United States v. Nicholas Lucidonio

PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

_________________

No. 24-1285

_________________

UNITED STATES OF AMERICA

v.

NICHOLAS LUCIDONIO

Appellant

_________________

On Appeal from the United States District Court

for the Eastern District of Pennsylvania

(D.C. Criminal No. 2:20-cr-00211-002)

District Judge: Honorable Gerald A. McHugh

_________________

Argued: November 12, 2024

Before: RESTREPO, MONTGOMERY-REEVES, and

AMBRO, Circuit Judges.

(Opinion filed: May 16, 2025)

Ian M. Comisky [ARGUED]

Matthew D. Lee

Fox Rothschild

Two Commerce Square

2001 Market Street, Suite 1700

Philadelphia, PA 19103

Matthew N. Leerberg

Fox Rothschild

301 Hillsborough Street

Suite 1120

Raleigh, NC 27603

Counsel for Appellant Nicholas Lucidonio

Katie Bagley

David A. Hubbert

Gregory S. Knapp [ARGUED]

Samuel R. Lyons

Joseph B. Syverson

United States Department of Justice

P.O. Box 972

Ben Franklin Station

Washington, DC 20004

Counsel for Appellee United States of America

_________________

OPINION OF THE COURT

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MONTGOMERY-REEVES, Circuit Judge.

This case involves a conspiracy to defraud the Internal

Revenue Service (the “IRS”) under 18 U.S.C. § 371 (Klein

conspiracy). The Klein conspiracy resulted from a payroll tax

fraud scheme at a cheesesteak restaurant named Tony Luke’s.

Nicholas Lucidonio, an owner of Tony Luke’s, avoided

employment taxes by causing Tony Luke’s to issue paychecks

to employees for an amount of “on-the-books” wages,

requiring the employees to sign back their paychecks, and

giving the employees an amount in cash that reflected both

“on-the-books” and “off-the-books” wages. Lucidonio then

caused Tony Luke’s to file false employer tax returns to the

IRS that underreported the full amount of wages paid to

employees and underpaid employment taxes owed by Tony

Luke’s and the employees. The employees, who learned about

the scheme during onboarding, received Form W-2s from Tony

Luke’s listing only “on-the-books” wages for the year’s

income. As a result, employees underreported income on their

personal income tax returns. The conspiracy “spanned ten

years[,] . . . involved systemic underreporting of wages” by “an

average of 30 to 40 employees” at any given time, and

benefitted from “the destruction of most original records and

the maintenance of false ledgers.” App. 17.

2

Lucidonio admitted to his involvement in this scheme

and pleaded guilty to one count of Klein conspiracy. So he

does not appeal his conviction. Instead, he challenges his

sentence. In particular, Lucidonio challenges the application

of a United States Sentencing Guideline that increased, or

“enhanced,” his total offense level by two points. The

enhancement applies when “conduct was intended to

encourage persons other than or in addition to co-conspirators

to violate the internal revenue laws or impede, impair, obstruct,

or defeat the ascertainment, computation, assessment, or

collection of revenue[.]” U.S. Sent’g Guidelines Manual

§ 2T1.9(b)(2) (U.S. Sent’g Comm’n 2023).1

Lucidonio argues that the District Court erred by

applying the enhancement for two reasons. First, he contends

that the phrase “conduct was intended to encourage” requires

explicitly directing another to violate the IRS Code or

otherwise impede the IRS’s collection of revenue. According

to Lucidonio, no such conduct exists here. Second, Lucidonio

asserts that, even if his conduct were intended to encourage

individuals to violate the IRS Code or otherwise impede the

IRS’s collection of revenue, he did not encourage anyone

“other than or in addition to co-conspirators” because Tony

Luke’s employees were aware of and participated in the

scheme.

We disagree with Lucidonio that the enhancement is

limited to those who explicitly direct another to violate the IRS

Code or otherwise impede the IRS’s collection of revenue.

