U.S. v. MacKenzie, s. 216

• Decision Date: 21 January 1986
• Docket Number: D,217,Nos. 216,s. 216
• Citation: 777 F.2d 811
• Parties: -319, 86-1 USTC P 9103 UNITED STATES of America, Appellee, v. Roderick J. MacKENZIE, Malcolm L. MacKenzie, and David H. MacKenzie, Inc., Appellants. ockets 85-1023, 1024.
• Court: U.S. Court of Appeals — Second Circuit

Page 811

777 F.2d 811

57 A.F.T.R.2d 86-319, 86-1 USTC P 9103

UNITED STATES of America, Appellee, v. Roderick J. MacKENZIE, Malcolm L. MacKenzie, and David H MacKenzie, Inc., Appellants.

Nos. 216, 217, Dockets 85-1023, 1024.

United States Court of Appeals Second Circuit.

Argued Sept. 18, 1985.

Decided Nov. 20, 1985.

Opinion on Denial of Rehearing Jan. 21, 1986.

Jacob D. Zeldes, Bridgeport, Conn. (David P. Atkins, Zeldes, Needle & Cooper, Bridgeport, Conn., of counsel), for appellants Roderick J. MacKenzie and David H. MacKenzie, Inc.

Andre L. Nagy, Bridgeport, Conn., for appellant Malcolm L. MacKenzie.

Elliot R. Warren, Asst. U.S. Atty. (Alan H. Nevas, U.S. Atty. for the D. of Conn., New Haven, Conn., of counsel; Allan Abare, Law Student Intern, on the brief), for appellee.

Before OAKES and NEWMAN, Circuit Judges, and POLLACK, Senior District Judge. ^*

OAKES, Circuit Judge:

This is an appeal from convictions for conspiracy to defraud the United States, filing fraudulent tax returns, and aiding and assisting the filing of fraudulent returns, all in connection with paying employees without withholding taxes. Appellants contend that the underlying withholding statute and regulations are unconstitutionally vague, that a provision of the Revenue Act of 1978 offers a "safe haven" defense that either barred this prosecution or should have been submitted to the jury; that the jury was improperly charged that deliberate ignorance would satisfy the requirement of knowledge; that their motions to suppress evidence obtained by virtue of civil summonses and other evidence obtained allegedly in violation of the plain view doctrine during a search executed pursuant to warrant were wrongly denied; and that the evidence regarding one false filing count and all of the aiding and assisting counts was insufficient. After a jury trial, appellants David H. MacKenzie, Inc., Roderick J. MacKenzie, and Malcolm MacKenzie were all convicted of conspiracy, 18 U.S.C. Sec. 371 (1982); Roderick MacKenzie was convicted of eleven counts of false filing of Forms 941, employer's quarterly tax returns, 26 U.S.C.

Sec. 7206(1) (1982); and both MacKenzies were convicted of five counts of aiding and assisting the filing of employees' false tax returns, 26 U.S.C. Sec. 7206(2) (1982). The United States District Court for the District of Connecticut, Ellen Bree Burns, Judge, sentenced the corporation to a $10,000 fine; Roderick MacKenzie to a $10,000 fine, three years' incarceration with all but thirty days suspended on the conspiracy count and one year's probation on each of the other counts, the sentences on all counts to be concurrent; and Malcolm MacKenzie to three years with all but six months suspended and two years' probation on the conspiracy count and on each of the aiding and assisting counts, all to run concurrently. We affirm.

FACTS

Roderick MacKenzie was president and Malcolm general manager of the family painting company, David H. MacKenzie, Inc. During the tax years in question, 1976-1979, the corporation paid a number of its full-time painters, in addition to their usual salaries, straight time for overtime and holiday work rather than the time and one-half or double time required by the union contracts, although the union painters were paid an additional sum more or less equalling the amount which the union contract required an employer to pay to cover employee benefits and insurance. These payments were made off the books, by separate check, and separate records of them were kept. No income or social security taxes were withheld by the corporation from these overtime or holiday work payments, nor were the payments reported to the Internal Revenue Service. The company accountant was told that the company was using more independent contractors; the wages of these "independent contractors" were posted to a materials purchased account or, after the accountant became suspicious, to a labor purchase account on a ledger sheet which, along with the separate payroll records, was withheld from the IRS.

