Free Sentencing Memorandum - District Court of Arizona - Arizona

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PAUL K. CHARLTON United States Attorney District of Arizona LARRY WSZALEK State of Wisconsin Bar No. 1003722 MARK T. ODULIO District of Maryland Bar No. 26348 Trial Attorneys U.S. Department of Justice Tax Division Two Renaissance Square 40 N. Central Avenue, Suite 1200 Phoenix, Arizona 85004-4408 Telephone (602) 514-7661

UNITED STATES DISTRICT COURT DISTRICT OF ARIZONA United States of America, Plaintiff, v. Sentencing Memorandum 1. Dennis O. Poseley; 2. Patricia Ann Ensign; 5. David W. Trepas; 6. Rachel McElhinney; 8. Keith D. Priest; Defendants. Plaintiff, United States of America, by and through its counsel of record, Larry J. Wszalek CR03-344-PHX

22 and Mark T. Odulio, Trial Attorneys, Department of Justice, Tax Division, files its Sentencing 23 Memorandum. The Memorandum consists of two parts: Proof at Trial (pgs. 2-17); and 24 25 26 27 28
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Sentencing Guideline Issues (pgs. 18- 43).

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PROOF AT TRIAL 1. Innovative Financial Consultants - Business Origins Dennis Poseley and his common law wife, Patricia Ensign profess to be sovereign. That

5 is, they maintain that the income tax laws do not apply to them. At trial, Dennis Poseley 6 7 8 43, line 17). Certified records from the IRS tend to corroborate this claim as there is no testified that he has not filed income taxes since 1972. (Transcript. Dennis Poseley, pg.

9 record of filing for Dennis Poseley between 1995 - 2003. (Trial Ex. 5). The same is true for 10 Patricia Ensign. (Trial Ex. 6). Together, the two associated with other like minded 11 individuals throughout the country who, from the Tax Division's perspective, are generally 12 13 referred to as tax protestors. David Trepas, Rachel McElhinney, and Keith Priest, all touted 14 the same dogma that income taxes are voluntary and, like their co-defendants Dennis Poseley 15 16 17 In October 1992, Dennis Poseley and Patricia Ensign formed an organization known as and Patricia Ensign, each "volunteered" not to pay taxes. (Trial Ex. 7,8,9)

18 Citizens For Sovereignty (CFS). (Trial Ex. 116, PC036381) The intent of CFS "was to 19 20 21 and what can be done by the individual to regain his/her Sovereign rights." (Id.) CFS sold inform as many people as possible of the inequities in the government of the United States

22 sovereignty-related products including trusts, common law marriage guides, social security 23 rescission packages, passport applications; international drivers licence applications, and tax 24 information. (Transcript, Mark Poseley, pg. 154, line 25 thru pg. 155, line 13.) In the 25 26 final months of 1992, CFS sales totaled 17,516. In 1993, its gross receipts were $172,577, 27 and in 1994 $176,489. (Trial Ex. 116, PC 036381) 28
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The Social Security rescission package marketed by CFS did not work. Touted as a mechanism for separating oneself from their social security number so that all contracts with the government were void, including the contract for paying income taxes, the rescission

5 package did nothing more than separate oneself from one's money. Cynthia Porter testified 6 7 8 Social Security Administration as directed but never got a response of any kind from SSA. 9 (Transcript. Cynthia Porter, pg. 11, lines 9-23). John Poseley testified that he sent 10 numerous letters to the SSA that Dennis Poseley had developed but eventually grew tired of 11 the lengthy process and abandoned his rescission efforts. (Transcript. John Poseley, pg 12 13 28-29) Stacey Vornbrock was similarly unsuccessful in rescinding her social security 14 number. 15 16 17 Information Clearing House (ICH). ICH was formed to allow "the most prominent players in By 1995, Dennis Poseley and Patricia Ensign formed a new organization named that she purchased the rescission package from CFS and wrote the rescission letters to the

18 the patriot community" to place their products on a shared listing. (Trial Ex. 116, 19 PC036379-80). Dennis Poseley explained that ICH was a mail order house with different 20 sovereignty products on the mailing list. (Transcript. Dennis Poseley, pg. 25, lines 1021 22 23). He reasoned that since "the Government's working together, we should be working 23 together, too, as a people." (Id.) 24 By 1998, Innovative Financial Consultants (IFC) was formed and doing business. IFC's 25 26 sole focus was selling Pure Trust Organizations (PTO). The business received a tremendous 27 boost in June 1998, when it became affiliating with the Institute of Global Prosperity, an 28
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1 entity that hosted offshore seminars for hundreds, if not thousands, of attendees. Mark 2 3 4 for most of its business. (Transcript. Mark Poseley, pg. 52, lines 7-8). After allying with 5 Global, IFC business doubled or tripled. (Transcript. Mark Poseley, pg. 53, line 1). 6 7 8 Deborah Carlson computed the following gross income figures for ICH/IFC during an eight The figures support Mark Poseley's estimations -- and then some. IRS Revenue Agent Poseley testified that prior to associating with Global, IFC relied on word-of-mouth referrals

9 year period: 10 11 12 13 14 15 16 17 18 19 20 21 (PTO) that made it a sham. First, IFC trustees did not maintain the requisite arms-length, 22 adverse-party relationship to the grantor (managing director) necessary for all irrevocable 23 trusts. Second, there was no true-separation between the grantor and property placed in the 24 25 26 27 28
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1996 1997 1998 1999 2000 2001 2002 2003 Total

132,581 237,138 572,592 1,175,698 1,353,562 807,731 400,656 60,206 4,740,164

(Trial Ex. 422)

As depicted, IFC's gross income increased nearly six-fold between 1997 and 2000. 2. Pure Trust Organizations (PTO) - Sham Trusts At trial, the Government highlighted two features of IFC's Pure Trust Organization

trust. The grantor (managing director) continued to own, control, and enjoy the benefits of assets placed in the trust.

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In addition, the proof at trial established that the defendants knew IFC trusts were shams. The defendants understood the need for an independent trustee but nevertheless took a pass on enforcing this duty. Moreover, the defendants understood the need for true separation

5 between the grantor and the property, yet allowed the clients to retain full control and 6 7 8 9 10 11 12 13 association with Commonwealth, Dennis Poseley came to disagree with the manner in which 14 Commonwealth operated its trusts -- namely the trustees had little or no involvement in the 15 16 17 18 19 20 21 22 The biggest difference that I felt needed to be changed is that they -- their trustees were a group of people, they actually lived in New Mexico. But they were not involved in the trust on any level whatsoever. Once the trust was done, and it was -- the managing director had it, the trustees had no involvement whatsoever. And, in fact, they did not even pay the trustees. And I felt those were two issues that needed to be change (sic). (Transcript. Dennis Poseley, pg. 36, lines 7-14) Dennis Poseley knew that a trust without trustee involvement was a sham trust. In fact, trusts. He explained: is reviewed below. 3. No Independent Trustees Dennis Poseley's trust career began with a company named Commonwealth with whom he sold several hundred trusts. (Transcript. Dennis Poseley, pg. 37, line 16). During his ownership of property placed in the trust. The proof associated with each of these concepts

