Unpublished Disposition, 874 F.2d 817 (9th Cir. 1989)

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U.S. Court of Appeals for the Ninth Circuit - 874 F.2d 817 (9th Cir. 1989)

UNITED STATES of America, Plaintiff-Appellee,v.Lawrence M. RICHEY, Defendant-Appellant.

No. 87-3083.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted April 5, 1989.Decided May 5, 1989.

Before PREGERSON, BOOCHEVER, and NOONAN, Circuit Judges.


Lawrence M. Richey was convicted, following a jury trial, of numerous violations of the Internal Revenue Code. We affirm his conviction.


One of Richey's codefendants, Frank Forrester, operated a trust company, Professional and Technical Services (PTS), which claimed to provide its clients with a way to avoid paying any income taxes. Under the company's "payroll discount" scheme, a client "sold" lifetime services for one dollar to PTS, which in turn sold the services to International Dynamics, Inc. (IDI), allegedly a Panamanian trust. Upon receiving a paycheck, the client endorsed it over to IDI, which transferred the funds, minus an 8-10% processing fee, to its beneficiary, IDI Credit Union, another Panamanian trust. Credit Union then sent the client an allegedly tax-free "gift" equal to 90-92% of the original paycheck.

PTS also marketed a "9:1 tax shelter," by which clients purchased "consulting services" from IDI. Clients paid an allegedly deductible consulting fee to IDI and immediately received an allegedly tax-free reimbursement of about 90% of the fee. No consulting services were ever performed.

Richey worked as a Revenue Agent for the IRS for 25 years until his retirement in 1980. He was introduced to the PTS schemes by James Russell, a codefendant in this case, who promoted and sold the schemes. After Richey's retirement, Russell began referring PTS clients to Richey for preparation of their federal income tax returns.

From 1981 to 1983, Richey prepared tax returns understating the income of PTS clients by $206,660.47. Several clients testified that they consulted Richey because their own accountants would not incorporate the IDI programs into their returns. Other clients were reassured about the schemes because Richey, a former IRS agent, told them the schemes were legal.

Richey and his codefendants were charged in a twenty-eight count indictment. Count One charged all the defendants with conspiracy to defraud the IRS. 18 U.S.C. § 371 (1989). Richey was also charged in Counts Thirteen through Twenty-six with aiding and assisting in the preparation of false and fraudulent tax returns. 26 U.S.C. § 7206(2) (1989).

Forrester and Russell were also charged with mail fraud and the interstate transportation of monies obtained by fraud. These related charges referred to the transfer of endorsed paychecks and "gift" payments between clients and IDI and between IDI's Washington State and New York City branches. Finally, Forrester and Russell were charged with attempting to evade their respective 1981 federal income taxes.


Richey claims that the trial judge should have recused himself sua sponte because Richey had conducted an audit of the judge's tax returns in 1970. The judge, who was a private practitioner at that time, was assessed about $1033.00 in additional taxes. Richey acknowledges that the audit was "conducted in the regular course of business," and only a "few minor discrepancies" were found. Blue Brief at 5.

Richey did not raise this issue at trial, ostensibly because he feared prosecution under 26 U.S.C. § 7213(a) (1) (1988), which makes it unlawful for a former IRS official to disclose publicly any information about the auditing of a taxpayer's return. Richey's failure to raise the issue does not foreclose him from raising it on appeal, but he does "bear a greater burden" than would otherwise be the case in showing that the judge committed reversible error. United States v. Sibla, 624 F.2d 864, 868 (9th Cir. 1980).

We review the denial of Richey's recusal claim for an abuse of discretion. Herrington v. Sonoma County, 834 F.2d 1488, 1501 (9th Cir. 1987), modified, 857 F.2d 567 (9th Cir. 1988). 28 U.S.C. § 455 (1988) provides in pertinent part that

(a) Any justice, judge, or magistrate of the United States shall disqualify himself in any proceeding in which his impartiality might reasonably be questioned.

