Opinion
NOT TO BE PUBLISHED
APPEAL from a judgment of the Superior Court of Los Angeles County, Super. Ct. No. KA070191, Charles E. Horan, Judge. Affirmed.
Stephen M. Lathrop, under appointment by the Court of Appeal, for Defendant and Appellant.
Edmund G. Brown, Jr., Attorney General, Dane R. Gillette, Chief Assistant Attorney General, Pamela C. Hamanaka, Assistant Attorney General, Victoria B. Wilson and Jonathan J. Kline, Deputy Attorneys General, for Plaintiff and Respondent.
ASHMANN-GERST J.
In an information filed by the Los Angeles District Attorney, appellant Robert John Roberts and his wife, Wanda Marie Roberts (Wanda), were charged in count 1 with filing a false income tax return (Rev. & Tax. Code, § 19706) and in counts 2 through 4 with failing to file state income tax returns with intent to evade the payment of taxes (§ 19706). Appellant pleaded not guilty.
At the conclusion of the prosecution’s case, the trial court granted Wanda’s Penal Code section 1118.1 motion and dismissed the felony charges against her. The jury subsequently acquitted her of the lesser included misdemeanor offenses.
Revenue and Taxation Code section 19706 provides, in relevant part: “Any person or any officer or employee of any corporation who, within the time required by or under the provisions of this part, willfully fails to file any return or to supply any information with intent to evade any tax . . . or who, willfully and with like intent, makes, renders, signs, or verifies any false or fraudulent return or statement or supplies any false or fraudulent information, is punishable by imprisonment in the county jail not to exceed one year, or in the state prison, or by fine of not more than twenty thousand dollars ($20,000), or by both the fine and imprisonment, at the discretion of the court, together with the costs of investigation and prosecution.”
Trial was by jury. The jury found appellant guilty on all counts. The trial court denied probation and sentenced appellant to 16 months in state prison on count 1. Sentence on the remaining counts was ordered to run concurrently. Appellant also was ordered to pay a $500 restitution fine (Pen. Code, § 1202.4, subd. (b)) and a parole revocation fine (Pen. Code, § 1202.45), which was imposed in the same amount and then suspended. Appellant was granted two days of presentence custody credits.
Appellant appeals from the judgment of conviction, contending that the trial court committed reversible error by (1) failing to instruct the jury sua sponte on the defense of good faith; and (2) failing to instruct the jury on an essential element of the offense charged in count 1, namely that the prosecution was required to prove the existence of a tax deficiency. We affirm.
In his opening brief, appellant argues that the trial court’s failure to instruct on this element warrants reversal of the conviction on all four counts. In his reply brief, he concedes that the trial court properly instructed the jury with respect to this element as charged in counts 2 through 4. Thus, we only consider whether the trial court erred in instructing the jury in connection with count 1 of the information.
FACTUAL AND PROCEDURAL BACKGROUND
This case arises out of appellant’s operation in California of Recyclights West. Recyclights West, a limited liability company, was organized in Minnesota and duly registered as a limited liability company authorized to do business in California. The jury found that appellant was the alter ego of Recyclights West, thereby making him responsible for reporting the profits of the company on his personal state income tax returns for the tax years 1999 through 2002.
A. Prosecution’s Evidence
From 1998 through 2002, Michael Goodwin (Goodwin) owned commercial property for lease in Glendora. Goodwin leased the property located on North Glendora Avenue to appellant. The property leased to appellant was paid for with checks bearing the name Recyclights West. On October 1, 2002, Samuel Richardson, a criminal investigator with the California Environmental Protection Agency, searched Recyclights West’s office in Glendora. He provided Special Agent Paul Murphy (Murphy) of the Franchise Tax Board’s investigation bureau with documents that he obtained during the search.
Daniel Simpson (Simpson), a tax technician with the Franchise Tax Board, performed a search for any tax returns that had been filed in the name of appellant, Wanda, or Recyclights West. Simpson determined that appellant and Wanda had filed a joint personal tax return in 1999, but had not filed any returns from 2000 through 2002. He also determined that Recyclights West had not filed any tax returns from 1999 through 2002.
