Argued and Submitted June 11, 2012.
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Michael K. Powell and Michael J. Kennedy (argued), Assistant Federal Public Defenders, Reno, NV, for Appellant Lori A. Kahre.
Lisa A. Rasmussen, Las Vegas, NV, for Appellant Robert D. Kahre.
Joel F. Hansen, Hansen Rasmussen, Las Vegas, NV, for Appellant Alexander C. Loglia.
Gregory Victor Davis, Mark S. Determan (argued), Department of Justice, Washington, D.C., for Appellee United States.
Appeal from the United States District Court for the District of Nevada, David A. Ezra, District Judge, Presiding. D.C. No. 2:05-cr-00121-DAE-RJJ-1.
Before: PROCTOR HUG, JR., JOHNNIE B. RAWLINSON, and SANDRA S. IKUTA, Circuit Judges.
Appellants Robert Kahre (Kahre), Lori Kahre (Lori) and Alexander Loglia (Loglia) challenge their convictions for various criminal tax offenses arising from their use of gold and silver coins to pay wages and thus avoid the reporting of payroll and income taxes due. Appellants contend that dismissal of the indictments was warranted because Appellants lacked the requisite notice that their conduct violated applicable tax laws. Appellants also assert that a new trial was in order because the prosecutor should have been disqualified due to his status as a defendant in a Bivens  lawsuit filed by the Kahres, and because the district court's prejudicial conduct and erroneous evidentiary rulings deprived them of a fair trial. In addition, Robert Kahre challenges the district court's denial of his motions to suppress and the sentence imposed. We affirm Appellants' convictions and Kahre's sentence.
A. Third Superseding Indictment (Indictment)
The Indictment alleged that Appellants engaged in a conspiracy to avoid the payment of payroll and income taxes by utilizing a payroll system pursuant to which employees received their wages in gold and silver coins, which were later exchanged for cash. According to the Indictment, " the face amount of the coins was one-eighth of the amount of pay that the employee actually earned and received in the envelope of cash[.]" The Indictment alleged that Appellants failed to withhold the required federal income taxes, medicaid taxes, and social security taxes from the employees' wages, and that Appellants created false invoices to conceal the payroll expenses. The Indictment also alleged that Kahre marketed the payroll service to other contractors and charged an administrative fee for use of the payroll service.
The Indictment charged all three defendants with one count of conspiracy in violation of 18 U.S.C. § 371, and one count of attempting to interfere with the administration of internal revenue laws in violation of 26 U.S.C. § 7212(a). Robert and Lori Kahre were charged with an additional count of attempting to interfere with the administration of internal revenue laws in violation of 26 U.S.C. § 7212(a).
The Indictment charged Robert Kahre with forty-eight counts of failure to pay employment taxes in violation of 26 U.S.C. § 7202; four counts of attempting to evade
or defeat taxes in violation of 26 U.S.C. § 7201; and one count of wire fraud in violation of 18 U.S.C. § 1343.
The Indictment charged Lori Kahre with one count of making false statements to a bank in violation of 18 U.S.C. § 1014, and eight counts of attempting to evade or defeat taxes in violation of 26 U.S.C. § 7201.
Finally, the Indictment charged Loglia with one count of filing false income tax returns in violation of 26 U.S.C. § 7206(1), and ten counts of attempting to evade or defeat taxes in violation of 26 U.S.C. § 7201.
B. Pretrial Motions
1. Kahre's Motions To Suppress
In his search warrant affidavit, Internal Revenue Service (IRS) Special Agent Jared Halper observed that, although Kahre's businesses were generating significant revenues, Kahre had not filed business tax returns or employment taxes since the early 1990s. Kahre also had not filed individual tax returns since 1991.
Agent Halper averred that Kahre leased employees to various contractors, and withdrew cash from Bank of the West for the payroll. According to Agent Halper, Kahre withdrew $24,096,012 in cash between January 17, 2002, and October 31, 2002. Kahre's employees collected their wages at a warehouse located at 6270 Kimberly Avenue in Las Vegas. The employees received nominal amounts of gold certificates or gold chips, which they immediately exchanged for envelopes of cash. Kahre allegedly withheld " sixty percent of the employees' payroll...."
Based on Kahre's conduct, Agent Halper stated that there was probable cause to believe that Kahre was engaged in a conspiracy to evade taxes and to interfere with the administration of the tax laws by the IRS. Agent Halper's affidavit reflected that evidence of Kahre's criminal activities could be found at the 6270 Kimberly Avenue, 6295 Grand Canyon, and 1555 Bledsoe Lane addresses (The Kimberly, Grand Canyon, and Bledsoe properties).
