Filed: Jul. 06, 1993
Latest Update: Mar. 02, 2020
Summary: UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT _ No. 92-7306 _ UNITED STATES OF AMERICA, Plaintiff-Appellee, VERSUS JOSEPH T. COVENEY and FRANCIS M. COVENEY, Defendants-Appellants. _ Appeals from the United States District Court for the Southern District of Texas _ (July 6, 1993) Before POLITZ, Chief Judge, REAVLEY, and BARKSDALE, Circuit Judges. BARKSDALE, Circuit Judge: This tax fraud appeal turns on a fairly routine, straight- forward and simple issue, sufficiency of the evidence; but,
Summary: UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT _ No. 92-7306 _ UNITED STATES OF AMERICA, Plaintiff-Appellee, VERSUS JOSEPH T. COVENEY and FRANCIS M. COVENEY, Defendants-Appellants. _ Appeals from the United States District Court for the Southern District of Texas _ (July 6, 1993) Before POLITZ, Chief Judge, REAVLEY, and BARKSDALE, Circuit Judges. BARKSDALE, Circuit Judge: This tax fraud appeal turns on a fairly routine, straight- forward and simple issue, sufficiency of the evidence; but, i..
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UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
_________________________________________
No. 92-7306
_________________________________________
UNITED STATES OF AMERICA,
Plaintiff-Appellee,
VERSUS
JOSEPH T. COVENEY and
FRANCIS M. COVENEY,
Defendants-Appellants.
_________________________________________________________________
Appeals from the United States District Court
for the Southern District of Texas
_________________________________________________________________
(July 6, 1993)
Before POLITZ, Chief Judge, REAVLEY, and BARKSDALE, Circuit Judges.
BARKSDALE, Circuit Judge:
This tax fraud appeal turns on a fairly routine, straight-
forward and simple issue, sufficiency of the evidence; but, it is
complicated greatly by the Government's failure to carry the day on
its global theory for conviction, by the concomitant difficulty of
instead reviewing its proof on a count-by-count basis, and by the
incomplete state of the record on appeal, due to the Government's
failure to include the exhibits. Also in issue is the possible
prejudice suffered by Joseph and Francis Coveney when the
Government called two of their former attorneys to testify, one
invoking the attorney-client privilege 20 times. Each of the
Coveneys was convicted of aiding and assisting in the preparation
of 29 false income tax returns, and conspiracy to commit those
offenses. Finding the evidence on conspiracy and 16 of the aiding
and assisting counts sufficient, and no reversible error arising
out of the attorneys' testimony, we AFFIRM on those counts.
However, because the evidence, as contained in the incomplete
record on appeal, is insufficient for 13 of the aiding and
assisting counts, we REVERSE those convictions, and REMAND for
resentencing.
I.
In 1983, brothers Francis and Joseph Coveney formed
Temperature Technology, Inc. (TTI), a Houston-based company which
installed energy management systems (EMS) in commercial buildings.
(An EMS is an energy control unit which is connected to an item of
equipment and is designed to reduce energy use by causing the item
to cycle on and off.) TTI became a recommended installation
company for the OEC Leasing Corporation (OEC), as part of its
promotion of a tax shelter program. OEC purchased EMS units from
Franklin New Energy Corporation (FNEC). (The EMS was driven by a
microprocessing panel manufactured by Eckard Engineering.) OEC
leased the EMS units to investors, who in turn contracted with an
installation company to install and service the systems. The
installation company was responsible for locating an "end-user" for
each system -- a commercial building where the unit would be
installed. If the EMS saved energy costs, those savings would be
shared by the end-user, the investor, and the installation
2
company.1 In addition to these shared savings, the installation
company received an installation fee from the investor, the end-
user reaped the benefits from a unit it was not required to
purchase or maintain, and the investor was entitled on his income
tax return to an investment tax credit and deductions for, among
other things, depreciation and installation.
Almost immediately, TTI began to experience technical problems
with the OEC units, which were apparently caused by the FNEC/Eckard
microprocessors. TTI attempted to correct the problem, and, in
May, hired John Millar as national service manager. Millar's
technical staff made a number of changes in the microprocessing
chips and eventually resolved the problem.
At approximately the same time, Francis Coveney directed
Millar to begin developing a solar-powered EMS. Millar immediately
developed a prototype using the FNEC/Eckard unit. Also working
with a National Enco brand EMS, which he considered superior, he
converted the National Enco eight and 16-channel units to solar
power, but was unable to do so with the 24-channel unit.2 This 24-
channel unit had a remote monitoring capability, which allowed the
1
The end-user retained 50% of the savings. It was billed by
the installation company for the other 50%. The testimony was
inconsistent on the further division of the savings. Some
witnesses testified that the installation company kept 15% of the
savings and forwarded the remaining 35% to the investor; others,
that the installation company kept only 15% of the amount it
received from the end-user, leaving 85% of that amount for the
investor.
2
Each channel represents an individual switching device which
will control one piece of equipment. An eight-channel unit, for
example, can control eight different pieces of equipment within a
building.
3
unit to be accessed and programmed through telephone lines.
Without such remote monitoring, the unit must be serviced on site.
Although the eight and 16-channel National Enco units did not have
remote monitoring, the FNEC/Eckard units did. But, Millar was
never able to convert those units to solar power while maintaining
the remote monitoring feature.
Francis Coveney had directed development of a solar-powered
EMS with an eye toward a new venture. In August 1984, he formed
Enersolex, a San Antonio-based company which marketed a tax shelter
similar to that offered by OEC. In the Enersolex program, however,
investors purchased, rather than leased, their EMS units, and the
units were to be solar, rather than electrically, powered. There
was no added benefit for the installation company or the end-user;
but, because the unit was solar powered, the investor was entitled
to a 15% energy tax credit, in addition to the investment tax
credit and deductions available to an OEC investor.
While Millar was still developing the prototypes, financial
planners expressed an interest in marketing the solar-powered EMS.
TTI retained Raymond Merry, an energy consultant, to analyze the
feasibility of such a system.3 He prepared a report on the
capabilities of the proposed EMS, but noted carefully that it had
not yet been assembled. And, Enersolex retained Craig Welscher, an
attorney, to prepare a tax opinion on the proposed solar unit.