Section 2T1.9(b)(2) unambiguously refutes his interpretation,

so the alleged absence of such conduct does not preclude

application of the enhancement. But the Government failed to

show by a preponderance of the evidence that Lucidonio

encouraged anyone “other than or in addition to co-

conspirators.” See United States v. Diallo, 710 F.3d 147, 151

(3d Cir. 2013) (“[T]he [G]overnment always bears the burden

of proving by a preponderance of the evidence that the facts

1

We refer to “internal revenue laws” for clarity as the “IRS

Code.” And we refer to “or impede, impair, obstruct, or defeat

the ascertainment, computation, assessment, or collection of

revenue” as “or otherwise impede the IRS’s collection of

revenue.”

3

support a sentencing enhancement, and ‘the defendant does not

have to prove the negative to avoid the enhanced sentence.’”

(quoting United States v. Evans, 155 F.3d 245, 253 (3d Cir.

1998)). Thus, we will vacate and remand for resentencing.2

I. BACKGROUND3

Lucidonio and his father Anthony Lucidonio, Sr.4 own

Tony Luke’s, a Philadelphia-based cheesesteak restaurant.5 In

this role, Lucidonio—alongside Anthony Sr.—ran Tony

Luke’s day-to-day operations by supervising and training

employees, managing financial aspects of the business, and

assisting with food preparation. But they also engaged in a

payroll tax fraud scheme at the restaurant.

Lucidonio and Anthony Sr. paid wages to Tony Luke’s

employees partially “on-the-books” and partially “off-the-

books” to avoid the payment of employment taxes. Lucidonio

and Anthony Sr. did so by issuing employees a paycheck for

some portion of their wages, requiring the employees to sign

back the paycheck to Tony Luke’s, and giving the employees

cash that comprised the amount listed on the paycheck and an

amount that went unreported. Lucidonio also directed

managers to explain to employees during onboarding that the

payment scheme allowed them to earn more money by

avoiding tax. The tax fraud scheme was common knowledge

among employees. For example, one employee asked for

2

Nothing in this opinion suggests the guilt or innocence of the

Tony Luke’s employees; the issue here is simply about whether

the Government has met its burden to prove facts necessary to

support a sentencing enhancement.

3

We take the Government’s factual assertions as true for

purposes of this appeal.

4

We refer to Nicholas Lucidonio as “Lucidonio” and Anthony

Lucidonio, Sr. as “Anthony Sr.” for clarity purposes only.

5

“Tony Luke’s,” now named “Tony and Nick’s Steaks,” refers

to a cheesesteak restaurant located at 39 East Oregon Avenue

in South Philadelphia.

4

specific amounts of “on-the-books” wages to ensure eligibility

for state-assisted medical coverage. Moreover, because Tony

Luke’s only reported “on-the-books” income to the IRS,

employees then filed false personal income tax returns after

receiving false IRS Form W-2s from Tony Luke’s.

A grand jury indicted Lucidonio for various tax-based

crimes; Lucidonio pleaded guilty to a single count of Klein

conspiracy under 18 U.S.C. § 371;6 and the remaining counts

were dismissed. Lucidonio objected to the application of

Section 2T1.9(b)(2), but the District Court overruled his

objection.

Before sentencing, a United States Probation Officer

prepared a Presentence Investigation Report (“PSR”).

Adjusting Lucidonio’s base offense level upward by two levels

under Section 2T1.9(b)(2), the PSR calculated a total offense

level of 17. With a criminal history category of I, the PSR

calculated an applicable Guidelines range of 24 to 30 months.

The District Court sentenced Lucidonio to 20 months’

imprisonment. He timely appealed.

II. JURISDICTION AND STANDARDS OF REVIEW

The District Court had jurisdiction over this case under

18 U.S.C. § 3231. We have jurisdiction under 28 U.S.C. §

1291 and 18 U.S.C. § 3742(a).

We exercise plenary review over the interpretation of

the Guidelines. United States v. Nasir, 17 F.4th 459, 468 (3d

Cir. 2021) (en banc) (citing United States v. Wilson, 880 F.3d

80, 83 (3d Cir. 2018)). Our “standard of review for the District

Court’s application of the Guidelines to the facts ‘depends on

the nature of the question presented.’” United States v.

