Sentencing Guidelines Loss Calculations -- No Double Counting Please

The key first step in the Sentencing Guidelines calculations is to determine the tax loss. Normally, this is rather cut and dried, except that the practitioner must assure that the tax loss only includes tax amounts related to fraudulent items (as opposed to just nonfraudulent civil adjustments). But every now and then controversy flares up about double counting, as it did in the recent case of United States v. May, 568 F.3d 597 (6th Cir. 2009), here.

In May, the defendant ran a business. At his direction, the business withheld tax amounts from the paychecks of all employees (including himself) but did not pay them over to the IRS. The taxpayer was subsequently prosecuted for personal tax evasion (§7201) and for willful failure to pay over the withholding amounts (§7202). He was convicted of both. The district court included in the tax loss the amount that was withheld and not paid over (including the amount related to the defendant's own salary) and also included the defendant's underpaid tax liability which underpaid amount included the amount withheld but not paid over. In effect, both amounts relating to the defendant's single income tax liability got counted twice, thus affecting his tax loss number and potential sentence under the Guidelines. The Court noted pungently: "Despite the fact that the taxes were only owed once, the government contends that the Sentencing Guidelines demand that we count the tax loss twice, once for the payroll tax loss calculation and once for the personal income tax evasion calculation." The court held that the Government's authority for this startling proposition were inapropos and concluded (p. 605):

As the government has admitted, the funds on which May failed to pay taxes were only subject to being taxed once. May could pay them as payroll taxes or pay them on his individual income tax form. (Gov't Br. at 37-38.) Section 2T1.1(c)(3) requires that "[i]f the offense involved willful failure to pay tax, the tax loss is the amount of the tax that the taxpayer owed and did not pay." (emphasis added). Thus, Section 2T1.1(c)(3) applies here because both of the statutes under which the jury convicted May require willfulness. See 26 U.S.C. §§ 7201-7202. Once again, the government does not argue that May owed the tax twice. (Gov't Br. at 22-23.) Because the plain text of the Sentencing Guidelines requires that only amounts actually owed should be aggregated, the district court erred in counting the tax loss twice. On remand, the district court should calculate the amount of taxes May owed on his own income. The district court should then add to this amount the amount of payroll taxes from the other employees of Maranatha that May collected but did not actually pay over to the government. These amounts may be aggregated because the payroll tax owed for the other employees was a separate taxable amount that was owed. See U.S.S.G. § 2T1.1(c)(3). n4