Saturday, April 6, 2013

The Sentencing Sophisticated Means Enhancement Is Not Easy to Avoid (4/6/13)

The critical Sentencing Guidelines calculations for tax cases require a two step enhancement to the Base Offense Level for "sophisticated means" in the commission of the crime of conviction.  S.G. 2T1.1(b)(2), here.  Observers of the tax crimes scene have noted for some time that it does not take very much for a tax crime to have been committed by sophisticated means, thus requiring the enhancement.  In United States v. Jennings, ___ F.3d ___, 2013 U.S. App. LEXIS 6690 (9th Cir. 2013), here, the Ninth Circuit reminded us that most tax crimes of the type that actually get prosecuted involve sophisticated means.

In Jennings, the evasion was a corporate diversion to an account owned by Jennings but titled in a name that was very close to one of the corporation's legitimate vendors.  The paperwork establishing the account showed that Jennings owned it and had his social security number associated with it.  Jennings and another co-owner defendant used the account to fund their person living expenses.  The income was not reported.

On this fact pattern, the Ninth Circuit sustained the sophisticated means enhancement.  Here is the Court's entire discussion (bold face added by JAT):
Under the Guidelines, a two-level sentencing enhancement should be imposed when a defendant's offense "involved sophisticated means." U.S. Sentencing Guidelines Manual § 2T1.1(b)(2) (2010). Application Note 4 explains that the term "sophisticated means," for purposes of subsection (b)(2), "means especially complex or especially intricate offense conduct pertaining to the execution or concealment of an offense. Conduct such as hiding assets or transactions, or both, through the use of fictitious entities, corporate shells, or offshore financial accounts ordinarily indicates sophisticated means." Id. at cmt. n.4. 
Defendants argue that they did not employ means as sophisticated as those listed in the application note. They argue, for instance, that the enhancement should not apply because they did not create corporate shells or offshore accounts. But the list contained in the application note is not exhaustive. We agree with other circuits that the enhancement properly applies to conduct less sophisticated than the list articulated in the application note. See United States v. O'Doherty, 643 F.3d 209, 220 (7th Cir. 2011); United States v. Clarke, 562 F.3d 1158, 1160, 1165 (11th Cir. 2009); United States v. Lewis, 93 F.3d 1075, 1082-83 (2d Cir. 1996) (applying enhancement to scheme involving fake bank accounts of non-existent businesses).
In O'Doherty, for example, the Seventh Circuit affirmed an application of the enhancement where a commodities trader funneled trading profits from corporations' trading accounts into four corporate bank accounts at two different financial institutions. 643 F.3d at 211. He then used the accounts, which appeared to be corporate assets, to pay personal expenses without reporting the accounts' holdings as assets. Id. The defendant argued that his scheme was not "especially complex or intricate" and that the shell corporations had legitimate purposes. Id. at 220. The Seventh Circuit rejected defendant's argument because the enhancement "'does not require a brilliant scheme, just one that displays a greater level of planning or concealment than the usual tax evasion case.'" Id. at 220 (quoting United States v. Fife, 471 F.3d 750, 754 (7th Cir. 2006)). 
The method employed by Defendants here reflected a sophisticated effort to conceal income. They syphoned money from ESS to themselves through a bank account that they named "Ecologic." The use of that name was no accident. It mimicked the name of the company's primary vendor, Eco-Logic Environmental Engineering. Payments to the Ecologic account thus appeared to be payments to Eco-Logic Engineering for legitimate business expenses. No legitimate reason for Defendants' use of an account with the name "Ecologic" was established. 
Defendants contend that the enhancement should not apply to them because the Ecologic account was opened under Jennings's real name and social security number. But the fact that the concealment might not have been total does not mean that there was no effort at concealment or that the method employed was not sophisticated. Application of the enhancement does not necessarily turn on the scheme's likelihood of success in remaining undetected. See Fife, 471 F.3d at 754 (noting that defendant's argument "confuses 'sophisticated' for 'intelligent'"). 
Opening the account under Jennings's real name and social security number might have made it somewhat less likely that the diversion of funds would go undetected, but the  [*8] scheme could have been figured out only by someone who knew that the Ecologic account was controlled by Jennings, or who knew to look at both the ESS records and the Ecologic account ownership records. Someone looking only at ESS's records would not have been able to tell that payments to the Ecologic account went to an account actually controlled by Jennings. Someone looking only at the Ecologic account records would not know that the funds deposited in that account were not proper business receipts. 
Defendants also argue that they opened the account for legitimate purposes and regularly used it for ESS business but that does not alter our conclusion, either. The fact that an account was also used for lawful payments does not immunize its use for improper purposes.
For further material on the sophisticated means, I provide here the excerpt from the current draft of my Federal Tax Crimes book.

Note the bold-faced sentence that sophisticated means is more than in the the "usual tax evasion case."  I am not sure I know what the "usual" tax evasion case.  I think that, given the DOJ Tax's selection criteria (which perhaps can only be inferred from incomplete data) that the usual case selected for prosecution will involve some level of sophistication.  So the reference to the "usual" tax evasion case is opaque and, I think, unhelpful.

1 comment:

  1. "So the reference to the "usual" tax evasion case is opaque and, I think, unhelpful." Indeed.


    What about tautological: it's "sophisticated" if it was prosecuted for using sophisticated means!

    ReplyDelete

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