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7th Circuit affirms tax fraud convictions

May 5, 2017

The 7th Circuit Court of Appeals has affirmed the convictions and sentence of a man convicted on three tax fraud charges, finding that the district court properly excluded evidence of his corporate “meeting minutes.”

In United States of America v. Charles Petrunak, 16-3631, Charles Petrunak, a pyrotechnician, was the sole proprietor of Abyss Special FX Inc., a pyrotechnic and aerial fireworks business that was regulated by the Bureau of Alcohol, Tobacco, Firearms, and Explosives.  During a mandatory ATF inspection in September 2001, inspectors documented various violations at Abyss, which Petrunak challenged.

An administrative law judge ruled Petrunak was in violation of explosives regulations and, thus, revoked his explosives license, putting Abyss out of business.  About five years later, Petrunak began targeting the inspectors who had reported his violations, mailing them an IRS W-9 form requesting identifying information, then sending them Form 1099, alleging that Abyss had paid $250,000 to both of them.

The inspectors provided the forms to their supervisors, but when they filed their taxes, they indicated only their income and excluded the fictional $250,000. One of the inspectors, Jill Krofta, was audited by the IRS because her tax return did not include the $250,000, and she was informed that she owed $101,114 in taxes.

Meanwhile, Petrunak submitted the “payments” to the inspectors as business expenses for “outside services/independent contractors” in his submissions to the IRS. Then, he filed Abyss’ corporate tax return, claiming the $500,000 deduction based on the falsified 1099 payments. Because Abyss was an S-corporation, Petrunak was able to report a loss exceeding $500,000 on his personal taxes in 2008, enabling him to offset the taxes he owed for 20 years until the loss was exhausted.

After discovering the discrepancy in Krofta’s return, the IRS began investigating Petrunak, who eventually admitted to filing the forms based on the “Illegal loss of licensing for his business as a result of the falsified testimony” of the inspectors, according to the record. He was then convicted on three counts of making and subscribing false and fraudulent IRS forms in violation of 26 U.S.C. 7206(1). He was sentenced to 24 months in prison.

Though Petrunak admitted to sending the 1099s and claiming the deduction, Petrunak said he concluded that he could use the 1099-Miscellaneous income forms to ascribe his losses to the agents, but did not intend for the forms to represent that he paid the inspectors $250,000 each in income.
To prove that point, Petrunak sought to introduce evidence of Abyss’ corporate meeting minutes, claiming that they would reflect his reduced income and tax losses and would demonstrate his state of mind in preparing the tax forms.

Judge William T. Lawrence of the U.S. District Court for the Southern District of Indiana excluded them, and Petrunak argued on appeal that the meeting minutes should have been admitted under the business records exception. But in a Thursday opinion, 7th Circuit Court of Appeals Judge Ilana Rovner wrote the “minutes” were created by Petrunak, who was the sole employee of Abyss and, thus, the only person present at the corporate meetings. Further, the records he sought to introduce were not the originals.

“None of the indicia of reliability that render business records reliable are present here, in that there is no indication that the records are relied upon for the operation of Abyss’ affairs, and the destruction of the originals casts doubt on whether the minutes submitted were actually made at or near the time of the meeting, or produced or altered in light of the impending litigation,” Rovner wrote.

The appellate court further affirmed the calculation of Petrunak’s sentence, finding that the district court properly determined a tax loss of $140,000.
 

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