United States v. Powell

UNITED STATES COURT OF APPEALS
For the Fifth Circuit

No. 96-20831

UNITED STATES OF AMERICA,

Plaintiff-Appellee,

VERSUS

JOSEPH READE POWELL, JR.,

Defendant-Appellant.

Appeal from the United States District Court
For the Southern District of Texas
September 24, 1997

Before KING, DAVIS, and DeMOSS, Circuit Judges.

DeMOSS, Circuit Judge:

This appeal rises from the conviction of Joseph Reade Powell,

Jr. for evading federal fuel excise taxes. Powell contests the

admission of certain items of evidence and the application of the

United States Sentencing Guidelines. We affirm the judgment of the

district court.

I. FACTUAL BACKGROUND

From approximately July 1986 through 1991, Joseph Powell

operated a wholesale distributorship of gasoline and diesel

products named J.P. Energy. Powell bought a building in Kingswood,
Texas, in which he maintained his offices. He sold gasoline and

diesel fuel to retail outlets, such as convenience stores, service

stations, and truck stops in and around Houston, Texas.

In the late 1980s, the federal government and the State of

Texas offered excise tax reduction programs for gasohol producers.1

On July 21, 1988, Powell registered with the Internal Revenue

Service as a gasohol producer. He obtained a Form 637, which

enabled him to purchase gasoline at a reduced rate of excise tax

beginning on July 25, 1988.

Under the federal program, a person who was buying gasoline to

blend it into gasohol could obtain authorization to buy gasoline

from his suppliers at a reduced rate of tax. In order to obtain

his Form 637, Powell represented to the IRS that he was going to

blend gasoline to make gasohol. The registration Powell received

warned him about the legal consequences of misusing the

certificate. Powell was required to blend the gasoline into

gasohol within twenty-four hours, and if he failed to do so he

would become liable for the difference between the reduced rate of

tax he paid and the full excise tax rate. During 1989 and 1990,

that difference was 5.6 cents per gallon. Powell was also

obligated to file a Federal Quarterly Excise Tax Return (Form 720)

for each quarter.

Powell also registered to buy diesel fuel and heating oil tax-

free on September 19, 1988. He became eligible to buy these fuels

1
Gasohol is a product made through the addition of ethanol
or alcohol, which are octane enhancers, to low grades of gasoline
with low octane ratings.

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tax-free on October 31, 1988. In order to obtain this

registration, Powell represented that he would act as a wholesale

distributor of diesel fuel. Powell was obligated to notify the IRS

if his business changed, but he never notified the IRS that he was

using the Form 637 for a purpose other than the one he claimed on

his application.

During 1988, less than one percent of Powell’s sales involved

gasohol or ethanol. Powell bought ethanol from Koch Industries,

Inc. (“Koch”), and Petdon, which was owned by Powell’s friend Tom

Petty. Petty stopped supplying Powell with ethanol in March 1988,

and Powell stopped buying ethanol from Koch in December 1988.

Powell nevertheless continued to use his Form 637 to buy gasoline

at the reduced rate of federal excise tax for gasohol blenders. He

also continued to use his other Form 637 to buy diesel fuel tax-

free. Powell sold these products to his retail customers, whom he

charged the full rates of federal and state excise tax on both

types of fuel.

In 1988, Powell contacted Oscar Lee Martin and entered into an

agreement whereby Powell would receive ethanol produced by Martin’s

grain processing plant, Livingston Steam Power, in exchange for

paying the expenses of the plant, the notes on the equipment, and

a small salary for Martin. Powell told Martin that he (Powell) had

the facilities to blend ethanol with gasoline and that it would be

very profitable for him (Powell) to have a source of ethanol. In

1988 and part of 1989, the plant never produced more than a total

of six to eight loads of ethanol. Powell received three of the

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loads of ethanol in 1988; the others were sold to other buyers

because Powell told Martin that he (Powell) did not need the

ethanol.

Powell put a fax machine and a new telephone line in Martin’s

house because Powell wanted Martin to send him records so Powell

would “have a paper trail for his auditors.” On September 29,

1988, Powell faxed to Martin a copy of an invoice that was

different in form from the one Livingston Steam Power used and that

did not meet the state requirements. The invoice described a

delivery by Livingston Steam Power of 8,063 gallons of ethanol

purportedly made by Martin’s truck. The delivery had never

occurred; Martin did not even own a truck. Martin confronted

Powell in his (Martin’s) front yard, and told Powell that he did

not have invoices like the one faxed by Powell, that such invoices

did not comport with state law, and that Powell should not send him

invoices any more. Martin testified that the State of Texas

required him to keep certain records in order to sell a load of

ethanol. All of the ethanol going into the truck had to be

measured by meter, and the operator had to sign the meter ticket

and invoice, including on the invoice the number of the trailer

containing the ethanol. Martin testified that he never gave anyone

any ethanol without generating these documents. Powell had a stack

of similar invoices that he wanted Martin to use to keep a paper

trail in the event of an audit. Martin told Powell that he could

not use those invoices and not to send them any more.

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 Martin closed the grain processing plant in January 1989. The

plant closed permanently in September or October 1989. Powell told

Chuck Henderson, a business associate who participated in Powell’s

scheme to evade taxes, that it did not make any difference whether

Livingston Steam Power worked or not. Powell told Henderson that

Livingston Steam Power gave him a vehicle to show that he

manufactured ethanol so that he could get the tax credit for

blending.

