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United States v. Perez

July 6, 2010

UNITED STATES OF AMERICA, PLAINTIFF-APPELLEE,
v.
FLAVIO PEREZ, DEFENDANT-APPELLANT.



Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 07 CR 166-John W. Darrah, Judge.

The opinion of the court was delivered by: Manion, Circuit Judge.

ARGUED FEBRUARY 10, 2010

Before RIPPLE, MANION, and WILLIAMS, Circuit Judges.

A jury convicted Flavio Perez of two counts of filing false federal income tax returns. The district court sentenced Perez to 33 months' imprisonment. Perez appeals, claiming that the district court violated his right to be present at trial by conducting a jury instruction conference in his absence. He also challenges the district court's failure to provide a jury instruction on the government's net worth and expenditure method of proof, its limitation on expert testimony, and the sufficiency of the evidence. We affirm.

I.

Flavio Perez ran a drywall installation company called Chateau Drywall, Inc., and a related sole proprietorship. The sole proprietorship received income from Chateau Drywall and in turn the sole proprietorship distributed payments to Perez and other drywall installers who were classified as independent contractors. Perez reported the income from the sole proprietorship on his Schedule C.

In 2000 and 2001, Perez declared on his federal income tax return (filed jointly with his wife, Sara Bello) total income of $125,079 and $268,387, respectively. The income tax returns were prepared by tax preparers Urbaldo Rojas and Arthur Rubalcaba based on information Bello and Perez provided them.

The government believed that Perez had purposely under-reported his income and charged him in a two-count information with filing false individual federal tax returns in violation of 26 U.S.C. § 7206(1).*fn1 Perez pleaded not guilty and proceeded to trial. At trial, the government sought to prove its case using the "net worth and expenditure method" ("net worth method"). Under the net worth method, an individual's actual income is estimated by comparing his net worth at the beginning of the tax year to his net worth at the end of the tax year, taking into account expenditures for basic living expenses and any non-taxable sources of assets (such as gifts, inheritances, and loans). See Holland v. United States, 348 U.S. 121, 125 (1954)(explaining the net worth method of proof).

The government presented evidence that on December 31, 1999, Perez's net worth was approximately $100,000, that during 2000, he had expenditures of about $123,000, and that by the end of the year his net worth increased to $218,911. Because Perez had reported income of only $125,079 for 2000, the government's expert concluded that (to increase his net worth by as much as he did in 2000) Perez had unreported income of more than $100,000. For 2001, the government's expert determined that Perez's net worth increased from $218,911 to $571,488, and that he had expenditures of approximately $186,000. Because Perez had reported income of only $268,387 for 2001, the government's expert concluded that (to increase his net worth by as much as he did in 2001) Perez had unreported income of more than $200,000.

At trial, the government also presented evidence that Perez gave clients discounts for cash jobs, paid some of his independent contractors in cash, and did not inform his wife-who usually provided the tax preparers with the financial information used to prepare the tax returns-of some of the cash-based jobs. Additionally, the government presented evidence that Perez provided the tax preparers with a last-minute list of deductions, without any supporting documentation, exceeding by more than $111,000 the amount of deductions they had calculated using business records Bello gave them.

Perez presented his own expert witness who challenged numerous aspects of the government's calculation of Perez's income under the net worth method. Perez also elicited testimony from his expert that the net worth method is "not the most accurate or reliable method for determining taxable income. The most accurate and reliable would be the specific items method that was mentioned by [the government's expert]." The government objected to Perez's expert expressing general criticisms of the method and asked that the expert's testimony be limited to specific criticisms about how the net worth method was applied in Perez's case. At side bar, the district court stated, "[h]e just opined that the net worth analysis itself is somehow unreliable. What's the basis of that opinion?" Perez's attorney responded: "Based on his experience." The district court responded, "No," and the prosecutor then said: "We would move to strike that." The district court then stated:

Yes. You can render an opinion-he can testify in the form of opinion if the testimony is based upon sufficient facts or data, the testimony is the product of reliable principles and methods, and the witness has applied the principles and methods reliably to the facts. What testimony is he going to offer that would supply the data or facts to support that opinion, and what principles or methodology did he use to result to arrive at that opinion?

Rather than respond to the district court's questions, Perez's trial counsel stated, "I'll just move on." The district court responded: "No, no," to which Perez's attorney said, "We'll withdraw it." The district court then responded: "No. We're going to sustain the objection, and I'll instruct them to disregard." Perez's attorney responded: "Absolutely, judge." The court so instructed the jury.

Bello also testified; she testified that they had provided Rojas and Rubalcaba all relevant information and had relied on the tax professionals to prepare accurate income tax returns. Bello explained that she had informed Rojas and Rubalcaba that Perez had received a piece of land in payment of a $60,000 business debt and that, unbeknownst to the Perezes, Rojas and Rubalcaba had neglected to include that income on Perez's tax return.

After the close of evidence, the district court met with the attorneys in open court to discuss jury instructions. Perez, however, was not present for this conference. The government offered a jury instruction explaining the net worth method, but Perez's attorney stated that the defense did not want the jury provided with a net worth instruction because by explaining the net worth method to the jury, "[i]t's basically the stamp of approval by the court." He also stated that Perez's defense was to challenge the accuracy and completeness of the net worth method.

The following day the judge revisited the issue, but Perez was also absent for this conference. The judge began by noting that Perez has "the right to instruct the jury on the net worth method." The court then asked Perez's attorney: "[D]o you wish to give the instruction?" He responded: "No, your Honor, we do not." The court then added: "You understand that you have an absolute right to give it, and you understand that if you offered such an instruction, I would give it." Again, Perez's attorney responded: "Yes, your Honor, I do." The court further clarified Perez's intent by asking: "In representing your client, you choose to follow a strategy that would not include giving this instruction?" Perez's attorney responded: "Correct, your Honor." The Assistant United States Attorney at this point noted that Perez was not present and the court followed up by asking Perez's attorney: "Have you discussed this with your client as well?" Perez's attorney replied: "I have discussed it with him.*fn2 I haven't discussed it in terms of explaining Tolbert, of course, and I will confirm this when he gets here. And if you would like, we can put it back on the record that I've now explicitly told him that." The court decided instead to direct Perez's attorney to inform him of the court's comments and to tell Perez the court would give the instruction if he desired. The ...


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