Government Urges Court to Affirm Tax Fraud Conspiracy Sentence

UNITED STATES OF AMERICA,
Plaintiff-Appellee
v.
NICHOLAS LUCIDONIO
Defendant-Appellant

IN THE UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

ON APPEAL FROM THE JUDGMENT OF THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
(No. 20-CR-211) (Hon. Gerald A. McHugh)

BRIEF FOR THE APPELLEE

DAVID A. HUBBERT
Deputy Assistant Attorney General

S. ROBERT LYONS
Chief, Criminal Appeals & Tax Enforcement Policy Section
KATIE BAGLEY
JOSEPH B. SYVERSON
GREGORY S. KNAPP
Attorneys
Tax Division
Department of Justice
Post Office Box 972
Washington, D.C. 20044
(202) 307-3350

Of Counsel:
JACQUELINE C. ROMERO
United States Attorney

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TABLE OF CONTENTS

TABLE OF AUTHORITIES

STATEMENT OF JURISDICTION

STATEMENT OF THE ISSUE

STATEMENT OF RELATED CASES AND PROCEEDINGS

STATEMENT OF THE CASE

SUMMARY OF THE ARGUMENT

ARGUMENT

CONCLUSION

REQUIRED CERTIFICATIONS

CERTIFICATE OF SERVICE

TABLE OF AUTHORITIES

Cases

Dubin v. United States, 599 U.S. 110 (2023)

Marinello v. United States, 584 U.S. 1 (2018)

United States v. Adair, 38 F.4th 341 (3d Cir. 2022)

United States v. Alowemer, 96 F.4th 386 (3d Cir. 2024)

United States v. Balboa, 614 F. App'x 605 (3d Cir. 2015)

United States v. Banks, 55 F.4th 246 (3d Cir. 2022)

United States v. Belletiere, 971 F.2d 961 (3d Cir. 1992)

United States v. Castleman, 572 U.S. 157 (2014)

United States v. Chugay, No. 22-12984, 2024 WL 1526115 (11th Cir. 2024)

United States v. Flemming, 617 F.3d 252 (3d Cir. 2010)

United States v. Knight, 266 F.3d 203 (3d Cir. 2001)

United States v. Lewis, 58 F.4th 764 (3d Cir. 2023)

United States v. Macchia, 104 F.3d 350 (Table), 1996 WL 518509 (2d Cir. 1996)

United States v. McKee, 506 F.3d 225 (3d Cir. 2007)

United States v. Mercado, 81 F.4th 352 (3d Cir. 2023)

United States v. Nasir, 17 F.4th 459 (3d Cir. 2021) (en banc)

United States v. Rabin, 986 F. Supp. 887 (D.N.J. 1997)

United States v. Robinson, 482 F.3d 244 (3d Cir. 2007)

United States v. Wise, 515 F.3d 207 (3d Cir. 2008)

United States v. Zourdos, No. 20-CR-298 (N.D.N.Y.)

Statutes and Sentencing Guidelines

18 U.S.C. §371

18 U.S.C. §1028A(a)(1)

18 U.S.C. §3231

18 U.S.C. §3742

26 U.S.C. §7201

26 U.S.C. §7206(2)

26 U.S.C. §7212(a)

USSG §2T1.1

USSG §2T1.4

USSG §2T1.9

USSG §2T4.1

USSG §3B1.1

USSG §4C1.1

Rules

Fed. R. App. P. 4(b)(1)(A)

Fed. R. App. P. 32

Regulations

51 Fed. Reg. 35080 (1986)

52 Fed. Reg. 3920 (1987)

52 Fed. Reg. 18046 (1987)

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STATEMENT OF JURISDICTION

The district court had jurisdiction over this criminal prosecution pursuant to 18 U.S.C. §3231. The district court sentenced defendant to 20 months of imprisonment on January 25, 2024, and entered its judgment on January 31, 2024. (A00042-43.)¹ On February 13, 2024, defendant timely filed a notice of appeal. (Ibid.) See Fed. R. App. P. 4(b)(1)(A).

This Court has jurisdiction over defendant's appeal of his sentence pursuant to 18 U.S.C. §3742.

STATEMENT OF THE ISSUE

Defendant pleaded guilty to conspiring to defraud the United States (18 U.S.C. §371) by impeding the IRS's collection of income taxes and payroll taxes owed by defendant's business. As part of the conspiracy, defendant paid a portion of his employees' wages in “off-the-books” cash, informing employees that this arrangement would help them evade taxes.

The issue is whether defendant's conduct “was intended to encourage [other] persons . . . to violate the internal revenue laws,” within the meaning of USSG §2T1.9(b)(2).

STATEMENT OF RELATED CASES AND PROCEEDINGS

Counsel for the government are unaware of any related cases or proceedings.

