United States v. Worack

FILED
United States Court of Appeals
Tenth Circuit
December 1, 2011
UNITED STATES COURT OF APPEALS
Elisabeth A. Shumaker
Clerk of Court
TENTH CIRCUIT
UNITED STATES OF AMERICA,
Plaintiff-Appellee,
v. No. 10-1487
PHILIP ALLEN WORACK, a/k/a Phil (D.C. No. 1:07-CR-00077-WDM-1)
A. Worack, (D. Colo.)
Defendant-Appellant.
ORDER AND JUDGMENT *
Before MURPHY, BALDOCK, and SILER, ** Circuit Judges.
Appellant, Philip Allen Worack, challenges the sufficiency of the evidence
that resulted in his conviction of two counts of filing fraudulent and false federal
income tax returns in violation of 26 U.S.C. § 7206(1). Because there was sufficient
evidence for a rational trier of fact to find Worack guilty, we AFFIRM his conviction.
I. Background
In 1995 Worack started an investor relations firm, with his associate Paul
Schemmel, called LKS Corporation (LKS). Worack owned half the stock of LKS and
*
This order and judgment is not binding precedent except under the doctrines
of law of the case, res judicata, and collateral estoppel. It may be cited, however,
for its persuasive value consistent with Fed. R. App. P. 32.1 and 10th Cir. R. 32.1.
**
The Honorable Eugene E. Siler, Jr., Senior United States Circuit Judge for
the Sixth Circuit, sitting by designation.
was president and treasurer of the corporation. Schemmel owned the other half of LKS
stock and was vice-president and secretary. LKS’s clients paid the company with cash
as well as stock in the client companies and stock options to buy stock in the client
companies. LKS filed IRS 1099 forms to report Worack’s and Schemmel’s earnings
from LKS and filed federal corporate income tax returns signed by Worack as president
of the company.
In 1996, LKS entered into a business relationship with Merrill, Scott &
Associates (MSA), a business consulting firm that assisted its clients in reducing
corporate tax liabilities, protecting assets and estate planning. MSA provided several
services for LKS including: 1) incorporating two foreign companies, Topaz Ltd. and
Octagon Worldwide Ltd.; 2) opening bank accounts for Topaz and Octagon in the
Bahamas; 3) opening credit card accounts for Topaz and Octagon at their respective
banks in the Bahamas; 4) incorporating a domestic company called OAB Enterprises,
Inc.; and 5) opening a domestic bank account for OAB Enterprises. Worack and
Schemmel were not incorporators, officers, shareholders or employees of Topaz,
Octagon or OAB Enterprises, and neither man had authority over or formal connections
to the companies’ bank accounts. Additionally, Worack indicated he had no authority
over any foreign bank account on his individual tax returns.
Subsequently, LKS began transferring its assets to these newly formed foreign
corporations. Specifically, LKS transferred its stock and options portfolio to Topaz and
directed its clients to issue any future stock or option compensation to either Topaz or
Octagon. The assets were sold after they were transferred to the foreign corporations
and most of the proceeds from the their sale were transferred to the bank accounts in
2
the Bahamas.
After the assets were liquidated into the Bahamian bank accounts, Worack began
using the proceeds for his personal use. He was given the credit card for Octagon
(Schemmel was given the credit card for Topaz), and from 1998 to 2002 he used the
card for $142,000 worth of goods and services in the United States for his personal
benefit. During the years at issue, Worack charged $29,997 in 2000 and $16,134 in
2001. The credit card bills were sent to the MSA offices in the Bahamas and MSA
would forward the bills to Worack. Then Worack would fax a message to MSA asking
them to use funds from the Octagon bank account to pay the bill. MSA then directed
Octagon’s bank to pay the credit card bill.
Worack also used funds from Octagon’s bank account to pay his mortgage. In
January 2000, Worack asked the Bahamian MSA officials to transfer $25,000 from the
Octagon bank account to the domestic OAB Enterprises bank account. Subsequently,
Worack contacted the domestic MSA offices in Utah and directed them to send a
$25,000 check drawn from the OAB Enterprises bank account to the mortgage company
holding the lien on his Colorado home. Worack repeated this process in March 2000 to
pay off the remaining $78,000 on his mortgage.
For tax years 1998-2002, Worack reported income from LKS, which LKS listed
on its 1099 forms, for his personal income taxes. During that time period he did not
report any of the money taken from the Octagon bank account as income.
Worack was convicted on two counts of filing fraudulent and false federal
income tax returns for tax years 2000 and 2001.
