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United States v. Stegman

United States Court of Appeals, Tenth Circuit

October 20, 2017

UNITED STATES OF AMERICA, Plaintiff - Appellee,
v.
KATHLEEN STEGMAN, Defendant-Appellant.

         APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF KANSAS (D.C. No. 2:14-CR-20109-JAR-1)

          Justin K. Gelfand, Capes Sokol Goodman & Sarachan, P.C., St. Louis, Missouri, appearing for Appellant.

          Jeffrey Brian Bender, Attorney, Tax Division (David A. Hubbert, Acting Assistant Attorney General, S. Robert Lyons, Chief, Criminal Appeals & Tax Enforcement Policy Section, and Gregory Victor Davis, Attorney, Tax Division, with him on the brief), United States Department of Justice, Washington, D.C., appearing for Appellee.

          Before BRISCOE, EBEL, and MATHESON, Circuit Judges.

          BRISCOE, CIRCUIT JUDGE.

         Defendant Kathleen Stegman was convicted by a jury of two counts of evading her personal taxes for the tax years 2007 and 2008, in violation of 26 U.S.C. § 7201. Stegman was sentenced to a term of imprisonment of 51 months, to be followed by a three-year term of supervised release. The district court also ordered Stegman to pay a $100, 000 fine, plus restitution in the amount of $68, 733. Stegman now appeals. Exercising jurisdiction pursuant to 28 U.S.C. § 1291, we affirm Stegman's convictions and sentence.

         I

         Factual background

         In September 1997, Stegman formed a Kansas corporation called Midwest Medical Aesthetics Center, Inc. (MMACI). The company operated in an office in Leawood, Kansas, and provided a wide range of medical aesthetic services including, but not limited to, liposuction, microdermabrasion, and laser hair removal.

         On January 16, 1998, a Certificate of Amendment was filed with the Kansas Secretary of State to reflect a name change from MMACI to Midwest Medical Aesthetics Center, P.A. (MMACPA or Midwest), and, relatedly, to convert the business to a professional association. Notwithstanding the name change, the business continued to be owned and operated by Stegman, and also continued to provide the same types of medical aesthetic services.

         Clients of Midwest were permitted to pay for services with a credit card, cash, or checks made out to Stegman personally. Of these forms of payment, Stegman preferred and encouraged the use of cash or checks. At the end of each business day, Stegman would personally collect the cash and checks that were paid by Midwest's clients.

         Stegman established several limited liability corporations, including Samson, LLC (Samson). Stegman in turn used these corporations to effectively launder Midwest client payments. As part of this process, Stegman would use the corporations to purchase money orders, typically in denominations of $500 or less, that she in turn used to purchase items for personal use. In 2007, Stegman purchased 162 money orders totaling $77, 181.92. In 2008, she purchased 252 money orders totaling $121, 869.99. And in 2009, she purchased 157 money orders totaling $73, 697.31. Notably, Stegman reported zero cash income on her federal income tax returns during each of these years.

         Stegman employed separate tax preparers for her corporate and personal tax returns. Alex Jones prepared the corporate tax returns. Don Lake prepared Stegman's personal tax returns. Although Stegman provided Jones with Midwest bank account information as proof of its corporate income, she did not provide him with bank records for the other accounts into which she deposited corporate income, including the Samson account and a personal account at U.S. Bank. Similarly, Stegman did not provide Lake with accurate records of the Midwest client payments that she used to purchase personal property.

         In November 2009, the Internal Revenue Service (IRS) initiated a civil audit of the 2007 and 2008 tax returns of both Stegman and Midwest. During the civil audit, Stegman told the IRS that Midwest never accepted cash payments and rarely accepted checks. Stegman further told the IRS that she kept approximately $300, 000 in cash at her home and reported that the source of the cash was gifts from relatives or money that she had saved from prior earnings. Stegman also provided the IRS with conflicting information about Samson and its purpose. Initially, Stegman told the IRS that "the business purpose of Samson was to lease equipment to Midwest . . ., and she paid them approximately $3, 000 a month." Aplee. App. at 115. She later told the IRS that "Samson had no business purpose" and "was only the name of a bank account." Id. at 116.

