U.S. v. Cole

• Decision Date: 21 January 2011
• Docket Number: No. 09–4487.,09–4487.
• Citation: 631 F.3d 146
• Parties: UNITED STATES of America, Plaintiff–Appellee,v.Henry COLE, Defendant–Appellant.
• Court: U.S. Court of Appeals — Fourth Circuit

631 F.3d 146

107 A.F.T.R.2d 2011-558

2011-1 USTC P 50,173

UNITED STATES of America, Plaintiff–Appellee,

v.Henry COLE, Defendant–Appellant.

No. 09–4487.

United States Court of Appeals, Fourth Circuit.

Argued: Oct. 29, 2010.Decided: Jan. 21, 2011.

ARGUED: Steven M. Klepper, Kramon & Graham, PA, Baltimore, Maryland, for Appellant. Joyce Kallam McDonald, Office of the United States Attorney, Baltimore, Maryland, for Appellee. ON BRIEF: Andrew Jay Graham, Max H. Lauten, Kramon & Graham, PA, Baltimore, Maryland, for Appellant. Rod J. Rosenstein, United States Attorney, A. David Copperthite, Assistant United States Attorney, Baltimore, Maryland, for Appellee.Before NIEMEYER, DAVIS, and WYNN, Circuit Judges.Affirmed by published opinion. Judge DAVIS wrote the opinion, in which Judge NIEMEYER and Judge WYNN joined.

OPINION

DAVIS, Circuit Judge:

Henry Cole appeals his convictions for filing false tax returns in violation of 26 U.S.C. § 7206(1) and evading taxes in violation of 26 U.S.C. § 7201. Cole, a real estate agent and investor, agreed with several others to purchase commercial properties in the Baltimore metropolitan area. Without his co-venturers' knowledge, Cole secretly negotiated with the sellers of each property to increase the purchase price. He then arranged to have the difference ($2 million in the aggregate) paid to an entity only he controlled. He paid no income tax on this bounty. A jury accepted the Government's theory of the prosecution and rejected Cole's innocent version of his acts and omissions, which he vigorously supported with documentary evidence and witness testimony (including his own and that of his expert accountant, among others). On appeal, Cole asks us to overturn his convictions, principally on the ground that the proper tax treatment of the $2 million was ambiguous as a matter of law, rendering proof of his willfulness a legal impossibility. He also assigns error to the district court's admission of certain evidence and its denial of a continuance. We affirm.

I.

This prosecution for tax offenses arose from Cole's promotion of real estate investment partnerships in connection with which he clandestinely extracted commissions that he reported on his tax returns as capital gains offset by capital losses. We summarize the facts in the light most favorably to the Government's theory of the case and consistent with the jury's verdict.

A.

Cole was a real estate agent at the O'Conor, Piper & Flynn real estate brokerage (later consolidated into Coldwell Banker) (“OPF”). He also invested in real estate. As relevant to this case, Cole partnered with three doctors to purchase five office buildings during the period 2001 to 2003. Prior to the first disputed purchase, there existed a two-person partnership between Cole and Dr. David Miller. Dr. Miller testified as a witness for the defense that he had long had an understanding with Cole that Cole, who was to serve as the property manager for any of their purchased investments, would take “a 10% profit up front ... on any building that he bought or sold.” J.A. 635–36. Dr. Stanley Friedler, a friend of Dr. Miller's, paid a premium to buy into the venture in 2001. Shortly thereafter, Dr. Friedler solicited the participation of his friend, Dr. Selvin Passen, who invested in subsequent deals.

Drs. Friedler and Passen contradicted Dr. Miller's apparently favorable view of Cole's business methods. Each testified for the prosecution, attesting to his understanding that the co-venturers had agreed to make equal capital contributions toward the purchase of commercial properties in return for equal returns, and that Cole specifically promised not to take a commission (over and above the customary broker commissions paid to OPF, which OPF shared with Cole) for finding and negotiating deals.

