Opinion ID: 2996020
Heading Depth: 3
Heading Rank: 3

Heading: Tax-Loss Calculation: Unclaimed Deductions

Text: Chavin and Litwin argue that they were improperly sentenced because the tax-loss figure upon which the district court based its sentence was inflated for two reasons: First, they contend that the district court should have reduced the tax-loss figure by the amount of legitimate but unclaimed deductions on Chavin’s tax return. Second, they maintain that part of the bad debt loss Chavin took was legitimate and should not have been considered in determining tax loss. We start with the unclaimed-deductions issue. Chavin and Litwin were sentenced on the tax counts under § 2T1.1 of the guidelines. Assessing the proper sentence under § 2T1.1 requires a determination of the “tax loss” resulting from the offense. Section 2T1.1(c)(1) provides the definition of tax loss applicable to this case: “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). Also, notes (A) and (C) under this subsection provide a further explanation of how to calculate tax loss in certain circumstances: 7 (...continued) objective is a different one. I don’t think it’s fair to say the conduct is treated as a specific offense characteristic if we say they concealed it in one context. In another they lied about it in bankruptcy.” (Tr. 45-46) (emphasis added). Nos. 01-2302 & 01-3414 19 (A) If the offense involved filing a tax return in which gross income was underreported, the tax loss shall be treated as equal to 28% of the unreported gross in- come . . . unless a more accurate determination of the tax loss can be made. ... (C) If the offense involved improperly claiming a deduction to provide a basis for tax evasion in the future, the tax loss shall be treated as equal to 28% of the amount of the improperly claimed deduction . . . unless a more accurate determination of the tax loss can be made. U.S.S.G. § 2T1.1(c)(1)(A) & (C). Chavin and Litwin assert that if the district court had considered all of the legitimate deductions that Chavin mistakenly failed to claim on his 1992 return then the tax-loss figure would have been reduced from $199,000 to $57,352, which would have corresponded to a lower sentencing level. The issue of whether to allow consideration of legitimate but unclaimed deductions in the determination of tax loss hinges on the definition of “tax loss.” On the one hand, Chavin and Litwin argue, in essence, that “tax loss” refers to the actual amount of loss suffered by the government as a result of the tax scheme. If we accept this interpretation, then unclaimed deductions should be considered because the government did not actually lose as much money as the scheme intended since the unclaimed deductions serve to offset the amount that the defendants attempted to evade. On the other hand, the government contends that “tax loss” refers to the amount of loss that the defendant attempted or intended to create through his tax offense. If we accept this interpretation, then unclaimed deductions should not be taken into account because they have no relevance to the amount of loss that the scheme attempted to produce. 20 Nos. 01-2302 & 01-3414 It is apparent from the definition of “tax loss” provided in the guidelines that the government has the correct position. The guidelines state that “tax loss is the total amount of loss that was the object of the offense.” Id. § 2T1.1(c)(1). We take the phrase “the object of the offense” to mean that the attempted or intended loss, rather than the actual loss to the government, is the proper basis of the tax-loss figure. Here, the object of Chavin’s offense was the amount by which he underreported and fraudulently stated his tax liability on his return; reference to other unrelated mistakes on the return such as unclaimed deductions tells us nothing about the amount of loss to the government that his scheme intended to create. Chavin and Litwin argue that we should accept their interpretation because it is less subjective than the government’s interpretation. They contend that trying to determine the loss that the defendant intended to create is simply too speculative. While in principle it is true that trying to assess intentions is often a subjective endeavor, we strongly disagree that the government’s view leads to more subjective results. Here, the defendants’ intention is embodied in the tax return that was filed with the IRS. We need to look no further than that return to find the tax-loss figure under the government’s view. In fact, it is the defendants’ position that would insert subjectivity into the calculation because it would require us to recreate a “perfect” tax return, taking into account all the