Court Joins Majority in Tax Loss Calculation Circuit Split

US v. Delfino: The Delfinos (husband and wife) ran several computer consulting businesses. The income generated by those businesses, rather than being taken directly by the Delfinos, was put into several trusts. Neither the Delfinos nor the trusts paid taxes on that income. After an audit (with which they refused to cooperate), the Delfinos were indicted for mail fraud and attempted tax evasion. At trial, they relied on a good faith defense based on the advise of a "trust promoter and self-described tax consultant." The jury rejected that defense and convicted the Delfinos on all counts. At sentencing, the tax loss was based on the audit with which the Delfinos did not cooperate and did not take into account deductions which they would have been entitled to take had they paid their taxes on time.

On appeal, the Fourth Circuit turned back the Delfinos' challenges to both their convictions and sentences. First, the court rejected the argument that the trial court improperly excluded the testimony of other people who relied on the same "trust promoter" as the Delfinos, holding that because there was no evidence that those witnesses received the same advice as the Delfinos it was irrelevant to the question of the Delfinos' subjective beliefs. Second, the court held that there was sufficient evidence to support the convictions.

Finally, as to sentencing, the court held that the amount of tax loss was properly calculated. Specifically, the court held that potential deductions should not have been subtracted from the amount of loss because the Delfinos failed to file tax returns as required and cooperate with the initial audit, during which they could have claimed the deductions. Those deductions were therefore waived. There is a split in the circuits on this issue, with the Fourth Circuit joining the Seventh and Tenth Circuits in the majority (the Second Circuit disagrees).