Thursday, August 23, 2007

Tax Attorney: Tax fraud mens rea

The taxpayer's was taped by an IRS agent in a seminar tellilng the audience how to evade taxes.This was an easy win for the DOJ in the circumsances.

United States of America, Plaintiff-Appellee, v. Michael E. Diesel, Defendant-Appellant. U.S. Court of Appeals, 10th Circuit; 06-3325, July 31, 2007.Unpublished opinion affirming an unreported DC Kan. decision.

[ ¶41,333.217 and ">ORDER AND JUDGMENT * GORSUCH, Circuit Judge: A federal jury found Michael E . Diesel guilty of willfully underreporting to the IRS over $3 million of his personal income over a three-year period. The United States District Court f o r the District of Kansas thereafter sentenced Mr. Diesel, inter alia, to 42 months of incarceration.

In this appeal, Mr. Diesel a rgues that we should overturn his conviction because (1) he "could not possibly have had the requisite mens rea "; (2) the government unconstitutionally required Mr. Diesel to "create his own tax form"; and (3) the district court violated Apprendi v . New Jersey, 5 30 U.S. 466 (2000) , and its progeny when it sentenced him to a mid-Guidelines term of 42 months of incarceration. Because Mr. Diesel's first two arguments are wholly without merit and Mr. Diesel's third argument is precluded by Supreme Court and our case law, we affirm.

* * *Mr. Diesel founded and, through a series of trusts, effectively owned and operated a telecommunications research company which paid him an annual salary of $103,549 in 1998, $106,754 in 1999, and $108,788 in 2000. Mr . Diesel reported, and presumably paid , income tax on these amounts . In addition to his salary, however, Mr. Diesel's trusts also made over $3 million in distributions from 1998 to 2000, through a series of intermediate trusts , to the Pernour International T rust, an off-shore , Belize-based trust. Mr. Diesel controlled all of the trusts in the chain and ultimately received all of the proceeds from Pernour for his personal use. Mr. Diesel failed to pay income taxes on any of these proceeds.

Mr. Diesel apparently learned how to devise this scheme from the Aegis Company in Chicago, which, following a nationwide investigation, the government successfully prosecuted for tax fraud. In January 1998, an undercover IRS agent at an Aegis seminar in Belize tape recorded Mr . Diesel stating that (1) any income tax above ten percent is "confiscation" and "everybody is trying to cheat" the IRS; (2) the "whole point" of the trusts he employed was that the IRS did not understand them; (3) the trusts are like a "Double K-1 disappearing tax liability trick"; and (4) the trusts were "too good to be true."

Unfortunately for Mr. Diesel, they were not. In January 2005, a federal grand jury returned a three-count indictment against Mr. Diesel, charging him, inter a lia, with three felony violations under 26 U .S.C. 1 , who served as Mr. Diesel's sole witness. Mr. Gross testified that, while he is not a tax attorney 2 , he had advised Mr. Diesel in 2001 that the Aegis trust plan was "appropriate and correct," so long as properly followed. But Mr. Gross also admitted that he knew that the United States Tax Court, as early as 1998, had ruled the Aegis trust plan illegal - and that he communicated this via letter to his clients, including Mr. Diesel.The jury found Mr. Diesel guilty on all three counts, and the district court denied Mr. Diesel's motion for judgment of acquittal. At sentencing, the probation office recommended a Guidelines-based sentence of 37 to 46 months based, in part, on a two-level enhancement under U.S.S.G. §2T1.1(b)(2) for Mr. Diesel's use of "sophisticated means" to conceal his tax evasion offense .

Mr. Diesel objected to this enhancement on factual grounds, arguing that he had concealed nothing. Mr. Diesel also objected that a proper consideration of the factors enumerated under 18 U .S.C. §3553(a) suggested that he deserved a below-Guidelines sentence. See Def. Sent. Mem. at 1-9; see also Sent. Tr. at 809-20.

