United States v. Luther Smith, Jr.

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
File Name: 13a0235n.06
No. 11-5985
FILED
UNITED STATES COURT OF APPEALS Mar 06, 2013
FOR THE SIXTH CIRCUIT DEBORAH S. HUNT, Clerk
UNITED STATES OF AMERICA, )
)
Plaintiff-Appellee, )
)
v. ) ON APPEAL FROM THE UNITED
) STATES DISTRICT COURT FOR
LUTHER T. SMITH, JR., ) THE MIDDLE DISTRICT OF
) TENNESSEE
Defendant-Appellant. )
)
OPINION
Before: COLE and DONALD, Circuit Judges, and RUSSELL, District Judge.*
Bernice B. Donald, Circuit Judge. Luther T. Smith, Jr. was found guilty of two counts of
tax evasion for tax years 2001 and 2002, in violation of 26 U.S.C. § 7201, and one count of filing
a false income tax return for tax year 2003, in violation of 26 U.S.C. § 7206(1). Smith now appeals
the district court’s exclusion of evidence, its calculation of the tax loss, the imposition of a two-level
sentencing enhancement for failing to report over $10,000 in income derived from criminal activity,
and the imposition of a two-level sentencing enhancement for obstruction of justice. For the
following reasons, we affirm in part and reverse in part.
*
The Honorable Thomas B. Russell, United States District Judge for the Western District of
Kentucky, sitting by designation.
No. 11-5985
United States v. Luther T. Smith, Jr.
I.
Luther Smith was a life insurance salesman who owned and operated two corporations used
to conduct his life insurance business, The Broker’s Edge and Eagle Financial Group. Smith
conducted his insurance business out of Nashville, Tennessee. After receiving commissions from
the insurance companies for his sale of insurance policies, Smith wrote checks from his personal
account to his two companies that he classified as loans. He deducted these amounts on his
Schedules C as commission expenses.
William McSwiney prepared Smith’s personal tax returns for the years 2001 through 2003.
The 2001 and 2003 tax returns were filed with the Internal Revenue Service (IRS), but the 2002
return was not filed.
In 2004, the IRS audited Smith. During the audit, Smith informed IRS Agent Robert Hissam
that his companies did not pay any of his personal expenses. Agent Hissam discovered that Smith
had submitted unfiled tax Forms 1040 for the years 2000 and 2001 to Union Planters Bank in an
effort to obtain a loan. On these forms, he reported more income than he had reported to the IRS.
The IRS subsequently investigated Smith for failing to report income from his insurance businesses.
On July 29, 2009, Smith was indicted on two counts of tax evasion for tax years 2001 and 2003 and
one count of filing a fraudulent tax return for tax year 2003.
At trial, IRS Agent Suzanne Poshedley testified that she conducted an extensive investigation
of Smith’s finances. Agent Poshedley identified personal expenses, such as home remodeling and
-2-
No. 11-5985
United States v. Luther T. Smith, Jr.
his children’s tuition, that were paid by his companies. Her investigation ultimately uncovered
unreported income of $91,788.06 for 2001, $613,512.99 for 2002, and $462,746.38 for 2003.
Smith’s sole witness at trial was his tax preparer, McSwiney. McSwiney testified as to his
preparation of Smith’s returns. He also testified as to a chart, Defense Exhibit 2, summarizing loans
made to Smith’s companies from Smith’s personal accounts. After determining that the source of
information presented in the chart was unreliable, the district court struck the chart and McSwiney’s
related testimony.
On January 19, 2011, the jury convicted Smith on all counts. The district court sentenced
him to ninety-six months’ imprisonment. He now appeals.
II
Smith first challenges the district court’s exclusion of Defense Exhibit 2 and McSwiney’s
testimony as it related to the exhibit.
We review a district court’s exclusion of evidence for an abuse of discretion. United States
v. Ham, 628 F.3d 801, 804 (6th Cir. 2011). An abuse of discretion occurs when “we are firmly
convinced that a mistake has been made, i.e., when we are left with a definite and firm conviction
that the trial court committed a clear error of judgment.” United States v. Heavrin, 330 F.3d 723,
727 (6th Cir. 2003) (internal quotations omitted).
-3-
No. 11-5985
United States v. Luther T. Smith, Jr.
The district court did not indicate which Rule of Evidence required the exclusion. Smith
argues that it was excluded under Rule 602, which prohibits the admission of evidence for which the
witness does not have personal knowledge. Fed. R. Evid. 602. The government, however, argues
that the district court properly excluded the evidence under Rule 1006, which permits summaries of
voluminous documents, Fed. R. Evid. 1006, but only if it satisfies certain requirements. See United
States v. Jamieson, 427 F.3d 394, 409 (6th Cir. 2006).
