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Opinions – U.S. 4th Circuit Court of Appeals

Criminal Procedure

Sentence enhancements

BOTTOM LINE: Defendant’s prior North Carolina convictions for taking of indecent liberties with a child were not “violent felonies,” for purposes of eligibility for sentencing enhancement under Armed Career Criminal Act, where each charging document alleged violation of indecent liberties statute, without specifying which subsection defendant had violated, and only one subsection described qualifying predicate crime.

CASE: United States v. Vann, No. 09-4298 (decided Oct. 11, 2011) (Judges TRAXLER, Niemeyer, Motz, King, Gregory, Shedd, Agee, Davis, Keenan, Wynna & Diaz). RecordFax No. 11-1011-60, 100 pages.

COUNSEL: David French, Alliance Defense Fund, Columbia, TN, for Appellant. Thomas Ziko, North Carolina Department of Justice, Raleigh, N.C., for Appellees.

FACTS: On Jan. 20, 2008, following a domestic altercation, Torrell Vann was arrested in possession of a handgun. In November of that year, the grand jury returned an indictment charging Vann with violating 18 U.S.C. §§922(g)(1) and 924. The indictment also alleged that Vann had at least three previous convictions for Armed Career Criminal Act (“ACCA”) violent felonies, rendering him eligible for the sentencing enhancement provided for in §924(e)(1). Vann pleaded guilty, and sentencing proceedings were scheduled for the following March.

Vann’s presentence investigation report (“PSR”) reflected that he had three previous convictions for violating North Carolina General Statute §14-202.1, the “Indecent Liberties Statute.” According to the probation officer, these previous convictions constituted ACCA violent felony convictions and subjected Vann to the sentencing enhancement. Vann objected to the district court’s application of the enhancement.

The district court concluded that Vann’s previous indecent liberties convictions were ACCA violent felonies and that he was thus subject to §924(e)(1)’s sentencing enhancement. As a result, on March 17, 2009, the court sentenced Vann to the statutory minimum of 15 years in prison.

Vann appealed to the 4th Circuit, which affirmed his sentence. On rehearing en banc, the Court held that Vann’s prior North Carolina convictions for taking of indecent liberties with a child were not “violent felonies” and vacated the sentence and remanded the case.

LAW: The ACCA’s provision for an enhanced sentence – a statutory range of 15 years to life – is applicable when a defendant has three previous convictions for a violent felony or a serious drug offense.” 18 U.S.C. §924(e)(1). The issue in this appeal was whether Vann’s previous convictions for violating the Indecent Liberties Statute constituted violent felony convictions under the “residual clause” of §924(e)(2)(B)(ii) – that is, whether his indecent liberties offenses otherwise involved conduct that presented a serious potential risk of physical injury to another.

In assessing whether a previous offense properly constitutes an ACCA violent felony, the federal courts typically employ the “categorical approach,” under which the court considers the fact of conviction and the elements of the offense, but not the particular underlying acts. See James v. United States, 550 U.S. 192, 202 (2007). If the elements of the offense are of the type that would justify its inclusion within the residual provision, without inquiry into the specific conduct of the particular offender, the previous offense is a violent felony for sentencing purposes. Id. at 202. In limited circumstances, however, the courts may take account of more than the fact of conviction and the bare elements of the previous offense, resorting to the “modified categorical approach.” See United States v. Harcum, 587 F.3d 219, 223 (4th Cir. 2009). Use of the modified categorical approach is appropriate only when the statute of conviction encompasses multiple distinct categories of behavior, at least one of which constitutes an ACCA violent felony. See Johnson v. United States, — U.S. —-, (2010).

In this case, Vann’s previous indecent liberties offenses lacked any element of force, were neither burglary, arson, nor extortion, and did not involve explosives. Therefore, those offenses could constitute ACCA violent felonies only if they fell within the ambit of the residual clause. To fall within the residual clause, the previous offense must be roughly similar, in kind as well as in degree of risk posed, to the ACCA-enumerated crimes of burglary, arson, extortion, and offenses involving explosives. Begay v. United States, 553 U.S. 137, 142 (2008). However, violation of the Indecent Liberties Statute is not the type of offense typically committed by those whom one normally labels armed career criminals. Begay, 553 U.S. at 146. At bottom, a violation of the Statute, although a serious offense, is unlikely to show an increased likelihood that the offender is the kind of person who might deliberately point a gun and pull the trigger.

Thus, under the categorical approach, which was applicable here, Vann’s indecent liberties convictions were categorically not violent felonies within the meaning of the ACCA. Therefore, Vann was not subject to enhanced sentencing.

Accordingly, the judgment of the Court of Appeals was vacated and the case remanded.

