Wednesday, January 17, 2018

Perjury and False Statements -- Is There a Literal Truth Defense? (1/17/18)

Whenever there is some commotion in Washington that calls for political-types or their enablers to give testimony (either in congressional or grand jury investigations), one of the issues that arises is whether the witness will give the testimony under oath or not.  Those with some familiarity of the criminal law related to testimony in such investigations know that there are two potential criminal regimes involved--perjury and false statement, both of which are crimes with substantial overlap.  The issue came up again today in the popular press where a witness -- Stephen Bannon -- negotiated (through his lawyers) the giving of testimony not under oath (this is often called a proffer session subject to the crime of false statement) rather than before the grand jury under oath (and thus subject to the crime  of perjury).

This frequently arises in a tax crimes setting where the witness -- who may be a putative target or subject of the investigation depending upon how the prosecutor feels for that day (I'll not get into that now) -- might prefer not to be under oath and thus might want his lawyer to "negotiate" (with an appropriate Queen for a Day letter) a proffer session rather than testifying under oath in the grand jury (assuming he might even be tempted for not assert his Fifth Amendment privilege in the grand  jury room).  One reason is that the witness may feel less exposure under a false statement criminal regime rather than a perjury criminal regime.  So, I thought I would do a quick survey of some  of the issues that have concerned me about the differences between perjury and false statements.

First, the statutes:

Perjury, 18 USC § 1621(1), here.
§ 1621 - Perjury generally
Whoever—
(1) having taken an oath before a competent tribunal, officer, or person, in any case in which a law of the United States authorizes an oath to be administered, that he will testify, declare, depose, or certify truly, or that any written testimony, declaration, deposition, or certificate by him subscribed, is true, willfully and contrary to such oath states or subscribes any material matter which he does not believe to be true; or
(2) in any declaration, certificate, verification, or statement under penalty of perjury as permitted under section 1746 of title 28, United States Code, willfully subscribes as true any material matter which he does not believe to be true;
is guilty of perjury and shall, except as otherwise expressly provided by law, be fined under this title or imprisoned not more than five years, or both. This section is applicable whether the statement or subscription is made within or without the United States.
Perjury before the Grand Jury, § 1623, here.
§ 1623 - False declarations before grand jury or court
(a) Whoever under oath (or in any declaration, certificate, verification, or statement under penalty of perjury as permitted under section 1746 of title 28, United States Code) in any proceeding before or ancillary to any court or grand jury of the United States knowingly makes any false material declaration or makes or uses any other information, including any book, paper, document, record, recording, or other material, knowing the same to contain any false material declaration, shall be fined under this title or imprisoned not more than five years, or both.
[I omit the balance of § 1623 which does have some interesting features such as where two inconsistent statements are made under oath, the crime does not require that the Government prove which is false except that it is a defense if the witness believed each statement to be true at the time  he made the statement; the witness' ability to purge the crime by acting within the court or grand jury setting, and eliminating the two witness rule to prove perjury.]

False Statement, § 1001, here.
§ 1001 - Statements or entries generally
(a) Except as otherwise provided in this section, whoever, in any matter within the jurisdiction of the executive, legislative, or judicial branch of the Government of the United States, knowingly and willfully—
(1) falsifies, conceals, or covers up by any trick, scheme, or device a material fact;
(2) makes any materially false, fictitious, or fraudulent statement or representation; or
(3) makes or uses any false writing or document knowing the same to contain any materially false, fictitious, or fraudulent statement or entry;
shall be fined under this title, imprisoned not more than 5 years or, if the offense involves international or domestic terrorism (as defined in section 2331), imprisoned not more than 8 years, or both. If the matter relates to an offense under chapter 109A, 109B, 110, or 117, or section 1591, then the term of imprisonment imposed under this section shall be not more than 8 years.

Monday, January 15, 2018

Fourth Circuit NonPublished Opinion Offers Little on Willful Blindness Instruction (1/15/18; 1/17/18)

In United States v. Parker, 2018 U.S. App. LEXIS 712 (4th Cir. 2018) (unpublished), here, the Fourth Circuit affirmed Parker's conviction for "conspiring to file false tax returns, in violation of 18 U.S.C. § 371, and presenting false claims to the Internal Revenue Service (the "IRS"), in violation of 18 U.S.C. § 287."  As a nonpublished opinion, it may have diminished precedential value.  Still, there are some items in the opinion that I find worthy of mention.

First, the trial court gave the following willful blindness instruction:
If you find that the defendant was aware of a high probability that the tax returns at issue were false and that the defendant acted with deliberate disregard of the facts, you may find that the defendant acted knowingly. However, if you find that the defendant actually believed that the tax returns at issue were true, he may not be convicted.
I have previously discussed that the jury's finding of willful blindness should, like other circumstantial evidence, only permit the jury to infer the requisite knowledge rather than compel that finding.  E.g. The Willful Blindness Concept -- What Does It Do? (Federal Tax Crimes Blog 1/23/17), here.  The instruction, as given by the trial judge, adopts the permissive construct ("you may find" rather than "must find."  This aspect of the instruction was not in issue on the appeal.  (I return to this issue below.)

Second, at trial, "Parker objected to this [willful blindness] instruction arguing that he could not be willfully blind to a conspiracy."  From that cryptic comment, not further addressed in the opinion, I presume that the defendant was asserting that willful blindness is not proper in conspiracy because conspiracy requires specific intent to reach an agreement for an illegal object.  As with using the instruction for the standard tax crimes mens rea -- specific intent to violate a known legal duty -- it could be viewed as an oxymoron to say that willful blindness can substitute for the specific intent required for conspiracy.  It seems to me that, if the crime requires the specific intent as the element, courts cannot authorize something less than that specific intent under the rubric of willful blindness.  In other words, the willful blindness properly interpreted should merely be evidence that a jury may find persuasive that the defendant had the required intent.  Nevertheless, Courts do seem to authorize the willful blindness instruction in conspiracy cases.  See Ninth Circuit Pattern Instruction 5.7 Deliberate Ignorance, here, ("United States v. Ramos-Atondo, 732 F.3d 1113, 1120, 1124 (9th Cir.2013) (deliberate ignorance instruction may be given in conspiracy case).

Third, I also recommend readers read the entire Ninth Circuit pattern instruction and comment which demonstrates some of the confusion with the willful blindness instruction.  The actual pattern instruction uses the "may find" construct which seems to be that willful blindness merely supports an inference of the knowledge element of the crime.  In other words, it is like circumstantial evidence of the required knowledge.  Then, however, the comment says that, in the approved Jewell decision, "the district court must determine whether the jury could rationally find willful blindness even though it has rejected the government’s evidence of actual knowledge." (Bold-face supplied by JAT.)  Query, if the willful blindness instruction merely permits the jury to infer knowledge, how can it be appropriate where the jury has rejected finding knowledge?

Sunday, January 14, 2018

Presence or Absence of Tax Deficiency, Although Not an Element of Tax Perjury (§ 7206(1)), Crime, May be Relevant to the Materiality Element (1/14/18)

In United States v. Huynh, 2018 U.S. App. LEXIS 767 (9th Cir. 2018), unpublished, here, the Court of Appeals affirmed Huynh's conviction for "one count of conspiracy to commit medical fraud in violation of 18 U.S.C. § 371 and eleven counts of subscribing to a false tax return in violation of 26 U.S.C. § 7206(1)."  The decision is rather cryptic and, since unpublished, does not, I think, deserve further analysis.  The decision does permit a digression over an issue that caught my attention.

The paragraph in question is (bold-face supplied by JAT):
2. Huynh also takes issue with the jury instruction stating that the prosecution was "not required to prove that any additional tax was due to the government or that the government was deprived of any tax revenues by reason of any filing of any false return." Specifically, he contends that because "a tax loss [was] the only material false statement charged in [the] tax counts," this instruction allowed the jury to convict him under Section 7206(1) without finding that his filings were incorrect as to material matters. This argument misrepresents the nature of the charges against him. Huynh was charged with and convicted of underreporting income—not underreporting tax liability. Moreover, the challenged instruction is consistent with the principle that "[t]he existence of a tax deficiency is not an element of this crime" under Section 7206(1). United States v. Marabelles, 724 F.2d 1374, 1380 (9th Cir. 1984); see also United States v. Marashi, 913 F.2d 724, 736 (9th Cir. 1990) ("Section 7206(1) is a perjury statute; it is irrelevant whether there was an actual tax deficiency."). And we are not persuaded by Huynh's citation to United States v. Uchimura, 125 F.3d 1282 (9th Cir. 1997), that the instruction took the materiality decision away from the jury.
The last sentence, bold-faced by me, caught my attention.  So, I thought I would read Uchimura and see what it offers to the § 7206(1) materiality analysis.  (By the way, cert was denied in Uchimura in 525 U.S. 863 (1998).)