23 he stated as much. During a videotaped presentation in Virginia Beach in 1997, Dennis 24 25 26 involved in the operation of the trust or are not being paid by the trust, it is probably a sham Poseley stated, "There is ample case law out there stating this -- if the trustees are not

27 and they'll try to break it." (Trial Ex. 164, Segment 5). 28
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Rachel McElhinney reiterated the same point at Managing Director's Workshop in April 2000. The reason this trust organization is designed this way is so that you as the Managing Director has arms-length relationship to adverse party -- the trustees. Because once the creator and this trustee enter into this private contractor agreement the creator goes away. Just like the incorporator in a corporation. Once they incorporate they really essentially go away. So the adverse party here are the trustees. You must have an adverse party. That's why you're not going to be the trustee or the beneficiary. You have to have the arms-length relationship. This is the inherent and profound strength of this design. The trustees must have the power of authority ( ) to be able to do that. Otherwise this is gonna be seen as an alter ego or sham of you and those will be pierced. No doubt. (Trial Ex. 61, Segment 7) Sales pitches aside, the same flaw Dennis Poseley found objectionable in the

13 Commonwealth trusts persisted in his PTOs as well. There was no independent trustee. 14 Although Dennis Poseley instituted cosmetic changes designed to give the appearance of an 15 16 17 difference. Dennis Poseley's trustees simply rubber stamped the whims and wishes of the arms-length relationship between the trustee and grantor, these synthetic changes made little

18 managing directors. Oftentimes the trustees did not even know what property was in the 19 trust. At trial, there was overwhelming evidence presented regarding the lack of trustee 20 involvement in IFC's pure trusts. 21 · Dennis Poseley announced to a Global audience, "As the managing director you are 22 an independent contractor with this trust organization. It affords you all of your 23 housing, automotive expense, a reasonable expense account and $1,000 a month in property. The $1,000 a month is between you and the trustees. If the $1,000 isn't 24 enough and you feel you need $20,000 a month, our trustees are very, very nice gentlemen. If the trust has the money, they'll give it to you." (Trial Ex. 26, Segment 25 4) 26 27 28
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· Jeff Lewis was an IFC trustee who operated his own pure trusts named Southwest Safety Foundation and Paladin Management. Lewis testified the trustees (David Trepas and Derral Hineman) did not know of the trusts' bank accounts and that he maintained full ownership, control, and authority over funds placed in the trust accounts. (Transcript. Jeff Lewis, pg. 16, line 3; pg. 18, line 23) Jeff Lewis further testified that in performing his duties as trustee it was not necessary that he know what property was placed in the trust (Id., pg. 25, lines 22-23); nor who the beneficiaries were. (Id., pg. 26, lines 5-8) · Mark Poseley was an IFC consultant who testified that "we would always let [clients] know that the trustees don't know the asset is in the trust until you either notify them or in the case of real estate, the property is going to be sold. So they don't know the asset is there until you tell them." (Transcript. Mark Poseley, pg. 25, lines 5-9). · David Trepas instructed a group attending a Managing Director's Workshop that "for those of you very concerned about the trustees knowing what's going into the trust, when you create minutes . . . you're going to do something like this: `on such-n-such a day the trustees met and had a meeting. The first order of business was to accept this automobile into the trust organization.' And you can have a serial number and everything else there. Or, you can go: `the trustees accept an automobile into the trust organization'. You don't put the serial number. `The serial number of which is registered on Schedule B of the trust' that the trustees don't see. So if you want that added piece of security from the trustees you certainly can do that. The trustees don't mind. . . . The same thing applies to real estate. You can list the real estate address or legal description on what the trustees are accepting in. Or, you can say: `the trustees on such-n-such a date are accepting real estate . . . the legal description of which is on Schedule A.' They never have to see it." (Trial Ex. 61, Segment 25) · John Poseley was an IFC trustee. He testified that some managing directors identified what assets where placed in their trust and some did not. As trustee, John Poseley did not care whether he knew or did not know what property was in the trust. (Transcript. John Poseley, pg. 47, lines 2-7). John Poseley also admitted that he did not have an adversarial relationship with the managing directors. (Id., pg. 244, lines 9-11) · Dennis Poseley advised Michael Schwarzmann in a surreptitiously videotaped meeting, "We don't even want to know your business, I mean, it's kind of a joke around the office when they come in and they see this pile of paperwork and in there is a closing document on an office building in New Jersey for 1.9 million dollars, we never even knew we owned it." (Trial Ex. 207). Poseley continued, "when you put a piece of property in a trust - - you fill out the warranty deed and as a grantor, you're
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the only one who signs it. The trustees receiving it don't even know it's there until you decide to sell it." (Id.) As illustrated, IFC trustees did not perform any fiduciary duties with respect to property placed in the trusts. The trustees had no oversight of the property. The trustees did not act on the beneficiary's behalf to preserve or protect the property. Often, the trustees did not

7 even know what property was in the trust. Nor did they know who the beneficiaries were. 8 By design, the IFC pure trust had no independent trustees and therefore were sham trusts. 9 4. No True Separation Between Grantor and Property 10 The defendants further understood the requirement that there be true separation between 11 12 the grantor and the property placed into the trust. For example, at the Virginia Beach 13 14 15 can't reach in and take it out." (Trial Ex. 164, Segment 2). Later, Poseley again stated, presentation, Dennis Poseley stated, "A PTO is irrevocable. The trust owns the assets. You

16 "Yes, you are giving up all assets to trustees." (Trial Ex. 164, Segment 4). David Trepas 17 18 19 powerful position. What makes you powerful is this. Own nothing. . . So it's better to own 20 nothing and you're very powerful because no one can threaten to take it away from you." 21 (Trial Ex. 61B, 1:34:22 - 1:39:50) 22 23 24 placed in the trust and the need to separate the grantor from the property. All trust 25 documents included boilerplate language setting forth the trustees obligations to "administer 26 27 28
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reiterated this rule at a Managing Director's Workshop when he stated, "You have to be in a

So too, the trust document itself set forth in writing the trustee's powers over property

and dispose of all properties for the benefit of all the unit holders" (beneficiaries) and to have

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1 "absolute management, control, and disposition of all the trust estates and its business affairs 2 3 4 Despite paying lip service to this rule, the proof established that the managing directors of every kind and character." (Trial Ex. 86) (Transcript. Jeff Lewis, pg. 97, lines 11-24)

5 not only retained full ownership and control of the assets placed in the trust, but they also 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
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maintained full authority over the trustees. · During an IFC staff meeting that was tape recorded for an absent Frank Williams, David Trepas discussed the real power the managing directors exerted over the trust, including the power to fire the trustee. He stated, "They can only request. Now we know behind the scenes, internally, that really they're telling them. But in real life, in the outside world, in a courtroom, they cannot, because that's direct or indirect control of the trust and we can't have that." (Trial Ex. 20) Later, during that same meeting David Trepas again commented about the power of the managing director. "And that's why you also don't want the outside world to know that there is a protector, who it is, and that you have any control over them whatsoever. Because the court will use that to say you have the authority through the protector to make certain things happen." (Id.) David Trepas also posed the following rhetorical questions: "Can the manager arrange to remove those trustees and put someone in that will do what that they want them to do? . . . Is that a kind of control? . . . Do you want a court to know you have that kind of power?" (Id.) · Dennis Poseley had the following conversation with Michael Schwarzmann in a surreptitiously videotaped meeting in Milwaukee, Wisconsin: MIKE: And I'm not, you know, if-if-i-if you're telling me today that no matter what minutes I send down there, as long as they're filled out right - POSELEY: Mmm-hmm. MIKE: - - I can do whatever I want with my - -

POSELEY: Absolutely you can. That's what I'm telling you. MIKE: - - and so I'm, so I'm totally in control of it.

