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:

Sec. 6654
Additions to
Sec. 6651(a)(1)
Sec. 6651(a)(2)
 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:
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

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").

Saturday, December 9, 2017

More on the Marinello Transcript of Oral Argument (12/9/17)

On Wednesday, I posted First Comments on the Marinello Oral Argument Transcript (Federal Tax Crimes Blog 12/6/17), here.  I had then anticipated a later offering a more detailed analysis of the transcript, here.  After reading the transcript through more I decided to offer some general comments rather a comprehensive discussion or try to predict the outcome.  In these comments, I often add my own thoughts and these thoughts may or may not be correct or may or may not be known to the Justices having to decide the case.  I will try to indicate the part that reflects my own thoughts.

1.  There was some discussion as to the role of the tax obstruction crime, § 7212(a)'s Omnibus Clause, in relation to other lesser or greater tax crimes.  Most pertinent was the concern expressed by Marinello's lawyer that a crime defined as a misdemeanor (such as failure to file a return, § 7203, or filing a false W-4 to lessen the withholding, § 7205) could be charged as felony tax obstruction at the discretion or whim of the prosecutor.  See e.g., Tr. 8-10 & 63-64.  The related concern is that Congress, by providing for the lesser misdemeanor for the described conduct, could not have meant to have the conduct charged as felony tax obstruction.  JAT Comment:  This genre of concern, however, is baked into the criminal laws and tax crimes specifically.  Conduct is often described in more than one criminal law with different punishments (maximum sentences).  Specifically, in the tax context, the prosecutor often has the discretion to charge particular conduct as either tax evasion, a five year felony under § 7201, or tax perjury, a three-year felony under § 7206(1).  Yet, that does not compel the prosecutor to charge the greater crime rather than the lesser crime or the lesser crime rather than the greater.  (By lesser crime, I do not mean the same as the concept of the lesser included offense, for tax perjury is not a lesser included offense to tax evasion.)

2.  In a related vein, there was discussion (Tr. 46-47; 55-56) of the general DOJ policy to charge the more serious offense. The question was whether this guidance would require or tilt in favor of charging the more serious crime, tax obstruction, rather than a misdemeanor crime that more precisely describes the conduct.  JAT Comment: The provision referenced, I presume, is USAM 9-27.300 - Selecting Charges—Charging Most Serious Offenses, here. (Note that the table of contents says this section is titled Selecting Charges—Conducting an Individualized Assessment, but the section itself is titled as indicated).  That provision directs the prosecuting attorney to make an individualized assessment which "will generally conclude that he or she should charge, or should recommend that the grand jury charge, the most serious offense that is consistent with the nature of the defendant's conduct, and that will probably be sufficient to sustain a conviction."  The most serious offense is one that "yields the highest range under the Sentencing Guidelines."  However, SG Appendix A - Statutory Index directs that the Sentencing ranges are calculated under either § 2J1.2 (obstruction  of justice) or § 2T1.1 (the tax guidelines).  In most cases, the sentencing is under § 2T1.1, so that the range is calculated the same as tax crimes, including the misdemeanor failure to file.  Since failure to file is rarely prosecuted for a single year, in all failure to file cases that get prosecuted, the indicated guidelines sentence would be the same and would not be limited by the counts of conviction cap.  (In other words, if the Guidelines range exceeded a single year, the prosecutor would not accept a plea for a single year which would otherwise limit the sentence to one year.)  Finally, I am fairly confident that where failure to file, even for multiple years, was the only conduct, the failure to file crime would be charged even if theoretically the obstruction crime could be charged.  Marinello's concern, echoed by some Justices, was that the obstruction crime if described broadly enough could make the same conduct either a misdemeanor or felony when Congress described the specific conduct as a misdemeanor.

3.  Also, in a related vein, the Government attorney said (Tr. 61) that
[Mr. Parker] The government would have brought a tax evasion charge in this case but for the fact that Mr. Marinello so destroyed his records that it was unable to prove beyond a reasonable doubt that there was an actual tax deficiency.
And so what I think Petitioner's proposed construction would do is it would effectively allow individuals to evade their taxes and then obstruct their way down to a misdemeanor charge, or if they are particularly good at it, maybe obstruct their way out of criminal penalties at all. 
And the government could do nothing about it, unless the individual actually happened to be obstructing a pending audit or investigation.

More on New DOJ Tax Position on FBAR Sentencing Guidelines (11/9/17)

At the 34th Annual National Institute on Criminal Tax Fraud in Las Vegas, a senior DOJ Tax CES attorney, Mark Daly, discussed DOJ Tax's new policy to seek sentencing under the Part 2S Guidelines rather than under the Part 2T Guidelines.  See DOJ Announces Major New Shift in Criminal Sentencing in Offshore Tax Matters (JD Supra 12/8/17), here.

I had previously discussed that shift in Another FBAR Plea And Notice of Government Change of Position on Applicable Guidelines (Federal Tax Crimes Blog 10/27/17), here.  The JD Supra article provides more detail on the consequences of that shift.

First, since the SG § 2S1.3 Guideline range is based on the value of the offshore account rather than the tax loss associated with the account, the dollar amount and resulting Guideline range is likely to be multiples of the Guideline range that would have been calculated under 2T1.1.  The JD Supra article says:
Daly gave the example of his United States v. Kim case in the Eastern District of Virginia, where the Part 2T tax loss was on the order of $150,000, but the Part 2S1.3 value was $28 million. Depending upon the circumstances, that could be a ten-fold increase in the sentence. In Kim, the DOJ asserted that Part 2S1.3 was the correct guideline, but due to a prior agreement with the defendant, the DOJ would in that case agree to sentencing based on Part 2T. Daly stated that the DOJ intended its language asserting that Part 2S1.3 was the correct guideline as a warning to the defense bar in other such cases.
In addition, the JD Supra article says:
The second problem is that Part 2S1.3 allows for a 2-level enhancement where a defendant has also been convicted of an offense under subchapter II of chapter 53 of title 31–which includes filing a false or misleading FBAR. Because an FBAR must be filed each year along with the tax return, the DOJ will now seek to add charges under title 31 chapter 53 to obtain a 2-level enhancement at sentencing.
To trace this through the Guidelines, SG § 2S1.3(b)(2) provides:
(2)       If the defendant (A) was convicted of an offense under subchapter II of chapter 53 of title 31, United States Code; and (B) committed the offense as part of a pattern of unlawful activity involving more than $100,000 in a 12-month period, increase by 2 levels.
Application Note 3 says:
3.      Enhancement for Pattern of Unlawful Activity.—For purposes of subsection (b)(2), "pattern of unlawful activity" means at least two separate occasions of unlawful activity involving a total amount of more than $100,000 in a 12-month period, without regard to whether any such occasion occurred during the course of the offense or resulted in a conviction for the conduct that occurred on that occasion.
The inference of the article is that if the contemporaneous filing of the false FBAR or failure to file the FBAR occurs at the same time that the tax return willfully failing to report the income is filed, this two level enhancement will automatically apply.