At the sentencing hearing, the district court indicated that it had considered Mr. Diesel's written sentencing submission in addition to his oral presentation; that it understood the Guidelines to be merely advisory; and that the Guidelines suggested a sentencing range of 37 to 46 months. The district court then announced its judgment that a 42-month sentence would be appropriate in this case , taking into account Section 3553(a) factors. Specifically, the judge noted, among other things, the seriousness and magnitude of Mr. Diesel's tax evasion scheme; the sophistication of Mr. Diesel's efforts to hide his illegal conduct; as well as the possibility that , if not punished sufficiently, Mr . Diesel's conduct might tempt others to follow his example .

* * *On appeal, Mr. Diesel raises three arguments. We address each in turn.1. Mr. Diesel contends that he "could not possibly have had the requisite mens rea " when he signed his tax returns because it was only after signing each of those returns that he took and spent his annual distributions from the Pernour trust. Aplt. Op. Br. at 8; see also id. a t 10 , 12 . Because Mr. Diesel, despite his assertion to the contrary, failed to raise th is issue in the district court, we review for plain error. We hold, however , that Mr. Diesel's argument fails under any standard of review.

The government's case had nothing whatsoever to do with when or how Mr. Diesel caused Pernour to distribute monies to him. Instead, the case focused on whether Mr. Diesel's tax returns failed to account as income to him the money siphoned into the Pernour trust. Thus, the mens rea question for the jury was whether Mr. Diesel, when he signed his tax returns, willfully failed to disclose as income the monies directed to the Pernour trust. See 26 U .S.C. 3 ,
we again review only for plain error. And we again find no error 3 under any standard of review.With respect to Mr. Diesel's Booker argument, the record simply does not support him.

The district court expressly indicated that it treated the Guidelines as "advisory." See Sent. Tr. at 822 (emphasis added) ("I have given particular emphasis, of course, to the presentence investigation report and the United States Sentencing Guidelines, though treating those guidelines as advisory only and not mandatory, in arriving at what I think is a reasonable sentence in this case."). From this starting point, the district court then expanded the scope of its analysis outside of the Guidelines by weighing the Section 3553(a) factors and Mr. Diesel's arguments before ultimately holding that 42 months of incarceration would be "reasonable" in this case. See id. at 822-35. With respect to Mr. Diesel's Cunningham argument, it is foreclosed by Supreme Court and our precedent. District courts may make factual findings and enhance sentences within the statutory range prescribed for the conduct found by the jury. See, e .g., United States v . Holyfield, 4 8 1 F .3d 1260, 1262-6 3 (10th Cir. 2007) (citing Harris v . United States, 536 U.S. 545 (2002)). Quite unlike Cunningham, Mr. Diesel does not allege that his 42 -month sentence fell outside this range. Nor could he , a s 26 U .S.C. * This order and judgment is not binding precedent except under the doctrines of law of the case, resjudicata and collateral estoppel. It may be cited, however, for its persuasive value consistent with Fed. R . App. P . 32.1 and 10th Cir. R. 3 2 .1.1 Mr. Gross is also one of Mr. Diesel's appellate attorneys on this case . The government has not objected to the propriety of this unusual arrangement, and accordingly we do not address it here .2 See, e .g., IV Tr. T ran. at 599 ( "Well, I really didn't have a tax background at the time I went to the seminar. The only tax background I had was one class in law school."); id. at 613 (stating the one course was "just basic federal income tax").3 While Mr. Diesel objected to this two-level enhancement on factual grounds ( e .g., facts demonstrated that Mr. Diesel reported his income in either his personal or trust returns and thus he did not conceal it), he did not object to the two-level enhancement on constitutional or other legal grounds. See Def. Mot. Obj. to PSR a t 1-5; see also Sent . Tr. at 805-09. Mr . Diesel, however, did make a Booker and Section 3553(a) argument that his overall case presented unique circumstances and asked the district court for a sub-Guidelines sentence. See Def. Sent. Mem. at 1-9; see also Sent. Tr. at 809-20.

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