United States v. DeMURO

PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

Nos. 11-1887, 11-1941

UNITED STATES OF AMERICA

v.

JAMES DEMURO,

Appellant (No. 11-1887)

THERESA DEMURO.

Appellant (No. 11-1941)

On Appeal from the United States District Court

for the District of New Jersey

(D.C. No. 09-cr-812)

District Judge: Honorable Garrett E. Brown

Argued on February 7, 2012

Before: SLOVITER and VANASKIE, Circuit Judges, and

PADOVA,*

Senior District Judge.

(Filed: April 23, 2012)

*

The Honorable John R. Padova, Senior District Judge for the

United States District Court for the Eastern District of

Pennsylvania, sitting by designation.

Frank P. Cihlar

Gregory Victor Davis

Joseph B. Syverson [Argued]

Department of Justice

Post Office Box 502

Washington, D.C. 20044

Counsel for Appellee

John L. Brown, Jr. [Argued]

954 Rt. 166

Toms River, N.J. 08753

Counsel for Appellant James DeMuro

Michael S. Noonan [Argued]

Noonan Logan LLC

64 E. Main St.

Freehold, N.J. 07728

Counsel for Appellant Theresa DeMuro

____________

OPINION OF THE COURT

____________

PADOVA, Senior District Judge

James and Theresa DeMuro (“the DeMuros”) owned

TAD Associates, LLC (“TAD”), an engineering and surveying

company in New Jersey. Between 2002 and 2008, TAD failed

to pay over to the IRS more than half a million dollars in taxes

that it had withheld from its employees’ paychecks. As the

owners and managers of TAD, the DeMuros were convicted

after a jury trial of conspiracy to defraud the United States, in

violation of 18 U.S.C. § 371, and 21 counts of failure to account

and pay over employment taxes, in violation of 26 U.S.C. §

7202. The DeMuros argue on appeal that the District Court

committed numerous evidentiary errors at trial, and further erred

at sentencing by applying a two-level increase to their offense

levels for abuse of a position of trust, pursuant to U.S.S.G. §

3B1.3. For the following reasons, we affirm the convictions, but

remand for re-sentencing.

2

I.

Appellants James DeMuro (“James”) and Theresa

DeMuro (“Theresa”), husband and wife, were the sole owners

and managers of TAD. James is an engineer and was

responsible for the business’s surveying operations, while

Theresa was the office manager and directed TAD’s marketing

efforts.

Between 2002 and 2008, TAD withheld from its

employees’ paychecks trust fund taxes, i.e., taxes that the

employees owed to the federal government for Social Security

and Medicaid, and as income tax. Employers typically withhold

these taxes from their employees’ paychecks, and then hold

them in trust until it is time to pay them over to the United

States. However, over the course of 21 calendar quarters

between 2002 and 2008, TAD failed to pay over to the IRS a

total of $546,247 in trust fund taxes that it had collected from its

employees.

IRS Revenue Officer Michelle Hornby first contacted the

DeMuros in 2002 about the trust fund taxes that TAD owed.

Hornby informed the DeMuros that they could be held

personally liable for the unpaid taxes because they were

responsible for paying TAD’s taxes. Hornby also advised them

that the IRS considered the trust fund taxes to be TAD’s top

priority, and that TAD was not permitted to spend the withheld

trust fund taxes for any other purpose. From 2002-2005, the

DeMuros expressed interest in paying the back taxes and

ostensibly worked with Hornby in an effort to pay off the debt.

At the same time, however, the DeMuros were spending large

amounts of money on personal expenditures and seemingly

discretionary business expenses.

In October 2003, the IRS assessed the DeMuros

personally with a trust fund recovery penalty, pursuant to 26

U.S.C. § 6672. The amount of the penalty was the amount that

TAD owed in trust fund taxes. Hornby again warned the

DeMuros that they needed to start making timely deposits of

TAD’s trust fund taxes, but they did not. As a result, Hornby

required TAD to increase the frequency of its payments of taxes

3

to the IRS from quarterly to monthly.

In June 2004, when the DeMuros were still failing to

make timely deposits of the trust fund taxes, the IRS required

TAD to establish a special trust account in favor of the United

States, pursuant to 26 U.S.C. § 7512. The DeMuros were

required to put withheld trust fund taxes into this account within

two days of withholding the money, and to keep the funds in the

account until they were paid to the IRS. However, after paying

funds into the trust account, the DeMuros withdrew some of

these funds to pay unrelated expenses. They later closed the

account without IRS permission.

On July 15, 2010, a grand jury indicted the DeMuros on

22 counts: one count of conspiracy to defraud the United States,

18 U.S.C. § 371, and 21 counts of failure to account and pay

over employment taxes, 26 U.S.C. § 7202, one count for each

quarter of unpaid taxes. At trial, the DeMuros conceded that

they did not pay over the $546,242 that TAD owed to the IRS in

trust fund taxes, but argued that their failure to pay TAD’s taxes

was not willful. In support of this position, they emphasized

that they negotiated with the IRS in an attempt to pay off the

delinquent taxes over time, and pointed to evidence that they

even attempted to refinance properties to obtain funds to pay the

delinquent taxes. Theresa also asserted an innocent spouse

defense at trial, arguing that James, not she, was responsible for

collecting and paying over TAD’s taxes.

The Government responded to these arguments by, inter

alia, presenting evidence that the DeMuros spent lavishly on

personal and discretionary business items while professing an

inability to pay the delinquent taxes. The evidence showed that,

in the 21 quarters in which TAD failed to pay over trust fund

taxes in the amount of $546,242, the DeMuros spent $5,043,867

from TAD and personal accounts. To prove that Theresa was

responsible for paying the taxes, the Government presented

evidence that Theresa had signature authority over all of TAD’s

bank accounts, freely spent TAD’s money, and had the power to

hire and fire employees.

