PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
Nos. 11-1887, 11-1941
UNITED STATES OF AMERICA
v.
JAMES DEMURO,
Appellant (No. 11-1887)
THERESA DEMURO.
Appellant (No. 11-1941)
On Appeal from the United States District Court
for the District of New Jersey
(D.C. No. 09-cr-812)
District Judge: Honorable Garrett E. Brown
Argued on February 7, 2012
Before: SLOVITER and VANASKIE, Circuit Judges, and
PADOVA,*
Senior District Judge.
(Filed: April 23, 2012)
*
The Honorable John R. Padova, Senior District Judge for the
United States District Court for the Eastern District of
Pennsylvania, sitting by designation.
Frank P. Cihlar
Gregory Victor Davis
Joseph B. Syverson [Argued]
Department of Justice
Post Office Box 502
Washington, D.C. 20044
Counsel for Appellee
John L. Brown, Jr. [Argued]
954 Rt. 166
Toms River, N.J. 08753
Counsel for Appellant James DeMuro
Michael S. Noonan [Argued]
Noonan Logan LLC
64 E. Main St.
Freehold, N.J. 07728
Counsel for Appellant Theresa DeMuro
____________
OPINION OF THE COURT
____________
PADOVA, Senior District Judge
James and Theresa DeMuro (“the DeMuros”) owned
TAD Associates, LLC (“TAD”), an engineering and surveying
company in New Jersey. Between 2002 and 2008, TAD failed
to pay over to the IRS more than half a million dollars in taxes
that it had withheld from its employees’ paychecks. As the
owners and managers of TAD, the DeMuros were convicted
after a jury trial of conspiracy to defraud the United States, in
violation of 18 U.S.C. § 371, and 21 counts of failure to account
and pay over employment taxes, in violation of 26 U.S.C. §
7202. The DeMuros argue on appeal that the District Court
committed numerous evidentiary errors at trial, and further erred
at sentencing by applying a two-level increase to their offense
levels for abuse of a position of trust, pursuant to U.S.S.G. §
3B1.3. For the following reasons, we affirm the convictions, but
remand for re-sentencing.
2
I.
Appellants James DeMuro (“James”) and Theresa
DeMuro (“Theresa”), husband and wife, were the sole owners
and managers of TAD. James is an engineer and was
responsible for the business’s surveying operations, while
Theresa was the office manager and directed TAD’s marketing
efforts.
Between 2002 and 2008, TAD withheld from its
employees’ paychecks trust fund taxes, i.e., taxes that the
employees owed to the federal government for Social Security
and Medicaid, and as income tax. Employers typically withhold
these taxes from their employees’ paychecks, and then hold
them in trust until it is time to pay them over to the United
States. However, over the course of 21 calendar quarters
between 2002 and 2008, TAD failed to pay over to the IRS a
total of $546,247 in trust fund taxes that it had collected from its
employees.
IRS Revenue Officer Michelle Hornby first contacted the
DeMuros in 2002 about the trust fund taxes that TAD owed.
Hornby informed the DeMuros that they could be held
personally liable for the unpaid taxes because they were
responsible for paying TAD’s taxes. Hornby also advised them
that the IRS considered the trust fund taxes to be TAD’s top
priority, and that TAD was not permitted to spend the withheld
trust fund taxes for any other purpose. From 2002-2005, the
DeMuros expressed interest in paying the back taxes and
ostensibly worked with Hornby in an effort to pay off the debt.
At the same time, however, the DeMuros were spending large
amounts of money on personal expenditures and seemingly
discretionary business expenses.
In October 2003, the IRS assessed the DeMuros
personally with a trust fund recovery penalty, pursuant to 26
U.S.C. § 6672. The amount of the penalty was the amount that
TAD owed in trust fund taxes. Hornby again warned the
DeMuros that they needed to start making timely deposits of
TAD’s trust fund taxes, but they did not. As a result, Hornby
required TAD to increase the frequency of its payments of taxes
3
to the IRS from quarterly to monthly.
In June 2004, when the DeMuros were still failing to
make timely deposits of the trust fund taxes, the IRS required
TAD to establish a special trust account in favor of the United
States, pursuant to 26 U.S.C. § 7512. The DeMuros were
required to put withheld trust fund taxes into this account within
two days of withholding the money, and to keep the funds in the
account until they were paid to the IRS. However, after paying
funds into the trust account, the DeMuros withdrew some of
these funds to pay unrelated expenses. They later closed the
account without IRS permission.
On July 15, 2010, a grand jury indicted the DeMuros on
22 counts: one count of conspiracy to defraud the United States,
18 U.S.C. § 371, and 21 counts of failure to account and pay
over employment taxes, 26 U.S.C. § 7202, one count for each
quarter of unpaid taxes. At trial, the DeMuros conceded that
they did not pay over the $546,242 that TAD owed to the IRS in
trust fund taxes, but argued that their failure to pay TAD’s taxes
was not willful. In support of this position, they emphasized
that they negotiated with the IRS in an attempt to pay off the
delinquent taxes over time, and pointed to evidence that they
even attempted to refinance properties to obtain funds to pay the
delinquent taxes. Theresa also asserted an innocent spouse
defense at trial, arguing that James, not she, was responsible for
collecting and paying over TAD’s taxes.
The Government responded to these arguments by, inter
alia, presenting evidence that the DeMuros spent lavishly on
personal and discretionary business items while professing an
inability to pay the delinquent taxes. The evidence showed that,
in the 21 quarters in which TAD failed to pay over trust fund
taxes in the amount of $546,242, the DeMuros spent $5,043,867
from TAD and personal accounts. To prove that Theresa was
responsible for paying the taxes, the Government presented
evidence that Theresa had signature authority over all of TAD’s
bank accounts, freely spent TAD’s money, and had the power to
hire and fire employees.