         In October 2010, the case was referred to the IRS's criminal investigation division. The criminal referral report listed the basis for suspected fraud as omitted income and false expenses/deductions. The report noted that Midwest took in large amounts of cash, yet made no cash deposits in 2007 or 2008. The report also noted Stegman's "lavish" lifestyle, which included frequent travel, large asset purchases of approximately $2, 000, 000 (unsupported by associated loans), all despite her reporting personal income of $50, 000 for 2007 and $57, 105 in 2008. Notably, the report indicated that, contrary to her 2007 and 2008 tax returns, Stegman had submitted loan applications reporting personal income ranging from $10, 000 to $46, 000 per month.

         For example, in 2007, Stegman applied for loans related to the purchase of two condominium units in Las Vegas. On her loan applications, Stegman represented that her monthly income was $30, 000, even though her 2007 federal tax return reported an annual adjusted gross income of $79, 428. Stegman purchased the condominium units for $543, 966.16 and $558, 652.86. In 2009, however, she disposed of both units by way of short sale contracts, resulting in forgiven debt of $362, 209 and $339, 722. In doing so, Stegman falsely reported to the lending bank that she was broke.

         As part of its criminal investigation, the IRS interviewed Midwest employees and clients, reviewed bank records, money order purchases, business and bank records, and tax records. The investigation revealed that Stegman used Samson to create false business expenses. For example, Stegman falsely claimed that Samson provided "cleaning, " "maintenance, " "equipment, " and "supplies" to Midwest.

         The investigation also revealed that Stegman engaged in obstructive conduct. In particular, she altered Midwest's general ledgers and directed employees of Midwest to destroy business records, including payment receipts, client folders, and a sign that was used at the business stating that cash was accepted. Stegman also altered business ledgers that she provided to the IRS; the IRS was able, however, to obtain the original, unaltered ledgers from her tax preparer. Lastly, Stegman encouraged a former Midwest client, Dr. Evelyn Clark, to tell the IRS that she didn't remember anything about her dealings with Midwest.

         Procedural background

         On October 29, 2014, a federal grand jury indicted Stegman on five counts (Counts 1 through 5) of tax evasion, covering the tax years 2007 through 2010, in violation of 26 U.S.C. § 7201, and one count (Count 6) of conspiring to defraud the United States by obstructing the lawful governing functions of the IRS, in violation of 18 U.S.C. § 371.[1] Each of the five counts of tax evasion were tied to a specific tax year. Counts 1 through 3 related to the tax years 2008 through 2010 for the business. Counts 4 and 5 related to the tax years 2007 and 2008 for Stegman personally. The conspiracy count (Count 6) charged both Stegman and an individual named Christopher Smith with conspiring to defraud the United States by obstructing the IRS from ascertaining, computing, assessing and collecting federal corporate and personal taxes.

         On February 24, 2015, Stegman moved "to dismiss th[e] case due to the Government's destruction of exculpatory evidence, " namely, "the IRS audit file regarding . . . Stegman's 2000 and 2001 federal tax returns." Aplt. App., Vol. 1 at 95. The district court denied that motion.

          The case proceeded to trial beginning on March 8, 2016. During the first week of trial, the district court granted the government's motion to amend the indictment to change all of the references to "Midwest Medical Aesthetics Center, Inc." to instead read "Midwest Medical Aesthetics Center." At the conclusion of the evidence, the jury convicted Stegman of evading her personal taxes for the tax years 2007 and 2008 (Counts 4 and 5), as well as evading corporate taxes for the tax years 2008 and 2009 (Counts 1 and 2). The jury acquitted Stegman of evading corporate taxes for the tax year 2010 (Count 3). The jury also acquitted Stegman and Smith of the conspiracy charge (Count 6).

