Individual Says Court Erred in Tax Fraud Sentence Enhancement

NICHOLAS LUCIDONIO
Appellant,
v.
UNITED STATES OF AMERICA
Appellee.

UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT

Appeal from Judgment Entered in the United States
District Court for the District of Eastern Pennsylvania

REPLY BRIEF OF
APPELLANT NICHOLAS LUCIDONIO

Ian M. Comisky
Matthew D. Lee
icomisky@FoxRothschild.com
mlee@FoxRothschild.com
FOX ROTHSCHILD LLP
2000 Market Street, 20th Floor
Philadelphia, PA 19103-3222
Telephone: 215.299.2000
Facsimile: 215.299.2150

Attorneys for Appellant Nicholas Lucidonio

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TABLE OF CONTENTS

INTRODUCTION

ARGUMENT

CONCLUSION

TABLE OF AUTHORITIES

Cases:

Asbury v. Teodosio, 412 F. App'x 786 (6th Cir. 2011)

Beaudry v. Corr. Corp. of Am., 331 F.3d 1164 (10th Cir. 2003)

Cargill v. Garland, 57 F.4th 447 (5th Cir. 2023)

Corner Post, Inc. v. Bd. of Governors of Fed. Rsrv. Sys., 144 S. Ct. 2440 (2024)

Da Silva v. Attorney General United States, 948 F.3d 629 (3d Cir. 2020)

Duncan v. Walker, 533 U.S. 167 (2001)

Erlinger v. United States, 144 S. Ct. 1840 (2024)

Fischer v. United States, 144 S. Ct. 2176 (2024)

Giles v. California, 554 U.S. 353 (2008)

Loper Bright Enterprises v. Raimondo, 144 S. Ct. 2244 (2024)

Mathis v. United States, 579 U.S. 500 (2016)

Mistretta v. U.S., 488 U.S. 361 (1989)

Mobay Chemical Corp. v. Gorsuch, 682 F.2d 419 (3d Cir. 1982)

Natural Resources Defense Council, Inc. v. U.S. E.P.A., 683 F.2d 752 (3d Cir. 1982)

Newton v. Clinical Reference Lab'y, Inc., 517 F.3d 554 (8th Cir. 2008)

Sorenson v. Secretary of Treasury of U.S., 475 U.S. 851 (1986)

Sparkle Hill, Inc. v. Interstate Mat Corp., 788 F.3d 25 (1st Cir. 2015)

Stillwell v. United States, No. 22-1425, 2023 WL 4045237 (4th Cir. June 16, 2023)

United States v. Adams, 759 F.2d 1099 (3d Cir. 1985)

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. Brigman, 350 F.3d 310 (3d Cir. 2003)

United States v. Caraballo, 88 F.4th 239 (3d Cir. 2023)

United States v. Castillo, 69 F.4th 648 (9th Cir. 2023)

United States v. Chugay, No. 22-12984, 2024 WL 1526115 (11th Cir. Apr. 9, 2024)

United States v. Garrett, No. 92 CR 755, 1994 WL 280048 (N.D. Ill. June 17, 1994)

United States v. Haggerty, 107 F.4th 175 (3d Cir. 2024)

United States v. Henderson, 841 F.3d 623 (3d Cir. 2016)

United States v. Inigo, 925 F.2d 641 (3d Cir. 1991)

United States v. Kirschner, 995 F.3d 327 (3d Cir. 2021)

United States v. Kumar, No. 20-4478, 2024 WL 1134035 (4th Cir. Mar. 15, 2024), cert. denied, No. 23-7480, 2024 WL 2883872 (U.S. June 10, 2024)

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

United States v. Manatau, 647 F.3d 1048 (10th Cir. 2011)

United States v. Musgrave, 647 F. App'x 528 (6th Cir. 2018)

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

United States v. Pelullo, 399 F.3d 197 (3d Cir. 2005)

United States v. Reynolds, 710 F.3d 498 (3d Cir. 2013)

United States v. Rigas, 605 F.3d 194 (3d Cir. 2010)

United States v. Sileven, 985 F.2d 962 (8th Cir. 1993)

United States v. Smith, 674 F.3d 722 (7th Cir. 2012)

United States v. Telemaque, 934 F.2d 169 (8th Cir. 1991)

United States v. Upshur, 67 F.4th 178 (3d Cir. 2023)

United States v. White, 97 F.4th 532 (7th Cir. 2024)

United States v. Whiteford, 676 F.3d 348 (3d Cir. 2012)

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

United States v. Xue, 42 F.4th 355 (3d Cir. 2022)

Statutes:

5 U.S.C. §553

18 U.S.C. §371

18 U.S.C. §991

18 U.S.C. §1512

18 U.S.C. §3551 et seq

18 U.S.C. §3553

28 U.S.C. §991

28 U.S.C. §994

U.S.S.G. §2B1.1

U.S.S.G. §2T1.9

U.S.S.G. §3B1.1

U.S.S.G. §6A1.3

Rules:

Fed. R. App. P. 28

Third Cir. Loc. App. R. 28.1

Other Authorities:

Model Penal Code §1.13

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INTRODUCTION

Appellant Nicholas Lucidonio (“Mr. Lucidonio”) and his father helped the family business — Tony Luke's — evade taxes via a payroll underreporting scheme. They created a paper trail of light paychecks and corresponding W-2s and paid their employees in cash representing some reported and some unreported income. Both Mr. Lucidonio and his dad both accepted responsibility for that conduct.

What they never did was “intend to encourage” the employees to commit tax violations as well. Yet, the District Court enhanced Mr. Lucidonio's offense level by two under Section 2T1.9(b)(2) for acts that were intended to encourage others to violate the tax laws. That was wrong, for several independent reasons.

The plain text of Section 2T1.9(b)(2) is unambiguous: a defendant must have the requisite intent to encourage. And even if the Guideline were ambiguous, that plain reading is fully supported by the Commentary thereunder. Either way, there is simply no reliable evidence that Mr. Lucidonio intended to encourage employees to cheat on their taxes. The Government points only to uncorroborated hearsay from a single witness and to evidence showing that Mr. Lucidonio intended for the business to violate tax laws. That's not enough for the enhancement to attach.

Besides, the Government's theory is self-defeating. As charged in the Indictment and explored in its appellee's brief, the Government insists that the employees were an integral part of the payroll scheme. But if that's so, then the two-level enhancement cannot apply for a different reason: it doesn't cover conduct intended to encourage “co-conspirators” or “participants” to violate the tax laws.

The Government's arguments are self-defeating in another way as well. In his opening brief, Mr. Lucidonio pointed to legislative history to support his reading of the Guideline. In response, the Government argued that the legislative history is of no significance because the Guideline as enacted was a last-minute addition to the Commission's proposal. But if that is true, then the Guideline as enacted never went through notice-and-comment — a plain APA violation that is actionable all these years later under Connor Post after injuring Mr. Lucidonio at his sentencing.

If that weren't enough, a flurry of controlling opinions over the last couple months has made Mr. Lucidonio's position that much stronger. Most notably, Loper Bright calls into question whether courts should be deferring to the Guidelines at all. For these reasons, this Court should vacate Mr. Lucidonio's sentence and remand for resentencing without the Section 2T1.9(b)(2) enhancement, or alternatively, without any deference to the Guidelines at all.

* * *

This reply brief proceeds in two parts. First, Mr. Lucidonio responds to the Government's responsive filing and points out errors in various of its positions. Second, Mr. Lucidonio analyzes the changed sentencing landscape after recent Supreme Court decisions.

ARGUMENT

I. The District Court Erred in its Interpretation and Application of Section 2T1.9(b)(2).

The District Court erred in applying Section 2T1.9(b)(2) to Mr. Lucidonio's case. This was contrary to the plain language of Section 2T1.9(b)(2), which is not susceptible to more than one reasonable reading. Alternatively, even if Section 2T1.9(b)(2) were ambiguous, the Commentary supports Mr. Lucidonio's reading of the statute.

A. The Government's Self-Serving Interpretation of Section 2T1.9(b)(2)'s Plain Language Is Incorrect.

There is only one reasonable reading of Section 2T1.9(b)(2) — that offered by Mr. Lucidonio. Under the District Court and the Government's reading of U.S.S.G. §2T1.9(b)(2), the word “intended” would be rendered superfluous. The Government would have this Court conclude that the effects of someone's conduct proves that person's intent. That is contrary to the purpose of mens rea and an improper reading of the Guideline.

i. The Plain Language of the Guideline Requires that the Defendant Intended to Encourage Others to Violate the Internal Revenue Laws, Not that His Actions Incidentally Produced Such a Result.

The Government argues at length about the meaning of the word “encourage” in Section 2T1.9(b)(2). (Resp. Br. at 11-13, 17-18). Indeed, at the outset of its discussion of the plain meaning of the statute, the Government proceeds first to the meaning of the word “encourage” rather than address the threshold limiting language: “If the conduct was intended to encourage. . . .” (Resp. Br. at 11). This approach convinced the District Court but should not be persuasive to this Court on appeal.

