author: ALICE M. BATCHELDER, Circuit Judge.

text:
    Roger BYRNE, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee, Eric C. Kus, Counterclaim Defendant-Appellant.
    No. 15-2396
    United States Court of Appeals, Sixth Circuit.
    Argued: December 8, 2016
    Decided and Filed: May 15, 2017

      ARGUED: Randolph T. Barker, BERRY MOORMAN P.C., Detroit, Michigan for Appellant Byrne. Scott R. Murphy, BARNES & THORNBURG LLP, Grand Rapids, Michigan, for Appellant Kus. Ivan C. Dale, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellee. ON BRIEF: Randolph T. Barker, BERRY MOORMAN P.C., Detroit, Michigan, Scott R. Murphy, BARNES & THORNBURG LLP, Grand Rapids, Michigan, for Appellants. Ivan C. Dale, Jonathan S. Cohen, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellee.
    Before: BATCHELDER, STRANCH, and DONALD, Circuit Judges.
   OPINION

ALICE M. BATCHELDER, Circuit Judge.

The Internal Revenue Code, 26 U.S.C. § 6672, permits the United States to recover unpaid trust-fund taxes from persons responsible for paying those taxes, if they willfully failed to pay them. We have previously held that Appellants Roger Byrne and Erie Kus, as president and CEO, respectively, of Eagle Trim, Inc. (“Eagle Trim”) were responsible for paying Eagle Trim’s trust-fund taxes, but we remanded on the question of whether their failure to pay those taxes was willful. On remand, the district court conducted a bench trial and determined that Byrne and Kus willfully failed to pay Eagle Trim’s trust-fund taxes by recklessly disregarding the risk that the taxes were not being paid. Byrne and Kus appeal the entry of judgment, which assigned Byrne a liability of $533,213.42 and Kus a liability of $533,204.37.

After a review of the record and a clarification of what constitutes reckless conduct for purposes of § 6672(a), we conclude that Byrne and Kus. did not willfully fail to pay Eagle Trim’s trust-fund taxes. Accordingly, we vacate the district court’s judgment and remand for further proceedings not inconsistent with this opinion.

I. BACKGROUND

In 1998, Eagle Pieher Corporation, a large manufacturing concern, owned a division that produced interior-trim parts for automobiles. The trim division’s factory was located in Kalkaska, Michigan, where hundreds of employees worked in manufacturing and in administration. Eagle Picher’s trim division also had a sales office in the Detroit area, 250 miles to the southeast of Kalkaska. Eagle Pieher put its trim division up for sale in 1998.

Eric Kus and Gary Anderson assembled a small group of investors, including Roger Byrne and Bernard Fuller, to buy Eagle Picher’s trim division. They negotiated a $15 million purchase price with Eagle Pieher and a financing package with General Motors Acceptance Corporation Business Credit LLC (“GMAC”), closing the deal on October 31, 1998. The investors created Eagle Trim to operate the new venture, and Eagle Land Holdings, LLC as a holding company for the real estate. Kus became the chairman and chief executive officer of Eagle Trim upon its formation. Byrne served as the president of Eagle Trim, and Fuller became the controller.

Part of the financing package was a revolving line of credit provided by GMAC to Eagle Trim, the maximum amount of which was calculated based on the company’s current accounts receivable and inventory, secured by a lien on all of Eagle Trim’s assets. Eagle Trim borrowed money against the line of credit to pay operating expenses, including trust-fund taxes. The financing agreement gave GMAC the right to have an accounting firm of its choice examine Eagle Trim’s business records on a periodic basis, and GMAC exercised this right. GMAC used different firms to conduct these examinations, called “collateral reviews,” including Lender Services and Iannuzzi & Darling, LLC. The findings of the collateral reviews were provided directly to GMAC, but they were not routinely shared with Eagle Trim.

The GMAC financing agreement also required Eagle Trim to provide GMAC with annual financial statements audited by an independent accounting firm. Eagle Trim hired the Michigan certified public accounting (“CPA”) firm of Weber, Curtin & Drake, PC (“WCD”) to conduct these year-end audits and to prepare Eagle Trim’s corporate income tax returns. In an engagement letter describing the scope of its services, WCD stated that its audits would be designed “to provide reasonable assurance of detecting errors or fraud that would have a material effect on the financial statements.” The letter cautioned, however, that an audit, even performed in accordance with generally accepted auditing principles (“GAAP”), “is not a guarantee of the accuracy of the financial statements, and there is a risk that material errors or fraud may exist and not be detected.”

Although Byrne and Kus were responsible for Eagle Trim’s income tax returns, Fuller, as controller, had wide discretion over Eagle Trim’s financial activities, and the responsibility to ensure that Eagle Trim’s tax liabilities-—including both trust-fund tax deposits and returns—remained current. In January 1999, WCD provided Fuller with the forms he needed to comply with the relevant tax laws and also provided guidance on how to prepare and file trust-fund taxes. Despite this guidance, Fuller deposited trust-fund taxes with the IRS on a biweekly, as opposed to a semiweekly, basis. See 26 C.F.R. § 31.6302-1(b). This resulted in a large penalty assessment against Eagle Trim in early 1999. By the end of 1999, Kus and Byrne had decided that Fuller was not adequately performing his duties, and Kus provided Fuller a handwritten list of tasks that he needed to start completing accurately and timely.

In March 2000, GMAC’s auditor, Lender Services, sent a letter to GMAC, stating that Eagle Trim had provided inadequate supporting documentation for Lender Services’ collateral reviews. Lender Services therefore recommended, among other things, that Eagle Trim implement procedures to “[e]nsure all tax payments are made timelyf] with supporting detail retained.” GMAC forwarded this letter to Eagle Trim, and Kus reviewed it. Within two weeks, Fuller sent a letter to GMAC, responding to Lender Services’ letter. Fuller acknowledged that he missed two trust-fund tax deposits during Eagle Trim’s switch from Northwestern Bank to National City Bank, but he asserted that Eagle Trim was then current with all tax deposits. Fuller copied Kus and Byrne on this correspondence.

Also in March 2000, WCD sent a letter to Kus, copying Byrne and Fuller, advising Eagle Trim of deficits in its accounting practices, which WCD had observed while conducting its 1999 audit. The letter also stated, however, that WCD’s observations did not discover any “material weaknesses,” defined as conditions which Eagle Trim’s internal control structure failed to “reduce to a relatively low level the risk that errors or fraud in amounts that would be material in relation to the financial statements being audited may occur.” WCD recommended in its letter that Eagle Trim hire an assistant controller with an accounting degree.

Pursuant to WCD’s recommendation, in April 2000, Eagle Trim hired Kelly Gill-man, an accountant, to assist Fuller with his duties as controller. Perhaps due in part to Fuller’s continued mishandling of Eagle Trim’s finances, in July 2000, Eagle Trim also hired Andrew Jones as Eagle Trim’s chief financial officer. As CFO, Jones reported to both Byrne and Kus on all of the financial aspects of Eagle Trim. Fuller reported to Jones, providing monthly financial statements for Jones to review.

In October 2000, the IRS sent Eagle Trim a notice of a penalty for $98,622.32 for unpaid trust-fund taxes for the first quarter of 2000. David Drake, a WCD partner, met with Fuller to discuss the penalty. Fuller informed Drake that he had failed to pay the trust-fund taxes on time because of difficulties associated with Eagle Trim’s switch from Northwestern Savings Bank to National City Bank. He said that he had contacted the IRS several times about the issue and that an IRS representative had informed him that Eagle Trim had made all trust-fund tax deposits in full and on time since June 14, 2000. Following his conversation with Fuller, Drake sent a letter to the IRS, repeating Fuller’s explanation for the late trust-fund tax deposit and requesting that the IRS waive the penalties. Drake also attached an Eagle Trim cheek to the letter to pay the interest on the late trust-fund taxes. On November 10, 2000, Fuller sent a letter to Kus, Byrne, and Jones, describing the IRS penalty, his meeting with Drake, and Drake’s request for an abatement of the penalty.

WCD issued a “clean” audit on December 11, 2000, regarding Eagle Trim’s financial statements through September 30, 2000, opining that the financial statements presented Eagle Trim’s financial position fairly in all material respects. The report found that Eagle Trim was current in the payment of trust-fund taxes. Despite WCD’s clean audit report, in January 2001, WCD sent a letter to Kus, copying Byrne, Jones, and Fuller, identifying flaws in Eagle Trim’s accounting practices observed by WCD in the course of its 2000 audit. The letter included a section devoted to Eagle Trim’s failure to pay trust-fund taxes in a timely manner, recounting the IRS penalties assessed for unpaid trust-fund taxes in 1999 and the first quarter of 2000. The letter added that WCD had been informed by “management” that trust-fund taxes for the second quarter of 2000 had been untimely as well, though th,e IRS had not yet assessed a penalty. WCD recommended that Eagle Trim “take the measures necessary to ensure that all payroll taxes and withholdings are deposited in a timely manner” and offered to assist Eagle Trim should “any payroll tax questions arise.” WCD stated, however, that its observations did not discover any “material weaknesses” in Eagle Trim’s internal control structure.

Also in January 2001, Lender Services discovered that Eagle Trim’s financial statements were fraudulently overstated and the company, rather than being profitable, was losing money. According to GMAC’s review, Fuller had falsified certain receivables by adding digits to the invoice. For example, an $8,000 invoice was recorded as an $80,000 receivable. Eagle Trim entered into a Forbearance Agreement with GMAC, dated January 31, 2001, and an Access and Accommodation Agreement with GM, dated February 2, 2001. Under the terms of these agreements, GM hired a crisis management company, BBK, Ltd. (“BBK”). At the time the Forbearance and Accommodation Agreements were executed, Kus and Byrne were unaware that Eagle Trim was delinquent on trust-fund taxes for the second, third, and fourth quarters of 2000. After execution of the agreements, both GMAC and BBK reviewed and approved all funding for Eagle Trim and had complete control over the flow of money in and out of Eagle Trim.

In late February 2001, BBK informed Byrne and Kus that Eagle Trim was delinquent on its trust-fund tax deposits for the last three quarters of 2000. Fuller and Byrne asked BBK for permission to pay these delinquent taxes, but the BBK reviewers refused to approve this expenditure. Fuller was then fired.

On March 1, 2001, WCD sent a letter to Byrne, copying Kus. The letter explained that due to the discovery of “intentional, improper accounting” resulting in material misstatements, Eagle Trim should no longer rely on WCD’s audit reports for 1999 and 2000. The same day, Drake' sent a letter to Byrne explaining that WCD was recalling its audit reports due to the discovery that Fuller had been making “a series of incorrect, inaccurate and/or fictitious entries, primarily relating to tooling receivables, pre-paid tooling and accounts payable.” Drake wrote that “there was a significant effort on the part of Mr. Fuller to disguise these activities, and to prevent their discovery in the course of our audits....”

