The opinion of the court was delivered by: ARTHUR D. SPATT
The issue before the Court is one of apparent first impression in this circuit. A tax protester filed income tax forms seeking a refund, setting forth huge sums of money as his earnings, which sums were obviously fictitious. There was no tax evasion, no tax loss and no false tax credits involved. No one at the Internal Revenue Service ("IRS") seriously considered making any refunds based on these outrageous figures, although the returns were designed to, and did, harass and impede IRS employees.
Query, should the defendant's sentence be enhanced by the amounts of these fictional sums?
The defendant, Michael Krause ("Krause" or the defendant) was convicted by a jury on all counts of a six-count indictment on September 24, 1991. Count one of the indictment charged that on or about April 15, 1990, Krause knowingly and willfully made and subscribed an Individual Income Tax Return, Form 1040 (the "Return" or "Form 1040") for the year 1989, which was verified and made under penalty of perjury. The indictment charged that Krause made the Return knowing that it was not true and correct, in that Krause listed earnings of $ 32,595,126 during 1989, entitling him to a refund in the amount of $ 23,472,858. This count was based on a violation of 26 U.S.C. § 7206(1).
Counts two through five charged that Krause violated section 7206(1) by knowingly and willfully subscribing four Internal Revenue 1096 Forms incorrectly and falsely, stating payments of huge fictitious salaries to variously named individuals.
In the sixth count, the defendant was charged with violating 26 U.S.C. § 7212(a) in that he knowingly, willfully and corruptly endeavored to obstruct and impede the administration of the IRS by filing the four false 1096 forms as charged in counts two through five of the indictment.
Krause allegedly sought such status after concluding, albeit incorrectly, that he was unjustly taxed. IRS agents confirmed that from 1982 through the present time, Krause had serious tax problems with regard to the payment of his taxes and whether his salary from Pan American World Airways was taxable income. The IRS levied on Krause's salary to collect tax monies owed and Krause vigorously objected to that action. In particular, Krause believed that the tax assessments were invalid and that everyone involved with the levy had "stolen" his property. According to the agents, Krause was given the opportunity to amicably resolve this dispute, but did not avail himself of the opportunity. Apparently, sometime during this period, the defendant began his course of conduct that resulted in the convictions at issue.
The first step that Krause undertook in his "protest" plan was to send a "notice of bill due and payable" to each target agency or individual. The evidence indicates that Krause sent such documents to at least 29 persons, including officials of the IRS, the New York State Department of Taxation and his employer, Pan American Airways. These "notices of bills due and payable" set forth the amounts the defendant claimed were due to him plus interest, legal fees, fines and penalties. The defendant "deemed" these sums due to him, as a result the target's purported violations of his civil rights.
Following the service of this "notice of bill due and payable," the defendant sent each person he targeted a form W-9, which is a request for a taxpayer identification number and certification. If that request was not complied with, and no one actually did comply with this request, he then sent a second form W-9. Following the transmission of the second form W-9, he prepared a form 1099, which stated that the recipient had, "non-employee compensation, and in very substantial amounts." He then wrote to the IRS employees who dealt with him in their official capacity. The letters were of a harassing nature, including such terms accusing the person of "theft . . ., violating my constitutional civil rights, this is your Miranda warning, you now have notice of this lien." By doing this, he created time consuming confusion for the officials involved and Internal Revenue Service itself (Tr. p. 31 - 32).
The government contends that the Probation Department has correctly calculated Krause's sentence under section 2T1.3(a)(1) of the United States Sentencing Guidelines (the "Guidelines"). On the other hand, the defendant's legal advisor argues that a plain reading of the Guidelines and the related case law requires the application of another subdivision of the Guidelines, namely section 2T1.3(a)(2). Not surprisingly, the application of this latter subdivision would result in a substantially shorter sentence.
Section 2T1.3, the Guideline applicable to a violation of 26 U.S.C. § 7206, governs the sentencing for the commission of "Fraud and False Statements Under Penalty of Perjury" and reads as follows:
(1) Level from § 2T4.1 (Tax Table) corresponding to the tax loss, if the offense was committed in order to facilitate evasion of a tax; or
For purposes of this guideline, the "tax loss" is 28 percent of the amount by which the greater of gross income and taxable income was understated, plus 100 percent of the total amount of any false credits claimed against tax. If taxpayer is a corporation, use 34 percent in lieu of 28 percent (emphasis supplied).
Application Note 4 in the commentaries with regard to the understatement of income and false tax credits, concludes with the following statement: