Thursday, November 1, 2012

Relevant Conduct in Tax Cases (11/1/12)

A person recently posted a comment on the concept of relevant conduct, so I thought I would devote a blog to discussing the issue.  The comment was posted to the following blog entry:  An Outlier Offshore Account Tax Obstruction Plea (10/26/12), here.

The following is a cut and paste of my Federal Tax Crimes text (footnotes omitted) discussion of relevant conduct.  The text including the footnotes is available for download here.  I also provide some links at the end to related materials.  Please note that the following cut and paste is not indented to show that I am quoting.  It is my own work, so I authorize myself to do that.

8. Relevant Conduct.

Prior to the Sentencing Guidelines, the convicted defendant’s conduct beyond the offense(s) of conviction could be and was often considered in sentencing.  Basically, any thing that the sentencing judge felt should be considered in determining an appropriate sentence could be considered, so long as it was not a constitutionally prohibited factor or other matter well outside the boundaries of good judgment.  This principal was codified as follows:
No limitation shall be placed on the information concerning the background, character, and conduct of a person convicted of an offense which a court of the United States may receive and consider for the  purpose of imposing an appropriate sentence.
This practice was incorporated in the Sentencing Guidelines under the general rubric of “relevant conduct.”  Section 1.B.3.(a) provides:
§1B1.3. Relevant Conduct (Factors that Determine the Guideline Range)
(a) Chapters Two (Offense Conduct) and Three (Adjustments).
Unless otherwise specified, (i) the base offense level where the guideline specifies more than one base offense level, (ii) specific offense characteristics and (iii) cross references in Chapter Two, and (iv) adjustments in Chapter Three, shall be determined on the basis of the following:
(1) (A) all acts and omissions committed, aided, abetted, counseled, commanded, induced, procured, or willfully caused by the defendant; and
(B) in the case of a jointly undertaken criminal activity (a criminal plan, scheme, endeavor, or enterprise undertaken by the defendant in concert with others, whether or not charged as a conspiracy), all reasonably foreseeable acts and omissions of others in furtherance of the jointly undertaken criminal activity,
that occurred during the commission of the offense of conviction, in preparation for that offense, or in the course of attempting to avoid detection or responsibility for that offense;
(2) solely with respect to offenses of a character for which §3D1.2(d) would require grouping of multiple counts, all acts and omissions described in subdivisions (1)(A) and (1)(B) above that were part of the same course of conduct or common scheme or plan as the offense of conviction;
(3) all harm that resulted from the acts and omissions specified in subsections (a)(1) and (a)(2) above, and all harm that was the object of such acts and omissions; and
(4) any other information specified in the applicable guideline.
This plays out in tax cases most often in determining the tax loss which drives the base offense level under Sentencing Guideline § 2.T.1.1.  Relevant conduct may be included in loss from (i) uncharged conduct (both state and federal taxes), (ii) loss from charged conduct of which the defendant was acquitted, and (iii) from conduct beyond the criminal statute of limitations.  For example, assume that, through a common pattern, the taxpayer commits tax evasion for years 1 through 6, evading $100,000 in each year.  The Government indicts him on April 14 of year 9, charging tax evasion (§ 7201) for all open years 3-6 (open years is a statute of limitations concept that I discuss later in these materials).  The Government cannot indict for years 1 and 2.  Assume that the taxpayer pleads guilty to two counts of tax evasion for years 5 & 6.  The tax loss for purposes of setting the Base Offense Level is $900,000.  And, this result is not changed even if, for example, the jury determines guilt (rather than by plea) for the two years and then determines that, for the remaining years charged, the Government did not prove guilt beyond a reasonable doubt (i.e., the jury acquits the defendant).  What this means is that the defendant rides up the scale, gets a higher BOL, and a greater indicated sentencing range.  Relevant conduct is the concept that permits that phenomenon.  See particularly § 1.B.1.3.(a)(2) above.

In United States v. Watts, the Supreme Court in a per curiam opinion held that that sentencing courts could consider as relevant conduct the defendants’ conduct on charges for which they had been acquitted.  The Court reasoned that Court historically could take all factors into consideration as to background, character and conduct in sentencing and the Guidelines were not intended to change that.  Accordingly, all relevant conduct of which the defendant is shown by a preponderance of the evidence in the sentencing phase may be considered.  The Court noted that an acquittal is not a finding that the defendant did not commit the criminal act charged; it is simply a finding that the Government did not prove beyond a reasonable doubt that he committed the act.  In the sentencing phase, the Government may still be able to prove that he committed the act by a preponderance of the evidence.

