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Wednesday, December 3, 2008

Can I Get A (Summary) Witness?: First Circuit Opinion Reveals That IRS Agents Can Testify As Summary Witnesses

The recent opinion of the First Circuit in United States v. Stierhoff, 2008 WL 5050171 (1st Cir. 2008), is an important reminder that we can't label every witness either a lay witness or an expert witness (or both); instead, as the opinion makes clear, courts have created a third category of witness:  the "summary witness." 

The Stierhoff opinion was written by Judge Selya, and he weaves such an interesting story that I figured I would reproduce large portions of it in this post.  According to Selya:

     "This case began when a young woman complained about a strange man who was harassing her. The state police launched an investigation, which later took an unexpected turn and morphed into an indictment for federal income tax evasion. The tale of how the stalker became the stalked follows * * * *

     In March of 2002, a young woman contacted the Rhode Island State Police and complained about a stalker. She told the troopers that the man had approached her at work, given her unwanted cards and poems, and left poetic messages on her windshield while her car was parked in a dormitory parking lot at Rhode Island College. The troopers traced the suspected stalker through his license plate number and identified him as Neil Stierhoff (the defendant herein).

     Between April 4 and April 12, 2002, the troopers conducted a surveillance that tended to confirm their suspicions about the defendant's obsession with the complainant. They then devised a sting operation that played out on the night of April 12. The sting worked, and the troopers arrested the defendant on the spot * * * *

     [With the defendant's consent, the troopers searched his residence] * * * *  The troopers found a treasure trove of interesting items. These items included the computer on which the defendant had composed the poems, greeting cards similar to those delivered to the complainant, a briefcase containing $100,000 in cash, another $40,000 in cash lodged in a desk drawer, and a myriad of financial documents. The troopers proceeded to make inquiries about the cash and a bank statement * * * *

     [T]he troopers concluded that the defendant had been operating a highly lucrative business featuring the sale of used electronic equipment over the internet. When they noticed that the aforementioned bank statement bore the name 'Joseph Adams,' the defendant explained that he used that pseudonym in conducting this business. As to the large sums of cash on hand, he ventured that he neither trusted banks nor paid any taxes (federal or state).

     Later that evening, [and again with the defendant's consent] the troopers conducted a search of a storage unit leased by the defendant....At the storage unit, the troopers discovered high-end computer equipment and a salmagundi of business records. The documents bore a wide range of individual and entity names, most of which comprised variations on the 'Joseph Adams' pseudonym.

    In due course, the troopers contacted the Internal Revenue Service (IRS) and relayed pertinent portions of the information they had unearthed to that federal agency. The IRS initiated its own investigation. That probe confirmed the defendant's aversion to the payment of federal income taxes.

     From there, the defendant found himself under attack on two fronts. The state successfully prosecuted him on charges related to his stalking activities....That conviction is final and need not concern us.

     The other shoe dropped on March 22, 2006, when a federal grand jury in the District of Rhode Island handed up an indictment charging the defendant with four counts of income tax evasion covering calendar years 1999, 2000, 2001, and 2002, respectively, in violation of 26 U.S.C. ยง 7201. The government asserted that the defendant had total unreported taxable income of approximately $1,250,000 during this four-year span and that he owed nearly $460,000 in back taxes.

    After some pretrial skirmishing,...a trial jury found the defendant guilty on all counts."

Stierhoff subsequently appealed, claiming that the district court improperly received the testimony of Michael Pleshaw, an experienced IRS agent.  Stierhoff noted that the district court did not allow Pleshaw to testify as an expert, but the First Circuit responded that the district court did properly allow him to testify as a summary witness.  The court noted that:

     "We have recognized as a general proposition that testimony by an IRS agent that allows the witness to apply the basic assumptions and principles of tax accounting to particular facts is appropriate in a tax evasion case....The key to admissibility is that the summary witness's testimony does no more than analyze facts already introduced into evidence and spell out the tax consequences that necessarily flow from those facts."

And, according to the First Circuit, that is exactly what Pleshaw did.  According to the court,

     "Pleshaw sat through the trial and studied the amplitudinous documentary evidence. Based on the information thus acquired, he calculated the defendant's tax liability for the years at issue.

     Pleshaw's methodology was unremarkable. Using bank deposit records, Pleshaw computed the defendant's gross receipts, again on a year-by-year basis. He then set to one side non-taxable receipts (such as loan proceeds) and subtracted business expenses (treating all non-cash withdrawals from the defendant's accounts as deductible), year by year. To the 2002 total, he added the cash found during the search (which the defendant had admitted to a trooper emanated from his business dealings).

     In that manner, Pleshaw arrived at an estimate of the defendant's net profits for each year. Thereafter, he adjusted for self-employment taxes, took the standard deduction, and factored in personal exemptions. These computations yielded the defendant's putative taxable income for each of the four years in question. From there, elementary school arithmetic-an application of the rate table-produced annual figures for taxes due and owing."

Based upon these findings, the First Circuit concluded that "Pleshaw's testimony fit[] comfortably within the mine-run of permissible summary witness testimony in tax cases."  And based upon the many opinions from other circuits cited by the court, it appears that most courts around the country would have come to the same conclusion.

-CM

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