On Appeal from the United States District Court for the District of New Jersey (D.C. No. 09-cr-812) District Judge: Honorable Garrett E. Brown
The opinion of the court was delivered by: Padova, Senior District Judge
Argued on February 7, 2012
Before: SLOVITER and VANASKIE, Circuit Judges, and PADOVA,*fn1 Senior District Judge.
James and Theresa DeMuro ("the DeMuros") owned TAD Associates, LLC ("TAD"), an engineering and surveying company in New Jersey. Between 2002 and 2008, TAD failed to pay over to the IRS more than half a million dollars in taxes that it had withheld from its employees' paychecks. As the owners and managers of TAD, the DeMuros were convicted after a jury trial of conspiracy to defraud the United States, in violation of 18 U.S.C. § 371, and 21 counts of failure to account and pay over employment taxes, in violation of 26 U.S.C. § 7202. The DeMuros argue on appeal that the District Court committed numerous evidentiary errors at trial, and further erred at sentencing by applying a two-level increase to their offense levels for abuse of a position of trust, pursuant to U.S.S.G. § 3B1.3. For the following reasons, we affirm the convictions, but remand for re-sentencing.
Appellants James DeMuro ("James") and Theresa DeMuro ("Theresa"), husband and wife, were the sole owners and managers of TAD. James is an engineer and was responsible for the business's surveying operations, while Theresa was the office manager and directed TAD's marketing efforts.
Between 2002 and 2008, TAD withheld from its employees' paychecks trust fund taxes, i.e., taxes that the employees owed to the federal government for Social Security and Medicaid, and as income tax. Employers typically withhold these taxes from their employees' paychecks, and then hold them in trust until it is time to pay them over to the United States. However, over the course of 21 calendar quarters between 2002 and 2008, TAD failed to pay over to the IRS a total of $546,247 in trust fund taxes that it had collected from its employees.
IRS Revenue Officer Michelle Hornby first contacted the DeMuros in 2002 about the trust fund taxes that TAD owed. Hornby informed the DeMuros that they could be held personally liable for the unpaid taxes because they were responsible for paying TAD's taxes. Hornby also advised them that the IRS considered the trust fund taxes to be TAD's top priority, and that TAD was not permitted to spend the withheld trust fund taxes for any other purpose. From 2002-2005, the DeMuros expressed interest in paying the back taxes and ostensibly worked with Hornby in an effort to pay off the debt. At the same time, however, the DeMuros were spending large amounts of money on personal expenditures and seemingly discretionary business expenses.
In October 2003, the IRS assessed the DeMuros personally with a trust fund recovery penalty, pursuant to 26 U.S.C. § 6672. The amount of the penalty was the amount that TAD owed in trust fund taxes. Hornby again warned the DeMuros that they needed to start making timely deposits of TAD's trust fund taxes, but they did not. As a result, Hornby required TAD to increase the frequency of its payments of taxes to the IRS from quarterly to monthly.
In June 2004, when the DeMuros were still failing to make timely deposits of the trust fund taxes, the IRS required TAD to establish a special trust account in favor of the United States, pursuant to 26 U.S.C. § 7512. The DeMuros were required to put withheld trust fund taxes into this account within two days of withholding the money, and to keep the funds in the account until they were paid to the IRS. However, after paying funds into the trust account, the DeMuros withdrew some of these funds to pay unrelated expenses. They later closed the account without IRS permission.
On July 15, 2010, a grand jury indicted the DeMuros on 22 counts: one count of conspiracy to defraud the United States, 18 U.S.C. § 371, and 21 counts of failure to account and pay over employment taxes, 26 U.S.C. § 7202, one count for each quarter of unpaid taxes. At trial, the DeMuros conceded that they did not pay over the $546,242 that TAD owed to the IRS in trust fund taxes, but argued that their failure to pay TAD's taxes was not willful. In support of this position, they emphasized that they negotiated with the IRS in an attempt to pay off the delinquent taxes over time, and pointed to evidence that they even attempted to refinance properties to obtain funds to pay the delinquent taxes. Theresa also asserted an innocent spouse defense at trial, arguing that James, not she, was responsible for collecting and paying over TAD's taxes.
The Government responded to these arguments by, inter alia, presenting evidence that the DeMuros spent lavishly on personal and discretionary business items while professing an inability to pay the delinquent taxes. The evidence showed that, in the 21 quarters in which TAD failed to pay over trust fund taxes in the amount of $546,242, the DeMuros spent $5,043,867 from TAD and personal accounts. To prove that Theresa was responsible for paying the taxes, the Government presented evidence that Theresa had signature authority over all of TAD's bank accounts, freely spent TAD's money, and had the power to hire and fire employees.
