United States v. King

Opinions of the United
2005 Decisions States Court of Appeals
for the Third Circuit
4-25-2005
USA v. King
Precedential or Non-Precedential: Non-Precedential
Docket No. 03-4715
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NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
_________________________
No: 03-4715
_________________________
UNITED STATES OF AMERICA
v.
LORENZO M. KING,
Appellant
Appeal from the United States District Court
for the Western District of Pennsylvania
(Crim. No. 03-cr-00122)
District Court: Hon. Gustave Diamond, Chief Judge
Argued: September 21, 2004
Before: McKEE, Circuit Judge, and
ROSENN and WEIS, Senior Circuit Judges
(Opinion filed: April 25, 2005)
_________________________
KAREN S. GERLACH (Argued)
Office of Federal Public Defender
1001 Liberty Avenue
1450 Liberty Center
Pittsburgh, PA 15222
Attorney for Appellant
BONNIE R. SCHLUETER
KELLY R. LABBY (Argued)
Office of United States Attorney
700 Grant Street, Suite 400
Pittsburgh, PA 14219
____________________
OPINION
____________________
PER CURIAM
Lorenzo King appeals the judgment of sentence that was entered following his
guilty plea to two counts of federal income tax evasion. He argues that the sentencing
judge erred in applying a sophisticated means enhancement under the Sentencing
Guidelines, and that the judge improperly refused to consider a sentence of probation.
For the reasons that follow, we will remand for resentencing pursuant to the Supreme
Court’s recent pronouncements in United States v. Booker, 125 S. Ct. 738 (2005).
I. F ACTS AND P ROCEDURAL H ISTORY
During 1996 and 1997, King performed computer consulting services under the
company name “K_Systems, Inc.” In 1996 and 1997, King earned $80,000 and $96,000,
respectively, as a computer consultant. He failed to report that income and was thereafter
charged with evasion of federal income taxes in violation of 26 U.S.C. § 7201. Following
indictment, King entered a plea agreement in which he stipulated that the tax loss
resulting from his evasion was greater than $23,500 but less than $40,000. This yielded a
2
base offense level of twelve under the applicable sentencing guideline. App. 25. The Pre-
Sentence Investigation Report (PSR) recommended a two-level enhancement for using
sophisticated means to accomplish the offense, and a two-level downward adjustment for
acceptance of responsibility. PSR at 6. The resulting adjusted Guideline range was ten to
sixteen months with incarceration for at least one-half of the ten-month minimum.
U.S.S.G. ch. 5, pts. A, C (1997). Accordingly, the District Court sentenced King to five
months of concurrent imprisonment on each count, followed by a three-year term of
supervised release. App. 73-4. This appeal followed.1
II. D ISCUSSION
After the District Court accepted King’s guilty plea and imposed a sentence, the
Supreme Court decided United States v. Booker. Briefly stated, the Court ruled that any
fact not admitted by a defendant or proven beyond a reasonable doubt to the fact finder
could not be used to increase a defendant’s sentence beyond the maximum sentence that
would have otherwise applied. “The Court held that 18 U.S. C. § 3553(b)(1), the
provision of the Sentencing Reform Act that makes the Guidelines mandatory, was
[unconstitutional] and that it must be severed and excised [from the Guidelines].” United
1
We have jurisdiction under 28 U.S.C. § 1291. We exercise plenary review over the
meaning and construction of the Sentencing Guidelines, but review underlying factual
determinations for clear error only. It should also be noted that United States v. Booker,
125 S. Ct. 738 (2005), has set forth a new standard for appellate review of sentences:
“review for unreasonable[ness].” Id. at 765 (brackets in original).
3
States v. Ordaz, 398 F.3d 236, 239 (3d Cir. 2005).
Following that decision, King asked to be resentenced pursuant to Booker even
though he had completed serving his sentence of incarceration and had begun his period
of supervised release. Since the District Court viewed the Guidelines as mandatory when
it decided upon an appropriate sentencing range, we will vacate King’s sentence and
remand for resentencing in accordance with Booker. On remand, the District Court will
exercise its discretion and fashion a sentence based upon all of the sentencing factors it
deems relevant to an appropriate sanction for King. However, since the court may wish
to consider factors previously incorporated into the Guidelines’ sophisticated means
enhancement, we must nevertheless resolve King’s claim that the court can not consider
the means by which he committed his crimes because his conviction for tax evasion
already incorporates the sentencing factors that were part of the sophisticated means
enhancement.
