September 22, 2018

Tenth Circuit: Defendant Sentenced to Significant Jail Time After Evasion of Personal Taxes

Tenth Circuit Court of Appeals issued its decision in United States v. Stegman on Friday, October 20, 2017.

Defendant Stegman owned and operated Midwest Medical Aesthetics Center (Midwest), which provided a wide range of medical aesthetic services. Clients were permitted to pay with a credit card, cash, or check made out to Stegman personally, who encouraged cash or checks. Stegman would personally collect the cash and checks at the end of each business day.

Stegman then established several limited liability companies (LLCs), which were effectively used to launder Midwest client payments. Stegman would use the LLCs to purchase money orders that she then used to purchase items for personal use. Stegman reported zero cash income on her federal income tax returns in 2007, 2008, and 2009.

Stegman employed two separate tax preparers for her corporate and personal tax returns. Stegman provided Jones, the corporate tax preparer, with Midwest bank account information, but did not provide Jones with bank records for the other accounts into which she deposited Midwest income. Similarly, Stegman did not provide Lake, the personal tax preparer, with accurate records of the Midwest client payments that she used to purchase personal property.

When Stegman was audited for the 2007 and 2008 tax returns, Stegman said Midwest never accepted cash payments, stated that the source of her money came from relatives or savings, and gave conflicting information for the purpose of one of her LLCs. The case was then referred to the IRS’s criminal investigation division. The investigation that followed revealed that Stegman used her LLCs to create false business expenses, that Stegman altered Midwest’s ledgers and directed other employees to destroy business records, and that Stegman encouraged a former Midwest client, Clark, to tell the IRS that she, Clark, didn’t remember anything about her dealings with Midwest. Stegman raises five issues on appeal.

1. The Amendment of the Indictment During Trial

Stegman argued that the district court erred by granting the government’s motion to amend the indictment during trial. The indictment in this case alleged that Stegman was the owner and operator of “Midwest Medical Aesthetics Center” and not “Midwest Medical Aesthetics Center, Inc.” The Tenth Circuit distinguished between a district court’s amending an indictment as to form, which is permissible, and as to substance, which is impermissible. An amendment as to form is 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.

Stegman argued that the amendment, which substituted the name of one business entity for another, was substantive. The Tenth Circuit disagreed. Contrary to Stegman’s assertion, and consistent with what the district court concluded, the amendment was merely a matter of form, and dropping the “Inc.” accurately reflected the change that Stegman made to the structure of her business. 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 further argued that the jury was never told there was an amendment or that she was entitled to rely on the indictment and, as a result, the jury may have been left with the impression that she misled them. The Tenth Circuit disagreed for several reasons. First, Stegman’s counsel conceded that Stegman never asked for such an instruction. Second, she failed to properly alert the district court to her constitutional challenge. Third, the argument lacked merit given the conclusion that the amendment was one of form only. Finally, the evidence of Stegman’s guilt was overwhelming and thus the district court’s decision did not deprive her of the right to a fair trial.

2. The Purported Braswell Violation

Stegman next contended that the government violated the Supreme Court’s decision in Braswell v. United States, 487 U.S. 99 (1988), by using corporate records against her as an individual. The company ledgers were obtained by compulsory summons issued to her. The Court in Braswell noted that it had long recognized that, for purposes of the Fifth Amendment, corporations and other collective entities are treated differently from individuals.

Prior to trial, Stegman moved to exclude from evidence handwritten ledgers of Midwest that were produced to the IRS pursuant to a Corporate Summons. Stegman argued, in pertinent part, that under Braswell, the Government could not introduce into evidence the fact that Stegman produced the documents in response to a subpoena, and thus could not attribute the documents to Stegman as an individual. Contrary to Stegman’s assertions, however, the Tenth Circuit found no violation of Braswell.

3. The Alleged Destruction of Exculpatory Evidence

Stegman also argued that the district court erred in denying her motion to dismiss the indictment due to destruction of exculpatory evidence.

After Stegman’s audit was referred to the IRS’s criminal investigation division in 2009, the IRS’s civil division forwarded to the criminal division a referral package of documents that included the file from an earlier audit that the IRS had conducted for the 2000 and 2001 tax season. The file was ultimately destroyed at the National Archives and Record Administration facility without the IRS’s knowledge.