In April 2001, Byrne signed a Chapter 11 bankruptcy petition on behalf of Eagle Trim in the Eastern District of Michigan. Eagle Trim ultimately liquidated through this bankruptcy proceeding, which eventually yielded payments to the IRS for the unpaid trust-fund taxes for the second quarter of 2000.

In July 2005, the IRS assessed against Byrne and Kus $855,668.35 in penalties under § 6672 for Eagle Trim’s outstanding trust-fund tax liability for the year 2000. Byrne paid $1,000 to the IRS and then filed a claim for a refund of the $1,000 and an abatement of the penalty as well as an abatement of the entire assessment. The IRS denied this claim, after which Byrne filed the instant lawsuit in the United States District Court for the Eastern District of Michigan. The government filed an Answer and Counterclaim, which included a third-party claim against Kus, seeking a judgment for the assessment balance. Kus then filed an Answer and Counterclaim to the government’s third-party claim against himself. All other claims initially brought in the litigation were resolved prior to the first entry of summary judgment in favor of the government. Byrne and Kus appealed, arguing that they were not persons responsible for paying Eagle Trim’s trust-fund taxes, and alternatively, if they were responsible, they did not willfully fail to pay the trust-fund taxes. In Byrne v. United States, 498 Fed.Appx. 555, 560 (6th Cir. 2012) (“Byrne I”), a panel of this court held that, by virtue of their roles and responsibilities within Eagle Trim, Byrne and Kus were responsible persons under § 6672. But we found that “the district court failed to consider critical facts that would undermine” the conclusion that Byrne and Kus willfully failed to pay Eagle Trim’s trust-fund taxes. Id. at 561. Because the record contained facts that showed a genuine dispute as to whether Byrne and Kus should have known that Eagle Trim’s trust-fund taxes were not being paid, we reversed the district court’s grant of summary judgment and remanded for further proceedings. Id. at 562, 563.

On remand, Byrne and Kus filed a renewed motion for summary judgment, which the district court denied. After a three-day bench trial, the district court issued its findings of fact and conclusions of law, finding that Byrne and Kus willfully failed to pay Eagle Trim’s trust-fund taxes for the third and fourth quarters of 2000 and were therefore liable under § 6672. The district court entered judgment against Kus in the. amount of $533,204.37, and against Byrne in the amount of $533,213.42. This timely appeal followed.

II. STANDARD OF REVIEW

We review the district court’s findings of fact for clear error and its conclusions of law de novo in an appeal from a judgment entered after a bench trial. T. Marzetti Co. v. Roskam Baking Co., 680 F.3d 629, 633 (6th Cir. 2012); Fed. R. Civ. P. 52(a)(6). We also review de novo “ultimate facts” and mixed questions of law and fact. Id.; see also Williams v. Mehra, 186 F.3d 685, 689 (6th Cir. 1999) (en banc) (“Lower court findings of ultimate facts based upon the application of legal principles to subsidiary facts are subject to de novo review.”).

The parties vigorously disagree as to which standard of review applies in the instant case. Appellants claim that the determination of liability under 26 U.S.C. § 6672 presents a mixed question of law and fact, while Appellee argues that the determination of willfulness under § 6672(a) is a question of fact. Which standard of review applies to the district court’s determination that a responsible person willfully failed to pay trust-fund taxes is a question of first impression in this court. While we acknowledge that at least one of our sister circuits has held that the determination of willfulness under § 6672(a) is a question of fact, see Wright v. United States, 809 F.2d 425, 428 (7th Cir. 1987), we believe that, at least in this context, willfulness is a question of ultimate fact because finding that someone was willful requires the application of a legal standard to underlying facts. Byrne and Kus do not challenge the district court’s factual findings regarding their conduct; they challenge whether this conduct satisfies the legal standard of willfulness. We therefore review de novo the district court’s holding that Byrne and Kus willfully failed to pay Eagle Trim’s trust-fund taxes. See Williams, 186 F.3d at 689.

III. LEGAL STANDARD

The Internal Revenue Code requires employers to withhold income and FICA (Social Security and Medicare) taxes from their employees’ wages and to deposit the withheld amounts with the United States Treasury on either a monthly or semiweekly basis, depending on the amount of tax due. See 26 U.S.C. §§ 3102(a), 3402(a); 26 C.F.R. §§ 31.3102-1, 31.6011(a)-l, 31.6011(a)-4; Internal Revenue Service, Publication 15 (Circular E), Employer’s Tax Guide (2017). Employers are required to hold these monies in a special fund in trust for the United States, until such time as the employer is required to remit payment to the Treasury. 26 U.S.C. § 7501(a). “The withholding taxes are part of the wages of the employee, held by the employer in trust for the government; the employer, as a function of administrative convenience, extracts money from a worker’s paycheck and briefly holds that money before forwarding it to the IRS.” Bell v. United States, 355 F.3d 387, 392 (6th Cir. 2004) (quoting Gephart v. United States, 818 F.2d 469, 472 (6th Cir. 1987)) (internal quotation marks omitted). “An employer who fails to pay taxes withheld from its employees’ wages is, of course, liable for the taxes which should have been paid.” Slodov v. United States, 436 U.S. 238, 243, 98 S.Ct. 1778, 56 L.Ed.2d 251 (1978) (citing 26 U.S.C. §§ 3102(b) and 3403). The IRS may impose penalties against delinquent employers, see for example 26 U.S.C. §§ 6656, 7202, 7215, and may hold certain employers personally liable, as in this case, 26 U.S.C. § 6672(a).

Under § 6672(a):
Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over....

“Person” is defined in § 6671(b) as “an officer or employee of a corporation, or a member or employee of a partnership, who as such officer, employee, or member is under a duty to perform the act in respect of which the violation occurs.” See also Slodov, 436 U.S. at 245, 98 S.Ct. 1778.

“[A]n individual is liable under § 6672(a) if he or she: 1) is responsible for paying the taxes and 2) willfully fails to turn over the tax money to the government.” Bell, 355 F.3d at 393 (citations omitted); see also Kinnie v. United States, 994 F.2d 279, 283 (6th Cir. 1993). The taxpayer bears the burden of proving by a preponderance of the evidence either that he is not a responsible person or that his failure to pay taxes was not willful. Cline v. United States, 997 F.2d 191, 194 (6th Cir. 1993); McDermitt v. United States, 954 F.2d 1245, 1251 (6th Cir. 1992) (collect ing cases). This is a conjunctive test; that is, “[a]ttaining the status of a ‘responsible person’ does not ... encompass strict liability for a company’s tax delinquency.” Michaud v. United States, 40 Fed.Cl. 1, 23 (1997); see also Byrne I, 498 Fed.Appx. at 560-61 (explaining that taxpayers are not liable under § 6672(a) unless their failure to pay trust-fund taxes was willful).

A responsible person will be found liable under § 6672(a) if the government can demonstrate that he had either (1) actual knowledge that the trust-fund taxes were not paid and the ability to pay the taxes, or (2) recklessly disregarded known risks that the trust-fund taxes were not paid. In other words, for a responsible person to be deemed to have acted willfully under § 6672(a), he must have either “had knowledge of the tax delinquency and knowingly failed to rectify it when there were available funds to pay the government,” Gephart, 818 F.2d at 475 (citation omitted), or “deliberately or recklessly disregarded facts and known risks that the taxes were not being paid,” Calderone v. United States, 799 F.2d 254, 260 (6th Cir. 1986). In describing actual knowledge, we have held:

A responsible person who first becomes aware of a past due withholding tax liability after the liability has accrued is considered willful (for purposes of section 6672) if he fails to use all unencumbered funds that come into his possession thereafter to pay the delinquent taxes. Funds are considered encumbered only where the taxpayer is legally obligated to use the funds for a purpose other than satisfying the preexisting employment tax liability and [the] legal obligation is superior to the interest of the IRS in the funds.

Huizinga v. United States, 68 F.3d 139, 145 (6th Cir. 1995) (quoting Honey v. United States, 963 F.2d 1083, 1090 (8th Cir. 1992)) (internal quotation marks omitted).

“But willful conduct may also include a reckless disregard for obvious or known risks.” Calderone, 799 F.2d at 259-60 (citation and internal quotation marks omitted). Some of our sister circuits have indicated that gross negligence may satisfy § 6672(a)’s willfulness prong, see Phillips v. IRS, 78 F.3d 989, 943 (9th Cir. 1996), Wright, 809 F.2d at 427, but we have never held that negligence, even gross negligence, is enough to support a finding of willfulness. Cf. Calderone, 799 F.2d at 259-60 (“More than mere negligence is required for willfulness.”). Namely, “a person is not willful if as a result of negligence he is unaware of the default in the payment of payroll taxes.” Id. (citation and internal quotation marks omitted). What constitutes reckless disregard for purposes of § 6672(a) is an issue of first impression for this court. However, several of our sister circuits have enunciated tests for recklessness under § 6672(a), a brief overview of which lays the groundwork for our analysis.

In many circuits, “[r]eckless disregard includes failure to investigate or correct mismanagement after being notified that withholding taxes have not been paid.” Morgan v. United States, 937 F.2d 281, 286 (5th Cir. 1991) (per curiam); see also Greenberg v. United States, 46 F.3d 239, 244 (3rd Cir. 1994); Denbo v. United States, 988 F.2d 1029, 1033 (10th Cir. 1993); Godfrey v. United States, 748 F.2d 1568, 1577 (Fed. Cir. 1984). The Second Circuit also defines willful conduct as “in-clud[ing] a reckless disregard for obvious and known risks as well as a failure to investigate ... after having notice that withholding taxes have not been remitted to the Government.” Winter v. United States, 196 F.3d 339, 345 (2d Cir. 1999) (citation and internal quotation marks omitted). But the Second Circuit recognizes an exception to § 6672(a) liability when a responsible person “believed that the taxes were in fact being paid, so long as that belief was, in the circumstances, a reasonable one.” Id. (citation and internal quotation marks omitted). The Fifth Circuit has also held that taxpayers who act with reasonable cause may be able to defeat a finding of willfulness. See Conway v. United States, 647 F.3d 228, 234, 235 (5th Cir. 2011) (finding that reasonable reliance on the advice of counsel may constitute reasonable cause under some circumstances).

