Third Circuit Upholds Tax Evasion Convictions, but Reverses Restitution Judgment

(Parker Tax Publishing January 2020)

The Third Circuit upheld the convictions of a married couple who failed to pay the appropriate amount of taxes as a result of inaccurately classifying personal expenses as business deductions and who failed to withhold and pay employment taxes for their employees. However, the court vacated and remanded the trial court's restitution sentence imposed under the Mandatory Victim Restitution Act because mandatory restitution does not apply to tax code offenses. U.S. v. Bunchuk, 2019 PTC 483 (3d Cir. 2019).

Background

Andrew and Vicki Bunchuk owned and operated Florist Concierge, a call center that took flower orders from customers and ensured fulfillment of those orders by flower shops around the country. Florist Concierge was an S corporation, and Vicki Bunchuk, as a shareholder of the S corporation, was responsible for paying any taxes due for the company as part of her individual return.

Between 2008 and 2012, the Bunchuks evaded paying their full tax burden in two ways. First, they improperly deducted personal expenses from their taxes as business expenses. For example, the Bunchuks deducted payments for a Mercedes-Benz, a Cadillac Escalade, Vermont ski trips, season tickets to the Philadelphia Flyers, and an almost $40,000 dollar payment towards a $3.4 million mansion. As a result, the Bunchuks underreported their income on their tax returns. Second, the Bunchuks failed to withhold and pay Florist Concierge's portion of employment taxes for its employees. Florist Concierge would often issue its employees "straight checks" that had no taxes withheld. Those checks were signed by Vicki Bunchuk. In total, the Bunchuks failed to withhold and pay $177,419 in federal payroll taxes.

In 2018, a jury convicted Vicki Bunchuk of three counts of filing false individual tax returns and three counts of filing false corporate tax returns in violation of Code Sec. 7206(1). The jury convicted Andrew Bunchuk of aiding and assisting in filing those same false returns in violation of Code Sec. 7206(2). Both Vicki and Andrew Bunchuk were also convicted of fourteen counts of failure to withhold and pay employment taxes in violation of Code Sec. 7202. The trial court sentenced Andrew Bunchuk to 42 months' imprisonment and sentenced Vicki Bunchuk to six months' imprisonment. During sentencing, the trial court imposed a restitution payment of $231,049, based on a calculation of taxes owed, under the Mandatory Victim Restitution Act (MVRA) (18 U.S.C. Sec. 3663A).

To be convicted of tax evasion under Code Sec. 7206, an individual must have acted "willfully." The trial court twice instructed the jury on the definition of willfulness - once when discussing the elements of the tax crimes and once during the general instructions. When discussing the elements, the trial court defined "willfully" as a voluntary and intentional violation of a known legal duty, stating that the Bunchuks' conduct was not willful if they acted through negligence, mistake, accident, or due to a good-faith misunderstanding of the requirements of the law, and that a good-faith belief is one that is honestly and genuinely held. In the trial court's general instructions, it provided another definition of willfulness that was proposed by the Bunchuks. The court explained that a good-faith belief can negate willfulness and that a person acts in good faith where he or she has an honestly held belief, opinion, or understanding about a particular fact even though the belief, opinion, or understanding turns out to be inaccurate or incorrect.

The Bunchuks appealed their convictions to the Third Circuit. They argued that the trial court incorrectly instructed the jury on the definition of willfulness. In particular, they contended that the trial court's instructions were inaccurate because they tied "good faith" to a mistake of fact as opposed to one of law. They also argued that the trial court misled the jury when answering a question. At one point during the deliberations, the jury asked whether the IRS spoke to Vicki Bunchuk directly concerning the third quarter of 2008 tax issue. The trial court responded that it was up to the jury's recollection and that the jury had to decide if such a conversation would be relevant. The trial court also said that none of the elements of any claim required the IRS to speak to one of the Bunchuks directly. The Bunchuks asserted that the trial court abused its discretion by mentioning that speaking with the IRS was not an element of tax evasion because the statement suggested that such a conversation would be irrelevant. The Bunchuks further argued that the evidence against Vicki Bunchuk was insufficient and that the trial court improperly calculated the restitution amount. Although the Bunchuks did not raise the issue, the government of its own accord requested a limited remand to allow the trial court to alter its restitution decision, reasoning that the trial court incorrectly imposed mandatory restitution under the MVRA.

Third Circuit's Analysis

The Third Circuit rejected the Bunchuks' arguments and affirmed their convictions. The Third Circuit found that the trial court's first instruction on the definition of willfulness correctly stated the law and also mirrored the Third Circuit Model Criminal Jury Instructions. As to the issue of its second instruction, the court found that it need not reach that issue since the Bunchuks themselves proposed the jury instructions, rendering any error "invited." The Third Circuit concluded that the Bunchuks could not challenge the instructions that they proposed. The Third Circuit also held that the jury instructions with respect to the IRS's conversation with Vicki Bunchuk was appropriate, legally correct, and within the trial court's broad discretion when supplying supplemental jury instructions.

The Third Circuit held that the evidence was sufficient to support Vicki Bunchuk's conviction. The court noted that there was ample evidence to show Florist Concierge's corporate returns were false, and that Vicki's individual returns correspondingly underreported her income. In the view of the Third Circuit, there was also evidence that Vicki acted with the requisite willful intent. The court said that the sheer amount of the false deductions, including luxury purchases that directly benefited her, and the multiple years of fraud supported the fact that Vicki acted willfully. The Third Circuit noted that Vicki was the president and owner of Florist Concierge, and it was reasonable to conclude that she had the requisite willfulness to commit the fraud. In addition, the Third Circuit took note of the evidence that Vicki signed the "straight checks" to Florist Concierge employees that failed to withhold federal taxes, demonstrating her willfulness. The Third Circuit concluded that all of this evidence supported the jury's unanimous verdict.

As to the trial court's restitution decision, the Third Circuit held that the Bunchuks' challenge had no merit because the lower court heard extensive testimony on the appropriate restitution amount, including the Bunchuks' expert witnesses. However, the Third Circuit agreed with the government that the trial court incorrectly applied the MVRA. The Third Circuit found that the MVRA does not apply to tax code offenses under Title 26 and only applies to offenses under the general criminal code of Title 18. The court explained that for Title 26 offenses, only discretionary restitution can be imposed as a condition of supervised release. The Third Circuit therefore vacated the restitution sentence and remanded so that the court could impose any restitution under the correct federal authority. The Third Circuit noted that its decision did not demonstrate disagreement with the trial court's decision to impose restitution nor with the amount imposed.

For a discussion of criminal and forfeiture penalties, see Parker Tax ¶265,100.

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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