Caraballo, 88 F.4th 239, 243 (3d Cir. 2023) (quoting Buford v.

6

18 U.S.C. § 371 applies to, in part, a conspiracy “to defraud

the United States, or any agency thereof . . . .” The offense

known as Klein conspiracy simply refers to a conspiracy to

defraud the IRS. See United States v. McKee, 506 F.3d 225,

238 n.10 (3d Cir. 2007) (explaining how United States v. Klein,

257 F.2d 908 (2d Cir. 1957), became an eponym for this strain

of conspiracy against the IRS).

5

United States, 532 U.S. 59, 63 (2001)). This appeal “presents

a mixed question of law and fact, [so] ‘our standard of review

takes on greater scrutiny, approaching de novo as the issue

moves from one of strictly fact to one of strictly law.’” United

States v. Miller, 527 F.3d 54, 60 (3d Cir. 2008) (quoting United

States v. Felton, 55 F.3d 861, 864 (3d Cir. 1995)).

III. DISCUSSION

Lucidonio’s appeal turns on Section 2T1.9(b)(2). As

noted above, this Guideline provides that “[i]f the conduct was

intended to encourage persons other than or in addition to co-

conspirators to violate the internal revenue laws or impede,

impair, obstruct, or defeat the ascertainment, computation,

assessment, or collection of revenue, increase by 2 levels.”

U.S. Sent’g Guidelines Manual § 2T1.9(b)(2) (U.S. Sent’g

Comm’n 2023).

Lucidonio argues that the District Court improperly

applied Section 2T1.9(b)(2) for two reasons. First, he argues

that the phrase “conduct was intended to encourage” requires

explicitly directing another to violate the IRS Code or

otherwise impede the IRS’s collection of revenue, which

purportedly did not happen here. Second, he argues that he did

not encourage anyone “other than or in addition to co-

conspirators” because his employees were part of the tax

scheme. We take the arguments in turn.7

A. “Conduct Was Intended to Encourage”

In Lucidonio’s view, the phrase “conduct was intended

to encourage” applies only when a defendant explicitly directs

someone to violate the IRS Code or otherwise impede the

IRS’s collection of revenue. In other words, Lucidonio

believes that the enhancement would apply only if he told “an

7

Because we vacate the application of the enhancement and

remand for resentencing without it, we need not address

Lucidonio’s arguments about the legality of the Guidelines in

general or this enhancement in particular under Loper Bright

Enterprises v. Raimondo, 603 U.S. 369 (2024), and the

Administrative Procedure Act.

6

employee, you’re getting cash; don’t report your taxes.” Oral

Arg. Tr. 15:13–15:14 (emphasis added). And under this

interpretation, Lucidonio contends that the enhancement

cannot apply because no such evidence exists.

In Nasir, this Court explained that when interpreting a

Guideline, courts must first exhaust traditional tools of

construction. 17 F.4th at 471. This requires considering the

“text, structure, history, and purpose” of the Guideline. Id.

(quoting Kisor v. Wilkie, 588 U.S. 558, 575 (2019)). And “if

the Guideline itself is unambiguous, our inquiry is at an end.”

United States v. Mercado, 81 F.4th 352, 356 (3d Cir. 2023);

see, e.g., Nasir, 17 F.4th at 472 (holding, based on

unambiguous text, that Section 4B1.2(b) excluded “inchoate

crimes” from “the definition of ‘controlled substance

offenses’”).

This issue begins and ends at the text. Like any question

of statutory interpretation, we “presume that words carry their

ordinary meaning[,]” and we often look “to standard reference

works such as legal and general dictionaries” to determine

ordinary meaning. Caraballo, 88 F.4th at 246 (cleaned up).8

Such standard reference works include but are not limited to

Black’s Law Dictionary, Oxford English Dictionary, and

Webster’s Dictionary. See id. (collecting cases). We also are

mindful that “[t]here is no canon against using common sense

in construing laws as saying what they obviously mean.”

Koons Buick Pontiac GMC, Inc. v. Nigh, 543 U.S. 50, 63

(2004) (quoting Roschen v. Ward, 279 U.S. 337, 339 (1929)).

