U.S. v. Mikutowicz

• Decision Date: 22 April 2004
• Docket Number: No. 02-2469.,No. 02-2522.,02-2469.,02-2522.
• Citation: 365 F.3d 65
• Parties: UNITED STATES of America, Appellee/Cross-Appellant, v. John MIKUTOWICZ, Defendant, Appellant/Cross-Appellee.
• Court: U.S. Court of Appeals — First Circuit

365 F.3d 65

UNITED STATES of America, Appellee/Cross-Appellant, v. John MIKUTOWICZ, Defendant, Appellant/Cross-Appellee.

No. 02-2469.

No. 02-2522.

United States Court of Appeals, First Circuit.

Heard January 9, 2004.

Decided April 22, 2004.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Michael J. Connolly with whom Kelley A. Jordan-Price and Hinckley, Allen & Snyder LLP were on brief, for appellant.

Gregory Victor Davis, Attorney, Tax Division, Department of Justice, with whom Eileen J. O'Connor, Assistant Attorney General, Robert E. Lindsay, Alan Hechtkopf, Attorneys, Tax Division, Department of Justice, and Michael Sullivan, United States Attorney, were on brief, for appellee.

Before TORRUELLA, LOURIE^* and HOWARD, Circuit Judges.

HOWARD, Circuit Judge.

In these cross-appeals, we consider John Mikutowicz's challenge to his convictions for tax offenses and the government's challenge to the term of incarceration. We affirm the convictions but vacate the judgment and remand for resentencing.

I.

We set forth the facts in the light most favorable to the verdict. See United States v. Diaz, 300 F.3d 66, 69 (1st Cir.2002). Mikutowicz is the sole shareholder of AGM Marine Contractors ("AGM"), a sub-chapter S corporation located in Mashpee, Massachusetts.¹ AGM is involved in marine construction projects, including dredging and building bridges. In addition, Mikutowicz is also the sole shareholder of Felix Management, Inc. ("Felix"), another sub-chapter S corporation, which manages Mikutowicz's various real estate investments.

In 1991, Mikutowicz sought the assistance of psychologist Neil Carter for a combination of business and personal problems. After Mikutowicz described his financial difficulties, Carter suggested that he contact an individual in Colorado named Paul Harris who could help him establish an "asset protection program."

Mikutowicz followed Carter's advice and contacted Harris. Harris was one of the operators of Tower Executive Resources ("Tower"), a company that, inter alia, assisted its members in shielding income from taxation. After meeting with Mikutowicz, Harris proposed moving some of AGM's and Felix's profits to offshore bank accounts in order to defer taxation on Mikutowicz's income. Mikutowicz agreed.

Tower thereafter created Ellis Engineering ("Ellis"), a Turks & Caicos corporation. Mikutowicz was Ellis's sole employee, and Ellis shared a business address with AGM. It did not outwardly appear that Ellis actually operated a separate business from this address, although Ellis, acting through Mikutowicz, purportedly provided AGM with consulting services and equipment rentals and materials from 1992 to 1998.

During this period, AGM paid Ellis $1.3 million for these "services." This money was deposited into Ellis's Massachusetts bank accounts. Mikutowicz deducted these payments from AGM's taxes as "ordinary and necessary business expenses." See 26 U.S.C. § 162. These deductions reduced AGM's profits and therefore reduced Mikutowicz's personal taxable income. See supra n. 1.

The money AGM paid to Ellis was eventually transferred to a bank account in the Turks & Caicos Islands established by Tower for Mikutowicz's benefit. This account was in the name of another Tower created company, Harborsober Ltd. From the Harborsober account, Mikutowicz eventually transferred most of the money into a personal account in the Cayman Islands.

Mikutowicz similarly diverted profits from Felix to his offshore account. In 1998, Felix paid Tower $26,357 for "franchise and professional fees," although there was no evidence that Tower actually gave or did anything of value for Felix. Mikutowicz deducted these fees from Felix's taxes, and this money was also transferred, through the Harborsober account, to Mikutowicz's Cayman Island account.² Mikutowicz and his companies never declared any of the money deposited in the Harborsober account as taxable income.

The government calculated that, through these machinations, Mikutowicz reduced his tax burden by $570,005. On September 6, 2001, a grand jury indicted Mikutowicz on ten tax offenses: one count of conspiring to commit tax fraud, see 18 U.S.C. § 371; five counts of filing materially false tax returns for the years 1995-1998, see 26 U.S.C. § 7206(1); and four counts of tax evasion for the years 1995-1998, see 26 U.S.C. § 7201. On June 28, 2002, after a fifteen-day trial, a jury convicted him on all counts.

