001
.
Accordingly,
we reverse the district court's decision acquitting defendant on Counts
36 and 37 of the indictment. Upon remand, the court is instructed to
reinstate the jury's felony convictions on these Counts, and to
resentence defendant accordingly.
B.
The False W-2 and W-3 Forms
The
government contends that the district court erred in reducing
defendant's Count 33 felony conviction under 26 U.S.C. §7206(2)
to a misdemeanor conviction under 26 U.S.C. §7204 . Defendant contends
that the district court erred by refusing to also reduce his felony
conviction in Count 34 to a misdemeanor.
1.
Count 33
In
Count 33, the government charged defendant with aiding and assisting in
the filing of a false W-3 wage transmittal form with the IRS. 26 U.S.C. §6051(a) provides that an
employer who is required to deduct and withhold taxes from its employees
must furnish to each employee a statement, the W-2 form, that sets forth
the amount of wages the employee earned and the amount withheld in
taxes. 26 U.S.C. §6051(d) provides that the
employer must also file a duplicate of the statement with the IRS. This
duplicate is the W-3 form.
26
U.S.C. §7206(2) provides, in
pertinent part, that a person is guilty of a felony if he
[w]illfully
aids or assists in, or procures, counsels, or advises the preparation or
presentation under, or in connection with any matter arising under, the
internal revenue laws, of a return, affidavit, claim, or other document,
which is fraudulent or is false as to any material matter, whether or
not such falsity or fraud is with the knowledge or consent of the person
authorized or required to present such return, affidavit, claim, or
document.
26
U.S.C. §7204
provides that:
In
lieu of any other penalty provided by law
(except the penalty provided by section 6674 ) any person
required under the provisions of section 6051 to furnish a
statement who willfully furnishes a false or fraudulent statement or who
willfully fails to furnish a statement in the manner, at the time, and
showing the information required under section 6051 , or
regulations prescribed thereunder, shall, for each such offense, upon
conviction thereof, be fined not more than $1,000, or imprisoned not
more than one year, or both. (Emphasis added.)
In
reducing defendant's section
7206 felony conviction to a section
7204 misdemeanor offense, the district court concluded that section 7204 provides the
exclusive sanction against an employer for submitting a false W-3
statement to the IRS and that it was a lesser included offense of that
defined in section 7206 .
The
government argues that section
7204 deals exclusively with statements furnished to employees
and does not cover the filing of a false W-3 form with the IRS, pointing
to the language in that section providing that it is the exclusive
sanction for persons who furnish a statement required to be furnished
under section 6051 and that,
while section
6051(a) provides that an employer shall furnish a W-2
to each employee, it provides that the W-3 statement shall be filed
with the IRS.
While
we agree with the government that section
7204 clearly is meant to provide the exclusive sanction for
an employer who furnishes an employee with a false W-2 statement, we do
not agree that there is any linguistic distinction between furnishing
and filing statements that compels our adopting its conclusion that the
section does not apply when an employer files a false W-3 form. The W-3
form filed with the IRS is merely a duplicate of the W-2 statement
furnished to the employee. When an employer furnishes an employee a
false W-2, he necessarily files a false W-3 with the IRS. Under section 6051 , an employer
is responsible for both forms W-2 and W-3. Accordingly, we would render
useless Congress' intent to punish as a misdemeanant a person who
provides false information on a statement required by section 6051 , if we were
to hold that the government may charge an employer with a felony for
filing a false W-3 form with the IRS.
2.
Count 34
In
Count 34, the government alleged that defendant violated section 7206(2) when he did
"willfully aid and assist in, and procure, counsel and advise the
preparation and presentation to the Internal Revenue Service of a Form
W-2 Wage and Tax Statement for Gay Griffith by the Communications
Workers of America." The district court held, and the government
now concedes, that defendant could not have violated section 7206(2) merely by
furnishing
Griffith
with a false W-2 form, since section 7204 provides the
exclusive sanction for this act. However, the district court also found
that the jury could have reasonably concluded that defendant took other
steps in counseling
Griffith
to understate her income on her tax return and, therefore, the court
refused to reduce defendant's felony conviction under section 7206(2) .
However,
a fair reading of the evidence would not permit the jury to conclude
that defendant took any action with respect to the filing of
Griffith
's tax return other than causing the CWA to furnish her with a false W-2
form.
Griffith
expressly denied that defendant gave her any advice concerning the
filing of her tax return.
Accordingly,
we affirm the district court's decision reducing defendant's Count 33
felony conviction to a misdemeanor conviction, and reverse the court's
denial of a similar reduction with respect to Count 34. Upon remand, the
district court is instructed to vacate defendant's Count 34 felony
conviction and to enter a misdemeanor conviction on that Count and
resentence defendant accordingly.
C.
The Recusal Motion
On
two occasions, defendant moved for recusal or disqualification of the
district judge, the Honorable Ann Aldrich. In his motions, defendant
filed an affidavit stating that, at defendant's request, President
Carter signed the final documents approving the appointment of the
Honorable George White to the bench of the Northern District of Ohio one
day earlier than he signed Judge Aldrich's commission, giving Judge
White greater seniority. Judge Aldrich acknowledged that Hughes was
responsible for her "lesser seniority" but, nonetheless,
denied the motions.
Under
28 U.S.C. §§144 and 455 , a judge must recuse
herself if a reasonable, objective person, knowing all of the
circumstances, would have questioned the judge's impartiality. See
Liljeberg v. Health Servs. Acquisition Corp., 486
U.S.
847, 108 S.Ct. 2194, 2203-05 (1988); United States v. Story, 716
F.2d 1088, 1090-91 (6th Cir. 1983). Given the marginal nature of the
benefits that a judge receives by having greater seniority, we believe
that, under the circumstances of this case, a reasonable, objective
person, knowing all the circumstances, would not have questioned Judge
Aldrich's impartiality. The "benefits" of which Judge Aldrich
was supposedly deprived by her lesser seniority are, in the case at
hand, truly de minimis based upon the evidence presented. Based upon the
large number and pattern of appointment of judges in the Northern
District of Ohio, it is quite implausible that either Judge White or
Judge Aldrich would ever become chief judge, with whatever perquisites
that might imply. There is not the slightest hint that whatever
precedence has existed in items such as office selection, etc., has been
of any significance either in fact, or in the estimation of either
judge. Thus, it is quite clear that under the circumstances of this
case, a reasonable, objective person, knowing all the circumstances,
would not have questioned Judge Aldrich's impartiality.
Accordingly,
we affirm the district court's decision denying defendant's motions for
recusal or disqualification.
D.
Defendant's Other Contentions
Defendant
also contends that the district court erred in denying his motion for a
mistrial and denying his motion to dismiss the entire indictment in
light of the holding in McNally v. United States, 483 U.S. 350
(1987). We believe that defendant's arguments with respect to these
issues are without merit, and we, therefore, affirm the district court's
decisions on these remaining issues.
III.
For
the foregoing reasons, the judgment of the district court is affirmed in
part and reversed in part, and this cause is remanded for further
proceedings consistent with this opinion.
[2003-1 USTC ¶50,162]
United States of America
v. John A. Gambone, Sr., a/k/a Jack, John A. Gambone, Sr., Appellant in
No. 01-4424.
United States of America
v. Anthony Gambone, a/k/a Tony, Anthony Gambone, Appellant in No.
01-4427.
U.S.
Court of Appeals, 3rd Circuit; 01-4424, 01-4427, 314 F3d 163,
January 3, 2003
.
Affirming a DC Pa. decision, 2001-2
USTC ¶50,652, 167 FSupp2d 803.
[ Code
Secs. 7204 and 7206]
Criminal penalties: Tax fraud: Aiding and assisting in preparation of
false returns: Providing false Forms W-2: Instructions to jury.