No application of these principles to the phrase “conduct was

intended to encourage” supports Lucidonio’s argument.

Lucidonio focuses on the terms “intended” and

“encourage.”9 “Intend” means “[t]o design, resolve, propose[;

8

Because Section 2T1.9 became effective in 1987 (with

amendments in 1989 and 1993), we look to contemporaneous

dictionary definitions. United States v. Mercado, 81 F.4th 352,

356 n.3 (3d Cir. 2023).

9

We note for completeness how the meaning of “conduct”

affects the enhancement. The noun “conduct” refers to, among

other things, “[p]ersonal behavior; deportment; mode of

7

t]o plan for and expect a certain result.” Intend, Black’s Law

Dictionary (6th ed. 1990); see also Intend, Merriam-Webster’s

Ninth New Collegiate Dictionary (1988) (“to have in mind as

a purpose or goal”; “to direct the mind on”); Intend, Oxford

English Dictionary (2d ed. 1989) (“[t]o apply oneself to do

something; to endeavor, to strive”). And “encourage” means

to “instigate,” “incite to action,” “give courage to,” “inspirit,”

“embolden,” “raise confidence,” “make confident,” “help,”

“forward,” and “advise.” Encourage, Black’s Law Dictionary

(6th ed. 1990); see also Encourage, Merriam-Webster’s Ninth

New Collegiate Dictionary (1988) (“to inspire with courage,

spirit, or hope”; “to spur on”; “to give help or patronage to”);

Encourage, Oxford English Dictionary (2d ed. 1989) (“to

inspire with courage sufficient for any undertaking; to

embolden, make confident”).

None shows why intending to encourage is limited to

explicitly directing another to act a certain way. A person can

“instigate” or “incite” another to act, with the expectation of a

certain result, without explicit direction. The District Court

explained how that principle applies here: “creating and

administering a cash payroll system that withholds less than

federal law and requires and issues fraudulent W-2 forms to

employees” was conduct “‘intended to encourage’ those

employees to violate tax laws.” App. 16. This conclusion is

“self-evident” because “the scheme depends on it, as honest

treatment of tax obligations would rapidly expose the fraud.”

Id. So the enhancement’s unambiguous text does not include

any requirement that a defendant’s conduct explicitly direct

another to violate the IRS Code or otherwise impede the IRS’s

collection of revenue.10

action; any positive or negative act.” Conduct, Black’s Law

Dictionary (6th ed. 1990); see also Conduct, Merriam-

Webster’s Ninth New Collegiate Dictionary (1988) (“the act,

manner, or process of carrying on”); Conduct, Oxford English

Dictionary (2d ed. 1989) (“[a] piece of behaviour”; “a course

of conduct”; “[t]he action or manner of conducting, directing,

managing, or carrying on”). These definitions show how

“conduct”—that is, any positive or negative act—can comprise

more than explicitly directing another to act.

10

Section 2T1.9(b)(2)’s structure, purpose, and history

confirm this conclusion. First, the structure of the

enhancement—comprised of four types of conduct (impeding,

8

Despite the plain language of the text, Lucidonio argues

that we should exercise interpretive restraint and construe the

enhancement in his favor. According to him, Dubin v. United

States, 599 U.S. 110 (2023), and Marinello v. United States,

584 U.S. 1 (2018), show that the Sentencing Commission

“cannot” have “intended a two-level enhancement to apply in

every run-of-the-mill tax fraud case simply because a

defendant’s conduct may have contributed in some way to

someone else’s violation.” Opening Br. 16.11 But this is no

run-of-the-mill tax fraud case involving a remote connection

with someone else’s violation. So we disagree that Dubin and

Marinello demand interpretive restraint here.

In Marinello, the Supreme Court held that 26 U.S.C. §

7212(a), which makes “it a felony ‘corruptly or by force’ to

‘endeavo[r] to obstruct or imped[e] the due administration’” of

the IRS Code, “does not cover routine administrative

procedures that are near-universally applied to all taxpayers,

such as the ordinary processing of income tax returns.” 584

impairing, obstructing, or defeating) aimed at four distinct

government acts (ascertainment, computation, assessment, or

collection)—captures a wide range of behavior. Second, the

purpose of the enhancement relates to how Klein conspiracies

are typically “complex” and “subvert the revenue system.”

