AMENDMENT 774
The Commentary to §2T1.1 captioned “Application Notes” is amended in Note 1 by inserting “Tax Loss.—” at the beginning;
in Note 2 by inserting “Total Tax Loss Attributable to the Offense.—” at the beginning, and by redesignating subdivisions (a) through (e) as (A) through (E);
by inserting after Note 2 the following:
“3. Unclaimed Credits, Deductions, and Exemptions.—In determining the tax loss, the court should account for the standard deduction and personal and dependent exemptions to which the defendant was entitled. In addition, the court should account for any unclaimed credit, deduction, or exemption that is needed to ensure a reasonable estimate of the tax loss, but only to the extent that (A) the credit, deduction, or exemption was related to the tax offense and could have been claimed at the time the tax offense was committed; (B) the credit, deduction, or exemption is reasonably and practicably ascertainable; and (C) the defendant presents information to support the credit, deduction, or exemption sufficiently in advance of sentencing to provide an adequate opportunity to evaluate whether it has sufficient indicia of reliability to support its probable accuracy (see §6A1.3 (Resolution of Disputed Factors) (Policy Statement)).
However, the court shall not account for payments to third parties made in a manner that encouraged or facilitated a separate violation of law (e.g., ‘under the table’ payments to employees or expenses incurred to obstruct justice).
The burden is on the defendant to establish any such credit, deduction, or exemption by a preponderance of the evidence. See §6A1.3, comment.”;
by striking “3. ‘Criminal activity’ means” and inserting the following:
“4. Application of Subsection (b)(1) (Criminal Activity).—‘Criminal activity’ means”;
by striking “4. Sophisticated Means Enhancement.—” and inserting the following:
“5. Application of Subsection (b)(2) (Sophisticated Means).—”;
by striking Notes 5 and 6 as follows:
“5. A ‘credit claimed against tax’ is an item that reduces the amount of tax directly. In contrast, a ‘deduction’ is an item that reduces the amount of taxable income.
6. ‘Gross income,’ for the purposes of this section, has the same meaning as it has in 26 U.S.C. § 61 and 26 C.F.R. § 1.61.”;
and inserting the following:
“6. Other Definitions.—For purposes of this section:
A ‘credit claimed against tax’ is an item that reduces the amount of tax directly. In contrast, a ‘deduction’ is an item that reduces the amount of taxable income.
‘Gross income’ has the same meaning as it has in 26 U.S.C. § 61 and 26 C.F.R. § 1.61.”; and
in Note 7 by inserting “Aggregation of Individual and Corporate Tax Loss.—” at the beginning.
Reason for Amendment: This amendment responds to a circuit conflict regarding whether a sentencing court, in calculating tax loss as defined in §2T1.1 (Tax Evasion; Willful Failure to File Return, Supply Information, or Pay Tax; Fraudulent or False Returns, Statements, or Other Documents), may consider previously unclaimed credits, deductions, and exemptions that the defendant legitimately could have claimed if he or she had filed an accurate tax return.
The Tenth and Second Circuits have held that a sentencing court may give the defendant credit for a legitimate but unclaimed deduction. These circuit courts generally reason that, while a district court need not speculate about unclaimed deductions if the defendant offers weak support, nothing in the guidelines prohibits a sentencing court from considering evidence of unclaimed deductions where a defendant offers convincing proof. See United States v. Hoskins, 654 F.3d 1086, 1094 (10th Cir. 2011) (“[W]here defendant offers convincing proof — where the court’s exercise is neither nebulous nor complex — nothing in the Guidelines prohibits a sentencing court from considering evidence of unclaimed deductions in analyzing a defendant’s estimate of the tax loss suffered by the government.”); United States v. Martinez-Rios, 143 F.3d 662, 671 (2d Cir. 1998) (holding that “the sentencing court need not base its tax loss calculation on gross unreported income if it can make a ‘more accurate determination’ of the intended loss and that determination of the tax loss involves giving the defendant the benefit of legitimate but unclaimed deductions”); United States v. Gordon, 291 F.3d 181, 187 (2d Cir. 2002) (applying Martinez-Rios, the court held that the district court erred when it refused to consider potential unclaimed deductions in its sentencing analysis).