POSELEY: Yup.

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MIKE:

And, and you guys know that.

POSELEY: Yup. MIKE: And uhm.

POSELEY: We're there for your benefit, that's the whole point to what we do. MIKE: So, really the system falls apart if one or the other of us says, "This is how we're doing it."

POSELEY: Exactly. MIKE: But we have no in-incentive to do it that way. Okay.

POSELEY: Neither one of us do. (Trial Ex. 205) · John Poseley was an IFC trustee. He testified that he did not believe he fulfilled his duty as a trustee "because the managing director always remained in control . . . of the assets regardless of what the trustees thought or did." (Transcript. John Poseley, pg. 243, lines 21-23). · Jeff Lewis was an IFC trustee. He testified that he did not consciously pay attention to any of the powers delegated to him in the trust document regarding administering, controlling, and disposing of trust assets for the benefit of the trust beneficiaries. (Transcript. Jeff Lewis, pg. 99, lines 17-18) As established at trial, IFC clients did not give up ownership of assets placed in a pure trust. The trustees pretended to own the assets, but in reality, seldom did they know what

22 assets were in the trust and never did they exercise fiduciary oversight of the trust assets. 23 Indeed, their sole duty was to conceal the existence of the assets from interested parties 24 25 26 27 28
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including the IRS.

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5. False Theories of Taxation Coupled with the sale of sham trusts for financial gain was IFC's libelous treatment of

4 the tax laws. If it were not criminal, it would be laughable. Although the defendants 5 professed not to give tax or legal advice and included a disclaimer in their written materials 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 · At a Managing Director's Workshop in Phoenix, Arizona, David Trepas told the audience that "IFC and everything we're talking about here today is 100% -- 100% in compliance with all the tax laws. So you don't have to worry about that." (Trial Ex. 61, Segment 9) · At a videotaped presentation in October 1995 (which pre-dated the Gregory Karl letter), Dennis Poseley stated, "You're going to get a 1099 at the end of the year for that trust organization. If it doesn't have a tax ID number it has no reporting requirements. Put it in the book and save it. . . . If you have a social security number, or if you have a corporation with an ID number, or you're a partnership that has a tax ID number, whose jurisdiction are you under? You're under the jurisdiction of the Internal Revenue Service. If you don't have a social security number, whose jurisdiction are you under? Your own. You're what they call a sovereign." (Trial Ex. 117, Segment 2) · At a presentation in Virginia Beach, Dennis Poseley told the audience, "Keep in mind that a pure trust has no tax requirement. So lets say that Trust A simply sold the house for $200,000, and the guy wasn't very attuned to this type of business. So he just bought the house. Is there any tax liability to Trust A. The house basis was only $100,000. He's lived there a long time. The IRS says your basis is $100,000. Is there any tax consequences to Trust A? Uh-uh. No capital gains. Has no tax requirement." (Trial Ex. 164, Segment 7) · At the Managing Director's Workshop in Phoenix, Arizona, Rachel McElhinney told the audience, "We talked about the compensation package that you get paid to manage. You get paid for this job. What you get paid is called `compensation for services'. It is the exchange of your time, talent, and energy for the trust's money. So let's say that you get paid $100 in compensation. That's a fair exchange for your time, talent, and energy. It's not income. Income is when you take the $100 and you put it in the bank and it earns $5 at the end of the year. The $5 is actually income. Not the $100 that you received in exchange for your time, talent, and energy. . . . This is very essential information for your understanding and comprehension of why, when
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(Trial Ex. 61, Segment 1), they nonetheless provided grossly false tax and legal advice.

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you receive compensation, it's not income; therefore it's not taxable." (Trial Ex. 61, Segment 8) · At the same Managing Director's Workshop, David Trepas stated, "First of all we better know where we are. What does this stand for? . . . That does stand for the United States. Capital U `United', capital S `States', which is also known as in law `the Federal States.' So this is the abbreviation for `the United States' which is also `the Federal States', which is also a corporation. Listen to what this `United States' includes: Washington D.C., Guam, Puerto Rico, the U.S. Virgin Islands, American Samoa, the Northern Mariana Islands, and any other owned territory of this `United States' it does not include the 50 states of the Union like Arizona." David Trepas continued, "Declaration of Independence. . . small u-nited States of America. This is where we named ourselves. We are the states of America - united. This is the name of our country. It's never been changed. The other name -- Capital U, capital S -- that designation came from the United States Codes, and this place. Because the . . . United States ( ) is a corporation talking about only federal places. That's why they call this the `Internal Revenue Code'; it's internal to this `United States' only. And a `Code' only applies to corporate entities. Nothing else. That's what they actually tell you in the book ­ `Internal Revenue Codes'. So they're interested in the revenues being generated by corporations in this place (Big U United States)." David Trepas continued, "If you were to read all of these volumes ­ and there's three of them now -- you're going to find that there isn't a single place in this entire code where they talk about this place (small U united States), except one. If you are in the petroleum industry and you are importing oil, you must pay a tax on it based on this code. Everywhere else in this code talks about only one other place and that's right here (Big U United States). Washington D.C., Guam, Puerto Rico, the U.S. Virgin Islands, American Samoa, and all that, and only for people dealing in corporate activities from those places in alcohol, tobacco, and firearms. Nothing else." (Trial Ex. 61, Segment 11) 6. Notice Evidence The defendants continued to promote these false theories of taxation even though they

25 knew better. The jury found that each defendant was aware of his or her legal duty to file 26 27 28
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taxes and that income earned in the name of each of the their trusts constituted taxable

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1 income for which they had a duty to report. A sample of this "notice evidence" is set forth 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 · The same IRS Notice 97-24 stated, "The grantor trust rules provide that if the owner of property transferred to a trust retains an economic interest in, or control over, the trust, the owner is treated for income tax purposes as the owner of the trust property,
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below. · The defendants' were in possession of the Internal Revenue Code. Section 61 states, "Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items: (1) Compensation for services, including fees, commissions, fringe benefits, and similar items; (2) Gross income derived from business; * * *

