U.S. v. Bishop

• Decision Date: 30 May 2002
• Docket Number: No. 01-50266.,No. 01-50195.,01-50195.,01-50266.
• Citation: 291 F.3d 1100
• Parties: UNITED STATES of America, Plaintiff-Appellee, v. Jay R. BISHOP, Defendant-Appellant. United States of America, Plaintiff-Appellee, v. Gene R. Cardenaz, Defendant-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

291 F.3d 1100

UNITED STATES of America, Plaintiff-Appellee, v. Jay R. BISHOP, Defendant-Appellant.

United States of America, Plaintiff-Appellee, v. Gene R. Cardenaz, Defendant-Appellant.

No. 01-50195.

No. 01-50266.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted April 5, 2002.

Filed May 30, 2002.

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Gerald T. McFadden, San Diego, CA, for defendant-appellant Bishop. Christopher R.J. Pace, Cooley Godward LLP, San Diego, CA, for defendant-appellant Cardenaz.

Robert E. Lindsay, Gregory Victor Davis, Tax Division, Department of Justice, Washington, DC, for the plaintiff-appellee.

Appeal from the United States District Court for the Southern District of California; Irma E. Gonzalez, District Judge, Presiding. D.C. No. CR-98-03260-IEG.

Before: GOODWIN, PREGERSON and TROTT, Circuit Judges.

GOODWIN, Circuit Judge:

Jay Bishop and Gene Cardenaz (collectively "appellants") appeal their convictions and sentences for one count of conspiring to defraud the Internal Revenue Service (IRS), in violation of 18 U.S.C. § 371, and two counts each of attempted income tax evasion, in violation of 26 U.S.C. § 7201. We affirm.

The main issue at trial, and on appeal, is whether the appellants' conduct was willful. Each argues (1) that the district court erred in relying on an objective standard for good faith in determining willfulness, and (2) that the district court improperly excluded as hearsay proffered testimony about willfulness.

Bishop also claims that his waiver of a jury trial was invalid. Cardenaz claims that the district court erred in denying his untimely Faretta motion to complete the trial as his own counsel, and in calculating the tax loss for sentencing purposes.

FACTUAL BACKGROUND

Bishop and Cardenaz, along with Robin McPherson (collectively "defendants"), who is not a party to this appeal, were employed as managers by American Wireless Cable Systems. In 1992, American Wireless sold its marketing business to defendants for $4,275,000. Defendants, as equal shareholders, formed an S-corporation called Continental Wireless Cable to take over American Wireless's marketing business. As an S-corporation, all of Continentals's profits and losses passed through to the shareholders without first being taxed to the corporation. It was undisputed at trial that: (1) some S-corporations commonly designate interim payments to their shareholders as "officer loans" until the end of an accounting period because the classification of profit and loss is uncertain, (2) an S corporation shareholder who is at personal risk may apply the corporate loss against compensation on his or her personal tax return, and (3) an at-risk shareholder may carry losses forward or back to other tax years as may be appropriate under existing regulations.

Continental employed Douglass Lambrose, an accountant who died before trial, to maintain its books and records. Lambrose prepared Continental's general ledger until the summer of 1993, when Continental's in-house accounting staff took over. In addition, Lambrose handled tax matters for Continental, including preparation of Continental's 1992 income tax return. The 1992 return reported a loss of $1,260,826. Continental's disbursements to the defendants were entered as "officer loans" and thus the 1992 tax returns showed no corporate officer compensation. Continental did not file tax returns for 1993 or 1994.

Lambrose's office also prepared Bishop's and Cardenaz's 1992 individual tax returns. The individual returns reported that defendants were at risk in Continental, and each claimed a $420,288 loss from Continental's operations. The loss was also carried back to previous years.

Charles Guskey started working as an accountant for Continental in September 1993. He was generally responsible for accounting relating to the contracts with various partnerships, while Tamberly Halkola did most of the other accounting and bookkeeping tasks as instructed by the appellants. Per defendants' instructions, Halkola continued to enter the payments Continental made to them as "officer loans," although she questioned the lack of documentation.

Appellants sold their marketing business in February of 1994 and formed a general partnership, Diversified Wireless Cable, which received the proceeds from the sale. Later in 1994, the SEC filed a complaint and obtained a TRO against Continental, freezing its operations, its bank accounts, and the bank accounts of its principals. Continental was placed in involuntary receivership, and a receiver was appointed to wind down the affairs of the business. Continental was ordered to prepare an accounting of all funds received and disbursed. Guskey undertook this accounting, but did not complete it. Consequently, the receiver was unable to prepare and file Continental's tax returns for 1993.

