Appeal from the United States District Court for the Northern District of Indiana, South Bend Division.
No. 3:94-CR-00023 Robert L. Miller, Judge.
Before POSNER, Chief Judge, and CUDAHY and DIANE P. WOOD, Circuit Judges.
DIANE P. WOOD, Circuit Judge.
Argued September 20, 1996
In his position as president and largest shareholder of Valley Engineering, Inc., a small engineering and surveying firm, Grama Bhagavan was able to control the firm's day-to-day operations. And control them he did, to a fault: this case arose because Bhagavan diverted a substantial amount of money nominally due to Valley into his personal bank accounts. Worse yet, he did not report these monies as income on either Valley's corporate returns or his personal return. When the IRS caught up with him, Bhagavan eventually pleaded guilty to one count of personal income tax evasion for the tax year 1988 in violation of 26 U.S.C. sec. 7201. Bhagavan now claims that the district court made several errors in computing his Sentencing Guideline range. Because we conclude that the district court's interpretations of the Guidelines were correct and that its findings of fact were adequately supported by the evidence, we affirm the sentence.
Although Valley was a small company, Bhagavan was not its only shareholder. In addition to Bhagavan, who owned 60% of its shares, the shareholders included Bhagavan's wife, Sita, draftsman Ronald Golden, survey manager Noah Stump, and two others. Golden and Stump each owned 20 shares of stock in Valley which they each purchased in 1986 for $500 a share. Although Valley appears not to have paid dividends regularly, the record shows that in 1987, Golden and Stump each received a dividend of $200. Evidently they never received any other dividends thereafter, and the company bought out their stock in 1993. Unbeknownst to the other shareholders, Bhagavan paid himself secret stock dividends of $500 in both 1988 and 1989, and he gave Sita Bhagavan a secret $250 stock dividend in 1989. In addition, Bhagavan received director's fees of $200 in both 1987 and 1988 and of $400 in 1989, while Sita Bhagavan received director's fees of $650 in 1988 and $200 in 1989. In 1993, Valley itself was acquired by Abonmarche Consultants.
In addition to his positions as president and largest shareholder, Bhagavan was also Valley's chief operating officer. Among other things, he solicited accounts from customers, handled payment terms, and directed where payments should go. Bhagavan opened the mail personally and passed along client checks to Valley's office manager, Sharon Campbell, for deposit. Campbell followed Bhagavan's instructions on other matters as well: she made out customer invoices according to notes he left her, and she recorded those invoices and the corresponding payments on a chart she kept for each client. Valley used an outside accountant to prepare its tax returns, which were based entirely on its bank accounts without reference to its invoices or account ledgers.
This system enabled Bhagavan to manipulate which incoming business went Valley's way, and which business remained "personal" to him. From 1987 to 1991, he arranged for 19 companies to make their checks payable to him personally and deposited those checks (amounting to $98,830) in his personal bank account without reporting them as income. A total of $95,355 of the diverted income came from known Valley clients, while the remaining $3,475 came from payors who were not listed as clients in Valley's books. For the former group, Bhagavan's practice was to request the client to pay for invoices partly with checks made out to Valley and partly with checks made out in his own name. Often, Bhagavan would record "credits" or "professional discounts" in the firm's accounting books which matched the amounts of the checks made out to him personally; he then reduced Valley's accounts receivables by these amounts. For the $3,475 coming from companies that could not be identified as Valley clients, Bhagavan billed the payors on his personal letterhead. Although he reported $2,975 in imputed dividends in 1987 and 1990, Bhagavan did not file Form 1099's in any of these years, which would have been required if he had personally done $600 or more of work for a business client in a given tax year.
A grand jury initially indicted Bhagavan on seven counts of tax evasion, four relating to his individual income taxes for the years 1987-90 and three relating to false corporate tax returns for the years 1988-90. Ultimately, he entered a plea of guilty on one count of attempted individual tax evasion for the tax year 1988 and the remaining counts were dismissed. The Probation Department, using the 1988 version of the Sentencing Guidelines (because of ex post facto concerns related to changes in the tax guideline), prepared a Presentence Report (PSR), which recommended that the $95,355 coming from Valley's clients should be treated as corporate income, subject to both the double taxation treatment of imputed dividends and the higher corporate rate. That figure resulted in a total tax loss of $50,182, which in turn yielded a base offense level of 11 under the tax table at USSG sec. 2T4.1(g). The PSR also recommended a two-level enhancement under USSG sec. 3B1.3 for abuse of a position of trust, a two-level enhancement under USSG sec. 2T1.1(b)(2) for use of sophisticated means, and a two-level decrease under USSG sec. 3E1.1 for acceptance of responsibility, for a final level of 13.
At the sentencing hearing, Bhagavan argued that the unreported $95,355 represented personal income for services he performed as a private consultant, not corporate income. Both he and the government presented witnesses who testified about the internal operations and the corporate structure of Valley. The district court agreed with the government that the clients whose checks Bhagavan pocketed believed they were dealing with Valley and not with Bhagavan personally and therefore concluded that the $95,355 was properly characterized as corporate income. The district court rejected the proposed enhancement for the use of sophisticated means, but it agreed that Bhagavan had abused a position of private trust for purposes of sec. 3B1.3. As president of the company, Bhagavan had abused the trust of the other shareholders by diverting funds that could have been used to pay dividends or to improve the company's long-term prospects. Finally, the district court gave Bhagavan a two-level decrease under sec. 3E1.1 for acceptance of responsibility, which brought his final adjusted offense level back down to 11. With his ...