(15) Income from an interest in an estate or trust. · The same Internal Revenue Code states at Section 1, "There is hereby imposed on the taxable income of" (a) Married Individuals Filing Joint Returns and Surviving Spouses; (b) Heads of Households; (c) Unmarried Individuals; (d) Married Individuals Filing Separate Returns; (e) Estates and Trusts; a tax determined in accordance with the tables setting forth the tax rates for each filing status. · IFC included in all Managing Directors' Handbooks IRS Notice 97-24. The Notice specifically stated, "Under the federal tax laws, trusts generally are separate entities subject to income tax (except for certain charitable or pension trusts that are expressly exempted by the tax laws and certain grantor trusts in sections 671-679 of the Internal Revenue Code). Under these laws and certain court developed doctrines, either the trust, the beneficiary, or the transferor, as applicable, must pay the tax on the income realized by the trust including the income generated by property held in trust." (Trial Ex. 137) · The same IRS Notice 97-24 stated, "Abusive trust arrangements typically are promoted by the promise of tax benefits with no meaningful change in the taxpayer's control over or benefit from the taxpayer's income or assets. The promised benefits may include reduction or elimination of income subject to tax; . . . These promised benefits are inconsistent with the tax rules applicable to the abusive trust arrangements". (Trial Ex. 137)

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and all transactions by the trust are treated as transactions of the owner. (Trial Ex. 137) · David Trepas admitted to being in receipt of a memo drafted by J. Thomas Hines, Sr. a Technical Reviewer with the IRS. (Transcript. David Trepas, pg. 252, lines 6-17) The memo stated, "There is no organization classified as a "pure trust" organization under the Internal Revenue Code or the accompanying regulations. In addition, neither the Internal Revenue Code nor the accompanying regulations provide for special treatment for a pure trust. . . . If the pure trust is not an entity separate from its owner, it is disregarded for tax purposes and the true owner of the property held by the pure trust must directly report all tax items on the owner's tax return and pay all taxes due." (Trial Ex. 129) · The Hines Memo further stated, "If the pure trust is determined to be an entity separate from its owner and is not a business entity, it will be classified as a trust . . . A trust is a taxable entity that must report on Form 1041 and is required to have an EIN." (Trial Ex. 129) · The Hines memo further stated, "We have been informed by Submissions Processing, National Office that as of June 1996, the Philadelphia Service Center has rescinded the letter that states that a pure trust has no tax requirements and that an EIN is not required. . . . Unfortunately, the promoters of various abusive trust schemes have taken the Philadelphia letter out of context and are concluding that neither the owner nor the trust is liable for an tax in order to promote their abusive trust schemes. We believe that the letter only intended to address the EIN question and certainly did not intend to suggest that there is no tax liability with respect to any income from the trust property. (Trial Ex. 129) · Dennis Poseley and Patricia Ensign received from Cynthia Porter a letter from Maryanne Slater, Chief, Entity Control Section addressing the pure trust. Ms. Slater's letter stated, "You have asked us how a `Pure Trust' should report its income. The term `Pure Trust' is not used in the Internal Revenue Code. These requirements are based on the economic reality of the arrangement, not its nomenclature." (Trial Ex. 166) · The Slater letter continued, "Many recent trust arrangements have been held by the courts to be shams with no economic substance. The income and expenses of such arrangements are attributed to the actual earner of the income, typically the individual grantor or other individual on whom the trusts depends for the production of income or the providing of services. Contrary to the claims of the promoters who sell such arrangements, trusts are not a legal method of paying personal tax liability, or
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avoiding income or employment taxes. Rather, ALL income is taxable unless there is a specific statutory provision excluding it; there is no such provision in the trust area." (Trial Ex. 166) · Found at Patricia Ensign's workspace at the IFC office was a copy of an unreported Fourth Circuit case, United States v. Melton, No. 94-5535, (4th Cir. 1996), wherein the court stated, "Federal courts have all agreed that wages or compensation for services constitute income and that individuals receiving income are subject to the federal income tax -- regardless of its nature. See, e.g. Brushaber, 240 U.S. at 17; United States v. Sloan, 939 F.2d 499, 500-01 (7th Cir. 1991), cert. denied, 502 U.S. 1060 (1992); Simmons v. United States, 308 F.2d 160, 167-68 (4th Cir. 1962)." The Court continued, "Furthermore, the duty to file returns and pay income taxes is clear." The Court then explained the statutory scheme citing 26 U.S.C. §§ 1, 63, 61, 6001, 6011, and 6012. (Trial Ex. 132) · Also found at Patricia Ensign's workspace at the IFC office was a copy of an unreported Ninth Circuit case, United States v. Steiner, No. 89-50350, (9th Cir. 1992), wherein the court stated, "Steiner next argues that he is not a `taxpayer' subject to the federal laws. This argument has repeatedly been rejected as `frivolous' by this court. See, e.g. Studley, 783 F.2d 934 (appellant's contention that she is not a `taxpayer' because `she is an absolute, freeborn and natural individual is frivolous.' Id. At 937)" (Trial Ex. 133) · Included in IFC's Managing Director's Workshop book was a copy of the 1999 IRS Filing Requirements. Highlighted on the form was the definition of "Gross income" which stated, "Gross income mean all income you received in the form of money, goods, property, and services that is not exempt from tax including any income from sources outside the United States (even if you may exclude part or all of it)" Included on the exhibit was a chart which set forth the filing thresholds for tax year 1999. (Trial Ex. 41) Despite a plethora of notice evidence, the testifying defendants persisted in their protestor views, stubbornly disagreeing that the law did not require them to file a tax return. Indeed, the three testifying defendants Dennis Poseley, David Trepas, and Rachel

25 McElhinney, crafted a novel theory at trial as to why they did not have a filing requirement. 26 27 28
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Each testified that they did not file tax returns because the filing thresholds are not included

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1 in the Code. This new-found theory was unveiled for the first time at trial. Dennis Poseley 2 3 4 videotaped Global Seminar in 2000; and David Trepas or Rachel McElhinney never never expressed it during his 1995 ICH videotape presentation; he never expressed it at the

5 expressed it during the videotaped Managing Director's workshop in 2000. The new theory 6 7 8 expressed by Attorney Oscar Stilley in January 2005, at the defendant's arraignment on the
nd 9 2 superceding indictment.

was never included in any of CFS, ICH, or IFC's promotional materials. In fact, it was first

10 11 12

Nevertheless, the defendants embraced this attorney-crafted theory as their own. They each claimed it was the absence of filing thresholds in the Code which served as their good

13 faith defense -- a theory first articulated at trial. The transparency is obvious. Attorney 14 Stilley furnished defendants with a fresh protestor theory and the defendants merely parroted 15 16 17 are voluntary", "wages are not income", and "without a social security number there is no 18 filing requirement") for the latest and greatest protestor excuse as to why they had no duty to 19 file taxes. Like all the rest, this theory failed miserably. All three testifying defendants were 20 21 22 23 24 25 26 27 28
16
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it at trial. They set aside their earlier justifications for not filing income tax returns ("taxes

convicted of all charges of willful failure to file a tax return.

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1 2 3

SENTENCING GUIDELINE ISSUES The United States will address four guideline issues in this sentencing memorandum.

