United States v. Kontny, Kenneth P. ( 2001 )

In the
United States Court of Appeals
For the Seventh Circuit
Nos. 00-3004, 00-3006
United States of America,
Plaintiff-Appellee,
v.
Kenneth P. Kontny and Joann L. Kontny,
Defendants-Appellants.
Appeals from the United States District Court
for the Western District of Wisconsin.
No. 00-CR-4--John C. Shabaz, Chief Judge.
Argued December 5, 2000--Decided January 4, 2001
Before Posner, Easterbrook, and Evans, Circuit Judges.
Posner, Circuit Judge. The Kontnys were
convicted of fraudulent nonpayment of federal
payroll taxes and sentenced to prison. Their
appeal complains about the denial of their motion
to suppress documents and statements that they
gave to an Internal Revenue Agent and about a
sentencing increase that they received by virtue
of the "sophisticated" character of their fraud.
The Fair Labor Standards Act requires employers
to pay their hourly employees time and a half for
overtime (that is, hours worked above 40 hours a
week), but, of course, the overtime wage is
taxable income to the employee. To defeat both
the overtime and tax laws, the Kontnys, who own
an equipment-supply business that employs 25 to
30 workers, concocted the following scheme. They
would pay the workers normal wages rather than
time and a half for overtime work but not report
the overtime wages to the government as taxable
income, thus making it easy (or easier) for the
workers to avoid detection if they did not report
this income on their tax returns. The employees
benefited from this scheme by obtaining a greater
after-tax income and the Kontnys by not paying
either overtime wages at the rate of 1.5 times
regular wages or payroll taxes on the overtime
wages.
The scheme continued for at least a decade until
the Kontnys became embroiled in a bitter labor
dispute with their workers. One of them decided
to tattle to the government. He visited an office
of the IRS and was interviewed by Special Agent
Babbitt, a criminal investigator. The matter was
turned over to Revenue Agent Furnas to
investigate. Revenue agents, unlike special
agents, conduct civil rather than criminal
investigations. Furnas interviewed a number of
employees of the Kontnys’ company and concluded
that despite their disgruntlement over the labor
dispute, they might well be telling the truth. In
that event the Kontnys had committed a fraud; and
tax fraud is criminal, though more often handled
on a civil than on a criminal basis.
Furnas requested an interview with the Kontnys.
They agreed. At the interview he explained that
he was investigating allegations that they had
failed to withhold payroll taxes from overtime
payments to their employees. Before Mr. Kontny
arrived for the interview, Mrs. Kontny asked
Furnas whether she needed to have a lawyer
present for the interrogation. He replied that
this was "a civil exam" and it was up to her to
decide whether she needed to have a lawyer
present. But he added that if he discovered fraud
he would refer the matter for a criminal
investigation. He asked her for various business
records, which she gave him, and she made some
statements that were later used against her at
trial, for example that she realized that payroll
taxes have to be withheld from overtime wages. In
a follow-up phone call from Furnas a few days
later she mentioned that she had shredded some
checks that Furnas had inquired about. At the
mention of the shredded checks his suspicions
crystallized and he decided that he now had firm
indications that the Kontnys had committed tax
fraud and he turned the case over to the criminal
investigatory arm of the IRS and had no further
contact with the Kontnys.
As an original matter it is extremely difficult
to see what possible basis there could be for a
motion to suppress in this case. Confessions or
other admissions obtained in the course of an
interrogation are deemed involuntary and
therefore inadmissible only if they are procured
by threats or promises. Bram v. United States,
168 U.S. 532, 542-43 (1897); Johnson v. Trigg, 28
F.3d 639, 641-42 (7th Cir. 1994); United States
v. Glover, 104 F.3d 1570, 1579 (10th Cir. 1997);
United States v. Guerrero, 847 F.2d 1363, 1366
(9th Cir. 1988). The Miranda rule is not in play
here since the interrogation of the Kontnys by
agent Furnas was not custodial. Beckwith v.
United States, 425 U.S. 341 (1976); compare
Mathis v. United States, 391 U.S. 1 (1968). But
the fact that the Kontnys were not in custody has
a broader significance. Virtually all cases
involving coerced confessions involve the
questioning of a suspect who is in police
custody, an inherently intimidating situation in
which people find it difficult to stand up for
their rights or even to think straight. The
situation is different when a person who does not
even know that he is a criminal suspect (that is
a premise of the Kontnys’ appeal) is being
interviewed in his home, and by a civil rather
than a criminal investigator to boot. Furnas was
unarmed, un-uniformed, unaccompanied. The Kontnys
were at no disadvantage in dealing with him. They
were under no pressure to answer his questions.
