U.S. v. George

• Decision Date: 23 August 2005
• Docket Number: No. 04-10307.,04-10307.
• Citation: 420 F.3d 991
• Parties: UNITED STATES of America, Plaintiff-Appellee, v. Randolph GEORGE, Defendant-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

420 F.3d 991

UNITED STATES of America, Plaintiff-Appellee, v. Randolph GEORGE, Defendant-Appellant.

No. 04-10307.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted April 12, 2005.

Filed August 23, 2005.

COPYRIGHT MATERIAL OMITTED

Marcus S. Topel and Daniel F. Cook, Topel & Goodman, San Francisco, CA, for the defendant-appellant.

David L. Denier, Assistant United States Attorney, Tax Division, San Francisco, CA, for the plaintiff-appellee.

Appeal from the United States District Court for the Northern District of California, Maxine M. Chesney, District Judge, Presiding. D.C. No. CR-01-00326-MMC.

Before: LAY,^* B. FLETCHER, and HAWKINS, Circuit Judges.

LAY, Circuit Judge.

Randolph George was convicted by a jury on two felony counts of willful filing of false tax returns in violation of 26 U.S.C. § 7206(1), and one misdemeanor count of willful failure to file a tax return in violation of 26 U.S.C. § 7203. The district court sentenced George to fifteen months of imprisonment for the false returns, twelve months for failure to file (to run concurrently), and one year of supervised release. Additionally, the district court ordered George to pay $70,000 in restitution, a $20,000 fine, and $125 in special assessments. We affirm.

I. Background

This case presents two key issues: First, are receivership¹ fees paid to a cash-basis taxpayer taxable in the year received even though they are subject to subsequent court review and possible disgorgement? Assuming they are, was the law on this point sufficiently clear to allow a criminal prosecution of George for failure to report this income? We answer both questions in the affirmative.

During 1991, 1992, and 1993, George was affiliated with Media Venture Partnership, which brokered the sale of radio stations and, through its affiliate Media Venture Management, Inc., handled court-appointed receiverships for financially troubled radio stations being sold off to satisfy debts owed to the stations' creditors. Because corporations cannot serve as court-appointed receivers, George, a cash-basis taxpayer, was appointed in his individual capacity to serve as the receiver. George's receiver fees, which were negotiated with the interested parties and approved by the court at the start of the receivership, were paid on an interim basis during the administration of the receivership, usually monthly.

With respect to the present case, George served as the court-appointed receiver for five different stations: Reno Broadcasting (Reno) from October of 1990 to January of 1992, Royal Broadcasting (Royal) from May of 1991 until 1994, KXGO Radio Station from March of 1991 to December of 1992, Diamond Broadcasting (Diamond) from May 1993 to May of 1994, and JJN Broadcasting (JJN) in 1994. In addition to brokerage commissions and income from other sources, George was paid $90,001.42 in receiver fees in 1991, $125,432.66 in 1992, and $154,595 in 1993.² Tax returns for the 1991 and 1992 income were not filed until 1995. George never filed a return reporting the receivership income from 1993.

Nevertheless, when George refinanced the mortgage on his residence in March of 1994, he submitted copies of apparent tax returns for 1991 and 1992, listing the receiver fees as personal income for those years. George also submitted a Statement of Income and Expenses for 1993, listing receiver fees as his personal income. These returns turned out to be fraudulent documents fabricated by George for purposes of obtaining the refinancing of his mortgage.

On January 13, 1995, the Internal Revenue Service (IRS) sent George a written inquiry regarding his 1991 and 1992 returns which had not been filed. George falsely responded that the returns had been filed in December of 1994. George also falsely responded to a subsequent IRS inquiry, asserting that the accounting firm of Antonini Professional Corporation was to have completed the returns, but that it went out of business and another firm was working on the returns. George later prepared the 1991 and 1992 returns himself, filing them on October 16, 1995. Neither George's returns nor his spouse's for 1991 and 1992 reported the receivership fees received during those years. No return was filed by George or his wife for tax year 1993. Finally, The Georges' 1994 joint tax return reported only $23,000 in receiver fees, in addition to income from other sources. These returns, though filed years after George was paid the receiver fees and approximately one year after the last receivership was approved by the court, failed to report $347,029.08 in receiver fees.

When an IRS revenue agent initially interviewed George regarding his 1991 and 1992 returns on July 16, 1996, George did not disclose his employment as a receiver and did not disclose the $90,001.42 of receiver fees from 1991 nor the $125,432.66 of receiver fees from 1992. During a second interview on February 28, 1997, George admitted he earned the receiver fees, but only after he was confronted with the fraudulent tax returns submitted to the lender in 1994 in support of his mortgage application. A referral for criminal prosecution soon followed.

