United States v. Ellis, Susan B. ( 2008 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 07-2643
U NITED S TATES OF A MERICA,
Plaintiff-Appellee,
v.
S USAN E LLIS,
Defendant-Appellant.
Appeal from the United States District Court
for the Southern District of Indiana, Indianapolis Division.
No. IP 06-76-CR-01 H/F—David F. Hamilton, Judge.
A RGUED O CTOBER 31, 2008—D ECIDED N OVEMBER 20, 2008
Before F LAUM, R OVNER, and W OOD , Circuit Judges.
F LAUM, Circuit Judge. Susan Ellis has appealed her eight
counts of failure to account for and pay federal taxes
in violation of 26 U.S.C. § 7202. Ellis objects to two of the
district court’s rulings admitting evidence against her, the
enhancement of her sentence based on her supposed
perjury, and the fine imposed by the district court. For
the reasons discussed below, we affirm on all counts.
2 No. 07-2643
I. Background
On May 9, 2006, Ellis was indicted on eight counts of
willful failure to collect or pay over taxes in violation of
26 U.S.C. § 7202. Ellis was the president, sole owner, and
principal agent of PharmaSource Temporary Pharmacy
Services. PharmaSource provided pharmacists on a tem-
porary basis to medical facilities and retail stores through-
out the country. In early 2001, Ellis made nine federal
tax deposits, but she failed to make any deposits for the
rest of 2001, all of 2002, and the first quarter of 2003.
During this time, Ellis withheld employment taxes, in-
cluding federal income taxes, FICA, and Medicare, from
the employees of PharmaSource in the total amount of
$1,597,062.71. In addition, PharmaSource was required
to pay a matching employer’s contribution for employ-
ment taxes, which totaled $437,361.27. The total employ-
ment tax loss to the government was $2,034,423.98.
From February 2001 through March 2003, Ellis trans-
ferred $2,783,665 from PharmaSource’s business checking
account to PharmaSource’s business investment account
and, as stated above, stopped making federal tax deposits
for PharmaSource. From May 2001 through November
2002, Ellis took $2,542,200.59 from the PharmaSource
business investment account to build a personal residence.
She took an additional $545,793.01 from the PharmaSource
business investment account to purchase numerous trips
to Florida, a luxury car, home decorations, and a house
for her mother.
Ellis was tried in the Southern District of Indiana. On
October 24, 2006, Ellis filed two motions in limine: one
No. 07-2643 3
to exclude evidence relating to Ellis’s “use of money” and
one to exclude evidence relating to Ellis’s uncharged
personal and corporate tax violations. Ellis filed another
motion in limine to exclude evidence relating to her
“Failure to File Returns and Pay Over Taxes for Periods
Other than Those Alleged in the Indictment” on November
3, 2006. The district court denied all three motions and
Ellis was found guilty on June 29, 2007.
At sentencing, the district court increased Ellis’s base
offense level from 22 to 24 pursuant to U.S.S.G. § 3C1.1
(2007), which allows a two-level enhancement if “the
defendant willfully obstructed or impeded, or attempted
to obstruct or impede, the administration of justice
during the course of the investigation, prosecution, or
sentencing of the instant offense of conviction.” Using the
new base offense level of 24, the district court sentenced
Ellis to the top of the guideline range: 63 months in prison
followed by three years of supervised release. The
district court also imposed a fine of $1,184,423.74. Ellis
timely appealed. She challenges the district court’s denial
of her motions in limine as well as her sentence enhance-
ment and fine.
II. Analysis
A. Admitting Evidence of Ellis’s Personal Expenditures
We review a district court’s admission or exclusion of
evidence for abuse of discretion. United States v. Wilson, 307
F.3d 596, 599 (7th Cir. 2002).
As noted above, prior to trial Ellis filed a motion in
limine to bar the admission of evidence concerning how
4 No. 07-2643
she spent money during the eight quarters of non-payment
charged in the indictment. The district court ruled that
the evidence of Ellis’s personal expenditures was probative
of willfulness, an element of the charged offense. Specifi-
cally, the district court stated that the evidence of expendi-
tures on the purchase of her home, home decoration and
travel were relevant to negate Ellis’s “principal defense”
that she was too busy to notice or remember her tax
obligations. Ellis argues that the evidence was not
relevant, and, moreover, that it should have been ex-
cluded under Federal Rule of Evidence 403 as unduly
prejudicial. Ellis’s charged crime was “Willful failure to
collect or pay over tax.” The relevant statute provides that
Any person required under this title to collect, account
for, and pay over any tax imposed by this title who
willfully fails to collect or truthfully account for and
pay over such tax shall . . . be guilty of a felony.
