United States v. DePaoli

Opinions of the United
2002 Decisions States Court of Appeals
for the Third Circuit
7-22-2002
USA v. DePaoli
Precedential or Non-Precedential: Non-Precedential
Docket No. 00-2212
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NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
Nos. 00-2212, 00-2238,
00-2422, and 00-2427
UNITED STATES OF AMERICA
v.
ROSEMARY DEPAOLI,
Appellant in No. 00-2212
UNITED STATES OF AMERICA
v.
FRANK KRESOCK,
Appellant in No. 00-2238
UNITED STATES OF AMERICA
Appellant in No. 00-2422
v.
FRANK KRESOCK
UNITED STATES OF AMERICA,
Appellant in No. 00-2427
v.
ROSEMARY DEPAOLI
On Appeal from the United States District Court
for the Middle District of Pennsylvania
D.C. Crim. Nos. 99-cr-00026-1 and 99-cr-00026-2
Honorable James F. McClure, Jr., District Judge
Argued July 11, 2002
BEFORE: SCIRICA and GREENBERG, Circuit Judges,
and FULLAM, District Judge*
(Filed: July 22, 2002)
Martin C. Carlson
United States Attorney
William S. Houser (argued)
Assistant U.S. Attorney
U.S. Attorney’s Office
Suite 309, Federal Building
Scranton, PA 18501
Attorneys for Appellee-Cross-Appellant
United States of America
Peter Goldberger (argued)
Pamela A. Wilk
50 Rittenhouse Place
Ardmore, PA 19003-2276
Attorneys for Appellant-Cross-Appellee
Rosemary DePaoli
*Honorable John P. Fullam, Senior Judge of the United States District Court for the
Eastern District of Pennsylvania, sitting by designation.
Peter T. Campana
Campana & Lovecchio, LLP
602 Pine Street
Williamsport, PA 17701
Attorneys for Appellant-Cross-Appellee
Frank Kresock
OPINION OF THE COURT
GREENBERG, Circuit Judge.
I. BACKGROUND & PROCEDURAL HISTORY
This criminal case is before the court on appeal and cross-appeal from judgments
of conviction and sentence. A grand jury returned a nine-count indictment charging
husband and wife defendants Frank Kresock and Rosemary DePaoli with income tax
evasion and related charges. In particular, the indictment charged each defendant with
three counts of income tax evasion, in violation of 26 U.S.C. 7201, relating to their joint
personal income tax returns for years 1992, 1993 and 1994, DePaoli with filing false
corporate income tax returns for the same three years, in violation of 26 U.S.C. 7206(1),
and Kresock with aiding and abetting the filing of the false corporate returns, in violation
of 26 U.S.C. 7206(2).
Appellants are medical doctors: Kresock is a cardiologist and DePaoli is a
dermatologist. In 1988, they formed Columbia Medical Group, Inc. "CMG," a medical
corporation. Each appellant owned one-half of the shares in CMG and both acted as the
corporation’s employees, lessors and creditors. William J. Roll, CPA, acted as their
accountant and designed CMG’s accounting procedures. The system provided for
appellants to use checks and check stubs, adding expense codes, to record CMG’s income
and expenses. Appellants’ practice was to send their accountant copies of the corporate
check stubs, bank statements, and payroll information monthly.
In 1995, a routine IRS audit of CMG’s 1993 corporate tax return led to a
criminal investigation and ultimately the indictments and convictions involved here. The
evidence at trial showed, inter alia, that appellants used CMG funds to purchase
thousands of dollars worth of guns and jewelry, which were coded as "office supplies."
Appellants also purchased numerous vehicles, including a Ferrari Testarossa and Harley
Davidson motorcycles, with corporate funds. Additionally they used CMG funds to
renovate their vacation home, purchase jewelry, gold coins and many other personal items
and services, including child care, home furnishings, groceries, diapers, children’s toys,
tampons and mustache wax. Many of Kresock’s receipts were altered. Appellants did
not declare the personal expenses they paid for with CMG funds as income on their
personal tax returns. Instead the expenses frequently were treated as business-related
items on CMG’s corporate returns.
Evidence showed that appellants took steps to conceal the personal nature of the
corporation’s expenditures by falsely coding the check stubs to make the expenses appear
business related. As an example, the purchase of a Harley Davidson motorcycle was
coded as "equipment rental" for a cardiac echo machine. Defendants also omitted income
on their personal tax returns from other sources, including fees from speaking
engagements and for work performed at Bloomsburg Hospital. Overall the evidence of
the appellants’ guilt was overwhelming and, indeed, they understandably do not contend
that the verdicts were against the weight of the evidence.
