U.S.A v. Blanchard

• Decision Date: 30 August 2010
• Docket Number: No. 09-1284.,09-1284.
• Citation: 618 F.3d 562
• Parties: UNITED STATES of America, Plaintiff-Appellee,v.Richard BLANCHARD, Defendant-Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

618 F.3d 562

UNITED STATES of America, Plaintiff-Appellee,v.Richard BLANCHARD, Defendant-Appellant.

No. 09-1284.

United States Court of Appeals, Sixth Circuit.

Argued: Aug. 5, 2010.

Decided and Filed: Aug. 30, 2010.

COPYRIGHT MATERIAL OMITTED

ARGUED: Joan Ellerbusch Morgan, Sylvan Lake, Michigan, for Appellant. S. Robert Lyons, United States Department of Justice, Washington, D.C., for Appellee. ON BRIEF: Joan Ellerbusch Morgan, Sylvan Lake, Michigan, for Appellant. S. Robert Lyons, Alan Hechtkopf, United States Department of Justice, Washington, D.C., for Appellee.

Before: COLE and CLAY, Circuit Judges; KATZ, District Judge. ^*

OPINION

COLE, Circuit Judge.

Appellant Richard Blanchard (“Blanchard”) was convicted of fifteen counts of Failure to Account for and Pay Over Withholding and FICA Taxes, in violation of 26 U.S.C. § 7202, and three counts of Making and Causing the Making of a False Claim for a Tax Refund, in violation of 18 U.S.C. § 287. He was sentenced to a term of imprisonment of twenty-two months, plus thirty-six months of supervised release, restitution of $195,852.60, and a special assessment of $1,800. He now argues that (a) several of the § 7202 counts should have been dismissed because they are barred by a three-year statute of limitations; (b) that the district court erred in admitting evidence of his discretionary expenditures, which were unduly prejudicial; (c) that the court erred in failing to instruct the jury that an ability to pay the taxes due is an element of the offense under 26 U.S.C. § 7202; (d) that the court also erred in failing to instruct the jury on the defense theory of the case; and (e) that his convictions for violating § 287 must be vacated because they are not supported by sufficient evidence. In the alternative, he argues that resentencing is required because the district court erred in calculating the amount of restitution it imposed. For the reasons below, we AFFIRM Blanchard's conviction and sentence of imprisonment but VACATE the restitution order and REMAND for further proceedings consistent with this opinion.

I. BACKGROUND

In early 2001, the Internal Revenue Service (“IRS”) began a civil audit of R. Blanchard Construction Company (“the Company”); in 2002, the case became a criminal investigation. The investigation revealed that from 1997 to 2003, the Company had failed to pay $195,852.60 in employment taxes, but that the Blanchards had filed for and received tax refunds totaling $11,639.00. In addition, the investigation determined that Blanchard routinely had clients pay directly to him funds that were due the Company, which he then would deposit in his personal account without reporting them as business income. This resulted in an additional $23,533.00 in taxes owed but not paid over to the IRS.

On April 12, 2005, a twenty-three-count indictment was returned against Blanchard and his wife, Karen Blanchard. Counts one through five charged Income Tax Evasion, in violation of 26 U.S.C. § 7201.¹ Counts six through twenty charged Failure to Account for and Pay Over Withholding and FICA Taxes, in violation of 26 U.S.C. § 7202.² Counts twenty-one through twenty-three charged Making and Causing the Making of a False Claim for a Tax Refund, in violation of 18 U.S.C. § 287.³

Before trial, the Blanchards brought motions to dismiss counts six through seventeen as time-barred by the limitations period set out in 26 U.S.C. § 6531, to sever the trial, and to exclude evidence regarding their discretionary spending and details of Blanchard's application to become a voluntary police officer. The district court denied the motions to dismiss and exclude the evidence regarding spending, but agreed to redact the records pertaining to Blanchard's application to become a police officer.

At trial, testimony was presented that Blanchard had begun an excavation business as a sole proprietorship in 1992, which he later incorporated as the R. Blanchard Construction Company. In March 1996, the Blanchards contracted with Paychex Incorporated to prepare payroll checks for the Company. Paychex also provided the Company with monthly tax notification-slips (detailing the amounts due to the IRS for social security, Medicare, and federal tax withholding) and quarterly Form 941 tax returns (“941 Forms”) for the Company to file. Paychex's primary contact at the Company was Karen; Blanchard was the secondary contact. An employee of Paychex testified that she was not aware if Blanchard had ever received or reviewed any of the forms Paychex generated for the Company.