The question is whether, in any event, courts will continue the pattern of Booker downward variances consistent with the level of sentencing under Booker variances when they applied the tax Guidelines.  I would expect criminal defense attorneys to submit detailed charts or spreadsheets showing the pattern of sentencing in the past and urging that the sentences be consistent with that pattern.  That was done in the Warner case, apparently to good effect, and I am sure in other cases as well.  I expect that to occur in the future.  I am not sure how the Courts will react to the Government's Eureka moment as to the appropriate Guidelines calculation.  I suspect that Courts will continue to apply Booker variances, and that, at the end of the day, even if the § 2S1.3 Guidelines are applied, the final Booker sentence will be the roughly same as the Booker sentence would have been had the tax Guidelines applied.  That is just my speculation.

And, I expect that, if available, a Government offer as to a plea deal for either a tax crime (evasion or tax perjury) or FBAR crime, a defendant should seriously consider the tax crime.

The article reports that Daly said that DOJ Tax policy guidance on the new position would be "forthcoming."

Wednesday, December 6, 2017

First Comments on the Marinello Oral Argument Transcript (12/6/17)

I perused the transcript, here, for the oral argument in Marinello v. United States, 839 F.3d 209, 218 (2d Cir. 2016), cert. pending.  I did not try to parse the give and take, but did have some general impressions that I will comment on here.  I may add some more if I have time to dig deeper in the transcript.

1.  Some of the Justices seemed particularly concerned about the seeming scope of § 7212(a)'s Omnibus Clause.  Under what they viewed as the Government's construction, they were concerned that seemingly innocuous conduct might be a felony under that provision and wondered whether there might be some limitation so that it applied only to conduct worthy of a felony crime.  The Government's position is that the mens rea is such a limitation.  I discussed the Government position in Marinello Tax Obstruction 7212(a) Oral Argument is Wednesday (Federal Tax Crimes 12/3/17), here.  In view of the concern expressed by some of the Justices, I thought it might be helpful to again consider the relationship of the Omnibus Clause and the defraud / Klein conspiracy which has been a frequent topic on this blog.  I collect my principal prior blog entries on this subject at the end of this blog entry.

Here is a typical Omnibus Clause jury instruction (from United States v. Sorensen, 801 F.3d 1217, 1229 (10th Cir. 2015), but paralleling the DOJ CTM instructions No. 7212(a)-1 through 7212(a)-4,  here; I bold-face the particularly pertinent text:
First: The defendant in any way corruptly;
Second: Endeavored to;
Third: Obstruct or impede the due administration of the internal revenue laws.
“Endeavor” means to knowingly and intentionally make any effort which has a reasonable tendency to bring about the desired result. It is not necessary for the government to prove that the “endeavor” was successful.
To act “corruptly” is to act knowingly and dishonestly, with the specific intent to gain an unlawful advantage or benefit either for oneself or for another by subverting or undermining the due administration of the internal revenue laws.
Now, here is a defraud conspiracy instruction from the DOJ Tax CTM.
the defendant[s], [names], came to some type of agreement or understanding to [defraud the United States for the purpose of impairing, impeding, obstructing, or defeating the lawful functions of the Internal Revenue Service of the Treasury Department in the ascertainment, computation, assessment, and collection of income (or other relevant, e.g., excise) taxes]
Note the overlap object of the Omnibus Clause and the defraud conspiracy -- to impair, impede obstruct, etc.  Indeed, there was a time when the DOJ Tax CTM described the Omnibus Clause as a one person conspiracy and a charge that could be brought when there is insufficient evidence of a conspiracy.  See CTM 17.02 (2001 ed.).  I guess the point here is that, although the text in the two statutes is not the same, the interpretation and application of the text appears to be the same except without the common element of a conspiracy.  If that is right, any limitation needed for the Omnibus Clause should also be needed for the defraud conspiracy.

Monday, December 4, 2017

NPR Fresh Air Interview of Bernstein About His Book Secrecy World (12/4/17)

On my daily walk today, I listened to this podcast.  Journalist Explains How Panama Papers Opened Up The World's Illicit Money Networks (NPR Fresh Air 11/20/17), here.  In the podcast, Terry Gross interviews Jake Bernstein who has recently written a book titled "Secrecy World" which has a chapter on the Panama Papers.  That book is now a best seller on Amazon, here.  He is also familiar with the Paradise Papers, the follow-up on the Panama Papers.  The link is to the podcast and to a transcription of the podcast for those who prefer to read (or just do a search of the transcription).

Some excerpts so that you get the flavor:
[GROSS:] Jake Bernstein, welcome to FRESH AIR. Let's start by just pulling back a little bit. What's the purpose of the offshore accounts that have been revealed in the Paradise and Panama Papers? 
JAKE BERNSTEIN: I mean, ultimately the purpose is secrecy. The purpose is to hide your activities or your money and to take advantage of certain benefits that you get from having stuff offshore, having anonymous companies. These are - there are tax benefits. There are benefits that one gets from being able to move money around in sort of secret ways. And so that's - ultimately, it's about tax avoidance or tax evasion and keeping your activities - your business activities - secret. 
GROSS: Especially if they're illegal activities. 
BERNSTEIN: Yes - very helpful to keep those secret. 
* * * * 
You know, the United States loses something like $70 billion a year due to the shifting of corporate taxes to tax havens. And that's money that could go to schools that could go to infrastructure. I could go to police. It could go to health care. But it's not. Instead, it's disappearing in the Caymans or the Bahamas or Bermuda or places like that. 
* * * * 
GROSS: So now we've been reading about the Paradise Papers. These are the papers that were leaked from another law firm that created a lot of shell companies, not nearly as many as MossFon did. But what's the difference between the Paradise Papers and the Panama Papers? 
BERNSTEIN: Well, at the firm that's at the center of the Paradise Papers is a firm called Appleby Global. It's based in the Bahamas. And they were a little bit more professional than MossFon. Their client was a little bit more high-end. They were more sophisticated. And they didn't skirt the law quite as much as Mossack Fonseca did. So there's a lot more Americans who used Appleby in part because Appleby is based in Bermuda, which is sort of culturally more acceptable, I think, to the Americans than Panama was - which is where Mossack Fonseca was based. But essentially, they're doing the same thing, you know? They're using the offshore world to hide money, to move it around, to avoid taxes. You know, it's the same MO.
And it goes on from there.  There is considerable discussion of Russian oligarch use of these offshore entities and Donald Trump's business dealings with them.