26 U.S.C. § 7202. The Supreme Court has defined the
willfulness described in the criminal tax laws as requiring
proof of a “voluntary, intentional violation of a known
legal duty.” Cheek v. United States, 498 U.S. 192, 200 (1991).
Ellis argues that the evidence was not relevant because
she did not present “inability to pay” or “good faith”
defenses at trial. However, Ellis’s principal defense was
that she was too busy to notice or remember her tax
obligations. Because Ellis claimed that she had no time to
remember her taxes, the ways she was spending her time—
traveling to Florida, buying cars, purchasing and oversee-
ing the decoration of her two million dollar home—were
relevant. We also note that the amount of taxes Ellis
No. 07-2643 5
failed to pay during the indictment period was around the
same amount she spent on herself during the indictment
period. This fact also undermines Ellis’s defense that she
simply overlooked or forgot her tax liability, since most
people would inquire as to why they have an unexpected
additional two million dollars to spend on themselves.
Ellis also argues that the evidence of her expenditures
gave rise to a “highly prejudicial” inference that she had
a bad character, and that the district judge did not appro-
priately limit questioning of witnesses in this vein.
While Ellis’s lavish personal expenditures certainly place
her in an unfavorable light, in view of the evidence’s
relevance, we do not believe that the danger of unfair
prejudice substantially outweighed the evidence’s proba-
tive value. See Fed. R. Evid. 403. Ultimately, striking the
correct balance was up to the district court and we
cannot conclude that the district court abused its discre-
tion in making this determination.
B. Admitting Evidence of Ellis’s Uncharged Tax Viola-
tions
Again, we review a district court’s admission or exclu-
sion of evidence for abuse of discretion. Wilson, 307 F.3d
at 599.
Prior to trial, Ellis filed two motions in limine objecting
to the admission of evidence regarding her other tax
liabilities and uncharged failures to pay during and
before the indictment period. The district court ruled
against Ellis and explained several reasons why the
6 No. 07-2643
other uncharged failures were relevant. The district court
stated that “[t]he evidence of the earlier failures to file
the returns and to make deposits, even when accountants
were doing all of the work [for Ellis] except the final
submissions . . . is all relevant to show that defendant
fully understood that PharmaSource was withholding
the taxes and that the company and she were legally
responsible for filing the returns and depositing the money
with the IRS.” The district court also stated that Ellis’s
failure to file individual and corporate tax returns was
probative of the defendant’s state of mind on the
charged violations because they tended to show that the
violations were part of a larger disregard for federal tax
obligations that a jury could find was willful. Under the
district court’s interpretation, the uncharged violations
were directly relevant under Cheek to show that Ellis was
aware of her duties under the tax laws and to show her
complete disregard of those duties. See Cheek, 498 U.S. at
200. During trial, the district court again stated that “[t]he
evidence that I’ve heard at trial has reinforced my view
of its relevance [to willfulness], and I think strongly
indicates that the probative value of that evidence is
not outweighed by any prospect for unfair prejudice to
Ms. Ellis.”
Ellis argues that evidence regarding her past tax viola-
tions runs afoul of Rule 404(b). She also argues that any
slight probative value the evidence had in showing
intent was outweighed by the unfair prejudice resulting
from its admission. The government responds that the
ten-year pattern of tax violations showed that Ellis’s trial
testimony about forgetting her obligations was not
No. 07-2643 7
worthy of belief. Government Brief at 28. Specifically, the
government notes that Ellis failed to timely file from 1995
to 1999, until her accountant discovered the misconduct
and Ellis belatedly filed and paid the taxes. The govern-
ment argues that this showed that Ellis had long been
aware of her legal obligation to file and pay taxes and
that Ellis knew that substantial penalties could be
imposed for late filing and payments, decreasing the
likelihood she would, as she claimed at trial, forget her
tax obligation during the indictment period.
Rule 404(b) states in relevant part:
Other crimes, wrongs, or acts.