In reading the text of a Guideline, “we start with the plain text and presume that words carry their ordinary meaning.” United States v. Caraballo, 88 F.4th 239, 246 (3d Cir. 2023). A court may refer to legal and general dictionaries to discern that meaning. Id. However, the anti-surplusage canon instructs that the court must “give effect, if possible, to every clause and word” of the Guideline. Id. (citing Duncan v. Walker, 533 U.S. 167, 174 (2001)). Thus, a common definition of one word does not relieve a court of its obligation to make sure every other word is given effect. See, e.g., Da Silva v. Attorney General United States, 948 F.3d 629, 635-36 (3d Cir. 2020).

That is why Mr. Lucidonio's reading is the only correct one. The Guideline does not apply to mere “encouragement.” It only applies to one with an intent to encourage. That is, the Government must prove a certain mens rea before this two-level enhancement can be applied.

The Government suggests that intent can be inferred from the outcome, because an “implicit agreement” can show proof of intent in the context of a conspiracy. (Resp. Br. at 14.) But even there, an “implicit agreement” only shows intent if there is evidence that the parties intended to make an agreement and intended the outcome of the agreement. See, e.g., United States v. Whiteford, 676 F.3d 348, 357 (3d Cir. 2012) (to prevail in a conspiracy prosecution under 18 U.S.C. §371, the government must prove, inter alia, that “the defendant intentionally joined the agreement, with knowledge of its objective”).

The plain meaning of “intend” requires volition. “Intended” means done with particular purpose. See United States v. Manatau, 647 F.3d 1048, 1050-51 (10th Cir. 2011) (Gorsuch, J.) (“Something is intended if it is done on purpose — not merely known, foreseen, or just possible or potentially contemplated”; detailing the mental state requirement of the intended loss analysis). It does not mean mere knowledge. See Giles v. California, 554 U.S. 353, 368 (2008) (“That knowledge [alone] is sufficient to show intent is emphatically not the modern view.”).

Here, Section 2T1.9(b)(2) provides for the two-level enhancement if the defendant's conduct was “intended to encourage.” U.S.S.G. §2T1.9(b)(2) (emphasis added). This means that the defendant must act with the purpose of encouraging others to violate the tax laws. To hold otherwise, as the Government suggests, would render Section 2T1.9(b)(2) a strict liability Guideline, such that if a defendant's conduct happened to encourage others to violate tax laws — even if that was not the purpose of his actions — then his offense level should be increased by two for sentencing purposes. That is inconsistent with the common meaning of “intended” and contrary to the plain meaning of this Guideline.

The correct meaning of “intent” — indeed, the commonsense one — can be found in this Court's analysis of other Guidelines. Take, for instance, the phrase “intended loss” as it appears in U.S.S.G. §2B1.1. District courts cannot just look at the actual loss and work backwards to find intent. United States v. Xue, 42 F.4th 355, 361 (3d Cir. 2022). Instead, “a district court is required to conduct a deeper analysis before inferring that a defendant intended to cause a particular loss.” Id. (cleaned up) (emphasis added); see also United States v. Kirschner, 995 F.3d 327, 336 (3d Cir. 2021) (“And again, the principal question is not whether [the defendant] could have sold the high-value counterfeits at the prices claimed by the government. The question is whether he intended to.”). In conducting this “deeper analysis,” the “district court must also find that the defendant had the required mental state to apply an enhancement based on intended loss.” Xue, 42 F.4th at 363; see also Kirschner, 995 F.3d at 337 (“[A] district court must conduct a 'deeper analysis' to make sure the defendant purposely sought to inflict each component of the losses the government claims he intended to commit.”).

Other courts' application of Section 2T1.9(b)(2) supports a plain reading of the intent requirement. See, e.g., United States v. Chugay, No. 22-12984, 2024 WL 1526115, at *8 (11th Cir. Apr. 9, 2024) (upholding the application of Section 2T1.9(b)(2) where the defendant “provided a means by which his hospitality workers could avoid paying taxes and impeded the ascertainment and collection of revenue by providing Forms 1099 to workers only upon request and assuring workers that they would not face penalties for failing to pay their taxes”); United States v. Sileven, 985 F.2d 962, 969-70 (8th Cir. 1993) (upholding the application of Section 2T1.9(b)(2) where defendant repeatedly encouraged others to hide income through his words and actions); United States v. Telemaque, 934 F.2d 169, 170 (8th Cir. 1991) (upholding the application of Section 2T1.9(b)(2) where the defendant and co-defendants “devised and marketed to like-minded tax protestors an elaborate scheme” involving false tax forms and refunds that would report income for a person who had committed “any wrong against you”); United States v. Garrett, No. 92 CR 755, 1994 WL 280048, at *1 (N.D. Ill. June 17, 1994) (applying Section 2T1.9(b)(2) where the defendant admitted to counseling others in the commission of tax fraud).

ii. Mr. Lucidonio Did Not Act with the Purpose of Encouraging Others to Violate Tax Laws.

