Sandwich Shop Owner Challenges Sentence for Tax Fraud Conspiracy

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

BRIEF FOR 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

JURISDICTIONAL STATEMENT

STATEMENT OF THE ISSUES

RELATED CASES AND PROCEEDINGS

STATEMENT OF THE CASE

SUMMARY OF THE ARGUMENT

STANDARD OF REVIEW

ARGUMENT

Conclusion

TABLE OF AUTHORITIES

Cases

Auer v. Robbins, 519 U.S. 452 (1997)

Chevron U.S.A. Inc. v. Nat. Res. Def. Council Inc., 467 U.S. 837 (1984)

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

Kisor v. Wilkie, 588 U.S. 558 (2019)

Loper Bright Enterprises v. Raimondo, 45 F.4th 459 (D.C. Cir.), cert. granted, 143 S. Ct. 2429 (2023)

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

Pulsifer v. United States, 144 S. Ct. 718 (2024)

Relentless Inc. v. Department of Commerce, 62 F.4th 621(1st Cir.), cert. granted, 144 S. Ct. 325 (2023)

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. Angulo, 638 F. App'x 856 (11th Cir. 2016)

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. Blackmon, 557 F.3d 113 (3d Cir. 2009)

United States v. Brothers, 75 F.3d 845 (3d Cir. 1996)

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

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

United States v. Garrett, 1994 WL 280048 (N.D. Ill.)

United States v. Henderson, 64 F.4th 111 (3d Cir. 2023)

United States v. Korus, 795 F. App'x 863 (3d Cir. 2019)

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

United States v. Long, 101 F.3d 687, 1996 WL 346670 (2d Cir. 1996)

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

United States v. Manthei, 913 F.2d 1130 (5th Cir. 1990)

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

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

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

United States v. Rivera-Luis, 43 F.4th 172 (1st Cir. 2022)

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, Case No. 20-cr-298 (N.D.N.Y.)

Statutes

18 U.S.C. §371

18 U.S.C. §1028A

18 U.S.C. §3231

18 U.S.C. §3742

26 U.S.C. §7201

26 U.S.C. §7206

26 U.S.C. §7212

28 U.S.C. §1291

28 U.S.C. §1294

U.S.S.G. §2B1.1

U.S.S.G. §2T1.4

U.S.S.G. §2T1.9

U.S.S.G. §3B1.1

U.S.S.G. §3E1.1

U.S.S.G. §4B1.2

U.S.S.G. §4C1.1

U.S.S.G. § C214

U.S.S.G. § T211

U.S.S.G. § T212

U.S.S.G. § T213

U.S.S.G. § T214

Other Authorities

Black's Law Dictionary (11th ed. 2019)

Cambridge Dictionary, https://dictionary.cambridge.org/us/dictionary/english/encourage

Cambridge Dictionary, https://dictionary.cambridge.org/us/dictionary/english/intend

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

Proposed Sentencing Guidelines for United States Courts, 52 FR 3920-01, 3967, 1987 WL 249222

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JURISDICTIONAL STATEMENT

The District Court had jurisdiction over this case pursuant to 18 U.S.C. §3231. On July 21, 2020, Appellant Nicholas Lucidonio (“Mr. Nicholas Lucidonio” or “Nicholas Lucidonio”) was charged along with his father, Anthony Lucidonio, Sr. (“Anthony Sr.”), in a 24-count Indictment relating to a multi-year income and payroll tax scheme. On May 9, 2022, Nicholas Lucidonio pled guilty to the portion of Count One charging him with conspiracy to defraud the United States in violation of 18 U.S.C. §371 based on a payroll tax fraud scheme. In his plea agreement, Mr. Lucidonio preserved the right to appeal if the District Court applied a two-level sentencing enhancement under a rarely used provision, U.S.S.G. §2T1.9(b)(2). A00045-57. The District Court applied the enhancement and sentenced Mr. Lucidonio to twenty months of imprisonment on January 25, 2024. The District Court entered judgment six days later, on January 31, 2024. A00022-29. Mr. Lucidonio timely filed a notice of appeal on February 13, 2024. A00001-2. Accordingly, this Court has jurisdiction to hear this appeal. See 28 U.S.C. §1291 and 1294(1); 18 U.S.C. §3742(a); Fed. R. App. P. 4(b)(1)(A).