         Stegman moved for judgment of acquittal or, in the alternative, a new trial. The district court granted the motion as to the two counts that related to the evasion of corporate taxes (Counts 1 and 2), but denied the remainder of the motion. In doing so, the district court concluded that "there was a flaw in the way the case was charged." Aplt. App., Vol. XII at 3311. In other words, the district court explained, it chose to acquit Stegman of the corporate tax evasion counts not due to a lack of "proof beyond a reasonable doubt that this corporation evaded taxes, " but rather because "the indictment itself was flawed in attributing the loss as due and owing by Ms. Stegman, when actually it was due and owing by the corporation." Id. at 3314.

         The district court sentenced Stegman on October 18, 2016. Based upon testimony from IRS Revenue Agent Janice Willard, the district court found that Stegman's evasion of personal and corporate taxes caused a federal tax loss in excess of $550, 000. The district court also imposed enhancements for use of sophisticated means and obstruction of justice. The district court ultimately sentenced Stegman to a term of imprisonment of 51 months, a sentence at the low end of the advisory Guidelines range, to be followed by a three-year term of supervised release. The district court also ordered Stegman to pay a $100, 000 fine, plus restitution to the IRS in the amount of $68, 733.

         II

         Stegman raises five issues on appeal, four of which pertain to her convictions and one of which pertains to her sentence. Although several of these issues require extensive discussion due to their fact-intensive nature, we conclude that all of these issues lack merit.

         A. The amendment of the indictment during trial

         In her first issue on appeal, Stegman contends that the district court erred by granting the government's motion to amend the indictment in the midst of trial. We review de novo a district court's decision to grant or deny a motion to amend an indictment. See United States v. Pina, 974 F.2d 1241, 1243 (10th Cir. 1992).

         1. Relevant facts

         In 1997, Stegman filed articles of incorporation with the State of Kansas for MMACI. The following year, 1998, Stegman filed an amendment to the articles of incorporation that converted the business to a professional association and altered slightly its name (MMACPA).

         Stegman's filings with the IRS, however, did not make the nature or name of her business clear. During the time period covered by the superseding indictment, the tax returns that Stegman filed with the IRS identified the business as "Midwest Medical Aesthetics Center, " but did not otherwise identify Midwest's particular corporate form. Further, the forms effectively treated the business as a C corporation. Not until February 2013 did Stegman file documents with the IRS adding a "P.A." to the name of her business.

         The indictment in this case alleged that Stegman "was the owner/operator of Midwest Medical Aesthetics Center, Inc. (MMACI), located in Leawood, Kansas." Dist. Ct. Docket No. 1 at 1. The indictment proceeded to refer repeatedly to MMACI. A superseding indictment was returned in January 2015 that included the same references to MMACI.

         During opening statements at trial, defense counsel mentioned that the entity at issue was "more properly called Midwest Medical Aesthetics Center, P.A. for professional association." Aplt. App., Vol. VIII at 2251. Subsequently, "in the course of cross examining more than several [government] witnesses, " defense counsel raised the issue "again as to the proper name [of the entity] and, beyond that even, the existence of the entity Midwest Medical Aesthetics Center, Inc." Id. The government objected, and the district court heard arguments and invited briefing on the issue. The government, as part of its briefing on the issue, moved to amend the superseding indictment to read "Midwest Medical Aesthetics Center and not Midwest Medical Aesthetics Center, Inc." Aplt. App., Vol. II at 444.