The First Circuit explains that “an individual who acts with a ‘reckless disregard’ of a known or obvious risk of nonpayment acts willfully.” Vinick v. CIR, 110 F.3d 168, 173 (1st Cir. 1997) (citation omitted). The First Circuit has recognized three factual scenarios that meet this standard:

(1) [RJeliance upon the statements of a person in control of the finances when the circumstances show that the responsible person knew the person to be unreliable; (2) failure to investigate or to correct mismanagement after having notice of nonpayment of withholding taxes; and (3) knowing that the business is in financial trouble and continuing to pay other creditors without making reasonable inquiry as to the status of the withholding taxes.

Id. And the Seventh Circuit has held that a responsible person is willful under § 6672 “if he (1) clearly ought to have known that (2) there was a grave risk that withholding taxes were not being paid and if (3) he was in a position to find out for certain very easily.” Wright, 809 F.2d at 427.

Having reviewed the precedents of our sister circuits, we reiterate our previous holding that a responsible person is reckless and therefore willful under § 6672(a) when he disregards obvious or known risks that trust-fund taxes are not being paid to the Treasury and fails to investigate. See Calderone, 799 F.2d at 259-60. However, we must balance the government’s prerogative to recover that which is owed with limiting liability for that recovery to those who are personally at fault. See Collins v. United States, 848 F.2d 740, 741-42 (6th Cir. 1988). For this reason we now adopt the Second Circuit’s “reasonable cause” exception to § 6672(a) liability, such that “a responsible person’s failure to cause the withholding taxes to be paid is not willful if he believed that the taxes were in fact being paid, so long as that belief was, in the circumstances, a reasonable one.” Winter, 196 F.3d at 345 (citations and alteration omitted). That is, if a responsible person can demonstrate by a preponderance of the evidence that he reasonably believed that trust-fund taxes were being paid, he will not be liable under § 6672(a). This narrow exception will not permit responsible corporate officers to evade liability simply because they compartmentalized responsibilities and adopted a “hear-no-evil-see-no-evil” policy. Rather, this exception limits liability to those who, under the circumstances, failed to take reasonable steps to ensure payment of trust-fund taxes after having received notice that those taxes were not being paid.

IV. DISCUSSION

Under this rubric, the district court correctly determined that Byrne and Kus did not have actual knowledge that the trust-fund taxes were not being paid. The record clearly indicates that Byrne and Kus did not acquire actual knowledge of the delinquency until after the Forbearance Agreement was executed and GMAC and BBK assumed control of Eagle Trim’s finances. Cf Bell, 355 F.3d at 393-94. However, the district court incorrectly determined that Byrne and Kus recklessly disregarded the risk that Eagle Trim’s trust-fund taxes were not being paid in the third and fourth quarters of 2000. We agree with the district court that the facts of this case make the issue of recklessness a “close call,” but, for the reasons stated below, we disagree with the district court that Byrne and Kus acted unreasonably.

A. Reckless Disregard

Here, the district court found that Byrne and Kus exhibited recklessness by relying on Fuller to pay the trust-fund taxes and by failing to verify the timely payment of the taxes. The record supports the district court’s determination that Byrne and Kus were aware that Fuller had failed to timely pay trust-fund taxes in 1999 and early 2000 and that Fuller was unreliable in ensuring the proper and timely payment of trust-fund taxes. But the district court found that Byrne and Kus’s reliance on WCD’s clean audit reports could not mitigate their liability under § 6672(a) because, among other things, WCD never verified Fuller’s account of why he did not deposit the trust-fund taxes on time in 1999 and early 2000. Rather, according to the district court, Byrne and Kus should have personally verified that Fuller was actually making the tax deposits on time. The district court added that Byrne and Kus’s duty to personally verify Eagle Trim’s tax compliance was made even clearer in January 2001, when WCD wrote a letter to Eagle Trim’s management and failed to include “any explanation from Fuller for the untimely deposits of the second quarter of 2000, let alone report that it had investigated Fuller’s ex-planationsThe district court stated that WCD’s January 2001 letter “highlighted the risk of continued untimely payments[,] ... indicating that Fuller’s reliability was still in question and that WCD had not examined it in any comprehensive manner.” “In this context,” the district court held, “the information from WCD was no cure for Byrne and Kus’s recklessness in relying on Fuller to fulfill duties he had fulfilled so unreliably in the past.”

We agree with the district court that Byrne and Kus knew or should have known there was a substantial risk that Eagle Trim’s trust-fund taxes were not being paid. The fact that in 1999 Fuller was paying Eagle Trim’s trust-fund taxes biweekly instead of semiweekly as required by IRS regulations may not, in itself, have been enough to hold Byrne and Kus liable under § 6672(a). Just because Fuller was not competently performing his job duties does not mean that Byrne and Kus would have had reason to know that the trust-fund taxes were not being paid. It could very well have been the case that Fuller was failing to adequately oversee and execute Eagle Trim’s other financial obligations (e.g., health insurance premium payments and state payroll taxes), while also paying Eagle Trim’s trust-fund taxes on time. A responsible person’s knowledge of general mismanagement concerns cannot be the sole basis for determining that he or she knew or had reason to know that trust-fund taxes were not being paid. But Byrne and Kus continued to receive information indicating Fuller’s irresponsibility in paying the trust-fund taxes or in his accounting practices. Fuller notified Byrne and Kus that he had missed two trust-fund tax deposits in early 2000 during Eagle Trim’s switch from Northwestern Bank to National City Bank. And in March of 2000, WCD notified Byrne and Kus that Eagle Trim was deficient in its accounting practices, even if WCD had not observed any “material weaknesses” in Eagle Trim’s financial statements.

We also agree with the district court that Byrne and Kus had a reasonable opportunity to investigate the status of Eagle Trim’s trust-fund taxes. Kus, as chairman and CEO, was responsible for Eagle Trim’s business strategy, acquisitions, sales, marketing, contact with major customers, development of new products, and extension of product lines. As president, Byrne’s responsibilities included handling Eagle Trim’s day-to-day operations, manufacturing oversight, and engineering development. Subject to Kus’s approval, Byrne determined employees’ salaries and discretionary bonuses. Byrne reported to Kus and Anderson; everyone else at Eagle Trim—approximately 400 employees—reported to Byrne. Both Byrne and Kus had the ability to hire and fire employees, and they both had signature authority on all Eagle Trim bank accounts and the borrowing base certificates that Eagle Trim submitted to GMAC. Until Jones was hired as CFO, Fuller reported directly to both Byrne and Kus. Even after Jones was hired, Fuller indirectly—through Jones— reported to Byrne and Kus. Byrne and Kus had the business experience and knowledge to understand the basic tax requirements of the Internal Revenue Code, as the record shows that they both had degrees in business and accounting. They both were able, and indeed were required under Eagle Trim’s financing agreement with GMAC, to hire an independent auditing firm to review Eagle Trim’s financial statements and prepare Eagle Trim’s income tax returns. With their educational and professional backgrounds, their ability to hire support staff or further oversee Fuller’s work, and their capacity to hire an outside accounting firm to audit Eagle Trim’s financial records, Byrne and Kus had a reasonable' opportunity to discover and remedy the nonpayment of trust-fund taxes.

B. Reasonable-Cause Exception

While the district court did not have the benefit of our adopting a reasonable-cause exception to § 6672(a), the district court’s finding that Byrne and Kus were reckless largely turned on the reasonableness of their reliance on WCD’s guidance and audits. Under the circumstances—as muddled as they are—we disagree with the district court that Byrne and Kus did not demonstrate by a preponderance of the evidence that they reasonably believed that Eagle Trim’s trust-fund taxes for the third and fourth quarters of 2000 were being paid.

The district court held that “Byrne and Kus could not rely on WCD to verify that Fuller had become a responsible taxpayer without making any inquiry into what WCD actually did to review his performance of his payroll tax duties.” In support of its conclusion, the district court cited Drake’s deposition testimony that when he drafted a letter to the IRS concerning the penalty for the first quarter of 2000, he had done nothing to verify Fuller’s account of the late payments. The district court also cited WCD’s January 2001 letter to Eagle Trim’s management, in which WCD recommended, based on the audit it had performed for the 2000 fiscal year, that Eagle Trim “take the measures necessary to ensure that all payroll taxes and with-holdings are deposited in a timely manner.” ‘WCD’s letter highlighted the risk of continued untimely payments and offered no concrete suggestions for averting that risk,” which should have, according to the district court, “indicat[ed] that Fuller’s reliability was still in question and that WCD had not examined it in any comprehensive manner.” The district court’s latter justification is insufficient to demonstrate that with regard to payment of the trust-fund taxes for the two financial quarters in question Byrne and Kus were reckless in relying on the WCD January 2001 letter, because that letter was drafted after payment of those trust-fund taxes.

With respect to the district court’s former justification, it is certainly true that Byrne and Kus could have taken any number of additional steps to ascertain the status of Eagle Trim’s trust-fund tax liability. However, our inquiry is limited to whether their belief that trust-fund taxes were being timely paid was reasonable under the circumstances. We will not impose liability on Byrne and Kus simply because they did not independently verify their auditors’ reports or Fuller’s account of the status of Eagle Trim’s tax position. Rather, under the circumstances and for the following reasons, we hold that Byrne and Kus took reasonable steps to ensure the timely payment of trust-fund taxes and reasonably believed that the taxes were being paid.

First, in April 2000, Byrne and Kus hired Kelly Gillman, an accountant, to assist Fuller in performing his duties. Gill-man was not responsible for the trust-fund taxes, but she was hired to assist Fuller in performing his duties, including payment of Eagle Trim’s trust-fund taxes. Byrne and Kus also added Andrew Jones as Eagle Trim’s CFO in July 2000. In this position, Jones oversaw Fuller’s work and reported to Byrne and Kus. While we do not hold that responsible persons may escape liability under § 6672(a) simply because they have hired support staff or other officers to review payment of trust-fund taxes, these are important considerations in determining whether Byrne and Kus reasonably believed Eagle Trim was making timely payment of trust-fund taxes.

Second, Byrne and Kus’s hiring of WCD—an independent, professional accounting firm—to assist in tax matters and conduct annual, full-scope audits further demonstrates that they took reasonable steps to comply with all of Eagle Trim’s legal tax obligations, including the timely payment of trust-fund taxes. We acknowledge that Eagle Trim, not WCD, was ultimately responsible for its financial statements and payment of taxes. But we find nothing in the record that would cause us to question the reasonableness of Byrne and Kus’s reliance on WCD’s competency. The district court reasoned that Byrne and Kus could not rely on Drake’s October 2000 letter to the IRS, in which he stated, “[Eagle Trim] ha[s] in fact paid all of [its] deposits in full and on time since [June 14, 2000, which] should indicate that [it is a] responsible taxpayerf ].” According to the district court, because Drake did not say in the letter whether he investigated Fuller’s story, Byrne and Kus could not reasonably have relied on this letter. That is, the district court’s logic is that Byrne and Kus could not reasonably rely on any of'WCD’s statements after notice of Fuller’s prior failures to pay the trust-fund taxes on time. Because Byrne and Kus had no prior indication of errors or inaccuracies in WCD’s auditing, we hold that their reliance on WCD’s representations was reasonable.

