308 F.3d 494 (6th Cir. 2002), 01-5962, U.S. v. Tarwater

Docket Nº:01-5962.
Citation:308 F.3d 494
Party Name:UNITED STATES of America, Plaintiff-Appellee, v. Larry T. TARWATER, Defendant-Appellant.
Case Date:October 16, 2002
Court:United States Courts of Appeals, Court of Appeals for the Sixth Circuit
 
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308 F.3d 494 (6th Cir. 2002)

UNITED STATES of America, Plaintiff-Appellee,

v.

Larry T. TARWATER, Defendant-Appellant.

No. 01-5962.

United States Court of Appeals, Sixth Circuit.

October 16, 2002

Argued: June 14, 2002.

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Jimmie Baxter (argued), Assistant United States Attorney, Knoxville, TN, for Plaintiff-Appellee.

Herbert S. Moncier (briefed), David S. Wigler (argued and briefed), Law Offices of Herbert S. Moncier, Knoxville, TN, for Defendant-Appellant.

Before MOORE and SILER, Circuit Judges; STAFFORD, District Judge.[*]

STAFFORD, D.J., delivered the opinion of the court, in which SILER, J., joined. MOORE, J. (pp. 519-523) delivered a separate dissenting opinion.

OPINION

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STAFFORD, District Judge.

Appellant, Larry T. Tarwater ("Tarwater"), appeals his conviction and sentence for making false statements to the Internal Revenue Service ("IRS"). We affirm.

I. THE EVIDENCE

In 1987, Tarwater, a certified public accountant, was retained by Jefferson Memorial Hospital ("JMH") to perform its annual audit and to prepare its annual Medicare and Medicaid cost reports. At the time, JMH was using a consultant, Willie Davis, to review the hospital's cost reports. Hired on a contingency fee basis, Davis was paid for his work if it resulted in additional Medicare and Medicaid reimbursements to the hospital. To obtain his fee, Davis submitted itemized invoices to JMH's Chief Financial Officer, Karen Bradley Chambers ("Chambers"), explaining what amount of money the hospital would be receiving back from Medicare and/or Medicaid. The cost reports reviewed by Davis for the years after 1986 were prepared by Tarwater.

In 1988, Tarwater and Craig Peters ("Peters") formed the Peters, Tarwater & Associates accounting partnership. The partnership maintained its only bank account at the Home Federal Bank in Knoxville, Tennessee, where the partners were supposed to deposit all business receipts. The Peters, Tarwater partnership lasted through 1991. Tarwater practiced accounting as a sole proprietor from January, 1992, until August 18, 1992. On August 19, 1992, Tarwater formed a corporation, Tarwater, Hines & Company, P.C. with another certified public accountant, Jenny Hines ("Hines"). The corporation maintained its business account at the Third National Bank where all business receipts were supposed to be deposited. Tarwater practiced with Hines until 1998.

In or about June of 1988, Barnett Bank of Florida notified Chambers that Davis had pledged his JMH fee receivables as security for a loan. Barnett Bank requested that any monies due Davis be made payable to both the bank and to Davis. Chambers agreed and thereafter wrote a check jointly to Davis and Barnett Bank in the amount of $26,852.75. Soon after she gave Davis the check, Chambers was notified by the bank that Davis had attempted—unsuccessfully—to cash the check. In fact, Davis had altered the check, removing Barnett Bank's name as a payee. Angered by Davis's action, and concerned that, if Davis would alter a check, he might do other unacceptable things as well, Chambers stopped payment on the check. She then told Robert Foster, the hospital's administrator, about Davis's conduct. Chambers explained to Foster that she was unwilling to work with Davis any longer, and she recommended that his contract with the hospital be terminated.

Soon after her meeting with Foster, Chambers was advised that, while Davis's contract was not being terminated, Davis would thereafter work through, and be paid through, Tarwater. Foster approved the Tarwater-to-Davis payment arrangement. Two checks totaling $26,852.75, the exact amount of the check from which Davis removed Barnett Bank's name, were soon after made payable to Tarwater for Davis.

Bettye King ("King"), the JMH bookkeeper, prepared all checks for the hospital but had no signatory authority. Two administrative officers, usually Foster and Chambers, had to sign the checks. Tarwater

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routinely gave King invoices to document his auditing and cost report work, and, based on those invoices, King prepared checks payable to Tarwater's accounting firm. Beginning in August of 1988, King made the "Willie Davis" checks payable to Tarwater individually. Although Davis had previously submitted itemized invoices when JMH paid him directly for his work, no such invoices or statements were submitted after Tarwater became the conduit for payments to Davis. Initially, King wrote the "Willie Davis" checks to Tarwater at the direction of Chambers or Foster. Later, Tarwater simply told King what amounts were to be paid to him on behalf of Davis. According to King, she did not question the absence of documentation because Tarwater was the hospital's auditor.

