United States District Court, D. Minnesota
John E. Kokkinen, and Tracy L. Perzel, UNITED STATES ATTORNEY'S OFFICE, for plaintiff.
Daniel L. Gerdts, and Daniel Patrick Brees, for defendant.
PATRICK J. SCHILTZ, District Judge.
For many years, defendant Michael Schlegel refused to file tax returns and obstructed the attempts of the Internal Revenue Service ("IRS") to audit him and his wife. Moreover, Schlegel and his codefendant (Bradley Collin) used various means -including sham trusts, sham companies, and warehouse-banking services-to hide income that they had received from various enterprises in which they were involved, including a company that was first known as The Master's Miracle, Inc., and then known as NatureRich, Inc. ("TMM/NR"). A jury convicted Schlegel of conspiring to defraud the government, 18 U.S.C. § 371; attempting to evade or defeat taxes, 26 U.S.C. § 7201; and willfully failing to file tax returns, 26 U.S.C. § 7203.
This matter is before the Court on Schlegel's objections to the Presentence Investigation Report ("PSR"). The bulk of those objections concern the "tax loss" calculated under the United States Sentencing Guidelines. The Court conducted evidentiary hearings regarding Schlegel's objections on January 6 and 23, 2015.
I. TAX LOSS
Because Schlegel's offense "involved tax evasion, " 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). For any year in which Schlegel did not file a tax return, "the tax loss is the amount of tax that the taxpayer owed and did not pay." U.S.S.G. § 2T1.1(c)(2). "In determining the total tax loss attributable to the offense..., all conduct violating the tax laws should be considered as part of the same course of conduct or common scheme or plan unless the evidence demonstrates that the conduct is clearly unrelated." U.S.S.G. § 2T1.1 cmt. n.2. If the amount of tax loss is uncertain based on the available evidence, "the guidelines contemplate that the court will simply make a reasonable estimate based on the available facts." U.S.S.G. § 2T1.1 cmt. n.1.
Applying these principles, the PSR calculated a total tax loss of $1, 434, 899.56. PSR ¶¶ 17-18. Because that tax loss fell between $1, 000, 000 and $2, 500, 000, the PSR found that Schlegel's base offense level was 22. U.S.S.G. § 2T4.1(I). Schlegel raises a number of objections to the PSR's calculation of the tax loss. For purposes of discussion, the Court will address the tax years included in the tax-loss calculation in four groups: (1) 1994 to 1997, (2) 2003, (3) 2004 to 2005, and (4) 2006 to 2008.
1. Interest and Penalties
In calculating a total tax loss of $636, 206.28 for the years 1994 to 1997, the PSR included not only the taxes that Schlegel failed to pay, but also the interest and penalties that had been assessed by the IRS. PSR ¶ 18, addendum at A.2. Schlegel objects that interest and penalties should not be included in calculating the tax loss for those years. The Court agrees.
The general rule is that "tax loss does not include interest or penalties." U.S.S.G. § 2T1.1 cmt. n.1; see also United States v. Thomas, 635 F.3d 13, 16 (1st Cir. 2011); United States v. Hunerlach, 197 F.3d 1059, 1069-70 (11th Cir. 1999); United States v. Hopper, 177 F.3d 824, 832 (9th Cir. 1999). The guidelines commentary was amended in 2001 to add a narrow exception to this general rule for "willful evasion of payment cases under 26 U.S.C. § 7201 and willful failure to pay cases under 26 U.S.C. § 7203." U.S.S.G. app. C, amend. 617 (amending § 2T1.1 cmt. n.1); see also United States v. Barker, 556 F.3d 682, 686 (8th Cir. 2009). The Sentencing Commission explained this exception as follows:
In evasion-of-payment tax cases, the Commission amended the definition of "tax loss" to include interest and penalties because, in contrast to evasion-of-assessment tax cases, such amounts appropriately are included in tax loss for such cases. This amendment limits the inclusion of interest or penalties to willful evasion of payment cases under 26 U.S.C. § 7201 and willful failure to pay cases under 26 U.S.C. § 7203. The nature of these cases is such that the interest and penalties often greatly exceed the assessed tax amount constituting the bulk of the harm associated with these offenses.
U.S.S.G. app. C, amend. 617.