Exclusion was proper under both Rules. The government correctly points out that this court
requires summaries admitted under Rule 1006 to meet five criteria:
(1) the underlying documents must be so voluminous that they cannot be
conveniently examined in court, (2) the proponent of the summary must have made
the documents available for examination or copying at a reasonable time and place,
(3) the underlying documents must be admissible in evidence, (4) the summary must
be accurate and nonprejudicial, and (5) the summary must be properly introduced
through the testimony of a witness who supervised its preparation.
Id. at 409. There are two primary issues with admission of Defense Exhibit 2. First, the chart,
captioned “loans and repayments,” was purported to summarize loans that Smith made to his
corporations. However, Smith did not make available the actual loan agreements, contrary to the
second criteria set forth in Jamieson. Second, it is unclear who actually prepared the chart. At trial,
McSwiney testified that he did not create the summary but that it was instead provided to him by
Smith and defense counsel. When the government challenged the admissibility of the chart based
on the fact that McSwiney did not prepare it, defense counsel told the court that “regardless of what
Mr. McSwiney said, . . . he did not receive that document from me.” Thus, the district court did not
-4-
No. 11-5985
United States v. Luther T. Smith, Jr.
exclude the exhibit sua sponte, as Smith contends, but instead responded to the government’s
challenge and appropriately determined that the document was unreliable as to the source, and
therefore contrary to the fifth Jamieson criteria.
While the chart was properly excluded under Rule 1006, McSwiney’s testimony as it
pertained to the chart was properly excluded under Rule 602 as well. “The threshold for Rule 602
is low[,]” and “[t]estimony should not be excluded for lack of personal knowledge unless no
reasonable juror could believe that the witness had the ability and opportunity to perceive the event
that he testifies about.” United States v. Hickey, 917 F.2d 901, 904 (6th Cir. 1990). McSwiney
testified that he was not provided with the loan documents that were the subject of the chart and that
his determination that they were loans was based solely on what Smith had told him. Because
McSwiney’s testimony was based on Smith’s hearsay statements, the district court did not abuse its
discretion in determining that no reasonable juror could believe that McSwiney had personal
knowledge of the loans, and, thus, exclusion was proper under Rule 602.
Smith further argues that even if exclusion was proper, the district court’s instruction to the
jury to disregard the chart and McSwiney’s corresponding testimony was overly broad and confusing
and effectively excluded his entire theory of defense.1 When reviewing jury instructions, we must
determine that “the instructions show no tendency to confuse or mislead the jury.” Miller v. Utica
Mill Specialty Mach. Co., Inc., 731 F.2d 305, 307 (6th Cir. 1984). When instructing the jury, the
1
We note that Smith has not raised a deprivation of the right to present a defense claim on
appeal.
-5-
No. 11-5985
United States v. Luther T. Smith, Jr.
district court said, “I want to announce that Defendant’s Exhibit Number 2 that was cited during the
testimony of Mr. McSwiney has been stricken by the Court. You will not consider that exhibit nor
any testimony based solely on that exhibit.”
Contrary to Smith’s assertion, the court did not instruct the jury to disregard McSwiney’s
testimony entirely. Indeed, McSwiney testified regarding his preparation of Smith’s tax returns for
the years at issue, and this testimony was not stricken. By the plain language of the instruction, the
district court made clear that only Defense Exhibit 2 and McSwiney’s testimony referring to that
exhibit had been stricken. “The jury is presumed to have followed the instructions correctly as
given.” Id. The instruction, as given, was not overly broad or confusing.
Smith’s remaining arguments against exclusion - that the prosecution improperly commented
on the lack of evidence produced and that the district court knew of the type of defense that would
be presented - are without merit and lack supporting authority.
III.
Smith next argues that the district court erred in calculating the tax loss for sentencing
purposes. He claims that the district court improperly rejected the evidence at trial and instead used
an unreliable document as the basis for the calculation. We review the district court’s factual
findings regarding the tax loss for clear error. United States v. Goosby, 523 F.3d 632, 639 (6th Cir.
2008). “Findings under the Sentencing Guidelines that increase a defendant’s sentence must be
based on reliable information and supported by a preponderance of the evidence.” Id. The district
-6-
No. 11-5985
United States v. Luther T. Smith, Jr.
court’s tax loss findings are entitled to deference. United States v. Webb, 335 F.3d 537, 537 (6th Cir.
2003); United States v. Harris, 433 F. App’x 383, 386 (6th Cir. 2011).