Third, while WCD noted in its December 2000 audit report that Eagle Trim had been delinquent in paying its trust-fund taxes for the first quarter of 2000 and that deposits for the second quarter of 2000 were late, WCD confirmed that Eagle Trim’s “financial statements ... [were] fairly presented in conformity with generally accepted accounting principles.” WCD also opined that Eagle Trim had accurately disclosed “[p]ending or anticipated tax assessments or refunds, price or profit renegotiation, other potential or pending claims, lawsuits by or against any branch of government or others[.]” WCD’s audit report also concluded that “there ha[d] been no ... [f]raud involving management or employees who have significant roles in internal control.” Of course, in March 2001, WCD withdrew its December 2000 audit report “[fjollowing the discovery in January 2001 that Bernie Fuller had been making a series of incorrect, inaccurate and/or fictitious entries.” Thus, even licensed CPAs, who had spent several weeks at Eagle Trim performing a full-scope audit, missed Fuller’s inaccurate accounting entries. Anthony Pierfelice, one of the crisis management consultants, confirmed that by the time GMA.C and BBK took control of Eagle Trim’s finances, “it took several months to gain an understanding of the full amount of the tax liability.” In fact, Pierfelice stated that “[i]t was not until after the bankruptcy that [the crisis management firm] w[as] able to meet with the IRS and reconcile the amounts outstanding.”

We cannot say that Byrne and Kus acted unreasonably or held an unreasonable belief that Fuller had begun to pay the trust-fund taxes on time, given that WCD, a CPA firm, did not detect Fuller’s suspect financial accounting after having performed a full-scope audit and that it took several months for a crisis management firm to determine the exact amount of Eagle Trim’s tax liability. Short of Byrne and Kus’s personally contacting the IRS to verify the status of Eagle Trim’s trust-fund tax liability or their firing Fuller upon the first or second notice of an irresponsible action by Fuller, we are hard-pressed to articulate what additional measures they could have taken.

The immediately preceding discussion shows why the district court’s heavy reliance on Jenkins v. United States, 101 Fed. Cl. 122 (2011), aff'd by Jenkins v. United States, 484 Fed.Appx. 511 (Fed. Cir. 2012), was misplaced. In Jenkins, the plaintiff, who was the CEO and CFO of a magazine-publishing corporation, learned in April 1995 that the corporation had failed to timely pay trust-fund taxes to the IRS. 101 Fed.Cl. at 127. But he also relied on the assertion by the president of the company that the tax delinquency had been remedied, admitting under cross-examination that he did nothing to verify the president’s claims that the taxes were being paid. Id. at 127 n.10. Jenkins testified that he did not actually know of the corporation’s tax problems until June 1995 and was therefore not willful for purposes of § 6672(a), or, alternatively, liable for payment of trust-fund taxes prior to June 1995. Id. at 127.

The Court of Federal Claims rejected Jenkins’s argument. Id. at 134. It held that once he, knew that the president “was unreliable in ensuring that proper and timely tax payments would be made,” Jenkins “could no longer operate on the good faith belief that [the corporation and president] would ensure that the back taxes were paid.” Id. at 135. From the point at which Jenkins learned that the president could not be relied upon to pay the trust-fund taxes, he “should have monitored whether the taxes, in fact, were being paid, and taken corrective action if they were not.” Id. (footnote omitted). By failing to take any corrective action, Jenkins “recklessly disregarded] ... a known risk that the taxes were not being paid,” id., and because he was a “responsible person,” the Court of Federal Claims found, him “liable for the 100 percent penalty assessed under section 6672(a) of the Code,” id. at 138.

Unlike the CEO in Jenkins, who issued himself a check after learning that the company was delinquent in paying the trust-fund taxes, Byrne and Kus had no ability to pay the IRS, let alone themselves, once they- actually learned or had reason to know of the trust-fund tax deficit for the third and fourth quarters of 2000. Also unlike the CEO in Jenkins, Byrne and Kus did not simply take Fuller at his word regarding Eagle Trim’s tax compli-anee. Byrne and Kus directed their independent accounting firm to instruct Fuller on how to timely deposit trust-fund taxes, added an assistant controller to help Fuller in his duties, created a new management spot to review Fuller’s financial management of the firm, and relied on WCD’s clean audit report that the financial statements were free of material misstatement.

Y. CONCLUSION

We share the IRS’s concern that Congress intended for § 6672 “to protect the government against losses,” Gephart, 818 F.2d at 473, but we must balance this goal against the unfairness of imposing too strict a rule of liability. Here, the government has successfully argued that Byrne and Kus were negligent. But, based on our review of the record, we are convinced that Byrne and Kus have met their burden in demonstrating that their negligence in believing that Eagle Trim’s trust-fund taxes were being paid for the third and fourth quarters of 2000 did not rise to the level of recklessness.

Accordingly, we vacate the district court’s opinion and remand for further proceedings not inconsistent with this opinion.

      . "A trust[-]fund tax is money withheld from an employee’s wages (income tax, social security, and Medicare taxes) by an employer and held in trust until paid to the Treasury." Internal Revenue Service, Trust Fund Taxes, https://www.irs.gov/businesses/small-businesses-self-employed/trust-fund-taxes (last visited March 15, 2017). The record in this case contains references to “payroll taxes,” which can be used interchangeably with "withholding taxes” and "trust-fund taxes.” Because the latter is used by the IRS, we have chosen to refer to "payroll taxes” as "trust-fund taxes” throughout this opinion.

      . It remains unclear, however, to what extent Byrne and Kus were able to discuss these collateral reviews with GMAC or GMAC’s auditors. Kus testified that he spoke with GMAC auditors regarding a June 2000 collateral review that revealed a potential tax delinquency for April and May 2000. The government implies that Byrne and Kus also knew the content of one of GMAC's collateral reviews from October 2000, which revealed a potential tax delinquency for the third quarter of 2000, but there is no evidence that Bryne or Kus had knowledge of this report.

      . There is some dispute in the record as to when Gillman was hired. Our previous opinion provided that Gillman was hired in January 2000, but Byrne testified at trial that she was hired in April 2000. We have given more weight to the testimony provided at trial.

      . There were indications throughout 2000 that Fuller was inadequate for his position. Hundreds of Eagle Trim’s checks bounced in 2000, and Fuller had fallen behind on paying employees’ health insurance premiums.

      . The record does not indicate why there is a slight difference in the judgment amounts.

      . It is true that “section 6672(a) does not have a reasonable cause exception,” Brewery v. United States, 33 F.3d 589, 593 (6th Cir. 1994), but to hold a responsible person liable when he or she reasonably believed taxes were being paid would be to engulf conduct that Congress, in requiring "willfulness,” never intended to be covered by the law. See Slodov, 436 U.S. at 254, 98 S.Ct. 1778 ("The fact that the provision imposes a 'penalty' and is violated only by a 'willful failure' is itself strong evidence that it was not intended to impose liability without personal fault.").

      . In its opinion, the district court identifies this letter as dating from January 2000. (R. 99 at 2676.) This appears to be a typographical error; a letter to this effect from WCD dating from January 2000 does not appear to have been introduced into the record.

      . Byrne and Kus argue that Fuller’s prior failures to pay trust-fund taxes in a timely fashion are not sufficient to give rise to notice that Eagle Trim's trust-fund taxes were not paid for the third and fourth quarters of 2000. (Appellants’ Br. at 35.) They cite Federal Circuit case law that ostensibly supports their argument. In Godfrey v. United States, 748 F.2d 1568, 1578 (Fed. Cir. 1984), the Federal Circuit stated that "actual notice of the current delinquency [is necessary] to establish an affirmative duty to act.” Similarly, the Court of Federal Claims has held that "[w]illfulness can only be met if the responsible individual had actual knowledge of the specific tax delinquency for which the penalty was assessed.” Ghandour v. United States, 36 Fed.Cl. 53, 62 (1996). Neither of these cases persuades us. While the Godfrey court's statement regarding actual notice of the current delinquency may be persuasive authority, it is ultimately unhelpful because the Federal Circuit held that Godfrey was not a responsible person under § 6671(b). 748 F.2d at 1578-79. A careful reading of Godfrey reveals that the above-quoted statement is read most naturally as referring to the "actual knowledge” prong of § 6672(a)’s willfulness requirement. Ghandour supports our reading of Godfrey, as the quoted statement upon which Byrne and Kus rely is excerpted from the Ghandour court's discussion of the "deliberate choice” (or “actual knowledge”) prong of the willfulness requirement. 36 Fed.Cl. at 62.

      . We cite this report not to find that Fuller acted fraudulently or perpetrated a fraud upon Eagle Trim or its management, but to explain that Byrne and Kus took reasonable steps to correct mismanagement of Eagle Trim's finances.

      . The Appellants claim that they are entitled to reimbursement of the tax refunds and settlement proceeds seized by the United States for satisfaction of Eagle Trim’s payroll tax liability for the second quarter of 2000. However, our holding applies only to the third and fourth quarters of 2000. We therefore remand this question to the district court.


source: Caselaw Access Project

author: SUTTON, Circuit Judge.

license: Public Domain

text:
    UNITED STATES of America, Plaintiff-Appellee, v. Michael Mancil BROWN, Defendant-Appellant.
    No. 16-6291
    United States Court of Appeals, Sixth Circuit.
    Argued: May 3, 2017
    Decided and Filed: May 15, 2017

      ARGUED: J. Alex Little, BONE MCALLESTER NORTON PLLC, Nashville, Tennessee, for Appellant. Byron M. Jones, UNITED STATES ATTORNEY’S OFFICE, Nashville, Tennessee, for Appel-lee. ON BRIEF: J. Alex Little, BONE MCALLESTER NORTON PLLC, Nashville, Tennessee, for Appellant. Byron M. Jones, UNITED STATES ATTORNEY’S OFFICE, Nashville, Tennessee, Anthony V. Teelucksingh, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellee.
    Before: COLE, Chief Judge; SUTTON and KETHLEDGE, Circuit Judges.
   OPINION

SUTTON, Circuit Judge.