4 They include the following: 5 1. Tax Loss 6 2. Income Exceeding $10,000 from Criminal Activity 7 8 3. Sophisticated Concealment 9 4. Obstruction of Justice 10 11 12 13 As set forth in the Government's Objections to the Presentence Reports, the Government 1. TAX LOSS - § 2T4.1 2T4.1

2T1.1(b)(1) 2T1.1(b)(2) 3C1.1

14 offers three methods by which tax loss can be calculated in this case. The first methodology 15 16 17 extrapolation methodology based on those clients who stopped filing tax returns after is based solely on the defendants and on the witnesses who testified at trial. The second is an

18 purchasing a Pure Trust Organization. The third methodology relies on specific items of 19 income (1099 and W-2 information) for the same group of clients identified in methodology 20 #2. 21 Methodology #1. Trial witnesses and defendants. $3,235,604 (Level 24). 22 23 24 25 26 27 28
17
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Select trial witnesses and the defendants' personal tax losses were calculated based on tax returns, trial testimony, bank records, and IFC Quick books analysis. They included: NAME STATUS AMOUNT BASIS

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

1 2 3 4

ADAIR, Doug BREITLER, Laila DUBOIS, Dirk ENSIGN, Patricia

Witness Witness Witness Defendant

1,315,622 180,000 13,415 467,996

Amended 1994, 1995, 1996 returns Trial Testimony Amended 1998, 1999, 2000 returns Quickbooks & Bank records (Trial Exhibit 422 + Tax years 1996 & 2002) Quick Books & Bank records (Trial Exhibit 446 + Tax year 1997) Amended 1997, 1998 returns Quickbooks & Bank records (Trial Exhibit 422 + Tax years 1996 & 2002) Quickbooks & Bank records Quickbooks & Bank records (Trial Exhibit 447 + Tax year 2002) Quickbooks & Bank records (Trial Exhibit 446 + Tax year 1997) Plea Agreement

5

McElhinney, Rachel

Defendant

56,678

6 7

PORTER, Cynthia & Patrick POSELEY, Dennis

Witness Defendant

166,371 467,996

8 9

POSELEY, Mark PRIEST, Keith

Defendant Defendant

54,264 42,943

10

TREPAS, David

Defendant

56,678

11

WILLIAMS, Frank

Defendant

412,442

19 20 21 22 23 24 In calculating their respective tax loss, Dennis Poseley and Patricia Ensign, as equal partners
TOTAL

3,234,404 (Level 24)

The tax loss attributable to Dennis Poseley and Patricia Ensign are conservative figures.

25 in IFC's business, received ½ of IFC's gross income. Their ½ shares were then multiplied by 26 27 28
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20% to arrive at tax losses totaling $467,996. See. 2T1.1 (c)(2)(A)

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1 2 3

Revenue Agent Deborah Carlson testified at trial that she reviewed eight or nine thousand deposit items in calculating IFC's gross income. (Transcript. Carlson, pg. 34,

4 line 10) When reviewing each deposit item, she made two piles: the first, labeled "taxable 5 income" contained deposit items she could confidently determine were ICH/IFC business 6 7 8 Carlson could not confidently say were business receipts. Agent Carlson explained, "Well, receipts; and the second pile, labeled "non-taxable income" contained deposit items Agent

9 you can imagine looking at microfilm checks, it's really hard to read everything. So there 10 were a lot of checks that I couldn't read". (Transcript. Carlson, pg. 37, lines 20-22). 11 Thus, the second pile of "non-taxable" items included a lot of the items that were simply 12 13 illegible. 14 15 16 17 bank deposits into IFC accounts for 2000 totaled $2,928,196. (Id., pg. 49, line 24) (Trial Ex. For example, in tax year 2000, Agent Carlson calculated IFC's gross business receipts to be $1,353,561.76. (Id., pg. 33, line 13)(Trial Ex. 422) Despite the hefty figure, the total

18 383). Agent Carlson excluded from "taxable income" over $1.5 million worth of deposits. 19 20 21 22 23 24 25 26 27 28
1997 1998 1999 237,138 572,592 1,175, 698 19 477,932 1,361,401 2,027,698 422, 380 422, 381 422, 382
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Agent Carlson employed the same conservative analysis for the other tax years at issue (1997-2001) as depicted in the table below.
Tax Year Deposits deemed Business Receipts (Taxable Income) Total Deposits Trial Exhibits

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1 2 3 4

2000 2001

1,353,562 807,730

2,928,196 1,471,889 8,267,116 - 892,770 7,374,346

422, 383 422, 384

Transfers

5 6 7 8 9 10 11 12 13 14
TOTAL 4,146,720

As reflected in the chart, there remained over $3.2 million worth of deposits into IFC's bank accounts that Agent Carlson did not count as taxable income and were therefore excluded from Dennis Poseley and Patricia Ensign's ensuing tax loss calculations. Methodology #2. Trust clients - tax histories. $16,706,436 (Level 26). The second methodology employed by the Government in calculating tax loss attempted to extrapolate tax loss to more than just the four clients and seven defendants identified in

15 methodology #1. 16 17 18 19 Poseley and David Trepas of conspiracy to defraud the United States by impairing and The evidence at trial established that one of IFC's purposes for selling pure trusts was to conceal assets from the IRS. Indeed, the jury made that finding when it convicted Dennis

20 impeding the IRS in the ascertainment, assessment, and collection of income taxes. Dennis 21 Poseley admitted as much at trial. When confronted with whether the trusts were designed to 22 disguise one's money if the IRS came knocking, Dennis Poseley stated, "They were designed 23 24 for a lot of purposes, including stopping the IRS, yes." (Transcript. Dennis Poseley, pg. 25 235-236, lines 25 - 3). 26 27 28
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1 2 3

So too, David Trepas repeatedly implored IFC clients to get everything out of their own name to make the IRS toothless. (See, e.g. Trial Ex. 107) ("I am quite comfortable that if

4 everyone gets everything out of their personal name, that action removes the IRS' power 5 over the individual because there is nothing to get.") During the videotaped Managing 6 7 8 9 10 11 12 13 14 15 don't earn money in my own name. No power. No water. Nothing. I'm destitute." (Trial So if you have it, the Government wants it. And even if you know they don't deserve it, the government wants it. When you use trust organizations the reason you use trust organizations is to get everything out of your name so that whenever everything is out of your name, what are they going to hold over your head? If you don't own a home, are they going to lien your home? No. If you don't own a car, are they going to take your car? No. If you do not own a bank account, are they going to seize your bank account? (Trial Ex. 61B; see also Transcript. Trepas, pg. 248, lines 12-23) Dennis Poseley echoed those same sentiments when he stated, "I don't own anything. I Director's Workshop in Phoenix, Arizona, David Trepas stated:

16 Ex. 164, Segment 1) 17 18 19 defendants' should be held responsible for their clients' tax losses. Methodology #2 attempts Because the pure trusts were designed to conceal client's assets from the IRS, the

20 to capture that loss. It entailed a three step process. First, the IRS identified 1,230 IFC trust 21 clients from IFC search warrant records. Second, the IRS determined that of the 1,230 IFC 22 trust client, approximately 300 stopped filing tax returns in the year (or year after) they 23 24 purchased the Pure Trust package. Third, the IRS measured tax loss by attributing the same 25 amount of tax to the non-file years as the clients had paid in their compliant years. The total 26 27 28
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for these clients equaled $16,831,370.