Under the Sentencing Guidelines, a defendant’s base offense level for tax evasion and filing
a fraudulent return is determined by the amount of the tax loss. The tax loss is defined as “the total
amount of loss that was the object of the offense (i.e., the loss that would have resulted had the
offense been successfully completed).” U.S.S.G. § 2T1.1(a)(1), (c)(1). The tax loss under this
section is determined by using the same rules applicable to any other sentencing factor. U.S.S.G.
§ 2T1.1 app. n.1. The Guidelines permit the court to “make a reasonable estimate based on the
available facts[,]” and indirect methods of proof are permitted. Id. Thus, contrary to Smith’s
contention, the tax loss may be calculated using any facts before the court, not just the figure Smith
believes was proved at trial.
At the sentencing hearing, the government submitted that, for tax loss calculation purposes,
the court should consider the tax returns that Smith presented to Union Planters Bank in order to
obtain loans. The record shows that the commissions the insurance companies paid to Smith
matched the amount of business income that he reported on the tax returns submitted to Union
Planters Bank. However, unlike the tax returns Smith filed with the IRS, which included deductions
for the commissions he paid to his corporations, the returns submitted to Union Planters Bank did
not include these deductions, and, thus reported higher taxable income and taxes due. Agent
Poshedley testified that Smith paid the commissions to his corporations so that they would not
appear on his personal tax return, and the corporations never filed tax returns reporting that income,
-7-
No. 11-5985
United States v. Luther T. Smith, Jr.
thus taxes were never paid on that money. She further testified that because the government proved
at trial that Smith had personal expenditures of $1.2 million, and his filed tax returns showed little
to no taxable income, the returns given to Union Planters Bank were more reflective of Smith’s
actual income. Moreover, Agent Poshedley indicated that the information presented at trial was not
intended to encompass all evidence of Smith’s income but was instead presented to show how Smith
funneled money between his personal accounts and his corporations to evade his tax obligations.
Relying on this information, the district court determined that the income represented on the
returns submitted to Union Planters Bank should be included in the calculation of the tax loss. Based
on the foregoing, we find that the district court’s determination was reasonable in light of the
available facts and was not “outside the realm of permissible computations.” United States v.
Jackson, 25 F.3d 327, 330 (6th Cir. 1994).
IV.
Smith also argues that the district court erred in imposing a two-level sentencing
enhancement based on its finding that he failed to report over $10,000 in income derived from
criminal activity. Smith asserts that the criminal activity enhancement, U.S.S.G. § 2T1.1(b)(1),
cannot be applied to the practice of insurance rebating because rebating, while illegal in Tennessee,
is not a classified as a crime, but is instead a civil offense.
We review the district court’s factual findings for clear error. United States v. Cromer, 93
F.3d 1271, 1278 (6th Cir. 1996). “Whether facts found by the district court warrant the application
-8-
No. 11-5985
United States v. Luther T. Smith, Jr.
of a particular guideline is a legal question and is to be reviewed de novo.” Id. (internal quotations
omitted).
In 2005, the Tennessee Department of Commerce and Insurance instituted an action against
Smith for practicing what is known as insurance “rebating.” “Rebating” occurs when an insurance
agent induces an individual to purchase a policy by promising to return to them a portion of the
premium. Tenn. Code Ann. § 56-8-104(8) (2009). In Tennessee, “rebating” is considered an unfair
trade practice and is illegal, but not criminal. See id. The State of Tennessee ultimately determined
that Smith engaged in “rebating” and revoked his insurance agent’s license. The Tennessee Court
of Appeals affirmed this decision.
Based upon the “rebating” scheme, the government sought a two-level sentencing
enhancement, arguing that Smith’s conduct constituted wire fraud under 18 U.S.C. § 1343. At the
sentencing hearing, Smith argued that because “rebating” is not a crime in Tennessee, he is not
subject to the enhancement. The Guidelines, however, are not limited to state crimes. Section
2T1.1(b)(1), Application Note 3 defines criminal activity as “any conduct constituting a criminal
offense under federal, state, local, or foreign law.” Thus, if Smith’s actions constitute wire fraud
under 18 U.S.C. § 1343, the enhancement is applicable to him.
Wire fraud requires that an individual 1) devise a scheme to defraud; 2) use interstate wire
communication in furtherance of the scheme; and 3) intend to deprive a victim of money or property.
United States v. Faulkenberry, 614 F.3d 573, 580-81 (6th Cir. 2010). The government contends that
-9-
No. 11-5985
United States v. Luther T. Smith, Jr.
Smith defrauded the insurance companies by inducing them to issue policies that were ultimately not
paid for and because the funds were transferred via wire, Smith’s actions constitute wire fraud under
§ 1343. It is uncontested that the commissions that the insurance companies paid to Smith were
transferred using interstate wire communication. Thus, the issue is whether the first and third
elements of wire fraud are met.