Any answers they gave were voluntary.
Trickery, deceit, even impersonation do not
render a confession inadmissible, certainly in
noncustodial situations and usually in custodial
ones as well, unless government agents make
threats or promises. Frazier v. Cupp, 394 U.S.
731, 739 (1969); Holland v. McGinnis, 963 F.2d
1044, 1051 (7th Cir. 1992); United States v.
Rutledge, 900 F.2d 1127, 1131 (7th Cir. 1990)
("far from making the police a fiduciary of the
suspect, the law permits the police to pressure
and cajole, conceal material facts, and actively
mislead"); United States v. Byram, 145 F.3d 405,
408 (1st Cir. 1998) ("trickery is not
automatically coercion. Indeed, the police
commonly engage in such ruses as suggesting to a
suspect that a confederate has just confessed or
that police have or will secure physical evidence
against the suspect. While the line between ruse
and coercion is sometimes blurred, confessions
procured by deceits have been held voluntary in a
number of situations"). And these were custodial
cases. Nothing is more common in the noncustodial
setting of police investigations than for an
undercover police officer to extract a damaging
admission from a criminal suspect simply by
pretending to be another criminal. The admission
is usable in evidence against the suspect even
though he would never have spilled the beans to
the officer had he known the officer’s status.
Planting informers is not an unconstitutional
method of collecting evidence for use in criminal
trials. Illinois v. Perkins, 496 U.S. 292, 298-99
(1990); Hoffa v. United States, 385 U.S. 293,
303-04 (1966). There is no right to require
secrecy of the people whom one confides in.
So even if Furnas was pretending to be
conducting a civil investigation but was really,
as the appeal argues, conducting a criminal one,
this would not, under the rules that govern the
admissibility of incriminating statements
(written or oral) made to government officers
even by a suspect who is in custody, make the
statements inadmissible. The circumstances did
not remotely prevent the Kontnys from making a
rational decision about whether to play ball with
Furnas. United States v. Lawal, 231 F.3d 1045,
1048 (7th Cir. 2000) ("a confession is voluntary
if the totality of the circumstances demonstrates
that it was the product of rational intellect and
not the result of physical abuse, psychological
intimidation, or deceptive interrogation tactics
calculated to overcome the defendant’s free
will"); United States v. Westbrook, 125 F.3d 996,
1006 (7th Cir. 1997) ("nothing in this record
leads us to believe the agents misled him or
exploited Mr. Westbrook’s anxiety to the point
that he was unable to make a rational decision
about whether to confess"); Sprosty v. Buchler,
79 F.3d 635, 647 (7th Cir. 1996) ("the police did
not magnify or exploit Sprosty’s fears, anxieties
and uncertainties to the point where he was
unable to make a rational decision about whether
to confess"); United States v. Doucette, 979 F.2d
1042, 1045 (5th Cir. 1992) ("a confession is
voluntary if, under the ’totality of the
circumstances,’ the statement is the product of
the accused’s ’free and rational choice’");
United States v. Velasquez, 885 F.2d 1076, 1089
(3d Cir. 1989) ("although the deception [by the
police] may have been a partial cause of
Velasquez’s statements, we do not think that her
will was overcome or her capacity for self-
control vitiated"); United States v. Guerrero,
supra, 847 F.2d at 1365 ("an inculpatory
statement is voluntary only when it is the
product of a rational intellect and a free
will"). We might have a more difficult case had
Furnas gone further and promised the Kontnys they
would not be prosecuted if they played ball with
him, for that conceivably is the kind of false
promise that might induce a rational person to
rely. United States v. Baldwin, 60 F.3d 363, 365
(7th Cir. 1995), vacated and remanded on other
grounds, 517 U.S. 1231 (1996); United States v.
Rutledge, supra, 900 F.2d at 1130. Furnas did not
do that. On the contrary, he as much as warned
the Kontnys that any evidence they provided of
fraud would lead to a criminal investigation. As
we have said, he didn’t have to go further and
give them Miranda warnings.