Evidence of other crimes, wrongs, or acts is not admis-
sible to prove the character of a person in order to
show action in conformity therewith. It may, however,
be admissible for other purposes, such as proof of
motive, opportunity, intent, preparation, plan, knowl-
edge, identity, or absence of mistake or accident . . . .
This court has established a four-part test to determine
whether evidence of other crimes, wrongs or acts may be
admitted. We look to whether:
(1) the evidence is directed toward establishing a
matter in issue other than the defendant’s propensity
to commit the crime charged, (2) the evidence shows
that the other act is similar enough and close enough
in time to be relevant to the matter in issue, (3) the
evidence is sufficient to support a jury finding that the
defendant committed the similar act, and (4) the
probative value of the evidence is not substantially
outweighed by the danger of unfair prejudice.
8 No. 07-2643
United States v. Shields, 999 F.2d 1090, 1099 (7th Cir. 1993)
(citing United States v. Zapata, 871 F.2d 616, 620 (7th Cir.
1989)).
We do not believe the district court abused its discre-
tion in admitting the evidence. We agree that the
evidence is relevant to negate Ellis’s defense of forget-
fulness and show that she acted willfully; that is, that
Ellis was aware of her duties to account for and pay over
her taxes and disregarded those duties by failing to do so.
The evidence was appropriate under the test stated in
Shields: the evidence was directed toward proving a
matter at issue (Ellis’s disregard of a known duty), the
prior acts were close in time and reliably substantiated,
and the acts’ probative value was not outweighed by the
danger of unfair prejudice. See Shields, 999 F.2d at 1099.
Moreover, this court has approved the admission of
evidence of prior tax violations in similar cases. In
United States v. McCaffrey, 181 F.2d 854 (7th Cir. 1999), the
defendant objected to the admission of evidence of his
failure to file income taxes for years other than those
charged in the indictment. Id. at 857. The court found
that the district court had not abused its discretion in
admitting the evidence. Id. In response to the defendant’s
argument that the evidence was unduly prejudicial, the
court stated that “[t]he only prejudice McCaffrey has
identified is that the evidence made him look guilty.
Naturally, probative evidence is also prejudicial in a
literal sense, but such prejudice is not ‘undue’ and is
therefore not subject to exclusion under Rule 403.” Id. The
same is true in this case. While the evidence of past
tax violations certainly makes Ellis look less than law
No. 07-2643 9
abiding, the prejudice is not undue. See United States v.
Kalita, 712 F.2d 1122, 1131 (7th Cir. 1983) (the failure to
file tax returns for time periods outside of the indictment
was relevant to the issue of willfulness in a tax case).
We hold that the district court did not abuse its discretion
in admitting evidence of Ellis’s uncharged tax violations.
C. Sentencing Enhancement for Obstruction of Justice
This court reviews the adequacy of the district court’s
obstruction of justice findings de novo and any underlying
factual findings for clear error. See United States v. Carrera,
259 F.3d 818, 831 (7th Cir. 2001).
In making its finding that Ellis obstructed justice, the
district court stated:
I find that she [obstructed justice], and I am going
to enhance for two levels for obstruction of justice
under the guidelines. That enhancement is not auto-
matic for testifying in a way that is inconsistent with
guilt and then being found guilty. But here the defen-
dant made repeated statements under oath to the
jury and to me that, for that two year period, she did
not know that she was not paying the employee
withholding taxes; that she did not make a conscious
decision to stop paying taxes; and that she did not
act willfully or purposefully.
...
The elements of perjury here are falsity, materiality
and willfulness. As for falsity on the testimony that
10 No. 07-2643
she forgot and did not make a conscious decision not
to pay the employee withholding taxes, the jury
obviously treated her testimony as false. . . . I also
find that the testimony was false. The testimony that
she did not intentionally fail to pay, but that she
forgot and that she never made a deliberate decision
to fail to pay the taxes. As for materiality. The issue of
the defendant’s state of mind in 2001 through 2003
went to the heart of the case. It obviously was material.
As for willfulness. I find that yes, this was a false and
deliberately false effort to avoid criminal responsibil-
ity. . . . I do not believe the defendant could have
honestly believed [during trial] in February of 2007
that she did not act willfully, that she had honestly
forgotten to pay her taxes and, so, that makes the
Offense Level 24.