A. The Sophisticated Means Enhancement.
In his opening brief, King claims that the sophisticated means enhancement should
not be used in determining a sentencing range because it rests on the same conduct that
established the substantive offense of felony tax evasion under 26 U.S.C. § 7201. He
maintains that the sophisticated means enhancement as applied to income tax evasion
applies only to actions that conceal the offense. According to King, conduct that
constitutes the offense can not also support a sentencing enhancement. King also claims
4
that the sophisticated means enhancement was improper because his actions were neither
“sophisticated” nor “extraordinary” as required under the Guidelines.
1. The Affirmative Act Requirement Under 26 U.S.C. § 7201
The felony of tax evasion requires: (1) willfulness; (2) the existence of a tax
deficiency; and (3) an affirmative act constituting evasion or attempted evasion of the tax.
Sansone v. United States, 380 U.S. 343, 351 (1965) (citing Spies v. United States, 317
U.S. 492 (1943)). We have previously stated that one affirmative act alone can satisfy the
affirmative act requirement. United States v. McGill, 964 F.2d 222, 229 (3d Cir. 1992)
(citing United States v. Conley, 826 F.2d 551 (7th Cir. 1987)). A defendant commits the
required overt act when engaging in “any conduct, the likely effect of which would be to
mislead or conceal.” Spies, 317 U.S. at 499. This includes, but is not limited to, using
“false invoices or documents . . . concealment of assets or covering sources of income,
[and] handling of one’s affairs to avoid making the records usual in transactions of the
kind.” Id. However, the affirmative act requirement can also be satisfied by a willful
omission. Accordingly, the failure to file a tax return can constitute the affirmative act
required under § 7201. United States v. Gricco, 277 F.3d 339, 350 (3d Cir. 2002).
Here, King fraudulently represented his businesses to be corporations. In one
instance, he used a false tax identification number to corroborate the misrepresentation.
He also accepted payments in the form of checks made payable to his wife or to fictitious
corporations rather than to himself. He had his wife cash checks at check cashing
5
facilities to avoid the formalities and documentation that would result from depositing
checks in a bank account. In addition, King discarded tax forms that the IRS issued to his
wife, and he willfully failed to file his tax returns or pay income taxes for the tax years
1996 and 1997.
As noted, King insists that the District Court could not rely upon any of these
affirmative acts of tax evasion to enhance his sentence for using sophisticated means to
accomplish his crime. We can not agree. “An affirmative act [under 26 U.S.C. § 7201] is
anything done to mislead the government or conceal funds to avoid payment of an
admitted and accurate deficiency. . . . The offense is complete when a single willful act of
evasion has occurred.” McGill, 964 F.2d at 230. Thus, although the failure to report
income or pay taxes must be accompanied by another affirmatively evasive act to satisfy
the requirements of 26 U.S.C. § 7201, we can not say that King’s actions could not satisfy
that requirement. See generally Spies, 317 U.S. 492 (1943), and McGill,964 F.2d at 233
(“Banking under the name of one’s spouse satisfies the affirmative act requirement under
§ 7201.”).
2. Sophisticated Means under U.S.S.G. § 2T1.1
King further claims that the District Court can only consider acts committed after
the fact (to conceal the tax evasion), in deciding whether to enhance his sentence, and that
does not extend to earlier conduct that serves only to conceal unreported income. He
argues that “[our] application of U.S.S.G. § 2T1.1(b)(2) confirms the indication in the
background commentary, that ‘sophisticated means’ does not refer to acts which create
6
the offense. Instead ‘sophisticated means’ refers to acts which go above and beyond the
offense, and in fact conceal an offense which already occurred.” Appellant’s Br. at 24
(emphasis in original). He rests this argument in large part upon United States v. Gricco,
277 F3d 339 (3d Cir., 2002), and Application Note 4 to U.S.S.G. § 2T1.1.
King also argues that “[t]he guideline itself provides no guidance on what
constitutes ‘sophisticated means,’ but Application Note 4 fills that gap. It defines
sophisticated means as conduct which is ‘especially intricate,’ and which constitutes
‘concealment of an offense.’” Appellant’s Br. at 23-4. He then quotes examples set forth
in the Application Note as follows:
Sophisticated Means Enhancement.--For purposes of
subsection (b)(2), "sophisticated means" means especially
complex or especially intricate offense conduct pertaining to
the execution or concealment of an offense. Conduct such as
hiding assets or transactions, or both, through the use of
fictitious entities, corporate shells, or offshore financial
accounts ordinarily indicates sophisticated means.
Appellant’s Br. at 24 (quoting U.S.S.G. § 2T1.1, cmt. n. 4 (2003)) (emphasis in original).