At the trial in the district court, the jury returned a verdict of guilty as to both
appellants on all charges. The court sentenced Kresock to serve 20-month concurrent
custodial terms to be followed by three-year concurrent terms of supervised release and
DePaoli to serve 16-month current custodial terms to be followed by three-year
concurrent terms of supervised release. DePaoli was to commence her custodial term
when Kresock was released from imprisonment. The appellants have appealed and the
United States has cross-appealed from the judgments insofar as they imposed sentences.
II. DISCUSSION
Appellants first contend that the district court erred in denying their pretrial
motions for bills of particulars. We consider this point on an abuse of discretion basis.
See United States v. Eufrasio, 935 F.2d 553, 575 (3d Cir. 1991).
The purpose of a bill of particulars is to inform the defendant of the nature of the
charges against him. See United States v. Addonizio, 451 F.2d 49, 63 (3d Cir. 1971). It
is not intended to be a discovery device. See United States v. Smith, 776 F.2d 1104, 1111
(3d Cir. 1985). Thus, its purpose is to give the defendant only the information necessary
to permit him to conduct his own investigation. See id. A trial judge has broad discretion
in considering a motion for a bill of particulars, but the court should grant a motion
seeking a bill of particulars when an indictment’s failure to provide factual or legal
information "significantly impairs the defendant’s ability to prepare his defense or is
likely to lead to prejudicial surprise at trial." United States v. Rosa, 891 F.2d 1063, 1066
(3d Cir. 1989).
In this case, the indictment sufficiently informed the appellants of the nature of
the charges against them, and provided them with sufficient information to prepare an
adequate defense and avoid prejudicial surprise at trial. For example, broken down by the
years 1992, 1993, and 1994, the indictment charged appellants with income tax evasion,
subscribing to a false tax return, and aiding and assisting the preparation of a false tax
return. Furthermore, the government provided appellants with considerable pretrial
discovery and explained its theories of the case in writing in advance. In the
circumstances, we are satisfied that appellants understood the nature of and, indeed, had
considerable details of the charges against them. Accordingly, we cannot say that the
court erred in denying the motions for a bill of particulars.
Appellants argue that the jury instruction on the elements of income tax evasion
was unclear and permitted personal income tax evasion convictions for acts not charged
in the indictment. Inasmuch as appellants did not object to the instructions during the
charging conference or when the instruction was given, we consider this contention on a
plain error basis. See Fed. R. Crim. P. 52(b); United States v. Dalfonso, 707 F.2d 757,
760 (3d Cir. 1983).
The appellants’ particular objection is that the instructions failed to specify that
the jury to convict was required to find that they knowingly filed personal tax returns each
year which understated their joint taxable income. They argue that the jury instructions
broadened the possible bases of conviction beyond that charged in the indictment. In
support of their argument, appellants quote a small portion of the charge in which the
court stated that the appellants’ tax evasion was attempted:
by filing and causing to be filed . . . a false and fraudulent joint U.S.
individual income tax return . . . wherein it was stated that their joint
taxable income for [1992] was the sum of $519,357 . . . whereas . . .
[they knew the correct figure] was substantially in excess of that . . . and
that upon said additional joint taxable income a substantial additional
tax was due.
App. at 290-91. Appellants complain that this instruction was ambiguous and that the
jury may not have known that it was to "focus exclusively on the omission of income
from the personal returns as the ’act of evasion.’" Appellants’ Jt. Reply Br. at 4.
Appellants point out that the record was "replete" with testimony about their conduct that
the jury could have viewed as affirmative acts undertaken with the intent of tax evasion.
They complain that nothing in the jury charge told the jury that it could convict on the
personal evasion counts only if it found that they had attempted to evade income taxes by
filing what they knew to be a false personal return which omitted income. This omitted
income includes the imputed income appellants derived from the value of CMG’s funds
that were incurred for their personal benefit. See Appellants’ Br. at 40.
We reject this contention as we are satisfied that the ambiguity of which
appellants complain is not real and we see no reason to believe that the jury failed to
understand that to convict it had to find beyond a reasonable doubt that appellants
knowingly filed personal tax returns that understated their joint taxable income. We
cannot believe that the jury, when it considered the charge, did not understand the
elements of the offenses involved here.