STATEMENT OF THE CASE

Defendant, owner and operator of a cheesesteak restaurant, concealed business income and paid a substantial portion of his employees' wages under the table. By doing so, defendant evaded millions of dollars in income taxes and payroll taxes owed by his business. Defendant pleaded guilty to conspiracy to defraud the United States, in violation of 18 U.S.C. §371.

At sentencing, the district court imposed a two-level enhancement under USSG §2T1.9(b)(2) because defendant “intended to encourage” other persons (his employees) to “violate the internal revenue laws” by underreporting their income. As part of his plea agreement, defendant reserved the right to appeal the §2T1.9(b)(2) enhancement.

I. FACTS OF THE OFFENSE

Defendant and his father, Anthony Lucidonio, Sr., owned and operated Tony Luke, Inc. (“Tony Luke's”) and Tony Luke's Commissary. (A00279 (PSR ¶13).) Tony Luke's was a popular cheesesteak sandwich restaurant in Philadelphia, while Tony Luke's Commissary housed Tony Luke's administrative and corporate offices. (Ibid.) Defendant deposited only a portion of the restaurant's receipts into business accounts, deliberately failing to deposit millions of dollars in cash receipts. (A00279 (PSR ¶14).) Defendant maintained two sets of business records. One was an accurate set of records that tracked all business receipts, while a second, fraudulent set failed to account for the millions of dollars in undeposited cash receipts. (A00279 (PSR ¶15).) Defendant gave his accountant the fraudulent set of records. (Ibid.) As a result, the corporate tax returns that the accountant prepared for Tony Luke's omitted millions of dollars in business receipts. (A00279-80 (PSR ¶¶16, 18).) Likewise, the individual tax returns that the accountant prepared for defendant substantially understated his income. (A00280 (PSR ¶19).)

In addition to evading income taxes, defendant evaded federal payroll taxes by paying employees “off-the-books” in cash. (See generally A00281-82 (PSR ¶¶25-30).) Defendant caused employees to receive paychecks that reflected only a portion of their wages. (A00282 (PSR ¶26).) Defendant directed employees to endorse the paychecks and return them to defendant or the employees' managers. In exchange, employees were given envelopes containing cash that covered the on-the-books wages reflected on their paychecks, plus the additional off-the-books wages that employees earned. (A00282 (PSR ¶¶27-28).) Defendant caused payroll taxes to be withheld from only the on-the-books portion of employees' wages. (A00282 (PSR ¶¶26-28).)

Defendant gave his accountant false employment records that reflected only the on-the-books portion of wages. (See A00282 (PSR ¶28).) As a result, the employment tax returns (Forms 941) prepared by the accountant understated wages paid and the corresponding payroll taxes due. (A00282 (PSR ¶¶28-29).) Defendant's scheme caused his business to underreport nearly $500,000 in payroll taxes over the course of several years. (See A00282-83 (PSR ¶¶29-30).)

Defendant caused his business to issue fraudulent IRS Forms W-2 that reported only the on-the-books portion of employees' wages. (See A00068 (interview statement of confidential informant); A00147 (grand jury testimony of D.T., Tony Luke's general manager); A00169 (interview statement of D.T.).) Those fraudulent W-2s, in turn, caused employees to underreport income on their own tax returns. (See A00068; A00147.)

In or around 2017, two former employees of Tony Luke's and members of the Lucidonio family (referred to below as “CI#1” and “CI#2”) began providing the government with information on defendant's cash payroll scheme. (See A00066 (Memorandum of Interview); A00084 (grand jury testimony of CI#2).) During an interview with law enforcement, the informants stated that defendant had explained the cash payroll scheme to them. (A00067 (Mem. ¶6).) Defendant also told the informants that “they should explain to employees that they (the employees) were earning more money and not paying taxes by being paid in this manner.” (Ibid.; see also A00067 (Mem. ¶7) (Defendant “told employees being paid in this manner rather than receiving overtime pay helped them not to pay taxes.”).) Before the grand jury, CI#2 testified that employees were told about the cash payroll system as “part of the onboarding process.” (A00102.) CI#2 further testified that defendant said that the business “would get killed in taxes” if it used a legitimate payroll system. (A00111.)

During their time at Tony Luke's, both informants suffered adverse employment consequences after they confronted defendant about the cash payroll scheme. In or around 2013, CI#1 “was demoted after he started asking questions about the payroll system.” (A00068 (Mem. ¶11).) Also during 2013, CI#2 told defendant that he wanted all of his pay accurately reported “on the books.” (A00068 (Mem. ¶10).) For a time, defendant honored that request and caused CI#2's payroll taxes to be accurately withheld. (Ibid.) Later, however, defendant “reverted back to the old [payroll] system” and told CI#2 that “if he didn't like it maybe he should go and collect unemployment.” (Ibid.) CI#2, refusing to accept payment under the table, left his job. (A00111 (grand jury testimony).)