In each of the five transactions presented at trial, after Cole had negotiated a purchase price with the seller on behalf of the specific co-venture, he asked the seller to increase the price by several hundred thousand dollars (ranging from $250,000 to $600,000). He then arranged, with one exception, to have funds representing the agreed increase paid at closing to an entity he controlled, B & N Realty.¹

The evidence of the contemporaneous treatment of the increased payments as commissions was substantial. First, the agreed increases in the sales prices of the investments, which totaled $2 million, were designated as commissions in the sales contracts, though several of the sellers testified that they were quite high for commissions. Second, Cole told Carol Wildesen, Esq., OPF's in-house settlement attorney who oversaw the disbursement of funds generated by the transactions, and John Evans, the OPF partner who oversaw sales associates, that they were commissions. Third, the checks Wildesen issued to Cole were labeled as commissions (as were the descriptions appearing in certain internal OPF documents). Fourth, in the course of civil litigation in 2006 between Friedler and Passen, on the one hand, and Cole on the other hand, Cole stated under oath that the disputed payments were commissions. J.A. 1128 (“[T]he commission and fees received by Cole were not material to Passen's and Friedler's decisions to invest in the properties [as] the commissions and fees were paid by the sellers, not the investors.” (emphasis added)).²

Cole had attorney Wildesen prepare separate settlement reports for the buyers and sellers in the subject transactions, a practice Wildesen testified was unusual. The payments to B & N Realty (Cole's alter ego) were listed only on the sellers' settlement reports. Friedler and Passen testified that they were wholly unaware of the secret payments to Cole. Indeed, Friedler testified that Cole urged him not to attend the settlement for the first property in which he invested.

Each of the sales contracts negotiated by Cole identified the buyer as “Henry Cole and/or assigns.” Nevertheless, each of the sellers testified that Cole told them he was purchasing the buildings not just for himself, but also as an agent for his physician/co-venturers. The down payments were all paid with partnership funds or with checks written directly by the doctors or their spouses, and one of the buildings was financed in part by a $1 million note personally guaranteed by Cole, Miller, and Friedler.³

In addition to the transactions summarized above, Cole arranged during the 2003 tax year for Dr. Passen's children to buy at a discount the $1 million note financing the third property. Passen testified that Cole was not to receive a commission on the purchase and sale of the note. Nonetheless, the evidence at trial showed that the seller sold the note for $98,200 less than Cole received from Passen's children, and Cole pocketed the difference.

B.

In April 2005, having learned a few months earlier of the Government's criminal investigation, Cole filed tax returns for the years 2001, 2002, and 2003, reporting no taxable income for each year. He had his accountant characterize the $2 million in payments he received in the transactions summarized above as “assignment fees” earned from the sale of his contractual right to make the purchases individually, and thus capital gains rather than ordinary income. In this fashion, he was able to offset completely the short-term capital gains income in each year with carry-forward losses. He entirely failed to report the $98,200 he received for arranging the sale of the $1 million note to Passen's children; he testified at trial that he “missed it” due to a bookkeeping error. J.A. 851. He did report approximately $15,000 of self-employment tax each year, though by the time of trial he had never paid the taxes.

C.

A grand jury issued a superseding indictment in September 2008 charging Cole in six counts: three counts for willfully filing false tax returns for tax years 2001, 2002, and 2003, in violation of 26 U.S.C. § 7206(1), and three counts for evading income taxes in the same years in violation of 26 U.S.C. § 7201. The indictment charged that, inter alia, Cole falsely claimed $2 million of ordinary income as capital gains.

D.

As mentioned above, to justify characterizing the $2 million as capital gains, Cole argued at trial that the amounts were proceeds from the assignment of the sales contracts to his co-venturers. Cole's expert accountant, James Wilhelm, testified that he believed the “underlying economics” of the transactions justified their treatment as assignments, J.A. 689, though he admitted that the sale of a contract would require (at minimum) that the buyer knew he was purchasing the contract rights. The Government, eliciting the above testimony from Friedler and Passen that they were unaware of the funds paid to Cole, citing the “commission” labels used in the relevant documents, and adverting to the totality of the direct and circumstantial evidence of Cole's suspicious methods, argued that the payments were disguised commissions, i.e., ordinary income and not capital gains.

Over Cole's objection, the trial court admitted into evidence three forms Cole had submitted to the federal Bureau of Alcohol, Tobacco, and Firearms (“ATF”) in 1996 and 1998 in order to purchase firearms. The forms asked if the applicant was “an unlawful user of, or addicted to ... any ... narcotic drug, or any other controlled substance,” and Cole answered “No” on each. J.A. 1359–60, 1362. But, as Cole stipulated at trial, he was “addicted to narcotic pain medication at the time he purchased the[se] firearms,” and “prior to the purchase of the firearms, [he] had self-admitted to a hospital for drug addiction and was subsequently re-admitted for drug addiction treatment between 1996 and 1998.” J.A. 308. The Government also proffered evidence that Cole plead guilty in 2001 to possessing those firearms while “an unlawful user of or addicted to any controlled substance” in violation of 18 U.S.C. § 922(g)(3), but the trial court sustained Cole's...