Tax Obstruction Conviction Permits Inclusion in Tax Loss of Penalties and Interest (3/12/16)

I previously reported on the criminal tax appeal by Rex Black who was convicted of tax obstruction, § 7212(a), here.  Seventh Circuit Reverses Sentence for Improper Calculation of Advisory Guidelines Range (8/21/15), here.  The Seventh Circuit opinion discussed in that blog entry covered several issues, one of which I questioned.  That issue was whether the conviction for obstructing the collection of tax could include penalties and interest within the scope of the financial harm Black intended to inflict on the IRS by his obstructive acts.  The Seventh Circuit held that the calculation could not.  The Government filed for rehearing on that issue.  On March 7, 2016, the Seventh Circuit granted the rehearing, changed its mind on that issue, and produced a new opinion which it substituted for the old one.  See United States v. Black, ___ F.3d ___ (7th Cir.), here.

Here is the complete discussion:

In its order, the district court stated "[t]he loss Black intended the IRS to suffer had Black's offense been successfully completed included the loss of the penalties and interest Black owed the IRS, as well as the taxes he owed." It included a footnote in its order that stated, 

Even though Black's criminal statute of conviction was 26 U.S.C. § 7212(a) not [ §§ ] 7201 or 7203, the evidence at trial established beyond a reasonable doubt that the object of Black's criminal conduct in committing the offenses . . . was to defraud the IRS by willfully failing to pay and willfully evading his payment of his debt obligations to the IRS, which included the penalties and interest, as well as the taxes that Black owed to the IRS. 

The district court included penalties and interest in the tax loss calculation and did so because Black's conduct was similar to conduct criminalized by § 7201 and § 7203. 

Black argues that the tax loss calculation under U.S.S.G. § 2T1.1 should not include penalties and interest as part of the tax loss calculation. He specifically argues that penalties and interest should not be included in the tax loss calculation because he was not charged or convicted of willful evasion under 26 U.S.C. § 7201 or willful failure to pay under § 7203. 

The government argues that the issue of whether Black's tax loss calculation included penalties and interest is not properly before the court because the district court based the tax loss amount on the face value of the fraudulent checks, not the amount of taxes Black owed. As stated above, the face value of the checks was not the correct tax loss. Moreover, the record establishes that the district court included penalties and interest in its tax loss calculation. 

The general rule is that the tax loss calculation "does not include interest or penalties." U.S.S.G. § 2T1.1 cmt. n.1. There is a narrow exception to this general rule for "willful evasion of payment cases under 26 U.S.C. § 7201 and willful failure to pay cases under 26 U.S.C. § 7203." Id. To determine whether penalties and interest should be included in the tax loss calculation, we must determine to which types of cases the exception applies. 

Relying on U.S.S.G. § 1B1.3 cmt. n.6 and United States v. Thomas, 635 F.3d 13 (1st Cir. 2011), the government argues that U.S.S.G. § 2T1.1 cmt. n.1 does not limit the inclusion of penalties and interest to defendants convicted of willful evasion of payment under § 7201 or willful failure to pay under § 7203. It further argues that penalties and interest should be included in the tax loss calculation "in any case where defendant's conduct -- offense, relevant, or stipulated, as admitted in a plea agreement, proven at trial, or established by a preponderance of the evidence at sentencing -- constituted willful evasion of payment, as defined by 26 U.S.C. § 7201, or willful failure to pay, as defined by 26 U.S.C. § 7203."

Application Note 6 to U.S.S.G. § 1B1.3 provides guidance on how to interpret a section of the guidelines that, like § 2T1.1 cmt. n.1, directs that a principle be applied to conduct in light of a specific statute. Specifically, it instructs: 

A particular guideline (in the base offense level or in a specific offense characteristic) may expressly direct that a particular factor be applied only if the defendant was convicted of a particular statute. For example, in § 2S1.1 (Laundering of Monetary Instruments; Engaging in Monetary Transactions in Property Derived from Unlawful Activity), subsection (b)(2)(B) applies if the defendant "was convicted under 18 U.S.C. § 1956". Unless such an express direction is included, conviction under the statute is not required. Thus, use of a statutory reference to describe a particular set of circumstances does not require a conviction under the referenced statute. An example of this usage is found in § 2 A3.4(a)(2) ("if the offense involved conduct described in 18 U.S.C. § 2242"). 

U.S.S.G. 1B1.3 cmt. n.6. Because U.S.S.G. § 2T1.1 cmt. n.1 does not expressly direct the court to exclude penalties and interest if the defendant was convicted under 26 U.S.C. §§ 7201 or 7203, a conviction under one of these statutes is not required for the court to include penalties and interest. While a conviction is not required, what makes a case a case "under" 26 U.S.C. §§ 7201 and 7203? 

In Thomas, the grand jury returned a six-count indictment against the defendant. Counts 1 and 2 charged the defendant with willfully attempting to evade the payment of taxes, in 1995 and 1996, respectively, under 26 U.S.C. § 7201 and Counts 3 through 6 charged the defendant with willfully attempting to evade the assessment of taxes also under 26 U.S.C. § 7201. Indictment, United States v. Thomas, No. 06 CR 00004, ECF No. 1 (D. Me. Jan. 11, 2006). The defendant pleaded guilty to one count of willful attempt to evade assessment of taxes. Thomas, 635 F.3d at 16. The district court included penalties and interest in the tax loss calculation used to determine his offense level. Id. On appeal the defendant argued that the district court should not have included penalties and interest because he evaded assessment, not payment of the tax, and that note 1 to U.S.S.G. § 2T1.1 concerns only willful evasion of payment cases under § 7201. Id. at 17. The First Circuit found that the fact the defendant pleaded guilty only to willful evasion of the assessment of taxes did not preclude the district court from considering as relevant conduct actions the defendant took that were evasion of the payment of taxes. Id. Finding that the defendant willfully evaded payment of taxes in 1995 and 1996 (Counts 1 and 2) in furtherance of his evasion of the assessment of taxes, the First Circuit concluded that the district court properly included penalties and interest. Id. at 17-18. 

We find Thomas persuasive and conclude that the statutory reference in U.S.S.G. § 2T1.1 n.1 does not require a charge or conviction to be applicable to a defendant's case. Admittedly, it is not clear whether the "cases under 26 U.S.C. § 7201 or § 7203" requires at least a charge, but the absence of a statement in the guidelines asserting that the indictment must contain a charge under either statute supports our interpretation. Moreover, the tax loss definition instructs the court to look to the object of the offense. U.S.S.G. § 2T1.1(c)(1). If the object of the offense is to avoid the tax, penalties, and interest, then penalties and interest should be included in the tax loss. The district court found that the evidence established beyond a reasonable doubt that Black intended to defraud the IRS by willfully failing to pay and willfully evading payment of the taxes he owed the IRS, a conclusion Black does not challenge. Since the conduct was tantamount to 26 U.S.C. § 7201 and § 7203 conduct, the district court may include penalties and interest in the tax loss calculation.

I am not sure if the Seventh Circuit changed other portions of the opinion in any material way.  If anyone knows the answer to that, please let me know by comment or by email.