II. PROCEDURAL HISTORY

Defendant and Anthony Lucidonio, Sr., were charged with conspiracy to defraud the United States by impeding the IRS's collection of income taxes and payroll taxes, in violation of 18 U.S.C. §371. (Dkt. 1, Indictment, Count 1.) The defendants also were charged with 19 counts of assisting in the preparation of false corporate and employment tax returns, in violation of 26 U.S.C. §7206(2) (id., Counts 2-20); and four counts of tax evasion, in violation of 26 U.S.C. §7201 (id., Counts 21-24).

Defendant entered an agreement to plead guilty to the conspiracy charge (Count 1). (A00045 (plea agreement).) The parties agreed that defendant's Guidelines sentencing range should be calculated pursuant to USSG §§2T1.9(a)(1) & 2T4.1. (A00050.) The government reserved the right to argue that defendant's conduct “was intended to encourage persons” to violate the tax laws, within the meaning of USSG §2T1.9(b)(2), resulting in a two-level increase in defendant's offense level. (Ibid.) Defendant reserved the right to contest the §2T1.9(b)(2) enhancement at sentencing and, if applicable, on appeal. (A00050, A00052.)

Before the district court, defendant argued that the §2T1.9(b)(2) enhancement did not apply because there was no evidence that he “actively counseled or instructed employees” to not fully report their income. (SA034.)² According to defendant, the employees' underreporting was merely a “byproduct” of the cash payroll scheme. (SA035.) In response, the government cited evidence that defendant explained the fraudulent payroll system to employees and further explained how it would help employees to not pay taxes. (Dkt. 88 at 39-40.)

The district court applied the “encouraging others” sentencing enhancement. (A00016-18.) Examining the text of §2T1.9(b)(2), the court rejected defendant's contention that the phrase, “intended to encourage,” required “explicit proof that defendants advised, verbally or in writing, that employees should not report their cash wages.” (A00016.) The court noted that the guideline referred to the defendant's “conduct,” which “can include but is hardly limited to speech.” (Ibid.)

The court also found it “self-evident” that “creating and administering a cash payroll system that withholds less than federal law [ ] requires and issues fraudulent W-2 forms to employees, is 'intended to encourage' those employees to violate tax laws, as well.” (Ibid.) Accordingly, the court rejected defendant's characterization that the employees' failure to report wages was a mere “byproduct” of defendant's tax fraud. (A00017.) “Defendants clearly expected their employees to go along with the scheme. . . .” (Ibid.)

In the alternative, the district court found that, even if defendant were correct that “encourage[ment]” under §2T1.9(b)(2) required “some affirmative statement,” the government had provided sufficient evidence of such statements. (A00018.) Specifically, “the two Confidential Informants were instructed by [defendant] that they should 'explain to employees that they (the employees) were earning more money and not paying taxes by being paid in this manner,'” and both informants “'understood the implications of the explanations they were providing to employees.'” (Ibid.; see also A00067 (containing the informant statements quoted by the district court).)

The district court found that the tax loss attributable to defendant's conduct, for purposes of USSG §2T4.1, was $1.3 million, representing the income taxes and payroll taxes that defendant evaded through the scheme. (A00009-16.) Accounting for that loss and the two-level increase under §2T1.9(b)(2), defendant's Guidelines sentencing range was 24 to 30 months. (A00284, A00297 (PSR ¶¶38-39, 112).)³ The district court varied downward, sentencing defendant to 20 months of imprisonment. (A00023.)

SUMMARY OF THE ARGUMENT

The district court correctly applied a two-level increase to defendant's Guidelines offense level because defendant's “conduct” was “intended to encourage” others to violate the tax laws. USSG §2T1.9(b)(2). Defendant's actions in administering the cash payroll scheme — along with defendant's statements to employees about using that scheme to evade taxes — encouraged employees to unlawfully report only part of their income.

Defendant's interpretation of §2T1.9(b)(2), to require “direct,” verbal encouragement (see Br. 14), conflicts with the plain meaning of the guideline text. Section 2T1.9(b)(2) covers any “conduct” that is “intended to encourage,” without drawing any distinction between explicit or implicit acts of encouragement. In any event, the evidence shows that defendant did directly and explicitly encourage his employees to violate the law by explaining to employees how the cash payroll scheme would help them evade taxes.

ARGUMENT

I. STANDARD OF REVIEW

This Court reviews the district court's sentencing decision for an abuse of discretion, “but the amount of deference . . . will depend on the type of procedural error asserted on appeal.” United States v. Wise, 515 F.3d 207, 217 (3d Cir. 2008). For challenges to a Guidelines sentencing enhancement, the Court reviews de novo the district court's legal interpretation of the Guidelines. United States v. Nasir, 17 F.4th 459, 469 (3d Cir. 2021) (en banc). The Court reviews for clear error the district court's factual findings in support of the sentencing enhancement. United States v. Adair, 38 F.4th 341, 347 (3d Cir. 2022); see also United States v. Alowemer, 96 F.4th 386, 388 (3d Cir. 2024) (“We review the District Court's reading of the Sentencing Guidelines de novo, its factfinding for clear error, and its application of [a] sentencing enhancement for abuse of discretion.”).