The Blanchards declined Paychex's tax payment service, which makes required payments to the IRS on behalf of clients. Accordingly, it was the Company's responsibility to make these payments. In the second, third, and fourth quarters of 1996, the Company filed the required 941 Forms and paid over to the IRS taxes withheld from employees' paychecks, but did not do so from the first quarter of 1997 until the third quarter of 2002. That quarter, the Company filed a return and paid over withheld taxes, but again failed to do so the next quarter.

In 1998, Kathryn Fox, an external accountant the Blanchards had retained to prepare the Company's annual income-tax returns, became aware of the delinquency in paying over to the IRS the withheld taxes and informed Karen that these amounts needed to be paid. In Fox's recollection, this issue “would come up every year. I mean, when they brought the paperwork in. Say, you know, this needs to be paid. Then, you know, I didn't really get an explanation as to why they weren't paid.” (R.157, Trial Tr. Aug. 15, 2007, at 526.) Karen was Fox's primary contact, but Fox recalled discussing the problem directly with Blanchard in April 2000. When Fox informed him that the amount of payroll taxes owed the government was about $100,000, he responded that “it was more like $200,000,” that “he hoped that they didn't take his equipment because he had a big job that he hoped would help towards paying the tax,” and that “he had retained an attorney to help him deal[ ] with it.” ( Id.) Accordingly, Fox assumed that Blanchard was addressing the issue with the assistance of an attorney, and only became aware in 2002 when approached by the IRS investigator that the Company was not only delinquent in its taxes, but also had not been filing any 941 Forms. She also was not told about the payments customers made directly to Blanchard, resulting in this income not being reported on the tax returns she prepared on his behalf.

In 1999, Joseph Amon, a construction manager at another firm, was hired to help the Blanchards keep better track of the internal accounting records of the Company. As part of this work, which lasted for about a year, Amon trained Karen on how to use the accounting software he installed. He testified that he and Blanchard discussed the delinquent federal withholding taxes “a couple times,” as well as the 941 Forms, although the latter was “more with Karen.” (R.154, Trial Tr. Aug. 10, 2007, at 125.) Amon urged Blanchard to address the tax situation, but for Blanchard, paying the IRS debt was “at the bottom of the list.” ( Id. at 127-29.) Amon also suggested that Blanchard “sell off some of the equipment to pay some of the bills such as the taxes,” but these suggestions “weren't always received well.” ( Id. at 128.) Amon was not aware of any withheld taxes being paid over to the IRS while he worked for the company.

For his part, Blanchard testified that he left the financial end of the business to Karen because he did not have any background in accounting and found the math confusing. He claimed that he never dealt with Paychex and recalled meeting Fox only once, at the time the company was incorporated. He also recalled speaking with her once on the telephone, but denied reviewing any tax returns with her or discussing the amount of taxes due the government; rather, “it was [his] understanding that between the attorneys that [he] had at the time that things were being taken care of.” (R. 163, Trial Tr. Aug. 17, 2007, at 779-80.) He denied at any point stating that he owed the IRS $200,000 in withheld taxes.

Because he was not involved with the financial aspects of the business, Blanchard testified, he did not realize “for a long time that taxes had to be paid by the quarter.” ( Id. at 801-02.) He acknowledged, however, that Karen eventually brought the problem to his attention. In his words, “[s]he maybe mentioned at one time that we had some taxes that needed to be paid ... and it was with the understanding that when the next check came in that it would be caught up.” ( Id. at 802.) According to Blanchard, Karen never mentioned the issue again, so he assumed that she had paid the delinquent taxes. Blanchard also conceded that at one point he had seen a list of bills prepared by Amon that he recognized had to be paid immediately. While he signed his own tax returns each year, he denied ever reviewing them.

While the corporation often had insufficient funds to pay wages-such that he often had to delay cashing his own paychecks and once had to use $30,000 of the equity in his home to pay a corporate debt that was due-Blanchard continued to pay the same wages to employees, his wife, and himself without paying over withheld payroll taxes to the IRS. At the same time, the Blanchards used funds from their personal bank account and the company's corporate account to make discretionary purchases, including taking a family vacation in Florida (which Blanchard testified he believed was paid for by his mother-in-law); leasing two Cadillac automobiles (paid for by Karen); buying jewelry, firearms, and a CD player; and engaging in recreational gambling that, according to records produced at trial, resulted in annual losses ranging from approximately $1,500 in 2000 to $20,000 in 2002.

On August 22, 2007, the jury returned a verdict of not guilty on counts one through five (the charges under 26 U.S.C. § 7201) and guilty on...