Convictions
against sibling owners of a family construction business in connection
with aiding and assisting in the preparation of false tax returns in
violation of Code
Sec. 7206(2) were sustained. The taxpayers argued that they
merely provided false Forms W-2 to their employees and thus, should be
acquitted on the ground that such violations could only be prosecuted
under Code
Sec. 7204. Although the intersection of Code
Sec. 7204 and Code
Sec. 7206 presented an issue of first impression, other
factors sustained the convictions. The taxpayers created an improper
payment scheme, persisted with it after they knew it to be improper, and
communicated to their employees that payments would be made without
being reported to the IRS. Moreover, although a jury charge relating to
the aiding and assisting of filing false returns may have been
erroneous, it was not prejudicial because the district court had made
clear that the jury could not convict the taxpayers unless it found that
they engaged in conduct beyond simply providing false Forms W-2.
[ Code
Sec. 7206]
Criminal penalties: Tax fraud: Conspiracy . --
Convictions
for conspiracy to defraud the government were upheld against sibling
owners and managers of a family construction business who attempted to
pay employees significant overtime wages off-payroll without withholding
taxes, skimmed cash from their business, and failed to report income.
The taxpayers signed paychecks, reviewed them, made changes and advised
employees of the benefit of making purported pre-tax mortgage payments.
Back references: ¶41,333.13
and ¶41,333.17.
Patrick
L. Meehan, United States Attorney, Laurie Magid, Deputy United States
Attorney for Policy and Appeals, Robert A. Zauzmer, Assistant United
States Attorney, Senior Appellate Counsel, Robert M. Falin, Kristin R.
Hayes, Assistant United States Attorneys, for U.S. Donald J. Goldberg,
Eric W. Sitarchuk, Meredith S. Auten, Ballard, Spahr, Andrews &
Ingersoll, for John A. Gambone, Sr. Thomas A. Bergstrom, for Anthony
Gambone.
Before:
Roth and Greenberg, Circuit Judges, and Ward, * District
Judge.
OPINION OF THE COURT
I. FACTUAL AND PROCEDURAL HISTORY
GREENBERG, Circuit Judge: This matter comes on before this court on
appeals from judgments of conviction and sentence entered in the
district court on December 13, 2001. Defendants-appellants, John A.
Gambone, Sr. ("Jack") and Anthony Gambone ("Tony"),
are brothers who owned and operated a construction business, known since
1983 as Gambone Brothers Organization, Inc. ("Gambone
Brothers"). The indictment accused them of engaging in a three-part
scheme over the course of 20 years, the purpose of which was to file
false personal income tax returns and to aid and assist certain of their
employees and subcontractors in doing the same. Although there are other
Gambone defendants in this case, we sometimes refer to Jack and Tony
exclusively as the Gambones as they are the only appellants.
The first prong of the conspiracy, called the "cash-skimming"
prong in the indictment, involved a systematic plan to receive payment
from home purchasers for certain "extras" in cash, not to
record those payments on Gambone Brothers' books, and to hide this
additional income from the IRS by buying United States savings bonds or
simply by holding the cash in a safe or a nightstand. 1
Prong two of the conspiracy, called the "overtime/expense
reimbursement/ `off-payroll' fraud" prong in the indictment,
charged that the Gambones used three methods to avoid reporting to the
IRS significant wages paid to their employees with the intention that
the employees would do the same. The first and most common method was to
pay the employees "straight time" rather than time and
one-half for all work beyond 40 hours per week and to pay the employees
with two separate checks, one for 40 hours paid from a payroll account
and a second for overtime paid from a nonpayroll account. 2 The
purpose of this scheme was to avoid the requirements of the Fair Labor
Standards Act and to avoid paying the employer's share of Social
Security and Medicare ("FICA") taxes by not reporting the
overtime wages to the IRS and by not withholding income or FICA taxes.
The indictment also alleged that the Gambones, either themselves or
through their personnel employees, informed new employees that Gambone
Brothers would not report overtime wages and encouraged those employees
to do the same. The second method used to avoid reporting wages involved
disguising certain employees' raises as expense reimbursements, which
are not reported as income. The third method involved paying some
employees partially or completely "off-payrolls," that is,
paying them from nonpayroll, operating accounts rather than from payroll
accounts.
To conceal all three types of payments the Gambones had their finance
department prepare and file numerous fraudulent tax documents, including
false W-2 forms to be attached to employees' personal income tax returns
reporting regular wages but failing to report overtime wages, expense
reimbursements, and off-payroll wages. The government estimated that the
Gambones aided and assisted their employees in failing to report at
least $4.5 million in overtime wages and hundreds of thousands of
dollars in wages disguised as expense reimbursement and off-payroll
payments.
The third prong of the conspiracy, called the "unreported
subcontractor payments" prong in the indictment, charged that the
Gambones failed to issue and file IRS forms 1099 for millions of dollars
worth of services rendered by subcontractors. In doing so, the Gambones
aided and assisted some subcontractors in failing to report substantial
income.
A grand jury returned a 67-count indictment against the Gambones and
their co-defendants, Sandra Lee Gambone ("Sandy"), William
Murdock, John Gambone, Jr. ("Johnny"), and Robert Carl Meixner
on April 6, 2000. In particular Count One charged all defendants with
the conspiracy to defraud the United States as outlined above, in
violation of 18 U.S.C. S 371. Murdock and Meixner were implicated,
however, only in the second prong of the conspiracy. Count Two charged
Jack and Sandy, who are married, with the substantive offense of
subscribing to their own false 1994 tax return, in violation of 26
U.S.C. S 7206(1). Count Three against Tony, Count Four against Murdock,
Count Five against Johnny, and Count Six against Meixner similarly
charged each individual with subscribing to a false personal tax return
for either the 1993 calendar year (Johnny, Murdock, and Meixner) or the
1994 calendar year (Tony). Counts Seven through Sixty-Seven charged Jack
and Tony with aiding and assisting in the preparation of false
individual income tax returns for 61 employees, in violation of 26
U.S.C. S 7206(2).
After the district court granted Sandy and Johnny a severance, the case
was tried against the other four defendants. 3 At the
trial each of the defendants moved for a judgment of acquittal on all
counts against them pursuant to Fed. R. Crim. P. 29(a) but the district
court reserved judgment on these motions pursuant to Fed. R. Crim. P.
29(b). On November 17, 2000, the jury returned guilty verdicts on all
counts against the Gambones except for counts Forty-Three and
Fifty-Seven. In addition, it found Murdock guilty on Counts One and Four
and Meixner guilty on Counts One and Six. Thus, the jury found all
defendants guilty on all counts except that it found the Gambones not
guilty of aiding and assisting two of the 61 employees in preparing
false individual returns.
Following the jury verdicts, each defendant renewed his motion for a
judgment of acquittal and, in the alternative, moved for a new trial. On
September 4, 2001, the district court granted Jack's motion for judgment
of acquittal on Count Two, Tony's motion for judgment of acquittal on
Count Three, Murdock's motion for judgment of acquittal on Count Four,
and Meixner's Motion for Judgment of Acquittal on Count One. 4 The
court denied all the defendants' motions on all other counts. See
United States
v. Gambone [ 2001-2
USTC ¶50,652], 167 F.Supp.2d 803 (E.D. Pa. 2001). All
defendants except Meixner therefore were acquitted of the substantive
offense of filing a false individual tax return in either 1993 or 1994
but the court did not disturb any of the convictions on the conspiracy
count except Meixner's and did not disturb the Gambones' convictions on
59 counts of aiding and assisting in the preparation of false individual
tax returns. Moreover, the court denied the defendants' motions for a
new trial. The court subsequently sentenced the Gambones to custodial
terms of 37 months on Count One and custodial terms of 36 months on all
other counts, all terms to run concurrently, ordered them to pay fines
of $75,000 and to pay the IRS $3,000,000. In addition, the court imposed
terms of supervised release upon the Gambones' completion of their
custodial terms and ordered them to pay certain costs of the
prosecution. They then appealed. 5 We have
jurisdiction under 28 U.S.C. S 1291.
