Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca9-08-10235/USCOURTS-ca9-08-10235-0/pdf.json

Parties Involved:
United States of America
Appellee
Andy S.S. Yip
Appellant

Document Text:

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

UNITED STATES OF AMERICA,  No. 08-10235

Plaintiff-Appellee, D.C. No.

v.  CR-02-00225-

DAE-1 ANDY S.S. YIP,

Defendant-Appellant. OPINION 

Appeal from the United States District Court

for the District of Hawaii

David A. Ezra, District Judge, Presiding

Argued and Submitted

October 13, 2009—Honolulu, Hawaii

Filed January 13, 2010

Before: Robert R. Beezer, Susan P. Graber, and

Raymond C. Fisher, Circuit Judges.

Opinion by Judge Graber

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COUNSEL

Theodore Y. H. Chinn, Honolulu, Hawaii; and Howard T.

Chang, Honolulu, Hawaii, for the defendant-appellant.

Leslie E. Osborne, Jr., Assistant United States Attorney,

Honolulu, Hawaii, for the plaintiff-appellee.

OPINION

GRABER, Circuit Judge:

Defendant Andy S.S. Yip operated an “off-the-books” business selling watches. He failed to report the income to the

Internal Revenue Service (“IRS”) or to disclose his foreign

bank accounts. He then conspired to keep the IRS from recovering the unpaid taxes. Defendant now stands convicted of

one count of conspiracy to defraud the United States, one

count of filing a false tax return, and two counts of failure to

report foreign financial agency transactions. He also pleaded

guilty to four additional counts of filing a false tax return. On

appeal, he challenges both his convictions and his sentence.

In particular, he contends that the district court erred in its calculation of tax loss and in its application of a sentencing

enhancement for obstruction of justice. In this opinion, we

hold that the district court properly included Defendant’s

unpaid state taxes in the tax loss computation on which his

term of imprisonment and his restitution order were based and

that Defendant was not entitled to an imputed deduction for

his unpaid state taxes. We also hold that the district court

properly applied the sentencing enhancement because Defendant’s actions obstructed the IRS audit. In a separate memorandum disposition filed this date, we reject Defendant’s

challenges to his convictions, but hold that the district court

made several errors in sentencing him. We therefore vacate

his sentence and remand for resentencing.

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FACTUAL AND PROCEDURAL HISTORY

Defendant owned a legitimate business in Hawaii called A

& E Creations. He also operated an off-the-books business

that primarily sold watches. On his federal and state tax

returns from 1995 to 1998, Defendant failed to report the

income from his off-the-books business. 

Defendant also opened bank accounts in Hong Kong in his

and his wife’s names. Defendant’s 1998 and 1999 tax returns

claimed that he did not have control over any foreign financial

accounts. Defendant also failed to file, in 1998 and 1999, the

Treasury form that is required when a taxpayer has an interest

in a foreign account. 

In 1997, IRS Agent Emerald Liburd began a civil audit of

Defendant’s 1995 tax return that later expanded to include his

tax returns from following years. At Defendant’s initial interview with Agent Liburd, he told her that he had received a

small loan from his father and that he had no foreign bank

accounts or foreign transactions. At a follow-up meeting,

Defendant and his accountant provided domestic bank statements to Agent Liburd. After analyzing the statements, Agent

Liburd concluded that there were unexplained deposits into

Defendant’s personal accounts of more than $600,000 in

1995. Agent Liburd requested an explanation of these deposits. Defendant then embarked on a campaign to convince the

IRS that the funds had come from personal loans.1

Defendant provided Agent Liburd in March of 1998 with

four promissory notes, allegedly documenting loans to Defendant from Eriko Dmitrovsky, along with a business card containing Dmitrovsky’s contact information. Six months later,

Defendant sent Agent Liburd four additional promissory

1Loans do not constitute taxable income. Comm’r v. Tufts, 461 U.S.

300, 307 (1983). Thus, had the funds been loan proceeds, Defendant

would not have been required to report them as income on his tax returns.

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notes, one from Dmitrovsky and one each from three other

friends. Defendant also gave Agent Liburd an analysis of his

bank accounts purporting to show that the unexplained deposits originated in loans. Eventually, Defendant claimed that a

fifth individual had also loaned him money. After the IRS

investigation began, Defendant even made ostensible payments on the loans. In June of 1999, Agent Liburd concluded

that Defendant’s story was implausible, closed the civil audit,

and referred the case to IRS criminal fraud investigators. 