Sunday, December 3, 2017

Marinello Tax Obstruction 7212(a) Oral Argument is Wednesday (12/3/17)

I have previously posted on Marinello v. United States, 839 F.3d 209, 218 (2d Cir. 2016), cert. pending. Supreme Court Grants Certiorari in Marinello Involving Whether § 7212(a)'s Omnibus Clause Requires Knowledge of Pending Investigation (6/27/17), here; and On Conflicts, Certiorari and Marinello (Federal Tax Crimes Blog 7/1/17), here.  The oral argument is scheduled for Wednesday, December 6, 2017.  I thought I would offer some resources for those interested in the oral argument.
  • Scotusblog docket entries, here.
  • Susan C. Morse, Argument preview: What limits tax law obstruction-of-justice charges? (Scotusblog 11/28/17), here.
  • Oral Argument (recorded audio only; when it is available), here. (The Supreme Court website says here that oral argument voice recordings are available by the end of the week of the oral argument.)
  • Transcripts of oral argument, here. (Available now.)
Although every attorney practicing in the criminal tax area will find some of the issues particularly interesting, the one I do not find the direct issue in the case -- whether the omnibus clause of § 7212(a) requires a known pending IRS investigation that the person's conduct is intended to obstruct -- particularly interesting.  Rather, I find the supporting issue of the mens rea requirement in § 7212(a) more interesting.  Most crimes in the Internal Revenue Code require that the conduct (the actus reus) be willful.  Section 7212(a)'s omnibus clause does not have a willful element but does have an element requiring that the defendant have acted corruptly.

Marinello argues that there is no limiting principle to the corruptly mens rea requirement, so that it is appropriate to constrict the scope of § 7212(a) to conduct intended to obstruct a pending investigation.  That is a simplified version of the argument as I understand it.  The Government argues in its brief, here, as follows.

From Summary of the Argument:
* * * * 
C. A defendant’s endeavor does not violate Section 7212(a) unless he acts “corruptly” and intends to obstruct the due administration of the tax code. Those mens rea requirements ensure that a defendant is aware that his obstructive acts are directed at the IRS’s administration of the tax code, that he intends to obstruct those functions, and that he does so with the specific intent of obtaining a benefit or advantage that he knows to be illegal. The mens rea elements of Section 7212(a) readily distinguish purposeful tax violators from those who lack a culpable intent to obstruct and ensure that the provision is not a trap for the unwary.  
From the Argument (pp. 18-21):

Crimes Requiring Materiality -- Scope of the Targets to Test Materiality (12/3/17)

In United States v. Raza, ___ F.3d ___, 2017 U.S. App. LEXIS 23431 (4th Cir. 2017), here, the defendants were convicted of wire fraud and conspiracy to commit wire fraud predicated on a fraudulent mortgage lending scheme.  18 USC §§ 1343 & 1349, respectively.  Both crimes had a materiality element.  See Neder v. United States, 527 U.S. 1 (1999).  The question presented in the case was whether materiality is judged by reference to some "reasonable lender" or had to be material to the specific lender that was the target of the conduct.  The Court summarized the instructions given and the defendant's argument as:
• The government was obliged to prove that "the scheme or artifice to defraud, or the pretenses, representations, or promises, were material; that is, they would reasonably influence a person to part with money or property." See J.A. 1313.
• A particular fact is material if it "may be of importance to a reasonable person in making a decision about a particular matter or transaction." Id. at 1315.
• "A statement or representation is material if it has a natural tendency to influence or is capable of influencing a decision or action." Id. at 1318.
Based on those instructions, the defendants argue that the jury could have convicted them on the basis of false statements that an objective, reasonable lender might have considered material, but that SunTrust [the target of the conduct] itself did not deem to be material in the circumstances. 
The defendants support their contention of error with several court decisions that assess materiality in the fraud context. For example, in Neder, the Supreme Court concluded — in the context of a tax fraud prosecution — that to be material a false statement must be "capable of influencing[] the decision of the decisionmaking body to which it is addressed." See 527 U.S. at 16. In a similar vein, we have determined, in the context of fraud against a county government, that "[t]he test for materiality of a false statement is whether the statement has a natural tendency to influence, or is capable of influencing its target." See Wynn, 684 F.3d at 479. The defendants contend on appeal — and argued at trial — that those decisions required that the jury be instructed on a subjective standard of materiality.
Bottom-line, in a private lending context, the Court concluded that the reasonable lender test was the proper test rather than a test based on the specific lender to which the conduct was directed.  The Court distinguished Neder and other cases involving public agencies which requires that the test be what is material to the specific agency targeted.  This distinction makes sense because private lenders are numerous and thus some objective reasonable lender standard can be applied and is appropriate.  Government agencies -- and particularly the IRS -- tend to be one-off, whose activities and decisions are directed to their scope of responsibility and thus not shared with other agencies.  Some reasonable Government agency standard would not work if the fraud were directed to the IRS; thus the question is whether the conduct was material to the IRS, not some other class of reasonable Government agencies.  The Court contrasted these two approaches as "objective" -- looking to the reasonable lender rather than the specific lender -- and "subjective" -- looking to the specific agency.

Tax crimes in which there is a materiality requirement either textually or as interpreted include:  tax evasion (§ 7201); tax perjury (§ 7206(1));  aiding or assisting (§ 7206(2)); and false returns (§ 7207); false claims (18 USC 286 imported by use of the word fraud).

I think, also, that a materiality requirement is implicit in tax obstruction (§ 7212(a), the Omnibus Clause) via the requirement that the endeavor “must have the natural and probable effect of interfering with the due administration" of the IRS.  Cf. United States v. Aguilar, 515 U.S. 593, 509 & 601 (1995) (dealing with the Title 18 obstruction provision which parallels the Omnibus Clause).

