Opinion ID: 3065377
Heading Depth: 2
Heading Rank: 1

Heading: Unpaid State Taxes

Text: 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 UNITED STATES v. YIP 989 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). 990 UNITED STATES v. YIP [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,” UNITED STATES v. YIP 991 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; 2 The 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. 992 UNITED STATES v. YIP 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 UNITED STATES v. YIP 993 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.