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No. 12-3471
_____________________________________________________
UNITED STATES COURT OF APPEALS
FOR THE SEVENTH CIRCUIT
_____________________________________________________
UNITED STATES OF AMERICA,
Plaintiff-Appellee,
VS.
NO.
12-3471
MICHAEL E. SCHOLL
Tennessee Bar No. 16284
8 South Third Street, 4th Floor
Memphis, Tennessee 38103
Telephone: 901.529.8500
Facsimile: 901.524.1803
Email: mike@scholl-law-firm.com
Attorney for Defendant-Appellant,
James A. Stuart, Jr.
_____________________________________________________
ORAL ARGUMENT REQUESTED
_____________________________________________________
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DISCLOSURE STATEMENT
The undersigned counsel for Defendant-Appellant furnishes the following list
in compliance with Federal Rule of Appellate Procedure 26.1:
1.
The full name of every party or amicus the attorney represents in the
3.
The names of all law firms whose partners or associates have appeared
for a party in the district court or are expected to appear for the party in the case:
Michael E. Scholl of The Scholl Law Firm; and the following attorney in the district
court: Robert G. Bernhoft of The Bernhoft Law Firm
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TABLE OF CONTENTS
DISCLOSURE STATEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I
TABLE OF AUTHORITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii
JURISDICTIONAL STATEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ISSUES PRESENTED FOR REVIEW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Whether the District Court erred by denying Defendants Motion for New
Trial or in the Alternative, Motion for Judgment of Acquittal based upon
ineffective assistance of counsel?
STATEMENT OF THE CASE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
STATEMENT OF FACTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
SUMMARY OF ARGUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
ARGUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
The District Court erred by denying Defendants Motion for New Trial or in
the Alternative, Motion for Judgment of Acquittal based upon ineffective
assistance of counsel.
A.
Standard of Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
B.
C.
15
C.
29
D.
14
CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
CERTIFICATE OF COMPLIANCE WITH CIRCUIT RULE 32 (a)(7). . . . . .
34
APPENDIX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . App. I
CERTIFICATE OF COMPLIANCE WITH CIRCUIT RULE 30. . . . . . . . . . . . App. ii
APPENDIX TABLE OF CONTENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . App. iii
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TABLE OF AUTHORITIES
PAGE
CASES
Brooks v. Tennessee, 406 U.S. 605, 92 S.Ct. 1981 (1972). . . . . . . . . . . . . . . . . 29
Kitchen v. United States, 227 F.3d 1014 (7th Cir. 2000). . . . . . . . . . . . . . . . . . 14
Mosley v. Atchison, 689 F.3d 838 (7th Cir 2012) . . . . . . . . . . . . . . . . . . . . . . . . 15
Nichols v. Butler, 953 F.2d 1550 (11th Cir.1992). . . . . . . . . . . . . . . . . . . . . . . . 29, 30
Rock v. Arkansas, 483 U.S. 44, 107 S.Ct. 2704 (1987) . . . . . . . . . . . . . . . . . . . 30
Rodriquez v. United States, 286 F.3d 792 (7th Cir. 2002) . . . . . . . . . . . . . . . . . 14
Strickland v. Washington, 466 US 668, 104 S.Ct. 2052 (1984). . . . . . . . . . . . 13,14,15
United States v. Booker, 981 F.2d 289 (7th Cir. 1992). . . . . . . . . . . . . . . . . . . . 14
United States v. Fudge, 325 F.3d 910 (7th Cir. 2003) . . . . . . . . . . . . . . . . . . . . 14
United States ex rel. Simmons v. Granley, 915 F.2d 1128 (7th Cir. 1990) . . . . 14
United States v. Taglia, 922 F.2d. 413 (7th Cir. 1991). . . . . . . . . . . . . . . . . . . . 14
United States v. Teague, 953 F.2d at 1525 (11th Cir. 1992). . . . . . . . . . . . . . . . 29
United States v. Walker, 772 F.2d 1172 (5th Cir.1985) . . . . . . . . . . . . . . . . . . . 30
United States. v. Zarnes, 33 F.3d 1454 (7th Cir. 1994). . . . . . . . . . . . . . . . . . . . 14
STATUTES
18 U.S.C. 2255 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
26 U.S.C. 1441 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,18
26 U.S.C. 1442 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,18,19
26 U.S.C. 1443 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,19
26 U.S.C. 1461 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,19
26 U.S.C. 7701 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,18,22
OTHER AUTHORITIES
Treasury Decision 8734 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
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JURISDICTIONAL STATEMENT
Defendant-Appellant states that:
(I)
subject matter jurisdiction in this cause was vested in the United States
District Court for the Eastern District of Wisconsin upon the filing of an indictment on
December 21, 2010 naming the United States of America as Plaintiff and James A.
Stuart, Jr. As Defendant by virtue of 18 U.S.C. 3231, which grants original
jurisdiction to the District Court over all offenses against the laws of the United States;
(ii)
Appellate jurisdiction in this cause was vested in this Court upon the
This appeal is from a judgment disposing of all claims with respect to the
Defendant-Appellant.
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Whether the District Court erred by denying Defendants Motion for New Trial
or in the Alternative, Motion for Judgment of Acquittal based upon ineffective
assistance of counsel?
