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No Mulligan for Tax Offender, Penalties and Interest Count for Criminal Tax Loss, but Restitution Doesn’t Include Tax Says Second Circuit by EVAN J. DAVIS

Do-overs are rare in criminal law, unlike a weekend golf game.  Finality is an important factor in what appellate courts do, which is why they establish hard-to-meet standards for reversal such as “plain error.”  Another tip: judges don’t like defendants to use the time between pleading guilty and being sentenced to commit the same crimes that they have pled to, and the sentence imposed may underscore this point.

Rule 11 of the Federal Rules of Criminal Procedure establishes what a district court must do when taking a guilty plea. When a defendant changes her plea to guilty and doesn’t object to any Rule 11 violations, she can only throw out her guilty plea on appeal if she shows the district court committed “plain error.”  Plain error in this context means that there’s an obvious error in the Rule 11 process, it affected substantial rights, and there’s a reasonable chance the defendant wouldn’t have pled guilty if the district court had done the Rule 11 colloquy correctly.  Each of these is difficult to show, and showing all three is rare.

Enter David Adams, a man with a 14-year history of

obstruct[ing] the IRS’s efforts to collect his delinquent tax payments and to secure overdue tax returns.  He lied to and manipulated his accountant, filed extension requests containing false information, claimed to have made payments that he had not made, missed deadlines, lied that checks were in the  mail, unjustifiably blamed his accountant for errors and delays, bounced checks, and fraudulently claimed financial distress at times when he had the funds necessary to pay his tax liability, all the while spending lavishly on a lifestyle that included purchasing and leasing multiple luxury vehicles, spending millions to construct a mansion in East Lyme, Connecticut, and staying at upscale hotels.

Given this history, it’s not surprising that he was indicted for a variety of tax crimes, including filing false returns, tax evasion, and obstructing the IRS.  When he decided he didn’t want to go to trial the government apparently made him “eat the sheet,” meaning, Adams had to plead guilty to all six counts in his indictment instead of just picking one or two (as the government often agrees to when a defendant agrees to plead guilty early rather than late in the game).  Each count carried a three-year or five-year statutory maximum sentence.

Can’t Withdraw Guilty Plea

When a defendant is convicted of multiple offenses, district judges have discretion to run sentences consecutively (stacking) instead of concurrently, to achieve what the court believes is an appropriate sentence.  Adams’ presentence report showed the recommended sentence under the Federal Sentencing Guidelines was 78-97 months – well above the 60-month maximum for any of his individual counts of conviction.  The district court sentenced Adams to 90 months, and he sought to withdraw his guilty plea by claiming that he didn’t understand that sentences could run consecutively.  Relying on well-established precedent, the Second Circuit rejected Adams’ attempt to “manufacture plain error,” and noted that Adams had plenty of chances to object or ask questions and he didn’t.

Penalties and Interest Included in Guideline Tax Loss Despite No Tax Evasion Conviction

Additionally, and as an issue of first impression, Adams complained that only tax, and not penalties and interest, should be used to compute his tax loss for Sentencing Guidelines purposes, because he hadn’t been convicted of “evasion of payment” or “willful failure to pay” taxes.  There is an important distinction in computing criminal tax loss between evasion of assessment and evasion of payment: in assessment cases, only the tax and not interest or penalties is included, primarily because when you take evasive action generally no interest or penalties are due; whereas in collection cases, the IRS is trying to collect assessed penalties and accrued or assessed interest, so it’s logical to include both in the criminal tax computation.  The Guidelines state the distinction at U.S.S.G. § 2T1.1 cmt. n.1, noting penalties and interest don’t count “except in willful evasion of payment cases under 26 U.S.C. § 7201 and willful failure to pay cases under 26 U.S.C. § 7203.”

Adams raised the issue whether one must be convicted of evasion of payment or failure to pay for a district judge to be allowed to include penalties and interest in tax loss, as the district judge did to Adams.  This, a legal issue reviewed de novo (meaning the district court’s decision isn’t given any weight), is a closer question than whether Adams could show plain error in the district court’s refusal to allow him to withdraw his plea.