However, King’s argument is undermined by the very language upon which he
relies. The Application Note states that the enhancement applies to “conduct pertaining
to the execution or concealment of the offense.” Id. This clearly is not limited to conduct
which only conceals the offense after its completion as King claims.2 Section 2T1.1 of
the 1997 Guidelines also contains a two-level enhancement for sophisticated means, and
2
King is relying upon the 2003 version of the sentencing Guidelines. The PSR that
was prepared for sentencing states without contradiction that King’s sentence was
controlled by the 1997 Guidelines. PSR at 5.
7
the following explanation:
“Sophisticated means,” as used in subsection (b)(2), includes
conduct that is more complex or demonstrates greater
intricacy or planning that a routine tax-evasion case. An
enhancement would be applied, for example, where the
defendant used offshore bank accounts, or transactions
through corporate shells or fictitious entities.
U.S.S.G. § 2T1.1, cmt. n. 4 (1997). There is no distinction between the execution of the
offense and the subsequent concealment of it, and King’s attempt to forge such a
distinction is unconvincing.
King also maintains that his case amounts only to a routine or a “garden variety”
tax evasion case and therefore an enhancement for sophisticated means was not
appropriate. This argument is not without force. Both the prosecutor and the District
Court referred to this case as a “garden variety” tax evasion case at sentencing.3
However, this rhetorical characterization of King’s conduct does not control the
sentencing court’s view of King’s conduct.
The Guidelines provide several examples of conduct that can constitute
“sophisticated means.” That conduct includes use of offshore bank accounts, corporate
shells or fictitious entities. We elaborated upon this in United States v. Veksler, 62 F.3d
544 (3d Cir. 1995). In Veksler, defendant McNaughton and a co-defendant were involved
in a scheme to evade state and federal taxes on the sale of oil that could be used both as
home heating oil and diesel fuel. Sales of home heating oil were not taxed, but diesel fuel
3
At sentencing, the Assistant United States Attorney told the court, “I viewed it as a
garden variety evasion case,” and the court agreed stating, “I think it is a garden variety
evasion case.” App. 67.
8
was subject to state and federal taxation. McNaughton was convicted of using a “daisy
chain” scheme consisting of “a series of paper transactions through numerous companies,
some of which were largely fictitious” to avoid taxation on the sale of oil. Veksler, 62
F.3d at 547. The transactions involved fictitious companies, including short-lived “burn
companies” that were used to disguise the nature of various sales of oil and create the
appearance that applicable taxes had been paid. Id. We affirmed the District Court’s
application of the sophisticated means enhancement relying in part on the fact that
“Application note 4 to section 2T1.1 states that ‘sophisticated means’ . . . enhancement
would be applied, for example, where the defendant used . . . transactions through
corporate shells or fictitious entities.” Id. at 550 (second ellipsis in original).
Although we certainly do not suggest that King’s offense was nearly as
complicated as the daisy chain at issue in Veksler, our holding there nevertheless confirms
that using corporate shells or fictitious entities to avoid taxes can justify a more severe
sentence than would be appropriate otherwise. King clearly used dummy corporations
and fictitious entities to evade paying taxes.
The analysis in Veksler therefore supports the enhancement here even though
King’s scheme does not come close to the sophistication and complexity we addressed in
Veksler. To paraphrase the court in United States v. Furkin, 119 F.3d 1276, 1284-85 (7th
Cir. 1997), “[t]he sophisticated means enhancement in this case was based on [King’s]
conduct relating to the everyday operation of the business, such as using fictitious names,
failing to keep records concerning income, [and] using cash [transactions].” We cited
9
Furkin in United States v. Cianci, 154 F.3d 106 (3d Cir. 1998). In addition, we upheld a
sophisticated means enhancement under a new version of the Guidelines in Gricco, supra.
In that case, Gricco argued that the enhancement only applied to the embezzlement
scheme he had been convicted of, and not to subsequent efforts to evade taxes on the
embezzled money. We rejected that argument and upheld the enhancement stating: “[the]
evidence supports a finding of sophisticated concealment through . . . [the] use of cash to
avoid reporting requirements and the use of family members’ names to hide assets.” Id.
at 360-61.
We realize that Gricco also involved evasion on a much larger scale, but that does
not alter our analysis. The Guidelines do not condition application of the sophisticated
means enhancement on the amount of the loss or the size or duration of the scheme.
