Saturday, February 12, 2011

Judge Smells a Rat in Government's Use of Tax Loss Presumption for Restitution

The tax loss is the principal determinant in tax Guidelines sentencing calculations. The Guidelines "contemplate that the court will simply make a reasonable estimate based on the available facts." SG 2T1.1, Application Note 1. Where the tax loss is not "reasonably ascertainable," the sentencing court may use certain "presumptions" to estimate the tax loss "unless the government or defense provides sufficient information for a more accurate assessment of the tax loss." Id. And, SG 2T1.1(c)(2)(A) provides that "If the offense involved failure to file a tax return, the tax loss shall be treated as equal to 20% of the gross income * * * less any tax withheld or otherwise paid, unless a more accurate determination of the tax loss can be made."

Restitution is a different concept designed to make the victim of the crime whole. Although, in tax cases, the tax loss and the restitution amount is often -- perhaps usually -- the same, it is not necessarily the same because the tax loss can, in some cases, include tax loss the defendant intended but never realized whereas restitution is allowed only for the realized tax loss.

In United States v. Hirmer, 2011 U.S. Dist. LEXIS 12572 (ND FL 2/8/11), a number of defendants were involved, so I want split out all the charges and how they were divvied up. Suffice it to say that there were counts for conspiracy to defraud (Klein tax conspiracy), conspiracy to commit wire fraud, conspiracy to commit money laundering and "Count Three charged Claudia Hirmer and Mark Hirmer only with tax evasion in violation of 26 U.S.C. §§ 7201 and 7203." The jury returned a verdict of guilty on the tax conspiracy count and on Count Three, the tax offense(s) count. For present purposes, the court was dealing only with restitution and identified the U.S. as a victim with respect to its actual tax loss (more about that in a minute) and the victims of the tax scam these defendants and other defendants engaged in. As to the tax loss, the Government sought restitution only for the tax the Hirmers did not pay on their income from the scam. (The Government could have sought restitution for any tax loss from the victims of the scam, but chose not to do so; moreover, apparently the Government sought restitution under the conspiracy count of conviction rather than the tax count of conviction, perhaps because the tax count of conviction encompassed less years than the conspiracy count of conviction.) Moreover, the Government did not seek restitution for the third party victims of the scam from whom the defendants, including the Hirmers, fraudulently received money. The Government could have sought such restitution for third party victims, but did not do so (which irritated the judge).

So, back to the restitution for the Government's tax loss. The Government attempted to extrapolate proof of the tax loss amount for restitution based on the presumptions in the tax loss Sentencing Guidelines. The court smelled -- or perceived that it smelled -- a rat and thought the Government was impermissibly using that tax loss presumption to extrapolate a restitution amount that, if allowed, would have actually exceeded the tax loss. Here's the court's discussion (footnotes omitted):

In order to award restitution, therefore, the court had to make a finding at sentencing as to the government's actual revenue loss, which required a predicate finding of the defendants' tax liability. Rather than present evidence of the defendants' tax liability at the restitution hearing, however, the government relied on evidence of the defendants' alleged gross receipts, as introduced at trial, and argued that to arrive at the proper amount of restitution, the court needed only to determine the amount of income tax the defendants should have paid on those gross receipts. Arguing that it was unable to determine the defendants' legitimate business expenses due to the sparseness of the defendants' financial records, the government urged the court to apply the 20% figure found in § 2T1.1(c)(2)(A) of the United States Sentencing Guidelines to the defendants' gross receipts to arrive at what it characterized as a conservative estimate of the amount of income tax the defendants owed. The government maintained that § 2T1.1(c)(2)(A) provided the best method for estimating its tax loss for restitution purposes, allowing leeway for the business deductions it could not ascertain. The court could not disagree more.

As an initial matter, the court notes that the government failed to demonstrate that it was impossible, or, for that matter, even too burdensome, to determine its actual loss. See Futrell, 209 F.3d at 1291-92 (explaining that in order to estimate a victim's loss for purposes of restitution, the court not only must have a reasonable basis upon which to approximate the loss, but it also must find that it would be impossible to determine the victim's actual loss.). Indeed, the government offered no evidence — in the form of testimony from an IRS agent or otherwise — that it could not determine the defendants' tax liability from the defendants' financial records, all of which admittedly were in its possession. The government also failed to account for numerous facts relevant to the defendants' tax liability, including that the IRS audited some of the defendants and even prepared a tax assessment against the Hirmers; Defendant Lyon filed delinquent tax returns and entered into an agreement with the government pursuant to which he satisfied his outstanding tax liability to the government; Merino filed delinquent tax returns setting forth the amounts he owed; and McPhillips entered into an agreement with the government as to the amounts he owed. It appeared to the court that, rather than work with the IRS to determine its actual tax loss as a result of the defendants' failure to pay income tax or, alternatively, establish on the record at the restitution hearing that such a determination could not be made and the reasons it could not be made, government's counsel concluded that such an effort was unnecessary and assumed the court would simply accept counsel's argument that the 20% of gross receipts figure was an acceptable measure of restitution. Contrary to the government's expectations, the court will not — and, indeed, cannot — award restitution under these circumstances.

