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Blakely challenges can’t be waived

The Supreme Court decision in Blakely v. Washington represented such a sea change in sentencing law that no defendant can be deemed to have waived a challenge to his sentence on Blakely grounds, the Seventh Circuit held on Sept. 14.

Bette J. Pree was indicted for one count of failing to file a tax return in 1994, and two counts of filing false tax returns for the years of 1995 and 1996.

The indictments arose from her employment with Health Care Centers of America (HCCA). Beginning in 1994, Pree sold stock in the company that had been issued to her “in lieu of salary,” 350,000 shares in all. The stock certificates stated that they had not been registered, and could not be sold or transferred unless registered.

During 1995, she received $21,500 from sales of the stock, and $60,450 in 1996, but did not report the income on her tax forms.

At trial, the government called Michael Welch, an IRS Revenue Agent, as a summary witness. Agent Welch testified that the income from the sales should have been reported on Line 13 of the 1040 form — gain from sales of stock — and that the fair market value of the stock was zero. Sums included in Line 13 ultimately are reflected in Line 22 — total income.

The jury convicted Pree of filing false tax forms in 1995 and 1996, and acquitted her of failing to file a form in 1994. At sentencing, the trial court increased her sentence for obstruction of justice.

Pree appealed, and the court of appeals affirmed the convictions, but vacated the sentence, in a decision by Judge Kenneth F. Ripple.

Sufficiency of Evidence

The court first held that the evidence was sufficient to support the convictions. The court acknowledged difficulties in valuing the stock, because it had no market, outside of the one created by Pree. Nevertheless, the court concluded that, even if the basis of the stock was not zero, as Agent Welch contended, the jury could still conclude that Pree failed to report some income from the sales.

What the court held

Case: U.S. v. Bette J. Pree, No. 03-1516.

Issue: Should a defendant’s sentence enhancement be vacated pursuant to U.S. v. Booker, even if the defendant never challenged the constitutionality of the enhancement in the district court?

Holding: Yes. Booker represented such a sea change in the law in the circuit that a defendant should not be deemed to have waived the issue by failing to raise it.

The court reasoned, “to establish falsity as to the 1995 and 1996 returns, the Government needed only to prove that Ms. Pree had unreported income, not the exact amount of such unreported income or the existence of a tax deficiency. See Peters, 153 F.3d at 461 (indicating that the Government need not establish a tax deficiency in a prosecution under § 7206(1)). Based on the evidence presented, a rational jury could have determined that some portion of Ms. Pree’s $21,500 stock sales receipts in 1995 and some portion of her $60,450 stock sales receipts in 1996 represented net gain and should have been included as income on the respective tax returns. Having reviewed the evidence presented at trial in the light most favorable to the Government, we must conclude that sufficient evidence of unreported income exists.”

The court further found sufficient evidence of willful misfiling, as the government presented evidence that several individuals informed Pree of her obligation to report income from stock sales, and that she admitted understanding that obligation.

Expert Testimony

The court then concluded that Agent Welch’s testimony did not constitute expert testimony that exceeded his role as a summary witness, citing numerous cases from other circuits acknowledging that it is not unusual for an IRS agent to testify as an “expert summary witness.”

The court found, “Although he was not proffered as an expert witness, his qualifications were in evidence. Those qualifications included eighteen years of service with the IRS as a revenue agent, a bachelor’s degree in accounting and a master’s degree in taxation. While employed by the IRS, he completed additional classes in taxation, specialized training and continuing professional education. At the time of trial, he had conducted approximately two hundred tax audits and had reviewed several thousand audits of other revenue agents. Agent Welch was therefore qualified to express ‘an opinion as to the proper tax consequences of a transaction’ and of the ‘transaction itself, which necessarily precedes his … evaluation of the tax consequences.’ (cite omitted).”

Sentencing

However, the court sua sponte raised the issue of sentencing, and held that the enhancement for obstruction of justice violated Pree’s constitutional right to trial by jury.

Related Links

7th Circuit Court of Appeals

Related Article

Case Analysis

Pree’s case was briefed and argued prior to the Supreme Court’s decision in Blakely v. Washington, 124 S.Ct. 2531 (2004), and the record was void of any indication that she addressed the constitutionality of her sentence enhancement in the district court.

Nevertheless, the court addressed the issue. The court reasoned, “In light of the sea change in federal sentencing law wrought by Blakely and Booker, we think it appropriate to take note of the possibility of an unconstitutional sentencing enhancement. See United States v. Seacott, 15 F.3d 1380, 1383 (7th Cir. 1994). Given the precedent in this circuit prior to Blakely, we think it would be unfair to characterize Ms. Pree as having waived a challenge to the validity of her sentencing enhancement.”

Noting that the Supreme Court will be addressing whether Blakely affects the federal sentencing guidelines in its upcoming term in U.S. v. Booker, however, the court stayed its mandate. The court instructed that, within 14 days of the Supreme Court’s decision in Booker, the parties may submit memoranda addressing application of Booker to the case at bar.

Click here for Case Analysis.

David Ziemer can be reached by email.

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