Eleventh Circuit Upholds Conviction for Elaborate Scheme to Avoid Paying Taxes

(Parker Tax Publishing September 2021)

The Eleventh Circuit affirmed the conviction and sentence of an individual for obstructing and impeding the due administration of the internal revenue laws in violation of Code Sec. 7212(a) after rejecting the individual's claim of prosecutorial misconduct and misapplication of sentencing guidelines by the district court. The Eleventh Circuit also upheld the application a sentencing enhancement for using "sophisticated means" based on the individual's decade-long effort to avoid paying taxes and to obstruct and delay the IRS's collection efforts through the use of forged letters, bad checks, and bogus promissory notes. U.S. v. Nagle, 2021 PTC 279 (11th Cir. 2021).

Background

For more than a decade, Dennis Nagle used several different tactics to avoid paying federal income taxes and to obstruct and delay the IRS in its efforts to collect the taxes he owed. Between 2003 and 2014, the IRS sent notices to Nagle advising him that he owed taxes for years 1999, 2001-2003, and 2005-2007. Instead of paying his taxes, Nagle sent letters to the IRS in which he made frivolous arguments about why he purportedly did not have to pay taxes. The IRS repeatedly warned Nagle that his arguments were frivolous and that fines could be imposed for taking such positions, but Nagle continued to send similar correspondence in which he persisted in his refusal to cooperate with the IRS and in which he claimed that the IRS did not have statutory authority to collect his taxes.

In 2010 and 2011, the IRS filed liens against Nagle's property in Florida and sent Nagle notices of intent to levy. The IRS also sent a notice of intent to levy to Nagle's employer and his former employer's pension department for $150,931 of taxes that Nagle owed. In response, Nagle prepared and sent a letter, designed to appear as if it was from his employer's payroll department, falsely stating that the company would not comply with the levy until the IRS provided proof of its authority to issue the levy. In 2012 and 2013, Nagle sent checks to the IRS totaling $714,500 in an attempt to pay his outstanding liabilities and to release his tax liens and levies, but the checks were drawn on a bank account that was closed in 2006. Nagle also attempted to pay his taxes using bogus promissory notes and sent a fictitious financial instrument, titled "International Bill of Exchange," for $430,781, purporting to pay his tax liabilities. Nagle also hid assets in a sham limited liability company.

Nagle sent the IRS a Form 843, Claim for Refund and Request for Abatement, falsely stating that he paid $150,931 for his outstanding taxes as set forth on the levy, and that the IRS owed him $3,517 for the payments that his former employer made pursuant to the levy. He also sent the IRS a false Form W-4 claiming that he was exempt from federal tax withholding. Nagle concealed his home address from the IRS. He directed the IRS to correspond with him in states where he did not maintain a physical address and used numerous paid mailbox addresses designed to look like residential street addresses and used those addresses on tax returns, correspondence, and the worthless checks that he sent to the IRS. Using his sophisticated knowledge of the IRS's collections and appeals processes, including the statute of limitations for collections and tolling periods, Nagle intentionally filed frivolous Collections Due Process (CDP) hearing requests, not for the purpose of honestly appealing the IRS's collections actions, but for the purpose of delaying and hindering those actions.

In 2019, Nagle was charged with obstructing and impeding the due administration of the internal revenue laws in violation of Code Sec. 7212(a). The case proceeded to trial, and a jury found Nagle guilty as charged. The district court sentenced him to three years in prison followed by one year of supervised release after applying an upward adjustment under the sentencing guidelines for Nagle's use of "sophisticated means."

Nagle appealed to the Eleventh Circuit. He argued that the prosecutor committed misconduct by wrongly representing to the jury that it could find him guilty as charged based on "corrupt acts" that were not specifically alleged in the indictment. Nagle contended that this statement was contrary to the jury instructions that the parties had previously agreed to and implied to the jury that it should disregard the instructions given by the court. Nagle also challenged the district court's calculation of his sentencing range under the Sentencing Guidelines manual. He asserted that the court should have used the sentencing guidelines for obstruction of justice rather than the guidelines for tax evasion, the willful failure to file tax returns, and filing fraudulent or false returns or statements.

Analysis

The Eleventh Circuit affirmed Nagle's conviction and sentence. Regarding Nagle's claim of prosecutorial misconduct, the court explained that a conviction will be vacated, and a new trial ordered, only if the prosecutor's remarks prejudicially affected the defendant's substantial rights. The court found that in this case, even if the prosecutor's remarks were improper, a new trial was not warranted because there was no reasonable probability that the outcome of the trial would have been different if the prosecutor had not made the comments. In the court's view, the evidence that Nagle committed at least one of the "corrupt acts" listed in the indictment was overwhelming. The court also found that the district court cured any potential for misunderstanding by instructing the jury that it was required to follow the law as explained by the court, follow all of the court's instructions, and not single out or disregard any of the court's instructions on the law. On the issue of the court's use of sentencing guidelines, the Eleventh Circuit held that the guideline for tax evasion was more appropriate to the offense conduct charged than the guideline for obstruction of justice. The court noted that the offense conduct charged in Nagle's indictment recounted Nagle's numerous and varied attempts to avoid paying his taxes by, among other things, failing to file returns or pay taxes and submitting false or fraudulent documents and statements.

The Eleventh Circuit further held that the district court properly applied a sentencing enhancement for an offense involving "sophisticated means." According to the guideline application notes, "sophisticated means" refers to "especially complex or especially intricate offense conduct pertaining to the execution or concealment of an offense," including conduct "such as hiding assets or transactions, or both, through the use of fictitious entities, corporate shells, or offshore financial accounts." In the view of the Eleventh Circuit, Nagle developed a long-term strategy for impeding and delaying the IRS's attempts to collect on his tax debt while waiting for portions of the debt to become uncollectable due to the ten-year statute of limitations. Nagle's tactics were creative and varied, the court found, and were apparently based on a careful study of tax laws and IRS collection methods. The court noted that Nagle created documents meant to look like negotiable instruments in order to trigger a release of tax liens; hid assets in a sham company; requested a CDP hearing to "stop the clock" on IRS levies; used his position in his employer's company to intercept IRS correspondence, obstruct a levy on his salary, and attempt to obstruct another levy on his pension benefits; and consulted with others on additional tactics to defer collections as long as possible. Based on these facts, the court found no clear error in the district court's finding that Nagle's overall scheme involved the use of sophisticated means to carry out his offense.

For a discussion of interference with the administration of the internal revenue laws, see Parker Tax ¶265,148.

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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