In 1989, Powell continued to purchase gasoline at the reduced

federal excise tax rate of 3.44 cents per gallon reserved for

gasohol producers, and he sold the gasoline, unblended, to retail

outlets. Powell charged his customers the full rate of 9.1 cents

per gallon federal excise tax, and the full rate of state excise

taxes on gasoline. He kept the difference.

Powell formed a second company, JLK Transport, which he

incorporated, in order to transport fuel to his customers. Powell

formed a separate company to transport fuel so that he could better

determine whether he was making or losing money on transportation.

JLK Transport was run for Powell by Charles Henderson, who pleaded

guilty in August 1995 to state organized-criminal-activity charges

concerning his failure to pay fuel tax.

Henderson did business with Powell in the late 1980s and early

1990s, after Powell approached Henderson and offered to sell him

fuel. Henderson sold only gasoline and diesel fuel, no gasohol,

from his service stations. Henderson bought only gasoline and

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diesel fuel from Powell. Powell charged Henderson excise tax on

both gasoline and diesel fuel.

Henderson and Powell became friends, and Henderson bought fuel

from and delivered fuel for Powell’s company. Their business

arrangement was that Powell would handle the fuel orders and

Henderson would handle the deliveries, and each would pick up some

of the checks and money. They agreed that Henderson would run JLK

Transport out of Henderson’s office, and Powell would pay Henderson

for transporting the fuel. Henderson leased five trucks from

Raymond Young, and Powell co-signed a note so that Henderson could

buy another truck. Henderson paid off the note on that truck.

Powell gave Henderson the title of vice-president for signing

paperwork. Powell gave Henderson transport tickets, letterhead,

and other paperwork necessary to run JLK Transport at his office.

Powell had a fuel card, and he gave other fuel cards to the drivers

or left them in the office for the drivers. Henderson testified

that he and Young transported fuel under the name JLK Transport

with Powell’s “complete approval.” Powell kept track of freight

expenses on a spreadsheet. This arrangement lasted until April

1990.

Henderson and Powell discussed blending fuel with ethanol and

the corresponding tax credits. Powell told Henderson that he got

a tax credit from the government for blending fuel, which allowed

him to sell fuel an average of five cents below rack prices.

Henderson never stored any fuel for Powell, and he never

stored any ethanol in his tanks nor sold any ethanol to Powell.

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Henderson sometimes blended diesel fuel and barge strippings, and

sometimes blended gasoline, but he never blended gasoline with

ethanol. Four drivers who delivered fuel for JLK Transport in 1989

and 1990 testified that during the time they delivered fuel for

Powell, they delivered only gasoline and diesel fuel to truck

stops, convenience stores, and service stations. These drivers

never blended gasoline with ethanol. Three of the drivers had

never transported ethanol for Powell, and the fourth driver had

only done so on one occasion, when he picked up a load at

Livingston Steam Power.

Between June 1989 and September 1989, Young, from whom

Henderson had leased five trucks, came in and took over Henderson’s

business. Young arranged credit on credit transactions, collected

the money, paid Henderson for his equity share of business, and

paid the bills. Young used the name of one of Henderson’s

companies, Travel Stop, for Young’s stations in Louisiana. Faye

Bartniski, who had kept Young’s books, came to work at Henderson’s

offices to keep the books for their business venture. Henderson

and Bartniski sent more than $25,000 in cash at a time to Young by

an overnight delivery service in order for Young to pay the bills.

The business relationship that developed between Powell and Young

was cordial.

In 1990, Powell continued using his Forms 637 to buy gasoline

at the reduced rate and to buy diesel tax-free, and he continued to

sell that fuel to gas stations and truck stops in the Houston area,

while charging for the full rates of federal and state excise

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taxes. Powell’s employees would record sales to service stations

and truck stops, but Powell would later change his business records

to show those sales as made to “DTM,” purportedly a fuel exporter,

at a shipyard in Bourg, Louisiana. DTM, or “Dry Tortugas Marina,”

was a small company in Marco Island, Florida that Young’s brother

operated for Young to sell fuel to fishing boats. DTM belonged

solely to Young.2 The drivers who Powell showed as making the

deliveries to DTM had never been to Bourg; one driver had never

been outside the State of Texas.

During the prosecution period, 1989 through the first quarter

of 1990, Powell filed or caused his in-house accountant, Bryan

Reasonover, to file monthly excise tax returns with the State of

Texas that underreported his taxable sales of gasoline, did not

report any sales of ethanol or gasohol, and underreported his

taxable sales of diesel fuel. The federal returns failed to report

excise taxes due in the amount of $376,407 for gasoline sales and

$200,446 for sales of diesel fuel.

The Texas State Comptroller of Public Accounts audited Powell

in 1988, the middle of 1990, and September 1990. The 1988 audit,

which covered October 1987 through June 1988, and the first audit

in 1990, which covered July 1988 through May 1990, concerned

Powell’s diesel fuel and gasoline sales. Powell told the auditor

2
Young had attempted once in late 1988 or early 1989 to
export rice and beans and a small bobtail truck to Haiti, but Young
failed to pay Haitian officials he was supposed to pay and charged
too much for the products he sought to export. The Haitians blew
up the truck on the dock, and Young barely escaped, dodging bullets
fired from the dock as the ship sailed out of Haiti.