Stegman moved to dismiss the indictment due to destruction of exculpatory evidence, namely the old civil audit file relating to her tax returns for 2000 and 2001. Stegman argued that these returns contained positions that were similar, if not identical, to the positions the government claimed were criminal in this case, and that the IRS found the 2000 and 2001 tax returns were accurate and did not assess any additional tax.

Where, as here, a defendant made the necessary request, but the evidence was no longer available at that time, the failure to preserve the evidence violates due process if the evidence was exculpatory and its exculpatory value was apparent before its loss. If, however, the evidence was not apparently exculpatory but merely potentially useful, the failure to preserve the evidence does not violate due process unless the criminal defendant can show bad faith on the part of the police.

The Tenth Circuit concluded that the district court did not clearly err in finding that the exculpatory value of the civil audit file was not apparent, as Stegman failed to challenge the district court’s finding that many of the documents could be obtained from other sources. Further, Stegman failed to establish that she relied in good faith on the IRS’s determination that her tax positions in 2000 and 2001 were valid. Lastly, Stegman failed to produce any evidence that the IRS itself played a role in the file’s destruction or any authority supporting a per se bad faith rule.

4. The Admission of Testimonial Statements from Don Lake

In her fourth issue on appeal, Stegman argued that the district court erred by allowing the government to introduce testimonial statements from her now-deceased personal tax preparer, Don Lake, in violation of the Confrontation Clause.

In her appeal, Stegman focused on the district court’s admission of Exhibit 85, a fax cover sheet and faxed records that Lake sent to an IRS Revenue Agent during the course of the IRS’s investigation. Mrs. Lake identified Don Lake’s handwriting on the fax cover sheet and on some of the accompanying records. Stegman objected to Exhibit 85, arguing that the language on the fax cover sheet violated her confrontation rights.

The Tenth Circuit remarked that Stegman made no attempt to challenge the district court’s finding that the papers contained in Exhibit 85 were actually her own financial documents rather than Lake’s work papers. She also failed to make a showing that the documents were testimonial in nature, which is a requirement for a challenge under the Confrontation Clause. As for the fax cover sheet that contained Lake’s handwriting, the Tenth Circuit agreed with the district court that it was also not testimonial in nature.

5. Stegman’s Advisory Sentencing Range

Finally, Stegman argued that the district court erred by miscalculating her advisory sentencing range under the Sentencing Guidelines. More specifically, Stegman asserted that the district court improperly calculated the intended tax loss and improperly applied the sophisticated means and obstruction of justice enhancements in calculating her advisory Guidelines sentencing range.

The Sentencing Guidelines apply to tax-related crimes, such as those of which Stegman was convicted. It directs a district court to apply a base offense level from the Tax Table corresponding to the tax loss. If the offense involved both individual and corporate tax returns, the tax loss is the aggregate tax loss from the offenses added together. The district court in this case found that the corporate tax loss and the individual tax loss were inextricably intertwined, and Tenth Circuit agreed.

One section of the Sentencing Guidelines states that if a tax-related offense involved sophisticated means, the base offense increases. “Sophisticated means” includes especially complex or especially intricate offense conduct pertaining to the execution or concealment of an offense, and includes conduct such as hiding assets or transactions through the use of fictitious entities, corporate shells, or offshore financial accounts. The district court in this case concluded that the “sophisticated means” enhancement applied to Stegman, and the Tenth Circuit found no error.

The Sentencing Guidelines further direct a district court to increase a defendant’s offense level if the defendant willfully obstructed or impeded, or attempted to obstruct or impede, the administration of justice with respect to the investigation, prosecution, or sentencing of the instant offense of conviction and the obstructive conduct related to (A) the defendant’s offense of conviction and any relevant conduct, or (B) a closely related offense. The district court in this case found that Stegman obstructed the IRS’s investigation in three ways: directing employees to shred receipts that documented cash that she received from her business, altering Midwest ledger entries to change the characterization of the way certain expenses were entered so that they appeared to be legitimate business expenses, and directing a witness, Clark, to testify that she did not remember her business relationship with Midwest.