It is true that the Internal Revenue Service by
regulation requires that a civil investigation
cease when the investigator develops firm
indications of fraud, Internal Revenue Manual
sec.sec. 4565.21(1), 9311.83(1), which the
Kontnys argued happened before the fatal
interview and the check-shredding phone
conversation. But the federal exclusionary rule,
which forbids the use of evidence obtained in
violation of the Fourth or Fifth Amendments, does
not extend to violations of statutes and
regulations. The Supreme Court so held in United
States v. Caceres, 440 U.S. 741, 755 (1979), with
specific reference to a regulation of the IRS.
See also United States v. Peters, 153 F.3d 445,
456 (7th Cir. 1998); United States v. Michaud,
860 F.2d 495, 498-99 (1st Cir. 1988); Groder v.
United States, 816 F.2d 139, 142 (4th Cir. 1987),
and, for application of the principle outside the
tax area, United States v. Chaparro-Alcantara,
226 F.3d 616, 621 (7th Cir. 2000); United States
v. Page, 2000 WL 1682523, at *3 (6th Cir. Nov. 9,
2000); United States v. Hinton, 222 F.3d 664,
674-75 (9th Cir. 2000); United States v. Felipe,
148 F.3d 101, 109 (2d Cir. 1998); United States
v. Hensel, 699 F.2d 18, 29-30 (1st Cir. 1983).
The Kontnys do not claim to have relied,
reasonably or unreasonably, on the existence of
the regulation that required Furnas to back off
as soon as he obtained firm indications of fraud.
United States v. Caceres, supra, 440 U.S. at 752-
53; United States v. Ani, 138 F.3d 390, 392 (9th
Cir. 1998); United States v. Pipes, 87 F.3d 840,
842 (6th Cir. 1996). But this means, as Pipes
makes clear, that there was no causal relation
between Furnas’s alleged violation of the
regulation and the Kontnys’ decision to make
incriminating statements. "The defendant
obviously did not know that the officers were
violating [the statute]. Thus, the officers’
failure to comply with [it] had no impact on
defendant’s decision to commit the offense." Id.Nor is there any suggestion that Furnas violated
the prohibition against enforcement of a summons
for tax records after a matter has been referred
to the Justice Department for possible criminal
prosecution. 26 U.S.C. sec. 7602(c)(1); United
States v. Michaud, 907 F.2d 750 (7th Cir. 1990)
(en banc).
A number of decisions explore at length the
nebulous distinction in the IRS regulation
between "first" and "firm" indications of fraud;
Furnas only admitted that he had the former sort
before he interviewed the Kontnys. But the cases
generally and we think rightly do not treat the
distinction as an independent basis for
determining whether evidence obtained in an IRS
investigation is admissible. They treat it merely
as a factor to be considered in evaluating the
defendant’s constitutional claim. The defendant
must prove that "the IRS’s conduct resulted in
prejudice to defendant’s constitutional rights."
United States v. Peters, supra, 153 F.3d at 452
n.10; see also United States v. Grunewald, 987
F.2d 531, 534 (8th Cir. 1993); United States v.
Knight, 898 F.3d 436, 438 (5th Cir. 1990), and
the concurring opinion in Peters, 153 F.3d at
462-64.
There are some outliers, such as United States
v. McKee, 192 F.3d 535, 541 (6th Cir. 1999),
which states (in dicta, as the concurring judge
pointed out, id. at 545), reflecting a common but
perhaps excessive hostility to the Internal
Revenue Service, that section 4565.21(1) of the
IRS manual is "mandated by the Constitution." It
is true as we have noted that Caceres left the
door slightly ajar by indicating that it might be
a denial of due process to induce reasonable
reliance on the regulation and then pull the rug
out from under the defendant; but nothing of that
kind is involved in this case. United States v.
Tweel, 550 F.2d 297, 299 (5th Cir. 1977),
contains broad McKee-like language, and has been
cited frequently. But besides having been decided
before Caceres, it was a case, unlike ours,
involving the issue of consent to a search, and
the defendant in giving his consent was held to
have relied reasonably on the agent’s promise
that the investigation was purely civil. United
States v. Powell, 835 F.2d 1095, 1098 (5th Cir.
1988). The government had broken its promise, and
we know that admissions extracted by false
promises are sometimes excluded as being
involuntary. There were no promises in the
present case.