Saturday, December 2, 2017

Default Judgment Granted in Multi-Year FBAR Willful Penalty Case (12/2/17)

In United States v. Forbes, 2017 U.S. Dist. LEXIS 193856 (E.D. Va. 8/24/17), here, the Magistrate Judge entered a report and recommendation for default judgment on willful FBAR penalties against George Forbes.  The District Court subsequently sustained the recommendation, here, and entered judgment, here.  The complaint on which the default judgment is based is here.

Forbes did not appear or contest the default judgment, although he had been properly served.  So I draw the facts from the complaint which contains more facts than the Magistrate Judge's report and recommendation..

The key facts are that:

1. Forbes worked as an engineering consultant in the oil and gas industry in Qatar from 2004 to 2011.

2. Forbes had foreign accounts exceeding $10,000 in each of the years 2004 through 2011.

3.  Forbes filed FBARs through 2007 and then picked up filing FBARs in 2011. 

4.  FBARs did not file FBARs for 2008-2010.  He did not report the income in excess of $3,100,000 from the unreported accounts in 2008-2010.  In two of the years, he omitted Schedule B and in the third, he answered the foreign account question no.

5.  On 11/28/11, Forbes was accepted into the 2011 OVDP.   "Forbes entered the OVDP with the agreement that his FBAR disclosure would be certified for tax years 2008, 2009, and 2010."

5.  Forbes apparently submitted the OVDP package, including amended income tax returns.  "Forbes failed to make acceptable arrangements with the IRS for payment of the taxes owed, plus, interest, accuracy penalties, and a miscellaneous offshore penalty. As a consequence, Forbes was removed from the program on May 8, 2014.

6.  After exiting the OVDP, Forbes was audited.  "The audits found that, for the years 2008 through 2010, Forbes had failed to report income in excess of $3,100,000.  The audit also found that Forbes had omitted approximately $1,750,000 of income from the tax returns he had submitted in connection with his participating in the 2011 OVDP.

Friday, December 1, 2017

Michael Flynn Plea Documents, Analysis and Comments (12/1/17; 12/4/17)

This is a federal tax crimes blog.  However, I thought it might be a good teaching experience for at least some readers and a learning experience for me to go through Michael Flynn's plea documents filed today.  I assume that everyone knows by now the Flynn did plead to one count for false statement under 18 USC § 1001(a)(2), here.  The relevant crime is:
whoever, in any matter within the jurisdiction of the executive, legislative, or judicial branch of the Government of the United States, knowingly and willfully * * * makes any materially false, fictitious, or fraudulent statement or representation.
This has been analogized to a perjury crime except the speaker is not under oath with penalty of perjury.  Like most tax crimes, this is an obstruction crime.

The plea documents are
  1. The criminal information, here.
  2. The plea agreement, here.
  3. The Statement of the Offense, here (which should give the judge sufficient facts to assure himself that the crime to which Flynn pled is proper.)
The false statement crime is used in many tax prosecutions.  I have discussed its application in tax crimes in my Federal Tax Crimes Publication 2013 edition, as updated, which may be downloaded here.

I won't delve into the false statements crime here except that it is a 5-year felony.  Suffice it to say that Flynn lied and the lies were material to the FBI investigation.

I turn to the plea agreement.  The plea is to FRCrP 11(c)(1)(B), here.  This means that the parties can recommend particular plea factors or calculations.  This is a recommendation only.  The sentencing judge makes the final decision.

The parties recommend the following:
SG §2B1.1(a)(2) with a base offense level of 6.  
I am curious as to this stipulation because Part B of the Guidelines including this section is for "Basic Economic Offenses."  The introductory comment says:
Introductory Commentary 
These sections address basic forms of property offenses: theft, embezzlement, fraud, forgery, counterfeiting (other than offenses involving altered or counterfeit bearer obligations of the United States), insider trading, transactions in stolen goods, and simple property damage or destruction.  (Arson is dealt with separately in Chapter Two, Part K (Offenses Involving Public Safety)).  These guidelines apply to offenses prosecuted under a wide variety of federal statutes, as well as offenses that arise under the Assimilative Crimes Act.
The offenses covered by § 2B1.1, the stipulated provision, are:
§2B1.1.     Larceny, Embezzlement, and Other Forms of Theft; Offenses Involving Stolen Property; Property Damage or Destruction; Fraud and Deceit; Forgery; Offenses Involving Altered or Counterfeit Instruments Other than Counterfeit Bearer Obligations of the United States
Federal Tax Crimes are economic crimes as well, but sentenced under the tax guidelines that parallel these economic crimes Guidelines.  As with economic crimes generally, the guidelines are primarily influenced by the amount of the economic crime the defendant committed or intended to commit.  The smallest amounts get the smallest base offense level in both cases of 6.  Then, higher offense levels apply as to the economic object of the offense goes up.

In this case, the plea agreement does not state the amount of the economic crime effected or intended but just pronounces that the level is the base offense level of 6.  I think this is odd.

Court Orders Enforcement of John Doe Summons Against Bitcoin Firm (12/1/17)

I have previously written on the IRS's John Doe Summons to Coinbase, a leading Bitcoin firm.  IRS seeks John Doe Summons to Bitcoin Firm (Federal Tax Crimes Blog 11/23/16; 11/30/16), here. In United States v. Coinbase, Inc. 2017 U.S. Dist. LEXIS 196306 (N.D. Cal. 11/28/2017), here, the U.S. Magistrate Judge ordered compliance with respect to most but not all of the information requested by the Government in a narrowed scope for the summons.  The Magistrate Judge's judgment is here; the docket entries as of today is here.

The Court did the standard summons analysis under the Powell standards.