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A response to the Motion for New Trial was filed by the Government on January
4, 2012 (R.70, Response by USA to James A. Stuart, Jr.)(R66, Motion for New Trial)
and a reply was filed on behalf of Stuart on July 3, 2012. (R.81, Reply). The Motion for
New Trial was partially heard on July 11, 2012. (R.84, Minute Order). The Motion for
New Trial and Sentencing was continued and additional proof was heard on October
1, 2012. (R.89, Minute Order). After a hearing, the Motion for New Trial was denied
(TR 10-01-12, p. 113-117) and sentencing proceeded forward at which time Stuart was
sentenced to thirty-three (33) months imprisonment with three (3) years of supervised
release. All counts were run concurrently and a six thousand dollar ($6,000.00) fine
was imposed. (R.90, Judgment).
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STATEMENT OF FACTS
From 2005 to 2007, James Stuart lived in Wisconsin with his wife and was
majority owner of a company in Wisconsin called New Age Chemical.(TR 12-05-11, p.
3). Mr. Stuart worked with his sister, Beverly Schlipp who was a minority owner. His
daughter, Erin Stuart started working there in 2009 in an effort to eventually run the
company. Before 2005, James Stuart had timely filed and paid his taxes.
Just prior to 2005, Mr. Stuart was faced with paying an alternative minimum
tax. His accountant at that time was Mr. Pat Walsh. In an effort to research this type
of tax, Mr. Stuart spoke with his accountant and began researching the alternative
minimum tax and its meaning. (TR 10-01-12, p. 34,35). In doing so, Mr. Stuart came
across a book by the name of Breaking the Code by Peter Hendrickson. This book gave
Mr. Stuart some insight on attempting to try and understand the tax code. (TR 10-0112, p. 35).
In performing his research, Mr. Stuart began to have questions concerning what
particular section of the code required him to pay tax or have a tax liability. Mr. Stuart
began to question whether he had any tax liability at all. He then began to seek the
advice of several professionals and continued to do his own research. (TR 10-01-12, p.
35)(R.66, Motion for New Trial)(R.67, R.82, Affidavits). He was unable to find anyone
that could point him to the Internal Revenue Code section that made him liable for an
income tax. He even began to send letters to the Internal Revenue Service in order to
get answers. (TR 10-01-12, p. 49)
Mr. Stuart continued to perform his research and continued to consult with tax
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professionals. Mr. Stuart concluded that according to the tax code and the way his
company did payroll, that under his circumstances, he was not liable to pay an income
tax. (TR 10-01-12, p. 37)(R.82, Affidavit).
Chemical was acting as a withholding agent on behalf of the Internal Revenue Service
as was their payroll company Payroll Data Services.
Mr. Stuart looked for the definition of withholding agent in the Internal Revenue
Code and found it located in one place, 26 U.S.C. 7701(a)(16). Upon reviewing this
definition, Mr. Stuart was referred to four other sections of the Internal Revenue Code.
These were sections 1441, 1442, 1443 and 1461. Upon review of these sections, along
with the review of other code sections and Treasury Decisions, it became apparent to
Mr. Stuart that if his company (and the payroll service they were using) was defined
as a withholding agent, then it was his interpretation that he had no tax liability. (TR
10-01-12, p. 39)(R.82, Affidavit).
Mr. Stuart discussed this with the company payroll service and with his
accountant. Neither could provide Mr. Stuart with an explanation as to whether he
was right or wrong. Mr. Stuart decided he had no tax liability and stopped filing and
paying his income taxes in 2005. Mr. Stuart, however, had placed enough money in a
bank account and set it aside in the event that it was determined that he indeed did
have a tax liability. (R.66, Motion for New Trial)(R.68, Affidavit).
Mr. Stuart began the process to stop his withholding because of his beliefs. His
Sister had several conversations with him and expressed her understanding of his
beliefs. In 2009, after Erin Stuart began to work at New Age Chemical and an internal
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audit was performed. It was discovered that Beverly Schlipp had been embezzling
money from the company.
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the 1099 form addressed to James Stuart be corrected for various reasons as stated in
the letter. Mr. Stuart met Mr. Schwarz in person and requested corrective action be
taken on his 1099's at which point his 2006 1099 was reversed. (TR 12-16-11, p.
146,147). Mr. Stuart sent Payroll Data Services additional letters disputing their
payroll procedures with his company, to which Payroll Data Services eventually
responded by severing the relationship. (TR 12-16-11 p. 150, 151).
The government next called Beverly Schlipp to testify. Shes the sister of James
Stuart who worked at New Age Chemical until March 2010, at which time she claims
to have retired. Ms. Schlipp was actually terminated. (TR 10-1-12, p. 45, 85). She
described New Age Chemical as a manufacturer of metalworking fluids located in
Delafield, Wisconsin. That the business had started in 1985 and had been at that
particular location for twelve (12) years. She emphasized that she had been working
there for twenty(20) years or more and at the time of her retirement she was vice
president. (TR 12-16-11, p. 155). She became a thirty percent (30%) owner of the
company in March 2010. She stated that both her and her brother received a salary
from the company, as did her husband. (TR 12-16-11, p. 156, 162-163). During her
testimony, her retirement is often referenced. The company maintained two (2) bank
accounts. She stated during this time, James Stuart had her contact Payroll Data
Services in order to have them stop taking out payroll taxes from his check. (TR 12-1611, p. 160, 163). He had explained to her that he didnt think that payroll taxes were
legal. Eventually payroll for Mr. Stuart was done through the company. Ms. Schlipp
would not sign the checks. (TR 12-16-11,p. 164). She stated that she received a salary
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up until 2007, at which point she received a K-1. (TR 12-16-11, p. 164). Mr. Stuart
began to get paid by check directly from the company. Those checks were issued on the
general account of the company by Ms. Schlipp. (TR 12-16-11, p. 165). She stated that
she was instructed by Mr. Stuart not to withhold any taxes. She stated that she was
fearful that she would lose her job, because Mr. Stuart had told her this multiple times.
(TR 12-16-11, p. 165,170). However, Mr. Stuart disagrees. According to Ms. Schlipp,
Mr. Stuart set up a type of limited company for the purpose of flying under the radar
concerning any tax problems. (TR 12-16-11, p. 174). James Stuart and Erin Stuart both
had information to the contrary.
Allison Reece testified that she was the niece of Mr. Stuart and the daughter of
Ms. Schlipp. (TR 12-16-11, p. 194). She has a degree in accounting. (TR 12-16-11, p.
189). Mr. Stuart had discussed his tax beliefs with Ms. Reese on multiple occasions.
(TR 12-16-11, p. 197-198). As a result of the information she received from her uncle
and mother, she began to perform research concerning James Stuarts beliefs. (TR
12-16-11, p. 201- 202). She confronted Mr. Stuart with her findings in two different
meetings, to which Mr. Stuart adamantly disagreed. (TR 12-16-11, p. 204-206). During
her meetings with her uncle, she did not advise him as to what specific section of the
Internal Revenue Code made him liable for the federal income tax. (TR 12-16-11, p.
219-220).
Pat Walsh testified as to his dealings with Mr. Stuart and New Age Chemical.
Mr. Walsh is a certified public accountant (TR 12-16-11, p. 224) and had a very close
relationship with Mr. Stuarts father. He stated in 1997, New Age Chemical changed
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Internal Revenue Code that required him to file a form 1040. (TR 12-16-11, p.283).
Joel Nettesheim testified concerning the income and monies made by New Age
Chemical after 2008. He also verified that he spoke with Mr. Stuart about his beliefs
surrounding the tax system and found him to be very passionate about those beliefs.
He also stated that he could not point to a section in the code that would make Mr.
Stuart liable for an income tax. (TR 12-16-11, p. 303-304). Mr. Netteshiem testified
about Mr. Stuarts actions after 2006 without objection from counsel.
The defense failed to put on any proof, Mr. Stuart did not testify under the
direction of counsel. Mr. Stuart was eventually found guilty of tax evasion. Mr. Stuart
filed a motion for new trial based on his counsels ineffective assistance and
insufficiency of the evidence.
Defendant filed several affidavits with his motion for new trial. During his
motion for new trial hearing, the defense called three main witnesses. These witnesses
were James Stuart, Erin Stuart, and Joel Nettesheim. Each of these witnesses painted
a picture of Mr. Stuarts position that was very different than what was presented at
trial. James Stuart and Erin Stuart provided information that would have refuted
several accusations by key government witnesses. Said motion was denied and Mr.
Stuart was sentenced to pay a fine of six thousand dollars ($6,000.00) and spend thirtythree (33) months in jail. (R.90, Judgment). The Defendant timely filed a notice of
appeal in this matter which is now before this Court. (R.92, Notice of Appeal).
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ARGUMENT
THE DISTRICT COURT ERRED BY DENYING DEFENDANTS MOTION FOR NEW
TRIAL OR IN THE ALTERNATIVE, MOTION FOR JUDGMENT OF ACQUITTAL
BASED UPON INEFFECTIVE ASSISTANCE OF COUNSEL.
STANDARD OF REVIEW
The standard of review for this Court in reviewing a District Courts ruling on
ineffective assistance of counsel is de novo. Rodriquez v. United States, 286 F.3d 792
(7th Cir. 2002). See also, Kitchen v. United States, 227 F.3d 1014 (7th Cir. 2000).
Whether a defendant received ineffective assistance of counsel is a mixed question of
law and fact reviewed de novo, with a strong presumption that his attorney performed
effectively. United States v. Fudge, 325 F.3d 910 (7th Cir. 2003). See also United
States ex rel. Simmons v. Granley, 915 F.2d 1128 (7th Cir. 1990). These claims are
reviewed under the principles set forth in Strickland v. Washington, 466 US 668, 104
S.Ct. 2052 (1984).
ESTABLISHED LAW REGARDING
TRIAL COUNSELS INEFFECTIVE REPRESENTATION
Ineffective assistance of counsel claims are best brought before the district court
by way of motion for new trial or a claim under 18 U.S.C. 2255. U.S. v. Zarnes, 33
F.3d 1454 (7th Cir. 1994); U.S. v. Booker, 981 F.2d 289 (7th Cir. 1992). Such claims are
typically supported by affidavits along with a request to proffer evidence in support
thereof. U.S. v. Taglia, 922 F.2d. 413 (7th Cir. 1991). Strickland v. Washington, 466
U.S. 668, 104 S. Ct. 2052 (1984) set forth the standard for an effective assistance of
counsel claims. Strickland requires the defendant to show that counsels performance
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fell below an objective standard of reasonableness and that the defendant was
prejudiced as a result of that deficient performance. Id.