II. DISCUSSION
A. Sufficiency of the Evidence
1. Standard of Review
We review the "sufficiency of the evidence ... in a light most
favorable to the Government following a jury verdict in its favor."
United States v. Antico, 275 F.3d 245, 260 (3d Cir. 2001) (citing
Glasser v. United States, 315
U.S.
60, 80, 62 S.Ct. 457, 469 (1942)). "We must sustain the verdict if
there is substantial evidence, viewed in the light most favorable to the
government, to uphold the jury's decision.... We do not weigh evidence
or determine the credibility of witnesses in making this
determination." United States v. Beckett, 208 F.3d 140, 151
(3d Cir. 2000) (citations omitted). In making our review we examine the
totality of the evidence, both direct and circumstantial. See Antico,
275 F.3d at 260. We must credit all available inferences in favor of the
government. See
United States
v. Riddick, 156 F.3d 505, 509 (3d Cir. 1998). Our review of the
district court's interpretation of a statute is plenary. See
United States
v. DeJulius, 121 F.3d 891, 893 (3d Cir. 1997).
2. Aiding and Assisting Convictions
We first address the Gambones' convictions for aiding and assisting
their employees in the preparation of false individual income tax
returns in violation of I.R.C. S 7206(2). Section 7206(2) provides:
Any
person who
...
(1)
[w]illfully aids or assists in, or procures, counsels, or advises the
preparation or presentation under, or in connection with any matter
arising under, the internal revenue laws, of a return, affidavit, claim,
or other document, which is fraudulent or is false as to any material
matter, whether or not such falsity or fraud is with the knowledge or
consent of the person authorized or required to present such return,
affidavit, claim, or document...
shall
be guilty of a felony and, upon conviction thereof, shall be fined not
more than $100,000 ($500,000 in the case of a corporation), or
imprisoned not more than 3 years, or both, together with the costs of
prosecution.
The
Gambones advance a two-part argument challenging their convictions under
section 7206(2). The first step in their reasoning raises a purely legal
question. Casting their conduct as, at most, a scheme to provide false
W-2s, they argue that the Internal Revenue Code allowed the government
to prosecute them only under I.R.C. S 7204. Section 7204 sets forth a
misdemeanor offense for willful furnishing of a false W-2 to an employee
as follows:
In
lieu of any other penalty provided by law (except the penalty provided
by section 6674) any person required under the provisions of section
6051 [governing an employer's obligation to issue, inter alia,
W-2 forms to employees] to furnish a statement who willfully furnishes a
false or fraudulent statement or who willfully fails to furnish a
statement in the manner, at the time, and showing the information
required under section 6051, or regulations prescribed thereunder,
shall, for each such offense, upon conviction thereof, be fined not more
than $1,000, or imprisoned not more than 1 year, or both.
The Gambones argue that this provision's "in lieu of" language
indicates that section 7204 provides the exclusive penalty for willfully
furnishing a false W-2 to an employee. They further note that the
three-year statute of limitations for prosecutions under section 7204
had expired by the time the government initiated its case under section
7206(2).
The Gambones then argue that inasmuch as the government may prosecute a
defendant for the willful furnishing of a false W-2 to an employee only
under section 7204, the evidence was insufficient to sustain a
conviction under section 7206(2) as that section requires proof of
conduct beyond the mere furnishing of false W-2s. They contend that they
did not take affirmative action with respect to their employees' false
tax returns beyond furnishing the false W-2s, and that the jury could
not appropriately consider the furnishing of those W-2s or other conduct
facilitating it, such as paying money off payroll and underreporting on
employee time cards, in connection with the section 7206(2) charges. The
Gambones argue that if we remove this evidence from the equation there
will not be an evidentiary basis for their section 7206(2) convictions.
a. Exclusivity of section 7204
As
the district court noted, this case presents an issue of first
impression in this court as we have not interpreted explicitly the
"in lieu of" language of section 7204, and we have not had the
occasion to discuss the relationship between sections 7204 and 7206(2). See
Gambone [ 2001-2
USTC ¶50,652], 167 F.Supp.2d at 820. The district court,
relying primarily on United States v. Hughes [ 88-1
USTC ¶9277], Crim. A. No. CR 86-98, 1987 WL 33806 (N.D. Ohio
Nov. 13, 1987), held that "conduct which involves, but is not
exclusively limited to, the provision of false W-2s can be sufficient
for a S 7206(2) violation. Thus, the mere fact that the provision of
false W-2s was a part of the case does not mean that a S 7206(2)
violation is not possible." Gambone [ 2001-2
USTC ¶50,652], 167 F.Supp.2d at 820. The court thus rejected
the Gambones' contention that it should disregard entirely the
furnishing of the W-2s in assessing the sufficiency of the evidence
supporting the section 7206(2) convictions. Nonetheless, when moving on
to examine the sufficiency of the evidence, the court found that the
evidence was sufficient to sustain the section 7206(2) verdicts
"even excluding consideration of the W-2s themselves."
Id.
at 821.
In Hughes, the district court concluded that"the simple fact
of providing, or helping to provide, an individual with a fraudulent W-2
is not punishable under S 7206(2) because of S 7204's `in lieu of'
provisions." Hughes [ 88-1
USTC ¶9277], 1987 WL 33806, at *4. The court found, however,
that "[a]s long as there are other actions violative of S 7206, the
fact that the defendant may also have provided an individual with a
false W-2 does not prevent a S 7206 conviction."
Id.
(citing United States v. MacKenzie [ 86-1
USTC ¶9103], 777 F.2d 811 (2d Cir. 1985); United States
v. Isaksson [ 84-2
USTC ¶9966], 744 F.2d 574 (7th Cir. 1984); United States
v. Barnes [ 63-1
USTC ¶9247], 313 F.2d 325 (6th Cir. 1963)). Having so
concluded, the court denied the defendant's motion for judgment of
acquittal or for a new trial, finding that, "[b]ased on the
evidence presented, the jury could have found beyond a reasonable doubt
that [the defendant] additionally counseled [an employee] to understate
her income on her income tax return, by reporting as income only that
amount shown on the W-2 and not the additional income which she received
as `expenses."'
Id.
In other words, the defendant violated section 7206(2) by going beyond
merely providing false W-2s and, in fact, counseling an employee to
understate income.
The defendant appealed and the Court of Appeals for the Sixth Circuit
reversed even though it did not find that the district court erred in
its legal analysis. Rather, the court of appeals held that there was
insufficient evidence that the defendant counseled the employee to
understate her income, noting that the employee had denied receiving
such advice. Hughes v. United States [ 91-1
USTC ¶50,022], 899 F.2d 1495, 1500-01 (6th Cir. 1990). The
court of appeals did not clarify whether section 7206(2) requires proof
of actual counseling or whether something more than furnishing false
W-2s but less than actual counseling would support a conviction. 6
Our cases have not been more helpful with respect to the issue here than
that of the court of appeals in Hughes. In a case not involving
furnishing of false W-2s, we held that "[t]o establish aiding and
abetting the filing of a false tax return `there must exist some
affirmative participation which at least encourages the
perpetrator."' United States v. Graham [ 85-1
USTC ¶9317], 758 F.2d 879, 885 (3d Cir. 1985) (quoting United
States v. Buttorff [ 78-1
USTC ¶9265], 572 F.2d 619, 623 (8th Cir. 1978) (internal
quotation omitted)). In Graham, we held that there was sufficient
evidence to affirm a defendant's conviction where the defendant, who was
a member of a group that opposed taxation, set up a Swiss bank account
for another member and advised him not to pay taxes on the interest
earned on that account "because the
U.S.
had no jurisdiction over it."