The jury convicted both James and Theresa on all 22
4
counts. At sentencing, the District Court applied a two-level
enhancement to the DeMuros’ offense levels for abuse of a
position of trust, explaining that the DeMuros were in a position
of trust vis-a-vis the IRS on account of the special trust fund
account, and that the DeMuros abused that position of trust by
using trust fund money for expenses other than trust fund taxes.
The District Court sentenced both James and Theresa to 51
months’ imprisonment. These timely appeals followed.1
II.
On appeal, the DeMuros raise numerous challenges to the
District Court’s decisions admitting or excluding evidence. We
review evidentiary rulings for abuse of discretion. United States
v. Friedman, 658 F.3d 342, 352 (3d Cir. 2011) (citing United
States v. Starnes, 583 F.3d 196, 213-14 (3d Cir. 2009)).
Evidentiary errors objected to at trial are reviewed for harmless
error. Fed. R. Crim. P. 52(a); Neder v. United States, 527 U.S.
1, 7 (1999). An error that was not objected to at trial is
reviewed for plain error. Fed. R. Crim. P. 52(b).
“An error in an evidentiary ruling is harmless error when
‘it is highly probable that the error did not affect the result.’”
Friedman, 658 F.3d at 352 (quoting Hill v. Laeisz, 435 F.3d 404,
420 (3d Cir. 2006)). “‘Plain error exists only when (1) an error
was committed (2) that was plain, and (3) that affected the
defendant’s substantial rights.’” United States v. Lopez, 650
F.3d 952, 961 (3d Cir. 2011) (quoting United States v. Lessner,
498 F.3d 185, 192 (3d Cir. 2007)). An error is “plain” when it
is “clear or obvious.” United States v. Russell, 134 F.3d 171,
180 (3d Cir. 1998) (citation omitted). Where a plain error has
occurred, we exercise discretion in determining whether that
error warrants reversal. United States v. Campbell, 295 F.3d
398, 404 (3d Cir. 2002). We will reverse the district court “only
if the error ‘seriously affect[s] the fairness, integrity, or public
reputation of judicial proceedings.’” United States v. Stevens,
1
The District Court had jurisdiction pursuant to 18 U.S.C. §
3231. We have jurisdiction pursuant to 28 U.S.C. § 1291 and 18
U.S.C. § 3742.
5
223 F.3d 239, 242 (3d Cir. 2000) (quoting United States v.
Olano, 507 U.S. 725, 732 (1993)).
A.
The DeMuros first argue that the District Court erred in
admitting much of the Government’s evidence that was intended
to establish the DeMuros’ willfulness and responsibility for
paying TAD’s taxes, two of the elements the Government must
prove to obtain a conviction under 26 U.S.C. § 7202.2 See
Cheek v. United States, 498 U.S. 192, 199-200 (1991) (citations
omitted); United States v. Thayer, 201 F.3d 214, 219 (3d Cir.
1999). Willfulness in a tax evasion case is “a voluntary,
intentional violation of a known legal duty.” Cheek, 498 U.S.
at 201 (citations omitted). Where a defendant proves that he had
a good faith belief that he was not violating the tax code,
regardless of whether that belief was objectively reasonable, he
has established that he did not act willfully. Id. at 201-03.
As mentioned above, the Government presented a variety
of evidence to prove willfulness and responsibility, including
evidence of the DeMuros’ personal spending, Theresa’s
handling of her father’s assets, and Theresa’s role in the
resignation of TAD employee Joel Boriek. The DeMuros argue
that the District Court abused its discretion in admitting this
evidence because the evidence was not only irrelevant to any
issue at trial, but also overly prejudicial.
1.
Several witnesses testified at trial about the DeMuros’
personal spending habits, including their luxury vacations, nice
homes, and Theresa’s substantial home shopping network
expenditures. The Government also presented evidence that the
DeMuros wrote checks on TAD’s accounts to pay for some of
2
26 U.S.C. § 7202 states that it is a crime for “[a]ny person
required under [Title 26] to collect, account for, and pay over”
a tax to “willfully fail[] to collect or truthfully account for and
pay over such tax . . . .”
6
their personal expenditures. The DeMuros contend that the
District Court abused its discretion not only by finding this
evidence to be relevant, but moreover by not finding that the
voluminous evidence of their personal spending was overly
prejudicial compared to any minimal relevance it may have had
to willfulness.
a. Relevance
Contrary to the DeMuros’ assertion, evidence of personal
spending can be relevant evidence in criminal tax actions and
was, in fact, relevant here. We find guidance in two cases from
our sister circuits. In United States v. Ellis, 548 F.3d 539, 543
(7th Cir. 2008), the United States Court of Appeals for the
Seventh Circuit considered a defendant whose “principal
defense” to a tax evasion charge was that she “was too busy to
notice or remember her tax obligations.” Under those
circumstances, “the ways [defendant] was spending her time -
traveling to Florida, buying cars, purchasing and overseeing the
decoration of her two million dollar home - were relevant”
because they rebutted her assertion that she was “too busy” to
pay her taxes. Id. The court further noted that the same
evidence of personal spending was also relevant to undermine
a defense that the defendant “simply forgot her tax liability,
since most people would inquire as to why they have an
unexpected additional two million dollars to spend on
themselves.” Id.
The United States Court of Appeals for the Sixth Circuit
has also addressed the use of evidence of personal spending in
a criminal tax case. United States v. Blanchard, 618 F.3d 562
(6th Cir. 2010). The court stated that:
evidence regarding a defendant’s ability to pay
taxes is pertinent to whether an offense has been
committed under § 7202, since it bears on the
willfulness of the defendant’s failure to pay over
withheld tax to the government. If a defendant
has made discretionary purchases in lieu of
meeting his tax obligations, this is probative of his
guilt.
7
Id. at 569-70. In Blanchard, the defendant argued that he lacked
the ability to pay the taxes. The court therefore held that the fact
that the defendant had spent money on gambling and other
personal pleasures was relevant to negating his defense. Id. at
570 n.4.