STATEMENT OF THE ISSUES

1. Did the District Court err in applying a two-level upward adjustment to Mr. Lucidonio's offense level under U.S.S.G. §2T1.9(b)(2) for intending to encourage others to violate the tax laws where there was no evidence that he actively encouraged any employee not to report their cash wages and where the evidence relied on by the Government would mean that the enhancement is applicable in any payroll tax fraud conspiracy case along with a myriad of other tax offenses?

This issue was raised below in pre-sentencing briefing before the District Court, see Docket Entry (“D.E.”) 87 at 26-34; D.E. 96 at 15-19, and was addressed in the District Court's Memorandum and Order dated October 24, 2023 at A00016-18.

RELATED CASES AND PROCEEDINGS

Counsel is unaware of any previous or pending related cases or proceedings.

STATEMENT OF THE CASE

This appeal arises out of the District Court's application of a two-level sentencing enhancement to Nicholas Lucidonio's offense level under U.S.S.G. §2T1.9(b)(2). That enhancement applies in a conspiracy case charged under 18 U.S.C. §371 if the Government can establish that “the [defendant's] 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.” U.S.S.G. §2T1.9(b)(2).

I. Relevant Facts

This case has its roots in a contentious business dispute that arose in 2015 among Nicholas Lucidonio, his father Anthony Sr., and an estranged relative. The dispute related primarily to franchising rights relating to Tony Luke's,¹ a well-known and popular sandwich shop in South Philadelphia, Pennsylvania. The conflict spawned multiple civil lawsuits and ultimately led to the initiation of the underlying criminal case after two confidential informants (grandchildren of Anthony Sr.) took records from the Tony Luke's business, approached the Government, and accused Nicholas Lucidonio and his father of participating in a multi-year income and payroll tax fraud scheme.

Tony Luke's was a small, family-run business. It was founded in 1992 by Anthony Sr., who at all relevant times owned ninety percent of the business. Nicholas Lucidonio has worked with his father at Tony Luke's ever since it opened. He assisted his father in running the day-to-day operations of Tony Luke's, including by making sandwiches, supervising and training employees, and, in more recent years, attempting to assist his father manage the financial side of the business.

As set forth in his plea agreement, Nicholas Lucidonio accepted full responsibility for participating in a payroll tax fraud scheme in which a number of employees were paid a portion of their wages in cash in order to understate the amount of employment taxes that Tony Luke's owed to the Internal Revenue Service (“IRS”). For example, if an employee worked 50 hours in a given week, he or she might have received a paycheck reflecting “on-the-books” wages for only a portion of those hours. The employee would have then signed the paycheck, returned it to Mr. Lucidonio or a store manager, and received an envelope with cash. The envelope would contain cash covering the net amount of the paycheck (after the reported taxes were removed) but would also include additional cash wages for any hours worked beyond those reflected on the paycheck. Nicholas Lucidonio also accepted responsibility for causing Tony Luke's to fail to report all of its cash receipts and thus causing tax losses to the IRS. The tax fraud scheme ended almost a decade ago, in 2015.

II. Procedural History

A. Indictment, Guilty Plea, and Pre-Sentencing Briefing

On July 21, 2020, Nicholas Lucidonio and his father were charged in a 24-count indictment. The charges included the following: (i) one count of conspiracy to defraud the United States in violation of 18 U.S.C. §371; (ii) nineteen counts of aiding/abetting the filing of false tax returns in violation of 26 U.S.C. §7206(2); and (iii) four counts of tax evasion in violation of 26 U.S.C. §7201. On May 9, 2022, Nicholas Lucidonio pled guilty to the portion of Count One charging him with conspiracy to defraud the United States in violation of 18 U.S.C. §371 based on a payroll tax fraud scheme. The remaining counts were dismissed at sentencing.

Before sentencing, the Lucidonios and the Government disputed a number of issues relating to the calculation of criminal tax loss, restitution, and the applicability of a two-level sentencing enhancement pursuant to U.S.S.G. §2T1.9(b)(2). The parties submitted briefing, and the District Court resolved all outstanding legal issues in a Memorandum and Order dated October 24, 2023. See A00004-21.