Id.
Likewise, where a defendant had provided false invoices to certain
taxpayers as documentation of business expenses and advised those
taxpayers to use those expenses as tax deductions improperly, we found
sufficient evidence to sustain his conviction under section 7206(2). United
States v. McCrane [ 76-1
USTC ¶9147], 527 F.2d 906, 913 (3d Cir. 1975), vacated on
other grounds [ 76-2
USTC ¶9517], 427 U.S. 909, 96 S.Ct. 3197 (1976).
Finally, other courts of appeals, in cases involving similar factual
scenarios where defendant employers disguised certain wages by issuing
paychecks from nonpayroll accounts, have affirmed convictions under
section 7206(2) where the defendants' conduct included, but apparently
was not limited to, furnishing false W-2s. See, e.g., MacKenzie [
86-1
USTC ¶9103], 777 F.2d at 820; Isaksson [ 84-2
USTC ¶9966], 744 F.2d at 577-78. These courts, however, did
not address specifically the relationship between sections 7204 and
7206(2).
The legislative history of section 7204, cited by both sides, clearly
establishes that Congress intended the "in lieu of" language
to ensure that the section 7204 penalties displaced the more severe
penalties in other provisions of the Internal Revenue Code setting out
both felonies and misdemeanors. H.R. Rep. No. 2333, 77th Cong., 2d Sess.
at 132 (1942); S. Rep. No. 1631, 77th Cong., 2d Sess. at 172 (1942)
("These penalties are prescribed in lieu of the penalty imposed by
S 145 of the Code, and are much less severe than those
displaced."). Beyond this point, which, in any event, the "in
lieu of" phrasing of section 7204 itself adequately captures, the
parties' citations to section 7204's legislative history are largely
inconclusive, inasmuch as that history fails to address its relationship
to section 7206(2).
On the other hand, the timeline of amendments to the Code does lend some
support to the government's position that evidence of the Gambones'
furnishing of false W-2s can be used to support the section 7206(2)
convictions. Congress enacted section 7204 as I.R.C. S 470(a) in 1942.
Revenue Act of 1942, Pub. L. No. 77-753, 56 Stat. 798, 892. 7 At that
time section 7206(2) already was in place in the form of I.R.C. S
3793(b) in the Internal Revenue Code of 1939, Congress having enacted it
in 1924. See Revenue Act of 1924, 26 U.S.C. S 1267 (1926). Conduct
designed to assist an employee in filing a false return therefore
already was punishable under section 3793(b), while failing to furnish a
statement required under the Code (although not specifically applicable
to the W-2 context, inasmuch as employers were not yet required to
withhold) was punishable under I.R.C. S 145(a). Taking the legislative
history at its word, section 470(a), enacted as part of the new
withholding regime, was intended to displace the penalties under section
145, which set out misdemeanors in subsection (a), including for failing
to furnish a statement, and felonies in subsection (b). There is no
indication, however, that Congress intended section 470(a), now section
7204, to displace the penalty under section 3793(b). The legislative
history therefore lends some support to the government's argument that
Congress did not intend section 7204 to preclude felony prosecutions of
conduct involving, but not limited to, furnishing false statements.
Moreover, nothing in the language of either section 7204 or section
7206(2) or in the relevant legislative history, suggests that a jury may
not consider the furnishing of false W-2s in deciding whether a
defendant committed an offense under section 7206(2). Read together,
these provisions stand for the less than remarkable proposition that a
person who merely furnishes false W-2s is only culpable enough to
deserve a misdemeanor conviction, while a person who goes further and
willfully causes a false return to be filed is more culpable and is
guilty of a felony. Thus, although the "in lieu of" language
suggests that proof of the mere furnishing of false W-2s is insufficient
as a matter of law to support a section 7206(2) conviction, 8 such
evidence plus any other evidence suggesting a defendant's intent to
cause a false return to be filed form a proper evidentiary basis for
such a conviction. Indeed, MacKenzie and Isaksson implicitly applied
this principle.
Thus, the government may prosecute conduct involving, but not limited
to, furnishing false W-2s to employees under section 7206(2). Under Graham,
the relevant inquiry is whether the defendant engages in "some
affirmative participation which at least encourages" the employee
to prepare or present a false return. Graham [ 85-1
USTC ¶9317], 758 F.2d at 885. Evidence of such affirmative
participation that includes, but is not limited to, furnishing false
W-2s is sufficient to sustain a conviction under that provision. 9 Finally,
such affirmative participation need not rise to the level of actual
counseling, as the Gambones sometimes seem to suggest, as long as it
"at least encourages" the preparation or presentation of a
false return.
b. Sufficiency of the Evidence
Given the foregoing framework, the government presented sufficient
evidence to sustain the 59 section 7206(2) aiding and assisting
convictions. To be sure, there was no direct evidence that either of the
Gambones explicitly counseled any of the 59 employees to underreport
their income. There was, however, ample circumstantial evidence to allow
the jury to conclude that the Gambones aided and assisted them in doing
so by encouraging exactly that behavior.
The essential elements of an offense under section 7206(2) are (1) that
defendant aided, assisted, procured, counseled, advised or caused the
preparation and presentation of a return; (2) that the return was
fraudulent or false as to a material matter; and (3) that the act of the
defendant was willful. I.R.C. S 7206(2). See United States v. La Haye
[ 77-1
USTC ¶9152], 548 F.2d 474, 475 (3d Cir. 1977); see also
United States
v. Hooks [ 88-1
USTC ¶13,771], 848 F.2d 785, 788-89 (7th Cir. 1988).
There appears to be no dispute as to the falsity of the employees'
returns and as to the materiality of the false statements. The Gambones
challenge the sufficiency of the evidence only on the issue of whether
they aided or assisted the filing of those returns and whether their
actions were willful. Through the testimony of two controllers of
Gambone Brothers, Frank Ruser, who worked in that position from 1972 to
1981, and Thomas Gaasche, who was controller from 1985 until April 2000,
the government established that there was a scheme to pay employees'
overtime wages from nonpayroll accounts, paying"straight
time," and failing to withhold tax from the overtime wages and to
disclose those wages to the IRS. Thus, when Ruser expressed his concerns
about how overtime was paid, Tony Gambone responded, "It's my
business, stay out of it."
Id.
at 662. Similarly, Gaasche testified:
I
was probably only working there, you know, six to ten weeks when I --you
know, looking at payroll, and I realized at that point everything going
through payroll was just a flat 40 hours. And, you know, I thought it
--I don't like this, this seemed improper to me. And I went to Jack
Gambone and I went in his office and I said, Jack, I don't --I don't
think we're handling payroll right, I don't know why we're doing this,
why is it only showing 40 hours and then the other is on a separate
check? And I don't recall verbatim what he said, but basically he said,
well, this is their mad money, you know, they take one check home and
the old lady don't have to know about the other one. And I said --at
that time I said, well, I don't know why you'd stick your neck out for
them and help them hide money from their wives. I said, you know, if it
gets audited you're probably going to wind up paying both your share and
their share of the social security and Medicare taxes.
Id.
at 1731-32.
Notwithstanding the controllers' concerns the practice persisted. In
1995 the IRS audited Gambone Brothers which then for a short time began
paying overtime through payroll. After some time, however, Gaasche
confronted Tony Gambone about what he suspected was a false expense
reimbursement, and Gambone responded, "[I]t's my company. I can pay
whoever I want however I want and as much as I want."