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that he was in the business of selling gasoline and diesel fuel,

and he stated that he was blending fuel in 1986 and 1987, but he

admitted that during the time period of the second audit (July 1988

through May 1990), he was no longer blending fuel. Neither Powell

nor his representatives ever said he blended any product with

ethanol between July 1988 and May 1990, and Powell never made any

claims that he blended fuel during that time period. While there

was evidence that Powell had blended fuel in 1988 and in January

1989, there was no evidence of any blending after January 1989.

In the middle of 1990, during the second state audit, the

auditor noticed that Powell’s sales summaries suddenly started

showing sales to DTM. After January 1989, Powell’s purported sales

to DTM for export began increasing as the months went on. However,

neither Powell nor his accountant, Stanley Smith, complied with

requests from the auditor that they provide documentation and

verification that the sales of fuel were for export. The auditor

went to the address listed for DTM in Powell’s sales records and

found an empty lot with a rundown, vacant building.

In 1990, Powell filed claims for refunds of federal excise

taxes. These claims triggered an IRS audit of his Federal

Quarterly Excise Tax Returns because Powell sought more in refunds

than he had paid. Powell claimed during the audit that he had

blended gasoline with ethanol. However, a more thorough review of

his records indicated that he had not blended the fuel, but had

sold gasoline to his customers. When the auditor questioned Powell

about this, Powell created and gave to the auditor a spreadsheet

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that purported to show ethanol purchases. The auditor analyzed the

spreadsheet and found it to be false. Powell also claimed to have

exported large quantities of gasoline and diesel fuel to Haiti by

ship. Powell provided the auditor with a stack of invoices, an

adding tape machine, and access to his records, in which the

auditor found false and fraudulent export documents. Thereafter,

the IRS began a criminal investigation.

During the criminal investigation, Powell gave false and

misleading statements to the IRS concerning his blending operation,

his source of ethanol, and the price he charged his customers. He

also claimed that he had exported fuel to Haiti by ship and that he

rarely received currency as payment for fuel. Powell’s drivers

testified that they had never delivered gasoline, gasohol, or

diesel fuel to a ship, barge, or tugboat for Powell. The special

agent assigned to the investigation analyzed Powell’s records and

found that Powell was buying gasoline at the reduced rate, selling

it at the full rate of tax, and keeping the difference. The agent

also found that Powell was buying diesel fuel tax-free, selling it

with all of the taxes included, and underreporting his taxable

sales. The agent found that the fuel Powell claimed to have

exported was actually sold, with all taxes included, to retail

stations in the Houston area. Powell’s records contained a

spreadsheet on which Powell had, by hand, kept track of the profit

he had made in 1989 by not remitting taxes.

On April 26, 1995, Powell was indicted on five counts of

attempting to evade and defeat federal excise taxes, in violation

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of 26 U.S.C. § 7201, for the four quarters of 1989 and the first

quarter of 1990. Trial was set for March 18, 1996.

Six to seven months before trial, Powell ran into his friend

Tom Petty, whom Powell had not seen in several years. Powell asked

Petty if he had been subpoenaed by the federal government to

testify. Powell then repeatedly asked Petty to testify, if he was

subpoenaed, that Powell bought all of his ethanol from Petty.

II. EVIDENTIARY ISSUES

Powell complains that his conviction must be set aside. He

claims that the district court erred by improperly admitting

unfairly prejudicial extrinsic evidence of bad acts. We review the

district court’s decisions to admit evidence for abuse of

discretion, and only upon a showing that a party’s substantial

rights have been affected will we disturb the ruling of the

district court. See First Nat’l Bank of Louisville v. Lustig, 96

F.3d 1554, 1574 (5th Cir. 1996).

Powell contests on appeal a number of matters introduced as

part of the government’s case against him, contending that they

constitute evidence of bad acts which is deemed inadmissible by

Federal Rule of Evidence 404(b).3 In particular, Powell objects to

3
Federal Rule of Evidence 404(b) provides:

Other crimes, wrongs, or acts. Evidence of other
crimes, wrongs, or acts is not admissible to prove the
character of a person in order to show action in
conformity therewith. It may, however, be admissible for
other purposes, such as proof of motive, opportunity,
intent, preparation, plan, knowledge, identity, or
absence of mistake or accident, provided that upon

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the following matters which were introduced into evidence:

1. Powell was engaged in an investment scam involving the

purchase and resale of tickets to entertainment events.

2. Powell regularly visited topless bars, and on two

occasions he spent over $3,000 per visit, commonly

tipping $100 per table dance.

3. A photograph was taken of Powell, accompanied by two

female employees of a topless club, bent over the back of

his car, with its trunk open and filled with cash.

4. Powell made a down payment on a condominium and concealed

this information from his wife.

Powell submits that the only purpose of this evidence was to impugn

his character and prejudice the jury against him.