3
Merry testified that he wasn't sure who intended to use his
report. He was retained by TTI and conducted the evaluation at its
offices, but he understood that the device was being manufactured
by Enersolex.
4
Moreover, Francis Coveney retained CPA John Pearl to prepare an
analysis of the estimated tax write-off and cash benefits of the
Enersolex system. The documents became part of the Enersolex
promotional package, which was distributed to financial planners.
A videotape featuring the National Enco prototype was prepared, as
well as a slideshow featuring the FNEC/Eckard model.
Representatives of both Enersolex and TTI visited a number of
cities, promoting and demonstrating the solar-powered EMS. TTI,
still installing and servicing OEC units, was also a recommended
installation company for the new Enersolex program.
Meanwhile, a New Jersey-based Internal Revenue Service task
force, investigating potentially abusive tax shelters, had heard of
the Enersolex promotion. In October 1984, two IRS agents travelled
to San Antonio and met with Francis Coveney, his attorney,
accountant, and the Enersolex marketing director. Francis Coveney
demonstrated the Enersolex unit and asked whether he should
continue to sell it. The agents explained that they were not then
in a position to answer that question, but would advise him if they
determined that the tax shelter was abusive. The investigation was
transferred to Texas before that determination was made.
By the end of 1984, approximately 115 Enersolex units had been
sold, most in the last two weeks of December.4 A majority of the
Enersolex investors selected TTI as their installation company.
Each investor received a letter from Joseph Coveney, thanking them
4
Testimony regarding the purchase price ranged from $32,500 to
$52,000.
5
for selecting TTI and telling them that information about their
end-user location would be forthcoming. A second letter told them
when and where their unit had been installed; most included
photographs of the unit and/or the end-user site.
Although TTI had represented that it had secured numerous end-
user locations for the Enersolex units, this was apparently not the
case. Because most investors intended to file their income tax
returns on April 15, see infra at 7 and note 20, the pressure was
on to install these units in the first few months of 1985. By
letter in February 1985, TTI informed OEC investors for whom it was
an installer that it would no longer service units through the OEC
program, explaining that it was becoming increasingly difficult to
obtain parts for repair and maintenance of those units. Therefore,
the units would be removed, and each OEC investor was to inform TTI
where his unit should be sent. Within days of that notice to OEC
investors, Enersolex investors began to receive letters from TTI
about their end-user sites. Many of the Enersolex units were
installed in the same locations from which OEC units had been
removed. There was extensive testimony at trial regarding specific
locations. In some cases, the OEC unit was physically removed, and
an Enersolex unit installed in its place. In most cases, however,
the OEC unit was simply converted to solar power.5 Among other
5
TTI was responsible for locating end-users, and Joseph Coveney
testified that he believed the locations belonged to TTI. Not so
for the units installed there. The service agreement between TTI
and the OEC lessees stated that "[t]he lessee shall retain full
legal possession of the system notwithstanding delivery of the
service company". Indeed, Joseph Coveney admitted that the "EMS
unit on the wall ... was the OEC lessee['s]. That was his."
6
things, internal wiring was changed, and the unit was connected to
solar panels which were installed on the roof. The brown OEC units
were painted blue and an Enersolex sticker added. Each Enersolex
investor was notified of his unit's installation; and, on their
1984 tax returns, most claimed a 15% energy tax credit, a 10%
investment tax credit, and deductions for depreciation and
installation (tax benefits).
Picking up on the earlier investigation, IRS agents in Texas
met with representatives of Enersolex, including Francis and Joseph
Coveney, on April 3 and 22, 1985. That July, they referred the
case to the Criminal Investigation Division of the IRS. First
indicted in April 1991, Francis and Joseph Coveney, Enersolex
accountant John Pearl, and Gerald Ramsey, TTI's vice-president of
operations, were charged in a superseding indictment in October
1991 with conspiracy to aid and assist in the preparation of false
income tax returns (count 1). Pearl and the Coveneys were also
charged in 30 counts with aiding and assisting in the preparation
of false income tax returns (counts 2-31). And, Ramsey was charged
in two additional substantive counts (counts 32 and 33).
In presenting its evidence, the Government called two of the
defendants' former attorneys as witnesses, as discussed in part
II.A. The defendants unsuccessfully moved for a mistrial, premised
on the repeated invocation of the attorney-client privilege. Their
motions for judgments of acquittal upon the completion of the
Government's case-in-chief were taken under advisement, re-urged at
the close of all the evidence, and ultimately denied.
7
Before the case went to the jury, the Government dismissed one
substantive count against the Coveneys and Pearl (count 4).
Francis and Joseph Coveney were each found guilty on the conspiracy
count and the remaining 29 substantive counts against them; Pearl
was acquitted; and Ramsey was found guilty of conspiracy, but
acquitted on his two substantive counts. On the conspiracy count,
Francis Coveney was fined $3,500 and Joseph Coveney, $2,750; and
each was sentenced to 30 concurrent prison terms -- Francis
Coveney's being 18 months each, and Joseph Coveney's, 16 months
each. Only the Coveneys are before us on appeal.
II.
The Coveneys challenge the denial of a mistrial and the
sufficiency of the evidence.6
A.
The grant or denial of a mistrial is, of course, a matter left
to the discretion of the district court. We review only for abuse
of that discretion, United States v. Burke, 496 F.2d 373 (5th
Cir.), cert. denied,
419 U.S. 966 (1974), and, as explained below,
find none here.
After the Government subpoenaed three of the defendants'
former attorneys to testify, the defendants moved to quash,
asserting the attorney-client privilege. The district court denied
the motions, but conducted a voir dire of the witnesses to
6
Francis and Joseph Coveney filed virtually identical briefs.
Therefore, we analyze their cases individually only when
considering the sufficiency of the evidence against them.
8
establish the acceptable boundaries for their testimony. Two of
the three, Robert Fee and Craig Welscher, were called to testify.
Fee was called as the Government's first witness. After he
twice invoked the attorney-client privilege, the defendants moved
for a mistrial. The motion was denied, but the jury was given a
limiting instruction.7 When Fee invoked the privilege a third
time, the defendants unsuccessfully re-urged their motion.