It is black letter law that a tax deficiency as a result of the false statement on the return is not an element of the crime of tax perjury in § 7206(1).  It is not thought that the lack of a tax deficiency is a defense to the crime.  However, materiality is an element of the crime.  So the question is whether the lack of a tax deficiency or the presence of a tax deficiency is relevant to the issue of materiality and thus admissible and considered by the jury.

Of course, if the lie that the indictment charges is tax underreported, then tax deficiency is an element of the crime.  But, § 7206(1) charges are usually brought where there is some other lie such as gross income omitted from the return, Schedule B foreign account question answered no rather than yes, or some such.  In those other cases where underreported tax is not the lie charge, then tax deficiency is not an element of the crime.

In Uchimura, the Court addressed the materiality issue after the Supreme Court decided in United States v. Gaudin, 515 U.S. 506 (1995) that the materiality element of crimes was a question for the jury rather than for the court.  The Uchimura court then moved into the definition of materiality.  The Uchimura Court opens the discussion in relevant part (bold-face supplied by JAT):
This Circuit has never explicitly defined "material" in Section 7206(1), although our Model Jury Instructions for Section 7206(2) define it as "something necessary to a determination of whether income tax was owed." Ninth Circuit Model Jury Instructions: Criminal 9.06E (1995). The definitions applied by other Circuits, and by at least one of our Districts, employ similar language. Klausner, 80 F.3d at 60 ("essential to the accurate computation of . . . taxes"); Aramony, 88 F.3d at 1384 ("in order that the taxpayer estimate and compute his tax correctly"); U.S. v. Warden, 545 F.2d 32, 37 (7th Cir. 1976) (same); U.S. v. Rayor, 204 F. Supp. 486, 491 (S.D.Cal. 1962) (same). We now hold that information is material if it is necessary to a determination of whether income tax is owed. 
Despite our adoption of a materiality definition similar to the one in Klausner, we cannot agree with the Second Circuit. The logic that must be employed (whether by a judge or by a jury) to deduce that a false statement is material renders materiality a "mixed question of law and fact." Under 18 U.S.C. § 1001, deciding whether a statement is material requires the determination of "at least two subsidiary questions of purely historical fact: (a) `what statement was made?'; and (b) `what decision was the agency trying to make?'." Gaudin, 115 S.Ct. at 2314. Under 26 U.S.C. § 7206(1), deciding whether a statement is material surely requires a similar determination of (a) "what statement was made?"; and (b) "what information was necessary in this case to a determination of whether income tax was owed?".

Saturday, January 13, 2018

Two "Investors" in BullShit Tax Shelters Lose FTCA Claims on Appeal (1/13/18)

In Esrey v. United States, 2018 U.S. App. LEXIS 252 (2d  Cir. 2018) (summary order), here, the Second Circuit affirmed a dismissal of a Federal Tort Claims Act ("FTCA") complaint against the United States by investors in a bullshit tax shelter.  I previously wrote on the complaint when it was filed.  Two Participants in BullShit Tax Shelter Sue the Government for Colluding to Protect the Promoter (EY) from the Participants (4/28/16; 5/15/16), here.  I did not write on the lower court dismissal of the complaint, but the key facts are set for in the Second Circuit summary order which I excerpt virtually in full below:
The FTCA's broad waiver of sovereign immunity for tort claims against the government is subject to several exceptions. See Kosak v. United States, 465 U.S. 848, 851-52, 104 S. Ct. 1519, 79 L. Ed. 2d 860 (1984). As relevant here, the FTCA does not waive sovereign immunity for claims "arising out of . . . misrepresentation." 28 U.S.C. § 2680(h). For purposes of this exception, "a misrepresentation may result from the failure to provide information, as well as from [the] provi[sion] [of] information that is wrong." Ingham v. E. Air Lines, Inc., 373 F.2d 227, 239 (2d Cir. 1967) (emphasis added). And the exception "applies to claims arising out of negligent, as well as intentional, misrepresentation." Block v. Neal, 460 U.S. 289, 295, 103 S. Ct. 1089, 75 L. Ed. 2d 67 (1983). 
The plaintiffs' complaint alleges that the Internal Revenue Service ("IRS"), in violation of the laws of New York, aided and abetted Ernst & Young ("EY") in breaching a fiduciary duty EY owed to the plaintiffs. Essentially, the plaintiffs claim that the IRS took steps to conceal from the plaintiffs the fact that EY was the subject of a criminal investigation that created a conflict of interest for EY in its representation of the plaintiffs in a civil audit before the IRS. The plaintiffs claim that they were injured by this concealment because, if they had known at the time of their audit that EY was under criminal investigation, they could have used that information to (1) convince their then-employer, an EY client that eventually terminated the plaintiffs over concerns arising from the audit, to instead terminate EY; and (2) pursue their arbitration claim against EY for fiduciary-duty breach in a more cost-effective manner. 
"A plaintiff may not by artful pleading avoid [§ 2680(h) of the FTCA]." Dorking Genetics v. United States, 76 F.3d 1261, 1265 (2d Cir. 1996). "In determining the applicability of the § 2680(h) exception, a court must look, not to the theory upon which the plaintiff elects to proceed, but rather to the substance of the claim which he asserts." Lambertson v. United States, 528 F.2d 441, 443 (2d Cir. 1976). 
Although the plaintiffs style their claim as one for "aiding and abetting a fiduciary-duty breach," the gravamen of that claim is that the IRS wrongfully withheld information from them. Indeed, in their complaint, the plaintiffs allege that they suffered their principal injuries because the "IRS . . . helped EY to hide information" and "[a]s a result of . . . the IRS's active concealment" of its criminal investigation and audit of EY's tax practices. App'x at 8-9. The alleged conduct that was "essential" to the plaintiffs' claimed injuries was the IRS's non-communication of information. Block, 460 U.S. at 297. Accordingly, the claim "aris[es] out of . . . misrepresentation" under 28 U.S.C. § 2680(h), and no court is statutorily accorded jurisdiction to hear it. 
The plaintiffs attempt to evade the misrepresentation exception by identifying two "non-concealment" acts that they allege in their complaint. Appellant's Br. at 24. First, they point to allegations that the IRS removed the word "penalty" from a press release regarding the IRS's audit of EY. Second, the plaintiffs contend that the IRS's failure to prohibit EY from representing them in audit proceedings due to a conflict of interest was not an act involving a representation. 
The plaintiffs' arguments are unavailing. As to the first argument, the allegation that the IRS decided to remove the word "penalty" amounts to an allegation that the IRS misrepresented to the public the nature of the IRS's concern with EY's tax shelter practices. This claim centers on the "communication of information on which the recipient relies," and is therefore barred by the misrepresentation exception. Block, 460 U.S. at 296. Similarly, the plaintiffs' second argument fails, because the plaintiffs' theory is that by failing to prohibit EY from representing them, the "IRS . . . helped EY to hide information from [the] Plaintiffs[,] knowing that such information would have been critical to [the] Plaintiffs' evaluation of whether to trust EY." App'x at 8. This claim too concerns communicating information to the plaintiffs, and therefore the plaintiffs fail to allege "the breach of a cognizable duty owed to [them] which is 'distinct from any duty to use due care in communicating information.'" Dorking Genetics, 76 F.3d at 1265 (quoting Block, 460 U.S. at 297).
For further reading on the case, I link the following:

  • The Joint Appendix (containing the complaint and the decision below, here.
  • The Appellant's Opening Brief, here.
  • The U.S. Answering Brief, here.
  • The Appellant's Reply Brief, here.

Friday, January 12, 2018

Fifth Circuit Adopts Disjunctive Reading Permitting § 7202 Conviction for Failure to Pay Over After Properly Accounting (1/12/18)

In United States v. Sertich, ___ F.3d ___, 2018 U.S. App. LEXIS 457 (5th Cir. 2018), here, the Court affirmed the convictions of Sertich, a physician, under § 7202 (failure to collect, account for and pay over trust fund tax) and § 7201(tax evasion).  The gravamen of the case, as described in the opinion, related to Sertich's pattern of conduct with respect to the trust fund tax.  He withheld the tax from the employees (including himself), accounted for withholding on the required forms and did not pay over the tax to the IRS.  Presumably, he reported the withholding to the employees (including himself) on the Form W-2 so that they (including himself) could claim the amounts withheld from them on their tax returns, Forms 1040.  (As an aside, it takes some chutzpah for a taxpayer to claim the withholding credit for his own "withheld" tax he caused not to be paid over to the IRS.) But he went beyond mere failure to pay over.  First, his accountant had told him repeatedly that he had the obligation to pay over.  Second, he resisted the IRS's attempts for years to collect the tax through avoiding IRS collection officers, filings of bankruptcy, etc.