In his declaration, Agent Halper related that IRS agents reviewed the search warrant affidavit prior to the searches. Kahre was subsequently arrested at Bank of the West pursuant to a state bench warrant for failure to appear, and the agents seized $230,913 in cash, which was provided to the IRS to satisfy Kahre's " unpaid federal income tax liabilities." According to Agent Halper, Kahre had unpaid tax assessments of approximately $2,000,000.
The district court ruled that Kahre's motion to suppress evidence seized when Kahre was arrested at Bank of the West was moot because the seized evidence would not be used at trial. The district court also determined that the government was not required to return the cash seized from Kahre because it was used to offset Kahre's tax liabilities.
The district court granted in part and denied in part Kahre's amended motions to suppress evidence seized from the Kimberly, Bledsoe, and Grand Canyon properties. Because Kahre was not present during the execution of the search warrants, the district court held that Kahre lacked standing to challenge the manner in which the search warrants were executed. The district court concluded that, because the search warrant properly incorporated the search warrant affidavit, the warrant was not overly broad. The district court also held that the agents properly seized gold and silver coins relating to Kahre's payroll scheme. However, the district court granted Kahre's motion to suppress information and documents that were unrelated to the time periods specified in the warrants.
2. Appellants' Motions To Disqualify the Prosecutor For Conflict of Interest
On October 30, 2003, several plaintiffs, including the Kahres, filed a Bivens action against the federal prosecutor, as well as other federal defendants. The complaint alleged, inter alia, that the federal defendants orchestrated an illegal raid of Kahre's properties, improperly arrested Kahre and stole $230,913 in cash from him.
On October 4, 2004, the district court in the Bivens action denied the prosecutor's motion to dismiss premised on absolute immunity. Treating the complaint's allegations as true, the court denied absolute immunity because of the prosecutor's alleged involvement in planning the raids.
The government subsequently filed two indictments against Appellants, and the district court in the Bivens case granted the government's emergency motion to stay the proceedings based on the pending criminal prosecutions. During the first trial, the jury was unable to reach verdicts, and the government subsequently filed the Third Superseding Indictment.
Prior to the second trial, Kahre renewed a prior motion to disqualify the prosecutor because of a conflict of interest. In an attached declaration, Kahre's counsel related that the prosecutor had remarked that Kahre's counsel had " threatened [his] job and [his] pension," making the case " personal." Kahre filed a subsequent motion to disqualify the prosecutor because of his pecuniary and emotional interests in the Bivens action, and because the prosecutor had filed the indictments as retaliation for being named in the Bivens action.
The district court denied Kahre's motion, ruling that automatic disqualification was not warranted due to the pendency of a Bivens action, and that the prosecutor's comments did not require disqualification on the merits.
3. Appellants' Motions To Dismiss the Indictments Based on the Gold and Silver Coins' Valuation
Appellants asserted that they lacked the requisite notice that their payroll payments in gold and silver coins were taxable at the coins' fair market value and that their conduct violated the tax laws. They contended that the lack of notice in the statutory language compelled application of the rule of lenity, resulting in a construction of the statute that was most favorable to them. The district court rejected the Appellants' argument, explaining that the applicable statutes were unambiguous regarding the elements of conspiracy to defraud the government and of willful failure to truthfully account for taxes owed. The district court added that the statutes' scienter requirements mitigated any vagueness and that the tax provisions patently articulated reporting and filing requirements.
The district court eschewed Appellants' argument that they did not defraud the government because gold and silver coins used to pay employees should have been assessed at face value, rather than fair market value, for tax purposes. If, for example, an employee was paid with ten silver dollar coins, Appellants would argue that the employee received only ten dollars in wages. However, if each silver dollar had a fair market value of fifty dollars, the government assessed the wages at 10 x $50 or $500.00. The district court was persuaded that Ninth Circuit precedent, as well as that of other courts including the Tax Court, required taxation of the coins at fair market value. The district court observed that the tax code and corresponding Treasury regulations treated property, such as gold and silver coins
used as compensation for services rendered, as taxable at fair market value.
C. Trial Testimony and Verdicts
George Rodriguez (Rodriguez), who pled guilty to tax evasion, served as a foreman and superintendent for Kahre's business, Wright Painting and Drywall. According to Rodriguez, all employees were required to sign an independent contract agreement in order to receive their pay. The agreement was designed to shield Kahre and his employees from tax obligations by establishing a system of wage payments in gold and silver.
Although Kahre told Rodriguez that he was an independent contractor, Rodriguez described himself as an employee of Robert Kahre's business. Kahre had the authority to direct Rodriguez in the performance of Rodriguez's duties, including what work to perform and when the work was to be performed. Kahre also instructed Rodriguez regarding the timing of hiring additional workers, and regarding where to purchase supplies and tools. Kahre also had the right to terminate Rodriguez's employment.