The jury convicted both James and Theresa on all 22

4

counts. At sentencing, the District Court applied a two-level

enhancement to the DeMuros’ offense levels for abuse of a

position of trust, explaining that the DeMuros were in a position

of trust vis-a-vis the IRS on account of the special trust fund

account, and that the DeMuros abused that position of trust by

using trust fund money for expenses other than trust fund taxes.

The District Court sentenced both James and Theresa to 51

months’ imprisonment. These timely appeals followed.1

II.

On appeal, the DeMuros raise numerous challenges to the

District Court’s decisions admitting or excluding evidence. We

review evidentiary rulings for abuse of discretion. United States

v. Friedman, 658 F.3d 342, 352 (3d Cir. 2011) (citing United

States v. Starnes, 583 F.3d 196, 213-14 (3d Cir. 2009)).

Evidentiary errors objected to at trial are reviewed for harmless

error. Fed. R. Crim. P. 52(a); Neder v. United States, 527 U.S.

1, 7 (1999). An error that was not objected to at trial is

reviewed for plain error. Fed. R. Crim. P. 52(b).

“An error in an evidentiary ruling is harmless error when

‘it is highly probable that the error did not affect the result.’”

Friedman, 658 F.3d at 352 (quoting Hill v. Laeisz, 435 F.3d 404,

420 (3d Cir. 2006)). “‘Plain error exists only when (1) an error

was committed (2) that was plain, and (3) that affected the

defendant’s substantial rights.’” United States v. Lopez, 650

F.3d 952, 961 (3d Cir. 2011) (quoting United States v. Lessner,

498 F.3d 185, 192 (3d Cir. 2007)). An error is “plain” when it

is “clear or obvious.” United States v. Russell, 134 F.3d 171,

180 (3d Cir. 1998) (citation omitted). Where a plain error has

occurred, we exercise discretion in determining whether that

error warrants reversal. United States v. Campbell, 295 F.3d

398, 404 (3d Cir. 2002). We will reverse the district court “only

if the error ‘seriously affect[s] the fairness, integrity, or public

reputation of judicial proceedings.’” United States v. Stevens,

1

The District Court had jurisdiction pursuant to 18 U.S.C. §

3231. We have jurisdiction pursuant to 28 U.S.C. § 1291 and 18

U.S.C. § 3742.

5

223 F.3d 239, 242 (3d Cir. 2000) (quoting United States v.

Olano, 507 U.S. 725, 732 (1993)).

A.

The DeMuros first argue that the District Court erred in

admitting much of the Government’s evidence that was intended

to establish the DeMuros’ willfulness and responsibility for

paying TAD’s taxes, two of the elements the Government must

prove to obtain a conviction under 26 U.S.C. § 7202.2 See

Cheek v. United States, 498 U.S. 192, 199-200 (1991) (citations

omitted); United States v. Thayer, 201 F.3d 214, 219 (3d Cir.

1999). Willfulness in a tax evasion case is “a voluntary,

intentional violation of a known legal duty.” Cheek, 498 U.S.

at 201 (citations omitted). Where a defendant proves that he had

a good faith belief that he was not violating the tax code,

regardless of whether that belief was objectively reasonable, he

has established that he did not act willfully. Id. at 201-03.

As mentioned above, the Government presented a variety

of evidence to prove willfulness and responsibility, including

evidence of the DeMuros’ personal spending, Theresa’s

handling of her father’s assets, and Theresa’s role in the

resignation of TAD employee Joel Boriek. The DeMuros argue

that the District Court abused its discretion in admitting this

evidence because the evidence was not only irrelevant to any

issue at trial, but also overly prejudicial.

1.

Several witnesses testified at trial about the DeMuros’

personal spending habits, including their luxury vacations, nice

homes, and Theresa’s substantial home shopping network

expenditures. The Government also presented evidence that the

DeMuros wrote checks on TAD’s accounts to pay for some of

2

26 U.S.C. § 7202 states that it is a crime for “[a]ny person

required under [Title 26] to collect, account for, and pay over”

a tax to “willfully fail[] to collect or truthfully account for and

pay over such tax . . . .”

6

their personal expenditures. The DeMuros contend that the

District Court abused its discretion not only by finding this

evidence to be relevant, but moreover by not finding that the

voluminous evidence of their personal spending was overly

prejudicial compared to any minimal relevance it may have had

to willfulness.

a. Relevance

Contrary to the DeMuros’ assertion, evidence of personal

spending can be relevant evidence in criminal tax actions and

was, in fact, relevant here. We find guidance in two cases from

our sister circuits. In United States v. Ellis, 548 F.3d 539, 543

(7th Cir. 2008), the United States Court of Appeals for the

Seventh Circuit considered a defendant whose “principal

defense” to a tax evasion charge was that she “was too busy to

notice or remember her tax obligations.” Under those

circumstances, “the ways [defendant] was spending her time -

traveling to Florida, buying cars, purchasing and overseeing the

decoration of her two million dollar home - were relevant”

because they rebutted her assertion that she was “too busy” to

pay her taxes. Id. The court further noted that the same

evidence of personal spending was also relevant to undermine

a defense that the defendant “simply forgot her tax liability,

since most people would inquire as to why they have an

unexpected additional two million dollars to spend on

themselves.” Id.

The United States Court of Appeals for the Sixth Circuit

has also addressed the use of evidence of personal spending in

a criminal tax case. United States v. Blanchard, 618 F.3d 562

(6th Cir. 2010). The court stated that:

evidence regarding a defendant’s ability to pay

taxes is pertinent to whether an offense has been

committed under § 7202, since it bears on the

willfulness of the defendant’s failure to pay over

withheld tax to the government. If a defendant

has made discretionary purchases in lieu of

meeting his tax obligations, this is probative of his

guilt.

7

Id. at 569-70. In Blanchard, the defendant argued that he lacked

the ability to pay the taxes. The court therefore held that the fact

that the defendant had spent money on gambling and other

personal pleasures was relevant to negating his defense. Id. at

570 n.4.