Murphy was assigned to investigate appellant, Wanda, and Recyclights West. Because Recyclights West was a limited liability company, it was required to file a tax return if it was doing business in California. Under the “check-the-box-rule,” when a limited liability company files its first federal tax return, the owners of the company can elect to be treated as a corporation or a partnership for tax purposes. If no election is made, the default designation is partnership (or solo proprietorship if there is only one owner). Since Recyclights West never filed a federal income tax return, no election could have been made and Recyclights West’s tax status defaulted to a partnership or sole proprietorship. Consequently, Recyclights West’s tax liability “flowed through” to its owner’s personal income tax return. Appellant was responsible for reporting Recyclights West’s income on his personal tax return because he is the only member listed on the company’s statement of information. Since the 1999 tax return filed by appellant and Wanda did not have a place for “a schedule C,” it was a form that would not be used by someone intending to file information about a limited liability company.
Murphy served a search warrant on Bank of America, where appellant, Wanda, and Recyclights West had accounts, and requested various documents pertaining to those accounts. Murphy analyzed the bank statements of Recyclights West’s account and was able to determine its income. He did this by analyzing copies of canceled checks, speaking to customers who had given large checks to Recyclights West, and subtracting out any items that were obviously not taxable. If Murphy was unable to identify an entity as a customer of Recyclights West, he subtracted the deposits from that entity in his calculation of gross income. In 1999, Recyclights West’s gross income was in excess of $370,000. In 2000, its gross income was in excess of $295,000. In 2001, its gross income was in excess of $64,000. In 2002, its gross income was in excess of $63,000.
Murphy calculated the taxes that appellant and Wanda owed by taking the gross income of Recyclights West and subtracting out the business expenses. He did not classify as business expenses checks made out to appellant, checks made out to cash, ATM withdrawals from the Recyclights West account, and checks made out to Chuck Leko (Leko), appellant’s residential landlord. All other withdrawals were classified as business expenses. If Murphy was uncertain whether an expense was personal business, he classified it as business. After subtracting out the business expenses, Murphy carried this amount forward to the personal income tax returns of appellant and Wanda. He then applied the normal personal deductions and exemptions and calculated the amount of taxes that they owed. He calculated that they owed $30,576.25 in taxes for 1999, $23,481.90 in taxes for 2000, $890.55 in taxes for 2001, and $1,728.32 in taxes for 2002.
Furthermore, every company must pay a minimum tax of $800 for the privilege of doing business in California, and every company that does business in California must file a tax return. Murphy determined that Recyclights West did business in California with California customers. In fact, in each of the subject years, there were deposits in Recyclights West’s account from California companies or customers.
In California, for a married couple filing jointly to be required to file a tax return, they must make in excess of $20,000. Murphy analyzed Recyclights West’s outgoing checks and categorized them as (1) payments made to cash, (2) payments made to appellant, and (3) payments made to Leko. Murphy included checks made out to Leko in his calculation because money drawn out of a business to pay for residential rent is considered personal income. In 1999, $37,656.40 worth of Recyclights West checks was made out to cash or to appellant. An officer of a limited liability company who writes himself checks and then cashes them is required to report that as income. Appellant did not report this sum in his 1999 tax returns. In 2000, the total amount of checks made out to cash was $31,550. In 2001, $52,749 was withdrawn from Recyclights West’s account as checks made out to cash, checks made out to Leko, or ATM withdrawals. In 2002, $65,486 was withdrawn from Recyclights West’s account as checks made out to cash, checks made out to Leko, or ATM withdrawals. The amounts calculated by Murphy in 1999 through 2000 exceeded the amount necessary to trigger appellant’s duty to file a tax return.
