United States v. St. Pierre: tax evasion and accountant malpractice

Accounting

Court Case Brief-Federal Tax Class

United States vs. St. Pierre, 599 F.

FACTS

The Staab Agency acts as an agent for out-of-state trucking companies looking to register trailers in Maine. Shirley St. Pierre, the appellant in this case, owned all of Staab after buying it from its previous owner in 1991. Under her leadership, the company flourished, growing from about four employees and 4,000 customers in 1991 to 17 employees and 37,500 customers in 2002. St. Pierre frequently used company income to pay personal bills and for other personal purposes. This in itself is not horrible as long as she reported the income on her tax returns.

The IRS randomly audited Staab's fiscal year 2000 returns in March 2002. The audit gave rise to suspicions and was later extended to include other returns by Staab and St. Pierre herself. Because Staab is a Subchapter S corporation, its income is not taxed to Staab but is attributed to St. Pierre, who must pay taxes on it herself. 26 U.S.C. § 1366(a)(1) (2006). In June 2007, St. Pierre was indicted on three counts of tax evasion, 26 U.S.C. § 7201, and one count of obstructing administration of the internal revenue laws for falsifying documents in an attempt to conceal her prior acts, 26 U.S.C. § 7212(a).

At trial, St. Pierre's underpayment of her personal taxes was undisputed. The central issue was whether St. Pierre had the requisite state of mind for the various offenses. The government relied mainly on testimony from the accountants and lawyer who had prepared Staab's and St. Pierre's tax returns and represented her at the audit, and the IRS agents who investigated Staab. One of the accountants testified that St. Pierre had been told to deposit company income into Staab's corporate bank account; as such deposits would permit the accountants to track Staab income that had to be reported on Staab's corporate and St. Pierre's personal income tax returns. Just when and to what extent St. Pierre understood her obligations and the tax consequences were disputed at trial.

ANALYSIS

The appellate court found that the district court properly applied Fed. R. Evid. 403 in supporting the government's opposition to expert testimony offered by the taxpayer as to the standard of care owed to her by her accountants. The government's evidence permitted the jury to find that the taxpayer, in diverting company income to personal ends but not reporting it as income to the company or herself, acted against warnings. They also found that she had used personal accounts not unveiled to her accountants, that the gauge of the diversion was vast, that her accountants were uninformed of most of what was occurring and that the taxpayer herself fashioned false documents to cover her tracks. By contrast, the taxpayer's proposed accounting standards evidence, by shifting the focus to whether the accountants were doing a good job, had a prospective to confuse and mislead the jury because her accountants' failure to prevent the fraud would not be a defense. The court did not unduly limit the taxpayer's cross-examination of the government's witnesses. Her proposed cross-examination of an IRS agent would have done little to propose either prejudice or contradiction, and prohibiting could easily be sustained under Rule 403 as a waste of time.