Appellants claim that the court’s charge to the jury on "willfulness" and "good
faith" confused the jury into applying the "objective reasonableness" approach prohibited
by Cheek v. United States, 498 U.S. 192, 111 S. Ct. 604 (1991). We review the
instructions on this point on a plenary basis for legal correctness but on an abuse of
discretion basis on matters of phrasing. See United States v. Zehrbach, 47 F.3d 1252,
1260 (3d Cir. 1995). Here we are satisfied that viewed in its entirety the court’s charge
on "willfulness" and "good faith" left no doubt that the defense of "good faith" need not
be objectively reasonable. Moreover, the instructions clearly set forth that the burden of
proving willfulness rested with the government.
With regard to willfulness, the district court stated in part:
[T]he government must prove beyond a reasonable doubt that each
defendant acted willfully. To act willfully means to act voluntarily and
deliberately and intending to violate a known legal duty. . . . The word
willfully as used in these instructions means a voluntary intentional
violation of a known legal duty, in other words, the defendant must have
acted voluntarily and intentionally with the specific intent to do
something he or she knew the law prohibited, that is to say with intent
either to disobey or to disregard the law.
App. at 298-300.
With regard to the "good faith" defense, appellants argue that the district court
led the jury to believe that it was their burden to show good faith and that their belief
must have been objectively reasonable. Appellants contend that the court’s statement that
"[i]f a person acts without reasonable grounds for belief that his or her conduct is lawful,
it is for the jury to decide whether that person has acted in good faith . . ." violated Unite
States v. Powell, 955 F.2d 1206 (9th Cir. 1991).
The district court stated:
Now, the good faith of a defendant is a complete defense to
the tax charges in the indictment because good faith is simply
inconsistent with willfully attempting to evade or defeat any tax,
subscribing to a false return or aiding and assisting the preparation of a
false tax return.
While the term good faith has no precise definition, it
means, among other things, an honest belief, a lack of malice, and the
intent to perform all lawful obligations. A person who acts on a belief
or on an opinion honestly held is not punishable under this statute
merely because that honest belief is unreasonable or turns out to be
incorrect or wrong. . . . If a person acts without reasonable grounds for
belief that his or her conduct is lawful, it is for the jury to decide
whether that person has acted in good faith in order to comply with the
law or whether that person has willfully attempted to evade or defeat the
tax, subscribed to a false return, or aid and assist the preparation of a
false tax return.
A person who believes that his or her tax return truthfully
reports the taxable income and allowable deductions under the tax law
acts in good faith and cannot be found guilty of willfully committing the
offenses charged in the indictment. . . . The burden of proving good
faith does not rest with the defendants because the defendants have no
obligation to prove anything to you. The government has the burden of
proving to you beyond a reasonable doubt that each defendant acted
willfully.
App. at 301-04. In context, the court’s instructions on willfulness and good faith did not
mislead the jury as to the burden of proof and did not lead the jury into believing that the
"good faith" defense required appellants to have an objectively reasonable belief in the
propriety of their actions. Thus, the court’s charge captures both the spirit and the letter
of the law as set forth in Cheek and is not contrary to Powell.
Appellants unsuccessfully sought jury instructions to the effect that corporate
expenditures for the benefit of shareholders are not treated as personal income until they
exceed in amount all outstanding shareholder loans to the corporation and that a
corporation cannot generate dividend income in the absence of earnings and profits. See
United States v. D’Agostino, 145 F.3d 69 (2d Cir. 1989). Appellants assert that their
receipt of benefits from CMG would not be taxable if those benefits served to reduce the
principal amount of a loan balance outstanding. See Appellants’ Jt. Reply Br. at 6. They
add that their intent, no matter how subjectively fraudulent, cannot create liability if they
did not receive income but instead were repaid for their loans. See id. Appellants
contend that the D’Agostino instruction was necessary to show that there was no
deficiency in tax and that the instruction they request would not have been contrary to our
opinion in United States v. Goldberg, 330 F.2d 30, 38 (3d Cir. 1964). We review a
refusal to give a requested instruction on an abuse of discretion basis, evaluating
"whether the proffered instruction was legally correct, whether or not it was substantially
covered by other instructions, and whether its omission prejudiced the defendant."
United States v. Pitt, 193 F.3d 751, 755-56 (3d Cir. 1999).