While Powell is correct that this evidence would be

inadmissible if its only relevance were its tendency to suggest

that Powell may have acted in accordance with the bad character

that the evidence suggests that Powell may have, Rule 404(b) does

not purport to exclude evidence of bad acts if the evidence is

“admissible for other purposes.” All of this evidence was relevant

to the case against Powell.

request by the accused, the prosecution in a criminal case shall
provide reasonable notice in advance of trial, or during trial if
the court excuses pretrial notice on good cause shown, of the
general nature of any such evidence it intends to introduce at
trial.

FED. R. EVID. 404(b).

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A. The Ticket Scam

Regarding the ticket scam, counsel for the government

explained to the district court that the relevance of the testimony

on this subject was to explore the potential bias of Tom Petty, who

was a testifying witness. During the trial, Powell’s strategy was

to shift the focus from him to Petty. Powell introduced evidence

that Petty had purchased fuel products from refineries with

Powell’s credit card, and that Powell had not authorized these

purchases and was never reimbursed for them.

The government called Petty as a trial witness, and elicited

his testimony that Powell had approached Petty prior to trial in an

attempt to influence Petty’s testimony. Anticipating that Powell

might try to impeach Petty as a biased witness, the government also

sought to bring out information that would help the jury to

understand the history between the two men. Thus, Petty testified

that he had lost about $250,000 that he had given to Powell in

order to participate in the ticket scam, and that Powell never paid

him back.

The potential bias of a witness is always relevant testimony,

and it is permitted even on direct examination. See United States

v. Fusco, 748 F.2d 996, 998 (5th Cir. 1984) (“[E]vidence of bias or

lack of bias is substantive . . . it may be developed on direct

examination, as well as cross-examination, just like any other

substantive evidence.”). We find no abuse of discretion in the

trial court’s decision to permit this line of questioning. It is

clear that the fact that Petty had lost money in his prior business

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dealings with Powell could have been a ground for the defense to

impeach Petty’s testimony. The government acted well within its

rights when it brought this information out on direct examination

in an attempt to ameliorate the effect of an anticipated attempt to

impeach Petty on cross-examination.4

B. The Topless Clubs

With respect to the evidence about Powell spending large sums

of money in topless clubs and posing in front of a trunk filled

with a large amount of cash, we again find no abuse of discretion.

Powell’s use of the cash proceeds from the sales of gasoline and

diesel was an issue in the case. Powell contended at trial that

his evasion of taxes was not willful; rather, it happened by

accident or mistake. He presented evidence that Henderson and

Petty wrongfully charged gasoline purchases to his credit card, and

that Henderson and Bartniski routinely sent large amounts of

currency to Young. The implication of this evidence was that

Powell had not received any of the money generated by the tax

evasion scheme.

4
The subject of the ticket scheme came up once again during
the government’s redirect examination of Petty. On cross-
examination, Powell had elicited testimony from Petty that Powell
at one time had a good reputation in their community. On redirect,
the government asked Petty whether there had been any change in
Powell’s reputation after the ticket scam. Petty responded that
Powell’s reputation had suffered as a result of the failed venture.
Since Powell raised the issue of his own character by asking Petty
to testify about Powell’s reputation, it was appropriate for the
government to inquire about specific instances of conduct. See
FED. R. EVID. 405(a).

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 The government countered this defense by showing, among other

things, that Powell’s spending habits ran contrary to the defense’s

portrayal of him as a hapless victim. It was the government’s

position at trial that one of Powell’s motives for committing the

crime of fuel excise tax evasion was to support his extravagant

lifestyle. Thus, in support of this argument, the government

presented a variety of evidence about Powell’s free spending,

including his generous patronage of topless bars, his ownership of

an expensive Cadillac convertible, and his posing for a photograph

with two female employees of a topless bar in front of a car trunk

filled with the cash collected from fuel purchasers. All of this

evidence was probative on the issue of whether Powell was reaping

benefits from tax evasion, or if he was, as the defense suggested

at trial, of such modest means that he was unable to pay his bills.

See United States v. Musquiz, 45 F.3d 927, 931 (5th Cir.), cert.

denied, 116 S. Ct. 54 (1995).

At trial, Powell’s counsel objected to the relevance of the

testimony about Powell’s spending habits at topless bars and the

photograph. For the reasons discussed above, we find that this

evidence was at least relevant and that the trial court did not

abuse its discretion in admitting it. Powell argues on appeal that

the evidence was unfairly prejudicial. However, no such objection

was registered at trial, and any error that may have occurred was

not preserved. Thus, we need not consider whether the evidence

should have been excluded because its probative value may have been

substantially outweighed by the danger of unfair prejudice against

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Powell, see FED. R. EVID. 403, or if such error, if any, affected

Powell’s substantial rights, see FED. R. EVID. 103(a).

C. The Condominium

Finally, we consider the evidence of a down payment on a

condominium which Powell concealed from his wife. At trial, Powell

consistently denied that he was paid for the fuel that he sold.

The fact of the condominium payment was evidence which supported

the government’s theory that Powell used the money that he was

trying to hide. Though no evidence was presented that traced the

money from the sales of fuel to the purchase of the condominium,

the purchase was made during the same time period as the fuel

sales, and those sales were the business in which Powell was

engaged at the time. This evidence was thus relevant to the issue

of Powell’s intent, and was admissible as it was “relevant for

other purposes” than those prohibited by Rule 404(b).