U.S. Sent’g Guidelines Manual § 2T1.9 cmt. background (U.S.

Sent’g Comm’n 2023); see also Caraballo, 88 F.4th at 247 n.5

(“We can consider the background commentary from the

Guidelines without going through the Kisor process.” (citing

Adair, 38 F.4th at 347–48)). Third, the Sentencing

Commission expanded the enhancement in 1993 to include the

four other types of conduct and government harm discussed

above. Amendments to the Sentencing Guidelines for United

States Courts, 58 Fed. Reg. 27148, 27159 (May 6, 1993). All

three confirm our reading of the text; nothing about Section

2T1.9(b)(2) supports reading a hidden limitation into an

otherwise encompassing enhancement.

11

Lucidonio also mentions the rule of lenity, but for the

reasons above, the Guideline is not ambiguous, and thus the

rule of lenity has no application. Nasir, 17 F.4th at 474 (Bibas,

J., concurring) (“[W]e should use lenity to interpret ambiguous

Guidelines.”).

9

U.S. at 4 (alterations in original) (quoting 26 U.S.C. § 7212(a)).

As relevant here, the Supreme Court noted that a broad

interpretation of the crime could apply it to a person who, for

example, “pays a babysitter $41 per week in cash without

withholding taxes.” Id. at 10. The Supreme Court “sincerely

doubt[ed]” that Congress “intended that outcome” and used

that example to support its more limited reading of the statute.

Id.

Dubin focused on similar interpretive concerns. There,

the Supreme Court interpreted the scope of 18 U.S.C. §

1028A(a)(1)—which prohibits aggravated identity theft—as

applied to a Medicaid-overbilling scheme. The Supreme Court

rejected the notion that Medicaid overbilling, on the facts in

Dubin, supported an aggravated identity theft conviction when

“the defendant’s misuse of another person’s means of

identification” was “merely an ancillary feature of the billing

method.” 599 U.S. at 114. In so holding, the Supreme Court

noted how the opposite view would cover anyone “who

fraudulently inflate[s] the price of a service or good” such as

“[a] lawyer who rounds up her hours from 2.9 to 3.” Id. Thus,

after analyzing the statute “from text to context, from content

to common sense,” the Supreme Court concluded that “§

1028A(a)(1) is not amenable to the Government’s attempt to

push the statutory envelope.” Id. at 131.

But nothing about the enhancement’s application to a

payroll tax fraud scheme like Lucidonio’s requires us to push

the envelope or “read[] incongruous breadth into opaque

language.” Id. at 130. Lucidonio pleaded guilty to Klein

conspiracy, and the applicable enhancement for Klein

conspiracy at issue rests on facts inapposite to those discussed

in Marinello and Dubin: Lucidonio was part of a conspiracy to

avoid the payment of taxes that spanned a decade, involved

dozens of employees, and remained hidden by Lucidonio

destroying accurate business records and recording false

information. So while there may be a case that calls for

exercising interpretive restraint in applying the Guidelines, this

is not that case; instead, it falls squarely within what a

reasonable person would consider “conduct . . . intended to

encourage” another to violate the IRS Code or otherwise

impede the IRS’s collection of revenue.

10

With a proper understanding in mind of “conduct was

intended to encourage,” we summarily reject Lucidonio’s

argument that the District Court clearly erred by applying this

aspect of the enhancement. See United States v. Ashe, 130

F.4th 50, 54 (3d Cir. 2025) (explaining that clear error exists

“when although there is evidence to support [a factual finding],

the reviewing body . . . is left with the definite and firm

conviction that a mistake has been committed” (quoting United

States v. Montalvo-Flores, 81 F.4th 339, 342 (3d Cir. 2023)).

