United States v. John McKinney ( 2012 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 11-3722
U NITED S TATES OF A MERICA,
Plaintiff-Appellee,
v.
JOHN Q UINN M C K INNEY,
Defendant-Appellant.
Appeal from the United States District Court
for the Southern District of Illinois.
No. 3:11-CR-30029-DRH—David R. Herndon, Chief Judge.
A RGUED JUNE 8, 2012 —D ECIDED JULY 13, 2012
Before P OSNER, F LAUM, and W ILLIAMS, Circuit Judges.
F LAUM, Circuit Judge. John McKinney, along with his
wife, brother, and sister-in-law, was charged in
an eleven-count indictment with conspiracy to defraud,
impede, impair, obstruct, and defeat the functions of
the IRS in the collection of income taxes, 18 U.S.C. § 371;
tax evasion, 26 U.S.C. § 7201; and false statements
to revenue agents, 26 U.S.C. § 1001. McKinney entered
a plea agreement and a factual stipulation with the govern-
2 No. 11-3722
ment. At sentencing, he received a two-level enhancement
to his base offense level for failing to report income exceed-
ing $10,000 from criminal activity, U.S. S ENTENCING
G UIDELINES M ANUAL (“U.S.S.G.”) § 2T1.1(b)(1), as well as
a two-level enhancement for obstruction of justice, U.S.S.G.
§ 3C1.1. He appeals these enhancements.
We affirm the district court.
I. Background
A. Tax Evasion
McKinney and his brother Robert own and operate
McKinney Hauling, a construction business. In early 2003,
the IRS filed a Notice of Federal Tax Liens
against McKinney for taxes owed. Thereafter, the IRS
pursued collection multiple times. McKinney avoided
paying taxes by transferring money earned from
his construction business into separate nominee accounts,
which McKinney and his brother used for personal and
household expenditures. He concurrently provided to IRS
Revenue Officers false statements about his ability to pay
the taxes he owed. He failed to pay taxes during 1999, 2000,
2002, 2003, 2004, 2005, and 2006.
Because of the federal tax liens, McKinney was unable to
obtain a residential m ortgage. Therefore, his
wife, Chamethele, independently applied for and obtained
a loan to purchase a home in Madison County, Illinois. On
her application, she falsely stated that she was a full-time
manager of McKinney Hauling with a gross monthly
income of $15,374.23. Her husband signed a false employ-
No. 11-3722 3
ment verification document to confirm her representations.
He, however, earned the income used to pay for the home.
Accordingly, the mortgage fraud diverted business income
earned by McKinney into an asset purchased by his
wife, enabling him to avoid the IRS tax assessment
and lien. Chamethele McKinney defaulted on the mortgage
on July 1, 2008.
McKinney’s sister-in-law, Belinda McKinney, similarly
applied for a loan to purchase a home in Madison County,
Illinois. She, too, falsely declared that she was a full-time
employee of McKinney Hauling, that she had been em-
ployed for ten years, and that she earned $9,500 per month.
The residential mortgage lender called McKinney to
confirm that Belinda was a full-time employee. McKinney
falsely represented that his sister-in-law was a full-time
employee. She did not report such employment on her tax
return. This financial transaction diverted business income
earned by Robert McKinney into an asset owned by
Belinda, thereby avoiding the IRS tax assessment and lien.
B. Obstruction of Justice
IRS Revenue Officers interviewed McKinney and
his brother regarding their failure to pay income taxes.
Both McKinney and his brother made false statements
regarding their actual income and assets. On March
23, 2007, McKinney falsely stated that he lived at 1528 Gaty
Avenue, East St. Louis, St. Clair County, Illinois, when, in
fact, he lived with his wife at their Madison County home.
On October 22, 2007, McKinney stated that he and his
4 No. 11-3722
brother were thinking about closing their business because
they had no work, which was untrue. On November 21,
2007, a Revenue Officer conducted a field visit with
McKinney and his brother during which both brothers
indicated that they lacked work and income. These state-
ments were also false: they received income just before and
after that meeting from their construction business. The
false information provided by the brothers caused the IRS
to close its investigation on December 13, 2007.
C. Procedural Background
Federal authorities ultimately discovered the broth-
ers’ tax evasion, and, on February 24, 2011, they charged
McKinney with one count of conspiracy, one count of tax
evasion, and three counts of making false statements.
McKinney pled guilty to each charge.
