U.S. v. Roush

• Decision Date: 03 October 2006
• Docket Number: No. 05-10238.,05-10238.
• Citation: 466 F.3d 380
• Parties: UNITED STATES of America, Plaintiff-Appellee, v. Edward Wesley ROUSH, Jr., Defendant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

466 F.3d 380

UNITED STATES of America, Plaintiff-Appellee, v. Edward Wesley ROUSH, Jr., Defendant-Appellant.

No. 05-10238.

United States Court of Appeals, Fifth Circuit.

October 3, 2006.

Susan B. Cowger (argued), Michael Reuss Snipes, Dallas, TX, for U.S.

Shirley L. Baccus-Lobel (argued), Law Offices of Shirley Baccus-Lobel, Dallas, TX, for Roush.

Appeal from the United States District Court for the Northern District of Texas.

Before GARZA, PRADO and OWEN, Circuit Judges.

EMILIO M. GARZA, Circuit Judge:

Edward Wesley Roush, Jr. ("Roush") appeals the below-guidelines sentence imposed after his guilty-plea conviction for tax evasion, in violation of 26 U.S.C. § 7201.

I

On February 5, 1998, Roush received income in the form of WasteMasters, Inc. stock for legal services he had performed during 1997 and 1998. On September 30, 1998, Roush caused 20,191,500 shares to be issued to six business entities, none of which filed tax returns in 1998. In Roush's 1998 tax return, which he filed in 2002, he declared a taxable income of $11,150. He did not report the receipt of the WasteMasters stock, although he did claim charitable contributions on his 1998 and 1999 tax returns for donating over 4 million shares to John Marshall Law School. The government estimated that the value of the stock received in 1998 was approximately $3.4 million and estimated that the corresponding tax loss was approximately $1,148,409. Roush and others were indicted on 47 counts of wire fraud, securities fraud, money laundering, and conspiracy.¹ Roush was also indicted on one count of tax evasion. When he pleaded guilty to tax evasion, the remainder of the charges were dismissed.

The Probation Officer who prepared the Presentence Report ("PSR") calculated the amount of tax loss for sentencing purposes at $1,148,409, establishing a Base Offense Level of 22. See U.S. SENTENCING GUIDELINES § 2T4.1 (2004) (hereinafter U.S.S.G.). After a two-level increase for failure to report income in excess of $10,000 derived from criminal activity, U.S.S.G. § 2T1.1(b)(1), a two-level increase for use of "sophisticated means," U.S.S.G. § 2T1.1(b)(2), and a three-level reduction for acceptance of responsibility, U.S.S.G. § 3E1.1(a) & (b), the Probation Officer determined Roush's Total Offense Level was 23, resulting in a sentencing range of 46 to 57 months. Roush objected to the adjustments for failure to report income derived from criminal activity and for use of sophisticated means. He also objected to the calculation of the tax loss. The district court held a sentencing hearing on the question of the appropriate measure of the tax loss. Testimony focused on whether the stock, which was restricted, was valueless by the end of 1998 and what impact that had on the tax loss calculation.

The district court ultimately adopted the PSR, specifically noting that it believed that the tax loss calculation in the PSR was correct. However, the district court expressed concerns about the severity of the sentence in light of the fact that the stock was worthless by the end of 1998,² stating "that that computation significantly overstates the actual seriousness of the offense here." Rather than using the PSR's $0.5160 per share value for the stock, the district court used the total value Roush had placed on the shares donated to John Marshall Law School in both 1998 and 1999, approximately $1,666,800.³ The district court stated at sentencing: "But I think in terms of trying to determine a fair sentence and a fair reflection of the gravamen of the offense, I think taking the defendant's own claimed amount of contribution, charitable contribution, is a fair reflection [ ]." Applying the 39.6 percent tax bracket to the total value of the charitable donations to determine the tax loss, the district court determined that the Total Offense Level would be 21, resulting in a sentencing range of 37 to 46. After being reminded of additional filings, the district court reduced the sentence again to 27 months.⁴ The district court also required restitution in the amount of $652,000, a special assessment of $100, and two years of supervised release. Roush now appeals, contesting the calculation of the guidelines range contained in the PSR and arguing that the sentence imposed is unreasonable.

II

Roush, on appeal, first challenges the district court's acceptance of the PSR's calculation of the tax loss, the use of the 39.6 percent tax bracket, and the application of the enhancements for failure to report income derived from criminal activity and the use of sophisticated means.