Murphy interviewed appellant. He said that Recyclights West was a company that he owned, and indicated that he maintained all of the company books and records. Appellant also said that he never received any money from Recyclights West. When Murphy asked appellant about him not filing personal income tax returns or returns on behalf of Recyclights West, appellant stated that he did not file returns because he made no money. Appellant also represented that he had received notices from the Franchise Tax Board and the Internal Revenue Service (IRS) instructing him not to file returns. Murphy reviewed the letters from the Franchise Tax Board. These letters indicated that, based on the information that appellant had provided, appellant was not required to file a tax return. These letters, however, did not mention Recyclights West. If someone has a business, he must file a tax return. Even if that person tells the Franchise Tax Board that the business is operating at a net loss, that would not relieve him of his duty to file a tax return. If the person provided false information to the Franchise Tax Board, that would render any advice given by the Franchise Tax Board invalid.
In his analysis of the Bank of America records, Murphy came across checks from Recyclights West to R&W Management. When Murphy asked appellant what R&W Management did, appellant replied “Nothing.” Appellant stated that he and Wanda owned R&W Management. Initially, appellant said that there were no money transfers between Recyclights West and R&W Management, but he later indicated that R&W Management may have paid some of Recyclights West’s bills.
Appellant also informed Murphy that he had filed for bankruptcy in 1999. Thus, Murphy obtained copies of appellant’s bankruptcy records. On those documents, appellant listed his monthly income as $3,000. There were signatures on the documents attesting to the truthfulness of the amounts listed in the documents. If appellant and Wanda were earning $3,000 a month, they were required to file tax returns.
B. Defense Evidence
Appellant testified in his own defense. He stated that he had previously owned a company called Mercury Recovery Services. He entered into an agreement with Recyclights, Inc. of Minnesota and its president, Keith Thorndyke, that called for the creation of a new business. The result of that agreement was Recyclights West, which was formed in Minnesota in 1998. R&W Management is a corporation that appellant formed in Nevada. It had a 60 percent interest in Recyclights West. Appellant is the only officer of R&W Management.
Appellant intended to do business in California and, accordingly, registered Recyclights West with the State of California as a foreign corporation. In his application for registration, appellant designated himself as the agent for service of process for the company. The principal office of Recyclights West was located on North Glendora Avenue.
Recyclights West was in the business of collecting and processing spent fluorescent tubes. The equipment to process the tubes was originally in Pomona, but was moved to Las Vegas when California denied appellant a permit to operate in California. Appellant rented a large facility in Las Vegas, set up the equipment, and relocated his 15 California employees to Las Vegas, all at company expense. Nevada, however, also denied appellant a permit to operate in that state. But, Nevada agreed to review its decision if Recyclights West paid for a study. After five months, Nevada granted Recyclights West the permit. In the meantime, Recyclights West continued to pay its lease and its employees’ salaries. Also, during the delay, Recyclights West was forced to ship its material to Minnesota for processing, thereby incurring additional costs. As a result, Recyclights West ran out of capital.
Appellant kept the books for Recyclights West. He calculated that Recyclights West lost $230,000 in 1998. He loaned several thousand dollars to Recyclights West from his own personal accounts to help the company pay its bills and keep afloat. However, some bills could not be paid, causing Recyclights West’s creditors to take legal action against the company. As a result of these actions, a lien was placed on Recyclights West’s accounts receivable and money was taken as soon as it was received. In order to keep paying other bills, appellant took the money destined for Recyclights West’s account and placed it in R&W Management’s account. Appellant would then pay Recyclights West’s bills with this money. All of the checks written from R&W Management’s account were written on behalf of Recyclights West.
At some point, appellant received a letter from the IRS, instructing him not to file a return if he had no income. He then received a letter from the Franchise Tax Board inquiring about his failure to pay taxes for the year 2000. Appellant copied the IRS letter and wrote to the Franchise Tax Board, explaining that if he could not file a federal tax return, he also could not file a state tax return because a person is required to submit a copy of his federal return with his state return. In response to appellant’s letter, the Franchise Tax Board sent appellant a confirmation letter, advising him that, based upon his representations, it would not be taking any further action at this time. When appellant received a similar letter from the Franchise Tax Board inquiring about his failure to pay taxes for the year 2001, he again copied the IRS letter and his previous letter, and again explained that he had no taxable income. In response, appellant received another confirmation letter from the Franchise Tax Board.
