U.S. v. Yip

• Decision Date: 13 January 2010
• Docket Number: No. 08-10235.,08-10235.
• Citation: 592 F.3d 1035
• Parties: UNITED STATES of America, Plaintiff-Appellee, v. Andy S.S. YIP, Defendant-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

592 F.3d 1035

UNITED STATES of America, Plaintiff-Appellee, v. Andy S.S. YIP, Defendant-Appellant.

No. 08-10235.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted October 13, 2009.

Filed January 13, 2010.

Theodore Y.H. Chinn, and Howard T. Chang, Honolulu, HI, for the defendant-appellant.

Leslie E. Osborne, Jr., Assistant United States Attorney, Honolulu, HI, for the plaintiff-appellee.

Appeal from the United States District Court for the District of Hawaii, David A. Ezra, District Judge, Presiding. D.C. No. CR-02-00225-DAE-1.

Before: ROBERT R. BEEZER, SUSAN P. GRABER, and RAYMOND C. FISHER, Circuit Judges.

GRABER, Circuit Judge:

Defendant Andy S.S. Yip operated an "off-the-books" business selling watches. He failed to report the income to the Internal Revenue Service ("IRS") or to disclose his foreign bank accounts. He then conspired to keep the IRS from recovering the unpaid taxes. Defendant now stands convicted of one count of conspiracy to defraud the United States, one count of filing a false tax return, and two counts of failure to report foreign financial agency transactions. He also pleaded guilty to four additional counts of filing a false tax return. On appeal, he challenges both his convictions and his sentence. In particular, he contends that the district court erred in its calculation of tax loss and in its application of a sentencing enhancement for obstruction of justice. In this opinion, we hold that the district court properly included Defendant's unpaid state taxes in the tax loss computation on which his term of imprisonment and his restitution order were based and that Defendant was not entitled to an imputed deduction for his unpaid state taxes. We also hold that the district court properly applied the sentencing enhancement because Defendant's actions obstructed the IRS audit. In a separate memorandum disposition filed this date, we reject Defendant's challenges to his convictions, but hold that the district court made several errors in sentencing him. We therefore vacate his sentence and remand for resentencing.

FACTUAL AND PROCEDURAL HISTORY

Defendant owned a legitimate business in Hawaii called A & E Creations. He also operated an off-the-books business that primarily sold watches. On his federal and state tax returns from 1995 to 1998, Defendant failed to report the income from his off-the-books business.

Defendant also opened bank accounts in Hong Kong in his and his wife's names. Defendant's 1998 and 1999 tax returns claimed that he did not have control over any foreign financial accounts. Defendant also failed to file, in 1998 and 1999, the Treasury form that is required when a taxpayer has an interest in a foreign account.

In 1997, IRS Agent Emerald Liburd began a civil audit of Defendant's 1995 tax return that later expanded to include his tax returns from following years. At Defendant's initial interview with Agent Liburd, he told her that he had received a small loan from his father and that he had no foreign bank accounts or foreign transactions. At a follow-up meeting, Defendant and his accountant provided domestic bank statements to Agent Liburd. After analyzing the statements, Agent Liburd concluded that there were unexplained deposits into Defendant's personal accounts of more than $600,000 in 1995. Agent Liburd requested an explanation of these deposits. Defendant then embarked on a campaign to convince the IRS that the funds had come from personal loans.¹

Defendant provided Agent Liburd in March of 1998 with four promissory notes, allegedly documenting loans to Defendant from Eriko Dmitrovsky, along with a business card containing Dmitrovsky's contact information. Six months later, Defendant sent Agent Liburd four additional promissory notes, one from Dmitrovsky and one each from three other friends. Defendant also gave Agent Liburd an analysis of his bank accounts purporting to show that the unexplained deposits originated in loans. Eventually, Defendant claimed that a fifth individual had also loaned him money. After the IRS investigation began, Defendant even made ostensible payments on the loans. In June of 1999, Agent Liburd concluded that Defendant's story was implausible, closed the civil audit, and referred the case to IRS criminal fraud investigators.

On September 22, 1999, IRS Criminal Investigator Gregory Miki informed Defendant that he was now under criminal investigation. IRS agents interviewed Defendant's purported lenders in the United States and abroad, finding various inconsistencies surrounding the alleged loans. In 2002, Investigator Miki finished his investigation and referred the case to the Tax Division of the Justice Department. A grand jury indicted Defendant in 2002 for income tax fraud; the indictment was later amended to include additional counts of filing a false tax return, failure to declare a foreign bank account, and conspiracy to defraud the United States.

