U.S. v. Brennick, 96-1969

• Decision Date: 08 October 1997
• Docket Number: No. 96-1969,96-1969
• Parties: -485, 98-1 USTC P 50,275 UNITED STATES of America, Appellant, v. John A. BRENNICK, Defendant, Appellee. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 10

134 F.3d 10

81 A.F.T.R.2d 98-485, 98-1 USTC P 50,275

UNITED STATES of America, Appellant, v. John A. BRENNICK, Defendant, Appellee.

No. 96-1969.

United States Court of Appeals, First Circuit.

Heard Oct. 8, 1997.

Decided Jan. 20, 1998.

Stephen G. Huggard, Special Assistant United States Attorney, Washington, DC, whom Donald K. Stern, United States Attorney, was on brief for the United States.

Scott P. Lopez, Sharon, MA, by appointment of the court, with whom Terry Philip Segal and Burns & Levinson LLP, Boston, MA, were on brief for appellee.

Before BOUDIN, Circuit Judge, GODBOLD and CYR, Senior Circuit Judges.

BOUDIN, Circuit Judge.

John Brennick was convicted of various offenses centered around his failure to pay over to the Treasury income and social security taxes withheld from his employees' paychecks. The district court calculated the range of imprisonment fixed by the sentencing guidelines at 41 to 51 months but then departed downward and imposed a sentence of 13 months' imprisonment. The government now appeals, arguing that the downward departure was error.

I.

John Brennick was the president and sole proprietor of a number of head injury treatment centers in Massachusetts, Pennsylvania, Delaware and Maryland. He also operated one head trauma center in New Jersey as a limited partnership, Brennick being the general partner. Some of the centers provided sophisticated medical treatment; others appear to have been supported living centers for head injured patients. Taken as a whole, the companies were a large and successful business venture.

Employers like Brennick are required to withhold income taxes and social security taxes from employee paychecks on a periodic basis and to pay those amounts over to the Treasury. The Internal Revenue Service specifies the periods for which such withholding is required. Employers are required by law to deposit the withheld taxes into the Treasury within three days after the end of each such period. Regular returns, specifying the amounts withheld and paid over, are also required on a quarterly basis.

From 1986 to 1992, Brennick followed a regular pattern of withholding the taxes from his employees' pay but delaying payment of the monies into the Treasury for a substantial period beyond the time due. Normally his payments to the government were between two and six months after the due dates. Brennick routinely filed returns accurately describing the amounts withheld, and when he ultimately made the delayed payments to the Treasury, he also paid the interest and penalties prescribed by law for late payments.

During this period, Brennick frequently withdrew money from his businesses by means that avoided bank reports to the IRS that are required when a person withdraws more than $10,000 from an individual bank on a single banking day. Brennick told various of his employees and family members to cash checks drawn on Brennick's various business accounts and to turn the money over to him. The individual checks were for less than $10,000 each; but the total withdrawn from his company accounts was often well over $10,000 a day.

There is no claim that Brennick was forbidden to withdraw the monies from the companies' accounts; in fact, for most of them he was the sole proprietor, and for the remaining one he was the general partner. The charge later brought against him was that the withdrawals were structured to avoid the filing of currency transaction reports and to deflect the attention of the tax authorities. It is said that Brennick took much or all the money he withdrew and lost it in gambling: he claims to have lost more than $1 million a year.

During the second half of 1992, Brennick's businesses began to suffer financial problems. Changes were occurring in the health care industry adversely affecting providers like Brennick. Insurance reimbursements came more slowly and for lower amounts, while the costs of providing service increased. In December 1992, one of the banks that had been lending money to Brennick failed and Brennick could not find another lender to replace it.

At the same time, the IRS began to investigate Brennick's pattern of chronically late payments. In a meeting with an IRS agent on October 30, 1992, Brennick agreed to a payment plan, including a commitment to keep current on future payments. He promised that his businesses would seek to expedite payments to the IRS and would cut his own pay and the pay of other executives in order to pay back taxes. Instead, Brennick removed another $80,000 cash from the businesses in November 1992 and almost twice that amount in December.

In addition, Brennick now began to file false quarterly withholding tax returns for many of the companies. Returns filed in the third and fourth quarter of 1992 incorrectly stated that Brennick had paid over to the government virtually all of the withheld taxes; in truth, the companies in question had paid none of the taxes over to the IRS. In two cases Brennick signed the false returns himself; in other cases they were signed by employees, but Brennick was the person responsible for the withholding of the taxes.

