Case o' The Week: A Taxing Decision - Jennings and Sophisticated Means

With the Judiciary battered by reduced federal funding, on the eve of the April 15 filing deadline, in a case submitted without oral argument, will the government prevail when tax evaders appeal a guideline enhancement?

  As sure as death and taxes. United States v. Jennings, 2013 WL 1317017 (9th Cir. Apr. 3, 2013), decision available here.

Players: Decision by Judge Clifton, joined by Judges O’Scannlain and Trott.

Facts: Defendants Jennings and Feuerborn sought investors for a process that would separate oil from dirt without producing hazardous waste. Id. at *1. They used a vendor, “Eco-Logic Environmental Engineering” to develop the technology. Id. Using Jennings’ real name and social security number, they opened a bank account called, “Ecologic.” Id. Without telling investors, board members, or accountants, they deposited about $2.5 million in investments into the Ecologic account and spent on private expenses. Id. That money wasn’t reported to the IRS as expenses. Id. The men were convicted at trial of conspiracy to defraud the US and tax counts. Id. At sentencing, Probation urged a two-level enhancement under USSG § 2T1.1 for the defendants’ “sophisticated means.” Id. Over defense objection, the district court imposed that enhancement, concluding the Ecologic account disguised income as company expenses. Id.

Issue(s): “Under the Guidelines, a two-level sentencing enhancement should be imposed when a defendant's offense ‘involved sophisticated means .’ [U.S.S.G.] § 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.” Id. at *2.

Held: “[T]he 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.” Id. at *2. “[T]he fact that the concealment might not have been total [because it was using Jennings’ real name and social security number] 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.” Id. at *3. “Defendants’ effort to disguise funds taken for their own personal use as money paid to a third party vendor for business expenses through use of a bank account with a deceptive name constituted a sufficiently complex method of concealment to warrant application of the sophisticated means enhancement.” Id.

Of Note: The Ninth joins the Second, Seventh, and Eleventh Circuits in holding that the “sophisticated means” enhancement can apply to conduct less sophisticated than the examples in the application note. Id. at *2. While that holding isn’t particularly surprising, applying the enhancement to conduct so – well, unsophisticated – is. If you can suffer that bump for opening an account using your real name and social security number, what conduct is not “sophisticated?”

How to Use: Jennings deals with “sophisticated means” in the tax guideline. What about that enhancement in the fraud guideline, USSG § 2B1.1(b)(10)? The two definitions are uncomfortably close. Mull Jennings when running the guideline calculations for tax or “vanilla” fraud cases.  

                                               

For Further Reading: Defenders are officially singing the sequestration blues. Many offices have laid-off staff, others have started furloughs, all will have furloughs underway by May. For a recent article describing the devastation, see Federal Defenders Face Deep Cuts, Delays In Cases, available here. 

 Image of Uncle Sam from http://www.mhpbooks.com/amazon-tax-holiday/

Steven Kalar, Federal Public Defender N.D. Cal. FPD. Website at www.ndcalfpd.org

.