When criminal-law cases imitate art, they do not always choose its highest form. In Austin Powers: International Man of Mystery, Dr. Evil develops a plan to steal a nuclear warhead and to hold the world hostage for $1 million. This was not, Dr. Evil’s deputy pointed out, all that much money for a 1990s global criminal enterprise. But it was enough for an anonymous extortionist in today’s case, who apparently was familiar with the movie and who chose some features of it as signatures of his 2012 crime. Assuming the nom de guerre “Dr. Evil,” the individual demanded $1 million in Bitcoin in exchange for an encryption key to Mitt Romney’s unreleased tax returns. The extortionist claimed to have stolen Romney’s returns from PricewaterhouseCoopers, and he posted a taunting, digitally altered image of Mike Myers’s Dr. Evil, wearing a Secret Service badge, in the lobby of the accounting firm’s offices in Franklin, Tennessee.

A trail of digital breadcrumbs led law enforcement to Tennessean Michael Brown. It turned out that Brown never stole Romney’s returns. And his attempt to extort PricewaterhouseCoopers, the Democratic and Republican parties, and the public earned Brown twelve convictions for wire fraud and extortion, a four year prison sentence, and an order to pay over $200,000 in restitution. Brown appeals his convictions on the grounds that the Secret Service’s search warrant lacked probable cause and that he was prejudiced by the trial judge’s decision to allow questions from the jury. Brown also appeals the obstruction of justice enhancement in the district court’s calculation of his sentence. We affirm Brown’s convictions but vacate his sentence.

I.

On August 28, 2012, a padded envelope arrived at the Franklin, Tennessee office of PricewaterhouseCoopers, an accounting and professional services firm. The envelope contained a flash drive and a letter, which explained that the anonymous sender had gained access to the firm’s network and stolen the unreleased tax documents of Republican presidential nominee Mitt Romney and his wife Ann. To “Stop Release” of those tax records, all Pricewater-houseCoopers had to do was deposit one million dollars in Bitcoin—a virtual, sovereign-free currency—into a specified account. App. R. 34 at 4. The encrypted tax files on the thumb drive would go to every major media outlet, the sender said, and the encryption key would become public if no one paid him before September 28. At “the same time,” the letter stated, “other interested parties will be allowed to compete” for the returns and guarantee immediate release of them by depositing a million dollars in a separate, “Promote Full Release” Bitcoin account. Id.

Within three days, similar envelopes with similar letters and flash drives arrived at the offices of the Williamson County Republican and Democratic parties. And within a week after that, a series of posts appeared on Pastebin.com, a website that permits anonymous publication, describing the stolen documents and the information in the letters. The third of these Pastebin posts—signed “Dr. Evil” and accompanied by an image of Dr. Evil superimposed on the lobby of Pricewater-houseCoopers’ Franklin office—directed users to a downloadable, encrypted file named “Romneyl040-Collection.7z,” which had been uploaded to another site by timyenmor28@live.com (that’s “Romney” and “Mit” spelled backwards). Id. at 34, 39, 41.

Meanwhile, the Secret Service opened an investigation, as did Pricewaterhouse-Coopers. The PricewaterhouseCoopers security team concluded that no one had breached its network or compromised the Romney tax records. That left the Secret Service to catch the schemer. Records obtained from Pastebin showed that the three posts had been made using the TOR network, which routes online communications through anonymizing proxy computers to hide the user’s IP address. And the Secret Service took possession of the envelopes, letters, and flash drives. All three flash drives contained a file named “Rom-neyl040-Collection.7z.” R. 177 at 33, 53-54. The unallocated space on the drives also held text strings and two photos of cats. The PricewaterhouseCoopers flash drive held the text string, “5276 dolphin ka-thryn.” Id. at 35. The Democratic Party drive had the string “4154 dolphin KnightMB.” Id. at 55, 57; App. R. 34 at 22.

A series of Google searches using “KnightMB” revealed an email address, knightmb@knightmb.dyns.org, and that a 33 year-old Tennessean named Michael Brown made online posts connected to that address. The Tennessee Department of Motor Vehicles confirmed that Michael Mancil Brown lived in Franklin and had a spouse named Kathryn. AT&T’s subscriber records for Brown’s home listed his email address as knightmb@knightmb. dyns.org. Brown’s Comcast subscriber records led to knightmb@timekoin.org. YouTube videos posted by “KnightMB” had Brown in them. And another online post by “KnightMB” had bragged about encrypting a file using 7-Zip, the program denoted by the “.7z” file extension in “Romneyl040-Collection.7z.” The Secret Service obtained a trap-and-trace order, see 18 U.S.C. § 3123(a)(1), to monitor internet traffic in and out of Brown’s house. On September 11, 2012, an IP address associated with Brown connected to TOR—the anonymizing proxy network that “Dr. Evil” and “timyenmor” had used—and accessed the same German IP address that one of the Pastebin posts had come from.

The Secret Service obtained a search warrant for Brown’s home, and forensic examination of Brown’s computer identified more incriminating evidence. The key conclusions were (1) that the extortionist’s flash drives had connected to Brown’s computer less than a week before they arrived at PricewaterhouseCoopers and the Democratic and Republican parties, (2) that Brown’s computer had stored the Romneyl040-Collection.7z file, (3) that Brown’s internet browser had bookmarked the Bitcoin addresses in the extortion letters two days before the first extortion letter arrived at PricewaterhouseCoopers and had accessed those addresses on the morning of the search, (4) that his computer had used TOR to connect to the IP address linked to one of the Pastebin posts ten minutes before that post appeared, (5) that the computer used the KnightMB email address around the time it had Goo-gled directions to the Pricewaterhouse-Coopers office in Franklin, one week before the letter arrived there, and (6) that the computer had stored the images of Dr. Evil and the PricewaterhouseCoopers lobby, the “timyenmor” email address, and the text of the “Dr. Evil” post—all before any of those items appeared on Pastebin— as well as numerous filenames related to Romney’s taxes. Brown’s neighbors said that he went to their house to print some files (the extortion letters), where he had also gotten padded envelopes like the ones the letters and thumb drives arrived in. Brown’s spouse and daughter resolved one last mystery: The anonymous cats pictured on the Democratic Party thumb drive belonged, they said, to a neighbor, Janine Bolin. Ms. Bolin corroborated that those were her cats, Tripper and Valentine, and that Brown had once helped her with some computer problems.

When confronted with this evidence, Brown denied any involvement. He told the Secret Service that someone else must have been in his house and manipulated his computer to do all of those incriminating things. He couldn’t say who, but he did say he had seen two unknown black men sitting at his computer at different times. In fact, he added, strangers often came to his house, and any one of them, or any one of the eight people on a list of visitors that Brown provided to the Secret Service, could have been the extortionist.

The government did not buy these explanations, and a grand jury indicted Brown. A jury convicted him on all twelve counts—six for wire fraud, six for extortion. That led to a 48-month sentence and $201,836 in restitution to Pricewaterhouse-Coopers for the cost of its investigation.

II.

Motion to suppress. Brown argues that the district court erred when it denied him a hearing under Franks v. Delaware as part of his motion to suppress evidence from the search of his home. 438 U.S. 154, 155-56, 98 S.Ct. 2674, 57 L.Ed.2d 667 (1978). If a defendant shows that the police used “false statements” to obtain a warrant, Franks gives the defendant the right to obtain an evidentiary hearing to challenge its validity. United States v. Fowler, 535 F.3d 408, 415 (6th Cir. 2008). No hearing is needed if the affidavit supports probable cause after setting aside any false statements. Franks, 438 U.S. at 171-72, 98 S.Ct. 2674.

Here are the alleged falsities. The affidavit details the Secret Service’s prior investigation of Brown for an unrelated incident involving data stolen from an insurance company. That investigation started in 2009 and ended in 2010, after Brown took a polygraph exam. The affidavit repeatedly refers to this as the “2009 investigation,” but misstates the date of the polygraph exam as “January 13, 2012,” when it occurred on January 13, 2010. R. 4 at 47-48. The affidavit also fails to state that Brown passed the polygraph. This error and this omission, says Brown, created the false impression that the investigation concluded more recently than it had and that the Secret Service had caught him lying before. He also says the affidavit unfairly omitted (1) that many presumably innocent people use TOR, (2) that the cats pictured on the thumb drives did not appear to be at his house, (3) that Brown runs an internet business, which means many users besides Brown use his IP addresses, (4) that the Secret Service did not know when or how the text strings got on the extortionist’s thumb drives, and (5) that Brown sometimes spelled “advice” correctly, even though he had misspelled it (as “advise”) during the insurance company incident in the same way the “Dr. Evil” letter misspelled it.

Even if we edit the affidavit in the way Brown requests, probable cause still exists. All that’s needed for probable cause “is a fair probability that contraband or evidence of a crime will be found in a particular place.” United States v. Miller, 314 F.3d 265, 268 (6th Cir. 2002) (quotation omitted). That is a “practical, commonsense decision,” Illinois v. Gates, 462 U.S. 213, 238, 103 S.Ct. 2317, 76 L.Ed.2d 527 (1983), based on “the totality of the circumstances, not line-by-line scrutiny” of the affidavit, United States v. Thomas, 605 F.3d 300, 307 (6th Cir. 2010).

The revised affidavit offers “a fair probability” that Brown’s home would contain evidence of the crime. Start with the text strings on the flash drives. One of them featured “KnightMB,” which was associated with several of Brown’s email addresses, online usernames, his Bitcoin-like business (called TimeKoin), and the utility companies that serviced his house in Franklin. Searches related to “KnightMB” also showed that Brown lived in Franklin, where all three extortion letters arrived, and that he was married to someone named Kathryn. One of the other flash drives had the name Kathryn, spelled the same way, in its unallocated space. Even accounting for the fact that the Secret Service did not know how those text strings landed on the flash drives, these facts alone established probable cause to search Brown’s house.

But that’s not the last of it. The supposed Romney tax files were encrypted with 7-Zip, and someone going by “knightmb” (Brown’s frequent username) had posted online about successfully using 7-Zip. The Pastebin poster had used TOR (a common mechanism for anonymizing internet use) to connect to a specific IP address in Germany; the Secret Service then observed someone in Brown’s house using TOR to connect to the same German IP address. Looking at all of these circumstances and without mentioning the insurance company incident, these facts establish a fair probability that the Secret Service would find evidence of a crime in Brown’s house. See Thomas, 605 F.3d at 307.

Once you add the insurance company incident, that probability gets higher. After properly accounting for the fact that Brown passed his polygraph and that the investigation concluded almost three years before, the 2009 insurance company investigation still showed that Brown was a sophisticated computer user who had gained access to private information inside a secure network. It also revealed that he misspelled “advice” as “advise” at least once (but not always). “Dr. Evil” made the same mistake. R. 4 at 34, 48. All in all, probable cause existed.