We adopt the rationale of Ellis and Blanchard insofar as
they stand for the proposition that evidence of personal spending
can be relevant to rebut a defendant’s defense that he has not
acted willfully. Of course, whether such evidence is relevant in
any particular case will be dependant on a case-specific inquiry.
Employing these principles in the case at bar, we
conclude that the District Court did not abuse its discretion in
finding the evidence of the DeMuros’ personal spending to be
relevant to the jury’s assessment of willfulness in light of the
DeMuros’ defensive arguments at trial. The DeMuros argued at
trial that they were genuinely trying to pay off their taxes and,
thus, were not acting willfully in not paying them. Given this
argument, evidence that the DeMuros spent money on vacations
and other personal items - money that they could have used to
pay their taxes - belies their assertions that they were sincerely
attempting to pay their back taxes as expeditiously as possible.
Thus, the District Court did not abuse its discretion in
concluding that the evidence of personal spending was relevant
proof that the DeMuros’ failure to pay TAD’s taxes was willful.
The evidence of the DeMuros’ lavish personal spending
was also relevant to the conspiracy charge as it was probative of
their conspiratorial purpose. See United States v. Boria, 592
F.3d 476, 481 (3d Cir. 2010) (“To establish a charge of
conspiracy, the Government must show . . . a shared unity of
purpose . . . .”) (citations omitted). The Government’s theory at
trial was that the DeMuros failed to pay their taxes because they
wanted to live a comfortable lifestyle and, thus, they agreed to
evade the tax laws so that they would have money to spend on
themselves. Given this theory, the evidence that they did live a
relatively lavish lifestyle, and how much money they spent on
that lifestyle, was relevant.
Finally, some of the evidence of the DeMuros’ personal
8
spending was also relevant to whether they were the parties
responsible for paying TAD’s taxes. Evidence of an employee’s
“‘ability to sign checks on the company’s bank accounts’” and
evidence of a company’s “‘payment of other creditors in lieu of
the United States’” are relevant to determining whether a
particular individual is responsible for paying over withholding
taxes. Greenberg v. United States, 46 F.3d 239, 243 (3d Cir.
1994) (quoting Brounstein v. United States, 979 F.2d 952, 954-
55 (3d Cir. 1992)). In the case at bar, the evidence showed that
the DeMuros wrote checks on TAD accounts to pay for some of
their personal expenses. This evidence was relevant, regardless
of the fact that it involved personal spending, because it showed
both that James and Theresa had the ability to sign TAD checks
and that they chose to pay other creditors in lieu of the United
States. Thus, the evidence of the DeMuros’ personal spending
was relevant to their willfulness and responsibility, as well as
the conspiracy charge.
b. Prejudice
Having addressed the issue of relevance, we turn to the
DeMuros’ argument that the evidence was overly prejudicial
and that the District Court therefore abused its discretion in
admitting it. According to the DeMuros, the extensive evidence
of their personal expenditures was prejudicial because it
fomented class prejudice by depicting a life of luxury that came
at the expense of the DeMuros’ employees and the American
people.
The District Court may exclude relevant evidence “if its
probative value is substantially outweighed by a danger of . . .
unfair prejudice, confusing the issues, misleading the jury,
undue delay, wasting of time, or needlessly presenting
cumulative evidence.” Fed. R. Evid. 403. “The District Court’s
discretion is ‘construed especially broadly in the context of Rule
403.’” Friedman, 658 F.3d at 355 (quoting United States v.
Kemp, 500 F.3d 257, 295 (3d Cir. 2007)). Furthermore, “‘Rule
403 does not provide a shield for defendants who engage in
outrageous acts, permitting only the crimes of Caspar
Milquetoasts to be described fully to a jury. It does not
generally require the government to sanitize its case, to deflate
9
its witnesses’ testimony, or to tell its story in a monotone.’”
United States v. Cross, 308 F.3d 308, 325 (3d Cir. 2002)
(quoting United States v. Gartmon, 146 F.3d 1015, 1021 (D.C.
Cir. 1998)).
As noted above, the evidence of the DeMuros’ personal
spending was relevant to their responsibility for paying TAD’s
taxes, their willfulness, and the conspiracy charge. Thus, its
probative value was significant. Further, despite the DeMuros’
contention that this evidence was overwhelming and voluminous
at trial, the evidence of personal spending was largely limited to
one witness, IRS Agent Carlos Natasi, with other witnesses only
briefly mentioning the DeMuros’ spending habits. While we are
sensitive to the effect that evidence of a defendant’s liberal
spending habits can have on a jury, particularly in these lean
economic times, the evidence admitted in this case, i.e.,
evidence of vacations, jewelry, cars, and parties, was not so
inflammatory as to carry a great risk of prejudice. It certainly
was not so prejudicial as to substantially outweigh its very
significant probative value. Cf. Blanchard, 618 F.3d at 570
(allowing evidence of gambling expenses to prove willfulness,
despite the risk that some jurors may have negative views
towards gambling). Accordingly, we conclude that the District
Court did not abuse its discretion in allowing Agent Natasi and
others to testify about how the DeMuros spent money.
2.
The DeMuros next argue that the District Court erred in
permitting IRS Agent Carlos Natasi to testify regarding
Theresa’s handling of her ailing father’s assets. According to
Agent Natasi, Theresa received power of attorney over her
father because he was mentally incompetent. Agent Natasi
testified that Theresa used that power of attorney to mortgage
her father’s home for approximately $300,000, then placed the
money into her personal bank account and spent some of the
proceeds on personal items, such as jewelry. The DeMuros
argue that this evidence was not only irrelevant, but also overly
prejudicial because it suggested that Theresa took advantage of
her ailing father.
10
Although this is a closer call than some of the personal
spending evidence, we find that the District Court did not abuse
its discretion in admitting this evidence. As explained above,
how the DeMuros spent their money was relevant to willfulness
in light of their defensive arguments at trial. More particularly,
the fact that Theresa came upon nearly $300,000 and spent that
money on personal items undercuts her defense that she and
James were attempting to work out a payment plan with the IRS.