Despite recognizing the “dearth of precedent applying §2T1.9(b)(2) to a payroll tax scheme,” the District Court held that a two-level sentencing enhancement under §2T1.9(b)(2) was applicable. A00018. Without applying this Court's three-step framework from United States v. Nasir, 17 F.4th 459 (3d Cir. 2021) (en banc), the District Court held that §2T1.9(b)(2) does not require “explicit proof that [a defendant] advised, verbally or in writing, that employees should not report their cash wages” to the IRS. A00016. Rather, the District Court found that the mere “creati[on] and administ[ration of] a cash payroll system that withholds less than federal law and requires and issues fraudulent W-2 forms to employees” supports application of the enhancement. A00016. The District Court further concluded that, even if §2T1.9(b)(2) did require “some affirmative statement” by Mr. Lucidonio, the Government met its burden of establishing that Mr. Lucidonio actively encouraged Tony Luke's employees to violate the tax laws, citing an unsubstantiated portion of a memorandum of interview of one of the informants. A00018.

B. Sentencing

Mr. Lucidonio proceeded to sentencing on January 25, 2024. The District Court calculated his total offense level under the U.S. Sentencing Guidelines as follows. The criminal tax loss was $1,321,043.31.² Mr. Lucidonio's base offense level, which was driven primarily by the amount of loss, was 20. The District Court increased Mr. Lucidonio's base offense level by two levels under §2T1.9(b)(2), making his adjusted offense level 22. The District Court further found that Mr. Lucidonio was entitled to a three-point reduction for acceptance of responsibility and timely notice thereof under §3E1.1, and a two-point reduction under the new “zero-point” offender Guideline (§4C1.1) that went into effect on November 1, 2023. The District Court therefore concluded that Mr. Lucidonio's total offense level was 17.³

With a Criminal History Category of I and a total offense level of 17, the District Court found that Nicholas Lucidonio was in Zone D of the Sentencing Table, and his advisory Guidelines range was 24 to 30 months of imprisonment. The District Court sentenced Mr. Lucidonio to 20 months of imprisonment. Nicholas Lucidonio renewed his objections to the District Court's pre-sentencing rulings after the imposition of sentence. See A00058-65.

SUMMARY OF THE ARGUMENT

For the two-level enhancement under U.S.S.G. §2T1.9(b)(2) to apply, the Government must establish that the defendant intended to encourage others to violate the internal revenue laws. Under the District Court's view, the enhancement applies whenever a defendant's conduct causes another individual to violate the tax laws. This adjustment, which could be applied under the District Court's view in most tax cases involving more than one participant, has been in the advisory Guidelines since their inception but was rarely applied until recently. The District Court's legal analysis of §2T1.9(b)(2) was wrong, and its application to Mr. Lucidonio's case was an abuse of discretion.

In this Circuit, a district court is required to analyze Guideline provisions under the three-step analysis set forth in Nasir, 17 F.4th 456, focusing on the text, structure, history, and purpose of the provision. Here, the District Court did not apply Nasir at all. As a result, the District Court's interpretation of §2T1.9(b)(2) is overbroad and is inconsistent with the plain text, history, and purpose of the provision. It is also at odds with the way in which the enhancement has been applied in the more than thirty years since its enactment.

Contrary to the District Court's interpretation, the §2T1.9(b)(2) enhancement was not intended to have any application in a run-of-the-mill payroll tax fraud case. Indeed, under the District Court's view, the enhancement would apply any time an employer pays an employee (or anyone else) in cash and does not report the cash wages to the IRS. But §2T1.9(b)(2) requires more. It only applies when the defendant's purpose in committing the crime is to encourage other individuals to independently violate the tax laws such as, for example, in tax return preparer and tax shelter promoter cases. In such a case, a two-level enhancement is appropriate because the defendant's conduct in encouraging others to violate the tax laws poses a greater threat to the revenue system above and beyond the underlying crime itself.

Section 2T1.9(b)(2) was not intended to reach Nicholas Lucidonio. The Government did not seek, and his sentence did not include, a role-in-the-offense adjustment. Nicholas Lucidonio did not actively counsel or instruct any employees not to report their cash wages. Nor did he undertake any other affirmative conduct to encourage anyone else to violate the tax laws. Rather, Mr. Lucidonio participated in a cash payroll scheme where his only purpose in doing so was to enable Tony Luke's to evade employment taxes that it otherwise would have owed to the IRS. Just because his conduct may have passively or indirectly led to other individuals violating the tax laws does not mean that he is subject to a sentencing enhancement punishing active conduct encouraging additional violations. Because the District Court failed to apply the correct legal standard, and because the facts in the record do not support application of the enhancement, this Court should remand the matter to the District Court for resentencing.

