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United States v. Spear

United States District Court, N.D. Illinois, Eastern Division

November 9, 2016



          Robert M. Dow, Jr. United States District Judge.

         Defendant Cheryl Spear was charged with presenting a false claim, 18 U.S.C. § 287, and theft of government funds, 18 U.S.C. § 641, in connection with an alleged scheme to defraud the Internal Revenue Service ("IRS") of a false $135, 000 tax refund. [See 1.] Defendant voluntarily waived her right to a jury trial [38] and elected to proceed with a bench trial, which began on May 23, 2016 and concluded on May 24, 2016. [See 40, 41.] Following trial, both parties filed post-trial briefs. [See 44, 45, 46, 47.]

         After carefully considering all of the parties' submissions, their stipulations, and the evidence adduced at trial, the Court sets forth below its findings of fact and conclusions of law pursuant to Federal Rule Criminal Procedure 23(c). To the extent, if any, that findings of fact, as stated, may be considered conclusions of law, they should be deemed conclusions of law. Similarly, to the extent that matters expressed as conclusions of law may be considered findings of fact, they should be deemed findings of fact. In the end, the Court concludes that the Government established beyond a reasonable doubt that Defendant knowingly presented a false claim in violation of 18 U.S.C. § 287 and knowingly committed theft of government funds in violation of 18 U.S.C. § 641. Accordingly, the Court finds Defendant guilty of both charges in the Indictment [1]. This matter is set for status hearing on December 1, 2016 at 9:00 a.m.

         I. Findings of Fact

         In the three years leading up to 2009, Defendant Cheryl Spear filed individual tax returns that were roughly similar. In tax year 2006, Defendant filed a Form 1040 for an individual income tax return that reported an adjusted gross income of $36, 352 and requested a tax refund of $2, 359. (Gov. Ex. 101; Tr. 22-23, May 23, 2016 a.m.) In tax year 2007, Defendant's Form 1040 reported an adjusted gross income of $19, 283 and requested a tax refund of $6, 609. (Gov. Ex. 102; Tr. 23-24, May 23, 2016 a.m.) That year, she also reported the income from her towing business, Lyrehc Towing, as $5, 250 in adjusted gross income and $8, 150 in total expenses, which amounted to a business loss of $2, 900. (Gov. Ex. 102 at 7; Tr. 24, May 23, 2016 a.m.) In tax year 2008, Defendant's Form 1040 reported an adjusted gross income of $7, 076 and requested a tax refund of $3, 277, but did not report any income or losses associated with her business. (Gov. Ex. 103; Tr. 25, May 23, 2016 a.m.) Defendant listed H&R Block as her third-party tax preparer on all three of these returns. (Gov. Exs. 101 at 3, 102 at 3, 103 at 3.) In 2006, her tax preparation fee was $242. (Gov. Ex. 101 at 5; Tr. 23, May 23, 2016 a.m.)

         Defendant deviated significantly from this past practice for tax year 2009. In December 2009, the IRS received an online application for an Employer Identification Number (EIN) for the "Cheryl Spear" trust. (Gov. Ex. 113; Tr. 27-29, May 23, 2016 a.m.) Just like a social security number for a natural person, an EIN serves as the tax identification number for a trust or corporate entity. (Tr. 79, May 23, 2016 p.m.) The EIN application identified the "TTEE" or trustee as "Cheryl L. Spear" and listed Defendant's home address and social security number. (Gov. Ex. 113; Tr. 29, May 23, 2016 a.m.) The IRS issued an EIN for this trust based on this application. (Gov. Ex. 113.)

         On January 6, 2010, the IRS received a Form 1041-the income tax form used for estates and trusts-on behalf of the "Cheryl McCain" trust for tax year 2009. (Gov. Ex. 105.) Defendant's maiden name is Cheryl McCain. (Tr. 86, May 23, 2016 p.m.) The form lists "Cheryl L. Spear" as "Trustee, " Defendant's home address, and the same EIN from the December 2009 EIN application for the "Cheryl Spear" trust. (Gov. Ex. 105; Tr. 30, May 23, 2016 a.m.) The box for "simple trust" is checked. (Gov. Ex. 105.) According to IRS revenue agent Paul Ponzo, the trustee is responsible for signing the Form 1041. (Tr. 51, May 23, 2016 a.m.) Here, the Form 1041 is signed with Cheryl Spear's name and dated January 4, 2010. (Gov. Ex. 105.)