(b) He shall also disqualify himself in the following circumstances:

(1) Where he has a personal bias or prejudice concerning a party ...

This court has determined that recusal under Sec. 455 is required when "a reasonable person with knowledge of all the facts would conclude that the judge's impartiality might reasonably be questioned." Herrington, 834 F.2d at 1502; United States v. Nelson, 718 F.2d 315, 321 (9th Cir. 1983). In addition, the Supreme Court recently stated that recusal "does not depend upon whether or not the judge actually knew of facts creating an appearance of impropriety, so long as the public might reasonably believe that he or she knew." Liljeberg v. Health Services Acquisition Corp., --- U.S. ----, 108 S. Ct. 2194, 2202 (1988).

Here, Richey claims that the judge testified to remembering that Richey audited his returns. Blue Brief at 11. This testimony came in a subsequent case after Richey had made a public statement about his auditing the judge's return. By itself, the judge's recollection does not show prejudice. Richey points to nothing else except an odd provision in his sentence (now eradicated) requiring him not to criticize the government of the United States. This portion of the sentence, while not defensible, does not bespeak prejudice.

Richey urges that it is possible that a taxpayer who has been meticulously audited by the Internal Revenue Service will carry a scar and bear a grudge. It is possible. There are eminent examples of such behavior. But we cannot say that the mere possibility of such a reaction would lead a reasonable person to conclude that the judge who had undergone an audit long ago would have a personal prejudice against the Internal Revenue agent who conducted the audit. In the conduct of the trial the district judge was eminently fair. We are reluctant to lay down a rule that every judge in his circumstances is automatically disqualified from presiding.

Richey argues that his trial was prejudiced because the nature of the indictments and the evidence introduced at trial against his codefendants were unrelated to his charges. He claims, in particular, that " [i]t was on proof of the crimes against Russell that the jury considered the evidence against Richey." Blue Brief at 14.

As a general rule, defendants who are jointly charged may be jointly tried. United States v. Ramirez, 710 F.2d 535, 545 (9th Cir. 1983); see also Fed. R. Crim. P. 8(b) (allowing joinder of charges in an indictment if defendants "are alleged to have participated in the same act or transaction or in the same series of acts or transactions constituting an offense or offenses."). However, the district court may order the separate trial of particular charges or defendants if a joint trial would prejudice a defendant or the government. Fed. R. Crim. P. 14. We review the denial of a motion to sever for an abuse of discretion. United States v. Douglass, 780 F.2d 1472, 1478 (9th Cir. 1986). Reversal is warranted only if the appellant can show " 'that joinder was so manifestly prejudicial that it outweighed the dominant concern with judicial economy.' " United States v. Monks, 774 F.2d 945, 948 (9th Cir. 1985) (quoting United States v. Armstrong, 621 F.2d 951, 954 (9th Cir. 1980)). An appellant must show that a joint trial violated one of his substantive rights, such as his sixth amendment right to confront witnesses or his right to present an individual defense. Douglass, 780 F.2d at 1478.

In assessing the prejudicial effect of a joint trial, the primary consideration is whether "the jury can reasonably be expected to compartmentalize the evidence as it relates to separate defendants." Id. at 1479. The jury's task is greatly aided by trial court instructions on the purposes to which different strands of evidence may be put. Indeed, " [t]he prejudicial effect of evidence relating to the guilt of codefendants is generally held to be neutralized by careful instruction by the trial judge." Id.; see also United States v. Sullivan, 595 F.2d 7, 8-9 (9th Cir.), cert. denied, 442 U.S. 933 (1979) (presuming that the jury listened to and followed the trial court's instructions).

Contrary to Richey's assertion, the charges against his codefendants were related to his charges and joinder was proper. Richey was not named in Counts Two through Ten and Counts Twenty-seven and Twenty-eight. Counts Two through Ten concerned the transfer of endorsed paychecks and "gift" payments between clients and IDI and between IDI's Washington State and New York City offices. Richey was charged with preparing tax returns that used these transfers as a shield to liability. Counts Twenty-seven and Twenty-eight charged Russell and Forrester, respectively, with evading their 1981 federal income taxes on the same basis. All the charges arose from the PTS tax evasion scheme.