STANDARD OF REVIEW

In reviewing the application of a sentencing enhancement under the U.S. Sentencing Guidelines, this Court applies a mixed standard of review. The Court “review[s] the District Court's reading of the Sentencing Guidelines de novo, its factfinding for clear error, and its application of the sentencing enhancement for abuse of discretion.” United States v. Alowemer, 96 F.4th 386, 388 (3d Cir. 2024) (citing United States v. Blackmon, 557 F.3d 113, 118 (3d Cir. 2009)). An error of law, however, is a per se abuse of discretion. See United States v. Wise, 515 F.3d 207, 217 (3d Cir. 2008).

ARGUMENT

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

The Sentencing Guidelines must be applied according to their plain meaning, if unambiguous. Here, the plain meaning of Section 2T1.9(b)(2) is evident — the defendant must actively engage in conduct with an intent to encourage others to violate the tax laws.

A. Interpretation of U.S. Sentencing Guidelines

This Court has addressed the framework for interpreting the Sentencing Guidelines in several recent cases. See Nasir, 17 F.4th at 472; United States v. Adair, 38 F.4th 341, 350 (3d Cir. 2022); United States v. Banks, 55 F.4th 246 (3d Cir. 2022); United States v. Henderson, 64 F.4th 111 (3d Cir. 2023); United States v. Mercado, 81 F.4th 352 (3d Cir. 2023).

As explained in Adair, “Guidelines drafted by the Sentencing Commission are treated as legislative rules, and the Commission's comments interpreting the Guidelines are viewed as interpretative rules.” Adair, 38 F.4th at 347. As such, a court may not “reflexively defer” to the Sentencing Commission's commentary. Nasir, 17 F.4th at 472 (Bibas, J., concurring). A court must instead begin with the plain text of the Guidelines and “must exhaust all the 'traditional tools' of construction” before determining that a provision is 'genuinely ambiguous.'” Adair, 38 F.4th at 348 (citing Kisor v. Wilkie, 588 U.S. 558, 573 (2019)). In making this determination, a court must consider the “text, structure, history and purpose of a regulation, in all the ways it would if it had no agency to fall back on.” Id. (quoting Kisor, 588 U.S. at 575). In other words, a court is not to examine or defer to the agency's own reading of the Guidelines — as set forth in the Guidelines commentary — unless and until it has exhausted all efforts to apply the Guidelines according to their plain meaning. See Kisor, 588 U.S. at 575 (making clear that this exhaustion is necessary for deference under Auer v. Robbins, 519 U.S. 452 (1997)) (citing Chevron U.S.A. Inc. v. Nat. Res. Def. Council Inc., 467 U.S. 837, 843 n.9 (1984)).

Even if a court determines that a provision is genuinely ambiguous, it still “must make an 'independent inquiry' into the 'character and context' of the reasonable interpretations of the regulation, i.e., those within the 'zone of ambiguity.'” Adair, 38 F.4th at 348 (citing Kisor, 139 S. Ct. at 2415). That is, “[e]ven when a regulation is ambiguous, there are limits to deference.” Nasir, 17 F.4th at 471 (citing Kisor, 139 S. Ct. at 2415-16). “The agency's reading must be 'reasonable[,]' as informed by '[t]he text, structure, history, and so forth[,]' which 'establish the outer bounds of permissible interpretation.'” Id.⁴

This Court applied the Kisor rule in Nasir, Adair, Banks, and, most recently, in Mercado. In Nasir, the Court refused to allow the commentary to expand the definition of a “controlled substance offense” in §4B1.2 to include inchoate crimes. Nasir, 17 F.4th at 471-72. In Adair, the Court refused to allow the commentary to expand the meaning of the words “organizer” and “leader” in §3B1.1(a). Adair, 38 F.4th at 354. In Banks, the Court refused to allow the commentary to expand the definition of “loss” in §2B1.1 to include “intended” (as opposed to actual) loss. Banks, 55 F.4th at 258. In Henderson, the Court refused to allow the commentary to expand the definition of a “crime of violence” in §4B1.2 to include conspiracies. Henderson, 64 F.4th at 119-20. However, in Mercado, the Court afforded Auer deference to the commentary after determining that the acceptance of responsibility Guideline (§3E1.1(a)) was genuinely ambiguous as to whether it applies to conduct after a plea was entered. Mercado, 81 F.4th at 359-61.

B. The District Court Erred in Finding that Section 2T1.9(b)(2) Does Not Require Any Active Encouragement or Counseling of Others to Violate the Tax Laws.