Peters goes on to state that the defendant must
show "affirmative misrepresentations,"
"affirmative deceit," or "affirmative misleading"
(153 F.3d at 456-57) (these terms are
synonymous), but it would be a mistake to infer
that such a showing without more requires
exclusion of incriminating statements. Proof of
deceit must be linked up to the constitutional
standard of threat or promise. Deceit by itself
is neither, though it can be the basis of either-
-if Furnas had pretended to be a representative
of the Mob and told the Kontnys that they would
be killed if they didn’t turn over their business
records to him, or pretended to be an Assistant
U.S. Attorney and assured them they would not be
prosecuted if they cooperated with him, the
Kontnys might have a sound ground for exclusion.
Cf. Arizona v. Fulminante, 499 U.S. 279, 287-88
(1991). They showed nothing of the sort, and must
therefore lose even if the district court clearly
erred (the applicable standard of appellate
review, United States v. Peters, supra, 153 F.3d
at 459; United States v. McKee, supra, 192 F.3d
at 543; United States v. Wadena, 152 F.3d 831,
851 (8th Cir. 1998))--which, incidentally, it did
not--in finding that Furnas had firm indications
of fraud before he interviewed the Kontnys. That
issue is not determinative. A failure to
terminate a civil investigation when the revenue
agent has obtained firm indications of fraud does
not without more establish the inadmissibility of
evidence obtained by him in continuing to pursue
the investigation. There is nothing more here.
Moving to the sentencing issue, we confront the
argument that the efforts the Kontnys made to
conceal their scheme of tax evasion did not
amount to the "sophisticated concealment" that
requires a two-level sentencing bonus under
U.S.S.G. sec. 2T1.4(b)(2). That they did make
such efforts is not in question. They wrote
separate checks to the employees, one for regular
wages and one for overtime, and sometimes the
overtime checks would include reimbursement for
expense items to disguise the fact that the
checks were for wages. The Kontnys programmed
their computer so that the amount of the overtime
checks was classified in nonwage expense
categories. The stubs for the overtime checks,
which they gave their accountant, likewise placed
the expense in nonwage categories.
But did these efforts amount to "sophisticated
concealment"? They were not very sophisticated in
the lay sense of the word, especially in context.
By creating a fraud that involved the knowing
participation of more than two dozen employees,
they not only armed the employees to blackmail
them but greatly increased the risk of eventual
detection, though it is true that the fraud
persisted for at least a decade before the
inevitable occurred. The Kontnys’ efforts at
concealment were sophisticated in relation to a
case in which the owner of a shop evades taxes by
emptying the drawer of the cash register before
counting the day’s cash receipts and puts the
cash thus skimmed into a shoebox and slides it
under his bed, but unsophisticated in relation to
a scheme of evasion that does not depend on the
continuing goodwill of one’s entire workforce and
that creates a paper trail that is more difficult
to follow to its guilty conclusion than the one
the Kontnys created.
The existence of a statutory sentencing range
reflects the fact that criminal acts that involve
the same statutory elements (in the case of
criminal tax fraud they are essentially that the
defendant knowingly made a materially false
return, 26 U.S.C. sec. 7206(1); United States v.
Pirro, 212 F.3d 86, 89 (2d Cir. 2000)) may differ
in circumstances that are pertinent to the
appropriate penalty. One criminal act may be much
more lucrative for the offender because it
involves a very large amount of money relative to
the cost of committing the offense, and so a
heavier punishment will be necessary to deter.
Another may be more lucrative than the average
not because it involves a larger take but because
the probability of detection is lower; an
economist would say in such a case that the
"expected" profit of the crime was greater. The
existence of a sentencing range as opposed to a
sentencing point allows these differences to be
reflected in sentencing. The federal sentencing
guidelines guide and discipline the judge’s
choice of the sentence within the range. They do
this by fixing a sentencing range (narrower than
the statutory range) for the average offense
within the offense category (here, criminal tax
fraud) and by prescribing bonuses and discounts
to adjust for relevant differences between the
average and the particular offender’s offense.
The more sophisticated the efforts that an
offender employs to conceal his offense, the less
likely he is to be detected, and so he should be
given a heavier sentence to maintain the same
expected punishment, and hence the same
deterrence, that confronts the average offender.