legitimate unclaimed deductions, which would undoubtedly engender a great deal of dispute between the parties over which deductions were legitimate and which were not. Defendants further argue that the 1993 changes in the commentary to the tax-fraud sections of the guidelines mandate courts to consider unclaimed deductions. Before 1993, § 2T1.1(a) defined “tax loss” as the greater of (1) the total amount of tax that the taxpayer evaded or attempted to evade; and (2) 28% of the amount by which the greater of Nos. 01-2302 & 01-3414 21 gross income and taxable income was understated.8 U.S.S.G. §§ 2T1.1(a) & 2T1.3(a)(2) (1992). The commentary to this section provided that the “alternative standard [the 28% rate] 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.” Id. § 2T1.1 cmt. n.4. When the Guidelines were amended in 1993, this note was deleted. Defendants contend that this deletion means that now courts must consider offsetting adjustments. Defendants, however, do not acknowledge that the entire definition of tax loss was changed by the 1993 amendments. The government offers an equally plausible reason as to why the commentary about offsetting adjustments was deleted, that takes account of the new “tax loss” definition. The government contends that the language was deleted because the new tax-loss definition specifically excludes consideration of unclaimed deductions on its face by defining tax loss as the “object of the offense.” Consequently, the explanatory note was no longer required. We agree with the government that the current definition of tax loss appears to exclude consideration of unclaimed deductions, and we refuse to ignore this definition based on the fact that certain language was deleted from the commentary notes in 1993. Finally, defendants base their argument in favor of the consideration of unclaimed deductions on the language in 8 The actual language of pre-1993 § 2T1.1(a) states: “the ‘tax loss’ is the greater of: (A) the total amount of tax that the taxpayer evaded or attempted to evade; and (B) the ‘tax loss’ defined in § 2T1.3.” U.S.S.G. § 2T1.1(a) (1992). Section 2T1.3(a)(2) provided that “the ‘tax loss’ is 28 percent of the amount by which the greater of gross income and taxable income was understated.” Id. § 2T1.3(a)(2). 22 Nos. 01-2302 & 01-3414 § 2T1.1(c)(1)(A) and (C), which states “the tax loss shall be treated as equal to 28% of the amount of the unreported gross income . . . unless a more accurate determination of the tax loss can be made.” U.S.S.G. § 2T1.1(c)(1)(A) & (C) (2000) (emphasis added). Chavin and Litwin contend that this provision plainly requires the sentencing court to recalculate the defendant’s tax return considering the unclaimed deductions if such consideration would result in a “more accurate determination” of tax loss. Defendants point out that in dicta the Second Circuit in United States v. Martinez-Rios stated that the phrase “a more accurate determination” allows a defendant to have legitimate but unclaimed deductions considered. 143 F.3d 662, 671 (2d Cir. 1998).9 We note that the Tenth Circuit has questioned the Second Circuit’s interpretation, stating “[w]e do not interpret this provision as giving taxpayers a second opportunity to claim deductions after having been convicted of tax fraud.” United States v. Spencer, 178 F.3d 1365, 1368 (10th Cir. 1999). The Tenth Circuit further explained that the phrase “a more accurate determination” simply allows the defendant or the government to argue for a rate that is “more accurate” than the 28% presumptive rate. Id. at 1368. It is our view that the Tenth Circuit interpreted the guideline correctly.10 9 The Second Circuit recently affirmed this position in United States v. Gordon, 291 F.3d 181, 187 (2d Cir. 2002). 10 The government notes in its brief how its expert, Ellis, correctly argued for a “more accurate determination” of the rate: Ellis determined that the total amount of unreported income was $674,625. He could have multiplied this figure by the 28% presumptive rate . . . and been done with it. However, he made ‘a more accurate determination,’ because some of that unreported income was ordinary income and some was capital (continued...) Nos. 01-2302 & 01-3414 23 Given the definition of tax loss discussed above, we simply cannot read the phrase “a more accurate determination” to allow for consideration of unclaimed deductions. Considering unclaimed deductions is outside the purview of what we are trying to accomplish in tax-loss calculations, which as the Tenth Circuit stated, is to “merely assess[ ] the tax loss resulting from the manner in which the defendant chose to complete his income tax returns.” Id. at 1368. It is simply not