The Court's key holdings, based on its conclusions as to relevance to IRS's legitimate need for information and documents, are in the following excerpts:
The Court agrees that the Coinbase account holder's identity and transaction records will permit the Government to investigate whether the holder had taxable gains that were not properly declared. But the Government seeks more than that information; it also seeks account opening records, copies of passports or driver's licenses, all wallet addresses, all public keys for all accounts/wallets/vaults, records of Know-Your-Customer diligence, agreements or instructions granting a third-party access, control, or transaction approval authority, and correspondence between Coinbase and the account holder. The Government claims to need these records to verify an account holder's identity and determine if the holder used others to make transactions on the account holder's behalf. However, at this stage, where the Government is seeking records on over 10,000 account holders, these requests seek information than is "broader than necessary." See Bisceglia, 420 U.S. at 151. The first question for the IRS is whether an account holder had a taxable gain. If the account holder did not, then correspondence between Coinbase and a user is not even potentially relevant. Similarly, while the Government needs an account holder's name, date of birth, taxpayer identification and address to determine if a taxable gain was reported, it only needs additional identity information such as copies of passports and driver' licenses or "Know Your Customer" due diligence if there is potentially a taxable gain and if there is some doubt as to the taxpayer's identity. If there is not, these additional records will not shed any light on a legitimate investigation. 
At oral argument the Government explained that it included such broad swaths of records in its summons so that it will not need to return to court to ask for them if and when needed. The Court is unpersuaded. Especially where, as here, the Government seeks records for thousands of account holders through a John Doe summons, the courts must ensure that the Government is not collecting thousands and thousands of personal records unnecessarily. Moreover, if the Government later determines that it needs more detailed records on a taxpayer, it can issue the summons directly to the taxpayer or to Coinbase with notice to a named user—a process preferable to a John Doe summons. 
The Court therefore finds that the relevant documents as identified in Request 1 are: (1) the taxpayer ID number, (2) name, (3) date of birth, and (4) address. The remaining items in Request 1 are not relevant at this stage: account opening records, copies of passports or driver's licenses, all wallet addresses, and all public keys for all accounts/wallets/vaults. 
The Court also finds that transaction history, as identified in Requests 4 and 6, is relevant to the Government's legitimate purpose. Coinbase must produce records of account activity including transaction logs or other records identifying the date, amount, and type of transaction (purchase/sale/exchange), the post transaction balance, and the names of counterparties to the transaction. The remaining information sought by Request 4 is not relevant at this time: requests or instructions to send or receive bitcoin and information identifying the users of such accounts where counterparties transact through their own Coinbase accounts/wallets/vaults and their contact information. 
The Court likewise finds the following documents are not necessary to achieve the Government's legitimate purpose at this stage: 
• Request 2: Records of Know-Your-Customer diligence,
• Request 3: Agreements or instructions granting a third-party access, control, or transaction approval authority, and
• Request 5: Correspondence between Coinbase and the user or any third party with access to the account/wallet/vault pertaining to the account/wallet/vault opening, closing, or transaction activity. 
These records may become necessary for a specific account holder once the IRS reviews the relevant records; but for many or even most of the account holders they may never be relevant and thus the Court will not order their production. Accordingly, the 
Government's Petition to Enforce Requests 1, 4 and 6 is GRANTED as set forth above; in all other respects the Petition to Enforce is DENIED.
Based on this analysis, the Court's order is:
Coinbase is ORDERED to produce the following documents for accounts with at least the equivalent of $20,000 in any one transaction type (buy, sell, send, or receive) in any one year during the 2013 to 2015 period:
(1) the taxpayer ID number,
(2) name,
(3) birth date,
(3) address,
(4) records of account activity including transaction logs or other records identifying the date, amount, and type of transaction (purchase/sale/exchange), the post transaction balance, and the names of counterparties to the transaction, and
(5) all periodic statements of account or invoices (or the equivalent).
In all other respects the Petition to Enforce is DENIED. The Court GRANTS John Doe 4's request for judicial notice.
A good article is Joel Rosenblatt, Coinbase Loses Bid to Block U.S. Tax Probe of Bitcoin Gains (Bloomberg Technology 11/29/17), here.  Key excerpts from that article are:

The company said it’s glad that the government and the court narrowed the scope of the summons.
“Coinbase started this process more than 12 months ago, and while today’s result is not the complete victory we hoped for, it does represent a substantial and unprecedented victory for the industry and the hundreds of thousands of customers that would have been unfairly targeted if it weren’t for our action,” the company said in a statement posted on its blog. 
Last year, analysts said similar demands could be made of other digital-currency companies if the IRS widens its investigation. 
“The government has sensed a windfall -- any company that has a plethora of wealthy users might be in the sights,” Charles Hayter, chief executive officer of market tracker CryptoCompare, said in an email. “If there is tax to be paid the government is going to go after it if it makes an example” or a return on investment.
JAT Comments:

Court of Federal Claims Sustains Nonwillful FBAR Penalty (j12/1/17)

In Jarnagin v. United States, 2017 U.S. Claims LEXIS 1483 (2017), here, the Court granted summary judgment sustaining the nonwillful multi-year FBAR penalties in 31 USC § 5321(a)(5).  The only issue was whether the Jarnagins had reasonable cause which is a defense to the nonwillful FBAR penalty and the Court held that they did not have reasonable cause. 

The IRS assessed the penalty of $10,000 for each of them for four years.  The penalty aggregated to $80,000.  The Jarnagins paid the assessed penalties and "filed a Form 843, seeking an abatement and refund of the penalty amounts paid."

The facts were essentially that (i) the Jarnagins were successful business people; (ii) the Jarnagins had a Canadian account; (iii) they had return preparers over the relevant years but did not tell them about the Canadian account; and (iv) the Jarnagins claimed they did not know of the FBAR filing obligation and feel that their preparers had enough information to raise the issue but did not.

The Courts holding proceeded in the following steps:

1.  Jurisdiction.  The Court held that it was a suit to recover for an illegal exaction, thus giving the Court jurisdiction under the Tucker Act, 28 U.S.C. § 1491(a).

2. Reasonable Cause Standard.  The Court found sparse authority of the meaning of reasonable cause in the statute (31 USC § 5321(a)(5)(B)(ii)) but found the meaning of reasonable cause in the tax statutes (§§ 6651(a) and 6664(c)(1)) to offer guidance.  The Court cited Moore v. United States, No. C13-2063RAJ, 2015 WL 1510007, at *4 (W.D. Wash. Apr. 1, 2015) (concluding that "[t]here is no reason to think that Congress intended the meaning of 'reasonable cause' in the Bank Secrecy Act to differ from the meaning ascribed to it in tax statutes"). 