Here, the District Court explained Lucidonio’s administration

of the payroll tax fraud scheme and production of fraudulent

W-2 forms to employees was integral to the conspiracy; it

found that Lucidonio depended on the employees to follow his

lead because an honest treatment of tax reporting by the

employees would unveil the scheme; and it supported its

finding that Lucidonio expected his employees to abide by the

scheme based on how long it went undetected.

B. “Persons Other than or in Addition to Co-

Conspirators”

Next, we must determine whether Lucidonio’s conduct

was intended to encourage “persons other than or in addition

to co-conspirators” to violate the IRS Code or otherwise

impede the IRS’s collection of revenue. U.S. Sent’g

Guidelines Manual § 2T1.9(b)(2) (U.S. Sent’g Comm’n 2023).

A co-conspirator is “[o]ne who engages in an illegal

confederacy with others.” Co-Conspirator, Black’s Law

Dictionary (6th ed. 1990)). And the Guidelines confirm that

“co-conspirators” in the enhancement must refer to “co-

conspirators” to the charged Klein conspiracy.12 All agree that

12

See U.S. Sent’g Guidelines Manual app. A (U.S. Sent’g

Comm’n 2023) (identifying applicable Guidelines to

substantive offenses). Compare U.S. Sent’g Guidelines

Manual § 2A1.5 (U.S. Sent’g Comm’n 2023) (conspiracy or

solicitation to commit murder), and U.S. Sent’g Guidelines

Manual § 2C1.1 (U.S. Sent’g Comm’n 2023) (conspiracy to

defraud by interference with governmental functions), and

U.S. Sent’g Guidelines Manual § 2K2.1 (U.S. Sent’g Comm’n

2023) (conspiracy to violate 18 U.S.C. § 924(c)), and U.S.

Sent’g Guidelines Manual § 2T1.9(b)(2) (U.S. Sent’g Comm’n

11

Lucidonio and Anthony, Sr. were co-conspirators in the

charged Klein conspiracy. And all agree that the charged Klein

conspiracy is that Lucidonio and Anthony Sr., “with others

known and unknown to the Grand Jury,” conspired to defraud

the IRS by “paying employees in cash ‘off the books’ to evade

payroll taxes.” Supp. App. 47, 51. The only question here is

whether the Government met its burden to prove by a

preponderance of the evidence that Tony Luke’s employees

were not “co-conspirators” in the Klein conspiracy described

by the indictment.

Klein conspiracy requires three elements: (1) “the

existence of an agreement,” United States v. Gambone, 314

F.3d 163, 176 (3d Cir. 2003) (citing United States v. Rankin,

870 F.2d 109, 113 (3d Cir. 1989)), “to impede the IRS” from

“assessing and collecting federal income taxes,” United States

v. Gricco, 277 F.3d 339, 348 (3d Cir. 2002) (citations omitted),

overruled on other grounds as stated in United States v.

Cesare, 581 F.3d 206, 208 n.3 (3d Cir. 2009); (2) “an overt act

by one of the conspirators in furtherance of the objective,”

Gambone, 314 F.3d at 176 (citing Rankin, 870 F.2d at 113);

and (3) “an intent on the part of the conspirators to agree as

well as to defraud the United States,” id. (citing Rankin, 870

F.2d at 113), which requires showing that the alleged

conspirators (a) “knew of the agreement” and (b) “intended

both to join it and to accomplish its illegal objects,” United

States v. McKee, 506 F.3d 225, 241 (3d Cir. 2007).

No one disputes “the existence of an agreement” or “an

overt act by one of the conspirators in furtherance of the

objective.” Gambone, 314 F.3d at 176. That is because

Lucidonio and Anthony Sr. both pleaded guilty to Klein

conspiracy arising from an agreement to defraud the IRS by

avoiding the payment of payroll taxes. And in so doing,

Lucidonio committed overt acts in furtherance of the

conspiracy by, for example, causing the false filing of tax

forms. E.g., McKee, 506 F.3d at 243 (“[T]he Partnership’s

2023) (conspiracy to impede, impair, obstruct, or defeat tax),

with U.S. Sent’g Guidelines Manual § 2X1.1 (U.S. Sent’g

Comm’n 2023) (attempt, solicitation, or conspiracy not

covered by a specific offense Guideline).