In Goldberg, we noted that the government need not fix a precise label on
diverted funds since "substance controls over form, and taxation is concerned with the
actual command over the property taxed." Id. at 38. A number of other courts have
agreed that the government need not prove the character of diverted funds, rejecting the
D’Agostino rationale. See United States v. Williams, 875 F.2d 846, 849-52 (11th Cir.
1989); United States v. Miller, 545 F.2d 1204, 1213-14 (9th Cir. 1976); Davis v. United
States, 226 F.2d 331, 335-36 (6th Cir. 1955). These courts have stressed the distinction
between a civil collection action and a criminal tax proceeding by noting that:
In civil tax cases the purpose is tax collection and the key
issue is the establishment of the amount of tax owed by the taxpayer. In
a criminal tax proceeding the concern is not over the type or the specific
amount of tax which the defendant has evaded, but whether he has
wilfully attempted to evade the payment or assessment of tax.
The difficulty in automatically applying the constructive
distribution rules in this case is that it completely ignores one essential
element of the crime charged: the willful attempt to evade taxes, and
concentrates solely on the nature of the funds diverted. That latter
aspect is not the important element. Where the taxpayer has sought to
conceal income by filing a false return, he has violated the tax evasion
statutes.
Miller, 545 F.2d at 1214; see also Williams, 875 F.2d at 850. Indeed, the Court of
Appeals for the Second Circuit has acknowledged that its view in D’Agostino does not
state the prevailing rule. See United States v. Bok, 156 F.3d 157, 162 (2d Cir. 1998).
We also point out that in D’Agostino, unlike in this case, the government
conceded that the defendant’s corporation had no earnings or profits. Here, there was
evidence supporting a conclusion that, when adjustments were made for personal items
falsely labeled as business expenses, CMG showed a profit for each year charged in the
indictment. Additionally, even though appellants complain that the diverted funds could
have been accounted for lawfully as return of capital or repayment of a loan and that there
would have been no or very little taxable income if corporate income diverted by
appellants had been accounted for by issuance of 1099 forms, there was no evidence from
which it could be inferred that the diverted income was accounted for in this way.
Accordingly, we will not stray from Goldberg, which requires the government to prove
the taxpayer’s "actual command" over the property taxed rather than fix a precise label or
prove the character of the diverted funds.
Appellant Kresock filed a motion to recuse the district judge, who, during the
pretrial conference, revealed to counsel that he and William Roll, appellants’ CPA,
belonged to the same church and were involved in church activities. We consider the
appeal from the court’s denial of the motion on an abuse of discretion basis. See
Securacomm Consulting, Inc. v. Securacom, Inc., 224 F.3d 273, 278 (3d Cir. 2000).
Under 28 U.S.C. 455:
(a) Any justice, judge, or magistrate of the United States shall
disqualify himself in any proceeding in which his
impartiality might reasonably be questioned.
(b) [The judge] shall also disqualify himself in the following
circumstances:
(1) Where he has a personal bias or prejudice concerning
a party, or personal knowledge of disputed
evidentiary facts concerning the proceeding.
In considering this issue we determine whether an objective observer reasonably
might question the judge’s impartiality. See Massachusetts Sch. of Law at Andover, Inc.
v. American Bar Ass’n, 107 F.3d 1026, 1042 (3d Cir. 1997). In its opinion declining to
recuse the court noted, quoting Hadler v. Union Bank and Trust Co., 765 F. Supp. 976,
977 (S.D. Ind. 1991) (internal quotation marks omitted) that "it is beyond the bounds of
reasonable supposition to infer that a judge would abandon his obligation of impartiality
merely because a friend is a witness in a case in which that judge is presiding. That is
why practically every federal court faced with arguments for recusal based on friendship
has found recusal unnecessary." App. at 22. In this case, the judge and the witness did
not have a close personal relationship. Instead, the judge merely was acquainted with the
witness through church involvement. Moreover, we see no reason to believe that the
judge’s acquaintance with the witness affected the outcome of sentencing. Indeed, we
note that neither appellant has appealed from his or her sentence, which, considering the
situation in which they were in, were favorable to them. In fact, it is the government
which is appealing from the sentences. Overall, we are satisfied that the district court
properly denied the motion to recuse.
Appellants argue that the court committed plain error in allowing testimony from
IRS agent Christopher Roginsky who was a summary witness who observed the trial and
testified as to the amount of criminal tax due and owing from the defendants based on the
evidence. See Fed. R. Crim. P. 52(b). Appellants argue that they received inadequate
pretrial notice of Roginsky’s testimony and that his testimony violated Fed. R. Evid.