After learning about the Tarwater-to-Davis payment arrangement, Chambers attempted to institute an audit review process to determine the correctness and propriety of the hospital's payments to Davis through Tarwater. Shortly after she started the process, however, she was instructed by Foster to cease the work and to accept the payment requests presented by Tarwater. Chambers complained about the absence of an audit trail, but to no avail. According to Chambers, Tarwater decided when, and for how much, checks were to be issued to him for Davis. Although it was her normal practice, as well as the hospital's, to insist on documentation to support any payment of monies, Chambers signed the undocumented checks to Tarwater because "Tarwater was hired by the Board of Directors [and] he could tell [her] what to do." J.A. at 375. Foster likewise signed the checks without insisting on documentation because he trusted Tarwater, knew that the checks were prepared under the direction of the chief financial officer, and had no reason to doubt that Davis was entitled to payment.

On October 27, 1994, the JMH Board of Directors (the "Board") held a meeting at which Tarwater was asked about Davis. Tarwater explained who Davis was, what he did for the hospital, and why monies intended for Davis were passed through Tarwater. As reflected in the minutes of the meeting, the Board learned that:

The reason these checks are made out to Mr. Tarwater is because Mr. Davis will call [Tarwater] from Florida and state[ ] he needs payment; so instead of [Tarwater] making a trip to Jefferson City, [Tarwater] will pay Mr. Davis's firm [him]self and then get reimbursed from the hospital next time [he is] up here. If checks were made out to the Tarwater firm for Mr. Davis's services, then it would cost his firm 11% off the top for professional liability.

J.A. at 899. After expressing concern about the hospital's failure to issue 1099 forms to either Tarwater or Davis for the amounts paid to Tarwater on Davis's behalf, the Board decided to stop all payments to Davis pending the Board's review of proper documentation, including proof of Medicaid/Medicare reimbursements. The Board also decided that, if any monies were thereafter owed to Davis, the hospital would pay Davis directly.

Following the October 27th Board meeting, Tarwater's services to JMH were terminated and an investigation was begun. In November of 1994, the Board retained an accounting firm, Morgan, Newman & Davenport, P.C., to review all payments that were made by the hospital to outside consultants. As part of this review, Ralph Erwin Newman, Jr., CPA ("Newman"), interviewed Tarwater. Tarwater explained (1) that he did not make a nickel from his arrangement with Davis, that all monies intended for Davis were passed on to Davis; (2) that he could document all payments

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that went to Davis; (3) that he sometimes advanced Davis money out of his own funds, reimbursing himself when JMH issued a check; and (4) that he cashed checks for Davis—sending Davis either the cash, a wire transfer, or a cashier's check—on the not-infrequent occasions when JMH issued him two checks at a time.

Beginning in 1995, the IRS began an investigation of Tarwater's tax returns for the years 1991 through 1994. When Tarwater both declined to discuss any tax matters with the revenue agent and also refused to turn over his personal and corporate records, a summons was issued to Tarwater's bank and accounting firm. Over Tarwater's motion to quash, the records were ultimately obtained by court order in the year 2000. Review of those records resulted in Tarwater's indictment on three counts of filing false tax returns—for the years 1992, 1993, and 1994—in violation of 26 U.S.C. § 7206(1).

Tarwater's case was tried before a jury for five days beginning on April 30, 2001. Through the testimony of two IRS agents, Mary Barton ("Barton") and Karen Jackson ("Jackson"), the government presented evidence that Tarwater deposited the monies he received from JMH into four separate accounts at Third National Bank in Knoxville. The first account, the Peters, Tarwater & Associates Account, was used by Tarwater for his accounting business receipts during the early parts of 1992. The name of that account was changed in August, 1992, to the Tarwater, Hines & Company Account. The remaining three accounts were (1) the Larry T. Tarwater, CPA, Account; (2) the Larry T. or Janie C. Tarwater Account; and (4) the Larry T. or Janie C. Tarwater Construction Account.

In 1992, JMH issued Tarwater twelve checks for a total of $73,460 for work allegedly performed by Davis. Of those twelve checks, Tarwater received one check on each of two different dates, and he received two checks on each of five separate occasions. Of the total 1992 checks intended for Davis, Tarwater deposited $45,010 in his partnership...

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