Justices Stevens and Kennedy dissented.  Note the following from Justice Kennedy’s dissent:
At the least it ought to be said that to increase a sentence based on conduct underlying a charge for which the defendant was acquitted does raise concerns about undercutting the verdict of acquittal, concerns noted by Justice Stevens and the other federal judges to whom he refers in his dissent. If there is no clear answer but to acknowledge a theoretical contradiction from which we cannot escape because of overriding practical considerations, at least we ought to say so. Finally, as Justice Stevens further points out, the effect of the Sentencing Reform Act of 1984 on this question deserves careful exploration. This is illustrated by the fact that Justices Scalia and Breyer each find it necessary to issue separate opinions setting forth differing views on the role of the Sentencing Commission.   
For these reasons the case should have been set for full briefing and consideration on the oral argument calendar. From the Court’s failure to do so, I dissent.  
Although Booker and its progeny did not change the Watts holding that acquitted conduct can be relevant conduct to one or more counts of conviction, by making the sentencing guidelines advisory permits a district court discretion under to avoid the problems of automatic use of acquitted conduct to increase the sentence.

The scope of relevant conduct that may be considered is sweeping indeed.  As one author has noted:
A sentence may often include consideration of dismissed counts, acquitted counts, and uncharged conduct, which, in turn may include conduct occurring outside the statute of limitations, or uncharged activities stipulated to in a plea agreement.  For a tax offense, this means that a guilty plea or conviction on one tax year may permit a court to add the tax loss from dismissed or acquitted counts as well as conduct not charged in the indictment, when determining the guideline range.  Similarly, when uncharged conduct in a money-laundering or currency reporting case can be used to increase the guideline range.  When a conspiracy charge is brought, the defendant may be sentenced for all taxes or monies involved in the scheme even if there is no conviction on any substantive offense, if the acts and omissions of otherwise were “reasonably foreseeable” to the defendant in connection with the criminal activity.
Focusing on the inclusion of conduct in years otherwise barred by the criminal statute of limitations, in tax cases the risk is how far the Government will go back in enhancing the tax loss that is the principal determinant of the Guidelines Sentencing range?  Prosecuted tax crimes have patterns which, in this context, often means multiple years.  Sometimes the years involved can go way beyond the criminal statute of limitations.  The risk is that the Government will throw into the relevant conduct mix all of those way out early years to drive up the sentencing range.  That is a theoretical risk, but it is mitigated by practical considerations.  Investigating such past history is not a good use of the Government’s resources, particularly if the easier picking years (the later years) generates sufficient tax loss to make the Government’s point by the criminal prosecution.  A good recent well-publicized example is in the recent wave of prosecutions related to foreign financial accounts.  In calculating the tax loss, the Government has not reached back to all years that it could have (some of the accounts went back to the 1980s and earlier and could have generated much larger tax losses).  Moreover, everyone practicing in this area has seen this phenomenon that the Government does not press on early years except in the most unusual of cases.  What often happens is that, in the initial criminal investigation years, the IRS will investigate years that will be within the 6 year criminal statute of limitations by the time a criminal indictment could be achieved.  The IRS will have worked the criminal numbers / tax loss for those years and perhaps, if continuity is needed, for one or two years before the earliest possible prosecution year.  For example, say that the investigation starts on 5/1/08 when the statute of limitations is technically open for years 01 - 06 (assumed the taxpayer filed the 01 year on 10/15/02 and filed the 07 year on 4/15/07).  The taxpayer has a pattern of conduct for all of the years 01 - 07.  The IRS agent and his manager know, however, that the investigation will last 1 ½ years year and that DOJ Tax CES and USAO processing time before indictment would be another 6 months.  So the expected date of the indictment will be, say, during the filing season of year 10, say 3/15/10, when only the years 03 - 07 have open statutes of limitation.  They therefore make the decision to focus on the years 03 - 07 and devote the investigate resources to work up the criminal numbers (basically same as tax loss numbers) for those years.  Their numbers indicate an aggregate tax loss in the investigated years of $500,000.  At sentencing, they know that $500,000 will achieve a Base Offense Level of 20 which, with the usual acceptance of responsibility, will achieve a sentencing Offense Level of 17 with a resulting Guideline range of 24 -30 months.  The question during the investigate phase presented is whether they will devote the significant additional resources required to dredge  up some higher tax loss in order to get a higher sentencing range.  In the example presented, the investigation would have to find more than $500,000 in the barred years to get to a higher level.  That amount or more may be there, but the IRS is not likely to go looking for it.  They can achieve their sentencing goals on the $500,000 found within the scope of the years that will not be barred by the time they obtain an indictment.

