USCA1 Opinion
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
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No. 96-1969
UNITED STATES OF AMERICA,
Appellant,
v.
JOHN A. BRENNICK,
Defendant, Appellee.
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APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Nancy J. Gertner, U.S. District Judge]
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Before
Boudin, Circuit Judge,
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Godbold and Cyr, Senior Circuit Judges.
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Stephen G. Huggard, Special Assistant United States Attorney,
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with whom Donald K. Stern, United States Attorney, was on brief for
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the United States.
Scott P. Lopez, by appointment of the court, with whom Terry
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Philip Segal and Burns & Levinson LLP were on brief for appellee.
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January 20, 1998
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BOUDIN, Circuit Judge. John Brennick was convicted of
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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,
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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
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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
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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.
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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
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States v. Brennick, 949 F. Supp. 32 (D. Mass 1996). After
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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
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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 had 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
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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
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1The government says for the record that the structuring
counts should have been grouped separately from the tax
counts, which would have resulted in a one-level increase.
U.S.S.G. 3D1.4. But this caveat was not raised in the
district court and is not pursued here.
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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.
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2T1.1(b)(2), and two more levels for obstruction of justice
because of untruthful testimony by Brennick at trial, see
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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 of the typical
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tax evader because, despite some conscious wrongdoing, he did
not intend permanently to deprive the government of the funds
he failed to pay over; and second, the ultimate losses to the
government were due not merely to Brennick's conduct but to
contributing causes as well, including failure of his
business's main bank and adverse developments in the health
care market.
The government has now appealed to challenge the
sentence. It argues that the departure was based on a
misconstruction of the guidelines and that even if a ground
for departure exists in theory (which the government denies),
the district court's decision to depart and degree of
departure were unreasonable on the present facts. We take
the issues in that order.
II.
Departures from the guideline range are allowed where
"the court finds that there exists an aggravating or
mitigating circumstance of a kind, or to a degree, not
adequately taken into consideration by the Sentencing
Commission in formulating the guidelines that should result
in a sentence different from that described." 18 U.S.C.
3553(b). Sometimes, the guidelines identify a "circumstance"
that is a permissible or forbidden basis for departure,
sometimes further indicating that departure is encouraged or
discouraged.
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Absent such explicit guidance, the Commission itself has
told courts that they should treat each guideline as carving
out a "heartland" representing "a set of typical cases
embodying the conduct that each guideline describes."
U.S.S.G. ch. 1, pt. A intro. comment 4(b). "When a court
finds an atypical case, one to which a particular guideline
linguistically applies but where conduct significantly
differs from the norm, the court may consider whether a
departure is warranted." Id. If the characteristic is
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"atypical" and aggravates or mitigates the typical conduct,
it may provide a basis for departure.
Where a district court does depart, an aggrieved party
may appeal from both the decision to depart and the extent of
the departure. 18 U.S.C. 3742. The standard of review
varies with the nature of the issue involved, deference being
limited or absent on abstract issues of law but more generous
as to questions of law application and factfinding. United
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States v. Black, 78 F.3d 1, 8 (1st Cir.), cert. denied, 117
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S. Ct. 254 (1996). The present case presents issues of all
three kinds.
We start with the district court's determination that
Brennick, although he had deliberately failed to pay the
government the withheld wages and social security taxes at
the time they were due, genuinely intended to pay them in due
course. In the district court's view, Brennick's main aim
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was to use the IRS as a bank. It is not clear that the
government directly challenges this finding, but in any case
we think the finding is not clearly erroneous, the standard
ordinarily applied to determinations of fact made at
sentencing. United States v. Pineda, 981 F.2d 569, 572 (1st
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Cir. 1992).
Brennick's pattern before financial difficulties
engulfed him was to retain the use of the funds in question
for periods of four to six months and then to pay over the
funds, adding penalties and interests. The likelihood that
he would be able to make this repayment obviously declined as
troubles loomed in late 1992, but he continued to scramble
for resources to continue payment. Whether an intent to
repay can be ascribed to all of the delays in payment is a
more difficult issue. See part III below.
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In the district judge's sentencing memorandum and order,
she relied heavily upon this intention to repay to carve the
present case out of the "heartland" of typical tax evasion
cases. The government says this rationale was a belated
attempt to bolster a departure earlier premised on a
different ground, namely, that there were multiple causes for
the loss to the government. Our own reading of the
sentencing transcript suggests that the benign view of
Brennick's intent was always an element in the district
court's reasoning.
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The nature of the scienter element in a tax evasion case
is complicated to summarize given that different requirements
may apply on different issues. Still, the taxpayer usually
is attempting to deprive the government permanently of taxes
owed to it. Typically, the instruction requires the
government to prove that the defendant "willfully evaded, or
attempted to evade, income taxes with the intention of
defrauding the government of taxes owed." Leonard B. Sand,
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et al., Modern Federal Jury Instructions: Criminal 59.01,
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Instruction 59-8 (1992) (emphasis added). See, e.g., United
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States v. Aitken, 755 F.2d 188 (1st Cir. 1985).
