901 F.2d 1130
284 U.S.App.D.C. 78
Joseph C. LEMIRE, Appellant
COMMISSIONER OF INTERNAL REVENUE, Appellee.
Roy R. CARVER, Appellant
COMMISSIONER OF INTERNAL REVENUE, Appellee.
Nos. 89-1180, 89-1181.
United States Court of Appeals, District of Columbia Circuit.
April 25, 1990.
NOTICE: D.C. Circuit Local Rule 11(c) states that unpublished orders, judgments, and explanatory memoranda may not be cited as precedents, but counsel may refer to unpublished dispositions when the binding or preclusive effect of the disposition, rather than its quality as precedent, is relevant.
Before WALD, Chief Judge, and MIKVA and D.H. GINSBURG, Circuit Judges.
This cause came to be heard on appeal from the decisions of the United States Tax Court and was briefed and argued by counsel. The issues have been accorded full consideration by the Court and occasion no need for a published opinion. See D.C.Cir.Rule 14(c). For the reasons stated in the accompanying Memorandum, it is
ORDERED AND ADJUDGED, by the Court, that the decisions of the United States Tax Court are affirmed.
The Clerk is directed to withhold issuance of the mandate herein until seven days after disposition of any timely petition for rehearing. See D.C.Cir.Rule 15.
Taxpayers Carver and Lemire appeal from the decision of the United States Tax Court that they underreported their income for 1976 and 1977 with intent to defraud. We affirm.
In 1986, the Commissioner sent taxpayers Carver and Lemire deficiency notices covering tax years 1976 and 1977. For each taxpayer, the notices specified a deficiency and an addition to tax under I.R.C. Sec. 6653(b) for each year. The additions to tax were based on the Commissioner's claim that the deficiencies resulted from fraud. The taxpayers filed petitions in the United States Tax Court for redeterminations of their deficiencies.
At the trial before the Tax Court, the Commissioner's theory of the case was that Carver and Lemire, employees of the Raytheon Corporation, together with Jon T. Stephens and Lionel Achuck, employees of Interconex, Inc., conspired to defraud Raytheon of over $2 million. They fraudulently arranged for Raytheon to pay too much for shipping prefabricated homes to Saudi Arabia, and diverted the overcharge to a company called Generation Holdings. From there the overcharge was further diverted and split among the conspirators. The taxpayers failed to report their share of the proceeds as income with intent to defraud.
Before the trial, the Commissioner moved that prior criminal judgments against the taxpayers be admitted in evidence under Federal Rule of Evidence 803(22) as proof of all facts essential to sustain them. Over the taxpayers' objections, the Tax Court granted the Commissioner's motion, admitted the prior convictions into evidence, and approved a list of ten facts as essential to sustain the convictions.
The Tax Court found for the Commissioner, and decision was entered accordingly. Both taxpayers filed timely notices of appeal, claiming that the evidence did not support the Tax Court's findings and that the prior criminal convictions were erroneously admitted.
A. Admission of the Criminal Convictions
The taxpayers' chief claim is that the Tax Court erred in admitting evidence of their prior criminal convictions and in determining which facts those convictions proved. Federal Rule of Evidence 803(22) states that a judgment of conviction may be admitted to prove "any fact essential to sustain the judgment," but the taxpayers claim that the Tax Court admitted the convictions as proof of facts not necessary to sustain them.
In Emich Motors Corp. v. General Motors Corp., 340 U.S. 558 (1951), the Supreme Court stated that when a party moves to introduce a criminal conviction in a civil case, "what was decided by the criminal judgment must be determined by the trial judge hearing the [civil case], upon an examination of the record, including the pleadings, the evidence submitted, the instructions under which the jury arrived at its verdict, and any opinions of the courts. " Id. at 569 (emphasis added). The Tax Court's failure to write even a short opinion explaining how it determined which facts were essential to support the criminal convictions leaves us wondering whether it applied this test, and we strongly encourage the court in the future to provide more explanation of its determinations under Rule 803(22). However, although the Commissioner's appellate counsel relies primarily on the argument that the Tax Court's determinations were harmless error, we think most of them were correct. To the extent that the court erroneously found certain facts to be essential to sustain the convictions, we find the error to be harmless. We will consider each fact that the Tax Court found essential to sustain the convictions.1
Fact 1, that Raytheon and IMS entered into two contracts to provide housing in Saudi Arabia, is undisputed. Any error in admitting the convictions as proof of it was harmless.