Defendant pleaded guilty to four counts of filing a false tax return in violation of 26 U.S.C. § 7206(1). The government dismissed one count of filing a false tax return. Defendant went to trial on the remaining counts. A jury convicted Defendant of one count of conspiracy to defraud the United States in violation of 18 U.S.C. § 371, one count of filing a false tax return in violation of 26 U.S.C. § 7206(1), and two counts of failure to report foreign financial agency transactions in violation of 31 U.S.C. §§ 5314, 5322(b) and 31 C.F.R. §§ 103.24, 103.27(c), (d).

At sentencing, the government included in the calculation of tax loss caused by Defendant's conduct the Hawaii state taxes that Defendant had failed to pay on the unreported income. Defendant objected to the inclusion of unpaid state taxes, both because he contended that tax loss for sentencing purposes is limited to federal tax loss and because the statute of limitations had expired for the state tax violations. In addition, Defendant argued that if the tax loss included the state taxes, he was entitled to credit for a matching deduction on his federal income tax returns for payment of state taxes. His theory was that, had he reported the income honestly and paid the state taxes due on it, the amount of federal tax that he owed would have been reduced by the deduction. Therefore, the total tax loss caused by his fraudulent returns was actually smaller than the sum of the federal and state income taxes corresponding to the relevant amount of unreported income. The district court rejected these objections, calculating the unpaid state taxes as a component of tax loss and refusing to adjust the tax loss for the hypothetical deduction. The district court estimated the combined federal and state tax loss attributable to Defendant's crimes at $1,052,995.

Defendant also objected to a proposed sentencing enhancement for obstruction of justice. Defendant argued that he submitted the false promissory notes and the false bank deposit analysis during the tax audit, rather than during a criminal investigation, and that obstruction of the audit could not support the enhancement. The district court rejected this argument as well. Accordingly, the district court increased Defendant's offense level under § 3C1.1 of the 2001 United States Sentencing Guidelines.

The district court sentenced Defendant to 67 months' imprisonment on the counts of conspiracy and failure to file the Treasury form on his foreign bank accounts, and 36 months' imprisonment on the counts of filing a false tax return, with all terms to run concurrently. The district court also imposed restitution in the amount of $1,758,835. Defendant timely appeals.

STANDARD OF REVIEW

We review de novo the district court's interpretation of the Sentencing Guidelines. United States v. Garro, 517 F.3d 1163, 1167 (9th Cir.2008). We have noted an intracircuit conflict as to whether the standard of review for application of the Guidelines to the facts is de novo or only for abuse of discretion. United States v. Rivera, 527 F.3d 891, 908 (9th Cir.), cert. denied, ___ U.S. ___, 129 S.Ct. 654, 172 L.Ed.2d 631 (2008). As in Rivera, we need not resolve that conflict here, because the choice between those standards does not affect the outcome of this appeal. Id.

DISCUSSION

A. Unpaid State Taxes

1. Inclusion of State Taxes in Tax Loss Calculation

Defendant first challenges the district court's calculation of the tax loss resulting from his crimes. The Sentencing Guidelines recommend a longer sentence for tax evasion or tax fraud when the amount of unpaid tax is higher. U.S.S.G. §§ 2T1.1(a)(1), 2T4.1. Therefore, the Guidelines direct a district court to determine the tax loss, which is "the object of the offense (i.e., the loss that would have resulted had the offense been successfully completed)." Id. § 2T1.1(c)(1). Defendant contends that "tax loss" is restricted to the amount of unpaid federal taxes. We reject his argument and hold that tax loss may properly include unpaid state taxes.

In United States v. Newbert, 952 F.2d 281, 284 (9th Cir.1991), we approved a sentencing calculation that considered "non-federal conduct." The defendant argued that some of his relevant conduct in submitting falsified travel vouchers may have violated state, but not federal, law. Id. Nevertheless, we reasoned that the text of the sentencing provisions at issue, U.S.S.G. § 1B1.3(a)(2), (a)(3), directed the court to consider "all acts that were part of the same course of conduct or common scheme or plan, as well as all harm that resulted from those acts." Newbert, 952 F.2d at 284. Therefore, we held that "conduct which could be the basis of state prosecution may be considered for sentencing purposes on a federal conviction for other conduct which was part of the same common scheme or plan." Id. at 285.

To be sure, Newbert was not a tax loss case. But the same reasoning applies to § 2T1.1. Application note 2 accompanying § 2T1.1 similarly instructs a court to consider "al...