         On the sixth day of trial[2], the district court granted the government's motion to amend and ordered that the superseding indictment refer to Stegman's business as "Midwest Medical Aesthetics Center." Id., Vol. VIII at 2258-59. In doing so, the district court concluded that Stegman was "fully on notice of which entity [wa]s at issue" in the indictment. Id. at 2254. The district court explained:

This isn't a situation where there actually is a Midwest Medical Aesthetics Center, Inc., that filed a different set of tax forms. This isn't a situation where there could potentially be a jeopardy, double jeopardy problem because there's an entity that filed tax returns under this name, but the government has charged an entity under another name. All were on notice that it was Midwest Medical Aesthetics Center that was the subject of Counts 2, 3, and 4.
And therefore, I find that it is a minor change and a variance. It doesn't prejudice the defendants. The defendants were on notice. And that in all respects, this is a variance that can be amended, as the government moves to amend, by going forward with the name being Midwest Medical Aesthetics Center. That matches the name on the tax returns. It matches the name on most of the business records that I've seen thus far. * * *
A variance, as opposed to an amendment, occurs when the evidence at trial proves facts other than those alleged in the indictment, but the charging terms and elements stated in the indictment remain unaltered. And that is the case here.
This is the type of variance that does not affect the substantial rights of the defendants in this case because the variance does not prevent the defendants from presenting their defense properly, it does not unfairly surprise them, or surprise them at all. It does not expose them to double jeopardy.
This variance is not fatal because the defendants, again, could've anticipated from the indictment and the evidence what evidence would be presented at trial. Could've anticipated just from the face of the indictment itself what evidence would be presented at trial, again, the corporate tax returns for this entity.

Id. at 2254-2256.

         At the conclusion of all the evidence, the jury found Stegman guilty of two counts of corporate tax evasion and two counts of personal tax evasion, and acquitted her on one count of corporate tax evasion and the conspiracy charge. Stegman subsequently moved for judgment of acquittal, and the district court granted her motion in part, dismissing the two convictions for corporate tax evasion. In doing so, the district court noted, as argued by Stegman, that "the Superseding Indictment specifie[d] that the corporate taxes were due and owing by Stegman, and the Government did not prove that Stegman herself owed the taxes." Id., Vol. VI at 1740. More specifically, the district court noted that the government "did not offer evidence that would have supported a theory that [Midwest] was a sham corporation or a disregarded entity, nor did it attempt to pierce [Midwest]'s corporate veil." Id. at 1740-1741. Thus, the district court concluded, "the income tax at issue . . . was due and owing by [Midwest], not Ms. Stegman." Id. at 1741.

          2. Analysis

         The Presentment Clause of the Fifth Amendment states, in pertinent part, that "[n]o person shall be held to answer for a capital, or otherwise infamous crime, unless on a presentment or indictment of a Grand Jury." U.S. Const. amend. V. The Supreme Court has interpreted this provision to mean that an indictment may not be "amended except by resubmission to the grand jury." Russell v. United States, 369 U.S. 749, 770 (1962); see also Stirone v. United States, 361 U.S. 212, 215-16 (1960).

         This prohibition does not, however, "extend to alterations that are 'merely a matter of form.'" United States v. Dowdell, 595 F.3d 50, 67 (1st Cir. 2010) (quoting Russell, 369 U.S. at 770). Thus, we "ha[ve] distinguished between a district court's amending an indictment as to form, which is permissible, and as to substance, which is an impermissible usurpation of the grand jury's prerogative." United States v. Pina, 974 F.2d 1241, 1243 (10th Cir. 1992). Further, we have "defined an amendment of form as a change that does not mislead the defendant in any sense, does not subject the defendant to any added burdens, and does not otherwise prejudice the defendant." Id. Likewise, other circuits "have allowed ministerial corrections of clerical errors in names, dates, and citations, so long as the change would not deprive the defendant of notice of the charges against him." Dowdell, 595 F.3d at 68. "In short, when a change 'le[aves] the substance of the charge unaffected, the switch d[oes] not usurp the prerogative of the grand jury." Id. (quoting United States v. Eirby, 262 F.3d 31, 38 (1st Cir. 2001)) (alteration in original).

