Free Response - District Court of Arizona - Arizona

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Donald W. MacPherson The MacPherson Group, P.C. 7508 N. 59th Avenue Glendale, Arizona 85301 (623) 209-7003; fax 7008 Attorney for Defendant AZ Bar #005627 UNITED STATES DISTRICT COURT DISTRICT OF ARIZONA UNITED STATES OF AMERICA, ) ) Plaintiff, ) ) v. ) ) JOHN DELO NICHOLS, ) ) Defendant. ) ______________________________) No. CR 04-350-001-PHX-PGR DEFENDANT'S RESPONSE TO GOVERNMENT'S SENTENCING MEMORANDUM

It is respectfully submitted that excludable delay pursuant to 18 U.S.C. §3161(h)(1) will not occur as a result of this pleading. Defendant, by counsel undersigned, responds to the

government's sentencing memorandum and requests the following relief: 1. The memorandum be stricken and disregarded as untimely,

or, alternatively, that sentencing be continued to (a) afford Defendant time to file a meaningful response; and (b) allow the parties time to attempt to work out (at least some of) their differences. 2. In event the parties do not resolve their differences, a

hearing be held if (a) the government remains adamant in its position, i.e. that Defendant should receive prison time; or (b) Defendant otherwise requests. 3. If this court does proceed with sentencing, Defendant

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receive that which the Probation Officer recommended: five months home detention. (If this court is to sentence Defendant to five months home detention, then Defendant has no need for delay or a hearing.) 4. This court find that the government's objection to the

Probation Officer's recommendation is disregarded as untimely. (The government failed to object to the PSR.) This response is supported by the memorandum of points and authorities hereunder. MEMORANDUM OF POINTS AND AUTHORITIES I. OVERVIEW While Defendant greatly appreciates the government's patience (as well, that of the court and Probation Officer) with respect to repeated sentencing continuances so as to afford Defendant time to prepare and file his returns, Defendant does not appreciate being sandbagged by an eleventh-hour government filing, especially given that the returns were filed in June.1 Defendant did not learn of the government's position on the returns until Friday, 9-15-06.2 Under Fifth Amendment due process and Title 18 Defendant is

entitled to adequate notice of the government's position so as to know whether to timely request an evidentiary hearing. Defendant now makes that request but has hope that it will be unnecessary if
1

In fact, Defendant submitted the returns to Revenue Agent Kunz as instructed, and did not learn until mid week or later that the returns were being reviewed by another Revenue Agent. Because Defendant's counsel, MacPherson, had a late morning doctor appointment, counsel did not learn of the filing until he spoke with government counsel in the early afternoon. 2
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the parties are afforded opportunity to resolve their differences. Defendant did not willy-nilly file tax returns; he utilized an Arizona Bar Board-certified specialist in tax law and CPA Mike

Davis. The charge at issue is one of Defendant wilfully failing to file his personal income tax returns for years which he operated a church3 business. Defendant utilizes the term "church business" because the vast majority of deductions he has taken on his tax return can be taken whether or not the church qualifies as a church. For example, payments by the church for parsonages of others who work for the church constitute either (a) parsonages for the church, or, at the very least (b) business deductions as payments to third parties for services rendered. Moreover, the church purchased at great expense a large Baptist church building in Oklahoma and conducted considerable missionary work in India. Finally, just by way of example, considerable refunds were given by the church to those who paid the church for minister status. Simply put, the gravamen of the government's action is that Defendant wilfully failed to file tax returns which, based upon gross income he received, he was required to file. Defendant has accepted full responsibility for his crime, for, as the Probation Officer stated at page 5 paragraph 10: The defendant admitted his actions as outlined in the factual basis of the plea agreement [receipt of gross income and wilful failure to file]. Nichols indicated his failed to file his income tax return in 1999, and did not keep track of his personal income which should have been separate from that of the church. The defendant further

Under 26 U.S.C. § 501(c)(3) churches are expressly exempt from having to seek tax exemption status. 3

3

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admitted he knew he should have filed his taxes, acknowledged he was wrong, and is willing to "get current" and pay any taxes owed to the government. Defendant indeed paid professionals to assist him through both direct and indirect methods4 to prepare and file accurate returns, utilizing both information available from the government's

investigation and from Defendant's limited records Defendant faced an "accounting nightmare." II. DEFENDANT HAS NOT ATTEMPTED TO AVOID OR REDUCE THE STIPULATED AMOUNT OF TAX LOSS The government assumes too much, claiming in its conclusion,