According to the District Court, the §2T1.9(b)(2) enhancement can be applied in any tax fraud conspiracy case where there is “a cash payroll system that withholds less than federal law and requires and issues fraudulent W-2 forms to employees[.]” A00016. In other words, the enhancement is applicable in any case where a defendant's conduct at least indirectly “abets” or “supports” someone else's violation of the tax laws; the Government need not prove that a defendant actively encouraged or counseled anyone else to independently violate the tax laws. A00016. The District Court's view is incorrect and improperly expands the reach of §2T1.9(b)(2) to garden-variety payroll tax fraud cases.

i. The Plain Text of §2T1.9(b)(2) Controls and it Unambiguously Requires More Than Passive Encouragement.

Section 2T1.9(b)(2) provides a two-level upward adjustment to a defendant's base offense level:

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[.]⁵

The Court must begin its analysis with the plain text of §2T1.9(b)(2). Adair, 38 F.4th at 348. Because the words “intend” and “encourage” are not terms of art, those words “take on their 'ordinary, contemporary, common meaning.'” Adair, 38 F.4th at 350 (citations omitted). The common meaning of “intend” is “to have as a plan or purpose.” Cambridge Dictionary, https://dictionary.cambridge.org/us/dictionary/english/intend; see also Black's Law Dictionary (11th ed. 2019) (defining “intend” as “[t]o have in mind a fixed purpose to reach a desired objective; to have as one's purpose”). The word “encourage” commonly means “[t]o instigate,” “to incite to action,” “to embolden,” or “to help.” Black's Law Dictionary (11th ed. 2019); see also Cambridge Dictionary, https://dictionary.cambridge.org/us/dictionary/english/encourage (defining “encourage” as “to help someone to feel confident and able to do something, or to give advice to someone to do something”).

Putting those definitions together, this Court should find that §2T1.9(b)(2) contains an intent element that requires direct (as opposed to indirect) encouragement or incitement for others to violate the tax laws. That is, the Court should conclude that the enhancement is only applicable where the Government can establish that the defendant undertook the “conduct” at issue with a “plan or purpose” in mind to “instigate” or “incite” someone not involved in the underlying conspiracy to violate the tax laws.

The District Court's contrary reading conflicts with the plain text of §2T1.9(b)(2). The District Court focused on the term “conduct” and stated that it “can include but is hardly limited to speech.” A00016. This misconstrues the plain language of the Guideline — that intent to encourage others to violate the tax laws must motivate the conduct. The District Court's interpretation may have been correct if §2T1.9(b)(2) applied any time a defendant's “conduct encouraged” others to violate the tax laws. But that is not what §2T1.9(b)(2) says. Section 2T1.9(b)(2) provides an enhancement only when a defendant's conduct was “intended to encourage” other violations of the tax laws. Because the District Court's reading of §2T1.9(b)(2) would render the word “intended” superfluous — and because it would conflate the intent to commit the underlying crime with the separate intent required under §2T1.9(b)(2) — that “kind of superfluity, in and of itself, refutes [the District Court's] reading.” Pulsifer v. United States, 144 S. Ct. 718, 731 (2024).

The District Court's interpretation also raises concerns similar to those that led the Supreme Court to exercise “interpretive restraint” in recent cases addressing the scope of potentially expansive statutory provisions. See Marinello v. United States, 584 U.S. 1 (2018), and Dubin v. United States, 599 U.S. 110 (2023). Using Marinello in particular, the Supreme Court was asked to construe the omnibus clause of 26 U.S.C. §7212, which prohibits obstructing the due administration of the tax laws. The Court noted that the literal reading of the statute was “neutral” and the words “obstruct or impede” were broad. The Court stated that the words suggested that a particular person or thing and held that the language and the context of the statute confirmed that the obstruction was limited to targeted acts of administration. Id. at 6-7. The Court held that the Government had not cited any case supporting an interpretation that would create overlap and redundancy as suggested and held that the Government had to demonstrate a nexus to a pending proceeding when the alleged obstructive conduct occurred. Id. at 13. The Supreme Court thus rejected an overbroad reading of the omnibus clause of §7212(a) that would have meant that “pay[ing] [a] babysitter $41 per week in cash without withholding taxes” counts as obstruction of the “due administration” of the tax code. See id. at 10. Under the District Court's view, this same type of conduct would support a §2T1.9(b)(2) enhancement.