In light of the plain language of the Guideline, it was error for the District Court to find that Mr. Lucidonio acted purposefully to encourage others to violate the internal revenue laws.

None of the Government's evidence shows such a purpose. Yes, the business evaded taxes by preparing apparently compliant paychecks but then actually paying employees in cash, and by issuing Forms W-2 showing only on-the-books payments and not the full amount of the cash received. (Resp. Br. at 12). But that is just a description of how the business lowered its tax burden. See A00277-A00283. It does nothing to demonstrate intent to encourage others to avoid paying taxes. This conspiracy was about avoiding tax burdens for Tony Luke's — nothing more. And that is insufficient to establish an intent to induce others to violate tax laws.

Nor does the Government's repeated reliance on the testimony of an informant change this result. (Resp. Br. at 25-26). An informant who received immunity stated that employees were paid partially in cash because otherwise the business would “get killed” on payroll taxes. SAA066. Again, that statement does not mean that Mr. Lucidonio intended to encourage the employees not to report their cash wages so that the employees would not get “killed on taxes.” (Resp. Br. at 25-26).

The absence of witness testimony to the contrary is telling. After all, the Government conducted an extensive investigation, interviewing and bringing many employees before the grand jury. Not a single one testified that Mr. Lucidonio encouraged employees to personally violate the tax laws. A straightforward view of Section 2T1.9(b)(2)'s language, when applied to the facts of this case, can result in no other conclusion: Mr. Lucidonio did not act with the requisite intent to encourage others.

B. The Government's Alternative Argument — That the Guidelines Commentary Supports Its Interpretation — Is Similarly Flawed.

The Commentary plays no role here because Section 2T1.9(b)(2) is not ambiguous. United States v. Nasir, 17 F.4th 459, 471 (3d Cir. 2021). Yet, even if it were ambiguous, a review of the Commentary would still support a finding that the two-level enhancement should not be applied.

i. Under the Commentary, Intent Is Still a Prerequisite.

There is no daylight between the Guideline and the Commentary here. The Commentary simply repeats the key language used in the Guideline: the enhancement applies “where the conduct was intended to encourage persons, other than participants directly involved in the offense, to violate the tax laws.” U.S.S.G. §2T1.9 cmt. n.4. “[I]dentical words used in different parts of the same act are intended to have the same meaning.” Sorenson v. Secretary of Treasury of U.S., 475 U.S. 851, 860 (1986) (internal quotation marks omitted). “Intended” has the same meaning in the Commentary as it does within the Guideline itself: “with purpose,” “designed” or “with design.” Model Penal Code §1.13. Again, since there is no evidence that Mr. Lucidonio acted “with purpose” or “with design” to encourage others to violate the tax laws, the Commentary only confirms that this Guideline does not apply here.

Second, despite the Government's arguments to the contrary, (Resp. Br. at 17-19), the examples that follow Application Note 4 support Mr. Lucidonio's reading of the Guideline. Similar to use of the modified categorical approach under the Armed Career Criminal Act, when a “statutory list is drafted to offer 'illustrative examples,' then these are considered to be 'a crime's means of commission.'” United States v. Henderson, 841 F.3d 623, 630 (3d Cir. 2016) (citing Mathis v. United States, 579 U.S. 500, 517 (2016)). While not an exhaustive list, the two examples in the Commentary share an unsurprising commonality: both involve acting with the purpose of inducing others to violate tax laws. See U.S.S.G. §2T1.9, cmt. n.4 (“e.g., an offense involving a 'tax protest' group that encourages persons to violate the tax laws, or any offense involving the marketing of fraudulent tax shelters or schemes”).

Recognizing the poor fit between the Commentary examples and Mr. Lucidonio's conduct, the Government argues that they are mere illustrations of violative conduct, not an exhaustive list thereof. (Resp. Br. at 18). No one is arguing that the examples are exhaustive. But they are plainly informative of the Commission's view of the limitations of the Guideline.

Consider the Supreme Court's recent rejection of a similarly expansive reading proffered by the Government in Fischer v. United States, 144 S. Ct. 2176 (2024). That case involved a statute that “consists of many specific examples of prohibited actions, followed by a “residual clause” to capture conduct similar to the examples but not expressly enumerated. Id. at 2185 (construing 18 U.S.C. §1512(c)(2)). The Government asked the Court to read the residual clause to encompass all manner of conduct, different in type from the conduct underlying the listed examples. Id. The Supreme Court rejected that invitation to broaden the statute's scope via the residual clause “in light of the narrower terms that precede it.” Id.