Id.
at 1828. The government also produced the testimony of four employees
who worked under the controllers in the accounting department, a
receptionist who worked at Gambone Brothers for over 20 years, and 20
field workers and supervisors, all of whom testified that they received
overtime wages off payroll. Moreover, the witnesses were aware that
Gambone Brothers neither withheld tax from nor reported those wages, and
they understood that they should not report those wages to the IRS
either. Many witnesses also testified that Gambone Brothers gave
employees who were to receive raises the option of having the money paid
on or off payroll.
The Gambones suggest that the testimony of these 25 employees is
insufficient to prove that they willfully aided or assisted the
preparation of false returns because none of the employees testified
that the Gambones directly counseled them to do so. As we discussed
above, however, the government did not have to prove that the Gambones
directly counseled employees to file false returns. Rather, it was
sufficient for the government to demonstrate that they engaged in some
affirmative conduct that at least encouraged them to do so. The Gambones
contend that their role was limited to providing false W-2s and that
they had no interest in whether or not the employees reported their
overtime wages. The overwhelming weight of the evidence, however,
establishes that this is not an accurate characterization of the
Gambones' conduct. Given the testimony of all of the witnesses just
mentioned, there plainly was sufficient circumstantial evidence to
support a finding that the Gambones engaged in a long-running scheme to
encourage their employees to file false returns. The Gambones not only
furnished false W-2s to scores of employees, but also created false
employee time cards, engaged in intricate and deceptive bookkeeping
intended to mask underreported income, and issued checks to employees
from nonpayroll accounts for unreported overtime wages.
The parade of employees testifying that they understood the Gambones'
actions as a sign that they should not report their overtime wages is
evidence in itself that the Gambones, through this pervasive, ongoing
scheme, took affirmative steps to encourage the employees to file false
returns. 10
Furthermore, some witnesses testified that agents of the Gambones,
including John Zangari, a superintendent involved in hiring new
employees, and certain foremen informed them more specifically that
Gambone Brothers' "straight-time" policy meant that they
should not worry about reporting overtime income. When pressed further,
Zangari told these employees that Gambone Brothers would take care of
any problems that might arise out of employees' failure to report
overtime income. One employee testified Zangari told him that he should
quit if he did not want to be paid under the "straight-time"
system, and Zangari testified that when he told Jack and Tony Gambone
about another employee's request that taxes be withheld from all of his
pay, the Gambones told him the employee's only options were to receive a
"straight-time" check, not to work overtime at all, or to
quit. Finally, Zangari, who, from 1989 to 1993, was the company's
"overall superintendent," overseeing all jobs performed during
that time period, testified that he informed all newly hired employees
upfront of the "straight-time" policy, and that he spoke daily
with Tony Gambone, mentioning in their discussions every new employee
hired.
Cumulatively, this evidence supports an inference that the Gambones,
either themselves or through their agents, encouraged employees not to
report overtime income. Employees were informed that Gambone Brothers
would pay straight time for overtime, not report overtime income, and
take care of any problems that might arise. As a result, some employees
testified that they felt obligated not to report overtime income for
fear of blowing the whistle on Gambone Brothers or on their fellow
employees. The evidence supports the inference that the Gambones
intended exactly that result, inasmuch as inconsistent reporting would
have pointed to their own underreporting, which they had taken great
pains to hide by creating false employee time cards and manipulating the
company's books. In any event, although there was little evidence
suggesting that the Gambones explicitly advised employees to file false
returns, there is ample circumstantial evidence showing that they took
affirmative steps to encourage them to do so. Accordingly, a reasonable
jury could have concluded that the Gambones knowingly aided and assisted
in the preparation of tax returns of 59 employees that contained
materially false statements and, thus, the evidence supported the
convictions for violations of section 7206(2).
3. Conspiracy Convictions
To sustain its burden of proof on the crime of conspiracy to defraud the
United States, the government had to prove: (1) the existence of an
agreement; (2) an overt act by one of the conspirators in furtherance of
the objective; and (3) an intent on the part of the conspirators to
agree as well as to defraud the United States. See United States v.
Rankin, 870 F.2d 109, 113 (3d Cir. 1989) (citing United States v.
Shoup, 608 F.2d 950, 956 (3d Cir. 1979)). The indictment described
three ways in which the Gambones conspired to defraud the United States
by: skimming cash from Gambone Brothers and failing to report it as
income on their own personal returns; paying and not reporting employee
income from overtime wages and aiding and assisting those employees in
filing false returns; and not reporting payments to subcontractors and
therefore aiding and assisting those subcontractors in their failure to
report that income.
We will affirm the convictions as long as we find that there was
sufficient evidence with respect to one of the three alleged prongs of
the conspiracy. See United States v. Syme, 276 F.3d 131, 144 (3d
Cir. 2002) (citing Griffin v. United States, 502 U.S. 46, 49-50,
112 S.Ct. 466, 469-70 (1991)). The evidence discussed above with respect
to the substantive convictions under section 7206(2) also supports
convictions under the second prong of the conspiracy count. In
particular, that evidence allowed a jury to conclude that the Gambones
(1) had an agreement, the purposes of which were to avoid paying their
share of social security and Medicare taxes and to encourage employees
to go along with the scheme by filing false tax returns, (2) committed a
number of overt acts in furtherance of those objectives by furnishing
false W-2s, falsifying employee timecards, paying overtime wages
off-payroll, and engaging in deceptive bookkeeping, and (3) intended
both to agree to defraud and to defraud the United States. There was
therefore sufficient evidence to sustain the conspiracy convictions.
The evidence was sufficient to sustain convictions for the cash skimming
conspiracy as well. Gaasche testified that Gambone Brothers received
payments predominantly by check, and that the largest of the infrequent
cash payments he recalled seeing when he was controller was
approximately $3300. Three home purchasers testified that they delivered
cash in payment for extras --respectively $10,750 in 1995, $50,000 in
1994, and a total of $105,805 in 1994 and 1995. None of these cash
payments were recorded on Gambone Brothers' books. Furthermore, Robert
Sylvester, Jack Gambone's brother-in-law, testified that he resided with
the Gambones for 20 years and that he frequently observed Jack Gambone
in possession of sums of cash. He testified that Jack would tell his
wife, Sandra, to hide the cash until she could use it to buy savings
bonds, which, Jack told Sylvester, were a good vehicle for hiding cash
inasmuch as the income from the bonds is not reported to the IRS until
they are cashed.
Sylvester also testified that he once saw Jack in possession of $30,000
in cash, and that on another occasion he accompanied Sandra to the bank,
where she purchased $60,000-70,000 in savings bonds. When
Pennsylvania
state police officers executed a search warrant at Jack's house on
August 25, 1994, they located $60,000 in a safe and $12,000 in Jack's
nightstand. When a federal search warrant was executed on December 6,
1995, $65,815 was seized from the safe, of which $30,000 belonged to
Sylvester. Bank records revealed that Sandra paid a total of $62,750 in
cash to purchase savings bonds between June 24, 1994, and July 21, 1995.
Moreover, Gaasche testified that in 1995 Jack told him that the FBI had
been "snooping around," and that he should record $150,000,
which Jack had received and split with Tony, on the company's records.
Taken together, this evidence is sufficient to sustain a finding by the
jury that Jack and Tony Gambone conspired to defraud the
United States
by skimming cash from Gambone Brothers and failing to report that cash
on their personal income tax returns.
By discussing the evidence only on the first two prongs of the
conspiracy indictment we do not imply that the evidence did not support
a conviction on the basis of the third prong. Rather, we do not find it
necessary to discuss that evidence. We do note, however, that there was
substantial evidence to support it.