704(b).
Before trial, appellants filed an unsuccessful motion under Rule 16(d)(2) to
exclude Roginsky’s testimony to the extent that he proposed to testify as an expert on tax
preparation. The government, however, identified Roginsky as a summary witness who
would offer a summary of tax calculations at the end of the government’s case, based on
the evidence presented at trial. Appellants complain that Roginsky’s testimony went
beyond his role as a summary witness when he offered expert opinion on their intent to
avoid taxes.
On cross-examination appellants tried to create the impression that there would
have been no corporate tax due and owing if their accountant simply had issued form
1099s to appellants on behalf of the corporation. Thus, the line of questioning suggested
that corporate profit, and appellants’ resulting liability, were consequences of the
accountant’s error. On redirect examination, the government asked the following
questions to rebut the suggestion that the accountant was responsible for creating
corporate profit:
Q: Now, Mr. Borden asked you a couple of questions about if
there had been 1099’s issued and if things had been done a
certain way what the effect would have been on the
corporate tax; is that correct?
A: Yes, I remember those questions.
Q: Why is it that you calculated a corporate tax due and owing
in this case?
A: The items which comprised the corporate adjustments
represent expenses that are not business expenses. They
were expenses personal expenses related to the
shareholder, nonbusiness items. Had the shareholders had
the intention of deducting them as business expenses, they
would have been wait, let me step back. Had they been
legitimate business expenses they would have been allowed.
Had the shareholders’ intention been otherwise, that was
additional compensation, they would have followed that
route when they were coding the checks, placing them in the
general ledger, et cetera.
Q: Okay, and that wasn’t done here, correct.
A: No, it was not.
Supp. app. at 492-93.
Although they did not object at the time, appellants now contend that Roginsky’s
answer was highly prejudicial and that he improperly expressed an opinion as to their
intent. See Appellants’ Br. at 74 (citing United States v. Watson, 260 F.3d 301, 308 (3d
Cir. 2001) for proposition that reversal is required when expert offers opinion about
defendant’s intention). The government responds that in the disputed testimony,
Roginsky merely stated that appellants’ treatment of the funds from CMG was
inconsistent with an intention to consider those payments to be compensation as
appellants had suggested, and that the opinion was not tantamount to an opinion regarding
appellants’ willfulness to evade income taxes. In any event, it points out that Roginsky’s
testimony covers 75 transcript pages and that the challenged testimony was not repeated.
In fact, from the start of Roginsky’s testimony, the government made clear that
he had been asked to assume that expenses paid by CMG to appellants were personal
rather than business expenses. The fact that he began with this assumption and that his
testimony was not intended to prove the intent of appellants was repeated throughout his
testimony. See Br. of Appellant/Cross-Appellee at 71-73 (citing pages of transcript).
Thus, even if a single, isolated portion of the agent’s testimony was improper, it would
not require reversal.
To reverse a conviction under Rule 52(b), plain error must affect substantial
rights. See United States v. Olano, 507 U.S. 725, 735, 113 S. Ct. 1770, 1778 (1993). The
appellant bears the burden of persuasion, and "[i]n most cases," the substantial rights
requirement "means that the error must have been prejudicial: [i]t must have affected the
outcome of the district court proceedings." Id. at 734, 113 S.Ct. at 1778. Here, the
testimony was a brief statement in the midst of lengthy testimony and the agent’s
statements did not directly address appellants’ intention to evade the payment of income
taxes. In the circumstances, it is difficult to characterize the error as plain.
Moreover, even if the error was plain, there has been no specific showing of
prejudice. We cannot believe that in the face of the overwhelming evidence supporting
the convictions that the statement affected the outcome of the trial. Thus, appellants are
not entitled to a new trial: the alleged error was not of constitutional dimension, and there
is a "high probability" that the error did not contribute to the conviction. See United
States v. Molina-Guevara, 96 F.3d 698, 703 (3d Cir. 1996). The error was harmless.
III. CONCLUSION
We have reviewed all the other points raised by the parties, including those the
government has advanced on the cross-appeal, and we are satisfied that we have no basis
to reverse by reason of any of them. Consequently, we will affirm the judgments of
conviction and sentence entered July 20, 2000.
TO THE CLERK:
Please file the foregoing opinion.
/s/ Morton I. Greenberg
Circuit Judge
DATED: July 22, 2002