After a three-day weekend, the trial resumed; and Welscher was
called as the third witness that day. During his testimony, the
7
The district court instructed the jury as follows:
You have heard this attorney do what is called
invoking a privilege, an attorney-client privilege
in terms of him not testifying about things that he
may have been told or discussed or saw or heard or
observed having to do with his representation of
one or more of the defendants in this case. Please
understand that that is a completely acceptable
practice in the law. Any time anyone goes to an
attorney to discuss anything, no matter how
frivolous, they are entitled to assume that that is
going to be held in confidence, and any attorney
who receives such information may not divulge it to
third persons even in open court without the
express permission of his client. There is nothing
sinister nor inappropriate nor illegal nor evil
about invoking the attorney-client privilege. It
is simply, simply put from our childhood, "I told
you a secret and I expect you to keep it," nothing
more than that.
Please, do not engage in any speculation or
conjecture as to what communications, if any, might
have transpired. Do not engage in any imagination
as to what questions or answers might have flown
from any answer but the one that counsel gave in
regard to that specific question.
9
attorney-client privilege was invoked 20 times, either by him or
one of the defendants.8
The Coveneys contend that the Government knew Fee and Welscher
would assert the attorney-client privilege, and committed
reversible error by calling them to testify. They maintain that
continued invocation of the privilege, highlighted by the district
court's "ineffective" limiting instructions,9 cast suspicion on
them and caused the jury to believe that they were "keeping
secrets".
8
When the Government asked Welscher what materials he relied on
in preparing his tax opinion, the defense objected, and the court
gave the following instruction to Welscher and the jury:
[W]hen you answer this question, I want you to feel
free to refer to any treatises, law, or other
generally recognized publications that you would of
necessity rely on in formulating any such opinion.
They are clearly within the public domain and don't
refer to these defendants. To the extent that they
gave you any documentation, information,
representation, or other information that you
relied on to formulate the report that indeed you
incorporated into the report which was subsequently
published, you may, of course, reveal all of that
as well and of necessity must.
Anything that was revealed to you that is not
made a part of the report clearly falls within the
attorney-client privilege, and I do not want that
waived inadvertently. So I'm asking you to give a
complete answer based on the limitations I have
expressed.
Ladies and gentlemen, by admonishing this
witness along those lines, please understand that I
am not suggesting to you that there is any secret
information out there or anything along those
lines. I am simply requiring this lawyer to do
that which he must, which is to observe the
attorney-client privilege, and that's all.
9
See notes 7 and 8, supra.
10
Both the Supreme Court, see Namet v. United States, 373 U.S.
179 (1963), and our court, see San Fratello v. United States,
340
F.2d 560 (5th Cir. 1965), have recognized that forced invocation of
a testimonial privilege might, in some cases, so prejudice the
defendant as to warrant reversal. Having reviewed the testimony of
both attorneys, we are convinced that this is not such a case.
In San Fratello, this court found reversible error where the
Government called the defendant's wife to testify after she had
made it known to the court that she would refuse on the ground that
her testimony might incriminate her. When called, she answered
questions about her name and address, but, invoking the privilege,
refused to answer further. The district court instructed the jury
that "[t]he reluctance of a witness to incriminate herself may not
be used to incriminate others", San Fratello, 340 F.2d at 563-64,
and emphasized that no unfavorable inferences could be drawn
against the defendant because of his wife's refusal to testify.
This court concluded, however, that "[t]he prosecution could have
had no purpose in calling this witness and requiring her to claim
her privilege in the presence of the jury other than to use her
conduct as an incriminating circumstance against her
husband". 340
F.2d at 567. Even the limiting instruction did not cure the error,
because it was "more than reasonably probable" that the wife's
refusal to testify prejudiced her husband.
Id.
The case before us, however, is much more closely analogous to
Namet. Unlike the wife who refused to testify in San Fratello, Fee
and Welscher "possessed nonprivileged information that could be
11
used to corroborate the Government's case". Namet, 373 U.S. at
188. Fee's testimony was very brief. He testified that he had
been retained by TTI in early 1984, but refused to elaborate.10
Both of the questions he refused to answer11 were quite similar to
questions he had answered at voir dire.12 They did not touch on
sensitive areas or critical issues in the case. His testimony was
of no particular import to the Government's case; but, on the other
hand, his refusal to answer could not have raised any suspicion
that he was "keeping a secret" for the Coveneys.
Conversely, Welscher was an important substantive witness. As
author of the tax opinion used in the Enersolex promotion, his
testimony was critical to the Government's case. Although he
claimed the privilege 20 times, this number must be viewed in the
context of his entire testimony and the substance of the questions.
First, his testimony was significantly longer than that of any
other witness in the 12-day trial. As in Namet, "[t]he effect of
these questions was minimized by [Welscher's] lengthy nonprivileged
testimony". 373 U.S. at 189. Second, the privilege was often
10
The Coveneys contend that Fee was called only to establish
that they refused to follow his legal advice. At his voir dire,
the Government did explain that it wished to call him for that
purpose. The court made it clear, however, that such testimony
would not be allowed; and the Government did not inquire about the
substance of his legal advice.
11
As noted, Fee invoked the attorney-client privilege three
times, but twice it was in response to the same question.
12
For example, at voir dire, Fee was asked, "You were hired ...
in 1984 to syndicate a tax opinion, weren't you?", to which he
answered "Yes". When asked if he was hired because he was a tax
specialist, he asserted the privilege.
12
asserted in response to questions which were not even slightly
incriminating, and which were ultimately answered by other
witnesses.13 Some of the questions were inappropriate and intruded
into privileged territory; but "[w]e cannot find that these few
lapses, when viewed in the context of the entire trial, amounted to
planned or deliberate attempts by the Government to make capital
out of witnesses' refusals to testify." Namet, 373 U.S. at 189.
Moreover, any error was cured by the district court's limiting
instructions. Although the instructions made reference to secrets,
they also made it clear that a lawyer is duty-bound to invoke the
privilege, and that its invocation should not be perceived as an
effort to hide information from the jury.
B.
The Coveneys also contend that the evidence was insufficient to
convict them for aiding and assisting in the preparation of false
income tax returns, and conspiracy to do so.14 We view the evidence
13
Welscher asserted the privilege in response to questions
about, inter alia, the nature of TTI's business, what TTI did
before it began to install EMS units, and whether anyone had
explained to him how an EMS worked.
