US v. Lewis, 95 CR 300 (SAS).

• Citation: 907 F. Supp. 683
• Decision Date: 16 October 1995
• Docket Number: No. 95 CR 300 (SAS).,95 CR 300 (SAS).
• Parties: UNITED STATES of America v. Ephraim LEWIS, Defendant.
• Court: U.S. District Court — Southern District of New York

907 F. Supp. 683

UNITED STATES of America v. Ephraim LEWIS, Defendant.

No. 95 CR 300 (SAS).

United States District Court, S.D. New York.

October 16, 1995.

Mary Jo White, United States Attorney, Southern District of New York by Lewis J. Liman, Peter K. Vigeland, Assistant United States Attorneys, New York City, for United States of America.

Robert G. Morvillo, Morvillo, Abramowitz, Grand, Iason & Silberberg, P.C., New York City, for defendant Ephraim Lewis.

OPINION

SCHEINDLIN, District Judge.

Defendant Ephraim Lewis has pled guilty to tax evasion and to conspiracy to defraud the IRS and to evade taxes. In its Presentence Report, the Probation Department has recommended that the Court increase the defendant's offense level by two points for the use of sophisticated means pursuant to U.S.S.G. § 2T1.1(b)(2).¹ The defendant opposes this recommendation. The Government has the burden of establishing, by a preponderance of the evidence, that the recommended sentencing enhancement applies.

I. Factual Background

From 1984 through 1992, the defendant participated in a tax evasion scheme created by his accounting firm. During those years, Mr. Lewis inflated his itemized deductions, thereby evading the full amount of taxes he owed. In order to achieve this goal, the accounting firm sent Mr. Lewis schedules listing amounts and fictitious payees for checks that he was to prepare. Mr. Lewis then drew checks payable to fictitious payees as indicated on the accountants' schedules. The accounting firm then deposited these checks in the twenty-six accounts it had created in the names of these fictitious payees. The accounting firm then transferred the funds to other bank accounts, taking 10% for itself and using the remainder to pay expenses, such as credit card bills, as directed by the defendant.

By the time the scheme was uncovered, Mr. Lewis had written approximately 178 checks totalling $154,839.07. He then used the majority of these checks to claim fraudulent deductions.² For example, Mr. Lewis took a deduction of $2,895 on a schedule attached to his 1988 return for "commissions"; these commissions correlate to the checks that he prepared in 1988 payable to two fictitious payees. The scheme resulted in a total tax loss of approximately $40,000.

II. The Sophisticated Means Enhancement

Part T of the Sentencing Guidelines is the section addressing offenses involving taxation. The first subpart, § 2T1.1, addresses the crime of tax evasion. The base offense level is determined by the amount of the tax loss. Next, two specific offense characteristics are defined. The second, § 2T1.1(b)(2), states that "if sophisticated means were used to impede discovery of the nature or extent of the offense, increase by 2 levels." Application Note 6 states that:

`Sophisticated means,' as used in § 2T1.1(b)(2), includes conduct that is more complex or demonstrates greater intricacy or planning than a routine tax-evasion case. An enhancement would be applied for example, where the defendant used offshore bank accounts, or transactions through corporate shells.

The "Background" section of the Commentary explains that "although tax evasion always involves some planning, unusually sophisticated efforts to conceal the evasion decrease the likelihood of detection and therefore warrant an additional sanction for deterrence purposes." If the Court determines that "sophisticated means" were used, the base offense level must be increased.

In determining specific offense characteristics, a court must consider relevant conduct, as determined on the basis of certain factors set forth at U.S.S.G. § 1B1.3. The Guidelines require a court to consider

all reasonably foreseeable acts and omissions of others in furtherance of ... jointly undertaken criminal activity, that occurred during the commission of the offense of conviction, in preparation for that offense, or in the course of attempting to avoid detection or responsibility for that offense.

U.S.S.G. § 1B1.3(a)(1)(B). Application Note 2 defines a "jointly undertaken criminal activity" as "a criminal plan, scheme, endeavor, or enterprise undertaken by the defendant in concert with others, whether or not charged as a conspiracy." There is no question here that defendant's acts were taken in concert with the acts of the accounting firm. Thus, the defendant is responsible for all of the acts taken by the accounting firm in furtherance of their jointly undertaken criminal activity and all of the acts that were reasonably foreseeable in connection with that criminal activity.³

III. Discussion

It is not easy to define the term "sophisticated means." Indeed, what one court views as sophisticated means may not be so viewed by another court. To some degree, then, the determination is subjective. As succinctly stated by one court, "whether the scheme was "sophisticated" or not is essentially a question of fact." United States v. Hunt, 25 F.3d 1092, 1097 (D.C.Cir.1994).