In reviewing the performance prong of this standard, if the defendant has
identified certain errors or omissions, then the court must determine whether, in light
of all the circumstances, the identified acts or omissions were outside a wide range of
professionally competent assistance.Id at 690. The court in Mosley v. Atchison, 689
F.3d 838 (7th Cir 2012) stated Strickland establishes a deferential presumption that
strategic judgments made by defense counsel are reasonable. 466 U.S. at 690-91, 104
S.Ct. 2052. The presumption applies only if the lawyer actually exercised judgment.
See Id. ( Strategic choices made after less than complete investigation are reasonable
precisely to the extent that reasonable professional judgments support the limitations
on investigation.)
In reviewing the prejudice prong of Strickland, the defendant must show that
there is a reasonable probability that, but for counsels unprofessional errors, the
result of the proceeding would have been different. Strickland at 694. The court in
Strickland further stated that a reasonable probability is a probability sufficient to
undermine confidence in the outcome. Id. at 694. (For the issue is not whether
[petitioner] is innocent, but whether if he had had a competent lawyer he would have
had a reasonable chance (it needn't be a 50 percent or greater chance) of being
acquitted....) See Mosley v. Atchison at 851.
INEFFECTIVE PERFORMANCE BY TRIAL COUNSEL
In reviewing the case at hand, the Court must first look to whether or not
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Mr. Stuart by his attorney and prejudiced the outcome of Mr. Stuarts case. These
actions and inactions by trial counsel constituted a pattern of ineffectiveness which
prejudiced Defendants case.
In looking at trial counsels ineffective representation, it is seen from the
beginning of trial that counsel never had a clear grasp of the facts surrounding Mr.
Stuarts thought process in this case. Counsel started from his opening statement
outlining the wrong procedure and fact pattern regarding Mr. Stuarts thought process.
Mr. Bernhoft immediately in his opening statement outlined an incorrect set of facts
about Stuart meeting some individuals in church who were questioning whether there
was an actual law that made citizens liable for income tax. (TR 12-05-11, p. 14,15).
This statement reflected none of what Mr. Stuart had actually done and was
completely inaccurate . (TR 10-01-12, p.33, 34).
Mr. Bernhoft failed to outline Mr. Stuarts position at all. The true facts are that
Mr. Stuart started researching the Internal Revenue Code because he was faced with
paying an alternative minimum tax due to inflation. He was having to pay more tax
than he had ever paid before and wanted to know why. He had asked his accountant
what could be done about this. (TR 10-01-12, p. 34,35).
Mr. Stuart began to research this issue on the internet and came across a book
called Cracking The Code by Peter Hendrickson. This book discussed a lot of issues in
the Internal Revenue Code and dealt with a lot of definitions in Title 26. (TR 10-01-12,
p. 35). Mr. Stuart then began to research these definitions and came across the
definition of withholding agent. Mr. Stuart was aware that his company, New Age
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Chemical was acting as a withholding agent on behalf of the Internal Revenue Service
as was their payroll company, Payroll Data Services. His company, along with Payroll
Data Services, were withholding taxes from his paycheck. Upon reviewing the
definition of withholding agent in the Internal Revenue Code, Mr. Stuart found the
following:
26 U.S.C. 7701(a)(16)
(a) When used in this title, where not otherwise distinctly expressed or
manifestly incompatible with the intent thereof(16) Withholding agent. The termwithholding agentmeans any person
required to deduct and withhold any tax under the provisions of section
1441, 1442, 1443 or 1461.
Mr. Stuart determined that this was the only definition of withholding agent in the
Internal Revenue Code. He then went to the sections that the definition of withholding
agent referred to and realized that none of these sections applied to him.
The Internal Revenue Code defines the sections as follows:
1441. Withholding of tax on nonresident aliens
(a) General rule.--Except as otherwise provided in subsection , all persons, in
whatever capacity acting (including lessees or mortgagors of real or personal
property, fiduciaries, employers, and all officers and employees of the United
States) having the control, receipt, custody, disposal, or payment of any of the
items of income specified in subsection (b) (to the extent that any of such items
constitutes gross income from sources within the United States), of any
nonresident alien individual or of any foreign partnership shall (except as
otherwise provided in regulations prescribed by the Secretary under section 874)
deduct and withhold from such items a tax equal to 30 percent thereof, except
that in the case of any item of income specified in the second sentence of
subsection (b), the tax shall be equal to 14 percent of such item.
1442. Withholding of tax on foreign corporations
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(a) General rule.--In the case of foreign corporations subject to taxation under
this subtitle, there shall be deducted and withheld at the source in the same
manner and on the same items of income as is provided in section 1441 a tax
equal to 30 percent thereof. For purposes of the preceding sentence, the
references in section 1441(b) to sections 871(a)(1) and (D) shall be treated as
referring to sections 881(a)(3) and (4), the reference in section 1441(c)(1) to
section 871(b)(2) shall be treated as referring to section 842 or section 882(a)(2),
as the case may be, the reference in section 1441(c)(5) to section 871(a)(1)(D)
shall be treated as referring to section 881(a)(4), the reference in section
1441(c)(8) to section 871(a)(1) shall be treated as referring to section 881(a)(3),
the references in section 1441(c)(9) to sections 871(h) and 871(h)(3) or (4) shall
be treated as referring to sections 881 and 881(c)(3) or (4), the reference in
section 1441(c)(10) to section 871(i)(2) shall be treated as referring to section
881(d), and the references in section 1441(c)(12) to sections 871(a) and 871(k)
shall be treated as referring to sections 881(a) and 881(e) (except that for
purposes of applying subparagraph (A) of section 1441(c)(12), as so modified,
clause (ii) of section 881(e)(1)(B) shall not apply to any dividend unless the
regulated investment company knows that such dividend is a dividend referred
to in such clause).
