U.S. v. Lewis

• Citation: 93 F.3d 1075
• Decision Date: 28 August 1996
• Docket Number: D,No. 1514,1514
• Parties: -6361, 96-2 USTC P 50,452 UNITED STATES of America, Appellant, v. Ephraim LEWIS, Defendant-Appellee. ocket 95-1681.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

Page 1075

93 F.3d 1075

78 A.F.T.R.2d 96-6361, 96-2 USTC P 50,452

UNITED STATES of America, Appellant, v. Ephraim LEWIS, Defendant-Appellee.

No. 1514, Docket 95-1681.

United States Court of Appeals,

Second Circuit.

Argued May 8, 1996.

Decided Aug. 28, 1996.

Lewis J. Liman, Assistant United States Attorney, New York City (Mary Jo White, United States Attorney, Alexandra Rebay, Assistant United States Attorney, Southern District of New York, New York City, of counsel), for Appellant.

Robert G. Morvillo, New York City (Monique Lapointe, Morvillo, Abramowitz, Grand, Iason & Silberberg, P.C., New York City, of counsel), for Defendant-Appellee.

Before CARDAMONE, ALTIMARI, and PARKER, Circuit Judges.

CARDAMONE, Circuit Judge:

This appeal by the United States in a criminal sentencing case asks us to determine whether "sophisticated means" were used to impede discovery of a tax-evasion scheme. See United States Sentencing Guidelines § 2T1.1(b)(2). This is our first occasion to interpret this provision of the Guidelines.

Courts are frequently asked to interpret broad phrases that defy precise definition. Such phrases are often expressed at a high level of generality, and a "mechanical jurisprudence" will not help define them. "Sophisticated means" is one such open-ended phrase. We are not charged with ascertaining an abstract formulation for it that would allow sentencing cases "[to] be worked out like mathematics from some general axioms." Oliver Wendell Holmes, The Path of the Law, in The Mind and Faith of Justice Holmes 71, 79 (Max Lerner ed., 1943). Rather, we need only determine how the words of the Guidelines are to be applied to the facts of a given case. In this inquiry we are guided by the language to be construed, commentary from its author, cases interpreting the language, and an understanding of the interests that the words are designed to further. Because we conclude that the tax-evasion scheme here involved the use of sophisticated means, we vacate the sentence imposed by the district court and remand the case for resentencing.

BACKGROUND

A. Underlying Facts

Defendant Ephraim Lewis is a former editor of a business magazine and a resident of New York City. Between 1982 and 1993 he employed Abrams Associates, an accounting firm, to prepare his tax returns. Abrams Associates was owned at different times by three coconspirators not charged in Lewis' criminal proceeding. According to an information filed by the government, Lewis and these others conspired to defraud the United States and to evade a substantial part of the income tax defendant owed.

The underlying facts concerning the conspiracy are not disputed. Abrams Associates instructed Lewis to draw checks on his personal bank accounts payable to various individuals and entities, including "YMCA," "Gods Church," "Ken Ferstig," "Ron Consulting," and "Don Shirley," all of which were fictitious. Abrams Associates deposited these checks (Escrow Checks) into bank accounts (Satellite Accounts) opened in the names of the sham entities. The existence of the Satellite Accounts created the false impression that Lewis' payments were made to actual businesses and charities.

Next, Abrams Associates transferred the funds from the Satellite Accounts into a second set of bank accounts (Operational Accounts). Ninety percent of the money in the Operational Accounts was used to pay defendant's creditors including Citibank, American Express, and Saks Fifth Avenue, to make personal investments on his behalf, and to pay his living expenses, e.g., mortgage payments and utility bills. Abrams Associates retained 10 percent of the funds in the Operational Accounts as its fee for facilitating defendant's tax evasion.

Despite the fact that defendant made no actual payments to any businesses that would entitle him to claim a tax deduction and did not make the alleged contributions to charity, he nonetheless claimed $130,000 in deductions between 1984 and 1991. He also wrote Escrow Checks totalling $7,000 in 1992, which were not claimed as deductions only

because the Internal Revenue Service (IRS) discovered the conspiracy before Lewis filed his 1992 tax return. During this eight-year conspiracy, Lewis wrote 178 checks to 26 different fictitious businesses and charities, and he evaded $36,400 in federal personal income taxes. Lewis was not the only individual to profit from this fraudulent arrangement; over a score of others have also been indicted for tax-evasion offenses arising out of this conspiracy, all but five of whom have pled guilty.