The probation office filed with the court a Presentence
Investigation Report (“PSR”) recommending enhancements
for failing to report the source of income exceeding $10,000
in any year from criminal activity and for obstruction of
justice. McKinney objected to both recommended enhance-
ments. First, he challenged the enhancement for failure to
report the source of income exceeding $10,000 in any year
from criminal activity as inapplicable to him because his
wife, not he, received the mortgage check. Second, he
argued that the adjustment for obstruction of justice for
providing false information to the IRS was improper
because (1) the IRS could have verified the information
sought, (2) the information regarding his business was
accurate, (3) his false statements did not rise to the level
No. 11-3722 5
contemplated by the Sentencing Guidelines, and (4) the IRS
field agent was not acting as a law enforcement agent when
he made the false statements.
The district court entered a judgment against McKinney
and adopted the PSR’s recommendations, treating his
applicable Guideline range as 51-63 months of imprison-
ment. It sentenced McKinney to 57 months’ imprisonment
on each count, to be served concurrently. It also imposed
three years’ supervised release and ordered him to pay
restitution of $1,512,384.22.
II. Discussion
We review the district court’s application of
the Sentencing Guidelines de novo. See United States
v. Sheneman, No. 11–3161, 2012 WL 1959551, at *5 (7th Cir.
June 1, 2012). We review its findings of fact for clear error,
id., including its determination that McKinney’s uncharged
involvement in the mortgage fraud scheme constitutes
conduct relevant to his tax evasion, see United States v.
Acosta, 85 F.3d 275, 279 (7th Cir. 1996), and its factual
findings underlying the obstruction enhancement, United
States v. Vallar, 635 F.3d 271, 288 (7th Cir. 2011).
A. Enhancement for Failure to Report Income From the
Uncharged Mortgage Fraud Scheme
Under the Guidelines, the district court may increase
McKinney’s base offense level by two if he “failed to report
or to correctly identify the source of income exceeding
6 No. 11-3722
$10,000 in any year from criminal activity.” U.S.S.G.
§ 2T1.1(b)(1). The district court applied this enhancement,
finding that McKinney failed to report to the IRS $45,000
that his wife received from the mortgage loan. McKinney
challenges that this enhancement was improper because (1)
he had no duty to report income obtained by his wife from
a third party, and (2) he was not charged with the specific
criminal activity related to the mortgage fraud. We dis-
agree.
1. Duty to Report Income
Section 2T1.1(b)(1) of the Sentencing Guidelines states
that the sentencing enhancement applies upon the defen-
dant’s failure to report income over $10,000. Thus,
in McKinney’s view, Section 2T1.1(b)(1) is inapposite since
his wife, not he, pocketed the $45,000 home loan proceeds
and the loan was in her name.
We rejected McKinney’s argument in United States
v. Oestreich, holding that an individual whose spouse
obtained income through illegal means shares the duty to
report such income and may receive a sentence enhance-
ment should that spouse fail to do so. 286 F.3d 1026,
1030-31 (7th Cir. 2002). In Oestreich, a husband and wife
conspired to defraud the United States for purposes of
impeding the IRS. The district court considered whether to
enhance the wife’s sentence under Section 2T1.1(b)(1), and
it concluded that, as a participant in the conspiracy to
impede the IRS’ collection of taxes, she shared her spouse’s
obligation to report the income and could reasonably
foresee that he would not report it. Id. at 1030-31. Ac-
No. 11-3722 7
cordingly, it found that her own failure to report the
income merited an enhancement under Section 2T1.1(b)(1).
As in Oestrich, McKinney and his wife conspired
to perpetrate a mortgage fraud scheme. Chamethele
McKinney falsely represented where she worked in order
to obtain the home loan, and her husband, through false
employment records, substantiated her representations.
They worked together to obtain the $45,000 loan, which
they both undisputedly had a duty to report to the IRS,
whether via a joint return or by one of them separately.
Chamethele McKinney did not report the income, a
result foreseeable to McKinney as participant in and
beneficiary of the mortgage fraud. He, therefore, had a
duty to report the income as well.
In Oestrich, we noted in dicta a possible tension between
the express use of the term “defendant” in U.S.S.G.
§ 2T1.1(b)(1) (“If the defendant failed to report or to
correctly identify the source of income exceeding $10,000
in any year from criminal activity, increase by 2 levels.”)
