United States v. Martin

• Decision Date: 07 August 2015
• Docket Number: No. 14–30034.,14–30034.
• Parties: UNITED STATES of America, Plaintiff–Appellee, v. Elaine MARTIN, Defendant–Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

796 F.3d 1101

UNITED STATES of America, Plaintiff–Appellee

v.Elaine MARTIN, Defendant–Appellant.

No. 14–30034.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted May 5, 2015.

Filed Aug. 7, 2015.

Andrew G. McBride (argued), Brett A. Shumate, and John R. Prairie, Wiley Rein LLP, Washington, D.C., for Defendant–Appellant.

Frank P. Cihlar, Chief, Criminal Appeals & Tax Enforcement Policy Section, Gregory Victor Davis and Alexander P. Robbins (argued), Attorneys, Tax Division, United States Department of Justice, Washington, D.C., for Plaintiff–Appellee.

Appeal from the United States District Court for the District of Idaho, B. Lynn Winmill, Chief District Judge, Presiding. D.C. No. 1:13–cr–00065–BLW–1.

Before: RONALD M. GOULD and MORGAN CHRISTEN, Circuit Judges, and FREDERIC BLOCK,^* Senior District Judge.

OPINION

GOULD, Circuit Judge:

Elaine Martin appeals her convictions for subscribing false federal tax returns and her sentence for those convictions and several fraud-related convictions.¹ First, we address Martin's contention that the district court abused its discretion in admitting evidence that, years before the conduct underlying this case, she had submitted Idaho state tax returns on which she improperly characterized several thousand dollars in personal expenses as deductible farm expenses and had been audited by Idaho tax authorities. Second, we address whether the district court misapplied the Sentencing Guidelines in calculating the losses that resulted from Martin's fraud, where her company was awarded government contracts under programs meant to aid disadvantaged businesses, for which Martin's company did not legitimately qualify. We have jurisdiction under 28 U.S.C. § 1291. For the reasons that follow, we vacate Martin's tax convictions, vacate her sentence, and remand for further proceedings.

I

Martin owned a construction company, MarCon, which specialized in installing steel guardrails and concrete barriers on public highways. MarCon also earned revenue by selling used materials the company removed from its construction sites. But Martin never reported the income from the used material sales to the IRS, and instead kept it off the company books and sent it to a bank account hidden from her external accountants.² By keeping several hundred thousand dollars of this income off of her personal and company tax returns between 2002 and 2008, Martin avoided paying about $100,000 in income taxes.

Martin also fraudulently obtained government contracts by misrepresenting her assets to qualify for programs designed to aid disadvantaged businesses. A federal program run by the Small Business Administration (“SBA”) qualifies small businesses owned by socially and economically disadvantaged persons for certain federal contracts without going through the normal competitive bidding process. Martin also obtained contracts through a state-administered Disadvantaged Business Enterprise (“DBE”) program, which sets targets for awarding a percentage of federally-funded contracts to participants. Between 1999 and 2006, MarCon received nearly $20 million from 85 contracts awarded through the DBE program, and successfully performed each contract. MarCon was admitted to the SBA program and awarded three contracts worth nearly $3 million, all of which the company successfully performed.

To prove that Martin knew she had a duty to truthfully report her income on her tax returns, the government was allowed to introduce evidence that Idaho tax authorities had audited Martin and that in tax years 1996 and 1997 she had improperly claimed less than $3,000 as deductible farm expenses on her state tax returns. Martin was accused of incorrectly characterizing student loan payments for her children and expenses related to her divorce as farm expenses. Martin settled the issue without conceding liability.

During closing arguments, the government reminded the jury in its rebuttal of the Idaho audits and argued that Martin knew what she was doing when she subscribed false tax returns because she had tried it before:

The government is focused obviously on the used materials, but the same thing was brought up and Elaine Martin agreed it was wrong ... when she tried to charge various things as a farm expense. Things like her divorce fees. Things like her children's health insurance and payment of student loans. Remember that. Remember how you were told that she tried this before. That she tried to say those were farm expenses. Now a farm needs fertilizer, it needs seed, it needs equipment, but does it really need to pay for student loans? Well, in Elaine Martin's book it does.

The jury convicted Martin of the tax counts and of several fraud-based counts.