II. Analysis

A. Clarity of the Law

George first argues that, as a matter of law, he lacked wilfulness to commit a crime because the law governing allocation of receiver fees was not clearly established at the time of the offense. The district court's determination that the predicate law was clearly established is a question of law which we review de novo. See United States v. Schulman, 817 F.2d 1355, 1358 (9th Cir.1987) (citing United States v. Russell, 804 F.2d 571, 574 (9th Cir.1986)).

The element of wilfulness cannot obtain in a criminal tax evasion case unless "the law clearly prohibited the conduct alleged in the indictment." Schulman, 817 F.2d at 1359; see also James v. United States, 366 U.S. 213, 221-22, 81 S.Ct. 1052, 6 L.Ed.2d 246 (1961) (vacating taxpayer's conviction for failure to report embezzled funds as income because conflicting caselaw rendered the predicate tax statute ambiguous when applied to embezzled funds). Without sufficient clarity in the law, taxpayers lack the "fair notice" demanded by due process so that they may conform their conduct to the law. United States v. Dahlstrom, 713 F.2d 1423, 1427 (9th Cir.1983) (citing United States v. Batchelder, 442 U.S. 114, 123, 99 S.Ct. 2198, 60 L.Ed.2d 755 (1979)). However, a lack of prior appellate rulings on the topic does not render the law vague, nor does a lack of previously litigated fact patterns deprive taxpayers of fair notice. See Russell, 804 F.2d at 575 (citing United States v. Ingredient Tech. Corp., 698 F.2d 88, 96 (2d Cir.1983) (stating that it was "immaterial" that there was no prior litigation directly on point)). Thus, criminal prosecution is permissible when it is "clear beyond any doubt that [the conduct] is illegal under established principles of tax law. . . ." Russell, 804 F.2d at 575.

The general income allocation rule provides that "[t]he amount of any item of gross income shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under the method of accounting used in computing taxable income, such amount is to be properly accounted for as of a different period." 26 U.S.C. § 451(a). The applicable regulations further clarify this general rule by identifying the respective duties for cash-basis and accrual basis taxpayers. "Under the cash receipts and disbursements method of accounting, such an amount is includible in gross income when actually or constructively received." 26 C.F.R. § 1.451-1(a).³ Thus, as a cash-basis taxpayer, George would ordinarily be required to report income in the year it is received.⁴

According to George, the statute and regulations are ambiguous as to when receiver fees should be reported as gross income. George points to caselaw that purports to support his claim that receiver fees paid to a cash-basis taxpayer are not taxable until the time of final accounting and approval by the supervising court. According to George, the potential for subsequent disgorgement means that receiver fees are not received under a claim of right. See e.g., C.I.R. v. Indianapolis Power & Light Co., 493 U.S. 203, 209-10, 110 S.Ct. 589, 107 L.Ed.2d 591 (1990); American Valmar Int'l Ltd., Inc. v. C.I.R., 229 F.3d 98, 102 (2d Cir.2000); Ahadpour v. C.I.R., 77 T.C.M. (CCH) 1210, 1999 WL 22639 (1999), 1999 Tax Ct. Memo LEXIS 9 at * 16-17; Massey v. C.I.R., 143 F.2d 429, 430-31 (5th Cir.1944); Parkford v. C.I.R., 133 F.2d 249, 250 (9th Cir.1943); Helvering v. McGlue's Estate, 119 F.2d 167, 169 (4th Cir.1941); C.I.R. v. Cadwalader, 88 F.2d 274, 274-75 (3d Cir.1937).

George's reliance on these cases for such a proposition is misplaced. These cases simply suggest that receiver fees paid to cash-basis taxpayers are income in the year actually paid, and fees paid to accrual basis taxpayers are taxable in the year the applicable state law creates a right to demand the fees. Compare Cadwalader, 88 F.2d at 275 ("As 1930 was the year in which she in fact received the cash commission from the Roebling estate, that is the year in which the income was received and the tax upon its receipt due.") (cash-basis taxpayer), and Massey, 143 F.2d at 430-31 (holding attorney's receipt of cash payment for part of contingency fee taxable in the year actually received; remainder of fee not constructively received or taxable until settlement approved by the court) (cash-basis taxpayer), with McGlue's Estate, 119 F.2d at 169 (stating that an accrual method taxpayer ordinarily reports executor fees only when entitlement to them attaches under applicable state law, but death of the taxpayer triggers special provision of tax code allocating income as of the date of death despite lack of entitlement under state law), and Parkford, 133 F.2d at 250 (holding an accrual basis taxpayer who was not a receiver need not report commission...