The Ninth Circuit Court of Appeals recently affirmed the sentence handed down following a defendant’s conviction on two counts of tax evasion in violation of 26 U.S.C. § 7201. On appeal, the defendant argued that the lower court erred by not crediting unclaimed business expenses incurred by his company, DLSS, in calculating the applicable tax loss under the U.S. Sentencing Guidelines. The appellate court’s answer: “Not so.”
U.S. Sentencing Guidelines Manual § 2T1.1 generally governs the guideline calculations for tax evasion sentencings. The “tax loss” figure plays a central role in the overall recommended sentencing range under the Guidelines, often largely driving the overall Guideline range.
Under the guideline provisions, a sentencing court can consider a defendant’s unclaimed tax deductions in estimating the tax loss for sentencing purposes; however, the defense must demonstrate that the deductions are, among other things, “reasonably and practicably ascertainable.” U.S.S.G. § 2T1.1 cmt. n.3. Notably, the defendant bears the burden of providing any unclaimed deductions, and must establish the right to the deductions by a preponderance of the evidence. Id.
The Ninth Circuit, in United States v. Saifan, recently grappled with this issue. Here is an excerpt from the appellate court’s analysis of the defendant’s claims on this score:
Although Saifan plausibly argues that DLSS incurred some legitimate business expenses in the course of its performance on numerous contracts, he provided no invoices, bank statements, or any other documentation establishing what those expenses actually were. Nor does he point to a reliable method for the district court to reasonably approximate those expenses—an especially onerous task given that DLSS operated as a cash business in wartime Iraq. Accordingly, the district court did not err in finding that DLSS’s unclaimed business expenses were not “reasonably and practicably ascertainable,” and therefore excluding them from its tax loss calculation.
As the court’s analysis demonstrates, a defendant bears the burden—again, by a preponderance of the evidence—to establish that he is entitled to any unclaimed tax deductions. Merely showing that it is likely that the business incurred some expenses is not enough. Astute defense counsel will often need to engage in a studied, forensic analysis of the business’s operations and the underlying documentation in order to put together a convincing argument and demonstrate that a defendant is entitled to unclaimed tax deductions in order to lower the overall tax loss (and thus the resulting sentencing range under the Guidelines). The difficulties with this undertaking are often exacerbated where the taxpayer operated a cash business and did not maintain adequate records. However, given the impact that the tax loss figure can have on a defendant’s Guideline calculation, the effort is an important one and can often have a significant impact on a tax defendant’s Guideline sentencing range.