Six other circuit courts — the Fourth, Fifth, Seventh, Eighth, Ninth, and Eleventh — have reached the opposite conclusion, directly or indirectly holding that a court may not consider unclaimed deductions to reduce the tax loss. These circuit courts generally reason that the “object of the [defendant’s] offense” is established by the amount stated on the fraudulent return, and that courts should not be required to reconstruct the defendant’s return based on speculation regarding the many hypothetical ways the defendant could have completed the return. See United States v. Delfino, 510 F.3d 468, 473 (4th Cir. 2007) (“The law simply does not require the district court to engage in [speculation as to what deductions would have been allowed], nor does it entitle the Delfinos to the benefit of deductions they might have claimed now that they stand convicted of tax evasion.”); United States v. Phelps, 478 F.3d 680, 682 (5th Cir. 2007) (holding that the defendant could not reduce tax loss by taking a social security tax deduction that he did not claim on the false return); United States v. Chavin, 316 F.3d 666, 677 (7th Cir. 2002) (“Here, the object of [the defendant]’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.”); United States v. Psihos, 683 F.3d 777, 781–82 (7th Cir. 2012) (following Chavin in disallowing consideration of unclaimed deductions); United States v. Sherman, 372 F.App’x 668, 676–77 (8th Cir. 2010); United States v. Blevins, 542 F.3d 1200, 1203 (8th Cir. 2008) (declining to decide “whether an unclaimed tax benefit may ever offset tax loss,” but finding the district court properly declined to reduce tax loss based on taxpayers’ unclaimed deductions); United States v. Yip, 592 F.3d 1035, 1041 (9th Cir. 2010) (“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.”); United States v. Clarke, 562 F.3d 1158, 1165 (11th Cir. 2009) (holding that the defendant was not entitled to a tax loss calculation based on a filing status other than the one he actually used; “[t]he district court did not err in computing the tax loss based on the fraudulent return Clarke actually filed, and not on the tax return Clarke could have filed but did not.”).
The amendment resolves the conflict by amending the Commentary to §2T1.1 to establish a new application note regarding the consideration of unclaimed credits, deductions, or exemptions in calculating a defendant’s tax loss. This amendment reflects the Commission’s view that consideration of legitimate unclaimed credits, deductions, or exemptions, subject to certain limitations and exclusions, is most consistent with existing provisions regarding the calculation of tax loss in §2T1.1. See, e.g., USSG §2T1.1, comment. (n.1) (“the guidelines contemplate that the court will simply make a reasonable estimate based on the available facts”); USSG §2T1.1, comment. (backg’d.) (“a greater tax loss is obviously more harmful to the treasury and more serious than a smaller one with otherwise similar characteristics”); USSG §2T1.1, comment. (n.1) (allowing a sentencing court to go beyond the presumptions set forth in the guideline if “the government or defense provides sufficient information for a more accurate assessment of the tax loss,” and providing “the court should use any method of determining the tax loss that appears appropriate to reasonably calculate the loss that would have resulted had the offense been successfully completed”).
The new application note first provides that courts should always account for the standard deduction and personal and dependent exemptions to which the defendant was entitled. The Commission received public comment and testimony that such deductions and exemptions are commonly considered and accepted by the government during the course of its investigation and during the course of plea negotiations. Consistent with this standard practice, the Commission determined that accounting for these generally undisputed and readily verifiable deductions and exemptions where they are not previously claimed (most commonly where the offense involves a failure to file a tax return) is appropriate.
The new application note further provides that courts should also account for any other previously unclaimed credit, deduction, or exemption that is needed to ensure a reasonable estimate of the tax loss, but only to the extent certain conditions are met. First, the credit, deduction, or exemption must be one that was related to the tax offense and could have been claimed at the time the tax offense was committed. This condition reflects the Commission’s determination that a defendant should not be permitted to invoke unforeseen or after-the-fact changes or characterizations — such as offsetting losses that occur before or after the relevant tax year or substituting a more advantageous depreciation method or filing status — to lower the tax loss. To permit a defendant to optimize his return in this manner would unjustly reward defendants, and could require unjustifiable speculation and complexity at the sentencing hearing.
Second, the otherwise unclaimed credit, deduction, or exemption must be reasonably and practicably ascertainable. Consistent with the instruction in Application Note 1, this condition reaffirms the Commission’s position that sentencing courts need only make a reasonable estimate of tax loss. In this regard, the Commission recognized that consideration of some unclaimed credits, deductions, or exemptions could require sentencing courts to make unnecessarily complex tax determinations, and therefore concluded that limiting consideration of unclaimed credits, deductions, or exemptions to those that are reasonably and practicably ascertainable is appropriate.
Third, the defendant must present information to support the credit, deduction, or exemption sufficiently in advance of sentencing to provide an adequate opportunity to evaluate whether it has sufficient indicia of reliability to support its probable accuracy. Consistent with the principles set forth in §6A1.3 (Resolution of Disputed Factors) (Policy Statement), this condition ensures that the parties have an adequate opportunity to present information relevant to the court’s consideration of any unclaimed credits, deductions, or exemptions raised at sentencing.
In addition, the new application note provides that certain categories of credits, deductions, or exemptions shall not be considered by the court in any case. In particular, “the court shall not account for payments to third parties made in a manner that encouraged or facilitated a separate violation of law (e.g., ‘under the table’ payments to employees or expenses incurred to obstruct justice).” The Commission determined that payments made in this manner result in additional harm to the tax system and the legal system as a whole. Therefore, to use them to reduce the tax loss would unjustifiably benefit the defendant and would result in a tax loss figure that understates the seriousness of the offense and the culpability of the defendant.
Finally, the application note makes clear that the burden is on the defendant to establish any credit, deduction, or exemption permitted under this new application note by a preponderance of the evidence, which is also consistent with the commentary in §6A1.3.
Effective Date: The effective date of this amendment is November 1, 2013.