         There is no dispute that the Form 1041 contains several falsehoods. First, the "Cheryl McCain" trust claimed $405, 000 in income for 2009 notwithstanding the fact that the trust was created on December 14, 2009-two weeks before the end of the tax year. (Gov. Ex. 105; Tr. 30-31, May 23, 2016 a.m.) The trust did not identify the source of that income despite a requirement to do so. (Gov. Ex. 105; Tr. 53, May 23, 2016 a.m.) Second, the trust claimed that this entire $405, 000 amount was owed as "fiduciary fees" to the trustee, "Cheryl L. Spear." (Gov. Ex. 105; Tr. 53, May 23, 2016 a.m.) Typically, fiduciary fees are paid for work performed by the fiduciary, while income from a simple trust is distributed to the trust's beneficiaries. (Tr. 50, 54, May 23, 2016 a.m.) Agent Ponzo testified that it would be "unusual" that all of a trust's income would be paid as a fiduciary fee. Id. He also explained that fiduciary fees are income that must be reported on the fiduciary's personal Form 1040. Id. Third, the trust claimed a $4, 950 exemption. (Gov. Ex. 105.) The maximum exemption permitted by law for a simple trust is $300. (Tr. 55, May 23, 2016 a.m.) Fourth, and most importantly, the trust represented that the trustee was due $135, 000 as a refund because this amount had been withheld as federal income taxes during its two-week existence. (Gov. Ex. 105; Tr. 31, 56, May 23, 2016 a.m.) The IRS has no records that any federal income taxes were withheld from this trust in 2009, and thus no refund was actually owed. (Gov. Ex. 119; Tr. 34-35, 57, May 23, 2016 a.m.)

         One month after this Form 1041 was filed, Defendant filed a Form 1040A representing her personal tax return for 2009. (Gov. Ex. 118.) That return lists her adjusted gross income as $29, 340, requests a tax refund of $4, 041, and did not report any business income or losses. Id. Defendant did not report $405, 000 as fiduciary fee income. (Id; Tr. 55, May 23, 2016 a.m.) Like her other individual tax returns from 2006 through 2008, Defendant listed H&R Block as her third-party tax preparer. Id. at 3.

         The IRS did not discover the problems with the Form 1041 right away. Instead, it issued a refund check dated March 16, 2010 to "Cheryl Spear, Cheryl L. Spear TTEE" for $135, 000, which it mailed to Defendant's home. (Gov. Ex. 106; Tr. 81, May 23, 2016 p.m.) The right-hand side of the check includes the phrase "CNCNATIF-1041 REF, " which denotes a Form 1041 refund mailed to the IRS's Cincinnati Service Center. (Tr. 33, May 23, 2016 a.m.) Below that phrase is the number "12/09, " which stands for December 2009. Id.

         Defendant flew to Chicago from Florida once the IRS issued the refund check. (Tr. 90-93, May 23, 2016 p.m.) She did not call H&R Block about the refund. (Tr. 92-93, May 23, 2016 p.m.) She purportedly called the IRS to "verify" the check, but never spoke with a live person. (Tr. 136-37, 143, May 23, 2016 p.m.) Instead, on March 24, 2010, Defendant traveled to Chase Bank in Chicago-where she had personal checking and savings accounts-to open a new trust checking account under the name "Cheryl L Spear TTEE, Cheryl L Spear Trustee." (Gov. Exs. 303, 304.) To open this account, Defendant provided her Florida driver's license, a debit card, and social security number for identification. (Gov. Ex. 303; Tr. 65-66, May 23, 2016 a.m.) She listed her home address on the account. (Gov. Ex. 303; Tr. 83, May 23, 2016 p.m.) She also provided a copy of a "Deed of Trust Contract" that appeared to create a trust. (Gov. Ex. 307 at 11.) This document, which Defendant signed, provides that the "Trustee shall receive annual compensation of $1, 000.00 (One Thousand Dollars), or quid pro quo, substance for substance, on an equal exchange of $1, 000.00 (One Thousand Dollars), payable in silver or gold via monthly, bi-annual or annual payments for services to the Trust."[1] Id. at 6.

         After opening the trust checking account, Defendant endorsed the back of the $135, 000 check and deposited it into the account. (Gov. Exs. 106, 306; Tr. 82, May 23, 2016 p.m.) The check was negotiated and paid by the United States Department of the Treasury on March 26, 2010. (Gov. Ex. 106; Tr. 34, May 23, 2016 a.m.; Tr. 82, May 23, 2016 p.m.)

         Defendant did not save this money for a rainy day. She withdrew $5, 031.95 from the account during the last five days of March 2010, $47, 072.70 in April, $81, 038.14 in May, and $3, 926.22 in June. (Gov. Ex. 603.) On June 10, only $14.87 was left in her account. Id. These withdrawals were mostly in the form of debit card purchases and cash withdrawals. (Gov. Exs. 306, 602.) But Defendant also transferred more than $30, 000 to her personal checking account and gave tens of thousands of dollars to her family members for use on cars and home repairs. (Gov. Exs. 306, 602, 604; Tr. 110-16, May 23, 2016 p.m.) More than $65, 000 was withdrawn from the trust account in a single week in May-an amount just shy of Defendant's total annual income from the prior three years combined. (Gov. Exs. 101-103, 602 at 2.)

