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In United States v. DeMuro, ___ F.3d ___, 2012 U.S. App. LEXIS 8094 (3d Cir. 2012), enhanced opinion available to lexis.com subscribers, (Non-subscribers can download the unenhanced official opinion here), the Demuros, husband and wife, were convicted of "conspiracy to defraud the United States, in violation of 18 U.S.C. § 371, enhanced version available to lexis.com subscribers, (Non-subscribers can access the unenhanced version here), and 21 counts of failure to account and pay over employment taxes (employee income tax and employee FICA withheld), in violation of 26 U.S.C. § 7202, enhanced version available to lexis.com subscribers, (Non-subscribers can access the unenhanced version here). The facts for the DeMuros were bad, very bad. Which is the reason that a civil tax matter turned into a criminal prosecution. I will attempt a comprehensive review. The opinion lays the facts and law out well, and at length.
1. By way of background, employers are required to withhold and pay over income tax and the employee's share of FICA from the pay otherwise due employees. I am sure that, almost all readers from the U.S., have encountered this system where our paychecks were less because of these withholdings. The withheld amount is sometimes referred to as a "trust fund" because the employer is deemed to have withheld it from the gross payments and must turn the withheld amounts over to the IRS according to schedules that time the turn to the IRS over depending upon amounts. The funds so withheld, although described as trust funds, are not required to be segregated by the employer until they are turned over to the IRS. Nevertheless, the amounts involved are often referred to as trust fund taxes.
2. Often, particularly in a down economy or even in an up-economy where the employer (or its responsible officers) wants to divert the money to other purposes, employers may raid the withheld trust fund taxes in order to use the amounts to pay other creditors or, even, themselves. In DeMuro, the employer -- the DeMuro's corporation -- withheld the trust fund taxes from the employees gross pay as the law requires, but they did not pay over to the IRS. It is unclear precisely why they did not pay over, but there was proof at trial of lavish personal expenditures by the DeMuros well beyond the amount of the trust fund withholdings the employer was required to pay over but did not.
10. The DeMuros finally complained that the trial court improperly applied a 2-level enhancement for abuse of position of trust, pursuant to Guidelines § 3B1.3. That enhancement was based only on the DeMuros failure to meet the obligation imposed under Section 7512 for the special trust account. The Court said: "Our inquiry is whether the DeMuros were in positions of trust vis-a-vis the IRS based on their positions as signatories of the trust fund account set up to benefit the IRS." The Court applied factors from United States v. Pardo, 25 F.3d 1187, 1192 (3d Cir. 1994), enhanced opinion available to lexis.com subscribers, to conclude that, relative to the purposes of the enhancement and the particular special trust fund involved, the enhancement should not have been applied. The factors in context were: (i) the special trust fund did not have the factor of difficulty to detect the breach of trust; (ii) the DeMuros had little authority (they had power, but not authority) over the trust fund; and (iii) the IRS did not rely upon the integrity of the DeMuros, having established the special trust fund because it did not rely upon their integrity. Based on this holding, the Court reversed for resentencing without the enhancement.
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