Put another way, Theresa’s choice to spend this money on
personal items rather than the delinquent taxes reflects that she
regarded her known obligation to pay the trust fund penalty with
little urgency. We therefore find this evidence to be probative
of willfulness.
While we recognize that the source of the $300,000
windfall, i.e., the mortgage on Theresa’s ailing father’s house,
is not itself relevant to willfulness, the Government was not
required to disentangle this aspect of the story when making its
case to the jury. See Fed. R. Evid. 401 advisory committee’s
note (explaining that background information is relevant). The
DeMuros maintain that the evidence was unduly prejudicial
because the jury undoubtedly inferred that Theresa effectively
stole this money from her mentally incapacitated father.
However, the DeMuros rebutted any such inference with
evidence that Theresa was her father’s sole heir, and thus was
destined to inherit the house upon his death. Indeed, Theresa’s
counsel argued this point to the jury in closing arguments,
saying that the $300,000 was essentially Theresa’s money
anyway. Accordingly, any potential prejudicial effect of the
evidence was mitigated and any residual prejudice was surely
outweighed by the evidence’s probative value. We therefore
find that the District Court did not abuse its discretion in
admitting this evidence.
3.
The DeMuros also challenge the District Court’s decision
to admit evidence about the circumstances surrounding TAD
employee Joel Boriek’s resignation. Boriek testified that he was
working four days a week at TAD because his wife was ill, but
then Theresa told him he needed to work five days a week, and
11
he quit rather than change his schedule. The evidence at trial
was that Theresa told another employee that she was concerned
about the medical benefits TAD was paying to Boriek, so she
asked him to work five days a week knowing that he would
rather quit. The DeMuros argue that testimony about Theresa’s
motivations in this regard was irrelevant and overly prejudicial.
They therefore contend that the evidence should have been
excluded.
Contrary to the DeMuros’ arguments, the evidence
regarding Theresa’s involvement in Boriek’s situation was
relevant to the issues at trial. First, the evidence was probative
of the fact that Theresa had the power to discharge Joel Boriek,
which is directly relevant to whether she was responsible for
paying TAD’s taxes. See Greenberg, 46 F.3d at 243 (citation
omitted) (explaining that an individual is responsible to pay his
employer’s taxes if he has significant control over the
employer’s finances, and stating that one factor a court may
consider in assessing that control is whether the individual is in
charge of hiring and firing employees). Second, evidence that
Theresa wanted Boriek to quit so as to save money on medical
benefits was probative of her control over TAD’s financial
affairs, which is also relevant to establishing her responsibility
for paying TAD’s taxes. Id. Significantly, Theresa vehemently
argued that she was not responsible for paying TAD’s taxes.
Given that argument, the evidence of her authority to discharge
employees and her control over TAD’s finances was highly
probative of a contested issue. While the DeMuros correctly
assert that this evidence was not flattering to Theresa, we do not
find it so prejudicial as to substantially outweigh its probative
value. Accordingly, we conclude that the District Court did not
abuse its discretion in allowing evidence regarding the
circumstances of Joel Boriek’s separation from TAD.
B.
The DeMuros challenge the admission of a portion of the
testimony of enrolled agent Victor Minelli. An enrolled agent
is one of three professionals who can represent a taxpayer before
the IRS, along with CPAs and attorneys. In that representative
12
capacity, an enrolled agent is required to have expertise in tax
issues. Minelli testified that the DeMuros hired him in 2005 to
represent them before the IRS with respect to TAD’s tax
problems. He testified that he reviewed two ongoing appeals
that the DeMuros had filed challenging decisions of the IRS, and
that he determined that the appeals had no merit and should be
withdrawn. The DeMuros argue that his testimony that these
two tax appeals were meritless constituted expert opinions,
which the District Court should not have permitted without first
finding Minelli to be qualified as a expert. The DeMuros did
not object to this testimony at trial, so we apply plain error
review.
The Federal Rules of Evidence limit the opinions that a
lay witness may provide. Rule 701 provides that lay opinions
must be “(a) rationally based on the perception of the witness,
(b) helpful to a clear understanding of the witness’ testimony or
the determination of a fact in issue, and (c) not based on
scientific, technical, or other specialized knowledge within the
scope of Rule 702.” Fed. R. Evid. 701. It is not uncommon for
witnesses who testify about tax consequences to be qualified as
experts. See United States v. Stadtmauer, 620 F.3d 238, 269 (3d
Cir. 2010) (listing cases where IRS agents were qualified as
experts and provided opinions as to the tax consequences of a
transaction). On the other hand, we have allowed professionals
to give lay opinions when the opinions are based on personal
knowledge of the issues, along with specialized experience. See
Eisenberg v. Gagnon, 766 F.2d 770, 781 (3d Cir. 1985)
(allowing lay opinion of lawyer, who specialized in business
litigation and securities law, about what information should have
been included in a private offering memorandum based on his
personal knowledge of the documents).
In the case at bar, the first appeal about which Minelli
testified involved a lien the IRS had filed against the DeMuros’
properties, which the DeMuros appealed. Minelli testified that,
under the law, if a person owes taxes, the IRS can file a lien. He
further testified that there was no dispute as to whether the
DeMuros owed the taxes for which the IRS lien was sought and,
thus, the DeMuros’ appeal had no merit. Even if we assume
arguendo that this opinion was an expert opinion, we conclude
13
that it was not “plain error” for the District Court to admit it
because it is not “clear or obvious” that this opinion was based
on any specialized knowledge of the tax code, rather than
Minelli’s personal knowledge and specialized expertise.