1443. Foreign tax-exempt organizations
(a) Income subject to section 511.--In the case of income of a foreign organization
subject to the tax imposed by section 511, this chapter shall apply to income
includible under section 512 in computing its unrelated business taxable income,
but only to the extent and subject to such conditions as may be provided under
regulations prescribed by the Secretary.
(b) Income subject to section 4948.--In the case of income of a foreign organization
subject to the tax imposed by section 4948(a), this chapter shall apply, except
that the deduction and withholding shall be at the rate of 4 percent and shall be
subject to such conditions as may be provided under regulations prescribed by
the Secretary.
1461. Liability for withheld tax
Every person required to deduct and withhold any tax under this chapter is
hereby made liable for such tax and is hereby indemnified against the claims and
demands of any person for the amount of any payments made in accordance with
the provisions of this chapter.
After reviewing these sections, Mr. Stuart came to the conclusion that if his
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company was acting as his withholding agent, then according to the Internal Revenue
Code, no money should be withheld from his check. (TR 10-01-12, p. 37-39). Mr. Stuart
did some further research that strengthened his conclusion by looking at Treasury
Decision 8734. Examining the plain text, Treasury Decision 8734 explained the legal
effect of the payors duty and responsibilities when acting as a withholding agent.
Treasury Decision 8734 states As a general matter, a withholding agent (whether U.S.
or foreign) must ascertain whether the payee is a U.S. or a foreign person. If the payee
is a U.S. person the withholding provisions under chapter 3 of the Code do not apply.
Mr. Stuart could find no other mention of the definition of withholding agent and since
his company and Payroll Data Services was considered Mr. Stuarts withholding agent
for the Internal Revenue Service, Mr. Stuart felt he was following the definitions as
spelled out directly in the Internal Revenue Code and determined he had no tax
liability.
This analysis formed the basis for Mr. Stuarts thought process in coming to his
decision that he had no tax liability. The defense that Mr. Bernhoft put forth was a far
cry from these facts. Although counsel did mention Mr. Stuarts issues regarding his
company withholding taxes in his opening statement, he never presented the reasoning
behind Mr. Stuarts issues, nor did he present any proof as to where and how Mr. Stuart
came to his conclusion. Exhibit 1 to sentencing hearing was never placed in evidence
during trial. It referenced the issue Mr. Stuart had with withholding with his company.
Further, counsel never made any references to the Internal Revenue Code sections
mentioned above, nor did he place these code sections into evidence before the jury. By
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failing to do so, counsel prevented Mr. Stuarts state of mind and thought process from
being heard by the jury. Instead counsel relied upon letters that were placed into
evidence piecemeal. The letters, as presented, do not completely or even closely reflect
Mr. Stuarts entire thought process. Although there was some mention of the
withholding issue, Mr. Bernhoft never presented evidence about the issue.
Mr. Stuart had tried to inform counsel of his theory prior to trial and had given
him Exhibit 1 prior to trial. (TR 10-01-12, p.38)(R.87, Exhibit 1).Counsel simply would
not discuss the matters and did not use the evidence he had access to. Counsel failed
to adequately ascertain Mr. Stuarts state of mind and failed to adequately interview
Mr. Stuart in order to establish the correct facts surrounding this case. In fact, counsel
never sat down and discussed the details and facts of the case at all with Mr. Stuart.
(TR 10-01-12, p. 39, 40, 67, 74, 75).
By failing to meet with Mr. Stuart and ascertain the correct facts of the case, key
evidence was left out of trial. In addition, counsel was unable to appropriately crossexamine key witnesses and argue evidence that would have been favorable to Mr.
Stuart. One key piece of evidence surrounded the witness, Mr. Schwarz. If argued and
developed properly, this witness testimony could have properly shown that Mr. Stuart
was trying to take steps to pursue what he believed to be the correct legal avenue
concerning his tax liability and the actions of Payroll Data Services as a withholding
agent.
Mr. Schwarz, while being employed with Payroll Data Services, was acting as the
third-party payor and withholding agent for New Age Chemical. He testified as to
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having had several discussions with Mr. Stuart with respect to this belief as to the
erroneous reporting to the Internal Revenue Service of his income if New Age Chemical
was considered a withholding agent. Stuart explained the precise procedures that
Schwarzs company were required to follow if New Age Chemical was a withholding
agent under Mr. Stuarts theory. Mr. Schwarz admitted that the company would not
change its policy, and further admitted that he felt that submitting information returns
to the Internal Revenue Service applies to everybody, despite the fact that Stuart in a
specific situation intended for the withholding agent to follow its purpose as defined in