Sertich defended his conduct by testifying at trial as follows:
He told the jury that he always intended to pay his taxes. He stated that his failure to do so was related to personal and family issues, and because he lacked the financial ability to comply. Sertich admitted he pursued bankruptcy filings to develop a payment plan, stressing that he always intended to make good on his debts. He also explained that because his accountant told him he would have to pay interest on his tax delinquency, he "assumed" the delinquency "was a loan" from the federal government.
It is not indicated whether his accountant told him that he would be subject to penalties on the failure to pay over, including the potential trust fund recovery penalty, under § 6672.

The jury convicted on all counts. 

The Court rejected Sertich's appellate argument as follows:

1.  Jury Instruction -- § 7202 Conjunctive Reading or Disjunctive Reading.

The Court lays out the law and the jury instruction as follows (italics in original):
Section 7202, titled "[w]illful failure to collect or pay over tax," provides that "[a]ny person required . . . to collect, account for, and pay over any tax imposed by this title who willfully fails to collect or truthfully account for and pay over such tax shall . . . be guilty of a felony." 26 U.S.C. § 7202 (emphasis added). The statute thus naturally breaks into two offenses: (1) willful failure to collect employees' taxes; or (2) willful failure to truthfully account for and pay over withheld taxes. At issue in Sertich's case is the second offense: willful failure to truthfully account for and pay over the taxes. The district court instructed the jury that as to this offense, "the government must prove that the defendant failed to comply with one of the two duties for which he was responsible," either accounting for or paying over a tax. The district court explained by example that § 7202 is violated if "a responsible person who collects taxes from his employees and files [returns] with the Internal Revenue Service . . . willfully fails to pay over the taxes to the United States."
Sertich's argument was:

Saturday, January 6, 2018

Court of Appeals Rejects Arguments as to Improper Admission of Evidence (1/6/18)

In United States v. Wrubleski, 2017 U.S. App. LEXIS 17168 (11th Cir. 2017) (unpublished), here, two issues interested me.  First, testimony from an IRS attorney who had handled a prior Tax Court case brought by Wrubleski.  Second, a holding on admission of co-conspirator testimony under FRE 801(d)(2)(E).

IRS Attorney Testimony

The Court describes the testimony and curative instruction:
At trial, the government called Ken Hochman, an attorney at the IRS, as one of its witnesses. Hochman testified that he represented the IRS in United States Tax Court, including in a case filed by Wrubleski in 2004 in which Wrubleski challenged the validity of an IRS collection action. Outside the presence of the jury, the district court expressed concern about Hochman's testimony. The court said it was "concerned that [] the government is attempting to take a taxpayer's participation in [the IRS] review process . . . as activity that can be looked at for the basis of a criminal charge" because "the government thinks the taxpayer was so baseless" in bringing the Tax Court action. The government explained that although Wrubleski's litigation in Tax Court could not itself constitute the crime of interference with the administration of the Internal Revenue laws, Wrubleksi's previous experience in Tax Court showed his "overall willfulness" to commit other acts that constitute the crime. 
When the jury returned, the district court gave a curative instruction. The court said:
I want to be clear that the fact that [Wrubleski] went to tax court, and the fact that, for instance, the government may not be happy with how [he] acted in the tax court . . . that can't be the basis of a charge of corruptly trying to impede the proper administration of the Internal Revenue Service. 
If you tell somebody they can take an appeal [to the Tax Court] and they take an appeal and they lose the appeal, that's not the basis of the charge here.
The court then explained that information about Wrubleski's Tax Court litigation was "relevant only to the question of whether the government can prove that Mr. Wrubleski acted willfully." Before resuming Hochman's testimony, the court reiterated: "I want to make sure that everybody understands that how Mr. Wrubleski conducted himself in the litigation, that cannot serve as the basis for the first charge, which is the charge of corruptly impeding the administration of justice." Despite the court's instruction, Wrubleski moved for a mistrial on the ground that his "use of judicial [*4]  process . . . has been portrayed as being something improperly done toward the IRS." The district court denied his motion.
The Court of Appeals held:
Wrubleski appears to argue that using a defendant's previous legal proceedings against the IRS to prove the offense of interfering with the administration of the Internal Revenue laws, 26 U.S.C. § 7212(a), is an improper "theory of culpability." He says the evidence of his Tax Court proceedings showed only that "[h]e took advantage of the legal avenues offered to him," and did not prove he was "corruptly trying to obstruct or impede the IRS." 
Even assuming it was error to admit the evidence of Wrubleski's litigation history—a question we need not decide—the admission of this evidence did not mandate a mistrial here [*9]  because the court gave an adequate curative instruction. The district court agreed with Wrubleski that a person's litigation in Tax Court could not constitute a violation of § 7212(a). As we described above, this prompted the district court to give an extensive curative instruction. The court instructed the jury that any actions Wrubleski filed in Tax Court "can't be the basis of a charge of corruptly trying to impede the proper administration of the Internal Revenue Service. . . . [H]ow Mr. Wrubleski conducted himself in the litigation, that cannot serve as the basis for the first charge, which is the charge of corruptly impeding the administration of justice." "When a curative instruction is given, this court reverses only if the evidence is so highly prejudicial as to be incurable by the trial court's admonition." United States v. Garcia, 405 F.3d 1260, 1272 (11th Cir. 2005) (per curiam) (quotation omitted). Here, the evidence that Wrubleski challenged his tax liability in Tax Court was not so prejudicial as to be beyond the cure offered by the district court's prompt and thorough instruction. Because the district court cured the error Wrubleski complains of, the court did not abuse its discretion in denying his motion for a mistrial. See Newsome, 475 F.3d at 1227.
Rule 801(d)(2)(E) Holding.

NYT Article on the Stefan Buck, Offshore Account Enabler, Acquittal (1/6/18)

The New York Times has an interesting article on a Swiss bank enabler who helped U.S. taxpayers avoid/evade U.S. tax.  David Enrich, A Swiss Banker Helped Americans Dodge Taxes. Was It a Crime? (NYT 1/6/10), here.

The article opens:
Diane Butrus, a business executive from St. Louis, wandered the streets of Zurich, looking for a bank that would help her keep $1.5 million hidden from America tax collectors. 
One bank after another turned her down on that afternoon in 2009. They were worried about a United States crackdown on tax evasion and were no longer willing to shelter American money. 
Finally, across the street from a city park, up a discrete elevator, seated in a luxurious conference room, Ms. Butrus found a banker ready to help. His name was Stefan Buck.
Mr. Buck said that his employer, Bank Frey, would be happy to take Ms. Butrus’s money, according to court documents and interviews with Mr. Buck and Ms. Butrus. He instructed her to wire the $1.5 million to Bank Frey. He told her that her name wouldn’t be attached to the new account. It would be known internally as Cardinal, an alias she chose in a nod to her favorite baseball team.
Some more excerpts, summarizing facts known to readers of this blog:
Then, in 2008, a legal earthquake shook the foundations of Swiss banking. American prosecutors started filing criminal charges against bankers and executives who had set up accounts for Americans. In 2009, UBS, the huge Swiss bank, admitted helping Americans hide money from the Internal Revenue Service and agreed to provide authorities with the names of its tax-dodging clients. 
Soon Swiss banks were expelling American clients. 
Not Bank Frey. It didn’t have offices in the United States, and executives didn’t see it as their responsibility to police whether their clients were paying taxes. 
“We decided there’s no reason not to maintain business with American clients,” Mr. Buck said in an interview. Executives consulted with legal experts to ensure they weren’t crossing any lines. “We really tried to make sure that how we did the business is correct.”
Opening accounts for desperate Americans seemed like a golden opportunity. “The positioning of Bank Frey as a solely Swiss private bank is now considered as a competitive advantage by the market,” the bank’s chief executive, Gregor Bienz, said at a board meeting in late 2008, according to records of the meeting. Mr. Bienz didn’t respond to requests for comment. 
Over the next few years, hundreds of millions of dollars in American deposits flowed from Swiss banking stalwarts — institutions like Credit Suisse and Julius Baer — to Bank Frey. Its number of American clients roughly tripled, according to court records. By September 2012, nearly half of the bank’s $2.1 billion in assets was held on behalf of American taxpayers.
The article then recounts the significant events of the trial.