II. THE DISTRICT COURT PROPERLY APPLIED THE §2T1.9(b)(2) “ENCOURAGING OTHERS” ENHANCEMENT

Defendant's conduct is covered by the plain text of USSG §2T1.9(b)(2) because it was “intended to encourage” other persons to violate the tax laws. Because the guideline text is unambiguous, the Court need not consult other sources such as legislative history and guideline commentary. To the extent those sources are relevant, they further support application of §2T1.9(b)(2) here.

A. Defendant “Intended to Encourage” Others to Violate the Tax Laws

The interpretation of a provision of the Sentencing Guidelines begins with the plain text.⁴ United States v. Banks, 55 F.4th 246, 256 (3d Cir. 2022). When interpreting the guideline text, the Court looks “to contemporary dictionary definitions while keeping in mind the whole statutory text, the purpose, and context of the statute, and relevant precedent.” United States v. Mercado, 81 F.4th 352, 356 (3d Cir. 2023) (quotation omitted); see also Banks, 55 F.4th at 257-58.

The text of USSG §2T1.9(b)(2) states:

If the conduct was intended to encourage persons other than or in addition to co-conspirators to violate the internal revenue laws or impede, impair, obstruct, or defeat the ascertainment, computation, assessment, or collection of revenue, increase by 2 levels.

According to contemporary⁵ dictionary definitions, to “encourage” a person means “to spur on,” “to give help or patronage to,” Webster's Ninth New Collegiate Dictionary, 410 (Merriam-Webster Inc. 1986), “to stimulate by assistance, approval, etc.,” or “to promote, advance, or foster,” The Random House Dictionary of the English Language, 641 (Random House, Inc. 2d ed. 1987). As the district court noted, other recognized synonyms of “encourage” include “abet,” “invite,” “further,” “approve,” and “support.” (A00016.)

In this case, defendant's conduct was intended to “spur on” and “help” his employees to violate the tax laws by underreporting their income. Defendant gave employees paychecks that reflected only the on-the-books portion of their wages. Defendant then had employees return those paychecks in exchange for cash that covered both the on-the-books wages and the additional, off-the-book wages that employees earned. (See A00282.) Defendant also caused employees to receive Forms W-2 that reported only the on-the-books portion of wages. (See A00068, A00147.)

In addition, defendant “approved” and “promoted” employees' underreporting their wages by explaining how the cash payroll scheme helped employees to not pay taxes. (See A00067, A00102.) Through these statements and actions, defendant induced employees to violate the tax laws.

Courts have upheld the §2T1.9(b)(2) “encouraging others” enhancement in similar cases where, as part of a scheme to evade payroll taxes, the defendant facilitated others' underpayment of income taxes. See United States v. Chugay, No. 22-12984, 2024 WL 1526115, at *4 (11th Cir. 2024) (Chugay's conduct “encouraged workers not to pay taxes by failing to withhold employment taxes, by not reporting the workers' wages to the IRS, and by not providing the workers with annual tax forms.”); United States v. John Zourdos, No. 20-CR-298 (N.D.N.Y.), Dkt. 179, Tr. of Sent. Hearing, at 13 (upholding §2T1.9(b)(2) enhancement “where the defendant encouraged and, in fact, set up off-the-books cash payments for [employee] overtime”).⁶

Defendant claims that Chugay and Zourdos are distinguishable because, in those cases, the defendants “explicitly” and “actively counseled employees” not to report all of their wage income. (Br. 21.) That purported distinction is factually inaccurate and legally irrelevant. On the facts, the government in this case provided evidence — in the form of statements by informants who had worked at defendant's business — that defendant explicitly told employees about the cash payroll scheme and how that scheme would help employees to not pay taxes. (A00067, A00102.)

As for the law, as explained below, defendant's interpretation of §2T1.9(b)(2) — to require “active” and “explicit” encouragement — lacks any support in the guideline text or other authority. Thus, even if defendant had not explicitly encouraged employees to underreport income, the §2T1.9(b)(2) enhancement would still apply.

B. Defendant's Interpretation of §2T1.9(b)(2) Conflicts with the Guideline Text

Defendant challenges the district court's conclusion that the “conduct” reached by §2T1.9(b)(2) “can include but is hardly limited to speech.” (Br. 14 (quoting A00016).) According to defendant, the “conduct” at issue must involve “active[ ] counsel[ing]” of others to violate the tax laws. (Br. 16.) Defendant relies on the “intended to” language of §2T1.9(b)(2), which he interprets to require “direct (as opposed to indirect) encouragement or incitement for others to violate the tax laws.” (Br. 14.)

