U.S. v. Pacheco, 87-1018

• Decision Date: 17 August 1990
• Docket Number: No. 87-1018,87-1018
• Citation: 912 F.2d 297
• Parties: -5429, 90-2 USTC P 50,458 UNITED STATES of America, Plaintiff-Appellee, v. Ronald H. PACHECO, Defendant-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 297

912 F.2d 297

66 A.F.T.R.2d 90-5429, 90-2 USTC P 50,458

UNITED STATES of America, Plaintiff-Appellee, v. Ronald H. PACHECO, Defendant-Appellant.

No. 87-1018.

United States Court of Appeals,

Ninth Circuit.

Argued and Submitted May 17, 1990.

Decided Aug. 17, 1990.

Daniel H. Bookin and Kristina E. Harrigan, Farella, Braun & Martel, San Francisco, Cal., for defendant-appellant.

Karen M. Quesnel, Tax Div., Dept. of Justice, Washington, D.C., for plaintiff-appellee.

Appeal from the United States District Court for the Northern District of California.

Before SCHROEDER and CANBY, Circuit Judges, and REA, ^* District Judge.

SCHROEDER, Circuit Judge:

Ronald Pacheco appeals his convictions, following a jury trial, for aiding the preparation of false income tax returns, in violation of 26 U.S.C. Sec. 7206(2), making and subscribing a false income tax return, in violation of 18 U.S.C. Sec. 1001, and making false statements to the IRS, in violation of 26 U.S.C. Sec. 7206(1).

We must decide whether the tax investment scheme devised and executed by the appellant was illegal and if so, criminal. We hold it was both. We are also called upon to decide a host of evidentiary and procedural issues. Because none of them require us to reverse the appellant's conviction for tax offenses, we affirm.

Background

Ronald H. Pacheco has an extensive background in tax. He was an Internal Revenue Agent for twelve years and has a master's degree in business administration, specializing in taxation, from Golden Gate University where he also taught tax. The charges against him arose from a limited partnership ("Lapeer Associates" or "Lapeer") he devised in 1979 to allow investors a three-to-one tax write-off for each dollar they invested. Not only was Pacheco the general partner, but he prepared the returns for the partnership as well as submitting returns to the IRS on behalf of the investors. The deductions were the basis of several charges in the indictment for causing the filing of false returns. In addition, on his own return, Pacheco only reported taxable income of $24,207 for 1980. He did not report two "withdrawals" totaling $33,560 taken from the Lapeer Associates partnership accounts, and this conduct resulted in additional charges.

On October 30, 1986, Pacheco was found guilty of twelve counts of a 14-count superseding indictment after a previous trial ended in mistrial. Eight of the twelve counts related to his aiding and assisting in the preparation and presentation of the Lapeer investors' false and fraudulent individual income tax returns in violation of 26 U.S.C. Sec. 7206(2). Three counts dealt with Pacheco's making false and fraudulent statements in concealing material facts relating to a matter within the jurisdiction of the Department of Treasury, in violation of 18 U.S.C. Sec. 1001. These counts related to a number of Form 1025-Schedule K's which were submitted on behalf of Pacheco's clients in connection with the investments they had made in Lapeer Associates. The remaining conviction was for violating 26 U.S.C. Sec. 7206(1), by making and subscribing his own individual tax return which he did not believe to be true and correct as to every material matter.

Willful Filing of False Statements: The Valuation for the Consulting Fee Deduction

Pacheco has two principal contentions in challenging his convictions of preparing false and fraudulent returns under section 7206 and making false and fraudulent statements in violation of section 1001. All those convictions were based upon the Lapeer partnership's deduction for a profits interest in the partnership granted to Pacheco.

Pacheco contends, first, that the deduction claimed for the partnership and reflected on the individual partners' returns did not violate the law. In the alternative, he contends that even if the deduction was improper, he did not act with the requisite willfulness because the evidence at most demonstrated that he was negligent.

To evaluate the merit of these contentions it is necessary to have some background understanding of Pacheco's conduct and the legal context in which it was set. In 1979, Pacheco set up the real estate limited partnership called "Lapeer" to develop real estate property in Lapeer, Michigan. For his consulting services, the Lapeer partnership agreement compensated him with a 20% interest in partnership profits. During 1979, Pacheco promoted Lapeer and had received as investments $229,000 in cash contributions and $150,000 of subscriptions receivable.

Pacheco advertised Lapeer as a tax shelter whereby investors would get a three-to-one tax write-off for investment in the limited partnership. In the fall of 1979 Pacheco valued the partnership at $18 million which, according to Pacheco's calculations, would coincidentally allow the investors in Lapeer their three-to-one deduction. The deduction derived through the 20% fee paid to Pacheco, which he was to deduct as an expense on Lapeer's partnership return (20% of $18 million is $3.6 million, which is three times the $1.2 million in contributions Pacheco expected). In 1979, when Pacheco received less than his expected contributions, he retained his three-to-one deduction formula (which was based upon the original $18 million valuation) and determined his fee by multiplying the contributions he received by three. Beginning in approximately March, 1980, Pacheco began preparing and filing returns for Lapeer investors which claimed a total of $987,950 in losses largely attributable to the consulting deduction. Subsequently, Pacheco prepared the partnership's income tax return for 1979 and deducted the $925,000 consulting fee as an expense of the partnership.