We adopt the rationale of Ellis and Blanchard insofar as

they stand for the proposition that evidence of personal spending

can be relevant to rebut a defendant’s defense that he has not

acted willfully. Of course, whether such evidence is relevant in

any particular case will be dependant on a case-specific inquiry.

Employing these principles in the case at bar, we

conclude that the District Court did not abuse its discretion in

finding the evidence of the DeMuros’ personal spending to be

relevant to the jury’s assessment of willfulness in light of the

DeMuros’ defensive arguments at trial. The DeMuros argued at

trial that they were genuinely trying to pay off their taxes and,

thus, were not acting willfully in not paying them. Given this

argument, evidence that the DeMuros spent money on vacations

and other personal items - money that they could have used to

pay their taxes - belies their assertions that they were sincerely

attempting to pay their back taxes as expeditiously as possible.

Thus, the District Court did not abuse its discretion in

concluding that the evidence of personal spending was relevant

proof that the DeMuros’ failure to pay TAD’s taxes was willful.

The evidence of the DeMuros’ lavish personal spending

was also relevant to the conspiracy charge as it was probative of

their conspiratorial purpose. See United States v. Boria, 592

F.3d 476, 481 (3d Cir. 2010) (“To establish a charge of

conspiracy, the Government must show . . . a shared unity of

purpose . . . .”) (citations omitted). The Government’s theory at

trial was that the DeMuros failed to pay their taxes because they

wanted to live a comfortable lifestyle and, thus, they agreed to

evade the tax laws so that they would have money to spend on

themselves. Given this theory, the evidence that they did live a

relatively lavish lifestyle, and how much money they spent on

that lifestyle, was relevant.

Finally, some of the evidence of the DeMuros’ personal

8

spending was also relevant to whether they were the parties

responsible for paying TAD’s taxes. Evidence of an employee’s

“‘ability to sign checks on the company’s bank accounts’” and

evidence of a company’s “‘payment of other creditors in lieu of

the United States’” are relevant to determining whether a

particular individual is responsible for paying over withholding

taxes. Greenberg v. United States, 46 F.3d 239, 243 (3d Cir.

1994) (quoting Brounstein v. United States, 979 F.2d 952, 954-

55 (3d Cir. 1992)). In the case at bar, the evidence showed that

the DeMuros wrote checks on TAD accounts to pay for some of

their personal expenses. This evidence was relevant, regardless

of the fact that it involved personal spending, because it showed

both that James and Theresa had the ability to sign TAD checks

and that they chose to pay other creditors in lieu of the United

States. Thus, the evidence of the DeMuros’ personal spending

was relevant to their willfulness and responsibility, as well as

the conspiracy charge.

b. Prejudice

Having addressed the issue of relevance, we turn to the

DeMuros’ argument that the evidence was overly prejudicial

and that the District Court therefore abused its discretion in

admitting it. According to the DeMuros, the extensive evidence

of their personal expenditures was prejudicial because it

fomented class prejudice by depicting a life of luxury that came

at the expense of the DeMuros’ employees and the American

people.

The District Court may exclude relevant evidence “if its

probative value is substantially outweighed by a danger of . . .

unfair prejudice, confusing the issues, misleading the jury,

undue delay, wasting of time, or needlessly presenting

cumulative evidence.” Fed. R. Evid. 403. “The District Court’s

discretion is ‘construed especially broadly in the context of Rule

403.’” Friedman, 658 F.3d at 355 (quoting United States v.

Kemp, 500 F.3d 257, 295 (3d Cir. 2007)). Furthermore, “‘Rule

403 does not provide a shield for defendants who engage in

outrageous acts, permitting only the crimes of Caspar

Milquetoasts to be described fully to a jury. It does not

generally require the government to sanitize its case, to deflate

9

its witnesses’ testimony, or to tell its story in a monotone.’”

United States v. Cross, 308 F.3d 308, 325 (3d Cir. 2002)

(quoting United States v. Gartmon, 146 F.3d 1015, 1021 (D.C.

Cir. 1998)).

As noted above, the evidence of the DeMuros’ personal

spending was relevant to their responsibility for paying TAD’s

taxes, their willfulness, and the conspiracy charge. Thus, its

probative value was significant. Further, despite the DeMuros’

contention that this evidence was overwhelming and voluminous

at trial, the evidence of personal spending was largely limited to

one witness, IRS Agent Carlos Natasi, with other witnesses only

briefly mentioning the DeMuros’ spending habits. While we are

sensitive to the effect that evidence of a defendant’s liberal

spending habits can have on a jury, particularly in these lean

economic times, the evidence admitted in this case, i.e.,

evidence of vacations, jewelry, cars, and parties, was not so

inflammatory as to carry a great risk of prejudice. It certainly

was not so prejudicial as to substantially outweigh its very

significant probative value. Cf. Blanchard, 618 F.3d at 570

(allowing evidence of gambling expenses to prove willfulness,

despite the risk that some jurors may have negative views

towards gambling). Accordingly, we conclude that the District

Court did not abuse its discretion in allowing Agent Natasi and

others to testify about how the DeMuros spent money.

2.

The DeMuros next argue that the District Court erred in

permitting IRS Agent Carlos Natasi to testify regarding

Theresa’s handling of her ailing father’s assets. According to

Agent Natasi, Theresa received power of attorney over her

father because he was mentally incompetent. Agent Natasi

testified that Theresa used that power of attorney to mortgage

her father’s home for approximately $300,000, then placed the

money into her personal bank account and spent some of the

proceeds on personal items, such as jewelry. The DeMuros

argue that this evidence was not only irrelevant, but also overly

prejudicial because it suggested that Theresa took advantage of

her ailing father.

10

Although this is a closer call than some of the personal

spending evidence, we find that the District Court did not abuse

its discretion in admitting this evidence. As explained above,

how the DeMuros spent their money was relevant to willfulness

in light of their defensive arguments at trial. More particularly,

the fact that Theresa came upon nearly $300,000 and spent that

money on personal items undercuts her defense that she and

James were attempting to work out a payment plan with the IRS.

