United States v. Utecht, Kenneth L. ( 2001 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 00-2285
United States of America,
Plaintiff-Appellee,
v.
Kenneth L. Utecht,
Defendant-Appellant.
Appeal from the United States District Court
for the Western District of Wisconsin.
No. 99-CR-101-S--John C. Shabaz, Chief Judge.
Argued December 8, 2000--Decided January 26, 2001
Before Flaum, Chief Judge, and Ripple and Evans,
Circuit Judges.
Flaum, Chief Judge. Kenneth L. Utecht claims the
district court erred in denying his motion to
dismiss the indictment or suppress evidence
because the Internal Revenue Service ("IRS") used
its civil summons power after it decided to
recommend that criminal charges be brought
against him. He also contends that he should have
been permitted to conduct discovery on this
issue. In addition, Utecht challenges the
calculation of his sentence, arguing that certain
enhancements should not have been applied and the
amount of tax loss was improperly calculated. For
the reasons stated herein, we affirm.
I. Background
Utecht is the owner of a corporation that
supplies entertainment equipment, such as pinball
machines and pool tables, to bars in central
Wisconsin. In 1990, Utecht added video poker
games to his stock and began offering these
devices to his customers. Video gambling is
illegal in Wisconsin, so Utecht took a number of
steps to hide the existence of the video gambling
machines and the monies these produced. Most
relevant to this case, Utecht did not report the
revenues from the poker devices on his corporate
or personal federal income tax returns.
The IRS began a civil audit of Utecht and his
company in 1994. The audit revealed that Utecht
was spending large amounts of cash over his
reported income. The IRS investigated and used
the "cash method" of proof to determine what the
IRS claims are conservative calculations of
Utecht’s unreported income. The IRS’s minimum
estimates of Utecht’s unreported corporate income
are $123,999.21 for the year ending June 30,
1993, and $75,085.46 for the year ending June 30,
1994. His individual unreported income is
$64,506.59 for 1992, $137,841.05 for 1993, and
$54,913.71 for 1994.
At some point, the IRS’s civil audit became a
criminal investigation for tax fraud. On October
6, 1999, Utecht was indicted on five counts of
violating 26 U.S.C. sec. 7206(1) by making false
statements in his personal and business tax
returns and two counts of violating 26 U.S.C.
sec. 7206(2) by assisting others in filing
materially false returns. Utecht filed a not
guilty plea on October 26, and then filed a
"LaSalle motion" (named after United States v.
LaSalle Nat’l Bank, 437 U.S. 298 (1978)) on
December 29, seeking to dismiss the indictment or
suppress evidence because the IRS allegedly
misused its civil summons power. This motion
claims that all of the administrative summonses
of the IRS seeking records from Utecht were
issued after the IRS had made an institutional
commitment to criminal prosecution. Utecht did
not provide any specific facts to support this
assertion in either the motion itself or a
supporting brief, but he also filed a discovery
motion seeking to require the government to
produce all evidence relevant to this defense. On
February 1, 2000, the district court, without
conducting a hearing, denied Utecht’s "LaSalle
motion" because he had not made a prima facie
showing of entitlement to relief. The court also
denied the discovery motion because the
government acknowledged that it was under a duty
to provide the kind of material Utecht was
seeking due to its exculpatory nature, but that
the government was unaware of any such evidence.
On February 4, 2000, Utecht entered a plea
agreement, under which he plead guilty to the
five counts of making false statements in his
income tax returns and the government dismissed
the remaining two counts. This plea preserved the
denial of the "LaSalle motion" for appeal. Utecht
claims that he was unable to consult with his
counsel before the plea colloquy on that date,
which led him to appear confused when the judge
first began questioning him. After a recess where
Utecht consulted with his attorney, he was able
to satisfactorily answer all of the questions
posed by the court. In particular, Utecht
answered that no one had forced him to plead
guilty and that he was pleading of his own free
will because he was in fact guilty of the
offenses. The district court scheduled sentencing
for April 14.
On March 24, Utecht’s appointed counsel filed a
motion to withdraw. This motion stated that
Utecht claimed that his counsel had threatened
him into agreeing to file a guilty plea and was
not acting in Utecht’s best interests. On April
12, the court conducted a hearing regarding this
motion, where Utecht agreed that his counsel
should withdraw. The court read various portions
of the transcript from the February 4 hearing
back to Utecht and reminded Utecht that he had
been under oath when he stated at the previous
hearing that he had not been forced to plead
guilty, that he was in fact guilty of the charged
offenses, and that he was satisfied with his
current attorney. Utecht then claimed that he had
lied at the plea colloquy because he was scared
and did not know what to do. The court granted
the motion to withdraw, and Utecht retained new
counsel.