The offense of tax evasion falls along a continuum of increasing sophistication as follows: failing to report cash income; creating and utilizing double books; inflating deductions; using numbered or offshore accounts that protect the identity of the account's owners; creating fraudulent tax shelters; establishing, maintaining and using shell corporations to make it difficult or impossible to trace the flow of money; engaging in complex commercial schemes including "land flips;" and creating phony foreign tax credits. Many other types of fraudulent schemes to evade taxes could surely be added to this list; the types of fraudulent conduct are as unlimited as the creativity of the criminal mind.

In any event, the question facing this Court is where to draw the line between a scheme that uses "sophisticated means" and one that does not. The analysis begins with the language of the Guidelines, continues with a review of cases interpreting that language and concludes with the application of the statute and caselaw to the facts of this case.

The examples of "sophisticated means" provided in the Application Notes are only examples, yet they are instructive in discerning the intent of the Commission. The use of offshore bank accounts implies that the perpetrator has used a means that will protect his or her identity. Similarly, "transactions through corporate shells" implies conducting business through corporate entities designed to shield the identity of the ultimate controlling person(s) or decision maker(s). In both instances, the examples describe "means" that are "sophisticated" at protecting against the discovery of the scheme or the identification of the person responsible for or benefitting from the fraudulent scheme.

A. Finding of No Sophisticated Means

A review of the cases interpreting this section reveals a similar distinction. In United States v. Rice, 52 F.3d 843 (10th Cir.1995), the defendant, a certified public accountant, falsely claimed that more money had been withheld by his company than he owed in taxes, thereby causing him to receive a tax refund to which he was not entitled. The court held that

In substance, Mr. Rice's fraud is the functional equivalent of claiming more in itemized deductions than actually paid. If that scheme is sophisticated within the meaning of the guideline, then every fraudulent tax return will fall within that enhancement's rubric.

Id. at 849. Because there was nothing about this scheme that prevented the identification of the criminal or the discovery of the fraud, the court found that sophisticated means had not been used.

In United States v. Kaufman, 800 F.Supp. 648 (N.D.Ind.1992), the court refused to apply the two-point enhancement. Kaufman, an accountant, failed to report income from clients that were diverted from Kaufman's accounting firm to him. Kaufman either (i) instructed the client to pay him personally and directed the bookkeeper to show the debt as a write-off or (ii) created a phony deposit slips showing that the payment was deposited in the firm account when it was not. The deposit was then recorded in the accounts receivable journal which indicated payment of the claim without specifying the amount paid. While the scheme may have been somewhat complicated, the court found that defendant did not use sophisticated means to protect him from being identified as the perpetrator or from permitting a reasonably competent auditor to discover the fraud by reviewing the company's books. The court held that

there were no off-shore banks and no dummy corporations. Although Mr. Kaufman employed methods to evade detection by clients, the court cannot say his scheme was more complex or demonstrated greater intricacy or planning than a routine tax evasion case.

Id. at 655. The court made two further observations, both relevant to the case at hand. In addressing the issue of difficulty of detection, the court noted that under either of the two methods of hiding the failure to credit the payments to the firm, "the paper trial remained: no true deposit record would exist for payments Mr. Kaufman pocketed." Id. Finally, the Government argued that the scheme was sophisticated because the defendant embezzled the money repeatedly over a four year period and repeatedly failed to report the income. In rejecting the argument, the court stated that it "does not believe repetitive conduct demonstrates `sophisticated means'." Id.⁴

B. Finding of Sophisticated Means

In other cases, however, courts have applied or approved of the two-point enhancement for sophisticated means. See, e.g., United States v. Veksler, 62 F.3d 544 (3d Cir.1995) (defendant used a "daisy chain" — a series of paper transactions through numerous companies, some of which were largely fictitious — to conceal taxable sale of diesel fuel oil); United States v. Hunt, 25 F.3d 1092, 1097 (D.C.Cir.1994) (defendant devised "tax-favored" investments that were so sophisticated that "to this day neither the probation officer nor the...