Furthermore, there was no error committed in the admission of

evidence showing that the down payment on the condominium was

concealed from Powell’s wife. The evidence about the condominium

payment was elicited from Stanley Smith. Smith was an accountant

who had worked with Powell on various business matters, including

the preparation of a personal financial statement used by Powell to

maintain a line of credit that he used to purchase fuel. Included

on this personal financial statement was a non-refundable deposit

on a condominium in Galveston, Texas, which had been purchased by

Galveston Real Estate Investments, Incorporated. This corporation

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had been formed by Smith for Powell because Powell was having

marital difficulties and Powell wanted to purchase some property

for himself.

During the government’s direct examination of Smith on the

subject of the condominium purchase, the district judge warned

counsel to stay away from the marital-discord aspect of this

episode. The government complied with this suggestion. On cross-

examination, however, Powell asked Smith if it were common for

residents of Houston to own vacation property in Galveston. Smith

replied that it was.5 Then, on redirect, the government

immediately returned to the subject of Mrs. Powell’s lack of

knowledge about the purchase of the condominium. Powell objected

on relevance grounds, but not on Rule 403 grounds. Counsel for the

government countered that Powell had “opened the door,” and the

district judge overruled the objection.

The relevancy of the evidence about Mrs. Powell’s ignorance of

the condominium seems dubious. The government’s assertion at trial

that Powell “opened the door” is not an adequate explanation of why

the evidence should have been admitted.6 The proper inquiry

5
Powell also used his cross-examination of Smith to develop
the aspect of his defense which sought to shift blame to Powell’s
in-house accountant, Bryan Reasonover. A major contention of
Powell’s defense was that mistakes in the payment of fuel excise
taxes resulted from Reasonover’s incompetence rather than Powell’s
willful nonpayment of the taxes. Smith testified about his very
low opinion of Reasonover’s accounting capabilities.
6
Additionally, in defense of the relevancy of this evidence,
the government asserts on appeal that it is probative to show
Smith’s disposition to help Powell and to cast suspicion on Smith’s
attack on Reasonover. See supra note 5. In light of our above
disposition of this issue, it is unnecessary for us to address the

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suggested by the government’s door-opening argument is whether

Powell, during his cross-examination, admitted evidence that turned

previously irrelevant evidence into relevant evidence. See 21

CHARLES ALAN WRIGHT & KENNETH W. GRAHAM, JR., FEDERAL PRACTICE AND PROCEDURE §

5039, at 199-200 (1977).

The effect of Powell’s questions and Smith’s responses on

cross-examination was to suggest that the ownership of a

condominium is a perfectly innocent arrangement. This evidence on

cross-examination was itself irrelevant -- the commonality of

vacation home ownership has nothing at all to do with whether

Powell had received money from illegal fuel sales -- and it invited

further examination on redirect. Though it would have been within

the power of the district judge to disallow further testimony on

redirect, we will not disturb his decision to permit it. See

generally JOHN WILLIAM STRONG, ET AL., MCCORMICK ON EVIDENCE § 59 (4th ed.

1992).

III. SENTENCING ISSUES

Powell raises a number of issues on appeal regarding the

district court’s calculation of his sentence. In particular, he

claims that the court misapplied the Guidelines in enhancing his

sentence under United States Sentencing Guidelines (USSG) §§ 1B1.3

(relevant conduct), 2T1.1(b)(2) (use of sophisticated means of

evasion), 3C1.1 (obstruction of justice), and 3B1.1(c) (organizer

new arguments raised by the government on appeal.

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or leader).7 A district court's findings of fact for purposes of

applying the Sentencing Guidelines are reviewed under the "clearly

erroneous" standard of review. See United States v. Moore, 997

F.2d 55, 60 (5th Cir. 1993). The application of the Guidelines to

the facts found by the district court is reviewed de novo. See id.

7
Unless otherwise indicated, all references to the Guidelines
are to the 1990 Manual. The district court and the parties have
used the 1990 Manual as the basis for determining Powell’s
sentence. Ordinarily, a sentence is determined by reference to the
Guidelines Manual in effect on the date of sentencing, see USSG
§ 1.B11(a) (1995), which in this case was August 30, 1996.
However, the Guidelines also provide that when “use of the
Guidelines Manual in effect on the date that the defendant is
sentenced would violate the ex post facto clause of the United
Sates Constitution, the court shall use the Guidelines Manual in
effect on the date that the offense of conviction was committed.”
Id. § 1B1.11(b)(1) (1995).

Our Circuit has determined that a “sentence that is increased
pursuant to an amendment to the guidelines effective after the
offense was committed violates the ex post facto clause.” United
States v. Domino, 62 F.3d 716, 720 (5th Cir. 1995). Section 2T4.1
of the Sentencing Guidelines contains the table which sets out
increasing base offense levels for progressively larger amounts of
tax loss for the purposes of sentencing under the various sections
of the Guidelines regarding offenses involving taxation. That
section was amended effective November 1, 1993. The effect of the
amendment was to increase the base offense level applicable to
Powell based on the amount of tax loss resulting from his crimes.

We assume, without deciding, that the 1990 Manual is the
appropriate reference for sentencing purposes in this case. We
note, however, that the facts suggest that Powell’s criminal
conduct may have been completed before November 1, 1990, in which
case the 1989 Manual would be the appropriate reference. Because
there appear to have been no amendments to the Guidelines between
November 1, 1989 and November 1, 1990 that would impact Powell’s
sentence, we are content to resolve the debate on the parties’
terms, which used the 1990 Manual as their point of reference.

