United States v. Ann W. McRee Joseph H. Hale

984 F.2d 1144

Opinions

BIRCH, Circuit Judge:

Appellants Ann McRee and Joseph Hale appeal their convictions on charges arising out of an erroneously issued tax refund check that McRee and Hale cashed and dispersed. We find that the erroneously issued refund check was not government property. We, therefore, REVERSE McRee’s and Hale’s convictions.

I. BACKGROUND

In February, 1985, the IRS filed a jeopardy assessment of over $1.9 million against Hale. The assessment, however, was not posted to Hale’s IRS account. Over the next few months, the IRS seized and sold property belonging to Hale, McRee and McRee’s mother to satisfy the assessment. Because the assessment was not posted to Hale’s account, the account showed that Hale had overpaid his taxes, and the IRS computer generated a refund check to Hale for $359,380.25. Hale cashed the United States Treasury check and dispersed the proceeds through a series of transactions. The IRS later realized that Hale had been the recipient of an erroneous refund and attempted to recover the money.

The government brought criminal charges against Hale and McRee in August, 1987. The indictment alleged that Hale and McRee conspired to convert United States property in violation of 18 U.S.C. § 371, Count One; engaged in the interstate transportation of fraudulently converted property in violation of 18 U.S.C. § 2314, Counts Two-Six; and converted United States property in violation of 18 U.S.C. § 641, Count Seven. A jury found Hale and McRee guilty on all counts.

On appeal, McRee and Hale contend that the evidence adduced at trial failed to support their convictions on all counts. They also argue that the district court (1) improperly limited voir dire, (2) erred in rejecting their Batson challenge, (3) incorrectly excluded testimony offered by McRee and Hale’s expert witness, and (4) erred in refusing to give an ignorance of the law instruction to the jury.

II. DISCUSSION

All of the charges against Hale and McRee derive from the alleged violation of 18 U.S.C. § 641, which provides. in pertinent part:

Whoever embezzles, steals, purloins, or knowingly converts to his use or the use of another, or without authority, sells, conveys or disposes of any record, voucher, money, or thing of value of the

United States or of any department or agency thereof, ...

Shall be fined not more than $10,000 or imprisoned not more than ten years, or both_

The government must prove three elements in a Section 641 prosecution: (1) the property belonged to the government, (2) the defendant fraudulently used the property for his own purposes or the purposes of another, and (3) the defendant did so knowingly and willingly with the intent to either temporarily or permanently deprive the government of the property. United States v. Lanier, 920 F.2d 887, 895 n. 62 (11th Cir.), cert. denied, — U.S. -, 112 S.Ct. 208, 116 L.Ed.2d 166 (1991); United States v.. Burton, 871 F.2d 1566, 1570 (11th Cir.1989) (per curiam).

Hale and McRee argue that the United States Treasury check was not government, property when Hale received and cashed the check because the government did not retain control over the check. The government contends that because the check was erroneously issued it remained government property.

In United States v. Rowen, 594 F.2d 98 (5th Cir.), cert. denied, 444 U.S. 834, 100 S.Ct. 67, 62 L.Ed.2d 44 (1979), the federal government transferred funds to various colleges as part of a student financial assistance program. The colleges were required to keep the funds in a separate bank account. Grants were then made to eligible students from the account. The defendant worked for a college that had received the government funds and induced the college to issue four checks to fictitious students. The defendant forged signatures on the checks and cashed them for her own use. Our predecessor court held that “the key factor” in determining whether the defendant had converted government property was “the supervision and control contemplated and manifested on the part of the government.” Id. at 100 (quoting United States v. Evans, 572 F.2d 455, 472 (5th Cir.), cert. denied, 439 U.S. 870, 99 S.Ct. 200, 58 L.Ed.2d 182 (1978)). Since the federal government had retained close control over the funds transferred to the college, the funds were still government property.

Similarly, in United States v. Smith, 596 F.2d 662 (5th Cir.1979), the federal government transferred funds to various colleges to support the federally created College Work-Study Program. The ' colleges in turn transferred the money to various students who qualified for grants. The defendants induced a college to draft checks to fictitious students from the college work-study funds. The defendants then cashed the checks for their own use. Again, the former Fifth Circuit ruled that the funds held by the college were government property because the funds were subject to substantial federal control. Id. at 664.

The “supervision and control” test has thus been applied to determine whether funds that an entity has received from the federal government to be further disbursed to eligible recipients in a government program remain government property. See United States v. Hope, 901 F.2d 1013, 1019-20 (11th Cir.1990) (per curiam) (funds transferred to Dade County that were to be used to fund community development projects remained government property because they were subject to government control), application and cert. denied, 498 U.S. 1041, 111 S.Ct. 713, 112 L.Ed.2d 702 (1991); United States v. McIntosh, 655 F.2d 80, 84 (5th Cir.1981) (grant transferred to closing attorney by Farmers Home Administration that was to be used to satisfy grantee’s debts remained government property because the government retained control over the use of the funds), cert. denied, 455 U.S. 948, 102 S.Ct. 1450, 71 L.Ed.2d 662 (1982). To view the test in another way, it has been used to determine whether the intermediate entity is, in effect, an agent of the government for the purpose of administering and dispersing the funds. However, the test does not inform the decision as to when a check drafted by such an intermediate entity loses its character as government property. In none of these binding cases has the court applied the “supervision and control” test to analyze whether the checks drawn on the intermediary’s funds were govern ment property. For example, in Rowen and Smith, the court did not find that the government retained supervision and control over the checks drafted by the colleges and payable to fictitious students.