The jury convicted both James and Theresa on all 22 counts. At sentencing, the District Court applied a two-level enhancement to the DeMuros' offense levels for abuse of a position of trust, explaining that the DeMuros were in a position of trust vis-a-vis the IRS on account of the special trust fund account, and that the DeMuros abused that position of trust by using trust fund money for expenses other than trust fund taxes. The District Court sentenced both James and Theresa to 51 months' imprisonment. These timely appeals followed.*fn2
On appeal, the DeMuros raise numerous challenges to the District Court's decisions admitting or excluding evidence. We review evidentiary rulings for abuse of discretion. United States v. Friedman, 658 F.3d 342, 352 (3d Cir. 2011) (citing United States v. Starnes, 583 F.3d 196, 213-14 (3d Cir. 2009)).
Evidentiary errors objected to at trial are reviewed for harmless error. Fed. R. Crim. P. 52(a); Neder v. United States, 527 U.S. 1, 7 (1999). An error that was not objected to at trial is reviewed for plain error. Fed. R. Crim. P. 52(b).
"An error in an evidentiary ruling is harmless error when 'it is highly probable that the error did not affect the result.'" Friedman, 658 F.3d at 352 (quoting Hill v. Laeisz, 435 F.3d 404, 420 (3d Cir. 2006)). "'Plain error exists only when (1) an error was committed (2) that was plain, and (3) that affected the defendant's substantial rights.'" United States v. Lopez, 650 F.3d 952, 961 (3d Cir. 2011) (quoting United States v. Lessner, 498 F.3d 185, 192 (3d Cir. 2007)). An error is "plain" when it is "clear or obvious." United States v. Russell, 134 F.3d 171, 180 (3d Cir. 1998) (citation omitted). Where a plain error has occurred, we exercise discretion in determining whether that error warrants reversal. United States v. Campbell, 295 F.3d 398, 404 (3d Cir. 2002). We will reverse the district court "only if the error 'seriously affect[s] the fairness, integrity, or public reputation of judicial proceedings.'" United States v. Stevens, 223 F.3d 239, 242 (3d Cir. 2000) (quoting United States v. Olano, 507 U.S. 725, 732 (1993)).
The DeMuros first argue that the District Court erred in admitting much of the Government's evidence that was intended to establish the DeMuros' willfulness and responsibility for paying TAD's taxes, two of the elements the Government must prove to obtain a conviction under 26 U.S.C. § 7202.*fn3 See Cheek v. United States, 498 U.S. 192, 199-200 (1991) (citations omitted); United States v. Thayer, 201 F.3d 214, 219 (3d Cir. 1999). Willfulness in a tax evasion case is "a voluntary, intentional violation of a known legal duty." Cheek, 498 U.S. at 201 (citations omitted). Where a defendant proves that he had a good faith belief that he was not violating the tax code, regardless of whether that belief was objectively reasonable, he has established that he did not act willfully. Id. at 201-03.
As mentioned above, the Government presented a variety of evidence to prove willfulness and responsibility, including evidence of the DeMuros' personal spending, Theresa's handling of her father's assets, and Theresa's role in the resignation of TAD employee Joel Boriek. The DeMuros argue that the District Court abused its discretion in admitting this evidence because the evidence was not only irrelevant to any issue at trial, but also overly prejudicial.
Several witnesses testified at trial about the DeMuros' personal spending habits, including their luxury vacations, nice homes, and Theresa's substantial home shopping network expenditures. The Government also presented evidence that the DeMuros wrote checks on TAD's accounts to pay for some of their personal expenditures. The DeMuros contend that the District Court abused its discretion not only by finding this evidence to be relevant, but moreover by not finding that the voluminous evidence of their personal spending was overly prejudicial compared to any minimal relevance it may have had to willfulness.
Contrary to the DeMuros' assertion, evidence of personal spending can be relevant evidence in criminal tax actions and was, in fact, relevant here. We find guidance in two cases from our sister circuits. In United States v. Ellis, 548 F.3d 539, 543 (7th Cir. 2008), the United States Court of Appeals for the Seventh Circuit considered a defendant whose "principal defense" to a tax evasion charge was that she "was too busy to notice or remember her taX obligations." Under those circumstances, "the ways [defendant] was spending her time - traveling to Florida, buying cars, purchasing and overseeing the decoration of her two million dollar home - were relevant" because they rebutted her assertion that she was "too busy" to pay her taxes. Id. The court further noted that the same evidence of personal spending was also relevant to undermine a defense that the defendant "simply forgot her tax liability, since most people would inquire as to why they have an unexpected additional two million dollars to spend on themselves." Id.
The United States Court of Appeals for the Sixth Circuit has also addressed the use of evidence of personal spending in a criminal tax case. United States v. Blanchard, 618 F.3d 562 (6th Cir. 2010). The court stated that: evidence regarding a defendant's ability to pay taxes is pertinent to whether an offense has been committed under § 7202, since it bears on the willfulness of the defendant's failure to pay over withheld tax to the government. If a defendant has made discretionary purchases in lieu of meeting his tax obligations, this is probative of his guilt.
Id. at 569-70. In Blanchard, the defendant argued that he lacked the ability to pay the taxes. The court therefore held that the fact that the defendant had spent money on gambling and other personal pleasures ...