Ellis’s only argument against the enhancement is that
the district court did not specifically point to any state-
ments made by Ellis that were lies. “Instead,” Ellis says,
“the court merely declares that her testimony regarding her
intent was false.” Ellis claims that without a more precise
record, the court’s errors cannot be found harmless and
therefore the sentence must be vacated and remanded.
Perjury is an appropriate basis for an obstruction en-
hancement under U.S.S.G. § 3C1.1, but not every instance
of false testimony under oath warrants the enhancement.
See Carrera, 259 F.3d at 830. The enhancement is limited to
situations in which “a defendant ‘gives false testimony
concerning a material matter with the willful intent to
provide false testimony, rather than as a result of confu-
No. 07-2643 11
sion, mistake, or faulty memory.’ ” United States v. Turner,
203 F.3d 1010, 1020 (7th Cir. 2000) (quoting United States
v. Dunnigan, 507 U.S. 87, 94 (1993)). Standing alone, the
fact that a defendant denied her guilt at trial and then
was found guilty is not enough to merit a § 3C1.1 enhance-
ment. See United States v. Webster, 125 F.3d 1024, 1037 (7th
Cir. 1997). To properly support an enhancement for
obstruction of justice, the district court must make inde-
pendent findings as to all of the elements of perjury:
falsity, willfulness, and materiality. Carrera, 259 F.3d at
831. The burden is on the government to prove by a
preponderance of the evidence that the defendant’s false
testimony was willful. United States v. Shearer, 479 F.3d
478, 484 (7th Cir. 2007).
Here it appears that the district court, as required,
“review[ed] the evidence and ma[de] independent
findings necessary to establish a willful impediment to,
or obstruction of, justice . . .” United States v. McGiffen,
267 F.3d 581, 591 (7th Cir. 2001). The district court specifi-
cally stated that it was not applying the enhancement
merely for testifying and being found guilty, but rather
because of “repeated statements under oath to the jury
and to me that she was not paying the employee with-
holding taxes, that she did not make a conscious decision
to stop paying taxes; and that she did not act willfully
or purposefully.” Contrary to Ellis’s argument, the
district judge’s description—in which he noted three of
Ellis’s statements that he believed to be false—sufficiently
identified the false statements. We will not find that the
enhancement was unsupported simply because the
district court did not cite a specific part of the record in
12 No. 07-2643
its oral ruling. In addition to identifying the false state-
ments, the district court also made findings regarding
the other elements of the obstruction enhancement in
detail. The district court’s enhancement of the sentence
thus appears sound and we will not disturb it.
D. Imposition of the $1,184,423.74 fine
We review a district court’s decision to impose a fine as
part of a defendant’s sentence for clear error. See United
States v. Hach, 162 F.3d 937, 950 (7th Cir. 1998). A district
court’s sentencing determinations are clearly erroneous
only if this court is “left with a definite and firm con-
viction that a mistake has been committed.” United States
v. Salinas, 62 F.3d 855, 861 (7th Cir. 1995) (citations and
quotations omitted).
For a crime with an offense level of 23 or 24, the Sentenc-
ing Guidelines suggest a fine between $10,000 and
$100,000. See U.S.S.G. § 5E1.2(c)(3). However, 18 U.S.C.
§ 3571 allows a sentencing judge to disregard the sug-
gested fines under the Sentencing Guidelines and instead
impose an “alternate fine based upon gain” to the defen-
dant as a result of the violation. Here, the government
requested a $1,184,423.74 fine based upon the total
amount Ellis took from the paychecks of her employees
during the indictment period, reduced by an amount of
$850,000 that Ellis paid to the government during trial. To
explain its fine, the district court stated:
It’s an unusual situation, under current federal law,
that I’m not empowered to order restitution. Instead
No. 07-2643 13
what I’ve done is order fines pursuant to 18 U.S.C.
§ 2571(d) [sic] based on the amount of gain to the
defendant, and the amounts are intended to add up
count by count to the principal amount unpaid, and
I am giving credit in that calculation to the $850,000
in payments the defendant made on the eve of trial.
Sentencing Transcript at 54.
Ellis’s only argument against her fine is that it should
be reconsidered because her sentence should not have
been enhanced for obstruction of justice. See Defendant’s
Brief at 27. As explained above, however, we have con-
cluded that the enhancement was appropriate. Therefore,
because the district court’s fine does not appear to be
clear error, we affirm the fine.
III. Conclusion
For the reasons above, we affirm the judgment of the
district court.
11-20-08