B. Proceedings Below

Defendant entered into a written plea agreement on January 18, 1995, in which the government agreed to accept a guilty plea to both counts in the information. Count One charged defendant with participating in a conspiracy to defraud the United States in violation of 18 U.S.C. § 371. Count Two charged that defendant willfully attempted to evade income taxes imposed pursuant to the Internal Revenue Code in violation of 26 U.S.C. § 7201 and 18 U.S.C. § 2.

Both parties agreed to apply the 1992 United States Sentencing Guidelines, see United States Sentencing Commission, Guidelines Manual (Nov.1992) (U.S.S.G. or Guidelines)--and references to Guidelines provisions hereafter are to the 1992 version, unless another date is specifically indicated--in calculating defendant's sentence, thereby avoiding any ex post facto problems and offering leniency to defendant. The plea agreement provided that Lewis' base offense level should be 10 (although the parties disputed whether the $7,000 that Lewis planned to deduct in 1992 should be included in this calculation). It was further agreed that defendant's offense level should be reduced by two levels to recognize his acceptance of responsibility. See U.S.S.G. § 3E1.1(a). Lewis' criminal history category was I, as he had not previously been convicted of a crime. The plea agreement specifically provided that the parties entered into no stipulation concerning the question of whether U.S.S.G. § 2T1.1(b)(2) applied. This specific offense characteristic states that "[i]f sophisticated means were used to impede discovery of the nature or extent of the offense," the sentencing court should increase the defendant's offense level by two levels.

Lewis pled guilty in the United States District Court for the Southern District of New York (Scheindlin, J.) on April 6, 1995. The Probation Department adopted all the stipulations in the plea agreement and determined that the tax loss caused by defendant included the $7,000 in checks written in 1992. It also recommended that § 2T1.1 be applied, observing that the use of fictitious entities made the Abrams tax-evasion plan similar to the use of corporate shells discussed in an application note to § 2T1.1. When the defendant objected to this recommendation, the trial court held a hearing on the enhancement's applicability.

It found that the government did not prove by a preponderance of the evidence that this enhancement should be applied. United States v. Lewis, 907 F.Supp. 683, 688 (S.D.N.Y.1995). Noting the difficulty of deciding whether a specific course of conduct can be described as sophisticated, the district court deemed the question "subjective" and "essentially a question of fact." Id. at 685. It described a "continuum of increasing sophistication," starting with the failure to report cash income and ending with the creation of phony foreign tax credits, id. at 685-86, and explained that its task was to "draw the line between a scheme that uses 'sophisticated means' and one that does not." Id. at 686.

The trial court considered the two examples of sophisticated means provided in the Guidelines commentary--offshore bank accounts and corporate shells--and found both examples involve shielding the taxpayer's identity. Identity concealment, it concluded, was an especially important factor in determining whether sophisticated means were employed. Id. at 686-88. Based on this analysis, the district court reasoned that the instant case involved nothing more than " 'an individual taxpayer complet[ing] his individual 1040 form with false information to avoid paying some of his federal taxes.' " Id. at 688 (quoting United States v. Jagim, 978 F.2d 1032, 1042 (8th Cir.1992), cert. denied sub nom. Ziebarth v. United States, 508 U.S. 952, 113 S.Ct. 2447, 124 L.Ed.2d 664 The trial court specifically rejected two other government contentions. With respect to the duration and scale of the conspiracy, it determined that repetitive conduct alone does not show the use of sophisticated means. And, it ruled even if Abrams Associates used sophisticated means, Lewis was not involved in its overall plans but only in a single unsophisticated scheme. Id. at 688. On reconsideration, the sentencing court affirmed its decision, reasoning that even if the scheme was sophisticated, defendant did not initiate or create the scheme, and he did not take it to the extremity that the accounting firm did. Its analysis concerning the defendant's relative role in the overall tax avoidance plan relied on the rationale in a connected case it cited, United States v. Richman, 95 Cr. 292 (S.D.N.Y.1995) (Leisure, J.). ¹ The district court also commented that if it were to apply the sophisticated means adjustment, a minor role adjustment (pursuant to U.S.S.G. § 3B1.2) would then be appropriate because Lewis' role was minor in comparison to the role of Abrams Associates.

(1993)). Further, it ruled that although fictitious entities were used, no shell corporations actually existed, and that Lewis did not attempt to conceal his identity. Hence, the scheme was unsophisticated. Id.

Lewis was thereupon sentenced to a term of three years of probation and 300 hours of community service, and ordered to pay all back taxes, interest and penalties, a $2000 fine, and a special assessment of $100. From this judgment, the United States appeals.

DISCUSSION

I Standard of Review

We must...