10 page 3, line 16, that, "There is no basis at this point to conclude 11 Defendant is entitled to avoid or reduce the stipulated amount of 12 tax loss."5 Rather, Defendant has not only performed that which he 13 promised 14 cooperate with IRS) but has done so prior to sentencing so as to 15 demonstrate that (a) he has learned his lesson; (b) he has accepted 16 17 18 19 20 21 22 23 24 25 26 27 28 Defendant utilized the same methods utilized by IRS. Under the direct method he gathered information from records available, such as bank statements, brokerage accounts, and his check register. Because he did not have adequate records for the earlier years, he utilized the indirect methods; e.g., the average of expenses as a percent of gross receipts for the later years. In fact the IRS accepted such a method for MacPherson's client, a dentist, who pled to the same charge where he had no records and was permitted by IRS to rely on a national survey conducted by a national dental association for the expense/income ratio. Defendant has made no attempt to argue a lower tax loss, despite his current belief that his tax loss is lower. To make such an argument would be in breach of his plea agreement: he stipulated to a tax loss of over $40,000. Even if the tax loss is zero, the guidelines range is 0 to 6 months, which encompasses the recommended 5 months home detention. 4
5 4

in

the

plea

agreement

(file

delinquent

returns

and

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full responsibility; (c) he has no problem with tax compliance and cooperation with IRS; and (d) he relies and will continue to rely on professionals. Again, he appreciates the government's patience so that he could file returns prior to sentence so as to

demonstrate his remorse and reform. What more could he do than rely upon an Arizona Bar Board-certified tax specialist and a CPA in tax matters about which many tax attorneys and CPAs have little or no knowledge.6 III. TAX COMPLIANCE AND COOPERATION WITH IRS As stated, Defendant submitted his returns in June and was awaiting (a) the IRS's response, and (b)opportunity to meet with IRS and reply. Instead, this eleventh-hour ambush. IV. EVEN ASSUMING ARGUENDO THAT DEFENDANT'S ACTIVITIES DO NOT QUALIFY AS CHURCH ACTIVITIES, DEFENDANT IS ENTITLED TO BUSINESS DEDUCTIONS. By way of a simple example, consider the following. Defendant claims that what he operates is a church, and travels to Texas to (a) put on a seminar, and (b) sell ministries.7 If what he operates is in fact a church, then the travel, lodging, and food expenses

It is of course not uncommon for IRS agents to strongly disagree with the position taken by taxpayers and their advisers. Here we have technical tax issues regarding churches and ministers. Defendant recognizes and has accepted responsibility for his wrongful conduct in giving improper tax-dodge advice to those who signed up for the ministry program. The only valid tax advantage for a bona fide minister is the parsonage allowance and car allowance. The "vow of poverty," and thus no income, has, even for Catholic nuns, been found by the courts to be invalid. 5
7

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are not at issue because a church is exempt from tax.8 Of course Defendant should report as income any net benefit; e.g. payment of personal expenses from church funds. Assuming arguendo that the church business does not qualify as a church, it is then simply a Schedule C business for which Defendant is entitled to business expenses; e.g. travel, lodging, and food. After all, these were incurred as ordinary and necessary expenses relating to the

production of income (sale of ministries). See § 162 (trade or business expenses allowed as deductions if "ordinary and necessary" to income production). V. DEFENDANT TAKES ISSUE WITH THE GOVERNMENT'S CLAIM THAT "THE RETURNS FILED ARE NOT TRUE AND ACCURATE." For the reasons stated above, Defendant does not accept the

13 government's position and would not have filed the returns had he 14 believed that they were not true and accurate. Defendant has relied 15 on both a tax attorney and a CPA, and all three are willing to 16 fully 17 Defendant has never disputed that, as a condition of supervisory 18 release or probation, he should be required to file true and 19 accurate returns and cooperate fully with IRS. He expressly agreed 20 to such in the plea agreement. 21 VI. 22 Contrary to the government's position, Defendant has shown 23 24 25 26 27 28 Many churches incorporate and thus file corporate returns. Not so here. Soon after entry of the plea, Defendant and his counsel met with Agent Kunz and government counsel and discussed Defendant's operation, record keeping, tax issues, etc. 6
9 8

cooperate

with

IRS

and

work

out

differences,

if

any.9

SUMMARY AND CONCLUSION

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remorse, contrition, and acceptance of responsibility, and has not persisted in the same course of conduct that brought him before this court; he has filed returns which at this point he believes to be true and accurate. If there be differences then those

differences can, as anticipated by the express condition of the plea agreement, be handled administratively by Defendant and the IRS. Given the absence of time to respond, Defendant will not, at this time, address all of the tax issues raised by the government. Simply put, the return preparation process has been an "accounting nightmare." But the seminal issue is due process: adequate notice of wrongdoing, and opportunity to be heard. A Friday filing prior to a Monday sentencing hardly suffices.10 On the other hand, if the court is to sentence Defendant to 5 months home detention as recommended by the Probation Officer and as agreed to by Defendant, then "no harm, no foul," and Defendant has no need for further delay or a hearing. DATED this 15th day of September, 2006.

/s/ Donald W. MacPherson The MacPherson Group, P.C. 7508 N. 59th Avenue Glendale, Arizona 85301 (623) 209-2003; fax 7008

The government fails to inform us of when the government reached its sentencing memorandum conclusions, but its memorandum from the Agent reporting the results is dated August 10, 2006, over one month ago. Defendant and his advisors would have and could have addressed the government's issues had they received timely notice. 7

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u:\scott\Nichols\sentencing memo

Attorney for Defendant

Copy of the foregoing by email this 15th day of September, 2006, to: Daniel Drake Asst. U.S. Attorney 40 N. Central, #1200 Phoenix, AZ 85004-4408 Ph. 602-514-7500; fax 7537 [email protected] cc by fax to Probation Officer Lisa Miller fax 602-322-7409 Ph. 602-322-7448

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