Defendant's interpretation conflicts with the plain meaning of “intend.” Defendant cites no support for the notion that one who “intends” something must use “direct,” explicit means to achieve it. On the contrary, defendant's brief recognizes that the word “intend” refers to what one has “in mind,” not what one says. (Br. 13 (citing Black's Law Dictionary).)

Defendant's argument also conflicts with the law on proving criminal intent. This Court has recognized that, to prove a conspiracy offense beyond a reasonable doubt, the government need not present “direct evidence” and may rely on an “implicit agreement” to violate the law. United States v. McKee, 506 F.3d 225, 238 (3d Cir. 2007). That being so, it would be odd if a conspiracy guideline (subject to a more lenient preponderance standard)⁷ additionally required the government to prove “direct,” “explicit” encouragement to violate the law. Nothing in the text of §2T1.9(b)(2) suggests such an unusual standard.

Lacking support in the guideline text, defendant cites two Supreme Court cases that he claims applied “interpretive restraint” to other criminal statutes. (Br. 15.) These cases, however, shed no light on the Guidelines issue presented here.

In Marinello v. United States, 584 U.S. 1 (2018), the Supreme Court addressed the scope of a felony tax statute, 26 U.S.C. §7212(a), that prohibits obstruction of the “due administration of [the Tax Code].” The Court concluded that the statute's “due administration” language refers to “specific interference with targeted government tax-related proceedings” but does not include “routine administrative procedures that are near-universally applied to all taxpayers.” Id. at 4. The Court was concerned that a broader interpretation would risk a “lack of fair warning” regarding the scope of 26 U.S.C. §7212(a). Id. at 10.

In Dubin v. United States, 599 U.S. 110, 116-17 (2023), the Court addressed what it means to “use” another person's means of identification “in relation to” a criminal offense, within the meaning of the aggravated identity theft statute, 18 U.S.C. §1028A(a)(1). Placing those terms in the context of the title and language of §1028A(a)(1), the Court concluded that the statute applies “where the means of identification itself is at the crux of the underlying criminality, not an ancillary feature” of it. Id. at 129.

The concerns expressed in Marinello and Dubin are not implicated here. The text of §2T1.9(b)(2) plainly reaches conduct “intended to encourage” others to “violate the internal revenue laws.” Nothing about the structure or context of the guideline suggests that those terms should be given a more “targeted reading,” see Dubin, 599 U.S. at 129, than that indicated by the ordinary meaning of the guideline text.

Defendant tries to analogize this case to the hypothetical posed in Marinello about a taxpayer who is prosecuted for “pay[ing] a babysitter $41 per week in cash without withholding taxes.” 584 U.S. at 10. (See also Br. 15.) But in this case, the district court did not impose the §2T1.9(b)(2) enhancement just because defendant “pa[id] employees in cash.” (Contra Br. 16.) Rather, defendant took multiple steps to inform employees about the cash payroll scheme and encourage them to go along with it. Defendant caused employees to receive paychecks that reflected the on-the-books portion of their wages, and to return those paychecks in exchange for cash that covered employees' actual, higher wages. Most importantly, defendant caused employees to receive fraudulent Forms W-2 — the forms employees use to report their wages — that reported only the on-the-books portion of wages. Defendant also explained to employees how this arrangement helped them to not pay taxes. Through these actions and words, defendant made it crystal clear to employees that their reported wages were lower than their actual, cash wages, and that employees could take advantage of that scheme to unlawfully reduce their tax obligations. This conduct was far more deliberate than simply “paying a babysitter in cash.” (Br. 16.)

C. The Guideline Commentary and History Do Not Support Defendant's Claims

The government agrees with defendant that the text of §2T1.9(b)(2) is unambiguous, making it unnecessary to consult the guideline commentary. (Br. 17.) We nevertheless respond to defendant's arguments regarding §2T1.9's commentary and legislative history. (See Br. 17-21.)

Defendant cites (Br. 18) the background note to USSG §2T1.9, which states:

This type of conspiracy generally involves substantial sums of money. It also typically is complex and may be far-reaching, making it quite difficult to evaluate the extent of the revenue loss caused. Additional specific offense characteristics are included because of the potential for these tax conspiracies to subvert the revenue system and the danger to law enforcement agents and the public.

Defendant also cites (Br. 17) application note 4 to the guideline, which provides two, non-exclusive examples of when the “encouraging others” enhancement could apply:

Subsection (b)(2) provides an enhancement where the conduct was intended to encourage persons, other than the participants directly involved in the offense, to violate the tax laws (e.g., an offense involving a “tax protest” group that encourages persons to violate the tax laws, or an offense involving the marketing of fraudulent tax shelters or schemes).