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1 2 3

Methodology #3. Trust clients - W-2 and 1099 information. $5,669,845 (Level 24). The third methodology is a refinement of methodology #2. Using the same 300+ clients

4 identified in methodology #2, the IRS collected W-2 and 1099 information for each clients' 5 non-file tax years. These specific items of income were totaled and multiplied by 20% to 6 7 8 9 Joint Participation in Selling Sham Trusts The defendants cry foul when held responsible for the tax loss incurred by others. It is arrive at a tax loss totaling $5,669,845.

10 the Government's position that all defendants should be held responsible for the tax loss 11 associated with the Conspiracy to Defraud charge (Count 1). 12 Pursuant to Guideline Section 1B1.3, in determining the defendant's base offense level, 13 14 the sentencing court is required to consider all acts and omissions committed by the 15 16 17 court is also required to consider all acts that were part of the same course of conduct or defendant during the commission of the offense of conviction. 1B1.3 (a)(1). The sentencing

18 common scheme or plan as the offense of conviction. 1B1.3(a)(2). Conduct that is not 19 formally charged or is not an element of the offense of conviction may enter into the 20 determination of the applicable guideline sentencing range. (See Background, 21 22 Commentary to 1B1.3) 23 24 25 26 148, 157 (1997). Even in the aftermath of Booker, this principle remains firmly intact as Pursuant to case law, a jury's verdict of acquittal does not prevent the sentencing court from considering conduct underlying the acquitted charge. United States v. Watts, 519 U.S.

27 illustrated by the following Court decisions: 28
22
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1 United States v. Lynch, 2006 WL 306766 (9th Cir. 2006); 2 3 4 5
United States v. Magallanez, 408 F.3d 672, 683-684 (10th Cir. 2005);
th 6 United States v. Tynes, 2005 WL 3536189 (11 Cir. 2005);

United States v. Vaughn, 430 F.3d 518, 527 (2d Cir. 2005); United States v. Price, 418 F.3d 771, 787-788 (7th Cir. 2005);

7 United States v. Duncan, 400 F.3d 1297, 1304-1305 (11th Cir. 2005). 8 9 10 McElhinney was guilty of the conspiracy to defraud and acquitted defendants Ensign and In this case, the jury was unable to reach a verdict on whether Defendant Rachel

11 Priest of the charge. Nevertheless, each defendant was convicted of Willful Failure to File 12 Income Tax Returns in violation of 26 U.S.C. §7203. Guideline Section 1B1.3(a)(2) requires 13 the sentencing court to consider "all acts and omissions . . . that were part of the same course 14 15 of conduct or common scheme or plan as the offense of conviction." Application Note 3 16 explains that "Application of this provision does not require the defendant, in fact, to have 17 18 19 It is the Government's position that in committing the offenses of Willful Failure to File been convicted of multiple counts."

20 tax returns, the defendants also joined a conspiracy to defraud the United States. The same 21 acts that constituted willful failure to file were also part of a common scheme or plan to 22 defraud the United States. 23 While committing their offenses of willfully failing to file tax returns, all defendants 24 25 were inextricably associated with Innovative Financial Consultants: they earned income 26 27 28
23
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through the sale of Pure Trust Organizations; they earned income by conducting training

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1 sessions; and they earned fees generated by the trusts. In addition, each defendant used a 2 3 4 income the defendants earned from IFC is the same income that should have been reported to Pure Trust Organizations to conceal their own income from the IRS. In the end, the very

5 the IRS on yearly income tax returns. 6 7 8 in conduct designed to stay off the IRS' radar screen. They used pure trusts to conceal 9 unreported income. This integrated program went something like this: Put your assets in a 10 trust. Stop filing taxes. Stay off the IRS' radar screen. If the IRS ever came looking for 11 12 13 assess and collect taxes. 14 15 16 17 18 19 20 21 22 23 24 25 26 IFC promoted an integrated program of placing assets in a pure trust and not filing Managing Director's Workshop: This is where [people] get in trouble. They're going out there saying I've got this new information. I'm gonna take my big 2x4. I'm gonna go to my senator's office, or I'm gonna go to the IRS office or I'm gonna go wherever it is and I'm going to hit them about the ears soundly with my 2x4 called "New Knowledge." Guess what they're going to do. They going to take out their atom bomb with their bigger knowledge and say `I don't think so.' It doesn't work that way. You have to be in a powerful position. What makes you powerful is this. Own nothing. Which is exactly opposite to what we've been taught our entire life. Own everything and get a big estate. So it's better to own nothing and you're very powerful because no one can threaten to take it away from you. (Trial Ex. 61B, 1:34:22 - 1:39:50) Therefore, it is important to understand that the act of failing to file tax returns went hand-in-hand with concealing assets in a pure trust. As David Trepas' explained at the assets, the IFC trustees were ready to hinder, obstruct, and stonewall all efforts by the IRS to In addition to willfully failing to file tax returns, the defendants simultaneously engaged

27 income tax returns. The defendants personally used this system to avoid paying taxes and 28
24
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1 sold the program to others for financial gain. Defendants Ensign, McElhinney, and Priest 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
25
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should be held responsible for the entire tax loss attributed to the conspiracy in this case. Individual Instances of Assisting Others to Conceal Assets In addition to the relevant conduct principles which make the defendants responsible for the entire tax loss in this case, at trial there were individual instances of active cooperation designed to hide assets from the IRS. · IFC paid Dennis Poseley, Patricia Ensign, John Poseley, Mark Poseley, Rachel McElhinney, David Trepas, Keith Priest, Dirk Dubois, Christine Dubois, Roz Josephs, and all of its staff by check made payable to a nominee entity (pure trust). This method of payment was designed to keep all workers' identities and record of compensation off the IRS' radar screen. No one received a 1099. No one received a W-2. No payroll taxes were withheld. In fact, no payment information was shared with the IRS. · Keith Priest authorized two separate and distinct false expense schemes that were specifically designed to inflate business expenses on tax returns to be filed with the IRS. The first entailed $200,000 worth of false deductions provided to undercover agent, Michael Priess, who posed as an IFC client in this case. Agent Priess testified that on December 28, 1999, the trustees (including Keith Priest) signed-off on a bogus service contract between his fictitious corporation and Pure Trust Organization whereby the pure trusts were to provide up to $300,000 worth of consulting services for tax year 1999. (Trial Ex. 144, AZ001144). Well knowing that there were only 3 business days left in 1999, Keith Priest nevertheless aided in the scheme by signing the December 28, 1999, minutes. Agent Priess testified that he took $200,000 worth of false expenses on his tax return characterized as "Outside Services" and "Consulting Fees". (Trial Ex. 52) Frank Williams, the accountant who assisted IFC in providing tax advice prepared the tax return. · On the same day, December 28, 1999, Keith Priest signed-off on a nearly identical false expense scheme devised for Michael Wall. (Trial Ex. 313) Michael Wall testified that no services were performed by the trust during the remaining 3 days of 1999, and that a $125,000 check from his corporation, Get Slim Inc. (Trial Ex. 314) to his pure trusts was not a legitimate business expense. Michael Wall included the false expense on his tax 1999 corporate tax return.