At the beginning of the bankruptcy process, appellant estimated that he could make about $3,000 a month. However, appellant never made $3,000; in fact, he never made anything. Appellant did not have an income, but he did have money that was owed to him by Recyclights West. He did not know and no one told him that he had to file a limited liability company return just for being in the State of California.
Joseph Tseng (Tseng), a certified public accountant, also testified on appellant’s behalf. He reviewed documentation regarding the finances of Recyclights West. At the beginning of 1999, Recyclights West had a loan account with a balance of $160,000. At the end of 2002, however, the balance on that account was only $60,000, indicating that Recyclights West had paid back some of the loan. Numerous checks were made out from Recyclights West to R&W Management, and deposits in the corresponding amounts were deposited into R&W Management’s account. The payees on the checks from R&W Management were companies to which Recyclights owed money. R&W Management paid approximately $600,000 of Recyclights West’s debts. If R&W Management paid Recyclights West’s bills with Recyclights West’s money, then that could be claimed as a deduction. The Franchise Tax Board did not take this information into account when calculating Recyclights West’s tax liability.
According to documents reviewed by Tseng, R&W Management owned 60 percent of Recyclights West and Recyclights, Inc. owned the remaining 40 percent. If that were true, the tax liability that Recyclights West owed to California would not “flow through” to appellant personally. Rather, it would flow through to R&W Management and Recyclights, Inc., both of which were corporations. This type of arrangement is commonly used to shield a person from legal issues.
If a business has a loss in one year, that loss can be carried forward to offset income earned in the subsequent five years. According to Tseng, Recyclights West lost $236,000 in 1998. That loss more than offset the $76,359 that Recyclights West generated from 1999 through 2002. Additionally, Recyclights West could have claimed more than $30,000 a year in deductibles due to depreciation.
Finally, Marshall Taylor (Taylor), a senior partner at a tax law firm, testified on appellant’s behalf. He reviewed the financial documents pertaining to Recyclights West, including Murphy’s and Tseng’s calculations. Under California law, only owners of a limited liability company bear the tax liability of the company. Accordingly, Recyclights West’s tax liability would not flow directly to appellant’s tax return because appellant was not an owner of the limited liability company. The economic activity that is reflected on the books and records of Recyclights West is reportable by the two corporate parents of that company, Recyclights, Inc., and R&W Management.
Recyclights West started off with a huge loss in 1998 and any income earned in the following years would have been offset by that loss. Recyclights West’s records reflected that appellant loaned Recyclights West $162,000. The account reflected a partial repayment of that loan to appellant. Loan repayments are not taxable income.
DISCUSSION
I. The trial court’s failure to instruct the jury sua sponte on appellant’s good faith is not reversible error
Appellant contends that the trial court erred in failing to instruct the jury sua sponte on his good faith defense. The People claim that the trial court had no such duty but, even if it did, the trial court’s failure to instruct on the defense of good faith constitutes harmless error.
“A court must instruct sua sponte on general principles of law that are closely and openly connected with the facts presented at trial. [Citations.]” (People v. Ervin (2000) 22 Cal.4th 48, 90.) “[T]he court must instruct on an affirmative defense, . . . even in the absence of a request, ‘if it appears the defendant is relying on such a defense, or if there is substantial evidence supportive of such a defense and the defense is not inconsistent with the defendant’s theory of the case.’ [Citation.]” (People v. Boyer (2006) 38 Cal.4th 412, 469; see also People v. Salas (2006) 37 Cal.4th 967, 982–983.)
At trial, appellant presented sufficient evidence that, if believed by the jury, would support his good faith defense. Specifically, he testified regarding the correspondence between himself and the Franchise Tax Board regarding his failure to file a tax return and the Franchise Tax Board’s decision not to take any action against him. Likewise, Tseng and Taylor testified that because appellant was not the owner of Recyclights West, any tax liability of the company would not flow through to him. Given this evidence, we conclude that appellant was entitled to a jury instruction on the affirmative defense of good faith.
We next examine whether the instructional error was prejudicial. The erroneous failure to instruct on a defense is harmless if the factual question posed by the omitted instruction was necessarily decided under other proper instructions. (People v. Jones (1991) 234 Cal.App.3d 1303, 1314–1315, fn. 9.)