Several years later, defendants were indicted for tax evasion, and their bench trial commenced on October 24, 2000 and lasted until November 3, 2000. The central issue during the trial was whether the "officer loans" made by Continental to its shareholders were reportable income to the shareholders during the tax years in question, and, if so, whether the appellants knew that the loans included reportable income.

The government relied on testimony that Cardenaz referred to the money he received from Continental as income and said he intended to pay taxes on the income "later on." The government argued that the "officer loans" were in fact distributions of income, and noted that there were no promissory notes indicating an obligation to repay, no repayment schedules, no personal collateral, and no authorization for loans in corporate minutes. Guskey testified that he told the defendants at various times that they should show some of the "officer loans" as income. Cardenaz claimed that his inability to obtain copies of Continental's tax returns made it impossible for him to file his own tax returns for 1993 and 1994. Bishop did not testify.

Appellants' main defense was that they could not have been willful in treating the money they received from Continental as "officer loans" because they relied on the professional advice of their accountant, Lambrose. The death of Lambrose in 1995 created difficulty for both sides in presenting their case. Both sides made efforts to obtain testimony relevant to willfulness, but relied mainly on circumstantial evidence. The district court returned guilty verdicts on all counts and imposed guideline sentences of thirty months in custody, as well as financial penalties.

WILLFULNESS

Proof of willfulness is essential to support a conviction under 26 U.S.C. § 7201, which makes it a felony to "willfully attempt[ ] in any manner to evade or defeat any tax imposed by this title or the payment thereof...." See United States v. Bishop, 412 U.S. 346, 361, 93 S.Ct. 2008, 36 L.Ed.2d 941 (1973). Willfulness is also an element of conspiracy to defraud the United States; the government must prove "the existence of an agreement to accomplish an illegal objective, an overt act in furtherance of the objectives of the conspiracy, and intent on [the] part of the conspirators to agree, as well as to defraud the United States." United States v. Crooks, 804 F.2d 1441, 1448 (9th Cir.1986).

More generally, willfulness is an element in all criminal tax cases. "Willfulness, as construed by our prior decisions in criminal tax cases, requires the Government to prove that the law imposed a duty on the defendant, that the defendant knew of this duty, and that he voluntarily and intentionally violated that duty." Cheek v. United States, 498 U.S. 192, 201, 111 S.Ct. 604, 112 L.Ed.2d 617 (1991).

[C]arrying this burden requires negating a defendant's claim of ignorance of the law or a claim that because of a misunderstanding of the law, he had a good-faith belief that he was not violating any of the provisions of the tax law. This is so because one cannot be aware that the law imposes a duty upon him and yet be ignorant of it, misunderstand the law, or believe that the duty does not exist.

Id. at 202, 111 S.Ct. 604. The rationale behind the subjective standard in Cheek is to avoid criminalizing unwitting violations of the complicated and extensive tax laws.

Good faith reliance on a qualified accountant has long been a defense to willfulness in cases of tax fraud and evasion. See United States v. Claiborne, 765 F.2d 784, 798 (9th Cir.1985), abrogated on other grounds, Ross v. Oklahoma, 487 U.S. 81, 108 S.Ct. 2273, 101 L.Ed.2d 80 (1988). "[A] defendant may rebut the Government's proof of willfulness by establishing good faith reliance on a qualified accountant after full disclosure of tax-related information." Id. This Court has not had occasion to establish the boundaries of this defense.

The trial court considered cases from other circuits dealing with the "good faith reliance on an accountant" defense after Cheek. The Fifth and the Seventh Circuits have not modified the requirement that the taxpayer hand over all relevant information to the accountant. See United States v. Becker, 965 F.2d 383, 387 (7th Cir.1992); United States v. Masat, 948 F.2d 923, 930 (5th Cir.1991). The government cites these cases in support of the proposition that requiring full disclosure to establish good faith reliance on professional advice is not inconsistent with Cheek. The government argues that if a defendant did not make full disclosure to his accountant, then he probably did not act in good faith. The appellants protest that the subjective good faith standard of Cheek should modify the full disclosure traditionally required for a successful good faith reliance on professional advice defense. We agree with the Fifth and the Seventh Circuits.

We hold that Cheek does not change the rule that a defendant claiming good faith reliance on the advice of a tax professional must have made full disclosure of all relevant information...