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

· Keith Priest served as trustee for Laila Breitler's pure trust named The Herb Stop which held Breitler's retail business. (Trial Ex. 87) Laila Breitler was the subject of a sales tax investigation conducted by the State of Arizona and was ordered to produce all books and records of the business to the state taxing authority. (Trial Ex. 209) Laila Breitler testified that Keith Priest removed all books and records from her business for storage at IFC in response to the court order. Laila Breitler also testified that she was audited by the IRS and served with a $180,000 tax bill. · Jeff Lewis testified that his role as an IFC trustee "was to not disclose what was in the trust, if, in fact, I was aware of what was in the trust, and what the trust assets were to anybody outside the Managing Director." (Transcript. Lewis, pg. 33, lines 14-17) · David Trepas responded to a question at the Managing Director's Workshop in Phoenix, Arizona, regarding IRS attempts to find clients' assets. He stated, "Refer them [the IRS] to the trustees. The trustees will tell them to have a nice day. What can they do about it? Nothing. We've had that already." (Trial Ex. 61, Segment 17) These individual pieces of evidence lend further support to the finding that IFC's pure trusts were designed to conceal clients' assets from the IRS. As such, the defendants should be held responsible for the tax loss emanating from the clients' use of the pure trusts.

26

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1 2. INCOME EXCEEDING $10,000 FROM CRIMINAL ACTIVITY - 2T1.1(b)(1) 2 3 4 5 6 7 8 constituting a criminal offense under federal, state, local, or foreign law. Application Note 3, 9 2T1.1. 10 11 12 13 sell bogus trusts for financial gain with the intent to defraud the United States. Therefore, all 14 income earned by Dennis Poseley and David Trepas was earned from criminal activity and 15 16 17 Next, the jury returned guilty verdicts against the remaining three defendants, Patricia subject to the 2 level enhancement pursuant to 2T1.1. It is important to begin with the jury's verdict in this case. Through their guilty verdicts, the jury found that Defendants Dennis Poseley and David Trepas engaged in a conspiracy to If the defendant failed to report or to correctly identify the source of income exceeding $10,000 in any year from criminal activity, increase by 2 levels. If the resulting offense level is less than level 12, increase to level 12. The Application Notes to 2T1.1 explains that "Criminal Activity" means any conduct Guideline Section 2T1.1(b)(1) provides:

18 Ensign, Rachel McElhinney, and Keith Priest for willful failure to file tax returns. That is, 19 the jury found that each of these defendants (not their trusts) earned income from IFC in the 20 tax years of conviction, and that each defendant knew they had a legal duty to report that 21 22 income as their own (and not their trusts'). 23 24 25 26 to the IRS. In essence, the jury found that for tax year 2001, Patricia Ensign knew the trusts Thus, for example, in tax year 2001, Patricia Ensign earned a lot of income from IFC knowing that the income belonged to her and that she had a legal duty to report that income

27 did not accomplish what they purported to accomplish and that they were sham trusts. 28
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1 Nevertheless, Defendant Ensign persisted in the marketing and sale of these sham trusts in 2 3 4 The evidence supports this conclusion. On May 18, 1999, Cynthia Porter received a 2001 even after knowing their fraudulent nature.

5 letter from Maryanne Slater, Chief, IRS Entity Control Section, explaining that the term 6 7 8 promoters, trusts are not a legal method to avoid income taxes. (Trial Ex. 166). The letter "Pure Trust" is not used in the Internal Revenue Code, and that contrary to claims of trust

9 was in response to a written inquiry Cynthia Porter made to the IRS at Patricia Ensign's 10 direction. Cynthia Porter testified, "Well, first I panicked, and then I faxed it to Dennis -- or 11 I called Dennis, I believe, first. I talked to him on the phone. And he said fax me the letter, 12 13 which I did." (Transcript. Cynthia Porter, pg. 44, lines 9-11). In response, Patty Ensign 14 sent Cynthia Porter additional language to use in a response letter to the IRS. (Id., pg. 45, 15 16 17 18 Trusts, Patricia Ensign continued to market and promote the sale of pure trusts. In addition, on February 28, 2001, the IRS executed a search warrant at the residence of lines 1-3). Despite a direct challenge from the IRS questioning the validity of the Pure

19 Patricia Ensign. As of that date, Patricia Ensign was aware that IFC was being criminally 20 investigated and yet she continued to market and promote the sale of pure trusts. 21 It is reasonable to conclude from the jury's verdict that as of February 28, 2001, Patricia 22 23 Ensign knew the trusts IFC was selling were sham trusts and that income earned the previous 24 25 26 2001. Moreover, IFC had gross income totaling $807,731 in 2001. (Trial Ex. 422). By year (tax year 2000) should be reported as her own by the tax filing deadline of April 15,

27 2001, Patricia Ensign knew the IFC trusts were shams and that IFC was engaged in a 28
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1 criminal activity. Any income Patricia Ensign earned in 2001 constituted income derived 2 3 4 The same goes for Rachel McElhinney. The jury found that as of 1998, Rachel from a criminal activity which should result in a 2 level increase pursuant to 2T1.1(b)(1).

5 McElhinney knew income earned from IFC activities was actually her income and not that of 6 7 8 advocate the false notion that compensation for services is not income and there is no duty to 9 report it to the IRS. Like Patricia Ensign, Rachel McElhinney was aware that the pure trusts 10 did not accomplish what they purported to do but nevertheless continued to promote and 11 12 13 subjecting Rachel McElhinney to a 2 level increase pursuant to 2T1.1(b)(1). 14 15 16 17 alone triggers the enhancement under 2T1.1(b)(1) as Keith Priest earned $67,332 from IFC in Lastly, the jury found that as of 2000, Keith Priest knew income earned from IFC was income for which he was responsible and for which he had a duty to report to the IRS. This market the sale of pure trusts under false pretense. These acts constituted criminal activity her trust. Nevertheless, in the years following 1998, Rachel McElhinney continued to

18 2000, and $51,687 from IFC in 2001. (Trial Ex. 447) 19 20 21 22 Agent Tom Klepper's trial testimony, Keith Priest received $50,000 into his offshore bank 23 account (Hummingbird Enterprises) on June 10, 1999, and June 11, 1999. (Trial Ex. 125 24 25 26 owned a pure trust named Positive Changes Hypnosis Las Vegas for which Keith Priest was PC064732) The deposits were from Barbara Nicodumus, who, according to IFC records, Moreover, there is independent evidence that Keith Priest stole $50,000 from Barbra Nicodemus while working in his capacity as a trustee for IFC. As summarized by Special

27 a trustee. (Trial Ex. 126, PC116027). Although Barbara Nicodemus intended that the funds 28
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1 be used for an investment offered through IFC, Defendant Priest converted her $50,000 to his 2 3 4 Priest's offshore bank account in St. Vincent Grenadines back to Keith Priest's Tamar bank own use. At trial, Agent Klepper testified that he traced Ms. Nicodemus' funds from Keith

