U.S. v. Smith

• Decision Date: 13 September 2005
• Docket Number: No. 03-10548.,No. 03-10604.,03-10548.,03-10604.
• Citation: 424 F.3d 992
• Parties: UNITED STATES of America, Plaintiff-Appellee, v. David L. SMITH, Defendant-Appellant. United States of America, Plaintiff-Appellee, v. Herbert A. Bates, Defendant-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 992

424 F.3d 992

UNITED STATES of America, Plaintiff-Appellee, v. David L. SMITH, Defendant-Appellant.

United States of America, Plaintiff-Appellee, v. Herbert A. Bates, Defendant-Appellant.

No. 03-10548.

No. 03-10604.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted May 9, 2005.

Submission Vacated May 31, 2005.

Resubmitted September 2, 2005.

Filed September 13, 2005.

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John Balazs, Sacramento, CA, for defendant-appellant Smith.

Victor S. Haltom, Sacramento, CA, for defendant-appellant Bates.

Samantha S. Spangler, Assistant United States Attorney, Sacramento, CA, for the plaintiff-appellee.

Appeals from the United States District Court for the Eastern District of California; Morrison C. England, District Judge, Presiding. D.C. No. CR-00-00229-MCE.

Before: KLEINFELD, HAWKINS, and GRABER, Circuit Judges.

MICHAEL DALY HAWKINS, Circuit Judge:

Defendants David Larry Smith ("Smith") and Herbert Arthur Bates ("Bates") appeal their convictions on multiple counts of tax fraud, mail and wire fraud, money laundering, and conspiracy, as well as their sentences. Defendants challenge: (1) arraignment by a magistrate judge, (2) multiplicity of the indictment resulting in a multiplicitous sentence on the three conspiracy counts, (3) an indictment passed on by grand jurors not questioned about their feeling towards the IRS, (4) denial of a suppression motion based on alleged defects in the arrest and search warrants, (5) sufficiency of the evidence on the tax counts, (6) denial of a motion for a new trial based on alleged petit juror bias, and (7) denial of a multiple conspiracy instruction. In addition to disputing the district court's application of various sentencing guidelines, Smith and Bates make a United States v. Booker, ___ U.S. ___, 125 S.Ct. 738, 160 L.Ed.2d 621 (2005), challenge to sentencing based on facts not found by a jury, and an ex post facto challenge to application of an advisory guideline system to their sentences. We have jurisdiction under 28 U.S.C. § 1291 and affirm the convictions in all respects and remand on sentencing pursuant to United States v. Ameline, 409 F.3d 1073 (9th Cir.2005) (en banc).

FACTS AND PROCEDURAL HISTORY

The government brought Smith and Bates¹ to trial for enlisting hundreds of clients to set up trusts known as Unincorporated Business Organizations, or "UBOs," which purportedly avoided taxes on income streamed into them; the defendants charged their clients to set up and conduct transactions for the UBOs, only to later steal their clients' money.

The defendants advised their clients to transfer all of their income and assets — including their businesses, homes, relative's homes, furniture, jewelry, cars, and even pets — into the UBO. Defendants also advised clients to ask their employers to issue pay checks, commission checks, or other income sources in the names of their UBOs instead of in their names.

Moreover, the defendants assured clients that they could use the UBOs to pay a variety of expenses, to be deducted as "business expenses" from the UBO's income. These business expenses included everything from mortgage and utility payments to business equipment to haircuts, pet needs, laundry, clothes, and lawn care. As one client testified, "practically everything we did could be seen as a legitimate deduction." Another client echoed that "pretty much everything could be deducted or be used as legitimate business expenses. . . . Probably certain personal items were not exempt, so to speak. Like toothpaste."

Numerous clients testified at trial how defendants (usually Smith²) advised them that they did not have to pay taxes once they paid the defendants to establish a UBO. For example, Phyllis Ellen Denby testified that Bates advised her to establish a UBO to distribute stock profits in a way the IRS would not be aware of them. Bates told Denby and her husband that no taxes need be paid on "any money" that was in the UBO. Charles Michael Stoker testified that Smith told him and his wife that by placing their home into the UBO, the home could be sold and yet he could withhold the proceeds from tax filing. David Vette testified that Smith informed him that "as long as the UBO did not have a profit at the end of the year, there was no taxable consequence. I did not have to file a tax return." Ronald J. Herrema testified that Smith told him that UBOs are never audited and do not have any filing requirements. Smith strongly recommended that Herrema "get rid of any cash" in the UBO at the end of the year to "not raise a flag to the Internal Revenue Service," and thus "never [be] subject to filing requirements or IRS audit inspections." And, Smith "highly suggested" that he and his wife kept their income below $10,500, the ceiling below which married couples were not required to file tax returns.