B. Improper Remarks During Rebuttal
1. Standard of Review
The Gambones argue that they are entitled to new trials by reason of the
prosecutor's improper statements in her rebuttal closing argument. We
make a harmless error analysis when deciding whether a new trial is
warranted because of improper remarks made by the prosecutor during
closing arguments. See United States v. Zehrbach, 47 F.3d 1252,
1265 (3d Cir. 1995) ( en banc). "The harmless error doctrine
requires that the court consider an error in light of the record as a
whole, but the standard of review depends on whether the error was
constitutional or non-constitutional.... [N]on-constitutional error is
harmless when `it is highly probable that the error did not contribute
to the judgment.'... `High probability' requires that the court possess
a `sure conviction that the error did not prejudice' the
defendant."
Id.
(citations omitted). If the error was constitutional, the court may
affirm "only if the error is harmless beyond a reasonable
doubt."
United States
v. Molina-Guevara, 96 F.3d 698, 703 (3d Cir. 1996).
2. Analysis
In opening statements, the prosecutor set forth the evidence the
government planned to introduce to corroborate Sylvester's testimony
regarding the Gambones' plot to skim cash from the company and to hide
that cash by purchasing savings bonds:
And
later, based on ... information [provided by Sylvester], search warrants
were executed, ... and guess what, they corroborated what Mr. Sylvester
said. A year later in `95 ... over $65,000 cash and almost a million
dollars face value savings bonds were found in a safe in Jack Gambone's
house. And you'll hear how many of those savings bonds were purchased
with cash from a bank representative.
J.A. at 184. Later in the trial, however, the court excluded evidence of
the bonds because the government was unable to lay a foundation for
admission of any but a small fraction of the bonds ($62,750, as
discussed above) by showing that they were purchased with cash.
In his closing, Thomas A. Bergstrom, counsel for Tony Gambone, after
reviewing impeachment evidence concerning Sylvester's incentive to lie
to obtain a lesser sentence for a drug conviction, raised the bond
issue:
And
I'm going to tell you this because part of me says stay away from it,
Bergstrom, but part of me says you've got to know, because you heard it
in the Government's opening argument. They came in front of you and
argued to you, three and a half weeks ago, that there's a million
dollars in bonds. Well, guess what? There isn't a million dollars in
bonds. They didn't show you a million dollars in bonds at all. They
showed you some bonds that were purchased between June of `94 and July
of `95. My recollection tells me those bonds totaled about $65,000....
So, you know, the Government had their moment here. They ... opened
with, the million dollars in bonds that they opened with, and that they
haven't been able to prove....
Id.
at 3143-44. In rebuttal, the prosecutor, discussing the cash-skimming
allegation, responded:
It's
all the money over all those other years. And again, they want to hide
behind the fact that there's not a paper trail of cash. And they want to
point their finger at Mr. Sylvester and they want to bring up that whole
thing about the bonds. Well, you know, ladies and gentlemen, Judge
Padova told you before Ms. Winters' opening that openings were about
what the Government expected the evidence to show. And you saw that
throughout this trial, various objections were made and Judge Padova
would rule on them as he saw fit and you saw that evidence was excluded.
So, if there's things we've said we were going to prove that we didn't,
don't hold it against us. You heard the objections they made.
Id.
at 3163-64.
At that point, Bergstrom objected. The court overruled the objection,
stating that he would charge the jury"on that subject." The
jury instructions, however, included only general statements as to the
burden of proof, the fact that the defendants need not produce any
evidence, the manner of ruling on objections according to the rules of
evidence, and the fact that statements and arguments of counsel are not
evidence. The court did not give a specific curative instruction with
respect to the prosecutor's remarks.
The parties do not dispute that the prosecutor's remarks were improper. 11 In
United States
v. Mastrangelo, we outlined three factors to consider in determining
whether improper comments are prejudicial: the scope of the comments
within the context of the entire trial, the effect of any curative
instructions given, and the strength of the evidence against the
defendant. 172 F.3d 288, 297 (3d Cir. 1999); see also
United States
v. Zehrbach, 47 F.3d at 1265.
The third factor, the strength of the evidence against the Gambones,
weighs in favor of the government. It should be noted at the outset that
the substance of the prosecutor's remarks establishes at most the
purchase of bonds, not illegal bond acquisition. Nevertheless, any
prejudicial effect from the prosecutor's remarks would go to evidence of
cash-skimming, the first prong of the conspiracy count. The government
needed to prove only one prong in order to establish a conspiracy, and
the district court found that two other prongs were proven. Further, the
jury had the witness testimony of Robert Sylvester upon which to base a
prong one verdict, and we have held that probative evidence on the same
issue as improper remarks may mitigate prejudice stemming from those
remarks. Gambone [ 2001-2
USTC ¶50,652], 167 F.Supp.2d at 827; see United States v.
Helbling, 209 F.3d 226, 242 (3d Cir. 2000) ("[A]lthough the
prosecutor's comments may have been a pointed assertion of Helbling's
guilt, the characterizations were related to the charges contained in
the indictment which the evidence presented later did in fact establish.
Accordingly, we find prejudice to be lacking.").
Similarly, the first factor, the scope of the improper comments within
the context of the whole trial, weighs in favor of the government. Not
only was the Sylvester testimony presented as evidence of cash-skimming,
the government successfully introduced evidence concerning approximately
$65,000 in bonds to corroborate Sylvester's testimony. 12
Although this amount falls short of a million, as a legal matter the
value of the bonds is not a critical factor in determining whether there
was an unlawful conspiracy. Further, the prosecutor's objectionable
comment amounts to less than half of a page out of over 3200 pages of
trial transcript prior to jury deliberations. It represented only a
fleeting moment in a four-week trial, in which the court sustained more
than 200 objections by the defendant.
Thus, the district court was correct to distinguish this case from
United States
v. Mastrangelo, 172 F.3d 288, and Molina-Guevara. In Mastrangelo,
the parties had stipulated that the defendant "had the chemical
background to know the ingredients and equipment necessary to make
methamphetamine," although the defendant had refused to stipulate
that he knew how to make the drug. Id . at 295. In his closing, the
prosecutor remarked both that the stipulation suggested that the
defendant "knew ... how to make methamphetamine" and that
there was no evidence of anyone else in the conspiracy knowing how to
make methamphetamine.
Id.
at 296. We held that these statements were improper because they
mischaracterized the evidence in the record and impermissibly shifted
the burden to the defendant to produce exculpatory evidence, influencing
the case outcome.
Id.
at 296-97.
The Gambones argue that the prosecutor's statements impermissibly
shifted the burden of proof by "telling the jury to hold any gaps
in the evidence against the defendants." Joint Br. of Appellants at
41. We reject this argument as the court made clear in its charge that
the burden of proof throughout the case remained with the government
and, in any event, even without the court's charge we are satisfied that
the prosecutor's statements would not have had the effect that the
Gambones suggest. In this regard, we point out that Mastrangelo
is distinguishable as the prosecutor's remarks here at most explained
the reason for the government's failure of proof and thus did not imply
that the Gambones had any obligation to produce exculpatory evidence.
Moreover, there was substantial evidence to support all the prongs of
the conspiracy count including witness testimony about cash-skimming to
which the prosecutor's statements did not relate.
Similarily, Molina-Guevara is distinguishable from this case. In Molina-Guevara
the government called one customs agent to testify to the defendant's
involvement in a drug conspiracy but chose not to call a second agent
who also had questioned the defendant. After counsel for the defendant
challenged the witness' credibility during his closing argument, the
prosecutor suggested during rebuttal that counsel for the defendant did
not call the second agent to testify because that agent would have
corroborated the testimony of the first agent. 96 F.3d at 703. In Molina-Guevara,
the prosecutor's comments about the credibility of government agents was
influential of case outcome, as it determined the crucial issue of
whether defendant was involved in a drug conspiracy.