A sentencing hearing was held on April 26,
2000. The government, using the presumptive rates
stated in Note (A) to U.S.S.G. sec. 2T1.1(c)(1),
argued that the tax loss from Utecht’s failure to
report his video gambling income was $120,769.09.
Utecht presented the testimony of his accountant
in contending that this amount should be
decreased by the unclaimed depreciation that
would have been taken on the poker machines if
the accountant had known about these games. The
district court rejected Utecht’s argument because
of a lack of credible evidence that the
depreciations would in fact have been taken. The
court also imposed a two level increase for
sophisticated concealment, listing a number of
ways in which Utecht hid his offenses. Because
the court found that Utecht lied at the April 12
hearing, it denied a two level decrease for
acceptance of responsibility recommended by the
government in the plea agreement. After applying
certain other provisions, the court calculated
the offense level at 21 and the criminal history
category as I, yielding a range of 37 to 46
months. Because the amount of tax loss was near
the minimum of the range for the base offense
level, the court originally stated that it would
sentence Utecht to 37 months, the lowest amount
permitted by the Guidelines. The court noted that
if it had accepted Utecht’s depreciation
argument, it would have sentenced him to the top
of the range for an offense level of 20, which
was 41 months and thus longer than the sentence
calculated without taking the deductions into
account. Because the statutory maximum for a
single count of violating 26 U.S.C. sec. 7206(1)
is three years, the court actually sentenced
Utecht to thirty-six months, rejecting the
government’s suggestion that it remain within the
Guidelines by using concurrent sentences.
II. Discussion
A. "LaSalle Motion"
Utecht argues that the indictment should have
been dismissed or evidence suppressed because the
IRS abused its civil summons power. In the
alternative, he claims that he should have been
permitted to conduct discovery into this issue.
Utecht principally relies on two cases, LaSalle,
437 U.S. at 316-17 & n.18, which held that under
the Internal Revenue Code then in effect the IRS
lacked the statutory power to issue civil
subpoenas for the sole purpose of investigating
criminal activity, and United States v. Peters,
153 F.3d 445 (7th Cir. 1998), which involves when
evidence obtained through a consensual search
should be suppressed. However, Utecht’s precise
claim, while closely related to these two lines
of authority, appears not to be covered by either
of these two cases. Utecht apparently argues that
the IRS circumvented his constitutional rights by
using civil summonses, and thus the evidence
should be suppressed under the exclusionary rule.
In theory, Utecht might have a valid argument
for suppression. Subject to certain exceptions
and qualifications, materials involuntarily
seized from a defendant without probable cause
(and a warrant unless an exception to the warrant
requirement applies) will be excluded from the
defendant’s trial. See, e.g., Soldal v. Cook
County, Ill., 506 U.S. 56, 66 (1992); United
States v. Place, 462 U.S. 696, 701 (1983).
However, the IRS need not show probable cause in
order to enforce a subpoena demanding that the
defendant produce documents for a civil
investigation. See United States v. Powell, 379
U.S. 48, 57 (1964); United States v. Kis, 658
F.2d 526, 536 (7th Cir. 1981). Thus, the
government’s use of civil subpoenas (or other
kinds of administrative measures that do not
require probable cause) principally to further a
criminal investigation could undermine the Fourth
Amendment’s probable cause requirement. These
constitutional concerns were recognized in Abel
v. United States, 362 U.S. 217 (1960), the most
relevant precedent for Utecht’s argument. Abel
explicitly contemplates applying the exclusionary
rule to evidence obtained through the bad faith
use of administrative warrants (which includes
the IRS’s civil summonses). Id. at 226, 230, 240.
Bad faith is present if "the decision to proceed
administratively . . . was influenced by, and was
carried out for, a purpose of amassing evidence
in the prosecution for crime." Id. at 230; see
also Michigan v. Tyler, 436 U.S. 499, 508 (1978)
(holding that, while administrative search
warrants issued without probable cause can be
used to investigate the cause of a fire, search
warrants based on probable cause must be used
where authorities are seeking evidence that will
be used in a criminal investigation). Therefore,
if the IRS uses civil subpoenas without
establishing the probable cause necessary for
criminal cases after having made an institutional
commitment to recommend prosecution of the
defendant, evidence obtained through these
subpoenas possibly could be suppressed at a
criminal trial. Factors used to determine when
the IRS is conducting a criminal investigation
rather than a civil audit are described in
Peters, 153 F.3d at 452-56.