On September 22, 1999, IRS Criminal Investigator Gregory

Miki informed Defendant that he was now under criminal

investigation. IRS agents interviewed Defendant’s purported

lenders in the United States and abroad, finding various

inconsistencies surrounding the alleged loans. In 2002, Investigator Miki finished his investigation and referred the case to

the Tax Division of the Justice Department. A grand jury

indicted Defendant in 2002 for income tax fraud; the indictment was later amended to include additional counts of filing

a false tax return, failure to declare a foreign bank account,

and conspiracy to defraud the United States. 

Defendant pleaded guilty to four counts of filing a false tax

return in violation of 26 U.S.C. § 7206(1). The government

dismissed one count of filing a false tax return. Defendant

went to trial on the remaining counts. A jury convicted Defendant of one count of conspiracy to defraud the United States

in violation of 18 U.S.C. § 371, one count of filing a false tax

return in violation of 26 U.S.C. § 7206(1), and two counts of

failure to report foreign financial agency transactions in violation of 31 U.S.C. §§ 5314, 5322(b) and 31 C.F.R. §§ 103.24,

103.27(c), (d).

At sentencing, the government included in the calculation

of tax loss caused by Defendant’s conduct the Hawaii state

taxes that Defendant had failed to pay on the unreported

income. Defendant objected to the inclusion of unpaid state

taxes, both because he contended that tax loss for sentencing

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purposes is limited to federal tax loss and because the statute

of limitations had expired for the state tax violations. In addition, Defendant argued that if the tax loss included the state

taxes, he was entitled to credit for a matching deduction on

his federal income tax returns for payment of state taxes. His

theory was that, had he reported the income honestly and paid

the state taxes due on it, the amount of federal tax that he

owed would have been reduced by the deduction. Therefore,

the total tax loss caused by his fraudulent returns was actually

smaller than the sum of the federal and state income taxes

corresponding to the relevant amount of unreported income.

The district court rejected these objections, calculating the

unpaid state taxes as a component of tax loss and refusing to

adjust the tax loss for the hypothetical deduction. The district

court estimated the combined federal and state tax loss attributable to Defendant’s crimes at $1,052,995. 

Defendant also objected to a proposed sentencing enhancement for obstruction of justice. Defendant argued that he submitted the false promissory notes and the false bank deposit

analysis during the tax audit, rather than during a criminal

investigation, and that obstruction of the audit could not support the enhancement. The district court rejected this argument as well. Accordingly, the district court increased

Defendant’s offense level under § 3C1.1 of the 2001 United

States Sentencing Guidelines. 

The district court sentenced Defendant to 67 months’

imprisonment on the counts of conspiracy and failure to file

the Treasury form on his foreign bank accounts, and 36

months’ imprisonment on the counts of filing a false tax

return, with all terms to run concurrently. The district court

also imposed restitution in the amount of $1,758,835. Defendant timely appeals.

STANDARD OF REVIEW

We review de novo the district court’s interpretation of the

Sentencing Guidelines. United States v. Garro, 517 F.3d

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1163, 1167 (9th Cir. 2008). We have noted an intracircuit

conflict as to whether the standard of review for application

of the Guidelines to the facts is de novo or only for abuse of

discretion. United States v. Rivera, 527 F.3d 891, 908 (9th

Cir.), cert. denied, 129 S. Ct. 654 (2008). As in Rivera, we

need not resolve that conflict here, because the choice

between those standards does not affect the outcome of this

appeal. Id.

DISCUSSION

A. Unpaid State Taxes

1. Inclusion of State Taxes in Tax Loss Calculation

[1] Defendant first challenges the district court’s calculation of the tax loss resulting from his crimes. The Sentencing

Guidelines recommend a longer sentence for tax evasion or

tax fraud when the amount of unpaid tax is higher. U.S.S.G.

§§ 2T1.1(a)(1), 2T4.1. Therefore, the Guidelines direct a district court to determine the tax loss, which is “the object of the

offense (i.e., the loss that would have resulted had the offense

been successfully completed).” Id. § 2T1.1(c)(1). Defendant

contends that “tax loss” is restricted to the amount of unpaid

federal taxes. We reject his argument and hold that tax loss

may properly include unpaid state taxes.

[2] In United States v. Newbert, 952 F.2d 281, 284 (9th Cir.

1991), we approved a sentencing calculation that considered

“non-federal conduct.” The defendant argued that some of his

relevant conduct in submitting falsified travel vouchers may

have violated state, but not federal, law. Id. Nevertheless, we

reasoned that the text of the sentencing provisions at issue,

U.S.S.G. § 1B1.3(a)(2), (a)(3), directed the court to consider

“all acts that were part of the same course of conduct or common scheme or plan, as well as all harm that resulted from

those acts.” Newbert, 952 F.2d at 284. Therefore, we held that

“conduct which could be the basis of state prosecution may be

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considered for sentencing purposes on a federal conviction for

other conduct which was part of the same common scheme or

plan.” Id. at 285. 