26 U.S.C. 7701. Mr. Bernhoft never developed or argued these facts further.
If the jury would have been able to hear all of this information, they would have
possibly been able to follow the reasoning Mr. Stuart had concerning the definitions of
the Internal Revenue Code. Whether this theory was correct or incorrect made no
difference since it was the true belief of Mr. Stuart. This would have put forth the legal
defense which Mr. Stuart embraced that if an employer is defined as a withholding
agent, then under the definition of withholding agent in the Internal Revenue Code his
employer was either not authorized to withhold money from his pay or he was not liable
to pay taxes. The key to this is that by Mr. Bernhoft failing to put forth the true and
correct facts and theories that Mr. Stuart believed, the jury was without the benefit of
the accurate facts in order to determine if Mr. Stuart truly had a good-faith belief as to
why he did not have a tax liability. It is unfairly prejudicial to the defendant and his
case to not allow a jury to correctly assess the accurate facts surrounding the case
because of his lawyers ineffective assistance. A defendant has no reasonable chance of
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acquittal if the lawyer makes no effort to ascertain the correct facts and properly argue
them to a jury.
Mr. Bernhoft further failed to interview and call to testify Erin Stuart. In doing
so, Ms. Stuart would have been able to verify several of the facts set forth above. In
addition, Ms. Stuart was able to testify as to the dealings that Mr. Stuart had with his
attorney. Ms. Stuart was present with her father during the meetings that he had with
his attorney. (TR 10-01-12, p. 74,75). She explained her testimony in the Sentencing
Hearing that they made several requests to speak with Mr. Bernhoft about her fathers
reasoning and the facts surrounding the case. (TR 10-01-12, p. 73,74). However, Mr.
Bernhoft never discussed the details and facts surrounding Mr. Stuarts case with Mr.
Stuart, nor did he prepare him in any way to testify. Although Mr. Stuart made
several requests to do so, Mr. Bernhoft made a unilateral decision for Mr. Stuart not to
testify, and therefore stated that he did not need to prepare Mr. Stuart to testify. Mr.
Stuart questioned this decision because similar cases always required the defendant to
testify. (TR 10-01-12, p. 74,75).
During trial, Mr. Bernhoft went as far as to take Mr. Stuart out in the hallway
outside of court and pretend to discuss whether or not Mr. Stuart was going to testify
after the governments case in chief already knowing that Mr. Bernhoft himself that
made this decision. (TR 10-01-12, p. 82). Ms. Stuart testified in the motion for new trial
that her father had expressed to her that Mr. Bernhoft had not presented a lot of things
needed for the case and that he should have testified. However, he said he was not
prepped and therefore, did not know what to do. (TR 10-01-12, p. 98).
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Erin Stuart further testified that her Father expressed concerns that Mr.
Bernhoft did not know the reasoning behind why her Father stopped paying taxes and
did not know how his position could be put before a jury without him testifying (TR 1001-12, p.76). She testified about how their concerns became greater after Mr. Bernhofts
opening statement and for the remainder of the trial they attempted, without success,
to express their concerns to Mr. Bernhoft as to how he was going to get Mr. Stuarts
position across to the jury. (TR 10-01-12, p. 79, 80, 81). She explained how Mr. Bernhoft
did not like to be questioned and her Father did not feel he could testify without being
prepared and was more than a little intimidated by Mr. Bernhoft. (TR 10-01-12, p. 79,
80, 81). Mr. Bernhoft would always tell her and her Father to trust him and that
everything would be summed up in closing argument. However, there was never any
additional evidence put before the jury. (TR 10-01-12, p. 82).
Erin Stuarts testimony during the motion for new trial established that Mr.
Bernhoft failed to adequately investigate and discuss the correct facts of the case and
failed to obtain the correct theory and basis for Mr. Stuarts good-faith defense. The
proof that was put before the court in the motion for new trial was uncontradicted.
If Erin Stuart would have been called to testify during trial, she would have been
able to tell the jury that she was an accountant. That her Father had presented her
with the book, Cracking the Code in an effort to try and help her understand the law
as it pertained to his tax status. She would have been able to testify that it did not look
like the tax code, as Mr. Stuart viewed it, applied to him and she could not tell him
which parts of the code did. (TR 10-01-12, p. 77, 78). Ms. Stuart would have also been
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able to testify that her Father had put money aside to pay his taxes. She would have
been able to testify as to the amount and where it was located. (R.66, Motion for New
Trial, p.6) (R.68, Affidavit of Erin Stuart). This key piece of evidence would have
directly contradicted evidence by the government concerning the act of evasion.
Erin Stuart would have also been able to testify about the credibility surrounding
a key witness by the name of Beverly Schlipp. Ms. Schlipp is the aunt of Erin Stuart
and the sister of James Stuart. Ms. Stuart would have been able to testify to a jury that
after she started working for the company in 2009, she performed an audit of the
company books and discovered that Ms. Schlipp has been embezzling from the company.
She would have been able to testify that her and Ms. Schlipp had a heated argument
about the transactions. (TR 10-01-12, p. 83, 84). This led to Erin Stuart firing Ms.
Schlipp from her position at New Age Chemical in 2010. (TR 10-01-12, p. 85,86). Some
of the money which Ms. Schlipp embezzled was used towards attorneys surrounding the
Internal Revenue Service investigation. At the sentencing hearing, Erin Stuart testified
that she provided this information to Mr. Bernhoft on several occasions. However, Mr.
