Coplan #7 - Booker Variance Fixes a Glitch in the Guidelines (12/6/12)

One of the defendants, Charles Bolton, pled guilty to a single conspiracy count alleging a conspiracy with three objectives -- a defraud / Klein objective and a two offense objectives and objectives (false statement (18 USC § 1001, here) and to impair and impede the IRS (§ 7212(a), here).  The trial judge sentenced Bolton to a 15 month term of imprisonment and imposed a $3 million fine.  Bolton appealed both this term of imprisonment and his fine.  Just a couple of comments before moving to the sentencing:

1. Plea agreements usually have a term waiving appeal with, in some cases, appeal permitted on some issues; apparently Bolton's permitted an appeal on these issues;
2. This conspiracy count was different from the conspiracy count on which the others were tried which involved a defraud / Klein conspiracy objective and two offense objectives (evasion (§ 7201, here) and false statement (18 USC § 1001).
3. The assertion of a defraud / Klein conspiracy and an offense conspiracy to violated § 7212(a) seems to be redundant.  What am I missing here?  The redundancy, if it exists, is irrelevant to any real world issue, but it seems odd.  (At one point, DOJ Tax in the CTM described § 7212(a) as a one person Klein conspiracy, so the concept of a conspiracy to commit a conspiracy is odd.)

Now, moving to the facts, Bolton, the operator of an investment firm used to implement investing strategies for the shelters, was involved in the concerted action among the defendants.  For example, Bolton proposed a the following "cover story" for a shelter that the trial defendants adopted to pass on to the IRS:

That cover story attributed a key step in the Add-On transaction—the transfer of digital options from the individual partnership to a newly formed LLC—to a request from trader Andrew Krieger to consolidate accounts for administrative convenience. There was no meaningful dispute at trial that the "consolidation cover story" was false.

On appeal, Bolton challenged the procedural and substantive reasonableness of his 15 month sentence.
In the plea agreement, the parties stipulated that "under the special facts of this case applicable to the defendant, there is no 'tax loss' as defined in § 2T1.1(c) of the Sentencing Guidelines" and that the advisory guideline range was 0 to 6 months if the Court applied SG § 2T1.9 (the conspiracy tax Base Offense Level) or 10 to 16 months if the Court applied SG § 2J1.2 (offense involving the administration of justice).  The PSR, apparently applying SG § 2T1.9 (the tax Guideline), determined a range of 0 to 6 months and recommended  a sentence of 6 months, the top of the range.  Since I focus here on three key guidelines, I provide the links for them -- § 2T1.1, here  (relating to general tax crimes), and § 2T1.9, here (relating to conspiracy), and § 2T1.4, here (the Tax Table); these links are to the current Guidelines, but they have not changed in any respect material to this discussion.

At the outset, the indicated sentencing ranges, certainly for the tax Guidelines, seems a bit odd.  In fact, the conspiracy of which Bolton was a member generated an estimated tax loss exceeding $400 million.  Those who have spent any time in the Guidelines know that, for financial crimes, the sentencing range is scalable depending upon the financial loss, called a "tax loss" in a tax setting.  And, we also know that a tax loss exceeding $400 million would generally produce a sentencing range far in excess of 0 to 6 months.  What happened here? Specifically why did the parties stipulate and  the PSR agree, there was no "tax loss," thus requiring a tax Guideline Base Offense Level of 10 under SG § 2T1.9.

SG § 2T1.9, here, provides in relevant part, that the Base Offense Level ("BOL") is the greater of 10 or the "Offense level determined from §2T1.1."  The latter section provides the BOL for most of the tax specific crimes (evasion, tax perjury, aiding and assisting, etc.).  The BOL determined under the tax specific guideline is scalable, riding up as the "tax loss" increases.  Thus, had Bolton been convicted of a tax specific crime (which he could have for his direct conduct as well as the co-conspirators' conduct under Pinkerton), his BOL for a tax loss of over $400 million would have been 36.  Many people practicing in this area might have just assumed that § 2T1.9's reference to § 2T1.1 would have produced that result.

But, the parties, the PO and the sentencing court noted something strange in how § 2T1.9 works.  The reference from § 2T1.9 to § 2T1.1 made no adjustments to the wording of § 2T1.1.  Focusing on the wording of § 2T1.1(c), the term "tax loss" ties the definition of tax loss to the offense(s) of conviction -- tax evasion, tax perjury, failure to file, etc.  It does not tie the tax loss to objects of a conspiracy where there was no substantive offense of conviction.  So, applying § 2T1.1 literally, there is no tax loss as defined.  What that does is to take scalability out of the Guidelines if conspiracy is the only count of conviction in a case such as this.  That indeed is an odd result, given the way the Guidelines otherwise work.

The sentencing judge did not like that conclusion.  I pick up the key excerpt from Court of Appeals opinion (omitted one three footnotes that quote the relevant Sentencing Guidelines which I provide links for above):

By order dated January 29, 2010, Judge Stein ordered counsel to appear at a hearing in order to discuss "several issues" related to Bolton's Guidelines calculation. At that hearing, Judge Stein explained that he had a "huge problem" with the parties' stipulation that no tax loss was attributable to Bolton under the Guidelines. Specifically, Judge Stein stated that he could not be "intellectually honest" and adopt the position that there was no tax loss attributable to Bolton in light of his (Judge Stein's) conclusion that the tax loss attributable to the trial defendants exceeded $400 million. At the April 13, 2010 sentencing hearing, Judge Stein applied § 2T1.1(a) and calculated an advisory Guidelines range of 210 to 262 months of imprisonment based on an estimated tax loss in excess of $400 million. He then imposed a sentence of 15 months of imprisonment, noting that "if my finding on loss is incorrect, the sentence would still be the same because this is a substantial, massive departure." Bolton A 117. 

