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United States v. Armstrong

United States District Court, E.D. Tennessee, Knoxville

January 4, 2017

UNITED STATES OF AMERICA
v.
JOSEPH E. ARMSTRONG

          MEMORANDUM AND ORDER

          THOMAS W. PHILLIPS, SENIOR UNITED STATES DISTRICT JUDGE

         On August 8, 2016, defendant Joseph E. Armstrong was convicted by a jury of one count of filing a false tax return in violation of 26 U.S.C. § 7206(1) for failing to report and pay federal income tax on the profit he made on the sale of cigarette tax stamps in 2008. Pending before the Court are several objections to the Presentence Investigation Report (“PSR”) [Docs. 62, 63]. Since the objections have been filed, the PSR has been revised twice [Docs. 67, 71] and some of the objections now appear to be moot. The Court has carefully considered the pending objections, the revised PSR, and the evidence and arguments presented on December 19, 2016.

         A. Defendant's objection to paragraph 27 - the two-point enhancement for defendant's abuse of position of trust pursuant to United States Sentencing Guideline (“U.S.S.G.”) §3B1.3 - is moot [Doc. 62 at pp. 3-4, ¶ 7, pp. 8-9]. This paragraph was removed in the second revised PSR and the government has indicated that it will not object to this revision of the PSR.

         B. Defendant's objection to the sentencing range set forth in the PSR as beyond the three-year statutory maximum of 26 U.S.C. § 7206 is moot [Doc. 62 at pp. 4-5, ¶ 9, pp. 14-16]. Both revised versions of the PSR reflect the restricted advisory Guideline range.

         C. Defendant has objected to PSR paragraph 73 which states that there are no factors warranting a variance outside the Guideline range [Doc. 62 at p. 5, ¶ 10, pp. 16- 17]. Inasmuch as paragraph 73 does not affect the initial calculation of the defendant's advisory Guideline range, the Court views this objection as more of a sentencing argument rather than an appropriate basis for objection to the PSR. The defendant has filed a pending motion for downward departure and/or variance [Doc. 68] to address his asserted bases for a sentence outside the Guideline range and the Court will consider those arguments at sentencing. Accordingly, to the extent that this issue is an objection to the PSR, it is overruled.

         D. Defendant has objected to paragraph 63 of the PSR which states that the defendant is not eligible for probation because his Guideline range is in Zone D of the Sentencing Table [Doc. 62 at p. 5, ¶ 11, pp. 17-18]. Defendant contends that the correct calculation of his offense level would put him in the range that is eligible for probation. Further, defendant argues that the statute of conviction clearly contemplates that the imposition of a fine, alone, may be an appropriate punishment. Finally, defendant argues that he should be eligible for probation because of the nature of the offense of conviction, his personal history, and the collateral consequences of his conviction. As with the prior objection, paragraph 63 does not affect the initial calculation of the defendant's advisory Guideline range. The Court will consider all of the parties' arguments regarding an appropriate sentence in accordance with the factors set forth in 18 U.S.C. § 3553(a) at the sentencing hearing. To the extent that this issue is an objection to the PSR, it is overruled.

         E. The government's sole objection [Doc. 63] to the PSR identifying Aberrant Behavior as a basis for departure pursuant to USSG §5K2.20 is moot inasmuch as that paragraph has been removed from the PSR. However, this is one of the bases cited in the defendant's pending motion for downward departure and/or variance [Doc. 68] and it will be considered in that context at sentencing and pursuant to the factors set forth in 18 U.S.C. § 3553(a).

         F. Calculation of Tax Loss

         Defendant objects to the calculation of tax loss of $104, 781.00 in paragraphs 15 and 17 and the finding of a base offense level of 16 [Doc. 62 at pp. 2-3, ¶¶ 4-6, 5-8; Doc. 68 at pp. 3-6].[1] Government's trial exhibit 68, Internal Revenue Service (“IRS”) Form 4549, contains the government's calculation of the tax loss on which the PSR determination is made. At the December 19, 2016 hearing, the government presented the testimony of IRS Agent Cindy West, who also testified at trial, to affirm that the calculations in Form 4549 correctly state the amount of tax loss. The defendant presented the testimony and expert witness report of Marshall H. Hamilton, a Certified Public Accountant, who opined that Form 4549 does not correctly calculate the amount of tax loss [Doc. 73, Exs. 1, 2].

