Sunday, January 19, 2014

Restitution Less than Tax Loss Based on Burden of Proof for Unclaimed Deductions; and Application of Section 3553(a) / Booker (1/19/14)

I previously blogged on an Eighth Circuit decision addressing the revisions to the Sentencing Guidelines regarding unclaimed deductions.  See Early Court Appellate Court Decision on New Sentencing Guideline Provision Regarding Unclaimed Deductions (Federal Tax Crimes Blog 11/19/13), here.  That blog entry discusses United Sates v. Fawaz, 2013 U.S. App. LEXIS 23135 (6th Cir. 2013), here, which discusses the amendment to the Guidelines Application Note § 2T1.1, par. 3, here, regarding unclaimed deductions in computing the tax loss.  The Eighth Circuit remanded the case for re-sentencing.


On remand, the district court re-sentenced and wrote an opinion, United States v. Safiedine, 2013 U.S. Dist. LEXIS 179364 (ED MI 2013), here.  Safiedine was the co-defendant with Fawaz; this re-sentencing opinion is for both Safiedine and Fawaz.  Here are key excerpts from the opinion regard unclaimed deductions and the relationship to restitution:
The new Application Note in § 2T1.1 provides the following guidance to courts considering such unclaimed deductions "needed to ensure a reasonable estimate of the tax loss": (1) the deductions must be "related to the tax offense and could have been claimed at the time the tax offense was committed;" (2) the deductions must be "reasonably and practicably ascertainable;" and (3) "the defendant presents information to support the credit, deduction, or exemption sufficiently in advance of sentencing to provide an adequate opportunity to evaluate whether it has sufficient indicia of reliability to support its probable accuracy [.]" Id. Defendants bear the burden of establishing an entitlement to any deduction for purposes of calculating tax loss by a preponderance of the evidence. Id. 
* * * * 
The amendment to § 2T1.1 allows the Court to account for unclaimed deductions in calculating tax loss only if the unclaimed deduction is both reasonably and practicably ascertainable. In elucidating its reasons for the amendment, the Sentencing Commission explained that this requirement is designed to ensure that sentencing courts are not required "to make unnecessarily complex tax determinations[.]" U.S.S.G. Manual supp. to app. X, amend. 774 at 42. The Court finds support for Defendants' claim that JSC is entitled to deduct payments for improvements to properties owned by other Safiedine-related entities as the lessee of those properties (under a theory of leasehold improvement). (10/22/13 Restitution Hr'g Tr. 65-66, ECF No. 128 (Kempf agreeing that a lessee of property paying for improvements to the property has a right to amortize the payments on its tax returns)).6 Nevertheless, Defendants have failed  [*19] to discharge their burden of demonstrating that the unclaimed deductions were not already claimed by another Safiedine-related entity. Based on this Court's evaluation of the evidence, it finds that such a factual determination is not reasonably and practicably ascertainable. For this reason as well, the Court concludes that Defendants' previously unclaimed deductions should not be used in calculating the tax loss for the purpose of sentencing. 
[Omit discussion of other unclaimed deductions] 
* * * * 
A. Amount 
In the present case, restitution is being ordered pursuant to the Mandatory Victims Restitution Act ("MVRA"), 18 U.S.C. § 3663A, which requires courts to order restitution in cases involving "offenses against property" under Title 18, such as the conspiracy to defraud the United States conviction here. 18 U.S.C. § 3663A(a)(l); see also U.S.S.G. § 5E1.1 (providing that restitution shall be ordered). While Defendants had the burden of demonstrating their entitlement to deductions for purposes of calculating tax loss for sentencing, the Government bears the burden to prove its loss by a preponderance of the evidence for purposes of calculating restitution. 18 U.S.C. § 3664(e). As discussed above, Defendants failed to demonstrate an entitlement to the previously unclaimed deductions they sought to benefit from to reduce the tax loss for sentencing. The Government, however, has similarly failed to discharge its burden with respect to restitution. 
As the parties have repeatedly acknowledged at the various hearings conducted in effort to ascertain the tax loss caused by Defendants' conduct, this is anything but a typical case. Accurately reconstructing tax loss in a hypothetical universe is anything but simple, particularly where certain expenses have not been verified by receipts (here, the Court refers to the payments that went to Kassabri) and where the tax returns as filed did not contain detailed depreciation schedules. As is often the case in the law, the result here is governed by which party bears the burden of proof on a particular issue. For sentencing, the amendment to § 2T1.1 clearly provides that Defendants shoulder the burden of proving that they are entitled to retroactively claim previously unclaimed deductions to reduce the tax loss. They have not met that burden. For restitution, the burden belongs to the Government. The Government has similarly failed to discharge its burden. While the Court's tax loss calculations therefore differ for purposes of sentencing and restitution, this result is not untenable. The Sentencing Commission's amendment to § 2T1.1 does not require a showing of actual tax loss; rather, the guideline requires only a "reasonable estimate of the tax loss." U.S.S.G. Manual supp. to app. X, amend. 774 at 42. The MVRA, however, makes clear that only actual loss may be taken into account in determining the restitution portion of a defendant's punishment. 18 U.S.C. § 3664(f)(1)(A). Given these varied standards, it is plainly reasonable that the appropriate loss amount for purposes of restitution may well be lower than the loss amount for purposes of sentencing.
This discussion of the results turning upon who has the burden of proof is fascinating, so I want to offer some comments on that discussion.  The Court's analysis of the effect of the differing burdens of proof -- here the burden of persuasion -- for the unclaimed deductions in the tax loss determination and in the restitution determination is excellent.  The Government bears the burden of persuasion as to the tax loss, but the defendant has the burden of persuasion for any unclaimed deductions that may reduce the tax loss determined without those unclaimed deductions.  However, since restitution is to recompense the IRS for the actual taxes involved, the Government bears the burden of persuasion to show in the restitution calculation that the taxpayer is not entitled to the deductions.  This is classic application of procedure theory.  (I do note that, in order for the Government to have the shoulder that burden to show that the defendant is not entitled to unclaimed deductions, I think that the defendant will be required to meet a production burden to show some right to unclaimed deductions; this is certainly the rule if unclaimed deductions are in issue in the criminal case in which where for tax evasion the Government must show tax due and owing which is net of all proper deductions.)