and the passive phrasing of U.S.S.G. § 2T1.1(b)(2) (“If
the offense involved sophisticated means, increase by
2 levels.”). 286 F.3d at 1031. One could argue, we sug-
gested, that the distinction between the sections’ language
meant that Section 2T1.1(b)(1) applied “only to the defen-
dant who failed to report and not to a co-conspirator who
had no duty to report.” Id. McKinney relies on this dicta to
underscore that he, as an uncharged co-conspirator in the
mortgage fraud, is not responsible for his wife’s failure
to report. Assuming arguendo that McKinney’s reading of
Section 2T1.1(b)(1) is correct, he still cannot prevail on this
8 No. 11-3722
argument. Our dicta suggested that Section 2T1.1(b)(1)’s
defendant-specific language might immunize a co-conspira-
tor from the enhancement when the co-conspirator had no
duty to report. First, McKinney is the defendant, not just a
co-conspirator, in the tax evasion scheme. The issue, then,
is whether, as the defendant, he had a duty to report the
income and failed to do so. McKinney, under general
principles of federal income tax law, was jointly and
severally liable for “any deficiencies, penalties and interest
assessed against [him and his wife] regarding [a joint]
return,” Kindred v. Comm’r of Internal Revenue, 454 F.3d
688, 693 n.10 (7th Cir. 2006), unless he was an “innocent
spouse.” Id. (citing IRC § 6015). He most certainly was
not an innocent spouse, and we are unconvinced by
his argument that, since he did not file taxes at all during
the subject period, it is “a stretch to find a duty to
report income . . . as if he were filing a joint tax return.” He
asks us to conclude that since he committed criminal tax
evasion and recruited his wife into his scheme, she alone,
not he, is responsible for declaring the income they ob-
tained. We decline to treat his criminal tax evasion as a
boon. So long as the mortgage fraud scheme constitutes
conduct relevant to the conspiracy, tax evasion, and false
statements with which he was charged, see U.S.S.G. §
1B1.3(a)(2), the district court could find a duty to report the
income and consider his failure to fulfill that obligation. See
U.S.S.G. § 1B1.3(a)(1) (stating that a defendant’s guideline
range “shall be determined on the basis of . . . (A) all acts
and omissions committed, aided, abetted, counseled,
commanded, induced, procured, or willfully caused by the
defendant; and (B) in the case of a jointly undertaken
No. 11-3722 9
criminal activity (a criminal plan, scheme, endeavor, or
enterprise undertaken by the defendant in concert with
others, whether or not charged as a conspiracy), all reason-
ably foreseeable acts and omissions of other in furtherance
of the jointly undertaken criminal activity”).
2. Relevant Conduct Inquiry
We must, thus, evaluate whether the district court clearly
erred in finding that the mortgage fraud was conduct
relevant to McKinney’s conspiracy to defraud the IRS.
Relevant conduct is defined as acts that were “part of the
same course of conduct or common scheme or plan as the
offense of conviction.” U.S.S.G. § 1B1.3(a)(2). A common
scheme or plan includes two or more offenses that are
connected by a common factor, including common accom-
plices, common purpose, or common modus operandi.
U.S.S.G. § 1B1.3, cmt. n.9(A). Offenses that are not part of
a common scheme or plan may still constitute the
same course of conduct if they are connected or related to
a degree to suggest that they are a part of a “single episode,
spree or ongoing series of offenses.” Id. at cmt. n.9(B).
At sentencing, the district court found that McKinney’s
failure to report income from the mortgage fraud was “part
and parcel” to the tax evasion, advancing a common
scheme to hide money and avoid paying taxes. The court
found that, in furtherance of his tax evasion, McKinney’s
wife obtained the mortgage loan in her name and per false
employment information to hide her husband’s business
income and avoid the IRS tax assessment and lien.
McKinney’s own false statements about his wife’s employ-
ment enabled his wife to obtain the loan. Accordingly, it
10 No. 11-3722
held that the mortgage fraud was part of the common
scheme of tax evasion to which McKinney pled guilty,
making it relevant conduct under the Sentencing Guide-
lines.
We affirm the district court. See Shenemen, 2012 WL
1959551, at *5 (“Under the clear error standard, we
will affirm a district court unless we are left with
the definite and firm conviction that a mistake has been
committed.” (quoting United States v. Reese, 666 F.3d 1007,
1021 (7th Cir. 2012) (internal quotation marks omitted))).
The Stipulation of Facts, which McKinney does not dis-
pute, states that he avoided the IRS tax assessment and lien
by diverting assets into this loan. He thereby concedes that
the mortgage fraud served the common scheme of tax
evasion, a connection also evidenced by the fact that
both schemes shared common accomplices and modus
operandi—all four McKinneys were complicit in both the
mortgage fraud and the tax evasion.
We hold, therefore, that the mortgage fraud was conduct
relevant to McKinney’s tax evasion, that he had a duty to
report the income from the fraudulently obtained mortgage
loan, and that the district court properly considered his
failure to report as it fashioned its sentence.
B. Enhancement for Obstruction of Justice
McKinney also appeals the district court’s two-level
enhancement for obstruction of justice. The district court
concluded that his false statements regarding his residence
and employment status warranted an adjustment for
No. 11-3722 11
obstruction of justice under Section 3C1.1, which states that
a defendant commits obstruction if:
(1) the defendant willfully obstructed or impeded,
or attempted to obstruct or impede, the administration
of justice with respect to the investigation, prosecution,
or sentencing of the instant offense of conviction, and
(2) the obstructive conduct related to (A) the defen-
dant’s offense of conviction and any relevant conduct;
or (B) a closely related offense[.]