In addition, Richey's broad allegations of prejudice are insufficient to require severance. He has not shown that any of his constitutional rights were adversely affected. The jury could compartmentalize the evidence as it related to each defendant. Also the trial court instructed the jury that each offense and each case must be considered separately and that the evidence must be considered only against the defendant against whom it was admitted. RT 9:30-32. Thus any prejudice that may have arisen was neutralized.

Richey claims that the presence of and certain statements made by his codefendant Russell were grounds for a mistrial. Russell represented himself at the trial. For the most part, he questioned witnesses and presented his case in a slightly odd manner that reflected his lack of legal education. Moreover, during his opening statement, Russell claimed certain "inalienable rights in the common law" as a "free, white, Christian male, holding no contract with the government." RT 934. The court immediately admonished Russell, removed the jury, and held a conference during which the court denied Richey's motion for a mistrial. The offending statements were stricken from the record. Id. at 941. Upon the jury's return, the court said that it "isn't certain whether you were aware or remember the remarks that the Court considered to be offenseive to its prior rulings; but in any event if you do, those statements were stricken, and they should be disregarded as having no place in this proceeding." Id.

Russell went on in his statement to say that "there are two classes of citizenship now, and they should attach to two intermingled governments." Id. at 946-47. He claimed that "the Indictment makes an impossible charge [of mail fraud], since the Postal Service is no longer a constitutionally-mandated part of the Government." Id. at 947. The fraud charge was also impossible because " [w]e do not have constitutional money circulating in the country." Id. Richey's renewed motion for a mistrial was denied. No further instruction was requested by Richey or given to the jury.

We review the denial of a motion for a mistrial for an abuse of discretion. United States v. Morris, 827 F.2d 1348, 1351 (9th Cir. 1987), cert. denied, 108 S. Ct. 726 (1988).

On the appeal from his own conviction, Russell submitted documents where his oddness and lack of legal education seem to have escalated and a neutral reader could conclude that he was suffering from psychiatric disturbances. If the bizarreness that marks his appellate proceedings had characterized his examination of witnesses at the trial, we would confront a different situation on Richey's appeal. But Russell--as far as we can tell from a cold transcript--went about the business of presenting his case and examining witnesses in a way that made sense even though it was the effort of an amateur. No doubt Richey would have preferred to have had a professional representing Russell. Even so, we cannot see that he was prejudiced by Russell's efforts in his own behalf.

Richey challenges four of the trial court's instructions to the jury. The instructions will be considered in turn. We do not find that " 'the instructions taken as a whole were misleading or represented a statement inadequate to guide the jury's deliberations.' " United States v. Shortt Accountancy Grp., 785 F.2d 1448, 1454 (9th Cir.), cert. denied, 478 U.S. 1007 (1986) (quoting Stoker v. United States, 587 F.2d 438, 440 (9th Cir. 1978)). We therefore hold that the district court did not abuse its discretion in giving the jury instructions. United States v. Frazin, 780 F.2d 1461, 1468 (9th Cir.), cert. denied, 479 U.S. 844 (1986).

A. Richey claims that Instructions 21 and 22 deprived him of his defense of "lack of notice," i.e., that he lacked fair notice of the illegality of the tax schemes. He acknowledges that the "thrust of these instructions" came from a previous Ninth Circuit opinion in this case, but he argues that the case did not foreclose his making of this defense. Blue Brief at 17. Richey's contentions lack merit. In United States v. Russell, 804 F.2d 571, 575 (9th Cir. 1986), this court specifically ruled that Richey and his codefendants had fair notice of the illegality of their scheme. It was not an abuse of discretion for the trial judge not to instruct the jury on that ground.