Id.
at 705. In this case, other evidence established the conspiracy.
Thus, the first and third factors weigh very strongly in the
government's favor. As a result, even though no specific curative
instruction was provided to the jury, we hold that the error was
harmless beyond a reasonable doubt, and the Gambones are not entitled to
a new trial by reason of the prosecutor's comments. Accordingly, we need
not determine whether the comments constituted constitutional or
nonconstitutional error, as the higher standard is met.
C. Prejudicial Spillover
"Generally, invalidation of the convictions under one count does
not lead to automatic reversal of the convictions on other counts."
United States
v. Pelullo, 14 F.3d 881, 897 (3d Cir. 1994). "[P]rejudicial
spillover analysis under Pelullo begins by asking whether any of
the evidence used to prove the reversed count would have been
inadmissible to prove the remaining count ( i.e., whether there
was any spillover of inadmissible evidence). If the answer is `no,' then
our analysis ends, as the reversed count cannot have prejudiced the
defendant."
United States
v. Cross, 308 F.3d 308, 318 (3d Cir. 2002). If there was any
spillover, we must ask whether the error was harmless, that is, whether
it is highly probable that the error did not prejudice the jury's
verdict on the remaining counts.
Id.
at 318-19.
The Gambones' arguments on this issue center on the assertion that they
also advanced with respect to their insufficient evidence argument on
the conspiracy count, that the government failed to prove that they
"engaged in a colossal 20 year tax fraud scheme whereby enormous
amount of cash were skimmed from their business and omitted from their
tax returns each year from 1975 to 1995." Joint Br. of Appellants
at 49. They argue that the evidence of such a plot was
"non-existent," a position belied by the evidence already
summarized. The Gambones further suggest that any evidence that was
admitted in support of the personal tax evasion counts (not only the
conspiracy count, but also the substantive counts as to which the
district court granted judgments of acquittal) amounted to nothing more
than unsupported "jury-arousing" accusations that portrayed
the defendants as massive tax evaders who wished, in the words of the
prosecutor, "to cheat the IRS in as many ways as they could."
J.A. at 3050. The Gambones conclude that, because those
characterizations were, in their eyes, proven to be inaccurate, the
spillover effect of the jury-arousing statements tainted the entire
trial, requiring that we reverse their convictions on the counts that
survived the district court's order partially granting their motions for
judgments of acquittal.
As we discussed above in detail, there was sufficient evidence to
sustain the conspiracy conviction on either of the government's first
two theories, that is, on the cash-skimming prong and the
"overtime/expense reimbursement / `off-payroll' fraud" prong.
The unsubstantiated counts are therefore Counts Two and Three charging
the Gambones with the substantive offenses of subscribing to false
personal tax returns for the year 1994. 13 The
district court granted the Gambones' motions for judgment of acquittal
on these charges because the government had not introduced evidence that
would allow the jury accurately to pinpoint exactly when they received
cash from the company that may have gone unreported. Gambone [ 2001-2
USTC ¶50,652], 167 F.Supp.2d at 815-17. Nevertheless, the
district court reasonably found that evidence was presented to suggest
that the business received substantial amounts of cash and that the
Gambones received distributions of this cash at some point, though it
ultimately found that there was not evidence suggesting that the
Gambones received the cash in 1994.
Id.
The evidence introduced to prove Counts Two and Three also would have
been admissible at a trial limited to the remaining valid counts. That
evidence, which focused on the allegedly false personal tax returns for
the year 1994, was merely a subset of the evidence supporting the
government's allegation that the Gambones engaged in a long-running
conspiracy to defraud the
United States
by skimming cash and failing to report that cash on their personal
income tax returns. The Gambones seek to characterize that evidence of
the false 1994 returns as jury-arousing. If that evidence contributed to
a picture of the Gambones as major tax evaders over the course of 25
years, however, it is for good reason; that is exactly what was alleged
in Count One, on which the jury convicted the Gambones. Thus, although
the evidence introduced to support Counts Two and Three, according to
the district court, would not have allowed a reasonable jury to pinpoint
the exact year in which the Gambones skimmed cash that may have gone
unreported, that evidence would have been admissible at a trial on the
cash-skimming conspiracy charge. Our analysis need continue no further.
Nonetheless, we also note that, inasmuch as there was very strong
evidence to sustain a conviction under the second prong of the
conspiracy count, i.e., the underreporting of employees' wages,
and to sustain the convictions on the 59 counts of aiding and assisting
in the preparation of employees' false returns, even if there had been
impermissible spillover, any error would have been harmless. Thus, we
are satisfied that the Gambones are not entitled to new trials
predicated on an adverse spillover effect from the counts on which they
were acquitted.
D. Jury Instructions
1. Standard of Review
The Gambones contend that they are entitled to reversals and new trials
on the aiding and assisting counts because the court's instructions on
those counts were erroneous. Inasmuch as they did not object to the
instructions at trial, we examine the charge for plain error. See
United States
v. Retos, 25 F.3d 1220, 1228 (3d Cir. 1994). Thus, for us to grant
them relief "[t]here must be an `error' that is `plain' and that
`affects substantial rights.' Moreover, [Fed. R. Crim. P.] 52(b) leaves
the decision to correct the forfeited error within the sound discretion
of the Court of Appeals, and the court should not exercise that
discretion unless the error `seriously affect[s] the fairness, integrity
or public reputation of judicial proceedings."'
Id.
(quoting United States v. Olano, 507
U.S.
725, 732, 113 S.Ct. 1770, 1776 (1993)). "[I]t is a rare case in
which an improper instruction will justify reversal of a criminal
conviction when no objection has been made in the trial court." United
States v. Gordon, 290 F.3d 539, 545 (3d Cir. 2002) (internal
quotation marks omitted).
2. Analysis
The Gambones challenge the portion of the jury charge relating to the
aiding and assisting counts in which the district court stated: "I
instruct you as a matter of law that if you find beyond a reasonable
doubt that a defendant willfully furnished, prepared or caused to be
prepared false and fraudulent documents which the defendant knew would
be relied on in the preparation of income tax returns and would result
in returns which were materially false ... then the Government has met
its burden of proof in this element...." J.A. at 3257.
When reviewing a jury instruction for plain error, the "analysis
must focus initially on the specific language challenged, but must
consider that language as part of a whole." Gordon, 290 F.3d
at 544. We recognize that if taken in isolation the challenged
instruction would be erroneous as a juror reasonably could interpret it
as allowing a conviction even though the Gambones merely had provided
employees with false W-2s without further encouraging them to file false
tax returns. In context, however, the error is not plain. The
instruction on this point began:
Okay.
Now let's focus on aiding and abetting. What is it, what can it be?
Where should your focus be with respect to whether there has been aiding
and abetting?
First
let me state that it is not enough, it is not enough for the Government
to establish only that the individual taxpayers listed in Count 7
through 67 received a Form W-2 that did not include all of their income.
That's not enough to make the charge. If that's all there is, it's not
enough to make the charge.
In
order for the Government to establish that Anthony Gambone or John
Gambone aided and abetted those individuals in filing a false return,
you must find first that the return they filed was indeed false.
Secondly, that the individual taxpayer in fact had income from Gambone
Brothers that was not reported on this tax return; thirdly, that the
failure to report was the cause of the unlawful assistance of the
defendant; and fourthly, that besides giving the taxpayer an incorrect
Form W-2, Anthony or John Gambone did something else to aid that
particular taxpayer in filing [a] false return, besides proving an
incorrect Form W-2 or transmitting an incorrect W-2.