[3] To be sure, Newbert was not a tax loss case. But the

same reasoning applies to § 2T1.1. Application note 2 accompanying § 2T1.1 similarly instructs a court to consider “all

conduct violating the tax laws” (emphasis added), rather than

conduct violating the federal tax laws. Thus, tax loss may

include the unpaid state taxes resulting from a defendant’s

failure to report the same income to both federal and state tax

authorities. 

Resisting this conclusion, Defendant argues that incorporating state tax loss into sentencing undermines the Guidelines’

goal of uniformity in sentencing because the amount of state

tax loss will differ depending on state tax rates. But precisely

because state tax rates differ, a taxpayer failing to report the

true extent of his income actually causes differing degrees of

loss or harm in different states. The Guidelines “take account

of a number of important, commonly occurring real offense

elements such as . . . the amount of money actually taken,”

instead of sentencing only on the elements of the offense.

U.S. Sentencing Guidelines Manual at 6. Thus, considering

state tax loss in sentencing is consistent with the approach of

the Sentencing Guidelines. Moreover, in adopting the rule that

§ 2T1.1 may include state tax loss, we join all the other circuits that have considered the issue. United States v. Maken,

510 F.3d 654, 656-59 (6th Cir. 2007); United States v. Baucom, 486 F.3d 822, 829 (4th Cir. 2007), vacated on other

grounds, 128 S. Ct. 870 (2008); United States v. Powell, 124

F.3d 655, 664-66 (5th Cir. 1997); see also United States v.

Fitzgerald, 232 F.3d 315, 318 (2d Cir. 2000) (per curiam)

(affirming tax loss calculation that included city and state tax

evasion); United States v. Schilling, 142 F.3d 388, 394 (7th

Cir. 1998) (affirming sentence computed in part on unpaid

state taxes). 

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[4] Defendant next argues that, even if tax loss may include

unpaid state taxes, the district court should not have considered the Hawaii tax losses in his case because the prosecution

of his state tax violations is time-barred under Hawaii law. He

relies on the phrasing of our holding in Newbert, in which we

wrote that the district court may consider “conduct which

could be the basis of state prosecution.” 952 F.2d at 285. His

reliance is misplaced. Newbert approved of sentencing that

considered conduct that violated state law, but did not address

any statute of limitations issues. See R.A.V. v. City of St. Paul,

505 U.S. 377, 387 n.5 (1992) (“It is of course contrary to all

traditions of our jurisprudence to consider the law on [a] point

conclusively resolved by broad language in cases where the

issue was not presented or even envisioned.”). Furthermore,

we have already held that relevant conduct under § 1B1.3

may include conduct whose prosecution is precluded by the

statute of limitations. See United States v. Williams, 217 F.3d

751, 753-54 & n.7 (9th Cir. 2000) (joining eight other circuits

in so holding). Unpaid state taxes may be included in the calculation of tax loss whether or not the statute of limitations

prevents the state from prosecuting a defendant for his violations of its tax laws. The district court properly included

Defendant’s unpaid state taxes in its computation of tax loss.

2. Deduction for State Taxes

Defendant argues that, if his unpaid state taxes are included

in tax loss, he is entitled to a reduction in the total tax loss

attributed to him by the amount of the deduction that he could

have taken on his federal tax returns for payment of those

state taxes. We are not persuaded.

Fifteen years ago, we held that, in calculating tax loss, no

allowance was to be made for unclaimed potential deductions.

United States v. Valentino, 19 F.3d 463, 464 (9th Cir. 1994).

Valentino, however, involved an earlier version of the tax loss

provision, which authorized a calculation method grounded in

“the nature and magnitude of the false statements made,”

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U.S.S.G. § 2T1.3 cmt. background (1992), rather than in the

magnitude of the tax loss that materialized as a result. Valentino, 19 F.3d at 465. Indeed, application note 4 for § 2T1.1

stated in 1992 that this method “should make irrelevant the

issue of whether the taxpayer was entitled to offsetting adjustments that he failed to claim.”

In 1993, Amendment 491 to the Sentencing Guidelines

removed the reference to offsetting adjustments and stated

that the Guidelines focus on “the amount of loss that was the

object of the offense.” U.S.S.G. § 2T1.1 cmt. background.