At sentencing, Martin, relying on the “procurement fraud rule” found in application note 3(A)(v)(II) of § 2B1.1 of the Sentencing Guidelines, argued for a loss amount of zero. Relying on the “government benefits rule” found in application note 3(F)(ii), the government advocated for a loss amount equal to the total value of the contracts—about $22 million—and the resulting 22–level enhancement that loss amount permitted.

The district court held that the government benefits rule applied. It disagreed, however, that the loss under that rule was $22 million and instead set the loss amount at $3 million, the profit from Martin's fraudulently obtained contracts. Acknowledging that its focus on profit was possibly erroneous, it invoked application note 20(C) and found that a higher loss amount would “overstate the actual loss.”

The district court's loss calculation led to an 18–level enhancement. With a base offense level of 7 and additional enhancements for defendant's role and sophisticated means, the adjusted offense level was 31, for which the Guidelines range for someone in criminal history category I is 108 to 135 months. The district court imposed a sentence of 84 months.

The district court also entered an order of forfeiture, pursuant to the parties' stipulation, requiring Martin to forfeit over $3 million.

Martin timely appealed her convictions and sentence.

II

We review a district court's evidentiary decisions for an abuse of discretion. United States v. McFall, 558 F.3d 951, 960 (9th Cir.2009). Even if an evidentiary ruling was incorrect, we will vacate a conviction only if that ruling “more likely than not affected the verdict.” United States v. Pang, 362 F.3d 1187, 1192 (9th Cir.2004) (internal quotation marks and citation omitted).³

The district court's interpretation of the sentencing Guidelines is reviewed de novo. United States v. Treadwell, 593 F.3d 990, 999 (9th Cir.2010).

III

We first address Martin's argument that the district court abused its discretion by admitting evidence about her audits by Idaho state tax authorities. We agree and conclude that the error was not harmless. As a result of this substantial error, we vacate Martin's convictions for subscribing false tax returns.

Federal Rule of Evidence 404(b) “provides that evidence of ‘other crimes, wrongs, or acts' is inadmissible to prove character or criminal propensity but is admissible for other purposes, such as proof of intent, plan or knowledge.” United States v. Rizk, 660 F.3d 1125, 1131 (9th Cir.2011) (quoting Fed.R.Evid. 404(b) ).

This general rule reflects our concern that a person charged with a crime be convicted only if its elements are proved beyond a reasonable doubt. A person should not be convicted merely because he or she has done prior bad acts. Rule 404(b) will not be violated if the prior bad acts are relevant on some issue in the current prosecution, such as “motive, opportunity, intent, preparation, plan, knowledge, identity, absence of mistake, or lack of accident.” Fed.R.Evid. 404(b). But when bad acts are not relevant, they can only be viewed as being presented to inflame prejudice in the trier of fact, in which case they are at odds with our fundamental premises on the need for a fair trial. And even when relevant on some issue, evidence of prior bad acts should not, under Federal Rule of Evidence 403, be admitted when its “probative value is substantially outweighed by dangers of unfair prejudice, confusion on issues, waste of time, or needlessly presenting cumulative evidence.” Fed.R.Evid. 403.

In United States v. Bailey, 696 F.3d 794 (9th Cir.2012), the government, prosecuting a defendant for the sale of unregistered securities, introduced an SEC civil complaint alleging that the defendant had previously issued securities in violation of the same SEC rules as those at issue in the criminal trial. We held that the admission of the complaint was an abuse of discretion that required a new trial.

Id. at 800–05. We outlined the four part test for admitting evidence under Rule 404(b) : the government must show that “(1) the evidence tends to prove a material point; (2) the other act is not too remote in time; (3) the evidence is sufficient to support a finding that defendant committed the other act; and (4) (in certain cases) the act is similar to the offense charged.” Id. at 799 (quotations omitted). “If the evidence meets this test under Rule 404(b), the court must then decide whether the probative value is substantially outweighed by the prejudicial impact under Rule 403.” Id. (quotation omitted).

Under these standards, admitting evidence of the prior state tax audit for a prosecution of federal tax violations was serious error. Here, the state tax auditors described their investigation and the settlement agreement that Martin had signed, providing more information than merely the civil complaint introduced in Bailey. But this is a distinction that makes no substantive difference. The government introduced evidence that Martin was accused of incorrectly deducting farm expenses on a state tax form in 1996 and 1997, apparently to show her knowledge of federal tax laws related to reporting income in the mid–2000s. But we can perceive no relevant connection between Martin's awareness of rules about the...