Implementation of this rule requires both
determining how much the average offense is
concealed and relating the guideline concept of
"sophistication" to deterrent needs. The
complication in the first half of this inquiry is
that fraud is by nature self-concealing--its
success depends on its being hidden from the
victim. The average criminal tax fraud thus
involves some concealment; "sophisticated" tax
fraud must require more. A parallel distinction
has arisen in determining when statutes of
limitations in fraud cases are tolled. If
concealment were enough to toll such a statute of
limitations, the statute would be tolled in
almost every case, because fraud is inherently
covert. So the courts distinguish between the
initial fraud and any distinct efforts at cover
up ("fraudulent concealment") and toll the
statute only when the defendant has resorted to
such efforts. Wolin v. Smith Barney Inc., 83 F.3d
847, 851 (7th Cir. 1996); Martin v. Consultants &
Administrators, Inc., 966 F.2d 1078, 1093-95 (7th
Cir. 1992). Likewise the concealment that is
inherent in criminal tax fraud, as in our shoebox
example, must be distinguished from efforts over
and above that concealment to prevent detection.
Only the latter permit the sentencing
enhancement.
In light of its purpose and context, we think
"sophistication" must refer not to the elegance,
the "class," the "style" of the defrauder--the
degree to which he approximates Cary Grant--but
to the presence of efforts at concealment that go
beyond (not necessarily far beyond, for it is
only a two-level enhancement that is at issue,
which in this case added roughly six months to
the defendants’ sentences) the concealment
inherent in tax fraud. It is true that the
guideline commentary illustrates with examples
suggesting a higher level of financial
sophistication: "’sophisticated concealment’
means especially complex or especially intricate
offense conduct in which deliberate steps are
taken to make the offense, or its extent,
difficult to detect. Conduct such as hiding
assets or transactions, or both, through the use
of fictitious entities, corporate shells, or
offshore bank accounts ordinarily indicates
sophisticated concealment." U.S.S.G. sec. 2T1.4,
Application Note 3. But these are offered as
examples, as emphasized in United States v.
Friend, 104 F.3d 127, 130 (7th Cir. 1997), and
United States v. Clements, 73 F.3d 1330, 1340
(5th Cir. 1996); the essence of the definition is
merely "deliberate steps taken to make the
offense . . . difficult to detect." When the term
"sophisticated" is defined so, it becomes
apparent that the district judge did not commit a
clear error (the applicable standard of appellate
review of this ruling too, e.g., United States v.
Madoch, 108 F.3d 761, 765 (7th Cir. 1997); United
States v. Aragbaye, No. 99-50603, 2000 WL 1818365at *6 (9th Cir. Dec. 13, 2000)) in enhancing the
defendants’ sentences.
The Kontnys point out that the government rarely
prosecutes criminal tax fraud that is not
"sophisticated" in the sense indicated by the
facts of this case. Armed as it is with fearsome
civil remedies involving huge penalties--for
example the 75 percent penalty for taxes
fraudulently not paid, 26 U.S.C. sec. 6663--the
government brings few criminal tax cases (fewer
than 700 a year) relative to the amount of tax
fraud; and perhaps none against defendants less
sophisticated than the Kontnys. We do not know
this to be the case, but will assume it is for
the sake of argument. No matter. The question is
what the Sentencing Commission took to be the
average criminal tax fraud when it promulgated
the "sophisticated concealment" guideline back in
1987. That would be the benchmark for courts to
use to decide whether the Commission would have
wanted the sentences of the Kontnys increased by
reason of the character or extent of their
efforts at concealment. The government’s lawyer
told us without contradiction from his opponent
that before the guidelines era the federal
government prosecuted many unsophisticated
criminal tax frauds, as illustrated by our
shoebox case. The defendant would usually plead
guilty and the judge impose a light sentence
("roughly half of all tax evaders were sentenced
to probation without imprisonment, while the
other half received sentences that required them
to serve an average prison term of twelve
months," U.S.S.C. sec. 2T1.1, Background
Commentary), and sentences in those days were
essentially unappealable unless they exceeded the
statutory maximum. So these were easy cases for
the government. When the guidelines came into
force, limiting sentencing discretion, the
government shifted its focus to the more serious
cases, not wanting to become involved in trials
of minor cases when under the guidelines
defendants might be reluctant to plead guilty
because they would be facing a heavier sentence
and might, like so many other federal criminal
defendants these days, appeal their sentences. So
today the average criminal tax fraud that is
prosecuted is more sophisticated than when the
concept of sophistication was introduced into the
guidelines. That is no reason for thinking the
Commission would consider the enhancement imposed
in this or like cases excessive even if they are
the only type of criminal tax fraud being
prosecuted nowadays.
Affirmed.