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A. Relevant Conduct

Under § 2T1.1 of the Guidelines, the base level for Powell’s

sentence depends upon the total amount of “tax loss,” which is

defined as “the total amount of tax that the taxpayer evaded or

attempted to evade.” USSG § 2T1.1. The presentence investigation

report (PSR) filed in this case based its sentencing recommendation

on the total amount of federal taxes which were evaded. Noting

that $915,522.84 in federal taxes had been shown to have been

evaded, the PSR recommended a base offense level of 17. See USSG

§§ 2T1.1(a), 2T4.1. The government objected that the amount of

state taxes evaded through the same relevant conduct should have

also been taken into account. The addition of the state tax losses

raised the total tax loss to $1,798,267.90, which subjected Powell

to a base offense level of 18 under USSG § 2T4.1. At the

sentencing hearing the district court sustained the government’s

objection and sentenced Powell based on the combined total of

federal and state taxes evaded.

On appeal Powell complains that for the purposes of the

Sentencing Guidelines, the “tax loss” only takes into account the

amount of federal taxes that the IRS would have been able to

collect (exclusive of interest and penalties). This is not a

substantial argument.

Powell bases his argument on the holdings of United States v.

Daniel, 956 F.2d 540, 544 (6th Cir. 1992), United States v.

Clements, 73 F.3d 1330, 1339 (5th Cir. 1996), and United States v.

Moore, 997 F.2d 55, 61 (5th Cir. 1993), which he cites for the

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proposition that the “tax loss” contemplated by USSG § 2T1.1(a)

refers only to the amount of tax revenue lost to the IRS, exclusive

of any other civil liabilities the IRS may have imposed. Thus,

Powell reasons, only the amount of federal tax evaded may be taken

into account for the purposes of determining his base offense level

under USSG § 2T4.1.

The cases cited by Powell are entirely inapposite. In Daniel,

the Sixth Circuit held that losses must result from criminal

conduct to be considered part of the “tax loss” for the purposes of

sentencing under USSG § 2T1.1. See Daniel, 956 F.2d at 544. The

court thus remanded the case for resentencing in light of the

district court’s inclusion of civil liabilities for unpaid taxes as

part of the “tax loss.” See id.

Turning to our Circuit’s own precedent, Powell takes too

literally our statement in Clements that “the ‘tax loss’ evaded

means the tax deficiency assessed . . . rather than the amount that

the IRS could actually recover.” Clements, 73 F.3d at 1339. Our

holding in Clements spoke only to the conclusion that the

computation of “tax loss” looks to the amount of “tax deficiency”

and is not limited to the value of an asset hidden for the purposes

of evading tax. See id. at 1338-39. There was no opportunity for

us to consider in Clements the effect of any state taxes which may

have been evaded.

Finally, we noted in Moore that “tax loss” contemplates “the

amount owed to the government” as a result of the act of tax

evasion rather than, as the defendants in that case contended, “the

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amount of taxes actually not paid.” See Moore, 997 F.2d at 61.

The importance of this distinction in Moore was that the defendants

had fraudulently induced the IRS to give them tax refunds which the

IRS subsequently recovered. See id. at 60. We rejected the Moore

defendants’ contention that these facts meant that the amount of

“tax loss” for sentencing purposes was zero. See id. at 61-62.

None of these cases stand for the proposition suggested by

Powell -- that is, that only federal tax losses may be taken into

account under USSG § 2T1.1. We reject that suggestion and pursue

the analysis mandated by the Sentencing Guidelines. The government

asked the district court to include in the USSG § 2T1.1 “tax loss”

the state tax losses arising from the same core criminal conduct

for which Powell was convicted. Although USSG § 2T1.1 does not

speak directly to this situation, it is evident from the text of

the Guidelines and their accompanying interpretive commentary that

the amount of state taxes evaded may be taken into consideration if

they constitute “relevant conduct” as that concept is defined in

USSG § 1B1.3.

The Sentencing Guidelines permit many factors to be taken into

account in determining a sentence. The concept of “relevant

conduct” constitutes one category of these factors. Relevant

conduct is taken into account at the outset of the sentencing

process, when the base offense level for a convicted defendant’s

criminal conduct is determined. The Guideline pertaining to

relevant conduct provides that in Powell’s case, “where the

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guideline specifies more than one base offense level,”8 the base

offense level for a sentence “shall be determined on the basis of

. . . all such acts and omissions that were part of the same course

of conduct or common scheme or plan as the offense of conviction.”

USSG § 1B1.3(a)(2). We note that the relevant conduct considered

in selecting the base offense level is not limited to the conduct

constituting the underlying criminal offense. See, e.g., United

States v. Vital, 68 F.3d 114, 118 (5th Cir. 1995). We note also

that, as a general proposition, state offenses constituting

"relevant conduct" under the Guidelines may be taken into account

when imposing a sentence for a federal offense. See, e.g., United

Sates v. Armstead, 114 F.3d 504, 513 (5th Cir. 1997), petition for

cert. filed, No. 97-5786 (U.S. Aug. 29, 1997).