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Admittedly, it would do a defendant no good to say that
he deliberately understated his income but sincerely intended
to pay the money back to the government in five years' time.
But neither is it easy to imagine a fraud conviction where a
defendant files an accurate return, intends shortly to pay in
full, but remits the funds with interest shortly after the
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April 15 deadline. Indeed, the guideline covering the
failure to pay over payroll taxes notes in the commentary
that "[t]he offense is a felony that is infrequently
prosecuted." U.S.S.G. 2T1.6, commentary.
In all events, we are inclined on the basis of the
information we have and our common sense to think that such a
temporary delay in payment--where the defendant expected to
pay--is not a "typical" or "heartland" case of tax evasion.
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Thus, even if the evasion statute and guideline might
"linguistically" be extended to embrace such temporary delay
cases, the intent to delay payment only briefly could take
the case out of the heartland. And, as already noted, the
district court made such a finding in this case, sustainable
at least as to much of the losses driving the guideline
sentence.
The district court had another theme in its departure
analysis. It said that the $1.5 million loss suffered by the
government overstated the seriousness of Brennick's offense,
partly because the losses were due to multiple causes, some
of which were not Brennick's fault or within his control
(failure of his bank, the changes in health care
reimbursement). The government says that these concepts are
part of the fraud guidelines and applying them to the tax
crime guidelines is an error of law.
The fraud guidelines, like the tax guidelines, set
offense levels primarily based upon loss. But the fraud
guidelines alone refer in comment to the possibility of a
departure where computed losses under- or overstate the
seriousness of the offense; likewise, the fraud guidelines
alone at one time referred to multiple causes as a possible
example of an overstatement and while that language has been
deleted, they retain that concept in one of the examples.
Compare U.S.S.G. 2F1.1, application note 11 (1990) with
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application note 10 (1991). See generally United States v.
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Rostoff, 53 F.3d 398, 406 (1st Cir. 1995).
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We agree with the government that provisions in one set
of guidelines cannot normally be transferred to another
separate set of guidelines. See United States v. Smallwood,
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920 F.2d 1231, 1238 (5th Cir. 1991); United States v. Anders,
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899 F.2d 570, 580 (6th Cir. 1990). The guidelines for each
offense or set of offenses tend to function as an integrated
unit, containing their own tradeoffs and specifications.
Thus, without laying down an iron rule, we view skeptically
any importation of language from another offense guideline,
absent an explicit cross-reference.
Yet this does not take the government very far. The
notion in the fraud guideline that the loss table may under-
or overstate the seriousness of the offense is little more
than another way of saying that departures from the loss
table may be warranted for good cause. Even if we treat the
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fraud guideline's language as generously inviting a search
for such causes, the fact remains that the all-purpose
departure provision remains available for tax cases whenever
the case falls outside the heartland. See 18 U.S.C.
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3553(b); U.S.S.G. 5K2.0.
The fraud guidelines' multiple-cause language is a more
complicated matter. The government says that the fraud
guidelines may need such flexibility because of the diverse
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situations to which they must apply. By contrast, it says,
"loss" for tax purposes is based on calculations, set forth
in the guidelines, that (in words of the brief) "focus upon
the amount due and owing at the time of the offense." If a
tax evader repays what was stolen, says the government, he
merely deserves a few levels off for acceptance of
responsibility.
Tax loss seems to be a somewhat more protean concept
than the government implies,2 but we think that the argument
is beside the point. We are here concerned not with
computing the loss--the parties have agreed that it should be
treated as "more than 1.5 million"--but rather with whether a
departure is proper. And we are dealing not with a tax
evader who stole the government's money and later had a
change of heart but with someone who (accepting the district
court's finding) never intended to steal the money at all (or
at least most of it).
Further, regardless of the fraud guideline, the facts
mentioned by the district court in its causation analysis are
obviously relevant even if the analysis is not. To
distinguish Brennick from the ordinary tax evader, it is
essential to show that he did intend to pay over what was
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2Tax loss is defined somewhat differently for the
different tax offenses, compare U.S.S.G. 2T1.1(a),
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2T1.2(a), 2T1.3(a), and 2T1.6(a), and the tax table at 2T4.1
has changed over time.
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owed and was merely deferring payment. This premise would be
hard to sustain unless some other cause had contributed to
his later failure to pay over the funds.
This said, we think that it merely invites confusion to
treat "multiple causation" as an independent basis for a
departure. And we think that to do so would be inconsistent
with the normal presumption that provisions in one guideline
are not to be read into the guideline for a different
offense--absent an explicit cross reference or some other
reason to believe that the Commission so intended. We doubt
that this emendation would alter the district court's desire
to depart, but as a remand is required for other reasons, it
is free to decide the point for itself.
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III.
While a departure could be justified in theory in this
case, we do not think that either the decision to depart or
the amount of the departure has been adequately explained.