On September 20, 2002, the district court sentenced Mikutowicz to one year and one day of imprisonment and two years of supervised release; it also ordered him to pay a $50,000 fine, a $1,000 special assessment, and restitution. The district court arrived at Mikutowicz's sentence by granting him a two-level reduction for acceptance of responsibility and a five-level downward departure because his criminal conduct constituted "aberrant behavior."

II.

Mikutowicz challenges his convictions on a number of grounds, focused primarily on the jury's consideration of whether the claimed deductions were "ordinary and necessary business expenses." He argues first that: (1) the district court should not have instructed the jury on the Internal Revenue Code's definition of "ordinary and necessary business expenses" and (2) even if such an instruction was appropriate, the district court erroneously declined to provide a supplemental instruction on this issue. Second, he argues that (1) the district court should have excluded testimony by the government's tax computation expert that the deductions AGM claimed for making payments to Ellis were not "ordinary and necessary business expenses" and (2) the district court improperly limited cross-examination of this expert. Finally, he claims that the district court abused its discretion by declining to investigate his allegation of juror misconduct.

A. Instruction on "Ordinary and Necessary Business Expenses"

Mikutowicz first argues that the district court erred by instructing the jury on the definition of "ordinary and necessary business expenses" under the Internal Revenue Code. See 26 U.S.C. § 162. He contends that the court's instruction was unnecessary because the government was required to prove only that the deductions he claimed were "false" — not that they failed to qualify as "ordinary and necessary business expenses." This unnecessary instruction was also prejudicial, he asserts, because it introduced an extraneous issue that might well have confused the jury and diverted its attention from his primary defense: that he claimed the deductions in "good faith."

The purpose of jury instructions "is to inform the jury of its function, which is the independent determination of the facts, and the application of the law, as given by the court, to the facts found by the jury." 2A Charles A. Wright, Federal Practice and Procedure: Criminal, § 485 (3d ed.2000). The instructions should "fairly and impartially state the issues and applicable law in logical sequence ... [so that] the jury [can] understand the issues and intelligently apply the law." Id. (quoting Elbel v. United States, 364 F.2d 127, 134 (10th Cir.1966)). It is common in tax crime prosecutions for the court to instruct the jury on the meaning of tax law terms implicated by the particular facts of a case. See, e.g., United States v. Wapnick, 60 F.3d 948, 955 (2d Cir.1995) (in tax evasion case, jury instruction on definition of "sham corporation" was proper); United States v. Curtis, 782 F.2d 593, 596-98 (6th Cir.1986) (in tax evasion case, jury instruction on definition of "income" was proper); United States v. Sorrentino, 726 F.2d 876, 881 (1st Cir.1984) (in tax evasion case, jury instruction on definition of "taxable income" was proper).

Here, knowing the definition of "ordinary and necessary business expenses" was helpful to the jury in applying the law to the evidence. The parties agree that conviction on each count required the government to prove that the deductions claimed by Mikutowicz on behalf of AGM and Felix were "false." See 26 U.S.C. § 7206(1) (filing false corporate tax return requires government to prove that return was false as to material matter); 26 U.S.C. § 7201 (tax evasion requires government to prove that defendant owed substantially more federal income tax than declared); 18 U.S.C. § 371 (conspiracy charge required government to prove that defendant agreed with another to file false return and to evade taxes). Based on the evidence presented, whether the deductions claimed by AGM and Felix were "false" depended on whether they were properly claimed as "ordinary and necessary business expenses." Thus, the jury's ultimate conclusion that the deductions were "false" was inexorably linked to whether they were "ordinary and necessary business expenses." Therefore, a definition of "ordinary and necessary business expenses" was useful information for the jury to evaluate the evidence.

Mikutowicz's suggestion that the "ordinary and necessary business expense" instruction shifted the jury's focus away from his "good faith" defense is not persuasive. The district court's instructions explained to the jury the separate requirement that the government prove that Mikutowicz did not act in "good faith." Indeed, the court was quite explicit in this regard. It instructed:

[I]t isn't enough for the government to show that [the deductions] were improper. The government also has to prove that the defendant knew that they were improper, or, rather that the defendant did not believe that the statements he made about the deductions in these returns were true and correct.

Rather than confuse the jury, the instructions highlighted for the jury that the government had to prove, inter alia, that the claimed deductions were false and that Mikutowicz did not claim the deductions in "good faith."

As a fallback, Mikutowicz contends that, even if the district court permissibly instructed the jury on the definition of "ordinary and necessary...