USSG §2T1.9, comment. (n.4).⁸ Defendant reads this commentary as reflecting an intent by the Sentencing Commission to reach conduct that poses a “unique threat” to the revenue system. (Br. 18.)

This commentary, however, does not bear the interpretive weight defendant places upon it. The background note does not purport to limit the scope of the enhancement to “unique threat” cases; at most, it explains that the enhancement was added because of the “potential for . . . tax conspiracies to subvert the revenue system.” USSG §2T1.9, comment. (backg'd) (emphasis added). And as the text — “e.g.” — of application note 4 makes clear, it merely provides two examples of conduct that is intended to encourage others to violate the tax laws, not an exhaustive definition. See United States v. Macchia, 104 F.3d 350 (Table), 1996 WL 518509, at *3 (2d Cir. 1996) (rejecting argument that enhancement applies only to “tax protest groups and promoters of fraudulent tax shelters,” and applying it where the defendant encouraged others to prepare false invoices so he and his co-conspirators could evade gasoline excise taxes); United States v. Rabin, 986 F. Supp. 887, 889-91 (D.N.J. 1997) (applying enhancement where company manager and union representative conspired to conceal income from under-the-table cash payments).

Regardless, even under defendant's reading, the commentary supports applying the “encouraging others” enhancement here, as the district court expressly found. (A00017-18.) Where, as here, the conspirators encourage other persons to violate the tax laws, the conspiracy represents a greater risk (or “unique threat”) to the revenue system because the tax losses are more “far-reaching” and “difficult to evaluate” than the loss caused by the conspiracy alone. See USSG §2T1.9, comment. (backg'd).

This case proves the point. The tax losses attributed to defendant under the Guidelines were limited to income taxes and payroll taxes owed by the conspirators themselves. (See, e.g., A00283 (PSR ¶¶31-33).) However, the evidence shows that an additional, unknown amount of income taxes owed by defendant's employees went unpaid because of defendant's encouragement. (E.g., A00068 (employee-informant's statement that he underreported income consistent with the false Forms W-2 he received); A00147 (employee's testimony that he did not report wages received “under the table”).) And as the district court correctly observed, this scheme “spanned ten years and involved systemic underreporting of wages for [a] business with an average of 30 to 40 employees,” which “certainly fits the description of a scheme 'to subvert the revenue system.'” (A00017-18 (quoting USSG §2T1.9, comment. (backg'd).) Without the §2T1.9(b)(2) enhancement, this additional “threat” to the revenue system would not have factored into the Guidelines calculation. (See Br. 18.)

Regarding legislative history, there is no additional, relevant history that provides insight on the intended scope of §2T1.9(b)(2). The commentary to the original version of §2T1.9 contained language substantially identical to the current version's “background” note, quoted above. See 52 Fed. Reg. 18046, 18086 (1987). As explained, the language of that note supports application of the §2T1.9(b)(2) enhancement here.

Defendant cites additional language and commentary from earlier drafts of the Guidelines, which included references to a “movement” to violate the tax laws. (See Br. 19-20.) The language cited by defendant is inapposite because it did not relate to §2T1.9, and moreover, it was ultimately dropped by the Commission.

In particular, a 1986 draft of USSG §2T1.4 (then labeled § C214) provided an enhancement “if the conduct was in furtherance of an organized movement to encourage others to violate the internal revenue laws.” 51 Fed. Reg. 35080, 35095 (1986). (See also Br. 18-19.) But that language was not included in the final version of §2T1.4, much less in the §2T1.9 conspiracy guideline at issue here.

A later draft of the Guidelines contained a similar enhancement for certain offenses “committed in furtherance of or in conjunction with a movement to encourage others to violate the internal revenue laws.” 52 Fed. Reg. 3920, 3965 (1987). (See also Br. 19.) The commentary to this draft stated that, with respect to the offense of tax evasion (26 U.S.C. §7201), an enhancement for “encouraging others” was appropriate because such conduct “significantly increases the risk of revenue loss, particularly when an organized movement is involved.” 52 Fed. Reg. at 3967. (See also Br. 19-20.) Again, this proposed enhancement for a tax-defying “movement” did not relate to the conspiracy offense covered by §2T1.9,⁹ and in any event, the enhancement was dropped from the final version of the guidelines. See, e.g., USSG §§2T1.1 & 2T1.4 (current guidelines covering the offenses covered by draft guidelines §§ T211 through T214).

In sum, the legislative history cited by defendant — relating to unenacted versions of guidelines other than USSG §2T1.9 — does not support defendant's narrow reading of the guideline. To the extent this history has any relevance, it only reinforces the district court's plain-language interpretation of §2T1.9(b)(2). The history suggests that the Commission considered an “encouraging others” enhancement that would have been limited to situations involving an “organized movement” such as a tax-protest group. Ultimately, however, the Commission dropped that limitation in favor of an enhancement for any “conduct” that was “intended to encourage” a violation of the tax laws. USSG §2T1.9(b)(2).