Rather, the amount of the tax loss is addressed separately in U.S.S.G. § 2T4.1.4
B. King’s Sentence Properly Includes Incarceration.
King also claims that the District Court erred as a matter of law in refusing to
consider the entire range of available sentences. According to King, the judge harbored a
personal bias against tax evaders, one that caused the judge to impose a sentence of
incarceration due to a personal policy of not considering probation in such cases. He also
maintains that the District Court’s bias toward imprisonment tainted its analysis of the
4
The closest that U.S.S.G. § 2T1.1 comes to such a distinction is its use of the word
“unusually” to qualify the term “sophisticated efforts” in the Background portion of the
Commentary. (“Although tax offenses always involve some planning, unusually
sophisticated efforts to conceal the offense decrease the likelihood of detection and
therefore warrant an additional sanction for deterrence purposes.”) U.S.S.G. § 2T1.1,
cmt. background.
10
sophisticated means enhancement. Absent that enhancement, the guideline range would
have allowed for a purely probationary sentence. King claims the court applied the
enhancement in order to reach a guideline range that would allow for imprisonment and
thus accommodate the court’s personal bias in favor of incarcerating tax evaders. That
argument is now moot because King has served the custodial portion of his sentence.
However, because it raises serious questions about the sentencing process, we will
respond to it in the interest of justice.
At the sentencing hearing, the court declared:
I do not believe, as a general rule, probation is appropriate for income tax
evaders. . . . I don’t believe that I have been giving income tax evaders
probation. But if I have, even that’s an aberration on my part. I am not
going to continue it here today.
App. 60-61. King argues that this and similar statements demonstrate the sentencing
judge’s strict adherence to a personal policy and that the judge refused to conduct the
analysis required under § 3553(a). King’s argument is, however, undermined by the
following statement of the sentencing judge at the sentencing hearing:
What I consider to be an appropriate sentence in the case,
tentatively, is ten months. . . . So, what you ought to be
addressing to me is why I shouldn’t sentence your client to ten
months. . . . [t]hat is where I, tentatively, believe is an
appropriate sentence. As I said, if you can convince me
somehow that sophisticated means, within the meaning of the
application notes of the guidelines, were not employed here . .
. if you have something additional that has not been made
known to the [c]ourt through the presentence report or other
documents, fine.
App. 58-59. We have already explained why a sophisticated means enhancement could
11
properly be applied, and that the resulting sentencing range included a period of
incarceration. Nevertheless, the sentencing judge clearly stated that he was open to
argument that the enhancement was not proper, and that a probationary sentence would be
appropriate instead. The court’s statements, taken in context, demonstrate that the judge
did not blindly sentence King to a period of incarceration based on a personal bias.
Rather, the court stated its “tentative” conclusion regarding the sentence. That conclusion
was appropriately “based on the presentence investigation report, the nature of the crime,
and the other factors known to the [c]ourt.” Id. Accordingly, we reject King’s argument
that the judge ignored the dictates of 18 U.S.C. 3553(a).
C ONCLUSION
For the foregoing reasons, we will vacate the District Court’s judgment of sentence
and remand the case for resentencing.
McKEE, Circuit Judge, concurring.
I believe that the District Court properly applied the sophisticated means
enhancement under the Guidelines. However, I write separately because I am concerned
that King may well be correct in arguing that his sentence resulted, at least partially, from
the District Court’s personal bias against tax offenders and that the court’s sentence was
driven by that policy rather than the individualized consideration mandated under 18
U.S.C. § 3553(a).
I
My concern is best illustrated by a brief examination of two cases where we
12
determined that a sentencing judge’s personal bias against a category of criminal offenses
interfered with the judge’s ability to act as an unbiased decision maker.
In United States v. Townsend, 478 F.2d 1072 (3d Cir. 1973), the defendant was
convicted of willful failure to submit to induction under then-existing draft laws. (50
U.S.C. App. § 462). Townsend appealed, arguing that the trial judge had erred by
refusing to recuse himself given his demonstrable bias toward persons charged with
violating the selective service laws. Pursuant to 28 U.S.C. § 1441, Townsend filed an
affidavit in support of his attempt to have the judge disqualify himself for bias based on
statements the judge had made during a pretrial conference. According to the affidavit:
The judge stated that he sentences all selective service
violators to thirty months in prison if they are ‘good people.’
The judge stated that he felt a duty to pressure conscientious
objectors into submitting to induction and that a uniform
thirty months sentence was the best way to effectuate that
policy.
Townsend, supra, at 1073.