B. Procedural Unreasonableness 

Bolton argues on appeal that the District Court committed procedural error by applying § 2T1.1(a) even though he was not convicted of tax evasion. In essence, Bolton contends that a "tax loss" within the meaning of the Guidelines exists only where a defendant willfully evaded taxes or committed certain other "specific intent" crimes. 

The Guideline applicable to § 371 conspiracy convictions is § 2T1.9,  which states that a defendant's base offense level shall be the greater of 10 or the offense level determined from § 2T1.1 or § 2T1.4, as appropriate. Section 2T1.1 is entitled "Tax Evasion; Willful Failure to File Return, Supply Information, or Pay Tax; Fraudulent or False Returns, Statements, or Other Documents." Section 2T1.4 is entitled "Aiding, Assisting, Procuring, Counseling, or Advising Tax Fraud." Under either provision, the base offense level is determined by calculating the "tax loss" for the offense. 

Pursuant to § 2T1.1(c)(1), a "tax loss" is defined as follows: 

If the offense involved tax evasion or a fraudulent or false return, statement or other document, the tax loss is the total amount of loss that was the object of the offense (i.e., the loss that would have resulted had the offense been successfully completed). 

U.S.S.G. § 2T1.1(c)(1). The definition measures tax loss by reference to "the object of the offense." But nothing in the definition limits the existence of a "tax loss" to instances where a defendant acted willfully or otherwise intended to cause a loss to the IRS. Thus, although the title of the provision makes clear that § 2T1.1 is focused on tax evasion and other willful violations of the tax laws, nothing in the language limits the application of § 2T1.1 to such crimes. fn45 Assuming arguendo that the District Court did err in applying § 2T1.1, that error would be harmless because the District Court stated explicitly that it would impose the same sentence regardless of the loss amount. See United States v. Jass, 569 F.3d 47, 68 (2d Cir. 2009) ("Where we identify procedural error in a sentence, but the record indicates clearly that the district court would have imposed the same sentence in any event, the error may be deemed harmless, avoiding the need to vacate the sentence and to remand the case for sentencing." (internal quotation marks omitted)). Bolton attempts to minimize the significance of the District Court's statements by characterizing them as "cursory" observations "near the close of Mr. Bolton's sentencing." But nothing about the sentencing below was "cursory." Although the Court determined that the applicable Guidelines range was 210 to 262 months of imprisonment, it ultimately imposed a sentence of 15 months—a 93% reduction from the low end of that range. Inasmuch as Bolton's sentence clearly was not driven by the initial Guidelines calculation, the Court's statement that it would impose the same sentence even in the absence of a tax loss is amply supported by the record. For that reason, we can "confidently conclude" that any arguable error here was harmless. Id.

   fn45 We note, however, our considerable skepticism about the wisdom of applying an intended rather than actual loss measure where, as here, the defendant has not been convicted of a crime requiring him to have the specific intent to cause a tax loss.

Of course, the key to the results at both levels is the Booker variance to 15 months.  The sentencing judge first varied downward to 15 months based  on the application of § 2T1.1 with a tax loss but then state  that he would impose the same result by varying upward if the indicated Guidelines range were 0 to 6 months.  So, the Court of Appeals says -- no harm, no foul (or some such in more lawyerly or courtly language).

I guess the take away lesson is that, for practitioners plea bargaining, one way to limit the BOL to 10 is to plea to a single conspiracy count.  The judge can still do a Booker upward variance, but with facts that are less egregious than Coplan, a sentencing judge may very will not do as much of an upward variance or do none at all.

I would state, however, that I am not convinced that reading the reference to § 2T1.1 to permit no tax loss is not a necessary reading.  It just makes  no sense to refer to § 2T1.1 with applying some concept of tax loss. It might work out OK where the conspirator is convicted of both the substantive offense(s) and the conspiracy, but the resolution of many cases is that there will only be a count of conviction for conspiracy.  I can't believe that the framers of the reference in § 2T1.9 intended that the conspirator get off lighter simply because there is no substantive offense of conviction.  Still, I will greatly appreciate the holding when my clients benefit from it in the future.

Finally, I just quote the Court of Appeals' brief discussion on substantive unreasonableness:\

C. Substantive Unreasonableness 

Bolton also argues that his 15-month sentence was substantively unreasonable because the District Court "unreasonably weighted the seriousness of [his] offense based on the evidence, particularly in comparison to the E&Y defendants." fn46 Bolton Br. 28. But given the fact that Bolton played a significant and necessary role in the conspiracy (by coming up with the Add-On cover story and signing IRS documents, for example), as well as his significant financial gain in implementing the transactions, it cannot be said that his 15-month sentence was "manifestly unjust." See Rigas, 583 F.3d at 122. 

   fn46 The sentences of the trial defendants were as follows: Robert Coplan (36 months), Martin Nissenbaum (30 months), Richard Shapiro (28 months), Brian Vaughn (20 months).