Stegman argued that any attempt she made to tamper with Clark’s testimony was unsuccessful because Clark told investigators that she couldn’t recall what happened when she was a client of Midwest. Notably, the district court found that even if Stegman’s attempt to influence Clark’s testimony was unsuccessful, it nevertheless was an attempt to obstruct justice. The Tenth Circuit, therefore, concluded that the district court did not err in applying the obstruction of justice enhancement.

The Tenth Circuit Court of Appeals AFFIRMED the judgment of the district court.

Colorado Supreme Court: Corporate Veil Properly Pierced to Impose Attorney Fees on LLC Manager

The Colorado Supreme Court issued its opinion in Stockdale v. Ellsworth on Monday, December 18, 2017.

Corporations—Piercing the Corporate Veil—Attorney Fees—Joinder.

The Colorado Supreme Court reversed the Colorado Court of Appeals’ opinion vacating the trial court’s judgment awarding attorney fees. The court held that the trial court properly pierced the corporate veil to impose joint and several liability on a limited liability company’s managing member for attorney fees. The court also held that the managing member was properly joined as a party to the litigation, and that imposing such liability did not violate the managing member’s due process rights under the circumstances of this case.

Summary provided courtesy of Colorado Lawyer.

Top Ten Programs and Homestudies of 2016: Business Law

The year is drawing to a close, which means that the compliance period is ending for a third of Colorado’s attorneys. Still missing some credits? Don’t worry, CBA-CLE has got you covered.

Today we are featuring the Top Ten Business Law Programs and Homestudies of 2016. These programs represent only a sampling of the wide array of business law programs and homestudies available; visit www.cba-cle.org/Practice-Area/Business to see a great selection of business-related books and programs.

10. M&A World in 15 & 2016: What Did Your CO Investment Bankers See in 15 & What Do They Expect in 2016
Investment bankers from five of Denver’s investment banking firms discussed their thoughts on what they expected to see in the M&A world in 2015, what they actually saw in 2015 and what they expected to see in 2016. The panel will provide their insights on the M&A market, trends in structuring and negotiating M&A transactions, legal issues arising in M&A transactions, particular trends in the Colorado M&A market, and their expectations going forward in 2016. Watch this  Video OnDemand homestudy (or listen to the MP3 audio homestudy) to find out if the investment bankers’ predictions were correct. Available for 2 general credits.

9. How to Understand and Analyze Financial Statements: What Lawyers Need to Know
Complex financial issues are involved in nearly every area of law, and it is your responsibility to master the skills and knowledge necessary to handle those issues effectively. This detailed program provides you with the financial literacy required to protect yourself and your clients by guiding you through an understanding of accounting concepts, terminology, and financial statements. Beginning with an examination of Generally Accepted Accounting Principles and continuing with an overview of an actual financial statement, you will gain hands-on-experience from Doug Smith, one of the nation’s leading experts in the field. Order the Video OnDemand here, the CD homestudy here, or the MP3 here. Available for 6 general credits.

8. Business Document Drafting Series: Drafting Compensation and Other Employment Agreements
Learn about the various agreements employers enter into with their current and former employees. Learn about the mechanics of these agreements, the legal parameters that apply to these agreements, how employers use these agreements to protect intellectual property and retain key employees, and the challenges posed by M&A activities. Our experienced practitioner will also teach about the important provisions in executive compensation agreements, including change in control provisions, non-competition and other restrictive covenants, and separation agreements. Order the Video OnDemand here, the CD homestudy here, and the MP3 here. Available for 2 general credits.

7. Business Document Drafting Series: Drafting LLC and Partnership Agreements
This program provides an overview of the primary drafting considerations in both LLC and partnership agreements. Learn about the key provisions and issues in drafting the LLC operating agreement as well as how to prepare the Articles of Organization. Also, learn about the most important drafting issues for a partnership, such as capital and partnership interests, profit, loss, cash flow, management and dissolution. Order the Video OnDemand here, the CD homestudy here, and the MP3 here. Available for 2 general credits.