Russell, 134 F.3d at180 (citation omitted). Moreover, we cannot
conclude that such error “‘seriously affect[ed] the fairness,
integrity, or public reputation of judicial proceedings.’” Stevens,
223 F.3d at 242 (quoting Olano, 507 U.S. at 732).
The second appeal about which Minelli testified
concerned the DeMuros’ appeal of the amount of their trust fund
penalty. The DeMuros argued in the appeal that the IRS’s
calculation did not reflect some payments they had made.
Minelli testified at trial that he checked the records and that the
IRS had credited all of the DeMuros’ payments. He therefore
opined that the DeMuros’ appeal was meritless. We conclude
that any error in allowing this testimony was not “plain” because
it is not “clear or obvious” that this opinion was based on
specialized knowledge of the tax code, as opposed to Minelli’s
experience in reading IRS account statements and the
application of simple mathematical concepts. Accordingly, we
find that the District Court did not commit reversible error when
allowing Minelli to opine that the DeMuros’ two appeals had no
merit.
C.
The DeMuros argue that the District Court erred in
permitting the Government to present evidence that TAD
withheld money from employee paychecks for health insurance,
retirement, and child support payments, and then failed to pay
over these funds to their intended recipients.3 The District Court
3
Specifically, TAD withheld wages from an employee’s
paycheck to purchase health insurance, but then failed to pay the
insurance premiums, leading to the cancellation of the insurance
and the denial of coverage to the employee. TAD withheld
wages from another employee’s paycheck for child support
payments, but then failed to pay the money to New Jersey,
which subsequently levied the employee’s bank accounts to
14
admitted this evidence pursuant to Rule 404(b), as evidence of
the DeMuros’ intent, plan, and motive.
Rule 404(b) provides that evidence of other bad acts,
although not admissible to show character, are admissible to
prove “motive, opportunity, intent, preparation, plan,
knowledge, identity, or absence of mistake or accident.” Fed. R.
Evid. 404(b). The Supreme Court has established a four-part
test to determine whether evidence was properly admitted under
Rule 404(b): 1) the evidence must have a proper purpose under
404(b); 2) the evidence must be relevant; 3) the probative value
of the evidence must outweigh its potential for prejudice; and 4)
the court must instruct the jury to consider the evidence only for
the limited purpose for which it is admitted. United States v.
Sampson, 980 F.2d 883, 886 (3d Cir. 1992) (citing Huddleston
v. United States, 485 U.S. 681, 691-92 (1988)). When offering
such evidence, the Government “‘must clearly articulate how
th[e] evidence fits into a chain of logical inferences, no link of
which can be that because the defendant committed . . . [such an
act] before, he therefore is most likely to have committed this
one.’” United States v. Lee, 612 F.3d 170, 186 (3d Cir. 2010)
(second alteration in original) (quoting Sampson, 980 F.2d at
887). Rule 404(b) “is inclusive, not exclusive, and emphasizes
admissibility.” Sampson, 980 F.2d at 886 (citation omitted).
Under the Supreme Court’s four-part test, we consider in
steps one and two whether the evidence was relevant to a proper
purpose under Rule 404(b). As noted above, the District Court
below admitted the evidence that TAD did not pay over
withheld child support payments, health insurance premiums,
and retirement monies based on the Government’s theory that
the evidence was relevant to intent, motive, and plan. We agree
that the evidence of failure to pay over other withheld monies
was relevant to the DeMuros’ intent, as it tended to prove that
the DeMuros’ failure to pay over the trust fund taxes was not
unintentional or the result of a misunderstanding or mistake.
collect the unpaid child support. TAD also withheld retirement
money from a third employee, but failed to pay this money into
the designated retirement account.
15
Accord United States v. Daraio, 445 F.3d 253, 264 (3d Cir.
2006) (allowing evidence of prior failures to pay taxes to prove
willfulness in a tax evasion case). The evidence was also
probative of a pattern, plan, and motive of the DeMuros to
surreptitiously take money from TAD employees by way of
legitimate withholdings and then retain the money for their own
benefit. We therefore conclude that the evidence was relevant
to several proper purposes under Rule 404(b).
In the next step in the Supreme Court’s test, we weigh the
probative value of the evidence against its potential for
prejudice. Here, the above-noted probative value of the
challenged evidence was significant. Moreover, we agree with
the District Court that the evidence was not unduly prejudicial.
Accordingly, we conclude that the probative value of this
evidence outweighed its potential for prejudice. Cf. Daraio, 445
F.3d at 264 (finding that the probative value of the evidence of
past failures to pay taxes outweighed the potential for prejudice
even though the past conduct was the same as the charged
conduct).
Finally, in step four of the four-part test, we consider
whether the lower court gave a proper jury instruction informing
the jury of the limited purposes of the evidence. Here, the
District Court properly instructed the jury that the evidence
could be considered as proof of state of mind, motive,
opportunity, pattern, and lack of mistake, all of which are proper
uses of the evidence under the circumstances presented.4
4
James argues that, because he only contested the element of
willfulness, the Government should not have been allowed to
present evidence regarding any other issue. He relies solely on
United States v. Jemal, 26 F.3d 1267 (3d Cir. 1994), in which
we stated that 404(b) evidence should not be admitted when a
defendant makes a proffer that is “comprehensive and
unreserved,” and that “completely eliminat[es] the government’s
need to prove the point it would otherwise try to establish.” Id.
at 1274.
James, however, did not make any proffer with respect to
his state of mind, motive, or any other issue related to the 404(b)
16
Consistent with this instruction, the Government argued during
its closing that the evidence showed motive and state of mind.
Accordingly, the Government and the District Court both
explained to the jury the proper use of this evidence. We
therefore conclude that the District Court did not abuse its
discretion in admitting the evidence of the DeMuros’ failure to
pay over other withheld money.
D.
Theresa objects to the District Court’s failure to strike the
Government’s closing argument reference to the DeMuros’ prior
bad acts of withholding money from their employees and not
paying it over. Theresa contends that the Government
impermissibly argued that this evidence showed the DeMuros’
bad character and propensity to steal withheld money. The
DeMuros did not object to this part of the closing argument at
trial, so we review it for plain error.