5 account (Trial Ex. 515) in the United States. The transfers and subsequent dispositions are 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
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summarized in the chart below:
DATE 6/10/99 DEPOSIT TO HUMMINGBIRD 40,000 Trial Ex. 125 6/11/99 10,000 Trial Ex. 125 7/2/99 $10,000 Trial Ex. 125 Trial Ex. 515 July 1999 Statement 7/16/99 $10,000 To Stearns Bank Re: Bar-Kol Trial Ex. 125 Testimony of Dr. Howard Goldberg July - August Statement 500 cash ATM 6 checks = 5,000 June- July Statement 11 small checks TRANSFER TO TAMAR TRANSFERS TO 3RD PARTIES DISBURSEMENTS FROM TAMAR

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

8/24/99

$10,000 Trial Ex. 125 Trial Ex. 515 Aug 1999 Statement

August - Sept. Statement 200 Cash ATM 600 LaPlaya Hotel Sept. - Oct. Statement $1,000 check Oct. - Nov. Statement 100 Cash ATM 4 checks $3,000 Nov. - December Statement 900 Cash ATM

12/29/99

$9,000 Trial Ex. 125 Trial Ex. 515 Dec 1999 Statement

Dec. - January Statement 600 Cash ATM 1,100 Ham Radio Jan. - February Statement 600 Cash ATM Feb. - March Statement 300 Cash ATM Mar. - April Statement 300 Cash ATM 247 Ideal Health 142 Real Goods 99 America West 878 Frontier April - May Statement 900 Cash ATM 2,550 Ideal Health May - June Statement 400 Cash ATM 330 Sky Bus Intl. 200 Ideal Health 20 Web subscription 2,000 check June-July Statement 700 Cash ATM 40 Web 200 Ideal Health 102 Aroma Therapy

31

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1 2 3 4 5 6 7 8 9 10 11 12

7/25/00

$9,000 Trial Ex. 125 Trial Ex. 515 July 2000 Statement

July - Aug. Statement 15,000 Tempe Toyota 1,500 Cash ATM 80 Ideal Health

2/23/01

Hummingbird A/C CLOSED Trial Ex. 125

1,050 Trial Ex. 125 Trial Ex. 515 Feb 2001 Statement

As reflected in the summary chart, Keith Priest converted $40,000 to his own use and used another $10,000 to mollify Dr. Howard Goldberg's demands for his investment principle. Dr. Goldberg testified at trial that in March 1999, he placed $175,000 with Keith

13 Priest as part of an investment offered through IFC. (Trial Ex. 277). Several months earlier, 14 15 16 investing funds offshore. (Trial Ex. 275). Dr. Goldberg explained that after making the Dr. Goldberg had purchased a pure trust named Bar-Kol Enterprises for the sole purpose of

17 $175,000 investment, he was directed to open an offshore bank account into which 18 investment returns would be deposited. (Trial Ex. 276). Despite getting the trust and related 19 bank accounts in place, Dr. Goldberg, like the rest, received no return on his investment. In 20 21 response to Dr. Goldberg's complaints, Keith Priest wired $10,000 to Dr. Goldberg's Stearns 22 Bank account in July 1999 as reflected on his offshore bank statement. (Trial Ex. 125). 23 24 25 Because Keith Priest converted $50,000 of Barbara Nicodemus' investment money to his Keith Priest used the other $40,000 for personal expenditures.

26 own use, this evidence serves as an additional basis for a 2 level enhancement under 27 28
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1 2T1.1(b)(1) because Keith Priest failed to report or to correctly identify the source of income 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
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exceeding $10,000 in any year from criminal activity.

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1 3. SOPHISTICATED CONCEALMENT - 2T1.1(b)(2) 2 3 4 5 6 7 8 9 10 11 The term "Sophisticated Means" is defined in the Application Notes as follows: "Sophisticated means" means especially complex or especially intricate offense conduct pertaining to the execution or concealment of an offense. Conduct such as hiding assets or transactions, or both, through the use of fictitious entities, corporate shells, or offshore financial accounts ordinarily indicates sophisticated means. Application Note 4, 2T1.1. As reflected in the proof at trial, the primary purpose for using pure trusts was to If the offense involved sophisticated means, increase by 2 levels. If the resulting offense level is less than level 12, increase to level 12. Guideline Section 2T1.1(b)(2) provides:

12 maintain anonymity and stay off the IRS' radar screen. In the event that the IRS did attempt 13 14 15 nothing. Become destitute. In the meantime, the client's assets were safely tucked away in a to assess or collect income taxes, IFC client's were directed to plead impoverishment. Own

16 fictitious entity protected by IFC trustees who would neither disclose the existence of the 17 asset nor comply with court orders to do so. 18 Further compounding the concealment was David Trepas and Rachel McElhinney's use 19 20 of cash. Funds deposited into their pure trust bank account were quickly converted to cash. 21 The chart below summarizes the checks-to-cash activity for Trepas and McElhinney's 22 23 24 25 26 27 28
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Resource Management Group bank account.

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Tax Year

IFC payments (Taxable Income) 92,403 (Trial Ex. 385)

Checks to Cash

1998

86,360 (Trial Ex. 457) 104,220 (Trial Ex. 458) 227,365 (Trial Ex. 459) 184,111 (Trial Ex. 460)

1999

104,081 (Trial Ex. 386)

2000

236,548 (Trial Ex. 387)

2001

106,994 (Trial Ex. 388)

Because each of the defendants personally used fictitious entities to conceal assets (some converting income to cash) while willfully failing to report the income, each defendant is

16 subject to the 2 level enhancement pursuant to 2T1.1(b)(2). 17 18 19 20 21 22 23 24 25 26 27 28
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1 OBSTRUCTION OF JUSTICE - 3C1.1 2 3 4 provided materially false testimony at trial and that their respective base offense levels 5 should be increased by two points pursuant to guideline section 3C1.1. Specifically, Rachel 6 7 8 need for an arms-length, adverse party relationship between the trustee and Managing 9 Director. 10 11 12 13 the presentation were played at trial. (See Trial Ex. 61) In one segment of the presentation, 14 Rachel McElhinney explained the importance of having an arms-length, adverse party 15 16 17 that without the arms-length, adverse party relationship, the pure trust organizations (PTO) relationship between the trustee and Managing Director. Defendant McElhinney explained In April 2001, Rachel McElhinney and David Trepas presented an IFC Managing Directors Workshop in Scottsdale, Arizona. The presentation was videotaped and portions of McElhinney and David Trepas falsely recanted earlier videotaped admissions regarding the It is the Government's position that defendants Rachel McElhinney and David Trepas

18 would be deemed an alter ego trust and the arrangement would be treated as a sham. 19 Defendant McElhinney stated: 20 The reason this trust organization is designed this way is so that you as the 21 Managing Director has arms-length relationship to adverse party -- the trustees. Because once the creator and this trustee enter into this private 22 contractor agreement the creator goes away. Just like the incorporator in a 23 corporation. Once they incorporate they really essentially go away. So the adverse party here are the trustees. You must have an adverse party. That's 24 why you're not going to be the trustee or the beneficiary. You have to have the arms-length relationship. This is the inherent and pr