So too here. Nothing in the Guideline or the Commentary thereunder allows the Government to sidestep its burden to prove intent. And since the examples stand in stark contrast to Mr. Lucidonio's conduct, the Commentary only supports his plain reading of the Guideline.

Finally, Mr. Lucidonio noted in his opening brief that to the extent there is any ambiguity in the Guideline that the rule of lenity should apply. (Opening Br. at 23-24). The Government never seriously engages on this issue. (Resp. Br. at 21). Under well-developed case law in this Circuit, the rule of lenity may be applied in these circumstances to the extent this Court finds the Guideline ambiguous. United States v. Lewis, 58 F.4th 764, 770 (3d Cir. 2023).

C. The District Court Abused its Discretion in Applying Section 2T1.9(b)(2) on These Facts.

Even if the Guideline could apply to conduct like that here, the facts of record simply do not support its application in this case. The District Court, therefore, abused its discretion in enhancing Mr. Lucidonio's offense level under Section 2T1.9(b)(2).

i. The District Court's Consideration of Uncorroborated Hearsay Was Error.

According to a “memorandum of interview” prepared by an IRS agent, an informant said he was instructed to inform employees that they were avoiding personal taxes as a result of the business's peculiar way of paying its employees. A00067. The District Court abused its discretion in relying on this uncorroborated hearsay statement to prove intent.

As a threshold matter, the Government argues that Mr. Lucidonio failed to preserve this objection below, triggering plain error review here. (Resp. Br. at 24-25). Not so. Mr. Lucidonio objected to this hearsay in the District Court by adopting the same objections lodged in his father's case. SAA068; see also SAA001-044. Thus, the error is reviewed through an abuse of discretion standard because the District Court selected the sentence based on clearly erroneous facts. United States v. Wise, 515 F.3d 207, 217 (3d Cir. 2008).

Hearsay is only admissible at a sentencing hearing if it is supported by “sufficient indicia of reliability.” United States v. Brigman, 350 F.3d 310, 315 (3d Cir. 2003); see also U.S.S.G. §6A1.3. For instance, hearsay evidence might be deemed reliable based on its “facts and details, corroboration by or consistency with other evidence, or the opportunity for cross-examination.” United States v. Smith, 674 F.3d 722, 732 (7th Cir. 2012).

Here, the statement lacks such indicia of reliability. It lacked self-authenticating detail. It was never subjected to cross-examination. It is inconsistent with other evidence. And it was not corroborated. After all, no employee testifying under oath before the grand jury provided similar information. See A00066-00273. The other examples cited by the Government, (Resp. Br. at 25-26), at most show that employees knew that the business used its payroll practices to avoid paying taxes. But again, employee knowledge is not the same as employer intent.

The Government then argues that other statements not relied upon by the District Court support the factual finding. This, however, is simply not the case. For instance, during onboarding, the cash payroll system was discussed. (Resp. Br. at 26). But, as noted, not a single employee testified that he or she had any discussion with Mr. Lucidonio or his father about it. Besides, there is no testimony that suggests “encouragement” of the employees not to report income on their tax returns, let alone intent.

The Government also points to another employee who asked Mr. Lucidonio to be paid under the table to avoid problems with state-assisted medical coverage. (Resp. Br. at 26). While acknowledging this was not “tax fraud per se,” the Government nonetheless argues that this corroborates the informant's statement. But, of course, it does not corroborate anything with respect to payroll taxes and provides no evidence of intent to encourage others to violate the tax laws. Moreover, since it was the employee requesting the corner-cutting, it cannot be evidence of Mr. Lucidonio intending to encourage the employee to violate tax laws.

The District Court abused its discretion by enhancing Mr. Lucidonio's offense level relying on uncorroborated, unreliable hearsay.

ii. Under the Government's Theory, the Employees Were Key Participants in the Scheme.

Section 2T1.9 only applies when the defendant engages in conduct “intended to encourage persons other than or in addition to co-conspirators to violate the internal revenue laws.” U.S.S.G. §2T1.9 (emphasis added). The Commentary paraphrases the limitation, restricting the Guideline to “conduct [that] was intended to encourage persons, other than the participants directly involved in the offense, to violate the tax laws.” U.S.S.G. §2T1.9 cmt. n.4. The Government's theory is that Mr. Lucidonio intended to, and did, encourage employees to violate the tax laws, who accepted that advice by underreporting on their taxes. But if that is true, then the employees were “co-conspirators” or fellow “participants,” and the Guideline does not apply anyway.

