Third Circuit Upholds Attorney's Conviction for Failing to Collect and Pay Payroll Taxes

(Parker Tax Publishing December 2020)

The Third Circuit upheld the conviction of an attorney for failing to collect and pay over payroll taxes and for making a false statement on a loan application. In reaching its conclusion, the Third Circuit found that (1) the district court properly excluded the expert testimony of the attorney's witness who would have testified that, because the attorney was a compulsive hoarder, his failure to timely pay taxes could not have been considered willful or voluntary, and that (1) the district court properly rejected a jury instruction that the government, in order to prove guilt, had to prove the attorney believed his failure to pay over the payroll taxes was a criminal act. U.S. v. Gilmore, 2020 PTC 377 (3d Cir. 2020).

Background

George Gilmore is an attorney and a founding partner of the law firm of Gilmore & Monahan, P.A. Gilmore exercised exclusive control over the firm's financial decisions, including expenditures, bills, and taxes. Under Gilmore's management, the firm had a history of submitting late payroll tax payments. Gilmore received numerous warnings from IRS agents - both written and in-person - regarding the firm's payroll tax obligations. Gilmore did not heed the warnings and continued to submit the taxes late.

Gilmore's failures to timely pay the firm's taxes were not his only financial misdeeds. After he was denied a personal loan in 2014 due to outstanding debt obligations, Gilmore applied for a $1.5 million loan in 2015. On that loan application, Gilmore did not disclose his outstanding tax obligations of roughly $500,000 or his outstanding personal debt to Dale Orlovsky of over $270,000. Instead, Gilmore checked the "no" box when asked whether he was presently delinquent or in default on any federal debt. Gilmore omitted the Orlovsky loan from his list of all outstanding debts.

In 2019, a grand jury indicted Gilmore for several tax and financial crimes. After the trial, the verdict was mixed. Gilmore was acquitted on two counts and the jury was deadlocked on one count. But Gilmore was convicted on two counts of failing to collect, account for, and pay over payroll taxes in violation of Code Sec. 7202, and one count of making a false statement in a loan application in violation of 18 U.S.C. Section 1014. After the trial, Gilmore moved for a judgment of acquittal and a new trial, but the district court denied the motions. The district court sentenced Gilmore to a year and a day in prison and three years of supervised release.

Gilmore appealed his conviction to the Third Circuit. He argued that the district court improperly excluded the expert testimony of Dr. Steven Simring. Gilmore proffered Dr. Simring as an expert witness to refute the government's assertion that Gilmore acted willfully in failing to pay his overdue payroll taxes. According to Gilmore, Dr. Simring's testimony would have informed the jury that because Gilmore was a compulsive hoarder, his failure to timely pay taxes could not be considered willful or voluntary. Gilmore also challenged the district court's jury instructions on willfulness. The district court instructed that willfulness could not be found if Gilmore believed in good faith that the tax laws did not make his conduct unlawful. Gilmore requested the word "criminal" be used instead of "unlawful." Gilmore claimed the instruction was legally erroneous because it equated belief of unlawful action with belief of criminal action. In addition, Gilmore argued there was insufficient evidence to find he acted willfully in violating a known duty to pay his payroll taxes or to prove that his loan application contained knowingly false statements.

Third Circuit's Analysis

The Third Circuit affirmed Gilmore's conviction. The Third Circuit held that Dr. Simring's testimony was properly excluded because it would not have provided a legally acceptable theory of a lack of knowledge of wrongdoing. The court found that evidence of diminished volitional control or lack of ordinary self-judgment does not constitute an acceptable theory of lack of knowledge of wrongdoing because any showing of purposeful activity, regardless of its psychological origins, generally satisfies the knowledge of wrongdoing (i.e., "mens rea") requirement. The court also found that the probative value of Dr. Simring's testimony would be outweighed by its prejudicial effect because Dr. Simring's report made numerous statements that simply proclaimed Gilmore's innocence without informing any expert conclusion.

The Third Circuit also found that the district court properly instructed the jury that willfulness could not be found if Gilmore believed in good faith that the tax laws did not make his conduct unlawful. The Third Circuit explained that for tax crimes, willfulness merely requires voluntary, intentional violation of a known legal duty - it does not require knowledge that one is committing a criminal act. According to the Third Circuit, there was no requirement that Gilmore must be aware that the conduct is criminal; rather, it was enough that Gilmore knew he had a legal duty and violated it.

In rejecting Gilmore's arguments regarding the sufficiency of the evidence, the Third Circuit found that the record was replete with evidence from which a rational jury could conclude both that Gilmore willfully violated a known duty when he failed to timely pay taxes and that he submitted a loan application that contained knowingly false statements. The court noted an IRS agent's testimony about Gilmore's repeated failures to pay payroll taxes on time, despite the many warnings he received. The court also noted that the prosecution presented evidence pertaining to Gilmore's massive tax debt (nearly $500,000 at the time he applied for a loan) as well as testimony about the roughly $270,000 he and his wife owed Orlovsky. Given this evidence, the court found that a jury could reasonably conclude Gilmore's failure to disclose his tax liability and his omission of the Orlovsky loan constituted the submission of a loan application containing knowingly false statements.

For a discussion of the penalty for a willful failure to collect or pay over tax, see Parker Tax ¶265,113.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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