Put another way, Theresa’s choice to spend this money on

personal items rather than the delinquent taxes reflects that she

regarded her known obligation to pay the trust fund penalty with

little urgency. We therefore find this evidence to be probative

of willfulness.

While we recognize that the source of the $300,000

windfall, i.e., the mortgage on Theresa’s ailing father’s house,

is not itself relevant to willfulness, the Government was not

required to disentangle this aspect of the story when making its

case to the jury. See Fed. R. Evid. 401 advisory committee’s

note (explaining that background information is relevant). The

DeMuros maintain that the evidence was unduly prejudicial

because the jury undoubtedly inferred that Theresa effectively

stole this money from her mentally incapacitated father.

However, the DeMuros rebutted any such inference with

evidence that Theresa was her father’s sole heir, and thus was

destined to inherit the house upon his death. Indeed, Theresa’s

counsel argued this point to the jury in closing arguments,

saying that the $300,000 was essentially Theresa’s money

anyway. Accordingly, any potential prejudicial effect of the

evidence was mitigated and any residual prejudice was surely

outweighed by the evidence’s probative value. We therefore

find that the District Court did not abuse its discretion in

admitting this evidence.

3.

The DeMuros also challenge the District Court’s decision

to admit evidence about the circumstances surrounding TAD

employee Joel Boriek’s resignation. Boriek testified that he was

working four days a week at TAD because his wife was ill, but

then Theresa told him he needed to work five days a week, and

11

he quit rather than change his schedule. The evidence at trial

was that Theresa told another employee that she was concerned

about the medical benefits TAD was paying to Boriek, so she

asked him to work five days a week knowing that he would

rather quit. The DeMuros argue that testimony about Theresa’s

motivations in this regard was irrelevant and overly prejudicial.

They therefore contend that the evidence should have been

excluded.

Contrary to the DeMuros’ arguments, the evidence

regarding Theresa’s involvement in Boriek’s situation was

relevant to the issues at trial. First, the evidence was probative

of the fact that Theresa had the power to discharge Joel Boriek,

which is directly relevant to whether she was responsible for

paying TAD’s taxes. See Greenberg, 46 F.3d at 243 (citation

omitted) (explaining that an individual is responsible to pay his

employer’s taxes if he has significant control over the

employer’s finances, and stating that one factor a court may

consider in assessing that control is whether the individual is in

charge of hiring and firing employees). Second, evidence that

Theresa wanted Boriek to quit so as to save money on medical

benefits was probative of her control over TAD’s financial

affairs, which is also relevant to establishing her responsibility

for paying TAD’s taxes. Id. Significantly, Theresa vehemently

argued that she was not responsible for paying TAD’s taxes.

Given that argument, the evidence of her authority to discharge

employees and her control over TAD’s finances was highly

probative of a contested issue. While the DeMuros correctly

assert that this evidence was not flattering to Theresa, we do not

find it so prejudicial as to substantially outweigh its probative

value. Accordingly, we conclude that the District Court did not

abuse its discretion in allowing evidence regarding the

circumstances of Joel Boriek’s separation from TAD.

B.

The DeMuros challenge the admission of a portion of the

testimony of enrolled agent Victor Minelli. An enrolled agent

is one of three professionals who can represent a taxpayer before

the IRS, along with CPAs and attorneys. In that representative

12

capacity, an enrolled agent is required to have expertise in tax

issues. Minelli testified that the DeMuros hired him in 2005 to

represent them before the IRS with respect to TAD’s tax

problems. He testified that he reviewed two ongoing appeals

that the DeMuros had filed challenging decisions of the IRS, and

that he determined that the appeals had no merit and should be

withdrawn. The DeMuros argue that his testimony that these

two tax appeals were meritless constituted expert opinions,

which the District Court should not have permitted without first

finding Minelli to be qualified as a expert. The DeMuros did

not object to this testimony at trial, so we apply plain error

review.

The Federal Rules of Evidence limit the opinions that a

lay witness may provide. Rule 701 provides that lay opinions

must be “(a) rationally based on the perception of the witness,

(b) helpful to a clear understanding of the witness’ testimony or

the determination of a fact in issue, and (c) not based on

scientific, technical, or other specialized knowledge within the

scope of Rule 702.” Fed. R. Evid. 701. It is not uncommon for

witnesses who testify about tax consequences to be qualified as

experts. See United States v. Stadtmauer, 620 F.3d 238, 269 (3d

Cir. 2010) (listing cases where IRS agents were qualified as

experts and provided opinions as to the tax consequences of a

transaction). On the other hand, we have allowed professionals

to give lay opinions when the opinions are based on personal

knowledge of the issues, along with specialized experience. See

Eisenberg v. Gagnon, 766 F.2d 770, 781 (3d Cir. 1985)

(allowing lay opinion of lawyer, who specialized in business

litigation and securities law, about what information should have

been included in a private offering memorandum based on his

personal knowledge of the documents).

In the case at bar, the first appeal about which Minelli

testified involved a lien the IRS had filed against the DeMuros’

properties, which the DeMuros appealed. Minelli testified that,

under the law, if a person owes taxes, the IRS can file a lien. He

further testified that there was no dispute as to whether the

DeMuros owed the taxes for which the IRS lien was sought and,

thus, the DeMuros’ appeal had no merit. Even if we assume

arguendo that this opinion was an expert opinion, we conclude

13

that it was not “plain error” for the District Court to admit it

because it is not “clear or obvious” that this opinion was based

on any specialized knowledge of the tax code, rather than

Minelli’s personal knowledge and specialized expertise.