The Government resists this logic by insisting that the employees were only “following orders.” (Resp. Br. at 23). But that isn't how the Government pleaded the case in Mr. Lucidonio's Indictment. There, the Government alleged that he and his father, both together and with others known and unknown, conspired to defraud the United States through both income and payroll tax fraud. SAA001-044. As the Government argues elsewhere, the employees were an integral part of that payroll scheme, endorsing their paychecks and receiving cash wages in return. (Resp. Br. at 4; A00282).

Next, the Government argues that the employees may have been “participants,” but they lacked sufficient involvement to be “co-conspirators.” (Resp. Br. at 22). That argument misunderstands the breadth of the conspiracy statute. “What §371 criminalizes is the unlawful agreement and not the substantive offenses which may be the object of the conspiracy.” United States v. Rigas, 605 F.3d 194, 209 (3d Cir. 2010). Further, conspirators do not need to have “[k]nowledge of all the particular aspects, goals, and participants of a conspiracy.” United States v. Adams, 759 F.2d 1099, 1114 (3d Cir. 1985). Thus, it makes no difference whether the employees knew all the details of how the business was evading taxes. Under the Government's charging theory of the case, they were a necessary part of an unlawful agreement with Mr. Lucidonio to defraud the United States. Section 2T1.9(b)(2) therefore does not apply.

Besides, there is no daylight between the words “participant” and “co-conspirator” here. The Section 3B1.1 leadership enhancement provides a helpful analogy. U.S.S.G. §3B1.1. Under that Guideline, a defendant who “was an organizer or leader of a criminal activity that involved five or more participants or was otherwise extensive” earns a 4-level increase in offense level. Id. The Commentary to the Guideline defines participant to include anyone “who is criminally responsible for the commission of the offense,” whether the participant was charged or convicted or neither. U.S.S.G. §3B1.1 cmt. n. 1.

In case law interpreting the term “participants,” courts have distinguished between mere customers or buyers (in a drug context) with those who follow directions from a leader as part of an overall scheme. See, e.g., United States v. Belletiere, 971 F.2d 961, 968-71 (3d Cir. 1992) (finding that a series of unrelated buyers who were not led, organized by, or answerable to the defendant were not “participants” in the scheme). In contrast, “participants” does include “persons who are used to facilitate the criminal scheme, a result we hold is consistent with the guideline.” United States v. Inigo, 925 F.2d 641, 659 (3d Cir. 1991).

Here, the Government insists that Mr. Lucidonio controlled the employees and “did not tolerate dissentions.” (Resp. Br. at 23). According to the Government, Mr. Lucidonio even took retaliatory action if the employees confronted him to be paid legitimately. (Resp. Br. at 23-24). Mr. Lucidonio's entire fraud “depended on employees underreporting their income,” the Government explains. (Resp. Br. at 28). In short, the Government views the employees as having been part of the tax fraud scheme — as “participants” or “co-conspirators.” This is yet another independent reason that Section 2T1.9(b)(2) should not be applied.

II. Alternatively, Section 2T1.9(b)(2) Is Invalid or Should Receive No Deference.

A. The Commission Did Not Follow Proper Notice-and-Comment Procedure before Submitting Section 2T1.9(b)(2).

In his opening brief, Mr. Lucidonio pointed to the legislative history of Section 2T1.9 as suggesting that this Guideline was only intended to apply to conduct involving an “organized movement.” (Resp. Br. at 19-21). In response, the Government contends that the Commission “dropped this limitation” in favor of a different approach — that which is now reflected in Section 2T1.9. (Resp. Br. at 21).

But if the Government were correct, then that would create an even bigger problem for Section 2T1.9. If the final version of Section 2T1.9 reflected more than a mere “amendment,” then it was a new substantive rule that had to be promulgated in accordance with notice-and-comment procedures. Since the Guideline was not approved in accordance with those procedures, it would be invalid.¹

The U.S. Sentencing Commission is an agency under the judicial branch and subject, in part, to the Administrative Procedure Act. 28 U.S.C. §§991(a), 994(x); Mistretta v. U.S., 488 U.S. 361, 393 (1989). The Sentencing Commission's authority arises out of the Sentencing Reform Act of 1984. See 28 U.S.C. §991 et seq., 18 U.S.C. §3551 et seq.It was tasked with “establishing sentencing policies and practices for the Federal criminal system” that achieve the purposes of sentencing in 18 U.S.C. §3553(a) and provide certainty and fairness to avoid unwarranted sentencing disparities.18 U.S.C. §991(b)(1)(A)-(B).The U.S. Sentencing Guidelines, created by the Sentencing Commission, are subject to the APA's notice-and-comment and hearing requirements. 28 U.S.C. §994(x); 5 U.S.C. §553(b)(A) (the notice-and-comment requirement does not apply to the policy statements).