3.  Application of the Reasonable Cause Standard.  The Court then reasoned:
In light of the foregoing, the Court concludes that in order to show reasonable cause under 31 U.S.C. § 5321(a)(5)(B)(ii), the Jarnagins must establish that they exercised "ordinary business care and prudence" with respect to their obligation to file FBARs for tax years 2006 through 2009. As noted, they assert that they have met their burden of proving their entitlement to the defense by showing that 1) "they hired a competent CPA to prepare all required forms"; 2) "the CPA was aware of the CIBC account in Canada through the financial statements provided to him by Plaintiffs before he filed the returns"; and 3) "Plaintiffs actually relied in good faith on the CPA." Pls.' Br. at 6. 
For purposes of ruling on the cross-motions for summary judgment, the Court assumes that the accountants the Jarnagins hired were "competent . . . to prepare all required forms" and were aware that the Jarnagins had a bank account in Canada. Nonetheless, the Court concludes that, as a matter of law, the Jarnagins did not exercise ordinary business care and prudence in the handling of their reporting obligations.
The basic reasoning for its fact finding of absence of reasonable cause was (i) the Jarnagins' business sophistication with multiple interests and significant wealth; (2) their signing of the tax returns stating under penalty of perjury that it was true, correct and complete and their failure to read the returns which would have alerted them via the foreign account question on Schedule B (relying on United States v. Williams, 489 F. App'x 655, 659 (4th Cir. 2012) which was a willful FBAR case and United States v. Sturman, 951 F.2d 1466, 1476-77 (6th Cir. 1991)); and (3) the mere fact that the returns were prepared by professionals does not constitute reasonable cause. 

In making these holdings, the Court relied heavily on United States v. Boyle, 469 U.S. 241 (1985) where the Court held that a reasonably prudent business person should have known about the estate tax return filing date.  The Court said in concluding its holding:
In fact, in Boyle, the Supreme Court rejected a similar argument by an estate that it had reasonable cause for the untimely filing of its tax return because it had relied upon the estate's tax attorney to prepare and file the return. 469 U.S. at 249-52. The Court reasoned that the duty to promptly file is "fixed and clear" and placed directly on the taxpayer, "not on some agent or employee of the [taxpayer]." Id. at 249; see also Baccei v. United States, 632 F.3d 1140, 1148 (9th Cir. 2011) (noting that "a taxpayer cannot rely on its employee or agent to escape responsibility for the nonperformance of nondelegable tax duties" and that "reliance upon [a professional advisor] to competently file a payment extension request does not constitute reasonable cause excusing [the taxpayer's] failure to timely pay the estate taxes owed" (quotation omitted)). The Court acknowledged that "[w]hen an accountant or attorney advises a taxpayer on a matter of tax law, such as whether a liability exists, it is reasonable for the taxpayer to rely on that advice." Boyle, 469 U.S. at 251 (emphasis in original). Such "reliance" however, "cannot function as a substitute for compliance with an unambiguous statute." Id. The Court thus held that "failure to make a timely filing of a tax return is not excused by the taxpayer's reliance on an agent, and such reliance is not 'reasonable cause.'" Id. at 252.
JAT Comments:

Friday, November 24, 2017

On Joint Defense Agreements (11/23/17)

Today's news includes an article indicating that Michael Flynn's lawyers had withdrawn from a joint defense/common interest agreement with President Trump's lawyers with respect to the acts being investigated by the Special Counsel, Robert S. Mueller III.  See A Split From Trump Indicates That Flynn Is Moving to Cooperate With Mueller (NYT 11/23/17), here.  Key excerpts are:
Lawyers for Michael T. Flynn, President Trump’s former national security adviser, notified the president’s legal team in recent days that they could no longer discuss the special counsel’s investigation, according to four people involved in the case — an indication that Mr. Flynn is cooperating with prosecutors or negotiating a deal. 
Mr. Flynn’s lawyers had been sharing information with Mr. Trump’s lawyers about the investigation by the special counsel, Robert S. Mueller III, who is examining whether anyone around Mr. Trump was involved in Russian efforts to undermine Hillary Clinton’s presidential campaign. 
That agreement has been terminated, the four people said. Defense lawyers frequently share information during investigations, but they must stop when doing so would pose a conflict of interest. It is unethical for lawyers to work together when one client is cooperating with prosecutors and another is still under investigation. 
The notification alone does not prove that Mr. Flynn is cooperating with Mr. Mueller. Some lawyers withdraw from information-sharing arrangements as soon as they begin negotiating with prosecutors. And such negotiations sometimes fall apart. 
Still, the notification led Mr. Trump’s lawyers to believe that Mr. Flynn — who, along with his son, is seen as having significant criminal exposure — has, at the least, begun discussions with Mr. Mueller about cooperating.
See also Why Trump should be nervous, but not panicking, after Michael Flynn’s lawyers cut off communication (WAPO 11/24/17), here.

For an interesting and entertaining comment on Trump's lawyer's reaction:  Hey Y’All, Jay Sekulow May Have No F**king Clue What He’s Doing (Above the Law 11/24/17), here.  The byline for the article is:  Trump's lawyer manages to put his foot in his mouth when "no comment" would have sufficed.

I thought this would be a good opportunity to offer readers some background on joint defense agreements.  I offer here the discussion of this topic in my, now discontinued publication, Federal Tax Crimes.  I discontinued this publication after writing Chapter 12: Criminal Penalties and the Investigation Function, in the publication Michael Saltzman and Leslie Book, IRS Practice and Procedure (Thomsen Reuters 2015).  Although discontinued, I think the excerpt on Joint Defense Agreements is still useful to understand the issues presented.

The key example I use in the excerpts is (footnotes omitted):
A and B are targets of a grand jury investigation.  A has engaged attorney X, and B has engaged you.  You and X are considering a JDA in which X will share with you otherwise privileged information he receives from A, and you likewise will share with X otherwise privileged information you receive from B.  A and B, and their respective attorneys, will commit under the JDA to maintain the confidentiality of the information so shared.  Is this really an attorney-client relationship between you and A?  If that is the case, can A object to your representing B if both are subsequently indicted or, worse, can the prosecutor urge that X and you are conflicted out in the criminal case because of that JDA?  Even if there is not strictly speaking a traditional full-bore attorney-client relationship between you and A, do you still have responsibilities to A with respect to using the information received from A or A’s attorney - specifically, can you use the information to benefit your client (B) even if it is adverse to A?  On a more mundane level, do you have to do a conflicts check with respect to A and will you thereafter be conflicted in future representation based upon the relationship between you and A under the JDA?  Can you continue to represent B if A’s and B’s interests diverge?  Should your client decide to plea bargain, can you bring to the negotiating table the information you learned from A (either directly or through A’s lawyer, X)?  Do you have malpractice exposure to A?
I discuss a Flynn-type situation as follows (footnotes omitted except that one footnote from a case is in the text):

Monday, November 20, 2017

Does the False Claims Crime (18 USC § 287) Require Willfulness (or Something Like It) (11/20/17)

In United States v. Gasich, 2017 U.S. App. LEXIS 22696 (7th Cir. 2017), nonprecedential, here, the Seventh Circuit affirmed the taxpayer's conviction based on their plea of guilty to one count of false claims under 18 USC § 287, here.  Before sentencing, they sought to withdraw their pleas.  They had other bases for error in not allowing them to withdraw the plea, but I focus on only the mens rea requirement in § 287.