Our reasons are not the usual ones--that the departure is
based on an impermissible ground or that there has been no
effort to explain the degree of departure. Rather, we think
that factors weighing against any departure, and certainly
one of this degree, received inadequate attention.
In this case the guideline range for Brennick was 41 to
51 months; and the 13-month sentence imposed was less than a
third of the minimum and just over a quarter of the maximum.
A 13-month sentence would be the midpoint in the range for a
first time offender who evaded or sought to evade $40,000 or
more in taxes but had no other adjustment. Brennick, of
course, caused the government a tax loss of over $1,500,000.
It would be easy enough to understand the sentence if
Brennick had merely withheld a large payment, reasonably
expecting to pay the money shortly but using it in the
meantime for business purposes which then unexpectedly
collapsed. Absent loss to the government, there would
probably not even be a prosecution in such a case; and
certainly the intent would be less culpable than in ordinary
tax evasion. But Brennick's actions and intentions were more
serious than this abstraction allows.
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First, Brennick may in some sense have intended
repayment, but the reasonableness, and perhaps even the
possibility, of such a belief must have lessened over time.
To the eve of bankruptcy and apparently beyond, Brennick
appears to have deferred payment to the government while
withdrawing very substantial sums for his own use. Without
more findings, it would be hard to give Brennick the benefit
of a bona fide intention to repay the entire loss, even if
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much of it may be encompassed.
Second, even apart from an intention to repay,
Brennick's good faith is marred by dishonesty in at least two
respects, (even apart from his falsehoods at trial which were
the subject of a separate adjustment). On a number of the
later returns, Brennick falsely stated or had others misstate
that the amounts due to the government had been paid when he
knew that they had not. And his elaborate structuring of
withdrawals was effectively an effort to mislead and conceal,
as perhaps also was his use of multiple employer
identification numbers.
Third, Brennick committed the crime of structuring and
the government points out that the structure counts alone, if
no other offense had been committed, could easily have
produced an adjusted offense level of 17,3 and a guideline
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3That level might have been anywhere between 15 and 21.
Under the 1992 guidelines, the structuring counts generated a
base offense level of 13. U.S.S.G. 2S1.3(a)(1), and would
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sentence of 24 to 30 months. The minimum is almost twice the
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amount of Brennick's actual sentence after departure. The
government has not argued that this makes a departure
impermissible as a matter of law, but it certainly bears on
the reasonableness and degree of departure.
We appreciate that where a ground for departure exists,
the district court's discretion is at its zenith deciding
both whether and how far to depart. United States v. Diaz-
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Villafane, 874 F.2d 43, 49-50 (1st cir. 1989). But the quid
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pro quo for departures is reviewability, including review for
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abuse of discretion, 18 U.S.C. 3742(b)(3); and even if
review is hedged by deference, Koon v. United States, 116 S.
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Ct. 2035, 2046 (1996), it has to mean something.
In this case, we fail to see how a departure to 13
months can be justified as reasonable on this record in light
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of the three considerations set forth above, all of which
appear to us relevant. We have put to one side Brennick's
gambling, the significance of which is a matter of reasonable
dispute, and the government's claim that he deprived his
employees of health care, which was neither a charged offense
nor clearly relevant conduct.
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have been adjusted upward two levels for the amount of money
involved. U.S.S.G. 2S1.3(b)(2). Brennick's two-level
adjustment for obstruction of justice would presumably also
have applied, generating a level of 17. A further increase
of four levels would have resulted if the court determined
that "the defendant knew or believed that the funds were
criminally derived property." U.S.S.G. 2S1.3(b)(1).
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Possibly, even after these factors are considered and
weighed in full, there is still warrant for a substantial
departure, but we think that some further explanation is
essential. Indeed, while the district court takes note of
Brennick's false filings, the government says that the
discussion understates them;4 and the district court's
decision does not squarely address our concerns about
Brennick's good faith on the later losses or the import of
the structuring guideline.
The sentence was not imposed casually: the district
court conducted a lengthy sentencing and wrote at length,
addressing itself primarily to the government's objections--
which we think are overstated. The area is complicated;
there is little helpful precedent; and Brennick's
circumstances are unusual. If it takes one more round to
fine-tune the sentence, this is a price worth paying.
On remand, the district court is free to consider
whether its inclination to depart is affected by our
conclusion that the fraud guideline should be put to one
side. Assuming not, we expect that in resentencing the
district court will address the considerations that we have
outlined. While expressing doubt that a sentence of 13
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4The district court mentioned two returns filed by
Brennick falsely claiming that the amount indicated was paid
in full. The government notes that although two false
returns were actually signed by Brennick, an additional
fourteen false returns were signed by his employees.
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months is justified, we impose no mechanical downward limit.
What procedure to follow on remand is entirely for the
district court to decide.
The sentence imposed by the district court is vacated in
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its entirety and the case is remanded to the district court
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for further proceedings consistent with this opinion.
It is so ordered.
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