Similarly, in Dubin, the Supreme Court rejected an overbroad reading of 18 U.S.C. §1028A, which establishes a two-year mandatory minimum sentence of imprisonment for anyone who “uses” another person's means of identification “in relation to” a predicate offense. Dubin, 599 U.S. at 129-31 (rejecting the “vast sweep” of the Government's reading which would have meant that “everyday overbilling cases” involving, for example, “the hour-inflating lawyer, the steak-switching waiter, [and] the building contractor who tacks an extra $10 onto the price of the paint he purchased” would fall within the scope of the statute).

Just like paying a babysitter in cash does not automatically mean one intends to obstruct the due administration of the tax laws, paying employees in cash does not automatically mean that the employer intends to encourage those employees to violate the tax laws within the scope of §2T1.9(b)(2). It cannot be that the Sentencing Commission intended a two-level enhancement to apply in every run-of-the-mill tax fraud case simply because a defendant's conduct may have contributed in some way to someone else's violation.

In short, the plain text of §2T1.9(b)(2) provides that the enhancement only applies in cases where a defendant actively counseled someone else to violate the tax laws. The District Court erred in holding otherwise. The Court should, therefore, reverse and remand for resentencing.

ii. Even if Ambiguous, the History and Application of §2T1.9(b)(2) Support Mr. Lucidonio's Interpretation.

Since §2T1.9(b)(2) is unambiguous, there is no need nor basis to consult the commentary. If this Court were to find a genuine ambiguity in the Guideline, the commentary confirms that U.S.S.G. §2T1.9(b)(2) was intended to address more than incidental action.

The relevant application note makes clear that the enhancement is not intended to cover run-of-the-mill payroll fraud cases. Rather, the provision is intended to cover cases of active encouragement that are particularly dangerous to the revenue system as a whole, such as cases involving tax protestors and fraudulent tax shelters or schemes:

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).

U.S.S.G. §2T1.9, application note 4.

To be sure, the commentary does not provide an exhaustive list of examples. See A00017. But the type of examples the Commission selected provide some insight into its thinking. The Commission was not concerned with ordinary tax fraud schemes, but rather with widespread schemes, like tax protest groups and fraudulent tax shelters, that pose a unique threat to the revenue system as a whole. That is why the “background” note to §2T1.9(b)(2) explains that “[a]dditional 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.” U.S.S.G. §2T1.9 (background note).

The District Court read the commentary in too broad a fashion. Instead of focusing on application note 4, the District Court referenced a different note and the commentary background to conclude that application note 4 applies to schemes involving the employees at issue because the conduct spanned a substantial amount of time. A00017. But the tax loss portion of the Guideline deals with the amount of loss to the IRS and there is no indication that this adjustment was intended to reach a steak shop's cash payroll scheme. Such a scheme does not provide a unique threat to the revenue system.

Moreover, this Court has counseled that the text, structure, and history of the Guideline should be considered in connection with the commentary. Adair, 38 F.4th at 348. Beginning with the legislative history, the predecessor and draft guidelines circulated before 1987 had similar and significant limiting language. In the September 1986 draft of the Guidelines, the “Aiding, Assisting, Procuring, Counseling or Advising Tax Fraud” Guideline (labeled § C214 at the time) had a specific offense characteristic that provided: “If the offender was in the business of preparing or assisting in the preparation of tax returns or the provision of documentation for the substantiation of tax returns, or if the conduct was in furtherance of an organized movement to encourage others to violate the internal revenue laws, add 6.”

In the subsequent January 1987 draft, a similar specific offense characteristic was added to each of the proposed tax Guidelines, including Tax Evasion (§ T211), Willful Failure to File a Return (§ T212), Fraud and False Statements (§ T213), and Aiding, Assisting, Procuring, Counseling, or Advising Tax Fraud (§ T214). The same provision was in each Guideline and read: “If the offense was committed in furtherance of or in conjunction with a movement to violate the internal revenue laws, increase by 2 to 4 levels, depending upon the nature of the conduct and its potential to subvert the tax system.”

The common thread throughout the draft versions of §2T1.9(b)(2) and the provision that ultimately went into effect is that the Commission intended the enhancement to apply only in those cases that have a particularly high risk of subverting the tax system, such as with tax protestor schemes or schemes where returns were filed with “no support in the tax laws.” See, e.g., Proposed Sentencing Guidelines for United States Courts, 52 FR 3920-01, 3967, 1987 WL 249222 (noting that “aiding or encouraging others to evade taxes . . . significantly increases the risk of revenue loss, particularly when an organized movement is involved, and therefore has been expressly included as an aggravating factor” in § T211); id. (noting that “[a] more severe punishment” is specified in § T212 for “tax protestors” because “their misconduct poses a greater risk of revenue loss and is more clearly willful”). Thus, the legislative history confirms that the §2T1.9(b)(2) enhancement should not be applied in a routine payroll fraud case.