In the present case, the “supervision and control” test provides limited guidance because funds held in the United States Treasury are obviously government property. The check drawn on Treasury funds and made payable to Hale was certainly government property when it was drafted. Nevertheless, the fact that the check was once government property does not mean that it always remains government property. In Smith, our predecessor court observed that “[w]e may accept the argument that when an outright grant is paid over to the end recipient, utilized, coim mingled or otherwise loses its identity, the money in the grant ceases to be federal.” 596 F.2d at 664. This statement was adopted in subsequent cases. Hope, 901 F.2d at 1019; McIntosh, 655 F.2d at 84.

In deciding whether a check that was at its inception government property remains government property, we have focused upon the manner in which the defendant received the funds. In McIntosh and Hope, the defendants directly misappropriated funds from entities that were holding government funds. The defendants were thus diverting government property from its intended recipient. In Rowen and Smith, the defendants did not directly misappropriate the intermediate entity’s funds but, instead, by some action induced the entity into wrongfully providing the government’s funds to them.

In this case, Hale did not directly misappropriate the funds of the United States Treasury. Hale did nothing to induce the federal government to draft and send him the check. The lack of inducement is the fundamental difference between this case and the previous decisions noted above. Therefore, we conclude that the tax refund check made payable to Hale was no longer government property when the government delivered that check to him and he used the proceeds.¹

Our holding in this case does not merge the first and third elements in a Section 641 prosecution that 1) the property must belong to the government, and 2) the conversion be intentional and knowing. The government must still prove that the defendant intentionally converted government property and not just that the defendant in some way induced a transfer of funds. We simply observe that the manner in which property is transferred may be relevant in determining ownership.²

In summary, when the named payee receives and uses an erroneously issued tax refund check that the recipient in no way induced, the check is not government property under Section 641. Therefore, we find that Hale and McRee did not violate Section 641 because the check was not government property.

We also find support for our holding in the Internal Revenue Code. The Code recognizes that the government will on occasion commit errors, in issuing tax refunds and has established a civil procedure for recovering erroneous refunds. 26 U.S.C. § 7405. It appears inconsistent that a government error that can be corrected by an established civil procedure may result in criminal liability depending on what the properly named recipient of the refund does with the money.

We note that the government was not without a proper remedy in this case to recover the money and punish Hale and McRee for thereafter concealing the proceeds. Not only could the government have pursued 26 U.S.C. § 7405 to recover the erroneously issued refund, but Hale and McRee were arguably prosecutable under 18 U.S.C. § 2232 for attempting to hide the proceeds of the erroneously issued check from the government so. that such funds could not be recovered. Hale and McRee should not be punished under 18 U.S.C. § 641 because the government choose to prosecute under the wrong statute.

The finding that the erroneously issued refund check was not government property results in the collapse of all the other charges against Hale and McRee. If there was no conversion of government property, there could be no conspiracy to fraudulently convert government property (Count One), or interstate transportation of fraudulently converted property (Counts Two-Six). We, thus, need not reach the other issues that Hale and McRee have raised.

III. CONCLUSION

We find that the check that Hale received and cashed was no longer government property under 18 U.S.C. § 641. Therefore, - we REVERSE the convictions of Hale and McRee.

Footnotes

1

. We note that our decision may place us in arguable conflict with two other circuits. In United States v. Spear, 734 F.2d 1 (8th Cir.1984), the defendants continued to receive Social Security direct deposits into their bank account from the United States Treasury although the deposits should have been terminated when the defendants’ mother died. There was no showing that the defendants induced the government to erroneously continue the payments. The Eighth Circuit held that the defendants were properly convicted under Section 641 because they had "dishonestly tak[en] advantage of the error by converting the funds to their own benefit.” Id. at 2. However, those funds were intended for the then-deceased mother.

In United States v. Miller, 520 F.2d 1208 (9th Cir.1975), an erroneously drafted Treasury check was sent to a local entity charged with disbursing funds in connection with a health and planning project in Los Angeles. The executive director of the entity later misappropriated the funds from the check and was prosecuted under Section 641. The Ninth Circuit held the check was still government property even after the local entity received it. The court stated that “the check was improperly issued by the federal government, and the property right in that check never passed to [the local entity]." Id. at 1210.

2

, It .is here that we part ways with the dissent. The dissent focuses much of its discussion on the attempt of Hale and McRee to disperse the proceeds of the refund check. We agree with the dissent that these actions relate to the third element, intent. Our holding, however, is limited to the specific finding that the check was not government property after Hale received and cashed the check. The subsequent actions of Hale and McRee are independent of the determination that once Hale received and cashed the check it was no longer government property.

Hale also advances a plausible explanation for the complicated financial transactions used to disperse the check proceeds. Due to a lack of communication between the IRS and Hale, Hale believed that the IRS had seized more assets than it was owed. His actions were, thus, an attempt to prevent the IRS from continuing what Hale believed were wrongful seizures.