Friday, January 5, 2018

Swiss Court Ruling Blocking the Disclosure to U.S. Tax Authorities of Individual Enabler Information (1/5/18)

The Swiss high court has issued an opinion that appears to be a setback for the U.S. efforts to obtain information about individual enablers working for or with Swiss banks to assist U.S. taxpayers avoid or evade their taxes.  The U.S. had expected to receive not only the U.S. taxpayer's Swiss bank financial information and information supplied to the Swiss bank by the U.S. taxpayers, but also the names and participations of the individual enablers (such as bankers, lawyers, and others).  I have not read the opinion, but, as reported, the court held that the information about the individual enablers was not relevant because not indispensable to the case against the U.S. taxpayer.  I cite articles below for further information, but the Swissinfo article concludes with this warning:
Despite Wednesday’s ruling, employees and managers of Swiss banks involved in helping foreign tax avoiders have also not been immune to prosecution.
I will update this blog entry as I get further information\.

Articles:

  • Swiss court stops handover of bank employee details to US (Swissinfo 11/3/18), here.
  • Helen Burggraf, Relief for some US bankers in Switzerland as court blocks tax case info disclosure (International Investment 11/5/17), here.

Pre-Trial Decisions on Motion to Suppress (Tweel Issue) and Dismiss Tax Obstruction Count (Marinello Issue) (11/5/17)

I offer today two interesting pre-trial opinions in a tax crimes case.  United States v. Wright, 2017 U.S. Dist. LEXIS 167300 (S.D. Ohio 10/10/2017), here (referred to as Wright 1); and United States v. Wright, 2017 U.S. Dist. LEXIS 169007 (S.D. Ohio 10/12/2017), here (referred to as Wright 2).  Wright 1 rejected Wright's suppression claim that the IRS investigation was an improper disguised criminal investigation and that the agent misled Wright.  Wright 2 dismissed in part, but inter alia rejected Wright's argument for dismissal based on the pending investigation issue currently before the Supreme Court in Marinello, albeit in a superseding indictment context.  I address these opinions in their chronological order.  But, I offer now the docket entries in the case, here, the superseding indictment, here, and the jury verdict, convicting on all counts except the tax obstruction count, Count 1, here.

Wright 1

The facts are the key to the suppression claim. Highly summarized, the facts as recounted by the Court are:

In 1997, Wright pled guilty to attempted tax evasion.  In the sentencing, the court ordered that Wright pay restitution "restitution in the amount of taxes determined by the [IRS] to be owing."  That amount was never quantified by the sentencing court.  The IRS, however, subsequently assessed taxes for a number of years and a substantial amount remained outstanding.

In 2010, the IRS started an audit of one of Wright's corporate businesses.  At that time, the auditing agent learned from her manager that Wright had a substantial outstanding tax liability.

On 11/2/10, the agent discussed with the Fraud Technical Adviser ("FTA") "possible indicators of fraud ... with all the related entities." Then
Bettelon [the agent] subsequently prepared and forwarded to Rowe a Form 13680, which allows RAs to "request research using the yK1 Link Analysis Tool. This tool provides a graphic representation of flow-through relationships created by partnerships, trusts, and S corporations. The tool uses Schedule K-1 data to depict ownership relationships and income/loss flows between payers and payees." Internal Revenue Manual ("IRM" or "Manual") § 4.10.4.3.4.3(5) (Aug. 9,2011). On November 17, 2010, Bettelon again met with Wright, and asked him "if he or [B&P] had ever been involved with any prior audits or dealings with the IRS." Doc. #52-3, PAGEID #457. Bettelon claims that in response, "Wright stated [that] he has [sic] never been involved with the IRS prior to my visit" on August 13, 2010. Id. Wright denies having ever made such a statement.
The agent then had another meeting with Wright to request credit card statements previously requested.  About two weeks later, after discussion with the FTA, the FTA instructed the agent to prepare Form 11661: Fraud Development Recommendation - Examination.  In the form, the agent listed several possible indicators of fraud and calculated a tax underpayment of more than $600,000. The Court said about the Form:
By completing Form 2797, Bettelon [the agent] was informing IRS Criminal Investigation ("IRS-CI") that there existed firm indicators of fraud as to B&P, Remnant and Wright, such that a criminal investigation was warranted. Internal Revenue Manual § 25.1.3.2(1). Upon completing the form, Bettelon was required to "suspend the examination/collection activity without disclosing to the taxpayer or representative the reason for the suspension." 
Shortly after the completion of the form, the agent contacted Wright to request a Form 872, Consent to Extend the Statute of Limitations.  The following occurred:
Wright indicated that he would not sign it, and asked for an update on the status of his audit. Bettelon replied that Rowe [the Group Manager] needed to review the credit card statements that Wright had sent to Bettelon, but that Rowe was on sick leave and had not had a chance to review them. Doc. #52-3, PAGEID #458. In her Examining Officer's Activity Record ("EOAR") for the B&P audit, Bettelon wrote that she was "postponing telling [Wright] any information regarding the criminal investigation." Id. Bettelon made a similar note in her EOAR after a conversation with Wright on May 5, 2011, as IRS-CI had not yet accepted the audit transfer requested via Form 2797. Id.; see also Internal Revenue Manual § 25.1.3.3-4 (IRS-CI's process for evaluating and accepting a criminal referral). On June 2, 2011, Bettelon met IRS-CI Agents Tony Westendorf ("Westendorf") and Thomas Buchenroth ("Buchenroth") to discuss the B&P audit and her reasons for referral. Id. On June 7, 9, 10, and 22, 2011, Wright called Bettelon to [*8]  inquire about the status of the civil audit; Bettelon did not return the calls. Id. On June 24, 2011, Bettelon talked to Rowe about Wright's "many phone calls . . . and the fact that she was running out of things to postpone" returning his calls. Id. That same day, Rowe called Wright and informed him that Bettelon was no longer working on the audit, and that the case had been transferred to IRS-CI. Id.
Now, I am sure readers of this blog already know the defendant's arguments for suppression.

The Court starts its analysis with the following caption and statement of Wright's argument (I omit the record references for easier readability):
A. Failure to Follow Internal Revenue Manual does not Mandate Suppression of any Evidence Obtained in Violation Thereof 
Wright argues that "[f]rom the outset, the IRS's audit of the B&P Company was an illicit and unconstitutional ruse devised to trick and deceive Wright into providing incriminating documents, information, and personal statements in service of an ongoing IRS criminal investigation." He claims that Bettelon was coached by Rowe, Fromer, Buchenroth and Westendorf to obtain statements from Wright that would tend to incriminate him. Wright takes issue with Bettelon's asking him, on November 17, 2010, about whether he had had any past dealings with the IRS. He argues that his answer to the question would have yielded no meaningful information with respect to the civil audit, but that Wright's lack of truthfulness could be used as an indicator of fraud for a criminal investigation. Most seriously, Wright claims, Bettelon continued the civil audit even after suspecting criminal activity and completing Forms 2797 and 11661, soliciting credit card statements from Wright, speaking with him via telephone, and attempting to persuade him to toll the statute of limitations as to the civil audit of B&P's tax year 2007. Wright's alleged statement from November 17, 2010, was a key element in the Government's allegation that he had violated 26 U.S.C. § 7212(a), and the credit card statements Wright provided after Bettelon completed From 11661 were used by the Government as evidence that Wright was using a tiered scheme to under-report income. Thus, Wright argues, that evidence should be suppressed as a violation of his Fourth and Fifth Amendment rights. 
The Court then finds that the agent's statement to Wright that the audit was routine prior to becoming aware of the past IRS difficulties was a misrepresentation invoking Tweel.  The Court then finds:
As discussed above, Wright argues that Bettelon's question on November 17, 2010, about his past interactions with the IRS was an affirmative misrepresentation. Yet, even assuming that Bettelon, by asking the question, was hoping to catch Wright in a lie, which would in turn serve as an indicator of fraud, Wright has failed to prove by clear and convincing evidence that he was prejudiced by such deceit. At least one of Wright's past dealings with the IRS is a matter of public record, No. 1:97-cr-64, and Wright cannot reasonably claim that providing misinformation about a public record in the context of a civil audit was somehow appropriate in a way that providing such misinformation in the context of a criminal investigation would not be. Further, Bettelon's interview of Wright took place at least two months before she completed Form 11661; thus, any suspicions of criminal activity that Bettelon had at that time were not the firm indicators of fraud required to refer the case to IRS-CI.1 The mere fact that Bettelon used that statement as an indicator of fraud in completing Form 11661 was not improper; as discussed above, it is neither inappropriate nor even uncommon for a civil audit to become a criminal investigation. U.S. v. Wadena, 152 F.3d 831, 851-52 (8th Cir. 1998). Thus, the allegedly false statement made by Wright to Bettelon on November 17, 2010, was not obtained in violation of Wright's Fourth and Fifth Amendment rights, and will not be suppressed.
Then, as to the request for credit card statements made after the preparation of the Forms 2797 and 1161, the Court found that they were merely follow-through requests for requests actually made earlier and thus did not warrant suppression.

