U.S. v. Ford

• Decision Date: 30 March 1993
• Docket Number: No. 92-30122,92-30122
• Citation: 989 F.2d 347
• Parties: UNITED STATES of America, Plaintiff-Appellee, v. Kenneth E. FORD, Defendant-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 347

989 F.2d 347

61 USLW 2659

UNITED STATES of America, Plaintiff-Appellee, v. Kenneth E. FORD, Defendant-Appellant.

No. 92-30122.

United States Court of Appeals Ninth Circuit.

Argued and Submitted Dec. 8, 1992.

Decided March 30, 1993.

Sheryl Gordon McCloud, Seattle, WA, for defendant-appellant.

Scott A. Schumacher, U.S. Dept. of Justice, Washington, DC, for plaintiff-appellee.

Appeal from the United States District Court for the Western District of Washington.

Before: WALLACE, Chief Judge, WRIGHT and LEAVY, Circuit Judges.

WALLACE, Chief Judge:

Ford appeals from his sentence imposed after he pleaded guilty to tax evasion in violation of 26 U.S.C. § 7201 and filing a false federal income tax return in violation of 26 U.S.C. § 7206(1). The district court exercised jurisdiction under 18 U.S.C. § 3231. We have jurisdiction over this timely appeal pursuant to 28 U.S.C. § 1291 and 18 U.S.C. § 3742(a). We affirm in part, reverse in part, vacate in part, and remand for resentencing.

I

Ford, an American citizen, established a network of Canadian and American companies (the Companies). He represented that they conducted legitimate research and development projects in order to take advantage of Canada's Scientific Research Tax Credit Program (Program). The Program, now repealed, was intended to stimulate Canadian research and development by offering attractive tax benefits to investors in research companies. A company engaged in research and development seeking to qualify under the Program made a "designation" to the Canadian government and filed an informational return describing the intended research project, thereby incurring a tax liability equal to 50 percent of the stated cost of the project. By making qualified research expenditures, a company could extinguish one dollar of tax liability for every two dollars spent on research. In order to finance their projects, research companies sought capital from investors, who received a one dollar tax credit for every two dollars invested. Invested capital was escrowed in a qualified Canadian bank that would disburse the cash to a research company upon proof of qualified research expenditures.

Ford controlled the Companies through his Vancouver based management firm, Ford, Gray, and Associates, Ltd. (Ford, Gray). Ford, Gray billed the Companies for management and consulting services, commissions, rent, and other costs. Ford extracted money from the Companies in the form of salary payments and consulting fees. Ford extinguished the Canadian tax liabilities of the Companies by submitting invoices for research that was never actually done. Ford fraudulently extracted hundreds of thousands of dollars in escrowed funds held by Canadian banks by submitting false invoices, contracts, and bills of lading. Ford also used his American companies, some of which did not exist, to bill his Canadian companies for nonexistent equipment, services, and other expenses.

United States and Canadian authorities launched a joint investigation of Ford's activities. In February of 1986, Canadian authorities executed search warrants at the Vancouver offices of Ford, Gray. The search warrants applied to business records of two of the Companies, but not to those of Ford, Gray itself. Ford was seen leaving the premises with a briefcase he had filled while the search was being conducted. Shortly thereafter, Ford fled to the United States. In July 1987, Canadian authorities filed criminal charges against Ford. Ford then fled to Costa Rica because that country has no extradition treaty with either the United States or Canada for tax offenses. While in Costa Rica, Ford arranged to receive several boxes of business records relating to Ford, Gray that he had secreted in various locations in Washington and Utah following the February 1986 search of Ford, Gray.

Ford provided his income tax preparer with false information indicating that he was entitled to claim a foreign tax credit on his 1984 federal income tax return based upon his payment of over $60,000 in Canadian income tax. Actually, Ford had reported to Canada a taxable income of only $3,858 for 1984, and had paid personal income taxes of only $42. The $60,000 consisted of taxes withheld against the anticipated Canadian tax liability of Power Pump International, Inc., one of the Companies. In April of 1989, Ford filed a delinquent 1984 federal income tax return that falsely claimed a foreign tax credit of over $19,000.

Ford returned to the United States in August of 1990, and was a fugitive for several months until his arrest in December. He was extradited to Canada where he pleaded guilty to criminal fraud and was sentenced to prison. Upon his release from Canadian custody, Ford was deported to the United States and placed in custody.

