## Facts

- James Dominic Delfino and Jeaniene Ann Delfino owned and operated computer consulting businesses that generated their personal income.
- For tax years 1993–2004, they did not file federal income tax returns.
- They placed income into several trusts; the trusts likewise did not file returns or pay income tax.
- The IRS began auditing them and the trusts in 1997; the Delfinos refused to cooperate.
- Due to noncooperation, the IRS reconstructed income from bank records and prepared substitute returns, assessing tax without allowing deductions that might have been available if returns had been filed.
- The government prosecuted them for (1) conspiracy to defraud the United States, (2) attempted evasion of payment of income tax, and (3) mail fraud tied to use of the mails in carrying out the trust scheme.
- At trial, the Delfinos claimed good-faith reliance on advice from Royce McCarley, a trust promoter and self-described tax consultant who told them the trust structure could lawfully shift tax liability.
- The district court instructed the jury that it could consider the good-faith theory; the jury convicted on all counts.
- At sentencing, the district court adopted the Presentence Report’s tax-loss figure based on the IRS assessment and did not reduce it for deductions the Delfinos asserted they could have claimed.

## Issues

1. Whether alleged trial errors (including treatment of the good-faith reliance theory and related evidentiary/instructional rulings) required reversal of the convictions for conspiracy, tax evasion, and mail fraud.
2. Whether the district court erred under USSG § 2T1.1 by using the IRS assessment to estimate tax loss without reducing it for unclaimed deductions the defendants said they could have taken, including in light of Fourth Circuit precedent.

## Decision

- The Fourth Circuit affirmed the convictions on all counts.
- The court held the jury was properly instructed on good faith and that sufficient evidence supported findings of willfulness and fraudulent intent, including prolonged nonfiling, use of non-taxpaying trusts, and refusal to cooperate with the IRS.
- The Fourth Circuit affirmed the sentences.
- The court held that the district court did not err in estimating tax loss using the IRS assessment that omitted deductions, because the defendants did not file returns or provide reliable proof of specific deductions warranting a reduction.

## Legal Principles

- Sufficiency of the evidence is reviewed for whether substantial evidence, viewed in the light most favorable to the government, supports guilt beyond a reasonable doubt.
- A district court commits reversible sentencing error when it makes an error of law; otherwise, tax-loss estimates are permitted so long as they are reasonable under the Guidelines framework.
- Under USSG § 2T1.1, when a defendant fails to file returns and does not substantiate deductible items, a sentencing court may rely on an IRS reconstruction/assessment as an appropriate estimate of tax loss.
- USSG § 2T1.1 does not require sentencing courts to speculate about hypothetical deductions; defendants seeking reductions must produce reliable evidence of specific credits, deductions, or exemptions.
- Prior authority permitting consideration of proven deductions does not compel across-the-board reductions for unclaimed deductions that are unsupported by documentation.

## Conclusion

The Fourth Circuit affirmed the Delfinos’ tax and fraud convictions and upheld their sentences, ruling that tax loss under USSG § 2T1.1 could be based on an IRS assessment derived from bank records without subtracting unproven, unclaimed deductions where the defendants failed to file returns and did not substantiate specific deductible amounts.


United States v. Delfino, 510 F.3d 468 (4th Cir. 2007)