Finally, defendant invokes the rule of lenity in support of his a-textual interpretation of §2T1.9(b)(2). (Br. 23-24.) However, as defendant acknowledges (see Br. 23), the rule of lenity may be considered “only where, 'after considering text, structure, history, and purpose, there remains a grievous ambiguity or uncertainty.'” United States v. Lewis, 58 F.4th 764, 770 (3d Cir. 2023) (quoting United States v. Castleman, 572 U.S. 157, 172–73 (2014)); see also United States v. Flemming, 617 F.3d 252, 270 (3d Cir. 2010) (“Application of the rule of lenity requires more than a difficult interpretative question.”). As discussed, the “intended to encourage” language of §2T1.9(b)(2) is not ambiguous, much less so grievously ambiguous that it could support defendant's reading of the guideline.

D. The “Encouraged” Employees Were not Co-Conspirators or Direct Participants in the Fraud

Defendant argues in the alternative that the employees he encouraged were “participants directly involved in the offense,” such that, pursuant to application note 4 to USSG §2T1.9, the enhancement should not apply. (Br. 22.) But this argument ignores the unambiguous text of the guideline text, which controls under this Court's precedent. E.g., Banks, 55 F.4th at 253. That text plainly states that only fellow “co-conspirators” — not any other criminal participants — are excluded from the “encouraging others” enhancement. USSG §2T1.9(b)(2). Thus, even if defendant were correct that the employees he encouraged were “participants” whose “own criminal conduct” facilitated the cash payroll scheme, that would not preclude application of §2T1.9(b)(2). (Br. 23 (quoting United States v. Belletiere, 971 F.2d 961, 970 (3d Cir. 1992).) Because those employees were not actually guilty as “co-conspirators” of the charged offense, they are included within the plain language of §2T1.9(b)(2).

But even if the commentary controlled and defendant were correct that the commentary's “direct participant” standard is more expansive than the Guidelines text,¹⁰ defendant's argument would fail. The employees defendant encouraged were not “participants” who were “directly involved” in the charged conspiracy. (See Br. 23.) Defendant was charged with conspiracy to impede the IRS's collection of payroll taxes and income taxes owed by defendant and his business. (E.g., Dkt. 1, Indictment ¶¶25-31.) To help conceal the business's cash payroll scheme, the conspirators encouraged employees to commit the additional violation of underreporting their own income. But that additional tax violation by the employees was not an essential part of the charged conspiracy to evade Tony Luke's tax obligations.

It also should be noted that the employees, when being paid under the table, were following orders. As stated, the conspirators explained to employees the operation of the cash payroll system as part of the onboarding process. Further, the experience of the two informants shows that the conspirators did not tolerate dissentions. After the informants confronted defendant and insisted on being paid legitimately, the informants were either demoted or forced out of the business. Under these circumstances, the employees' role in defendant's scheme was not “participation” but, as the district court described it, “acquiescence.” (A00017.)

III. THE DISTRICT COURT DID NOT PLAINLY ERR IN CREDITING AN INFORMANT STATEMENT

Defendant's final argument is styled as a claim that the district court “abused it discretion” in applying §2T1.9(b)(2) to the facts. (Br. 25.) However, a close reading of this argument reveals that defendant is trying to raise an untimely “hearsay” objection to certain evidence. (See Br. 26.) Specifically, defendant challenges the informants' interview statement that they “were instructed by [defendant] to explain to employees that they (the employees) were earning more money and not paying taxes by being paid” partially under the table. (Br. 25.)

Defendant's hearsay challenge to the informants' statement is reviewable only for plain error because he failed to raise that challenge below. See United States v. Knight, 266 F.3d 203, 207 (3d Cir. 2001) (Plain-error review applies “where a defendant has failed to object to a purported error before the sentencing court.”); United States v. Balboa, 614 F. App'x 605, 608 (3d Cir. 2015) (reviewing for “plain error because defense counsel did not object to the introduction of hearsay evidence” at a revocation hearing). During the sentencing proceedings, defendant never objected to the informants' statement based on hearsay or any other ground; he argued only that the facts established by the government's evidence did not satisfy the “intended to encourage” standard of USSG §2T1.9(b)(2). (See SA032-40 (Def. Sent. Memo.); SA063-67 (Def. Reply).)