Similarly, James Allen Herrema testified that Smith told him that the benefit of the UBO receiving his income is that he "would not have to file personal income tax on that income." Smith plainly stated that income into the UBO "fell into a category of not being taxable." When Herrema specifically asked whether he had to continue filing personal tax returns, Smith said "it was not necessary." Sharon Ludders testified that she was told that everything she owned could be transferred into the UBO, and that the trust would "take care" of her obligations to pay personal income taxes. Judith Reitz testified that Smith told her that "it wasn't necessary" for her UBO to file a tax return; "[i]n fact, it was really not desirable." When Ms. Reitz said she planned to continue filing personal income tax returns, Smith explicitly told her not to file.

Michael Joseph Young was told by Smith that trust expenses would be deducted from the income into the trust, to achieve a zero balance at the end of the year. "You didn't have to worry about filing a return or anything like that on it." Young understood from Smith that the money that went into the UBO did not need to be reflected on his personal income tax return, either. Lawrence Newton Craig testified that Smith said that UBOs did not have to file any tax returns. Smith said UBOs were "basically a tax shelter."

In addition to the above advice, Smith had a "particular way" at "particular bank[s]" to set up the UBO accounts, which he did in person. Smith established non-interest-bearing accounts for the UBOs, which the government argued kept the banks from filing with the IRS to report interest income.

Smith told clients not to discuss their UBOs with qualified accountants or attorneys. Bates told one set of clients to not even tell their closest relatives about their UBO. Smith told another client that she did not have the authority to provide UBO-related documents to the IRS because a vote of the trustees was needed. Bates and Smith also insisted on handling correspondence with the IRS. For example, Bates would write the IRS requesting legal authority for reporting certain income to the IRS, as well as asking the IRS to review certain portions of the Constitution regarding the power to collect taxes. The letters attempted to avoid paying taxes. Indeed, with or without such letters, most of the defendants' clients did not file tax returns and/or filed tax returns that omitted substantial income.

In order to make the UBO scheme work, many clients were told that they had to make "distributions" out of their UBOs to avoid filing taxable income within them. As one client put it, "if there was a[UBO] profit, we would do a distribution, and that would eliminate any of the profit, and there would be no taxable occurrence." Clients were told that their "distribution" was "going offshore into an investment program . . . and it would earn a profit . . . and [they] would have access to it down the road." Smith offered several ways to get the distribution money back, including an out-of-country credit card account or a direct payment to Smith to move the money off-shore for an eleven percent charge. Although clients could access their distribution or investment money for a while, Smith eventually transferred the money to another bank, and the clients could no longer access their money. Client losses ranged from $20,000 to $400,000.

Agent Bridgette O'Keeffe ("Agent O'Keeffe"), the government's summary witness, testified, among other things, regarding (1) each of the tax returns charged in the counts pertaining to aiding and assisting false or fraudulent returns, and (2) the numerous mail fraud and wire fraud counts, explaining the monies she traced that clients had invested with the defendants that ended up in Cayman Islands accounts.

The jury found Bates guilty of: (1) conspiracy to defraud the United States in the ascertainment, computation, or assessment of taxes, in violation of 18 U.S.C. § 371; (2) multiple counts of aiding and assisting in the preparation and presentation of false and fraudulent tax returns, in violation of 26 U.S.C. § 7206(2); (3) conspiracy to engage in mail or wire fraud, in violation of 18 U.S.C. § 371; and (4) conspiracy to launder money, in violation of 18 U.S.C. § 371. The jury also found Smith guilty of the above charges, as well as multiple counts of each of the following: (1) mail fraud, in violation of 18 U.S.C. § 1341; (2) wire fraud, in violation of 18 U.S.C. § 1343; (3) money laundering, in violation of 18 U.S.C. §§ 1956(a)(1)(A) 1956(a)(1)(B); and (4) engaging in financial proceeds of unlawful activity, in violation of 18 U.S.C. § 1957.

Bates and Smith moved for a new trial based on the alleged lack of impartiality of Jurors # 9 and # 1. Juror # 9 wrote Agent O'Keeffe after the trial suggesting they "get acquainted." Juror # 9 did not converse with Agent O'Keeffe during the trial, at most exchanging a smile across elevators. The district court considered allegations of Juror # 9's bias, and found "absolutely no tangible evidence that...