As in all requests for dismissal of the
indictment or suppression of the evidence, the
defendant must first allege facts demonstrating
that a hearing on the suppression issue is
warranted and then at the hearing must produce
evidence that he or she is entitled to the relief
sought. Utecht bears the burden of making a prima
facie showing before the district court must hold
a hearing to investigate whether the IRS abused
its civil summons power. See United States v.
Rodriguez, 69 F.3d 136, 141 (7th Cir. 1995);
United States v. Randle, 966 F.2d 1209, 1212 (7th
Cir. 1992). A defendant must present specific,
detailed, and material facts in order to carry
this burden. See Rodriguez, 69 F.3d at 141;
Randle, 966 F.2d at 1212. Utecht fails to satisfy
this standard. The only fact on which he relies
is that his civil audit has not yet resulted in
a tax bill or arrears notice, which he claims
suggests that the IRS abandoned its civil tax
collection purpose. However, a tax fraud
defendant’s failure to receive a tax bill tends
to suggest that the IRS maintained a proper
separation of its civil and criminal functions,
undermining Utecht’s claim rather than supporting
it. Civil matters should be suspended once a
criminal investigation begins, see Peters, 153
F.3d at 454, and this would preclude the IRS from
sending a tax bill until after the criminal
proceeding was completed. Thus, the lack of a
civil tax notice is not material to the question
of whether the IRS improperly used its civil
summons power to gather evidence for a criminal
prosecution. Therefore, Utecht has not
established a prima facie case and the district
court did not err in denying Utecht’s motion or
refusing to hold a hearing.
Moving on to discovery, what standard a
defendant must satisfy to engage in discovery to
gather evidence that a potential violation based
on Abel may have occurred appears to be a
question of first impression. In the areas of
vindictive prosecution and selective prosecution,
a defendant must show a colorable basis for his
or her claim before discovery against the
government is permitted, see United States v.
Goulding, 26 F.3d 656, 662 (7th Cir. 1994);
United States v. Heidecke, 900 F.2d 1155, 1159
(7th Cir. 1990), and we adopt that requirement
for cases where a defendant claims that the IRS
misused its civil summons power in a criminal
investigation. This standard prevents defendants
from unnecessarily imposing enormous
administrative costs and delays in tax evasion
prosecutions by engaging in extended fishing
expeditions to support frivolous challenges. Cf.
Heidecke, 900 F.2d at 1158-59 (justifying the
colorable basis requirement by discussing the
need to guard against "allowing claims of
vindictive prosecution to mask abusive discovery
tactics by defendants" and to "free[ ] the
judicial system of criminal trials with
irrelevant massive discovery"). However, this
"relatively low burden" on defendants recognizes
that, as with vindictive or selective
prosecutions, the government holds most of the
relevant evidence. Id. at 1158.
Utecht again bases his claim only on his
failure to receive a tax bill. As explained
above, this lack of action by the IRS is
consistent with a proper separation between its
civil and criminal functions, and thus is not a
colorable basis on which to conclude that the IRS
engaged in wrongdoing. Therefore, the district
court did not err in refusing to grant discovery
against the government.
Moreover, the prosecutor in Utecht’s case
professed that he was under an obligation to
provide the defense with any evidence that might
tend to show that the IRS had used its civil
summons power improperly. The prosecutor
consulted with IRS agents before informing the
court and Utecht that he was unaware of any such
evidence. Thus, Utecht benefitted from the added
protection of a search of the evidence by the
government to ensure that Utecht had not been
deprived of any of his constitutional rights.
B. Sentencing Issues
1. Acceptance of responsibility.
The district court denied a two level downward
adjustment for acceptance of responsibility, even
though this was recommended by the prosecution
and the pre-sentencing report, because the court
believed that Utecht lied at the April 12, 2000
hearing when he disavowed his earlier statements
at the plea colloquy. Utecht does not deny that
he lied under oath but challenges the court’s
decision, claiming that a sworn prevarication is
an insufficient basis on which to deny an
adjustment for acceptance of responsibility.
Whether a defendant has accepted responsibility
for his actions is a factual question and thus we
review for clear error. See United States v.
Martinez, 169 F.3d 1049, 1056 (7th Cir. 1999). In
addition, great deference is given to the trial
court’s determination, since that court is best
able to judge the sincerity and contrition of the
defendant. See United States v. Stewart, 198 F.3d
984, 987 (7th Cir. 1999); United States v.
Mancillas, 183 F.3d 682, 711 (7th Cir. 1999).