Russell, 134 F.3d at180 (citation omitted). Moreover, we cannot

conclude that such error “‘seriously affect[ed] the fairness,

integrity, or public reputation of judicial proceedings.’” Stevens,

223 F.3d at 242 (quoting Olano, 507 U.S. at 732).

The second appeal about which Minelli testified

concerned the DeMuros’ appeal of the amount of their trust fund

penalty. The DeMuros argued in the appeal that the IRS’s

calculation did not reflect some payments they had made.

Minelli testified at trial that he checked the records and that the

IRS had credited all of the DeMuros’ payments. He therefore

opined that the DeMuros’ appeal was meritless. We conclude

that any error in allowing this testimony was not “plain” because

it is not “clear or obvious” that this opinion was based on

specialized knowledge of the tax code, as opposed to Minelli’s

experience in reading IRS account statements and the

application of simple mathematical concepts. Accordingly, we

find that the District Court did not commit reversible error when

allowing Minelli to opine that the DeMuros’ two appeals had no

merit.

C.

The DeMuros argue that the District Court erred in

permitting the Government to present evidence that TAD

withheld money from employee paychecks for health insurance,

retirement, and child support payments, and then failed to pay

over these funds to their intended recipients.3 The District Court

3

Specifically, TAD withheld wages from an employee’s

paycheck to purchase health insurance, but then failed to pay the

insurance premiums, leading to the cancellation of the insurance

and the denial of coverage to the employee. TAD withheld

wages from another employee’s paycheck for child support

payments, but then failed to pay the money to New Jersey,

which subsequently levied the employee’s bank accounts to

14

admitted this evidence pursuant to Rule 404(b), as evidence of

the DeMuros’ intent, plan, and motive.

Rule 404(b) provides that evidence of other bad acts,

although not admissible to show character, are admissible to

prove “motive, opportunity, intent, preparation, plan,

knowledge, identity, or absence of mistake or accident.” Fed. R.

Evid. 404(b). The Supreme Court has established a four-part

test to determine whether evidence was properly admitted under

Rule 404(b): 1) the evidence must have a proper purpose under

404(b); 2) the evidence must be relevant; 3) the probative value

of the evidence must outweigh its potential for prejudice; and 4)

the court must instruct the jury to consider the evidence only for

the limited purpose for which it is admitted. United States v.

Sampson, 980 F.2d 883, 886 (3d Cir. 1992) (citing Huddleston

v. United States, 485 U.S. 681, 691-92 (1988)). When offering

such evidence, the Government “‘must clearly articulate how

th[e] evidence fits into a chain of logical inferences, no link of

which can be that because the defendant committed . . . [such an

act] before, he therefore is most likely to have committed this

one.’” United States v. Lee, 612 F.3d 170, 186 (3d Cir. 2010)

(second alteration in original) (quoting Sampson, 980 F.2d at

887). Rule 404(b) “is inclusive, not exclusive, and emphasizes

admissibility.” Sampson, 980 F.2d at 886 (citation omitted).

Under the Supreme Court’s four-part test, we consider in

steps one and two whether the evidence was relevant to a proper

purpose under Rule 404(b). As noted above, the District Court

below admitted the evidence that TAD did not pay over

withheld child support payments, health insurance premiums,

and retirement monies based on the Government’s theory that

the evidence was relevant to intent, motive, and plan. We agree

that the evidence of failure to pay over other withheld monies

was relevant to the DeMuros’ intent, as it tended to prove that

the DeMuros’ failure to pay over the trust fund taxes was not

unintentional or the result of a misunderstanding or mistake.

collect the unpaid child support. TAD also withheld retirement

money from a third employee, but failed to pay this money into

the designated retirement account.

15

Accord United States v. Daraio, 445 F.3d 253, 264 (3d Cir.

2006) (allowing evidence of prior failures to pay taxes to prove

willfulness in a tax evasion case). The evidence was also

probative of a pattern, plan, and motive of the DeMuros to

surreptitiously take money from TAD employees by way of

legitimate withholdings and then retain the money for their own

benefit. We therefore conclude that the evidence was relevant

to several proper purposes under Rule 404(b).

In the next step in the Supreme Court’s test, we weigh the

probative value of the evidence against its potential for

prejudice. Here, the above-noted probative value of the

challenged evidence was significant. Moreover, we agree with

the District Court that the evidence was not unduly prejudicial.

Accordingly, we conclude that the probative value of this

evidence outweighed its potential for prejudice. Cf. Daraio, 445

F.3d at 264 (finding that the probative value of the evidence of

past failures to pay taxes outweighed the potential for prejudice

even though the past conduct was the same as the charged

conduct).

Finally, in step four of the four-part test, we consider

whether the lower court gave a proper jury instruction informing

the jury of the limited purposes of the evidence. Here, the

District Court properly instructed the jury that the evidence

could be considered as proof of state of mind, motive,

opportunity, pattern, and lack of mistake, all of which are proper

uses of the evidence under the circumstances presented.4

4

James argues that, because he only contested the element of

willfulness, the Government should not have been allowed to

present evidence regarding any other issue. He relies solely on

United States v. Jemal, 26 F.3d 1267 (3d Cir. 1994), in which

we stated that 404(b) evidence should not be admitted when a

defendant makes a proffer that is “comprehensive and

unreserved,” and that “completely eliminat[es] the government’s

need to prove the point it would otherwise try to establish.” Id.

at 1274.

James, however, did not make any proffer with respect to

his state of mind, motive, or any other issue related to the 404(b)

16

Consistent with this instruction, the Government argued during

its closing that the evidence showed motive and state of mind.

Accordingly, the Government and the District Court both

explained to the jury the proper use of this evidence. We

therefore conclude that the District Court did not abuse its

discretion in admitting the evidence of the DeMuros’ failure to

pay over other withheld money.

D.

Theresa objects to the District Court’s failure to strike the

Government’s closing argument reference to the DeMuros’ prior

bad acts of withholding money from their employees and not

paying it over. Theresa contends that the Government

impermissibly argued that this evidence showed the DeMuros’

bad character and propensity to steal withheld money. The

DeMuros did not object to this part of the closing argument at

trial, so we review it for plain error.

