The opinion of the court was delivered by: JAMES WARE
ORDER DENYING MOTION TO DISMISS COUNTS ONE AND TWO OF SUPERSEDING INDICTMENT
Before the Court is Mr. Di Girolamo's motion entitled Motion to Dismiss Counts One and Two, For Election of Trial on Separate Counts, or to Exclude Evidence. In that motion, Di Girolamo argues 1) the conduct set forth in Counts One and Two of the superseding indictment is not criminal, 2) pursuant to Fed. R. Crim. P. 14, the government must elect to proceed to trial either on Counts One and Two or on Counts Three and Four -- alternatively, defendants are entitled to separate trials, one on Counts One and Two, and the other on Counts Three and Four -- and 3) pursuant to Fed. R. Evid. 403, the Court should exclude all evidence of Mr. Di Girolamo's alleged payments to John Warner or Sparta Enterprises.
GOOD CAUSE appearing, and as set forth herein, the motions are DENIED.
Mr. Di Girolamo was the President of Top Line Services, Inc. ("Top Line"), a painting contractor. As a painting contractor, Top Line Services sought and obtained painting contracts from, inter alia, First Nationwide Savings. First Nationwide Savings would award painting contracts to the lowest bidder in a sealed bidding process.
During 1983 and 1984, Mr. Di Girolamo allegedly made payments to John Warner ("Warner"), an employee of First Nationwide Savings, and to Sparta Enterprises ("Sparta"), an alter ego of Warner, as kickbacks or bribes. In exchange for these payments, Warner would provide Top Line with the information regarding the low bid, and Top Line could circumvent the bidding process.
Count One of the superseding indictment charges that on or about June 12, 1985, Mr. Di Girolamo signed a corporate tax return for the calendar year 1984, in which Top Line deducted $ 9,326 in kickbacks as cost of goods sold.
Count Two of the superseding indictment charges that on or about June 20, 1985, Mr. Di Girolamo signed an amended corporate tax return for the calendar year 1983, in which Top Line deducted $ 18,948 in kickbacks as an expense.
Both of Top Line's tax returns in question were allegedly executed by Mr. Di Girolamo under penalty of perjury.
Counts Three and Four name both Mr. Di Girolamo and Mrs. Di Girolamo, and address their joint individual tax returns for the same calendar years.
Count Three alleges that in March 1987, defendants executed a joint return for the calendar year 1983, which 1) indicated a Net Operating Loss Carryover of $ 117,090 when they were not entitled to a net operating loss carryover in any amount, and 2) omitted income from the proceeds of the sale of World Fish Company as well as from the sale of their personal residence, totalling $ 14,000, which they failed to report.
Count Four charges that in March 1987, defendants executed a joint return for the calendar year 1984, in which the Defendants 1) claimed a business loss of $ 63,125, when the Defendants were only entitled to claim a loss of $ 34,760 2) claimed a Net Operating Loss Carryover of $ 94,758 when they were not entitled to a net operating loss carryover in any amount, and 3) failed to report income in the form of diverted corporate receipts in the amount of at least $ 4500.
II. MOTION TO DISMISS COUNTS ONE AND TWO
For purposes of this motion, the parties agree that Mr. Di Girolamo paid a total of $ 28,274 to Warner and Sparta in exchange for the low bid information. Using that information, Top Line would submit the low bid and receive the painting contracts. Mr. Di Girolamo deducted $ 18,948 as an expense in Top Line's 1983 corporate return, and $ 9,326 as cost of goods sold in Top Line's 1984 return.
A conviction for violating Section 7206(1) requires that the defendant will fully make and subscribe to any return which he does not believe to be true and correct as to any material matter. To prove willfulness in a criminal tax case, the government must prove that the law posed a duty on the defendant, that the defendant knew of the duty, and that the defendant nonetheless voluntarily and intentionally violated that duty. Cheek v. United States, 498 U.S. 192, 112 L. Ed. 2d 617, 111 S. Ct. 604 (1991).
The government argues that the payments were proscribed under California law. In the alternative, the government argues that Warner violated the laws of the United States, and that Mr. Di Girolamo knowingly aided and abetted Warner's violation of federal law. Under either theory, the government contends the deductions were clearly proscribed by Section 162(c)(2) of the Internal Revenue Code. Section 162(c)(2) provides, in pertinent part:
Other illegal payments.--No deduction shall be allowed under subsection (a) for any payment . . . made, directly or indirectly, to any person, if the payment constitutes an illegal bribe, illegal kickback, or other illegal payment under any law of the United States or under any law of a State (but only if such State law is generally enforced), which subjects the payor to a criminal penalty or the loss of license or privilege to engage in a trade or business. . . .
26 U.S.C. § 162(c)(2) (West 1992 Supp.).
Mr. Di Girolamo contends that the amounts claimed were deductible, and hence there is no crime. In the alternative, he claims that even if the deductions were improper, he could not, under the law existing at the time, have known them to be improper. Accordingly, he contends that the government can not prove willfulness.
Mr. Di Girolamo relies on the case of Raymond Bertolini Trucking Co. v. Commissioner of Internal Revenue, 736 F.2d 1120 (6th Cir. 1984), ("RBTC"), a civil case, in support of his argument that payments made for lawful commercial bribery,
such as the payments alleged here, are deductible. The RBTC decision was premised on the finding that "in making these payments, RBTC did not violate either Ohio state law or federal law, and was not by virtue of the payments subject to loss of any license or privilege to engage in its trade." RBTC, 736 F.2d at 1122.
The question before the Court in this case is not determined by Ohio law, but by the laws of the United States and of the State of California. Nevertheless, RBTC is clearly analogous in holding that the kickbacks, to the extent that they are not proscribed by law, are deductible under Section 162 as necessary business expenses.
The motion raises three important questions: 1) did Mr. Di Girolamo's payments to Warner aid and abet a violation of federal law, 2) were the kickbacks made in violation of California law for purposes of Section 162(c), and, 3) if the payments themselves were lawful, are payments made as part of ...