The Court finally said that the request for the Form 872 was "ill-advised" but did not warrant suppression, particularly since Wright had not signed it.
However, Wright did not sign the Form 872; in other words, even if Bettelon's request that he toll the statute of limitations constituted an affirmative misrepresentation, Wright took no action in reliance on that misrepresentation. Similarly, Bettelon's conversation with Wright on May 5, 2011, and Wright's subsequent, unreturned phone calls to Bettelon, did not prejudice Wright; Wright produced no evidence that he undertook any action with respect to the B&P audit after refusing, on March 29, 2011, to toll the civil statute of limitations. Thus, even assuming that Bettelon's refusal to disclose that she had referred the case to IRS-CI constituted misrepresentation by omission, the lack of prejudice means that the exclusionary rule does not apply.
Wright 2

In this opinion, the Court addressed Wright's claim that the original indictment did not make the proper allegation of a pending investigation to support the tax obstruction, § 7212(a), count.  The key allegations and supporting overt acts were improperly asserted for the first time in the Superseding Indictment, filed after the Government realized the defects.

The issue was whether the Superseding Indictment filed after, allegedly, the statute of limitations improperly expanded the original indictment.  The Court said:
However, any superseding indictment may charge a violation of 26 U.S.C. § 7212(a), even if all the acts occurred more than six years prior to the superseding indictment, as long as the superseding indictment does not materially broaden or substantially amend the original indictment. A superseding indictment will be considered to "relate back," as long as "the original indictment fairly alerted the defendant to the subsequent charges against him and the time period at issue." U.S. v. Salmonese, 352 F.3d 608, 622 (2d Cir. 2003); accord: U.S. v. Smith, 197 F.3d 225, 228-29 (6th Cir. 1999). Thus, if the superseding indictment fails to meet [*8]  this criteria, and no obstructive act occurred within six years of the superseding indictment, a charge of violation of 26 U.S.C. § 7212(a) is time-barred.
Basically, the Court held that the Superseding Indictment did not run afoul of these requirements.  Some key excerpts:
Pursuant to Kassouf, knowledge of a proceeding is a necessary element of a charge of violating 26 U.S.C. § 7212, and the original Indictment failed to allege such knowledge. However, none of the cases cited by Wright stand for the proposition that failure to allege a specific element of the offense in the initial indictment prevents a superseding indictment including that element from relating back for statute of limitations purposes. See, e.g., Smith, 197 F.3d at 229 (citing U.S. v. Freidman, 649 F.2d 199, 203-04 (3d Cir. 1981) (discussing how "a facially invalid original indictment, which did not allege the proper $5000 minimum amount for prosecution under the applicable statute, was corrected by a superseding indictment properly alleging the $5000 minimum without being troubled by the statute of limitations."); see also Russell v. United States, 369 U.S. 749, 764, 82 S.Ct. 1038, 8 L.Ed.2d 240 (1962) ("whether the indictment contains the elements of the offense intended to be charged" is just one "of the criteria by which the sufficiency of an indictment is to be measured."). Indeed, such a rigid standard would be contrary to this Circuit's binding precedent. Smith, 197 F.3d at 229 (citing U.S. v. Grady, 544 F.2d 598, 601 (6th Cir. 1976) ("[n]otice to the defendants of the charges, so that they can adequately prepare their defense, is the touchstone in determining whether a superseding indictment has broadened the original indictment."); see also Fed. R. Grim. P. 7(c)(1) ("indictment or information must be a plain, concise, and definite written statement of the essential facts constituting the offense charged[.]"). 
Further, this case is factually distinct from U.S. v. Ogbazion, in which the Court dismissed a charge of violation of 26 U.S.C. § 7212(a) because the indictment failed to allege that the defendant was aware of any IRS proceeding when he undertook the allegedly obstructive acts. No. 3:15-cr-104-TSB-1, 2016 U.S. Dist. LEXIS 143358, 2016 WL 6070365, at *17 (S.D. Ohio Oct. 17, 2016) (Black, J.) (quoting Kassouf, 144 F.3d at 957)). The Ogbazion indictment did not allege any interaction between the defendant and an IRS agent, No. 3:15-cr-104-TSB-1,, and the Court noted that it was undisputed that "there [was] no evidence that Defendant was aware of any pending IRS actions prior to November 2011." 2016 U.S. Dist. LEXIS 143358, 2016 WL 6070365, at *17. In this case, Wright's allegedly false statement to Bettelon on November 17, 2010, was in both the original and Superseding Indictments. Moreover, both Indictments allege that Wright made that false statement "to an IRS revenue agent[,]" The allegations in the original Indictment were sufficient to put Wright on notice that: (a) there were IRS active proceedings; (b) Wright was aware of those proceedings; and (c) he allegedly made a false statement in an effort to obstruct one or more of those proceedings. In other words, "the essential facts constituting the offense charged[,]" Fed. R. Cram. P. 7(c)(1), were all present in the original Indictment. The Superseding Indictment made no new allegations that changed or broadened the circumstances surrounding that supposed obstructive act. The addition of the phrase "conducting an audit of B&P Company, Inc.'s corporate income tax returns[,]" did nothing more than clarify the proceeding that was implicitly referenced in the original Indictment. 
Finally, Wright's argument that the addition of three alleged overt acts constitutes a material broadening of the Superseding Indictment, is unavailing. It is well settled that the addition of new overt acts to a superseding indictment does not bar that later indictment from relating back to the original indictment, as long as it does not alter the scope of the offense being charged and "the original indictment clearly put [the] defendants on notice of the charges against which they were to defend themselves at trial." U.S. v. Lash, 937 F.2d 1077, 1082 (6th Cir. 1991). For the reasons discussed above, the Superseding Indictment did not alter the scope of Count One, and the addition of the three overt acts did not deprive Wright of adequate notice of the charge against him. 
As the Superseding Indictment did not materially broaden or substantially amend the essential portions of the charge of violating 26 U.S.C. § 7212(a), it relates back to the original Indictment. Smith, 197 F.3d at 228. As Wright's last alleged obstructive act occurred [*17]  within six years of the original Indictment, and "the unit of prosecution remains the corrupt endeavor and not the pending proceeding," even after Kassouf, Count One is not time-barred.
The Court did hold that certain actions related to the ambiguous original indeterminate restitution amount could not be asserted in support of the tax obstruction count.

Thursday, December 28, 2017

Article with Predictions, Properly Hedged, on Outcome in Marinello (12/28/17)

Accounting Today has an article on Marinello reflecting some observations on oral argument and predictions as to the Supreme Court's final result in the case.  See Andrew Harrer/Bloomberg,, The ‘one-man conspiracy’ statute (Accounting Today 12/27/17), here.  I have covered the oral argument in Marinello.  See More on the Marinello Transcript of Oral Argument (Federal Tax Crimes Blog 12/9/17), here; and First Comments on the Marinello Oral Argument Transcript (Federal Tax Crimes Blog 12/6/17), here.  I am not able to make the type of predictions made in the Accounting Today article.