In its rebuttal argument, the Government argued to the
jury:
And what does Mr. Tonik tell them at the meeting
he has with them in 2002 and the meeting that he
has with them in 2003? Your spending is out of
control. You’re paying your daughter who’s a no-
show employee, who’s a full-time student,
$15,000 a year.
You’re paying her tuition. You’re paying
for Mrs. DeMuro’s Mercedes Benz. You’re
paying for your daughter’s car; you[r] mortgage.
evidence. To the contrary, he strongly contested each of these
issues, arguing that he did not intend to violate the tax laws, that
he planned to pay off the taxes after negotiations with the IRS,
and that he did not take the money to finance his and his wife’s
comfortable lifestyle. Accordingly, because James did not
proffer to the issues proved by the 404(b) evidence, but rather
strongly contested those issues, his argument based on Jemal
fails.
17
That’s good faith? Are you kidding me? They
have the nerve to come in here and stand before
you and say, that’s good faith, ladies and
gentlemen of the jury.
That’s not good faith. When you’re
stealing money from your employees and the
United States of America, that is not good faith.
(A363 (emphasis added).)
As discussed above, the evidence that the DeMuros
effectively stole money from their employees by using money
withheld for other purposes for their own personal gain was
admitted to show intent, among other proper usages, pursuant to
Rule 404(b). The Government here properly argued that this
evidence was related to the DeMuros’ intent, i.e., their lack of
good faith. Furthermore, the juxtaposition of the Government’s
statement with its description of the DeMuros’ expenditures
links the 404(b) evidence to motive, another proper purpose
under Rule 404(b). Accordingly, it was not plain error for the
District Court to allow the Government to make this argument
to the jury.
E.
The DeMuros argue that the District Court improperly
excluded four pieces of testimony from IRS Agent Hornby
regarding their negotiations with the IRS. In their view, the
excluded evidence would have shown that they were trying to
pay their taxes and, thus, not acting willfully. They also argue
that this evidence showed that they had a good faith belief that
their conduct was not criminal.
The first piece of excluded testimony at issue is certain
testimony from Agent Hornby that the DeMuros attempted to
finance their properties but were unable to due to IRS liens. The
DeMuros argue that this evidence was probative of the fact that
they did not willfully fail to pay their taxes because it shows that
they were attempting to raise money to pay the taxes through
refinancing. However, contrary to the DeMuros’ suggestion, the
exclusion of this particular testimony did not deprive the jury of
important probative information because Hornby testified at
18
length about the DeMuros’ efforts at refinancing, and the
DeMuros actually argued to the jury in closing arguments that
their refinancing efforts proved that they did not act willfully.
Thus, there was ample evidence of the DeMuros’ attempts to
refinance and we reject the DeMuros’ argument that the District
Court abused its discretion in excluding this additional
testimony.
The DeMuros also challenge the exclusion of a note that
Hornby wrote after a meeting with James, in which Hornby
stated that she had advised James that the IRS could shut down
TAD. The District Court excluded this evidence on the grounds
of confusion, delay, and minimal relevance. The DeMuros
argue that this evidence should have been admitted as probative
of their lack of willfulness, because no reasonable person would
willfully fail to pay their taxes knowing that the IRS could shut
down their business. However, the note at issue would have
been duplicative of other testimony, as Hornby had already
testified that she had told James about the possibility of shutting
down the business. Moreover, even in the absence of the
testimony about the note, the DeMuros argued to the jury in
closing that they knew of the potential shutdown of the business
and would not have willfully failed to pay their taxes risking
such a shutdown. Under these circumstances, it was not an
abuse of discretion for the District Court to exclude Hornby’s
merely redundant note.
Third, the DeMuros argue that the District Court erred by
excluding any testimony that the reason that the negotiations
between the IRS and the DeMuros ceased was that the IRS
referred the case for criminal prosecution. In the DeMuros’
view, the exclusion of this evidence left the jury free to
speculate that the DeMuros themselves chose to stop negotiating
with the IRS, which undermined their lack of willfulness
defense. The District Court, however, excluded this evidence
because it opened the door to jury nullification, by inviting the
jury to reason that the IRS should have continued to pursue the
matter civilly rather than criminally. See United States v. Buras,
633 F.2d 1356, 1360 (9th Cir. 1980) (explaining that the
availability of civil remedies in a tax case “is irrelevant to the
issue of criminal liability” and finding that a jury instruction
19
regarding civil remedies “would serve only to confuse the
jury”). Significantly, the DeMuros concede that this evidence
would have opened the door to jury nullification. Moreover, we
believe it unlikely that the jury would speculate that the
DeMuros terminated the negotiations with the IRS without any
evidence regarding the circumstances of the termination and
based solely on the fact that the negotiations ended. We thus
conclude that it was not an abuse of discretion for the District
Court to find that the concern about jury nullification
outweighed the risk that the lack of this evidence would give
rise to a speculative negative inference.
Fourth, the DeMuros challenge the District Court’s
decision to exclude Hornby’s testimony that she never told them
that their case had been referred for criminal prosecution or that
their conduct was criminal. The DeMuros argue that this
evidence was probative of whether they knew that their conduct
was criminal and, thus, should have been admitted. This
evidence, however, had only minimal probative value. The
mere fact that Hornby did not tell the DeMuros that their
conduct was criminal is not strong evidence that the DeMuros
honestly believed that their conduct was legal. Further, as the
District Court stated, this evidence had the potential for
confusion and opened the door to jury nullification. We thus
conclude that the District Court did not abuse its discretion by
excluding it.
