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United States v. Chavin

December 13, 2002

UNITED STATES OF AMERICA, PLAINTIFF-APPELLEE,
v.
LEONARD CHAVIN AND MARTIN LITWIN, DEFENDANTS-APPELLANTS.



Appeals from the United States District Court for the Northern District of Illinois, Eastern Division. No. 99 CR 282--Rebecca R. Pallmeyer, Judge.

Before Easterbrook, Kanne, and Evans, Circuit Judges. Kanne, Circuit Judge.

ARGUED SEPTEMBER 9, 2002

On July 22, 1998, this court affirmed the district court's decision to deny Leonard Chavin a discharge in bankruptcy. In re Chavin, 150 F.3d 726, 729 (7th Cir. 1998). In our opinion, we noted an ap- pearance of deliberate fraud in Chavin's bankruptcy filings. Accordingly, we referred the case to the Department of Justice for further investigation. Id. Eventually, a grand jury returned a fifteen-count superseding indictment charg- ing Chavin and his attorney, Martin Litwin, with tax and bankruptcy fraud. Following a lengthy trial, a jury found them guilty on eleven of the fifteen counts, and the district court sentenced Chavin to 37 months in prison and Litwin to 33 months in prison. On appeal, they raise multiple is- sues, including various claims related to the district court's application of the federal sentencing guidelines. We reject all of Chavin's and Litwin's arguments and affirm the dis- trict court's disposition.

I. History

A. Tax Fraud

Leonard Chavin, a businessman and investor, owned a block of commercial real estate on South Halsted in Chicago ("the Halsted property"). He also controlled a corporation known as SCV Corporation ("SCV"), which held as its only asset a clothing store that did business under the name of Howard's Style Shop ("HSS"). *fn1 The business struggled, and over a period of years Chavin personally lent SCV in excess of $900,000. In 1992, Chavin sold part of the Halsted property for $975,000, generating a substantial capital gain and greatly increasing his tax burden. *fn2 Chavin and his attorney, Litwin, devised a plan to offset the Halsted-prop- erty gain with the SCV-debt loss.

They discovered that the tax code allows an individual to take a deduction for worthless, unrecoverable debts, known as a "bad debt loss." 26 U.S.C. § 166(d) (2002). The only problem was that they had to somehow make the SCV debt worthless to Chavin. They did so by manufacturing a sham sale of SCV's only asset, the HSS clothing store, to Litwin's cousin, Michael Glickman. Glickman paid nothing out of his own pocket for HSS. He was told that the sale was nothing more than a "paper transaction"--meaning he would have no connection with the clothing store except that on paper he would be listed as the owner. Following the "sale," Chavin continued to control HSS and nothing about the business changed. And because SCV no longer had any assets of record, Chavin could claim that the debt SCV owed him was entirely worthless and thereby claim it as a bad debt loss. On his 1992 tax return, Chavin reported a capital gain from the sale of the Halsted property of $328,000. Against this, Chavin deducted $900,000 as a bad debt loss based on the SCV debt. In 1992, Chavin could only take the loss to the extent that it offset the capital gain from the Halsted-property sale plus $3000--in total $331,000; thus, he carried over the remaining portions of the loss on his returns for subsequent years.

After being alerted to possible fraud in Chavin's financial dealings, the government investigated and a federal grand jury returned a fifteen-count superseding indictment. The first six counts of the indictment related to the tax dealings just described. Count 1 charged Chavin and Litwin with conspiring to defraud the Internal Revenue Service ("IRS") through the creation of a fraudulent $900,000 bad debt loss in violation of 18 U.S.C. § 371. Count 2 charged Chavin with violating 26 U.S.C. § 7206(1) by making false state- ments on his 1992 tax return, in that he understated the sale price of the Halsted property and in that he claimed a $900,000 bad debt loss to which he knew he was not entitled. Counts 3 and 5 charged Chavin with making false statements on his 1993 and 1994 tax returns, respectively, in that he reported a false carryover loss from his 1992 return in violation of 26 U.S.C. § 7206(1). Similarly, Counts 4 and 6 charged Litwin with violating 26 U.S.C. § 7206(2) for aiding and assisting Chavin in the preparation and presentation of his 1993 and 1994 fraudulent tax returns. Following a trial, the jury convicted Chavin and Litwin on all of these tax counts.

B. Bankruptcy Fraud

The remaining charges in the superseding indictment, Counts 7 through 15, related to a bankruptcy fraud that developed when Chavin's creditors forced him into bank- ruptcy on December 30, 1994. As part of the bankruptcy proceeding, Chavin was required to file schedules disclosing all of his assets, income, and expenses. On the schedules he filed, he failed to disclose certain assets and income, in- cluding the interest he had in HSS. Also, as part of the bankruptcy proceeding, Glickman was deposed about his purported ownership of HSS. Litwin counseled Glickman on his responses so as to make it appear that Glickman owned HSS and that Chavin had no interest in the company.

The relevant portion of Count 7 charged Litwin with violating 18 U.S.C. § 1623 for aiding Glickman to commit perjury in the bankruptcy proceedings. *fn3 Litwin was found guilty on this count. Counts 8 through 13 charged Chavin with concealing various assets from the bankruptcy trustee and his creditors in violation of 18 U.S.C. § 152(1). Of these counts, the jury convicted Chavin on Counts 10 and 11, which both related to life insurance polices. Chavin was convicted on Count 14, which charged him with failing to disclose assets on his bankruptcy filings in violation of 18 U.S.C. § 152(3). Finally, the jury convicted Chavin on Count 15, which charged him with converting an asset in bank- ruptcy in violation of 18 U.S.C. § 152(7).

C. The Sentencing and Appeal

Following a sentencing hearing, the district court deter- mined that the appropriate sentencing level under the U.S. Sentencing Guidelines was 19 for both defendants, which corresponds to a sentencing range between 30 and 37 months. The district court sentenced Chavin to 37 months imprisonment and fined him $10,000 and sentenced Litwin to 33 months imprisonment and fined him $50,000.

II. Analysis

A. Trial Issues

1. Theory-of-Defense Jury Instruction

Chavin and Litwin argued as part of their defense to the tax-fraud charges that they relied in good faith on the ad- vice of Chavin's accountant Kessler and therefore did not "willfully" perpetrate the tax fraud. Defendants tendered a theory-of-defense jury instruction that covered this point. The district court, however, refused to give the instruction to the jury, stating that the theory of defense was suffi- ciently covered by other instructions; specifically, by the pattern instruction on good faith and a further instruction that made clear that defendants must have acted "willfully" within the precise definition of that term.

We review a district court's refusal to give a theory-of- defense instruction de novo. United States v. Meyer, 157 F.3d 1067, 1074 (7th Cir. 1998). To be entitled to a theory of defense instruction, a defendant must satisfy a four-part test by showing (1) that the proposed instruction is a cor- rect statement of law; (2) that the evidence in the case supports the theory of defense; (3) that the theory of de- fense is not already part of the charge; and (4) that failure to include the proposed instruction would deny the defen- dant a fair trial. Id.

Here, defendants have, at the very least, failed to satisfy the third element. We have recognized in prior tax-evasion cases that a " 'good faith reliance' defense is essentially a claim that the [defendant] did not act 'willfully.' " United States v. Brimberry, 961 F.2d 1286, 1291 (7th Cir. 1992). Consequently, when, as here, instructions are given that require the jury to find that a defendant acted "willfully" and those instructions define "willfulness" and "good faith" as mutually exclusive, then a further "good faith reliance" theory-of-defense instruction would be unnecessarily re- dundant. Id.; United States v. ...


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