There was no error — let alone “plain” error that was “clear or obvious,” Knight, 266 F.3d at 206 — in the district court's consideration of the informants' interview statement. At sentencing, hearsay evidence is admissible as long as it has some “minimal indicium of reliability beyond mere allegation.” United States v. Robinson, 482 F.3d 244, 246 (3d Cir. 2007). The informants' statement, regarding what defendant told them to “explain to employees” about the cash payroll scheme (A00067), easily meets that standard. The statement was memorialized by an IRS Special Agent who participated in the interview of the informants and took notes on what they said. (See A00066-67, A00072 (Memorandum of Interview).) Cf. Robinson, 482 F.3d at 246 (concluding that law enforcement officer's testimony about drug offenders' out-of-court statements was sufficiently reliable).

Defendant is wrong in claiming that the informants' statement was “contradicted” by “the grand jury and other testimony of employees.” (Br. 26.) Notably, defendant does not identify what specific testimony he believes contradicted the informants' statement. (See ibid.) Moreover, several employees corroborated the informants' statement about defendant's explaining the cash payroll scheme. Before the grand jury, CI#2 (a former employee of Tony Luke's) testified that Anthony Sr. (defendant's co-conspirator) explained to CI#2 that the purpose of being paid in cash was to avoid “gett[ing] killed by taxes.” (A00088.) CI#2 further testified that the conspirators explained the cash payroll system to employees as “part of the onboarding process.” (A00102.) Similarly, employee D.T. testified that it was common knowledge that employees were being paid under the table, and that some employees openly discussed that arrangement. (A00136.) This testimony — regarding ongoing discussions within the business about the cash payroll scheme — is consistent with the informants' statement that defendant explained that scheme to employees.

In addition, during an interview with law enforcement, employee M.M. stated that she spoke with defendant about setting M.M.'s “on the books” compensation at 25 hours per week, as any hours exceeding 25 would affect M.M.'s state-assisted medical coverage. (A00231.) Defendant agreed to that arrangement. (Ibid.) Although M.M.'s statements were not about tax fraud per se, they corroborated the informants' statement because they demonstrated defendant's willingness to “explain to employees” how the cash payroll scheme could be used to obtain unlawful benefits. (See Br. 25.) In light of this corroborating evidence, the district court did not err in relying on the informants' statement.

Defendant also cannot show that any error in admitting the informants' statement affected his “substantial rights” and seriously affected the fairness of judicial proceedings. Knight, 266 F.3d at 206. Even disregarding the informants' statement, the remaining evidence was sufficient to show that defendant “intended to encourage” employees to violate the tax laws within the meaning of USSG §2T1.9(b)(2).

Defendant's claim (Br. 25) that the remaining evidence was insufficient because it was limited to “[p]aying employees partially under the table and providing them with inaccurate Forms W-2” is mistaken. As explained above, the provision of false W-2s — the form that employees use to report their wages to the IRS — suffices to show that defendant encouraged his employees to use those very forms to underreport their wages. Moreover, defendant is wrong in claiming that there was no more evidence of encouragement in this case. As discussed, defendant additionally caused employees to receive paychecks that reflected the official, on-the-books portion of wages reported to the IRS. He also required employees to return those paychecks in exchange for cash covering employees' actual, higher wages. Through these actions, defendant made it abundantly clear to employees that Tony Luke's was maintaining a second, fraudulent set of records for the purpose of underreporting wages to the IRS. That information emboldened employees to underreport their wage income consistent with the business's fraudulent accounting.

Defendant also is incorrect in claiming that his actions were intended only “to evade the payroll taxes that Tony Luke's owed to the IRS.” (Br. 25-26.) No doubt one of defendant's intentions was to evade his business's payroll taxes. But a defendant “may have mixed or multiple intents.” Alowemer, 96 F.4th at 389; see also Rabin, 986 F. Supp. at 891 (A defendant who encouraged others to violate the tax laws had “more than one nefarious motive for his actions.”). As the district court found, the continued success of defendant's payroll fraud depended on employees underreporting their income because “honest treatment of tax obligations by employees would rapidly expose the fraud.” (A00016.) Thus, defendant intended both to evade his business's payroll taxes and to encourage employees to evade their own taxes, as each of those frauds facilitated the other. See also Macchia, 1996 WL 518509, at *3 (upholding §2T1.9(b)(2) enhancement where the defendant “encouraged others to prepare false documents to facilitate his tax evasion”). For these reasons, the district court correctly applied the §2T1.9(b)(2) “encouraging others” enhancement.

CONCLUSION

The judgment of the district court should be affirmed.

Respectfully submitted,

DAVID A. HUBBERT
Deputy Assistant Attorney General

Gregory S. Knapp

S. ROBERT LYONS
Chief, Criminal Appeals & Tax Enforcement Policy Section
KATIE BAGLEY
JOSEPH B. SYVERSON
GREGORY S. KNAPP
Attorneys
Tax Division
Department of Justice
Post Office Box 972
Washington, D.C. 20044
(202) 307-3350

Of Counsel:
JACQUELINE C. ROMERO
United States Attorney

DATED: June 26, 2024