B. Richey claims that Instruction 23 confused the jury. That instruction states, in relevant part: "The defendants have claimed that the monies their clients received from IDI Credit Union were tax-free gifts. It is for you, the jury, to decide whether certain funds were taxable or nontaxable." RT 9:46-47. Richey claims the jury was misled to believe that all the people who received money from IDI Credit Union were his clients; they were his clients only if he prepared their tax returns. This argument is specious. The trial had established Richey's relationship to the tax scheme. The isolated sentence from the jury instruction, viewed in the context of the whole trial, would not have confused the jury. Shortt Accountancy Grp., 785 F.2d at 1455 (" ' [i]solated, individual statements do not by themselves establish error.' ") (quoting United States v. Elksnis, 528 F.2d 236, 238 (9th Cir. 1975)).

C. Richey claims that Instruction 25 was "misleading and confusing because it failed to distinguish evasion from avoidance." Blue Brief at 19. He also claims that it was "absolutely unnecessary" to ask the jury to consider the economic substance of the tax scheme. Id.

Instruction 25 reads in pertinent part:

A taxpayer may try to pay as little tax as possible so long as he uses legal means. That is to say, transactions may be arranged in an attempt to minimize taxes if the transactions have economic substance.

The incidence of taxation, of course, depends upon the substan [ce] of a transaction. If a transaction lacks substance, it cannot properly be used to compute taxes. A transaction is without economic substance when it is entered into solely for the purpose of tax evasion.

Contrary to Richey's assertion, the instruction plainly distinguished between tax evasion and avoidance. Also, since the difference between the two turns on the economic substance of the relevant transactions, it was necessary to discuss economic substance.

Richey argues that the district court erred in admitting Government Exhibit 22-H, a summary of the tax deficiencies of Russell's clients who were examined by the IRS. He maintains that some of the documents in the summary were inadmissible. At trial, Richey objected to the admission of the summary claiming that the information necessary to document the summary had not been given to the defense. RT 878-880. But Richey withdrew his objection to the documents after he was given an opportunity to examine them. RT 898. Therefore, we review his current appeal under the plain error standard. Johnson v. United States Postal Service, 756 F.2d 1461, 1464 (9th Cir. 1985). Richey cannot show any error.

Federal Rule of Evidence 1006 allows for the admission of summaries of voluminous writings. It is a condition precedent to the admission of a summary that the underlying documents be admissable, although they need not be admitted. United States v. Johnson, 594 F.2d 1253, 1255-57, 1257 n. 6 (9th Cir.), cert. denied, 444 U.S. 964 (1979).

The underlying documents would have been admissible. Exhibit 22-H was based on ledger cards kept by the codefendants. These cards named IDI clients and described their total wages and "gift" check amounts. The ledger cards were admitted into evidence. The numbers in Exhibit 22-H could be determined by referring to those cards. Thus the requirements of Rule 1006 were satisfied.

As a condition of probation, Richey was required to refrain from making any derogatory statements about the United States. Richey is joined by the ACLU, as amicus curiae, in arguing that this condition violated his first amendment rights. However, Richey's probation was later revoked when, in violation of 26 US.C. Sec. 7213(a) (1) (1988), he publicly disclosed that he had audited the judge's tax returns. Richey was convicted and resentenced to a new probationary term that did not include the offending condition. Accordingly, this issue is moot. In re Grand Jury Proceedings Klayman, 760 F.2d 1490, 1491 (9th Cir. 1985). This court may only consider the issue if the issue is capable of repetition and of evading review. Nebraska Press Ass'n v. Stuart, 427 U.S. 539, 546 (1976); Klayman, 760 F.2d at 1490-91. There has been no showing that Richey is in danger of being resentenced to hold his tongue. Also, if he were resentenced, review would be available if he makes a timely application. Therefore, there is no reason for this court to consider this issue.



This disposition is not appropriate for publication and may not be cited to or by the courts of this circuit except as provided by Ninth Cir.R. 36-3