14
The record on appeal reflects numerous acts by the Coveneys
that are shabby business practices at best; criminal violations at
worst. For example, the Enersolex promotional brochure touted the
creation of a defense fund, through which Craig Welscher was to
serve as counsel to any investor whose claims were challenged by
the IRS. Welscher testified that no such fund existed. As another
example, when IRS agents were scheduled to visit the Enersolex
offices in San Antonio in October 1984 to see the solar-powered
units, the Enersolex warehouse was empty. Therefore, approximately
200 boxes, for OEC units, were moved from TTI's Houston warehouse,
and "Enersolex" was stenciled on them. Steve Halliburton testified
that most of the boxes were empty -- only about ten contained OEC
EMS units.
13
supporting criminal convictions in the light most favorable to the
verdict, and affirm if "any rational trier of fact could have found
the essential elements of the offense beyond a reasonable doubt".
United States v. Chaney, 964 F.2d 437, 448 (5th Cir. 1992).
Of course, when multiple defendants are tried on a multi-count
indictment, as here, the analysis is a lengthy one. We must review
each count separately as to each defendant. Our review in this
case, however, is atypical. Neither the evidence at trial, nor the
briefs on appeal, have been presented in such a fashion. Rather,
the Government's theory has been a global one: Enersolex marketed
a solar-powered energy management system and promoted its potential
tax benefits; Enersolex never created the system it marketed;
therefore, investor/taxpayers who claimed the tax benefits which
the defendants represented they were entitled to, filed returns
which were, by definition, false; and, because the defendants knew
that the investor/taxpayers were not entitled to those tax
benefits, they aided and assisted in the preparation of the
investors' false returns. Under such a theory, the Government need
only prove that the investors filed tax returns claiming tax
benefits for a system which did not exist, and that the defendants
assisted them in doing so. Having reviewed the record on appeal,
however, we must conclude, for the reasons that follow, that a
reasonable jury could not have found these defendants guilty beyond
Notwithstanding the repugnance of such activities, it must be
kept in mind that the only charges before us are aiding and
assisting in the preparation of false income tax returns, and
conspiracy to do so. That is what the Government was required to
prove beyond a reasonable doubt.
14
a reasonable doubt on the global theory asserted by the Government.
In addition to the difficulty of trying to piece the evidence
together on a count-by-count basis, our task in analyzing its
sufficiency is complicated greatly by the incomplete state of the
record on appeal. After trial, hundreds of exhibits were released
to the Government "for safekeeping until the time for appeal has
run". After the Coveneys filed their notices of appeal, each
ordered transcripts of his initial appearance, arraignment, trial
and sentencing. They made no further designation of the record.
In short, they did not request inclusion of the exhibits. Nor did
the Government supplement the record. Therefore, the record before
us consists only of the papers filed in the district court and the
transcripts ordered by the appellants. We do not have the
exhibits.
It is well-settled, of course, that the appellant bears the
burden of creating the record on appeal. Fed. R. App. P. 11(a).
If the record does not establish a basis for reversal, we will
affirm. Here, however, the record provided by the appellants,
albeit incomplete, shows that the evidence was insufficient to
support the Government's global theory. We must then look to more
specific evidence for whether each tax return listed in the
indictment was false, and whether the defendants willfully assisted
in its preparation. In some instances, those elements can be
established from the trial testimony. In others, they cannot. It
may well be that the documentary evidence, to which we are not
privy, would establish the essential elements on those counts. The
15
dilemma before us, then, is which party bears the burden of placing
such evidence into the appellate record. If the burden is with the
appellants, we must affirm as to those counts. See United States
v. O'Brien, 898 F.2d 983, 985 (5th Cir. 1990). But, if the burden
is with the Government, we must reverse the convictions as to the
applicable counts.
We hold that, given the specific facts of this case, the
burden of establishing a record which might provide sufficient
evidence of an alternative basis for affirmance must be with the
Government. Though the appellants must initially designate the
record, the appellee always has the opportunity to supplement it.
Here, the appellants needed only the record, as they ordered it, to
show that there was insufficient evidence to support the
Government's global theory.15 Thus, we must consider the
alternative basis for affirmance through a count-by-count review;
and the Government must bear responsibility for providing us
adequate information with which to do so.
Moreover, the Government must realize that the potentially
critical documents are not in the record before us. They were
released to it at the close of the trial, and there are repeated
references to them in the Government's brief. There are no such
15
The record does contain the trial exhibit list. While we
recognize the generality of that list, it appears that the
documentary evidence would not have provided the necessary
additional support to prove, beyond a reasonable doubt, the
Government's contention that no solar-powered EMS unit ever
existed.
16
references in the appellants' briefs. From this, we must conclude
that the exhibits are still in the Government's possession.
We have recognized, in the civil context, that the appellee
bears some responsibility for creating a complete record on appeal.
See Soley v. Star & Herald Co., 390 F.2d 364 (5th Cir. 1968).
Soley was decided before the Federal Rules of Appellate Procedure
became effective, so it relies upon rules of civil procedure which
have since been usurped by the appellate rules. However, the
rationale behind that decision is unchanged. There, the district
court dismissed an action for failure to state a claim. In so
doing, it apparently referred to evidence outside the pleadings.
Acknowledging that the motion had been treated as one for summary
judgment, our court concluded that it was unable to review that
judgment, because the record did not include the evidence to which
the district court had referred. The appellees asserted that they
were entitled to affirmance by default: because the record did not
include the necessary information, there were no grounds upon which
to reverse. Our court disagreed, concluding that the appellees had
notice of the appellant's allegation of error, and were "not devoid
of responsibility to inform" the appellate court.
Soley, 390 F.2d
at 367. "That responsibility increases when such appellees seek
our stamp of approval on an unarticulated summary judgment for
which no justification can be found in the record."
Id. at 368.
Likewise, that responsibility must also increase when we are
asked by the Government to conclude, pursuant to its global theory,
that the jury had sufficient evidence upon which to convict. If
17
the Government has nonetheless proven guilt beyond a reasonable
doubt on some other theory, it bears the burden of showing us how.
Obviously, this includes providing a sufficient and complete record
on appeal.
1.
We look first to the 29 substantive counts of aiding and
assisting in the preparation of false income tax returns, in
violation of 26 U.S.C. § 7206(2).16 Proof for such a violation must
establish that (1) the defendant advised or assisted in the
preparation of a tax return, (2) the return was false or fraudulent
as to a material matter, and (3) the defendant acted willfully in
doing so. See United States v. Salerno, 902 F.2d 1429 (9th Cir.