12

failure to report income of its RIY member employees

established the overt act . . . .”).

Thus, the third element, “intent,” which we sometimes

call “participation,” is the crux of this issue. In McKee, we

explored this subject in the context of a multi-defendant Klein

conspiracy centered on personal tax and employment tax fraud.

506 F.3d at 228. There, we explained that “intent may be

inferred from conduct that furthered the purpose of the

conspiracy.” Id. at 241 (citing Direct Sales Co. v. United

States, 319 U.S. 703, 711 (1943)). With that principle in mind,

we held that defendants’ signature on paychecks and

“signature on the payroll records and tax returns” evinced the

requisite intent. Id. Another defendant’s intent “was less

direct” because he did not carry out the “relevant tasks” of the

conspiracy. Id. But we explained that while “a conspirator’s

stake in the venture is not an essential element of the crime of

conspiracy, the existence of such a stake is relevant to the

question of deliberate participation.” Id. at 242. The defendant

had “both a financial and a philosophical motive” to take part

in the Klein conspiracy because—as someone who opposed the

tax system—he could collect income while undermining the

government. Id. Combined with evidence that “the fraudulent

withholding was common knowledge amongst the . . .

employees,” which a reasonable jury could use to conclude that

a partner both knew and participated in the scheme, we held

that the evidence was sufficient to support a conviction for

Klein conspiracy. Id.

Here, the Government argues that Tony Luke’s

employees had nothing to do with “the charged conspiracy to

evade Tony Luke’s tax obligations.” Answering Br. 23. And

the Government describes any involvement by Tony Luke’s

employees as “acquiescence” not “participation.” Answering

Br. 24. But the facts emphasized by the Government to show

the applicability of the first part of the enhancement—that

Lucidonio encouraged his employees to violate the IRS Code

or otherwise impede the IRS’s collection of revenue—rebut

that conclusion.13

13

Blackletter tax law helps understand why the payroll tax

fraud scheme involving Lucidonio’s operation of Tony Luke’s

also involves employees. The indictment explains that Tony

13

According to the Government, Lucidonio encouraged

“his employees to violate the law by explaining to employees

Luke’s filed a false Form 941. Employers use the Form 941 to

report, among other things, the wages paid to

employees. Based on the wages paid to employees, employers

must then calculate and pay their share of certain taxes borne

jointly by employers and employees under the Federal

Insurance Contributions Act (“FICA”). See generally 26

U.S.C. § 3101 et seq. FICA created “a tax on wages (up to an

annual limit) that comprises a 12.4% Social Security tax and a

2.9% Medicare tax.” Glass Blocks Unlimited v.

Commissioner, T.C. Memo. 2013-180, 2013 WL 4016519, at

*2 (T.C. Aug. 7, 2013). Unlike many taxes, FICA splits

payment between employer and employee; both employer and

employee each owe a 6.2% Social Security tax and 1.45%

Medicare tax. See 26 U.S.C. § 3101(a), (b) (specifying

employee’s share); 26 U.S.C. § 3111(a), (b) (specifying

employer’s share). Employers must “withhold from wages the

amount of the tax imposed on its employee, and the employer

is liable for paying the tax it is required to so withhold.” Glass

Blocks Unlimited, 2013 WL 4016519, at *2 (citing 26 U.S.C.

§ 3102(a), (b)). By understating the amount of wages paid to

employees, Tony Luke’s and the employees avoided the

payment of their respective shares of FICA taxes.

Also important is Lucidonio and Anthony Sr.’s relationship

with Tony Luke’s nonpayment of FICA taxes. Tony Luke’s is

a small business corporation under Subchapter S in the IRS

Code. Phillips v. Commissioner, T.C. Memo 2017-61, 2017

WL 1324203, at *3 (T.C. Apr. 10, 2017). Corporations elect

for tax treatment under Subchapter S because it allows “many

small business owners to enjoy the limited liability of the

corporate structure without, for the most part, being subject to

taxation at the corporate level.” Pugh v. Commissioner, 213

F.3d 1324, 1326 (11th Cir. 2000). That is because an S

Corporation’s income flows through to its shareholders, see 26

U.S.C. § 1366(a)(1) (explaining that an S Corporation’s

income is assigned by “pro rata share” to the corporation’s

shareholders). So Lucidonio and Anthony Sr. had personal

interests in Tony Luke’s payroll tax fraud conspiracy because

when Tony Luke’s saved money, Lucidonio and Anthony Sr.

did too.