Although the court may estimate a victim's loss for purposes of restitution, it may do so only when it has a reasonable basis upon which to approximate the loss. See Futrell, 209 F.3d at 1291-92. 23 In arguing that application of the 20% figure found in § 2T1.1(c)(2)(A) to the defendants' gross receipts results in a reasonable approximation of the government's tax loss in this case, the government wholly ignored the fact that, according to § 2T1.1(c)(2)(A), the 20% figure is to be applied to gross income, not gross receipts. See U.S. Sentencing Guidelines Manual § 2T1.1(c)(2)(A) (2007); 24 see also United States v. Harris, 200 Fed. Appx. 472 (6th Cir. 2006). The Harris decision is highly instructive here. In Harris, the defendant was convicted of conspiracy to defraud the IRS and tax evasion in connection with his failure to file income tax returns and pay federal income tax. In attempting to establish the defendant's base offense level under the Sentencing Guidelines, the government requested that the court apply the 20% figure in § 2T1.1(c)(2)(A) to the defendant's gross receipts to determine its tax loss, arguing that the 20% figure accounted for the defendant's business expenses. The court rejected the government's position as "untenable," noting the distinction between gross receipts and gross income, and explaining that "[w]hen a provision directs the court to use twenty percent of gross income, by definition the twenty percent has not already 'taken into consideration' the taxpayer's expenses. Only by subtracting expenses from gross receipts can the court arrive at gross income — and it is a percentage of that latter number that must be used in the § 2T1.1 calculation." 2526 Id. at 495-96 (emphases in original). The government makes precisely the same argument here; however, the reason for rejecting the argument is even stronger in this case where the issue is not the base offense level but rather restitution, as a court's decision with regard to a loss calculation under the Sentencing Guidelines is much less demanding in terms of precision than a decision on restitution. See United States v. Huff, 609 F.3d 1240, 1247-48 (11th Cir. 2010) (noting that "the amount of loss (for purposes of offense level calculation) is either the actual or intended loss while the restitution amount must be the actual loss suffered by the victim").

Following the Sixth Circuit's analysis in Harris, the court in this case rejected the government's argument for application of the 20% figure in § 2T1.1(c)(2)(A) to the defendants' gross receipts for purposes of restitution. Further, because there was no evidence that the amount the government sought was a reasonable estimate, and not in excess, of its actual loss, the court denied the government's request for restitution. See United States v. Beydoun, 469 F.3d 102, 108 (5th Cir. 2006) (remanding case for a determination of actual loss based on net, rather than gross, profit); United States v. Dove, 585 F. Supp. 2d 865, 869 (W.D. Va. 2008) (noting that "[t]he proper measurement of loss," for purposes of restitution, "is lost net profit, not lost gross income" and denying restitution because the government failed to prove the amount of the victims' actual loss or establish a logical basis upon which to estimate it); see also United States v. Huff, 609 F.3d 1240, 1249 (11th Cir. 2010) (quoting United States v. Arutunoff, 1 F.3d 1112, 1121 (10th Cir. 1993)) (holding that "[r]estitution is not intended to 'provide a windfall for crime victims but rather to ensure that victims, to the greatest extent possible, are made whole for their losses.'"); Jenkins, 884 F.2d at 440 (holding that "the United States government should not be permitted to collect more than its total tax loss as 'restitution'").
Bottom line, the court was just concerned that the restitution the Government sought was too much and hammered the Government accordingly.  That holding has two interwoven themes.  First, the court was irritated that the Government did even attempt to make a more accurate calculation or even prove that it could not reasonably make a more accurate calculation.  Second, focusing on the gross receipts / gross income distinction, it just thought that 20% of gross receipts (as estimated by the Government) would produce a higher than actual tax loss for restitution.  And, the court appears to have been irritated with the Government's attempt to get justice for itself but not the other victims -- in this case, injustice (he thought) -- on the cheap.

1 comment:

  1. Only by subtracting expenses from gross receipts can the court arrive at gross income — and it is a percentage of that latter number that must be used in the § 2T1.1 calculation.

    Wouldn't that be net income or closer to something called taxable income? The whole point of the 20% calc is that no one can arrive at net or taxable income.

    Great post thank you.


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