6. Business Contracts — The Fundamentals
Drafting contracts is the bread and butter of business law attorneys. In this program, twelve Moye White attorneys discussed various aspects of contract drafting, from compliance with state and federal securities laws to sponsorship agreements and sweepstakes events to mergers and acquisitions. As a bonus, the ePDF of CBA-CLE’s book, Business Contracts, is provided with every homestudy. Order the Video OnDemand here, the CD homestudy here, or the MP3 here. Available for 6 general credits.

5. Business Document Drafting Series: Boilerplate and Drafting Business Documents
This program provides practical advice on the perils of boilerplate in document drafting. Hear specific examples of drafting issues when you use forms. Learn the importance of keeping provisions current with case law, and knowing the definition of terms you use in your agreements. Better understand the value of silence, ambiguity, and knowing for whom you are drafting provisions. Know when to avoid “overdrafting.” Learn from a practitioner with a wealth of experience in preparing the many, many different documents required of a business lawyer. Order the Video OnDemand here, the CD homestudy here, and the MP3 here. Available for 2 general credits.

4. Advising Entrepreneurs
Whether you are new to the business law arena, expanding your practice, or simply need a refresher to get up to date on advising entrepreneurs, this homestudy provides current and expert guidance on the issues, questions, and documents you will most likely encounter when representing the entrepreneur.  Develop and fine tune the lawyering skills needed to better advise entrepreneurs and start-up companies. Order the Video OnDemand here, the CD homestudy here, or the MP3 here. Available for 6 general credits, including 1 ethics credit.

3. Business Document Drafting Series: Drafting IP Licenses, InfoTechnology Contracts, and Related Documents
Businesses are focusing more and more on their intellectual property assets, and license agreements are used both to protect those assets and to leverage those assets as a source of revenue. You don’t have to be an intellectual property specialist to benefit from a fundamental understanding of how and why licenses for software, trademarks, copyrights, patents and other types of intellectual property are created. In addition, software and information technology services are increasingly a part of every type of business, so it is important to understand the company’s rights with respect to IT services and software that it receives from third parties. Learn the basics of drafting and reviewing these documents in this information-packed program! Order the Video OnDemand here, the CD homestudy here, and the MP3 here. Available for 2 general credits.

2. Limited Liability Companies in Colorado
The limited liability company (LLC) has been a very popular choice of entity for many types of business since the Internal Revenue Service adopted the “check-the-box” regulations in December 1996. Because of the combination of limited liability for all owners of the LLC, pass-through tax treatment, and ease and flexibility in customizing the relationships between the owners, the LLC is seen by many as providing the best of all worlds. Of course, there are specific disadvantages to using an LLC, and the specific facts of each matter must be analyzed before making a decision to move forward with organizing an LLC. Each homestudy order receives a copy of the CBA-CLE book, Limited Liability Companies and Partnerships in Colorado, First Edition as part of the course materials for this program. Please note the book will be provided in PDF. Order the Video OnDemand here, the CD homestudy here, and the MP3 here. Available for 8 general credits, including 1 ethics credit.

1. Annual Institute on Advising Nonprofit Organizations in Colorado/A Primer on Advising Nonprofits
This annual program provides a comprehensive overview of issues related to advising nonprofit organizations. Although it is not available as a homestudy, the live program is worth attending every year. Visit ColoradoBusinessLawInstitute.org for more information and registration information for the 2017 program.

Two Law Legends and CBA-CLE Recognized by International CLE Organization for Legal Publication: Limited Liability Companies & Partnerships in Colorado

StarburstAwardsLogoThe Association for Continuing Legal Education (ACLEA), an international continuing legal education organization, awarded Colorado Bar Association CLE (CBA-CLE) with the Award of Outstanding Achievement in the publication category for its business law book Limited Liability Companies and Partnerships in Colorado.

Lidstone-SparkmanAttorneys Herrick Lidstone, Jr. and Allen Sparkman, two business law legends in Colorado, have taken a complex subject and written a clear, concise treatise on how to structure a business. The criteria for an ACLEA award include excellence in style, innovation, and content, in addition to the book’s appeal to a broad spectrum of the legal community. CBA-CLE Assistant Executive Director Dawn McKnight says, “We are extremely honored to win this award and grateful to have as authors two legends in the field, Herrick Lidstone and Allen Sparkman. Their vast experience, diligence, and thoroughness are evident throughout the book. They spent countless hours researching, writing, and revising this treatise to make it a comprehensive guide for practitioners.”