The legislative history is consistent with the way in which the §2T1.9(b)(2) enhancement has been applied in the more than thirty years since its enactment on November 1, 1987. Historically, the enhancement has been applied sparingly and only sought in cases where a defendant overtly advised others (other than co-conspirators) to engage in tax avoidance behavior. See, e.g., United States v. Rabin, 986 F. Supp. 887, 890-91 (D.N.J. 1997) (defendant encouraged his girlfriend to violate tax laws by using her, with her knowledge, to deposit unreported cash proceeds he earned from his soda delivery business into her bank account and by using his attorney to draft a secret agreement with respect to the unreported income); United States v. Macchia, 104 F.3d 350 (2d Cir. 1996) (defendant encouraged others to prepare false invoices such that defendant and co-conspirators could evade millions of dollars in gasoline excise taxes); United States v. Garrett, 1994 WL 280048 (N.D. Ill.) (return preparer aided and counseled at least 11 other persons in committing income tax fraud).⁶

Indeed, until recently, the Government had not sought to apply the adjustment in payroll cases.⁷ This Court has not previously addressed the applicability of §2T1.9(b)(2) to a payroll tax fraud case. Counsel is only aware of two other cases in which courts have applied the enhancement in such a case. See United States v. Zourdos, Case No. 20-cr-298 (N.D.N.Y.); United States v. Chugay, No. 22-12984, 2024 WL 1526115 (11th Cir. Apr. 9, 2024) (unreported). Both of these cases are distinguishable. In Zourdos, unlike in this case, there was evidence that the owners of the business explicitly counseled employees not to report all of their wages to the IRS. And in Chugay, the defendant actively counseled employees by ensuring them that they would not face penalties if they did not pay their taxes. Both Zourdos and Chugay are consistent with the legislative history and the way in which §2T1.9(b)(2) has historically been applied, i.e. only in cases involving active incitement of others.

iii. The Enhancement Should Not Be Applied When the Other Individuals Involved Were Participants

Even if this Court were to determine that the language of the Guideline and associated commentary warranted application of Section 2T1.9(b)(2) to payroll tax schemes like this one, the two-level enhancement still does not apply in Mr. Lucidonio's case. Application note 4 to §2T1.9(b)(2) provides that the conduct must encourage persons “other than participants directly involved in the offense, to violate the tax laws.” Assuming arguendo that there was encouragement within the scope of the Guideline provision, the encouragement was to the employees who received the cash and did not report it on their returns. The employees were thus directly involved in the offense, and the two-level enhancement should not apply.

The Government's argument below was that the employees were involved but not “directly” involved. This argument should be summarily rejected because it was the taxes of the employees that were at the heart of the alleged scheme and if the District Court opinion is to be credited, the payroll scheme could not have succeeded without the employees' participation. Indeed, “participant” is a defined term under U.S.S.G. §3B1.1 and includes individuals who are “criminally responsible” even if not charged.⁸ U.S.S.G. §3B1.1 n.1. This Court has stated that participants do “not have to be guilty [of the charged offense] in connection with [the defendant's] scheme so long as their own criminal conduct made it possible.” United States v. Belletiere, 971 F.2d 961, 970 (3d Cir. 1992) (quoting United States v. Manthei, 913 F.2d 1130, 1136 (5th Cir. 1990)). Under this alternative framework, the employees were clearly participants and were directly involved. For this reason, the adjustment was improperly applied.⁹

iv. The Rule of Lenity Favors Mr. Lucidonio's Interpretation.

The Court should reject the District Court's interpretation of §2T1.9(b)(2) for another reason: to the extent that §2T1.9(b)(2) is ambiguous, it should be construed in Mr. Lucidonio's favor.

This Court has previously recognized the applicability of the rule of lenity to Guidelines interpretation. See United States v. Lewis, 58 F.4th 764, 770 (3d Cir. 2023) (the rule of lenity applies to interpreting a Guidelines provision where “after considering [the] text, structure, history, and purpose” of the provision, “there remains a grievous ambiguity or uncertainty” about its meaning) (citing United States v. Flemming, 617 F.3d 252, 269-70 (3d Cir. 2010)). It has also recognized the important role that the rule of lenity plays in safeguarding liberty. See Nasir, 17 F.4th at 474 (noting that the rule of lenity is “[a] key tool in th[e] judicial toolkit,” which, inter alia, “serves our nation's strong preference for liberty”) (Bibas, J., concurring).