16
The statute reads, in pertinent part:
Any person who --
* * *
(2) Aid or assistance.--Willfully aids
or assists in, or procures, counsels, or
advises the preparation or presentation
under, or in connection with any matter
arising under, the internal revenue laws,
of a return, affidavit, claim, or other
document, which is fraudulent or is false
as to any material matter, whether or not
such falsity or fraud is with the
knowledge or consent of the person
authorized or required to present such
return, affidavit, claim, or document ...
* * *
shall be guilty of a felony....
26 U.S.C. § 7206.
18
1990); United States v. Sassak, 881 F.2d 276 (6th Cir. 1989);
United States v. Hooks,
848 F.2d 785 (7th Cir. 1988).
The evidence was sufficient to show that Francis and Joseph
Coveney advised or assisted in the preparation of the tax returns
of all Enersolex investors. A person need not actually sign or
prepare a tax return to aid in its preparation. See United States
v. Williams, 809 F.2d 1072 (5th Cir.), as corrected,
828 F.2d 1
(5th Cir.), cert. denied,
484 U.S. 896 (1987). It is sufficient
that the Coveneys knowingly participated in the sale and
installation of EMS units and provided information about the
transaction "with the expectation",
id. at 1095 (emphasis in
original), that the investors would use that information to file
their tax returns.
The Coveneys hired Ray Merry to prepare a report on the
technical feasibility of the solar-powered EMS. They retained
Craig Welscher to prepare an opinion letter on the tax implications
of purchasing the system and John Pearl to prepare an analysis of
the estimated tax write-off. They included all three documents in
a promotional brochure which was provided to potential investors
and financial advisors. The jury could have concluded that the
Enersolex project was marketed through financial advisors because
the Coveneys knew that its tax advantages were among its strongest
selling points. Finally, Joseph Coveney provided each Enersolex
investor who chose TTI as its installation company with photographs
of their unit and information about the date of installation. In
short, the jury could reasonably have found that the Coveneys
19
marketed the units and provided the tax opinions and installation
dates with the expectation that investors would rely on that
material in filing their income tax returns.
The more difficult question is whether the evidence was
sufficient as to the Coveneys willfully providing information which
they knew would lead to the preparation of tax returns which were
false as to a material matter. If they had told investors that
they had purchased a solar-powered EMS and that the EMS had been
installed, when, in fact, no solar-powered EMS existed, then
certainly the elements of willfulness and falsity would also be
established. As noted, however, the record does not support that
global theory.
The Government put on extensive evidence that Enersolex often
demonstrated a National Enco prototype, but actually sold a
modified FNEC/Eckard unit; that there were problems with the
FNEC/Eckard microprocessing chips; that Millar considered the
National Enco model a superior one; and that the Enersolex EMS
could not simultaneously operate on solar power and retain its
remote monitoring capability. However, none of these facts, or
even all of them considered together, could lead a reasonable trier
of fact to conclude that no solar-powered EMS was ever developed.
In fact, many of the Government's own witnesses testified to the
contrary.
Welscher testified that he saw the Enersolex unit work at
least twice. Welscher was unsure whether the units he saw were
developed from National Enco or FNEC/Eckard models, but Millar
20
testified that he was able almost immediately to convert the
FNEC/Eckard EMS unit to solar power.17 Jack Teschemacher, the
Enersolex marketing director, testified that changes were made in
the FNEC/Eckard units to "bring them up to the Enersolex
standards".18 Michael Munroe, whose company sold solar panels for
use with the Enersolex units, testified that solar power seemed an
expensive way to operate the EMS, but solar panels were capable of
powering the unit. Kent Maerki, head of Spectra Financial Network,
through which numerous Enersolex units were sold, and one of his
sales representatives also testified that they witnessed
17
Millar did testify that the unit could not simultaneously
operate on solar power and retain remote monitoring capability.
Units which were not solar powered, of course, could not qualify
for the energy credit. But, there was no evidence, nor was the
jury instructed, that a unit must have remote monitoring ability in
order to qualify for an investment tax credit or energy credit.
Certainly, TTI would prefer to access its units by telephone in
order to avoid on-site maintenance calls.
From this obvious preference, the Government builds its
argument that technicians were instructed to disable the solar
power in order to maintain the remote monitoring. But, while there
is evidence that, on one occasion, Francis Coveney instructed
technicians to install solar panels on the roof but not connect
them to the EMS unit, there is no evidence that this was standard
procedure. It may well be that any tax returns filed in relation
to that transaction were false, and that the Coveneys aided and
assisted in their preparation. Obviously, such evidence is
insufficient to establish that all tax returns claiming Enersolex-
related deductions and credits are false. This is particularly so
in light of the testimony that, in many cases, solar panels were
installed and connected to the EMS unit.
18
Teschemacher also testified that at least two of the National
Enco prototypes were installed at Enersolex end-user locations.
There was no evidence to the contrary. Even if the FNEC/Eckard
unit never worked with solar power, installation of solar-powered
National Enco models (which the Government seems to concede would
qualify for the claimed credits and deductions) would militate
against the global conclusion that all Enersolex investors filed
false tax returns.
21
demonstrations of the Enersolex units, which appeared to be
functioning properly.
Defense witnesses also testified that the Enersolex units
worked. John Pearl testified that he witnessed demonstrations of
both the National Enco and FNEC/Eckard prototypes. George Reneer,
an end-user whose EMS was either replaced with a solar-powered
unit, or converted to solar power, as discussed infra concerning
count 3, testified that he saved money as a result of the unit
installed at his business, and that he continued to do so with a
solar-powered unit.
The Government emphasizes that many witnesses testified that
they simply couldn't tell whether the EMS unit was working, or
whether it was being powered by solar panels. Indeed, they did;
but obviously, much more is required for a guilty verdict. The
Government must prove guilt beyond a reasonable doubt. In sum,
testimony which merely calls the investment (and, as a result, its
tax advantages) into question, is not sufficient, standing alone,
to support a conviction. Therefore, we must look to each
substantive count of the indictment and determine whether either of
the Coveneys aided and assisted in the preparation of the tax
return claimed to be false. In 16 instances, counts 6-8, 12, 13,
15, and 22-31, we conclude that they did.