In its rebuttal argument, the Government argued to the

jury:

And what does Mr. Tonik tell them at the meeting

he has with them in 2002 and the meeting that he

has with them in 2003? Your spending is out of

control. You’re paying your daughter who’s a no-

show employee, who’s a full-time student,

$15,000 a year.

You’re paying her tuition. You’re paying

for Mrs. DeMuro’s Mercedes Benz. You’re

paying for your daughter’s car; you[r] mortgage.

evidence. To the contrary, he strongly contested each of these

issues, arguing that he did not intend to violate the tax laws, that

he planned to pay off the taxes after negotiations with the IRS,

and that he did not take the money to finance his and his wife’s

comfortable lifestyle. Accordingly, because James did not

proffer to the issues proved by the 404(b) evidence, but rather

strongly contested those issues, his argument based on Jemal

fails.

17

That’s good faith? Are you kidding me? They

have the nerve to come in here and stand before

you and say, that’s good faith, ladies and

gentlemen of the jury.

That’s not good faith. When you’re

stealing money from your employees and the

United States of America, that is not good faith.

(A363 (emphasis added).)

As discussed above, the evidence that the DeMuros

effectively stole money from their employees by using money

withheld for other purposes for their own personal gain was

admitted to show intent, among other proper usages, pursuant to

Rule 404(b). The Government here properly argued that this

evidence was related to the DeMuros’ intent, i.e., their lack of

good faith. Furthermore, the juxtaposition of the Government’s

statement with its description of the DeMuros’ expenditures

links the 404(b) evidence to motive, another proper purpose

under Rule 404(b). Accordingly, it was not plain error for the

District Court to allow the Government to make this argument

to the jury.

E.

The DeMuros argue that the District Court improperly

excluded four pieces of testimony from IRS Agent Hornby

regarding their negotiations with the IRS. In their view, the

excluded evidence would have shown that they were trying to

pay their taxes and, thus, not acting willfully. They also argue

that this evidence showed that they had a good faith belief that

their conduct was not criminal.

The first piece of excluded testimony at issue is certain

testimony from Agent Hornby that the DeMuros attempted to

finance their properties but were unable to due to IRS liens. The

DeMuros argue that this evidence was probative of the fact that

they did not willfully fail to pay their taxes because it shows that

they were attempting to raise money to pay the taxes through

refinancing. However, contrary to the DeMuros’ suggestion, the

exclusion of this particular testimony did not deprive the jury of

important probative information because Hornby testified at

18

length about the DeMuros’ efforts at refinancing, and the

DeMuros actually argued to the jury in closing arguments that

their refinancing efforts proved that they did not act willfully.

Thus, there was ample evidence of the DeMuros’ attempts to

refinance and we reject the DeMuros’ argument that the District

Court abused its discretion in excluding this additional

testimony.

The DeMuros also challenge the exclusion of a note that

Hornby wrote after a meeting with James, in which Hornby

stated that she had advised James that the IRS could shut down

TAD. The District Court excluded this evidence on the grounds

of confusion, delay, and minimal relevance. The DeMuros

argue that this evidence should have been admitted as probative

of their lack of willfulness, because no reasonable person would

willfully fail to pay their taxes knowing that the IRS could shut

down their business. However, the note at issue would have

been duplicative of other testimony, as Hornby had already

testified that she had told James about the possibility of shutting

down the business. Moreover, even in the absence of the

testimony about the note, the DeMuros argued to the jury in

closing that they knew of the potential shutdown of the business

and would not have willfully failed to pay their taxes risking

such a shutdown. Under these circumstances, it was not an

abuse of discretion for the District Court to exclude Hornby’s

merely redundant note.

Third, the DeMuros argue that the District Court erred by

excluding any testimony that the reason that the negotiations

between the IRS and the DeMuros ceased was that the IRS

referred the case for criminal prosecution. In the DeMuros’

view, the exclusion of this evidence left the jury free to

speculate that the DeMuros themselves chose to stop negotiating

with the IRS, which undermined their lack of willfulness

defense. The District Court, however, excluded this evidence

because it opened the door to jury nullification, by inviting the

jury to reason that the IRS should have continued to pursue the

matter civilly rather than criminally. See United States v. Buras,

633 F.2d 1356, 1360 (9th Cir. 1980) (explaining that the

availability of civil remedies in a tax case “is irrelevant to the

issue of criminal liability” and finding that a jury instruction

19

regarding civil remedies “would serve only to confuse the

jury”). Significantly, the DeMuros concede that this evidence

would have opened the door to jury nullification. Moreover, we

believe it unlikely that the jury would speculate that the

DeMuros terminated the negotiations with the IRS without any

evidence regarding the circumstances of the termination and

based solely on the fact that the negotiations ended. We thus

conclude that it was not an abuse of discretion for the District

Court to find that the concern about jury nullification

outweighed the risk that the lack of this evidence would give

rise to a speculative negative inference.

Fourth, the DeMuros challenge the District Court’s

decision to exclude Hornby’s testimony that she never told them

that their case had been referred for criminal prosecution or that

their conduct was criminal. The DeMuros argue that this

evidence was probative of whether they knew that their conduct

was criminal and, thus, should have been admitted. This

evidence, however, had only minimal probative value. The

mere fact that Hornby did not tell the DeMuros that their

conduct was criminal is not strong evidence that the DeMuros

honestly believed that their conduct was legal. Further, as the

District Court stated, this evidence had the potential for

confusion and opened the door to jury nullification. We thus

conclude that the District Court did not abuse its discretion by

excluding it.