Bernhoft failed to investigate it further. (TR 10-01-12, p. 85,86). This information was
drastically important, because Ms. Schlipp was a key witness as to the acts of evasion.
Her credibility was very important to this case. Ms. Schlipp was the one who testified
that Mr. Stuart was doing things with he payroll to fly under the radar. (TR 12-06-11,
p. 174). However, the defense had actual proof as to her motive to lie and failed to
adequately investigate and present that proof to the jury. Mr. Bernhoft, at least, could
have cross-examined Ms. Schlipp about these events and been able to elicit testimony
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that she had been fired. This could have gone to the credibility of both her and her
daughter, as her daughter would have benefitted from Ms. Schlipps continued
employment. Failure of Mr. Bernhoft to develop this line of questioning or to submit
this proof to the jury was blatantly ineffective. There was a strong possibility that the
jury could have viewed her testimony differently had they had these facts.
Erin Stuart would have further testified that any money that Mr. Stuart received
from the company was reported. That Ms. Schlipps job was never in danger, because
of her refusal to sign any checks and she faced no discipline because of this fact. She
would have testified that her Father had discussed his theories often with Ms. Schlipp
and she found them to be interesting and thought about adopting them. Ms. Schlipp,
during her testimony, made a statement to the effect that Mr. Stuart was performing
some of these acts in order to fly under the radar. Erin Stuart would have been able
to testify that according to the numerous conversations she had with Ms. Schlipp that
this statement was inaccurate. (TR 10-01-12, p. 91). If Ms. Stuart had been called to
testify, it would have placed in great dispute the issue of evasion. It would have shown
that Ms. Schlipp had a motive to lie about her brothers actions. It would have also
shown and elaborated on Mr. Stuarts thought process, as well as shown the jury that
Mr. Stuart was not hiding money and that all of the money for his taxes was sitting
there to be paid if he owed a tax liability.
Mr. Bernhoft also failed to adequately interview and properly cross-examine
another key witness, Joel Netteshiem. During the trial the government had put forth
representation that Mr. Stuarts accountants began to leave his employment because
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they disagreed with his tax position. (TR 12-05-11, p. 12). His testimony became very
important, because the government painted a picture of Mr. Stuart as being a difficult
man that fired each of his accountants because they strongly disagreed with his beliefs.
However, if counsel had properly cross-examined each of the witnesses and called James
Stuart and Erin Stuart to testify, the jury would have seen that this was far from the
truth. Mr. Netteshiem would have testified that Mr. Stuarts previous accountant, Mr.
Hau did not leave the employment of Mr. Stuart because of his individual tax position.
(TR 10-01-12, p. 100). He would have testified that Mr. Stuart thoroughly discussed his
theory concerning his tax liability. He would have been able to testify that he had
discussed Mr. Stuarts beliefs with the Internal Revenue Service and that he was not
in a position to verify if they were correct. He would have also testified that he believed
that Mr. Stuart was passionate about what he believed and understood from his
research. (TR 10-01-12, p. 102). Mr. Nettesheim would have testified that he was unable
to tell Mr. Stuart whether he was correct or incorrect about his beliefs. He would have
been able to testify that he consulted with his partner who had a Masters in Tax and
a friend who was a tax attorney who represented individuals in tax matters and was
still unable to tell Mr. Stuart whether he was correct or incorrect about his beliefs. He
also stated in the motion for new trial hearing that he at least told Mr. Bernhoft about
his tax partner. (TR 10-01-12, p. 102, 103). During the motion for new trial, on cross
examination, he admitted that as a C.P.A., he did not know what was the basis for the
federal governments ability to tax people. He just knew that he accepted it as fact
because it was such a dominating force in the nation. (TR 10-01-12, p. 104). Mr.
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Bernhoft had an opportunity in he failed to develop any of these facts. This was because
he lacked knowledge of the correct facts.
Looking at each of these facts and witnesses it becomes blatantly apparent that
trial counsel was ineffective. First and foremost, the failure to interview your client to
obtain the correct set of facts falls below even the most basic line of practice for any
attorney. Trial counsel in this case had the ability with little effort to ascertain that the
facts he set forth throughout the case were incorrect. He had the ability with little effort
to show that Mr. Stuart did not hide money and that the money was available in an
account to pay the taxes if necessary. This goes directly to the acts of evasion. If the
Defendant had the money sitting in an account, then the governments theory that he
was hiding money would fail. Trial counsel also had the ability to contradict much of the
governments case with information readily available to him through his client.
Therefore, counsel was ineffective because each of the following:
1.
2.
Failing to set forth an accurate account of how Mr. Stuart came to his
4.
Failing to put on proof that showed a different reason as to why Mr. Stuart
Failing to put on proof that Mr. Stuart was not hiding money and that he
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8.
Failing to put on proof that Joel Nettesheim had consulted with his tax
partner and a tax attorney and still was unable to answer Mr. Stuarts questions
concerning the law that made him liable for income tax;
9.
a tax liability and tax due and owing without Mr. Stuarts consent; and
10.
Counsel wrongfully allowed proof of Mr. Stuarts tax situation in the state
of Wisconsin to be admitted without objection and allowed proof of his tax situation
after 2007.
Each of these acts individually and collectively fell below the line of reasonable
practice for trial counsel. Each of these acts individually and collectively show proof of
trial counsels ineffective representation, which denied Mr. Stuart his Sixth Amendment
right to effective assistance of counsel.