These examples are subject to a lot of variations, but if we assumed that, in the foregoing example, the tax loss in the investigated years turns out near the end of the CI investigation to be $950,000, the question is whether the IRS would then choose to devote further, potentially significant resources to squeeze out enough to clearly get above $1,000,000 in the aggregate for the higher sentencing range.  Based on my experience, I doubt it.  Again the IRS will likely have achieved its goals with the sentences already investigate.  Of course, where the IRS has some extra incentive or animus against the taxpayer, it may range far and wide for sentencing range enhancers that it might not have otherwise explored or developed.

Some other examples should give you some idea of the sweep of the relevant conduct consideration in determining tax loss.

First, in a federal tax case where the state taxes are also evaded based on the same pattern of conduct, the sentencing court should consider the state tax loss as relevant conduct.  For inclusion of the state tax loss number as relevant conduct, there is no requirement that the state have convicted the defendant.  Thus, the defendant’s federal sentence could be enhanced by the state tax loss and, should the state convict for the state tax evasion, the defendant would have suffered criminal punishments twice for the same conduct, albeit by two different jurisdictions.  If that were to occur, would the defendant have a double jeopardy argument?

Second, in establishing relevant conduct to up the sentence, the Government or the court can rely upon even illegally seized evidence that could not be used in determining guilt.

The potential adverse effects of relevant conduct must be considered at all stages.  But the first critical time that the rubber hits the road on relevant conduct is in the plea process.  I  discuss pleas specifically below, but one of the classic strategies for the Government is to load up an indictment with counts and then settle the case by plea bargaining to one or in some cases two counts (referred to in the tax field as “major counts”).  Because the tax loss for the dismissed counts may be considered in sentencing, the Government’s giving up of the dismissed counts is usually meaningless in terms of the sentence.  Using the example I just noted, if Government charges for years 03 - 05 and the taxpayer obtains a plea for one year (say 06), the Government will have already calculated the loss for all three years and will require (usually) the taxpayer to stipulate to the indicated tax loss for the three years (subject to such downward adjustments to the amount that the defendant has been able to negotiate).  The Guidelines sentence thus will be the same whether the plea is to three years or to one year and that Guidelines sentence in the example noted is within the maximum allowed for a one year sentence.  In short, the Guidelines sentence calculations are unaffected by the ability by the plea to knock out two counts in the indictment.  This phenomenon is well recognized.  For example, in a recent case I handled where the client was charged with three counts, she pled to one but, as the Presentence Report (often referred to as the PSR) succinctly notes:
47. Had the defendant been convicted on all counts of the Indictment, the guideline imprisonment range would remain the same.
A defendant is not required to discuss relevant conduct (conduct other than the conduct in the count(s) of conviction).  A defendant’s failure and even refusal to discuss relevant conduct cannot be used to deny him or her an acceptance of responsibility downward adjustment.  However, if the defendant discusses relevant conduct and lies about it, acceptance of responsibility can be denied.

Now that we know that relevant conduct can enter the sentencing calculation, the question is whether it must enter the calculation.  Stated alternatively, can a sentencing judge decline to consider relevant conduct as a way to achieve an appropriate sentence level?  The answer is no.  Consider the following from United States v. Hayes where the sentencing court ignored relevant conduct:
The presentence report (PSR) prepared before Hayes' sentencing concluded that the crimes of which Hayes had been convicted cost the Government a total of $75,814 (“Indictment Losses”). The PSR then estimated that the Government suffered additional losses of $199,017 from 63 tax returns prepared by Hayes that did not result in prosecution (“Non-Indictment Losses”). In computing Hayes' sentencing range, the PSR included both the Indictment Losses and the Non-Indictment Losses in Hayes' relevant conduct. See U.S. Sentencing Guidelines Manual section 1B1.3 (2000) (defining relevant conduct).   
Before the sentencing hearing, Hayes filed written objections to the PSR. With respect to the Non-Indictment Losses, he argued that (1) the 63 returns in question were not part of his relevant conduct, (2) the value of the Non-Indictment Losses was calculated improperly, and (3) consideration of the Indictment Losses alone would result in an appropriate sentence under 18 U.S.C.A. section 3553(a) (West 2000). The Government, responding in writing, disagreed with these assertions and offered to introduce evidence in support of its position.   
The Government did not have an opportunity to present this evidence. At the beginning of the sentencing hearing, the district court ruled: 
Given the facts in the pre-sentence report, I grant the defendant's objections to the calculations of the tax loss amount. Even though relevant conduct may be considered, The Court finds that a tax loss amount of $75,814, the total loss amount for the counts charged in the indictment, results in a sentence sufficient, but not greater than necessary, to reflect the seriousness of the offense, provide just punishment for an adequate deterrence, and to protect the public, in satisfaction of [section 3553(a)].   
J.A. 691. The Government noted an objection and proffered evidence to support its assertions, but the court did not change its ruling. The effect of this ruling was to reduce Hayes' base offense level from 16 to 14. See U.S.S.G. sections 2T1.4(a)(1), 2T4.1(I) & (K) (2000).   
The Government asserts that the district court erred in refusing to consider its evidence. Hayes counters that the court did not refuse to consider any evidence, but instead found such evidence insufficient to demonstrate that the Non-Indictment Losses resulted from relevant conduct.   
We agree with the Government's position. The statements of the district court do not reflect any inquiry whatsoever into the adequacy of the Government's proffers. Instead, the ruling quoted above indicates that the court simply made a personal assessment of what loss amount would result in an appropriate sentence, without regard to the sentencing guidelines. However, “[t]he relevant conduct provisions are designed to channel the sentencing discretion of the district courts and to make mandatory the consideration of factors that previously would have been optional.” Witte v. United States, 515 U.S. 389, 402 (1995); see U.S.S.G. section 1B1.3(a) (providing that a defendant's offense level ordinarily “shall be determined on the basis of” relevant conduct (emphasis added)). Thus, while the guidelines preserve a broad range of discretion for district courts, a court has no discretion to disregard relevant conduct in order to achieve the sentence it considers appropriate.