Brown responds that TOR is so common that it renders his home’s connection to it “meaningless.” Appellant’s Br. 31. But his home didn’t merely connect to TOR; it used TOR to connect to the same German IP address that the Pastebin poster used.

Saying “advise” instead of “advice,” he adds, is meaningless given that he sometimes used “advice” correctly. He’s right that this was not' the Rosetta Stone to the investigation. But it still had some probative value and supported all of the other arrows pointing in his direction.

Same with the insurance company incident. Brown argues for the first time on appeal that we should redact the entire insurance company incident from the affidavit. See Appellant’s Br. 31-33. That’s quite a change of heart. He first wants to challenge the omissions from this part of the affidavit, then claims the incident told the magistrate too much. But law enforcement need not omit facts from an affidavit just because they came to light in an earlier investigation. It’s usually a good idea for affidavits to include as much potentially relevant information as possible, not least because it avoids reckless omissions under Franks. The 2009 investigation explains what the Secret Service already knew about Brown, including his facility with computers and his experience in taking protected data from a private company. The Secret Service agent fairly included it in the affidavit.

Juror questions. Brown challenges the trial judge’s decision to permit jurors to propose questions during the trial. Because he declined to raise this objection before or during trial, we review it for plain error. Fed. R. Crim. P. 52(b); United States v. Henry, 797 F.3d 371, 374 (6th Cir. 2015). That means we may correct the error only if it was obvious, prejudiced the defendant, and seriously affected the integrity of the proceeding. Molina-Martinez v. United States, — U.S.-, 136 S.Ct. 1338, 1343, 194 L.Ed.2d 444 (2016).

Brown’s claim does not get out of the gate. There was no error, plain or otherwise, in the choice to allow juror questions. Trial judges have discretion to permit juror questions if they take precautionary measures. United States v. Collins, 226 F.3d 457, 462-65 (6th Cir. 2000); see also United States v. Rawlings, 522 F.3d 403, 407 (D.C. Cir. 2008) (noting unanimity among ten circuits). Juror questioning, we have explained, “should be a rare practice,” but “the balance of risks to benefits is more likely to weigh in favor of juror questions in complex cases.” Collins, 226 F.3d at 463. When a district court decides to permit juror questions, (1) counsel should be alerted as early as practicable; (2) the jury should be instructed that questions should be reserved for important points, that the rules of evidence may prevent certain questions from being asked, and that jurors should not draw any inferences from the court’s choice not to ask a question; (3) the court should give a prophylactic instruction in its final charge to the jury; and (4) “a screening mechanism should be set in place, such as having the jurors write down their questions and pass them to a judge, followed by a sidebar at which the judge would rule on attorneys’ objections.” Id.

No abuse of discretion occurred. Understanding the evidence required the jury to grasp the Secret Service’s forensic analysis of thumb drives, online posts, and Brown’s computers, as well as the TOR network, Bitcoin, fingerprint matching, and digital photo manipulation. That’s enough complexity for a district court to believe that permitting questions might aid jurors in their search for truth. And the precautionary measures taken by the trial judge ensured that the jury would retain its proper role and that the parties would not be prejudiced.

As in Collins, the district court announced its intention to permit juror questions on the first day of trial. See id. As in Collins, the court created a screening procedure and instructed jurors that, after the lawyers were finished, they could ask questions they “consider[ed] important of [that] witness [by] writ[ing] it out [and] passing] it down” so that the judge and lawyers could consider whether to ask it. R. 176 at 34-35; Collins, 226 F.3d at 464. The court further instructed the jury, as Collins recommends, that a juror should not “become a detective. Don’t ask too many questions.” R. 176 at 34. And “don’t get your feelings hurt” if your question doesn’t get asked, because it may have “been ruled on earlier” or may be addressed by another witness later. Id.; see Collins, 226 F.3d at 463. Although the district court did not repeat those instructions in its final charge, it reminded the jury that its prior instructions still applied. No error occurred.

Obstruction of justice. Brown claims that the district court improperly increased his offense level based on obstruction of justice. In assessing an obstruction of justice enhancement, we give clear error review to the district court’s factual determinations and fresh review to its legal conclusions. United States v. Bazazpour, 690 F.3d 796, 805 (6th Cir. 2012).

The Sentencing Guidelines add two levels to the offense level if “the defendant willfully obstructed or impeded, or attempted to obstruct or impede, the administration of justice with respect to the investigation, prosecution, or sentencing of the instant offense of conviction.” U.S.S.G. § 3C1.1. The Application Notes provide non-exhaustive lists of covered and non-covered conduct. Id. at n.4, n.5. Note 4(G) provides that “a materially false statement to a law enforcement officer that significantly obstructed or impeded the official investigation or prosecution” generally merits an enhancement. And Note 5(B) provides that “making false statements, not under oath, to law enforcement officers” generally does not merit an enhancement “unless Application Note 4(G) above applies.” The upshot is that a lie to an investigator by itself does not usually warrant an enhancement unless it substantially interferes with the government’s investigation. United States v. Carter, 510 F.3d 593, 598 (6th Cir. 2007).

The district court found one obstructive act: that Brown “ran a rabbit across the trail” by telling investigators that other people had “access” to his computer and thus may have committed the crimes. R. 175 at 16. There is some dispute over whether the two unnamed black men Brown mentioned during the proffer were included in the list of eight people with access to Brown’s computer that his lawyer later emailed to investigators. But Brown cannot be subject to an obstruction enhancement either way. If the two men were not included in the list, the government has not shown, and the district court did not find, that this statement caused any obstruction, significant or otherwise, to the government’s investigation.

And even if the list of eight included the two men mentioned during the proffer, Brown’s statements do not establish obstruction of justice for two reasons. The first is that Brown did not lie. The emailed list of eight names, supplied by his lawyer to investigators, responded to a question posed by investigators and came with the caveat that it was “not furnished as being exculpatory.” App. R. 34 at 209. The trial established that six of the eight people had indeed been to Brown’s house and thus had “access” to Brown’s computer. As for the two individuals on the list who had never been to Brown’s house, they were added to the list by Brown’s wife, not Brown.

The second reason is that the email did not “hurt or retard [the] investigation.” United States v. Williams, 952 F.2d 1504, 1516 (6th Cir. 1991). Brown’s defense was that he didn’t do it and that these eight people had access to his computer and thus may have committed the crime. All the investigators had to do in response was investigate the eight people on the list. The investigators interviewed each one. They called each one at trial. And when each of the persons on this discrete list denied using Brown’s computer, that helped the government, as it undermined Brown’s credibility, bolstered the government’s case, and eliminated one of the few remaining ways in which this crime could have been committed. Brown’s statements to prosecutors thus did not “significantly obstruct[] or impede[] the government’s investigation” and thus cannot suffice for an obstruction of justice enhancement. Carter, 510 F.3d at 598; see U.S.S.G. § 3C1.1 n.4,

For these reasons, we affirm Brown’s convictions, vacate his sentence, and remand for resentencing consistent with this opinion.


author: ALICE M. BATCHELDER, Circuit Judge. MERRITT, Circuit Judge,

text:
    UNITED STATES of America, Plaintiff-Appellee, v. Bret A. DUNNING, Defendant-Appellant.
    No. 16-5164
    United States Court of Appeals, Sixth Circuit.
    Argued: October 20, 2016
    Decided and Filed: May 18, 2017

      ARGUED: Athanasia N. Lewis, GLENN MARTIN HAMMOND LAW OFFICE, Pikeville, Kentucky, for Appellant. Daniel E. Hancock, UNITED STATES ATTORNEY’S OFFICE, Lexington, Kentucky, for Appellee. ON BRIEF: Stephen W. Owens, Pikeville, Kentucky, for Appellant. Daniel E. Hancock, Charles P. Wisdom Jr., UNITED STATES ATTORNEY’S OFFICE, Lexington, Kentucky, for Appellee.
    Before: MERRITT, BATCHELDER, and ROGERS, Circuit Judges.
   BATCHELDER, J., delivered the opinion of the court in which ROGERS, J., joined. MERRITT, J. (pp. 851-53), delivered a separate dissenting opinion.

OPINION

ALICE M. BATCHELDER, Circuit Judge.

Bret Dunning was indicted for knowingly receiving and possessing child pornography in violation of 18 U.S.C. § 2252(a)(2) and (a)(4)(B). He moved to compel discovery and to suppress evidence that the police seized from his home. After the district court denied his motions and his request for an evidentiary hearing, Dunning entered into a conditional plea agreement, preserving his right to appeal and pleading guilty to one count of knowingly receiving material involving the sexual exploitation of minors in violation of 18 U.S.C. § 2252(a)(2). The district court sentenced him to 165 months’ imprisonment.

Dunning argues on appeal that the district court erred by denying his motion to suppress evidence, that 18 U.S.C. § 2252 is unconstitutionally vague because it provides a stiffer penalty for receipt than for possession of child pornography, and that his sentence is procedurally and substantively unreasonable. We AFFIRM his conviction and sentence.

I. Facts

A Kentucky State Police Detective twice used Nordic Mule, a program that is part of a law enforcement software package known as the Child Protection System (CPS), to search for IP addresses that had recently shared child pornography on the peer-to-peer file-sharing network eDonkey (a.k.a. eMule). The software locates specified files on public peer-to-peer networks and records the IP addresses that have downloaded and made available for sharing files containing child sexual exploitation. When the software finds shared materials on these public networks, it logs the “date, time, hash values, filename, and IP address.” After the second CPS inquiry and report, the detective obtained a search warrant for Dunning’s residence.

During the execution of the search warrant, the police seized numerous electronic devices, including computers, iPhones, and iPads, which contained over 22,000 images and videos depicting the sexual exploitation of minors. Some images showed prepubescent children engaged in sexually explicit conduct with adults.

After his indictment, Dunning moved for discovery, seeking, among other things, the source code for the software that the detective relied on for the search warrant. The court ordered a response to Dunning’s motion and the government responded, stating with regard to the software that:

The program [the] Detective [] used when conducting his search for CP images is part of the Child Rescue Coalition, which is a private non-profit organization. The source code and program are proprietary and are not in the possession of the United States. The data base [sic] used in this case evolved from the program formerly known as the Wyoming tool.

The court then denied without prejudice Dunning’s motion for discovery. Dunning also moved to suppress evidence that the police seized from his home, arguing that the warrant application was not supported by probable cause because the detective used software of uncertain reliability and accuracy to obtain the warrant, and that he had a reasonable expectation of privacy in the files stored on his computer. The district court denied Dunning’s motion to suppress.

Dunning then pled guilty to a violation of 18 U.S.C. § 2252(a)(2) for knowingly receiving material involving the sexual exploitation of minors, and the district court sentenced him to 165 months’ imprisonment. This appeal followed.