Noting it was an issue of first impression in the Second Circuit, the appellate court stated the First and Seventh Circuits had already decided that a district court could include penalties and interest in the tax computation even if the defendant hadn’t been convicted of evasion of payment or failure to pay, where the defendant’s conduct included evading payment.  The Guidelines permit judges to include conduct related to the offense(s) of conviction when computing the accurate Guideline.  Relying on the Guidelines and the First and Seventh Circuit decisions, the Second Circuit determined that the Guideline comment regarding penalties and interest did not trump the Guidelines’ general rule that relevant conduct is included regardless of the counts of conviction.

Post-Plea Obstruction Merits 2-Point Enhancement

Adams had the temerity to object to an “obstruction of justice” enhancement as well, which arguably could have been based on his pre-indictment conduct (described in great detail above) but the Second Circuit didn’t need to decide that harder question.  Instead, the district court and Second Circuit zeroed-in on Adams’ conduct after pleading guilty that included “concealing, transferring and failing to disclose his assets” tantamount to a “game of ‘cat and mouse’” with both the IRS and the district court.  This is primarily a reminder not to stick a thumb in the eye of the person who will be sentencing you.

Tax Restitution Only Permissible as Supervised Release Condition

Finally, the district court erred in treating taxes like normal losses for restitution purposes.  Absent a plea agreement where a defendant agrees to it, taxes can only be ordered as a condition of supervised release or probation, and not during custody or after supervision has terminated (unlike fraud losses, for example).  However, the district court ordered that Adams’ restitution obligation began immediately after sentencing, when it should have ordered it solely as a condition of supervised release.  The Court of Appeals fixed this problem without sending it back down to the district court.


In addition to the obvious takeaway that constructing a mansion and leasing luxury vehicles while claiming poverty with the IRS might result in the Revenue Officer referring you to Criminal Investigation, the other takeaway is that, even once you’ve been charged, your conduct matters.  Had Mr. Adams accepted responsibility early, he might have negotiated fewer charges of conviction and, therefore, a lower statutory maximum.  Halting the cat-and-mouse game after pleading guilty would have saved a two-point enhancement and avoided the ire of the district judge.  Tax sentences tend to be lower, and sometimes much lower, than the low end of the Guideline range, but here it was above the mid-range.  Why?  Only the district judge knows, but post-indictment obstructive conduct and the late guilty plea is the likely answer.

The case is United States v. David M. Adams, No. 18-3650 (2d Cir. April 7, 2020), and the decision is available at http://www.ca2.uscourts.gov/decisions/isysquery/fc3a03ee-eb58-44b1-8480-325829418c50/2/doc/18-3650_opn.pdf#xml=http://www.ca2.uscourts.gov/decisions/isysquery/fc3a03ee-eb58-44b1-8480-325829418c50/2/hilite/

EVAN J. DAVIS – For more information please contact Evan Davis – davis@taxlitigator.com or 310.281.3288. Mr. Davis is a principal at Hochman Salkin Toscher Perez PC.  He spent 11 years as an AUSA in the Office of the U.S. Attorney (C.D. Cal), spending three years in the Tax Division of the where he handed civil and criminal tax cases and 11 years in the Major Frauds Section of the Criminal Division where he handled white-collar, tax, and other fraud cases through jury trial and appeal.  As an AUSA, he served as the Bankruptcy Fraud coordinator, Financial Institution Fraud coordinator, and Securities Fraud coordinator.  Among other awards as a prosecutor, the U.S. Attorney General awarded him the Distinguished Service Award for his work on the $16 Billion RMBS settlement with Bank of America.  Before becoming an AUSA, Mr. Davis was a civil trial attorney in the Department of Justice’s Tax Division in Washington, D.C. for nearly 8 years, the last three of which he was recognized with Outstanding Attorney awards. 

Mr. Davis represents individuals and closely held entities in criminal tax (including foreign-account and cryptocurrency) investigations and prosecutions, civil tax controversy and litigation, sensitive issue or complex civil tax examinations and administrative tax appeals, and federal and state white-collar criminal investigations including campaign finance, FARA, money laundering, and health care fraud. 

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