The relevant text of § 287 is:
Whoever makes or presents to * * * any department or agency [of the United States] * * *, any claim upon or against the United States, or any department or agency thereof, knowing such claim to be false, fictitious, or fraudulent, shall be imprisoned not more than five years * * * *. 
The key facts on this issue:
  • "The Gasiches are tax protestors who have been warring with the IRS for roughly twenty years."
  • They attempted the OID scam, falsely reporting that various institutions had withheld tax allowing them $475,000 in refunds.
  • They were indicted.
  • The proceeded pro se at trial.
  • Before trial, each of them decided to plead to one § 2877 count.  The explained that they had come to understand that § 287 was a "strict liability" offense.  The court appointed standby counsel for them and scheduled plea colloquies.
  • At the plea colloquies, they repeated their understanding that § 287 was a strict liability offense.  The trial court advised them that the understanding was not correct as summarized:
The court flagged this as a misconception and listed the three elements of § 287-(1) that the Gasiches made a claim; (2) that the claim was false, fictitious, or fraudulent; and (3) that they knew that the claim was false, fictitious, or fraudulent at the time they made it. Though the [Gasiches readily agreed that they understood these elements, the court continued to clarify the point in a methodical dialogue with Barbara that defined the phrases "strict liability" and "mens rea" and explained how those definitions did or did not apply to their case. After this explanation of the law, the Gasiches agreed with the government's statement of the facts: they knowingly had claimed they were entitled to funds that were not withheld in order to get the IRS off their backs for their longstanding tax liabilities. The court then accepted their pleas.
  • The Gasiches then filed a number of motions as tax protestors are wont to do.  The trial court treated them as a motion to withdraw their plea.  The trial court denied the motion.
  • The trial court sentenced each to 3 years.
  • The Gasiches appealed.
Among their arguments was that they could not have given a knowing plea when the trial court failed to advise them of a potential conflict among the Circuits as to the mens rea element.  The Seventh Circuit's resolution of their mens rea argument:
The Gasiches next argue that their guilty pleas were invalid because they did not understand the elements of § 287 when they pleaded guilty. The record contradicts this contention. The Gasiches came in with a misunderstanding that the court quickly recognized and patiently corrected. Even if the Gasiches began their colloquies not fully grasping the elements of the crime, including the required state of mind, there is no reason to suspect that the confusion persisted after the district court's extensive explanations. That is the point of the colloquy. Their statements that they understood the charge and agreed to the factual basis offered by the government are subject to a "presumption of verity" and are "not a meaningless act." United States v. Collins, 796 F.3d 829, 834 (7th Cir. 2015). 
The Gasiches also insist on appeal that they could not knowingly and voluntarily plead guilty without a full understanding of a circuit split about whether 18 U.S.C. § 287 includes an element of willfulness beyond the knowledge requirement. Compare United States v. Clarke, 801 F.3d 824, 827 (7th Cir. 2015) ("[T]he government need not prove willfulness in a § 287 case."), with United States v. Nash, 175 F.3d 429, 437 (6th Cir. 1999) (finding harmless error in district court's refusal to instruct on a willfulness element in § 287). But the district court had no duty to inform the Gasiches of the split before accepting their pleas. A plea colloquy need not seek "conscious waiver" of every potential defense. United States v. Broce, 488 U.S. 563, 573 (1989). And lack of willfulness is no defense at all in this circuit. Cf. United States v. Ranum, 96 F.3d 1020, 1025 (7th Cir. 1996) ("[T]he failure to be informed of a non-existent legal defense could not, under any circumstances, represent a fair and just reason for withdrawing the plea."). Our determination that § 287 has no willfulness element is as old as the Gasiches' twenty years of quarrels with the United States taxing authority, see United States v. Catton, 89 F.3d 387, 392 (7th Cir. 1996) (clarifying that § 287 violation does not require willfulness), and their contention that the district court was required to apprise them of the possibility of changing our position is just as meritless.
JAT Comments:

Burden of Proof on the Eighth Amendment Excessive Fines Issue (11/20/17)

I was reading again the unpublished opinion in United States v. Bussell, 2017 U.S. App. LEXIS 21189 (9th Cir. 2017), here, which I blogged earlier in Ninth Circuit Summarily Rejects Arguments Against FBAR Willful Penalty (10/27/17), here.  As I noted in the blog, the Court's bottom-line was that Bussell had "failed to carry her burden to establish that the penalty is grossly disproportional to her offense."

I want to say some more about the burden of proof issues.  The Court said earlier in the opinion:
Bussell bears the burden to prove that the fine against her violates the Constitution. See United States v. $132,245.00 in U.S. Currency, 764 F.3d 1055, 1058 (9th Cir. 2014) (explaining that the claimant has the burden of establishing that the forfeiture is grossly disproportional to the offense). Generally, "a punitive forfeiture violates the Excessive Fines Clause if it is grossly disproportional to the gravity of a defendant's offense." United States v. Bajakajian, 524 U.S. 321, 334, 118 S. Ct. 2028, 141 L. Ed. 2d 314 (1998).
I think the Court is referring to the burden of persuasion which is a burden related to fact finding rather than legal conclusions.  Thus, I think the Court means that the person asserting a violation of the Eighth Amendment must establish the facts by a preponderance of the evidence that are necessary for a court to conclude that the Eighth Amendment applies.

I was trying to think about what this really meant in the two types of cases in which the Eighth Amendment issue might arise in the context of the FBAR willful penalty  -- the Government's FBAR suit to reduce the assessment to judgment and the refund suit by the person who did not file or filed an incomplete FBAR.  In both of those cases, the Government bears the burden of persuasion to establish that the person acted willfully in not filing or filing incompletely.  Basically, at least in the mainstream cases, the Government's threshold burden and any defense the person would require that the facts be fleshed out as to both issues.