         Stegman argues that "[t]he amendment substantively changed the entity from which individual and corporate income tax obligations allegedly flowed and the affirmative acts of tax evasion the Government had to prove." Aplt. Br. at 13. "Furthermore, " she argues, "the district court constructively amended the indictment by, inter alia, broadening the possible bases for conviction." Id. Stegman argues that "[t]o allow an indictment to be amended in a tax evasion case to substitute the name of one business entity allegedly impacting tax liability for the name of another business entity frustrates 130 years of jurisprudence prohibiting district courts from amending indictments." Id.

         We reject these arguments. Contrary to her assertion, and consistent with what the district court concluded, the amendment was merely a matter of form, dropping the "Inc." to accurately reflect the change that Stegman made to the structure of her business (and a change, we note, that she did not alert the IRS to when she filed the business's federal tax returns). Further, as clearly stated by the district court, the amendment did not mislead Stegman in any sense, did not subject her to any added burdens, and did not otherwise prejudice her in any way. See Pina, 974 F.2d at 1243. Moreover, the amendment did not deprive Stegman of notice of the charges against her. In short, the obvious and consistent focus of the criminal proceedings, both before and after the amendment, was on whether Stegman evaded federal taxes by diverting money from the only business she owned that generated an income, using that money for personal expenses, and failing to properly report these transactions to the IRS. Consequently, because the amendment was one of form only, the district court did not err in granting the government's motion to amend the indictment.

         Stegman also asserts that the district court's allowance of the amendment violated her due process rights. Specifically, she argues that "[t]he jury was never told there was an amendment or that [she] was entitled to rely on the indictment" and, "[a]s a result, the jury may have been left with the impression that [she] misled them on the issue of the existence of MMACI." Aplt. Br. at 29.

         This argument fails for several reasons. First, Stegman's counsel conceded at oral argument that Stegman never asked the district court for such an instruction. Second, and relatedly, she failed to properly alert the district court to this constitutional challenge. Third, the argument lacks merit given our conclusion that the amendment was one of form only. Finally, the evidence of Stegman's guilt was overwhelming and thus we are not persuaded that the district court's decision to allow the amendment deprived her of the right to a fair trial.

         B. The purported Braswell violation

         In her second issue on appeal, Stegman contends that the government violated the Supreme Court's decision in Braswell v. United States, 487 U.S. 99 (1988), by using against her corporate records, specifically company ledgers, that it obtained by compulsory summons issued to her, and that this violation requires reversal of her convictions. Because this issue concerns Stegman's Fifth Amendment privilege against self-incrimination, we review the issue de novo. See United States v. Banks, 761 F.3d 1163, 1184 (10th Cir. 2014) ("Whether a defendant's Fifth Amendment privilege against self-incrimination has been violated is a legal question we review de novo.").

         1. The holding in Braswell

         The Supreme Court granted certiorari in Braswell to address "the question whether the custodian of corporate records may resist a subpoena for such records on the ground that the act of production would incriminate him in violation of the Fifth Amendment." 487 U.S. at 100. The Supreme Court "conclude[d] that he may not." Id. In reaching this conclusion, the Court began by noting that corporations "are not protected by the Fifth Amendment." Id. at 102. More specifically, the Court noted that it "ha[d] long recognized that, for purposes of the Fifth Amendment, corporations and other collective entities are treated differently from individuals." Id. at 104. This collective entity rule, the Court noted, mandated "that without regard to whether [a] subpoena is addressed to the corporation" or "to the individual in his capacity as a custodian, a corporate custodian . . . may not resist a subpoena for corporate records on Fifth Amendment grounds." Id. at 108-09 (citations omitted). The Court then contrasted this with sole proprietorships and noted that sole proprietors are entitled to "show that [an] act of production [of proprietorship documents] would entail testimonial self-incrimination." Id. at 104.

         In a passage relevant to the case at hand, the Court explained the proper and improper uses of corporate ...


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