U.S. v. Reynolds, 90-1479
Decision Date | 28 November 1990 |
Docket Number | No. 90-1479,90-1479 |
Citation | 919 F.2d 435 |
Parties | -779, 91-1 USTC P 50,267 UNITED STATES of America, Plaintiff-Appellee, v. David L. REYNOLDS, Defendant-Appellant. |
Court | U.S. Court of Appeals — Seventh Circuit |
Stephen J. Liccione, Francis D. Schmitz, Asst. U.S. Attys., Milwaukee, Wis., for plaintiff-appellee.
William E. Callahan, Jr., Davis & Kuelthau, Milwaukee, Wis., for defendant-appellant.
Before CUMMINGS, EASTERBROOK and KANNE, Circuit Judges.
For more than a decade Milwaukee has participated in the community development block grant program administered by the Department of Housing and Urban Development. The City selects urban projects that meet federal criteria and pays a contractor to do the work; the federal government reimburses the City on certification that the work has been done according to the federal standards. A pot of money attracts many people, not all of them interested in fulfilling the statutory objectives. David Reynolds was one such person.
Reynolds formed the Phoenix Redevelopment Project, Inc., ostensibly to renovate housing in the 10th Aldermanic District of Milwaukee. That the extent of a federal redevelopment project should be limited by political boundaries in Milwaukee--boundaries having nothing to do with housing that could benefit from rehabilitation--seems to have drawn little attention at Milwaukee's Community Development Agency or at HUD. The link between Phoenix and the 10th District reflects the link between Reynolds and Michael McGee, the Alderman of the 10th District. Reynolds was one of McGee's confidants, able to induce action on applications for liquor licenses in his district (in exchange for baksheesh). Phoenix may have been another vehicle to send money in McGee's direction.
Reynolds arranged for two of Phoenix's suppliers to submit false invoices for supplies. Reynolds also forged some invoices on letterheads he obtained from these two suppliers. He submitted both the fraudulent and the forged invoices to the City for payment. Reynolds and his suppliers arranged to split the proceeds 50-50, but Reynolds reneged, paying them only 1/3 of the takings on the explanation that he needed a larger share to take care of someone from the City. The skimming led to four kinds of charges, in addition to the drearily inevitable yet pointless conspiracy charge: making false claims against the government, in violation of 18 U.S.C. Sec. 287; embezzling federal funds, in violation of 18 U.S.C. Sec. 641; theft from a governmental program, in violation of 18 U.S.C. Sec. 666; and filing false income tax returns, in violation of 26 U.S.C. Sec. 7206(1) ( ). He was charged with and acquitted of three counts of extortion. The 42 counts on which he was convicted produced a term of four years' imprisonment, plus restitution of $52,219 and special assessments of $2,100.
The tax counts are the most problematic. Reynolds filed IRS form 1040EZ for each of tax years 1986 and 1987. Line 1 of this form says: Reynolds inserted in the space provided the amount shown on his W-2 forms, which he dutifully attached. The only other line on form 1040EZ calling for income is line 2, which reads: Reynolds performed the additions and subtractions called for on the other lines, filling in the total on line 7, which reads:
The indictment charged Reynolds with filing a return,
which said income tax return he did not believe to be true and correct as to every material matter in that on line 7 of the return, the defendant's taxable income was represented as being $12,743.00 [in 1986; $16,185 in 1987], whereas, as he then and there well knew and believed, he had taxable income in 1986 [or 1987] in excess of that heretofore stated.
Line 7 did not call for anything other than the difference between line 6 (the personal exemption, preprinted on the form) and line 5. Line 5 came from lines 1 and 2 (added to yield line 3), from which Reynolds subtracted charitable contributions (line 4). The veracity of Reynolds' verification (by signing the return) that line 7 is "true, correct, and complete" therefore depends on the accuracy of his entry on line 1. He contends that the entry on line 1 is literally correct: he wrote down everything he had received as "wages, salaries, and tips", exactly as it appeared on the forms W-2.
To this the prosecutor has two replies. One is that by filing form 1040EZ, Reynolds represented that he had no income not called for on lines 1 and 2. The other is that, according to expert testimony, Reynolds could have put his illegal income on line 1. Only one of these can be true. If income that is not reflected on a W-2 disqualifies someone from filing form 1040EZ, then illegal income may not be included on line 1 of that form. And the existence of such income indeed disqualifies a taxpayer from using form 1040EZ. It is designed for persons whose entire income appears on W-2s, plus interest income that financial institutions report on forms 1099. Anything more complex requires the taxpayer to use form 1040.
The prosecutor's argument that by filing form 1040EZ a taxpayer implicitly represents that he has no additional income has more substance, but this is not the theory in the indictment. It charged that line 7, specifically, was false, and line 7 is derived arithmetically from other lines. Section 7206(1) is a perjury statute, and literal truth is a defense to perjury, even if the answer is highly misleading. Bronston v. United States, 409 U.S. 352, 93 S.Ct. 595, 34 L.Ed.2d 568 (1973). Using the wrong form does not violate Sec. 7206(1). Hartford-Connecticut Trust Co. v. Eaton, 34 F.2d 128, 130 (2d Cir.1929). If the form has an open-ended line calling for Sec. 61 income, and the taxpayer leaves some income out, Sec. 7206(1) applies. United States v. Young, 804 F.2d 116, 119 (8th Cir.1986). Form 1040EZ is anything but open-ended, however. The right charges are tax evasion (26 U.S.C. Sec. 7201) and failure to supply information required by law (26 U.S.C. Sec. 7203). Reynolds did not reveal his complete income (Sec. 7203) and evaded taxation on that income (Sec. 7201). Neither the indictment nor the charge to the jury set out the elements of these offenses, so the problem is deeper than a citation to the wrong statute in the indictment. We vacate Reynolds' tax convictions, without foreclosing indictment and trial for the offenses that match the prosecution's theory of the case.
Leaving tax, we turn to embezzlement of federal funds, which violates 18 U.S.C. Sec. 641. Reynolds defended against the embezzlement counts by observing that Milwaukee, and not HUD, paid Phoenix's invoices. Although the federal government reimbursed Milwaukee, the money in Phoenix's hands was Milwaukee's and therefore, Reynolds concludes, outside the scope of Sec. 641. Section 641, which punishes those who purloin "money, or any thing of value of the United States or of any department or agency thereof", is a problem child when applied to grantees or other independent contractors. What does it mean to say that Phoenix embezzled funds that the City and HUD handed over willingly? Isn't this just a back door way to cumulate the punishment assessed by Sec. 287, which penalizes false claims? Yet Reynolds does not contest the application of Sec. 641 to false claims, and he does not challenge this circuit's approach to defining "money ... of the United States": if the United States supplies the funds and exercises supervision and control over their use in the hands of grantees, they remain "money ... of the United States". E.g., United States v. Kristofic, 847 F.2d 1295 (7th Cir.1988); United States v. Wheadon, 794 F.2d 1277, 1284-85 (7th Cir.1986); United States v. Bailey, 734 F.2d 296 (7th Cir.1984).
Community block grant funds come with the strings that usually tie up the use of federal money. 24 C.F.R. Part 570. Recipients must certify that they will put the dollars to particular uses. If they do not, the United States retains a...
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