ABOUT THE BOOK:

Partnerships and other business entities have a fascinating history going back thousands of years.  Now in the twenty-first century, the variety of ways in which a new business may be formed and operated has made this a complex and especially important practice area.  Limited Liability Companies and Partnerships is a business law treatise for practitioners as they advise clients on issues from the time of a business’s formation to the time of dissolution. Topics include: choice of entity, formation and dissolution of the entity, creditor rights, securities and tax issues, as well as ethical considerations.

ABOUT THE AUTHORS:

Lidstone_HerrickHerrick Lidstone, Esq. is a shareholder and managing director of Burns Figa & Will, P.C. in Greenwood Village, Colorado. Mr. Lidstone practices in the areas of business transactions, including partnership, limited liability company, and corporate law, federal and state securities compliance, mergers and acquisitions, contract law, tax law, real estate law, and natural resources law. Mr. Lidstone’s work includes the preparation of securities disclosure documents for financing transactions, as well as agreements for business transactions,

limited liability companies, partnerships, lending transactions, real estate and mineral property acquisitions, mergers, and the exploration and development of mineral and oil and gas properties.

SparkmanAllenAllen Sparkman, Esq. practices law in Denver and Houston as a partner of Sparkman + Foote LLP. Mr. Sparkman’s practice includes the areas of business transactions, securities, tax, and professional responsibility. Mr. Sparkman’s work includes the preparation of securities disclosure documents for start-up companies in a variety of fields, including offshore oil and gas exploration, foreign mining operations, real estate, and comic book certification. He also regularly prepares LLC and partnership documents, and represents buyers and sellers of businesses, including preparing or reviewing all necessary legal documents.

ABOUT CBA-CLE:
Colorado Bar Association CLE (CBA-CLE) is the nonprofit educational arm of the Colorado Bar Association and the Denver Bar Association. We produce high-quality continuing legal education programs and legal publications for attorneys and legal professionals.

The Colorado Lawyer Book Review: Limited Liability Companies and Partnerships in Colorado

Editor’s Note: This article originally appeared in the March 2016 edition of The Colorado Lawyer. Reprinted with permission.

ZLLCAP15Limited Liability Companies and Partnerships in Colorado 

by Herrick K. Lidstone, Jr. and Allen Sparkman
687 pp., plus CD-ROM; $109 ($99 for CBA members)
CLE in Colorado, Inc., 2015
1900 Grant St., Ste. 300, Denver, CO 80203
(303) 860-0608; www.cle.cobar.org

Reviewed by Keith M. Olivia

Keith M. Olivia is a member of Roberts & Olivia, LLC in Boulder, where he represents businesses and individuals in their transactional matters. He is also an adjunct faculty member at the University of Colorado School of Law, where he co-teaches the Entrepreneurial Law Clinic—kmolivia@wrrlaw.com.

Limited Liability Companies and Partnerships in Colorado is a practitioner’s guide that is primarily focused on Colorado limited liability companies (LLCs) and Colorado partnerships, including general partnerships, limited partnerships, limited liability partnerships, and limited liability limited partnerships. A typical chapter opens with a discussion of the relevant Colorado LLC law and then compares and contrasts the various Colorado partnership laws. In addition to the primary focus on Colorado unincorporated business entities, the authors frequently compare and contrast the Colorado law with the Delaware law on unincorporated business entities, especially when the Delaware law differs from the Colorado law or the Delaware courts have addressed a matter that has not been addressed by the Colorado courts.

The first chapter provides an interesting historical perspective of the development of partnerships (which date back to ancient times), limited partnerships, and LLCs. The early chapters address choice of entity issues and then walk the reader through forming the entity, drafting the operating or partnership agreement that governs the entity, and dissolving the entity. The chapters that follow focus on the rights and duties of members, managers, and partners; derivative actions filed by members on behalf of an LLC; the transfer of membership and partnership interests and the restrictions imposed on such transfers; creditors’ rights and theories of owner liability for the debts of the entity; the merger or conversion of LLCs and partnerships into other business entities; special uses of unincorporated entities, such as single or special purpose entities, joint ventures, and regulated businesses, including the practice of law; and the “Series LLC,” which provides for the segregation of assets under a single legal entity and is permitted under Delaware law but not yet under Colorado law.