Finally, the DeMuros argue that these four rulings in

combination effectively took their good faith defense away from

the jury. While it is improper to exclude evidence of a good

faith defense based solely on a judicial determination that the

good faith belief lacks credibility, it is “proper to exclude

evidence having no relevance or probative value with respect to

willfulness.” Cheek, 498 U.S. at 203. Here, there is no basis in

the record to conclude that the District Court excluded any

evidence relating to good faith due to a determination that the

defense lacked credibility. Rather, the evidence was excluded

because it was irrelevant, cumulative, and/or because it was

outweighed by a concern for confusion. Accordingly, we find

that the District Court did not improperly take the DeMuros’

good faith defense away from the jury.

20

F.

Theresa challenges the District Court’s decision to

exclude the testimony of IRS Agent Lloyd Walling. Walling

was an IRS agent assigned to investigate the DeMuros’ former

company, DA Resources, which had also failed to pay over trust

fund taxes. Theresa called Walling to testify about the contents

of a written statement made by James, in which James stated

that only he, and not Theresa, was responsible for paying DA

Resources’ taxes. The District Court excluded this testimony on

the grounds that 1) it was irrelevant to whether Theresa was

responsible for paying TAD’s taxes, 2) it had the potential to

confuse the jury, and 3) James’ statement was inadmissible

hearsay. As a result of this ruling, Walling did not testify at all.

Theresa argues that Walling’s testimony was relevant and

admissible either as a non-hearsay party admission or under the

hearsay exception for statements against interest.

Even assuming arguendo that Theresa is correct that this

evidence was admissible, we conclude that exclusion of the

evidence was harmless. First, the evidence against Theresa with

respect to her control and responsibility was substantial: she

was an owner and manager of TAD, she had signatory authority

over all of TAD’s accounts, she signed numerous checks drawn

on TAD’s accounts during the relevant period, and she had the

power to hire and fire employees. See Greenberg, 46 F.3d at

243 (citation omitted) (listing the factors for determining

whether an individual was responsible for paying a company’s

taxes). Second, the testimony of Walling was of minimal

probative value because it related to a former company of the

DeMuros, not TAD. Moreover, James made his statement at a

time when his responsibility to pay DA Resources’ taxes was

clear, but Theresa’s was not, meaning that the statement was

self-serving in spite of appearing to be a statement against

interest. Accordingly, we conclude that “‘it is highly probable

that the error did not affect the result’” of the trial, and thus the

error was harmless. Friedman, 658 F.3d at 352 (quoting Hill,

435 F.3d at 420).

Theresa also argues that the District Court’s decision to

exclude Walling’s hearsay testimony effectively excluded any

21

other testimony that Walling may have given regarding

Theresa’s responsibilities with respect to DA Resources. She

argues that, as a result of the exclusionary ruling, she was

prevented from presenting a defense in violation of her Fifth and

Sixth Amendment rights. Theresa, however, did not proffer any

further testimony from Walling at trial, and it is not clear from

the record what the substance of his testimony would have been.

Thus, Theresa cannot now raise this issue on appeal. See Fed.

R. Evid. 103(a)(2). Moreover, even on appeal, Theresa has not

once described the substance of any further testimony from

Walling. Therefore, we have no basis upon which to conclude

that the District Court erred by foreclosing any further testimony

of Agent Walling.

Accordingly, we affirm the convictions of both James

and Theresa DeMuro.5

III.

At sentencing, the District Court applied a two-level

enhancement to the DeMuros’ base offense levels for abuse of

position of trust, pursuant to U.S.S.G. § 3B1.3. The District

Court applied the enhancement based on the DeMuros’ conduct

with respect to the trust fund account imposed by the IRS, into

which the DeMuros were obliged to pay TAD’s trust fund taxes

within two days of withholding the taxes. The DeMuros,

however, made several withdrawals from this account for other

business purposes, and closed the account without IRS

permission. We review whether a defendant occupied a position

5

The DeMuros also argued that the combined evidentiary

errors by the District Court warrant reversal, even if no single

error alone would support such relief. Even assuming arguendo,

as we did, that the District Court erred in allowing the opinion

testimony of Minelli and in excluding the testimony of Walling,

these evidentiary rulings did not constitute errors that “so

infected the jury’s deliberations that they had a substantial

influence on the outcome of the trial.” United States v. Hill, 976

F.2d 132, 145 (3d Cir. 1992). Accordingly, the cumulative

effect of these assumed errors does not require reversal.

22

of trust de novo. United States v. Hart, 273 F.3d 363, 376 (3d

Cir. 2001) (citation omitted). We review whether a defendant

abused that position of trust for clear error. Id. (citation

omitted).

Pursuant to U.S.S.G. § 3B1.3, a two-level increase to a

defendant’s offense level applies “[i]f the defendant abused a

position of public or private trust . . . in a manner that

significantly facilitated the commission or concealment of the

offense.” In applying this enhancement, we employ “a two-step

analysis: (1) whether the defendant occupied a position of

public or private trust; and (2) whether the defendant abused this

position of trust in a way that significantly facilitated the crime.”

Hart, 273 F.3d at 375 (citing United States v. Iannone, 184 F.3d

214, 222 (3d Cir. 1999)).

In United States v. Pardo, 25 F.3d 1187, 1192 (3d Cir.

1994), we set forth three factors to consider in addressing the

first step in the two-step analysis, stating:

[I]n considering whether a position constitutes a

position of trust for purposes of § 3B1.3, a court

must consider: (1) whether the position allows

the defendant to commit a difficult-to-detect

wrong; (2) the degree of authority which the

position vests defendant vis-a-vis the object of the

wrongful act; and (3) whether there has been a

reliance on the integrity of the person occupying

the position.

Id. See also Hart, 273 F.3d at 375. The Sentencing Guidelines

further explain that a position of trust is “characterized by

professional or managerial discretion (i.e., substantial

discretionary judgment that is ordinarily given considerable

deference).” U.S.S.G. § 3B1.3 cmt. n.1.