The alleged conspiracy also involved another scheme as to which the jury could properly have found that the company contracted with certain nonunion painters to do work under the name of the "MacKenzie Co." The MacKenzie Co. was headed by one Dennis McDevitt, a former self-employed subcontractor, who acted as supervisor of nonunion employees hired by the company. Disbursements for work performed by the nonunion painters employed by the MacKenzie Co. were not handled through the corporate accounting system. Rather, the nonunion painters were paid an hourly wage, in cash, by McDevitt, who received a check from David MacKenzie, Inc., for this purpose. The wages paid to the McDevitt nonunion painters were not reported to the IRS, nor were income taxes or social security taxes withheld. Only after it appeared that the IRS might discover the unreported payroll did the MacKenzies notify nonunion employees that they could, if they chose, go on the payroll. For those who did not so choose, appellants prepared Forms 1099, which must be filed if an independent contractor is paid $600 or more in a calendar year, see 26 U.S.C. Sec. 6041(a) (1982), Treas.Reg. Sec. 1.6041-1 (1985), for the first time for calendar year 1979, after the corporation had come under IRS investigation.

By underreporting the payroll to the IRS, the corporation avoided significant federal income and FICA (social security) taxes for calendar years 1976, 1977, 1978, and 1979. The five aiding and assisting counts related to three separate employees who falsified their returns by understating their income for various tax years during the period in question.

DISCUSSION

The concept of requiring withholding from wages of amounts to be applied against income tax liability involves making employers tax collectors with respect to the forthcoming tax obligation of their employees. 8A J. Mertens, The Law of Federal Income Taxation Sec. 47A.03, at 10 (1978). The existence of an employer-employee relationship is necessary for there to be any duty of withholding on the one hand or liability to be subjected to withholding on the other. Congress defined certain people as employees in 26 U.S.C. Sec. 3401(c) (1982), and made clear the common law definition would govern who would be considered an employee. See 26 U.S.C. Sec. 3121(d)(2) (1982). Treasury Regulation Sec. 31.3401(c)-1(b) (1985) states specifically that the test is whether "the person for whom services are performed has the right to control and direct the individual who performs the services not only as to the result to be accomplished by the work but also as to the details and means by which that result is accomplished." ¹ The factors mentioned in the regulations are among those that section 220 of the Restatement (Second) of Agency (1957) suggests for determining the existence of a master-servant relationship. It is obvious that in drawing the line between who is an employee and who is an independent contractor there will be some doubtful cases, a fact the regulations recognize in acknowledging that whether the relationship exists will be determined "upon an examination of the particular facts of each case." Treas.Reg. Sec. 31.3401(c)-1(d) (1985).

It is from the fact that there are doubtful cases that appellants seek to make their strongest arguments. They point out that over the years decisions about whether a person is an employee or an independent contractor have been "inconsistent and unpredictable," and they cite examples. They point out that the statutory employees described in 26 U.S.C. Sec. 3121(d) and Treasury Regulation Sec. 31.3121(d)-1(d) (pertaining to FICA) are not discussed under 26 U.S.C. Sec. 3401 (pertaining to income tax) so that, they say, a worker might be an employee under one statute but not the other. And they point to the statutory exceptions from the employment tax laws contained in, e.g., 26 U.S.C. Sec. 3402(n) and 26 U.S.C. Sec. 3121(b). The complexity of all these statutes and regulations, they argue, created endless confusion about what an employer's obligations were and in what circumstances they applied or did not apply. Finally, they argue that the Government has brought but one other criminal prosecution for willful misclassification of workers, United States v. McLaughlin, 663 F.2d 949 (9th Cir.1981), and contend that even the Government is confused about what the law requires, noting that its counsel was unable to state at trial precisely when Dennis McDevitt ceased being an independent contractor and his painters became employees. The confusion surrounding the statutory requirements in question, appellants claim, makes it impossible for employers to know whether they are obeying the law, and creates the possibility of arbitrary enforcement, making a vagueness challenge appropriate. Appellants remind us that the Supreme Court has only recently reaffirmed the void-for-vagueness doctrine, requiring "that a penal statute define the criminal offense with sufficient definiteness that ordinary people can understand what conduct is prohibited and in a manner that does not encourage arbitrary and discriminatory enforcement." Kolender v. Lawson, 461 U.S. 352, 357, 103 S.Ct. 1855, 1858, 75 L.Ed.2d 903 (1983).

Moreover, they claim, Congress acknowledged that the law in the area was hopelessly confused when it enacted Section 530 of the Revenue Act of 1978, reading in pertinent part as follows:

(a) Termination of Certain Employment Tax Liability for Periods Before 1980.--

(1) In General.--If--

(A) for purposes of employment taxes, the taxpayer did not treat an individual as an employee for any period, and

(B) in the case of periods after December 31, 1978, all Federal tax returns (including information returns) required to be filed by the taxpayer with respect to such individual for such period are filed on a basis consistent with the taxpayer's treatment of such individual as not being an...