Facts 2, 4, 5, and 6 state that in 1976, Carver, Lemire, Stephens, and Achuck entered into a scheme to defraud Raytheon of money, that they defrauded Raytheon of at least $775,008, that they stole, converted, or took by fraud a check for that amount payable to Generation Holdings, as part of the proceeds of the shipping aspect of the contract between Raytheon and IMS, which contract would not have been consummated but for the fraudulent scheme of the conspirators. In the criminal case of United States v. Lemire, 720 F.2d 1327 (D.C.Cir.1983), cert. denied, 467 U.S. 1226 (1984), this court addressed the claim that the jury instructions in the criminal trial improperly allowed the jury to find the defendants guilty of fraud solely because Carver and Lemire intentionally failed to disclose a conflict of interest between their loyalties to Raytheon and their venture with Stephens and Achuck. After agreeing that such failure could not by itself support a conviction for wire fraud, the court carefully examined the record to determine whether it was possible that the jury's verdict was based solely on such a failure. The court concluded that it was not. Given the instructions, the evidence, and the verdict, the court concluded that the jury necessarily found that the defendants had schemed to defraud Raytheon of money, that they defrauded Raytheon of at least $775,008, that they stole, converted or took by fraud a check in that amount payable to Generation Holdings, and that the shipping contract for which the check was payable would not have been consummated but for the fraud. Id. at 1342-43. These facts are Facts 2, 4, 5, and 6, and under Emich it was therefore proper in the present case to allow the convictions to be evidence of those facts.
Fact 3 states that the schemers caused IMS to enter into a separate shipping contract with Generation Holdings. We agree with the taxpayers that this fact was not essential to sustain the criminal convictions and that the convictions should not have been admitted as evidence of it. However, we think the error was harmless. The Tax Court's opinion specifically noted that there was no evidence that Carver and Lemire knew of the existence of Generation Holdings or of its role in the fraudulent scheme. Appendix ("App.") at 57. The Tax Court found only that Lemire and Carver knew that the funds that reached Redcon Establishment were ultimately derived from Raytheon. Id. Accordingly, we think it clear that the court in no way relied on Fact 3 in reaching its decision.
Facts 7-9 state specific occasions on which the conspirators transmitted writings or sound by wire in interstate or foreign commerce in furtherance of their fraudulent scheme. Each of these facts was the only such transmission alleged in a particular count of the criminal indictment. See Exhibit ("Ex.") 13-M. Since such a transmission is a necessary element of wire fraud, the jury's verdict of guilty on all these counts necessarily meant that it found these facts.
Fact 10 states that Carver received $1.049 million from Stephens as a result of the fraudulent scheme, and divided this sum with Lemire. This fact was evidently taken from the list of admissions Carver made under oath when pleading guilty. See Ex. 17-Q at 23-24. However, the particular amount received and the fact that the money was divided with Lemire were not necessary to support Carver's conviction, and it was therefore error to admit the conviction as evidence of these facts. However, this error too was harmless. Since Carver, at the tax trial, contradicted the statements he made under oath when pleading guilty to the criminal charges, see App. 196, 205-06, those statements became admissible nonhearsay under Rule 801(d)(1), and under the Federal Rules they were substantive evidence of the facts they stated. United States v. Orr, 864 F.2d 1505, 1509 (10th Cir.1988); United States v. Thompson, 708 F.2d 1294, 1303 (8th Cir.1983). The conviction and the statements were therefore properly in evidence, and we think it makes little difference whether the conviction is viewed as evidence of the facts contained in the statements or the statements are themselves the evidence of the facts contained in them.
Accordingly, we find the Tax Court's ruling on the Commissioner's motion to admit the prior convictions to be partly correct and partly harmless error.
B. The Tax Court's Findings
The remaining question is whether the Tax Court's findings were properly supported by the evidence before it. The Commissioner's deficiency notice ordinarily enjoys a presumption of correctness, and a taxpayer petitioning for a redetermination of a deficiency must ordinarily bear the burden of demonstrating the notice to be incorrect. Helvering v. Taylor, 293 U.S. 507, 515 (1935); Schaffer v. Commissioner, 779 F.2d 849, 857 (2d Cir.1985). The presumption does not apply when the Commissioner's notice is a " 'naked' assessment without any foundation whatsoever." United States v. Janis, 428 U.S. 433, 441 (1976).