“‘[T]hese factors should be considered in light of the

guiding rationale of [§ 3B1.3]: ‘to punish ‘insiders’ who abuse

their positions rather than those who take advantage of an

available opportunity.’” United States v. Dullum, 560 F.3d 133,

140 (3d Cir. 2009) (quoting Pardo, 25 F.3d at 1192). Although

23

the enhancement often arises in an employment relationship, we

have applied it to other forms of trust relationships. E.g., id. at

140-41 (finding that enhancement applies to a fraud committed

by a trusted church adviser); see also Pardo, 25 F.3d at 1190-91

(citing cases involving a mother/daughter relationship and a

babysitter/child relationship, among others).

Our inquiry is whether the DeMuros were in positions of

trust vis-a-vis the IRS based on their positions as signatories of

the trust fund account set up to benefit the IRS.6 In making this

determination, we compare the relative position of the DeMuros,

as signatories to the trust fund account, to that of other business

managers who withhold trust fund taxes. See United States v.

Lieberman, 971 F.2d 989, 994 (3d Cir. 1992) (citing United

States v. Hill, 915 F.2d 502, 507-08 (9th Cir. 1990)) (noting that

the inquiry involves comparing the defendant’s position relative

to other persons who could commit bank embezzlement). In

that light, each of the three Pardo factors supports the

conclusion that the DeMuros were not in positions of trust based

on the trust fund account.

First, we consider whether the trust fund account put the

DeMuros in a position to commit a difficult-to-detect wrong.

The IRS imposed the trust fund account on the DeMuros so that

it would be easier for the IRS to monitor whether the DeMuros

were properly paying the trust fund taxes. Indeed, before the

creation of the trust fund account, the IRS could only monitor

the DeMuros’ compliance on a monthly or quarterly basis,

whereas afterwards it could monitor the trust fund daily,

tracking all deposits into and withdrawals from the account.

Under these circumstances, had the IRS been more watchful, it

could have discovered rather quickly that the DeMuros were

withdrawing money from the account for improper purposes.

Thus, the trust fund in no way put the DeMuros in a better

position to commit a difficult-to-detect wrong.

6

The Government and the DeMuros agree that an average

taxpayer is not in a position of trust with respect to the IRS and

that the issue on appeal is whether the trust fund account put the

DeMuros in a position of trust with respect to the IRS.

24

Second, we look to the authority given to the DeMuros

over the trust fund taxes as a result of the trust fund account.

Before the trust fund account, the DeMuros were required to pay

the withholding taxes on a quarterly, and later monthly, basis,

and could co-mingle the withheld money with other TAD assets.

After the establishment of the trust fund, the DeMuros were

required to pay the withholdings into the account within two

days. Thus, the trust fund account decreased any discretion and

authority the DeMuros had with respect to how to hold the

money until it was time to pay it to the IRS. Thus, this factor

weighs against the imposition of the enhancement.

Third, we consider the extent to which the IRS relied on

the integrity of the DeMuros. The IRS imposed the trust fund

account on the DeMuros because it could not rely on their

integrity. The trust fund account was only set up because the

DeMuros had repeatedly failed to pay TAD’s taxes in full. The

IRS did not trust them to hold the withheld money without

spending it. Accordingly, this third Pardo factor also weighs

against the imposition of the enhancement. We therefore

conclude that the DeMuros were not in a position of trust with

respect to the IRS, and that it was error for the District Court to

apply the abuse of a position of trust enhancement.

The Government argues, however, that even if the

District Court applied the enhancement in error, we should not

remand for re-sentencing because the error was harmless. At

sentencing, in addition to the abuse of a position of trust

enhancement, the District Court applied a two-level increase to

the DeMuros’ offense level, pursuant to U.S.S.G. §§ 2T1.1 and

2T .4.1, because the loss involved was over one million dollars.

As a result, each DeMuro had a total offense level of 24 and an

advisory Guidelines range of 51 to 63 months’ imprisonment.

The District Court then varied downwards two levels, because

the loss involved just barely triggered the two-level increase,

resulting in an adjusted offense level of 22 and a Guidelines

range of 41 to 51 months. The District Court sentenced each

DeMuro to 51 months’ imprisonment, the top of the range.

“[T]he use of an erroneous Guidelines range will

typically require reversal.” United States v. Langford, 516 F.3d

25

205, 215 (3d Cir. 2008). Under limited circumstances, however,

an error in applying the Guidelines can be harmless. Id. “For

the error to be harmless, it must be clear that the error did not

affect the district court’s selection of the sentence imposed.” Id.

(citing Williams v. United States, 503 U.S. 193, 203 (1992)).

The mere fact that the sentence actually imposed falls within

both the incorrect Guideline range employed at sentencing and

the correct Guideline range is insufficient to show harmless

error. Id. at 216. Rather, “the record must be unambiguous that

the miscalculation of the range had no effect” and that “the

sentencing judge would have imposed the same sentence under

a correct Guideline range.” Id. at 216, 217. “The proponent of

the sentence bears the burden of ‘persuad[ing] the court of

appeals that the district court would have imposed the same

sentence absent the erroneous factor.’” Id. at 215 (quoting

Williams, 503 U.S. at 203).

Without the two-level enhancement for abuse of a

position of trust, the DeMuros’ offense levels would be 22 and

their Guidelines ranges would be 41 to 51 months. The

Government argues that because this range is the same as the

range ultimately used by the District Court, and because the

sentences imposed were within this range, the sentencing error

was harmless. As discussed, however, the fact that the

sentenced imposed falls within the correct range does not alone

establish harmless error. Moreover, the Government’s argument

ignores the fact that the District Court found the Guidelines

range to be inappropriate and varied downwards. There is

absolutely no basis in the record for us to conclude that the

District Court would not have made a similar variance if the

abuse of a position of trust enhancement had not applied. We

thus cannot conclude that the error here was harmless. We

therefore vacate the DeMuros’ sentences and remand for re-

sentencing.

IV.

For the foregoing reasons, the convictions of the

DeMuros are affirmed, but we vacate their sentences and

remand for re-sentencing.

26