Finally, the DeMuros argue that these four rulings in
combination effectively took their good faith defense away from
the jury. While it is improper to exclude evidence of a good
faith defense based solely on a judicial determination that the
good faith belief lacks credibility, it is “proper to exclude
evidence having no relevance or probative value with respect to
willfulness.” Cheek, 498 U.S. at 203. Here, there is no basis in
the record to conclude that the District Court excluded any
evidence relating to good faith due to a determination that the
defense lacked credibility. Rather, the evidence was excluded
because it was irrelevant, cumulative, and/or because it was
outweighed by a concern for confusion. Accordingly, we find
that the District Court did not improperly take the DeMuros’
good faith defense away from the jury.
20
F.
Theresa challenges the District Court’s decision to
exclude the testimony of IRS Agent Lloyd Walling. Walling
was an IRS agent assigned to investigate the DeMuros’ former
company, DA Resources, which had also failed to pay over trust
fund taxes. Theresa called Walling to testify about the contents
of a written statement made by James, in which James stated
that only he, and not Theresa, was responsible for paying DA
Resources’ taxes. The District Court excluded this testimony on
the grounds that 1) it was irrelevant to whether Theresa was
responsible for paying TAD’s taxes, 2) it had the potential to
confuse the jury, and 3) James’ statement was inadmissible
hearsay. As a result of this ruling, Walling did not testify at all.
Theresa argues that Walling’s testimony was relevant and
admissible either as a non-hearsay party admission or under the
hearsay exception for statements against interest.
Even assuming arguendo that Theresa is correct that this
evidence was admissible, we conclude that exclusion of the
evidence was harmless. First, the evidence against Theresa with
respect to her control and responsibility was substantial: she
was an owner and manager of TAD, she had signatory authority
over all of TAD’s accounts, she signed numerous checks drawn
on TAD’s accounts during the relevant period, and she had the
power to hire and fire employees. See Greenberg, 46 F.3d at
243 (citation omitted) (listing the factors for determining
whether an individual was responsible for paying a company’s
taxes). Second, the testimony of Walling was of minimal
probative value because it related to a former company of the
DeMuros, not TAD. Moreover, James made his statement at a
time when his responsibility to pay DA Resources’ taxes was
clear, but Theresa’s was not, meaning that the statement was
self-serving in spite of appearing to be a statement against
interest. Accordingly, we conclude that “‘it is highly probable
that the error did not affect the result’” of the trial, and thus the
error was harmless. Friedman, 658 F.3d at 352 (quoting Hill,
435 F.3d at 420).
Theresa also argues that the District Court’s decision to
exclude Walling’s hearsay testimony effectively excluded any
21
other testimony that Walling may have given regarding
Theresa’s responsibilities with respect to DA Resources. She
argues that, as a result of the exclusionary ruling, she was
prevented from presenting a defense in violation of her Fifth and
Sixth Amendment rights. Theresa, however, did not proffer any
further testimony from Walling at trial, and it is not clear from
the record what the substance of his testimony would have been.
Thus, Theresa cannot now raise this issue on appeal. See Fed.
R. Evid. 103(a)(2). Moreover, even on appeal, Theresa has not
once described the substance of any further testimony from
Walling. Therefore, we have no basis upon which to conclude
that the District Court erred by foreclosing any further testimony
of Agent Walling.
Accordingly, we affirm the convictions of both James
and Theresa DeMuro.5
III.
At sentencing, the District Court applied a two-level
enhancement to the DeMuros’ base offense levels for abuse of
position of trust, pursuant to U.S.S.G. § 3B1.3. The District
Court applied the enhancement based on the DeMuros’ conduct
with respect to the trust fund account imposed by the IRS, into
which the DeMuros were obliged to pay TAD’s trust fund taxes
within two days of withholding the taxes. The DeMuros,
however, made several withdrawals from this account for other
business purposes, and closed the account without IRS
permission. We review whether a defendant occupied a position
5
The DeMuros also argued that the combined evidentiary
errors by the District Court warrant reversal, even if no single
error alone would support such relief. Even assuming arguendo,
as we did, that the District Court erred in allowing the opinion
testimony of Minelli and in excluding the testimony of Walling,
these evidentiary rulings did not constitute errors that “so
infected the jury’s deliberations that they had a substantial
influence on the outcome of the trial.” United States v. Hill, 976
F.2d 132, 145 (3d Cir. 1992). Accordingly, the cumulative
effect of these assumed errors does not require reversal.
22
of trust de novo. United States v. Hart, 273 F.3d 363, 376 (3d
Cir. 2001) (citation omitted). We review whether a defendant
abused that position of trust for clear error. Id. (citation
omitted).
Pursuant to U.S.S.G. § 3B1.3, a two-level increase to a
defendant’s offense level applies “[i]f the defendant abused a
position of public or private trust . . . in a manner that
significantly facilitated the commission or concealment of the
offense.” In applying this enhancement, we employ “a two-step
analysis: (1) whether the defendant occupied a position of
public or private trust; and (2) whether the defendant abused this
position of trust in a way that significantly facilitated the crime.”
Hart, 273 F.3d at 375 (citing United States v. Iannone, 184 F.3d
214, 222 (3d Cir. 1999)).
In United States v. Pardo, 25 F.3d 1187, 1192 (3d Cir.
1994), we set forth three factors to consider in addressing the
first step in the two-step analysis, stating:
[I]n considering whether a position constitutes a
position of trust for purposes of § 3B1.3, a court
must consider: (1) whether the position allows
the defendant to commit a difficult-to-detect
wrong; (2) the degree of authority which the
position vests defendant vis-a-vis the object of the
wrongful act; and (3) whether there has been a
reliance on the integrity of the person occupying
the position.
Id. See also Hart, 273 F.3d at 375. The Sentencing Guidelines
further explain that a position of trust is “characterized by
professional or managerial discretion (i.e., substantial
discretionary judgment that is ordinarily given considerable
deference).” U.S.S.G. § 3B1.3 cmt. n.1.