Count 6. Douglas Devore purchased an eight-channel Enersolex
EMS. He selected TTI to install it, and received notice that his
unit, serial number 8437, had been installed at the Ione Top Value
22
Market in Ione, California,19 on April 23, 1985.20 Devore testified
that he spoke with an employee at the Ione Top Value and asked him
to check the serial number on the EMS unit installed there. Though
Devore never testified to the number the employee read to him, he
said that he became "concerned because of information [he] had
now". A photograph taken of the unit at the Ione Top Value
reflected a serial number which did not match the one assigned to
Devore. Devore received a subsequent letter from TTI informing him
that the unit had been removed from Ione and installed at the Del
Sol Food Market in Houston, Texas. But, a photograph of the unit
at the Del Sol revealed that it was a 16-channel unit, not an
eight-channel, as Devore had purchased.
Devore testified that he filed a 1984 return in which he
claimed benefits as a result of the Enersolex investment. Given
all of this evidence, a reasonable jury could have concluded that
Devore never owned a unit entitling him to those benefits.
Likewise, because Enersolex (Francis Coveney) and TTI (Joseph
19
Devore testified he was told initially that his unit would be
installed in Newport Beach, California. This was apparently near
his home, and he told TTI representatives that he intended to see
the unit. Approximately a month later, he was informed that the
unit could not be installed in Newport Beach and would, instead, be
installed in Ione.
20
All of the returns at issue were for the 1984 tax year. We do
not determine when the units must have been installed to qualify
for 1984 tax benefits, however, because TTI notified the investors
of the installation dates (only one of which was in 1984) and there
are no allegations that those dates were fabricated. The
Government does not contend that the investors' decisions regarding
the year for which they would claim the benefits of their
investments were the result of any aid or assistance from the
Coveneys.
23
Coveney) gave him information apparently confirming such ownership,
a reasonable jury could have also found that the Coveneys aided and
assisted in the preparation of the false tax return filed as a
result of those representations.
Counts 7 and 8. Guillermo Bruce purchased an Enersolex EMS on
the recommendation of his financial planner, and was subsequently
informed that his unit, serial number 8434, had been installed at
the Lamplighter Restaurant in North Hollywood, California, on
December 31, 1984. Millar testified that the installation at the
Lamplighter was not a conversion. He took an Enersolex unit to
California, but did not activate its solar capacity. Francis
Coveney had instructed him to install the solar panels, but not
connect them to the unit, in order to maintain the remote
monitoring capability. In short, this unit looked solar powered,
but wasn't.
Approximately six weeks after receiving notice of the December
installation, Bruce was informed that his unit had been removed
from the Lamplighter because "savings could not be maintained at
the end user location due to the operation of the owner". Two
weeks later, he was advised by letter that his unit had been
installed on June 10, 1985, at the Ione Top Value Supermarket.
Bruce claimed 1984 tax benefits for his Enersolex investment
both personally and through Bruce Investments Company. Other
evidence at trial included a photograph taken in 1986 of the EMS
unit at the Ione Top Value. That unit bore a different serial
number: 8467. A reasonable jury could have concluded that Bruce
24
never owned the Enersolex unit for which he claimed those benefits.
Accordingly, the returns for Bruce and his company would be false
as to a material matter. As in the case of Devore, a reasonable
jury could have found that the Coveneys aided and assisted in the
preparation of those returns by giving false information upon which
a taxpayer relied in filing a return.
Counts 12 and 13. Janet Horner and her husband also purchased
the smallest Enersolex unit, an eight-channel EMS. She testified
that, as a result of that purchase, they claimed benefits on their
1984 personal and JMH Investment Company returns. A letter dated
May 1, 1985, informed the Horners that their unit had been
installed at Longhorn Foods.
Richard Barsness, an OEC investor, testified that one of his
units, leased in 1983, was installed at Longhorn Foods. Joseph
Coveney confirmed that a 24-channel unit was installed for Barsness
at that location. Some time later, however, Barsness received
notice that his unit was being removed from that location because
TTI was "unable to obtain necessary repair parts from the
manufacturer and because of economic reasons".21
Janet Horner testified that she understood the Longhorn Foods
location was being "transferred" to her. She, however, purchased
an eight-channel EMS. The unit installed for Barsness had 24
channels. Joseph Coveney testified that that same unit "is on the
wall now assigned to Janet Horner". Because Barsness testified
21
Joseph Coveney testified that these letters were sent to OEC
investors in February 1985.
25
that he did not transfer his unit to anyone and gave no one
permission to use it, a reasonable jury could have concluded that
Enersolex "sold" the Horners a unit which belonged to OEC and was
being leased to Barsness. The Horners could not, therefore, own
the unit and would not be entitled to the tax advantages for such
ownership.
Counts 15 and 22 through 31. Count 22 involves the return of
the Energymisers partnership; counts 15 and 23-31, returns filed by
Energymisers partners. The partnership invested in several eight-
channel Enersolex units and received notice that one of them was
installed at Ryder Truck Rental in Houston.
Steve Halliburton, who performed installation work for TTI,
described the process of converting an electrically-powered
FNEC/Eckard EMS to solar power. He testified that he performed
this transformation at a number of locations, thereby converting
an OEC unit to an Enersolex unit. One location was Ryder Truck
Rental. In light of the testimony about Enersolex's difficulty in
locating end-users and the termination of TTI-OEC contracts so that
OEC sites could be used for Enersolex investors, a reasonable jury
could have concluded that the unit at Ryder Truck Rental was the
property of OEC and one of its lessees. As was the case with the
Horners, it could not legally have been sold to Energymisers.
Phillip Rulon, the general partner who prepared 1984 income
tax returns for Energymisers partners, testified that Energymisers
claimed tax benefits because of the Enersolex investment.
Moreover, those benefits were passed through to the partners and
26
were reflected in their individual returns. Neither the
partnership nor the partners would be entitled to such benefits if
the EMS was not Enersolex's to sell.
Evidence regarding counts 2, 3, 5, 9-11, 14, and 16-21 was
admitted at trial. However, the testimony was insufficient to
prove that the tax returns were false, or that the Coveneys
willfully provided the false information rendering them so.
Accordingly, as hereinafter discussed, there was insufficient
evidence from which a reasonable jury could find, beyond a
reasonable doubt, that either Francis or Joseph Coveney was guilty
on these counts.