Schlegel's case does not fall within this exception. As the Sentencing Commission's explanation reflects, § 7201 includes two distinct offenses: (1) evading the assessment of taxes and (2) evading the payment of taxes that have been assessed. Likewise, § 7203 contains several distinct offenses, including (1) failing to file a tax return and (2) failing to pay a tax. See 26 U.S.C. §§ 7201, 7203; United States v. McLaughlin, 126 F.3d 130, 136 (3d Cir. 1997) (citing Sansone v. United States, 380 U.S. 343, 354 (1965)), abrogated on other grounds as recognized in United States v. Shavers, 693 F.3d 363 (3d Cir. 2012); United States v. Hogan, 861 F.2d 312, 315 (1st Cir. 1988) (citing Sansone ); United States v. Dack, 747 F.2d 1172, 1174 (7th Cir. 1984) (citing Sansone ).
The exception to the general rule that tax loss does not include interest or penalties applies only in "willful evasion of payment cases under 26 U.S.C. § 7201 and willful failure to pay cases under 26 U.S.C. § 7203." § 2T1.1 cmt. n.1. But Schlegel was not convicted of any offense under § 7201 or § 7203 with respect to the years 1994 to 1997-and, even with respect to the years 2006 to 2008, he was not convicted of evading the payment of taxes under § 7201 or of failing to pay taxes under § 7203. See ECF No. 1 at 11-12 (indictment); ECF No. 114 at 1-2 (verdict). Moreover, this is not a case in which "interest and penalties... greatly exceed the assessed tax amount" and thus "constitut[e] the bulk of the harm associated with these offenses." U.S.S.G. app. C, amend. 617. To the contrary, the taxes for the relevant years ($369, 915.00) exceed the interest and penalties ($266, 291.28). Def.'s Ex. 1; ECF No. 144 Ex. 1 (Gov.'s Trial Ex. 120).
In arguing that Schlegel's tax loss for the period 1994 to 1997 should include interest and penalties, the government relies on two out-of-circuit cases (one unpublished): United States v. Lombardo, 582 F.Appx. 601 (6th Cir. 2014), and United States v. Thomas, 635 F.3d 13 (1st Cir. 2011). But both of those cases-unlike this case-were "willful evasion of payment cases under 26 U.S.C. § 7201, " and thus fell squarely within the exception provided in the Sentencing Guidelines. See Superseding Indictment, United States v. Barkus, No. 1:09-cr-00386-PAG, ECF No. 5 (N.D. Ohio Sept. 29, 2009) (Counts 7 and 8 charging that defendants Barkus and Lombardo "did willfully attempt to evade and defeat the payment of income taxes"); Indictment, United States v. Thomas , No. 1:06-cr-00004-JAW, ECF No. 1 (D. Me. Jan. 11, 2006) (Counts 1 and 2 charging that defendant "willfully attempted to evade and defeat the payment of" tax due). The other case on which the government relies- United States v. Mathis, 980 F.2d 496 (8th Cir. 1992)-involved a defendant who had stipulated to the tax-loss amount for purposes of sentencing, and thus Mathis does not support the government's position.
For these reasons, the Court sustains Schlegel's objection and holds that interest and penalties should not be included in calculating the tax loss for the years 1994 to 1997.
2. STS Commissions
Schlegel objects that the tax loss calculated for the years 1994 to 1997 is inflated for a second reason. The IRS audited Schlegel and his wife for the years 1994 to 1997. During this period, Schlegel and his wife received commissions from a company known as Strategic Telecom Systems ("STS"). At the beginning of the audit process, the IRS attributed 50 percent of the total income received from STS to Schlegel and 50 percent to his wife, as the IRS was not able to determine precisely how much each Schlegel had earned from STS. Later, though, after the Schlegels refused to provide evidence as to who had earned what, the IRS attributed 100 percent of the STS income to Schlegel and 100 percent to his wife. Gov.'s Ex. M. Schlegel's refusal to provide information about the STS commissions was of a piece with his "uncooperative and obstructive" conduct during the IRS audit-conduct that included "inundat[ing] the IRS with frivolous filings" and "return[ing] mail from the IRS stamped with RETURNED FOR GOOD LEGAL REASON.'" PSR ¶ 7.
Schlegel argues that, in calculating the tax loss for 1994 to 1997, only 50 percent of the STS commissions should be attributed to him. Schlegel's argument is meritless. Schlegel's tax loss is governed by U.S.S.G. § 2T1.1. Under that guideline, the tax loss is "the total amount of loss that was the object of the offense, " and "all conduct violating the tax laws should be considered as part of the same course of conduct or common ...