II. Standard of Review
3
We review denials of motions for judgment of acquittal and challenges to
sufficiency of the evidence de novo. United States v. Cooper, 654 F.3d 1104, 1115
(10th Cir. 2011). Viewing the evidence in the light most favorable to the government,
we must ask whether any rational trier of fact could have found the defendant guilty of
the crime beyond a reasonable doubt. Id. “However, we do not weigh conflicting
evidence or consider witness credibility and the fact that prosecution and defense
witnesses presented conflicting or differing accounts at trial does not necessarily render
the evidence insufficient.” Id. (internal citations omitted).
A person violates 26 U.S.C. § 7206(1) when he “[w]illfully makes and
subscribes any return, statement, or other document, which contains or is verified by a
written declaration that it is made under the penalties of perjury, and which he does not
believe to be true and correct as to every material matter.”
Income is taxable when it is received. Walker v. United States, 202 F.3d 1290,
1293 (10th Cir. 2000).
Income although not actually reduced to a taxpayer's possession
is constructively received by him in the taxable year during which
it is credited to his account, set apart for him, or otherwise made
available so that he may draw upon it at any time, or so that he
could have drawn upon it during the taxable year if notice of
intention to withdraw had been given.
26 C.F.R. § 1.451-2.
III. Discussion
The money at issue came from Octagon’s Bahamian bank account. That account
was funded with proceeds from the sale of LKS’s stock and options portfolio beginning
in 1996 and continuing thereafter with proceeds from additional sales of stock and
4
options paid to Octagon by LKS’s clients for services rendered by LKS. At least as
early as 1998 Worack began drawing funds from the Octagon account to pay off his
credit card.
Accordingly, whether there is sufficient evidence for any rational trier of fact to
find Worack guilty of filing false income tax returns in 2000 and 2001, respectively,
hinges on the legitimacy of LKS. If LKS was a legitimate corporation, then the income
at issue belonged to the company until it paid Worack’s expenses in 2000 and 2001. If
LKS was a sham, then Worack earned the income at issue before tax years 2000 and
2001 and failure to report that income in those tax years was not illegal.
The government presented evidence that LKS was a legitimate corporation, that
LKS earned the stock and stock options payments from its clients and that the proceeds
from the sale of the LKS stock and options portfolio by their international corporate
alter egos belonged to LKS. Accordingly, Worack earned the money he spent in 2000
and 2001 from LKS when money was drawn from a Bahamian bank account to pay his
expenses. Therefore, his failure to include that income on his 2000 and 2001 personal
income tax returns were violations of 26 U.S.C. § 7206(1).
Worack presented evidence that LKS was a sham corporation and, accordingly,
when LKS earned revenue Worack simultaneously earned income. Therefore, the
money Worack used to pay off his credit card and his mortgage was earned prior to
2000 and failure to include that income on his 2000 and 2001 personal income tax
returns was not illegal.
Nevertheless, the government did present sufficient evidence that LKS was a
legitimate corporation. Once that fact was accepted it was clear that the proceeds in the
5
Bahamian bank account belonged to LKS and that Worack earned the income in
question in tax years 2000 and 2001 when the money from that account was used for his
personal expenses. The fact that the government and Worack “presented conflicting or
differing accounts at trial does not necessarily render the evidence insufficient.”
Cooper, 654 F.3d at 1115. A rational trier of fact could have found Worack guilty
beyond a reasonable doubt and denied his motions for judgment of acquittal.
IV. Conclusion
Once a person chooses to form a corporation he must accept the tax
consequences that come with that decision. “For tax purposes, where the purpose for
the creation of the corporation is a business one or the creation is followed by business
activity, the corporate entity will not be disregarded.” Skarda v. C.I.R., 250 F.2d 429,
433-34 (10th Cir. 1957). “Those responsible for the existence of a corporation are not
entitled to have it disregarded in order for them to gain an advantage that would be lost
under it.” DeBoer Const., Inc. v. Reliance Ins. Co., 540 F.2d 486, 496 (10th Cir. 1976)
(citations omitted).
Worock cannot ignore the tax consequences that come with forming a
corporation. A rational trier of fact could find that LKS was a legitimate
corporation. When the company paid Worack’s expenses in 2000 and 2001 the
money was income to Worack that he failed to report in tax years 2000 and 2001.
6
Accordingly, we AFFIRM Worack’s conviction. Appellant’s motion to be present
at oral argument is DENIED as moot.
Entered for the Court,
Eugene E. Siler, Jr.
United States Circuit Judge
7