In February 1993, Brennick filed for reorganization of his businesses under chapter 11 of the Bankruptcy Code, and later the case was transformed into a chapter 7 liquidation. At the initial filing, Brennick owed the Treasury over $1.4 million in withheld taxes that should have been, but had not been, paid over to the government. During reorganization, Brennick took additional funds out of the businesses for himself while failing to pay over the full amount of taxes withheld during the same period.

In 1995, a grand jury indicted Brennick. In a superseding indictment, Brennick was charged with 22 counts of willful failure to account for, and pay over quarterly, specified withholding taxes, 26 U.S.C. § 7202; nine counts of structuring currency transactions, 31 U.S.C. §§ 5313, 5322 and 5324; and one count of corruptly endeavoring to obstruct and impede the IRS, 26 U.S.C. § 7212(a). There was an additional single charge of bankruptcy fraud, 18 U.S.C. § 152, but the jury later deadlocked on that issue.

In December 1995, Brennick went on trial. The government, in addition to offering evidence of the events already described, called several of Brennick's former employees who testified that Brennick had known the deadlines for paying over the withheld taxes but had deliberately chosen to ignore them even though his employees had sought to get him to pay over the taxes on a timely basis. The bankruptcy fraud count aside, the jury convicted Brennick on all remaining counts.

The district court held a two-day proceeding to determine Brennick's sentence and after sentencing, issued a memorandum and order explaining the court's analysis. United States v. Brennick, 949 F.Supp. 32 (D.Mass.1996). After briefly setting out the background facts, the memorandum calculated the normal guideline range, referring (as we do) to the 1992 version of the guidelines. Then, at length, it set out the framework for departures and the court's reasons for departing in this case.

Brennick was convicted of violating three different statutes--failure to pay over withheld taxes, structuring, and obstructing the IRS--but the conduct was arguably related. In any event, the district court chose to treat the offenses as closely related counts to be grouped under U.S.S.G. § 3D1.2, and its choice is not disputed on this appeal. ¹ Where counts are so grouped, the court selects the offense level for the violation among the group that has the highest offense level. U.S.S.G. § 3D1.3(b).

The district court ruled that the highest offense level was generated by the offense of corruptly impeding tax officials under 26 U.S.C. § 7212(a). Although no specific guideline exists for this offense (unless force is used), see U.S.S.G., appendix A, the court is directed to use the guideline for the offense most analogous to the criminal conduct of which the defendant was convicted. U.S.S.G. § 1B1.2. Here, the district court concluded that the closest analogy for the obstructive conduct was the offense of tax evasion, a violation of 26 U.S.C. § 7201, for which a specific tax evasion guideline is set forth, U.S.S.G. § 2T1.1.

Although Brennick was not charged with tax evasion, this choice of analogy is not challenged by either side, and we accept it as reasonable for purposes of this appeal. The government's obstruction charge embraced all of Brennick's behavior (deliberate underpayments, structuring, and other acts of falsity or concealment) and that conduct includes withholding revenues from the government combined with elements of conscious wrongdoing and personal gain.

The base offense level for the tax evasion guideline is driven by the tax loss inflicted on the government, and in this case the undisputed level of the government's loss--"more than $1,500,000"--corresponds to offense level 18. U.S.S.G. §§ 2T1.1(a), 2T4.1(M). The district court added two levels on the ground that Brennick had used "sophisticated means" to impede discovery of the offense, see U.S.S.G. § 2T1.1(b)(2), and two more levels for obstruction of justice because of untruthful testimony by Brennick at trial, see U.S.S.G. § 3C1.1.

Given a total offense level of 22 (and a criminal history category I), the guideline range for Brennick was a term of imprisonment of 41 to 51 months. From this range, the district court departed downward to level 13, for which the prescribed range for a defendant in criminal history category I is 12 to 18 months' imprisonment. The court imposed a sentence of 13 months, as well as a fine of $6,000 and the statutory special assessment, noting that Brennick remained personally liable to the government for tax losses he had caused, 26 U.S.C. § 6672.

The court's reasons for the departure were set forth in some detail but reflect two central themes: first, that Brennick's intent was not as wicked as that...