Ford subsequently pleaded guilty to counts II and III of a seven count indictment. Only count III, filing a false 1984 tax return on or about April 24, 1989, is subject to the United States Sentencing Guidelines (Guidelines). For sentencing purposes, the parties stipulated that the tax loss resulting from count III was $156,922.

The presentence report prepared by a probation officer computed an offense level of 19 for count III. Pursuant to U.S.S.G. § 2T1.3(a)(1), the probation officer looked to the tax table in section 2T4.1 to determine that the base offense level was 13. The probation officer then applied two specific offense characteristics under section 2T1.3(b). First, the probation officer determined that because Ford had failed to report income exceeding $10,000 per year from criminal activity, section 2T1.3(b)(1) mandated a two-level increase. The criminal activity relied on was Ford's fraudulent activities in Canada. Second, the probation officer concluded that a two-level increase pursuant to section 2T1.3(b)(2) should be imposed because Ford used sophisticated means to impede discovery of the nature or extent of his offense.

The probation officer further concluded that a two-level increase for obstruction of justice was warranted under section 3C1.1 because Ford had secreted business records pertinent to the investigation of the instant offense. Finally, the probation report stated that Ford had not met the criteria for a two-level reduction for acceptance of responsibility pursuant to section 3E1.1. Therefore, the probation officer calculated the total offense level to be 19.

Ford objected to the three increases for criminal activity, sophisticated means, and obstruction of justice, and he objected to the denial of the reduction for acceptance of responsibility. The district court, in making its ruling, incorporated all the facts as stated in the presentence report except to the extent they conflicted with the court's oral findings. The district court rejected Ford's arguments and held that the appropriate offense level on count III was 19, resulting in a Guideline range of 30 to 37 months. The district court imposed on Ford a 32 month sentence of imprisonment on count III.

II

Ford argues that the district court erred in imposing a two-level increase in his base offense level based on Ford's failure to report income exceeding $10,000 from criminal activity, pursuant to U.S.S.G. § 2T1.3(b)(1). We review de novo the district court's application and interpretation of the Guidelines, but the district court's factual determinations are reviewed for clear error. United States v. Restrepo, 884 F.2d 1294, 1295 (9th Cir.1989) (Restrepo ); 18 U.S.C. § 3742(e). The district court's determination that Ford's actions in Canada constitute "criminal activity" within the meaning of section 2T1.3(b)(1) presents a question of law reviewed de novo.

The presentence report explained that more than $10,000 of Ford's unreported income "is, in part, the 'fruits' of his fraudulent activities in Canada." The record supports the conclusion that as part of his Canadian tax fraud scheme, Ford engaged in fraudulent activities in Canada generating more than $10,000 of income that went unreported in the United States. The presentence report concluded that these facts mandated a two-level upward adjustment in Ford's base offense level, pursuant to U.S.S.G. § 2T1.3(b)(1), which provides: "If the defendant failed to report or to correctly identify the source of income exceeding $10,000 in any year from criminal activity, increase by 2 levels." The Commentary to this section effective at the time of Ford's sentencing provides: " 'Criminal activity' means any conduct constituting a criminal offense under federal, state, or local law." Id. at application note 1.

Ford objected to the imposition of this adjustment, arguing that because the fraudulent activity relied on for the adjustment took place in Canada, and violated only Canadian, not American law, the activity could not constitute "criminal activity" as that term is defined in the Guidelines and its commentary. It is undisputed that the only activity relevant to the present inquiry occurred in Canada. The district court addressed the issue:

The question has been raised in the briefs as to whether illegality under Canadian law would satisfy the requirements for this adjustment. I find that the conduct that produced the proceeds in this case was illegal both under Canadian and United States law, that is, had it taken place entirely in the United States it would have been illegal here, and under those circumstances, the conduct being illegal both where it was committed and under American law had it been committed in this country, that the required illegality is shown.

The issue before us is one of first impression and requires that we determine whether the district court's analysis is correct.

Ford's only conviction in Canada was for tax fraud. The "criminal activity" of section 2T1.3(b)(1) cannot refer to tax fraud or tax evasion, since these activities do not actually generate any income; they merely result in an amount of previously generated income being...