Standard rule-making procedures require that the Sentencing Guidelines be published in the Federal Register and follow public hearing and comment procedures. United States v. Haggerty, 107 F.4th 175, 181 (3d Cir. 2024) (referencing 28 U.S.C. §994(x)); see also 5 U.S.C. §553(b)-(c)). Then, the Commission must notify Congress of the proposed revisions. See 28 U.S.C. §994(p). After 180 days, if Congress does not disapprove or modify them, the amendments then take effect. See id.

Here, though, the Sentencing Commission did not submit the current version of Section 2T1.9(b)(2) through the required notice-and-comment process. The notice of the preliminary draft was sent by the Commission for notice and comment on October 1, 1986. That draft did not contain any provision comparable to Section 2T1.9(b)(2). 51 Fed. Reg. 35080. On February 6, 1987, an amended set of Guidelines was submitted for public comment, and the final Guidelines were submitted to Congress on April 13, 1987. They also did not have a comparable Section 2T1.9(b)(2) section. 52 Fed. Reg. 3920. There were clarifying amendments submitted on May 1, 1987. Finally, on May 13, 1987, Section 2T1.9 appeared in the Guidelines for the first time — but without having gone through the notice-and-comment procedure. 52 Fed. Reg. 18046. This language came into effect in November 1987. See U.S.S.G. §2T1.9(b)(2) (historical note indicating effective date was November 1, 1987).

This is improper rulemaking and as such, U.S.S.G. §2T1.9 is procedurally invalid and must be set aside. See Natural Resources Defense Council, Inc. v. U.S. E.P.A., 683 F.2d 752, 768-770 (3d Cir. 1982); Corner Post, Inc. v. Bd. of Governors of Fed. Rsrv. Sys., 144 S. Ct. 2440, 2461 (2024) (Kavanaugh, J., concurring) (the plain text of the “APA authorizes vacatur of agency rules” in response to unlawful agency action). Under Corner Post, even a legislative rule that has existed for decades is subject to challenge if and when an injury finally occurs. Id. Here, Mr. Lucidonio suffered injury when Section 2T1.9 was applied to him at sentencing. Now, for the first time, he can challenge it under the APA.

The procedural error here is more akin to a complete failure of notice and comment rather than a technical failure. The Sentencing Commission utilized two notice-and-comment provisions before submitting a final draft to Congress. In neither of these versions did a comparable Section 2T1.9 appear. “[T]he essential purpose of according §553 notice and comment opportunities is to reintroduce public participation and fairness to affected parties after governmental authority has been delegated to unrepresentative agencies.” United States v. Reynolds, 710 F.3d 498, 519–20 (3d Cir. 2013) (internal quotation marks omitted).

Thus, this Guideline has not been subjected to public comment, nor does it provide fairness to defendants sentenced — or potentially sentenced — under the scheme. See Reynolds, 710 F.3d at 517. To excuse such a violation, the Government must demonstrate good cause for the agency to adopt the regulation without notice and comment. Mobay Chemical Corp. v. Gorsuch, 682 F.2d 419, 426 (3d Cir. 1982). The Government has provided no such reason here. The failure to follow required notice and comment, especially when the Commission did so for the surrounding portions of the Guidelines, prejudiced Mr. Lucidonio. This action undermines the reliability of the Guidelines and is an “ad hoc determination” that is “inherently arbitrary in nature.” Reynolds, 710 F.3d at 520. It cannot be applied at all and the case must be remanded for resentencing without application of Section 2T1.9.

B. Alternatively, the Guidelines as a Whole Receive No Deference after Loper Bright.²

Under Loper Bright, the United States Sentencing Guidelines as a whole are now owed no deference by the courts. See Loper Bright, 144 S. Ct. at 2273 (“[W]hen a particular statute delegates authority to an agency consistent with constitutional limits, courts must . . . ensur[e] that the agency acts within it.”). This is because the Guidelines are an impermissible interpretation of the governing statute at issue.