A

Tax loss is "the total amount of loss that was the object of the offense." U.S.S.G. § 2T1.1(c)(1); see also United States v. Clements, 73 F.3d 1330, 1339 (5th Cir. 1996) (holding that tax loss "means the tax deficiency assessed ... rather than the amount that the IRS could actually recover"). To calculate the total tax loss for purposes of the PSR, the probation officer used the fair market value ("FMV") of the stock on February 5, 1998, the date that Roush became able to request delivery of the stock (average trading price of $0.5160). This amount was then multiplied by the number of shares (20,191,500). The value of the shares was then discounted by 67 percent.⁵ The total actual gross receipts were therefore $3,435,543. The probation officer then subtracted $38,874 of reported gross income to reach the total unreported income of $3,396,669. After subtracting the itemized deductions and using the 39.6 percent tax bracket, the total tax loss was $1,148,409.

Roush argues, as he did at sentencing, that the tax loss used to determine the Base Offense Level in the PSR was incorrect. Roush asserts that the stock should be valued at the close of the taxable year. He then argues that the value of the stock by the end of 1998 was de minimus (worth $0.01 per share) if not utterly valueless because of the stock's cancellation. He also argues that even during 1998, the restricted nature of the stock further suppressed the value of the shares. We review the application of the guidelines de novo and factual findings for clear error. United States v. Clark, 139 F.3d 485, 490 (5th Cir.1998) (reviewing the district court's computation of the tax loss).

Under the Internal Revenue Code, when property is transferred in connection with the performance of services, "the excess of (1) the fair market value of such property (determined without regard to any restriction other than a restriction which by its terms will never lapse) at the first time the rights of the person having the beneficial interest in such property are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier, over (2) the amount (if any) paid for such property, shall be included in the gross income of the person who performed such services in the first taxable year ...." 26 U.S.C. § 83(a). For the purposes of the PSR, the stock was valued on February 5, 1998, the date that Roush was first able to request the issuance of the shares.⁶ The Government argues that this is the correct date. In contrast, Roush argues that the stock should be valued at the end of the taxable year.

On February 5, 1998 Roush had the right to request immediate issuance of the stock and thus, constructively received the stock. See Arnwine v. C.I.R., 696 F.2d 1102, 1111 (5th Cir.1983) ("[A] cash basis taxpayer will be deemed to be in constructive receipt of income when it becomes available to him without substantial restrictions."); see also Reed v. C.I.R., 723 F.2d 138, 142 (1st Cir.1983) ("[U]nder the constructive receipt doctrine, a taxpayer recognizes taxable income when he has an unqualified, vested right to receive immediate payment."). Typically, stock is valued on the date the shares are issued. See Champion v. C.I.R., 303 F.2d 887, 891 (5th Cir.1962) (applying the "well-settled rule that stock received as compensation for services rendered to the issuing corporation is taxable as ordinary income of an amount equal to the value of the stock at the date of issuance"); see also Pledger v. C.I.R., 641 F.2d 287, 291 (5th Cir.1981) ("[T]he value of [defendant's] compensation for purposes of taxation could be determined by reference to the fair market value of the stock on the day of purchase."). Because Roush took constructive receipt of the stock on February 5, that is the correct date on which to establish valuation. See Wolder v. C.I.R., 493 F.2d 608, 612-13 (2d Cir.1974) (observing that stock is valued on the date of constructive receipt). The Revenue Ruling cited by Roush in support of his argument that the stock should be valued at the end of 1998 is inapposite as it deals with the rescission of a contract that voided the transfer of property, thus extinguishing all taxable income. See Rev. Rul. 80-58, 1980-1 C.B. 181. Roush's argument that the stock should have been valued at the end of the year fails.

Furthermore, the fact that the stock was restricted at all times during 1998 did not render its fair market value either zero or de minimus for the purposes of income calculations. See McDonald, 764 F.2d at 325 (discussing how the fair market value of a share of stock is determined without regard to restrictions). This court has analyzed a situation in which a taxpayer purchased corporate stock pursuant to a stock option plan that was subject to certain restrictions on subsequent sale. Pledger, 641 F.2d at 288. The sales agreement in Pledger stipulated that the restricted stock was worth only 65 percent of its fair market value if sold pursuant to a private placement sale. Id. at 289. The taxpayer argued that I.R.C. § 83(a) unconstitutionally allowed Congress to tax in excess of the value for which the stock could be sold. Id. In rejecting this argument, we wrote:

When he purchased the stock, the value of his compensation for purposes of taxation could be determined by reference to the fair market value of the stock on the day of...