Now to delve lightly into burden of proof theory, the function of the burden of persuasion is to determine who wins when the trier of fact is in a state of equipoise -- i.e., cannot find whether the fact in question exists or does not exist.  This is often referred to as a state of equipoise.  One way of illustrating the equipoise phenomenon in a proceeding where the preponderance of the evidence standard applies is by percentages -- equipoise is when the trier of fact cannot decide one way or the other, so the trier might be said to be at 50% on the issue of the facts existence or nonexistence.  To continue that illustrative device, if the trier is at 49% or at 51%, the trier is not in equipoise but can find that the fact does not exist (49% or less) or does exist (51% or more).  When the trier is not in equipoise, the burden of persuasion is irrelevant.

In its opinion, the sentencing court in Safiedine says (emphasis supplied):  "As is often the case in the law, the result here is governed by which party bears the burden of proof on a particular issue."  The sentencing court certainly has observed and participated in more fact findings than I have, so his pronouncement that the phenomenon of equipoise -- not his word, but that is what he means -- occurs often and thus controls the outcome of the case relevant to that fact or those facts.  However, the role of the burden of persuasion applies in most civil cases -- if the trier is in equipoise, the burden of persuasion determines who wins.  This is the burden of persuasion in most civil tax cases, such as those tried routinely in the Tax Court.  Here is what I say about the burden of persuasion in my Federal Tax Procedure book:
Cases are replete with burden of proof discussions as if burden of proof played a role in the decisions.  Of course, in criminal cases, burden of proof beyond a reasonable doubt is critical and a constitutional requirement.  But in civil cases the assignment of the ultimate burden of proof -- the burden of persuasion -- merely determines who wins and who loses if the trier of fact is in equipoise -- i.e., is unable to find that the fact more likely than not existed or didn't exist.  If the trier believes that the evidence establishes that the fact more likely than not existed, then it doesn't matter which of the parties had the burden of proof or any component of it.  Similarly, if the trier believes that the evidence establishes that the fact more likely than not did not exist, then it also doesn't matter which of the parties had the burden of proof or any component of it.  It is only where the trier is unable to make the affirmative finding that the case is affected by which party bore the burden of proof (or any component). n1754  Most trial observers feel that it is rare that a trier – whether judge or jury – is in this state of equipoise so that the assignment of the burdens of proof may not ultimately be that important an issue, but it is important in framing and trying a case, of course. n1755  In fact, in judge tried cases, it is common for the trial judge to discuss in the opinion the burden of proof (i.e., the burden of persuasion) to a greater or lesser extent, but then to say that, after all, the discussion is irrelevant because he is not in a state of equipoise as to any issue.
   n1754  An interesting recent case illustrates the phenomenon where the trier is in equipoise so that the resolution turns upon the assignment of the burden of proof, meaning in this case the burden of persuasion.  In Forste v. Commissioner, T.C. Memo 2003-103, the issue was whether the taxpayer could exclude $45,615  from income under a prior version of § 104.  The court first determined that recently enacted § 7491 which we discuss in more detail below applied to assign the burden of proof to the IRS as to $25,130.  The Court held that the IRS had failed to meet that burden and thus, without an affirmative finding, held that that portion was excluded under § 104.  As to the balance of the payment, the Court held that the taxpayer bore the burden of proof and held for the IRS because the taxpayer had not met his burden of proof.  In other words, as to both components, the Court was in equipoise so that the assignment of the burden of proof controlled the result.  For an application of this type of analysis in a criminal sentencing, see United States v. Safiedine, 2013 U.S. Dist. LEXIS 179364 (ED MI 2013) (where the preponderance of the evidence standard applied to tax loss and restitution issues; as to tax loss, the taxpayer bore the burden of persuasion on unclaimed deductions and as to restitution, the Government bore the burden of persuasion; since the court was in equipoise on unclaimed deductions, the tax loss was computed without the unclaimed deductions but as to restitution, the amount was determined with the unclaimed deductions).
   n1755 Cigaran v. Heston, 159 F.3d 355, 357 (8th Cir. 1998) (“The shifting of an evidentiary burden of preponderance is of practical consequence only in the rare event of an evidentiary tie . . . .”); see also Polack v. Commissioner, 366 F.3d 608, 613 (8th Cir. 2003) (citing the Cigaran case); Blodgett v. Commissioner, 394 F.3d 1030, 1039 (8th Cir. 2004); and Knudsen v. Commissioner, 131 T.C. 185, 188 (2008).
I will acknowledge that it is possible that the phenomenon of equipoise is not as rare as I state in the Federal Tax Procedure text above.  I would appreciate hearing the experience or judgment of other observers of determinations of equipoise under the preponderance of the evidence standard.