Count 2. Rena and Clifford Brantner claimed benefits on their
1984 return as a result of purchasing two eight-channel Enersolex
units. They received letters from Joseph Coveney informing them
that one unit was installed on April 8, 1985, at Patterson Services
in Houston; the other, at Baytown Motors in Baytown, Texas, on
April 11, 1985. The IRS disallowed the Brantners' depreciation
deduction, and they appealed. Clifford Brantner testified that
they "did resolve [the matter]" through the appeal process. It is
unclear from his testimony whether other credits or deductions were
disallowed, and how the depreciation issue was finally resolved.
This evidence is insufficient to establish either the falsity
of the return or the Coveneys' willfulness. We cannot discern the
precise basis for the IRS's initial disallowance, or how that
matter was ultimately concluded. Neither are there any questions
raised, as there were on some counts, about the Brantners'
27
ownership of their units, or whether those units were actually
solar powered. And, the record on appeal is silent about either of
the Brantners' end-user locations.
Count 3. Concerning Katheryne and Roger Chassay's return, he
testified that he invested in Enersolex for the 1984 tax year, and
claimed benefits as a result of that investment. Chassay testified
also that he visited Gayla Industries, the installation site for
one of his units, on more than one occasion. During a visit in May
1985, solar panels were visible on the roof; on another occasion,
they were not.
Reneer, the vice-president of Gayla, whose testimony is
discussed in part supra, was called as a defense witness, and
testified that TTI installed an EMS there in the early to mid-
eighties, that the unit saved money on electric bills, and that
solar panels were later added to the system. When Gayla added a
new roof to its building, the panels were removed, but Reneer never
contacted TTI to replace them. Reneer identified a photograph of
the Enersolex unit installed at Gayla, confirming that it looked as
if a label underneath the one pictured had been torn off. But, he
testified that "either a sticker or a label was changed or maybe
there was a different panel to start with." (Emphasis added.)
This evidence is similar to that which we found sufficient for
counts 15 and 22-31. It is a close call. But, because Reneer
testified that the EMS unit may have been replaced, we hold that it
is insufficient to establish the Coveneys' guilt. A reasonable
jury could not have concluded beyond a reasonable doubt that an OEC
28
unit was initially installed and later converted to solar power.
Therefore, there is insufficient evidence to conclude that the
Chassays did not own the unit.
A reasonable jury could have concluded that the unit ceased
being solar powered when Gayla re-roofed its building. However,
there is no proof on when that took place. In order to establish
falsity in the Chassays' 1984 tax return, the Government had to
prove that the unit was not solar powered during the period covered
by that return. Nor, concerning the panel removal, was there any
testimony which would establish the Coveneys' willfulness. Indeed,
there was no testimony that the Coveneys knew about, or directed,
removal of the panels.
In short, this evidence could not have led a reasonable jury
to conclude either that the Chassays' 1984 income tax return was
false, or that the Coveneys willfully provided information
rendering it so.
Count 5. For Barbara and Stephen Kucka's 1984 return, Stephen
Kucka testified that, on November 16, 1984, he received a letter
from Joseph Coveney, informing him that his Enersolex unit had not
been installed. On April 8, 1985, he received notice that his unit
had been assigned serial number 8410, and installed at Chem Central
in Houston on April 1. In reliance on this information, Kucka
claimed tax benefits, which were disallowed by the IRS.
Kucka's testimony also described his difficulty in contacting
TTI. After numerous attempts to do so, he called Chem Central to
confirm installation. He learned that the "unit was not functional
29
and not working". Millar testified that he performed the Enersolex
installation at Chem Central. He explained that an OEC unit had
previously been placed at that location, but was not converted to
solar power. Rather, it was replaced with an Enersolex unit.
This evidence could not lead a reasonable jury to find the
Coveneys guilty beyond a reasonable doubt of aiding and assisting
in the preparation of a false income tax return. There is no
evidence which calls the Kuckas' ownership of the unit into
question. Steve Kucka testified that the unit did not work, but
this alone does not establish the falsity of the return or
willfulness on the part of the Coveneys. The evidence does not
describe the problem, nor is there any evidence that the Coveneys
knew this unit did not work properly, or that it malfunctioned
because of any action by them.
Count 9. Concerning the 1984 return for Carol and Stanley
Swartz, there was very little testimony about them; and we conclude
that the evidence was insufficient to support the conviction of
either Francis or Joseph Coveney.
James Baker, a CPA and Spectra representative, testified that
he sold an Enersolex unit to the Swartzes, and that the unit was
installed on April 1, 1985. Baker also prepared the Swartzes' 1984
return, which included deductions for depreciation and installation
of the Enersolex unit, as well as investment and energy tax
credits.
30
Our review of the record reveals no evidence about the
Swartzes' end-user location22 or the installation process for that
unit. In short, a reasonable jury could not have concluded that
the Swartzes' return was false as to a material matter.
Count 10. As for the 1984 return of Ann and George Yount,
they purchased three Enersolex units through Baker. He also
prepared their 1984 income tax return, claiming the same benefits
as he did on behalf of the Swartzes. Again, there is insufficient
evidence from which a reasonable jury could conclude that the
Younts were not entitled to those benefits. Indeed, what little
testimony was offered on the matter seems to support such
entitlement.
The Younts were informed that one of their units was installed
at a Ben Franklin store in Houston, another at a Baptist church in
the Houston area, and the last at Texas Western Beef (no location
given). There was no further identification of the church. The
testimony regarding Texas Western Beef and Ben Franklin points to
the legitimacy -- not falsity -- of the return. Millar testified
that OEC units previously existed at both locations, but that he
removed them and installed Enersolex units. There was no contrary
evidence. We conclude, therefore, that the evidence was
insufficient to establish the falsity of the return.
22
Baker did testify that he and the Swartzes once called the
end-user and asked maintenance personnel if the unit was installed
there. He did not name the end-user; and a hearsay objection was
sustained, precluding him from repeating the response to his
installation inquiry.