I suppose that burden of proof could be teed up if the person asserting the Eighth Amendment admitted willfulness so that the Government did not have to prove willfulness to sustain the penalty.  That posture would leave the factual record bare except for such factual proof as the parties entered in the case as they sparred about the Eighth Amendment issue.  Then, the person might have a risk of nonpersuasion (burden of persuasion) as to any fact that would support application of the Eighth Amendment.

And, in any event, given the limited applicability of the burden of persuasion (it only applies in the rare case where the fact finder is in equipoise as to a fact), it would seem to me that making much ado about the burden is a bit of a diversion.

What concerns me is the Court's way of expressing its holding -- "Bussell has failed to carry her burden to establish that the penalty is grossly disproportional to her offense."  Read literally, that could mean either (i) that the Court was in equipoise on some the key fact or facts or (ii) that the court was able find all relevant facts and held that the Eighth Amendment just did not apply to the facts.  In either event, Bussell would not have established that the Eighth Amendment applied.  I think that the Court probably meant the latter; if that is what it meant, it did not state precisely its holding.  The more precise holding would have been something like: On the facts found, the Eighth Amendment does not apply.

Tuesday, November 14, 2017

Another Bullshit Tax Shelter Bites the Dust (11/14/17)

In Smith v. Commissioner, T.C. Memo. 2017-218, here, the taxpayers implemented and claimed the tax benefits of a tax shelter concocted by a Houston lawyer to shelter their income upon retirement.  Professor Bryan Camp has a nice discussion of the gambit and the result in Lesson From The Tax Court: The Power Of Fact-Finding (TaxProf Blog 11/13/17), here, who described it as a "Rube Goldberg scheme," which, he confessed, "I don’t understand how this works even as I am writing it!"

While I, like Professor Bryan Camp, don't profess to understand all the machinations, I think the core idea was for the taxpayers to create a limited partnership in which they directly or indirectly owned all the partnership interests - 98% LP interests and 2% GP interests.  They contributed significant cash and marketable securities to the partnership through an interim entity, an S Corporation.  The limited partnership was allegedly created for estate planning and preservation reasons.  Without the intervention of the S Corporation, that would not be particularly noteworthy.  The S Corporation first received the assets and then contributed them to the limited partnership.  (I haven't focused on the precise order of those steps, but it is not important.)  The S corporation then, in the same year, liquidated.

The machinations resulted in the following:
  • At the beginning of the process, the taxpayers had the cash and assets.
  • At the end of the process, the taxpayers had the LP interests and, indirectly, the GP interests.
  • Between the beginning and the end the Subchapter S corporation was created and liquidated. 
The taxpayers then claimed ordinary loss deductions based on the purported tax results of the S corporation.  I confess that I did not spend the time to fully understand exactly how those results worked.  Normally, the liquidation of an S corporation generates a capital loss to the extent that the value of the assets distributed is less than the shareholders' basis in the stock.  I think, however, that the lawyer pulled of some other sleight of hand to create the appearance of an ordinary loss in the S Corporation that flowed through to the shareholders via the K-1.  The ordinary loss was needed to shelter the ordinary income that caused the taxpayers to adopt the "Rube Goldberg scheme" in the first instance.  I may not have that right, because, in my mind, it is not critical to the result in the case.

The linchpin to the planning was that the S corporation be recognized for tax purposes.  This presented the issue that bedeviled true Bullshit tax shelters -- economic substance.  The taxpayers had to convince the court that they had some real reason to create and then liquidate the S corporation in the same year without any material activity other than routing assets from the taxpayer into the limited partnership.  The taxpayers failed in that burden.  The Tax Court Judge found that their testimony as to some legitimate nontax purpose for the S corporation was not credible.  Stated otherwise, the Tax Court found that they lied about the claimed nontax business purpose.

Monday, November 13, 2017

Fifth Circuit on Bruton Confrontation Clause Issue and Deliberate Ignorance / Willful Blindness Issue (11/13/17)

In United States v. Gibson, ___ F.3d ___, 2017 U.S. App. LEXIS 22261 (5th Cir. 2017), here, a nontax case, the Court hit some themes that I have discussed before in tax cases.  In this regard, as readers know, tax crimes are merely one subset of white collar crimes.  See e.g., Geraldine Szott Moohr, Tax Evasion as White Collar Fraud, 9 Hous. Bus. & Tax Law J. 207 (2009), here.  That is why experienced white collar crimes lawyers can try criminal tax cases, even learning a little tax law along the way.  And, it works vice-versa as well.

The opinion starts off with a good summary of the issues presented (footnote omitted, but it is not Shakespeare):
"The trouble with conspiracies is that they rot internally." According to the government's cooperating witnesses, the appellants—Earnest Gibson, III (Gibson III) and his son, Earnest Gibson, IV (Gibson IV)—participated in three: one to defraud Medicare, another to pay unlawful kickbacks, and a third to launder money. A jury convicted the Gibsons for each, plus several substantive kickback counts. On appeal, the Gibsons advance sufficiency challenges and assert that the health care fraud and money laundering conspiracies merged. For his part, Gibson III argues that the district court infringed his constitutional rights by limiting one of his cross-examinations and by admitting a co-conspirator's confession, in violation of the Bruton doctrine. He also faults the trial court for giving the jury "deliberate ignorance" instructions on charges requiring specific intent. In turn, Gibson IV posits that the district court imposed too much restitution. Both appellants also invoke the cumulative error doctrine, claiming that the trial court's alleged mistakes infected the verdict. We find no reversible error and thus affirm.
The Bruton Holding:

The Bruton holding is complete, so I just cut and paste:
The Bruton doctrine addresses the thorny Sixth Amendment problem where one defendant confesses out of court and incriminates a co-defendant without testifying at their joint trial. In its landmark opinion, the Bruton Court reversed a defendant's postal robbery conviction, see 18 U.S.C. § 2114, on Confrontation Clause grounds where his non-testifying co-defendant had made "powerfully incriminating" statements against the defendant in a pretrial confession, 391 U.S. at 135-36. At trial, a postal inspector testified that the declarant twice confessed—once to say that both the declarant and the defendant committed the robbery, and again to admit to having an "an accomplice he would not name[.]" Id. at 124. Though the trial judge instructed the jury to consider the confessions against only the declarant, the Supreme Court reversed the conviction because there was a "substantial risk that the jury, despite instructions to the contrary, looked to the incriminating extrajudicial statements in determining petitioner's guilt[.]" Id. at 126.