If someone commits a financial crime and, at the same time, commits a tax crime, can the tax crime sentence be used to enhance the sentence for the financial crime? The court addresses this in United States v. Smith, No. 18-3222 (8th Cir. 2019). The answer may surprise you.
Facts & Procedural History
The defendant was an investment advisor. He stole client funds.
The defendant used the funds by having his investment firm use the funds to invest in a business that owned a refinery. The majority owner of the refinery business delegated the payroll functions for the refinery to the defendant. The defendant withheld taxes from the refinery employees’ wages, but did not remit the monies to the IRS.
The defendant was indicted in 2016 for the unpaid payroll taxes. He pleaded guilty and was sentenced to 13 months imprisonment.
In 2017, the defendant was indicted for wire fraud. He pleaded guilty to the charge, but reserved the right to challenge whether the prior tax crime could be factored into his sentence for wire fraud. The defendant wanted them treated as one related criminal act, thereby reducing the sentencing range for his wire fraud case.
The trial court concluded that the tax fraud and wire fraud cases were separate and distinct. It noted:
The scheme in this case was a fraud perpetrated by taking money from private clients of . . . [Smith] without their permission, when he purported to be their trusted investment advisor. In the tax scheme, he and his accomplice deducted employee payroll taxes and the like and did not pay them over to the IRS, nor account for them. So two different schemes entirely. As mentioned, in the tax scheme, he had an accomplice; in this case, he acted alone. In the tax case, the government and the employees were victims; and in this case, private individuals, different individuals, were the victims, and they were not, of course, employees of [Smith].
The defendant appealed the decision.
The Federal Sentencing Guidelines
The sentencing guidelines provide a range for the court to consider in imposing criminal sentences. They set out various factors the court is to consider in imposing criminal sentences.
To apply the guidelines, the court looks to the U.S. Probation Office to investigate the facts. The probation office will issue a pre-sentence investigation report that identifies the facts and applies them using the sentencing guidelines.
The guidelines themselves set out a base offense amount and then provide for enhancements that are added if certain enumerated facts are met in the case. The enhancements allow the court to consider the defendants aggravating or mitigating role in the offense.
What is a Prior Sentence?
The term prior sentence is broad. It includes every offence where the defendant was found guilty. It includes plea agreements.
It does not include “relevant conduct.” Relevant conduct includes “all acts . . . that occurred during the commission of the offense of conviction, in preparation for that offense, or in the course of attempting to avoid detection or responsibility for that offense.” What does this mean? It basically means that overlapping crimes are to be treated as one in computing the sentence.
Put another way, a prior sentence can be used in computing the criminal sentence. A prior sentence cannot be used if it occurred at the same time as the crime that is being considered. This was the defendant’s argument in this case:
[The Defendants] prior tax-related conviction are sufficiently linked in time, place, and motive. He, therefore, asserts that the conduct underlying his prior tax-related conviction qualifies as relevant conduct for his offense of conviction in the instant case. In other words, Smith’s primary contentions are that his prior tax-related conduct falls squarely within the same acts that constituted his instant wire-fraud conduct and that his combined conduct should fall under a criminal history category of I. If classified under a criminal history category of I, Smith argues that he may have received a sentence with 16 fewer months for his wire-fraud conviction, likely reducing his total sentence.
The question on appeal was whether the tax fraud sentence was a relevant conduct for the wire fraud sentencing.
What is Prior Criminal Conduct Separate?
The appeals court in this case concluded that the criminal tax fraud case was a prior sentence in computing the sentence for the wire fraud case:
In the presentence investigation report (PSR), the probation office recommended adding two criminal history points for Smith’s prior conviction of failing to account for and pay over employment taxes. The two points resulted in a criminal history category of II.
Smith objected to the probation office’s recommendation. He argued that the conduct underlying his prior tax-related conviction was relevant conduct to his wire-fraud conviction and should not result in two criminal history points. Without the two points, Smith’s criminal history would have been a category I, and his Guidelines range would have been 135 to 168 months’ imprisonment instead of 151 to 188 months’ imprisonment.
This resulted in the defendant’s sentencing range. But should it have counted as a prior sentence? The appeals court noted that “the conduct underlying the prior sentence and offense of conviction shared some temporal and geographical proximity.” It seems the defendant used the withheld tax payments as he did with the stolen investment funds. Both were apparently used to fund the refinery’s operations.
But the court noted that other facts suggest that the crimes were separate and distinct. This includes the fact that the victims differed. The tax fraud case impacted taxpayers; whereas, the wire fraud case only impacted the persons the defendant stole from.
The takeaway is that a tax offense that is committed at the same time as another criminal offence will most likely be treated as separate and distinct crimes. The result is that the tax crime can add to the sentence range for the other crime.