         On June 16, 2010, the IRS's Frivolous Return Program sent a Form 3176C letter-also referred to as a frivolous filing letter-to Defendant's home address. (Gov. Ex. 108; Tr. 36-37, May 23, 2016 a.m.) The taxpayer identification number listed on the top of the form is Defendant's social security number, not the trust's EIN. (Gov. Ex. 108; Tr. 37, May 23, 2016 a.m.) The letter stated that the IRS deemed the trust's 2009 Form 1041 to be frivolous. (Gov. Ex. 108.) The IRS notified Defendant that if she did not file corrected tax returns with 30 days or if she submitted another frivolous response, she would be assessed a $5, 000 penalty per return. Id. Defendant did not submit a corrected return or pay the $5, 000. Instead, she stamped each page of the letter with the phrase "Accepted for value and returned for value by authorized representative, " signed it, and sent it back to the IRS.[2] (Gov. Ex. 108; Tr. 37-38, May 23, 2016 a.m.) Needless to say, the IRS did not consider this an acceptable response and assessed the $5, 000 penalty against Defendant. (Gov. Ex. 105; Tr. 36-38, May 23, 2016 a.m.) Ultimately, tax year 2009 is the one and only year that the "Cheryl Spear" or "Cheryl McCain" trust ever filed a Form 1041. (Gov. 110; Tr. 35, May 23, 2016 a.m.)

         In 2014, IRS criminal investigation agent Denis Umali began investigating Defendant. (Tr. 76-78, May 23, 2016 p.m.) He conducted in-person interviews with Defendant on June 17 and December 1, 2014, and phone interviews on July 8, 2014. (Tr. 85, 93-94, May 23, 2016 p.m.) During the first interview, Defendant admitted that the Form 1041 included her maiden name and address, but denied that it was her signature on the form or that she had seen the form before.[3] (Tr. 86, May 23, 2016 p.m.) She also could not recall obtaining the EIN listed on the form. (Tr. 87, May 23, 2016 p.m.) Defendant confirmed that she had never earned $405, 000, but claimed that she had received a tax refund of $75, 000 or $80, 000. Id.

         Defendant told Agent Umali that she had heard "through word of mouth or through a flyer" about Saadiq Bey, a business accountant or tax preparer. (Tr. 88, 129, May 23, 2016 p.m.) "Bey" is a last name adopted by some followers of the Moorish Science Temple. (Tr. 120, May 23, 2016 p.m.) Defendant knew that Bey was associated with this group and mentioned this information to Agent Umali. (Tr. 129-30, May 23, 2016 p.m.) In 2009, Defendant met Bey at a Starbucks, and he offered to help her write off a loss from her tow truck business to receive a tax refund of $20, 000 or $30, 000. (Tr. 88-89, May 23, 2016 p.m.) Defendant claimed that this loss occurred because her business failed after she became injured, which occurred shortly after purchasing a tow truck for $80, 000 or $90, 000. Id. In fact, Michael Fresso, owner of Town and Country Motors, testified that he sold a used 2001 tow truck to Defendant in late-June 2007 for $20, 000 in cash. (Gov. Ex. 401; Tr. 68-72, May 23, 2016 a.m.) Defendant told Agent Umali that she signed "some sort of form that had profits or losses at the top" and provided Bey with information about her tow truck business. (Tr. 89, May 23, 2016 p.m.) Bey purportedly gave her an IRS phone number to check on the status of the refund. (Tr. 89-90, May 23, 2016 p.m.)

         Agent Umali then showed Defendant the $135, 000 refund check (Gov. Ex. 106), and she confirmed that she had signed this check. (Tr. 90, May 23, 2016 p.m.) Defendant stated that, in March 2010, Bey called her while she was living in Florida to say that he had her refund check in his hands. Id. Defendant believed that Bey "must have waited around for the mailman to deliver" the refund check because there was no one living at her address at the time and her mailbox is behind a locked front entry door. (Tr. 91, May 23, 2016 p.m.) Defendant said that she flew back to Chicago to meet Bey at Chase Bank, but could not recall opening a new trust account. (Tr. 93, May 23, 2016 p.m.) Agent Umali then showed her the form that she used to open the account (Gov. Ex. 303), and she confirmed that it was her signature on the form. (Tr. 93, May 23, 2016 p.m.) Defendant further stated that she made arrangements to pay Bey $20, 000 and another of his associates $15, 000, which she was supposed to do after the money from the refund check cleared. (Tr. 93-94, May 23, 2016 p.m.)

         On July 8, 2014, Agent Umali and Defendant spoke by phone. (Tr. 94, May 23, 2016 p.m.) On this call, Defendant indicated that she formed her tow truck business in 2008, but she never filed a tax return for the business. Id. She repeated that Bey had offered to help her with a tax write-off for losses that she had suffered from this business. Id. Defendant also "wonder[ed] aloud" to Agent Umali "if there was possibly ...

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