Here was some key excerpts from the Accounting Today article:
"Justice Sotomayor and Justice Gorsuch offered a reading of the tax obstruction statute that is likely to carry the day,” said Jeffrey Green, a partner at Sidley Austin. “That is, that the IRS must be engaged in some type of active proceeding, even if that is not a full-blown audit or investigation. The assistant to the solicitor general ably withstood withering questioning from the bench, but his appeal to the DOJ’s charging discretion was undone by the DOJ’s new policy requiring that the most severe charge be made in all cases.” 
* * * *\ 
“Not filing a tax return is a misdemeanor, not a felony,” Green noted. “But the government’s interpretation would make a felony obstruction charge automatic, because the IRS can’t do its job if they can’t look to see if you’ve reported all of your income.”
Green anticipates that the Court will reverse and remand to the Second Circuit to apply a new standard to the facts of Marinello’s case. 
“It’s almost certain that they will reverse,” he said. “It will be interesting to see where they will land. It will probably be a bit short of what the petitioner is asking for — that there needs to be a pending proceeding. Justices Sotomayor and Gorsuch offered a reading a bit broader than that. On remand, it could potentially be a danger for Mr. Marinello depending on how the Supreme Court writes the case.” 
“Quite likely it will be a 9-0 decision, and the opinion will be written by Justice Sotomayor,” he said. 
“My sense is that it will be reversed,” agreed Don Falk, an appellate litigation partner at Mayer Brown. “But the court won’t adopt either the petitioner’s or the government’s position.” 
“The court may decide based on the mens rea [knowledge of wrongdoing] component, or it may focus on the ‘administration of this title’ element. My best guess is that they would require some kind of affirmative action by the taxpayer that occurs after any contact by the IRS. A letter or phone call would be enough — it would not have to be a formal proceeding.” 
“It’s rare to hear a justice described a statute in such terms as ‘ungodly broad’ and still find it constitutional,” observed Hochman. “The reason is that the due process clause requires a statute to alert someone as to when they’re crossing a line in order to find them criminally responsible for their action. What they seemed [at oral argument] to be suggesting is that the statute covers many actions that they don’t believe to be potentially criminal.” 
“The indications seem to be that they will reverse,” he said. “It looks like Mr. Marinello found a right collection of justices to hear his case.”
One other point discussed in the article is that the tax obstruction crime, § 7212(a) Omnibus Clause, is a " one-man conspiracy statute."  The parallels between the defraud/Klein conspiracy and tax obstruction are striking.  Hence, as I have suggested before, whatever the Supreme Court does may affect the defraud/Klein conspiracy.

Procedurally Taxing Blog Discussion of Two Designated Orders (12/28/17)

I write today on two Tax Court designated orders regarding cases of interest to enthusiasts of tax crimes.  In addition to writing opinions as T.C.'s or T.C.M.'s, the Tax Court issues orders in cases that are published on its web site.  The Tax Court's explanation, here,
The Tax Court provides two tools to assist the public in locating orders of interest: Today’s Designated Orders and Orders Search. Users of both of these tools are reminded that Tax Court Orders shall not be treated as precedent. Rule 50(f). 
Orders appearing on Today’s Designated Orders are designated by the individual Judges, Senior Judges, and Special Trial Judges who issued the orders. Designated orders may exclude routine, nonsubstantive orders such as scheduling orders or rulings on motions for extension of time. Designated orders are not a complete inventory of all orders of the Court nor are these versions official documents of record. Designation practices of Judges vary; some select more of their orders for posting here than others. 
In contrast, the Orders Search function contains all orders issued after June 17, 2011 by all Judges, Senior Judges, and Special Trial Judges of the Court, except it does not include computer-generated mailings of form orders, such as standing pretrial orders, standing pretrial notices, orders for amended petition & filing fee, orders for filing fee or waiver, and orders for ownership disclosure statement.
The Procedurally Taxing Blog, here, regularly writes on designated orders of general interest to tax procedure enthusiasts.  The PT Blog is an important resource for tax practitioners generally, but its discussion of designated orders is particularly helpful to identify items of interest in the designated orders.

Today, the PT Blog discusses, here, two designated orders of interest for criminal tax enthusiasts.  I won't write on these two orders because the author of the Blog entry does that well.  I will add, where I think appropriate, some information for context./

In Dicker v. Commissioner (Dkt 12007-16L Order dated 12/12/17), here, the Court denied the IRS summary judgment in a CDP proceeding involving restitution based assessment ("RBA") under the procedures whereby the IRS may assess criminal restitution "as if such amount were such tax" without further ado after the restitution award becomes final.  § 6201(a)(4)(A),here.  In this case, Dicker had been convicted for promoting a bull shit shelter for his work with BDO and Daugerdas.  See BDO Seidman Personnel Sentenced for Bullshit Tax Shelter Promotion (Federal Tax Crimes Blog 6/11/14), here.  Presumably the RBA was for the taxes of the tax shelter investors.  The issue addressed in the order is the adequacy of the CDP proceeding.  Specifically, there was some breakdown in the communications between the Appeals Settlement Officer ("SO") and the taxpayer's representative, who had represented the taxpayer in the criminal case.

The PT Blog discussion of Dicker ends with this conclusion
My advice to criminal tax counsel would be to appropriately limit a Form 2848 to that criminal representation—if that’s even necessary, as one could simply enter an appearance in the criminal tax case. I think a Form 8821 may have been more useful here, as that allows for information flow between the Service and another individual, without suggesting to the Service that the individual represents the taxpayer. If Ms. Gavioli’s role was limited to providing useful information, this would have been a safer option. If it wasn’t, then Mr. Dicker is in trouble.
In Soleimani v. Commissioner (Dkt. 8884-13 Order dated 12/12/17), here, which the PT author describes as a "page turner," the taxpayer sought to prove a foreign seizure loss (Iran) with forged Iranian documents.  After this skullduggery turned up in the course of the Tax Court case, "At the end of trial, respondent orally moved under Rule 41(b)(1) to conform the pleadings to the evidence, such that a fraud penalty under section 6663(b) could be asserted."  The Court denied the IRS's attempt to assert the civil fraud penalty.  I refer for the rest to the PT blog and the opinion.

Wednesday, December 27, 2017

Agostino & Associates Monthly Journal of Tax Controversy Articles of Interest to Tax Crimes Enthusiasts (12/27/17)

Tax Crimes enthusiasts should regularly read Agostino & Associates Monthly Journal of Tax Controversy.  The December 2010 edition, here, has the following articles of interest:

  • Frank Agostino and Edward Mazlish, Protecting the Taxpayer Facing Passport Revocation (Agostino & Associates Monthly Journal of Tax Controversy December 2010)
  • Frank Agostino and Valerie Vlasenko, Fifth Amendment Privilege in Tax:  How to Keep the Case Moving While Protecting the Taxpayer (Agostino & Associates Monthly Journal of Tax Controversy December 2010)

Article on Points in the Indictment of Manafort and Gates Obtained by the Special Counsel (12/27/17)

This article offers some good information that white collar crimes (including tax crimes) lawyers should know.  Betsy Woodruff, Robert Mueller May Indict Paul Manafort Again (Daily Beast 12/26/17), here.  The background is the Paul Manafort indictment obtained by the Special Counsel's office.  Key excerpts and comments:

1.  "[T]here’s a broad expectation that Mueller will file what’s called a superseding indictment of Manafort and Rick Gate."  I offer at the bottom of this blog excerpts from my now discontinued Federal Tax Crimes Book.  I think the discussion is still good.  On the effect of superseding indictments, the article quotes Jonathan Turley, the frequent pundit (at least in his own mind), as saying that there is a tactical reason for superseding indictments in that they "tend to grind defendants a bit more over time."  While superseding indictments may have that effect, I don't think the federal prosecutors stage superseding indictments for that purpose.  In my experience and observation, there is some need for the timing of the original indictment and the state of the investigation does not make the additional matters in the superseding indictments ready for indictment at the time of the original indictment.  The article later describes use of superseding indictments as:
“Superseding indictments are frequently brought in financial investigations due to defendant recalcitrance to cooperate and also because they take so long to be put together,” said Martin Sheil, a retired supervisory special agent for the IRS’ criminal investigations unit.
The article speculates that the superseding indictment may charge tax crimes.  There has been speculation that the Special Counsel's team had not yet obtained the required Tax Division approval to charge tax crimes and that, when and if that approval is obtained, tax crimes counts would be included in a superseding indictment.  The article says that obtaining Tax Division approval "can be time-consuming, and the would-be defendant’s attorneys often can petition Tax Division lawyers against authorizing the charges."  I assume that all readers of this blog are familiar with the process for a putative defendant to invoke a conference with Tax Division Criminal Enforcement Section attorneys to attempt to dissuade CES from obtaining an indictment.

2.  The article quotes an unnamed former Tax Division prosecutor as describing the original indictment as a
“speaking indictment"—in other words, an indictment that contains more information than necessary. 
“It’s a way of dirtying up a defendant without having to actually prove the conduct,” he said. “I think, in fairness to them, they probably rushed it because they didn’t want to wait for the tax division approval on those tax counts. That, I assume, would be working its way through the system.”
I found a good discussion of speaking indictments.  Ronald Levine, Talk Is Cheap: The Misuse of ‘Speaking’ Indictments (Law Journal Newsletters Nov. 1916), here.

