Tenth Circuit Decision on Unclaimed Deductions for Sentencing Tax Loss Calculations (8/16/11)

The Tenth Circuit recently rendered a very good decision on the issue of a convicted defendant using unclaimed deductions to reduce the tax loss for sentencing purposes. The decision is United States v. Hoskins, ___ F.3d ___, 2011 U.S. App. LEXIS 16636 (10th Cir. 2011) and may be viewed or downloaded here.  First a little background.

Tax crimes afficionados know, that the tax loss is the principal determinant in sentencing for tax crimes and the drill for the defendant and his or her lawyer is to get that number down.  But there is another key context in which a similar concept is used in tax crimes.  Tax evasion is the key tax crime where tax loss -- called tax due and owing -- is an element of the crime. The Government must actually prove a tax due and owing, basically the same as a sentencing tax loss. (I have discussed previously in this blog the issue of whether that tax due and owing must be substantial, but that is not the issue here; in all events there must be a tax due and owing.) In the case of an allegedly false return, the Government will usually make its proof usually by showing omitted income, falsely claimed deductions or falsely claimed credits, and make the resulting adjustments to the return to determine the tax allegedly due and owing. But the taxpayer may want to put in play unclaimed deductions, overreported income or unclaimed credits to offset the Government claims. The taxpayer can do that in the tax evasion case in chief as bearing on the issue of whether the Government has proved a tax due and owing. (There are some interesting burden of proof issues as to the unclaimed tax benefits, but I forego them for now.)  For example, in her now infamous criminal trial, Leona Helmsley (“only little people pay taxes”) asserted this defense by claiming that her husband's real estate empire generated far more depreciation deductions than they had claimed on their returns that so offended the Government. Indeed, she urged, the unclaimed deductions were more than sufficient to eliminate this element despite omission of large sums of income. It did not work for her, but it is an avenue that the experienced practitioner will explore. See United States v. Helmsley, 941 F.2d 71 (1991), cert denied, 502 U.S. 1091 (1991).
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