Pacheco claims that his valuation and the subsequent deduction were lawful under I.R.C. Sec. 707(c), which permits deductions for payments to partners in limited circumstances. ¹

The statute is clear that in order for a partnership to claim a deduction under the terms of section 707(c), the payments to the partner must meet the requirements of section 162(a). Diamond v. Commissioner, 92 T.C. 423, 1989 WL 13679 (1989); Durkin v. Commissioner, 87 T.C. 1329, 1388-89, 1986 WL 22064 (1986), aff'd, 872 F.2d 1271 (7th Cir.), cert. denied, --- U.S. ----, 110 S.Ct. 84, 107 L.Ed.2d 50 (1989); Wildman v. Commissioner, 78 T.C. 943, 960 n. 19, 1982 WL 11104 (1982); Cagle v. Commissioner, 63 T.C. 86, 91, 1974 WL 2717 (1974), aff'd 539 F.2d 409 (5th Cir.1976); see Treas. Reg. Sec. 1.707-1(c)(1956).

Section 162(a)(1), in turn, requires that salaries and other compensation be reasonable. I.R.C. Sec. 162(a)(1). ² Pacheco's profits interest totaled 20% of his valuation of the partnership. Even assuming 20% was a reasonable commission for the services Pacheco rendered in 1979, ³ the legality of the partnership deduction would depend upon whether the $4,625,000 (20% of $4,625,000 = $925,000) valuation was reasonable. See id.; Treas. Reg. Sec. 162-7(b)(3) ("in any event [a deduction for] compensation paid may not exceed what is reasonable under all the circumstances"); Barton-Gillet Co. v. C.I.R., 442 F.2d 1343 (4th Cir.1971); United States v. Haskel Engineering & Supply Co., 380 F.2d 786, 788-89 (9th Cir.1967); Durkin, 87 T.C. at 1388-89; see also Hortenstine & Ford, Receipt Of A Partnership Interest For Services: The Diamond Case, 65 Taxes 880, 917 (1971-72) (if profit interests transfers constitute taxable events, "expert appraisals of all profit interests" are required); Frank v. Commissioner, 54 T.C. 75, 94, 1970 WL 2221 (1970) (fair market value is appropriate measure for valuation), aff'd 447 F.2d 552 (7th Cir.1971); cf. Pagel Inc. v. C.I.R., 91 T.C. 200, 1988 WL 81469 (1988) (reasonable accuracy is required in valuation under section 83. "To hold otherwise would be to encourage estimates of fair market value of such rights on the basis of pure speculation and surmise.") (citation omitted), aff'd, 905 F.2d 1190 (8th Cir.1990).

It is also well-established that in order for an accrual method partnership to deduct the profits interest it transfers to a partner, the amount must have an ascertainable value. Treas. Reg. Sec. 1.446-1(c)(1)(ii) (1957) (accrual method taxpayer may only deduct amounts that "can be determined with reasonable accuracy").

Here, with only $379,000 invested in the partnership, Pacheco valued it at $4,625,000. The evidence provided no basis for this figure other than his own "forecast" of what the partnership would be worth. Expert testimony at trial showed the partnership was actually worth no more than $408,000. Accordingly, Pacheco's $925,000 service fee, derived as a percentage of the $4,625,000 valuation, was similarly without justification. Under these circumstances the jury was justified in finding this figure false. Because Pacheco's arbitrary valuation and inflated fee clearly violated section 707(c) and Treas. Reg. Sec. 1.446-1(c)(1)(ii), it was unlawful. Pacheco's claim that he did not have fair notice that such conduct was prohibited is also without merit. See United States v. Austin, 902 F.2d 743, 745 (9th Cir.1990) (fair notice of illegal conduct satisfies due process); United States v. Mussry, 726 F.2d 1448, 1454 (9th Cir.) (same), cert. denied, 469 U.S. 855, 105 S.Ct. 180, 83 L.Ed.2d 114 (1984); cf. United States v. Schulman, 817 F.2d 1355, 1359 (9th Cir.) ("sham transactions are illegal"), cert. dismissed, 483 U.S. 1042, 108 S.Ct. 362, 97 L.Ed.2d 803 (1987); United States v. Clardy, 612 F.2d 1139, 1152-53 (9th Cir.1980) (affirming conviction under section 7206 for "sham" tax deductions).

Pacheco also claims that if his conduct was illegal, there was insufficient evidence of the requisite willfulness. We review this claim to determine if "any rational trier of fact could have found the essential elements of the crime beyond a reasonable doubt." Jackson v. Virginia, 443 U.S. 307, 319, 99 S.Ct. 2781, 2789, 61 L.Ed.2d 560 (1979) (emphasis in original); United States v. Mason, 902 F.2d 1434,...