According to Rodriguez, he and the other employees were paid in gold and silver on a weekly basis based on a system developed by Kahre and administered by Lori. Each week, Rodriguez received a single gold coin which he immediately exchanged for an envelope containing his $500 weekly salary in cash. All employees were required to accept payment in gold or silver coins, which coins were later exchanged for cash. Rodriguez never received W-2 forms reflecting his wages, and no deductions were made from his wages for income tax purposes.
Rodriguez obtained tubes of gold and silver which he exchanged for envelopes of cash to distribute to the other employees. Rodriguez confirmed payroll payments after consulting payroll sheets generated by Lori. Payrolls were met with cash payments, and Rodriguez did not recall any employee who actually retained the gold or silver coins as wage payments.
Heidi Molesworth (Molesworth), who also pled guilty to tax evasion, was employed in Kahre's payroll office for five years. Kahre informed Molesworth that she was an independent contractor and she signed an independent contractor agreement. Nevertheless, Kahre paid Molesworth's wages in gold and silver coins that she immediately exchanged for envelopes of cash. Molesworth did not receive W-2 or 1099 forms, and never filed a tax return. Molesworth paid Kahre's employees in gold and silver coins. If an employee retained the gold or silver coins, the coins' fair market value was deducted from the cash wages due.
Molesworth testified that she and Lori used false names on the payroll sheets to avoid having to pay taxes, and that it was standard procedure to use false names on employment verification forms. Although most other employees were paid using the gold and silver exchange, Molesworth and the Kahres did not use that system for payment of their own wages. Instead, envelopes of cash were prepared for payment of their wages. In addition, Robert Kahre
received fees for administering the payrolls of other companies, for which he used the same coin/cash payment system he utilized for his employees.
IRS Special Agent Ryan Rickey testified that, between 1999 and 2003, Kahre's companies paid $22,382,760.42 in wages. Between 1998 and 2003, the companies using Kahre to administer their payrolls paid a total of $95,042,952.14 in wages and Kahre received $14,100,087.10 in fees. Agent Rickey also testified that return filing histories reflected that Kahre did not file any tax returns between 1991 and 2006; Lori filed false returns from 1996 to 1999, and did not file any returns between 2000 and 2006; and Loglia did not file returns from 1998 to 2006.
IRS Revenue Agent Sue Cutler estimated that, between 1999 and 2002, Kahre's companies paid Kahre a total salary of $1,956,738, and Kahre earned $14,100,087.10 in fees from other companies using his payroll services. Agent Cutler surmised that Kahre owed $2,049,172.97 in income taxes. Because Kahre did not file any employment taxes for his businesses from 1999 to 2003, Agent Cutler calculated an additional tax liability of $7,082,138.54.
In his testimony, Robert Kahre explained that he developed his payroll system after the IRS seized his property and equipment from a failed business. Kahre met John Nelson (Nelson), who authored books and taught classes about the IRS and the monetary system, and Nelson's ideas influenced Kahre to develop the payment system at issue.
According to Kahre, he developed his gold payroll system because the United States government had debauched the national currency and utilized inflation to confiscate the wealth of U.S. citizens. Kahre relied on court cases and the Gold Bullion Coin Act of 1985 that approved gold coins as legal tender. Kahre devised the independent contractor agreements to reflect that the IRS was a foreign agent for the World Bank and the International Monetary Fund (IMF). In Kahre's view, by collecting taxes for the IRS, employers illegally served as foreign agents for the World Bank and IMF. Kahre relied on several federal statutes, regulations, and " Presidential Documents" in the process of developing his payroll system to avoid the collection of taxes on behalf of foreign agents.
Loglia testified that, like Kahre, he was influenced by Nelson's ideas about monetary history and monetary policy. Loglia believed that Congress approved the use of gold coins as an alternative to paper currency. Because of his interest in gold payments, Loglia agreed to work for Kahre, and stopped filing tax returns in 1993, since his income, calculated in accordance with the face value of the gold and silver coins, was below the filing threshold. Loglia believed that there was legal precedent supporting the gold payment system, and he calculated his income based on the coins' face value on the ground that coins can be legally used to pay debt. Loglia was of the view that federal statutes and the Gold Bullion Coin Act of 1985 supported the gold payment system, considering that coins were approved legal tender, and that gold clause contracts were legally authorized.
Lori Kahre testified that she started to work for her brother, Robert, in 1988. In 1993, Kahre commenced paying Lori her wages in silver dollars, and Lori thought the coins were legal tender based on Congressional acts. Lori was persuaded that the coins were legal tender because a coin shop did not collect taxes when exchanging cash for the ...