Argued and Submitted, Seattle, Washington: May 5,
Appeal from the United States District Court for the District of Idaho. D.C. No. 1:13-cr-00065-BLW-1. B. Lynn Winmill, Chief District Judge, Presiding.
The panel vacated the defendant's convictions for subscribing false federal tax returns, vacated her sentence for those convictions and fraud-related convictions, and remanded for further proceedings.
The panel held that the district court abused its discretion by admitting evidence about the defendant's audits by Idaho state tax authorities. The panel explained that the evidence was not relevant on the federal tax claims and should have been excluded under Fed.R.Evid. 404(b), and even if relevant, was unduly prejudicial and not admissible under Fed.R.Evid. 403. The panel held that the error was not harmless as to the defendant's convictions for subscribing false tax returns but was harmless as to her fraud and obstruction of justice convictions.
The panel addressed how the district court at sentencing should have calculated loss resulting from the defendant's fraud, where the defendant's company was awarded government contracts under programs meant to aid disadvantaged businesses, for which the defendant's company did not legitimately qualify. The panel held that neither the " government benefits" rule of application note 3(F)(ii) to U.S.S.G. ¶ 2B1.1, nor the " regulatory approval" rule of application note 3(F)(v), applies, and held that the procurement fraud rule of application note 3(A)(v)(II) applies. The panel rejected the defendant's contention that because the defendant's company performed the contracts, the loss amount is nothing. The panel remanded on an open record to let both the government and the defendant submit further evidence and argument on the loss amount. The panel wrote that on remand, the government may attempt to prove any actual or intended losses resulting from the defendant's fraud, including whether there was any pecuniary harm to the government from paying a premium on top of the normal contract price for services comparable to those the defendant's company provided.
The panel affirmed the defendant's fraud-related convictions in a concurrently filed memorandum disposition.
Andrew G. McBride (argued), Brett A. Shumate, and John R. Prairie, Wiley Rein LLP, Washington, D.C., for Defendant-Appellant.
Frank P. Cihlar, Chief, Criminal Appeals & Tax Enforcement Policy Section, Gregory Victor Davis and Alexander P. Robbins (argued), Attorneys, Tax Division, United States Department of Justice, Washington, D.C., for Plaintiff-Appellee.
Before: Ronald M. Gould and Morgan Christen, Circuit Judges, and Frederic Block,[*]
Senior District Judge.
GOULD, Circuit Judge:
Elaine Martin appeals her convictions for subscribing false federal tax returns and her sentence for those convictions and several fraud-related convictions. First, we address Martin's contention that the district court abused its discretion in admitting evidence that, years before the conduct underlying this case, she had submitted Idaho state tax returns on which she improperly characterized several thousand dollars in personal expenses as deductible farm expenses and had been audited by Idaho tax authorities. Second, we address whether the district court misapplied the Sentencing Guidelines in calculating the losses that resulted from Martin's fraud, where her company was awarded government contracts under programs meant to aid disadvantaged businesses, for which Martin's company did not legitimately qualify. We have jurisdiction under 28 U.S.C. § 1291. For the reasons that follow, we vacate Martin's tax convictions, vacate her sentence, and remand for further proceedings.
Martin owned a construction company, MarCon, which specialized in installing steel guardrails and concrete barriers on public highways. MarCon also earned revenue by selling used materials the company removed from its construction sites. But Martin never reported the income from the used material sales to the IRS, and instead kept it off the company books and sent it to a bank account hidden from her external accountants. By keeping several hundred thousand dollars of this income off of her personal and company tax returns between 2002 and 2008, Martin avoided paying about $100,000 in income taxes.
Martin also fraudulently obtained government contracts by misrepresenting her assets to qualify for programs designed to aid disadvantaged businesses. A federal program run by the Small Business Administration (" SBA" ) qualifies small businesses owned by socially and economically disadvantaged persons for certain federal contracts without going through the normal competitive bidding process. Martin also obtained contracts through a state-administered Disadvantaged Business Enterprise (" DBE" ) program, which sets targets for awarding a percentage of federally-funded contracts to participants. Between 1999 and 2006, MarCon received nearly $20 million from 85 contracts awarded through the DBE program, and successfully performed each contract. MarCon was admitted to the SBA program and awarded three contracts worth nearly $3 million, all of which the company successfully performed.
To prove that Martin knew she had a duty to truthfully report her income on her tax returns, the government was allowed to introduce evidence that Idaho tax authorities had audited Martin and that in tax years 1996 and 1997 she had improperly claimed less than $3,000 as deductible farm expenses on her state tax returns. Martin was accused of incorrectly characterizing student loan payments for her children and expenses related to her divorce as farm expenses. Martin settled the issue without conceding liability.
During closing arguments, the government reminded the jury in its rebuttal of the Idaho audits and argued that Martin knew what she was doing when she subscribed false tax returns because she had tried it before:
The government is focused obviously on the used materials, but the same thing was brought up and Elaine Martin agreed it was wrong . . . when she tried to charge various things as a farm expense. Things like her divorce fees. Things like her children's health insurance and payment of student loans. Remember that. Remember how you were told that she tried this before. That she tried to say those were farm expenses. Now a farm needs fertilizer, it needs ...