The government argues that Smith’s “rebating” actions constitute a scheme to defraud. In
support of this contention, it presented to the district court Agent Poshedley’s testimony that one of
the insurance companies with which Smith had dealings indicated that its decision to issue the
policies would have been affected if it had known that Smith was engaging in “rebating.” The
government insists that this omission was a material misrepresentation sufficient to support the
element of fraud. However, the insurance company with which Agent Poshedley spoke did not
indicate that it would not have issued the policies, and the government does not put forth any
evidence as to how the company’s decision would have been affected.
The government also argues that the “rebating” resulted in a deprivation of property. In so
doing, it relies on a statement in the PSR that, “the majority of these policies lapsed for non-
payment.” The government asks us to take a leap that we are unwilling to make. There is simply
no evidence linking the non-payments to the “rebating” conduct. Even if it can be argued that Smith
devised a scheme to defraud, the government has failed to prove by a preponderance of the evidence
that there was an intention to deprive the insurance companies as a result of that scheme. In fact, in
illustrating the practice of “rebating” at the sentencing hearing, the government’s witness used as an
- 10 -
No. 11-5985
United States v. Luther T. Smith, Jr.
example one of the insurance companies that Smith dealt with and testified that the company
received all of the money it was owed, which would tend to weigh against a finding that Smith
intended to deprive the company of money.
Not only has the government failed to cite any case law supporting its argument that
“rebating” does in fact constitute wire fraud, the proof offered is too speculative to uphold the
enhancement. Accordingly, the district court erred in its application.
V.
Lastly, Smith challenges the district court’s imposition of a two-level sentencing
enhancement for obstruction of justice. “We review the district court’s factual findings for clear
error and the court’s determination of whether the facts constitute an obstruction of justice de novo.”
United States v. Carson, 560 F.3d 566, 589 (6th Cir. 2009).
Pursuant to U.S.S.G. § 3C1.1, a court may apply a two-level enhancement if “the defendant
willfully obstructed or impeded, or attempted to obstruct or impede, the administration of justice.”
The district court found that a document was tendered at trial for which the witness, McSwiney, had
no personal knowledge, and, as a result, “there was absolutely no factual basis” for the evidence.
In so finding, the district court relied on United States v. Parrott, 148 F.3d 629, 634 (6th Cir. 1998),
and determined that the enhancement was applicable. The district court’s reliance on Parrott
appears to be misplaced. In Parrott, the defendant was found to have submitted false documents to
the court. Here, the basis for the district court’s ruling was that the source of the document was
- 11 -
No. 11-5985
United States v. Luther T. Smith, Jr.
unreliable in that a proper foundation had not been laid as to who prepared it. Thus, the district court
never actually found that Smith or McSwiney produced a “false, altered, or counterfeit document.”
U.S.S.G. § 3C1.1 at app. n.4(C).
Smith assumes that because the district court indicated that the document did not have a
factual basis, the enhancement rests on a finding of perjury. This assumption does not take into
account the other examples of covered conduct in § 3C1.1. A finding of perjury will trigger the
enhancement, see id. at app. n.4(B); however, the commentary clearly instructs that perjury is not
the only obstructive conduct for which the enhancement may be applied. “Obstructive conduct can
vary widely in nature, degree of planning, and seriousness.” Id. at app. n.3. The Guidelines indicate
that a court may consider conduct similar to the listed examples when applying the enhancement.
See id. Calling a witness who has no personal knowledge of what he is testifying to is not
specifically listed as an example in the Guidelines.
Producing a witness who cannot lay the proper foundation for introduction of a document
is not obstruction of justice in this case. There is no evidence that the document was false, but
merely that this witness could not attest to its accuracy. On cross-examination, the witness admitted
he had no personal knowledge of the factual background needed to support introduction of the
document.
In addition, during the preparation of the presentence report, Smith, knowing his insurance
license was to be revoked, misrepresented to the probation officer that he had a valid license.
- 12 -
No. 11-5985
United States v. Luther T. Smith, Jr.
Providing “materially false information to a probation officer in respect to a presentence or
other investigation for the court” can be obstructive conduct. U.S.S.G. § 3C1.1 at app. n.4(H). This
was false information but it was not “materially false information.” It did not affect guilt or
innocence nor did it affect the accurate calculation of the application offense level. It was not relied
on by the district court in determining the proper sentence. It had no effect on the sentencing process
or result. In the peculiar situation of this case, it was an abuse of discretion to apply the obstruction
of justice enhancement.
VI.
Given the foregoing, we affirm the judgment of the district court as to the exclusion of the
evidence and the calculation of the tax loss, but reverse as to the application of the enhancement for
failing to report over $10,000 in income derived from criminal activity and the application of the
obstruction of justice enhancement.
- 13 -