31
Counts 11 and 14. These counts involve the 1984 returns of
Joyce and Roswell Combs (count 11) and Mignon and Eugene Kurtz
(count 14). The Combses and the Kurtzes each purchased a 16-
channel Enersolex unit through their accountant and tax preparer,
Phillip Rulon. As discussed, Rulon also arranged the investments
in eight-channel Enersolex units for the Energymisers partnership
and prepared the 1984 individual tax returns for most of its
partners (counts 15 and 22-31). The same year, he arranged the
purchase of three 16-channel units: one for the Combses, one for
the Kurtzes, and one for himself.
Rulon served as the general partner in the Energymisers
partnership, and invested in the eight-channel units, as well.
However, it is unclear from his testimony whether the Government
was trying to prove that the Combses and the Kurtzes were
Energymisers partners, and therefore held an interest in the eight-
channel units, in addition to ownership of the 16-channel units.
Moreover, when the Government had Rulon identify Energymisers
partners, it did not inquire about the Combses or the Kurtzes.
Because the Government did not establish their Energymisers
partnership beyond a reasonable doubt, we cannot affirm the
convictions on these counts on the same basis as those involving
proven Energymisers partners.23
23
Of course, we mean only that this was not established in the
record on appeal (testimony). Examination of the Combses' and
Kurtzes' 1984 returns, had they been included in the record on
appeal, would have shown whether they claimed benefits through the
partnership. In addition, examination of Rulon by the Government
included repeated references to, and introduction of, exhibits,
such as the partnership return and the Schedule K1 and tax returns
32
Furthermore, there is no testimony about the installation or
end-user sites for the 16-channel units these taxpayers purchased.
Therefore, the record on appeal contains no evidence which could
lead a reasonable jury to conclude that the returns were false, or
that any crime was committed by the Coveneys in aiding and
assisting in their preparation.
Count 16. Patricia and Kip Walker purchased an Enersolex
unit, and claimed benefits in their 1984 return as a result. Kip
Walker testified that he received a letter from TTI stating that
his unit had been installed in Austin, Texas, at a business known
as Freshco, on June 3, 1985. His testimony was preceded by that of
Mike Davis, an OEC investor. Davis testified that he invested in
OEC in late 1983, and that his OEC unit had also been assigned the
Freshco location. However, he received a letter from TTI, dated
June 10, 1985, stating that his unit had been removed because
savings could not be maintained. Davis did not sell his unit or
give anyone permission to move it.
In light of the testimony about on-site conversions, one
explanation of this situation might well be that Enersolex
converted a unit it did not own. Absent testimony which would
support that theory, however, the jury is not allowed to make such
a logical leap, for it is just as likely that the OEC unit was
indeed removed and replaced with the Enersolex unit. The record is
he prepared for the partners; but, as stated, none are included in
the record on appeal. Our difficulty in reviewing his testimony,
without the exhibits referred to during it, is a classic example of
why the Government should have included them in the record on
appeal.
33
full of testimony about particular locations, and the installations
or conversions which occurred there. However, there is no
testimony about the procedure followed at Freshco.
The only other testimony about this location came from
Margaret DePrez, with the IRS Criminal Investigation Division.
DePrez testified that she visited Freshco in 1987 to photograph the
Enersolex unit, but was unable to locate it. The absence of a unit
in 1987, without more, does not prove the truth or falsity of the
1984 return. Accordingly, we conclude that the evidence was
insufficient to establish the falsity of that return, and
therefore, insufficient to support the convictions on this count.
Counts 17 through 21. Count 17 involves the 1984 partnership
return for Capital Equipment II; counts 18-21, the returns filed by
its partners. Galyd Perkins testified that he prepared the 1984
partnership and partner returns. The partnership claimed
deductions for depreciation and installation of Enersolex units, as
well as investment and energy tax credits. Each of the four
partners in issue claimed the tax benefits which were passed
through from the partnership.
Testimony revealed that the partnership purchased at least
three Enersolex units. One was installed at Truk Shak (no location
given); the other two in Houston, at Bobby's Supermarket and North
Freeway Porsche-Audi. A TTI field service technician testified
that the Truk Shak unit was converted at the warehouse and
transported to the installation site. An IRS agent visited the
North Freeway Porsche-Audi location in 1987 and photographed the
34
EMS unit installed there. This evidence could not lead a
reasonable jury to conclude that the partners and partnership were
not entitled to the claimed tax benefits. The record on appeal
contains no more testimony about these locations or the
installations which occurred there. Accordingly, we conclude that
the evidence was insufficient to support the convictions on these
counts.
2.
Although the record on appeal contains insufficient evidence
for affirmance on all substantive counts, it includes ample
evidence that Francis and Joseph Coveney conspired to aid and
assist in the preparation of false returns (count 1). In order to
convict for conspiracy under 18 U.S.C. § 371, the jury must find
(1) an agreement between two or more people to violate the law, and
(2) an overt act by any member of the conspiracy in furtherance of
it. United States v. Bourgeois, 950 F.2d 980, 983 (5th Cir. 1992).
Proof of a specific agreement is not necessary; the jury may infer
an agreement from a concert of action.
Id.
There was substantial evidence that the Coveneys worked
together in forming TTI and Enersolex, that they travelled together
promoting the Enersolex program, and that they worked together on
the day to day operation of each company. Though Francis worked
out of the Enersolex office in San Antonio, and Joseph out of the
TTI office in Houston, several witnesses testified that the two
companies were essentially one in the same. Moreover, both
brothers were apparently present at meetings where some of the
35
"conversions" were discussed. An agreement to take an OEC unit,
without the consent of the OEC investor, convert it to solar power
and "sell" it to an Enersolex investor is an agreement to violate
the law, in that, among other things, the sale would aid and assist
in the preparation of false returns, because it was performed with
the expectation that investors would rely on their erroneous belief
of ownership in filing returns.
Needless to say, there were numerous overt acts in furtherance
of this agreement. Enersolex units were sold to those investors
previously discussed. Joseph Coveney wrote letters to many of
them, informing them of the end-user locations and installation
dates. There was sufficient evidence for the jury to find that
these are all overt acts taken with the expectation that taxpayers
would rely on the false information in preparing and filing their
returns.
III.
Accordingly, the convictions on counts 1, 6, 7, 8, 12, 13, 15,
and 22-31 are AFFIRMED; those on counts 2, 3, 5, 9, 10, 11, 14, and
16-21 are REVERSED; all sentences are VACATED; and the case is
REMANDED for resentencing.
AFFIRMED in Part; REVERSED in Part; and REMANDED.
36
