U.S. v. Martinez-Rios

• Decision Date: 04 May 1998
• Docket Number: MARTINEZ-RIO,S
• Citation: 143 F.3d 662
• Parties: -2083 UNITED STATES of America, Appellee, v. Angel L.r., Abraham Garcia, and Richard Danziger, Defendants-Appellants. Dockets 97-1021, 97-1039, 97-1085.
• Court: U.S. Court of Appeals — Second Circuit

Page 662

143 F.3d 662

81 A.F.T.R.2d 98-2083

UNITED STATES of America, Appellee, v. Angel L. MARTINEZ-RIOS, Sr., Abraham Garcia, and Richard Danziger, Defendants-Appellants.

Dockets 97-1021, 97-1039, 97-1085.

United States Court of Appeals Second Circuit.

Argued Dec. 1, 1997.

Decided May 4, 1998.

Myron Kirschbaum, New York City (Paul J. Curran, Jane W. Parver, Michael A. Rogoff, Kaye, Scholer, Fierman, Hays & Handler, on the brief), for appellant Martinez-Rios, Sr.

Joshua L. Dratel, New York City, for appellant Garcia.

Stuart E. Abrams, New York City (David S. Hammer, Frankel & Abrams, New York City, on the brief), for appellant Danziger.

Frank P. Cihlar, Washington, DC (Loretta C. Argrett, Asst. Atty. Gen., Robert E. Lindsay, Alan Hechtkopf, Dep't of Justice, Washington, DC; Zachary W. Carter, U.S. Atty., Brooklyn, NY, on the brief), for appellee.

Before: WINTER, Chief Judge, NEWMAN and WALLACE, ^* Circuit Judges.

JON O. NEWMAN, Circuit Judge:

This appeal principally concerns the proper computation, for sentencing purposes, of the tax loss for which each of the participants in a sophisticated criminal tax evasion conspiracy may be held accountable. This appeal also presents the often encountered but seldom discussed issue of how a reviewing court should proceed when it determines that a provision in a plea agreement waiving a defendant's right of appeal is unenforceable. Angel L. Martinez-Rios, Sr. ("Martinez"), Abraham Garcia, and Richard Danziger appeal from judgments entered on January 8 and February 11, 1997, by the District Court for the Eastern District of New York (Charles P. Sifton, Chief Judge), convicting them, upon their guilty pleas, of conspiracy to evade income taxes and sentencing them to various terms of imprisonment. Appellants dispute numerous aspects of the District Court's approach in computing the tax losses caused by the scheme. The Government maintains that the District Court calculated the tax losses correctly, and that Garcia and Danziger waived their right to appeal when they pleaded guilty.

We conclude that the waiver provisions in the plea agreements of Danziger and Garcia are unenforceable, and that we should regard those provisions as severable and therefore consider the merits of their appeals. On the merits, because we disagree with certain aspects of the District Court's methodology for calculating tax losses, we vacate the sentences of all three defendants and remand for resentencing.

Background

I. Defendants' Tax Evasion Scheme

At all relevant times, appellant Martinez was the president and sole shareholder of Brooklyn-based A & L Pen Manufacturing Company ("A & L Pen"). In 1985, Martinez incorporated 20th Century Promotion ("20th Century"), which was to serve as A & L Pen's alter ego. Appellant Danziger was the president, and appellant Garcia was the vice- president, of Roburn International ("Roburn"), a pen manufacturing company based in New Jersey. Danziger and Garcia were equal shareholders in Roburn. Between 1987 and 1992, all three appellants implemented a sophisticated tax evasion scheme.

To conceal income from pen sales, Martinez regularly instructed his customers to pay sums due to A & L Pen by checks made out to a fictitious individual named "Juan Rosario," to his girlfriend, to his sister, or to "Marc Write," a company that had performed contract labor for A & L Pen prior to Marc Write's dissolution in 1989. With the help of an individual named Carlos Cruz-Brandenberger ("Cruz"), an officer at First Federal Savings Bank in Santurce, Puerto Rico, Martinez set up two accounts at the bank in the name of the fictitious Juan Rosario, and deposited the Juan Rosario and Marc Write checks in those accounts. In most cases, Cruz would either return the funds to Martinez, or would use the funds to purchase certificates of deposit for Martinez.

Martinez permitted Danziger and Garcia to use the Puerto Rican accounts to facilitate the concealment of income from sales of Roburn pens. Danziger and Garcia periodically instructed their customers to pay sums due to Roburn by checks made out to Juan Rosario, 20th Century, or Marc Write, and many of those checks were deposited in the Juan Rosario accounts. In most cases, these funds were either returned by cashier's check to Martinez, Danziger, or Garcia, or used to purchase certificates of deposit. On some occasions, Danziger and Garcia also deposited checks payable to Roburn in the Juan Rosario accounts, without reporting the amounts of the checks as income.