The law of this circuit is that lying under
oath is a sufficient reason for denying a
downward adjustment for acceptance of
responsibility. See United States v. Taliaferro,
211 F.3d 412, 415 (7th Cir. 2000) (collecting
cases). This statement would normally be enough
to conclude discussion on this issue, but Utecht
raises a couple of challenges based on case law,
though these are unsuccessful. Utecht cites this
court’s decision in United States v. Eschman, 227
F.3d 886, 891 (7th Cir. 2000), which vacated a
defendant’s sentence where the defendant
expressed remorse at his actions but the district
court denied an acceptance of responsibility
downward adjustment apparently because the
defendant challenged the calculation of his
sentence. When Utecht lied at the April 12
hearing, he stated that he had previously lied at
the plea colloquy about pleading guilty of his
own free will because he was in fact guilty of
the charged offenses. This prevarication (that
is, the one at the April 12 hearing) was a denial
of factual guilt for filing false tax returns
because Utecht claimed that he lied when he
admitted such guilt. By contrast, Eschman did not
involve a claim that the defendant had lied under
oath in denying that he had violated the law, as
the court here found that Utecht had done. Id.(stating that the defendant "never expressed
outright denials of relevant conduct").
Therefore, Eschman does not aid Utecht.
In addition, Utecht relies on the Ninth
Circuit’s opinion in United States v. Gonzalez,
16 F.3d 985, 991 (9th Cir. 1994), which holds
that lying about one’s motivation for committing
a crime should not play a part in sentencing if
the defendant was not trying to avoid criminal
liability. However, Gonzalez has been explicitly
rejected by the Sixth Circuit in United States v.
Greene, 71 F.3d 232, 235 (6th Cir. 1995),
weakening its persuasive authority, and is
distinguishable from Utecht’s circumstances.
Gonzalez applies only to lies about a defendant’s
motivation; as described above, at the April 12
hearing Utecht prevaricated about filing false
tax returns, the offenses with which he was
charged rather than his motivation for those
crimes. Utecht does not challenge the district
court’s factual finding that he lied at the April
12 hearing, and thus the district court did not
commit clear error in determining that he had not
accepted responsibility.
2. Sophisticated concealment.
The district court imposed a two level increase
for sophisticated concealment under U.S.S.G. sec.
2T1.1(b)(2). Utecht argues that the district
court incorrectly applied a two level enhancement
for sophisticated concealment because none of his
activities rises above what is necessary to
commit garden variety tax fraud. We review the
district court’s determination that Utecht’s
conduct made the offense difficult to detect for
clear error. See United States v. Madoch, 108
F.3d 761, 765 (7th Cir. 1997); United States v.
Hammes, 3 F.3d 1081, 1083 (7th Cir. 1993).
Utecht is correct that the enhancement should
not be applied where the concealment is no more
intricate or complex than the routine tax evasion
case, since all such offenses involve some
planning and this is already incorporated into
the base offense level. U.S.S.G. sec. 2T1.1,
Application Note 4; U.S.S.G. sec. 2T1.1,
Background; see Madoch, 108 F.3d at 765-66.
However, the mere fact that the scheme might have
been more sophisticated or may have had some
uncomplicated elements does not preclude the
enhancement. See Madoch, 108 F.3d at 766. At
least some of the conduct relied on by the
district court in imposing the increase is
sufficiently above the standard tax fraud case to
warrant the enhancement. These activities
include: hiding the existence of the video poker
machines and proceeds from his accountants;
fabricating receipts to account for the proceeds
from the video poker machines and including these
in the corporate records; generating false 1099s
that did not include the payments to bars owners
from the revenues of these machines, causing
these owners to file false tax returns; and
generating false personal property tax returns.
Cf. id. (relying in part on defendant’s creation
of "false W-2 forms, phony itemized deductions
and false employment records" in upholding
sophisticated concealment enhancement); United
States v. Wu, 81 F.3d 72, 73-74 (7th Cir. 1996)
(listing falsification of business records,
providing fraudulent documents to others, and
providing incomplete and misleading information
to accountants as some of the defendant’s
activities justifying a sophisticated concealment
enhancement).
3. Tax loss calculation.
The district court used the presumptive rates
in U.S.S.G. sec. 2T1.1(c)(1), Note (A) in
calculating the tax loss from Utecht’s offenses
to be $120,769.09, resulting in a base offense
level of 15, U.S.S.G. sec. 2T4.1. If this loss
had been just $769.09 less, then Utecht’s base
offense level would have been 14. Id. At the
sentencing hearing, Utecht presented the
testimony of his accountant that he would have
depreciated the video poker machines had he known
of them, resulting in a deduction of more than
necessary to drop the tax loss into the amount
for the lower base offense level. Utecht argues
that the district court should have begun with
the presumptive tax rates to calculate tax loss
and then decreased this amount by any unclaimed
deductions to which he would have been entitled.