the role of this court to consider other hypothetical ways that the defendant could have completed his return. United States v. Wu, 81 F.3d 72, 75 (7th Cir. 1996).11 4. Tax-Loss Calculation: the $339,000 Loan Payment Finally, Chavin and Litwin argue that $339,000 of the claimed $900,000 bad debt loss was in fact a legitimate deduction, and should not have been included in the taxloss figure upon which their sentence was based. In 1992, Chavin made a $339,000 payment to Cole Taylor Bank as a guarantor of a loan the bank had made to SCV. This payment, as reflected in SCV’s financial statements, created a $339,000 debt on the part of the company to Chavin, adding to SCV’s already substantial indebtedness to him. This $339,000 debt was part of the $900,000 bad debt loss that Chavin claimed on his 1992 tax return. The defendants argued at trial that the $339,000 debt was legitimately deducted. The jury returned a general verdict finding de- 10 (...continued) gain, and the two are taxed at different rates depending on the income of the taxpayer. (Gov. Br. at 29). 11 We recognize that Wu was decided under the pre-1993 guidelines, but the principle expressed there is still applicable. 24 Nos. 01-2302 & 01-3414 fendants guilty on all tax counts. At sentencing, the defendants argued that while the jury convicted them of having created a fraudulent bad debt loss, the jury did not specify the amount of the loss that was illegitimate. Thus, they maintained that it was still an open question as to whether Chavin was entitled to the $339,000 deduction. The district court rejected the argument, finding that the jury had determined that Chavin improperly took a bad debt loss of $900,000 and was not entitled to any portion of it. Consequently, the district court sentenced defendants based on a $900,000 tax loss figure, noting that to make a finding that the tax-loss figure was lower than $900,000 would contradict the jury’s verdict. On appeal, Chavin again argues that the jury did not decide the issue of whether the $339,000 deduction was legitimate, and that because the verdict did not necessarily resolve the issue, the district court erred by not making its own finding on the issue. We agree with the district court’s conclusion that the jury had already preclusively decided the issue and that the sentencing court could not sentence defendants based on an amount different from what the jury decided. Defendants were convicted on all the tax offenses charged—Counts 1 through 6. All of these counts reference $900,000 as the bad-debt-loss figure, and make no mention of or distinction between the various elements that comprised the total debt. Defendants’ attempt to cut the total debt into pieces and argue about the individual parts at sentencing was, as the district court found, unavailing. In any event, the record reveals that Chavin was not entitled to the deduction for which he argued. Chavin argues that the $339,000 was deductible because SCV was insolvent prior to and independent of the sham sale to Glickman and because he had personally guaranteed the loan he had paid on SCV’s behalf. These factors alone, however, do not trigger the ability to take a deduction. Section Nos. 01-2302 & 01-3414 25 166(d) of the tax code, the section under which Chavin attempted to take the deduction on his 1992 return, permits individuals to take deductions for nonbusiness debts only when those debts become “worthless.” 26 U.S.C. § 166(d)(1)(B) (2000). As this court has noted, “[t]he criterion of worthlessness is interpreted strictly: the deduction is unavailable if even a modest fraction of the debt can be recovered.” Buchanan v. United States, 87 F.3d 197, 198 (7th Cir. 1996). At the end of 1992, SCV, though insolvent, still had assets worth $839,000—against liabilities of $1,240,000. Given this amount of assets, it was reasonable for the jury to have found that Chavin had at least a “reasonable prospect of recovering” a “nontrivial” amount of the money SCV owed him. Id. at 200. As the government points out, the real triggering event that made the debt worthless and thereby “entitled” Chavin to the bad-debt-loss deduction was the sham sale to Glickman, which drained SCV of all its assets and ensured its inability to repay him. Indeed, as even the defense’s tax expert noted at trial, Chavin’s tax return itself showed that the sale to Glickman, and nothing else, was the triggering event. Because the event that triggered the availability of the deduction was fraudulent, the deduction itself was illegitimate. Therefore, Chavin was not entitled to any portion of the $900,000 bad debt loss, not even the $339,000 portion related to the loan payment. 26 Nos. 01-2302 & 01-3414