I would note that speaking indictments, like briefs, are intended to state the prosecutors' view that its audience will find persuasive.  The audience is often the audience of public opinion.  Levine says:
In other words, by design, the government’s speaking indictments advocate a story — one usually reserved for opening and closing jury arguments, but now intended for the news media, the jury pool and the trial jury. See Crafting Helpful Indictments, United States Attorneys’ USA Bulletin at 9, 18 (July 1998)  (“An indictment … is an advocacy tool … ‘Speaking indictments’ are more effective because they help notify the defense, court and jury of the Government’s theory.”).
Levine notes another benefit:
At the back-end of prosecutions that go to trial, “advocacy” speaking indictments may afford the government a second, and this time ex parte, closing argument to the jury. This occurs if and when the trial court reads from the indictment or sends it back with the jury during its deliberations.
Levine then offers guidance as to responses.

Tuesday, December 26, 2017

IRS CI Annual Report for Fiscal Year 2017 (12/26/17)

Prefatory Note:  I have some built up inventory of topics for this blog.  I hope to get to them at least by next week.  As with many of you, the holidays have demanded that I focus attention elsewhere.

I offer a link to IRS CI's annual report.  I will do some analysis later and do a further posting if there is something I think the readers might be interested in.  In the meantime, I cut and paste the formal notice, IR-2017-208, with the link to the report provided as a link in the cut and paste:

IR-2017-208, December 20, 2017

WASHINGTON — The Internal Revenue Service today announced the release of the Criminal Investigation Division’s (CI) annual report, reflecting significant accomplishments and criminal enforcement actions taken in fiscal year 2017.

Focusing on employment tax, refund fraud, international tax enforcement, tax-related identity theft, public corruption, cybercrime, terrorist financing and money laundering, CI initiated 3,019 cases in FY 2017.  The number of cases initiated is directly tied to the number of special agents that CI has.

“We have the same number of special agents—around 2,200—as we did 50 years ago,” said Don Fort, Chief, CI.  “Financial crime has not diminished during that time– in fact, it has proliferated in the age of the Internet, international financial crimes and virtual currency. Despite these challenges, we continue to do amazing work, investigating some of the most complicated cases in the agency’s history.  Criminals would be foolish to mistake declining resources for a lack of commitment in this area.”

The annual report is released each year for the purpose of highlighting the agency’s successes while providing a historical snapshot of the make-up and priorities of the organization. The very first Chief of IRS CI, Elmer Lincoln Irey, served from 1919 to 1946 and envisioned releasing such a document each year to showcase the agency’s investigative work.

CI is the only federal law enforcement agency with jurisdiction over federal tax crimes. This year, CI again boasted a conviction rate rivaling all federal law enforcement at 91.5% while spending more than 72% of their investigative time working tax cases. That conviction rate speaks to the thoroughness of the investigations and CI is routinely called upon by prosecutors across the country to lead financial investigations on a wide variety of financial crimes including international tax evasion, identity theft, terrorist financing and transnational organized crime.

CI investigates potential criminal violations of the Internal Revenue Code and related financial crimes in a manner to foster confidence in the tax system and compliance with the law. The interactive report summarizes a wide variety of CI activity throughout the fiscal year and includes case examples from each field office on a wide range of financial crimes.

“Since taking over as the Chief of CI this summer, I could not be prouder to lead the men and women of this organization,” said Fort. As financial crimes—and the way we investigate them—continue to evolve, CI continues to set the standard for financial investigations worldwide.”

Monday, December 18, 2017

On Judge Kozinski's Retirement and Tax Crimes Opinion in Caldwell (12/18/17)

Judge Kozinski retired from the Ninth Circuit Court of Appeals.  See here.  He retired under a cloud of allegedly inappropriate conduct.  I can't speak to his inappropriate conduct other than to say that, if it occurred, as seems somewhat likely given the number of accusers, it was wrong and his leaving the federal bench is well-earned.

I do remind readers of this blog that Judge Kozinski has penned some great opinions in many areas of the law, including tax and tax crimes.  My favorite Judge Kozinski opinion on tax crimes is United States v. Caldwell, 989 F.2d 1056 (9th Cir. 1993), here.  He famously opens the opinion with:
We consider whether conspiring to make the government's job harder is, without more, a federal crime.
The federal crime in issue was the defraud / Klein conspiracy in 18 USC § 371, here, which has a common formulation of being conspiratorial conduct to impair or impede the lawful function of the IRS (or the administration of the tax law by the IRS).  Judge Kozinski's opinion emphasizes the need that the conduct must include "deceit, craft or trickery, or at least by means that are dishonest." as required by Hammerschmidt v. United States, 265 U.S. 182 1924), here.  (The terms fraud and defraud normally connote in the federal criminal law that the defendant acquire another's property by intentional misrepresentations, but the words in § 371 have been interpreted more broadly, but still require that the conduct must be deceitful or dishonest.

I hope readers will recognize from the way he frames the issue projects what his answer is.  (Appellate lawyers always try to frame appellate issues in a way that projects the conclusion they wish to reach, and judges do that as well.)

I urge students and lawyers to read the opinion both on its own and for the resonances with the tax obstruction crime in § 7212(a) (the Omnibus Clause), now before the Supreme Court in Marinello v. United States, 839 F.3d 209, 218 (2d Cir. 2016), cert. pending..  For myself, I wrote an article some time back on tax obstruction crimes and used Judge Kozinski's opinion on Caldwell to frame the issues.  John A. Townsend, Tax Obstruction Crimes: Is Making the IRS's Job Harder Enough, 9 Hous. Bus. & Tax. L.J. 255 (2009), here and in an online appendix with examples, Tax Obstruction Crimes: Is Making the IRS's Job Harder Enough? Online Appendix, 9 Hous. Bus. & Tax L.J. A-1 (2009), here.

Monday, December 11, 2017

Court Holds that Foreign Law Not Proved and Applies U.S. Law (12/11/17)

In Nineveh Investments Ltd. v. United States, 2017 U.S. Dist. LEXIS 199486 (E.D. Penn. 2017),  here, the Government assessed tax against one Gary Kaplan and then, in collection of the tax, levied on assets nominally owned by either Nineveh Investments, Ltd. ("Nineveh") or the Kaplan Family Trust ("KFT"); Nineveh brought a wrongful levy suit.  (Related Documents are (i) the docket entries as of today, here, the complaint, here, the answer, here, and the Government response on the motion, here.)  

The underlying liability for Gary Kaplan was litigated in Kaplan v. Commissioner, T.C. Memo. 2014-43, here, where the Court stated the issues and its bottom-line holding in the introduction:
 Petitioner did not file Federal income tax returns nor make any tax payments for 2004 and 2005, the years at issue. Pursuant to his authority under section 6020(b) , respondent prepared substitutes for returns for both years.
 In a notice of deficiency, respondent determined the following income tax deficiencies and additions to tax:

Year
Tax
Sec. 6654
Additions to
Sec. 6651(a)(1)
tax
Sec. 6651(a)(2)
2004
$16,944,855
$485,572
$3,812,592
$4,236,214
2005
    7,424,638
  297,514
  1,670,544
  1,856,160
 Petitioner resided in Missouri when he timely petitioned this Court. The issues before us are:
(1) whether for the years at issue petitioner is liable for self-employment tax on his income as a consultant for BetOnSports, PLC, and capital gains tax from the sale of shares of BetOnSports, PLC. We hold that he is; and
(2) whether for the years at issue petitioner is liable for additions to tax under section 6651(a)(1) for failure to file timely, under section 6651(a)(2) for failure to pay tax timely, and under section 6654 for failure to make estimated tax payments. We hold that he is.
The Nineveh Court states the facts succinctly, so I just offer them here:
II. BACKGROUND 
This lawsuit arises out of tax levies by defendant United States on the claimed assets of terminated third-party defendant Gary Kaplan to satisfy Kaplan's outstanding tax obligations. Kaplan's tax obligations stem from the sale of his shares in BetOnSports, PLC, an overseas gambling operation, in public offerings in 2004 and 2005. Doc. No. 37 at 3. In anticipation of the public offerings, Kaplan settled two trusts based in the Isle of Jersey, to which he transferred his shares in BetOnSports. Doc. No. 38 at 2. During the public offerings, the trusts sold Kaplan's shares in BetOnSports for approximately $97 million, which Kaplan invested in bank accounts in Switzerland and the Isle of Jersey. Id. at 3. In 2010, Kaplan settled the Kaplan Family Trust ("KFT") under the laws of the Bahamas as a successor to the two trusts based in the Isle of Jersey. Doc. No. 37 at 4. Plaintiff Nineveh Investments Limited is a Bahamian corporation that serves "as the underlying company for KFT's financial assets." Id. In 2014, the United States Tax Court ruled that Kaplan earned taxable income from the 2004 and 2005 sales of his shares in BetOnSports. Doc. No. 38 at 3. Consequently, on February 24, 2016, the Internal Revenue Service ("IRS") placed levies on assets transferred by Kaplan to plaintiff. Doc. No. 37 at 4. 
On March 4, 2016, plaintiff Nineveh Investments Limited filed suit in this Court, alleging that the levied assets were not taxable property belonging to Mr. Kaplan, but only to plaintiff and KFT. The Complaint set forth a single count, for wrongful levy, and sought return of the levied assets, with interest and costs. Plaintiff also filed suit in the Bahamian Supreme Court, a trial-level tribunal, against Kaplan for determination of "the rights of the discretionary beneficiaries" of KFT. Doc. No. 37, exh. B ¶ 5. The United States was invited to "participate" in the Bahamian proceedings, but declined to do so. Doc. No. 37 at 3. On July 6, 2017, the Bahamian Supreme Court issued an Order ("July 6, 2017 Order"), ruling that the levied assets "do not form a part of the personal assets of Gary Kaplan." Doc. No. 37, exh. C. Plaintiff now asks this Court to adopt the July 6, 2017 Order.