Utecht relies heavily on dicta in United States
v. Martinez-Rios, 143 F.3d 662, 670-71 (2d Cir.
1998), which states that under the 1995
Guidelines legitimate but unclaimed deductions
may be used in calculating tax loss.
The government responds by discussing the
language of U.S.S.G. sec. 2T1.1(c)(1), Note (A),
which provides that the presumptive rates shall
be used "unless a more accurate determination of
the tax loss can be made." It asserts that this
language means that either the presumptive rates
can be used without any adjustment, or the
government or taxpayer can forego use of the
presumptive rates and perform a more complete
audit to determine tax loss which could include
unclaimed deductions. However, the government
asserts that these two approaches cannot be
mixed; that is, if the defendant wishes to rely
on the presumptive rates, then no adjustments
such as deductions can be applied. It also notes
that United States v. Spencer, 178 F.3d 1365,
1368 (10th Cir. 1999) questions the dicta in
Martinez-Rios.
We need not answer the question posed by the
parties of whether deductions can be taken from
tax loss calculated using the presumptive rates
for two reasons. First, the district court
indicated that if it had credited Utecht’s
argument and decreased his offense level by one
to 20, it would have sentenced him to the high
end of the range for that level, which is 41
months. Because the maximum sentence for a
violation of 26 U.S.C. sec. 7206(1) is three
years and the district court refused to construct
consecutive sentences, the court would have
reduced this sentence to 36 months, which is of
course the sentence that Utecht received. Thus,
Utecht’s sentence would not change even if the
depreciation deductions were used in calculating
tax loss. Because we conclude that the same
sentence would have been imposed irrespective of
whether these deductions should have been
applied, we decline to resolve this issue. See
United States v. Howard, 179 F.3d 539, 545 (7th
Cir. 1999); United States v. Dillon, 905 F.2d
1034, 1038 (7th Cir. 1990).
The second, independently sufficient reason for
not deciding this legal question is that the
district court found as a matter of fact that
Utecht had not established that he would have
taken the deductions./1 While Utecht’s
accountant said on direct examination that he
would have depreciated the video poker machines
during the relevant fiscal years if he had known
these existed, on cross-examination the
accountant could not remember whether the poker
equipment had ever actually been depreciated
after the accountant learned of the games. The
prosecutor asked additional questions indicating
that on the accounting worksheets for years
subsequent to when Utecht filed false tax returns
the video poker machines had never been
depreciated, but the accountant again stated that
he could not remember and could not determine
from the documents presented to him whether the
games were ever depreciated. Presumably on this
basis, the district court found that the video
poker machines would not have been depreciated
during the years of Utecht’s tax fraud even if
the accountant had known of the games, since
whether the machines had in fact been depreciated
after the accountant learned of these was
unclear. On the record presented to the district
court, this finding is not clearly erroneous.
Therefore, we need not determine the legal effect
of a finding contrary to the district court’s
actual factual determinations.
III. Conclusion
Utecht failed to present sufficient evidence to
entitle him to dismissal of the indictment,
suppression of the evidence, or discovery to
investigate a potential violation of his
constitutional rights. The district court did not
commit error in any of its sentencing
calculations. Therefore, Utecht’s conviction and
sentence are Affirmed.
/1 Indeed, the transcript of the April 26, 2000
sentencing hearing reveals that the district
court apparently accepted Utecht’s legal argument
that unclaimed deductions could be subtracted
from tax loss calculated using the presumptive
rates, but that Utecht had failed to present
sufficient evidence in this particular case that
such deductions would have been claimed. After
stating that the offense level was based on a tax
loss of $120,769.09, the district court stated:
It may very well be that variations can be
addressed by the Court but certainly not in this
case. There has been no credible evidence
presented to the Court as to the variation which
has been suggested by the defendant.
[. . .]
The Court does understand that it should attempt
to be more precise perhaps than the guidelines
may direct and where the evidence would so
demonstrate to the Court by a preponderance of
the evidence that the guideline should be changed
from that from which it is as suggested to us by
the defendant, the Court would do that, but at
this point there is nothing to so suggest.
As stated in the body of the text, we express no
opinion on the legal issue presented by the
parties.