Petrunak also submitted the sham "payments" as business expenses in submissions to the IRS. Petrunak filed Abyss' corporate tax return claiming a $500,000 deduction based on the falsified 1099 payments. Because Abyss was an S-corporation, the proceeds flowed through to Petrunak as the owner and applied to his personal taxes.
The IRS began investigating Petrunak. He admitted to filing the various tax forms, claiming that he did so based on the illegal loss of licensing for his business as a result of the falsified testimony of Krofta and Vicario at the administrative hearing. Petrunak asserted that he believed he suffered personal and business income loss because the inspectors lied at the administrative hearing. He said that he tried to contact the IRS on multiple occasions and was referred to an IRS Publication. He concluded that he could use the IRS 1099-Miscellaneous income forms to ascribe his losses to the agents, though he did not intend for the 1099s to represent that he actually paid each inspector $250,000 in income. To bolster his contention, he sought to introduce evidence of Abyss' corporate meeting minutes.
Petrunak was indicted on three counts of making and subscribing false and fraudulent IRS forms, in violation of 26 U.S.C. § 7206(1). A jury convicted him, and he was sentenced to 24 months' imprisonment.
On appeal, Petrunak argued that the district court erred in excluding certain evidence at his trial. He also challenged his sentence. Petrunak maintained that certain corporate meeting minutes should have been admitted under the business records exception to the hearsay rule. Included in the minutes were statements such as the following:
Need to mention that there was a verbal conversation with an IRS representative. She said that issuing the 1099s and to write off the losses from the business were acceptable. However she would not be specific to my situation.
In addition, the minutes included statements bemoaning that the IRS was not more helpful and declarations that the ATF agents perjured themselves in the case.
The appeals court was not buying it. Under the business records exception in Federal Rule of Evidence (FRE) 803(6), records of regularly conducted activity, made at or near the time of the transaction, are excluded from the hearsay rule unless "the source of information or the method of preparation indicate a lack of trustworthiness." Such records are presumed reliable because businesses depend upon them for the operation of their own affairs, and therefore there is little incentive to falsify such records, and because the regularity of such record-keeping leads to habits of accuracy.
Here, the district court excluded the records in this case, and its decision was reviewed for abuse of discretion. The district court noted that the records contained multiple instances of hearsay and that it lacked evidence that the business records exception applied to the minutes. The purported "minutes" were created by Petrunak, who by his own admission, was the sole attendee at the meeting. He acknowledged that there was no one else at the purported meeting to even transcribe minutes. Moreover, the minutes he submitted to the district court were not even the originals, which he shredded, but instead reproductions apparently prepared in 2010, at a time when the IRS was already investigating him. None of the indicia of reliability that render business records reliable were present, in that there was no indication that the records were relied upon for the operation of Abyss' affairs. Further, the destruction of the originals cast doubt on whether the minutes submitted were actually made at or near the time of the meeting, or instead were produced or altered in light of the impending litigation. Accordingly, the evidence was properly excluded.
The facts of this case are unusual, but the takeaway is that it is necessary to provide an adequate foundation to qualify a document as a business record.
The case is United States v. Petrunak, ___ F. 3d___, 2017 WL 1734441 (7th Cir. 2017)