To generate bogus deductions, Martinez periodically wrote checks drawn on A & L Pen and 20th Century accounts to Juan Rosario, to Marc Write, and to cash, for fictitious business and labor expenses. These checks were sometimes cashed by Martinez's sister and sometimes deposited in the Juan Rosario accounts. Danziger and Garcia generated similarly improper deductions for Roburn by issuing checks for fictitious business expenses to Juan Rosario and 20th Century. Martinez would deposit the checks in Puerto Rico or negotiate them in New York, and would then return the funds to Danziger and Garcia. 20th Century generally reported the sums received as income, but ultimately never paid income taxes because it claimed various improper deductions that entirely offset its income.

Martinez also organized an off-the-books pen assembly business utilizing home labor, and used some of the cash diverted to the Juan Rosario accounts to pay the home workers. After consulting with Martinez, Garcia set up a similar operation for the assembly of Roburn pens. Periodically, Garcia would furnish Danziger with a list of amounts owed to the Roburn home workers, together with a Juan Rosario or 20th Century invoice obtained from Martinez. Danziger would pay the invoice with a Roburn check and would claim the payment as a deduction for Roburn. As noted above, checks issued by Roburn to 20th Century were reported as income by 20th Century. In addition, Martinez gave Garcia $2,000 to $3,000 per week in cash (which Martinez withdrew from the Juan Rosario accounts) for payments to the Roburn home workers.

Prior to the dissolution of Marc Write, Martinez entered into a kickback arrangement with the company's owner, Moses Geffen, to generate additional phony deductions for Martinez's corporations. Martinez would instruct Marc Write to bill A & L Pen and 20th Century for twice the sum actually owed on each invoice. Geffen would return the overcharges to Martinez, but Martinez would claim the full amount of the overcharge as a business expense deduction on his corporations' returns. Martinez entered into a similar arrangement with an individual named Tomas Rivera, another independent contractor for A & L Pen. Danziger and Garcia organized a substantially similar overcharge and kickback scheme with a Roburn supplier known as Davro. Davro would refund the overcharges to Danziger and Garcia by sending checks payable to 20th Century.

On numerous occasions between 1987 and 1991, Danziger and Garcia also concealed income earned from sales to A & L Pen of inventory of Roburn pen parts. Martinez would pay for the inventory with funds from the Juan Rosario accounts or from the certificates of deposit, and Danziger and Garcia did not report these sums as income. In addition, Danziger and Garcia occasionally instructed their customers to issue checks to false payees for sums owed to Roburn. Danziger and Garcia cashed these checks without reporting them as income.

II. District Court Proceedings

Martinez, Garcia, and Danziger each pled guilty to one count of conspiracy to commit income tax fraud. See 18 U.S.C. § 371 (1994); 26 U.S.C. § 7201 (1994). ¹ Because the Sentencing Guidelines correlate a tax evader's sentence to the amount of the tax loss, see U.S.S.G. §§ 2T1.1(a), 2T4.1 (1991), the District Court was obliged to determine the tax loss for which each defendant was responsible. Though the precise amounts of tax loss are appropriately determined in civil proceedings, the Guidelines require a sentencing court to determine which of 19 ranges of tax loss apply to a defendant (21 ranges in the current version).

In determining the appropriate range, the District Court used a five-step process. First, the Court calculated gross unreported income for each corporation, and derived net unreported income by subtracting legitimate amounts, supported by evidence at the sentencing hearing, for which deductions could have been claimed against the unreported income. Second, the Court calculated the unpaid corporate tax for each corporation as 34 percent of the net unreported income, and then held each corporation's owner or owners responsible for a portion of the unpaid corporate tax, allocating the tax loss according to each shareholder's percent of stock ownership. Third, the Court added personal income tax losses, which it calculated as (i) 28 percent of any unreported interest income from certificates of deposit, plus (ii) 28 percent of any corporate income which could be attributed to each defendant as a constructive dividend. Fourth, if the defendant's corporation was permitted to deduct payments to home workers as labor expenses, the Court increased the tax loss to reflect unpaid social security taxes. Finally, the Court increased the tax loss figure for each defendant by the amount of his co-conspirators' tax losses, to the extent that those losses could be deemed "relevant conduct" of the defendant under the Sentencing Guidelines.

The District Court attributed to Martinez a total tax loss of $1,525,513.87, resulting in a base offense level of 18. The Court held Martinez accountable for most of his co-conspirators' tax losses, finding that Martinez was a direct participant in the tax evasion committed by Garcia and Danziger. Martinez received a three-level enhancement based on his role in the offense, for a total offense level of 21. Martinez received a 37-month term of imprisonment, which was, as the...