United States v. Brennick

UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT

No. 96-1969

UNITED STATES OF AMERICA,

Appellant,

v.

JOHN A. BRENNICK,

Defendant, Appellee.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MASSACHUSETTS

[Hon. Nancy J. Gertner, U.S. District Judge]

Before

Boudin, Circuit Judge,

Godbold and Cyr, Senior Circuit Judges.

Stephen G. Huggard, Special Assistant United States Attorney,

with whom Donald K. Stern, United States Attorney, was on brief for

the United States.
Scott P. Lopez, by appointment of the court, with whom Terry

Philip Segal and Burns & Levinson LLP were on brief for appellee.

January 20, 1998

BOUDIN, Circuit Judge. John Brennick was convicted of

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

States v. Brennick, 949 F. Supp. 32 (D. Mass 1996). After

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

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

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.

2T1.1(b)(2), and two more levels for obstruction of justice

because of untruthful testimony by Brennick at trial, see

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

"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

States v. Black, 78 F.3d 1, 8 (1st Cir.), cert. denied, 117

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

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.

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,

et al., Modern Federal Jury Instructions: Criminal 59.01,

Instruction 59-8 (1992) (emphasis added). See, e.g., United

States v. Aitken, 755 F.2d 188 (1st Cir. 1985).

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

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.

Rostoff, 53 F.3d 398, 406 (1st Cir. 1995).

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,

920 F.2d 1231, 1238 (5th Cir. 1991); United States v. Anders,

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

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.

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

2Tax loss is defined somewhat differently for the
different tax offenses, compare U.S.S.G. 2T1.1(a),

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

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

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

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-

Villafane, 874 F.2d 43, 49-50 (1st cir. 1989). But the quid

pro quo for departures is reviewability, including review for

abuse of discretion, 18 U.S.C. 3742(b)(3); and even if

review is hedged by deference, Koon v. United States, 116 S.

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

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.

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

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

its entirety and the case is remanded to the district court

for further proceedings consistent with this opinion.

It is so ordered.

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