II. Motion to Suppress

“The Fourth Amendment requires that search warrants be issued only ‘upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized.’ ” Dalia v. United States, 441 U.S. 238, 255, 99 S.Ct. 1682, 60 L.Ed.2d 177 (1979). To establish probable cause, the issuing judge must “make a practical, common-sense decision whether, given all the circumstances set forth in the affidavit before him, ... there is a fair probability that contraband or evidence of a crime will be found in a particular place.” Illinois v. Gates, 462 U.S. 213, 238, 103 S.Ct. 2317, 76 L.Ed.2d 527 (1983).

“In reviewing a ruling on a motion to suppress, we will uphold a district court’s factual findings unless they are clearly erroneous, but will conduct a de novo review of a district court’s legal determinations.” United States v. Navarro-Diaz, 420 F.3d 581, 584 (6th Cir. 2005). “When reviewing the denial of a motion to suppress evidence, the appellate court must consider the evidence in the light most favorable to the government.” Id. We review the totality of the circumstances to determine whether probable cause supported a search warrant, Gates, 462 U.S. at 230-31, 103 S.Ct. 2317, and we afford great deference to the issuing judge’s determination of probable cause, United States v. Greene, 250 F.3d 471, 478 (6th Cir. 2001) (citing United States v. Allen, 211 F.3d 970, 973 (6th Cir.), cert. denied, 531 U.S. 907, 121 S.Ct. 251, 148 L.Ed.2d 181 (2000)).

Dunning argues that because probable cause did not support the search warrant the district court erred by denying his motion to suppress. He claims that conclusions in the detective’s affidavit were wholly conclusory because the detective had relied on computer software results to identify child pornography files. Although wholly conclusory statements would fail to meet the probable cause requirement, see Gates, 462 U.S. at 239, 103 S.Ct. 2317, the detective’s statements in this case were not wholly conclusory:

The detective in this case submitted an affidavit to a state circuit judge in support of his application for a warrant to search Dunning’s home. In the affidavit, the detective set out his training and experience as well as his use of “law enforcement systems to query IP addresses in Kentucky that had been seen sharing child sexual exploitation files.” Dunning claims that because the detective did not have the source code for the computer program, “it [was] not possible to authenticate the function of the application or validate its ‘calibration’ ” and that “statements contained within his search warrant affidavit [were] therefore “wholly conelusory,’ because he did not have enough information to substantiate his claims without the source code.”

A defendant who challenges the factual assertions in an affidavit supporting a search warrant is entitled to an evidentiary hearing if

(1) the defendant makes a substantial preliminary showing that the affiant engaged in deliberate falsehood or reckless disregard for the truth in omitting information from the affidavit, and (2) a finding of probable cause would not be supported by the affidavit if the omitted material were considered to be a part of it.

United States v. Fowler, 535 F.3d 408, 415 (6th Cir. 2008). This court has joined the First Circuit in rejecting the argument that a higher degree of certainty is required when the government uses software to locate IP addresses. See United States v. Schumacher, 611 Fed.Appx. 337, 340 (6th Cir.), cert. denied, — U.S.-, 136 S.Ct. 434, 193 L.Ed.2d 337 (2015) (citing United States v. Chiaradio, 684 F.3d 265, 279 (1st Cir. 2012), which held that the defendant failed to establish any way in which omission of certain information in the search warrant affidavit was material to a finding of probable cause). As in Schu-macher, the omission of information regarding the reliability of the CPS software does not call into question the reliability of this software and does not provide grounds for an evidentiary hearing. Furthermore, it is arguable that such information would have only strengthened the affidavit by showing that the software was reliable. See Schumacher, 611 FedAppx. at 340.

As the district court held, the detective was trained to use, and had previously used, software to investigate child pornography crimes, and he identified and confirmed that the files containing child pornography had been shared by Dunning’s IP address on various dates. Moreover, Dunning failed to make even a preliminary showing that the detective knowingly, intentionally, or recklessly made false statements in his affidavit.

Dunning also argues that the detective’s use of the software to find his IP address is similar to the use of the drug-sniffing dog in Florida v. Harris, 568 U.S. 237, 133 S.Ct. 1050, 185 L.Ed.2d 61 (2013), and that he should have had the same opportunity to challenge the software’s reliability as the defendant had in Harris “to challenge such evidence of a dog’s reliability, whether by cross-examining the testifying officer or by introducing his own fact or expert witnesses.” Id. at 1057. But the analogy falls far short. The CPS software merely combs through large amounts of data and takes note of when and what IP address downloaded suspect material. As the Second Circuit explained in United States v. Thomas,

[traditionally, law enforcement officers seek to detect child pornography offenses by manually sending out search queries for illicit material over P2P [peer to peer] networks, one-by-one. CPS automates this process by canvassing these public P2P networks, identifying files that contain child pornography, cataloguing this information, and providing law enforcement officers with a list of the online users who are sharing these files over P2P networks.

788 F.3d 345, 348 (2d Cir. 2015), cert. denied, — U.S.-, 136 S.Ct. 848, 193 L.Ed.2d 750 (2016). Unlike a drug-sniffing dog, whose potential errors law enforcement might not be able to detect without more invasive search, CPS merely records information it finds on public peer-to-peer networks, thus automating law enforcement’s task of combing through those public networks, a task that law enforcement could do in real time using publicly available tools. Id. at 352-53.

III. Unconstitutional Vagueness

It is elementary when the constitutionality of a statute is assailed, if the statute be reasonably susceptible of two interpretations, by one of which it would be unconstitutional and by the other valid, it is our plain duty to adopt that construction which will save the statute from constitutional infirmity.... [T]he rule plainly must mean that where a statute is susceptible of two constructions, by one of which grave and doubtful constitutional questions arise and by the other of which such questions are avoided, our duty is to adopt the latter.

United States ex rel. Attorney General. v. Delaware & Hudson Co., 213 U.S. 366, 407-08, 29 S.Ct. 527, 53 L.Ed. 836 (1909). “To survive a challenge of unconstitutional vagueness in application, a penal statute must ‘define the criminal offense with sufficient definiteness that ordinary people can understand what conduct is prohibited and in a manner that does not encourage arbitrary or discriminatory enforcement.’ ” United States v. Search of Music City Mktg., Inc., 212 F.3d 920, 924-25 (6th Cir. 2000) (quoting Posters ’N’ Things, Ltd. v. United States, 511 U.S. 513, 526, 114 S.Ct. 1747, 128 L.Ed.2d 539 (1994)).

Although the [void-for-vagueness] doctrine focuses both on actual notice to citizens and arbitrary enforcement, we have recognized recently that the more important aspect of the vagueness doctrine ‘is not actual notice, but the other principal element of the doctrine—the requirement that a legislature establish minimal guidelines to govern law enforcement.’ Where the legislature fails to provide such minimal guidelines, a criminal statute may permit ‘a standardless sweep [that] allows policemen, prosecutors, and juries to pursue their personal predilections.’

Kolender v. Lawson, 461 U.S. 352, 357-58, 103 S.Ct. 1855, 75 L.Ed.2d 903 (1983) (alteration in original) (citing Smith v. Goguen, 415 U.S. 566, 574-75, 94 S.Ct. 1242, 39 L.Ed.2d 605 (1974)). Kolender held a California statute to be “unconstitutionally vague on its face because it encourages arbitrary enforcement by failing to describe with sufficient particularity what a suspect must do in order to satisfy the statute.” Id. at 361, 103 S.Ct. 1855. Unlike the statutes at issue in Kolender or Go-guen, 18 U.S.C. § 2252 provides actual notice, and provides more than minimal guidelines to govern law enforcement.

The government charged Dunning with two counts of receipt of child pornography in violation of 18 U.S.C. § 2252(a)(2) for images that he downloaded on two separate dates, and with one count of possession of those images in violation of 18 U.S.C. § 2252(a)(4)(B). Section 2252(a)(2) provides that “Any person who—(2) knowingly receives, or distributes, any visual depiction ... if—(A) the producing of such visual depiction involves the use of a minor engaging in sexually explicit conduct; and (B) such visual depiction is of such conduct; shall be punished as provided in subsection (b) of this section.” (emphasis added) Section 2252(a)(4)(B) provides that “Any person who—... (B) knowingly possesses, or knowingly accesses with intent to view” materials that involve the use of a minor engaging in sexually explicit conduct shall be punished according to subsection (b). (emphasis added). 18 U.S.C. § 2252 provides Dunning with fair notice of what acts are prohibited and the penalties associated with them.

Dunning argues that there is no difference between “receipt” and “possession,” and 18 U.S.C. § 2252 therefore allows law enforcement to arbitrarily enforce the law. But there is at least one difference between the two: a person who produces child pornography has not received it. It is true that prosecutors may charge a defendant with both receipt and possession. But this is nothing more than permissible pros-ecutorial discretion. “In our criminal justice system, the Government retains ‘broad discretion’ as to whom to prosecute.” Wayte v. United States, 470 U.S. 598, 607-08, 105 S.Ct. 1524, 84 L.Ed.2d 547 (1985); see also Gardenhire v. Schubert, 205 F.3d 303, 319 (6th Cir. 2000). Although prosecu-torial discretion is limited by constitutional constraints, such that the decision to prosecute may not be based on unjustifiable standards such as race, religion, or other arbitrary classifications, the decision to prosecute Dunning under both sections in this case was not based on an unjustifiable standard.

Furthermore, “while possession of child pornography is generally a lesser-included offense of receipt of child pornography, conviction under both statutes is permissible if separate conduct is found to underlie the two offenses.” United States v. Dudeck, 657 F.3d 424, 430 (6th Cir. 2011). In this case, the government charged Dunning for receipt when he downloaded images on March 9 and April 14, 2013, and with possession for those images that he possessed on April 30, 2013.

IV. Sentence

Dunning argues that his sentence is unreasonable for two reasons: (1) the two-level enhancement that- he received for distribution should not apply because there is no evidence that he knew that peer-to-peer software shares files as it downloads them; (2) at sentencing, the district court did not give him an individualized determination because it “relied heavily” on a study that suggests a correlation between looking at and touching minors. Dunning’s sentence of 165 months’ imprisonment falls within the Guidelines range of 151 to 188 months. The presentence report included a two-level enhancement for distributing material involving the sexual exploitation of minors • pursuant to USSG § 2G2.2(b)(3)(F), which the district court applied.

“[T]he appellate court must review the sentence under an abuse-of-discretion standard.... If the sentence is within the Guidelines range, the appellate court may, but is not required to, apply a presumption of reasonableness.” Gall v. United States, 552 U.S. 38, 51, 128 S.Ct. 586, 169 L.Ed.2d 445 (2007).

