United States v. King

Opinions of the United
2005 Decisions States Court of Appeals
for the Third Circuit

4-14-2005

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Precedential or Non-Precedential: Non-Precedential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 NOT PRECEDENTIAL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 14, 2005)

_________________________

KAREN S. GERLACH (Argued)
Office of Federal Public Defender
1001 Liberty Avenue
1450 Liberty Center
Pittsburgh, PA 15222
Attorney for Appellant

1
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

because of personal bias. 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

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resulting from his evasion was greater than $23,500 but less than $40,000. That resulted

in a base offense level of twelve under the applicable sentencing guideline. App. 25. The

Pre-sentence Investigation Report 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, “[t]he 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 States v. Ordaz, 398 F.3d 236, 239 (3d. Cir. 2005). The

Court also held 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.

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.

3
 Following that decision, King asked to be resentenced pursuant to Booker even

though he had completed serving his sentence of incarceration and had started serving 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 fashioning 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.2

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

2
Our discussion of the sophisticated means enhancement in no way suggests that a
sentencing court must apply such an enhancement even where it might otherwise have
been appropriate. It is clear that in the post Booker universe, the district court is free to
reject all such enhancements in the appropriate exercise of its discretion. Moreover, to
the extent the sentencing court may decide to enhance a sentence based upon factors such
as those incorporated into the sophisticated means enhancement, it must rely only upon
conduct admitted by the defendant or found by the fact finder based upon proof beyond a
reasonable. That fact finder must be a jury unless a defendant waives his/her right to a
jury trial.

4
established the substantive offense of felony tax evasion under 26 U.S.C. § 7201. That

conduct also distinguishes King’s offense of willful failure to file a tax return under 26

U.S.C. § 7203. 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 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

5
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

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

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 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

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 aruges 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 he relies upon.

The Application Note states that the enhancement applies to “conduct pertaining to the

7
execution or concealment of the offense.” This clearly is not limited to conduct which

only conceals the offense after its completion as King claims.3 Section 2T1.1 of the

1997 guidelines also contains a two-level enhancement for sophisticated means, and 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. That argument is not without force. Both the prosecutor and the district

court referred to this case as a “garden variety” evasion case at sentencing.4 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

3
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.
4
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
“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). There, 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 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 included 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 551 (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

9
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

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.

There, 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 is addressed separately in U.S.S.G. § 2T4.1.5

B. King’s Sentence Properly Includes Incarceration.

5
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.

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 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 that caused the judge to impose a sentence of

incarceration because of 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

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

11
 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

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.

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