Our application of the “relevant conduct” concept is

controlled by the commentary supplied by the United States

Sentencing Commission, which carries the same weight as legislative

rules adopted by federal agencies. See Stinson v. United States,

508 U.S. 36, 45 (1993). The commentary explains what conduct is

contemplated by the USSG § 1B1.3(a)(2) terms “common scheme or

plan” and “same course of conduct”:

(A) Common scheme or plan. For two or more
offenses to constitute part of a common scheme or
plan, they must be substantially connected to each

8
The applicability of USSG § 1B1.3(a)(2) is determined by
reference to USSG § 3D1.2. Because the offense level specified by
USSG § 2T1.1 “is determined largely on the basis of the total
amount of harm or loss,” the grouping rule of the Sentencing
Guidelines provides that “[a]ll counts involving substantially the
same harm shall be grouped together,” USSG § 3D1.2, and thus USSG
§ 1B1.3(a)(2) is the applicable relevant conduct provision.

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 other by at least one common factor, such as common
victims, common accomplices, common purpose, or
similar modus operandi. . . .

(B) Same course of conduct. Offenses that do not
qualify as part of a common scheme or plan may
nonetheless qualify as part of the same course of
conduct if they are sufficiently connected or
related to each other as to warrant the conclusion
that they are part of a single episode, spree, or
ongoing series of offenses. . . .

USSG § 1B1.3 comment. n.9 (1995).

As an initial matter, we observe that the commentary

describing “common scheme or plan” and “same course of conduct”

requires in both prongs that the potentially relevant conduct

constitute an “offense.” See id. Although the Guidelines

themselves do not specify what constitutes an “offense,”9 we are

guided in this matter by our Circuit’s precedent. “For conduct to

be considered ‘relevant conduct’ for the purpose of establishing

ones offense level that conduct must be criminal.” United States

v. Peterson, 101 F.3d 375, 385 (5th Cir. 1996), cert. denied, 117

S. Ct. 1346 (1997).

The trial court found that the additional loss sustained by

the State of Texas during the same period of time and arising from

the same offense conduct was a criminal tax loss. Powell has

argued on appeal that there is no evidence in the record to support

this conclusion. While we agree that the record below on this

9
There is, of course, a definition of “offense” in the
Guidelines. See USSG § 1B1.1 comment. n.1(l). However, because
that definition of “offense” includes within its text the term
“relevant conduct,” as a matter of logic that definition is not
helpful to our inquiry as to the parameters of “relevant conduct.”

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issue is sparse,10 we conclude that the district court’s conclusion

on this point was not clearly erroneous. See TEX. TAX CODE ANN.

§ 153.403 (Vernon 1992 & Supp. 1997) (providing state criminal

liability for various methods of evading state fuel excise taxes).

We turn now to the issue of whether the evasion of state taxes

may be considered to be related to the conduct constituting the

underlying offense as part of a “common scheme or plan” or the

“same course of conduct.” Powell’s evasion of state and federal

taxes involved the same modus operandi: using a tax certificate to

buy fuel at a reduced rate, filing false tax returns, using false

customer invoices, and supplying false information to taxing

10
The government did not explicitly state a theory of how
Powell’s evasion of state taxes constituted criminal conduct. The
government’s objection to the PSR conceded that criminal activity
is confined to conduct constituting a criminal offense under
federal, state, local, or foreign law, and while the government
demonstrated that Powell violated state laws, the government did
not demonstrate that Powell committed criminal conduct under those
laws.

During the sentencing hearing the district court inquired into
this matter. With respect to the government’s objection the
district court stated:

The objection is that as a part of relevant conduct
for this same period of time in these same quarters in
the same offense conduct, there was also a loss to the
State of Texas, a tax loss, a criminal tax loss -- is
that the position?

The government then responded “yes.” The court then proceeded,
stating:

I find from a preponderance of the evidence that
that’s correct; that should be considered relevant
conduct within the meaning of the Guidelines.

Neither the parties nor the court identified any statute making the
defendant’s state tax evasion criminal conduct. As noted above,
however, we find no error.

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authorities. This suggests the presence of a common scheme or

plan.

The commentary to the Guidelines specifies three factors to be

taken into consideration in finding a common scheme or plan:

temporal proximity, similarity, and regularity. See USSG § 1B1.3

comment. n.9 (1995). The district court found that Powell’s

conduct with respect to state and federal tax evasion took place

during the same period of time, which satisfies the temporal

proximity requirement. The court also found that the two offenses

were based on the same conduct, which satisfies the similarity

requirement. With respect to regularity, although the district

court made no specific finding, it is clear from the record that

Powell’s conduct was not made up of isolated and sporadic

incidents. Rather, his criminal conduct can be aptly described as

consistently repeated behavior.

We review the district court’s determination of the amount of

loss, as well as its findings as to what constitutes relevant

conduct, for clear error. See Peterson, 101 F.3d at 384. As

discussed above, the facts of Powell’s conduct make clear that the

district court did not clearly err in deciding that the state tax

evasion was part of Powell’s relevant conduct. It was therefore

proper for the district court, in calculating Powell’s sentence, to

include the amount of state fuel excise taxes evaded in the total

“tax loss” used to determine Powell’s base offense level.