Questions About New DOJ Tax Policy on FBAR Sentencing Guidelines (12/11/17)

I recently posted on the new DOJ Tax position as to the Sentencing Guidelines calculations for FBAR crimes.  See More on New DOJ Tax Position on FBAR Sentencing Guidelines (Federal Tax Crimes Blog 11/9/17), here; and Another FBAR Plea And Notice of Government Change of Position on Applicable Guidelines (Federal Tax Crimes Blog 10/27/17), here.  I am preparing an  update for the next supplement of FBAR plea Guidelines in my chapter 12, titled Criminal Penalties and the Investigation Function, in Michael Saltzman and Leslie Book, IRS Practice and Procedure (Thomsen Reuters 2015).  I have hit upon some issues for which I don't know the answers.

Assume that the taxpayer had an FBAR violation for 4 years -- years 01 - 04 -- involving unreported account of $1,000,000 in each of the 4 years.  The taxpayer also had a tax loss in each of the 4 years related to the account of $13,333 per year resulting from the omission of $40,000 interest income per year (aggregating $53,333 tax loss for all 4 years).  The taxpayer pleads to a one year FBAR count for year 04.

Under SG § 2S1.3(a), the Base Offense Level is 6 plus the incrementing levels in the Theft Loss table in § 2B1.1.  The question is whether the 3 years to which the taxpayer did not plead (i.e., years 01 - 03 at amounts of $1,000,000 in each year) is relevant conduct that must be considered in applying the table in § 2B1.1?  If so, the number for the table is $4,000,000 (including 01 - 04) and the Base Offense Level is 24.  If not, the number for the table is $1,000,000 (only 01, the year of conviction) and the Base Offense level is 20.

The nonconviction years (Years 01 - 03) seem to fit the requirements for relevant conduct in § 1B1.3.  Relevant conduct includes:
(2)       solely with respect to offenses of a character for which §3D1.2(d) would require grouping of multiple counts, all acts and omissions described in subdivisions (1)(A) and (1)(B) above that were part of the same course of conduct or common scheme or plan as the offense of conviction.
I won't work through the grouping rules, but I am sure that they would require grouping.  (For example, if the count of the plea had been to tax evasion, the tax loss in the nonconviction years 01 - 03 would be included as relevant conduct.)

So, it looks like the nonconviction years would be relevant conduct for the conviction year and the FBAR amounts would be included in the § 2B1.1 calculation.

This raises the second question.  Are the tax loss amounts relevant conduct for the FBAR violation?

And the third question.  If the plea had been to a tax violation (e.g., single year tax evasion), would the Base Offense Level under § 2T1.1 include the FBAR violations?  If so, how would they be considered (the tables increment on different bases, thus like comparing apples to oranges).

I would appreciate hearing from anyone knows the answers or has any thoughts as to these questions.  Please let me know either  by comment or by email to jack@tjtaxlaw.com.

In this regard, the JD Supra article said that DOJ Tax would be issuing some type of guidance soon, so we may have to await that.

Sunday, December 10, 2017

Case with Good Discussion of Venue for Tax Evasion Charges (12/10/17)

In United States v. Michael Sang Han, 2017 U.S. Dist. LEXIS 198609 (D. D.C. 12/1/17) (Criminal Action No. 15-142 (JEB)), which I do not link because I provide everything relevant to this post in the post), the Court starts the opinion with this introduction:
Defendant Michael Han allegedly promised investors that his company Envion would usher in a black gold rush by turning plastic back into oil. According to the Government, although that concept never materialized, it did not stop Han from stringing along his financers, ultimately defrauding them out of nearly $40 million. With trial a couple of months away, Defendant now brings several Motions challenging the validity of the Indictment. Specifically, he asks the Court to: (1) require the Government to provide a bill of particulars; (2) dismiss Counts 10 and 11 as lacking venue [for the tax evasion counts]; (3) dismiss Count 12 for first-degree fraud as duplicative of the wire-fraud charges (Counts 1 and 2); and (4) dismiss Count 3 for securities fraud as failing to state an offense. Finding no merit in any of these positions, the Court will deny all of the Motions.
I offer here the Court's discussion of the disposition of the tax evasion venue motion.  Students of tax crimes should find it useful.  I think the Court's discussion is pretty good.  However, for those who want more background and context, I offer here the venue chapter from the latest working draft of my Federal Tax Crimes book which is good through about 2015 and is still good on venue.  (That book is now discontinued because I offer a substantially overlapping Chapter on tax crimes in Michael Saltzman and Leslie Book, IRS Practice and Procedure (Thomsen Reuters 2015).)

The Court's tax evasion venue discussion in Han is as follows:
B. Venue (Counts 10 and 11) 
Han next moves to dismiss the tax-evasion counts (10 and 11) on the ground that venue is not proper in the District. See ECF No. 45. The Government has a choice of forum in which to prosecute but still ultimately bears the burden of establishing proper venue by a preponderance of the evidence. See United States v. Lam Kwong-Wah, 924 F.2d 298, 301 (D.C. Cir. 1991). The Court views such evidence in the light most favorable to the Government when determining whether it has done so. Id. 
The Indictment charges Han with violations of 26 U.S.C. § 7201, the prosecution of which requires a willful "affirmative act constituting an evasion or attempted evasion of" a tax deficiency. Sansone v. United States, 380 U.S. 343, 351 (1965). Tax evasion is a continuing offense, meaning that it may be prosecuted in any jurisdiction "through which a process of wrongdoing moves." United States v. Johnson, 323 U.S. 273, 276 (1944); see also 18 U.S.C. § 3237(a) (allowing for "any offense against the United States [that is] begun in one district and completed in another, or committed in more than one district" to be "prosecuted in any district in which such offense was begun, continued, or completed"). The offense is not completed until the person's tax return is filed, signed, and mailed, but it begins whenever the defendant makes a "willful attempt to defeat and evade" tax liability. Spies v. United States, 317 U.S. 492, 499 (1943). Venue is thus proper in any district where the defendant "beg[a]n, continued, or completed" an affirmative act with a "tax evasion motive." United States v. Strawberry, 892 F. Supp. 519, 521 (S.D.N.Y. 1995). 
Here, Han argues that § 7201 requires that he commit an act while actually present in the District, which he believes the Government has not sufficiently alleged. Defendant is correct that the Indictment does not state that Han committed any act with a tax-evasion motive while in D.C. Instead, it alleges that he (1) "cause[d]" a fax to be transmitted "from the District directing the transfer of $20 million to" his personal bank account, see Indictment, ¶ 46, and (2) provided false information to Envion bookkeepers who were located in D.C., which resulted in the creation of false business records. Id., ¶¶ 52, 54. Han acknowledges that the Indictment contains information that he interacted with individuals within the District but contends that he "cannot be subject to venue in the District of Columbia due to the alleged acts of a third party." ECF No. 57 (Reply) at 4; see Mot. at 2 (noting that Indictment "claims that [he] concealed information from, or misled, unnamed Envion employees who were allegedly located in the District of Columbia for some period of time").