United States District Court, E.D. Tennessee, Knoxville
MEMORANDUM AND ORDER
W. PHILLIPS, SENIOR UNITED STATES DISTRICT JUDGE
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,
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.
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.
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.
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.
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).
Calculation of Tax Loss
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]. 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].
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.
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.
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.
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. 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.” 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.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.
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 ...