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B. Sophisticated Means

The district court added two levels to Powell’s sentence under

USSG § 2T1.1(b)(2). The Guidelines provide that “[i]f sophisti-

cated means were used to impede discovery of the nature or extent

of the offense, increase by 2 levels.” USSG § 2T1.1(b)(2). The

commentary to § 2T1.1 observes: “‘Sophisticated means,’ as used in

§ 2T1.1(b)(2), includes conduct that is more complex or

demonstrates greater intricacy or planning than a routine tax-

evasion case. An enhancement would be applied, for example, where

the defendant used offshore bank accounts or transactions through

corporate shells or fictitious entities.” USSG § 2T1.1 comment.

n.4. (1995). In accepting the PSR’s recommendation of applying the

two-point increase for sophisticated means, the district judge

noted that Powell’s scheme was more complex and intricate than

routine tax evasion, and that the evidence demonstrated that

Powell’s mode of operation was similar to the examples cited in the

commentary to the Guidelines. The district court’s factual

determination that Powell used sophisticated means is reviewed for

clear error. See Clements, 73 F.3d at 1340.

Powell objects that he could not be found to have used

sophisticated means because all the government contends is that (1)

he obtained a form which enabled him to buy fuel at a decreased

rate of tax because he was blending ethanol with the gasoline, (2)

after he stopped blending gasoline he continued to buy fuel at the

low tax rate, and (3) he thereafter filed excise tax returns which

claimed no tax was due. Thus, Powell concludes in his brief,

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“assuming arguendo the government’s theory, the making of such

false statements on tax returns does not constitute the use of

sophisticated means.”

We disagree with Powell’s characterization of the issue. This

was much more than a case of misrepresentations on a tax return,

which would probably not justify invocation of the sophisticated

means provision. See United States v. Rice, 52 F.3d 843, 849 (10th

Cir. 1995), cert. denied, 116 S. Ct. 2536 (1996). Rather, the

facts show that Powell purchased an ethanol plant to facilitate his

scheme to defraud the government by avoiding excise taxes. This

course of action constitutes the sort of “greater intricacy or

planning” contemplated by the Sentencing Guidelines. The district

court thus committed no error in increasing Powell’s offense level

based on its finding that Powell used sophisticated means.

C. Obstruction of Justice

The district court increased Powell’s offense level by two

levels based on his obstruction of justice. Section 3C1.1 of the

Guidelines provides: “If the defendant willfully obstructed or

impeded, or attempted to obstruct or impede, the administration of

justice during the investigation, prosecution, or sentencing of the

instant offense, increase the offense level by 2 levels.”. USSG

§ 3C1.1. The PSR recommended the increase, based upon the

following actions by Powell: (1) making false statements to an IRS

auditor, (2) submitting false documents during an IRS audit, (3)

making false statements to an IRS agent investigating Powell’s

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blending operation, (4) attempting to conceal his scheme by falsely

claiming to have purchased ethanol from certain suppliers, and (5)

attempting to suborn perjury by asking Tom Petty to testify falsely

at Powell’s trial. The district court accepted this recommendation

over Powell’s objection.

On appeal, Powell contends that an obstruction-of-justice

increase cannot be based merely upon a false statement made to an

investigator unless the statement significantly obstructed an

official investigation or prosecution of the offense. Powell also

argues that when the government is already in possession of

accurate information, a false statement by the defendant is not a

material falsehood. In essence, Powell’s argument is that any

obstruction that he may have created was not substantial.

The district court’s factual finding of an obstruction of

justice is subject to review for clear error. See United States v.

Tello, 9 F.3d 1119, 1122 (5th Cir. 1993). We could reverse the

finding of the district court only if we held a “definite and firm

conviction that a mistake has been committed.” United States v.

United States Gypsum Co., 333 U.S. 364, 395 (1948). Under this

standard, we cannot say that the judgment of the district court was

clearly erroneous. Evidence in the case showed that Powell made

false statements to investigating IRS agents and that he attempted

to influence the testimony of a witness. This is the type of

behavior that subjects a defendant to the obstruction-of-justice

enhancement under the Guidelines. See generally USSG § 3C1.1

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comment. n.3 (1995). Under these circumstances, the judgment of

the district court cannot be disturbed.

D. Organizer or Leader

Finally, Powell disputes the application of USSG § 3B1.1(c) to

enhance his sentence based upon his aggravating role as an

“organizer, leader, manager, or supervisor.” This argument is

based wholly upon Powell’s contention that he did not have a

supervisory role. We review the district court’s factual findings

for clear error. United States v. Upton, 91 F.3d 677, 688 (5th

Cir. 1996), cert. denied, 117 S. Ct. 1818 (1997). Despite the

PSR’s recommendation of a four-level enhancement under USSG

§ 3B1.1(a) (which requires criminal activity involving five or more

participants), the district court was unable to find that a

preponderance of the evidence would support the conclusion that

Powell’s organization of people was large enough to meet the

requirements of that provision. The judge did find, however, that

a preponderance of the evidence supported an increase under USSG

§ 3B1.1(c). The record plainly shows that Powell supervised

Reasonover’s work on fraudulent tax returns. This factor alone is

sufficient to support the district court’s judgment. We thus find

no clear error.

IV.

For the foregoing reasons, the judgment of the district court

is AFFIRMED.

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