         Defendant relies on U.S.S.G. §2T1.1(c)(1), Note A, which states that “[i]f the offense involved filing a tax return in which gross income was underreported, the tax loss shall be treated as equal to 28% of the unreported gross income … unless a more accurate determination of the tax loss can be made” (emphasis added). Defendant does not dispute that he did not report $321, 853.00 in 2008 as income from the tobacco tax stamp profits. Although defendant's briefing does not suggest what the appropriate tax loss should be, defense counsel noted at the December 19, 2016 hearing that application of the 28% “presumptive” tax rate to $321, 853.00 would equal a tax loss of $90, 118.84.

         Mr. Hamilton opined that the calculation in Form 4549 fails to account for the loan origination costs and the UCC-1 filing fee defendant incurred in repaying the BankEast loan that was used to purchase the cigarette tax stamps. Including those costs would result in an adjusted gross profit of $319, 038.00. Further, Mr. Hamilton opined that Form 4549 failed to correctly adjust the sales tax deduction for the increase in defendant's income, a point that IRS Agent West conceded. Finally, and most critically, Mr. Hamilton opined that Form 4549 failed to correctly treat the interest paid on the loan as investment interest and therefore as an itemized deduction, rather than a miscellaneous itemized deduction. Mr. Hamilton opined that the correct amount of tax loss is $99, 943.00, which the defendant urges the Court to adopt as the amount of tax loss.

         In response, the government contends that the tax loss calculation of $104, 781 by IRS Agent Cindy West took into consideration all appropriate deductions [Doc. 69 at pp. 9-10]. Ms. West testified that the loan interest would not be treated as investment expense because, per Tennessee law, only a licensed cigarette stamper could purchase cigarette tax stamps. Because defendant was able to do so only because of his position as a state representative, she opines that the income was not a legitimate investment and therefore the interest was not deductible as an investment expense.

         The Court first notes that the government bears the burden of establishing the amount of tax loss by a preponderance of the evidence standard. United States v. Daulton, 266 F.App'x 381, 388 (6th Cir. 2008). The key to this dispute is whether the interest paid on the loan should be treated as a miscellaneous personal deduction subject to a limitation of 2% of adjusted gross income under I.R.C. § 67, as the government contends, or whether the interest should be treated as investment interest under I.R.C. § 163(d)(1), as the defendant contends.[2] The Court further observes that neither party has cited to any statutory, regulatory, or other law or guidance by which this determination should be made. Mr. Hamilton testified that investment interest under I.R.C. § 163 is “interest on a loan used to secure an investment property.”[3] He further explained that the loan interest should not be considered a miscellaneous itemized deduction as Ms. West opined because I.R.C. § 67(b)(1) explains that miscellaneous itemized deductions do not include interest.[4]Neither Ms. West nor the government cited any I.R.C. provision or other authority for the position that defendant's purchase of tax stamps was not a legitimate investment because the investment opportunity was not generally available to the public.

         Based on the evidence presented at trial and the parties' stipulations [Gov. Ex. 1], it is undisputed that only a licensed cigarette stamper can legally purchase cigarette tax stamps in Tennessee. It is also undisputed that the defendant is not a licensed cigarette tax stamper. However, it is also undisputed that defendant's purchase of the cigarette tax stamps from Tru Wholesale and subsequent resale was not illegal. The Court finds that both Mr. Hamilton and Ms. West are credible, competent witnesses on this subject and that they both have reasonable bases for their opinions. In the absence of other evidence or any persuasive authority, the Court finds that the government has not carried the burden of proof that the amount of tax loss is $104, 781.00. Therefore, the Court accepts the opinion of Mr. Hamilton that the ...


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