In United States v. Hoskins, 654 F.3d 1086 (10th Cir. 2011), the Tenth Circuit held, inter alia, that a sentencing court was not precluded in appropriate cases from considering unclaimed deductions in determining tax loss under § 2T1.1 of the Sentencing Guidelines. In the present case, however, the lower court had not erred in rejecting the defendant’s calculation of tax loss based on previously unclaimed deductions.

Jodi Hoskins (“Hoskins”) and her husband operated an escort service in Salt Lake City, UT. In 2008, Hoskins was convicted of attempting to evade federal income taxes for the tax year 2002 based on her failure to report approximately $1.2 million in gross receipts. The government calculated a tax loss of more than $485,000 for sentencing, which included deductions actually claimed on Hoskins’s 2002 income tax return. Hoskins proposed a tax loss calculation of $160,202 based on deductions she argued she could have claimed but did not. These unclaimed deductions were premised on her estimation that more than 60% of her company’s gross receipts were deductible commission payments given to the escorts. The district court rejected Hoskins’s alternative accounting of tax loss and arrived at a sentencing range based on the government’s tax loss estimates.

On appeal, the Tenth Circuit determined that the district court had not erred in declining to consider Hoskins’s unclaimed deductions. The appellate court identified many reasons to be skeptical of Hoskins’s proposed tax loss estimate, including her failure to provide credible evidence to support the deductions. Her proposal was based on information from a two-month period in 2007 and 2008 that had no demonstrated relation to the situation in 2002.

The court made clear, however, that it was not creating a bright-line rule categorically prohibiting a court from considering unclaimed deductions in its sentencing analysis. In cases where a defendant offers convincing proof for a tax loss estimate, such as providing evidence that, given his tax filing practices, he would have claimed deductions on the unreported income, a court could properly consider this argument. The court reasoned that the government could not claim to have lost revenue it never would have collected had the defendant not evaded his taxes.