Even sophisicated tax lawyers who know the nuances of the tax code may find themselves facing criminal charges for tax violations. This is shown by the recent case set forth below.
United States v. Lynch
2017 U.S. Dist. LEXIS 634 ( W.D. PA 2017)
For a period of more than ten years, Stephen Lynch kept the IRS at bay, with promises to pay the withheld employment taxes owed, and with partial payments, some made involuntarily on the rare occasion when the IRS was able to successfully levy a bank account or by applying refunds due to Defendant from his personal tax returns.
He structured the Iceoplex entities to keep employees in companies with minimal assets which resulted in the IRS being unable to collect unpaid liabilities; and, he kept Iceoplex assets in other companies that were then able to receive large loans from banks that were unaware the other Iceoplex entities owed millions of dollars in unpaid employment taxes.
Trial testimony established that Lynch told IRS agents that he would make more payments toward the unpaid tax liabilities when he was able to secure funds, but instead, Lynch used funds from the loans obtained to pay other creditors and to make capital improvements to his businesses.
After deliberating over four days for a total of 19 hours, the Jury returned a verdict in this case which shows a careful count-by-count analysis. The Jury found that the Government proved beyond a reasonable doubt each element of the crimes charged at Counts 13 through 19 and 21 through 29, but acquitted Lynch on all other counts.
Lynch moved for judgment of acquittal under Federal Rule of Criminal Procedure 29 or, in the alternative, for a new trial under Federal Rule of Criminal Procedure 33. Both motions were denied.
The opinion of the Court follows:
I. Legal Standards
A. Federal Rule of Criminal Procedure 29
Federal Rule of Criminal Procedure 29 provides that a defendant "may move for a judgment of acquittal . . . after a guilty verdict," for "any offense for which the evidence is insufficient to sustain a conviction." When reviewing a post-verdict motion for judgment of acquittal under Rule 29, a district court "must review the record in the light most favorable to the prosecution to determine whether any rational trier of fact could have found proof of guilt beyond a reasonable doubt based on the available evidence." United States v. Smith, 294 F.3d 473, 476-77 (3d Cir. 2002). District courts must be careful "not to usurp the role of the jury by weighing credibility and assigning weight to the evidence, or by substituting [their] judgment for that of the jury." United States v. Brodie, 403 F.3d 123, 133 (3d Cir. 2005) (citing United States v. Jannotti, 673 F.2d 578, 598 (3d Cir. 1982) (en banc).
B. Federal Rule of Criminal Procedure 33
Federal Rule of Criminal Procedure 33 permits a court to "vacate any judgment and grant a new trial if the interest of justice so requires." When reviewing a Rule 33 motion, the district court must exercise its own judgment in assessing the Government's case, but can order a new trial "only if it believes that there is a serious danger that a miscarriage of justice has occurred--that is, that an innocent person has been convicted." United States v. Silveus, 542 F.3d 993, 1004-05, 50 V.I. 1101 (3d Cir. 2008) (quoting United States v. Johnson, 302 F.3d 139, 150 (3d Cir. 2002)).
C. Elements of 26 U.S.C. § 7202 as Set Forth in the Jury Instructions
For each of the time periods specified in the Counts for which Lynch was found guilty by the Jury, the Government had to prove beyond a reasonable doubt:
1. That Mr. Lynch had a duty under Title 26 of the United States Code to collect, account for, and pay over taxes from the wages of employees;
2. That Mr. Lynch failed to collect, or to truthfully account for, or to pay over the taxes; and,
3. That Mr. Lynch acted willfully.
Final Jury Instructions
"Willfully" means a voluntary and intentional violation of a known legal duty. Conduct is not willful if done through negligence, mistake, accident, or due to a good faith misunderstanding of the requirements of the law.
A "good faith belief" is one that is honestly and genuinely held. A belief need not be correct or objectively reasonable to be held in good faith. To find that a defendant acted "willfully," the evidence must prove beyond a reasonable doubt that the defendant acted with a purpose to disobey or disregard the law. There is no requirement, however, to prove that a defendant had any evil motive or bad purpose other than the purpose to disobey or disregard the law.
A. Sufficient Evidence Exists to Support a Finding of Defendant's Willfulness for the Counts on which Defendant was Convicted
Lynch argues that the evidence presented at trial was insufficient to establish that he "willfully" failed to pay the employment taxes and that "overwhelming evidence of [his] good faith" was not refuted by the Government. Lynch contends that his good faith was shown by: his accurate and timely-filed quarterly employment tax returns (Form 941s); his payment of a portion of the taxes due; his so-called "prior course of dealings" preceding the quarters for which he was indicted and during which he paid employment taxes late; mistakes made by the IRS in applying payments made to the several employer-company accounts and filing liens in an attempt to collect the taxes owed; and, finally, the undisputed evidence that Lynch always stated that he intended to pay the employment taxes. Id.
Viewing the evidence in the light most favorable to the prosecution, the Court found that the evidence presented at trial supported the Jury's verdict finding a willful failure to pay the employment taxes for the counts for which Lynch was convicted.
First, Lynch never disputed that the employment taxes at issue were unpaid. In fact, Defendant's own expert witness submitted a report showing that the taxes still due - - with interest, penalties, and fees - - totaled $2,743,127.00 for all quarters between March of 2008 and March of 2015.
Second, the Counts for which Lynch was convicted are for a two-year, nine month time period between the quarter ending June 31, 2012, and the quarter ending March 30, 2015. Evidence at trial from which a rational fact finder could conclude that Lynch acted willfully during that time period includes:
• Lynch's failure to make any timely payments toward the taxes related to Counts 13-19 and 21-29.
• The IRS's notice to Lynch in April of 2010 that his actions, such as paying other creditors (including himself), would meet the standard for willfulness.
• The FBI's interview of Lynch in March of 2011, during which he was notified that he was the subject of a criminal investigation for willful failure to pay employment taxes. After the FBI interview, Lynch made full, timely payments for three subsequent quarters and substantial partial payments for two more subsequent quarters before failing to make any payment towards the taxes owed for the quarters related to the Counts for which he was convicted.
• Lynch's failure to pay employment taxes owed after receiving a $6.5 million loan for several Iceoplex entities in 2013; instead, he paid other creditors and made capital improvements to the Iceoplex property. See United States v. Boccone, 556 Fed. App'x 215, 239 (4th Cir. 2014), cert. denied, 135 S. Ct. 169, 190 L. Ed. 2d 121 (2014) ("The intentional preference of other creditors over the United States is sufficient to establish the element of willfulness.").
• Lynch authorized payments in excess of $25 million from the Iceoplex entities' accounts between 2008 and 2014 while accruing more than $2 million in unpaid employment taxes during the same time period.
The evidence presented at trial by the Government showed that, for a period of more than ten years after he purchased the Iceoplex property, Lynch continually failed to pay employment taxes withheld from employee wages, often blamed the failure to pay taxes on the poor financial condition of the Iceoplex companies while authorizing large sums to pay for improvements to the property and, therefore, increasing the value of his investment in the Iceoplex. Id. See also Lee v. United States, 951 F. Supp. 79, 83 (W.D. Pa. 1997) ("It is no excuse that, as a matter of sound business judgment, the money was paid to suppliers and for wages in order to keep the corporation operating as a going concern--the government cannot be made an unwilling partner in a floundering business.").
The Jury reasonably concluded that, after a certain point in time, Lynch's failure to pay the taxes was not indicative of good faith to pay what was owed, but instead his conduct showed intent to willfully avoid paying as much of the amount owed as possible.
B. Defendant was a "Person Responsible" to Collect, Withhold, and Pay Over Employment Taxes.
Lynch also attempts to re-litigate several issues decided by the Court in pre-trial rulings. First, Lynch argues that he was not a "person responsible" under Section 7202 to "collect, account for, and pay over" the employment taxes for the employer-entities.
This issue was initially raised in Lynch's Motion to Dismiss the Superseding Indictment in which he argued that the Government had not identified him as the "person required to collect, account for, and pay over" the taxes. The Government had set forth the elements that establish who is deemed a "responsible person" under Section 7202 and adequately identified Lynch as the person who met those elements.
The Government produced an overwhelming amount of evidence to show that Lynch was the person responsible to collect, account for, and pay over employment taxes for the employer-companies at issue in this case.
C. Legal Status and Separateness of the Employer-Companies and Related Companies Does Not Negate Defendant's Responsibility Under Section 7202.
Again, attempting to re-litigate issues decided before trial, Lynch also argued that the "legal status and separateness of the employer-companies and related companies" of the Iceoplex entities was improperly disregarded and was "clear legal error. The Court found such evidence relevant because of Lynch's intent to argue that his contribution of personal funds to the Iceoplex was evidence of his "good faith/lack of willfulness" defense.
Lynch argued that "corporate formalities and structures matter and must be respected, unless the rare exception for piercing the corporate veil exists." Although the general principle that entities may be formed and structured in countless ways cannot be denied, Lynch's use of corporate structure to avoid paying over withheld employment taxes cannot be used to shield him from criminal and civil liability under the Tax Code. 26 U.S.C. §§ 6672 and 7202.
Sections 6672 and 7202 specifically prevent an individual from escaping civil or criminal liability by holding individuals responsible for collecting, accounting for, and paying the employment taxes of corporate entities. As the Government aptly states, "[i]f an individual could avoid personal liability -- either criminal or civil -- by simply creating corporate entities to accrue employment taxes and not pay them over, then the statutes would be rendered meaningless." To allow an individual to escape responsibility under 26 U.S.C. § 7202 simply by creating new corporate entities, as the Jury rationally found that Lynch did here, would render Section 7202 inoperative.