“‘[T]hese factors should be considered in light of the
guiding rationale of [§ 3B1.3]: ‘to punish ‘insiders’ who abuse
their positions rather than those who take advantage of an
available opportunity.’” United States v. Dullum, 560 F.3d 133,
140 (3d Cir. 2009) (quoting Pardo, 25 F.3d at 1192). Although
23
the enhancement often arises in an employment relationship, we
have applied it to other forms of trust relationships. E.g., id. at
140-41 (finding that enhancement applies to a fraud committed
by a trusted church adviser); see also Pardo, 25 F.3d at 1190-91
(citing cases involving a mother/daughter relationship and a
babysitter/child relationship, among others).
Our inquiry is whether the DeMuros were in positions of
trust vis-a-vis the IRS based on their positions as signatories of
the trust fund account set up to benefit the IRS.6 In making this
determination, we compare the relative position of the DeMuros,
as signatories to the trust fund account, to that of other business
managers who withhold trust fund taxes. See United States v.
Lieberman, 971 F.2d 989, 994 (3d Cir. 1992) (citing United
States v. Hill, 915 F.2d 502, 507-08 (9th Cir. 1990)) (noting that
the inquiry involves comparing the defendant’s position relative
to other persons who could commit bank embezzlement). In
that light, each of the three Pardo factors supports the
conclusion that the DeMuros were not in positions of trust based
on the trust fund account.
First, we consider whether the trust fund account put the
DeMuros in a position to commit a difficult-to-detect wrong.
The IRS imposed the trust fund account on the DeMuros so that
it would be easier for the IRS to monitor whether the DeMuros
were properly paying the trust fund taxes. Indeed, before the
creation of the trust fund account, the IRS could only monitor
the DeMuros’ compliance on a monthly or quarterly basis,
whereas afterwards it could monitor the trust fund daily,
tracking all deposits into and withdrawals from the account.
Under these circumstances, had the IRS been more watchful, it
could have discovered rather quickly that the DeMuros were
withdrawing money from the account for improper purposes.
Thus, the trust fund in no way put the DeMuros in a better
position to commit a difficult-to-detect wrong.
6
The Government and the DeMuros agree that an average
taxpayer is not in a position of trust with respect to the IRS and
that the issue on appeal is whether the trust fund account put the
DeMuros in a position of trust with respect to the IRS.
24
Second, we look to the authority given to the DeMuros
over the trust fund taxes as a result of the trust fund account.
Before the trust fund account, the DeMuros were required to pay
the withholding taxes on a quarterly, and later monthly, basis,
and could co-mingle the withheld money with other TAD assets.
After the establishment of the trust fund, the DeMuros were
required to pay the withholdings into the account within two
days. Thus, the trust fund account decreased any discretion and
authority the DeMuros had with respect to how to hold the
money until it was time to pay it to the IRS. Thus, this factor
weighs against the imposition of the enhancement.
Third, we consider the extent to which the IRS relied on
the integrity of the DeMuros. The IRS imposed the trust fund
account on the DeMuros because it could not rely on their
integrity. The trust fund account was only set up because the
DeMuros had repeatedly failed to pay TAD’s taxes in full. The
IRS did not trust them to hold the withheld money without
spending it. Accordingly, this third Pardo factor also weighs
against the imposition of the enhancement. We therefore
conclude that the DeMuros were not in a position of trust with
respect to the IRS, and that it was error for the District Court to
apply the abuse of a position of trust enhancement.
The Government argues, however, that even if the
District Court applied the enhancement in error, we should not
remand for re-sentencing because the error was harmless. At
sentencing, in addition to the abuse of a position of trust
enhancement, the District Court applied a two-level increase to
the DeMuros’ offense level, pursuant to U.S.S.G. §§ 2T1.1 and
2T .4.1, because the loss involved was over one million dollars.
As a result, each DeMuro had a total offense level of 24 and an
advisory Guidelines range of 51 to 63 months’ imprisonment.
The District Court then varied downwards two levels, because
the loss involved just barely triggered the two-level increase,
resulting in an adjusted offense level of 22 and a Guidelines
range of 41 to 51 months. The District Court sentenced each
DeMuro to 51 months’ imprisonment, the top of the range.
“[T]he use of an erroneous Guidelines range will
typically require reversal.” United States v. Langford, 516 F.3d
25
205, 215 (3d Cir. 2008). Under limited circumstances, however,
an error in applying the Guidelines can be harmless. Id. “For
the error to be harmless, it must be clear that the error did not
affect the district court’s selection of the sentence imposed.” Id.
(citing Williams v. United States, 503 U.S. 193, 203 (1992)).
The mere fact that the sentence actually imposed falls within
both the incorrect Guideline range employed at sentencing and
the correct Guideline range is insufficient to show harmless
error. Id. at 216. Rather, “the record must be unambiguous that
the miscalculation of the range had no effect” and that “the
sentencing judge would have imposed the same sentence under
a correct Guideline range.” Id. at 216, 217. “The proponent of
the sentence bears the burden of ‘persuad[ing] the court of
appeals that the district court would have imposed the same
sentence absent the erroneous factor.’” Id. at 215 (quoting
Williams, 503 U.S. at 203).
Without the two-level enhancement for abuse of a
position of trust, the DeMuros’ offense levels would be 22 and
their Guidelines ranges would be 41 to 51 months. The
Government argues that because this range is the same as the
range ultimately used by the District Court, and because the
sentences imposed were within this range, the sentencing error
was harmless. As discussed, however, the fact that the
sentenced imposed falls within the correct range does not alone
establish harmless error. Moreover, the Government’s argument
ignores the fact that the District Court found the Guidelines
range to be inappropriate and varied downwards. There is
absolutely no basis in the record for us to conclude that the
District Court would not have made a similar variance if the
abuse of a position of trust enhancement had not applied. We
thus cannot conclude that the error here was harmless. We
therefore vacate the DeMuros’ sentences and remand for re-
sentencing.
IV.
For the foregoing reasons, the convictions of the
DeMuros are affirmed, but we vacate their sentences and
remand for re-sentencing.
26