Under the instructions given, the jury was required to find that appellant willfully filed a false tax return or failed to file a tax return with the specific intent to evade a tax in intentional violation of a known legal duty. Since the jury found appellant guilty of the charged offenses, it necessarily rejected the notion that he acted in good faith. (See, e.g., People v. Hagen (1998) 19 Cal.4th 652, 659–660 [a defendant’s good faith belief negates the element of willfulness].) And, appellant’s claim notwithstanding, nothing in these instructions “undermined appellant’s good faith defense by requiring appellant’s good faith to be objectively reasonable.” It follows that the trial court’s failure to instruct sua sponte on appellant’s defense of good faith was harmless beyond a reasonable doubt. (Chapman v. California (1967) 386 U.S. 18, 22; People v. Carter (2003) 30 Cal.4th 1166, 1221–1222; People v. Ervin, supra, 22 Cal.4th at p. 91.)
II. The trial court properly instructed the jury that the prosecution was required to prove the existence of a tax deficiency on count 1 of the information
Appellant contends that the trial court failed to adequately instruct the jury that the prosecution was required to prove the existence of a tax deficiency in connection with count 1 of the information.
A trial court has the duty to instruct on all elements of a charged offense. (People v. Cummings (1993) 4 Cal.4th 1233, 1311.) But, “‘[t]he absence of an essential element in one instruction may be supplied by another or cured in light of the instructions as a whole.’ [Citation.]” (People v. Burgener (1986) 41 Cal.3d 505, 539, overruled on other grounds in People v. Reyes (1998) 19 Cal.4th 743, 753.)
The existence of a tax deficiency is an essential element of felony tax evasion under section 19706. (People v. Mojica (2006) 139 Cal.App.4th 1197, 1202.) When read as a whole, the instructions given to the jury adequately conveyed this element.
For example, CALJIC No. 7.94 provides: “To prove that substantial additional tax was due, the People must prove beyond a reasonable doubt that (a) the defendant received substantial additional income in addition to what he reported on his income tax return, and (b) there was tax due in addition to what was shown to be due on the return. [¶] . . . [¶] If you find, based on all the evidence, that the People have established beyond a reasonable doubt that the defendant received substantial income in addition to what he reported on his income tax return for the year in question, then you must decide whether there was a tax due in addition to what was shown to be due on the return, as a result of the defendant’s additional, unreported income. . . . [¶] If you find, based upon all the evidence, that the People have established beyond a reasonable doubt that the defendant received substantial additional income, and that there was tax due in addition to what was shown to be due on his income tax return, as a result of this additional income, then this first element has been satisfied.”
Moreover, throughout closing argument, the prosecutor pointed out that the People had to prove that appellant “did specifically intend to evade paying a tax.” Such an argument presupposes the existence of a tax deficiency; if taxes were not owed, there would be nothing of which to evade payment. Additionally, the prosecutor noted that, at a minimum, appellant had to pay, yet failed to pay, the $800 annual tax just for operating Recyclights West, a limited liability company. She stated: “if you agree with the People that there is, at least, that tax and more, then you would find that there was a tax for [appellant] to evade.” The prosecutor’s argument, coupled with the People’s evidence as to how much of a tax was owed, left no doubt that the jury had to find the existence of a tax deficiency. (See People v. Kelly (1992) 1 Cal.4th 495, 526–527 [pointing to the argument of counsel as one basis for finding the jury did not misunderstand the law after being read erroneous jury instruction]; People v. Lee (1987) 43 Cal.3d 666, 677–678 [citing closing argument and strong evidence of intent as factors in finding that instructional error regarding intent to kill was harmless].)
III. No cumulative error
In light of our conclusion that appellant failed to establish prejudicial error with respect to any of the challenged instructions, or lack thereof, it follows that appellant has not demonstrated cumulative error warranting reversal. (See, e.g., People v. Staten (2000) 24 Cal.4th 434, 464.)
DISPOSITION
The judgment is affirmed.
We concur: P. J. BOREN, J.DOI TODD
All further statutory references are to the Revenue and Taxation Code unless otherwise indicated.