And
as to each taxpayer, members of the jury, you must affirmatively decide
that the Government has proven beyond a reasonable doubt that the
defendant did something to aid and assist that taxpayer besides simply
and only providing an incorrect W-2 form. And you have heard all of the
evidence with respect to everything that was going on. You don't have to
determine what was going on, and then determine whether there was aiding
and assisting under the definition as I've just given it to you.
J.A. at 3255-56 (emphasis added). After an additional paragraph the
court gave the challenged portion of the charge.
In the four paragraphs of the charge that we have quoted, the district
court made abundantly clear that the jury could not convict the Gambones
on the aiding and assisting counts unless the jury found that they
engaged in conduct beyond simply providing false W-2s. Thus, even though
the challenged portion of instruction in itself is not consistent with
four paragraphs we have quoted, 14 and the
court's use of the phrase "as a matter of law," was erroneous,
in the context of the charge as a whole this statement was not
prejudicial. Indeed, it is probably for exactly that reason that the
Gambones' attorneys did not object to the charge at the trial.
Furthermore, given the substantial evidence pointing to the Gambones'
guilt and the overall fairness of the proceedings, any error clearly did
not affect substantial rights. See Retos, 25 F.3d at 1229 (stating that,
under plain error analysis, the court of appeals will exercise its
discretion to order correction where the defendant is actually innocent
or where the error seriously affects the fairness, integrity, or public
reputation of judicial proceedings). The instruction was therefore not
plainly erroneous and the Gambones are not entitled to new trials by
reason of it.
III. CONCLUSION
For the foregoing reasons the district court properly denied the
Gambones' motions for new trials and acquittals and the judgments of
convictions and sentence entered December 13, 2001, will be affirmed.
*
Honorable Robert J. Ward, Senior Judge of the United States District
Court for the Southern District of New York, sitting by designation.
1 We point
out that even though it might seem strange that a person would buy
United States
savings bonds with unreported income, the Gambones did so as the income
from such bonds need not be reported to the IRS until they are cashed or
mature.
2 At least
at certain times Gambone Brothers used an outside payroll service to pay
straight time wages.
3 The
district court denied the defendants' pretrial motion to dismiss count
one of the indictment. See
United States
v. Gambone, 125 F.Supp.2d 128 (E.D. Pa. 2000).
4 Although
the September 4 order accompanying the court's opinion mistakenly
granted Murdock's motion as to Count Three, in which he was not charged,
that error was corrected by order of September 6, 2001.
5
According to the Gambones' brief, Murdock and Meixner did not appeal
and, as of the time of the filing of the Gambones' brief on this appeal,
the case against Sandy and Johnny had not been tried. The Gambones
challenge only their convictions and not their sentences on this appeal.
6 The
court of appeals affirmed in part and reversed in part on other aspects
of the appeal that we need not describe.
7 Congress
first required employers to withhold employees' income taxes in 1942;
the 5% World War II "Victory Tax" on most employees' gross
wages was the first vehicle for doing so. Carolyn C. Jones, Class Tax to
Mass Tax: The Role of Propaganda in the Expansion of the Income Tax
During World War II, 37 Buff. L. Rev. 685, 694-99 (1989); Peter W.
Colby, Comment, Federal Withholding on Employee Fringe Benefits for
Income and Social Security Taxes, 70 Cal. L. Rev. 178, 180-81 & n.19
(1982). The following year, Congress amended the Code to make
withholding applicable to all income tax. Id.
8 Allowing
the jury to infer intent to aid and assist from the mere furnishing of
false W-2s would subject a defendant who had engaged in precisely the
conduct prohibited by section 7204 --no more and no less --to a
punishment other than that prescribed by that section, thus ignoring the
"in lieu of" language.
9 The
Gambones also argue that other conduct ancillary to furnishing false
W-2s --details such as the preparation of employee time cards, the use
of separate, nonpayroll checks for overtime wages, and the extra
accounting necessary to accommodate a false W-2 scheme --should in
effect merge with the furnishing of false W-2s, so that evidence of such
conduct likewise would be insufficient on its own to sustain a section
7206(2) conviction. Because this position lacks any support in the
statutory text, legislative history, and applicable caselaw, we reject
it. If a defendant goes beyond merely furnishing false W-2s, and if the
jury finds his conduct to constitute affirmative participation that
encourages employees to file false returns, it may convict him of a
felony under section 7206(2). The Gambones suggest that, because
"every fraudulently understated W-2 opens the possibility" of
such ancillary conduct, in every section 7204 case the facts also would
support a section 7206(2) conviction. Joint Br. of Appellants at 26.
Nevertheless we are satisfied that persons who furnish false W-2s may
avoid felony convictions so long as they either eschew such ancillary
conduct altogether, or at least engage in such conduct in such a way
that a jury does not believe to constitute affirmative participation
that willfully encourages employees to file false returns.
10
Curiously, the Gambones appear to concede that there was evidence
supporting this inference. Joint Br. of Appellants at 26 ( "There
was also evidence enough to conclude that the Gambones intended to make
it possible for their employees not to report all of their wage income
by issuing false W-2s, and that some employees so understood it.").
11 The
government appears to have abandoned an argument it raised in the
district court, that the "invited error" doctrine should
apply. That doctrine "teaches that where a prosecutorial argument
has been made in reasonable response to improper attacks by defense
counsel, the unfair prejudice flowing from the two arguments may balance
each other out, thus obviating the need for a new trial." United
States v. Pungitore, 910 F.2d 1084, 1126 (3d Cir. 1990) (citing United
States v. Young, 470 U.S. 1, 12-13, 105 S.Ct. 1038, 1045 (1985)).
The doctrine does not apply, however, where defense counsel's attacks
are proper, "vigorous advocacy." Molina-Guevara, 96
F.3d at 705. As the district court found, defense counsel did nothing
improper by pointing out that the government did not prove every fact
alleged in the indictment or raised in opening statements. The
government has not advanced the invited error theory on appeal.
12 The
Gambones argue that the effects of the prosecutor's comments seeped well
beyond the confines of the cash-skimming prong, infecting the entire
trial with unsupported, "jury-arousing" allegations. They
argue that the prosecutor's use of the word "objections" was
meant to refer to the over 200 defense objections sustained during the
trial: "[T]he jury simply could not have understood the
government's egregious remarks as restricted to the prong 1 conspiracy.
The explicit references to other excluded evidence could only lead the
jury to conclude that there was all sorts of evidence of the defendant's
guilt which was being kept from them by the defense objections."
Joint Br. of Appellants at 42-43. We reject this argument, which makes
ambitious use of the prosecutor's pluralization of the word
"objection" when we consider it in the context of the rebuttal
argument as a whole. Defense counsel only mentioned the bonds when
discussing Sylvester's credibility and testimony concerning the
cash-skimming scheme, and the government only referred to defense
"objections" while discussing this same point.
13 We
recognize that the jury found the Gambones not guilty on two of the 61
counts charging them with aiding and assisting in the preparation of
their employees' false individual income tax returns. It is clear,
however, that inasmuch as the jury convicted the Gambones on the
remaining 59 of these counts and the court denied their motions for
acquittal on those counts, there could not possibly have been a
spillover effect from the evidence on the two counts on which they were
acquitted, and the Gambones do not contend otherwise. Rather, they
contend that reversal of the remaining 59 counts "for insufficiency
will also require [us] to assess the spillover effect of those
invalidated counts." Joint Br. of Appellants at 50 n.9. Of course,
inasmuch as we are affirming the convictions on these counts we need not
make the analysis that the Gambones believe might be necessary.
14 The
contradiction, however, is not as flat as the Gambones suggest. The
challenged instruction refers to "false and fraudulent
documents" rather than specifically to W-2s, the only inappropriate
document to consider without additional proof of encouragement.
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