TRIAL COUNSELS INEFFECTIVE PERFORMANCE
IN NOT CALLING JAMES STUART TO TESTIFY
It is important to discuss separately trial counsels ineffective performance in
placing the Defendant in a position where he did not testify. A criminal defendant
cannot be compelled to remain silent by defense counsel. United States v. Teague, 953
F.2d at 1525 (11th Cir. 1992). Testifying is both a tactical decision for defendant and
also constitutional right. Brooks v. Tennessee, 406 U.S. 605, 92 S.Ct. 1981 (1972). The
Eleventh Circuit in Nichols v. Butler, 953 F.2d 1550 (11th Cir.1992) held that it is
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beyond question that an attorney cannot threaten to withdraw during a trial order to
coerce the defendant to relinquish his fundamental right to testify. Id. The most
important witness for the defense in many criminal cases is the defendant himself.
Rock v. Arkansas, 483 U.S. 44, 107 S.Ct. 2704 (1987). Where the very point of the trial
is to determine whether an individual was involved in criminal activity, the testimony
of the individual himself must be considered of prime importance. Nichols v. Butler at
1554 quoting United States v. Walker, 772 F.2d 1172 (5th Cir.1985).
First and foremost, Mr. Stuarts testimony is paramount in this case. In order to
establish a good-faith defense, the jury needs to know the thought process of the
Defendant and needs to judge his sincerity as to whether he truly believed his position.
The question becomes did Mr. Bernhoft coerce Mr. Stuart from testifying? Although
there is no direct threat to withdraw, trial counsel placed Mr. Stuart in a position where
he had no choice about testifying. Mr. Bernhoft made the decision that Mr. Stuart was
not testifying. He made this decision knowing nothing about the correct facts. (TR 1001-12, p. 42-44). James Stuart had never been in a trial before. Mr. Bernhoft never
prepared him to testify. He met with Mr. Stuart during trial, prior to being questioned
by the court, and told him what to say. (TR 10-01-12, p.43, 82). Although not making
any threatening statements, Mr. Bernhoft made the decision for Mr. Stuart. Mr. Stuart
was afraid. (TR 10-01-12, p. 42). James Stuart and Erin Stuart both testified that Mr.
Stuart felt intimidated and that he had no choice in the matter. (TR 10-01-12, p.42, 8081). The real problem is how could trial counsel make a decision to not have Mr. Stuart
testify if he did not know all the facts of the case and what Mr. Stuart had to say. Trial
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counsel did not exercise judgment after sufficient investigation. Further the limits of
the investigation did not support counsels judgment.
COUNSELS INEFFECTIVE ASSISTANCE PREJUDICED
THE OUTCOME OF THE CASE
It is clear from the trial record, that there is a reasonable probability that the
outcome of this case would have been different had Mr. Stuart not received such
effective assistance of counsel. The government in this case painted a picture of Mr.
Stuart as an arrogant individual who bullied people and refused to listen to anyone.
Someone who was hiding his money to keep from paying taxes. All of which could of
been disputed.
Of course there is a reasonable probability that the outcome of this case would
have been different, because Mr. Bernhoft did not even put forth the correct facts. Mr.
Stuart was denied the opportunity for the jury to hear the true and correct reasoning
behind his good-faith decision that he had no tax liability. He was denied the
opportunity for the jury to hear how he analyzed the definitions in the Internal Revenue
Code and how he applied the definitions to his facts and circumstances in making this
determination. The jury was denied the opportunity to hear that Mr. Stuart actually
had the money to pay his taxes set aside in a bank account and was not hiding his
money. This would have contradicted the acts of evasion. If James Stuarts counsel had
not been ineffective, the jury would have been able to fairly assess the credibility of
Beverly Schlipp and her daughter. The jury would have been able to hear that
accountants, such as Joel Nettesheim did not necessarily disagree with Mr. Stuart, but
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that he and other professionals could not provide Mr. Stuart with an answer to his
questions. The jury, without objection from trial counsel, was provided inappropriate
information such as Mr. Stuarts dealings with the state of Wisconsin and Mr. Stuarts
tax situation after 2007. It is apparent from all the above that had Mr. Bernhoft
performed in an effective manner, the jury would have deliberated over a much different
case. But for Mr. Bernhofts ineffective assistance, there is a reasonable probability
that the result of the trial would have been different.
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CONCLUSION
It is clear from the facts of this case and the testimony of witnesses at all
proceedings that trial counsel rendered ineffective assistance to Mr. Stuart. Further,
it is clear that but for the deficient performance of trial counsel, there is reasonable
probability that the outcome of this case would have been different. For these reasons,
this Court should vacate the verdict in this matter and send this case back to the
District Court for a new trial on the merits.
s/Michael E. Scholl
MICHAEL E. SCHOLL
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CERTIFICATE OF SERVICE
I, the undersigned, do hereby certify that a copy of the foregoing brief was
delivered electronically through ECF to Matthew L. Jacobs, Assistant United States
Attorney, Eastern District of Wisconsin at 517 East Wisconsin Avenue, Room 530,
Milwaukee, WI 53202 on the 14th day of January, 2013.
s/Michael E. Scholl
MICHAEL E. SCHOLL
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APPENDIX
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