Tax Law

Retroactive change of accounting method

BOTTOM LINE: For purposes of its tax return, credit card company could not retroactively change its accounting method without first securing the required consent, and could not deduct the estimated costs of a company-sponsored coupon redemption program before credit card customers actually redeemed the coupons.

CASE: Capital One Financial Corporation, and Subsidiaries v. Commissioner of Internal Revenue, No. 10-1788 (decided Oct. 21, 2011) (Judges WILKINSON, Niemeyer & Floyd). RecordFax No. 11-1021-60, 24 pages.

COUNSEL: Jean Pawlow, McDermott, Will & Emery, LLP, Washington, for Appellant. Deborah Snyder, United States Department of Justice, Washington, for Appellee.

FACTS: Capital One was a publicly held financial and bank holding company. Its principal subsidiaries, Capital One Bank (“COB”) and Capital One, F.S.B. (“FSB”), provided consumer-lending products and issued Visa and MasterCard credit cards. Capital One earned part of its income from fees associated with its lending services, including late fees and overlimit fees.

In its 1998 tax return, Capital One changed its tax treatment of income from certain fees in response to the Taxpayer Relief Act of 1997 (“the TRA”). COB, but not FSB, filed the requisite Form 3115, “Application for Change in Accounting Method.” Adopting this proposed change in accounting method, Capital One reported income from overlimit fees, cash advance fees, and interchange fees as original issue discount (“OID”) in its 1998 and 1999 returns. Capital One did not, however, report late-fee income as OID in those returns; rather, it continued to recognize this income under the current-inclusion method, meaning at the time those fees were charged to cardholders. At the same time, Capital One in 1998 began its “MilesOne program” whereby, in exchange for an annual membership fee, participants were issued “MilesOne” credit cards and earned “miles” for every dollar charged on a Miles–One credit card account.

In 1998 and 1999, Capital One estimated future redemption costs related to its MilesOne program and deducted this amount on its tax returns for those years. Capital One claimed current deductions for estimated liability for future airline tickets in the amount of $583,411 for 1998 and $34 million for 1999, relying upon a particular exception established in §1.451–4, under which the reasonable estimated redemption costs are deducted from “gross receipts with respect to sales with which trading stamps or coupons are issued.” Upon audit, the Commissioner disallowed the deductions.

Capital One brought suit in the Tax Court contesting the Commissioner’s disallowance of deductions claimed for estimated miles redemption costs. In an amended petition, Capital One also sought to change its accounting method for late fees for 1998 and 1999. The Tax Court held that Capital One could not retroactively change its treatment of COB’s and FSB’s late-fee income for 1998 and 1999. The Tax Court also disallowed Capital One’s deduction of estimated costs associated with the rewards program.

Capital One appealed to the 4th Circuit, which affirmed the decision of the Tax Court.

LAW: This case presented two questions: first, whether Capital One could retroactively change the method of accounting used to report credit-card late fees on its 1998 and 1999 tax returns in such a fashion as would reduce its taxable income for those years by roughly $400,000,000; and second, whether Capital One could deduct the estimated costs of coupon redemption related to its MilesOne credit card program before credit card customers actually redeem those coupons.

As to late-fee income, Capital One sought to retroactively change accounting methods years after it selected and implemented an alternative method. The critical problem for Capital One was that it never secured the necessary consent to make the sought-after change. Both statute and regulation require a taxpayer to secure consent to change accounting methods and to do so prior to calculating taxable income. Section 446(e) of the Code instructs that a taxpayer who intends to change accounting methods, “shall, before computing his taxable income under the new method, secure the consent of the Secretary.” I.R.C. §446(e). The law thus requires what common sense would suggest. Although as a general matter late-fee income may be treated as OID, Capital One could not retroactively treat such income in that fashion on its 1998 and 1999 returns.

Capital One also asked that the Court overturn the Tax Court’s decision to disallow deductions for estimated future costs related to its “MilesOne program.” Under the program, cardholders earned miles for purchases made with their MilesOne credit cards. However, it is a well-established rule of tax accounting that for an accrual-method taxpayer such as Capital One, deductions are to be taken in the year in which the deductible items are incurred. Brown v. Helvering, 291 U.S. 193, 199 (1934). By statute, an accrual-method taxpayer is prohibited under the “all-events test” from deducting a liability any earlier than when economic performance with respect to such item occurs. I.R.C. §461(h). Because credit card lending is not a sale and because Capital One did not have gross receipts to match against its estimated costs, Capital One’s costs associated with the MilesOne program did not qualify for deduction prior to the fact of liability.

Accordingly, the decision of the Tax Court was affirmed.