In reviewing the court’s refusal to recuse, we examined the law pertaining to
conscientious objectors and noted Congress’s clear intention to not require conscientious
objectors to serve in combat as well as congressional instruction that conscientious
objectors be ordered to perform civilian work “contributing to the national health, safety,
or interest,” as opposed to imprisonment. Id. at 1074 (citing the Selective Service Act, 50
U.S.C. § 456(j)). In light of that analysis, we concluded that the judge’s personal policy
of imposing thirty-month sentences in an effort to “[place] pressure on conscientious
objectors” to submit to induction, indicated a sufficient “bent of mind” to warrant a
13
recusal. Id.
Similarly, in United States v. Thompson, 483 F.2d 527 (3d Cir. 1973), Thompson
was convicted of violating the Selective Service Act. He appeared before the same judge
who had refused to recuse in Townsend. Thompson also submitted an affidavit in support
of his request that the judge recuse himself arguing that the judge had a personal policy
for handling Selective Service Act cases that precluded presiding over such cases with an
unbiased and open mind. The attached affidavit recounted that, during a conversation
with the judge in chambers, the judge had “stated that in cases of Selective Service
violation, it is his policy to sentence all violators to thirty months in prison if they are
good people.” Id. The judge maintained this policy even though the applicable Selective
Service law did not mandate a prison sentence. On appeal, we held that “the personal
bias alleged was of such a nature and intensity to prevent the defendant, when convicted,
from obtaining a sentence uninfluenced by the court’s prejudgment concerning Selective
Service violators generally.” Id. at 528-9. We noted that “a defendant is entitled to trial
before a judge who is not biased against him at any point of the trial and, most
importantly, at sentencing,” and remanded the case for a new trial before a different
judge. Id. at 529.
Although these cases turn on issues of recusal rather than abuse of discretion or
unreasonableness1 in imposing a sentence, they nevertheless counsel that a sentencing
judge must determine what sentence is appropriate based upon an individualized
1
1 See Per Curiam majority opinion, note 1.
14
assessment of numerous factors, including those required under § 3553(a), and that a
sentence of incarceration that is selected solely because of a sentencing judge’s personal
bias is an abuse of discretion because it reflects the sentencing court’s refusal to exercise
its discretion. See Vinci v. Consolidated Rail Corp., 927 F.2d 287, 288 (6th Cir.1991)
(“The failure to exercise discretion can constitute an abuse of discretion.”).
II
During King’s sentencing hearing, the court explicitly stated: “I do not believe, as
a general rule, probation is appropriate for income tax evaders.” When defense counsel
suggested that many tax evaders do receive probation, the judge replied:
Then you have, and your clients have, been lucky because
they haven’t come before me. I don’t believe that I have been
giving income tax evaders probation. But if I have, even that’s
an aberration on my part. I am not going to continue it here
today.
App. 60-1.
(emphasis added). Thereafter, the judge reiterated his disdain for sentencing tax evaders
to probation, stating that if his pronouncement regarding tax evaders “gives you any basis
for an appeal, then you should take an appeal and let the Third Circuit tell me that’s not
the way to do it.” App. 63. I believe we should accept the District Court’s invitation and
reiterate the principles established under Townsend and Thompson that preclude imposing
incarcerative sentences pursuant to a personal policy when Congress has authorized a
non-incarcerative sentence. Here, the sentencing court explained why he does not believe
in imposing sentences that do not include incarceration on persons convicted of tax
15
evasion. He states:
I believe that income tax evasion, in order to have any kind of
deterrent effect, must include some kind of incarceration. . . .
[I]ndividuals who are inclined to attempt to evade and defeat
income taxes ought to know that even though they are pillars
of the community, even though they don’t have any prior
record, they don’t get a first bite at that apple. I believe that
it’s an important policy matter, an important matter in the
interest of justice.”
App. 66.
My concern is not mitigated by the court’s sentencing discretion that is newly
recognized in United States v. Booker, 125 S. Ct. 738 (2005). Booker does not allow a
sentencing court to refuse to impose a non-incarcerative sentence that would otherwise be
appropriate based solely upon the court’s personal view of a category of offenders.
Rather, “the Federal Sentencing Act . . . requires a sentencing court to consider
Guidelines ranges, see 18 U.S.C. § 3553(a)(4) (Supp. 2004) . . . Section 3553(a) remains
in effect, and sets forth numerous factors that guide sentencing. Those factors in turn will
guide appellate courts, as they have in the past, in determining whether a sentence is
unreasonable.” Booker, 125 S. Ct. at 757, 766.
I am reluctant to conclude that a personal policy such as may appear on this record
can be deemed reasonable if it precludes the appropriate exercise of a sentencing court’s
discretion.
16