In this case, the Commissioner's notice was not a naked assessment. The evidence provides rational support for the Commissioner's conclusion that Carver and Lemire, between them, received unreported income of $705,000 in 1976 and $344,000 in 1977; there is certainly nothing "naked" about the Commissioner's determination of these figures.2 Lemire rightly observes that the evidence is sparse as to the precise division of these sums between Carver and Lemire. However, when two or more persons jointly participate in an illicit income-generating enterprise, and keep no records from which the Commissioner can determine how they divided the enterprise's income, the Commissioner may properly assess a prorated share of the untraced income against each participant, or may even attribute the full income of the enterprise to each, although in the latter case the Commissioner is limited to collection of a single tax on the income. See Schaffer, 779 F.2d at 852; Cannon v. Commissioner, 533 F.2d 959 (5th Cir.1976), cert. denied, 430 U.S. 907 (1977). For this reason, the weakness of the Commissioner's evidence that Lemire and Carver divided the spoils of their scheme equally does not render the Commissioner's deficiency notices naked, for there is sufficient evidence that each taxpayer participated in the scheme and received some of the money.
Accordingly, the burden was on the taxpayers to show that the Commissioner's deficiency notices were incorrect, and the Tax Court did not err in finding that the taxpayers failed to meet that burden. The taxpayers claimed that the monies Redcon Establishment received from Generation Holdings were nontaxable capital contributions. We think the Tax Court did not clearly err in rejecting this characterization of the payments, given that Stephens and Achuck denied that the payments were capital contributions, App. 246, 486, and that Carver and Lemire produced no documentation to support their claim.
The taxpayers also claim that they rebutted the assessment by evidence of restitution orders entered against Stephens and Achuck in prior criminal proceedings. Since Stephens and Achuck together were ordered to pay $1.75 million back to Raytheon, Lemire contends that they must have received at least that much of the $2.13 million fraudulently taken from Raytheon, and that at most about $380,000 could have gone to him and Carver. This argument fails because the district judge, in passing the sentence of restitution, specifically noted that she was not determining that Stephens and Achuck personally kept the amounts she was ordering them to repay. She noted that some of the money may have gone to Carver and Lemire, and she invited Stephens to sue Carver and Lemire if they should be liable for some part of the restitution. See United States v. Lemire, 720 F.2d at 1354 n. 40. The restitution order therefore does not give rise to an inference that Stephens and Achuck ultimately kept at least $1.75 million of the fraudulently obtained money.
Accordingly, we affirm the Tax Court's finding that Carver and Lemire each had unreported income in the years 1976 and 1977 in the amounts determined by the Commissioner.
The Tax Court also found that the Commissioner had properly assessed a fraud penalty on the taxpayers for each of the two years in question. A finding of fraud is a finding of fact, and we can reverse it only for clear error. Traficant v. Commissioner, 884 F.2d 258, 264 (6th Cir.1989); Edelson v. Commissioner, 829 F.2d 828, 832 (9th Cir.1987). The Tax Court correctly noted that the Commissioner bears the burden of proving fraud by clear and convincing evidence. Failure to keep records of income, implausible or inconsistent explanations of behavior, and the defrauding of others all may indicate intent to defraud the Commissioner. Edelson, 829 F.2d at 832; Afshar v. Commissioner, T.C. Memo 1981-241, aff'd, 692 F.2d 751 (4th Cir.1982), cert. denied, 461 U.S. 928 (1983). These factors are all present in this case, and we do not think the Tax Court clearly erred in finding that the taxpayers fraudulently underreported their income.
Accordingly, we affirm the Tax Court's decisions.
The list of facts appears at pages 41 and 42 of the Appendix to Taxpayer Lemire's brief
The Commissioner introduced evidence of the following scheme: Lemire and Carver, using their positions at Raytheon, caused IMS, a provider of prefabricated housing, to form a teaming agreement with Interconex, a freight forwarder, for the purpose of bidding on Raytheon's request for proposals to provide certain housing in Saudi Arabia, even though Raytheon could have obtained shipping for far less than the amount charged by Interconex. App. 98-101, 380, 460. IMS paid part of the shipping fee to Interconex and part to a Swiss company called Generation Holdings, even though Generation Holdings never performed any useful services related to the shipping contract. App. 187, 536-37; Exs. Y, AA. IMS ultimately paid $2.1 million to Generation Holdings, half of which that company then paid to a Liechtenstein company called Redcon Establishment. App. 472-77. The taxpayers concede that $705,000 was paid from Generation Holdings in 1976 and $344,000 in 1977. Brief for Appellant Lemire at 12. Redcon Establishment was controlled by Carver, and the payments to it were in return for Carver's and Lemire's getting Interconex the shipping contract. App. 478-79, 539-40. Lemire, at times using a false name, established certain companies in the Cayman Islands, deposited money from Redcon Establishment into these companies' bank accounts, withdrew some of the money, and disposed of it in various ways, including keeping some for himself (although he claims the money he kept represented a loan). App. 610-15, 620