In addition to the tax loss / restitution issues, the Court has an interesting discussion of its application of the Section 3553(a) / Booker sentencing factors to achieve an appropriate sentence by varying downward from the indicated Guideline range.  Here is the discussion for Safiedine:
C. Section 3553(a) Factors 
* * * * 
1. Safiedine 
With respect to Safiedine, there are two factors delineated in § 3553(a) that the Court finds relevant. The first is "the nature and circumstances of the offense and the history and characteristics of the defendant[.]" 18 U.S.C. § 3553(a)(1). The second is "the need to avoid unwarranted sentence disparities among defendants with similar records who have been found guilty of similar conduct[.]" Id. § 3553(a)(6). 
Safiedine has resided in Michigan for forty-four years and has been married to an American citizen for forty-one years. He and his wife have four children and seven grandchildren, all of whom reside in the United States. Despite Safiedine's lengthy stay in this country, he never become a citizen (he is a lawful permanent resident). He therefore faces potential deportation to Lebanon as a result of his conviction. Safiedine has not been to Lebanon since 1969. 
Safiedine's counsel represented to the Court that his client is more likely to be deported if his sentence exceeds ten months. (10/17/12 Sent'g Hr'g 120, ECF No. 81.) He will be removed from the country where he has lived for his entire adult life, separated from his family, and returned to a country where he has not been since he was seventeen years old. A sentence exceeding ten months therefore is likely to lead to far harsher consequences for Safiedine than other defendants with similar records who have been found guilty of similar conduct. 
Further, although a successful businessman, Safiedine has less than a high school education and has difficulty reading, writing, and understanding English. While these characteristics may not be relevant with respect to the failure to report the total income derived from the sale of the Joy Road station, they are significant when reflecting upon the nature and circumstances surrounding the failure to report the Sunoco payments. The tax issues relevant to those payments, in this Court's view, are not simple. 
The Court finds it significant that this is not a case of a taxpayer who failed to file income tax returns; Safiedine filed tax returns and paid substantial taxes into the United States Treasury. The tax loss here, although not insignificant, can hardly be deemed overwhelming. While this consideration is generally reflected in the base offense level used to calculate a defendant's guidelines range, in Safiedine's case, it is not reflected in the further penalty he will almost certainly face if the Court adheres to the guidelines range. In short, the risk of deportation for the offense at hand '"take[s] it outside the Guidelines' 'heartland' and make[s] of it a special, or unusual, case.'" Koon v. United States, 518 U.S. 81, 95, 116 S. Ct. 2035, 2045 (1996) quoting United States v. Rivera, 994 F.2d 942, 949 (1st Cir. 1993)). 
Lastly, and with respect to the purposes of punishment as set forth in 18 U.S.C. § 3553(a)(2), the Court notes that the offense of conviction involved events beginning and ending over a decade ago. While this consideration, standing alone, does not necessarily mitigate the seriousness of the offense, there is nothing in the record that suggests that Safiedine has failed to accurately report the income from his businesses since 2002. Accordingly, there is little reason to believe that the public needs to be protected from Safiedine. 
For these reasons, as well as the other considerations relevant to the sentencing determination, the Court concludes that a sentence of ten months is appropriate for Safiedine. This period of incarceration shall commence retroactively from March 25, 2013 - the date on which Safiedine reported to the Bureau of Prisons to serve his original sentence. (See 2/13/13 Order Extending Reporting Date, ECF No. 108.) This sentence shall be followed by two years of supervised release 9 with the same conditions previously imposed. (Safiedine J., ECF No. 79.)

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