The revised version of § 2T1.1 instructed the district court to

treat the tax loss “as equal to 28% of the unreported gross

income . . . unless a more accurate determination of the tax

loss can be made.” Id. § 2T1.1(c)(1) note A.

Relying on the latter clause, the Second Circuit has concluded that, under the amended Guidelines, tax loss should be

adjusted for “ ‘legitimate but unclaimed deductions.’ ” United

States v. Gordon, 291 F.3d 181, 187 (2d Cir. 2002) (quoting

United States v. Martinez-Rios, 143 F.3d 662, 671 (2d Cir.

1998)). Several other circuits, however, disagree. United

States v. Clarke, 562 F.3d 1158, 1164 (11th Cir. 2009), cert.

denied, 2009 WL 3481902 (U.S. Dec. 7, 2009) (No. 09-514);

United States v. Delfino, 510 F.3d 468, 472 (4th Cir. 2007),

cert. denied, 129 S. Ct. 41 (2008); United States v. Phelps,

478 F.3d 680, 681-82 (5th Cir. 2007) (per curiam); United

States v. Chavin, 316 F.3d 666, 677 (7th Cir. 2002); United

States v. Spencer, 178 F.3d 1365, 1368 (10th Cir. 1999).

These sister circuits have offered three reasons to refuse to

allow a defendant to reduce tax loss by the amount of

unclaimed deductions. First, deductions are not permissible if

they are unintentionally created or are unrelated to the tax violation, because such deductions are not part of the “object of

the offense” or intended loss.2 Clarke, 562 F.3d at 1164;

2The deductions at issue in Defendant’s case are, of course, related to

his offense. Therefore, we do not rely on this reason in our adjudication

of his appeal. 

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Phelps, 478 F.3d at 682; Chavin, 316 F.3d at 677; see also

United States v. Blevins, 542 F.3d 1200, 1203 (8th Cir. 2008)

(noting that the defendant’s unclaimed deductions were unrelated to his tax fraud, but declining to reach issue of whether

unclaimed deductions may ever reduce calculated tax loss),

cert. denied, 129 S. Ct. 1024 (2009). Second, the revisions of

Amendment 491 were so extensive that the mere fact that the

revised § 2T1.1 does not include the former “offsetting adjustments” reference fails to demonstrate that deductions are now

permissible. Chavin, 316 F.3d at 678. Finally, our sister circuits reject the nebulous and potentially complex exercise of

speculating about unclaimed deductions. Delfino, 510 F.3d at

473; Chavin, 316 F.3d at 678. The Tenth Circuit observed that

it does not interpret the Guidelines “as giving taxpayers a second opportunity to claim deductions after having been convicted of tax fraud. . . . Rather, we are merely assessing the

tax loss resulting from the manner in which the defendant

chose to complete his income tax returns.” Spencer, 178 F.3d

at 1368. 

We are persuaded by the Fourth, Fifth, Seventh, Tenth, and

Eleventh Circuits. The amendment to § 2T1.1’s application

notes is irrelevant to our analysis. It is true that the notes no

longer state that § 2T1.3’s alternative minimum standard

“may be easier to determine, and should make irrelevant the

issue of whether the taxpayer was entitled to offsetting adjustments that he failed to claim.” But this sentence was deleted

when § 2T1.3 was deleted in its entirety from the Guidelines.

As a reference to § 2T1.3 was no longer logical, such a

change does not show an intent to allow unclaimed deductions sufficient to undercut our decision in Valentino.

[5] Section 2T1.1 does permit “a more accurate determination” of tax loss than the 28% approximation. A more accurate determination might involve applying a different tax rate

or incorporating exemptions and deductions legitimately

claimed by the taxpayer on a tax return. But that section does

not require a court to speculate about tax deductions that the

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taxpayer chose not to claim.3

 We hold that § 2T1.1 does not

entitle a defendant to reduce the tax loss charged to him by

the amount of potentially legitimate, but unclaimed, deductions even if those deductions are related to the offense.

[6] In Defendant’s case, he cannot even argue that the state

taxes are legitimate, but unclaimed, deductions. The state

taxes are not legitimate deductions because he did not pay

them. A cash-basis taxpayer may deduct state and local taxes

“for the taxable year within which paid.” 26 C.F.R. § 1.164-

1(a). The district court properly refused to reduce the tax loss

attributed to Defendant to account for an imputed deduction

from his unpaid state taxes. 

B. Obstruction of IRS Audit

Defendant also disputes the district court’s two-level

enhancement of his sentence for obstruction of justice.