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how the cash payroll scheme would help them evade taxes.”

Answering Br. 9; see also Answering Br. 27 (“[Lucidonio]

made it abundantly clear to employees that Tony Luke’s was

maintaining a second, fraudulent set of records for the purpose

of underreporting wages to the IRS.”). This repeated behavior

“emboldened employees to underreport their wage income

consistent with the business’s fraudulent accounting.”

Answering Br. 27. For example, one employee made an

“arrangement” with Lucidonio to cap “on-the-books” hours at

25 per week, as “any hours exceeding 25 would affect [the

employee’s] state-assisted medical coverage.” Answering Br.

26. And as the Government describes, this was not a one-way

street comprised of Lucidonio and Anthony Sr. singlehandedly

engaging in the criminal-tax conspiracy; “the continued

success of [Lucidonio’s] payroll fraud depended on employees

underreporting their income because ‘honest treatment of tax

obligations by employees would rapidly expose the fraud.’”

Answering Br. 28 (quoting the District Court). Put another

way, again by the Government, Lucidonio “intended both to

evade his business’s payroll taxes and to encourage employees

to evade their own taxes, as each of those frauds facilitated the

other.” Answering Br. 28.

The Government paints a picture of this case that is

incompatible with holding that it proved by a preponderance of

the evidence that the employees did not know of Lucidonio and

Anthony Sr.’s Klein conspiracy and did not intend both to join

it and accomplish its illegal objects. The employees (1) learned

about the conspiracy during onboarding—in fact, it was

common knowledge; (2) knew that the conspiracy would help

them evade taxes; (3) understood that Lucidonio kept false sets

of records; (4) signed back paychecks to Tony Luke’s for on-

the-books income in exchange for off-the-books cash; (5) filed

false personal tax returns; (6) asked for certain off-the-books

arrangements to remain qualified for state benefits; (7) helped

facilitate the conspiracy by not honestly reporting their tax

obligations to the IRS; and (8) like Lucidonio, evaded both

income tax and employment tax as a result of the scheme. See

McKee, 506 F.3d at 241–42.

The District Court mentioned this part of the

enhancement only once, “reject[ing] the argument that [the

employees’] ‘acquiescence’ render[ed] § 2T1.9(b)(2)

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inapplicable[.]” App. 17. But even were this a factual finding

that employees at Tony Luke’s did not participate in the

charged Klein conspiracy and we reviewed that determination

for clear error, we would still vacate and remand. The

Government’s own assertions prove why it “failed to introduce

any evidence” that Tony Luke’s employees were not co-

conspirators to the charged Klein conspiracy. United States v.

Belletiere, 971 F.2d 961, 966 (3d Cir. 1992). And the District

Court did not make any specific findings to support its

conclusion that employees merely acquiesced. “[M]ore is

required, even under the preponderance-of-the-evidence

standard,” for this enhancement to apply. Ashe, 130 F.4th at

56.

Thus, based on the Government’s representations, we

hold that it failed to show by a preponderance of the evidence

that Lucidonio intended to encourage persons “other than or in

addition to co-conspirators” to violate the IRS Code or

otherwise impede the IRS’s collection of revenue. U.S. Sent’g

Guidelines Manual § 2T1.9(b)(2) (U.S. Sent’g Comm’n 2023).

We will therefore vacate the judgment and remand for

resentencing without the enhancement applied. United States

v. Raia, 993 F.3d 185, 195 (3d Cir. 2021).

IV. CONCLUSION

For the reasons discussed above, we will vacate the

sentence and remand this case to the District Court for

resentencing without any enhancement under Section

2T1.9(b)(2).

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