A. Two-Level Enhancement for Distribution

The Guidelines provide for an increase of two levels if the defendant knowingly engaged in distribution. USSG § 2G2.2(b)(3)(F). Distribution is defined as

any act, including possession with intent to distribute, production, transmission, advertisement, and transportation, related to the transfer of material involving the sexual exploitation of a minor. Accordingly, distribution includes posting material involving the sexual exploitation of a minor on a website for public viewing but does not include the mere solicitation of such material by a defendant.

USSG § 2G2.2 comment. n.l. Dunning cites cases from the Second, Fourth, and Seventh Circuits to argue that a defendant must know that his actions will make the files accessible to other users. See United States v. Baldwin, 743 F.3d 357, 361 (2d Cir. 2014); United States v. Robinson, 714 F.3d 466, 468 (7th Cir. 2013); United States v. Layton, 564 F.3d 330, 335 (4th Cir. 2009). But Sixth Circuit law states that “[t]he use of a file-sharing program like Ares readily ‘relatefe] to the transfer’ of files because the whole point of a file-sharing program is to share, sharing creates a transfer, and transferring equals distribution.” United States v. Abbring, 788 F.3d 565, 567 (6th Cir.) (internal citation omitted), cert. denied, — U.S.-, 136 S.Ct. 379, 193 L.Ed.2d 305 (2015).

Dunning distinguishes Abbring by arguing that the defendant in that case admitted that he knew how the peer-to-peer software operated, thus resolving the requirement for the defendant’s knowledge. In this case, there is no direct evidence that shows that Dunning knew how the software operated because he made no admission that he knew how the peer-to-peer software worked. The court in Abbr-ing recognized that the Eighth Circuit had “held that offenders using peer-to-peer file-sharing software may rebut [an] inference of knowing distribution with ‘concrete evidence of ignorance.’ ” Abbring, 788 F.3d at 568 (citing United States v. Durham, 618 F.3d 921, 931-32 (8th Cir. 2010), which stated that “unless a defendant presents ‘concrete evidence of ignorance,’ the fact-finder may reasonably infer the defendant utilized a file-sharing program to distribute files” (internal citation omitted)). But in Abbring we noted that while this circuit has never so held, we had not needed to reach the question in that case because Abbring had admitted that he knew how the peer-to-peer software operated. -Although Dunning has not admitted that he knew how peer-to-peer file-sharing software works, neither has he presented any evidence that he did not know that file-sharing software shares—and thus distributes—files. Not only could the fact-finder have reasonably inferred that Dunning knew that his use of a file-sharing program distributed files, Dunning’s argument that he removed the files from the software so that others would no longer have access to them undermines his argument that he did not know that the file-sharing software shares files.

Dunning’s knowing use of peer-to-peer software justifies the distribution enhancement. Dunning used peer-to-peer software to download files, and while he was doing so, he was also sharing these files with others. He presented no evidence that he was ignorant of the software’s sharing function, and the district court reasonably applied the two-level enhancement for distribution.

B. Substantive Reasonableness in Light of Reference to Butner Study

We presume that a within-range sentence is substantively reasonable. United States v. Vonner, 516 F.3d 382, 389 (6th Cir. 2008). And “[t]he defendant shoulders the burden of showing substantive unreasonableness.” United States v. Woodard, 638 F.3d 506, 510 (6th Cir. 2011). Dunning argues that he did not receive an individualized determination because the court allegedly improperly relied on the Butner study when sentencing him. The Butner study suggested that a correlation exists between those who look at child pornography and those who have had physical contact with children. Although Dunning claims that the court relied heavily on the Butner study in reaching the sentence, the record demonstrates that this, study is one of many factors that the court considered in determining the sentence. Furthermore, Dunning’s sentence of 165 months’ imprisonment falls within the guideline range. See Vonner, 516 F.3d at 389; Gall, 552 U.S. at 49, 128 S.Ct. 586.

V. Conclusion

For the foregoing reasons, we AFFIRM Dunning’s conviction and sentence.

MERRITT, Circuit Judge,

dissenting.

DISSENT

This dissent is addressed to Section III of the Court’s opinion concerning “receipt” and “possession” of child pornography. The opinion allows a 13⅜ year sentence for “receiving” instead of a much lesser sentence for “possessing.” The disparity is the result of a curious mistake by Congress in treating them as different. Semantically, “receiving” pornography from another and “possessing” porn received from another are synonymous. That is obvious. The fact that Congress has made this mistake does not bind us to continue it.

The irrational distinction behind punishing “receipt of’ differently than “possession of’ child pornography should be set aside and the case remanded for resen-tencing. In 2012, the U.S. Sentencing Commission issued a report to Congress regarding the punishment of child pornography offenses. With respect to the separate crimes of “receipt” and “possession” of child pornography, the Commission found “[tjhere is no rational basis to treat receipt offenses (which carry a mandatory minimum five-year term of imprisonment) and possession offenses (which do not carry a mandatory minimum term of imprisonment) differently under the guidelines or penal statutes.” Id. at 13 (emphasis added). The crime of “receipt” for first-time offenders also carries a maximum penalty of twenty years in prison, while the crime of “possession” carries a maximum of ten years. See 18 U.S.C. § 2252(b). The defendant in this case was charged with both receipt and possession of child pornography, eventually pleading to one count of receipt. 18 U.S.C. §§ 2252(a)(2), 2252(a)(4)(B). The Sentencing Commission is certainly correct that having two disproportionate statutory and guideline sentencing schemes for the same conduct is irrational. Statutes that invite arbitrary and irrational enforcement violate the due process of law. E.g., Johnson v. United States, — U.S. -, 135 S.Ct. 2551, 2556-57, 192 L.Ed.2d 569 (2015). As it is being applied here, 18 U.S.C. § 2252(a)(2) violates due process.

This Court, when reviewing the imposition of a statute, must ensure that words and phrases are not so irrational, “so vague and indefinite that any penalty prescribed for their violation constitutes a denial of due process of law.” Champlin Ref. Co. v. Corp. Comm’n of State of Oklahoma, 286 U.S. 210, 243, 52 S.Ct. 559, 76 L.Ed. 1062 (1932). Judge Posner describes § 2252 as a “puzzle,” and recognizes in United States v. Richardson that attempting to make sense of the statute is a futile exercise. 238 F.3d 837, 839 (7th Cir. 2001). The Richardson decision questions “why-receiving, which under the first guideline and the statute that it implements ... should be punished more severely than possessing, since possessors, unless they fabricate their own pornography, are also receivers.” Id. (internal citation omitted). Non-production offenders who knowingly possess child pornography necessarily receive it. See U.S. Sentencing Comm’n 2012 Report, at 13. The majority fails to recognize the irrationality of punishing receipt more harshly than possession, since possession is essentially identical to receipt unless it is associated with “production.” See Richardson, 238 F.3d at 839.

Section 2252⅛ contradictions were compounded by a mistake in semantics by Senators Thurmond and Helms in 1991. See Stephen Bacon, Note A Distinction Without a Difference, 65 U. Miami L. Rev. 1027, 1034-36 (2011). On July 18, 1991, a congressional amendment was introduced that upended the sentencing scheme recommended by the Sentencing Commission and resulted in the disproportionate punishment of these two identical crimes. The “Helms-Thurmond Amendment,” which was proposed as an amendment to a 1991 appropriations bill, directed the Commission to reorganize “receipt” offenses under § 2G2.2. See id. The Sentencing Commission sent a letter to Congress, defending their choice to treat “receipt” and “possession” similarly. See 137 Cong. Rec. H6736-02, 4 (1991) (letter from Chairman Wilk-ens) (arguing that the amendment caused sentencing to turn on the timing of law enforcement intervention, rather than on the gravity of the underlying conduct). The Senate rejected these arguments and passed the amendment anyway. See U.S. Sentencing Comm’n 2009 Report, at 20-22.

Since then, this “receipt” versus “possession” fiction has been reflected in the Sentencing Guidelines. See U.S.S.G. §§ 2G2.2, 2G2.4. The United States Sentencing Commission continues to' argue that there is no rational basis for applying the current Sentencing Guidelines, as they do not “distinguish adequately among offenders based on their degrees of culpability.” U.S. Sentencing Comm’n 2012 Report, at 331. The Commission also criticizes the “lack of proportionality in sentence length compared to typical sentences for many ‘contact’ sex offenders[,]” noting that “some child pornography offenders with no history of sexually abusing a child receive sentences equal to or greater than the sentences received by ‘contact’ sex offenders.” Id. at 13. The Department of Justice has also come out against these Guidelines. See Joint Prepared Statement of James Fottrell, Steve Debrota, and Francey Hakes, U.S. Dep’t of Justice, to the Sentencing Comm’n, 8 (Feb. 15, 2012) (“... [Pjrosecutors, probation officers, and judges are often assessing these cases using a guideline that does not account for the full range of the defendant’s conduct and also does not differentiate among offenders given the severity of their conduct”). The Criminal Law Commission of the Judicial Conference of the United States has argued strongly against both the Guidelines and the mandatory minimums for these crimes. See Testimony of U.S. District Judge Casey Rodgers on Behalf of the Crim. Law Comm, of the Jud. Conf. of the U.S. Courts to the Sentencing Comm’n, 361-70 (Feb. 15, 2012).

We should not continue to allow this completely irrational statute to send people to prison for such long, ridiculous sentences. Here the defendant, Dunning, age 54, downloaded pictures of child pornography onto his computer. He did not touch or physically harm a child. He did not produce the pictures. He did not email them to anyone else. The evidence discloses that he simply looked at them. For “receipt” of child pornography he was given 13⅜ years in prison. If sentenced for a “possession” offense, his time in prison would be greatly reduced.

      . Michael L. Bourke & Andres E. Hernandez, The “Butner Study” Redux: A Report of the Incidence of Hands-on Child Victimization by Child Pornography Offenders, 24 J. Fam. Violence 183 (2009). .

      . U.S. Sentencing Comm’n, 2012 Report to the Congress: Federal Child Pornography Offenses (2012), http://www.ussc.gov/sites/ default/files/pdpnews/congressional-testimony-and-reports/sex-offense-topics/ 201212-federal-child-pornography-offenses/ FulLReport_to_Congress.pdf.

      . See U.S. Sentencing Comm’n, The History of the Child Pornography Guidelines, 19-20 (2009), http://www.ussc.gov/sites/default/files/ pdpresearch-and-publications/research-projects-and-surveys/sexoffenses/20091030_ History_ChilcLPornography_Guidelines.pdf.