Among the acts that the district court cited as supporting

application of the enhancement were Defendant’s provision of

four false promissory notes and a false bank deposit analysis

to Agent Liburd during the audit. Section 3C1.1 of the 2001

version of the Sentencing Guidelines authorized a district

court to increase a defendant’s offense level by two levels if

the defendant “willfully obstructed or impeded, or attempted

to obstruct or impede, the administration of justice during the

course of the investigation, prosecution, or sentencing of the

instant offense of conviction” and if the conduct related to a

qualifying offense. Here, Defendant asserts that the audit was

not a criminal investigation of the offense of conviction and,

thus, that the enhancement was improper. 

3We note, for instance, that a taxpayer is entitled to deduct either state

income tax or state sales tax, but not both. 26 U.S.C. § 164(b)(5)(A).

Some of the states in our circuit impose both an income tax and a sales

tax. Reconstructing a hypothetical federal tax return for a resident of one

of these states would require selecting between these potential deductions.

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[7] A defendant’s conduct before an investigation begins

does not constitute obstruction of justice under the version of

§ 3C1.1 that was in effect before 2006.4 For instance, in

United States v. Rising Sun, 522 F.3d 989, 996-97 (9th Cir.

2008), we held that the enhancement could not be applied to

a murder defendant who, on the night of the killings, had

attempted to destroy evidence and had threatened his brother

to keep him from talking to his girlfriend about the night’s

events. The enhancement “could only apply if an investigation or prosecution was already in progress when the obstructive actions were taken.” Id. at 995. Similarly, in United

States v. DeGeorge, 380 F.3d 1203, 1222 (9th Cir. 2004), we

held that the enhancement did not apply to perjury committed

during a civil suit between a defendant and his insurance company, where the criminal investigation of the defendant’s mail

fraud did not begin until after the civil suit ended. Until today,

we have never decided whether an IRS audit may constitute

an investigation for the purposes of § 3C1.1. We now hold

that it may.

Section 3C1.1 itself does not define an “investigation.” But

in United States v. Luca, 183 F.3d 1018, 1022 (9th Cir. 1999),

we affirmed application of the enhancement to the submission

of false documents to a state administrative agency that was

investigating a defendant’s Ponzi scheme. We found it significant in Luca that the agency was investigating “the same

offense” that led to the defendant’s federal conviction. Id.

Two other circuits have likewise held that obstruction during

a civil investigation of the same conduct that forms the basis

of a conviction suffices for application of the enhancement.

The First Circuit held that obstruction during administrative

4

In 2006, Amendment 693 to the Sentencing Guidelines replaced the

phrase “during the course of the investigation” in § 3C1.1 with “with

respect to the investigation” and added commentary explaining that conduct occurring before the start of an investigation may be covered “if [the

conduct] was purposefully calculated, and likely, to thwart the investigation.” However, this amendment was a substantive change to the Guidelines and cannot be applied retroactively. Rising Sun, 522 F.3d at 997. 

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audits by Medicare and Medicaid may trigger the enhancement, “so long as the investigation which has been obstructed

has a sufficient connection to the offense of conviction.”

United States v. McGovern, 329 F.3d 247, 252 (1st Cir. 2003).

And the Second Circuit, after noting the extensive overlap

between civil and criminal investigations of securities fraud,

affirmed application of the enhancement to perjury committed

during a civil investigation by the Securities and Exchange

Commission. United States v. Fiore, 381 F.3d 89, 94 (2d Cir.

2004).

[8] An IRS audit is an official investigation that may be the

first step leading to a criminal conviction for tax violations.

United States v. Peters, 153 F.3d 445, 447 (7th Cir. 1998).

The audit places a taxpayer on notice that the government is

looking into the accuracy and propriety of his or her tax

returns. Evidence gathered during such an audit properly may

be transferred to prosecutors. United States v. McKee, 192

F.3d 535, 544 (6th Cir. 1999). The IRS may distinguish

between the procedures to be followed during the civil and

criminal phases of an audit, Peters, 153 F.3d at 447, but to a

taxpayer under suspicion, the latter merely represents an

escalating development in the same underlying investigation.

Obstruction during an IRS audit justifies enhancing a defendant’s sentence for obstruction “during the course of the

investigation.” U.S.S.G. § 3C1.1 (2001). 

CONCLUSION

[9] For these reasons, the district court properly charged

Defendant with the full amount of his unpaid state taxes and

properly enhanced his sentence for obstruction of justice. 

Convictions AFFIRMED; sentence VACATED and

REMANDED.5

5

In a separate memorandum disposition, see supra, at 984, we vacate

Defendant’s sentence and remand for resentencing to address certain

defects in his sentence. 

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