Additional chapters address the applicability of the securities laws, income tax laws, and employment tax laws to LLCs and partnerships. The final chapters address the use of LLCs and partnerships for estate planning purposes, as well as ethical considerations, such as defining “who is the client” and potential conflicts of interest when the attorney represents multiple parties and enters into business transactions with the entity client.

The three appendices to the text are (1) a form operating agreement for a manager-managed, multi-member LLC, (2) a form operating agreement for a manager-managed, single-member LLC, and (3) an LLC formation checklist that summarizes the material points that counsel should consider when forming an LLC. Each of the appendices includes cross-references to where the relevant provisions are addressed in the text and annotations to the underlying law. The accompanying CD-ROM includes Microsoft Word versions of the form documents and a searchable table of authorities and subject matter index for the text.

Limited Liability Companies and Partnerships in Colorado is a comprehensive practitioner’s guide that is suitable for seasoned transactional attorneys who routinely form unincorporated business entities and attorneys who occasionally work with discreet issues related to Colorado LLCs and partnerships. The text is compiled into coherent chapters that thoroughly address the Colorado statutes for unincorporated business entities; other substantive areas of the law related to LLCs and partnerships that attorneys routinely address, such as tax law and securities law; and practical uses of limited liability companies and partnerships to address specific client needs, such as estate planning.

Colorado attorneys who work with LLCs and partnerships and who purchase this cost-effective reference tool for their law libraries will quickly recoup the cost. Attorneys will also appreciate the well-developed forms of multi-member and single-member operating agreements and the LLC formation checklist, whether they are used as a starting point for drafting documents for a client or to supplement clauses in practitioners’ existing form documents.

CLE Book: Limited Liability Companies and Partnerships in Colorado

Order this CLE book online here or call (303) 860-0608 to order.

Standard price: $109.00
CBA member price: $99.00

Colorado Supreme Court: Profit from Contingency Fee Case Pending During Law Firm’s Dissolution Must Be Shared

The Colorado Supreme Court issued its opinion in LaFond v. Sweeney on Tuesday, January 20, 2015.

Colorado’s Limited Liability Company Act—CRS § 7-8-404(a)(1)—Contingent Fee—Unfinished Business Rule—No-Compensation Rule.

The Supreme Court held that under the plain language of Colorado’s Limited Liability Company Act (LLC Act), CRS §§ 7-80-101 to -1101, any profit derived from a contingency fee case that is pending upon dissolution of the LLC belongs to the LLC and must be divided between members and managers according to their profit sharing agreement. Members and managers are not entitled to additional compensation for their post-dissolution work winding up the LLC business. This holding derives from (1) the principle that law firms do not end upon dissolution, but extend through the winding-up period; (2) the fiduciary duties of members and managers of an LLC; and (3) the absence of language in the LLC Act granting members and managers the right to additional compensation for their post-dissolution services. Accordingly, the Court affirmed the judgment of the court of appeals.

Summary and full case available here, courtesy of The Colorado Lawyer.

Colorado Supreme Court: LLC Act Does Not Allow LLC’s Creditor to Assert Claim Against Managers of LLC

The Colorado Supreme Court issued its opinion in Weinstein v. Colborne Foodbotics LLC on Monday, June 10, 2013.

Limited Liability Company (LLC)—LLC Creditor’s Claims Against Members and Managers—CRS § 7-80-606—Fiduciary Duty of LLC Manager.

The Supreme Court held that, pursuant to CRS § 7-80-606, an LLC’s members are liable for an unlawful distribution to the LLC but not to the LLC’s creditors. The Supreme Court also held that an insolvent LLC’s managers do not owe the LLC’s creditors the same common law fiduciary duty an insolvent corporation’s directors owe the corporation’s creditors. Accordingly, plaintiff, a creditor of an LLC, may not assert a claim for either unlawful distribution against the defendant members or common law breach of fiduciary duty against the defendant managers absent express statutory authority.

Summary and full case available here.