For these reasons, we must vacate Hayes' sentence and remand for further proceedings. On remand, the district court must apply section 1B1.3 to determine whether to treat some or all of the Non-Indictment Losses as part of Hayes' relevant conduct. We take no position regarding the procedures the court must follow or what its ultimate conclusion should be.
Just because the sentencing judge may not ignore relevant conduct in making the Guidelines calculations, there may be a way for the parties to prevent a sentencing judge from acting on the relevant conduct.  In plea agreements, the parties usually address the sentencing factors, at least those as to which the parties can reach agreement.  Most of the time, the defendant and the prosecutors will address relevant conduct and provide the basis for and tax loss related to relevant conduct.  But, assuming there is or could be relevant conduct, what if the parties do not address relevant conduct in the plea agreement and, in their other submissions to the Probation Office and the Court, do not say anything about relevant conduct?  How will the sentencing judge know anything about it and even if he suspects it be able to find the tax loss relevant conduct by the required preponderance of the evidence?  Now, that is not the way the Guidelines are supposed to work.  Certainly, if there is no doubt that the conduct in question clearly is relevant conduct and the prosecutors could prove it, they are not supposed to walk away from it and not advise the Court.  Indeed, most plea agreements will caveat that, notwithstanding anything else if the plea agreement, the prosecutors are free to meet their obligation to advise the sentencing judge of relevant sentencing factors, including, of course, relevant conduct.  But, sometimes, apparently, including the relevant conduct may inhibit a defendant’s willingness to enter a plea agreement.

So, what’s a prosecutor full of grace for the defendant supposed to do?  I discuss one such instance in my Federal Tax Crimes Blog which I cite in the footnote.  Basically, the prosecutors will not address the issue in the plea agreement but then, in the sentencing memorandum, the prosecutors will advert in some way to the possibility of relevant conduct but decline to prove it.  A sentencing judge could perhaps force the issue and make the prosecutors cough up what they have to see if it permits a determination of the relevant conduct.  But, if the judge does not, the gambit works because neither the sentencing judge, the defendant or the prosecutors complain.  If the gambit works, the net effect is the Guidelines calculations are understated and the defendant gets  a Guidelines calculations benefit.  I do think that the Guidelines do not contemplated that result and instead contemplate the relevant conduct will be included and any “grace” to the defendant will be handled through Guidelines departures and Booker variances.

Finally, relevant conduct can include conduct that was considered relevant conduct in a prior sentencing, even if conceptually it might be considered double punishment.  Thus, tax losses in uncharged years considered relevant conduct in the prior proceeding might be considered relevant conduct in the charged year. (OK, I do hope you are asking why somebody could have been so stupid to continue such conduct, and the thought “protestor” might come to mind; but once you get past that anti-defendant thought, it does seem at least unfair that the pile-on effect of relevant conduct can be used in two separate prosecutions.)

I hope you can see why the concept of relevant conduct can be such a wild card in criminal cases.



Sentencing Guidelines on Relevant Conduct:
§1B1.3.     Relevant Conduct (Factors that Determine the Guideline Range), here.

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