There are several statutes that the Commission has improperly interpreted through the Guidelines. First, 28 U.S.C. §991(b)(1) provides that the purpose of the Sentencing Commission is to “establish sentencing policies and practices for the Federal criminal justice system.” These policies and practices must then do three things: “assure the meaning of the purposes of sentencing” as found in 18 U.S.C. §3553(a)(2); provide, among other things, certainty and fairness, avoid unwanted sentencing disparities among similarly-situated defendants while also “maintaining sufficient flexibility to permit individualized sentences”; and reflect “advancement in knowledge of human behavior as it relates to the criminal justice process.” 28 U.S.C. §991(b)(1)(A)-(C). Relatedly, the Sentencing Commission's duties are then to promulgate the Guidelines to be used by courts in determining an appropriate sentence, as well as the general policy statements concerning the application of the Guidelines. 28 U.S.C. §994.

After Loper Bright, courts owe no deference to the Sentencing Commission's interpretation of these three statutes. The Commission's interpretation of its enacting statutes, and overall directive from Congress, fails to properly achieve the listed purposes and goal of standardized sentencing. For instance, there are countless issues that have arisen over the course of the last few years that resulted in disparate sentences. One of those issues has been addressed first by caselaw in this Circuit, and then by an amendment to the Guidelines: calculation of loss to include intended loss. United States v. Banks held that “loss” within the meaning of Section 2B1.1 meant only actual loss. 55 F.4th 246, 257-58 (3d Cir. 2022). This will remain the law of this Circuit until November 2024, when the Commission's newly promulgated Guideline that incorporates intended loss into its text comes into effect. See 89 Fed. Reg. 36853, 36855-36856.

Section 2T1.1, incorporated in part in Section 2T1.9, punishes intended, not actual, loss. United States v. Upshur, 67 F.4th 178 (3d Cir. 2023). The base offense level of Section 2T1.9 incorporates the tax loss table in the Guidelines. There is no empirical evidence and certainly none for Section 2T1.9 that supports the view that higher sentences should follow a grid of increased tax loss. There has been substantial criticism of the fraud Guidelines, which also employ a similar graduated system. See, e.g., United States v. Musgrave, 647 F. App'x 528, 538-539 (6th Cir. 2018).

The calculation-of-loss issue is just one example — there are more. For instance, there is a circuit split whether inchoate offenses are to be considered controlled substance offenses under Section 4B1.2(b). Compare United States v. Castillo, 69 F.4th 648, 658-663 (9th Cir. 2023) (finding that Guidelines' definition of “controlled substance offense” was unambiguous and therefore the Commentary improperly expanded the definition to include inchoate crimes), with United States v. White, 97 F.4th 532, 537-39 (7th Cir. 2024) (continuing to defer to the Guideline Commentary and finding that inchoate offenses are included within the meaning of “controlled substance offense”).

In practical application, within this Circuit alone, district courts vary in the rate at which they issue “within Guidelines” sentences — from as low as 27.6 percent of the time to as high as 74.6 percent. See U.S. Sent'g Comm'n, Statistical Information Packet Fiscal Year 2023 Third Circuit, https://www.ussc.gov/sites/default/files/pdf/research-and-publications/federal-sentencing-statistics/state-district-circuit/2023/3c23.pdf (last visited August 13, 2024). If Congress's intent was to rectify the old sentencing regime's “great variation among sentences imposed by different judges upon similarly situated offenders,” then that intent has not been realized by the Guidelines. Misretta, 488 U.S. at 366 (quoting S. Rep. No. 98-225, at 38, 65 (1983)).

The Guidelines were intended to achieve uniform sentencing through the Commission's interpretation of the applicable statutes. However, despite its best efforts, the Commission's promulgation of the Guidelines has failed to achieve this. “[T]he People's elected representatives should be able to pursue new and innovative approaches to sentencing and sentencing reform without undue interference by courts [ ] especially given that unfair and disparate sentences are a persistent societal problem that the legislature is indisputably authorized to address.” Erlinger v. United States, 144 S. Ct. 1840, 1879 (2024) (Jackson, J., dissenting) (internal quotation marks omitted). The Sentencing Commission's creation of the Guidelines is “inconsistent with the law as they interpret it” and therefore courts owe the Guidelines no deference when fashioning an appropriate sentence under 18 U.S.C. §3553(a).

CONCLUSION

This Court should vacate Mr. Lucidonio's sentence and remand to the District Court for resentencing with instructions clarifying that the two-level enhancement under U.S.S.G. §2T1.9(b)(2) is not applicable here. Alternatively, this Court should vacate and remand for resentencing with instructions that the Guidelines are not to be given any deference.

Ian M. Comisky
Matthew D. Lee
FOX ROTHSCHILD LLP
2000 Market Street
20th Floor
Philadelphia, PA 19103-3222
Tel: 215.299.2000
Fax: 215.299.2150
icomisky@FoxRothschild.com
mlee@FoxRothschild.com

Dated: August 16, 2024

Attorneys for Appellant Nicholas Lucidonio