This case is precisely one in which the rule of lenity should apply. At the very least, it is less than clear that the Sentencing Commission intended the §2T1.9(b)(2) enhancement to apply in ordinary payroll cases where there is no evidence of any affirmative conduct undertaken by a defendant to actively encourage others to independently violate the tax laws. Indeed, it had been understood for almost thirty years that §2T1.9(b)(2) did not apply under such circumstances. To the extent that there is any ambiguity, that uncertainty should be resolved in Mr. Lucidonio's favor.

* * *

Section 2T1.9(b)(2) is applicable only where there is evidence that a defendant engaged in some affirmative conduct with the express purpose of encouraging someone not involved in the underlying conspiracy to violate the tax laws, such as with tax shelter promoters or “tax protestors.” The District Court erred in arriving at a different — and essentially boundless — legal interpretation. Remand is therefore appropriate.

II. The District Court Abused its Discretion in Applying the §2T1.9(b)(2) Enhancement.

Even if the District Court correctly interpreted §2T1.9(b)(2), it erred in applying the enhancement based on the record before it. The District Court relied on the following facts in support of its decision to apply the enhancement:

• Tony Luke's employed a cash payroll system;

• Employees were provided with Forms W-2 that did not include the unreported cash; and

• The confidential informants who launched this case told law enforcement agents that they “were instructed by Nicholas Lucidonio that they should explain to employees that they (the employees) were earning more money and not paying taxes by being paid in this manner [i.e. partially under the table].”

A00016-18.

The evidence cited by the District Court does nothing more than describe the underlying crime to which Nicholas Lucidonio pled guilty. Paying employees partially under the table and providing them with inaccurate Forms W-2 is part and parcel of the payroll scheme. If the Forms W-2 reported all of the under-the-table wages, there would have been no payroll fraud case in the first place. But just because the employees were given inaccurate Forms W-2 does not mean that they were precluded from reporting the additional cash they earned on their tax returns. Indeed, they were obligated to do so. The fact that employees received inaccurate Forms W-2 is only evidence of an intention to evade the payroll taxes that Tony Luke's owed to the IRS. It does not establish an intention to encourage the employees to independently violate the tax laws.

Moreover, the informants each received immunity, see A00080, and while the quoted portion of a memorandum of interview stated that they were instructed to inform the employees, there is no testimony that they actually did so. Indeed, the Government conducted an exhaustive investigation where many of the employees were interviewed and testified before the grand jury. No one ever testified that anyone, whether Anthony, Sr., Nicholas Lucidonio or the informants, ever discussed what they should or should not report on their tax returns. See A00066-273.

While hearsay may be relied upon at sentencing, it must be reliable. United States v. Robinson, 482 F.3d 244, 246 (3d Cir. 2007). In United States v. Brothers, 75 F.3d 845, 848 (3d Cir. 1996), this Court noted that the hearsay must have sufficient indicia of reliability where there is other evidence to support the statement. The District Court was presented with the grand jury and other testimony of employees that contradicted the statement allegedly made by the informant. When not a single employee supported the interview statement of the informant, the District Court erred in its reliance. See United States v. Korus, 795 F. Appx. 863, 866 (3d Cir. 2019) (hearsay admissible at sentencing only if “it has sufficient indicia of reliability”); Robinson, 482 F.3d at 246 (“Prosecutors, of course, may not introduce any and all hearsay testimony at a sentencing proceeding. The admission of hearsay statements in the sentencing context is subject to the requirements of the Due Process Clause.”); see also United States v. Rivera-Luis, 43 F.4th 172, 181-186 (1st Cir. 2022) (holding that administrative complaints constituted unreliable hearsay and error was not harmless).

At most, the Government's evidence established that an “ancillary” effect of Mr. Lucidonio's conduct was that Tony Luke's employees may not have reported all of their wages to the IRS. Dubin, 599 U.S. at 132. But that is not the type of conduct that Section 2T1.9(b)(2) was intended to cover. The District Court erred in its interpretation and application of 2T1.9(b)(2), and as such, abused its discretion.

CONCLUSION

For the foregoing reasons, this Court should reverse and remand this matter to the District Court for resentencing with instructions not to apply the two-level enhancement in U.S.S.G. §2T1.9(b)(2).

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

Attorneys for Appellant Nicholas Lucidonio

Dated: May 22, 2024