U.S.S.G. § 3C1.1. McKinney argues that because the
false statements were made prior to the initiation of
a criminal investigation, the adjustment should apply
only if his conduct was “purposely calculated, and likely
to thwart the investigation or prosecution of the offense
of conviction.” Id. at cmt. n.1. He posits that lies to federal
officers, without more, cannot rise to the level of obstruc-
tion for purposes of a sentencing enhancement.
As an initial matter, it is of no moment that a criminal
investigation had not been initiated at the time McKinney
lied to IRS agents. Section 3C1.1 penalizes “obstructing or
impeding the administration of justice.” Though the
criminal investigation had not yet begun, the IRS was
investigating McKinney’s tax activities, which eventually
and inevitably merited further investigation as criminal tax
evasion. The fact that the investigation originated as civil,
not criminal, does not legitimize McKinney’s lies and
attempts to frustrate the government’s inquiries.
Nevertheless, providing false statements or incomplete
or misleading information to law enforcement, if not under
oath, does not constitute obstruction if the investigation is
12 No. 11-3722
not actually obstructed or impeded. See id. at cmt. n.5(B);
United States v. Selvie, ___ F.3d ____, 2012 WL 2477835, at *3
(7th Cir. June 29, 2012). The government must establish
that the defendant’s disinformation was material and
obstructed or impeded the official investigation or pros-
ecution of the instant offense. See U.S.S.G. § 3C1.1 cmt.
n.4(G). The information is material if, were it believed, it
“would tend to influence or affect the issue under deter-
mination.” Id. at cmt. n.6. The misinformation obstructs
or impedes the investigation if it “burden[s] law enforce-
ment and precipitate[s] ‘expended resources to track
down its false leads.’ ” See Selvie, 2012 WL 2477835, at *3
(quoting United States v. Griffin, 310 F.3d 1017, 1023 (7th
Cir. 2002)).” McKinney’s lies to the IRS satisfy both criteria.
McKinney made false statements to an IRS Revenue
Officer on three occasions. On March 23, 2007, he falsely
stated that he lived at a home in St. Clair County, Illinois,
when he actually lived in Madison County, Illinois with his
wife. On October 22, 2007, he stated that he and his brother
were thinking about closing the doors of their business
because they did not have any current work. In truth, they
did have work, including a demolition for which they
issued an invoice on October 27, 2007. On November 21,
2007, the brothers told an IRS agent during a field inter-
view that they did not have any income or work. In fact,
on the same day they made a deposit of $7,500 from Keeley
& Sons and received and additional $240,377 from Keeley
& Sons during 2007. These lies were material because they
“influence[d] or affect[ed] the issue under determination,”
U.S.S.G. § 3C1.1 cmt. n.6, whether the McKinneys could
afford to pay their taxes owed. Moreover, they caused the
No. 11-3722 13
IRS to close its investigation by representing the
McKinneys’ inability to pay on the basis of financial
hardship, thwarting the IRS’ discovery of the criminality of
the tax evasion —at least temporarily —and demanding
additional government resources to uncover the fraud.
See U.S.S.G. § 3C1.1 cmt. n.4(G); Selvie, 2012 WL 2477835,
at *3-4. His actions merited an obstruction enhancement.
We are not persuaded by McKinney’s assertions to
the contrary. He refers us to United States v. Urbanek,
930 F.2d 1512, 1515 (10th Cir. 1991), in which the Tenth
Circuit found the defendant’s false statements to
IRS agents denying the existence of bank accounts
or taxable income to be “nothing more than a denial
of guilt or an ‘exculpatory no.’ ” Id. Under the Guidelines,
the court held, refusing to admit guilt or volunteer infor-
mation cannot underlie an obstruction enhancement.
Unlike the defendant in Urbanek, McKinney did
not merely deny wrongdoing, but affirmatively lied
to the IRS. He lied about his past finances, he made
false representations about the current and future state
of his business, and he lied about where he lived
to conceal the value of his home. Moreover, unlike
in Urbanek, where the defendant immediately recanted
his lie when confronted with the truth, McKinney’s
false statements hindered the IRS investigation and
caused the expending of additional time and
manpower to uncover and prosecute the tax
evasion scheme. Therefore, we conclude that McKinney
obstructed justice, and the district court properly
enhanced his base offense level accordingly.
14 No. 11-3722
III. Conclusion
For the foregoing reasons, we AFFIRM .
7-13-12